<PAGE>
As filed with the Securities and Exchange Commission on July 3, 1996
REGISTRATION NO. 33-73914
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
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 -------------------------
Classification Code Number) (IRS Employer
C/O MERRILL LYNCH INVESTMENT Identification Number)
PARTNERS INC.
SIXTH FLOOR
SOUTH TOWER
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
(212) 236-4167
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
JOHN R. FRAWLEY, JR.
SIXTH FLOOR
SOUTH TOWER
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
(212) 236-4167
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
COPIES TO:
David R. Sawyier
James B. Biery
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933 (the "Securities Act") check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
__________
<TABLE>
<CAPTION>
============================================================================================================
Title of Each Class of Additional Maximum Offering Maximum Aggre- Amount of
Additional Securities Amount Price gate Additional
to be Registered being Registered Per Unit Offering Price Registration Fee
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units of Limited 250,000 $100 $25,000,000 $8,621
Partnership Interest
============================================================================================================
</TABLE>
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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. THIS REGISTRATION STATEMENT ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT
NO. 5 WITH RESPECT TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1, NO.
33-73914.
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM
No. PROSPECTUS HEADING
- ----- -----------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus......... Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus............................ Inside Cover Page;
Table of Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges............. Summary; Risk Factors
4. Use of Proceeds................................. Use of Proceeds
5. Determination of Offering Price................. Inside Cover Page;
Plan of Distribution
6. Dilution........................................ Not Applicable
7. Selling Security Holders........................ Not Applicable
8. Plan of Distribution............................ Inside Cover Page;
Plan of Distribution
d. 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;
Management's Discussion
and Analysis of
Financial Condition and
Results of Operations;
The Advisor Selection
Process; The Advisors;
MLIP and MLF; The ML&Co.
Guarantee; Use of
Proceeds; Charges;
Conflicts of Interest;
The Limited Partnership
Agreement; Index to
Financial Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................................ Not Applicable
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PRELIMINARY PROSPECTUS DATED JULY 3, 1996 -- SUBJECT TO COMPLETION
ML PRINCIPAL PROTECTION L.P.
$100,000,000
UNITS OF LIMITED PARTNERSHIP INTEREST
(CURRENTLY AVAILABLE FOR SALE)
ML PRINCIPAL PROTECTION L.P. (THE "FUND") is a multi-strategy, multi-
market managed futures investment, employing a range of strategies diversified
across major markets of the global economy -- financials, currencies, energy,
metals and agriculture. The Fund's objectives are achieving substantial
capital appreciation over time 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. The
Fund trades under the direction of multiple independent trading advisors
("TRADING ADVISORS" OR "ADVISORS") selected and monitored by MLIP. MERRILL
LYNCH & CO., INC. ("ML&CO.") has agreed to make sufficient payments to the
Fund, if necessary, to ensure that the Net Asset Value of each Unit outstanding
as of the fifth anniversary (the "Principal Assurance Date") of such Unit's
issuance will be at least the $100 subscription price.
The Fund began trading October 12, 1994 with an initial capitalization
of $32 million. The Units are continuously offered and sold as of the
beginning of each calendar quarter at $100 per Unit. As of June 1, 1996, seven
series of Units had been sold, the Fund's aggregate capitalization was
approximately $92.8 million and the initial series of Units had recognized a
cumulative rate of return of 13.82% in the first 19-2/3 months of trading.
The minimum initial investment is 50 Units ($5,000); the minimum
investment for existing Limited Partners is 10 Units ($1,000). Investors may
purchase any whole number of Units over the minimum.
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.
MLIP may make distributions to the Unitholders, but does not presently
intend to do so.
_________________________
THE UNITS ARE SPECULATIVE SECURITIES. AN INVESTMENT
IN THE FUND INVOLVES SIGNIFICANT RISKS.
. INVESTORS MUST BE PREPARED TO LOSE THE ENTIRE TIME VALUE OF THEIR
INVESTMENT. AT A 7% INTEREST RATE, THE PRESENT VALUE OF RECEIVING THE
ASSURED MINIMUM $100 PER UNIT FIVE YEARS IN THE FUTURE WOULD BE ONLY
APPROXIMATELY $71.
. PAST PERFORMANCE 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 SUBSTANTIALLY REDUCES PROFIT
POTENTIAL ALTHOUGH IT IS HIGHLY UNLIKELY TO BE OF ANY VALUE TO INVESTORS.
. 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 THE REDEMPTION VALUE OF
SUCH UNIT TO EQUAL ITS INITIAL $100 SUBSCRIPTION PRICE.
. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING OR
TERMINATING TRADING.
. CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS
PERIODS WITHOUT MAJOR PRICE MOVEMENTS -- SIGNIFICANTLY REDUCE THE ADVISORS'
ABILITY TO TRADE SUCCESSFULLY.
SEE "RISK FACTORS" BEGINNING AT PAGE 9.
_________________________
SUBSCRIBERS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES IN
THE 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 DISCLOSURE DOCUMENT.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR
HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON
THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
_________________________
<TABLE>
<CAPTION>
================================================================================
UNITS OF PRICE TO SELLING PROCEEDS TO
LIMITED PARTNERSHIP INTEREST PUBLIC(1) COMMISSIONS(2)(3) FUND(2)(3)
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
PER UNIT...................... $100 NONE $100
================================================================================
</TABLE>
SEE NOTES ON PAGE (i).
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
THE DATE OF THIS PROSPECTUS IS JULY ___, 1996
(NOT FOR USE AFTER MARCH 31, 1997)
<PAGE>
NOTES TO COVER PAGE
(1) The Units are continuously offered on a "best efforts" basis
without any firm underwriting commitment through Merrill Lynch, Pierce,
Fenner & Smith Incorporated and its affiliates ("MLPF&S" or the "Selling
Agent").
Subscriptions for Units are accepted throughout each calendar
quarter. Pending investment in the Fund as of the beginning of the
following quarter, subscription funds are held in escrow at The Bank of
New York (the "Escrow Agent") in New York City. There is no minimum
number of Units that must be sold at the beginning of a calendar quarter
for any Units then to be sold at such time.
Subscribers receive all interest earned, and no fees or costs
are assessed, on subscriptions while held in escrow.
See "Plan of Distribution -- Subscription Procedure" at page 52.
(2) See "Plan of Distribution -- Selling Agent Compensation" at
page 53 for information relating to indemnification arrangements with
respect to the Selling Agent.
(3) No selling commissions are paid from the proceeds of
subscriptions. MLIP credits the Selling Agent with "production credits"
of $5 per Unit on all Units at the time of sale (no such initial
production credits are payable on sales to officers and employees of
ML&Co. and its affiliates, who purchase Units at $97 rather than $100 per
Unit).
Beginning with the thirteenth full month after a series of Units
is sold, the Selling Agent receives ongoing production credits on all
outstanding Units of such series (including Units sold at a 3% discount to
officers and employees of ML&Co. and its affiliates); provided that such
Units were sold by Financial Consultants who are registered with the
Commodity Futures Trading Commission (the "CFTC") and who have passed
either the Series 3 National Commodity Futures Examination or the Series
31 Managed Futures Fund Examination. Such ongoing production credits
continue to accrue from the beginning of such thirteenth month for as long
as the Units remain outstanding, at the rate of 2% per annum of the
average month-end Net Assets attributable to such Unit committed to
trading; 75% of the capital attributable to each Unit sold under this
Prospectus will be initially committed to trading, resulting in annual
ongoing production credits of 1.5%.
_________________________
THIS PROSPECTUS IS 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 TO MAKE ANY REPRESENTATION
CONCERNING NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE FUND, MLIP, MLAM, THE SELLING AGENT, ANY TRADING ADVISOR
OR ANY OTHER PERSON.
_________________________
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY TO ANY
PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION MAY NOT LAWFULLY BE MADE.
-i-
<PAGE>
_________________________
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. DURING NORMAL BUSINESS HOURS,
LIMITED PARTNERS MAY INSPECT AND COPY SUCH BOOKS AND RECORDS FOR ANY
PURPOSE REASONABLY RELATED TO THEIR INTEREST AS LIMITED PARTNERS.
MLIP DISTRIBUTES MONTHLY REPORTS, SUMMARY PERFORMANCE
INFORMATION FOR THE FUND TO ALL LIMITED PARTNERS. LIMITED PARTNERS
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 CERTAIN OF 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.
_________________________
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 34 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO
BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT
PAGE 8.
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 9.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE
FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED
OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED
STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR
DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED
STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF
THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES
JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
-1-
<PAGE>
SPECIAL DISCLOSURES REGARDING THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND
1. ML&CO'S GUARANTEE IS NOT A GUARANTEE OF PROFIT. IF INVESTORS'
UNITS ARE WORTH NO MORE ON THEIR PRINCIPAL ASSURANCE DATE (FIVE YEARS
AFTER ISSUANCE) THAN THE GUARANTEED MINIMUM $100 PER UNIT, INVESTORS WILL
HAVE LOST THE ENTIRE USE OF THEIR CAPITAL. AT A 7% INTEREST RATE, THE
PRESENT VALUE OF RECEIVING $100 FIVE YEARS IN THE FUTURE IS ONLY
APPROXIMATELY $71.
2. THE FUND'S MULTI-ADVISOR STRATEGY MAKES LOSSES WHICH WOULD
REQUIRE ML&CO. TO MAKE ANY PAYMENTS UNDER ITS GUARANTEE HIGHLY UNLIKELY.
MOREOVER, MLIP CONTROLS THE LEVERAGE AT WHICH THE FUND TRADES SPECIFICALLY
IN ORDER TO PREVENT ML&CO. INCURRING ANY SUCH LIABILITY.
3. IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS
GUARANTEE, ALL UNITS BEGIN WITH ONLY 75% OF THEIR ASSETS ALLOCATED TO
TRADING. THIS DELEVERAGING SUBSTANTIALLY REDUCES PROFIT POTENTIAL.
4. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER
DELEVERAGING OR EVEN TERMINATING TRADING. MLIP WOULD TERMINATE TRADING IF
A NEWLY-ISSUED UNIT LOST ONLY APPROXIMATELY $22 (AT CURRENT INTEREST
RATES), AND WOULD FURTHER DELEVERAGE TRADING BELOW 75% WELL BEFORE THAT
POINT.
5. IRRESPECTIVE OF LOSSES, IN THE EVENT THAT THE FUND DOES NOT EARN
SUFFICIENT PROFITS, MLIP WILL FURTHER DELEVERAGE, SUSPEND OR TERMINATE
TRADING.
6. IF THE FUND IS SUCCESSFUL, ITS PERFORMANCE WOULD HAVE BEEN
SUBSTANTIALLY BETTER WITHOUT "PRINCIPAL PROTECTION."
7. "PRINCIPAL PROTECTION" DOES NOT PROTECT INVESTORS AGAINST THE
EFFECTS OF INFLATION.
8. "PRINCIPAL PROTECTION" DOES NOT TAKE INTO CONSIDERATION THE TAX
CONSEQUENCES OF INVESTING IN THE FUND.
9. THE ML&CO. GUARANTEE IS EFFECTIVE ONLY ON UNITS OUTSTANDING ON
THEIR PRINCIPAL ASSURANCE DATE.
10. THE ML&CO. GUARANTEE IS A CONTRACT BETWEEN ML&CO. AND THE FUND.
INVESTORS COULD ENFORCE THE GUARANTEE ONLY THROUGH BRINGING A DERIVATIVE
ACTION IN THE NAME OF THE FUND.
11. THE ML&CO. GUARANTEE IS A GENERAL, UNSECURED OBLIGATION OF
ML&CO.
12. AN INVESTOR COULD CONTROL THE ASSETS HE OR SHE COMMITTED TO THE
FUTURES MARKET SO AS TO ACHIEVE THE SAME "PRINCIPAL PROTECTION" OFFERED BY
THE FUND, WITHOUT BEING SUBJECT TO THE FUND'S REDEMPTION OR OTHER
RESTRICTIONS.
13. PROSPECTIVE INVESTORS MUST CONSIDER CAREFULLY WHETHER THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND MERITS THE OPPORTUNITY COSTS
INVOLVED,
__________________
SEE "RISK FACTORS" AT PAGE 9, "LEVERAGE
CONSIDERATIONS" AT PAGE 30 AND "THE ML&CO. GUARANTEE" AT PAGE 31.
-2-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SECTION PAGE
- ------------------ ----
<S> <C>
SUMMARY........................................ 5
Introduction................................. 5
Risk Factors................................. 5
The Fund and Its Objectives.................. 6
"Breakeven Table"............................ 8
RISK FACTORS................................... 9
(1) Investors May Incur Substantial Losses... 9
(2) Past Performance......................... 9
(3) Volatile Markets; Highly Leveraged
Trading................................. 9
(4) The Costs of "Principal Protection"...... 9
(5) Substantial Charges...................... 9
(6) Further Deleveraging..................... 9
(7) Importance of General Market
Conditions.............................. 9
(8) Series Issued After July 1, 1996......... 10
(9) Combining Independent Strategies......... 10
(10) Systematic Strategies.................... 10
(11) Discretionary Strategies................. 10
(12) Increased Assets Under Management........ 10
(13) Advisors' Continued Services
Uncertain............................... 10
(14) Changes in Trading Strategy.............. 10
(15) Illiquid Markets......................... 10
(16) Cash Management Risks.................... 11
(17) Non-Correlation Not
Negative Correlation.................... 11
(18) Redemptions Restricted................... 11
(19) Trading on Non-U.S. Exchanges............ 11
(20) Conflicts of Interest.................... 11
(21) Use of Graphs............................ 11
(22) Limited Partners Taxed Currently......... 11
(23) "Investment Advisory Fees"............... 11
(24) Taxation of Interest Income.............. 11
(25) Tax Audit................................ 12
(26) Bankruptcy or Default.................... 12
(27) Regulatory Change........................ 12
INVESTMENT FACTORS............................. 12
PERFORMANCE OF THE FUND........................ 14
PERFORMANCE OF THE OTHER MLIP
MULTI-ADVISOR FUNDS........................... 15
SELECTED FINANCIAL DATA........................ 19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS................................. 20
THE ADVISOR SELECTION PROCESS.................. 22
THE ADVISORS................................... 25
MLIP AND MLF................................... 26
Background.................................... 26
Principals.................................... 27
MLF........................................... 28
FIDUCIARY OBLIGATIONS OF MLIP.................. 28
LEVERAGE CONSIDERATIONS........................ 30
THE ML&CO. GUARANTEE........................... 31
USE OF PROCEEDS................................ 33
CHARGES........................................ 34
Charges Paid by the Fund...................... 35
Organization and Initial Offering
Costs..................................... 35
Brokerage Commissions...................... 36
Administrative Fees........................ 37
"Bid-Ask" Spreads.......................... 37
Service Fees; "EFP" Differentials.......... 37
Securities Mark-Ups........................ 37
Profit Shares.............................. 37
Extraordinary Expenses..................... 39
Charges Paid by Merrill Lynch................. 39
Selling Commissions; Ongoing
Compensation.............................. 39
Consulting Fees............................ 39
MLAM Fees.................................. 40
Redemption Charges......................... 40
CERTAIN LITIGATION............................. 40
CONFLICTS OF INTEREST.......................... 44
Merrill Lynch Affiliated Entities.......... 44
General.................................... 45
MLIP....................................... 45
MLF; MLIB; MLAM............................ 46
The Trading Advisors....................... 46
Financial Consultants...................... 47
Proprietary Trading........................ 47
</TABLE>
-3-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
TABLE OF CONTENTS (CONT.)
<TABLE>
<CAPTION>
PROSPECTUS SECTION PAGE
- ------------------ ----
<S> <C>
THE LIMITED PARTNERSHIP AGREEMENT................ 47
FEDERAL INCOME TAX CONSEQUENCES.................. 49
PLAN OF DISTRIBUTION............................. 52
Subscription Procedure.......................... 52
Purchases by Employee Benefit Plans............. 53
Selling Agent Compensation...................... 53
LEGAL MATTERS.................................... 54
EXPERTS.......................................... 54
ADDITIONAL INFORMATION........................... 54
INDEX OF TERMS................................... 55
ORGANIZATIONAL CHART............................. 56
INDEX TO FINANCIAL STATEMENTS.................... 57
APPENDIX I -- THE "CORE" TRADING
ADVISORS...................................... APPI-1
APPENDIX II -- PERFORMANCE OF THE
PUBLIC SINGLE-ADVISOR FUTURES
FUNDS OPERATED BY MLIP.......................... APPII-1
APPENDIX III -- THE ROLE OF MANAGED
FUTURES IN AN INVESTMENT PORTFOLIO.............. APPIII-1
APPENDIX IV -- BLUE SKY GLOSSARY................. APPIV-1
EXHIBIT A -- THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT................... A-1
EXHIBIT B -- AMENDED FORM OF GUARANTEE
AGREEMENT....................................... B-1
EXHIBIT C -- SUBSCRIPTION REQUIREMENTS........... SR-1
EXHIBIT D -- SUBSCRIPTION AGREEMENT
AND POWER OF ATTORNEY........................... SA-(i)
</TABLE>
--------------------
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
SOUTH TOWER, 6TH FLOOR
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
TELEPHONE: (212) 236-4167
-4-
<PAGE>
SUMMARY
The merits and risks of an investment in the Fund are complex and
must be reviewed carefully by any person considering purchasing
Units. The following summary is qualified in its entirety by
the information set forth elsewhere in this Prospectus.
____________________
INTRODUCTION
THE FUND AND THE OFFERING
ML Principal Protection L.P. trades in the international futures,
commodity options and forward markets, with the objectives of achieving
substantial capital appreciation over time while controlling performance
volatility. MLIP selects and monitors the Fund's multiple independent Advisors,
as well as allocating and reallocating the Fund's trading assets among them.
$32,000,000 was invested in the Fund's initial Series A Units as of
October 12, 1994, and a total of an additional $60,256,700 in the six subsequent
quarter-end closings through June 1, 1996. Through June 1, 1996, an aggregate of
932,567 of Units had been sold and 117,917 redeemed. As of June 1, 1996, the
Fund's capitalization was $84,609,493.
PERFORMANCE
As of June 1, 1996, the Net Asset Value of the series of Units issued at
different times, in each case for $100 per Unit, were as follows:
<TABLE>
<CAPTION>
Unit June 1, 1996
Series Date of Issuance Net Asset Value
- ------ ---------------- ---------------
<S> <C> <C>
A October 12, 1994 $107.82 ($6.00 distribution, 10/1/95)
B January 9, 1995 $105.20 ($6.00 distribution, 1/1/96)
C April 10, 1995 $100.66 ($3.50 distribution, 4/1/96)
D July 11, 1995 $103.11
E October 11, 1995 $103.49
F January 17, 1996 $100.44
G April 19, 1996 $ 98.95
</TABLE>
As of June 1, 1996, the Fund had a total of 4080 Limited Partners.
All series of Units issued to date have traded with 60% of their capital
allocated to trading. Units sold pursuant to this Prospectus will commence
trading with 75% of their assets so allocated.
RISK FACTORS
THE FOLLOWING ARE CERTAIN OF THE SIGNIFICANT RISKS OF THIS AN INVESTMENT.
. INVESTORS MUST BE PREPARED TO LOSE THE ENTIRE TIME VALUE OF THEIR
INVESTMENT. AT A 7% INTEREST RATE, THE PRESENT VALUE OF RECEIVING THE
ASSURED MINIMUM $100 PER UNIT FIVE YEARS IN THE FUTURE WOULD BE ONLY
APPROXIMATELY $71. SEE "THE ADVISOR SELECTION PROCESS" AT PAGE 22 AND
"RISK FACTOR (1) -- INVESTORS MAY INCUR SUBSTANTIAL LOSSES" AT PAGE 9.
. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. SEE
"COMMODITY FUTURES TRADING COMMISSION--RISK DISCLOSURE STATEMENT" AT PAGE
1 AND "RISK FACTOR (2) -- PAST PERFORMANCE" AT PAGE 9.
-5-
<PAGE>
SUMMARY (contd.)
RISK FACTORS (CONT.)
. THE FUND TRADES WITH A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS. SEE
"RISK FACTOR (3) -- VOLATILE MARKETS; HIGHLY LEVERAGED TRADING" AT PAGE 9.
. THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND SUBSTANTIALLY REDUCES PROFIT
POTENTIAL ALTHOUGH IT IS HIGHLY UNLIKELY TO BE OF ANY VALUE TO INVESTORS.
SEE "RISK FACTOR (4) -- THE COSTS OF 'PRINCIPAL PROTECTION'" AT PAGE 9.
. 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 THE REDEMPTION VALUE OF
SUCH UNIT TO EQUAL ITS INITIAL $100 SUBSCRIPTION PRICE. SEE "CHARGES" AT
PAGE 34 AND "RISK FACTOR (5) -- SUBSTANTIAL CHARGES" AT PAGE 9.
. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING OR
TERMINATING TRADING. SEE "RISK FACTOR (6) -- FURTHER DELEVERAGING" AT PAGE
9.
. CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS
PERIODS WITHOUT MAJOR PRICE MOVEMENTS -- SIGNIFICANTLY REDUCE THE ADVISORS'
ABILITY TO TRADE SUCCESSFULLY. SEE "RISK FACTOR (7) -- IMPORTANCE OF
GENERAL MARKET CONDITIONS" AT PAGE 9.
NO SUBSCRIBER SHOULD INVEST MORE THAN 10% OF HIS OR
HER READILY MARKETABLE ASSETS IN THE FUND.
SEE "RISK FACTORS" AT PAGES 9 THROUGH 12.
THE FUND AND ITS OBJECTIVES
A MULTI-STRATEGY APPROACH
The Fund is a multi-strategy, multi-market managed futures investment,
employing a range of strategies diversified across major sectors of the global
economy -- financials, currencies, energy, metals and agriculture. MLIP
allocates Fund assets both to Advisors specializing in particular market sectors
and to Advisors which trade broadly diversified portfolios.
The Fund has to date retained between five and ten Advisors, trading
independently of each other and employing diverse trading methods. MLIP
allocates a substantial portion of the Fund's assets to a limited group of
"core" Advisors, each of which receives significant allocations -- typically 20%
or more of the assets committed to trading. The remainder is allocated in
smaller percentages to a group of non-"core" Advisors, certain of which may be
newer to the business or may implement specialized strategies.
At this point in the economic cycle, MLIP believes there may be substantial
profit opportunities in the traditional commodity markets -- energy, metals and
agriculture -- over the medium to long term. Traditional commodities represent
approximately 30% to 40% of the Fund's holdings.
The Fund offers a means of diversifying a limited portion of the risk
segment of a portfolio into an investment with the potential to exhibit a high
degree of non-correlation with traditional stock and bond investments. If such
non-correlation is, in fact, achieved, and the Fund is profitable, investing in
the Units has the potential to enhance the reward/risk ratio of an overall
portfolio. See Appendix III -- The Role of Managed Futures in an Investment
Portfolio.
-6-
<PAGE>
SUMMARY (CONT.)
MLIP
MLIP, a Delaware corporation, is one of the largest managed futures
sponsors in the United States (or elsewhere) in terms of both financial and
personal resources and assets under management. As of June 1, 1996, MLIP was
serving as sponsor or trading manager for futures funds with total capital in
excess of $1.3 billion.
THE ADVISORS
As of May 31, 1996, the current "core" Advisors retained for the Fund were
collectively managing approximately $2.0 billion in managed futures accounts in
which their clients (and in certain cases the Advisors themselves) had invested,
and approximately $1.4 billion in the trading programs used for the Fund. Many
of the Fund's Advisors also manage accounts for other futures funds for which
MLIP acts as sponsor or trading manager.
See Appendix I for certain performance and other information relating to
the current "core" Advisors. The accompanying Prospectus Supplement identifies
the current non-"core" Advisors. A number of Advisor changes, as well as
reallocations of assets among Advisors, have been made since inception.
"PRINCIPAL PROTECTION"
ML&Co. has agreed to make any payments to the Fund necessary to ensure that
the Net Asset Value of each outstanding Unit, as of its Principal Assurance
Date, will be at least $100.
The ML&Co. guarantee is effective only on Units still outstanding at their
Principal Assurance Date.
POTENTIAL YIELD ENHANCEMENT
MLIP attempts to increase the yield received by the Fund on its available
cash by retaining the services of 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 and securities issued
by certain U.S. government agencies and instrumentalities (collectively,
"Government Securities"), within investment parameters established by MLIP.
-7-
<PAGE>
SUMMARY (CONT.)
"BREAKEVEN TABLE"
<TABLE>
<CAPTION>
COLUMN I COLUMN II
"BREAKEVEN" "BREAKEVEN"
PERCENTAGE RETURN DOLLAR RETURN REQUIRED
REQUIRED FIRST ($5,000 INITIAL
TWELVE MONTHS INVESTMENT) FIRST
OF INVESTMENT TWELVE MONTHS
(BASED ON 75% OF OF INVESTMENT (BASED ON
EXPENSES AND TOTAL ASSETS ALLOCATED TO 75% OF TOTAL ASSETS
INTEREST INCOME TRADING) ALLOCATED TO TRADING)
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------
Brokerage Commissions 6.94% $347.00
- ------------------------------------------------------------------------------------------------------------------------
Administrative Fees 0.19 $ 9.50
- ------------------------------------------------------------------------------------------------------------------------
Organizational and Initial Offering Costs(1) 0.10 $ 5.00
- ------------------------------------------------------------------------------------------------------------------------
F/X Service Desk and Related Fees(2) 0.25 $ 12.50
- ------------------------------------------------------------------------------------------------------------------------
Profit Shares(3) 2.00 $100.00
- ------------------------------------------------------------------------------------------------------------------------
Redemption Charge(4) 3.10 $155.00
- ------------------------------------------------------------------------------------------------------------------------
Interest Income(5) (7.58)% $(250.00)
- ------------------------------------------------------------------------------------------------------------------------
TRADING PROFITS REQUIRED FOR
AN INITIAL $5,000 INVESTMENT TO 7.58% $379.00
"BREAKEVEN"
- ------------------------------------------------------------------------------------------------------------------------
NOTES TO "BREAKEVEN TABLE"
(1) Estimated, based on the Fund's June 1, 1996 capitalization.
(2) Estimated; paid on a per-transaction basis. "Bid-ask" spreads are difficult
to estimate and are not included as an expense in the "Breakeven Table."
(3) 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, but actual Profit Shares could differ.
(4) Redemption charges would equal 3.1% of the initial $5,000 investment
because these charges would equal 3% of the $5,155 Net Asset Value required
in order for the investor to receive net redemption proceeds of $5,000
after subtracting the 3% redemption charge.
(5) Estimated, based on current 91-day Treasury bill rates.
-------------
If the percentage of a series' capital allocated to trading were to
increase, so would brokerage commissions and Administrative Fees as a
percentage of such capital. At 100% leverage, the Fund's annual brokerage
commissions and Administrative Fees would equal 9.25% and 0.25%,
respectively, of average month-end Net Assets and the Trading Profits
required for an initial $5,000 investment to "breakeven" would increase to
9.95% or $497.50.
</TABLE>
-8-
<PAGE>
RISK FACTORS
The markets in which the Fund trades are speculative and highly leveraged.
An investment in the Fund involves significant risks. There can be no assurance
that the Fund will trade successfully.
If an investor receives from the Fund only the "guaranteed" minimum Net
Asset Value per Unit, the investor will have incurred substantial losses.
If the Fund does not trade successfully, it cannot serve as a useful or
effective diversification for an overall portfolio.
_______________
(1) INVESTORS MAY INCUR SUBSTANTIAL LOSSES
INVESTORS MUST BE PREPARED TO LOSE THE USE OF THEIR INVESTED CAPITAL FOR
THE ENTIRE FIVE-YEAR "TIME HORIZON" FROM A UNIT'S ISSUANCE TO ITS PRINCIPAL
ASSURANCE DATE. AT A 7% INTEREST RATE, THIS WOULD CONSTITUTE APPROXIMATELY A 30%
LOSS.
(2) PAST PERFORMANCE
Past performance is not necessarily indicative of future results. Neither
the Advisors' nor the Fund's past performance to date may be representative of
how they or it will trade in the future.
(3) VOLATILE MARKETS; HIGHLY LEVERAGED TRADING
Futures and forward trading is highly leveraged, and market price levels
are volatile and materially affected by unpredictable factors such as weather
and governmental intervention. The combination of leverage and volatility
creates a high degree of risk.
(4) THE COSTS OF "PRINCIPAL PROTECTION"
The Fund's "principal protection" substantially reduces profit potential by
causing MLIP to deleverage trading. However, losses sufficient to require any
payment under the ML&Co. guarantee are highly unlikely because of the Fund's
multi-advisor strategy. Furthermore, MLIP's management of the Fund's trading
leverage is principally directed towards protecting ML&Co. from having to make
any such payments.
(5) SUBSTANTIAL CHARGES
The Fund is subject to substantial charges. It is particularly important,
due to the "principal protection" structure of the Fund, that capital not be
depleted by expenses. Any such depletion could result in the further
deleveraging or termination of trading. The charges assessed on Units sold under
this Prospectus will be greater as a percentage of their total equity than the
charges reflected in the Fund's performance to date because the newly-issued
Units will begin trading at 75% rather than the 60% leverage used by previous
series. Brokerage commissions as well as Administrative Fees are based on the
assets committed by each series. At the same time, however, the increased
leverage of these Units will correspondingly increase their profit potential
(as well as risk).
(6) FURTHER DELEVERAGING
In the event that the Fund incurs relatively small losses (even if it had
previously traded profitably), MLIP could to further deleverage or terminate
trading.
(7) IMPORTANCE OF GENERAL MARKET CONDITIONS
There appears to be a tendency for managed futures products to be generally
profitable or generally unprofitable at approximately the same times. Overall
market or economic conditions -- which neither MLIP nor any Advisor can predict
or control -- have a material effect on performance.
-9-
<PAGE>
(8) SERIES ISSUED AFTER JULY 1, 1996
All series of Units issued after July 1, 1996 will commence trading at 75%
leverage. Previously issued series began trading at 60% leverage and have
maintained that leverage to date. Consequently, the new series issued under this
Prospectus will generally be more highly leveraged and their trading results
correspondingly more volatile than that of previous series.
If MLIP makes a leverage adjustment to any series issued under this
Prospectus, MLIP must make corresponding adjustments to the other series so that
all series trade at the same level of leverage. This regulatory requirement of
uniform leverage could adversely affect certain series. For example, a series
might have traded profitably and generated sufficient profits that MLIP would
have otherwise upleveraged its trading but cannot do so because that would
require upleveraging other series which had not been comparably profitable
because sold at different times.
MLIP does not intend to make any distributions on newly issued Units.
(9) COMBINING INDEPENDENT STRATEGIES
Combining independent trading strategies involves substantial opportunity
costs, since 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.
(10) 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.
(11) DISCRETIONARY STRATEGIES
Discretionary trading managers may be prone to "emotionalism" and a lack of
discipline in their trading. Reliance on subjective trading judgment may produce
less consistent results than systematic approaches.
(12) 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 have recently accepted substantial additional customer
funds.
(13) ADVISORS' CONTINUED SERVICES UNCERTAIN
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.
(14) CHANGES IN TRADING STRATEGY
An Advisor may make significant changes in its trading strategies without
the knowledge of MLIP.
(15) ILLIQUID MARKETS
Certain instruments traded by the Fund may become illiquid preventing a
Trading Advisor from acquiring positions otherwise indicated by its strategy or
making it impossible for a Trading Advisor to close out positions against which
the market is moving.
-10-
<PAGE>
(16) CASH MANAGEMENT RISKS
It is possible that the Fund could incur losses in its cash management
program.
(17) NON-CORRELATION NOT NEGATIVE CORRELATION
MLIP anticipates that the Fund's performance will be non-correlated,
not negatively correlated, with general equity and debt price levels. The Fund
may or may not be profitable during upward or downward cycles in the stock and
bond markets.
(18) REDEMPTIONS RESTRICTED
Investors' limited ability to redeem Units could result in there being
a significant difference between a Unit's redemption value and its Net Asset
Value as of the cut-off date for irrevocable redemption requests.
(19) 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.
(20) 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
financially disfavored 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.
(21) USE OF GRAPHS
Appendix III -- The Role of Managed Futures in an Investment Portfolio
contains various graphic comparisons of the performance of the Fund and a
managed futures index to broad-based stock and bond market indices. The format
of graphics can have a significant impact on their effect on a reader.
(22) LIMITED PARTNERS TAXED CURRENTLY
Each year, Limited Partners are taxed on their allocable share of any
Fund profits. If an investor purchased stocks or bonds, on the other hand, there
would generally be no tax due on the appreciation in the value of such holdings
until disposition.
The performance information included in this Prospectus is presented
exclusively on a pre-tax basis.
(23) "INVESTMENT ADVISORY FEES"
Limited Partners could be required to treat the Profit Shares as well
as certain other expenses of the Fund as "investment advisory fees," which are
subject to substantial restrictions on deductibility for most individual
taxpayers. MLIP has not been classifying the Profit Share or such expenses as
"investment advisory fees," a position to which the Internal Revenue Service
(the "IRS") may object.
(24) TAXATION OF INTEREST INCOME
The Fund's trading losses will be almost exclusively capital losses
against ordinary income only to the extent of $3,000 per year. If an individual
Limited Partner had, for example, an allocable trading loss of $10,000 and
-11-
<PAGE>
allocable interest income of $5,000, he or she would incur a net loss
of $5,000 but would recognize taxable interest income of $2,000.
(25) TAX AUDIT
There can be no assurance that the Fund's tax returns will not
be audited by the IRS. If such an audit results in an adjustment, Limited
Partners could be required to pay back taxes, additions to such 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. SEE "FEDERAL INCOME TAX CONSEQUENCES" AT PAGE
49.
(26) BANKRUPTCY OR DEFAULT
The Fund could be unable to recover its assets from MLF or
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in the event
of the bankruptcy of such entities. In its off-exchange trading, the Fund
deals with its counterparties as principals and is subject to the full
risk of their default or insolvency. Investors could incur substantial
losses, despite the Fund having been otherwise highly profitable, in the
event of the bankruptcy or default of a Merrill Lynch entity or a market
counterparty.
(27) REGULATORY CHANGE
In the past several years, considerable international regulatory
attention has been focused on the activities of "non-traditional"
investment funds such as the Fund. There have also been a number of U.S.
tax proposals which would affect the Fund adversely. Future regulatory
change could have material negative consequences for an investment in the
Units.
____________________
INVESTMENT FACTORS
The following summarizes certain of the principal potential
advantages which MLIP believes may be associated with an investment in the
Fund. There are also substantial risks associated with such an
investment. See "Risk Factors" beginning at page 9.
____________________
(1) MLIP
MLIP is a major futures fund sponsor. MLIP's experience and
familiarity with the industry assists MLIP in its ongoing monitoring of
the Trading Advisors' performance as well as in the administration of the
Fund. MLIP combines experience in its trading advisor selection process
with an active approach to its general partner and trading manager roles.
(2) THE TRADING ADVISORS
All Advisors selected by MLIP for the Fund are successful, full-
time professionals, specializing in the trading strategies which they
implement for the Fund. The broad diversification of the Fund's Advisor
group has the potential to increase profit opportunities as well as risk
control.
(3) MARKET AND STRATEGY DIVERSIFICATION
MLIP emphasizes broad diversification and participation in
numerous global markets in its Advisor selections. MLIP focuses on
combining Advisors that collectively implement a wide range of
qualitatively different strategies and trading methods. Although the
current Advisor group emphasizes technical, trend-following methods, in
the future MLIP may favor fundamental and/or discretionary Advisors for
the Fund.
-12-
<PAGE>
(4) PORTFOLIO DIVERSIFICATION
The performance of the Fund should exhibit a substantial degree
of non-correlation with the performance of traditional stock and bond
portfolio components. 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.
(5) GLOBAL TRADING
As global markets and investing become more complex,
professionally managed futures may increasingly continue to be included in
traditional portfolios of stocks and bonds managed by advisors seeking
improved balance and diversification. By allocating a portion of the risk
segment of their portfolios to selected advisors specializing in futures
and forward trading, investors have the potential, if their futures
investment is successful, to enhance their prospects for superior
performance as well as to reduce both the volatility of their portfolios
over time and their dependence on a single nation's economy. Global
trading, with the ability to move capital rapidly among the world's
economies and markets, can both spread risk and multiply the profit
opportunities available to the Fund.
(6) OPPORTUNITY TO PROFIT IN RISING AS WELL AS DECLINING MARKETS
The futures markets offer the ability to trade either side of
any market. 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. It may be
advantageous for an overall portfolio to include investments that have the
potential to appreciate during periods of generally declining prices,
financial disruption, or economic instability.
(7) YIELD ENHANCEMENT
MLAM manages a substantial portion (approximately 80% to 90%) of
the Fund's available assets in the Government Securities markets --
subject to investment parameters established by MLIP as general partner of
the Fund. Through July 1, 1996, MLAM's cash management had returned a
yield enhancement for the Fund of approximately 1.02% (annualized) over
the prevailing 91-day Treasury bill rates.
As of April 30, 1996, MLAM and its affiliates, collectively, had
a total of approximately $207.7 billion in investment company and other
portfolio assets under management, including accounts of certain
affiliates of MLAM.
(8) SMALL MINIMUM INVESTMENT; SMALLER MINIMUM ADDITIONAL INVESTMENT
The initial minimum investment in the Fund is 50 Units ($5,000),
and the minimum additional investment only 10 Units ($1,000). Larger
investments are permitted in any whole Unit multiples.
(9) MERRILL LYNCH EMPLOYEE DISCOUNT
Officers and employees of ML&Co. and its affiliates subscribe
for Units at the discounted price of $97 per Unit. MLIP contributes the
remaining $3 per Unit so that other subscribers' investments are not
diluted. (Due to regulatory considerations, the employee discount is not
available to retirement accounts. Such accounts are free to purchase
Units, but must do so at $100 per Unit.)
(10) ADMINISTRATIVE CONVENIENCE
The Fund is structured so as to minimize the administrative
burden to Limited Partners. Limited Partners receive, directly from MLIP,
monthly unaudited and annual certified financial reports as well as all
tax information relating to the Fund 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 from MLIP upon
request.
-13-
<PAGE>
PERFORMANCE OF THE FUND
ML PRINCIPAL PROTECTION L.P.
JUNE 1, 1996
Type of Pool: Multi-Advisor; Selected Advisor/Publicly-Offered/
"Principal Protected"/(1)/
Inception of Trading: October 12, 1994
Aggregate Subscriptions: $92,863,020
Current Capitalization: $89,609,493
Worst Monthly Drawdown (Month/Year): (3.70)% (2/96)
Worst Peak-to-Valley Drawdown (Period)/(2)/: (3.70)% (2.96)
<TABLE>
<CAPTION>
============================================================
MONTHLY RATES OF RETURN/(3)/
------------------------------------
MONTH 1996 1995 1994
------------------------------------------------------------
<S> <S> <S> <S>
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 (0.21)% --
------------------------------------------------------------
July (1.30)% --
------------------------------------------------------------
August 0.95% --
------------------------------------------------------------
September (0.32)% --
------------------------------------------------------------
October 0.29% 1.04%
------------------------------------------------------------
November 0.69% 0.32%
------------------------------------------------------------
December 2.12% 0.40%
------------------------------------------------------------
Compound Annual 0.76% 10.51% 1.76%
Rate of Return (5 months) (2-2/3 months)
============================================================
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
---------------------------
THE UNITS ISSUED UNDER THIS PROSPECTUS WILL COMMENCE TRADING AT 75%
LEVERAGE. ALL SERIES OF UNITS ISSUED TO DATE HAVE TRADED AT 60% LEVERAGE.
INCREASING TRADING LEVERAGE SHOULD INCREASE PROFIT POTENTIAL, RISK AND
VOLATILITY.
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund
is defined as one that allocates no more than 25% of its traded assets to any
single manager. The Fund does not currently allocate more than 25% of its
trading assets to a single Advisor but may do so in the future; consequently, it
is referred to as a "Multi-Advisor; Selected Advisor" fund. Applicable CFTC
regulations define a "Principal Protected" fund as one which is designed to
limit the loss of participants' initial investment.
(2) "Worst peak-to-valley drawdown" represents the greatest
percentage decline from a month-end cumulative Monthly Rate of Return without
such cumulative Monthly Rate of Return being equalled or exceeded as of a
subsequent month-end. For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the "peak-to-valley
drawdown" would still be continuing at the end of April in the amount of
approximately (3)% whereas if the Monthly Rate of Return had been approximately
3% in March, the "peak-to-valley drawdown" would have ended as of the end of
February at approximately the (2)% level.
(3) The composite record does not reflect the performance of any
single series of Units (although it closely matches that of the Series A Units,
which have traded since inception). In no month has any series had a rate of
return 10% higher or lower than any other series.
SEE ALSO APPENDIX I -- NOTES TO THE PERFORMANCE SUMMARIES;
NOTES 10 AND 11 ON PAGES APPI-3 AND APPI-4.
---------------------------
-14-
<PAGE>
PERFORMANCE OF THE OTHER MLIP
MULTI-ADVISOR FUTURES FUNDS
The following performance summaries present the past performance of
other "selected-advisor"/"multi-advisor"; "principal protected"/non-"principal
protected" funds sponsored by MLIP.
Funds with different "principal protection" features allocate
substantially different percentages of their assets to trading. Each series of
Units sold pursuant to this Prospectus will initially allocate 75% of its assets
to trading. However, all series sold on or before June 30, 1996 initially
allocated only 60% of their assets to trading. The SECTOR Strategy Funds, whose
performance summaries are set forth below, each began trading with approximately
70% of their assets allocated to trading, and certain of such SECTOR Strategy
Funds have traded at significantly more than 70% leverage over time. The MLIP
funds without "principal protection" features all generally trade at 100%
leverage.
MLIP funds are each different investments, have different advisors and
different numbers of advisors, and allocate different percentages of assets to
trading in general as well as among such advisors.
All of the "principal protected" MLIP funds (other than The Growth and
Guarantee Fund L.P., see Appendix II) are also "multi-advisor" funds.
As of the date of this Prospectus, each of the current Advisors is
managing one or more accounts for other MLIP multi- or selected-advisor funds.
However, no MLIP fund has ever had the same Advisor group as does the Fund.
The fee structure and interest income arrangements of the various MLIP
"multi-" and "selected-advisor" funds vary somewhat, but all are generally
comparable to those of the Fund.
ML Principal Protection Ltd. (see page 16) has operated as the
offshore "sister" pool of the Fund.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND
MATERIAL DIFFERENCES EXIST BETWEEN THE FUNDS WHOSE PERFORMANCE SUMMARIES ARE SET
FORTH ON THE FOLLOWING PAGES AND THE FUND. TO DATE, THE FUND HAS NOT PERFORMED
IN A MANNER COMPARABLE TO OTHER MLIP-SPONSORED FUNDS, AND IT IS UNLIKELY THAT
THE FUND WILL PERFORM IN A MANNER COMPARABLE TO MANY OF SUCH FUNDS IN THE
FUTURE.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF A COMMODITY POOL'S INCOME AND, IN CERTAIN INSTANCES, MAY
GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED AND UNREALIZED LOSSES FROM
COMMODITY TRADING.
-15-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITH "PRINCIPAL PROTECTION" FEATURES
- ------------------------------------------------------------------------------------------------------------------------------------
Worst
Worst Monthly Peak-to-valley
Type of Inception Aggregate Current Drawdown Drawdown
NAME OF FUND Offering of Trading Subscriptions Capitalization % Date % Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Principal Protection Plus
Ltd. (Offshore Counterpart of
the Fund) Private Oct. 1994 $273,427,700 $259,303,924 (1.27)% (7/95) (1.46)% (6/95-7/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The S.E.C.T.O.R. Strategy
Fund(SM) L.P. Public July 1990 $125,853,001 $34,302,882 (5.87)% (1/92) (13.78)% (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. Public Dec. 1990 $136,410,000 $22,119,944 (4.53)% (1/92) (15.93)% (8/93-1/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. (SECTOR III Units) Public July 1991 $194,005,000 $37,612,177 (7.10)% (1/92) (14.25)% (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
IV L.P. Public July 1992 $75,646,400 $5,845,344 (4.96)% (7/95) (8.98)% (6/95-10/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International V L.P.
(Series A Units) Public July 1993 $137,500,000 $25,031,062 (3.24)% (7/95) (7.91)% (6/95-10/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
VI L.P. Public Sept. 1993 $108,693,900 $53,903,016 (2.71)% (7/95) (7.29)% (9/93-4/94)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International II Ltd. Private Dec. 1990 $55,181,600 $3,627,565 (4.56)% (8/94) (16.49)% (8/93-1/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II Ltd. (SECTOR III Shares) Private July 1991 $85,701,800 $10,891,584 (7.10)% (1/92) (14.25)% (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International IV Ltd.
Series A Shares Private July 1992 $55,189,400 $9,304,153 (2.78)% (8/94) (8.32)% (1/94-1/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International V. Ltd. Private Jan. 1993 $81,252,600 $10,343,566 (3.41)% (7/95) (8.00)% (6/95-10/95)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Japan Investment (YEN) (YEN)
Partners Ltd. Private Aug. 1993 1,050,000,000 1,012,582,786 (3.52)% (7/94) (7.32)% (1/94-2/95)
- ------------------------------------------------------------------------------------------------------------------------------------
SECTOR International Ltd. Private Sept. 1993 $163,806,100 $35,818,055 (4.60)% (2/94) (10.43)% (9/93-2/94)
- ------------------------------------------------------------------------------------------------------------------------------------
(YEN) (YEN)
Yen Linked ML PPP Ltd. Private Oct. 1995 5,283,000,000 5,387,536,662 (1.67)% (2/96) (1.67)% (2/96)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1996
Cumula- Compound 1995 1994 1993 1992 1991
tive Rate of Compound Compound Compound Compound Compound
Rate of Return Rate of Rate of Rate of Rate of Rate of
NAME OF FUND Return (5 months) Return Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Principal Protection Plus
Ltd. (Offshore Counterpart of 10.97% 1.47%
the Fund) composite (1.35)% 11.10% (2-2/3 mos.) N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The S.E.C.T.O.R. Strategy
Fund(SM) L.P. 51.67% (1.24)% 19.25% (9.29)% 19.36% (3.43)% 23.18%
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. 24.71% (1.31)% 13.50% (9.93)% 5.49% (2.76)% 20.50%
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) 13.99%
II L.P. (SECTOR III Units) 20.96% (5.69)% 9.30% (3.22)% 15.99% (8.30)% (6 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) 0.51%
IV L.P. 13.75% (3.57)% 9.78% (5.73)% 13.40% (6 mos.) N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International V L.P. 4.99%
(Series A Units) 6.85% (7.49)% 14.22% (3.68)% (6 mos.) N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (1.72)% N/A N/A
VI L.P. 3.23% (0.78)% 6.72% (0.80)% (4 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International II Ltd. 34.45% N/A 21.27% (9.64)% 5.49% (2.76)% 20.50%
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) 13.99%
II Ltd. (SECTOR III Shares) 18.89% (5.38)% 2.84% 0.77% 15.99% (8.30)% (6 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International IV Ltd. 0.51%
Series A Shares 14.18% (3.46)% 11.84% (7.21)% 13.40% (6 mos.) N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International V. Ltd. 9.85% (1.96)% 11.11% (3.94)% 4.99% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
ML Japan Investment 1.13%
Partners Ltd. (1.56)% (0.43)% 3.95% (5.95)% (5 mos.) N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
(3.25)%
SECTOR International Ltd. 0.77% (0.77)% 7.65% (3.99)% (3-2/3 mos.) N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
(0.16)%
Yen Linked ML PPP Ltd. (0.30)% (0.46)% (3 mos.) N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS (OTHER THAN ML
PRINCIPAL PROTECTION PLUS LTD.) ARE EACH TRADED PURSUANT TO MATERIALLY DIFFERENT
PROGRAMS AND WITH MATERIALLY DIFFERENT OBJECTIVES THAN THE FUND.
-16-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
ML SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
JUNE 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Worst
Worst Monthly Peak-to-valley
Type of Inception Aggregate Current Drawdown Drawdown
NAME OF FUND Offering of Trading Subscriptions Capitalization % Month % Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Global Horizons L.P. Public Jan. 1994 $95,759,901 $82,916,686 (3.15)% (7/95) (4.98)% (6/95-10/95)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series A) Public Jan. 1994 $71,325,088 $49,728,598 (3.39)% (7/95) (5.57)% (6/95-9/95)
- -----------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series B) Public Sept. 1994 $3,708,415 $2,785,641 (3.43)% (7/95) (5.73)% (6/95-9/95)
- -----------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments II L.P.
Public May 1988 $269,809,800 $15,195,377 (10.34)% (1/91) (17.81)% (11/90-8/91)
- ------------------------------------------------------------------------------------------------------------------------------------
Canadian Diversified Futures ceased trading
Fund Limited Partnership Public July 1989 $13,060,222 12/31/93 (6.53)% (5/90) (18.38)% (12/90-8/91)
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
Series A Units Public Jan. 1990 $18,182,000 $13,377,039 (15.99)% (1/92) (34.39)% (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
Series B Units Public Jan. 1991 $50,636,000 $29,249,070 (15.01)% (1/92) (32.38)% (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
Series C Units Public Jan. 1992 $40,000,000 $16,326,835 (7.97)% (1/94) (24.13)% (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV L.P.
Series B Units Public July 1992 $13,353,600 $1,961,618 (6.08)% (7/95) (11.10)% (6/95-10/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV Ltd.
Series B Shares Private July 1992 $9,131,000 $684,651 (3.66)% (1/94) (10.79)% (1/94-1/95)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments L.P. Private Mar. 1989 $86,500,700 $27,352,649 (5.09)% (2/91) (8.33)% (6/95-10/95)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1996
Cumula- Compound 1995 1994 1993 1992 1991
tive Rate of Compound Compound Compound Compound Compound
Rate of Return Rate of Rate of Rate of Rate of Rate of
NAME OF FUND Return (5 months) Return Return Return Return Return
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Global Horizons L.P. 17.82% (5.25)% 19.48% 4.08% N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series A) 18.49% (5.01)% 19.77% 4.15% N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series B) 20.78% (5.16)% 22.62% 3.86% N/A N/A N/A
(4 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments II L.P.
26.99% (0.36)% 17.07% (1.36)% 18.67% (3.17)% (3.95)%
- ------------------------------------------------------------------------------------------------------------------------------------
Canadian Diversified Futures
Fund Limited Partnership
(15.21)% N/A N/A N/A N/A N/A (15.21)%
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
Series A Units 58.70% (0.39)% 34.89% (8.64)% 20.64% (16.65)% 28.57%
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
Series B Units 71.14% 0.07% 34.49% (8.43)% 19.74% (13.88)% 34.67%
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
Series C Units 33.80% (0.02)% 35.08% (7.88)% 14.77% (6.30)% N/A
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV L.P.
Series B Units 20.41% (3.59)% 12.01% (7.44)% 19.56% 0.76% N/A
(6 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV Ltd. 20.09% (3.96)% 14.51% (9.37)% 19.56% 0.76% N/A
Series B Shares (6 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments L.P. 41.49% (1.26)% 11.80% 2.95% 16.56% 4.06% 2.64%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE EACH
TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN THE FUND.
-17-
<PAGE>
- --------------------------------------------------------------------------------
ML SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
JUNE 1, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Worst
Worst Monthly Peak-to-valley
Type of Inception Aggregate Current Drawdown Drawdown
NAME OF FUND Offering of Trading Subscriptions Capitalization % Month % Period
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Futures dissolved as of
Investments Ltd. Private Mar. 1989 $ 68,202,237 8/31/94 (6.17)% (2/94) (11.10)% (1/94-2/94)
Currency Investment dissolved as of
Partners Ltd. Private April 1991 $ 55,114,566 8/31/94 (5.13)% (8/91) (16.10)% (7/91-5/94)
The Managed Futures Trust dissolved as of
Fund L.P. Private May 1991 $ 11,090,759 9/24/93 (6.22)% (7/91) (14.50)% (1/92-5/92)
Commodity Trading dissolved as of
Company, Ltd. Private July 1991 $ 25,797,626 10/31/94 (6.47)% (2/94) (23.31)% (1/92-12/92)
Permal F/X, Financials &
Futures Ltd. Private July 1992 $106,495,710 $48,660,183 (5.67)% (2/94) (12.24)% (2/94-4/94)
ML Institutional dissolved as of
Partners L.P. Public Feb. 1992 $ 57,312,700 12/31/94 (3.58)% (1/94) (8.78)%(10/93-4/94)
Futures Opportunities dissolved as of
Limited Private Dec. 1988 $ 45,310,202 8/1/92 (13.70)% (5/90) (17.34)% (1/92-5/92)
Daiwa Hudson
River Fund Private Feb. 1994 $ 7,044,701 $5,576,266 (4.72)% (3/94) (17.20)% (2/94-1/95)
The JLI Trading
Co. Fund Private Mar. 1995 $ 14,300,136 $13,925,926 (6.93)% (2/96) (6.93)% (2/96)
</TABLE>
<TABLE>
<CAPTION>
1996
Cumula- Compound 1995 1994 1993 1992 1991
tive Rate of Compound Compound Compound Compound Compound
Rate of Return Rate of Rate of Rate of Rate of Rate of
NAME OF FUND Return (5 months) Return Return Return Return Return
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Futures (3.78)%
Investments Ltd. 13.39% N/A N/A (8 mos.) 15.26% 3.12% (0.85)%
Currency Investment (4.05)% (7.52)%
Partners Ltd. (14.25)% N/A N/A (8 mos.) 2.06% (1.57)% (9 mos.)
The Managed Futures Trust 20.58% 10.06%
Fund L.P. 36.19% N/A N/A N/A (8-2/3 mos.) 2.63% (8 mos.)
Commodity Trading 6.21% (3.50)%
Company, Ltd. (14.46)% N/A N/A (10 mos.) 14.91% 23.31% (6 mos.)
Permal F/X, Financials & (5.79)%
Futures Ltd. 18.61% 4.33% 14.77% (5.33)% 11.05% (6 mos.) N/A
ML Institutional (3.51)%
Partners L.P. (0.35)% N/A N/A (4.06)% 7.65% (11 mos.) N/A
Futures Opportunities (13.56)%
Limited (1.86)% N/A N/A N/A N/A (7 mos.) 13.54%
Daiwa Hudson (16.22)%
River Fund (0.65)% 0.26% 19.82% (11 mos.) N/A N/A N/A
The JLI Trading 2.45%
Co. Fund (2.64)% (4.97)% (10 mos.) N/A N/A N/A N/A
</TABLE>
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE EACH
TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN THE FUND.
-18-
<PAGE>
SELECTED FINANCIAL DATA
The following Selected Financial Data is derived: (i) from the
financial statements of the Fund for the period from October 12, 1994
(commencement of operations) to December 31, 1994 and for the fiscal year ended
December 31, 1995, which has been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report included in this Prospectus (see "Index to
Financial Statements"), and is included herein in reliance upon the authority of
Deloitte & Touche LLP as experts in auditing and accounting; and (ii) from the
unaudited financial statements of the Fund for the period from January 1, 1996
to May 31, 1996 and January 1, 1995 to May 31, 1995.
<TABLE>
<CAPTION>
January 1, 1996 January 1, 1995 October 12, 1994
to to January 1, 1995 (Commencement
May 31, 1996 May 31, 1995 to of Operations) to
Income Statement Data (Unaudited) (Unaudited) December 31, 1995 December 31, 1994
- --------------------- --------------- --------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Realized Gain (Loss) $2,856,105 $2,364,339 $4,407,833 $ (363,054)
Unrealized (Loss) Gain (2,015,889) 1,466,799 1,355,377 1,115,935
---------- ---------- ---------- ----------
Total Trading Results 840,216 3,831,138 5,763,210 752,881
Interest Income 1,927,550 1,083,661 3,415,670 377,303
---------- ---------- ---------- ----------
Total Revenues 2,767,766 4,914,799 9,178,880 1,130,184
Expenses:
Administrative Fees/1/ 53,617 --- --- ---
Profit Shares 110,738 505,860 652,366 129,169
Brokerage Commissions 1,983,811 1,051,336 3,303,292 416,617
Total Expenses 2,148,166 1,557,196 3,955,658 545,786
---------- ---------- ---------- ----------
Net Income (Loss) Before
Minority Interest 619,600 3,357,603 5,223,222 584,398
Minority Interest/2/ (1,846) 27,376 (36,730) (4,504)
---------- ---------- ---------- ----------
Net Income $ 617,754 $3,330,227 $5,186,492 $ 579,894
========== ========== ========== ==========
May 31, 1996
December 31, 1995 (Unaudited)
------------------------------ ---------------------------
Redemption Redemption
Purposes GAAP/3/ Purposes GAAP/3/
------------- ----------- ----------- ----------
Aggregate Net
Asset Value
(Series A-E) Net Asset
$74,988,233 $74,846,544 Value (Series $84,609,493 $84,501,012
A-G)
Net Asset
Value per Unit Net Asset
Series A $106.96/4/ $106.74/4/ Value per Unit
Series B $110.36 $110.15 Series A $107.82/4/ $107.69/4/
Series C $103.35 $103.16 Series B $105.20/4/ $105.03/4/
Series D $102.34 $102.15 Series C $100.66/4/ $100.52/4/
Series E $102.72 $102.53 Series D $103.11 $102.98
Series E $103.49 $103.36
Series F $100.44 $100.31
Series G $ 98.95 $ 98.82
- ---------------------
</TABLE>
1 As of January 1, 1996, a portion of the Brokerage Commissions were
reclassified as Administrative Fees, at no additional cost to the Fund.
2 MLIP is general partner of the "trading partnership" (of which the Fund is the
sole limited partner and MLIP the general partner) through which the Fund
trades. Because the Fund owns substantially all of the "trading partnership,"
"trading partnership" activities are referred to as Fund activities in this
Prospectus. The minority interest represents MLIP's share of the trading
partnership's profit or loss.
3 In accordance with Generally Accepted Accounting Principles ("GAAP"), the full
amount of the organizational and initial offering costs were deducted from
Partners' capital from inception. The Fund, however, reduces Net Asset Value for
these costs only as the monthly reimbursement payments are actually made. This
difference will be eliminated as of October 31, 1997 when reimbursement payments
end.
4 Net of annual distributions of $6.00 on the Series A and B and $3.50 on the
Series C Units.
_________________
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
-19-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATIONAL OVERVIEW; ADVISOR SELECTIONS
The Fund's results of operations depend on MLIP's ability to select
Advisors as well as on the Advisors' ability to trade profitably. MLIP's
selection procedures and trading leveraging analysis, as well as the Advisors'
trading methods, are confidential, so that substantially the only available
information relevant to the Fund's results of operations is its actual
performance record to date. Because of the speculative nature of its trading,
the Fund's past performance is not necessarily indicative of future results.
As of July 1, 1996, the trading assets attributable to each series of
Units were allocated approximately as follows:
Chesapeake Capital Corporation 25.0%
John W. Henry & Company, Inc 25.0%
Non-"Core" Advisors 50.0%
------
Total 100.0%
======
In the Fund's first 19-2/3 months of trading, MLIP (i) terminated one
"core" Advisor, (ii) added 4 non-"core" Advisors, (iii) terminated 3 non-"core"
Advisors, and (iv) reallocated trading assets as of the beginning of 8 different
months. MLIP expects to continue to change both allocations and Advisor
selections from time to time without advance notice to existing investors.
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. However, there can be no assurance as to the frequency or
number of the Advisor changes that may take place in the future, or as to how
long any of the current Advisors will continue to manage assets for the Fund.
Results of Operations
General
- -------
MLIP believes that multi-Advisor futures funds should be regarded as
medium- to long-term invest ments, 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.
The Fund controls credit risk in its derivatives trading by trading
only through Merrill Lynch entities. The Fund attempts to control the market
risk inherent in stock trading in the manner described under "The Advisor
Selection Process -- MLIP and Its Advisor Selection and Monitoring Process" at
page 22 and "Leverage Considerations" at page 30. The market risk to the Fund
is, in any event, limited by the deleveraged character of its trading and its
"principal protection" feature. See "Leverage Considerations" at page 30 and
"The ML&Co. Guarantee" at page 31.
Through May 31, 1996, all series of Units traded with approximately
60% of their assets allocated to trading. All series of Units sold pursuant to
this Prospectus will start trading with 75% of their assets so allocated.
The performance of the different series of Units differs somewhat over
the same period, because the various series begin trading at different times and
pay different Profit Shares.
-20-
<PAGE>
Performance Summary
-------------------
1994 (2-2/3 months)-1995
STATISTICS. During 1994 (2-2/3 months), the Fund's average month-
end Net Assets equalled $32,552,448, and the Fund recognized gross trading
gains of $752,881 or 2.31% of such average month-end Net Assets. Brokerage
commissions of $416,617 or 1.28% and Profit Shares of $129,169 or 0.4% 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) 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.
During 1995, the Fund's average month-end Net Assets equalled
$55,827,125, and the Fund recognized gross trading gains of $5,763,210 or
10.32% of such average month-end Net Assets. Brokerage commissions of
$3,303,292 or 5.92% and Profit Shares of $652,366 or 1.17% 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) or 9.29% of average month-end Net Assets, which resulted in a
10.57% increase in the overall Net Asset Value of the Fund.
OVERVIEW. In 1994-1995, prevailing price trends in several key
markets enabled the Fund's Trading Advisors to trade profitably for the
Fund. Although trading in many of the traditional commodity markets may
have been lackluster, the currency and financial markets offered
exceptional trading opportunities. Soaring stock prices and falling
interest rates, coupled with significant currency moves, resulted in
profitable trading opportunities in these markets throughout the year.
After months characterized by very difficult trading
environments, solid price trends across many markets began to emerge
during the first quarter of 1995. In February, bond markets worldwide
recovered some of the ground lost in the previous year. Specifically, U.S.
Treasury prices improved, a development spurred by the belief that growth
in the U.S. economy was slowing enough for inflation to stabilize. The
Fund was also able to profit in the non-dollar markets, as German and
Japanese bonds rallied. In the currency markets, long positions in the
Deutsche mark versus the U.S. dollar resulted in strong profits for the
Fund as the Deutsche mark hit a two-year high against the dollar on
February 24.
In the second quarter of 1995, market volatility once again began
to affect trading, as many previously strong price trends began to weaken
and, in some cases, reverse. During April, the U.S. dollar hit new lows
versus the Japanese yen and Deutsche mark before rebounding sharply. The
U.S. dollar enjoyed another sharp rally in May, due to the intervention of
major central banks, potential trade sanctions against Japan and United
States Congressional action to reduce the federal deficit. In June, strong
indications that the U.S. economy was slowing, coupled with a failure of
the Bundesbank to lower the Lombard rate, stalled a rally in the German
bond market.
In July the Federal Reserve Board Chairman Alan Greenspan's
optimistic comments concerning the U.S. economy led to a sudden 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 bias 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 Deutsche mark. The dollar's rally was supported by coordinated
intervention by major central banks and further bolstered on August 30 by
widespread recognition of the growing banking crisis in Japan.
Despite continued price volatility during the final quarter of
1995, the Trading Advisors were able to identify several trends in key
markets. U.S. Treasury bond prices continued their strong move upward
throughout November, due both to weak economic data and optimism on
Federal budget talks. By month-end, the 30-year Treasury bond rate was
pushed to its lowest level in more than two years. During December, U.S.
bond prices weakened further as government budget talks continued to
stall. By year-end, however, prices strengthened somewhat as the yield on
the U.S. long bond fell below 6% for the first time in over two years.
-21-
<PAGE>
1996 (5 months)
STATISTICS. From January 1, 1996 through May 31, 1996, the Fund's
average month-end Net Assets equalled $83,860,013 and the Fund recognized
gross trading gains of $840,216 or 1.00% of such average month-end Net
Assets. Brokerage commissions of $1,983,811 or 2.37%, administrative
expenses of $53,617 or 0.06% and Profit Shares of $110,738 or 0.13% of
average month-end Net Assets were paid. Interest income of $1,927,550 or
2.30% of average month-end Net Assets resulted in a net gain of $617,754
(before organizational and initial offering cost reimbursement payments of
$33,208 and after deducting MLIP's "minority interest" in the trading
partnership), or 0.74% of average month-end Net Assets which resulted in a
0.86% increase in the Net Asset Value of the Series A Units, a 0.84%
increase in the Net Asset Value of the Series B Units, a 0.81% increase in
the Net Asset Value of the Series C Units, a 0.77% increase in the Net
Asset Value of the Series D and Series E Units, a 0.44% increase in the
Net Asset Value of the Series F Units and a 1.05% decrease in the Net
Asset Value of the Series G Units (since April 19, 1996, when Series G
Units were issued).
The performance of the different series of Units differs somewhat
over the same period due primarily to Profit Share calculation differences
resulting from the different times at which the various series of Units
began trading.
OVERVIEW. The first five months of 1996 have included the largest
single monthly drawdown 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 dollar
reached a 23-month high against the 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 May, 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.
LIQUIDITY AND CAPITAL RESOURCES
The amount of capital raised for the Fund does not have a
significant impact on its operations. This is because (leaving aside the
de minimis organizational and initial offering cost reimbursement
obligation) the Fund has no capital expenditure or working capital
requirements other than paying trading losses and costs, both of which
should be generally proportional to the capital available. In addition,
within broad ranges of capitalization, the Advisors' trading positions
should increase or decrease in approximate proportion to the size of the
Fund account managed by each of them, respectively.
The Fund raises additional capital only through the continuous
offering of its Units.
Inflation is not a significant factor in the Fund's
profitability, although inflationary cycles can give rise to the type of
major price movements that can have a materially favorable or adverse
impact on the Fund's performance.
Changes in the level of prevailing interest rates could have a
material effect on the Fund's trading leverage. Interest rates directly
affect the calculation of the discounted value of the guaranteed $100 per
Unit and, accordingly, the assets available for trading.
-22-
<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 with traditional investments such as stocks and bonds.
Advisors' past records are evaluated comparatively with a view to
combining Advisors whose respective trading results have historically
demonstrated not only a low degree of correlation with stocks and bonds
but also with the other advisors selected. Certain mathematical
optimization procedures are then used to develop an advisor combination
which, based on a hypothetical composite of the past performance of the
respective advisors, exhibits a risk/reward profile consistent with MLIP's
objectives. By identifying advisor combinations on this basis, MLIP hopes
to maintain profit potential while also materially reducing the risk of
major drawdowns.
In selecting Advisors for the Fund, MLIP emphasizes retaining
multiple Advisors, trading in multiple markets and implementing multiple
strategies. Certain of the Advisors will trade limited portfolios -- for
example, focusing on currencies or financial instruments. Other Advisors
will trade on a broadly diversified basis. MLIP evaluates the overall
market diversification and emphasis that particular Advisor combinations
would give the Fund. Discretionary as well as systematic, fundamental as
well as technical, Advisors are retained. 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 trading approach, markets traded, prior experience, past
performance, fee requirements and assets under management. Although
different factors may be considered in the case of different Advisors (and
no representation is made that any given factor will be considered in
selecting any given Advisor), subjective evaluation of each prospective
Advisor by principals of MLIP is an important factor in all of MLIP's
Advisor selections. Quantitative non-correlation analysis and volatility
studies are employed in developing the overall Advisor mix, but the
principal objective is to identify Advisors MLIP believes to have
excellent potential to trade successfully.
No Advisor selected by MLIP (other than MLAM) will have 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 will be affiliated with any other
Advisor.
MLIP monitors the performance of the Fund and its Advisors on a
day-to-day basis, and, from time to time, reallocates assets among,
terminates and/or appoints new Advisors. At least quarterly, MLIP formally
reviews the performance of the Fund and each Advisor in order to assess
whether to change Advisor selections or allocations. MLIP anticipates that
a number of additional adjustments may be made over time, as they have
been to date; but there can be no assurance that the Fund's Advisor
portfolio may not remain static for significant periods of time. On the
other hand, MLIP may, on short notice, terminate or allocate assets away
from an Advisor if MLIP has reason to believe that the Advisor is
deviating from historical trading patterns, violating the Advisor's risk
management policies or has otherwise given MLIP what it considers to be
cause for termination.
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<PAGE>
ACCESS TO GLOBAL MARKETS
The Fund has access to global markets including, but not limited
to, the following:
CURRENCIES
--------------------------------------------------------------
Australian Dollar Irish Punt
Belgian Franc Italian Lira
British Pound Japanese Yen
Canadian Dollar New Zealand Dollar
Danish Krone Norwegian Krone
Deutsche Mark Singapore Dollar
Dutch Guilder Spanish Peseta
European Currency Unit Swedish Krona
Finnish Markka Swiss Franc
French Franc United States Dollar
FINANCIAL INSTRUMENTS
--------------------------------------------------------------
Australian Bonds Major Market Stock Index (U.S.)
Australian Treasury Bills MEFF&S Stock Index (Spain)
Canadian Bonds Nikkei Stock Average (Japan)
CAC 40 Stock Index (France) PIBOR
Eurodollars S&P 500 Stock Index (U.S.)
Eurolira Spanish Bonds
Euromarks Tokyo Stock Price Index
Euroswiss U.K. "Gilts"
Euroyen U.K. Short Sterling
Financial Times 100 Stock U.S. Dollar Index
Index (U.K.) U.S. Treasury Bills
French Bonds U.S. Treasury Bonds
German Bonds U.S. Treasury Notes
Italian Bonds Value Line Stock Index (U.S.)
Japanese Bonds
METALS
--------------------------------------------------------------
Aluminum Platinum
Gold Silver
Lead Tin
Nickel Zinc
ENERGY PRODUCTS
--------------------------------------------------------------
Crude Oil No. 2 Heating Oil
Gas Oil Propane
Heavy Fuel Oil Residual Fuel Oil
Natural Gas Unleaded Gasoline
AGRICULTURAL PRODUCTS
--------------------------------------------------------------
Cocoa Orange Juice
Coffee Pork Bellies
Corn Soybeans
Cotton Soymeal
Feeder Cattle Soy Oil
Live Hogs Sugar
Oats Wheat
The Fund has not traded in all of the foregoing markets. There can be no
assurance as to which markets the Fund will trade in over time.
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<PAGE>
THE ADVISORS
"CORE" ADVISOR SUMMARIES
As of May 31, 1996, the "core" Advisors were, in the aggregate,
managing approximately $2.0 billion of customer assets in the futures,
cash and forward markets, of which approximately $1.4 billion was being
traded in the programs used for the Fund.
THE CURRENT "CORE" ADVISORS ARE AS FOLLOWS:
<TABLE>
<CAPTION>
JUNE 1, 1996
ALLOCATION APRIL 30, 1996
GENERAL TRADING OF TRADING ASSETS UNDER
ADVISOR APPROACH ASSETS MANAGEMENT*
------- --------------- ------------ --------------
<S> <C> <C> <C>
Chesapeake Capital Technical; 25% $819 million (total)
Corporation trend-following $770 million (Diversified Program)
John W. Henry & Technical; 25% $1.3 billion (total)
Company, Inc. trend-following $880 million (Financial and Metals Portfolio)
</TABLE>
____________________
/*/ Excluding "notional funds." "Notional" funds represent the
difference between the level at which an advisor is instructed to trade an
account and the capital actually committed to the account.
_________________________
CHESAPEAKE CAPITAL CORPORATION (25% ALLOCATION AS OF JULY 1,
1996) -- Chesapeake Capital Corporation ("Chesapeake") has offered
investment advisory and portfolio management services to clients since
1988. Chesapeake currently trades three programs, relying primarily on
technical analysis and "charting" in its evaluation of historical
commodity price movements. In the Diversified Program that 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 April 30,
1996, Chesapeake was managing approximately $770 million of customer funds
in the Diversified Program ("notional" funds excluded) and approximately
$819 million of customer funds in all of its programs ("notional" funds
excluded).
Chesapeake has traded the Diversified Program since February
1988. The compound annual rates of return achieved by the Diversified
Program since January 1, 1990 have been 43.12%, 12.51%, 1.81%, 61.82%,
15.87%, 2.67% and 0.98% (5 months), respectively. During that period, the
largest monthly drawdown was (10.98)% (1/92) and the largest peak-to-
valley drawdown (16.62)% (1/92-5/92).
See pages APPI-9 through APPI-10 for performance information
relating to Chesapeake.
JOHN W. HENRY & COMPANY, INC. (25% ALLOCATION AS OF JULY 1,
1996) - John W. Henry & Company, Inc. ("JWH") operates eleven trading
programs for U.S. and non-U.S. investors. These programs, other than the
InterRate(TM) program, emphasize intermediate- and long-term, quantitative
trend analysis models. The Financial and Metals Portfolio used for the
Fund implements a technical, trend-following system which participates in
four major market sectors -- interest rates, world currencies, stock
indices and precious metals -- and initiates trades according to trend-
emergence and computerized determination of relative risk. As of April
30, 1996, JWH was trading approximately $880 million of customer funds in
the Financial and Metals Portfolio ("notional" funds excluded) and
approximately $1.3 billion of customer funds in all of its programs
("notional" funds excluded).
JWH has traded the Financial and Metals Portfolio with client
capital 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,
1990 have been 83.59%, 61.87%, (10.89)%, 46.82%, (5.32)% 38.54% and 3.89%
(5 months), respectively. During that period the largest monthly drawdown
was (22.7)% (5/90) and the largest peak-to-valley drawdown (39.5)% (12/91-
5/92).
-25-
<PAGE>
See pages APPI-20 through APPI-23 for performance information relating
to JWH.
More complete descriptions and the performance summaries for the
"core" Advisors are included in Appendix I of this Prospectus. Read Appendix I
carefully before you decide whether to invest. See "Risk Factors -- (2) Past
Performance" at page 9.
THE ADVISORY AGREEMENTS
The Advisory Agreements among the Fund, MLIP and each Advisor
terminate approximately one year after the Advisor begins managing an account
for the Fund, subject to up to two one-year renewals, on the same terms, at the
option of MLIP (most of the current Advisory Agreements are in their first
renewal period as of the date of this Prospectus).
Each Advisory Agreement provides that the Fund will indemnify the
Trading Advisor and related parties for losses and expenses resulting from any
claims or proceedings against them relating to the activities of the Fund,
provided that the conduct which was the subject of such claim or proceeding does
not constitute negligence or 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
("capital and profits," for such purposes, does not include any distributions
previously received or other returns of capital and profits, including
redemptions).
Under the exculpatory provisions of the Advisory Agreements, none of
the Trading Advisors or any related parties is 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.
Most Advisors agree to invest $10,000 in the Fund as a precondition to
being retained by the Fund.
MLAM'S INVESTMENT ADVISORY CONTRACT
The Investment Advisory Contract executed and delivered among MLIP,
the Fund, MLF and MLAM exculpates MLAM for actions or omissions in connection
with managing the Fund's portfolio of Government Securities, provided such
actions or omissions do not constitute gross negligence or willful and reckless
misconduct. Under the Investment Advisory Contract, MLF is obligated to pay
MLAM's management fees, and MLIP will be responsible for paying these fees
should MLF for some reason fail to do so. In the Limited Partnership Agreement,
MLIP agrees to indemnify and hold harmless the Fund for any loss or expense the
Fund may incur as a result of the difference between MLAM's standard of
liability under the Investment Advisory Contract and MLIP's standard of
liability under the Limited Partnership Agreement.
MLIP AND MLF
BACKGROUND
MLIP is the sole promoter of the Fund. None of MLAM, MLF, 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 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 June 1, 1996, there were in excess of $1.3 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.
-26-
<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.
PRINCIPALS
The officers of MLIP and their business backgrounds are as follows.
<TABLE>
<CAPTION>
<S> <C>
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
William T. Maitland Secretary and Director
Allen N. Jones Chairman and Director
</TABLE>
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief Executive
Officer, President and a Director of MLIP and Co-Chairman of MLF. He joined
MLPF&S in 1966 and has served in various positions, including Retail and
Institutional Sales, Manager of New York Institutional Sales, Director of
Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets,
and Director of International Institutional Sales. Mr. Frawley holds a Bachelor
of Science degree from Canisius College. Mr. Frawley served on the CFTC's
Regulatory Coordination Advisory Committee from its inception in 1990 through
its dissolution in 1994. Mr. Frawley is currently a member of the CFTC's
Financial Products Advisory Committee. In January 1996, he was re-elected to a
one-year term as Chairman of the Managed Futures Association, the national trade
association of the United States managed futures industry. Mr. Frawley is also a
Director of that organization, and a Director of the Futures Industry Institute.
James M. Bernard was born in 1950. Mr. Bernard is Chief Financial
Officer, Senior Vice President and Treasurer of MLIP. He joined MLF in 1983.
Before that he was the Commodity Controller for Nabisco Brands Inc. from
November 1976 to 1982 and a Supervisor at Ernst & Whinney from 1972 to November
1976. Mr. Bernard is a member of the American Institute of Certified Public
Accountants and holds a Bachelor of Science degree from St. John's University
and a Master of Business Administration degree from Fordham University.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice
President and the Director of Sales, Marketing and Research of MLIP. He joined
MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Derivatives and Mortgage-Backed Securities as well as
Managing Director of International Sales in the United States, and Managing
Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts degree from
Trinity College, Hartford, Connecticut.
William T. Maitland was born in 1949. From MLIP's inception in August
1986 through June 1, 1988, Mr. Maitland was the Secretary and a Director of MLIP
and, on August 15, 1992, he again assumed these positions. Mr. Maitland is the
General Counsel for Futures & Options for MLPF&S, a position he has held since
November 1990, and is a member of the Board of Directors of MLF. In 1971, Mr.
Maitland graduated with a Bachelor of Arts degree from Fordham University where
his field of concentration was economics. In 1974, he received his Juris Doctor
degree from Fordham Law School. Mr. Maitland joined MLPF&S in 1979. Mr. Maitland
is presently a member of the Board of Directors of the NFA and the Futures
Industry Association ("FIA") and a past President of the Executive Committee
-27-
<PAGE>
of the Law & Compliance Division of the FIA. He is a member of the Committee on
Commodities Regulation of the Association of the Bar of the City of New York.
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.
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., Merrill Lynch Investments II L.P. (formerly The Futures
Dimension Fund II L.P.), Merrill Lynch 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.
The principals of MLIP do not currently intend to acquire any personal
investment in the Fund. As of June 1, 1996, MLIP's interest in the Fund was
valued at $636,761. MLIP is required to maintain at least a 1% interest in each
series of Units at all times.
MLF
MLF is a clearing member of The Board of Trade of the City of Chicago,
the Chicago Mercantile Exchange, the New York Futures 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 are defined and established, in large
part, by the consent of each subscribing Limited Partner to the business terms
of the Fund as embodied in the Limited Partnership Agreement and as described in
this Prospectus. Certain of the conflicts of interest involved in the operation
of the Fund -- for example, the Fund's trading currency forward contracts with
an affiliate of MLIP -- might be impermissible under the fiduciary principles
applied in certain other investment contexts -- for example, "investment
advisers" are prohibited from trading securities with their clients on a
principal-to-principal basis. In the case of the Fund, such activities are
authorized by disclosure and the informed consent of subscribers. There are
substantial and inherent conflicts of interest in the structure of the Fund. One
of the purposes underlying the disclosures set forth in this Prospectus is to
disclose these conflicts of interests to all prospective Limited Partners so
that MLIP may have the opportunity to obtain their informed consent to them.
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 44.
Having once established the business terms of the Fund, MLIP is
effectively precluded from changing these terms in a manner that
disproportionately benefits MLIP, since any such change could constitute self-
dealing under common law fiduciary standards, and it is virtually impossible to
obtain the consent of the existing Limited Partners to
-28-
<PAGE>
such self-dealing (given adequate disclosure, on the other hand, new investors
to the Fund should be deemed to have given their consent to its business terms
by the act of subscribing).
MLIP has selected the Trading Advisors and the Trading Advisors 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. MLIP has no control or input into the trades ordered for
the Fund by the Trading Advisors, and the brokerage commissions paid by the Fund
are assessed on a flat-rate, not a per-trade, basis. Nevertheless, prospective
investors must recognize that by subscribing to the Fund they have consented to
its basic structure, in which affiliates of MLIP, and MLIP itself, receive
substantial revenues from the Fund and do not negotiate on behalf of the Fund to
achieve lower rates from the Merrill Lynch entities which provide services to
it.
The Fund, as a publicly-offered "commodity pool," is subject to the
Statement of Policy of the North American Securities Administrators Association,
Inc. relating to the registration, for public offering, of commodity pool
interests (the "NASAA Guidelines"). These NASAA Guidelines explicitly prohibit a
general partner of a commodity pool from "contracting away the fiduciary
obligation owed to [investors] under the common law."
The Limited Partnership Agreement provides that MLIP and its
affiliates shall have no liability to the Fund or to any Limited Partner for any
loss suffered by the Fund that arises out of any action or inaction of MLIP or
its affiliates if MLIP or its affiliates, in good faith, determined that such
course of conduct was in the best interests of the Fund, and such course of
conduct did not constitute negligence or misconduct by MLIP or its affiliates.
The Fund has agreed to indemnify MLIP and certain of its affiliates against
claims, losses or liabilities based on their conduct relating to the Fund,
provided that the conduct resulting in the claims, losses or liabilities for
which indemnity is sought did not constitute negligence or misconduct and was
done in good faith and in a manner reasonably believed to be in the best
interests of the Fund. The NASAA Guidelines prescribe the maximum permissible
extent to which the Fund can indemnify MLIP and its affiliates and prohibit the
Fund from purchasing insurance to cover indemnification which the Fund itself
could not undertake directly.
REMEDIES AVAILABLE TO LIMITED PARTNERS
Under Delaware law, a limited partner may, in certain circumstances,
institute legal action on behalf of himself or herself and all other similarly
situated limited partners (a "class action") to recover damages from a general
partner for violations of fiduciary duties, or on behalf of a partnership (a
partnership "derivative action") to recover damages from a third party where a
general partner has failed or refused to institute proceedings to recover such
damages. In addition, limited partners may have the right, subject to applicable
procedural, jurisdictional and substantive requirements, to bring actions in
federal court to enforce their rights under the federal securities laws and the
rules and regulations promulgated thereunder by the SEC. For example, limited
partners who have suffered losses in connection with the purchase or sale of
their interests in a limited partnership may be able to recover such losses from
a general partner where the losses result from his violating of the anti-fraud
provisions of the federal securities laws.
In certain circumstances, Limited Partners also have the right to
institute a reparations proceeding before the CFTC against MLIP (a registered
commodity pool operator), MLF (a registered futures commission merchant) and the
Trading Advisors (registered commodity trading advisors), as well as those of
their respective employees who are required to be registered under the Commodity
Exchange Act and the rules and regulations promulgated thereunder. There is a
private right of action under the Commodity Exchange Act. Investors in
commodities and commodity pools (such as the Fund) may, therefore, invoke its
protections.
In the case of most public companies, the management is required to
make numerous decisions in the course of the day-to-day operations of the
company and is protected in doing so by the so-called "business judgment rule."
This rule protects management from liability for decisions made in the course of
operating a business if the decisions are made on an informed basis and with the
honest belief that the decision is in the best interests of the corporation.
MLIP believes that similar principles apply to MLIP in its management of the
Fund.
Limited Partners should consult their own counsel regarding their
possible rights of action in respect of the Fund.
-29-
<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 any losses are incurred that would require ML&Co. to make
any payment under its guarantee.
MLIP will terminate all trading if the Net Asset Value per Unit of any
series falls to 110% or less of the then present value of $100 discounted back
from the Principal Assurance Date for such series at ML&Co.'s cost of borrowing
for the period remaining to such Principal Assurance Date.
For example, assume when a particular series of Units commences
trading that the present value of the $100 as of the Principal Assurance Date
was, at ML&Co.'s five-year cost of funding (assume 7%), approximately $71. As of
the date that such series is sold, MLIP would terminate trading when the Net
Asset Value per Unit of such series declined to approximately 110% of $71 or
approximately $78. At the beginning of the second year of trading, the trading
termination point would be determined by calculating 11% of $100 discounted for
four years at ML&Co.'s four-year cost of funding, and so on.
Unless a series of Units recognizes revenues sufficient both to (i)
cover all expenses and (ii) increase the Net Asset Value per Unit at a rate
faster than the increase in the mandatory trading termination level, the assets
available to support such series' trading will be diminished or eliminated.
Declining interest rates would adversely affect the Fund in two
respects. First, such declines would reduce the yield earned by the Fund on its
Government Securities and cash deposits. Second, by decreasing the discount rate
used by MLIP in calculating the mandatory trading termination point, such
declines would reduce the assets available for trading. One "principal
protection" fund sponsored by a major investment bank was, in fact, compelled to
terminate trading and dissolve, due primarily to a drop in interest rates which
caused the net asset value of the fund and the present value of its guarantee to
converge.
POSSIBLE UPLEVERAGING
Any deleveraging of trading involves an inherent opportunity cost,
sacrificing profit potential in return for reducing the risk of major losses. If
the Fund achieves sufficient profits, MLIP intends to commit more than 75% of
all series' capital to trading. To date, MLIP has not upleveraged any series of
Units, and MLIP must upleverage all series issued after July 1, 1996 to the same
level if it upleverages any such series. (Such discretionary upleveraging is to
be distinguished from the upleveraging caused simply by the reinvestment of
trading profits if any in the Fund's trading component, which can lead to the
different series trading at different levels of leverage.)
THE EFFECT OF PARTIAL DELEVERAGING IN HIGHLY LEVERAGED MARKETS
There is very little direct connection between the amount of assets
allocated to a particular Advisor and the face value of the positions which such
Advisor acquires for the Fund. Market positions with an aggregate face value
ranging up to $100 million or more could be acquired for a $10 million Fund
account, depending upon an Advisor's strategy. Even though only 75% of each
series' capital is initially allocated to trading, each Advisor has broad
flexibility in determining the appropriate market exposure for its Fund account.
Consequently, MLIP's adjustment of the leverage at which the Units trade will
not necessarily result in a corresponding adjustment in the market exposure of
the Fund.
-30-
<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
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.
See "Special Disclosures Regarding the 'Principal Protection' Feature of
the Fund" at page 2 and "Leverage Considerations" at page 30.
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.
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.
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 March 30, 1996, the aggregate net worth (stockholders'
equity) of ML&Co. was approximately $6.08 billion.
-31-
<PAGE>
The following is certain summary financial information for ML&Co. for
the fiscal year ended December 29, 1995 and the fiscal quarters ended March 30,
1996 and March 30, 1995. Because the ML&Co. guarantee is a general, unsecured
obligation of ML&Co., the value of the ML&Co. guarantee is dependent upon the
continued financial soundness of ML&Co.
MERRILL LYNCH & CO., INC.
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN MILLIONS, EXCEPT WHERE INDICATED)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 29, 1995 MARCH 30, 1996 MARCH 30, 1995
----------------- -------------- --------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues........................... $ 21,513 $ 2,682 $ 2,302
Earnings before income taxes and
cumulative effect of changes
in accounting principles.......... $ 1,811 $ 485 $ 389
Net earnings....................... $ 1,114 $ 300 $ 232
SHARE DATA
Average number of primary shares
outstanding....................... 236,330,162 196,395,000 209,030,000
Common shares outstanding.......... 236,330,162 236,330,162 236,330,162
BALANCE SHEET DATA
Total assets (billions)............ $ 176.86 $ 185.47 $ 168.39
Total liabilities (billions)....... $ 170.72 $ 179.39 $ 162.69
Stockholders' equity (billions).... $ 6.14 $ 6.08 $ 5.70
</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 March 30, 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.
-32-
<PAGE>
USE OF PROCEEDS
SUBSCRIPTION PROCEEDS
MLIP pays from its own funds all selling commissions incurred on the
sale of the Units. 100% of the proceeds of such sales are available to the Fund.
The Fund uses the proceeds of the Units to support, both as margin and
reserve funds, the speculative trading of the Advisors.
The Fund's margin commitments to date have averaged approximately 20%
of its Net Assets (trading at 60% leverage).
CASH MANAGEMENT
MLAM has been retained by MLIP to invest the Fund's available assets
(generally approximately 80% to 90% of total Fund capital) in Government
Securities, maintaining a short-term portfolio with a maximum duration of two
years.
CUSTODY OF FUNDS; INTEREST INCOME
All of the Fund's assets are deposited with either MLF or MLPF&S.
The assets of the Fund held to margin futures contracts traded on
United States exchanges are deposited, together with the assets of numerous
other MLF customers, in CFTC-regulated "customer segregated funds accounts" at
MLF or MLPF&S. MLF and MLPF&S credit the Fund with interest on the total assets
so deposited (i.e., the cash on deposit adjusted to include open-trade equity
and funds in collection or settlement), and not invested at the direction of
MLAM, at prevailing 91-day Treasury bill rates less 0.50% per annum.
The assets of the Fund used for trading on foreign futures exchanges
are held at MLF in its "foreign futures and foreign options secured amount
account." These assets are held in the functional currency of the respective
foreign markets on which the Fund trades, and MLF credits the Fund with interest
on the total assets so held at 0.50% per annum below the prevailing short-term
government interest rate in the country in question. The Fund is subject to
exchange-rate risk in respect of such investments. In some cases, certain of the
Fund's assets held to margin foreign futures and options trading may be held in
non-interest bearing accounts, either as required by the applicable rules of
various foreign exchanges or due simply to considerations of practicality.
The assets of the Fund not held to margin U.S. and foreign futures
trading are held in "unregulated" accounts at MLPF&S. Substantially all such
assets are managed by MLAM. Any assets held at MLPF&S and not managed by MLAM
are credited with interest by MLPF&S on the same basis as MLF credits the Fund
with interest on assets held at MLF not managed by MLAM. Assets held in MLF's
"foreign futures and options secured amount account" or in unregulated MLPF&S
(in respect of which no regulatory net capital requirement is assessed) would
not have the benefit of the same protections that are afforded "customer
segregated funds" in the event of the bankruptcy of MLF or MLPF&S.
Of the 10% to 20% of the Fund's assets not managed by MLAM, a
substantial portion is held by MLF or MLPF&S, as the case may be, in "offset
accounts" ("customer segregated funds" as well as funds held in "unregulated"
accounts may be held in "offset"). "Offset accounts" involve the banks with
which MLF or MLPF&S maintain their customer accounts making available to ML&Co.
and certain of its affiliates interest-free overnight credits in an amount not
to exceed the daily cash balances in such accounts. The net benefit to Merrill
Lynch from the offset account arrangement -- i.e., the difference between the
savings recognized by Merrill Lynch entities from the overnight credits which
they receive and the 0.50% below the 91-day Treasury bill rate which they pay
out to the Fund -- has not to date exceeded approximately 0.25% to 0.50% per
annum of the average daily cash balances held in "offset." MLF and MLPF&S also
invest a portion of the customer assets held by them in Treasury bills of up to
one-year duration. In crediting the Fund with interest on its total assets on
deposit with them (including assets invested in Treasury bills) at 0.50% per
annum below the 91-day Treasury bill rate, MLF and MLPF&S earn a spread
comparable to the net benefit which they receive from maintaining such assets in
"offset."
-33-
<PAGE>
FORWARD TRANSACTIONS
Spot and forward contracts on foreign currencies and foreign futures
and options contracts are the only non-CFTC regulated instruments currently
traded by the Fund. The forward markets are unregulated and involve certain
risks -- in particular, risk of counterparty default -- additional to the risks
of trading CFTC-regulated futures contracts.
To date, approximately 20% to 30% of the Fund's trades by volume have
been in forward currency contracts, but from time to time the percentage of the
Fund's trading represented by forward currency trades may fall substantially
outside this range. MLIP, through the F/X Desk, has arranged lines of credit
with various counterparties for the Fund's forward currency trades. Because MLIP
has made arrangements so that the Fund need not deposit any margin with the
various counterparties with which the F/X Desk executes currency forward trades
on the Fund's behalf, the Fund's additional risk in trading in such unregulated
markets should be limited to a possible loss of unrealized profits on open
forward positions which a counterparty would not, in the event of its
bankruptcy, be able to pay to the Fund.
CHARGES
The following table summarizes the charges paid by the Fund during
1994 (2-2/3 months), 1995 and 1996 (5 months). Beginning January 1, 1996, 0.25
of the 9.5% annual brokerage commissions were recharacterized as Administrative
Fees and paid directly by the Fund to MLIP.
<TABLE>
<CAPTION>
1/1/96 - 5/31/96 1/1/95 - 12/31/95 10/12/94 -12/31/94
---------------- ----------------- ------------------
COST AS A % OF
AVERAGE MONTH- COST AS A % OF
END NET COST AS A % OF AVERAGE MONTH-
DOLLAR ASSETS DOLLAR AVERAGE MONTH- DOLLAR END NET ASSETS
COST AMOUNT (ANNUALIZED) AMOUNT END NET ASSETS AMOUNT (ANNUALIZED)
- --------------------------- ---------------- -------------- ----------------- -------------- ---------- --------------
<S> <C> <C> <C> <C> <C> <C>
Brokerage Commissions $1,983,811 5.68% $3,303,922 5.92% $416,617 5.76%
Administrative Fee 53,617 O.15 -- -- -- --
Reimbursement of
Organizational and
Initial Offering Costs 33,208 0.10 79,700 0.14 17,712 0.24
Profit Shares 110,738 0.32 652,366 1.17 129,169 1.79
---------- ---- ---------- ---- -------- ----
Total $2,181,374 6.25% $4,035,988 7.23% $563,498 7.79%
========== ==== ========== ==== ======== ====
</TABLE>
The Fund's average month-end Net Assets during 1994 (2-2/3 months),
1995 and 1996 (5 months) equalled $32,552,448, $55,827,125 and $83,860,013,
respectively.
The foregoing table does not reflect the "bid-ask" spreads paid by the
Fund on its forward trading.
During 1994 (2-2/3 months), 1995 and 1996 (5 months), the Fund earned
$377,303, $3,415,670 and $1,927,550, respectively, in interest income, or
approximately 1.16%, 6.12% and 2.30%, respectively, of the Fund's average month-
end Net Assets.
See also the "Breakeven Table" included in the "Summary" at page 8.
______________________________
-34-
<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 in 36 monthly
initial offering costs installments of $6,642 ending October 31, 1997.
Merrill Lynch Brokerage commissions A flat-rate monthly commission of 0.7708 of 1%
Futures of the month-end assets committed to trading (a
9.25% annual rate; 6.94% at 75% leverage).
MLIP Administrative Fees A flat-rate monthly charge, payable to MLIP, of
0.020833 of 1% of the month-end assets com-
mitted to trading (a 0.25 of 1% annual rate;
0.1875 of 1% at 75% leverage). MLIP pays all
of the Fund's routine administrative costs.
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
Counterparties the F/X Desk deals each receive "bid-ask"
spreads on the forward trades executed with the
Fund.
MLIP Service fees Under the F/X Desk arrangements, MLIP or
another Merrill Lynch entity receives a service
fee equal, at current exchange rates, to
approximately $5.00 to $12.50 on each purchase
or sale of each futures contract-equivalent
forward contract executed with counterparties
other than MLIB.
MLIB EFP "differentials" MLIB or an affiliate receives a "differential"
spread for exchanging the Fund's cash currency
positions for equivalent futures positions.
Government Securities "Bid-ask" spreads The dealers with which MLAM executes Govern-
Dealers ment Securities trades include "bid-ask" spreads
in the prices they quote to the Fund.
Trading Advisors Quarterly Profit Shares Currently, 15% or 20% of any New Trading
Profit (depending on the Trading Advisor) as of
the end of each calendar quarter and upon
redemption of Units. Profit Shares are calculated
separately with respect to each series of Units.
MLF; Extraordinary charges Actual costs; none incurred to date, and expected
Others to be negligible.
--------------------------
</TABLE>
ORGANIZATIONAL AND INITIAL OFFERING COSTS
MLIP advanced the organizational and initial offering costs of the
Fund, which totaled $239,100. The Fund is reimbursing MLIP for such costs in 36
equal monthly installments of $6,642 each, through October 31, 1997. The accrued
liability for the remaining reimbursement of organizational and initial offering
costs does not reduce Net Assets for any purpose (other than financial
reporting).
-35-
<PAGE>
BROKERAGE COMMISSIONS
Commodity brokerage commissions for futures trades are typically paid
on the completion or liquidation of a trade and are referred to as "round-turn
commissions," which cover both the initial purchase (or sale) of a commodity
futures contract and the subsequent offsetting sale (or purchase). However, the
Fund pays commissions at a monthly flat rate of 0.7708 of 1% (a 9.25% annual
rate) of the Fund's month-end assets committed to trading. Assets committed to
trading are not reduced for purposes of calculating brokerage commissions by any
accrued but unpaid Profit Shares, Administrative Fees or the brokerage
commissions being calculated. The Fund could obtain lower rates for similar
brokerage services at other firms.
The Fund initially commits 75% of the capital attributable to each
series of Units to the Trading Advisors for management. At this leverage factor,
the brokerage commissions equal 6.94% per annum of the average total month-end
assets attributable to each series, including assets not allocated to trading.
The Fund's brokerage commissions are allocated among the outstanding
series of Units pro rata based on the respective amount of assets which each
series commits to trading, without reduction for accrued but unpaid brokerage
commissions, Profit Shares or Administrative Fees.
During 1994 (2-2/3 months), 1995 and 1996 (5 months), the Fund paid
brokerage commissions of $416,617, $4,404,292 and $1,983,811, respectively;
these flat-rate brokerage commissions were the approximate equivalent of per-
trade commissions of $53, $134 and $117, respectively, per "round-turn" futures
trade. These "round-turn" equivalent rates were somewhat higher than those of
most MLIP funds. The per-trade equivalent of the Fund's flat-rate commissions
varies over time with market conditions and different Advisor combinations.
The annual reports distributed by MLIP to Limited Partners include the
approximate round-turn equivalent commission rate paid by the Fund during the
previous year.
State securities administrators require MLIP to state that brokerage
commissions paid by the Fund shall not be increased while redemption charges are
in effect. Moreover, MLIP has undertaken to various state securities commissions
that in no event will MLIP increase the original 9.5% annual brokerage
commissions (now recharacterized as 9.25% annual brokerage commissions and 0.25%
annual Administrative Fees) without the unanimous consent of all Limited
Partners. In fact, MLIP has never raised the futures brokerage commissions paid
by any of its funds and has on a number of occasions reduced such charges. In
addition, MLIP has been required by various state regulators to make the
following disclosure:
The Fund's "brokerage commissions" constitute a "wrap fee." This "wrap
fee" (including the component of such "wrap fee" reclassified as
Administrative Fees) is Merrill Lynch's only source of revenues from the
Fund (other than "offset account" and interest credit benefits as described
under "Use of Proceeds"), from which revenues Merrill Lynch 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 Merrill Lynch 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) Merrill Lynch 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 SIGNI-
FICANT 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
ABOVE THE CURRENT ANNUAL LEVEL OF 9.5% OF THE AVERAGE MONTH-END NET ASSETS
COMMITTED TO TRADING WITHOUT THE UNANIMOUS CONSENT OF ALL LIMITED PARTNERS.
-36-
<PAGE>
MLF pays, from the brokerage commissions received by it, all costs of
executing the Fund's futures trades, including the NFA transaction fees assessed
on the Fund's futures trading on United States exchanges. Such fees currently
equal $0.14 per round-turn trade of a futures contract and $0.07 for each trade
of a commodity option contract.
ADMINISTRATIVE FEES
Since January 1, 1996, MLIP has been charging flat-rate monthly
Administrative Fees of 0.020833 of 1% of each series of Units' month-end assets
committed to trading (a 0.25 of 1% annual rate). Month-end assets for such
purposes are not reduced by accrued but unpaid Profit Shares or brokerage
commissions or by the Administrative Fees being calculated. As of January 1,
1996, the Fund's flat-rate brokerage commissions have been reduced in an amount
corresponding to the Administrative Fees so that there has been 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
(5 months), MLIP paid $36,900, $31,142 and $53,617, respectively, in
administrative expenses relating to the Fund.
"BID-ASK" SPREADS
Many of the Fund's currency trades are executed in the forward
markets, in which participants include in their pricing a spread between the
prices at which they are prepared to buy and sell a particular currency. The
fact that the Fund pays such "spreads" does not reduce the flat-rate brokerage
commissions paid by the Fund.
SERVICE FEES; "EFP" DIFFERENTIALS
The Fund trades forward contracts through the F/X Desk. The F/X Desk
gives the Fund access to counterparties in addition to (but also including)
MLIB. MLIP (or another Merrill Lynch entity) charges a service fee equal to, at
current exchange rates, approximately $5.00 to $12.50 on each purchase or sale
of a futures contract-equivalent face amount of a given currency traded in the
forward markets. No service fees are charged on trades awarded to MLIB (which
receives "bid-ask" spreads on such trades).
In its EFP trading with Merrill Lynch, the Fund acquires spot or
forward (collectively, "cash") currency positions through MLIP's F/X Desk in the
same manner and on the same terms as in the case of the Fund's other F/X Desk
trading. When the Fund exchanges these positions for futures, there is a
"differential" between the prices of the two positions. This "differential"
reflects, in part, the different settlement dates of the cash and the futures
contracts and prevailing interest rates, but also includes a pricing spread in
favor of MLIB or another Merrill Lynch entity.
These F/X Desk service fees and EFP differentials, combined, are
estimated to total no more than 0.25 of 1% of the Fund's average month-end
traded assets on an annual basis.
SECURITIES MARK-UPS
The Fund's Government Securities trades are executed with dealers
unaffiliated with any Merrill Lynch entity at competitive "bid-ask" spreads.
PROFIT SHARES
John W. Henry & Company, Inc. receives a quarterly Profit Share of 15%
and Chesapeake Capital Corporation of 20%, in each case of any New Trading
Profit earned by such Advisors, respectively, for each series of Units
considered independently. Advisors could receive Profit Shares from one series
of Units but not from others due to the different times at which the series
began trading.
The quarterly Profit Shares paid to the non-"core" Advisors are
calculated in the same manner as described below. As of the date of this
Prospectus, these Profit Shares equal 15% or 20% of any New Trading Profit
generated by each such Trading Advisor, depending upon the Advisor.
The Profit Shares paid to certain Advisors ("core" or non-"core") in
the future may fall outside of the 15% to 20% range.
-37-
<PAGE>
New Trading Profit for purposes of calculating each Trading Advisor's
Profit Share includes (i) realized trading profit (loss) plus or minus (ii) the
change in unrealized trading profit (loss) on open positions and is calculated
after payment of all or a portion of the monthly brokerage commissions and
Administrative Fees, but is not reduced by Profit Shares previously paid. New
Trading Profit does not include interest or any yield enhancement return earned
on the Fund's assets. Organizational and initial offering cost reimbursement
payments do not reduce New Trading Profits for purposes of calculating Profit
Shares. New Trading Profit is only generated to the extent that a Trading
Advisor's cumulative New Trading Profit exceeds the highest level of cumulative
New Trading Profit achieved by such Advisor as of the end of any previous
calendar quarter (or $0, if an Advisor has traded unprofitably for a series of
Units).
Assume that as of the end of a series' first calendar quarter of
trading, 1996, Chesapeake Capital Corporation ("Chesapeake") had, after all or a
portion of the allocable monthly brokerage commissions and Administrative Fees,
a realized profit of $50,000 and an unrealized profit of $150,000 in respect of
such series' New Trading Profit would equal $200,000. The entire amount would
represent an increase in cumulative Trading Profit allocable to such series and
20%, or $40,000 would be paid by such series to Chesapeake. Assume also that
during the second quarter of such series' trading, again after all or a portion
of allocable monthly brokerage commissions and Administrative Fees, the
Chesapeake account had realized additional profits of $60,000 on its closed-out
positions but incurred a decrease in the unrealized profits on its open
positions of $50,000 in respect of such series. Cumulative Chesapeake Trading
Profit allocable to such series would have increased to $210,000, and 20% of
such $10,000 increase or $2,000 would be paid by such series to Chesapeake. If
the assets allocable to the series and managed by Chesapeake were subsequently
to sustain losses, Chesapeake would not be required to refund any of the Profit
Shares previously paid by the series, but it would not be until Chesapeake's
cumulative Trading Profit allocable to exceeded $210,000 as of a calendar
quarter-end that Chesapeake would again generate New Trading Profit in respect
of such series that would be subject to additional Profit Share accruals. The
Fund pays Profit Shares in respect of each series of Units to each Trading
Advisor based on each such Advisor's individual performance, rather than paying
Profit Shares based on the overall performance of any such series. It is likely
that there will be periods when the aggregate New Trading Profits on which
Profit Shares are paid by a series to one or more Trading Advisors are exceeded
by the losses incurred in respect of such series by one or more of the other
Trading Advisors.
Termination of the Fund's Advisory Agreement with a Trading Advisor is
treated as if the date of termination were a calendar quarter-end for purposes
of calculating any Profit Shares due to such Trading Advisor.
If a new or replacement Trading Advisor is retained, such Trading
Advisor calculates its Profit Shares without regard to any losses previously
incurred by any series of Units.
The Profit Shares are calculated separately in respect of each series
of Units.
In the case of Units redeemed as of the end of any month that is not
the end of a calendar quarter, the Net Asset Value at which such Units are
redeemed is reduced by any accrued Profit Shares, calculated in the same manner
as described above. The amounts so deducted and paid to the appropriate Trading
Advisor(s) as of such month-end are not subject to being returned to the Fund or
the redeeming Limited Partner, irrespective of subsequent losses during the
quarter.
Reduction of the assets attributable to a particular series of Units
managed by a Trading Advisor, whether due to redemptions, distributions or
reallocations of assets by MLIP away from such Trading Advisor (but not as a
result of trading losses), results in (i) a proportional pay-out of any accrued
Profit Shares and (ii) a proportional decrease in any cumulative loss
carryforwards (i.e., shortfalls between the current level of Trading Profit and
the "high water mark" level of cumulative Trading Profits as of cumulative the
end of any previous calendar quarter, or $0 if higher) for Profit Share
calculation purposes.
In calculating New Trading Profit, Profit Shares paid at previous
quarter-ends do not reduce cumulative New Trading Profit in subsequent periods
(i.e., the Trading Advisors do not have to earn back their Profit Shares before
their trading can generate additional New Trading Profit).
Redemption charges do not affect the Profit Shares assessed on Units
being redeemed.
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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.
During 1994 (2-2/3 months), 1995 and 1996 (five months), the Fund paid
Profit Shares of $129,169, $652,366 and $110,738, respectively, and had net
income of $579,894 and $5,186,492 and $617,754, respectively. These Profit
Shares equalled 0.4%, 1.17% and 0.13% of average month-end Net Assets, and 22%,
12.6% and 17.9% of net income during such periods.
EXTRAORDINARY EXPENSES
The Fund is required to pay any extraordinary costs (such as taxes)
incidental to its operations. In MLIP's experience, such charges have been
negligible. No such costs have been paid by the Fund (or any other MLIP fund) to
date.
____________________
MLIP sends a monthly statement to each Limited Partner describing the
Fund's performance during the prior month and itemizing brokerage commissions,
Administrative Fees paid and Profit Shares or accrued during such month and on a
year-to-date basis.
____________________
CHARGES PAID BY MERRILL LYNCH
The following costs are paid by the Merrill Lynch entities indicated
below. In each case, these entities receive substantial revenues, directly or
indirectly, from the Fund.
SELLING COMMISSIONS; ONGOING COMPENSATION
MLIP pays the selling commissions due on the Units, as well as the
ongoing compensation on Units which remain outstanding for more than twelve
months. See "Plan of Distribution -- Selling Agent Compensation" at page 53.
MLIP paid a total of $4,089,835 in selling commissions (in the form of
"production credits," not cash out-of-pocket) on sales of the first seven series
of Units.
The first monthly installments of ongoing compensation began to accrue
as of October 1, 1995 on the Series A Units sold as of October 1, 1994. Through
May 31, 1996, MLIP paid a total of $148,727 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 which MLF pays monthly consulting fees to them: Chesapeake receives
0.167% (2% annually), and JWH 0.333% (4% annually) of the month-end assets of
the Fund committed to them, respectively.
Currently all non-"core" Advisors receive consulting fees equal to
0.167% (2% annually) of the month-end Fund assets committed to their management.
MLIP anticipates that the consulting fees paid to Advisors in the
future will generally fall within the range of 1% to 4% annual rate, but such
fees could fall outside of such range in certain cases.
During 1994 (2-2/3 months), 1995 and 1996 (5 months), MLF paid
consulting fees of $106,951, $858,044 and $533,705, respectively, or
approximately 0.33%, 1.54% and 0.64% of the Fund's average month-end Net Assets
during these periods.
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MLAM FEES
MLF pays MLAM annual management fees of 0.20% on the first $25
million of Fund capital managed by MLAM, 0.15% on the next $25 million of
capital, 0.125% on the next $50 million, and 0.10% on capital in excess of
$100 million. Such fees are paid quarterly in arrears and are calculated
on the basis of the average daily assets managed by MLAM. In the event
that MLF for some reason fails to make prompt payment to MLAM, MLIP is
responsible for doing so.
During 1994 (2-2/3 months), 1995 and 1996 (5 months), MLF
expensed approximately $11,319, $70,670 and $57,067, respectively, in cash
management fees paid or accrued to MLAM.
REDEMPTION CHARGES
Units redeemed on or prior to the end of the twelfth full month
after issuance are subject to redemption charges of 3% of the Net Asset
Value at which they are redeemed. Such charges are paid to MLIP and are
intended to compensate MLIP for the financial burden to MLIP associated
with paying selling commissions on short-term investments.
Receipt of redemption charges does not reduce the Fund's
reimbursement obligations to MLIP for organizational and initial offering
costs.
During 1994 (2-2/3 months), 1995 and 1996 (5 months), MLIP
received a total of $7,436, $57,489 and $25,438, respectively, in
redemption charges.
CERTAIN LITIGATION
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 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 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
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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 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. The parties have agreed to stay this action pending developments in 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
for the State of California, San Francisco County, by twelve California public
entities (the "Atascadero State Court Action"). Named as defendants are ML&Co.,
certain subsidiaries of ML&Co. and an employee of ML&Co. The complaint alleges,
among other things, that the defendants committed fraud and deceit, negligence
and negligent misrepresentation, breached fiduciary duties, aided and abetted
breaches of fiduciary duty, and violated California Penal Code Section 496 and
the California Unfair Business Practices Act, 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. 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 the Racketeer Influenced and Corrupt
Organizations Act ("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. The complaint in this action has not been
served.
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 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.
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 June 15, 1995. As
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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. Incorporated, 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 funds controlled by the Orange County Treasurer-
Tax Collector. Damages in an unspecified amount are sought. Certain of the
defendants in the Smith Federal Court Action and 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 has been stayed until June 30, 1996.
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 November 3, 1995, a purported derivative action on behalf of ML&Co.
was filed in the Supreme Court of the State of New York, New York County, naming
12 present or past directors of ML&Co. as defendants. Damages in an unspecified
amount are sought on behalf of ML&Co. The complaint alleges, among other things,
claims for breach of fiduciary duty, indemnification and corporate waste in
connection with (i) certain of ML&Co.'s municipal finance activities, including
certain contractual arrangements that led to a civil settlement of approximately
$12 million with the United States Attorney for the District of Massachusetts,
the Massachusetts Attorney General and the SEC and to the issuance by the SEC of
an order censuring MLPF&S and an order directing MLPF&S to cease and desist from
committing or causing any violation or future violation of Rule G-17 of the
Municipal Securities Rulemaking Board (as to which MLPF&S consented without
admitting or denying any of the findings or allegations contained in the orders)
and (ii) certain basket trading activities in Japan that led to administrative
sanctions by Japanese securities regulators consisting of a 48-hour suspension
of arbitrage trading by ML&Co. for its own account in Japan.
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On December 16, 1994, a consolidated amended complaint was filed 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 June 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.
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 has been granted 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").
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.
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 sub-
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stantially 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, Messrs. Miller and Steiner commenced derivative
actions, now consolidated, purportedly brought on behalf of ML&Co., in New York
State Supreme Court, 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. The plaintiffs assert claims of breach of fiduciary
duties in connection with the year-end securities transactions with GSLIC and
other claims against Transmark and one of Transmark's principals. The damages
sought in this action are unspecified. The court has stayed the action for all
purposes pending a resolution of the above-mentioned related litigation in
Florida.
ML&Co. believes it has strong defenses to, and will vigorously
contest, the actions described above. Although the ultimate outcome of the
actions described above and other civil actions, arbitration proceedings and
claims pending against ML&Co. or its subsidiaries as of the date of this
Prospectus cannot be ascertained at this time and the results of legal
proceedings cannot be predicted with certainty, it is the opinion of the
management of ML&Co. that the resolution of these actions will not have a
material adverse effect on the financial condition or the results of operations
of ML&Co.
CONFLICTS OF INTEREST
Merrill Lynch Affiliated Entities
Other than the Trading Advisors, all parties involved in the
operations of the Fund are affiliated with Merrill Lynch. Consequently, many of
the business terms of the Fund have not been negotiated at arm's-length. Were
investors to seek redress from Merrill Lynch for damages relating to the
offering of the Units or the operations of the Fund, they (i) would be unlikely
to have recourse against any Merrill Lynch entity (other than MLIP or the Fund
itself) which is not in direct privity with the Fund, and (ii) would be likely
only to have such recourse even in case of entities which are in such privity
only on a derivative basis, suing not individually but in the right of the Fund.
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ML PRINCIPAL PROTECTION L.P.
ASSOCIATED MERRILL LYNCH ENTITIES
[SET CHART 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 assert that Limited Partners have
consented to the following conflicts of interest by subscribing to the
Fund.
MLIP
Relationship among the Merrill Lynch Entities
As MLIP sponsored the Fund, MLIP and its affiliates are its
service providers, other than the Trading Advisors, and will continue to
be so even if other firms might be more advantageous for the Fund.
Other Funds Sponsored by MLIP
MLIP might be able to add more value to the Fund were certain
MLIP personnel to focus exclusively on managing the Fund, but none do so.
MLIP's benefits from accounts other than the Fund because such accounts
generate significant revenues for it, and also diversify MLIP's exposure
to one or more of such accounts performing poorly.
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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. MLIP
also has a conflict of interest in selecting Advisors due to different
advisory fee structures being more likely than others to result in a
greater net revenues for MLIP. A number of Advisors are willing to accept
a lower consulting fee, paid by MLF, in return for a higher Profit Share.
Profit Shares are paid by the Fund, not MLIP.
Leveraging Considerations
MLIP has a conflict of interest in determining the Fund's
trading leverage between MLIP's interest in maintaining the leverage which
it believes to be best for the Limited Partners and its interest in
protecting ML&Co.'s guarantee liability. Although the brokerage
commissions and the Administrative Fees paid increase as trading leverage
is increased, added revenues are not a significant factor in MLIP's
leverage policy, compared with the need to avoid any ML&Co. payments under
the guarantee.
MLF; MLIB; MLAM
MLF has numerous clients and executes trades for a numerous
different clients in the same markets and at the same time. Executing
orders for different, and possibly competing, customers at the same time
involves an inherent conflict of interest. As a result of executing orders
for many other clients, MLF also has fewer resources to allocate to the
Fund's account.
Certain clients of MLF pay materially lower brokerage rates than
does the Fund. These lower rates are due in large part to the costs
associated with sponsoring and operating a publicly-offered commodity
pool. See "Charges -- Charges Paid by Merrill Lynch" at page 39 above. In
the case of institutional accounts, these costs are not incurred by the
Merrill Lynch organization, so that the brokerage commissions charged to
such accounts can be correspondingly reduced without reducing the net
revenue received by Merrill Lynch. Nevertheless, even in terms of the "net
brokerage commissions," certain institutional clients of MLF receive, as a
result of arm's-length negotiations, a better rate than the Fund.
MLIB and MLIB each also have numerous clients and they have
financial incentives to favor certain accounts over the Fund.
THE TRADING ADVISORS
Other Clients and Business Activities of the Trading Advisors
The Fund might benefit significantly from an exclusive focus on
the Fund by certain of the Trading Advisors' 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.
The Trading Advisors and their principals devote a substantial
portion of their business time to ventures and accounts other than
managing their Fund account, including, in some cases, ventures which are
unrelated to futures trading.
Certain of the Trading Advisors do now, or may in the future,
act as sponsors of their own single or multi-advisor futures funds which
may, from time to time, be in direct competition with the Fund for
positions in the market.
Other client accounts managed by a Trading Advisor may
significantly outperform its Fund account.
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 with which such Trading Advisors have
ongoing
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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 receive initial selling commissions and
ongoing compensation on the Units. Consequently, Financial Consultants
have a financial incentive to encourage investors to purchase Units and to
discourage them from redeeming their Units.
PROPRIETARY TRADING
The Trading Advisors, MLIP, their respective affiliates and such
affiliates' respective principals may trade in the commodity markets for
their own accounts and for the accounts of their clients, and in doing so
may take positions which are the same as or opposite to those held by the
Fund. Prospective investors should be aware that -- as a result of a
neutral allocation system, testing a new trading system, trading their
proprietary accounts more aggressively or other actions not in violation
of their fiduciary or other duties -- such persons may from time to time
take positions in their proprietary accounts ahead of the positions taken
for the Fund and on occasion orders may be filled more advantageously for
the account of one or more such persons than for the Fund's account.
Records of this trading will not be available for inspection by Limited
Partners.
___________________
While it is generally true that it is in the best interests of
MLIP, the Trading Advisors and their respective affiliates and principals
for the Fund to trade successfully, in particular circumstances any of the
foregoing parties may receive significantly more benefit from acting in a
manner adverse to the Fund than from acting in, or not opposed to, the
Fund's best interests. It is very difficult, if not impossible, for
Limited Partners to know or confirm that any of the foregoing persons is
equitably resolving the conflicts of interest described above.
THE LIMITED PARTNERSHIP AGREEMENT
A copy of the Limited Partnership Agreement is included as
Exhibit A to this Prospectus and is incorporated herein by reference.
Section and page references below are to the Limited Partnership
Agreement.
LIMITED LIABILITY OF SUBSCRIBERS
The Limited Partnership Agreement provides that (except as
otherwise provided by law -- for example, if the Fund is bankrupt or
insolvent at the time that a distribution is made to a Limited Partner),
no Limited Partner shall be personally liable for the debts of the Fund
beyond the amount invested by such Limited Partner in the Fund, plus his
share of any undistributed profits. (Section 7(e) at page A-6).
ASSIGNMENTS; REDEMPTIONS
Units may only be transferred with the consent of the General
Partner, although the assignment of the economic interest represented by
the Units (but not any of the other rights, such as the right to vote and
receive monthly reports) does not require such consent.
A Limited Partner may redeem any or all of his Units at Net
Asset Value as of the last business day of any month upon ten calendar
days' irrevocable notice to his Merrill Lynch Financial Consultant.
Payment of the redemption price of Units is generally made within ten
business days of the effective date of redemption.
If Units are redeemed on or prior to the end of the twelfth full
calendar month after their sale, 3% of such Units' redemption proceeds are
paid to MLIP as an early redemption charge.
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In general, redemption requests need not be made in writing.
Limited Partners may simply contact their Merrill Lynch Financial
Consultant. A Limited Partner who no longer has a Merrill Lynch account
must request redemption in writing (signature guaranteed), by
corresponding with MLIP at: Merrill Lynch World Headquarters, Sixth Floor,
South Tower, World Financial Center, New York, New York 10080-6106.
(Section 11 at page A-11).
MANAGEMENT OF PARTNERSHIP AFFAIRS; VOTING RIGHTS
Limited Partners take no part in the management and have no
voice in the operation of the Fund. (Section 8(a) at page A-7). Limited
Partners may remove and replace MLIP as general partner of the Fund, and
may, with the consent of MLIP, amend the Limited Partnership Agreement,
except in certain limited respects, by the affirmative vote of holders of
Units representing more than fifty percent (50%) of the outstanding Units
of each series owned by Limited Partners. (Section 17(b) at page A-15). A
majority of the Units held by Limited Partners may also compel dissolution
of the Fund. (Section 17(b) at page A-15). Ten percent (10%) of the Units
held by Limited Partners have the right to bring a matter before a vote of
the Limited Partners. (Section 17(c) at page A-15).
MLIP has no power under the Limited Partnership Agreement to
restrict any of the Limited Partners' voting rights. (Section 17(c) at
page A-15). Any Units purchased by MLIP or its affiliates are non-voting.
(Section 6 at page A-3).
MLIP has the right unilaterally to amend the Limited Partnership
Agreement to the extent that such amendment is not adverse to the Limited
Partners and also in certain unusual circumstances -- for example, if
doing so is necessary to effect the intent of the Fund's tax allocations
or to comply with certain regulatory requirements. (Section 17(a) at page
A-15).
In the event that MLIP or the Limited Partners vote to amend the
Limited Partnership Agreement in any material respect, the amendment will
not become effective prior to all Limited Partners having an opportunity
to redeem their Units. (Section 17(c) at page A-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,
and Limited Partners and their duly authorized representatives have the
right during normal business hours upon reasonable notice to MLIP to
inspect such books and records for any purpose reasonably related to their
interest as Limited Partners. MLIP will also mail copies of such books and
records to Limited Partners upon request and receipt of reasonable
reproduction and mailing costs. (Section 9 at page A-9).
Each month MLIP distributes summary performance reports to all
Limited Partners. All tax information relating to the Fund necessary for
the preparation of Limited Partners' federal income tax are distributed no
later than March 15 of each year. Audited financial statements are
distributed by March 31 of each year. (Section 9 at page A-9).
GENERAL
In compliance with the Statement of Policy of the North American
Securities Administrators Association, Inc. relating to the registration
of commodity pool programs under state securities or "Blue Sky" laws (the
"Guidelines"), the Limited Partnership Agreement provides that: (i) the
Fund will make no loans (Section 8(c) at page A-8); (ii) no rebates or
give-ups, among other things, may be received from the Fund by any Trading
Advisor, MLIP, MLF, MLIB, MLAM or any affiliate of the foregoing, and such
restriction may not be circumvented by reciprocal business arrangements
among any Trading Advisor, MLIP, MLF, MLIB, MLAM or any of their
respective affiliates and the Fund (Section 8(d) at page A-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 A-8); and (iv) the assets of
the Fund will not be commingled with the assets of any other person
(deposit of assets with a commodity broker, clearinghouse or forward
dealer does not constitute commingling for these purposes). (Section 8(c)
at page A-8).
All Advisors must meet the experience requirements of the
Guidelines. (Section 8(f) at page A-8).
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MLIP has agreed in the Limited Partnership Agreement to
reimburse the Fund, with interest, for any advisory or other fees paid by
the Fund during any fiscal year to any Advisor which exceed the 6% annual
management fees and 15% quarterly incentive fees permitted by the
Guidelines. (Section 8(a) at page A-7).
FEDERAL INCOME TAX CONSEQUENCES
MLIP has been advised by its counsel, Sidley & Austin, that, in
its opinion, the following Summary correctly describes the material
federal income tax consequences, as of the date hereof, to a United States
individual taxpayer of acquiring, owning and disposing of Units.
PARTNERSHIP TAX STATUS OF THE FUND
MLIP has been advised by its counsel, Sidley & Austin, that, in
its opinion, each of the Fund and the trading partnership in which the
Fund invests is properly classified as a partnership for federal income
tax purposes. MLIP believes that all of the income generated by the Fund
to date has constituted and all income expected to be generated will
constitute "qualifying income." Accordingly, Sidley & Austin has advised
MLIP that, in its opinion, the Fund will not be subject to federal income
tax as a corporation under the provisions applicable to "publicly-traded
partnerships."
TAXATION OF PARTNERS ON PROFITS OR LOSSES OF THE FUND
Each Partner is required for federal income tax purposes to take
into account his allocable share of all items of Fund income, gain, loss
or deduction. A Partner's share of such items for tax purposes generally
is determined by the allocations in the Limited Partnership Agreement
unless such allocations do not have "substantial economic effect" or are
not in accordance with the Partners' interests in the Fund. Under the
Limited Partnership Agreement, allocations are generally made in
proportion to the capital accounts of each Unit of such series, and
therefore such allocations should have substantial economic effect.
However, in cases in which a Partner redeems part or all of his Units in
the Fund the allocations of capital gain or loss specified in the Limited
Partnership Agreement will not be in proportion to capital accounts.
Because such allocations are consistent with the economic effect of the
Limited Partnership Agreement, MLIP files the Fund's tax return based upon
such allocations. However, it is not certain that such allocations will be
respected. If such allocations were challenged and not sustained, some or
all of a redeeming Partner's capital gain or loss could be converted from
short-term to long-term, and each remaining Partner's share of the capital
gain or loss that is the subject of such allocations could be increased
(solely for tax purposes).
LIMITATIONS ON DEDUCTIBILITY OF FUND LOSSES
The amount of any Fund loss that a Partner is entitled to
include in his personal income tax return is limited to his tax basis for
his Units as of the end of the year in which such loss occurred.
Generally, a Partner's tax basis for his Units is the amount paid for such
Units reduced (but not below zero) by his share of any Fund distributions,
realized losses and expenses and increased by his share of the Fund's
realized income and gains. In addition, losses of the Fund may be limited
under the "at risk" rules.
Because of the limitations imposed upon the deductibility of
capital losses (see "-- Tax on Capital Gains and Losses," at page 50
below), a Partner's distributive share of any capital losses of the Fund
will not materially reduce the federal income tax payable on his ordinary
income (including his allocable share of the Fund's ordinary income).
TREATMENT OF INCOME AND LOSS UNDER THE "PASSIVE ACTIVITY LOSS RULES"
The Internal Revenue Code of 1986 (the "Code") contains rules
(the "Passive Activity Loss Rules") designed to prevent the deduction of
losses from "passive activities" against income not derived from such
activities, including salary income from investment activities not
constituting a trade or business, such as interest and dividends
("Portfolio Income"). The trading activities of the Fund will not
constitute a "passive activity," and income derived from the Fund will
constitute Portfolio Income or other income not from a "passive activity."
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REDEMPTIONS OF UNITS
Cash received from the Fund by a Partner generally is not
reportable as taxable income by a Partner, except as described below.
Rather, such receipt reduces (but not below zero) the total tax basis of
all of the Units held by the Partner after the redemption.
Redemption for cash of all of a Partner's Units will result in
the recognition of gain or loss for federal income tax purposes. Such gain
or loss will be equal to the difference, if any, between the amount
received and the Partner's adjusted tax basis for his Units. Assuming that
the Partner has held his Units for more than one year, such gain or loss
will be long-term capital gain or loss.
GAIN OR LOSS ON SECTION 1256 CONTRACTS
Under the "mark-to-market" system of taxing futures and
commodity options contracts traded on United States exchanges and certain
foreign currency forward contracts ("Section 1256 Contracts"), any
unrealized profit or loss on positions in such Section 1256 Contracts open
as of the end of a fiscal year is treated as if such profit or loss had
been realized for tax purposes as of such time. In general, 60% of the net
gain or loss which is generated as a result of the "mark-to-market" system
is treated as long-term capital gain or loss, and the remaining 40% of
such net gain or loss is treated as short-term capital gain or loss.
GAIN OR LOSS ON NON-SECTION 1256 CONTRACTS
Except as described below with respect to Section 988
transactions entered into by a qualified fund, gain or loss with respect
to contracts that are non-Section 1256 Contracts is taken into account for
tax purposes only when realized.
"Section 988 transactions" include entering into or acquiring
any forward contract, futures contract or similar instrument if the amount
paid or received is denominated in terms of (or determined by reference to
the value of) a foreign currency other than the taxpayer's functional
currency or if the underlying property to which the contract or instrument
ultimately relates is a foreign currency other than the taxpayer's
functional currency. In general, foreign currency gain or loss on Section
988 transactions is treated as ordinary income or loss. However, under the
"qualified fund election" made by the Fund, gain or loss with respect to
all Section 988 transactions will be capital gain or loss. In addition,
all such transactions are subject to the "mark-to-market" rules (see
"-- Gain or Loss on Section 1256 Contracts," above).
TAX ON CAPITAL GAINS AND LOSSES
Net long-term 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 51 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 -- (25) Taxation of Interest
Income" at page 11.
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," 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
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exceeds 2% (the "2% floor") of an individual taxpayer's adjusted gross
income. In addition, Aggregate Investment Expenses in excess of the 2%
floor, when combined with a taxpayer's deductions for certain other items,
are subject to a reduction (the "3% phase-out") equal to, generally, 3% of
the taxpayer's adjusted gross income in excess of a certain threshold
amount. Moreover, such Aggregate Investment Expenses are miscellaneous
itemized deductions which are not deductible by individual taxpayers in
calculating his alternative minimum tax.
Based on the contemplated trading activities of the trading
partnership in which the Fund invests, in the opinion of Sidley & Austin,
the trading partnership should be treated as engaged in the conduct of a
trade or business for federal income tax purposes. As a result, the
ordinary and necessary business expenses incurred by the trading
partnership in conducting its commodity futures trading business should
not be subject to the 2% Floor or the 3% Phase-Out. Substantially all of
the expenses related to an investment in the Fund are incurred and paid by
the trading partnership. Investors should be aware that an opinion of
counsel is not binding on the IRS or on any court and it is possible that
the IRS could contend, or that a court could decide, that the contemplated
trading activities of the trading partnership do not constitute a trade or
business for federal income tax purposes. To the extent the
characterization of the trading partnership's expenses as investment
advisory expenses were to be sustained, each non-corporate Partner's pro
rata share of the amounts so characterized would be deductible only to the
extent that such non-corporate Partner's Aggregate Investment Expenses
exceeded the 2% Floor and, when combined with certain other itemized
deductions, exceeded the 3% Phase-Out. In addition, each non-corporate
Partner's distributive share of the income allocated to the Fund by the
trading partnership would be increased (solely for tax purposes) by such
Partner's pro rata share of the amounts so recharacterized.
TAXATION OF GOVERNMENT SECURITIES INVESTMENTS
The Fund's purchase and sale of Government Securities generates
capital gain or loss -- generally short-term -- as well as interest
income. Taxable income is recognized on any interest accrued on zero-
coupon Government Securities acquired for the Fund, even though no
interest is paid on such Government Securities until they mature.
SYNDICATION FEES
The $239,100 in organizational and initial offering costs, for
which MLIP is being reimbursed by the Fund in 36 equal monthly
installments, have been treated as a non-deductible, non-amortizable,
syndication expense by the Fund. The IRS could take the position that a
portion of the brokerage commissions paid to MLF constitutes non-
deductible syndication expenses.
LIMITATION ON DEDUCTIBILITY OF INTEREST ON INVESTMENT INDEBTEDNESS
Interest paid or accrued on indebtedness properly allocable to
property held for investment constitutes "investment interest." Interest
expense incurred by a Limited Partner to acquire or carry his Units (as
well as other investments) will constitute "investment interest." Such
interest is generally deductible by individual taxpayers only to the
extent that it does not exceed net investment income (that is, generally,
the excess of (i) gross income from interest, dividends, rents and
royalties, which would include a Partner's share of the Fund's interest
income, and (ii) certain gains from the disposition of investment
property, over the expenses directly connected with the production of such
investment income). Any investment interest expense disallowed as a
deduction in a taxable year solely by reason of the above limitation is
treated as investment interest paid or accrued in the succeeding taxable
year. An individual taxpayer's net capital gain from the disposition of
investment property is included in clause (ii) of the second preceding
sentence only to the extent that such taxpayer elects to make a
corresponding reduction in the amount of net capital gain that is subject
to tax at the maximum 28% rate described above. (See "--Tax on Capital
Gains and Losses," at page 50 above.)
POSSIBLE PAYMENTS UNDER THE ML&CO. GUARANTEE
Any payment to the Fund pursuant to the ML&Co. guarantee in
respect of a series will give rise to taxable income in the amount of such
payment to the Partners who hold Units of the recipient series.
MLIP'S CONTRIBUTION TO THE PURCHASE PRICE OF CERTAIN UNITS
MLIP contributes $3 to the Fund for each Unit purchased by
officers and employees of ML&Co. or its affiliates, who subscribe for
Units at $97. The $3 MLIP contribution is taxed as ordinary income in the
year of purchase, and subscribers will acquire a tax basis of $100 in
their Units.
"UNRELATED BUSINESS TAXABLE INCOME"
MLIP has been advised by its counsel, Sidley & Austin, that
income earned by the Fund does not constitute "unrelated business taxable
income" under Section 511 of the Code to employee benefit plans and other
tax-exempt entities which purchase Units; provided that Units purchased
by such plans and entities are not "debt-financed."
IRS AUDITS OF THE FUND AND ITS PARTNERS
The tax treatment of Fund-related items is determined at the
Fund level rather than at the Partner level. MLIP is the Fund's "tax
matters partner" with general authority to determine the Fund's responses
to an audit. The limitations period for assessment of deficiencies and
claims for refunds with respect to items related to the Fund is three
years after the Fund's return for the taxable year in question is filed,
and MLIP has the authority to extend such period with respect to all
Limited Partners.
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If an audit results in an adjustment, all Partners may be
required to pay additional taxes plus interest as well as penalties and
additional taxes. Partners may themselves also be subject to audits as the
result of an audit of the Fund.
STATE AND OTHER TAXES
In addition to the federal income tax consequences described
above, the Fund and the Partners may be subject to various state and other
taxes. Certain of such taxes could, if applicable, have a significant
effect on the amount of tax payable in respect of an investment in the
Fund.
____________________
THE FOREGOING DISCUSSION IS NOT INTENDED AS TAX ADVICE,
PARTICULARLY AS CERTAIN OF THE INCOME TAX CONSEQUENCES OF AN INVESTMENT IN
THE FUND MAY NOT BE THE SAME FOR ALL TAXPAYERS. ACCORDINGLY, PROSPECTIVE
INVESTORS IN THE FUND ARE URGED TO CONSULT THEIR TAX ADVISERS WITH
SPECIFIC REFERENCE TO THEIR SITUATION UNDER FEDERAL, STATE AND OTHER LAWS
BEFORE DETERMINING WHETHER TO SUBSCRIBE FOR UNITS.
PLAN OF DISTRIBUTION
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 subscription. (Prospective subscribers must open an MLPF&S customer
securities account in order to purchase Units.) Accounts are debited, and
subscriptions transmitted directly by the Selling Agent to The Bank of New
York at its offices in New York, New York by Selling Agent wire transfer
or check made payable to "THE BANK OF NEW YORK, AS ESCROW AGENT FOR ML
PRINCIPAL PROTECTION L.P., ESCROW ACCOUNT NO. 328436," on the settlement
dates. Settlement dates are specified by the Selling Agent and occur not
later than five business days following notification by MLIP of the
acceptance of an investor's subscription (which will be received within
five business days of subscription). No sale of Units of any series will
be completed until at least 5 business days after the date a subscriber
has executed, dated and submitted the Signature Page to the Subscription
Agreement and Power of Attorney. Subscriptions must generally be received
no less than 5 business days prior to issuance of the Units to be
purchased.
Existing Limited Partners subscribing for additional Units need
not (except in certain states) submit a new Signature Page to the
Subscription Agreement and Power of Attorney, but must be in possession of
a current Prospectus as well as recent summary financial information
relating to the Fund (current within 60 calendar days). FINANCIAL
CONSULTANTS ARE REQUIRED TO RECONFIRM THE SUITABILITY OF EXISTING LIMITED
PARTNERS TO MAKE AN ADDITIONAL INVESTMENT IN THE FUND.
Subscriptions are held in escrow pending investment in the Units
as of the beginning of the calendar quarter immediately following the
acceptance of such subscriptions. Each subscriber is paid the interest
actually earned on his subscription funds while held in escrow, generally
by credit to subscribers' customer securities accounts. Subscription funds
are invested in United States Treasury bills or comparable authorized
instruments while held in escrow and earn interest at prevailing "risk-
free" rates.
The Units are being sold when, as and if subscriptions are
accepted by MLIP, subject to the satisfaction of certain conditions set
forth in the Selling Agreement and to the approval by counsel of certain
legal matters. The Units are offered on a continuous basis. MLIP may
terminate but not suspend the offering.
FOREIGN PERSONS AND ENTITIES NOT OTHERWISE SUBJECT TO U.S. FEDERAL INCOME TAX
MAY NOT INVEST IN THE FUND.
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PURCHASES BY EMPLOYEE BENEFIT PLANS
SPECIAL INVESTMENT CONSIDERATIONS. In general, the terms
"employee benefit plan" as defined in the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and "plan" as defined in
Section 4975 of the Code together refer to any plan or account of various
types which provide retirement benefits or welfare benefits. Such plans
and accounts include, but are not limited to, corporate pension and profit
sharing plans, "simplified employee pension plans," KEOGH plans for self-
employed individuals (including partners), individual retirement accounts
and medical plans (collectively, "Plans," and the fiduciaries of such
plans with investment discretion, "Plan Fiduciaries").
Each Plan Fiduciary must give appropriate consideration to the
facts and circumstances that are relevant to an investment in the Fund,
including the role that an investment in the Fund plays in the Plan's
overall investment portfolio. Each Plan Fiduciary, before deciding to
invest in the Fund, must be satisfied that investment in the Fund is a
prudent investment for the Plan, that the investments of the Plan,
including the investment in the Fund, are diversified so as to minimize
the risk of large losses and that an investment in the Fund complies with
the Plan and related trust documentation.
THE FUND DOES NOT HOLD "PLAN ASSETS." A regulation issued under
ERISA contains rules for determining when an investment by a Plan in an
equity interest of a limited partnership will result in the underlying
assets of the partnership being considered to constitute assets of the
Plan for purposes of ERISA and Section 4975 of the Code (i.e., "plan
assets"). Those rules provide in pertinent part that assets of a limited
partnership will not be considered assets of a Plan which purchases an
equity interest if interest is a "publicly-offered security." This
exception is satisfied with respect to the Units. Therefore, the
underlying assets of the Fund are not considered to constitute "plan
assets."
INELIGIBLE PURCHASERS. Units may not be purchased with the
assets of a Plan if MLIP, any Advisor, the Selling Agent, any Financial
Consultant, MLF, MLIB, ML&Co., MLAM or any of their respective affiliates
either: (a) has investment discretion with respect to the investment of
such plan assets; (b) has authority or responsibility to give or regularly
gives investment advice with respect to such plan assets, for a fee, and
pursuant to an agreement or understanding that such advice will serve as a
primary basis for investment decisions with respect to such plan assets
and that such advice will be based on the particular investment needs of
the plan; or (c) is an employer maintaining or contributing to such plan.
As a matter of policy, MLIP limits each investor's subscriptions
to the Fund to no more than 10% of such investor's readily marketable
assets. In the case of IRA, BASIC and SEP accounts, this 10% limitation
applies to the beneficiary of such accounts, while such accounts
themselves may not invest more than 50% of their readily marketable assets
in the Fund.
ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF INDIVIDUAL RETIREMENT
ACCOUNTS OR OTHER EMPLOYEE BENEFIT PLANS IS IN NO RESPECT A REPRESENTATION
BY ANY PARTY THAT AN INVESTMENT IN THE UNITS IS APPROPRIATE OR AUTHORIZED
FOR ANY PARTICULAR PLAN. EACH PLAN FIDUCIARY CONSIDERING ACQUIRING UNITS
MUST CONSULT WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO.
SELLING AGENT COMPENSATION
No selling commissions are paid from the proceeds of
subscriptions. MLIP credits the Selling Agent with "production credits," a
portion of which are paid to the Selling Agent in cash by MLIP. Pursuant
to standard Selling Agent compensation procedures, a percentage of the
amount credited to the Selling Agent is paid out in cash by the Selling
Agent to Financial Consultants who sell Units. The Selling Agent is
credited with production credits of $5 per Unit on all sales, provided
that no initial production credits accrue to the Selling Agent or
Financial Consultants in respect of sales of Units at $97 per Unit to
officers and employees of ML&Co. and its affiliates.
MLIP credits the Selling Agent with ongoing production credits,
a portion of which are paid in cash, with respect to Units which remain
outstanding more than twelve months. Such ongoing production credits will
begin to accrue with the start of the thirteenth month after sale (i.e.,
after subscription funds are released from escrow, not when Subscription
Agreements are submitted or investors' funds deposited in escrow) on Units
sold by Financial Consultants who are registered with the CFTC, have
passed either the Series 3 National Commodity Futures Examination or the
Series 31 Managed Futures Fund Examination and agree to provide certain
ongoing services to investors, upon request. Such production credits equal
2% per annum of the average month-end Net Assets attributable to such
Units committed
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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. The Selling Agent
will, in turn, pay out a portion of the amounts so received to qualified
Financial Consultants.
Ongoing production credits accrue monthly and are paid
quarterly.
In the Selling Agreement, each Trading Advisor and MLIP have
agreed to indemnify the Selling Agent against certain liabilities that the
Selling Agent may incur in connection with the offering and sale of the
Units, including liabilities under the Securities Act of 1933 and the
Commodity Exchange Act.
Certain of the offering costs paid by MLIP might be deemed to
have constituted costs properly allocated to the account of the Selling
Agent. Such costs, which included the expense of producing a revised sales
brochure and organizing certain seminars (such costs did not exceed
$100,000 in the aggregate), were in addition to the selling commissions
credited to the Selling Agent.
MLIP pays the costs of the ongoing offering of the Units. In no
event will any such costs, properly allocated to the account of the
Selling Agent, when added to the selling commissions paid by MLIP, exceed
an aggregate of $10 per Unit.
LEGAL MATTERS
Sidley & Austin, Chicago, Illinois and New York, New York passes
upon certain legal matters for MLIP, MLF and the Selling Agent in
connection with the offering of the Units. Sidley & Austin relies as to
matters of Delaware law upon the opinion of Richards, Layton & Finger,
Wilmington, Delaware. In the future, Sidley & Austin may advise MLIP (and
its affiliates) with respect to its responsibilities as general partner
of, and with respect to matters relating to, the Fund. Sidley & Austin
does not represent either the Limited Partners or the Fund. Sidley &
Austin has reviewed the statements under "Federal Income Tax
Consequences."
EXPERTS
The balance sheet of MLIP as of December 29, 1995, and the
consolidated financial statements of the Fund as of December 31, 1995 and
1994 included in this Prospectus, have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their reports appearing herein,
and have been so included in reliance upon such reports given upon the
authority of that firm as experts in auditing and accounting.
ADDITIONAL INFORMATION
This Prospectus constitutes part of the Registration Statement
filed by the Fund with the SEC in Washington, D.C. This Prospectus does
not contain all of the information set forth in such Registration
Statement, certain portions of which have been omitted pursuant to the
rules and regulations of the SEC including, without limitation, certain
exhibits thereto (for example, the forms of the Selling Agreement, the
Advisory Agreements, the Investment Advisory Contract and the Customer
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.
-54-
<PAGE>
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) Terms Page(s)
- ----- ------------- ----- -------------
<S> <C> <S> <C>
Administrative Fee................... 37 ML&Co................................ Cover page
Advisors............................. Cover page MLIP................................. Cover page
"Bid-ask" spreads.................... 35 MLIB................................. 35
"Breakeven" level.................... 8 Monthly drawdown..................... 14
Brokerage commissions................ 36 New Trading Profit................... 38
CFTC................................. -i- NFA.................................. 26
Clearinghouses....................... APPIII-6 Non-"core" Trading Advisors.......... 6
Consulting fees...................... 39 "Offset accounts".................... 33
"Core" Trading Advisors.............. 6 Ongoing production credits........... -i-
"Customer segregated funds".......... 33 Organizational and initial offering
Daily limits......................... APPIII-6 cost reimbursement................ 35
Differential......................... 35 Peak-to-valley drawdown.............. 14
EFP.................................. 37 Principal Assurance Date............. Cover page
Employee benefit plan................ 53 "Principal protection"............... 7
ERISA................................ 53 Profit Shares........................ 37
Escrow Agent......................... -i- Redemption charges................... 40
Forward contracts.................... APPIII-5 Selling Agent........................ -i-
Futures contracts.................... APPIII-5 Selling commissions.................. -i-
F/X Desk............................. 8 Service fees......................... 37
Government Securities................ 7 Speculative position limits.......... APPIII-6
Guarantee............................ 31 Time Horizon......................... 9
Initial margin....................... APPIII-6 Trading Advisors..................... Cover page
Maintenance margin................... APPIII-6 Variation margin..................... APPIII-6
Margin call.......................... APPIII-6 Yield enhancement.................... 7
MLF.................................. Cover page "Zero-sum" trading................... 11
MLAM................................. Cover page
</TABLE>
_________________________
-55-
<PAGE>
ORGANIZATIONAL STRUCTURE
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Investors
MLPF&S
Custody Limited Partnership
Cash Agreement Units
Management
of Fund Assets Sole
General
ML Principal Partner MLIP
MLAM Investment Protection L.P.
Advisory
Contract
Cash Sole Sole
Management Limited Partner General
of Fund Assets Partner
Customer ML Principal
Agreement Protection Trading
MLF L.P.
F/X Desk
Service Agreement
CTA CTA CTA
International Futures and Forward Markets
</TABLE>
-56-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
----
ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................. 58
Consolidated Statements of Financial Condition........... 59
Consolidated Statements of Income........................ 60
Consolidated Statements of Changes in Partners' Capital.. 61
Notes to Consolidated Financial Statements............... 62
</TABLE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
Independent Auditors' Report............................. 71
Balance Sheets........................................... 72
Notes to Balance Sheets.................................. 73
____________________
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.
-57-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
ML Principal Protection L.P. (formerly ML Principal Protection Plus 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. (formerly ML Principal Protection Plus 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
-58-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
MAY 31, 1996 (UNAUDITED), DECEMBER 31, 1995 AND 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
May 31, 1996 1995 1994
------------ ----------- -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
Cash $ 856 $ 19,332 $ --
Accrued interest receivable (Note 2) 684,607 17,852 65,078
U. S. Government Securities 79,566,875 74,280,477 30,850,465
Equity in commodity futures trading accounts:
Cash and option premiums 8,691,996 1,586,839 993,636
Net unrealized gain on open contracts 57,649 2,073,538 1,115,935
----------- ----------- -----------
TOTAL $89,001,983 $77,978,038 $33,025,114
=========== =========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Administrative Expenses $ 11,197 $ -- $ --
Settlement payment due to broker -- 1,496,925 --
Redemptions payable 3,299,502 539,877 213,696
Brokerage commissions payable (Note 2) 414,276 356,607 156,876
Profit shares payable 24,113 78,840 129,169
Organization and initial offering costs payable (Note 1) 115,122 148,331 228,030
----------- ----------- -----------
Total liabilities 3,864,210 2,620,580 727,771
----------- ----------- -----------
Minority Interest 636,761 510,914 204,504
----------- ----------- -----------
PARTNERS' CAPITAL:
General Partner (19,785.98, 16,603.42 and 10,572 units) 2,087,012 1,766,403 1,074,985
Limited Partners (794,863.18, 697,715.56 and 306,990
units) 82,414,000 73,080,141 31,017,854
----------- ----------- -----------
Total partners' capital 84,501,012 74,846,544 32,092,839
----------- ----------- -----------
TOTAL $89,001,983 $77,978,038 $33,025,114
=========== =========== ===========
NET ASSET VALUE PER UNIT (Note 5)
</TABLE>
See notes to consolidated financial statements.
-59-
<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 MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 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 October 12, 1994
to to to
May 31, 1996 May 31, 1995 1995 December 31, 1994
--------------- --------------- ---------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 2,856,105 $2,364,339 $4,407,833 $ (363,054)
Change in unrealized (2,015,889) 1,466,799 1,355,377 1,115,935
----------- ---------- ---------- -----------
Total trading results 840,216 3,831,138 5,763,210 752,881
Interest income (Note 2) 1,927,550 1,083,661 3,415,670 377,303
----------- ---------- ---------- -----------
Total revenues 2,767,766 4,914,799 9,178,880 1,130,184
----------- ---------- ---------- -----------
EXPENSES:
Administrative Fees 53,617 -- -- --
Profit shares 110,738 505,860 652,366 129,169
Brokerage commissions 1,983,811 1,051,336 3,303,292 416,617
----------- ---------- ---------- -----------
Total expenses 2,148,166 1,557,196 3,955,658 545,786
----------- ---------- ---------- -----------
INCOME BEFORE MINORITY INTEREST 619,600 3,357,603 5,223,222 584,398
----------- ---------- ---------- -----------
Minority interest in income (1,846) (27,376) (36,730) (4,504)
----------- ---------- ---------- -----------
NET INCOME $ 617,754 $3,330,227 $5,186,492 $ 579,894
=========== ========== ========== ===========
NET INCOME PER UNIT OF
PARTNERSHIP INTEREST:
Weighted average number of
Units outstanding (Note 6) 825,563 410,286 551,944 319,887
=========== ========== ========== ===========
Weighted average net income
per Unit $ .75 $ 8.12 $ 9.40 $ 1.81
=========== ========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
-60-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Initial offering 320,000.00 $30,942,800 $1,057,200 $32,000,000
Organization and
initial offering costs -- (237,615) (1,485) (239,100)
Redemptions (2,438.00) (247,955) -- (247,955)
Net income -- 560,624 19,270 579,894
---------- ----------- ---------- -----------
PARTNERS' CAPITAL,
DECEMBER 31, 1994 317,562.00 31,017,854 1,074,985 32,092,839
Redemptions (47,810.02) (5,054,249) -- (5,054,249)
Subscriptions 444,567.00 43,851,304 605,396 44,456,700
Distributions -- (1,771,806) (63,432) (1,835,238)
Net income -- 5,037,038 149,454 5,186,492
---------- ----------- ---------- -----------
PARTNERS' CAPITAL,
DECEMBER 31, 1995 714,318.98 73,080,141 1,766,403 74,846,544
Redemptions (67,669.82) (7,155,421) -- (7,155,421)
Subscriptions 168,000.00 16,481,744 318,256 16,800,000
Distributions -- (595,090) (12,775) (607,865)
Net income -- 602,626 15,128 617,754
---------- ----------- ---------- -----------
PARTNERS' CAPITAL,
MAY 31, 1996 814,649.16 $82,414,000 $2,087,012 $84,501,012
========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
-61-
<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 JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ML Principal Protection L.P. (formerly ML Principal Protection Plus
L.P.) (the "Partnership") was organized as an open-ended fund under the
Delaware Revised Uniform Limited Partnership Act on January 3, 1994 and
commenced trading activities on October 12, 1994. The Partnership
engages both in speculative trading of futures, options and forward
contracts on a wide range of commodities -- through ML Principal
Protection Trading L.P. (the "Trading Partnership"; formerly ML
Principal Protection Plus Trading L.P.), of which the Partnership is
the sole limited partner -- and in investing in U.S. Government
Securities, as defined. Merrill Lynch Investment Partners Inc.
(formerly, ML Futures Investment Partners Inc.) (the "General Partner"
or "MLIP"), a wholly-owned subsidiary of Merrill Lynch Group, Inc.
("Merrill Lynch"), which in turn is a wholly-owned subsidiary of
Merrill Lynch & Co., Inc., is the general partner of both the
Partnership and the Trading Partnership, and Merrill Lynch Futures Inc.
("MLF"), also a Merrill Lynch affiliate, is its commodity broker.
Merrill Lynch Asset Management, L.P. ("MLAM"), another affiliate of
Merrill Lynch, provides cash management services to the Partnership,
and substantially all of the Partnership's assets are held in accounts
maintained at Merrill Lynch, Pierce, Fenner & Smith Incorporated, a
Merrill Lynch affiliate. The General Partner has agreed to maintain a
general partner's interest of at least 1% of the total equity interest
in each of the Partnership and the Trading Partnership. The General
Partner and the Limited Partners share in the profits and losses of the
Partnership, and the General Partner and the Partnership share in the
profits and losses of the Trading Partnership, in proportion to the
respective interests in the Partnership and the Trading Partnership
owned by each.
The consolidated financial statements include the accounts of the
Trading Partnership in which the Partnership is the sole limited
partner. All related transactions and intercompany balances between
the Partnership and the Trading Partnership are eliminated in
consolidation.
The ownership by the General Partner in the Trading Partnership
represents a minority interest when the financial results of the
Trading Partnership are consolidated into those of the Partnership.
The General Partner's share of the Trading Partnership's profits and
losses is deducted from the Consolidated Statements of Income, and the
General Partner's interest in the Trading Partnership reduces partners'
capital on the Consolidated Statements of Financial Condition and the
Consolidated Statements of Changes in Partners' Capital.
The Partnership issues units of limited partnership interest ("Units")
as of the beginning of each calendar quarter. Each series has its own
Net Asset Value per Unit. Different series may allocate different
percentages of their total capital to trading, but all series trade
under the direction of the same combination of advisors (the "Trading
Advisors" or the "Advisors"), chosen from time to time by MLIP to
manage the Trading Partnership's trading.
MLIP selects the Advisors to manage the Partnership's assets, and
allocates and reallocates the Partnership's trading assets among
existing, replacement and additional Advisors.
MLIP also determines what percentage of the Partnership's total capital
to allocate to trading from time to time.
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
-62-
<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 JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
and disclosure of contingent assets and liabilities at the date of the
consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Revenue Recognition
-------------------
Commodity futures, options and forward contract transactions are
recorded on the trade date and open contracts are reflected in the
consolidated financial statements at their fair value on the last
business day of the reporting period. The difference between the
original contract amount and fair value is reflected in income as an
unrealized gain or loss. Fair value is based on quoted market prices.
All commodity futures, options and forward contracts are reflected at
fair value in the consolidated financial statements.
U.S. Government Securities
--------------------------
The Partnership invests a portion of its assets in obligations of the
U.S. Treasury and other U.S. Government agencies. These investments
are carried at fair value.
Organization and Initial Offering Costs, Operating Expenses and
---------------------------------------------------------------
Selling Commissions
-------------------
The General Partner advanced all organization and initial offering
costs relating to the Partnership and the Trading Partnership. The
Partnership is reimbursing the General Partner for such costs in 36
equal monthly installments. For financial reporting purposes, the
Partnership deducted the organization and initial offering
reimbursement costs of $239,100 from partners' capital at inception.
For all other purposes (including determining the Net Asset Values of
the Units), the Partnership deducts organization and initial offering
cost reimbursements only as actually paid.
The General Partner pays for all routine operating costs (including
legal, accounting, printing and similar administrative expenses) of the
Partnership and the Trading Partnership, including the cost of the
ongoing offering of the Units. The General Partner receives a portion
of the brokerage commissions paid to MLF by the Partnership as
reimbursement for the foregoing expenses.
No selling commissions were or are paid by Limited Partners.
Income Taxes
------------
No provision for income taxes has been made in the accompanying
consolidated financial statements as each partner is individually
responsible for reporting income or loss based on such partner's
respective share of the Partnership's consolidated income and expenses
as reported for income tax purposes.
Redemptions
-----------
A limited partner may require the Partnership to redeem some or all
of such partner's Units at their Net Asset Value as of the close of
business on the last business day of any calendar month upon ten
calendar days' notice. Units redeemed on or prior to the end of the
twelfth full month after purchase are assessed an early redemption
charge of 3% of their Net Asset Value as of the date of redemption.
-63-
<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 JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2024 or at an earlier
date if certain conditions occur, as well as under certain other
circumstances as set forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
A portion of the Partnership's assets are held by MLF as margin
deposits in respect of the Partnership's futures trading. As a means
of approximating the interest rate which would be earned by the
Partnership were 100% of its Net Assets on deposit with MLF been
invested in 91-day Treasury bills, MLF pays the Partnership interest on
its account equity on deposit with MLF at a rate of 0.5 of 1% per annum
below the prevailing 91-day U.S. Treasury bill rates. In the case of
its trading in certain foreign futures contracts, the Partnership
deposits margin in foreign currency denominated instruments or cash and
earns interest generally at the prevailing London Clearing Broker Rate
less 0.5 of 1% per annum. Any additional benefit derived from
possession of the Partnership's assets accrues to MLF and its
affiliates.
The Partnership pays brokerage commissions to MLF, at a flat monthly
rate equal to 0.7917 of 1% (a 9.5% annual rate) of the Partnership's
month-end assets allocated to trading. Assets committed to trading are
not reduced for purposes of calculating brokerage commissions by any
accrued but unpaid brokerage commissions, profit shares or other fees
or charges. The General Partner estimates that the round-turn
equivalent commission rate charged to the Partnership during the period
ended May 31, 1996, year ended December 31, 1995 and the period ended
December 31, 1994 was approximately $117, $134 and $53, respectively
(not including, in calculating round-turn equivalents, forward
contracts on a futures-equivalent basis).
MLF pays MLAM annual management fees of 0.20 of 1% on the first $25
million of Partnership capital managed by MLAM, 0.15 of 1% on the next
$25 million of capital, 0.125 of 1% on the next $50 million, and 0.10
of 1% on capital in excess of $100 million. Such fees are paid
quarterly in arrears and are calculated on the basis of the average
daily assets managed by MLAM.
MLF pays the Trading Advisors annual Consulting Fees, generally
ranging from 1% to 4% of the Partnership's average month-end assets
allocated to them for management, after reduction for a portion of the
brokerage commissions accrued in respect of such assets.
The Partnership trades forward contracts through a Foreign Exchange
Desk (the "F/X Desk") established by MLIP that contacts at least two
counterparties along with Merrill Lynch International Bank ("MLIB") for
all of the Partnership's currency transactions. All counterparties
other than MLIB are unaffiliated with any Merrill Lynch entity. The
F/X Desk charges a service fee (at current exchange rates) equal to
approximately $5.00 to $12.50 on each purchase or sale of a futures-
contract equivalent face amount of a foreign currency. No service fee
is charged on trades awarded to MLIB (on which MLIB receives a "bid-
ask" spread). MLIB is awarded trades only if its price (without the
service fee) is equal to or better than the best price (including the
service fee) offered by any of the other counterparties contacted.
The F/X Desk trades using credit lines provided by a Merrill Lynch
entity. The Partnership is not required to margin or otherwise
guarantee its F/X Desk trading.
Certain of the Partnership's currency trades are executed in the form
of "exchange of futures for physical" ("EFP") transactions involving
MLIB and MLF. In these transactions, a spot or forward (collectively
referred to as "cash") currency position is acquired and exchanged for
an equivalent futures position on the Chicago Mercantile
-64-
<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 JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
Exchange's International Monetary Market. In its EFP trading, the
Partnership acquires cash currency positions through the F/X Desk in
the same manner and on the same terms as in the case of the
Partnership's other F/X Desk trading. When the Partnership exchanges
these positions for futures, there is a "differential" between the
prices of these two positions. This "differential" reflects, in part,
the different settlement dates of the cash and the futures contracts as
well as prevailing interest rates, but also includes a pricing spread
in favor of MLIB or another Merrill Lynch entity.
The Partnership's F/X Desk service fee and EFP differential costs have
to date totaled no more than 0.25 of 1% of the Partnership's average
month-end Net Assets on an annual basis.
3. ANNUAL DISTRIBUTIONS
The Partnership makes annual fixed-rate distributions, payable
irrespective of profitability, of between $2 and $5 per Unit on the
Series A-H Units. The Partnership may also pay discretionary
distributions on such series of Units of up to 50% of any Distributable
New Appreciation, as defined. For the period ended December 31, 1994,
no distributions were made by the Partnership, as no Units had been
outstanding for a year as of such date. The first such distribution
was made, with respect to the Series A Units, as of October 1, 1995,
the first Issuance Anniversary, as defined, of such series. At such
time, Series A Unitholders received a fixed-rate distribution equal to
$3.50 per Series A Unit and a discretionary distribution equal to $2.50
per Series A Unit (for a total distribution of $6.00 per Series A
Unit). The first such distribution with respect to Series B Units was
announced as of January 1, 1996, the first Series B Issuance
Anniversary, and also consisted of an annual fixed-rate distribution
equal to $3.50 per Series B Unit as well as a discretionary
distribution equal to $2.50 per Series B Unit (for a total distribution
equal to $6.00 per Series B Unit). As of April 1, 1996, the Series C
Units received a $3.50 fixed-rate distribution but no discretionary
distribution.
Any distributions made on all series of Units issued after Series H
will be entirely in the discretion of the General Partner, which does
not presently intend to make any such distributions.
4. AGREEMENTS
The Partnership and the Trading Advisors have each entered into
Advisory Agreements. These Advisory Agreements generally terminate one
year after they are entered into, subject to certain renewal rights
exercisable by the Partnership. The Trading Advisors determine the
commodity futures and forward contract trades to be made on behalf of
their respective Partnership accounts, subject to certain trading
policies and to certain rights reserved for the General Partner.
Profit Shares, generally ranging from 15% to 25% of any New Trading
Profit, as defined, recognized by each Advisor (individually,
irrespective of the overall performance of the Partnership) as of the
end of each calendar quarter are paid to the appropriate Trading
Advisors. Such payments are also made in respect of Units redeemed as
of each of the interim months during a quarter to the extent of the
applicable percentage of any New Trading Profit attributable to such
Units.
5. NET ASSET VALUE PER UNIT
For financial reporting purposes, the Partnership deducted the total
organization and initial offering costs payable to the General Partner
at inception for purposes of determining Net Asset Value. For all
other purposes (including computing Net Asset Value for redemptions),
the Partnership deducts the organization and initial offering cost
reimbursements only as actually paid. At December 31, 1994 and 1995
and May 31, 1996 , the Net Asset Values of the different series of
Units for financial reporting purposes and for all other purposes were:
-65-
<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 JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value Net Asset Value per Unit
-------------------------------- --------------------------------------------
All Other Financial Number of All Other Financial
Purposes Reporting Units Purposes Reporting
------------ ----------- --------- ---------- ----------
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
=========== =========== ===========
May 31, 1996
-------------------------------------------------------------------------------------
Series A Units $26,328,980 $26,295,156 244,184.00 $107.82* $107.69*
Series B Units 4,643,764 4,636,165 44,140.00 105.20** 105.03**
Series C Units 5,776,782 5,768,884 57,390.00 100.66*** 100.52***
Series D Units 20,459,691 20,434,711 198,430.00 103.11 102.98
Series E Units 11,202,499 11,188,821 108,252.16 103.49 103.36
Series F Units 9,667,326 9,654,916 96,253.00 100.44 100.31
Series G Units 6,530,451 6,522,359 66,000.00 98.95 98.82
----------- ----------- -----------
Total $84,609,493 $84,501,012 $814,649.16
=========== =========== ===========
</TABLE>
* After reduction for the $6.00 per Series A Unit distribution made as
of October 1, 1995.
** After reduction for the $6.00 per Series B Unit distribution made as
of January 1, 1996.
*** After reduction for the $3.50 per Series C Unit distribution made as
of April 1, 1996.
-66-
<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 JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
6. WEIGHTED AVERAGE NUMBER OF UNITS
The weighted average number of Units outstanding was computed for
purposes of disclosing consolidated net income per weighted average
Unit. The weighted average number of Units for a period equals the
number of Units outstanding at the end of such period, adjusted
proportionately for Units redeemed or issued based on how long such
Units were outstanding during such period.
7. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch & Co., Inc. has guaranteed to the Partnership that it
will have sufficient net assets, as of the Principal Assurance Date,
as defined, for each series of Units, that the Net Asset Value per
Unit of such series as of such Principal Assurance Date will equal,
after adjustment for all liabilities to third parties, not less than
$100.
8. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options and forward contracts on
interest rates, stock indices, commodities, currencies, energy and
metals. The Partnership's revenues by reporting category were as
follows:
<TABLE>
<CAPTION>
1995 1996 (through May 31)
Trading Results Trading Results
--------------- ---------------------
<S> <C> <C>
Interest Rates $ 3,933,366 $ (630,236)
Stock Indices 587,931 108,652
Commodities (447,486) 256,197
Currencies 2,914,300 1,470,278
Energy 238,988 764,038
Metals (1,463,889) (1,128,713)
--------------- ---------------------
$ 5,763,210 $ 840,216
=============== =====================
</TABLE>
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the financial instruments
or commodities underlying such derivative instruments frequently result in
changes in the Partnership's unrealized gain or loss on such derivative
instruments as reflected in the Consolidated Statements of Financial
Condition as of the end of the period. The Partnership's exposure to
market risk is influenced by a number of factors, including the
relationships among the derivative instruments held by the Trading
Partnership as well as the volatility and liquidity of the markets in
which the derivative instruments are traded.
The General Partner has procedures in place intended to control market
risk, although there can be no assurance that they will, in fact, succeed
in doing so. These procedures focus primarily on monitoring the trading of
the Advisors selected from time to time for the Partnership, adjusting the
percentage of the Partnership's total assets allocated to trading with
-67-
<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 JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
respect to each Series of Units, calculating the Net Asset Value of the
Advisors' respective Partnership accounts as of the close of business on each
day and reviewing outstanding positions for over-concentrations -- both on an
Advisor-by-Advisor and on an overall Partnership basis. While the General
Partner will not itself intervene in the markets to hedge or diversify the
Partnership's market exposure, the General Partner may urge Advisors to
reallocate positions, or itself reallocate Partnership assets among Advisors
(although typically only as of the end of a month), in an attempt to avoid over-
concentrations. However, such interventions are unusual. Except in cases in
which it appears that an Advisor has begun to deviate from past practice or
trading policies or to be trading erratically, the General Partner's basic risk
control procedures consist simply of the ongoing process of Advisor monitoring
and selection, with the market risk controls being applied by the Advisors
themselves.
Fair Value
- ----------
The derivative instruments traded by the Trading Partnership are marked to
market daily with the resulting unrealized gains or losses recorded in the
Consolidated Statements of Financial Condition and the related income or loss
reflected in trading revenues in the Consolidated Statements of Income. The
contract/notional values of the Trading Partnership's open derivative instrument
positions as of May 31, 1996, December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
May 31, 1996
------------------------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------- -------------------
<S> <C> <C>
Interest Rates $125,192,569 $ 98,591,010
Stock Indices 12,881,277 226,160
Commodities 18,708,993 5,281,790
Currencies 108,971,043 159,714,003
Energy 7,809,490 --
Metals 18,331,244 25,241,476
------------------ ------------------
$291,892,616 $289,054,439
================== ==================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
---------------------------------- ----------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
------------------ -------------- ------------------ --------------
<S> <C> <C> <C> <C>
Interest Rates $230,060,441 $ 37,950,386 $69,728,257 $64,233,570
Stock Indices 8,866,682 152,858 922,700 1,106,848
Commodities 17,582,456 3,850,643 7,859,990 1,576,977
Currencies 34,118,884 71,457,359 8,884,733 20,155,361
Energy 9,047,015 3,440,800 1,330,952 983,996
Metals 7,796,167 11,765,623 4,270,470 8,486,235
------------------ -------------- ------------------ --------------
</TABLE>
-68-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
$307,471,645 $128,617,669 $92,997,102 $96,542,987
============== ============== ============= =============
Substantially all of the Trading Partnership's open derivative instruments
outstanding as of May 31, 1996 expire within one year.
The contract/notional value of the Trading Partnership's exchange-traded and
non-exchange-traded derivative instrument positions as of December 31, 1995 was
as follows:
<TABLE>
<CAPTION>
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------- -------------------
<S> <C> <C>
Exchange-Traded $238,654,840 $ 76,980,099
Non-Exchange-Traded 68,816,805 51,637,570
------------------- -------------------
$307,471,645 $128,617,669
=================== ===================
</TABLE>
The average fair value of the Trading Partnership's derivative instrument
positions which were open as of the end of each calendar month during the year
ended December 31, 1995 was as follows:
<TABLE>
<CAPTION>
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------- -------------------
<S> <C> <C>
Interest Rates $170,252,009 $14,100,439
Stock Indices 5,390,839 1,288,747
Commodities 9,360,681 2,915,357
Currencies 36,054,488 38,557,545
Energy 2,823,925 2,417,008
Metals 6,113,263 10,207,341
------------------- -------------------
$229,995,205 $69,486,437
=================== ===================
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects offsetting
commitments to purchase and to sell the same derivative instrument on the same
date in the future. These commitments are economically offsetting but are not,
as a technical matter, offset in the forward markets until the settlement date.
Credit Risk
- -----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases limited
in amount, in some cases not) of the members of the
-69-
<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 JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED),
JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
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 December 31, 1995, $10,444,577 of the Trading Partnership's assets were
held in segregated accounts in accordance with Commodity Futures Trading
Commission regulations. Substantially all of the Partnership's assets were held
in unregulated accounts maintained at MLF, Merrill Lynch Pierce, Fenner & Smith
Incorporated or certain of their affiliates.
The gross unrealized gain and the net unrealized gain on the Trading
Partnership's open derivative instrument positions as of December 31, 1995 were
as follows:
<TABLE>
<CAPTION>
Gross Unrealized Net Unrealized
Gain Gain (Loss)
---------------- --------------
<S> <C> <C>
Exchange-Traded $2,942,622 $2,223,484
Non-Exchange-Traded 352,246 (149,946)
---------------- ----------------
$3,294,868 $2,073,538
================ ================
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
-70-
<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 as of December 29, 1995 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
January 26, 1996
New York, New York
-71-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
BALANCE SHEETS
DECEMBER 29, 1995 AND MAY 31, 1996 (UNAUDITED)
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
MAY 31, 1996
(UNAUDITED) DECEMBER 29, 1995
------------ -----------------
<S> <C> <C>
ASSETS
Cash $ 61,267 $ 17,738
Investments in affiliated partnerships 8,611,221 8,397,789
Other investments 613,792 579,127
Due from parent and affiliate 77,088,690 69,476,980
Receivables from affiliated partnerships 3,361,869 3,525,337
Deferred charges 13,804,132 11,759,885
Advances and other receivables 9,204,410 7,742,943
Fixed assets-net of accumulated depreciation of $1,016,602 144,892 119,823
Other assets 100,000 130,000
------------ ------------
TOTAL ASSETS $112,990,273 $101,749,622
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 2,371,687 $ 1,759,019
Due to affiliate 1,757,315 1,568,396
Current and deferred income taxes 8,376,580 7,162,014
------------ ------------
Total liabilities 12,505,582 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 83,568,691 74,344,193
------------ ------------
Total stockholder's equity 100,484,691 91,260,193
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $112,990,273 $101,749,622
============ ============
</TABLE>
See Notes to Balance Sheet.
PURCHASER OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-72-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEETS
DECEMBER 29, 1995 AND MAY 31, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION - Merrill Lynch Investment Partners Inc. (formerly, ML Futures
Investment Partners Inc.) (the "Company") is a wholly-owned subsidiary of
Merrill Lynch Group Inc., a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("ML&Co."). The Company is registered as a commodity pool operator and
a commodity trading advisor. The Company serves as the sole general partner
of The Futures Expansion Fund Limited Partnership, The Growth and Guarantee
Fund L.P., ML Futures Investments II L.P. (formerly, The Futures Dimension
Fund II L.P.), ML Futures Investments L.P. (formerly The Tudor Prime
Advisors Fund L.P.), John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R.
Strategy Fund(SM) L.P., The SECTOR Strategy Fund(SM) 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, ML Principal Protection L.P. (formerly ML Principal
Protection Plus L.P.) and ML JWH Strategic Allocation Fund L.P.
(collectively, the "Affiliated Partnerships"). Additionally, the Company
has sponsored or initiated the formation of various offshore entities
engaged in the speculative trading of futures and forward contracts.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
INVESTMENTS IN AFFILIATED PARTNERSHIPS - The Company's investments in its
Affiliated Partnerships are accounted for under the equity method of
accounting.
DEFERRED CHARGES - Deferred charges represent compensation to ML&Co.
affiliates for the sale of fund units to their customers. Such costs are
amortized over 6, 12, 24, 36 or 48-month periods.
2. RELATED PARTIES
Certain of the Company's officers and directors are also officers of other
subsidiaries of ML&Co. An affiliate bears all of the Company's facilities
and employee costs, for which it is reimbursed by the Company. Another
affiliate, Merrill Lynch Futures Inc., executes and clears the Affiliated
Partnerships' trades, as well as those of various offshore funds sponsored
or managed by the Company, for which it receives a fee, generally based on
the net assets of the Affiliated Partnerships and offshore funds.
ML&Co. is holder of the Company's excess cash, which is available on demand
to meet current liabilities. ML&Co. credits the Company with interest, at a
floating rate approximating ML&Co.'s average borrowing rate, based on the
Company's average daily balances receivable. At December 29, 1995 and May
31, 1996, approximately $69,500,000 and $77,100,000, respectively, was
subject to this agreement.
At December 29, 1995 and May 31, 1996, the Company had receivables from
Affiliated Partnerships and offshore funds for certain administrative,
management and redemption fees, all of which are expected to be
collected within 90 days. Additionally, the Company had receivables
from certain Affiliated Partnerships and offshore funds for
organizational 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 five months of 1996, the Company did not
declare or pay a dividend.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-73-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEETS
DECEMBER 29, 1995 AND MAY 31, 1996 (UNAUDITED)
(CONTINUED)
================================================================================
3. INVESTMENTS IN AFFILIATED PARTNERSHIPS
Under the terms of the limited partnership agreements of the Affiliated
Partnerships, the Company is required to maintain an investment in each
Affiliated Partnership of at least one percent of the total contributions
to such Partnership.
At May 31, 1996 and December 29, 1995, the Company's investments in its
Affiliated Partnerships were as follows:
<TABLE>
<CAPTION>
May 31, 1996 December 29, 1995
<S> <C> <C>
ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.).. $2,718,963 $2,324,996
ML Global Horizons L.P..................................................... 1,056,916 1,068,112
The SECTOR Strategy Fund/(SM)/ II L.P...................................... 749,441 770,619
John W. Henry & Company/Millburn L.P....................................... 674,195 728,350
The SECTOR Strategy Fund/(SM)/ VI L.P...................................... 728,659 725,174
RXR Defensive Equity Alternative Account L.P. I............................ 468,060 546,428
The JWH Global Asset Fund L.P.............................................. 495,178 492,278
The S.E.C.T.O.R. Strategy Fund/(SM)/ L.P................................... 412,851 441,992
ML Futures Investments L.P................................................. 330,311 356,788
The SECTOR Strategy Fund/(SM)/ V L.P....................................... 307,846 339,622
ML Futures Investments II L.P.............................................. 207,247 213,181
The Growth and Guarantee Fund L.P.......................................... 173,804 155,787
The Futures Expansion Fund Limited Partnership............................. 113,716 121,808
The SECTOR Strategy Fund/(SM)/ IV L.P...................................... 95,036 111,654
ML JWH Strategic Allocation Fund L.P....................................... 1,000 1,000
ML Chesapeake L.P.......................................................... 78,000 --
---------- ----------
Total...................................................................... $8,611,223 $8,397,789
========== ==========
</TABLE>
The following represents condensed combined financial information of the
Affiliated Partnerships as of May 31, 1996 and December 29, 1995 (in
thousands):
<TABLE>
<CAPTION>
May 31, 1996 December 29, 1995
<S> <C> <C>
Assets..................................................................... $465,129 $528,180
======== ========
Liabilities................................................................ 24,733 15,836
Partners' capital.......................................................... 440,396 512,344
-------- --------
Total................................................................. $465,129 $528,180
======== ========
</TABLE>
The Company's Affiliated Partnerships trade various futures, 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 Partnerships' net asset values.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-74-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(Formerly, ML Futures Investment Partners Inc.)
NOTES TO BALANCE SHEETS
December 29, 1995 and May 31, 1996 (Unaudited)
(Continued)
================================================================================
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 May 31,
1996 and December 29, 1995, the Company had no deferred tax assets. Deferred tax
liabilities ($4,880,601) consisted of the following:
May 31, 1996 December 29, 1995
State and local $ 986,962 $1,176,130
Federal 3,108,570 3,704,471
---------- ----------
$4,095,532 $4,880,601
========== ==========
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 five months
of 1996, the Company transferred $10,707,045 and $4,639,743, respectively,
in current taxes payable to ML&Co. At May 31, 1996 and December 29,
1995, the Company had a current tax payable with ML&Co. of $2,647,203 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 $88,512,000 and $79,337,000 at
May 31, 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 the 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
-75-
<PAGE>
APPENDIX I
THE "CORE" TRADING ADVISORS
____________
FUTURES TRADING METHODS IN GENERAL
Systematic and Discretionary Trading Approaches
Managed futures strategies are generally classified as either systematic or
discretionary (or both).
A systematic trader will generally rely to some degree on judgmental
decisions concerning, for example, what markets to follow and commodities to
trade, but his primary reliance is on trading programs or models which generate
trading signals. The systems utilized to generate trading signals are changed
from time to time (although generally infrequently), but the trading
instructions generated by the systems being used are followed without
significant additional analysis or interpretation. Discretionary traders, on the
other hand, while they may utilize market charts, computer programs and
compilations of quantifiable fundamental information to assist them in making
trading decisions, make such decisions on the basis of their own judgment and
"trading instinct," not on the basis of trading signals generated by any program
or model.
Each approach involves certain inherent risks. For example, systematic
traders may incur substantial losses when fundamental or unexpected forces
dominate the markets, while discretionary traders may overlook price trends
which would have been clearly signaled by a trading system. Systematic traders
tend to rely more on computerized programs than do discretionary traders, and
some consider the discipline of a systematic trading process to be advantageous.
However, any trader, systematic or discretionary, may suffer substantial losses
by misjudging the market analysis.
Technical and Fundamental Analysis
Managed futures trading analysis are generally classified as either
technical or fundamental (or both).
Technical analysis is based on the theory that the commodities markets
themselves provide a means of anticipating future prices. Technical analysis
operates on the theory that market prices and momentum at any given point in
time reflect all known factors affecting the supply and demand for a particular
commodity. Consequently, technical analysis focuses not on evaluating those
factors directly but on an analysis of price histories, movements and patterns,
theorizing that a detailed analysis of market date is the most effective means
of attempting to predict the future course of prices.
Fundamental analysis, in contrast, focuses on the study of factors external
to the trading markets that affect the supply and demand of a particular
commodity. Such factors might include weather, the economy of a particular
country, government policies, domestic and foreign political and economic
events, and changing trade prospects. Fundamental analysis theorizes that by
monitoring relevant supply and demand factors for a particular commodity, a
state of current or potential disequilibrium of market conditions may be
identified that has yet to be reflected in the price level of that commodity.
Fundamental analysis assumes that markets are imperfect, that information is not
instantaneously assimilated or disseminated and that econometric models can be
constructed that generate equilibrium prices that reflect "true value" and may
indicate market mispricing.
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.
APPI-1
<PAGE>
"Trend-following" traders assume that most of their trades will be unprofitable.
Their objective is to make a few large profits, more than offsetting their more
numerous but (hopefully) smaller losses, from capitalizing on major trends.
During periods when no major price trends develop in a market, a "trend-
following" trading advisor is likely to incur substantial losses.
Risk Control Techniques
Trading advisors often adopt fairly rigid "risk management" or "money
management" principles. Such principles typically restrict the size of
positions which will be taken as well as establishing "stop-loss" points at
which losing positions must be liquidated. No risk control technique is "fail
safe," and none can, in fact, assure that major drawdowns will be avoided. Not
only do estimates of market volatility themselves require judgmental input, but
also market illiquidity can make it impossible for an account to liquidate a
position against which the market is moving strongly, whatever risk management
principles are utilized. The Advisors' risk management principles should be
seen more as a discipline applied to their trading in highly speculative markets
than as an effective protection against loss.
THE "CORE" TRADING 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.
__________________________
Chesapeake Capital Corporation, one of the two current "core" Advisors, will, if
requested, trade "notional" equity for clients -- i.e., trade such clients'
accounts as if more equity were committed to such accounts than is, in fact, the
case. The Fund's accounts do not include any notional equity.
APPI-2
<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 (as described in the performance
summaries); however, all proprietary funds are traded in the same manner
and charged the same fees as client funds, and the proprietary funds are,
in any event, not material in terms of the overall assets managed by JWH.
8. Aggregate assets (including "notional" equity) overall is the aggregate
amount of total equity, including "notional" equity, under the management
of the relevant "core" Advisor in all programs operated by such "core"
Advisor, as of the end of the period covered by the performance summary.
"Notional" equity represents the additional amount of equity which exceeds
the amount of equity actually committed to the "core" Advisor for
management. With respect to Chesapeake, these numbers include client funds
only. With respect to JWH, these numbers also include proprietary funds;
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 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.
APPI-3
<PAGE>
NOTES TO THE PERFORMANCE SUMMARIES
(Cont.)
10. Largest monthly drawdown is the largest monthly loss experienced by the
relevant program on a composite basis in any calendar month covered by the
performance summary. "Loss" for these purposes is calculated on the basis
of the loss experienced by the program as a composite, expressed as a
percentage of the total equity (including "notional" equity) in the
program. Individual accounts of a "core" Advisor may have experienced
larger monthly drawdowns. Largest monthly drawdown information includes the
month and year of such drawdown.
11. Largest peak-to-valley drawdown is the largest percentage decline (after
eliminating the effect of additions and withdrawals) during the period
covered by the performance summary from any month-end net asset value,
without such month-end net asset value being equaled or exceeded as of a
subsequent month-end. Largest peak-to-valley drawdown is calculated on the
basis of the loss experienced by the program as a composite, expressed as a
percentage of the total equity (including "notional" equity) in the
program. Individual accounts managed by a "core" Advisor may have
experienced larger peak-to-valley drawdowns. JWH calculates the period over
which the largest peak-to-valley drawdown of a program has occurred as
beginning with the last profitable month immediately preceding the
drawdown. Chesapeake calculates such period as beginning with the first
unprofitable month of the drawdown.
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 Trading 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" in this Appendix I), 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 both of the current "core" Advisors are, in
certain cases, calculated on the basis of assets under management including
proprietary capital. However, both of the current "core" Advisors believe
that the inclusion of such capital has had no material effect on their
Monthly Rates of Return.
13. Compound Rate of Return is calculated by multiplying on a compound basis
each of the Monthly Rates of Return and not by adding or averaging such
Monthly Rates of Return. For periods of less than one year, the results are
year-to-date.
APPI-4
<PAGE>
CHESAPEAKE CAPITAL CORPORATION
JULY 1, 1996 ALLOCATION OF TRADED ASSETS: 25%
BACKGROUND
Chesapeake Capital Corporation ("Chesapeake") was incorporated under
the laws of the Commonwealth of Virginia in February 1988 for the purpose of
offering investment advisory and portfolio management services to both retail
and institutional investors in trading in the futures and forward markets. On
August 19, 1991, Chesapeake was merged into Chesapeake Capital Corporation, an
Illinois corporation formed on August 13, 1991. References herein to
"Chesapeake" refer to the Virginia corporation prior to August 19, 1991 and to
the Illinois corporation on and after August 19, 1991. Chesapeake is registered
as a CTA and a CPO with the CFTC, and is also a member in good standing of the
NFA. Chesapeake has been registered with the CFTC as a CTA and a CPO since June
20, 1988 and May 8, 1991, respectively, and a member of the NFA since June 20,
1988.
Mr. R. Jerry Parker, Jr. is the Chairman, Chief Executive Officer,
Director, sole shareholder and a principal of Chesapeake. Mr. Parker received
his B.S. in Commerce, with an emphasis in Accounting, from the University of
Virginia in January 1980. Mr. Parker worked in the accounting field for four
years after graduating from college and became a licensed Certified Public
Accountant in Virginia in 1982. From January 1983 until November 1983, Mr.
Parker was a CPA at Wilkinson & Lester, a certified public accounting firm based
in Richmond, Virginia. From November 1983 until January 1987, Mr. Parker was
employed as an exempt CTA by Richard J. Dennis, a principal and shareholder of
Richard J. Dennis & Company (a Chicago-based CTA and CPO registered with the
CFTC) in his "Turtle" training program. From January 1987 until February 1988,
Mr. Parker traded for Mr. Thomas Dennis as an exempt CTA. During these periods,
Mr. Parker had complete discretionary trading authority over a futures account
of $1 million to $1.5 million. In February 1988, Mr. Parker ceased trading for
Mr. Thomas Dennis and formed Chesapeake, where he serves as the Chairman, Chief
Executive Officer and Chief Trader.
Mr. John M. Hoade is President, Secretary and a principal of
Chesapeake. Mr. Hoade received a B.S. degree in Business Administration from
Lynchburg College in 1978. From 1976 through 1990, Mr. Hoade was employed by
Thurston Metals, Inc., located in Lynchburg, Virginia, in sales, marketing and
general management. Mr. Hoade joined Chesapeake in December 1990 to direct its
operations and marketing efforts.
TRADING STRATEGY
Chesapeake trades pursuant to its "Diversified Program" for the Fund.
The Diversified Program emphasizes diversification with a global portfolio of
futures, forward and cash markets which include, but are not limited to,
agricultural products, precious and industrial metals, currencies, financial
instruments, and stock, financial and economic indices. Chesapeake trades on
numerous U.S. and non-U.S. exchanges.
The investment portfolios currently offered by Chesapeake are the
"Diversified Program," the "Diversified 2XL Program" and the "Financials and
Metals Program" (the "Trading Programs"). The Diversified Program is
Chesapeake's longest operating investment portfolio, with a performance record
beginning in February 1988. While all of the Trading Programs employ the same
general trading methodology, as described below, they differ in their emphasis
on certain markets or market sectors and the exclusion of others. The following
overview is not intended as a detailed or exhaustive description of the trading
methodologies or strategies employed by Chesapeake, as the exact nature of these
methods and strategies is proprietary and confidential.
Relying primarily on technical analysis, Chesapeake believes that
future price movements in all markets may be more accurately anticipated by
analyzing historical price movements within a quantitative framework than by
attempting to predict or forecast changes in price through fundamental economic
analysis. The trading methodologies employed by Chesapeake are based on
programs analyzing a large number of interrelated mathematical and statistical
formulas and techniques which are quantitative, proprietary in nature and which
have been either learned or developed by Mr. Parker.
In addition to such mathematical evaluations, Chesapeake employs a
technique of technical analysis generally known as "charting" in order to
attempt to determine optimal support and resistance levels and entry and exit
APPI-5
<PAGE>
points in the various markets. In an effort to determine the overall technical
condition of the market and as a timing mechanism for trades, Chesapeake also
makes extensive use of internally-generated market information, which includes
but is not limited to price volatility, open interest, daily price action,
volume and market psychology or sentiment.
The profitability of the Chesapeake Trading Programs, traded pursuant
to technical analysis emphasizing mathematical and charting approaches, will
depend upon the occurrence in the future, as in the past, of major trends in
some markets. If there are no trends, the Trading Programs are likely to be
unprofitable. There have been trendless periods in the past which can be
expected to recur, and any factor which lessens the prospect of trends in the
future, such as increased governmental control, regulation, or participation as
a purchaser or seller in the futures markets (including joint governmental
control or regulation of, or participation in, international currency markets),
lessens the prospect that programs utilizing technical analysis, including the
Chesapeake Trading Programs, will be profitable in the future. In addition, the
future profitability of the Trading Programs would also be adversely affected by
factors which increase the number of signals leading to unprofitable trades.
For example, a significant increase in technically-oriented trading (trend-
following or otherwise) in a particular commodity might cause a change in the
pattern of price movements in a manner which might be unfavorable.
Trend-following trading systems, such as those employed by Chesapeake,
will seldom effect market entry or exit at the most favorable price in the
particular market trend. Rather, this type of trading system seeks to close out
losing positions quickly and to hold portions of profitable positions for as
long as the trading system determines that the particular market trend continues
to exist. There can be no assurance, however, that profitable positions can be
liquidated at the most favorable price in a particular trend. As a result, the
number of losing transactions may exceed substantially the number of profitable
transactions. However, if Chesapeake's approach is successful, these losses
should generally be relatively small and more than offset by gains on profitable
transactions.
The Trading Programs are oriented toward the preservation of original
equity. The commencement of trading or a drawdown from starting equity are
considered the situations of highest risk, and risk management techniques at
this point are emphasized over those which invite greater risk in the interest
of enhancing performance. These risk management techniques include
diversification. Also, the Trading Programs adhere to the requirements of a
money management system which determines and limits the equity committed to each
trade, each market, each commodity complex (in Trading Programs which trade in
more than one commodity complex) and each account.
Chesapeake believes that a long-term commitment to its Trading Programs is
necessary for profitable trading. Chesapeake attempts to take a limited number
of positions over the long term in an attempt capture major price movements
while limiting downside risk on open positions.
Decisions concerning the liquidation of positions, the commodities to be
traded and the size of positions to be taken or maintained will require to some
degree the exercise of judgment by Chesapeake. The decision not to trade futures
interest contracts for a certain period, or not to trade certain futures
interest contracts due to lack of discernible price movements (trends) or lack
of liquidity, may result at times in clients (such as the Fund) missing
significant profit opportunities which might otherwise have been captured by
Chesapeake.
Futures contracts which are traded by Chesapeake may include, but are not
limited to, agricultural products, precious and industrial metals, currencies,
financial instruments, and stock, financial and economic indices. Exchanges on
which these transactions take place include, but are not limited to, all
exchanges in the United States, as well as non-U.S. exchanges (e.g., the Belgian
Futures and Options Exchange (BELFOX), the London International Financial
Futures and Options Exchange Ltd. (LIFFE), the International Petroleum Exchange
of London Ltd., the London Metal Exchange, the London Commodity Exchange (LCE),
the Italian Derivatives Market (IDEM), the Marche a Terme International de
France (MATIF), the Deutsche Terminborse, the Hong Kong Futures Exchange Ltd.,
the Montreal Exchange (ME), the Tokyo Commodity Exchange, the Tokyo
International Financial Futures Exchange (TIFFE), the Tokyo Stock Exchange
(TSE), the Singapore International Monetary Exchange (SIMEX), the Sydney Futures
Exchange Ltd., and the Winnipeg Commodity Exchange). In addition, Chesapeake
continually monitors numerous markets, both U.S. and non-U.S., and will
generally initiate trades at such point that Chesapeake determines that a market
is sufficiently liquid and tradeable using the methods employed by Chesapeake.
Chesapeake engages in transactions in physical commodities, including EFPs.
APPI-6
<PAGE>
Chesapeake generally uses between 15% and 30% of an account's assets
as original margin for trading in the Diversified Program, but at times this
percentage can be higher.
The trading strategy utilized by Chesapeake's Trading Programs,
including the Diversified Program, may be revised from time to time by
Chesapeake as a result of ongoing research and development which seeks to devise
new trading systems, as well as test methods currently employed. The trading
methods used by Chesapeake in the future may differ significantly from those
presently used, due to the changes which may result from this research.
Since the Trading Programs utilized by Chesapeake are proprietary and
confidential, the above discussion is general in nature and is not intended to
be exhaustive.
PAST PERFORMANCE
The following information describes the composite actual performance
of all customer accounts managed by Chesapeake. Chesapeake trades its
Diversified Trading Program on behalf of the Fund. As of April 30, 1996,
Chesapeake was managing approximately $819 million (excluding "notional" funds)
of customer funds in the futures and forwards markets. All performance
information is current as of April 30, 1996.
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.
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 to approximately $50 per round-turn.
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.
APPI-7
<PAGE>
The "Notes to the Performance Summaries" are set forth on pages APPI-3
through APPI-4.
The information presented has not been audited. However, Chesapeake
believes that such information is accurate and fairly presented.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FURTHERMORE, THE RATES OF RETURN ACHIEVED WHEN AN ADVISOR IS MANAGING A LIMITED
AMOUNT OF EQUITY MAY HAVE LITTLE RELATIONSHIP TO THE RATES OF RETURN WHICH SUCH
ADVISOR MAY BE ABLE TO ACHIEVE MANAGING LARGER AMOUNTS OF EQUITY.
THE FOLLOWING FIGURES HAVE IN NO RESPECT BEEN ADJUSTED TO REFLECT THE
CHARGES TO THE FUND. CERTAIN OF THE ACCOUNTS INCLUDED IN THE FOLLOWING
PERFORMANCE SUMMARIES PAID FEES MATERIALLY DIFFERENT FROM, AND IN SOME CASES
MATERIALLY LOWER THAN, THOSE CHARGED TO THE FUND.
COMMODITY INTEREST TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK. THERE CAN BE NO ASSURANCE THAT THE TRADING ADVISOR WILL TRADE PROFITABLY
OR AVOID INCURRING SUBSTANTIAL LOSSES.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT
PORTION OF A COMMODITY TRADING ADVISOR'S TOTAL INCOME AND, IN CERTAIN INSTANCES,
MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED OR UNREALIZED LOSSES FROM
COMMODITIES TRADING.
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
See "Risk Factors -- (2) Past Performance."
APPI-8
<PAGE>
CHESAPEAKE CAPITAL CORPORATION
DIVERSIFIED PROGRAM
JANUARY 1991 - APRIL 1996
The following performance summary and chart reflect the composite
performance results from January 1991 through April 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 199 accounts since its inception.
As of April 30, 1996, 134 accounts had been closed and 63 accounts remained
open. Of the closed accounts, 106 were profitable and 30 were unprofitable at
their closing. Of the 63 open accounts, 59 were profitable and 4 were
unprofitable as of April 30, 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: $819 million
Aggregate assets (excluding "notional" equity) in program: $770 million
Aggregate assets (including "notional" equity) overall: $991 million
Aggregate assets (including "notional" equity) in program: $939 million
Largest monthly drawdown: (10.98)% (1/92)
Largest peak-to-valley drawdown: (16.62)% (1/92-5/92)
<TABLE>
<CAPTION>
Monthly Performance 1996 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------
<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 6.84 9.06 0.40 (3.66) 0.27
- -----------------------------------------------------------------------------
June 0.88 7.02 0.98 6.52 (1.25)
- -----------------------------------------------------------------------------
July (3.09) (1.70) 9.49 12.96 (1.75)
- -----------------------------------------------------------------------------
August (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 7.55% 14.09% 15.87% 61.82% 1.81% 12.51%
Rate of Return (4 months)
- -----------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. SEE THE
"NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES APPI-3 THROUGH APPI-4.
APPI-9
<PAGE>
<TABLE>
<CAPTION>
OTHER CHESAPEAKE CAPITAL CORPORATION PROGRAMS
- -------------------------------------------------------------------------------------------------------------------------------
NAME OF CTA: Chesapeake Capital Chesapeake Capital Chesapeake Capital Chesapeake Capital
Corporation Corporation Corporation Corporation
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAME OF PROGRAM: Financials and Metals Pacific Rim Program Diversified 2XL 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 June 1994 April 1994 June 1992
TRADING IN PROGRAM: ceased trading 8/95 ceased trading 6/94
- ------------------------------------------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 6 0 4 0
- ------------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING $819 million $819 million $819 million $819 million
"NOTIONAL" EQUITY) OVERALL:
- ------------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING $26 million N/A $23 million N/A
"NOTIONAL" EQUITY) IN PROGRAM:
- ------------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $991 million $991 million $991 million $991 million
"NOTIONAL" EQUITY) OVERALL:
- ------------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $30 million N/A $23 million N/A
"NOTIONAL" EQUITY) IN PROGRAM:
- ------------------------------------------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN: (5.65)% (2/94) (3.30)% (7/95) (9.38)% (2/96) (5.77)% (9/92)
- ------------------------------------------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY (10.36)% (1/94-2/94) (3.30)% (7/95) (15.07)% (1/95-2/95) (5.77)% (9/92)
DRAWDOWN:
- ------------------------------------------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: 2.79% (4 months) N/A 11.17% (4 months) N/A
- ------------------------------------------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 12.61% 37.04% (8 months) 18.77% N/A
- ------------------------------------------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: 3.22% (2.76)% (7 months) 26.88% (9 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 APPI-3 THROUGH
APPI-4.
APPI-10
<PAGE>
JOHN W. HENRY & COMPANY, INC.
JULY 1, 1996 ALLOCATION OF TRADED ASSETS: 25%
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 & Co., Inc. ("JWH"), 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 $1.3 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. 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, Executive Vice President and a
member of JWH Board of Directors. He is also Vice Chairman and a director of JWH
Risk Management, Inc., director of JWH Asset Management, Inc., Vice President of
JWH Investments, Inc., and Vice President of Westport Capital Management
Corporation. 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 the 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; and the Executive Committee of the Law and Compliance
Division of the FIA. In 1985, he received the Richard P. Donchian Award for
Outstanding Contributions to the Field of Commodity Money Management. He has
been an editor of Futures International Law Letter and its predecessor
publication, Commodities Law Letter. He received an A.B. with honors from
Dartmouth College and a J.D. from the University of California at Los Angeles,
where he was named to the Order of the Coif, the national legal honorary
society.
Mr. David R. Bailin is an Executive Vice President and a member of the
Operating Committee of JWH. He is also President of JWH Investments, Inc., JWH
Risk Management, Inc., JWH Asset Management, 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
APPI-11
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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.
Mr. Peter F. Karpen is a Managing Director and a member of the Operating
Committee of JWH. Mr. Karpen announced his resignation from JWH on March 18,
1996 but will continue in his present capacity for approximately six months from
that date. Mr. Karpen joined JWH in June 1995 from CS First Boston where he had
been Director of Futures and Options since 1988 and Vice President since 1981.
Mr. Karpen has been a member of the board of the FIA since 1984 and a member of
its executive committee since 1988. Mr. Karpen was chairman of the FIA in 1994
and 1995. In addition, he is public director of the New York Cotton Exchange and
serves on the CFTC's Financial Products Advisory Committee. He has been a
Trustee of the Futures Industry Institute, a member of the CFTC's Regulatory
Coordination Advisory Committee and a member of several commodities and
securities exchanges in the United States. He received his B.A. from Boston
University and M.B.A. from Boston College.
Mr. James E. Johnson, Jr., is chief financial officer and chief
administrative officer for JWH. He also serves as a member of the Company's
Operating Committee. In addition, beginning in March 1996, 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., a Vice President
of JWH Asset Management, Inc. a Director of Westport Capital Management
Corporation, the Executive Vice President of JWH Investments, Inc., and a
Director of Global Capital Management Limited. Prior to her employment at JWH,
Ms. Kenton was Associate Manager of Finance and Trading Operations at Krieger
Investments, a currency and commodity trading firm. From July 1987 to September
1988, Ms. Kenton worked for Bankers Trust Company as a Product Specialist for
foreign exchange and Treasury options trading. She received a B.S. in Finance
from Ithaca College.
Ms. Mary Beth Hardy is Senior Vice President and Director of Trading
Administration and a member of the Operating Committee of JWH. Since joining JWH
in September 1990, Ms. Hardy has held positions of increasing responsibility in
Research and Development and Trading. Prior to her employment at JWH, beginning
in 1989 Ms. Hardy held the position of Associate Editor at Waters Information
Services, a publishing company, where she wrote weekly articles covering
technological advances in the securities and futures markets. Prior to joining
Waters in 1989, Ms. Hardy was at Shearson Lehman Brothers, Inc. where she held
the position of assistant director of the Managed Futures Trading Department.
Prior to that, Ms. Hardy was an institutional salesperson at Shearson in a group
specializing in financial futures and options. Previously, Ms. Hardy was an
institutional salesperson for Donaldson, Lufkin and Jenrette with a group which
also specialized in financial futures and options. Ms. Hardy serves on the Board
of Directors of the Managed Futures Association and chairs its Trading and
Markets Committee. She received a B.B.A. in Finance from Pace University.
Mr. David M. Kozak is Counsel to the firm, Vice President and Secretary of
JWH. He is also secretary of JWH Risk Management, Inc., JWH Asset Management,
Inc. and Assistant Secretary of Westport Capital Management. 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 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.
APPI-12
<PAGE>
Mr. Kevin S. Koshi is a Senior Vice President and Chief Trader 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 responsible for the
design and testing of new programs. He also supports and maintains proprietary
algorithms used to generate JWH trades. Mr. Fox joined JWH in March 1991, and
since that time he has held positions of increasing responsibility in the
Research and Product Development Departments. Prior to his employment at JWH,
Mr. Fox provided sales and financial analysis support since October 1990 for
Spreadsheet Solutions, a financial software development company. Prior to
joining Spreadsheet Solutions, Mr. Fox operated a trading company where he
traded his own proprietary capital. Before that, he was employed with Bankers
Trust as a product specialist for foreign exchange and treasury options trading.
He received a B.S. in Business Administration from the University of Buffalo.
Ms. Glenda G. Twist is a Director of JWH and has held that position since
August 1993. Ms. Twist joined JWH in September 1991 with responsibilities for
corporate liaison, and she continues her duties in that area. Her
responsibilities include assistance in the day-to-day administration of the
Florida office, and review and compilation of financial information for JWH. Ms.
Twist was President of J.W. Henry Enterprises Corp., for which she performed
financial, consulting and administrative services from January 1991 to August
1991. From 1988 to December 1990, Ms. Twist was Executive Director of Cities in
Schools, a program in Arkansas designed to prevent students from leaving school
before completing their high school education. She received her B.S. in
Education from Arkansas State University.
Mr. 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
APPI-13
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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 1993, Mr. Lautenslager was a partner and managing
director to Limitless Option Partners, a registered Chicago Mercantile Exchange
trading and brokerage organization, where he traded currency futures and
options. He received a B.S. in Accounting from the University of Colorado and a
Masters in Management from Northwestern University.
Mr. Edwin B. Twist is a Director of JWH and has held that position since
August 1993. Mr. Twist is also a director of JWH Risk Management, Inc. 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.
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 thirteen trading programs. JWH implements the Financial and Metals
Portfolio for the Fund.
The quantitative models of JWH are guided by a proprietary set of
mathematical formulas that provide signals for investment decisions integrated
within a disciplined money-management framework. JWH's investment techniques
focus on long-term trends rather than day-to-day price fluctuations. 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 traded 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 portfolio leverage,
commencement of trading in an account, contracts traded, contract month
selection, margin utilization and effective trade execution.
In an effort to maintain and improve trading performance, JWH has engaged,
and continues to engage, in an extensive program of research. While the basic
philosophy underlying the firm's investment approach have 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 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.
APPI-14
<PAGE>
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 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.
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, and may cause one
series of Units to under- or outperform other series during the same time
periods.
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.
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, world currencies, stock indices and precious metals -- and
initiates trades according to trend-emergence and computerized determination of
relative risk.
The Financial and Metals Portfolio may take long, short or neutral
positions in up to 39 markets within the four market sectors traded, may use
stop orders and generally commits 10% to 30% of equity to margin on open
positions. Because assets are concentrated in interest rates, currencies, stock
indices and metals only, volatility can be higher than in a more diversified
portfolio.
APPI-15
<PAGE>
Other JWH Programs
In addition to the Financial and Metals Portfolio, JWH currently operates
twelve 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. With the exception of InterRate, a yield enhancement strategy,
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 exclusively on trading
between 10 to 15 foreign currencies in outright and cross-rate positions,
primarily through forward contracts. Portfolios are dynamic and include from
time to time various matrices of futures positions. InterRate, which commenced
trading in November 1987, uses a portfolio of foreign currency contracts that
seeks to capture interest-rate differentials between countries. This program
utilizes leverage that is significantly lower than other JWH programs, reducing
risk as it seeks to generate returns significantly enhanced over the prevailing
91-day U.S. government securities rate.
The World Financial Perspective, which began in 1986, trades the
financial and energy sector markets from the perspective of the Japanese yen,
German mark, Swiss franc, British pound, Australian dollar, French franc,
Canadian dollar and the U.S. dollar. The pricing of key global markets in terms
of foreign currencies provides a level of diversification not generally found in
futures portfolios. In February 1991, JWH began trading a portfolio in which
the same techniques utilized in the International Foreign Exchange Program are
primarily applied to the currencies of the major industrial nations, known as
"the Group of Seven" and Switzerland. These currencies are the Japanese yen,
British pound, Canadian dollar, German mark, French franc, Italian lira, the
U.S. dollar and Swiss franc and are among the most liquid, actively traded
currencies in the world. The G-7 Currency Portfolio makes use of both outright
positions and cross-rate positions. Positions are primarily taken in the
interbank market and from time to time on U.S. futures exchanges. The Yen
Financial Portfolio began in August 1991 and uses the same quantitative models
used in the Financial and Metals Portfolio. The Yen Financial Portfolio trades
futures on the Japanese yen, the 10-year Japanese Government Bond, the Euroyen
and the Nikkei 225 stock index. The International Currency and Bond Portfolio,
begun in January 1993, combines the techniques employed in the G-7 Currency
Portfolio and the global bond sector of the Financial and Metals Portfolio to
trade a combined portfolio of currencies and international long-term bonds. In
June 1994, JWH began trading the Global Financial Portfolio, which utilizes the
same reversal approach as the Original Investment Program. The program trades
in four market sectors: interest rates, stock indices, currencies and energy.
The Dollar Program began trading proprietary capital in June 1994. 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. (No performance summary is included for the
Dollar Program because no client accounts had been managed pursuant to that
Program as of April 30, 1996.)
The Worldwide Bond Program (WWB) began trading proprietary 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. Although WWB concentrates on one
sector, diversification is achieved by trading the interest rate instruments of
numerous countries. Unlike most fixed income investments, WWB is not limited to
investments that have the potential to profit in a stable or declining interest
rate environment. Rather, WWB is designed to capitalize on dominant trends,
whether rising or falling, in worldwide bond markets.
The Delevered Yen Denominated Financial and Metals Profile which began
trading in October 1995 seeks to capitalize on sustained moves in global
financial markets utilized intermediate-term and long-term quantitative
APPI-16
<PAGE>
trend analysis models, some of which attempt to employ neutral stances during
periods of nontrending markets. This portfolio is traded at approximately one
half of the leverage of the traditional Financial and Metals portfolio and is
traded from the perspective of the Japanese yen.
PAST PERFORMANCE
The following information describes the composite actual performance of all
customer and proprietary accounts managed by JWH and JWH Investments Inc. JWH
trades its Financial and Metals Portfolio on behalf of the Fund. As of April 30,
1996, JWH was managing approximately $1.3 billion (excluding "notional" funds)
of customer funds in the futures and forwards markets. All performance
information is current as of April 30, 1996.
Performance information is set forth for the most recent five full years
for each JWH and JWH Investments, Inc. program or, in the event that a program
has been trading for less than five years, performance information is set forth
from the inception of client account trading in such program. Performance
information prior to January 1, 1991 has been excluded in accordance with CFTC
regulations.
The "Notes to the Performance Summaries" are set forth on pages APPI-3
through APPI-4.
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 investment 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 (even if 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 a trading manager 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; and
(j) trading instructions/restrictions of the client.
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.
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
APPI-17
<PAGE>
in the performance summaries of continuing to record interest income, management
fees, commissions and other expenses on a cash basis differs immaterially from
the results which would be obtained using accrual basis accounting.
Advisory fees vary from account to account managed pursuant to all
programs. Management fees vary from 0% to 6% of assets under management;
incentive fees vary from 0% to 25% of profits. Such variations in advisory fees
may have a material impact on the performance of an account from time to time.
The Notes to the Performance Summaries are an integral part of such
performance summaries, which are presented on a cash basis except as otherwise
described herein.
ADDITIONAL NOTE TO THE FINANCIAL AND METALS PORTFOLIO COMPOSITE PERFORMANCE
SUMMARY
In May 1992, 35 percent of the assets in the Financial and Metals
Portfolio was deleveraged 50 percent at the request of a client. The
deleveraging materially affected the rates of return achieved. The 1992 annual
rate of return for these deleveraged accounts was negative 24.3 percent. The
1992 annual rate of return for the Financial and Metals Portfolio performance
summary was negative 10.9 percent. If these accounts had been excluded from the
Financial and Metals Portfolio performance summary, the 1992 annual rate of
return would have been negative 3.9 percent. The effect of this deleveraging
was eliminated in September 1992.
Additionally, the Financial and Metals Portfolio composite performance
summary includes the performance of several accounts that do not participate in
global markets due to their smaller account equities which do not meet the
minimums established for this program. Accounts not meeting such minimums can
experience performance materially different than the performance of an account
which meets the minimum account size. The performance of such accounts has no
material effect on the overall Financial and Metals Portfolio performance
summary.
ADDITIONAL NOTE TO THE YEN FINANCIAL PORTFOLIO COMPOSITE PERFORMANCE SUMMARIES
The Yen Financial Portfolio is traded from the Japanese yen
perspective. Accounts may be opened with either U.S. dollar or Japanese yen
deposits. Accounts originally opened with U.S. dollars establish additional
interbank positions in Japanese yen in an effort to enable such accounts to
generate returns similar to returns generated by accounts with yen-denominated
balances. Over time, as profits and losses are recognized in yen-denominated
Japanese markets, accounts may hold varying levels of U.S. dollars and Japanese
yen. Additionally, the interbank positions are adjusted periodically to reflect
the actual portions of the account balances remaining in U.S. dollars. Because
performance may be affected by fluctuations in the dollar/yen conversion rate,
and investors may open accounts with either U.S. dollar or Japanese yen
deposits, performance records from the perspective of both denominations are
presented.
Accordingly, as the equity mix between U.S. dollars and Japanese yen
varies, performance from each perspective will also vary. Investors should be
aware that their individual account performance may differ from the composite
performance summaries presented in relation to the perspective of their base
currency. Such differences arise from exchange rate movements, percentage of
account balances held in yen, and fee arrangements.
The performance summary as presented from the U.S. dollar perspective
includes all of the performance included in the yen perspective performance
summary, plus any additional gains and losses from currency fluctuations. The
performance summary as presented from the Japanese yen perspective reflects the
trading activity of an account which deposits and maintains all equity balances
in Japanese yen.
ADDITIONAL NOTE TO THE GLOBAL FINANCIAL PORTFOLIO COMPOSITE PERFORMANCE SUMMARY
Since the inception of the Global Financial Portfolio, the timing of
individual account openings has had a material impact on compound rates of
return. Based on the account startup methodology used by JWH, the performance
of individual accounts composing the Global Financial Portfolio composite
performance summary has varied. In 1994, the two accounts that were open
generated separate rates of return of negative 44 percent and negative 17
percent, respectively. For the period January 1995 through June 1995, the three
open accounts achieved separate rates of return of 101 percent, 75 percent and
67 percent, respectively. As of June 1995, these accounts now maintain mature
positions and are performing consistently with each other.
APPI-18
<PAGE>
ADDITIONAL NOTE TO THE SUMMARIES PRESENTED WHICH UTILIZE THE FULLY-FUNDED SUBSET
METHOD -- I.E., THE JWH GLOBAL DIVERSIFIED PORTFOLIO AND JWH INVESTMENTS, INC.
INTERRATE(TM) (THE "FULLY-FUNDED SUBSET SUMMARIES")
The level of actual funds in the accounts that comprise these two
performance summaries currently requires additional disclosure. Actual funds are
the amount of margin-qualifying assets on deposit. Nominal account size is a
dollar amount which clients have agreed to in writing and which determines the
level of trading in the account regardless of the amount of actual funds.
Notional funds are the amount by which the nominal account size exceeds the
amount of actual funds. The amount of notional equity in the accounts that
compose these summaries requires additional disclosure under current CFTC
policy. The Fully-Funded Subset Summaries include notional equity in excess of
the 10% disclosure threshold established by the CFTC and reflect the adoption of
a method of presenting rate-of-return and performance disclosure authorized by
the CFTC, referred to as the Fully-Funded Subset method. See "Chesapeake
Capital Corporation -- Past Performance" in this Appendix I. This method
permits notional and fully-funded accounts to be included in a single
performance summary.
To qualify for the use of the Fully-Funded Subset method, the Fully-
Funded Subset Advisory requires that certain computations be made in order to
arrive at the Fully-Funded Subset and that the accounts for which performance is
so reported meet two tests which are designed to provide assurance that the
Fully-Funded Subset and the resultant rates of return are representative of the
programs.
These computations have been performed since January 1, 1992 for JWH as
well as since the inception of JWH Investments, Inc.'s InterRate(TM). They were
designed to provide assurance that the performance presented in the Fully-Funded
Subset Summaries and calculated on a Fully-Funded Subset basis would be
representative of such performance calculated on a basis which includes notional
funds in beginning equity. The rates of return in the Fully-Funded Subset
Summaries are calculated by dividing net performance by the sum of beginning
equity plus additions minus withdrawals. JWH and JWH Investments, Inc. believe
that this method yields substantially the same adjusted rates of return as would
the Fully-Funded Subset method were there any "fully-funded" accounts, and that
the rates of return for the Fully-Funded Subset Summaries are representative of
the performance of the programs for the periods presented.
The information presented has not been audited. However, JWH and JWH
Investments, Inc. believe that such information is accurate and fairly
presented.
INTERRATE(TM) IS QUALITATIVELY DIFFERENT FROM THE METHODS WHICH GENERATED
THE COMPOSITE PERFORMANCE SUMMARIES OF OTHER JWH INVESTMENT PROGRAMS. THE
PROGRAMS REPRESENTED IN THE COMPOSITE PERFORMANCE RECORD DIFFER FROM
INTERRATE(TM) WITH RESPECT TO: (a) FEES CHARGED; (b) LENGTH OF TIME FOR WHICH
POSITIONS ARE HELD; (c) POSITIONS TAKEN; (d) LEVERAGE USED; AND (e) RATE OF
RETURN OBJECTIVES.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FURTHERMORE, THE RATES OF RETURN EARNED WHEN AN ADVISOR IS MANAGING A LIMITED
AMOUNT OF EQUITY MAY HAVE LITTLE RELATIONSHIP TO THE RATES OF RETURN WHICH SUCH
ADVISOR MAY BE ABLE TO ACHIEVE MANAGING LARGER AMOUNTS OF EQUITY.
A NUMBER OF THE ACCOUNTS INCLUDED IN THE FOLLOWING PERFORMANCE
SUMMARIES WERE TRADED IN A MANNER MATERIALLY DIFFERENT FROM THAT IN WHICH JWH
TRADES ON BEHALF OF THE FUND.
THE FOLLOWING PERFORMANCE SUMMARIES HAVE IN NO RESPECT BEEN ADJUSTED
TO REFLECT THE CHARGES TO THE FUND. CERTAIN OF THE ACCOUNTS INCLUDED IN THE
FOLLOWING PERFORMANCE SUMMARIES PAID FEES MATERIALLY DIFFERENT FROM, AND IN SOME
CASES MATERIALLY LOWER THAN, THOSE CHARGED THE FUND.
APPI-19
<PAGE>
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."
APPI-20
<PAGE>
JOHN W. HENRY & CO., INC.
FINANCIAL AND METALS PORTFOLIO
JANUARY 1991 - APRIL 1996
The following performance summary and chart reflect the composite
performance results from January 1991 through April 1996 of the Financial and
Metals Portfolio. JWH trades this program on behalf of the Fund. The program has
been utilized in trading for 350 accounts since its inception. As of April 30,
1996, 270 accounts had been closed and 80 client accounts remained open. Of the
closed accounts, 233 were profitable and 37 were unprofitable at their closing.
Of the 80 open client accounts, 78 were profitable and 2 were unprofitable as of
April 30, 1996.
Name of CTA: John W. Henry & Co., 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 client accounts: 80
Aggregate assets (excluding "notional" equity) overall: $1.3 billion
Aggregate assets (excluding "notional" equity) in program: $880 million
Aggregate assets (including "notional" equity) overall: $1.3 billion
Aggregate assets (including "notional" equity) in program: $880 million
Largest monthly drawdown: (18.0)% (1/92)
Largest peak-to-valley drawdown: (39.5)% (12/91-5/92)
<TABLE>
<CAPTION>
==========================================================================================
Monthly Performance 1996 1995 1994 1993 1992 1991
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
January 6.0%* (3.8)%* (2.9)%* 3.3%* (18.0)%* (2.3)%
- ------------------------------------------------------------------------------------------
February (5.5)* 15.7* (0.6)* 13.9* (13.5)* 3.8
- ------------------------------------------------------------------------------------------
March 0.7* 15.3* 7.2* (0.3)* 3.0* 4.5
- ------------------------------------------------------------------------------------------
April 7.3* 6.1* 0.9* 9.3* (12.2)* (0.8)
- ------------------------------------------------------------------------------------------
May 1.2* 1.3* 3.3* (5.7)* (0.3)*
- ------------------------------------------------------------------------------------------
June (1.7)* 4.5* 0.1* 21.9* (1.3)*
- ------------------------------------------------------------------------------------------
July (2.3)* (6.1)* 9.7* 25.5* (13.4)*
- ------------------------------------------------------------------------------------------
August 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 7.5%* 38.50%* (5.32)%* 46.82%* (10.89)%* 61.88%*
Rate of Return (4 months)
==========================================================================================
</TABLE>
The rates of return marked by an asterisk (*) indicate the presence of
proprietary capital included in the performance of the program. In May
1991, one proprietary account commenced trading and in March 1992 a second
proprietary account commenced trading. Both accounts appear in the capsule
performance from their inception until August 1995. The maximum percentage
of proprietary funds during this time period was less than 0.50%. These
proprietary funds had no material effect on the rate of return.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES APPI-3 THROUGH APPI-4.
APPI-21
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & CO., INC. PROGRAMS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAME OF CTA: John W. Henry John W. Henry John W. Henry John W. Henry
& Co., Inc. & Co., Inc. & Co., Inc. & Co., Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
NAME OF PROGRAM: Original Investment Global Diversified KT Diversified The World Financial
Program Program Program Perspective
- ----------------------------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT October 1982 October 1982 October 1982 October 1982
TRADING BY CTA:
- ----------------------------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT October 1982 June 1988 January 1984; April 1987
TRADING IN PROGRAM: ceased trading 2/94
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 22 21 0 5
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion $1.3 billion
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $117 million $109 million N/A $15 million
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion $1.3 billion
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $117 million $127 million N/A $15 million
- ----------------------------------------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN: (14.1)% (10/94) (16.8)% (7/91) (19.2)% (7/91) (21.6)% (1/92)
- ----------------------------------------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY
DRAWDOWN: (26.2)% (6/94-10/94) (29.1)% (12/91-5/92) (40.6)% (1/91-3/92) (32.0)% (12/91-10/92)
- ----------------------------------------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: 2.3% (4 months) (3)% (4 months) N/A 11% (4 months)
- ----------------------------------------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 53% (20)% N/A 32%
- ----------------------------------------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: (6)% 10% (14)% (2 months) (15)%
- ----------------------------------------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: 41% 60% 21% 14%
- ----------------------------------------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: 11% (13)% (12)% (23)%
- ----------------------------------------------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF RETURN: 5% 40% (2)% 15%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NAME OF CTA: John W. Henry John W. Henry John W. Henry
& Co., Inc. & Co., Inc. & Co., Inc.
- ----------------------------------------------------------------------------------------------------------------------
NAME OF PROGRAM: Yen Financial Portfolio Yen Financial Portfolio Global Financial
(U.S. dollars) (Japanese yen) Portfolio
- ----------------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING BY CTA: October 1982 October 1982 October 1982
- ----------------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING IN PROGRAM: January 1992 January 1992 June 1994
- ----------------------------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 7 9 4
- ----------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion
- ----------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $42 million (Yen)6010 million $22 million
- ----------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion
- ----------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $42 million (Yen)6010 million $22 million
- ----------------------------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN: (14.4)% (2/92) (13.0)% (5/92) (17.4)% (11/94)
- ----------------------------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY
DRAWDOWN: (27.0)% (4/95-4/96) (20.5)% (12/93-1/95) (46.0)% (6/94-1/95)
- ----------------------------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: ___ (4 months) ___ (4 months) 4% (4 months)
- ----------------------------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 20% (10 months) 23% (10 months) 86%
- ----------------------------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: (9)% (19)% (38)% (7 months)
- ----------------------------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: 66% 49% N/A
- ----------------------------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: 24% (11 months) 24% (11 months) N/A
- ----------------------------------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF RETURN: 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 APPI-3 THROUGH APPI-4.
APP1-22
<PAGE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & CO., INC. PROGRAMS
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NAME OF CTA: John W. Henry John W. Henry John W. Henry
& Co., Inc. & Co., Inc. & Co., Inc.
- ---------------------------------------------------------------------------------------------------------------
NAME OF PROGRAM: International Currency International Foreign
and Bond Portfolio Exchange Program G-7 Currency Portfolio
- ---------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING BY CTA: October 1982 October 1982 October 1982
- ---------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING IN PROGRAM: January 1993 August 1986 February 1991
- ---------------------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 1 7 9
- ---------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion
- ---------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $2 million $75 million $86 million
- ---------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion
- ---------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $2 million $75 million $86 million
- ---------------------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN: (6.7)% (7/94) (12.0)% (1/92) (10.7)% (1/92)
- ---------------------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY
DRAWDOWN: (20.1)% (6/94-1/95) (24.1)% (12/91-4/92) (19.5)% (7/93-1/95)
- ---------------------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: 0% (4 months) 1% (4 months) 1% (5 months)
- ---------------------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 37% 17% 32%
- ---------------------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: (2)% (6)% (5)%
- ---------------------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: 15% (5)% (6)%
- ---------------------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: N/A 5% 15%
- ---------------------------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF RETURN: N/A 39% 49% (11 months)
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NAME OF CTA: John W. Henry
& Co., Inc. JWH Investments, Inc. JWH Investments, Inc.
- ---------------------------------------------------------------------------------------------------------------
NAME OF PROGRAM: Financials And Metals
Interrate(SM) Portfolio Interrate(SM)
- ---------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING BY CTA: October 1982 September 1991 September 1981
- ---------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT September 1991; February 1992;
TRADING IN PROGRAM: December 1988 ceased trading 7/95 ceased trading 11/93
- ---------------------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 1 0 0
- ---------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.3 billion N/A N/A
--------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $17 million N/A N/A
- ---------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) OVERALL: $1.3 billion N/A N/A
- ---------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $17 million N/A N/A
--------------------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN: (9.71)% (9/92) (16.6)% (1/92) (9.3)% (9/92)
- ---------------------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY
DRAWDOWN: (17.8)% (8/92-2/94) (34.4)% (12/91-5/92) (20.6)% (8/92-11/93)
- ---------------------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: 5% (4 months) N/A N/A
- ---------------------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 5% 30% (7 months) N/A
- ---------------------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: 3% (1)% N/A
- ---------------------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: (5)% 46% (10)% (11 months)
- ---------------------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: (1)% (4)% (3)% (11 months)
- ---------------------------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF RETURN: 9% 59% (4 months) 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 APPI-3 THROUGH APPI-4.
APPI-23
<PAGE>
APPENDIX II
PERFORMANCE OF THE
PUBLIC SINGLE-ADVISOR FUTURES FUNDS OPERATED BY MLIP
GENERAL
The following is summary performance information for the four single-
advisor funds which MLIP has distributed other than as part of its "Managed
Account Program" -- 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 June 1, 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.
Two of the funds presented (The Futures Expansion Fund Limited Partnership
and World Currencies Limited) have fee structures and interest arrangements
generally comparable to that of the Fund (although these funds, being single-
advisor pools, pay profit shares only in respect of overall fund performance,
not on an advisor-by-advisor basis). The other funds, The Growth and Guarantee
Fund L.P. and InterRate/tm/ Limited, were designed as "index" and yield
enhancement funds, respectively, and pay (paid, in the case of The Growth and
Guarantee Fund L.P. -- Series B and InterRate/tm/ Limited, each of which has
dissolved) reduced fees.
THE FUNDS WHOSE PERFORMANCE IS SUMMARIZED IN THIS APPENDIX II 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 four single-
advisor funds the records of which are summarized herein. MLIP selects the
professional advisors for the funds in the Managed Account Program. However,
each client determines with which, if any, of such advisors the client will
invest. The Managed Account Program emphasizes single-advisor funds.
In its single-advisor funds, MLIP does not implement asset allocation
strategies which MLIP does for the Fund. Nor is MLIP's trading leverage
analysis of any relevance in the context of single-advisor funds. All the
assets of such funds are simply allocated to their respective advisors.
Managed Account Program funds are privately distributed with a minimum
investment of $100,000 (although MLIP has from time to time permitted
investments of $50,000).
Although MLIP's ability to select advisors for the Managed Account Program
might be regarded as a reflection on MLIP's ability to select advisors for its
multi-advisor funds, MLIP regards the Managed Account Program and MLIP's multi-
advisor funds as qualitatively different investments. Consequently, while MLIP
will furnish, without charge, full performance records of all MLIP single-
advisor funds upon the request of any existing or prospective investor in the
Fund, such records are not set forth herein.
APPII-1
<PAGE>
The three worst performing of the single-advisor Managed Account Program
funds sponsored by MLIP had, as of June 1, 1996, cumulative rates of return,
since inception, of (53.27)% (18 months), (17.67)% (43 months) and (6.20)% (27
months).
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND
MATERIAL DIFFERENCES EXIST BETWEEN THE FUNDS SET FORTH IN THIS APPENDIX II 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.
____________________________
"WORST MONTHLY DRAWDOWN" AS USED IN THIS APPENDIX II 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 IN THIS APPENDIX II 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.
APPII-2
<PAGE>
<TABLE>
<CAPTION>
MLIP PUBLIC SINGLE-ADVISOR FUNDS
JUNE 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
WORST MONTHLY
TYPE OF INCEPTION AGGREGATE CURRENT DRAWDOWN
NAME OF FUND OFFERING OF TRADING SUBSCRIPTIONS CAPITALIZATION PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
The Futures Expansion Fund Public Jan. 1987 $ 56,741,035 $9,345,919 (9.29)% (1/92)
Limited Partnership
- ----------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee Fund Public Aug. 1987 $148,349,450 $8,248,271 (4.28)% (6/91)
L.P. - Series A Units
- ----------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee Fund Public Sept. 1987 $ 84,282,707 dissolved as (7.63)% (8/90)
L.P. - Series B Units of 1/31/91
- -----------------------------------------------------------------------------------------------------------------------------------
World Currencies Limited Public Aug. 1987 $ 47,814,293 $4,038,708 (13.41)% (4/92)
dissolved as
of 4/11/96
- -----------------------------------------------------------------------------------------------------------------------------------
InterRate/(TM)/ Limited Public Dec. 1988 $ 7,429,200 dissolved as (10.08)% (9/92)
of 1/31/94
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
WORST 1996 1995 1994 1993 1992 1991
PEAK-TO-VALLEY CUMULATIVE COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
DRAWDOWN RATE OF RATE OF RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND PERIOD RETURN RETURN RETURN RETURN RETURN RETURN RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
The Futures Expansion Fund (17.32)% (1/91-11/91) 94.92% (8.13)% 21.95% 5.55% 3.36% 9.23% (1.79)%
Limited Partnership (5 months)
- ------------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee Fund (10.19)% (9/89-10/90) 60.37% 6.19% 32.01% (2.34)% 5.20% 3.75% 23.30%
L.P. - Series A Units (5 months)
- ------------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee Fund (10.93)% (6/90-9/90) 6.93% N/A N/A N/A N/A N/A 11.77%
L.P. - Series B Units
- ------------------------------------------------------------------------------------------------------------------------------------
World Currencies Limited (35.81)% (9/92-1/95) 73.85% (0.48)% 12.40% (12.84)% (10.46)% (3.10)% 35.28%
(4 1/2
months)
- ------------------------------------------------------------------------------------------------------------------------------------
InterRate/(TM)/ Limited (13.49)% (9/92-1/93) 30.04% N/A N/A 0.55% (7.02)% (2.63)% 11.03%
(1 month)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE EACH TRADED
PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY DIFFERENT
OBJECTIVES THAN THE FUND.
APPII-3
<PAGE>
APPENDIX III
THE ROLE OF MANAGED FUTURES IN AN INVESTMENT PORTFOLIO
MANAGED FUTURES AS AN ELEMENT IN MODERN PORTFOLIOS
A global investment perspective may be appropriate in seeking investment
opportunity while attempting to control portfolio risk. 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 must have 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. 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. The past performance of the Fund may not be representative of its
future results.
An asset allocation strategy involves diversifying 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, real estate and hard assets (among a variety of
alternatives). The goal is to achieve the twin investment objectives of long-
term total return combined with reduced portfolio volatility and limited risk of
major losses. An investment's anticipated return, relative risk level and
historical correlation with the other components in the portfolio are principal
factors taken into account in allocating 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.
PROFESSIONALLY MANAGED FUTURES
An investment in managed futures consists of professionally managed trading
in the global commodity markets, including financials, currencies, energy,
metals and agriculture. These markets are traded through futures, commodity
options 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 available markets, and its positions may frequently be concentrated
in limited markets and sectors.
FUTURES VOLUME BY MARKET SECTOR
[PIE CHARTS APPEAR HERE]
1980 1995
Total Volume: 92 million contracts Total Volume: 1.4 billion contracts
The futures volume figures and market sector distributions presented above
include both speculative and hedging transactions as well as options on futures.
Source: U.S. Futures Industry Association
Once confined to a few basic agricultural commodities, the futures markets
have expanded to include a wide range of instruments representing major sectors
of the world's economy. Coinciding with access to an increasingly broad range of
markets has been greatly expanded 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 able quickly to deploy and redeploy capital across a wide
range of international markets.
APPIII-1
<PAGE>
At the same time that the rapid geographical expansion of the
available markets and the introduction of an array of innovative products
have created new opportunities for both profit and diversification, they
have made trading very much more complex and difficult for the individual
investor. Managed futures investments offer the investor the opportunity
to participate in the global financial, currency, energy, metals and
agriculture sectors through the futures, forward and commodity options
markets utilizing professional money managers. Managed futures has profit
potential, but also involves a high degree of risk. A managed futures
investment is suitable only for a limited portion of the risk segment of a
portfolio. The expansion of the futures markets internationally does not
necessarily imply an expansion of the markets traded by the Fund.
SUBSTANTIAL INVESTOR PARTICIPATION
A large number of investors, both individuals and institutions, have
committed a limited portion of their assets to managed futures during the
last 10 to 15 years. In 1980, assets in the managed futures industry were
estimated by Managed Account Reports ("MAR"), a leading industry
publication, at approximately $0.3 billion. As of the end of 1995, the
same publication estimated client assets at approximately $18 billion. The
assets comniitted to managed futures are invested in a wide range of
different products, including single-advisor and multi-advisor funds,
"funds of funds," "principal protection" pools (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 performance and risk control
objectives. The Fund trades at lower leverage, and with correspondingly
less profit potential, than many other futures funds.
NON-CORRELATION -- AN 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 elements of a
portfolio can improve the risk/reward characteristics of an investor's
overall holdings. Consequently, allocating a limited portion of the risk
segment of a portfolio to managed futures, if the managed futures
performance is, in fact, profitable as well as noncorrelated with stocks
and bonds, can potentially add a valuable aspect of diversification to a
traditionally structured portfolio. 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.
Furthermore, non-correlation is not negative correlation. Even if the
performance of the Fund is non-correlated with these markets, this does
not mean that the Fund's results will not parallel either or both during
significant periods of time. In any event, unless a managed futures
investment is successful, it cannot add a potentially valuable element of
diversification to a portfolio.
Allocating assets to non-traditional investments ("alternative
investments") is based on the premise that while securities (e.g., stocks
and bonds) prices are often affected by overall market price trends,
alternative investments may not be, at least to the same degree. In
addition, the results of many types of alternative investments have
historically been largely non-correlated with each other. This creates the
possibility of assembling a portfolio whose various investments have been
developed with the objective of participating successfully in different
economic cycles and national financial markets, potentially multiplying
profit opportunities while decreasing the effect of price movements in any
given market on the overall volatility of the portfolio.
The following chart depicts the performance of the MLIP Index, the
S&P 500 Stock Index and the ML Domestic Master Bond Index. The MLIP Index
is an index of all futures funds for which MLIP serves or has served as
its trading manager or sponsor. It includes a total of 45 different funds,
9 of which are no longer operating. The MLIP Index includes "principal
protection" funds such as the Fund, which trade with only a limited
portion of their assets committed to trading, as well as funds which
allocate all, or even more than all, of their assets to trading. Although
MLIP's first fund began operations in January 1987, the following
comparison begins in 1990 because that was the year in which MLIP first
began to act as trading manager for multi-advisor funds. The MLIP Index
includes all MLIP funds, including single advisor funds for which MLIP
does not act as trading manager. The performance of each fund included in
the MLIP Index is weighted on the basis of relative month-end
capitalization (irrespective of the percentage of such capitalization
allocated to trading). The S&P 500 Stock Index is a capitalization-
weighted index of the common stocks of publicly-traded United States
issuers. The ML Domestic Master Bond Index is a total return index
comprised of 6,632
APPIII-2
<PAGE>
investment-grade corporate bonds, Treasuries and mortgage issues; average
maturity 12.70 years (calculated on a market-weighted basis as of June 30,
1996). The non-correlation among these different indices is indicated by
the fact that during certain periods their movements roughly parallel each
other while in other periods they diverge.
The past performance of a particular MLIP fund during any period of
time is not necessarily indicative of how such fund will perform in the
future. If the past performance of a given MLIP fund is not necessarily
indicative of how such fund itself will perform in the future, much less
so is the past performance of other, unrelated funds combined into a
composite presentation in either the MLIP Index or the MAR Public Funds
Index (see below). The MLIP Index and the MAR Public Funds Index are
included herein, not as being representative of how the Fund can be
expected to perform, but as an indication of how a variety of different
managed futures investments have performed.
COMPARISON OF THE MLIP INDEX AND CERTAIN GENERAL
SECURITIES MARKET INDICES
[CHART APPEARS HERE]
COMPARISON OF MLIP INDEX AND CERTAIN GENERAL
SECURTIES MARKET INDICES
JAN. 1990-APR. 1996
1-Jan-90 1000
31-Mar-96 1700
All graphs in this section reflect percentage changes from a
"normalized" starting point of 1,000. Past performance is not necessarily
indicative of future results. The compilation of an index of actively
managed futures funds as well as the comparison of such index to passive
indices of securities returns has certain inherent and material
limitations. There can be no assurance that a managed futures investment
will, in fact, perform in a manner non-correlated with traditional
portfolio components.
The deleveraging of the Fund's trading reduces profit potential as
well as volatility. If a series of Units is required to further
deleverage its trading below the 75% level, the Fund's ability to achieve
its objectives, or to provide diversification to an overall portfolio,
will be materially impaired.
The MLIP Index is a composite of the performance of all funds for
which MLIP has acted or acts as trading manager or sponsor. The MLIP
Index includes single-advisor, multi-advisor, "principal protection" and
non-"principal protection "funds. Forty-five different funds, including 9
which have been closed, are included in the MLIP Index, certain of which
are simply "feeder funds" through which Merrill Lynch clients invest in
funds sponsored by third parties. Certain of these funds are materially
different investment products from the Fund, and their fee structures
vary. The MLIP Index does not reflect the historical results of any actual
futures fund, and combining the performance of funds with materially
different investment characteristics has certain inherent and material
limitations. In addition, due to the unusually wide range of leverage
factors at which futures funds may trade, compositing their performance on
the basis of month-end capitalization may have certain distorting effects.
During its first 19-2/3 months of operations, the Fund's performance
demonstrated a significant degree of non-correlation with the S&P 500
Stock Index as well as with the ML Domestic Master Bond Index. Non-
correlation does not mean negative correlation. Investors must not
anticipate that when the stock or bond market drops, the Fund will
necessarily be profitable or vice versa. To date there have been, and
MLIP anticipates that there will continue to be, periods during which the
Fund's performance roughly parallels that of the general securities market
indices. However, during a substantial portion of its brief trading
history to date, the performance of the Fund has appeared generally
unrelated to the performance of such indices.
APPIII-3
<PAGE>
COMPARISON OF ML PRINCIPAL PROTECTION L.P.
AND
CERTAIN GENERAL SECURITIES MARKET INDICES
[CHART APPEARS HERE]
COMPARISON OF ML PRINCIPAL PROTECTION PLUS L.P. AND
CERTAIN GENERAL SECURITIES MARKET INDICES
OCT. 1994-APR. 1996
10/12/94 1000
4/30/96 1000
Past performance is not necessarily indicative of future results,
particularly in the case of performance information for as brief a period
as twelve and two-thirds months. The comparison of the performance of the
Fund, an actively managed futures and forward market investment, to
passive and unleveraged indices of general securities returns has certain
inherent and material limitations.
The S&P 500 Stock Index and the ML Domestic Master Bond Index
reflect the price movements of unmanaged and unleveraged groups of
publicly-traded stocks and bonds. The MLIP Index and the MAR Public Funds
Index, on the other hand, represent the composite performance of actively
managed, highly leveraged futures funds. Although it is common to
evaluate the performance of financial assets against general stock and
bond market indices, there are material differences between passive
indices of equity and debt prices and indices of managed products, as well
as between leveraged and unleveraged accounts. In addition, the MLIP
Index and the MAR Public Funds Index reflect the performance of
futures based, not securities, products. The futures markets are different
from the securities markets in a number of respects, and any comparison
between them is subject to certain inherent and material limitations.
MLIP INDEX COMPARED TO THE MAR PUBLIC FUNDS INDEX
The MAR Public Funds Index represents a combination of the
performance of a large number of publicly offered futures funds, weighting
the returns recognized by each such fund on the basis of relative
capitalization. The funds included in the MAR Public Funds Index represent
a wide variety of materially different products, including single and
multi-advisor funds, as well as funds with and without "principal
protection" features. As in the case of the MLIP Index, combining the
results of funds with materially different performance objectives and fee
structures into a single index is subject to certain inherent, and
material limitations. Nevertheless, the MAR Public Funds Index is one of
several widely-used benchmarks of general managed futures industry
performance. The following chart depicts the relative movements of the
MLIP Index and the MAR Public Funds Index over the January 1990 through
May 1996 period.
COMPARISON OF MLIP INDEX TO
MAR PUBLIC FUNDS INDEX
[CHART APPEAR HERE]
COMPARISON OF MLIP INDEX TO
MAR PUBLIC FUNDS INDEX
JAN. 1990 - MAR. 1996
1-Jan-90 1000
31-Mar-96 1000
Past performance is not necessarily indicative of future results.
Neither the MLIP nor the MAR Public Funds Index purports to indicate
either the results or the objectives of any actual or proposed fund.
Furthermore, there can be no assurance that the MAR Public Funds Index is
in fact representative of the performance of the managed futures industry
as a whole.
APPIII-4
<PAGE>
The MAR Public Funds Index represents the composite performance of a
large group of single and multi- advisor public futures funds with widely
disparate performance objectives, "principal protection" parameters and
fee structures, trading pursuant to a broad range of different and
independent strategies. While reference to the MAR Public Funds Index may
indicate certain performance characteristics which may reasonably be
considered as objectives of a managed futures investment, there can be no
assurance that the MAR Public Funds Index provides any meaningful
indication of how the Fund, or managed futures investments in general,
have performed in the past or will perform in the future. The distorting
effect of composite treatment may be greater in the case of the MAR Public
Funds Index than in the case of the MLIP Index, due to the inclusion in
the former of a wider variety of funds as well as of funds operated by
independent sponsors.
While graphic presentation of comparative performance results
facilitates illustrating certain performance characteristics, e.g., non-
correlation, prospective investors must be aware that alternative graphic
presentations of the same information can appear materially different. For
example, the use of a logarithmic rather than a standard scale de-
emphasizes both apparent volatilitv and rate of return, while the use of a
standard, or simply a larger lologarithmic, scale accentuates both. MLIP
believes that the graphs presented above are reasonable representations of
the information intended to be conveyed, but prospective investors must
recognize both the general nature and limited significance of such
information and that such information could have been depicted in a number
of materially different graphic presentations.
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 globally into a wide range of financial and non-financial
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).
. Participate in the highly leveraged futures, commodity options and
currency markets with liability limited, in the case of the Fund, to
the partial loss of the use of the funds invested.
Prudence demands that an investor carefully examine all aspects of a
managed futures investment and weigh the associated benefits of profit
potential and possible access to diversification against the risks
involved. A managed futures investment is not suitable for all investors,
and different managed futures investments have materially different
objectives and risk reward profiles. However, for the investor who can
tolerate the risks, a managed futures investment, if successful, has the
potential to yield important benefits in portfolio diversification and
management. See "Risk Factors."
THE FUTURES AND FORWARD MARKETS
Futures and Forward Contracts
Commodity futures contracts in the United States are required to be
made on approved commodity exchanges and call for the future delivery of
various commodities at a specified time and place. These contractual
obligations, depending on whether one is a buyer or a seller, may be
satisfied either by taking or making physical delivery of an approved
grade of the particular commodity (or, in the case of some contracts, by
cash settlement) or by making an offsetting sale or purchase of an
equivalent commodity futures contract on the same exchange prior to the
designated date of delivery.
Currencies may be purchased or sold for future delivery through
banks or dealers pursuant to what are commonly referred to as "forward
contracts." In such instances, the bank or dealer generally acts as
principal in the transaction and includes its anticipated profit and the
costs of the transaction in the prices it quotes for such contract; such
mark-ups are known as "bid-ask" spreads. Brokerage commissions are
typically not charged in forward trading.
APPIII-5
<PAGE>
Hedgers and Speculators
The two broad classifications of persons who trade in commodity
futures are "hedgers" and "speculators." Commercial interests that market
or process commodities use the futures markets for hedging against losses
that may occur because of price fluctuations, for example, between the
time a merchandiser or processor makes a contract to sell a raw or
processed commodity and the time he must perform the contract. The
commodity markets enable the hedger to shift the risk of price
fluctuations to the speculator. The speculator, unlike the hedger,
generally expects neither to deliver nor receive the physical commodity;
rather, the speculator risks his capital with the hope of making profits
from price fluctuations in commodity futures contracts.
Exchanges; Speculative Position Limits; Margins
Commodity exchanges provide centralized market facilities for
trading in futures contracts relating to specified commodities. Each of
the commodity exchanges in the United States has an associated
"clearinghouse." Once trades made between members of an exchange have been
confirmed, the clearinghouse becomes substituted for the clearing member
acting on behalf of each buyer and each seller of contracts traded on the
exchange and in effect becomes the other party to the trade. Thereafter,
each clearing member party to the trade looks only to the clearinghouse
for performance.
Foreign commodity exchanges differ in certain respects from their
United States counterparts and are not subject to regulation by any United
States governmental agency. Accordingly, the protections afforded by such
regulation are not available to the Fund to the extent that it trades on
such exchanges.
In its trading on foreign exchanges, the Fund is subject to the risk
of fluctuations in the exchange rate between the currencies in which the
contracts traded on such foreign exchanges are denominated and United
States dollars (as well as to the risk that exchange controls could be
imposed in the future).
The CFTC and the United States exchanges have established limits,
referred to as "speculative position limits," on the maximum net long or
net short position that any person (other than a hedger) may hold or
control. Most financial markets have replaced position limits with
"position accountability," under which the only limits imposed on a
trader's positions are those related to the trader's financial ability to
support such positions. However, such limits continue to be applicable in
a number of important (primarily agricultural) markets. These limits may
restrict the Trading Advisors' ability to acquire positions on behalf of
the Fund.
Most United States exchanges limit the maximum permissible
fluctuation in futures contract prices during any single trading day.
These regulations establish what are commonly referred to as "daily
limits." Daily limits restrict the maximum amount by which the price of a
futures contract may vary, either up or down, from the previous day's
settlement price. Once the daily limit has been reached, it becomes
difficult and costly to execute any trades in the affected contract.
Because these limits apply on a day-to-day basis, they do not limit
ultimate losses, but may reduce or eliminate liquidity. Daily limits are
generally not applicable to currency futures or to forward contracts.
Margin represents a security deposit to assure futures traders'
performance under their open positions. When a position is established,
"initial margin" is deposited and at the close of each trading day
"variation margin" is either credited or debited from a trader's account,
representing the unrealized gain or loss on the open positions. If
"variation margin" payments cause a trader's "initial margin" to fall
below "maintenance margin" levels (usually approximately one-half to two-
thirds of "initial margin"), a "margin call" will be made, requiring the
trader to deposit additional margin (up to the "initial margin" level) or
have his position closed out.
APPIII-6
<PAGE>
APPENDIX IV
BLUE SKY GLOSSARY
The following definitions are included in this Appendix IV in
compliance with the requirements of various state securities
administrators who review public futures fund offerings for compliance
with the "Guidelines for the Registration of Commodity Pool Programs"
Statement of Policy promulgated by the North American Securities
Administrators Association, Inc. The following definitions are reprinted
verbatim from such Guidelines and may, accordingly, not in all cases be
relevant to an investment in the Fund.
DEFINITIONS -- As used in the Guidelines, the following terms have
the following meanings:
Administrator -- The official or agency administering the security
laws of a state.
Advisor -- Any person who for any consideration engages in the
business of advising others, either directly or indirectly, as to the
value, purchase, or sale of commodity contracts or commodity options.
Affiliate -- An Affiliate of a Person means: (a) any Person directly
or indirectly owning, controlling or holding with power to vote 10% or
more of the outstanding voting securities of such Person; (b) any Person
10% or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held with power to vote, by such Person;
(c) any Person, directly or indirectly, controlling, controlled by, or
under common control of such Person; (d) any officer, director or partner
of such Person; or (e) if such Person is an officer, director or partner,
any Person for which such Person acts in any such capacity.
Capital Contributions -- The total investment in a Program by a
Participant or by all Participants, as the case may be.
Commodity Broker -- Any Person who engages in the business of
effecting transactions in commodity contracts for the account of others or
for his own account.
Commodity Contract -- A contract or option thereon providing for the
delivery or receipt at a future date of a specified amount and grade of a
traded commodity at a specified price and delivery point.
Cross Reference Sheet -- A compilation of the Guideline sections,
referenced to the page of the Prospectus, Program agreement, or other
exhibits, and justification of any deviation from the Guidelines.
Net Assets -- The total assets, less total liabilities, of the
Program determined on the basis of generally accepted accounting
principles. Net Assets shall include any unrealized profits or losses on
open positions, and any fee or expense including Net Asset fees accruing
to the Program.
Net Asset Value Per Program Interest -- The Net Assets divided by
the number of Program Interests outstanding.
Net Worth -- The excess of total assets over total liabilities as
determined by generally accepted accounting principles. Net Worth shall
be determined exclusive of home, home furnishings and automobiles.
New Trading Profits -- The excess, if any, of Net Assets at the end
of the period over Net Assets at the end of the highest previous period or
Net Assets at the date trading commences, whichever is higher, and as
further adjusted to eliminate the effect on Net Assets resulting from new
Capital Contributions, redemptions, or capital distributions, if any, made
during the period decreased by interest or other income, not directly
related to trading activity, earned on Program assets during the period,
whether the assets are held separately or in margin account.
Organizational and Initial Offering Expenses -- All expenses
incurred by the Program in connection with and in preparing a Program for
registration and subsequently offering and distributing it to the public,
including, but not limited to, total underwriting and brokerage discounts
and commissions (including fees of the underwriter's attorneys),
APPIV-1
<PAGE>
expenses for printing, engraving, mailing, salaries of employees while
engaged in sales activity, charges of transfer agents, registrars,
trustees, escrow holders, depositories, experts, expenses of qualification
of the sale of its Program Interest under federal and state law, including
taxes and fees, accountants' and attorneys' fees.
Participant -- The holder of a Program Interest.
Person -- Any natural Person, partnership, corporation, association
or other legal entity.
Pit Brokerage Fee -- Pit Brokerage Fee shall include floor
brokerage, clearing fees, National Futures Association fees, and exchange
fees.
Program -- A limited partnership, joint venture, corporation, trust
or other entity formed and operated for the purpose of investing in
Commodity Contracts.
Program Broker -- A Commodity Broker that effects trades in
Commodity Contracts for the account of a Program.
Program Interest -- A limited partnership interest or other security
representing ownership in a Program.
Pyramiding -- A method of using all or a part of an unrealized
profit in a Commodity Contract position to provide margin for any
additional Commodity Contracts of the same or related commodities.
Sponsor -- Any Person directly or indirectly instrumental in
organizing a Program or any Person who will manage or participate in the
management of a Program, including a Commodity Broker who pays any portion
of the Organizational Expenses of the Program, and the general partner(s)
and any other Person who regularly performs or selects the Persons who
perform services for the Program. Sponsor does not include wholly
independent third parties such as attorneys, accountants, and underwriters
whose only compensation is for professional services rendered in
connection with the offering of the units. The term "Sponsor" shall be
deemed to include its Affiliates.
Valuation Date -- The date as of which the Net Assets of the Program
are determined.
Valuation Period -- A regular period of time between Valuation
Dates.
APPIV-2
<PAGE>
EXHIBIT A
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
Dated as of July 1, 1996
<PAGE>
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<C> <S> <C>
1. Formation and Name................................... A-1
2. Principal Office..................................... A-1
3. Business............................................. A-1
4. Term, Dissolution, Fiscal Year and Net Asset Value... A-2
5. Net Worth of General Partner......................... A-3
6. Capital Contributions; Units......................... A-3
7. Allocation of Profits and Losses..................... A-3
(a) Capital Accounts and Allocations................ A-3
(b) Allocation of Profit and Loss for Federal Income
Tax Purposes................................... A-4
(c) Adjustments..................................... A-6
(d) Expenses........................................ A-6
(e) Limited Liability of Limited Partners........... A-6
(f) Return of Capital Contributions................. A-6
8. Management of the Partnership........................ A-7
(a) General......................................... A-7
(b) Fiduciary Duties................................ A-8
(c) Loans; Investments.............................. A-8
(d) Certain Conflicts of Interest Prohibited........ A-8
(e) Certain Contracts............................... A-8
(f) Trading Advisors................................ A-8
(g) Other Activities................................ A-9
(h) Tax Matters Partner............................. A-9
(i) The Trading Partnership......................... A-9
(j) "Pyramiding" Prohibited......................... A-9
9. Audits and Reports to Limited Partners............... A-9
10. Assignability of Units............................... A-10
11. Redemptions; Distributions........................... A-11
12. Offering of Units.................................... A-12
13. Additional Offerings................................. A-12
14. Special Power of Attorney............................ A-12
15. Withdrawal of a Partner.............................. A-12
16. Standard of Liability; Indemnification............... A-13
17. Amendments; Meetings................................. A-15
(a) Amendments with Consent of the General Partner.. A-15
(b) Amendments and Actions without Consent of the
General Partner................................ A-15
(c) Meetings; Other................................. A-15
18. Governing Law........................................ A-16
19. Miscellaneous........................................ A-16
A-1
</TABLE>
<PAGE>
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
This Third Amended and Restated Limited Partnership Agreement
(this "Limited Partnership Agreement") is made as of July 1, 1996, by and
among MERRILL LYNCH INVESTMENT PARTNERS INC., a Delaware corporation, as
general partner (the "General Partner"), and each other party who becomes
a party to this Limited Partnership Agreement as a limited partner
(individually, a "Limited Partner" or, collectively, the "Limited
Partners") (the General Partner and the Limited Partners being
collectively referred to herein as "Partners").
WITNESSETH:
1. Formation and Name.
The parties hereto do hereby form and continue a limited
partnership under the Delaware Revised Uniform Limited Partnership Act, as
amended (the "Act"). The name of the limited partnership is ML PRINCIPAL
PROTECTION L.P. (the "Partnership").
2. Principal Office.
The address of the principal office of the Partnership shall be
c/o the General Partner, Merrill Lynch World Headquarters, 6th Floor,
South Tower, World Financial Center, New York, New York 10080-6106;
telephone: (212) 236-4167. The address of the registered office of the
Partnership in the State of Delaware is c/o The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle
County, Delaware 19801, and the name and address of the registered agent
for service of process on the Partnership in the State of Delaware is The
Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,
Wilmington, New Castle County, Delaware 19801.
3. Business.
The Partnership's business and purpose is to trade, buy, sell or
otherwise acquire, hold or dispose of forward and futures contracts for
all manner of commodities, financial instruments and currencies, any
rights pertaining thereto and any options thereon or on physical
commodities, as well as securities and any rights pertaining thereto, and
to engage in all activities necessary, convenient or incidental thereto.
The Partnership may also engage in "hedge," arbitrage and cash trading of
commodities, futures, forwards and options, as well as in yield
enhancement and other fixed-income strategies. The objective of the
Partnership's business is appreciation of its assets through speculative
trading. The Partnership may engage in the foregoing speculative trading
directly, through investing in other partnerships and funds and through
investing in subsidiary limited partnerships or other limited liability
entities structured so that, to the maximum extent permitted by law,
Limited Partners can be assured that the assets attributable to one series
of units of limited partnership interest ("Units") in the Partnership will
never be used to pay losses or expenses attributable to any other series.
In particular, it is contemplated that the Partnership shall engage in
speculative trading through ML PRINCIPAL PROTECTION PLUS TRADING L.P. (the
"Trading Partnership"), of which the General Partner shall be the sole
general partner, and the Partnership the sole limited partner.
In addition to its trading activities, as described above, the
Partnership and the Trading Partnership retain MERRILL LYNCH ASSET
MANAGEMENT, L.P. ("MLAM") to implement cash management strategies in -- in
MLAM's absolute discretion within investment parameters established by,
and the responsibility of, the General Partner -- United States Treasury
securities and securities issued by U.S. government agencies and
instrumentalities. The Partnership instructs Merrill Lynch Futures Inc.,
the Trading Partnership's commodity broker, to pay MLAM's fees for such
cash management services from the flat-rate brokerage commissions paid by
the Trading Partnership to Merrill Lynch Futures Inc., and the General
Partner is hereby specifically empowered to (i) retain MLAM to provide
cash management advice and services to the Partnership and the Trading
Partnership, (ii) arrange for Merrill Lynch Futures Inc. to pay MLAM's
fees for such advice and services and (iii) establish investment
parameters for MLAM's cash management services for the Partnership and the
Trading Partnership. In the event that Merrill Lynch Futures Inc. does
not pay MLAM's cash management fees, the General Partner, not the
Partnership, shall be responsible for doing so.
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<PAGE>
The Partnership 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 Partnership, to be allocated to
the appropriate series of units of limited partnership interest ("Units")
in the Partnership, so that the Net Asset Value per Unit of all Units of
such series outstanding on such series' Principal Assurance Date, as
defined in the Prospectus of the Partnership, as amended and updated from
time to time (the "Prospectus"), in each case relating to the public
offering of the Units, will equal at least $100.
Other than as set forth above, it is specifically intended that
the Partnership function in a manner analogous to a "commercial paper
issuer" so as to have no operations and incur no debts or obligations
whatsoever, except as explicitly set forth herein (including, without
limitation, in Section 16(e)).
In no event shall the Partnership as a whole, or any series of
Units, considered individually, be permitted to operate as an entity which
is principally engaged in trading or investing in securities, as opposed
to in futures and forward contracts and options thereon.
4. Term, Dissolution, Fiscal Year and Net Asset Value.
(a) Term. The term of the Partnership commenced on the day on
which the Certificate of Limited Partnership was filed with the Secretary
of State of the State of Delaware pursuant to the provisions of the Act
and shall end upon the first to occur of the following: (1) December 31,
2024; (2) receipt by the General Partner of an approval to dissolve the
Partnership at a specified time by Limited Partners owning Units
representing more than fifty percent (50%) of the outstanding Units of
each series then owned by Limited Partners, notice of which is sent by
certified mail, return receipt requested, to the General Partner not less
than ninety (90) days prior to the effective date of such dissolution; (3)
the death, insanity, bankruptcy, retirement, resignation, expulsion or
dissolution of the General Partner or any other event that causes the
General Partner to cease to be a general partner unless (i) at the time of
such event there is at least one remaining general partner of the
Partnership who carries on the business of the Partnership (and each
remaining general partner of the Partnership is hereby authorized to carry
on the business of the Partnership in such an event), or (ii) within
ninety (90) days after such event all Partners agree in writing to
continue the business of the Partnership and to the appointment, effective
as of the date of such event, of one or more general partners of the
Partnership; (4) a decline in the aggregate Net Assets of the Partnership
to less than $250,000; (5) dissolution of the Partnership pursuant hereto;
or (6) any other event which shall make it unlawful for the existence of
the Partnership to be continued or requires termination of the
Partnership.
(b) Dissolution. Upon the occurrence of an event causing the
dissolution of the Partnership, the Partnership shall be dissolved and
terminated.
(c) Fiscal Year. The fiscal year of the Partnership shall
begin on January 1 of each year and end on the following December 31.
(d) Net Asset Value. Net Assets of the Partnership are its
assets less its liabilities determined in accordance with generally
accepted accounting principles. If an open position cannot be liquidated
on the day with respect to which Net Assets are being determined, the
settlement price on the first subsequent day on which the contract can be
liquidated shall be the basis for determining the liquidating value of
such contract for such day, or such other value as the General Partner may
deem fair and reasonable. The liquidating value of a commodity futures or
option contract not traded on a United States commodity exchange shall
mean its liquidating value as determined by the General Partner on a basis
consistently applied for each different variety of contract. The Net
Asset Value of the Partnership's investment in the Trading Partnership
will be valued in accordance with the foregoing principles.
The Partnership's accrued but unpaid liability for reimbursement
to the General Partner of the Partnership's organizational and initial
offering costs shall not reduce Net Asset Value for any purpose, including
cal culating 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.
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<PAGE>
5. Net Worth of General Partner.
The General Partner agrees that at all times so long as it
remains general partner of the Partnership, it will maintain its net worth
-- determined without reference to the General Partner's interests in the
Partnership or any other limited partnership or to any notes or accounts
receivable from and payable to any limited partners in which the General
Partner has an interest -- at an amount not less than 5% of the total
contributions by all partners to the Partnership and all other
partnerships of which the General Partner is general partner. The General
Partner will not permit its net worth to decline below $10 million without
the approving majority vote of each series of Units then owned by Limited
Partners.
The requirements of the first sentence of the preceding
paragraph may be modified if the General Partner obtains an opinion of
counsel for the Partnership that a proposed modification will not
adversely affect the classification of the Partnership as a partnership
for federal income tax purposes, and if such modification will reflect or
exceed applicable state securities and Blue Sky laws and qualify under any
guidelines or statements of policy promulgated by any body or agency
constituted by the various state securities administrators having
jurisdiction in the premises.
6. Capital Contributions; Units.
The Partners' respective capital contributions to the
Partnership shall be as shown on the books and records of the Partnership.
The General Partner shall invest in the Partnership, as a
general partner interest, no less than 1% of the total contributions to
the Partnership (including the General Partner's contribution) made with
respect to each series of Units issued by the Partnership. The General
Partner, so long as it is a general partner of the Partnership, or any
substitute general partner, shall maintain a minimum investment of 1% of
the outstanding contributions to the Partnership with respect to each
series of Units. The General Partner need not maintain an equal
percentage investment in each series, but must maintain at least a 1%
investment in each. The General Partner may withdraw any interest it may
have as a general partner in excess of the foregoing requirement, and may
redeem any Units of any series which it may acquire as of any month-end on
the same terms as any Limited Partner, provided that the General Partner
must, at all times while it is the sole general partner of the
Partnership, maintain the minimum 1% interest in each series of Units
described in the preceding sentence.
Units of any series acquired by the General Partner or any of
its affiliates will be non-voting, and will not be considered outstanding
for purposes of determining whether the majority approval of the
outstanding Units of such series has been obtained.
7. Allocation of Profits and Losses.
(a) Capital Accounts and Allocations. A capital account shall
be established for each series of Units sold by the Partnership and,
within each such series a capital account shall be established for each
Unit of such series as well as for the General Partner's interest in such
series on a Unit-equivalent basis. The initial balance of each series'
and of each Unit's capital account shall be the amount contributed to the
Partnership with respect to such series or Unit. As of the close of
business (as determined by the General Partner) on the last day of each
month, (i) any increase or decrease in the value of the Partnership's U.S.
Treasury and federal government agency or instrumentality securities and
short-term foreign sovereign debt instruments, as well as any increase or
decrease in the Partnership's cash (other than as a result of
distributions, redemptions or payments described in the following
paragraphs of this Section 7(a)), plus (ii) any increase or decrease in
the Net Asset Value of the Partnership's capital account in the Trading
Partnership attributable to capital (a) invested in the Trading
Partnership or (b) committed to the Trading Partnership by the Partnership
pursuant to Section 16(e), shall be allocated among the series, in the
case of (i) above, pro rata based on the relative amounts of assets
(without regard to accrued but unpaid brokerage commissions,
Administrative Fees or Profit Shares) attributable to each series as of
the close of business on the last day of the immediately preceding month
(after deducting amounts payable as a result of the redemption of Units as
of the last day of such immediately preceding month) and, in the case of
(ii) above, pro rata based on the relative amounts set forth in (ii)(a)
and (b) with respect to each series as of the close of business on the
last day of the immediately preceding month (after deducting amounts
payable as a result of the redemption of Units as of the last day of such
immediately preceding month).
A-3
<PAGE>
The capital accounts of each series of Units shall be reduced by
the amount of any distributions, redemption payments and related
redemption charges paid out with respect to such series.
Any Profit Share payments made by the Partnership shall be
allocated among the series based upon the Profit Shares that would have
been paid by the Partnership for the relevant period if the Partnership's
only assets during such period had been those of the appropriate series.
Any reimbursement of organizational and initial offering costs
made pursuant to Section 7(d) as of the last day of any given month shall
be allocated among the series based on the relative net asset value
(without regard to accrued but unpaid brokerage commissions,
Administrative Fees or Profit Shares) of each series as of the last day of
the immediately preceding month (after deducting amounts payable as a
result of the redemption of Units on the last day of such immediately
preceding month).
Any payments made under the Merrill Lynch & Co., Inc. guarantee
of the minimum Net Asset Value per Unit of each series, as of the
"Principal Assurance Date," as defined in the Prospectus, for such series
and any indemnity payments by the General Partner pursuant to Section
16(d) hereof shall be allocated to the appropriate series.
The amounts allocated to a series shall be allocated equally
among the Units of such series outstanding as of the last day of such
month (including Units redeemed as of such day), except that redemption
payments, related redemption charges and Profit Shares payable upon the
redemption of Units as of a date other than the last day of a calendar
quarter shall be allocated solely to the redeemed Units.
For purposes of maintaining capital accounts, amounts paid or
payable to the General Partner for items such as reimbursement of
organizational and initial offering costs and service fees shall be
treated as if paid or payable to a third party and, except for the General
Partner's pro rata share of such amounts, shall not affect the capital
account of the interest held by the General Partner.
(b) Allocation of Profit and Loss for Federal Income Tax
Purposes. As of the end of each fiscal year, the Partnership's income,
expense, Capital Gain and Capital Loss shall be allocated among the series
of Units, and among the Partners of each such series, pursuant to the
following subparagraphs for federal income tax purposes. Such allocations
shall, as among the series and as among Partners holding the same series,
be pro rata from the short-term Capital Gain and Capital Loss and long-
term Capital Gain and Capital Loss of the Partnership or allocated to such
series, 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-4
<PAGE>
(A) There shall be established a tax account with respect to each
outstanding Unit of such series. The initial balance of such tax account
shall be the amount contributed to the Partnership for such Unit. For
each of the first 36 months of the Partnership's operations, the balance
of such tax account shall be reduced by the Unit's allocable share of the
series' share of the amount payable as of the end of such month by the
Partnership to the General Partner in respect of the reimbursement of
organizational and initial offering costs, as described in the Prospectus.
The adjustment to reflect the reimbursement of organizational and initial
offering costs shall be made prior to the allocations of Trading Capital
Gain and Trading Capital Loss (and shall be taken into account in making
such allocations). As of the end of each fiscal year:
(i) Each tax account shall be increased by the amount of
income allocated to such Unit pursuant to Sections 7(b)(2) and
7(b)(4)(C).
(ii) Each tax account shall be decreased by the amount of
expense or loss allocated to such Unit pursuant to Sections 7(b)(2),
7(b)(3) and 7(b)(4)(E) and by the amount of any distributions paid
out with respect to such Unit other than upon redemption.
(iii) When a Unit is redeemed, the tax account attributable to
such Unit (determined after making all allocations described in this
Section 7(b)) shall be eliminated.
(B) Each Partner who redeems Units of a given series (including
Units redeemed as of the end of the last day of such fiscal year) shall be
allocated such series' share of Trading Capital Gain, if any, up to the
amount of the excess, if any, of the aggregate amount received in respect
of such Units (before taking into account any early redemption charges)
over the aggregate tax accounts for such Partner's redeemed Units
(determined after making the allocations described in Sections 7(b)(2) and
7(b)(3), but prior to making the allocations described in this Section
7(b)(4)(B)) allocable to such Units (a "Positive Excess"). In the event
the series' share of Trading Capital Gain is less than the aggregate
amount of Trading Capital Gain to be allocated pursuant to the first
sentence of this Section 7(b)(4)(B), the series' share of Trading Capital
Gain shall be allocated among all such redeeming Partners in the ratio
which each such Partner's Positive Excess bears to the aggregate Positive
Excess of all such Partners.
(C) The series' share of Trading Capital Gain remaining after the
allocation described in Section 7(b)(4)(B) shall be allocated among all
Partners who hold Units in such series outstanding as of the end of the
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
A-5
<PAGE>
one series. Without limiting the foregoing, Limited Partners who
redeem their Unit(s) in one series and invest in another shall be treated
no differently than Limited Partners making their initial investment in
the latter series.
(5) The allocation of profit and loss for federal income tax
purposes set forth herein is intended to allocate taxable profit and loss
among Partners generally in the ratio and to the extent that profit and
loss are allocated to such Partners so as to eliminate, to the extent
possible, any disparity between a Partner's capital account and his tax
account, consistent with principles set forth in Section 704 of the Code,
including, without limitation, a "Qualified Income Offset."
(6) The allocations of profit and loss to the Partners in
respect of the Units shall not exceed the allocations permitted under
Subchapter K of the Code, as determined by the General Partner, whose
determination shall be binding. For purposes of this Section 7(b), unless
specified to the contrary, Units redeemed as of the end of any month shall
be considered outstanding as of the end of such month.
(c) Adjustments. The General Partner may adjust the
allocations set forth in Section 7(b), in the General Partner's
discretion, if the General Partner believes that doing so will achieve
more equitable allocations or allocations more consistent with the Code.
(d) Expenses. The General Partner has paid $239,100 incurred
as organizational and initial offering costs in connection with the
initial public offering of Units, for which the General Partner is being
reimbursed by the Partnership in equal monthly installments of $6,642
through October 31, 1997, as described in the Prospectus; provided that in
the event that the Partnership dissolves at any time prior to the end of
such 36-month period, any remaining reimbursement obligation of the
Partnership to the General Partner shall be extinguished. The General
Partner shall not be paid interest on any funds advanced for
organizational and initial offering costs.
The General Partner shall pay, without reimbursement, the
selling commissions and ongoing compensation relating to the offering of
the Units.
The Partnership shall not itself pay any advisory fees due to
MLAM or any other manager providing cash management services to the
Partnership. All such fees shall be paid by Merrill Lynch Futures Inc.,
or, if Merrill Lynch Futures Inc. does not do so, by the General Partner.
The Partnership shall bear all of any taxes applicable to it.
The Partnership shall pay to the General Partner Administrative
Fees as described in the Prospectus, and the General Partner shall pay all
of the Partnership's routine legal, accounting and administrative
expenses. None of the General Partner's "overhead" expenses incurred in
connection with the administration of the Partnership (includ ing, but not
limited to, salaries, rent and travel expenses) will be charged to the
Partnership. Any goods and services provided to the Partnership by the
General Partner shall be provided at rates and terms at least as favorable
as those which may be obtained from third parties in arm's-length
negotiations. All of the expenses which are for the Partnership's account
shall be billed directly to the Partnership. Appropriate reserves may be
created, accrued and charged against Net Assets for contingent
liabilities, if any, as of the date any such contingent liability becomes
known to the General Partner. Such reserves shall reduce Net Asset Value
for all purposes. Reserves may, in circumstances in which the General
Partner believes it to be appropriate to do so, be established in respect
of one or more but less than all series of Units.
(e) Limited Liability of Limited Partners. Each Unit, when
purchased in accordance with this Limited Partnership Agreement, shall,
except as otherwise provided by law, be fully paid and nonassessable. Any
provisions of this Limited Partnership Agreement to the contrary
notwithstanding, except as otherwise provided by law, no Limited Partner
shall be liable for Partnership obligations in excess of the capital
contributed by such Limited Partner, plus his share of undistributed
profits and assets.
(f) Return of Capital Contributions. No Partner or subsequent
assignee shall have any right to demand the return of his capital
contribution or any profits added thereto, except through redeeming Units
as provided in Section 11(a) or upon dissolution of the Partnership, in
each case as provided herein. In no event shall a Partner or subsequent
assignee be entitled to demand or receive any property from the
Partnership other than cash.
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<PAGE>
8. Management of the Partnership.
(a) General. The General Partner, to the exclusion of all
Limited Partners, shall control, conduct and manage the business of the
Partnership as well as of the Trading Partnership, and have full authority
to retain brokers, dealers, advisors, cash management advisors and other
service providers on their behalf. The General Partner shall execute
various documents on behalf of the Partnership and the Partners pursuant
to powers of attorney and supervise the liquidation of the Partnership if
an event causing dissolution of the Partnership occurs.
The General Partner may in furtherance of the business of the
Partnership cause the Partnership to buy, sell, hold or otherwise acquire
or dispose of commodities, futures contracts and options traded on
exchanges or otherwise, arbitrage positions, repurchase agreements, debt
securities, deposit accounts and similar instruments and other assets, as
well as cause the Partnership's trading to be limited to only certain of
the foregoing instruments. The General Partner is specifically authorized
to enter into, on behalf of the Partnership and the Trading Partnership,
(A) the Investment Advisory Contract with MLAM, whereby it is contemplated
that MLAM will manage the available assets of the Partnership and the
Trading Partnership pursuant to the investment parameters established by
the General Partner (in its capacity as respective general partner of each
of the Partnership and Trading Partnership), and the Customer Agreement
with Merrill Lynch Futures Inc., which will receive futures brokerage
commissions from the Trading Partnership, and will pay MLAM's cash
management fees for services rendered to the Partnership and the Trading
Partnership as described in the Prospectus, and (B) "offset account"
arrangements as described in the Prospectus. Effective January 1, 1996, a
portion of the Partnership's brokerage commissions, in the amount of 0.25
of 1% per annum of the Partnership's average month-end assets committed to
trading, has been recharacterized as Administrative Fees payable directly
to the General Partner -- the Partnership hereby agreeing to make such
payments -- and, accordingly, the Partnership's brokerage commissions has
been correspondingly reduced from 9.5% to 9.25% of the Partnership's
average month-end assets committed to trading.
The General Partner may engage, and compensate on behalf of the
Partnership from funds of the Partnership, or agree to share profits and
losses with, such persons, firms or corporations, including (except as
described in this Limited Partnership Agreement) the General Partner and
any affiliated person or entity, as the General Partner in its sole
judgment shall deem advisable for the conduct and operation of the
business of the Partnership; provided, that no such arrangement shall
allow brokerage commissions paid by the Partnership in excess of the
amount described in the Prospectus or as permitted under applicable North
American Securities Administrators Association, Inc. Guidelines for the
Registration of Commodity Pool Programs (the "NASAA Guidelines") in effect
as of the date of the Prospectus (i.e., 80% of the published retail rate
plus pit brokerage fees, or 14% annually -- including pit brokerage and
F/X Desk service fees -- of average Partnership Net Assets, excluding
Partnership Net Assets not directly related to trading activity),
whichever is higher. The General Partner is hereby specifically
authorized to enter into, on behalf of the Partnership and/or the Trading
Partnership, the Advisory Agreements, the Investment Advisory Contract,
the Guarantee Agreement and the Selling Agreement as referred to in the
Prospectus. The Partnership's brokerage commissions will not be increased
during the period in which redemption charges are in effect with respect
to any series of Units, unless such charges are waived or the series to
which redemption charges are still applicable are not subject to such
increase. The Partnership's brokerage commissions may not be increased
without prior written notice to Limited Partners within sufficient time
for the exercise of their redemption rights. Such notification shall
contain a description of Limited Partners' voting and redemption rights
and a description of any material effect of such increases. The
Partnership's brokerage commissions and Administrative Fees, taken
together, may not be increased above an annual level of 9.5% of the
average month-end assets committed to trading without the unanimous
consent of all Limited Partners.
The General Partner may at any time and without the consent of
any Partners of the Partnership admit persons acquiring any series of
Units as Limited Partners of the Partnership.
The General Partner may take such other actions on behalf of the
Partnership as it deems necessary or desirable to manage the business of
the Partnership, including without limitation all actions in connection
with the future issuance of Units of different series.
In addition to any specific contract or agreement described
herein, the Partnership, either directly through the Trading Partnership
or together with the Trading Partnership, may enter into any other
contracts or agreements specifically described in or contemplated by the
Prospectus without any further act, approval or vote of the Limited
Partners, notwithstanding any other provisions of this Limited Partnership
Agreement, the Act or any applicable law, rule or regulations.
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<PAGE>
(b) Fiduciary Duties. The General Partner shall be under a
fiduciary duty to conduct the affairs of the Partnership in the best
interests of the Partnership. The Limited Partners will under no
circumstances be deemed to have contracted away the fiduciary obligations
owed them by the General Partner under the common law. The General
Partner's fiduciary duty includes, among other things, the safekeeping of
all Partnership funds and assets and the use thereof for the benefit of
the Partnership. The General Partner shall at all times act with
integrity and good faith and exercise due diligence in all activities
relating to the conduct of the business of the Partnership and in
resolving conflicts of interest. The Partnership's brokerage arrangements
shall be non-exclusive, and the brokerage commissions paid by the
Partnership shall be competitive. The Partnership shall seek the best
price and services available for its commodity transactions.
(c) Loans; Investments. The Partnership shall make no loans
to any party, and the funds of the Partnership will not be commingled with
the funds of any other person or entity (deposit of funds with a commodity
broker, securities dealer, clearinghouse or forward dealer or entering
into joint ventures or partnerships shall not be deemed to constitute
"commingling" for these purposes). The General Partner shall make no loans
to the Partnership unless approved by the Limited Partners in accordance
with Section 17(a) of this Limited Partnership Agreement. If the General
Partner makes a loan to the Partnership, the General Partner shall not
receive interest in excess of its interest costs, nor may the General
Partner receive interest in excess of the amounts which would be charged
the Partnership (without reference to the General Partner's financial
resources or guarantees) by unrelated banks on comparable loans for the
same purpose. The General Partner shall not receive "points" or other
financing charges or fees regardless of the amount. The Partnership shall
not invest in any debt instruments other than Treasury securities,
securities issued by U.S. government agencies or instrumentalities, other
CFTC-authorized investments and foreign sovereign debt instruments
acquired in connection with the Trading Partnership's trading of foreign
futures and options, and shall not invest in any equity security (other
than as a limited partner in the Trading Partnership) without prior notice
to all Limited Partners.
(d) Certain Conflicts of Interest Prohibited. No person or
entity may receive, directly or indirectly, any advisory, management or
incentive fees, or any profit-sharing allocation from joint ventures,
partnerships or similar arrangements in which the Partnership
participates, for investment advice or management, who shares or
participates in any commodity brokerage commissions; no broker may pay,
directly or indirectly, rebates or give-ups to any trading advisor or
manager or to the General Partner or any of their respective affiliates;
and such prohibitions may not be circumvented by any reciprocal business
arrangements. No trading advisor for the Partnership shall be affiliated
with Merrill Lynch Futures Inc., the General Partner or any of their
respective affiliates (this prohibition shall not preclude (i) the General
Partner retaining a manager for which the General Partner provides
administrative services or (ii) MLAM from providing cash management
services to the Partnership, provided that MLAM's fees are paid either by
Merrill Lynch Futures Inc. or by the General Partner, and that MLAM does
not execute transactions for the account of either the Partnership or the
Trading Partnership through any Merrill Lynch affiliate).
(e) Certain Contracts. The maximum period covered by any
contract entered into by the Partnership, except for the various
provisions of the Selling Agreement which survive the closing of the sale
of the Units, shall not exceed one year. Any agreements between the
Partnership and the General Partner or any affiliate of the General
Partner shall be terminable by the Partnership upon no more than 60 days'
written notice. All sales of Units in the United States will be conducted
by registered brokers.
(f) Trading Advisors. All trading advisors for the
Partnership must meet the NASAA Guidelines' minimum experience
requirement.
The General Partner shall reimburse the Partnership for any
advisory or other fees (including Profit Shares) paid by the Partnership
to any trading advisor over the course of any fiscal year, to the extent
that such fees exceed the 6% annual management fees and the 15% quarterly
incentive fees (calculating New Trading Profit, as defined in the
Prospectus, after all expenses and without including interest income or
any yield enhancement return) contemplated by the NASAA Guidelines during
such year. Any such reimbursement shall be made on a present value basis,
fully compensating the Partnership for having made payments at any time
during the year which would not otherwise have been due from it. The
General Partner shall disclose any such reimbursement in the next Annual
Report delivered to Limited Partners.
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(g) Other Activities. The General Partner is engaged, and may
in the future engage, in other business activities and shall not be
required to refrain from any other activity nor forego any profits from
any such activity, whether or not in competition with the Partnership.
Limited Partners may similarly engage in any such other business
activities. The General Partner shall devote to the Partnership such time
as the General Partner may deem advisable to conduct the Partnership's
business and affairs.
(h) Tax Matters Partner. The General Partner is hereby
authorized to perform all other duties imposed by Sections 6221 through
6232 of the Code on the General Partner as the "tax matters partner" of
the Partnership.
(i) The Trading Partnership. The General Partner shall not
permit the Partnership to undertake any debts or obligations other than as
set forth herein, including without limitation pursuant to Section 16(e).
The General Partner further covenants and agrees that as general partner
of the Trading Partnership, the General Partner will not permit the
Trading Partnership (A) to engage in any activities or incur any
obligations except in respect of the Trading Partnership's speculative
futures and forward trading on behalf of the Partnership or (B) to enter
into any brokerage, F/X or other agreement or undertaking, unless all
other parties to such agreement explicitly acknowledge and agree that (i)
they will in no event seek to assert, other than pursuant to and to the
extent of the Partnership's undertaking set forth in Section 16(e), that
the Partnership or any of its assets is in any respects subject to any
debts of or claims against the Trading Partnership, either through
"piercing the corporate veil," "substantive consolidation" or any other
theory, and (ii) they will take no action and institute no action or
proceeding seeking to adjudicate the Trading Partnership a bankrupt or
insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its
debts under any law relating to bankruptcy, insolvency or reorganization
or relief of debtors, or seeking the entry of an order for relief or the
appointment of a receiver, trustee, custodian or other similar official
for the Trading Partnership or for any substantial part of its property.
The General Partner shall ensure that (i) the Partnership is at
all times the sole limited partner of the Trading Partnership and (ii) the
General Partner is at all times the sole general partner of the Trading
Partnership and at all times controls the Trading Partnership, by virtue
of the Partnership's equity ownership of the Trading Partnership and the
General Partner's serving as sole general partner of both the Partnership
and the Trading Partnership -- the intent of the parties being that the
Trading Partnership should function solely as a conduit for the
Partnership's own trading activities and not as any form of investment by
the Partnership.
The General Partner, as general partner of the Trading
Partnership, will cause the Trading Partnership to comply with all
provisions of the NASAA Guidelines.
The General Partner is, by way of greater certainty and not by
way of limitation, specifically authorized as general partner of the
Partnership and the Trading Partnership to retain the General Partner's
affiliate, MLAM, to provide cash management services to the Partnership
and the Trading Partnership and to instruct and authorize Merrill Lynch
Futures Inc. to pay the cash management fees due to MLAM from the futures
brokerage commissions received by Merrill Lynch Futures Inc. from the
Trading Partnership. In the event that Merrill Lynch Futures Inc. does
not pay MLAM's fees, the General Partner will do so without reimbursement
from either the Partnership or the Trading Partnership.
(j) "Pyramiding" Prohibited. The Partnership is prohibited
from employing the trading technique commonly known as "pyramiding," and
will not permit the Trading Partnership to employ any such technique. A
trading manager or advisor of the Partnership taking into account the
Partnership's open trade equity on existing positions in determining
generally whether to acquire additional commodity positions on behalf of
the Partnership will not be considered to constitute "pyramiding."
9. Audits and Reports to Limited Partners.
The Partnership books shall be audited annually by an
independent certified public accountant. The Partnership will use its
best efforts to cause each Limited Partner to receive (i) within ninety
(90), but in no event later than one hundred twenty (120), days after the
close of each fiscal year certified financial statements of the
Partnership for the fiscal year then ended, (ii) within ninety (90) days
of the end of each fiscal year (but in no event later than March 15 of
each year) such tax information relating to the Partnership as is
necessary for a Limited Partner to complete his federal income tax return
and (iii) such other annual and monthly information as the Commodity
Futures Trading
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Commission may by regulation require. The General Partner
shall include in the annual reports sent to Limited Partners an
approximate estimate (calculated as accurately as may be reasonably
practicable) of the round-turn equivalent brokerage commission rate paid
by the Trading Partnership during the preceding year. Limited Partners or
their duly authorized representatives may inspect the Partnership books
and records for any purpose reasonably related to such Limited Partner's
interest as a limited partner in the Partnership during normal business
hours upon reasonable written notice to the General Partner. Copies of
such records may be made upon payment of reasonable reproduction costs for
any purpose reasonably related to such Limited Partner's interest as a
limited partner in the Partnership and, upon request, shall be sent to any
Limited Partner upon payment of reasonable reproduction and mailing costs.
The General Partner shall calculate the approximate Net Asset
Value per Unit of each series on a daily basis and furnish such
information upon request to any Limited Partner.
The General Partner will send written notice to each Limited
Partner within seven (7) days of any decline in the aggregate Net Asset
Value attributable to any series of Units held by such Limited Partner or
in the Net Asset Value per Unit of any such series to 50% or less of such
Net Asset Value as of the previous month-end. Any such notice shall
contain a description of Limited Partners' voting rights.
The General Partner shall maintain and preserve all Partnership
records for a period of not less than six (6) years.
Not by way of qualifying the General Partner's obligations under
Section 8(a) to ensure that the Partnership's brokerage commissions are
competitive, but rather as a means of providing additional information to
the Limited Partners, the General Partner will, with the assistance of the
Partnership's commodity broker, make an annual review of the commodity
brokerage arrangements applicable to the Partnership (including the
commodity brokerage arrangements applicable to any subsidiary entity, such
as the Trading Partnership, through which the Partnership trades). In
connection with such review, the General Partner will ascertain, to the
extent practicable, the commodity brokerage rates charged to other major
commodity pools whose trading and operations are, in the opinion of the
General Partner, comparable to those of the Partnership in order to assess
whether the rates charged the Partnership are competitive in light of the
services it receives. If, as a result of such review, the General Partner
determines that such rates are not competitive in light of the services
provided to the Partnership, the General Partner will notify the Limited
Partners, setting forth the rates charged to the Partnership and several
funds which are, in the General Partner's opinion, comparable to the
Partnership. The General Partner shall also conduct a similar review of
the Partnership's forward trading arrangements.
In addition to the undertakings in the preceding paragraph, the
Partnership will seek the best price and services available in its
commodity brokerage transactions. All brokerage transactions will be
effected at competitive rates. Brokerage fees may not exceed the cap in
Section 8(a). The General Partner will annually review rates to guarantee
that the criteria of this paragraph is followed. The General Partner may
not rely solely on the rates charged by other major commodity pools to
make its determinations.
10. Assignability of Units.
Each Limited Partner expressly agrees that he will not assign,
transfer or dispose of, by gift or otherwise, any of his Units or all or
any part of his right, title and interest in the capital or profits of the
Partnership in violation of any applicable federal or state securities
laws or without giving written notice to the General Partner. No
assignment, transfer or disposition by an assignee of Units or of all or
any part of his right, title and interest in the capital or profits of the
Partnership shall be effective against the Partnership or the General
Partner until the General Partner receives written notice of the
assignment; and the General Partner shall not be required to give any
assignee any rights hereunder prior to receipt of such notice. The
General Partner may, in its sole discretion, waive any such notice. No
such assignee, except with the consent of the General Partner, which
consent may be withheld in its sole and absolute discretion, may become a
substituted Limited Partner, nor will the estate or any beneficiary of a
deceased Limited Partner or assignee have any right to withdraw or receive
assets from the Partnership except by redemption as provided in Section
11(a) or upon dissolution of the Partnership. Each Limited Partner agrees
that with the consent of the General Partner any assignee may become a
substituted Limited Partner without need of any further act or approval of
any Limited Partner. If the General Partner withholds consent, an
assignee shall not become a substituted Limited Partner,
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and shall not have any of the rights of a Limited Partner, except that the
assignee shall be entitled to receive that share of capital and profits and
shall have that right of redemption and those rights upon dissolution to
which his assignor would otherwise have been entitled. No assignment,
transfer or disposition of Units shall be effective against the Partnership
or the General Partner until the first day of the month succeeding the
month in which the General Partner receives notice of such assignment,
transfer or disposition.
11. Redemptions; Distributions.
A Limited Partner, the General Partner to the extent that it owns
Units or any assignee of Units of whom the General Partner has received
written notice as described above, may redeem all or any of his Units (a
"redemption"), effective as of the close of business (as determined by the
General Partner) on the last business day of any month, provided, that (i)
all liabilities, contingent or otherwise, of the Partnership (including
the Partnership's allocable share of the liabilities, contingent or
otherwise, of any entities, such as the Trading Partnership, in which the
Partnership invests), except any liability to Partners on account of their
capital contributions, have been paid or there remains property of the
Partnership sufficient to pay them and (ii) the General Partner shall have
timely received a request for redemption.
Units redeemed on or before the end of the twelfth full month
after they are issued are subject to redemption charges of 3% of the Net
Asset Value at which they are redeemed. Such charges shall be paid to the
General Partner.
Redemption charges shall not apply to distributions.
Requests for redemption must be received by the General Partner
at least ten (10) calendar days, or such lesser period as shall be
acceptable to the General Partner, in advance of the requested effective
date of redemption. Such requests need not be in writing so long as the
Limited Partner has a Merrill Lynch customer securities account. If a
redeeming Limited Partner no longer has a Merrill Lynch customer
securities account, requests for redemption must be submitted in writing
and with the signature guaranteed (not notarized; guaranteed) by a member
firm of the National Association of Securities Dealers, Inc.
The General Partner may waive any of the foregoing charges or
restrictions on redemptions in the General Partner's discretion, and may
declare additional redemption dates upon notice to the Limited Partners as
well as to those assignees of whom the General Partner has received notice
as described above.
Payment will be made within ten (10) business days after the
month-end of redemption, except that under special circumstances,
including, but not limited to, inability to liquidate commodity positions
as of a redemption date or default or delay in payments due the Trading
Partnership or the Partnership from commodity brokers, banks or other
persons or entities, the Partnership may in turn delay payment to Partners
or assignees requesting redemption of their Units of the proportionate
part of the Net Asset Value of such Units equal to the proportionate part
of the Partnership's aggregate Net Asset Value allocable to all series of
Units being redeemed, and represented by the sums which are the subject of
such default or delay.
The General Partner may require a Limited Partner to redeem all
or a portion of such Partner's Units if the General Partner considers
doing so to be desirable for the protection of the Partnership, and will
do so to the extent the General Partner deems appropriate or necessary to
prevent the Partnership or any series of Units considered individually
from being deemed to hold "plan assets" within the meaning of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), or the Code,
with respect to any "employee benefit plan" as defined in and subject to
ERISA or with respect to any "plan" as defined in Section 4975 of the
Code.
The General Partner may, in its discretion, establish "Special
Redemption Dates" in respect of one or more series of Units as a means of
implementing "stop loss" or similar policies. "Special Redemption Dates"
may require the suspension of all trading and the liquidation of all open
positions held with respect to such series.
The General Partner may -- but shall be under no obligation
whatsoever (and does not presently intend) to -- make any distributions in
respect of the Units. Any such distributions would be made pro rata to all
outstanding series of Units and would not reduce the $100 minimum Net
Asset Value per Unit guaranteed to investors as of the Principal Assurance
Date for their series of Units, as described in the Prospectus.
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12. Offering of Units.
The General Partner on behalf of the Partnership shall (i) cause
to be filed such Prospectus Supplements and amended Registration
Statements as the General Partner may deem advisable, with the Securities
and Exchange Commission for the registration and public offering of Units,
(ii) use its best efforts to maintain the qualification of the Units for
sale under the securities laws of such States of the United States or
other jurisdictions as the General Partner shall deem advisable and (iii)
take such action with respect to the matters described in (i) and (ii) as
the General Partner shall deem advisable or necessary.
The General Partner shall not accept any subscriptions for Units
if doing so would cause the Partnership, or any series of Units considered
individually, to have "plan assets" status under ERISA. If an ERISA
subscriber has its subscription reduced in order to avoid "plan assets"
status, such subscriber shall be entitled to rescind its subscription in
its entirety even though subscriptions are otherwise irrevocable.
13. Additional Offerings.
The General Partner may, in its discretion, continue the ongoing
offering of Units contemplated by the Prospectus as well as make
additional public or private offerings of Units, provided that doing so
does not dilute existing Limited Partners' economic interest in the
Partnership. No Limited Partner shall have any preemptive, preferential or
other rights with respect to the issuance or sale of any additional Units,
other than as set forth in the preceding sentence.
The General Partner intends to offer series of Units for sale as
of the beginning of each calendar quarter, subject to the General
Partner's absolute right to terminate the offering at any time, in the
General Partner's discretion, and to the minimum investment and minimum
capitalization requirements set forth in the Prospectus; provided that,
unless otherwise expressly required by law, the assets attributable to
each such series shall under no circumstances be subject to being used in
any respect to satisfy or discharge any debt or obligation of any other
such series.
Each additional series of Units issued hereunder must comply with
the NASAA Guidelines in the same manner and to the same extent as the
initial series of Units issued hereunder.
14. Special Power of Attorney.
Each Limited Partner by his execution of this Limited Partnership
Agreement does hereby irrevocably constitute and appoint the General
Partner and each officer of the General Partner, with power of
substitution, as his true and lawful attorney-in-fact, in his name, place
and stead, to execute, acknowledge, swear to (and deliver as may be
appropriate) on his behalf and file and record in the appropriate public
offices and publish (as may in the reasonable judgment of the General
Partner be required by law): (i) this Limited Partnership Agreement,
including any amendments and/or restatements hereto duly adopted as
provided herein; (ii) certificates of limited partnership in various
jurisdictions, and amendments and/or restatements thereto, and of assumed
name or of doing business under a fictitious name with respect to the
Partnership; (iii) all conveyances and other instruments which the General
Partner deems appropriate to qualify or continue the Partnership in the
State of Delaware and the jurisdictions in which the Partnership may
conduct business, or which may be required to be filed by the Partnership
or the Partners under the laws of any jurisdiction or under any amendments
or successor statutes to the Act, to reflect the dissolution or
termination of the Partnership or the Partnership being governed by any
amendments or successor statutes to the Act or to reorganize or refile the
Partnership in a different jurisdiction; and (iv) to file, prosecute,
defend, settle or compromise litigation, claims or arbitrations on behalf
of the Partnership. The Power of Attorney granted herein shall be
irrevocable, deemed to be a power coupled with an interest (including,
without limitation, the interest of the other Partners in the General
Partner being able to rely on the General Partner's authority to act as
contemplated by this Section 14) and shall survive and shall not be
affected by the subsequent incapacity, disability or death of a Limited
Partner.
15. Withdrawal of a Partner.
The Partnership shall be dissolved upon the withdrawal,
dissolution, admitted or court-decreed insolvency or removal of the
General Partner, or any other event that causes the General Partner to
cease to be a general
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partner under the Act, unless the Partnership is continued pursuant to the
terms of Section 4. In addition, the General Partner may withdraw from the
Partnership, without any breach of this Limited Partnership Agreement, at
any time upon one hundred and twenty (120) days' written notice by first
class mail, postage prepaid, to each Limited Partner and assignee of whom
the General Partner has notice. If the General Partner withdraws as general
partner and the Partnership's business is continued, the withdrawing
General Partner shall pay all expenses incurred as a result of its
withdrawal.
The General Partner may not assign its general partner interest
or its obligation to direct the management or trading of the Partnership's
or the Trading Partnership's assets without the consent of each Limited
Partner. The General Partner will notify all Limited Partners of any
change in the principals of the General Partner.
The death, incompetency, withdrawal, insolvency or dissolution of
a Limited Partner or any other event that causes a Limited Partner to
cease to be a limited partner of the Partnership shall not terminate or
dissolve the Partnership, and a Limited Partner, his estate, custodian or
personal representative shall have no right to redeem, receive proceeds
from or value such Limited Partner's interest in the Partnership except as
provided in Sections 11(a) and 11(b) hereof and upon dissolution of the
Partnership. Each Limited Partner expressly agrees that in the event of
his death, he waives on behalf of himself and his estate, and directs the
legal representatives of his estate and any person interested therein to
waive, the furnishing of any inventory, accounting or appraisal of the
assets of the Partnership and any right to an audit or examination of the
books of the Partnership. Nothing in this Section 15 shall, however, waive
any right given elsewhere in this Limited Partnership Agreement for a
Limited Partner to be informed of the Net Asset Value of his Units, to
receive periodic reports, audited financial statements and other
information from the General Partner or the Partnership or to redeem or
transfer Units.
16. Standard of Liability; Indemnification.
(a) Standard of Liability for the General Partner. The General
Partner and its Affiliates, as defined below, shall have no liability to
the Partnership or to any Partner for any loss suffered by the Partnership
which arises out of any action or inaction of the General Partner or its
Affiliates if the General Partner or such Affiliates, in good faith,
determined that such course of conduct was in the best interests of the
Partnership, and such course of conduct did not constitute negligence or
misconduct by the General Partner or its Affiliates.
(b) Indemnification of the General Partner by the Partnership. To
the fullest extent permitted by law, subject to this Section 16, the
General Partner and its Affiliates, shall be indemnified by the
Partnership against any losses, judgments, liabilities, expenses and
amounts paid in settlement of any claims sustained by them in connection
with the Partnership; provided that such claims were not the result of
negligence or misconduct on the part of the General Partner or its
Affiliates, and the General Partner or such Affiliates, in good faith,
determined that such conduct was in the best interests of the Partnership;
and provided further that Affiliates of the General Partner shall be
entitled to indemnification only for losses incurred by such Affiliates in
performing the duties of the General Partner and acting wholly within the
scope of the authority of the General Partner.
Notwithstanding anything to the contrary contained in the
preceding two paragraphs, the General Partner and its Affiliates and any
persons acting as selling agent for the Units shall not be indemnified for
any losses, liabilities or expenses arising from or out of an alleged
violation of federal or state securities laws unless (1) there has been a
successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee and the court
approves indemnification of the litigation costs, or (2) such claims have
been dismissed with prejudice on the merits by a court of competent
jurisdiction as to the particular indemnitee and the court approves
indemnification of the litigation costs, or (3) a court of competent
jurisdiction approves a settlement of the claims against a particular
indemnitee and finds that indemnification of the settlement and related
costs should be made.
In any claim for indemnification for federal or state securities
law violations, the party seeking indemnification shall place before the
court the position of the Securities and Exchange Commission, the
Massachusetts Securities Division, the Pennsylvania Securities Commission,
the Tennessee Securities Division, the Texas Securities Board, and any
other state or applicable regulatory authority with respect to the issue
of indemnification for securities law violations.
The Partnership shall not incur the cost of that portion of any
insurance which insures any party against any liability the
indemnification of which is herein prohibited.
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For the purposes of this Section 16, the term "Affiliates" shall
mean any person acting on behalf of or performing services on behalf of
the Partnership who: (1) directly or indirectly controls, is controlled
by, or is under common control with the General Partner; or (2) owns or
controls 10% or more of the outstanding voting securities of the General
Partner; or (3) is an officer or director of the General Partner; or (4)
if the General Partner is an officer, director, partner or trustee, is any
entity for which the General Partner acts in any such capacity.
Advances from Partnership funds to the General Partner and its
Affiliates for legal expenses and other costs incurred as a result of any
legal action initiated against the General Partner by a Limited Partner
are prohibited.
Advances from Partnership funds to the General Partner and its
Affiliates for legal expenses and other costs incurred as a result of a
legal action will be made only if the following three conditions are
satisfied: (1) the legal action relates to the performance of duties or
services by the General Partner or its Affiliates on behalf of the
Partnership; (2) the legal action is initiated by a third party who is not
a Limited Partner; and (3) the General Partner or its Affiliates undertake
to repay the advanced funds, with interest from the initial date of such
advance, to the Partnership in cases in which they would not be entitled
to indemnification under this Section 16.
In no event shall any indemnity or exculpation provided for
herein be more favorable to the General Partner or any Affiliate than that
contemplated by the NASAA Guidelines as in effect on the date of this
Limited Partnership Agreement.
In no event shall any indemnification permitted by this Section
16(b) be made by the Partnership unless all provisions of this Section for
the payment of indemnification have been complied with in all respects.
Furthermore, it shall be a precondition of any such indemnification that
the Partnership receive a determination of qualified independent legal
counsel in a written opinion that the party which seeks to be indemnified
hereunder has met the applicable standard of conduct set forth herein.
Receipt of any such opinion shall not, however, in itself, entitle any
such party to indemnification unless indemnification is otherwise proper
hereunder. Any indemnification payable by the Partnership hereunder shall
be made only as provided in the specific case.
In no event shall any indemnification obligations of the
Partnership under this Section 16(b) subject a Limited Partner to any
liability in excess of that contemplated by Section 7(e).
(c) Indemnification of the Partnership by the Partners. In the
event that the Partnership is made a party to any claim, dispute or
litigation or otherwise incurs any loss or expense as a result of or in
connection with any Partner's activities, obligations or liabilities
unrelated to the Partnership's business, such Partner shall indemnify and
reimburse the Partnership for all loss or expense incurred, including
reasonable attorneys' fees.
The General Partner shall indemnify and hold the Partnership
harmless from all loss or expense which the Partnership may incur
(including, without limitation, any indemnity payments) as a result of (i)
the differences between MLAM's standard of liability under the Investment
Advisory Contract and MLIP's standard of liability as set forth herein or
(ii) the differences between Merrill Lynch, Pierce, Fenner & Smith
Incorporated's standard of liability under the Custody Agreement and
MLIP's standard of liability as set forth herein.
(d) Series Default Indemnification of the Partners by the General
Partner. In addition, and not by way of limitation of the provisions of
Section 13, the General Partner shall indemnify and hold harmless each
Limited Partner against all loss or expense incurred by the Units of any
series held by such Limited Partner, which loss or expense is properly
attributable to trading losses or expenses allocable to any other series
of Units.
(e) Undertaking to Make Additional Payments to the Trading
Partnership. The Partnership hereby agrees and undertakes that it will pay
to the Trading Partnership or the Trading Partnership's estate, or to the
Trading Partnership's brokers and dealers, an amount equal to the excess,
if any, between the amount which the Trading Partnership commits, at the
direction of the General Partner and on behalf of the Partnership, to the
Trading Advisors for trading and the amount of assets invested in the
Trading Partnership by the Partnership. In the event that the Partnership
is obligated to make any payments pursuant to this undertaking, it shall
allocate such payments among the different series of Units pro 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
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and attributable to such series. The General Partner is authorized and
directed to provide in the Trading Partnership's brokerage and dealer
agreements that the amounts agreed to be paid to the Partnership hereunder
may be debited directly from the Partnership's account without need of
giving any advance notice of any such debit to the Partnership.
17. Amendments; Meetings.
(a) Amendments with Consent of the General Partner. If at any
time during the term of the Partnership the General Partner shall deem it
necessary or desirable to amend this Limited Partnership Agreement, the
General Partner may proceed to do so, provided that such amendment shall
be effective only if embodied in an instrument approved by the General
Partner and, subject to the immediately following sentence, by the holders
of Units representing more than fifty percent (50%) of the aggregate
number of Units then owned by the Limited Partners. In any such vote,
Units of different series shall vote separately, and the approving
majority vote of each such series must be obtained for approval unless a
series is not adversely affected by such amendment, in which case such
series shall not have the right to vote with respect to such amendment. No
meeting procedure or specified notice period is required in the case of
amendments made with the consent of the General Partner, mere receipt of
an adequate number of unrevoked written consents being sufficient. The
General Partner may amend this Limited Partnership Agreement without the
consent of the Limited Partners in order (i) to clarify any clerical
inaccuracy or ambiguity or reconcile any inconsistency (including any
inconsistency between this Limited Partnership Agreement and the
Prospectus), (ii) to effect the intent of the allocations proposed herein
to the maximum extent possible in the event of a change in the Code or the
interpretations thereof affecting such allocations, (iii) to attempt to
ensure that the Partnership is not treated as an association taxable as a
corporation for federal income tax purposes, (iv) to qualify or maintain
the qualification of the Partnership as a limited partnership in any
jurisdiction, (v) to delete or add any provision of or to this Limited
Partnership Agreement required to be deleted or added by the Staff of the
Commodity Futures Trading Commission, the Securities and Exchange
Commission or any other federal agency or any state "Blue Sky" official or
similar official or in order to opt to be governed by any amendment or
successor statute to the Act, (vi) to better insulate the different series
of Units from the risk of paying the debts of any other such series, (vii)
to make any amendment to this Limited Partnership Agreement which the
General Partner deems advisable provided that such amendment is not
adverse to the Limited Partners, or that is required by law, (viii) to
make any amendment that is appropriate or necessary, in the opinion of the
General Partner, to prevent the Partnership or the General Partner or its
directors, officers or controlling persons from in any manner being
subjected to the provisions of the Investment Company Act of 1940, as
amended, and (ix) to make any amendment that is appropriate or necessary,
in the opinion of the General Partner, to avoid causing the assets of the
Partnership, or of any series of Units considered individually, from
constituting assets of any "employee benefit plan" as defined in and
subject to ERISA, or a "plan" as defined in and subject to Section 4975 of
the Code.
(b) Amendments and Actions without Consent of the General
Partner. In any vote called by the General Partner or by a Limited Partner
pursuant to Section 17(c), upon the affirmative vote (which may be in
person or by proxy) of the holders of Units representing more than fifty
percent (50%) of the aggregate number of Units of each series then owned
by Limited Partners, the following actions may be taken, irrespective of
whether the General Partner concurs: (i) this Limited Partnership
Agreement may be amended, provided, however, that approval of all Limited
Partners holding Units of any series shall be required in the case of
amendments changing or altering this Section 17, extending the term of the
Partnership, or materially changing the Partnership's basic investment
policies or structure; in addition, reduction of the capital account of
any Limited Partner or assignee or modification of the percentage of
profits, losses or distributions to which a Limited Partner or an assignee
is entitled hereunder shall not be effected by any amendment or supplement
to this Limited Partnership Agreement without such Limited Partner's or
assignee's written consent; (ii) the Partnership may be dissolved; (iii)
the General Partner may be removed and, as of the time of such removal,
the General Partner may be replaced; (iv) a new general partner or general
partners may be elected if the General Partner withdraws from the
Partnership, provided that such election takes place prior to or as of the
time the General Partner withdraws; (v) the sale of all or substantially
all of the assets of the Partnership may be approved; and (vi) any
contract with the General Partner or any affiliate thereof may be
disapproved of and, as a result, terminated upon sixty (60) days' notice.
In any such vote, Units of different series shall vote separately, and the
approving majority vote of each such series must be obtained for 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
A-15
<PAGE>
held by each (which shall be mailed by the General Partner to the Limited
Partner within ten (10) days of the receipt of the request). Upon receipt
of a written proposal, signed by Limited Partners owning Units representing
at least ten percent (10%) of the aggregate number of Units then owned by
Limited Partners of any series, that a meeting of the Partnership (or of
any or all series of Units) be called to vote upon any matter upon which
the Limited Partners may vote pursuant to this Limited Partnership
Agreement, the General Partner shall, by written notice to each Limited
Partner of record mailed within fifteen (15) days after such receipt, call
a meeting of the Partnership (or of such series of Units). Such meeting
shall be held at least thirty (30) but not more than sixty (60) days after
the mailing of such notice, and such notice shall specify the date of, a
reasonable place and time for, and the purpose of such meeting.
The General Partner may not restrict the voting rights of Limited
Partners except as set forth herein.
In the event that the General Partner or the Limited Partners
vote to amend this Limited Partnership Agreement in any material respect,
the amendment will not become effective prior to all Limited Partners
having an opportunity to redeem their Units.
18. Governing Law.
THE VALIDITY AND CONSTRUCTION OF THIS LIMITED PARTNERSHIP
AGREEMENT SHALL BE DETERMINED AND GOVERNED BY THE LAWS OF THE STATE OF
DELAWARE, INCLUDING SPECIFICALLY THE ACT (WITHOUT REGARD TO PRINCIPLES OF
CONFLICTS OF LAW); PROVIDED, HOWEVER, CAUSES OF ACTION FOR VIOLATIONS OF
FEDERAL OR STATE SECURITIES LAW SHALL NOT BE GOVERNED BY THIS SECTION 18.
19. Miscellaneous.
(a) Compliance with the Investment Advisers Act of 1940. No
provision of this Limited Partnership Agreement shall be deemed, nor does
any such provision purport, to waive compliance with the Investment
Advisers Act of 1940, as amended.
(b) Notices. All notices under this Limited Partnership Agreement
shall be in writing and shall be effective upon personal delivery, or if
sent by first class mail, postage prepaid, addressed to the last known
address of the party to whom such notice is to be given, upon the deposit
of such notice in the United States mails.
(c) Binding Effect. This Limited Partnership Agreement shall
inure to and be binding upon all of the parties, their successors and
assigns, custodians, estates, heirs and personal representatives. For
purposes of determining the rights of any Partner or assignee hereunder,
the Partnership and the General Partner may rely upon the Partnership
records as to who are Partners and assignees, and all Partners and
assignees agree that their rights shall be determined and they shall be
bound thereby.
(d) Captions. Captions in no way define, limit, extend or
describe the scope of this Limited Partnership Agreement nor the effect of
any of its provisions. Any reference to "persons" in this Limited
Partnership Agreement shall also be deemed to include entities, unless the
context otherwise requires.
A-16
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Third
Amended and Restated Limited Partnership Agreement as of the day and year
first above written.
GENERAL PARTNER: LIMITED PARTNERS:
MERRILL LYNCH INVESTMENT PARTNERS INC. All Limited Partners now and
hereafter admitted as limited
partners of the Partnership
pursuant to Powers of Attorney
now or hereafter executed in
favor of, and delivered
to, the General Partner.
By /s/ John R. Frawley, Jr.
----------------------------------------
John R. Frawley, Jr.
President and Chief Executive Officer
MERRILL LYNCH INVESTMENT PARTNERS INC.
By /s/ John R. Frawley, Jr.
------------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
A-17
<PAGE>
EXHIBIT B
ML PRINCIPAL PROTECTION L.P.
AMENDED
FORM OF
GUARANTEE AGREEMENT
GUARANTEE AGREEMENT made as of the ___ day of July, 1996 between
MERRILL LYNCH & CO., INC., a Delaware corporation ("ML&Co."), and ML
PRINCIPAL PROTECTION L.P., a Delaware limited partnership (the
"Partnership").
1. ML&Co. shall make, on September 30, 2003 and as of each
calendar quarter-end thereafter (the "Principal Assurance Dates") (subject
to adjustment by up to one month in the discretion of MERRILL LYNCH
INVESTMENT PARTNERS INC. ("MLIP")), sufficient payments to the Partnership
so that the Net Asset Value per Unit of each series of Units, as of the
Principal Assurance Date for such series, which is available for
distribution to Limited Partners (after adjustment for all liabilities of
the Partnership to third parties) will be at least $100, as of such date.
Such $100 minimum Net Asset Value per Unit shall not be reduced by any
distributions made by the Partnership in respect of the series of Units in
question from the date of issuance of such Units through the Principal
Assurance Date for such Units.
2. This Guarantee Agreement -- which supports a corresponding
obligation of MLIP, an indirect wholly-owned subsidiary of ML&Co. -- will
remain in effect unless the Partnership is dissolved or MLIP is removed as
the general partner of the Partnership, in each case with the approving
vote of the Limited Partners -- upon either of which events this Guarantee
Agreement will terminate without any payment obligation on behalf of
ML&Co.
3. ML&Co. acknowledges and agrees that its risk under this
Guarantee Agreement is in no respect mitigated by the fact that the
Partnership will not trade directly, but rather through a wholly-owned
subsidiary limited partnership, ML PRINCIPAL PROTECTION TRADING L.P. (the
"Trading Partnership"), because the Partnership will commit to pay losses
and expenses incurred by the Trading Partnership in amounts in excess of
the capital invested in the Trading Partnership by the Partnership.
4. ML&Co. agrees that in the event it is required to make one
or more payments under this Guarantee Agreement, any such payment will be
made without recourse to the Partnership, the Trading Partnership, MLIP,
Merrill Lynch Futures Inc. or any Limited Partner.
5. ML&Co. shall be obligated to make payments under this
Guarantee Agreement only on the Principal Assurance Date for each series
and only in respect of Units of such series outstanding on such date
(including Units then being redeemed).
6. This Guarantee Agreement is an agreement between ML&Co. and
the Partnership; investors in the Partnership are in no respects parties
hereto.
7. This Guarantee Agreement will terminate as to each series
of Units on the Principal Assurance Date for such series, upon payment by
ML&Co. of any amounts due hereunder at such time. No series, except as of
the Principal Assurance Date for such series, shall have any rights
hereunder.
8. This Guarantee Agreement shall inure to the benefit of the
Partnership only in respect of each series of Units as of its Principal
Assurance Date, not in respect of Units of other series.
9. This Guarantee Agreement shall be governed by and construed
in accordance with the laws of the State of New York, without regard to
principles of conflicts of law.
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 Partner ship 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 July __,
1996, as the same may from time to time be supplemented and amended (the
"Prospectus"). EXCEPT AS SET FORTH BELOW IN THE CASE OF MAINE AND
MICHIGAN RESIDENTS, INVESTORS WHO ARE CURRENTLY LIMITED PARTNERS IN THE
FUND NEED NOT EXECUTE AN ADDITIONAL SUBSCRIPTION AGREEMENT AND POWER OF
ATTORNEY SIGNATURE PAGE IN ORDER TO PURCHASE ADDITIONAL UNITS. HOWEVER,
SUCH PERSONS MUST RECEIVE A CURRENT PROSPECTUS FOR THE FUND AND CAREFULLY
REVIEW THIS EXHIBIT C -- SUBSCRIPTION REQUIREMENTS AS WELL AS THE
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY. SUCH PERSONS' FINANCIAL
CONSULTANTS WILL BE REQUIRED TO RECONFIRM THAT SUCH PERSONS CONTINUE TO
MEET THE SUITABILITY REQUIREMENTS SET FORTH BOTH HEREIN AND THEREIN IN
ORDER FOR SUCH PERSONS TO BE ABLE TO PURCHASE ADDITIONAL UNITS.
By executing a Subscription Agreement and Power of Attorney
Signature Page, Purchaser has thereby authorized Merrill Lynch, Pierce,
Fenner & Smith Incorporated or one of its affiliates (the "Selling Agent")
to debit Purchaser's customer securities account in the full amount of
Purchaser's subscription. If Purchaser's Subscription Agreement and Power
of Attorney Signature Page is accepted, Purchaser agrees to contribute
Purchaser's subscription to the Fund and to be bound by the terms of the
Fund's Third Amended and Restated Limited Partnership Agreement, included
in the Prospectus as Exhibit A. Purchaser agrees to reimburse the Fund
and Merrill Lynch Investment Partners Inc. ("MLIP"), the General Partner
of the Fund, for any expense or loss incurred by either as a result of the
cancellation of Purchaser's Units due to a failure of the Purchaser to
deliver good funds in the full amount of the subscription price of the
Units subscribed for by Purchaser.
FOREIGN PERSONS AND ENTITIES NOT OTHERWISE SUBJECT TO
U.S. FEDERAL INCOME TAX MAY NOT INVEST IN THE UNITS.
Representations and Warranties
As an inducement to MLIP to accept this subscription, Purchaser,
by executing and delivering Purchaser's Subscription Agreement and Power
of Attorney Signature Page, represents and warrants to the Fund, ML
Principal Protection Plus Trading L.P., MLIP, Merrill Lynch Futures Inc.
and the Selling Agent as follows:
(a) Purchaser is of legal age to execute the Subscription Agreement
and Power of Attorney Signature Page and is legally competent to do so.
Purchaser acknowledges that Purchaser has received (prior to any direct or
indirect solicitation of Purchaser's investment) a copy of the
Prospectus -- including the applicable Prospectus Supplement, the
Appendices, the Third Amended and Restated Limited Partnership Agreement
and summary financial information relating to the Fund current within 60
calendar days -- the earliest date of such documents to be dated within
nine months of the date as of which Purchaser has subscribed to purchase
Units.
(b) All information that Purchaser has heretofore furnished to MLIP or
that is set forth in the Subscription Agreement and Power of Attorney
submitted by Purchaser is correct and complete as of the date of such
Subscription Agreement and Power of Attorney, and if there should be any
change in such information prior to acceptance of Purchaser's subscription,
Purchaser will immediately furnish such revised or corrected information to
MLIP.
(c) Unless (d) below is applicable, Purchaser's subscription is made
with Purchaser's funds for Purchaser's own account and not as trustee,
custodian or nominee for another.
SR-1
<PAGE>
(d) The subscription, if made as custodian for a minor, is a
gift Purchaser has made to such minor and is not made with such minor's
funds or, if not a gift, the representations as to net worth and annual
income set forth below apply only to such minor.
(e) If Purchaser is subscribing in a representative capacity,
Purchaser has full power and authority to purchase the Units and enter
into and be bound by the Subscription Agreement and Power of Attorney on
behalf of the entity for which Purchaser is acquiring the Units, and such
entity has full right and power to purchase such Units and enter into and
be bound by the Subscription Agreement and Power of Attorney and to become
a Limited Partner pursuant to the Limited Partnership Agreement.
(f) If Purchaser is subscribing in a representative capacity,
the entity for which the Purchaser is acquiring Units either is not
required to be registered with the Commodity Futures Trading Commission
("CFTC") or to be a member of the National Futures Association ("NFA") or,
if required to be so, is duly registered with the CFTC and is a member in
good standing of the NFA. It is an NFA requirement that MLIP attempt to
verify that any entity which seeks to purchase Units be duly registered
with the CFTC and a member in good standing of the NFA, if required.
Purchaser agrees to supply MLIP with such information as MLIP may
reasonably request in order to attempt such verification.
(g) If Purchaser is acting on behalf of an "employee benefit
plan," as defined in and subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or any "plan," as defined in
Section 4975 of the Internal Revenue Code, as amended (the "Code") (the
"Plan"), Purchaser, in addition to the representations and warranties set
forth above, hereby further represents and warrants as, or on behalf of,
the fiduciary of the Plan responsible for purchasing the Units (the "Plan
Fiduciary") that: the Plan Fiduciary has considered an investment in the
Units in light of the risks relating thereto; the Plan Fiduciary has
determined that, in view of such considerations, an investment in the Fund
is consistent with the Plan Fiduciary's responsibilities under ERISA; the
Plan's investment in the Fund does not violate and is not otherwise
inconsistent with the terms of any legal document constituting the Plan or
any trust agreement thereunder; and the Plan Fiduciary (i) is responsible
for the decision to invest in the Units, including the determination that
such investment is consistent with the requirement imposed by Section 404
of ERISA that Plan investments be diversified so as to minimize the risks
of large losses, (ii) is independent of MLIP, Merrill Lynch Asset
Management, L.P., any Trading Advisor, the Selling Agent and any of their
respective affiliates, (iii) is qualified to make such investment
decision, and (iv) none of MLIP, Merrill Lynch Asset Management, L.P., any
Trading Advisor, the Selling Agent or any of their respective affiliates
or any of their respective employees either: (a) has investment discretion
with respect to the investment of assets of the Plan; (b) has authority or
responsibility to or regularly gives investment advice with respect to the
Plan for a fee and pursuant to an agreement or understanding that such
advice will serve as a primary basis for investment decisions with respect
to the Plan and that such advice will be based on the particular
investment needs of the Plan; or (c) is an employer maintaining or
contributing to the Plan. The undersigned will, at the request of MLIP,
furnish MLIP with such information as MLIP may reasonably require to
establish that the purchase of the Units by the Plan does not violate any
provision of ERISA or the Code, including, without limitation, those
provisions relating to "prohibited transactions" by "parties in interest"
or "disqualified persons."
THE REPRESENTATIONS AND STATEMENTS SET FORTH HEREIN MAY BE
ASSERTED IN THE DEFENSE OF THE FUND, ML PRINCIPAL PROTECTION L.P., MLIP,
MERRILL LYNCH FUTURES INC., THE SELLING AGENT, MLAM, OR OTHERS IN ANY
LITIGATION OR OTHER PROCEEDING.
Investor Suitability
PURCHASER UNDERSTANDS THAT THE PURCHASE OF UNITS MAY BE MADE
ONLY BY PERSONS WHO, AT A MINIMUM, HAVE (I) A NET WORTH OF AT LEAST
$150,000 (EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES) OR (II) AN
ANNUAL GROSS INCOME OF AT LEAST $45,000 AND A NET WORTH OF AT LEAST
$45,000 (EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES). RESIDENTS OF
THE FOLLOWING STATES MUST MEET THE REQUIREMENTS SET FORTH BELOW ("NET
WORTH" FOR SUCH PURPOSES IS IN ALL CASES IS CALCULATED EXCLUSIVE OF HOME,
FURNISHINGS AND AUTOMOBILES). IN ADDITION, PURCHASER MAY NOT INVEST MORE
THAN 10% OF PURCHASER'S READILY MARKETABLE ASSETS IN THE FUND.
1. Arizona -- Net worth of at least $225,000 or a net worth of
at least $60,000 and an annual income of at least $60,000.
SR-2
<PAGE>
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 POWER OF ATTORNEY SIGNATURE PAGE SPECIFICALLY PREPARED FOR
MAINE RESIDENTS, A COPY OF WHICH SHALL ACCOMPANY THIS PROSPECTUS AS
DELIVERED TO ALL MAINE RESIDENTS.
6. Massachusetts -- Net worth of at least $250,000 or a net
worth of at least $100,000 and an annual income of at least $100,000.
7. Michigan -- Net worth of at least $225,000 or a net worth of
at least $60,000 and taxable income in 1995 of at least $60,000. ALL
MICHIGAN RESIDENTS, INCLUDING EXISTING LIMITED PARTNERS IN THE FUND
SUBSCRIBING FOR ADDITIONAL UNITS, MUST EXECUTE A SUBSCRIPTION AGREEMENT
AND POWER OF ATTORNEY SIGNATURE PAGE.
8. Minnesota -- Net worth of at least $250,000 or a net worth of
at least $100,000 and an annual income of at least $100,000.
9. Mississippi -- Net worth of at least $225,000 or a net worth
of at least $60,000 and an annual income of at least $60,000.
10. Missouri -- Net worth of at least $250,000 or a net worth of
at least $100,000 and an annual income of at least $100,000.
11. New Hampshire -- Net worth of at least $250,000 or a net
worth of at least $125,000 and an annual income of at least $50,000.
12. North Carolina -- Net worth of at least $225,000 or a net
worth of at least $60,000 and an annual income of at least $60,000.
13. Oklahoma -- Net worth of at least $225,000 or a net worth of
at least $60,000 and an annual income of at least $60,000.
14. Oregon -- Net worth of at least $225,000 or a net worth of
at least $60,000 and an annual taxable income of at least $60,000.
15. Pennsylvania -- Net worth of at least $175,000 or a net
worth of at least $100,000 and an annual taxable income of at least
$50,000 in the past year and an expectation of the same in the current
year.
16. South Carolina -- Net worth of at least $100,000 or a net
income in 1995 some portion of which was subject to maximum federal and
state income tax.
17. South Dakota -- Net worth of at least $250,000 or a net
worth of at least $100,000 and an annual income of at least $100,000.
18. Tennessee -- Net worth of at least $250,000 and gross income
during 1995 and an expectation of gross income during 1996 of at least
$65,000 or a net worth of at least $500,000.
19. Texas -- Net worth of at least $250,000 or a net worth of at
least $100,000 and an annual taxable income of at least $100,000.
SR-3
<PAGE>
EXHIBIT D
ML PRINCIPAL PROTECTION L.P.
---------------------------------------
SUBSCRIPTION INSTRUCTIONS
ANY PERSON CONSIDERING PURCHASING UNITS SHOULD CAREFULLY READ
AND REVIEW THE PROSPECTUS OF THE FUND DATED JULY __, 1996, INCLUDING THE
PROSPECTUS SUPPLEMENT AND RECENT FINANCIAL INFORMATION (CURRENT WITHIN 60
CALENDAR DAYS) RELATING TO THE FUND, BOTH OF WHICH ACCOMPANY THE
PROSPECTUS.
The Units are speculative and involve a high degree of risk. No
person may invest more than 10% of his readily marketable assets in the
Fund.
The Units are sold in separate series as of the beginning of
each calendar quarter. Different series of Units are each sold at $100
per Unit but over time come to have different Net Asset Values.
Foreign persons and entities not otherwise subject to U.S.
federal income tax may not invest in the Fund.
EXISTING LIMITED PARTNERS WHO ARE SUBSCRIBING FOR ADDITIONAL
UNITS (EXCEPT MAINE AND MICHIGAN RESIDENTS) NEED NOT COMPLETE AN
ADDITIONAL SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE BUT
MUST CAREFULLY REVIEW THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY AND
EXHIBIT C -- SUBSCRIPTION REQUIREMENTS. SUCH LIMITED PARTNERS' FINANCIAL
CONSULTANTS MUST RECONFIRM THAT SUCH LIMITED PARTNERS CONTINUE TO MEET THE
STANDARDS AND REQUIREMENTS SET FORTH HEREIN AND IN EXHIBIT C --
SUBSCRIPTION REQUIREMENTS IN ORDER FOR SUCH LIMITED PARTNERS TO BE
ELIGIBLE TO PURCHASE ADDITIONAL UNITS.
ANY ADDITIONAL UNITS PURCHASED BY AN EXISTING LIMITED PARTNER
WILL BE A DIFFERENT SERIES OF UNITS THAN THE UNITS ALREADY OWNED BY SUCH
LIMITED PARTNER.
-------------------------------------
FILL IN ALL OF THE BOXES ON PAGES SA-5 and SA-6; TYPE OR PRINT
USING BLACK INK ONLY AND ONE LETTER OR NUMBER PER BOX, AS FOLLOWS:
Item 1 -- Financial Consultants must complete the information
required.
Item 2 -- Enter the number of Units to be purchased.
Item 3 -- Enter the dollar amount (no cents) of the purchase (the
dollar amount must be $100 per Unit; $97 per Unit for
officers and employees of Merrill Lynch & Co., Inc. and its
affiliates).
Item 4 -- Enter customer's Merrill Lynch Account Number.
Item 5 -- Enter the Social Security Number or Taxpayer ID Number. In
case of joint ownership, either Social Security Number may
be used.
The Signature Page is self-explanatory for most types of
investors; however, we have provided specific instructions for the
following types of investors:
Trust -- Enter the Trust name on line 8 and the trustee's
name on line 9, followed by "Trustee." If applicable, use line 10 for the
custodian's name, followed by "Custodian." Be sure to furnish the Taxpayer
ID Number of the Trust.
Custodian Under Uniform Gifts to Minors Act -- Complete line
6 with the name of minor followed by "UGMA." On line 9 enter the
custodian's name, followed by "Custodian." Be sure to furnish the minor's
Social Security Number.
SA-(i)
<PAGE>
Partnership or Corporation -- The Partnership or Corporation name
is required on line 8. Enter an officer's or partner's name on line 9. Be sure
to furnish the Taxpayer ID Number of the Partnership or Corporation.
Items 6, 7, 8 -- Enter the exact name in which the Units are to be held.
Items 9, 10 -- Complete information as required.
Item 11 -- The investor(s) (EXCEPT CURRENT LIMITED PARTNERS IN THE FUND
OTHER THAN RESIDENTS OF MAINE OR MICHIGAN) must execute the
Subscription Agreement and Power of Attorney Signature Page
(Item 11, Page SA-6) and review the representation relating
to backup withholding tax underneath the signature and
telephone number lines in Item 11.
Item 12 -- Financial Consultants must complete the information
required.
THE SPECIMEN COPY OF THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE
PAGE (PAGES SA-3 AND SA-4) SHOULD NOT BE EXECUTED.
Instructions to Financial Consultants:
THE EXECUTED SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE
PAGE MUST BE RETAINED IN THE BRANCH OFFICE.
RECONFIRMATIONS (I.E., SUBSCRIPTION AGREEMENT AND POWER OF
ATTORNEY SIGNATURE PAGES EXECUTED BY FINANCIAL CONSULTANTS) OR ANOTHER FORM OF
WRITTEN RECONFIRMATION APPROVED BY THE BRANCH OFFICE REGARDING THE CONTINUING
SUITABILITY OF EXISTING LIMITED PARTNERS SUBSCRIBING FOR ADDITIONAL UNITS MUST
ALSO BE RETAINED IN THE BRANCH OFFICE.
SA-(ii)
<PAGE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
-------------------------
BY EXECUTING THIS SUBSCRIPTION AGREEMENT
SUBSCRIBERS ARE NOT WAIVING ANY RIGHTS UNDER THE SECURITIES ACT
OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934
-------------------------
SUBSCRIPTION AGREEMENT AND
POWER OF ATTORNEY
ML PRINCIPAL PROTECTION L.P.
c/o Merrill Lynch Investment Partners Inc.
General Partner
Merrill Lynch World Headquarters
Sixth Floor
South Tower
World Financial Center
New York, New York 10080-6106
Dear Sirs:
1. Subscription for Units. I hereby subscribe for the number
of limited partnership units ("Units") in ML PRINCIPAL PROTECTION L.P.
(the "Fund") set forth in the Subscription Agreement and Power of Attorney
Signature Page attached hereto; a minimum of 50 Units ($5,000) must be
purchased -- 10 Units if I am an existing Limited Partner; any greater
number of whole Units may be purchased. The purchase price is $100 per
Unit -- $97 per Unit if I am an officer or employee of Merrill Lynch &
Co., Inc. or any of its affiliates. The terms of the offering of the Units
are described in the Prospectus of the Fund dated July __, 1996, together
with the accompanying Prospectus Supplement (collectively, the
"Prospectus"). Units are offered as of the beginning of each calendar
quarter. Concurrently with or prior to the delivery of this Subscription
Agreement and Power of Attorney, I have authorized Merrill Lynch, Pierce,
Fenner & Smith Incorporated (the "Selling Agent") to debit my customer
securities account in the amount of my subscription. I acknowledge that I
must have my subscription payment in such account on but not before the
settlement date for my purchase of Units, which will occur no later than
five business days after the acceptance of my subscription. My Merrill
Lynch Financial Consultant will inform me of such settlement date, on
which my account will be debited and the amount so debited transmitted, in
the form of a Selling Agent check or wire transfer, directly to the Escrow
Agent for the Fund pending investment in the Units, as described in the
Prospectus. MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP"), the General
Partner of the Fund, may, in its sole and absolute discretion, accept or
reject this subscription in whole or in part, except that, if this
subscription is to be accepted in part only, it shall not be reduced to an
amount less than 50 Units (10 Units if I am an existing Limited Partner).
All subscriptions once submitted are irrevocable. All Units are offered
subject to prior sale.
Foreign persons and entities which are not otherwise subject to
U.S. federal income tax may not invest in the Fund.
2. Representations and Warranties of Subscriber. I have
received the Prospectus together with summary financial information
relating to the Fund current within 60 calendar days. I understand that
by submitting this Subscription Agreement and Power of Attorney I am
making the representations and warranties set forth in Exhibit C --
Subscription Requirements in the Prospectus, including, without
limitation, those representations and warranties relating to my net worth
(exclusive of home, furnishings and automobiles), annual income and
readily marketable assets.
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
SA-1
<PAGE>
arbitrations on behalf of the Fund and (ii) make, execute, sign,
acknowledge, swear to, deliver, record and file any documents or
instruments which may be considered necessary or desirable by MLIP to
carry out fully the provisions of the Limited Partnership Agreement of the
Fund, including, without limitation, by executing said Limited Partnership
Agreement itself, and by effecting all amendments permitted by the terms
thereof. I acknowledge that the other investors in the Fund are relying on
MLIP's authority to act pursuant to the Power of Attorney granted hereby.
The Power of Attorney granted hereby shall be deemed to be coupled with an
interest, shall be irrevocable and shall survive, and shall not be
affected by, my subsequent death, incapacity, disability, insolvency or
dissolution or any delivery by me of an assignment of the whole or any
portion of my Units.
4. Irrevocability; Governing Law. I hereby acknowledge and
agree that I am not entitled to cancel, terminate or revoke this
subscription or any of my agreements hereunder after the Subscription
Agreement and Power of Attorney Signature Page attached hereto has been
submitted (and not rejected), and that this subscription and such
agreements shall survive my death or disability. This Subscription
Agreement and Power of Attorney shall be governed by and interpreted in
accordance with the laws of the State of New York, without regard to
principles of conflicts of law.
SA-2
<PAGE>
SPECIMEN
------------------------------------------------------------------------------
-------------------- - ------------------------- ----------
1
Financial Consultant
-------------------- - ------------------------- ----------
Name
First M.I.Last Sub.
Financial Consultant Order
Ref. #
Phone Number ----- ----- ------ ------ -----
-
-
Financial Consultant Number
------ Branch Wire Code
----- ----- ------ -----
------------------------------------------------------------------------------
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.
------------ --------------- ----- --------
2 3 4
------------
--------------- ----- --------
Number of Units Total $ Amount -
(minimum 50 (No. of Units X
Units; 10 Units $100; $97 for Merrill Lynch
for existing Merrill Lynch Account #
Limited Partners officers and
subscribing for employees)
additional
Units)
----- --- ------ --- -----------
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 StateZip 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 StateZip 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 StateZip Code
-----------------------------
-----------------------------
Country (If Other Than U.S.A.)
SA-3
<PAGE>
SPECIMEN
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED)
11 FOR USE BY INVESTOR
X-------------------------------- X --------------------------------
Signature of Investor Date Signature of Joint Investor (if
any)
Date
( ) - 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
- --------------------------------------------------------------------------------
DATE RECEIVED COUNTRY CODE
ADDITIONAL ORDER
CONTROL NUMBER
FOR OFFICE USE ONLY
SA-4
<PAGE>
EXECUTION COPY
------------------------------------------------------------------------------
-------------------- - ------------------------- ----------
1
Financial Consultant
-------------------- - ------------------------- ----------
Name
First M.I.Last Sub.
Financial Consultant Order
Ref. #
Phone Number ----- ----- ------ ------ -----
-
-
Financial Consultant Number
------ Branch Wire Code
----- ----- ------ -----
------------------------------------------------------------------------------
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.
------------ --------------- ----- --------
2 3 4
------------
--------------- ----- --------
Number of Units Total $ Amount -
(minimum 50 (No. of Units X
Units; 10 Units $100; $97 for Merrill Lynch
for existing Merrill Lynch Account #
Limited Partners officers and
subscribing for employees)
additional
Units)
----- --- ------ --- -----------
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 StateZip 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 StateZip 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 StateZip Code
-----------------------------
-----------------------------
Country (If Other Than U.S.A.)
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 Investor (if
any)
Date
( ) - 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
- --------------------------------------------------------------------------------
DATE RECEIVED COUNTRY CODE
ADDITIONAL ORDER
CONTROL NUMBER
FOR OFFICE 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 Registration Statement. The
following is an estimate of such costs:
<TABLE>
<CAPTION>
<S> <C>
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.
</TABLE>
____________________
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>
<S> <C>
Exhibit
Number Description of Document
------- -----------------------
1.01 Selling Agreement among the Partnership, the Trading Partnership,
the General Partner, Merrill Lynch Futures, the Selling Agent and
the Trading Advisors.
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.
3.02(ii) Third Amended and Restated Limited Partnership Agreement of the
Partnership (included as Exhibit A to the Prospectus).
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.
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
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.
23.02 Consent of Deloitte & Touche.
23.03 Consent of Richards, Layton & Finger (included 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 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:
S-3
<PAGE>
<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.
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>
<C> <S>
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:
S-4
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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,
(Amended) MLFIP 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
(Amended) Selling 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.
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 and of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
S-5
<PAGE>
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
(b) Insofar as indemnification for liabilities under the Securities Act of
1933 may be permitted to officers, directors or controlling persons of the
registrant pursuant to the provisions described in Item 14 above, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act of 1933 and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by an officer, director,
or controlling person of the registrant in the successful defense of any such
action, suit or proceeding) is asserted by such officer, director or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
S-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
General Partner of the Registrant has duly caused this Registration Statement
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in The City of New York in the State of New York on the 3rd day of
July, 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.
Signature Title With Registrant Date
--------- --------------------- ----
JOHN R. FRAWLEY, JR.
- ---------------------------- President, Chief Executive July 3, 1996
John R. Frawley, Jr. Officer and Director
(Principal Executive Officer)
JAMES M. BERNARD
- ---------------------------- Chief Financial Officer, July 3, 1996
James M. Bernard Treasurer and Vice-President
(Principal Financial and
Accounting Officer)
WILLIAM T. MAITLAND
- ---------------------------- Secretary and Director July 3, 1996
William T. Maitland
ALLEN N. JONES
- ---------------------------- Director July 3, 1996
Allen N. Jones
(Being principal executive officer, the principal financial and
accounting officer and a majority of the directors of Merrill Lynch Investment
Partners Inc.)
Merrill Lynch Investment General Partner of Registrant July 3, 1996
Partners Inc.
By JOHN R. FRAWLEY, JR.
- ----------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
S-7
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996
REGISTRATION NO. 33-_____
REGISTRATION NO. 33-73914
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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EXHIBITS
To
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
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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)
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ML PRINCIPAL PROTECTION L.P.
ML PRINCIPAL PROTECTION TRADING L.P.
EXHIBIT INDEX
Exhibit
Number Description of Document
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1.01 Selling Agreement among the Partnership, the Trading
Partnership, the General Partner, Merrill Lynch Futures, the
Selling Agent and the Trading Advisors.
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.
3.02(ii) Third Amended and Restated Limited Partnership Agreement of the
Partnership (included as Exhibit A to the Prospectus).
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.
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Exhibit
Number Description of Document
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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.
23.02 Consent of Deloitte & Touche.
23.03 Consent of Richards, Layton & Finger (included in Exhibit
5.01(b)).
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EXHIBIT 1.01
SELLING AGREEMENT
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ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
A DELAWARE LIMITED PARTNERSHIP
1,000,000 UNITS OF LIMITED PARTNERSHIP INTEREST
Dated as of July 15, 1996
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ML PRINCIPAL PROTECTION L.P.
SELLING AGREEMENT
TABLE OF CONTENTS
<TABLE>
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Page
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Section 1. Representations and Warranties of
the General Partner.............. 2
Section 2. Representations and Warranties of
the Commodity Broker............. 8
Section 3. Representations and Warranties of
the Trading Advisors............. 10
Section 4. Offering and Sale of Units......... 13
Section 5. Covenants of the General Partner... 18
Section 6. Covenants of the Trading Advisors.. 20
Section 7. Payment of Expenses and Fees....... 21
Section 8. Conditions of Closing.............. 22
Section 9. Indemnification and Exculpation.... 25
Section 10. Status of Parties.................. 28
Section 11. Representations, Warranties and
Agreements to Survive Delivery... 28
Section 12. Termination........................ 29
Section 13. Notices and Authority to Act....... 29
Section 14. Parties............................ 29
Section 15. Governing Law...................... 29
Section 16. Requirements of Law................ 29
</TABLE>
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ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
1,000,000 UNITS OF LIMITED PARTNERSHIP INTEREST
(SUBSCRIPTION PRICE: $100 PER UNIT,
$97 PER UNIT FOR MERRILL LYNCH EMPLOYEES)
SELLING AGREEMENT
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July 15, 1996
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10080-6106
Dear Sirs:
Your affiliate, MERRILL LYNCH INVESTMENT PARTNERS INC. (formerly, ML
Futures Investment Partners Inc.), a Delaware corporation (referred to herein in
its individual corporate capacity and as general partner as the "General
Partner"), caused the formation, in 1994, of a limited partnership pursuant to
the Revised Uniform Limited Partnership Act of the State of Delaware (the
"DRULPA") under the name ML PRINCIPAL PROTECTION PLUS L.P., for the purpose of
engaging in speculative trading of futures and forward contracts and commodity
options in the international markets. ML Principal Protection Plus L.P. was
renamed ML PRINCIPAL PROTECTION L.P. (the "Partnership") as of July 1, 1996. The
Partnership does not have any trading operations of its own but rather enters,
through its wholly-owned trading subsidiary, ML PRINCIPAL PROTECTION TRADING
L.P., (formerly, ML Principal Protection Plus Trading L.P.), a Delaware limited
partnership (the "Trading Partnership"), into separate Advisory Agreements with
various professional commodity trading advisors which have no affiliation with
the General Partner (other than perhaps managing accounts for the clients of the
General Partner) (individually, a "Trading Advisor" and, collectively, the
"Trading Advisors"). The Trading Partnership engages in speculative trading in
the commodities markets as aforesaid, and the Trading Advisors direct such
trading; the commodity broker and forward contract dealer for the Partnership is
MERRILL LYNCH
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FUTURES INC., a Delaware corporation and certain of its affiliates (the
"Commodity Broker") or such other brokers as approved of in writing by Merrill
Lynch Futures Inc.; and the exclusive selling agent for the Partnership is
yourself, including, without limitation, ML INTERNATIONAL & CO., C.V.O.A., and
certain of your affiliates (herein sometimes collectively referred to as the
"Selling Agent").
The Commodity Broker acts as (i) broker for the Partnership pursuant
to a customer agreement (the "Customer Agreement") between the Commodity Broker
and the Trading Partnership and (ii) forward contract dealer through the
Partnership's affiliated Foreign Exchange Desk with respect to the Partnership's
forward trading pursuant to a foreign exchange desk service agreement (the
"Foreign Exchange Desk Service Agreement") between the Commodity Broker, the
General Partner, the Trading Partnership and certain other parties.
Each Trading Advisor provides commodity trading advisory services to
the Trading Partnership pursuant to an advisory agreement (individually, the
"Advisory Agreement" and, collectively, the "Advisory Agreements") between each
Trading Advisor, the Partnership, the Trading Partnership and the General
Partner.
The Trading Advisors provide various commodity-related services to the
Commodity Broker pursuant to consulting agreements (individually, the
"Consulting Agreement" and, collectively, the "Consulting Agreements") between
each Trading Advisor and the Commodity Broker.
The Trading Advisors are referred to herein and in the Prospectus
(defined below) as either "core" or non-"core" Trading Advisors depending upon
the percentage of the Partnership's "trading assets" (i.e., assets invested in
the Trading Partnership as well as assets held by the Partnership and committed
to paying trading losses) allocated to them. The "core" Trading Advisors are
those Trading Advisors who are initially allocated 10% or more of the
Partnership's trading assets and for whom disclosure has been given in the
Prospectus, including Appendix I thereto, in accordance with the disclosure
requirements of the rules and regulations of the Commodity Futures Trading
Commission ("CFTC") under the Commodity Exchange Act (the "Commodity Act"). The
non-"core" Trading Advisors are those Trading Advisors who are initially
allocated less than 10%
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of the Partnership's trading assets and for whom only summary disclosure has
been given in the Prospectus Supplement which accompanies each Prospectus
(pursuant to relief granted by the CFTC and the Securities and Exchange
Commission ("SEC")).
Capitalized terms used herein, unless otherwise indicated, shall have
the meanings attributed to them in the Prospectus referred to below.
Section 1. Representations and Warranties of the General Partner. The
General Partner represents and warrants to the Trading Advisors and the Selling
Agent, as follows:
(a) The Partnership (and the Trading Partnership as co-registrant)
has: provided to the Trading Advisors and to the Selling Agent and filed
with the SEC a registration statement on Form S-1 (Registration No. 33-
_____), constituting also Post-Effective Amendment No. 3 to Registration
No. 33-73914; effective July 14, 1994, as filed with the SEC on July 3,
1996, for the registration, or continued registration pursuant to SEC Rule
429, as the case may be, of Units of Limited Partnership Interest (the
"Units") and the interests in the Partnership represented thereby under the
Securities Act of 1933, as amended (the "1933 Act"); and has filed two
copies thereof with the CFTC under the Commodity Act and one copy with the
National Futures Association (the "NFA") in accordance with NFA Compliance
Rule 2-13. On July __, 1996 the Partnership filed its final Amendment No. 1
(Post-Effective Amendment No. 4 to Registration No. 33-73914), to the
registration statement and a final amended prospectus, with the forms of
which all parties hereto are familiar. The Partnership will not, at any
time after the date hereof file any other amendment to the registration
statement or any other amended prospectus which shall be reasonably
objected to in writing by any Trading Advisor or by counsel to any of the
Trading Advisors. Amendment No. 1 to the registration statement and the
amended prospectus included therein are hereinafter called the
"Registration Statement" and the "Prospectus," respectively. If the
Partnership files a subsequent post-effective amendment to the Registration
Statement, then the term, "Registration Statement," shall, from and after
the declaration of the
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effectiveness of such post-effective amendment, refer to the Registration
Statement as amended by such post-effective amendment thereto, and the
term, "Prospectus," shall refer to the amended prospectus then on file with
the SEC as part of the Registration Statement, or if a subsequent
prospectus is filed by the Partnership pursuant to Rule 424 of the rules
and regulations of the SEC under the 1933 Act (the "SEC Regulations"), the
term, "Prospectus," shall refer to the prospectus most recently filed
pursuant to such Rule from and after the date on which it shall have been
first used. Except as required by law, the Partnership will not file any
amendment to the Registration Statement or any amendment or supplement to
the Prospectus which shall be reasonably objected to in writing by any
Trading Advisor or by counsel to any Trading Advisor, upon reasonable prior
notice.
(b) The Certificate of Limited Partnership, as amended (the
"Certificate of Limited Partnership"), pursuant to which the Partnership
has been formed and the Third Amended and Restated Limited Partnership
Agreement of the Partnership (the "Limited Partnership Agreement") each
provides for the subscription for and sale of the Units in series; all
action required to be taken by the General Partner and the Partnership as a
condition to the sale of the Units to qualified subscribers therefor has
been, or prior to each Closing Time, as defined in Section 4 hereof, will
have been taken; and, upon payment of the consideration therefor specified
in all accepted Subscription Agreements and Powers of Attorney, the Units
will constitute valid limited partnership interests in the Partnership.
(c) Each of the Partnership and the Trading Partnership is a limited
partnership duly organized pursuant to the Certificate of Limited
Partnership, the Certificate of Limited Partnership of the Trading
Partnership, as amended (the "Trading Partnership Certificate"), the
Limited Partnership Agreement and the Amended and Restated Limited
Partnership Agreement of the Trading Partnership (the "Trading Limited
Partnership Agreement"), respectively, and the DRULPA and validly existing
under the laws of the State of Delaware with full power and authority to
(i) invest in
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U.S. Treasury securities and securities issued by U.S. government agencies
and instrumentalities and in the Trading Partnership, in the case of the
Partnership, and (ii) engage in the trading of futures, forward and option
contracts, in the case of the Trading Partnership, as described in the
Prospectus; each of the Partnership and the Trading Partnership has
received a certificate of authority to do business in the State of New York
as provided by Article 8-A of the New York Uniform Limited Partnership Act.
(d) The General Partner is duly organized and validly existing and in
good standing as a corporation under the laws of the State of Delaware and
in good standing as a foreign corporation under the laws of the State of
New York and in each other jurisdiction in which the nature or conduct of
its business requires such qualification and the failure to so qualify
would materially adversely affect the Partnership or the General Partner's
ability to perform its obligations hereunder.
(e) The Partnership, the Trading Partnership and the General Partner
have full partnership or corporate power and authority under applicable law
to perform their respective obligations under the Limited Partnership
Agreement, the Escrow Agreement relating to the offering of the Units (the
"Escrow Agreement"), the Advisory Agreements and this Agreement, as
described in the Registration Statement and Prospectus.
(f) The Registration Statement and Prospectus contain all statements
and information required to be included therein by the Commodity Act and
the rules and regulations thereunder. When the Registration Statement
became effective under the 1933 Act and at all times subsequent thereto up
to and including the Closing Time, the Registration Statement and
Prospectus did and will comply in all material respects with the
requirements of the 1933 Act, the Commodity Act and the rules and
regulations under such Acts. The Registration Statement as of its effective
date did not contain any untrue statement of a material fact or omit to
state a material fact required to be stated therein or necessary to make
the statements therein not mislead-
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ing. The Prospectus as of its date of issue and as of the beginning of each
calendar quarter as of which Units are sold (an "Additional Closing Time")
did not and will not contain an untrue statement of a material fact or omit
to state a material fact necessary to make the statements therein, in light
of the circumstances under which such statements were made, not misleading.
This representation and warranty shall not, however, apply to any statement
or omission in the Registration Statement or Prospectus made in reliance
upon and in conformity with information relating to the Trading Advisors or
the Selling Agent and furnished or approved in writing by the Trading
Advisors or the Selling Agent, it being acknowledged that each Trading
Advisor has approved the information relating to such Trading Advisor or
its principals as set forth in the Prospectus and in the selling brochure
of the Partnership dated July 1996.
(g) Deloitte & Touche, the accountants who certified the financial
statements filed with the SEC as part of the Registration Statement, are,
with respect to the General Partner, the Partnership and the Trading
Partnership, independent public accountants as required by the 1933 Act and
the SEC Regulations.
(h) The financial statements filed as part of the Registration
Statement and those included in the Prospectus present fairly the financial
position of the Partnership, the Trading Partnership and the General
Partner as of the dates indicated; and said financial statements have been
prepared in conformity with generally accepted accounting principles (as
described therein), or, in the case of unaudited financial statements, in
substantial conformity with generally accepted accounting principles,
applied on a basis which is consistent in all material respects for each
balance sheet date presented.
(i) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
material adverse change in the condition, financial or otherwise, business
or prospects of the General Partner, the
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Partnership or the Trading Partnership, whether or not arising in the
ordinary course of business.
(j) The General Partner at Closing Time will have a net worth
sufficient in amount and satisfactory in form, as set forth in the opinion
of Sidley & Austin, counsel for the General Partner, for classification of
the Partnership and the Trading Partnership as partnerships for Federal
income tax purposes under current interpretations of the Internal Revenue
Code of 1954 and the Internal Revenue Code of 1986, as amended
(collectively, the "Code"), and the regulations thereunder.
(k) The Advisory Agreements, the Limited Partnership Agreement, the
Trading Limited Partnership Agreement, the Escrow Agreement and this
Agreement have each been duly and validly authorized, executed and
delivered by the General Partner on behalf of the Partnership and/or the
Trading Partnership, as the case may be, and each constitutes a valid,
binding and enforceable agreement of the Partnership and/or the Trading
Partnership as the case may be, in accordance with its terms. The Customer
Agreement and the Foreign Exchange Desk Service Agreement has been duly and
validly authorized, executed and delivered by the General Partner on
behalf of the Trading Partnership.
(l) The Merrill Lynch & Co., Inc. Guarantee of the General Partner's
undertaking to the Partnership that the Net Asset Value per Unit of each
series issued by the Partnership will equal no less than $100 as of the
Principal Assurance Date for such series, as described in the Prospectus,
has been duly and validly authorized, executed and delivered by Merrill
Lynch & Co., Inc. and constitutes a valid, binding and enforceable
agreement of Merrill Lynch & Co., Inc. in accordance with its terms.
(m) The execution and delivery of the Limited Partnership Agreement,
the Trading Limited Partnership Agreement, the Escrow Agreement, the
Customer Agreement, the Foreign Exchange Desk Service Agreement, the
Advisory Agreements and this Agreement, the incurrence of the obligations
set forth in each of such
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agreements and the consummation of the transactions contemplated therein
and in the Prospectus will not constitute a breach of, or default under,
any instrument by which either the General Partner, the Partnership or the
Trading Partnership, as the case may be, is bound or any order, rule or
regulation applicable to the General Partner, the Partnership or the
Trading Partnership of any court or any governmental body or administrative
agency having jurisdiction over the General Partner, the Partnership or the
Trading Partnership.
(n) There is not pending, or, to the best of the General Partner's
knowledge threatened, any action, suit or proceeding before or by any court
or other governmental body to which the General Partner, the Partnership or
the Trading Partnership is a party, or to which any of the assets of the
General Partner, the Partnership or the Trading Partnership is subject,
which is not referred to in the Prospectus and which might reasonably be
expected to result in any material adverse change in the condition
(financial or otherwise), business or prospects of the General Partner,
the Partnership or the Trading Partnership or is required to be disclosed
in the Prospectus pursuant to applicable CFTC regulations. The General
Partner has not received any notice of an investigation or warning letter
from the NFA or the CFTC regarding non-compliance by the General Partner
with the Commodity Act or the regulations thereunder.
(o) The General Partner has all Federal and state governmental,
regulatory and commodity exchange approvals and licenses, and has effected
all filings and registrations with Federal and state governmental agencies
required to conduct its business and to act as described in the
Registration Statement and Prospectus or required to perform its
obligations as described under the Limited Partnership Agreement, the
Trading Limited Partnership Agreement and this Agreement (including,
without limitation, registration as a commodity pool operator under the
Commodity Act and membership in the NFA as a commodity pool operator), and
the performance of such obligations will not contravene or result in a
breach of any provision of its
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certificate of incorporation, by-laws or any agreement, order, law or
regulation binding upon it. The principals of the General Partner
identified in the Registration Statement are all of the principals of the
General Partner, as "principals" is defined by the CFTC regulations. Such
principals are duly registered as such on the General Partner's commodity
pool operator Form 7-R registration.
(p) Neither the Partnership nor the Trading Partnership requires any
Federal or state governmental, regulatory or commodity exchange approvals
or licenses, or need to effect any filings or registrations with any
Federal or state governmental agencies in order to conduct its businesses
and to act as contemplated by the Registration Statement and Prospectus
and, in the case of the Partnership, to issue and sell the Units (other
than filings relating solely to the offering of the Units), and, in the
case of Trading Partnership, to trade in the commodity markets.
Section 2. Representations and Warranties of the Commodity Broker. The
Commodity Broker represents and warrants to the Partnership, the Trading
Partnership, the General Partner, the Trading Advisors and the Selling Agent, as
follows:
(a) The Commodity Broker is a corporation duly organized and validly
existing and in good standing under the laws of the State of Delaware and
in good standing and qualified to do business in the State of New York and
in each other jurisdiction in which the nature or conduct of its business
requires such qualification and the failure to be duly qualified would
materially adversely affect the Commodity Broker's ability to perform its
obligations hereunder or under the Customer Agreement, the Foreign Exchange
Desk Service Agreement and the Consulting Agreements. The Commodity Broker
has full corporate power and authority to perform its obligations under the
Customer Agreement, the Consulting Agreements and this Agreement and as
described in the Registration Statement and Prospectus.
(b) All references to the Commodity Broker and its principals in the
Registration Statement and
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Prospectus are accurate and complete in all material respects, and set
forth in all material respects the information required to be disclosed
therein under the Commodity Act and the rules and regulations thereunder.
As to the Commodity Broker and its principals, (i) the Registration
Statement and Prospectus contain all statements and information required to
be included therein under the Commodity Act and the rules and regulations
thereunder, (ii) the Registration Statement as of its effective date did
not contain any misleading or untrue statement of a material fact or omit
to state a material fact which is required to be stated therein or
necessary to make the statements therein not misleading and (iii) the
Prospectus at its date of issue and as of each Additional Closing Time did
not and will not contain an untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not
misleading, in light of the circumstances under which such statements were
made.
(c) The Commodity Broker has all Federal and state governmental,
regulatory and commodity exchange licenses and approvals, and has effected
all filings and registrations with Federal and state governmental and
regulatory agencies required to conduct its business and to act as
described in the Registration Statement and Prospectus or required to
perform its obligations under the Customer Agreement, the Foreign Exchange
Desk Service Agreement, the Consulting Agreements and this Agreement
(including, without limitation, registration of the Commodity Broker as a
futures commission merchant under the Commodity Act and membership of the
Commodity Broker as a futures commission merchant in the NFA), and the
performance of such obligations will not violate or result in a breach of
any provision of the Commodity Broker's certificate of incorporation, by-
laws or any agreement, instrument, order, law or regulation binding upon
the Commodity Broker.
(d) Each of the Customer Agreement, the Foreign Exchange Desk Service
Agreement, the Consulting Agreements and this Agreement has been duly
authorized, executed and delivered by the Commodity Broker and each of this
Agreement and the Consulting Agreements
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constitutes a valid, binding and enforceable agreement of the Commodity
Broker in accordance with its terms.
(e) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as may otherwise be
stated in or contemplated by the Registration Statement and the Prospectus,
there has not been any material adverse change in the condition, financial
or otherwise, business or prospects of the Commodity Broker, whether or not
arising in the ordinary course of business.
(f) In the ordinary course of its business, the Commodity Broker is
engaged in civil litigation and subject to administrative proceedings.
Neither the Commodity Broker nor any of its principals have been the
subject of any administrative, civil, or criminal actions within the five
years preceding the date hereof that would be material to an investor's
decision to purchase the Units which are not disclosed in the Prospectus.
(g) The execution and delivery of the Customer Agreement, the Foreign
Exchange Desk Service Agreement, the Consulting Agreements and this
Agreement, the incurrence of the obligations set forth herein and therein
and the consummation of the transactions contemplated herein and therein
and in the Prospectus will not constitute a breach of, or default under,
any instrument by which the Commodity Broker is bound or any order, rule or
regulation applicable to the Commodity Broker of any court or any
governmental body or administrative agency having jurisdiction over the
Commodity Broker.
Section 3. Representations and Warranties of the Trading Advisors.
Each Trading Advisor represents and warrants to the Partnership, the Trading
Partnership, the Selling Agent, the Commodity Broker, the other Trading Advisors
and the General Partner as follows:
(a) The Trading Advisor is a corporation duly organized and validly
existing and in good standing under the laws of its state of incorporation
and in good standing as a foreign corporation in each other
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jurisdiction in which the nature or conduct of its business requires such
qualification and the failure to be duly qualified would materially affect
the Trading Advisor's ability to perform its obligations under this
Agreement, the Consulting Agreement and the Advisory Agreement. The Trading
Advisor has full corporate power and authority to perform its obligations
under this Agreement, the Consulting Agreement and the Advisory Agreement
as described in the Registration Statement and Prospectus.
(b) With respect to each "core" Trading Advisor, all references to
such "core" Trading Advisor and its principals, and its trading systems,
methods and performance in the Registration Statement and the Prospectus
are accurate and complete in all material respects. Further, as to such
"core" Trading Advisor, each of the principals of the "core" Trading
Advisor, and its trading systems, methods and performance: (i) the
Registration Statement and Prospectus contain all statements and
information required to be included therein under the Commodity Act and the
rules and regulations thereunder, (ii) the Registration Statement (with
respect to the information relating to the "core" Trading Advisor furnished
to the General Partner) as of its effective date did not contain any
misleading or untrue statement of a material fact or omit to state a
material fact which is required to be stated therein or necessary to make
the statements therein not misleading and (iii) the Prospectus (as approved
in pertinent part by the "core" Trading Advisor) at its date of issue and
as of each Additional Closing Time did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements therein not misleading, in light of the circumstances
under which such statements were made. Except as otherwise disclosed in the
Prospectus or identified in writing to the General Partner on or prior to
the date hereto, the actual performance of each discretionary account
directed by such "core" Trading Advisor or any principal or affiliate of
such "core" Trading Advisor for the periods covered by the Performance
Summaries set forth in the Prospectus (including Appendix I thereto) is
disclosed in accordance with the requirements of the Commodity Act and the
rules and
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regulations thereunder (or as otherwise permitted by the Staff of the
Division of Trading and Markets). The information and Performance Summaries
relating to the actual performance of the "core" Trading Advisor are
complete and accurate in all material respects and comply in all material
respects with the disclosure requirements of the rules and regulations of
the CFTC under the Commodity Act, including those relating to the inclusion
of "notional" equity. The Performance Summaries in the Prospectus (as
applicable to the "core" Trading Advisor) have been calculated in the
manner set forth in the notes thereto.
With respect to the non-"core" Trading Advisors, the foregoing
representation and warranty is not applicable. Instead, each such non-
"core" Trading Advisor represents and warrants to the Partnership, the
Trading Partnership, the Selling Agent, the Commodity Broker, the other
Trading Advisors and the General Partner that (i) the Disclosure Document
furnished by such non-"core" Trading Advisor to the General Partner is
accurate and complete in all material respects and contains all statements
and information required to be included therein under the Commodity Act and
the rules and regulations thereunder, and (ii) the summary information
included in the Prospectus Summary with respect to such non-"core" Trading
Advisor (as approved in pertinent part by such non-"core" Trading Advisor)
at its date of issue and as of Closing Time did not and will not contain
any misleading or untrue statement of a material fact.
(c) The Advisory Agreement, the Consulting Agreement and this
Agreement have each been duly and validly authorized, executed and
delivered on behalf of the Trading Advisor and each constitutes a valid,
binding and enforceable agreement of the Trading Advisor in accordance with
its terms.
(d) The Trading Advisor has all Federal and state governmental,
regulatory and commodity exchange licenses and approvals and has effected
all filings and registrations with Federal and state governmental and
regulatory agencies required to conduct its business and to act as
described in the Registration Statement
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and Prospectus or required to perform its obligations under this Agreement,
the Consulting Agreement and the Advisory Agreement (including, without
limitation, registration of the Trading Advisor as a commodity trading
advisor under the Commodity Act and membership of the Trading Advisor as a
commodity trading advisor in the NFA), and the performance of such
obligations will not violate or result in a breach of any provision of the
Trading Advisor's Certificate of Incorporation, By-laws or any agreement,
instrument, order, law or regulation binding on the Trading Advisor. The
principals of the Trading Advisor are duly listed as such on the Trading
Advisor's commodity trading advisor Form 7-R registration.
(e) Management by such Trading Advisor of an account for the Trading
Partnership in accordance with the terms hereof and of the Advisory
Agreement, and as described in the Prospectus, will not violate the
Investment Advisers Act of 1940.
(f) Neither the Trading Advisor nor any principal of the Trading
Advisor will use or distribute any preliminary prospectus, Prospectus,
amended or supplemented Prospectus or selling literature nor engage in any
selling activities whatsoever in connection with the offering of the Units,
except as may be requested by the General Partner pursuant to Section 6(c)
of this Agreement.
(g) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, except as may otherwise be
stated in or contemplated by the Registration Statement and the Prospectus,
there has not been any material adverse change in the condition, financial
or otherwise, business or prospects of the Trading Advisor, whether or not
arising in the ordinary course of business.
In the case of the non-"core" Trading Advisors, the foregoing
representation and warranty shall be modified so that the first two clauses
of the first sentence read "Since the respective dates as of which
information is given in the Prospectus Supplement and in the Disclosure
Document furnished by such non-"core"
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Trading Advisor to the General Partner, except as may otherwise be stated
in or contemplated by the Prospectus Supplement and such material...."
(h) The execution and delivery of this Agreement, the Consulting
Agreement and the Advisory Agreement, the incurrence of the obligations
herein and therein set forth and the consummation of the transactions
contemplated herein and therein and in the Prospectus will not constitute a
breach of, or default under, any instrument by which the Trading Advisor is
bound or any order, rule or regulation applicable to the Trading Advisor of
any court or any governmental body or administrative agency having
jurisdiction over the Trading Advisor.
(i) There is not pending, or to the best of the Trading Advisor's
knowledge threatened, any action, suit or proceeding before or by any court
or other governmental body to which the Trading Advisor is a party, or to
which any of the assets of the Trading Advisor is subject, which might
reasonably be expected to result in any material adverse change in the
condition, financial or otherwise, business or prospects of the Trading
Advisor. The Trading Advisor has not received any notice of an
investigation or warning letter from the NFA or the CFTC regarding non-
compliance by the Trading Advisor with the Commodity Act or the regulations
thereunder.
(j) The Trading Advisor has not received, and is not entitled to
receive, directly or indirectly, any commission, finder's fee, similar fee
or rebate from any person in connection with the organization or operation
of the Partnership.
Section 4. Offering and Sale of Units.
--------------------------
(a) The appointment of the Selling Agent as exclusive selling agent
of the Partnership for an indefinite period of time (the "Offering Period")
is hereby reconfirmed to the Selling Agent to continue to attempt to find
acceptable subscribers for up to the number of Units set forth on page 1
hereof through a public offering of different series of Units sold as of
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the beginning of each calendar quarter beginning October 1, 1996. Any
checks received which are made payable to any party other than the Escrow
Agent shall be returned to the purchaser who submitted the check and not
accepted. Subject to the performance by the General Partner of all its
obligations to be performed hereunder, and to the completeness and accuracy
in all material respects of all the representations and warranties of the
General Partner, the Commodity Broker and the Trading Advisors contained
herein, the Selling Agent hereby accepts such agency and agrees on the
terms and conditions herein set forth to use its best efforts to find
acceptable subscribers for the Units as of each such calendar quarter-end
at a public offering price of $100 per Unit, each subscriber being required
to subscribe for at least 50 Units, except in the case of existing Limited
Partners making additional investments, in which case the minimum
investment is 10 Units. Officers and employees of Merrill Lynch & Co., Inc.
or any of its affiliates will be permitted to subscribe for Units at a
price of $97 per Unit, with the General Partner supplying the remaining $3
per Unit subscription price on such Units (retirement accounts established
for such officers and employees must subscribe at $100 per Unit).
The offering of the Units must be continuous. The Selling Agent may
not, at any time, suspend or defer such offering; provided that the Selling
Agent may terminate the Offering as set forth herein.
It is understood that the Selling Agent's agreement to use its best
efforts to find acceptable subscribers for the Units as of the beginning of
each such calendar quarter shall not prevent it from acting as a selling
agent or underwriter for the securities of other issuers which may be
offered or sold during the Offering Period. The agency of the Selling Agent
hereunder shall continue until the General Partner terminates the Offering
Period, upon at least 30 calendar days' notice to the Selling Agent (the
date on which the Offering Period terminates being hereinafter referred to
as the "Offering Termination Date"), including such additional period as
may be required to effect the closing of the sale of the Units, or the
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Selling Agent terminates this Agreement upon 30 calendar days' notice to
the General Partner.
(b) Before the end of each calendar quarter, the General Partner
shall notify the Selling Agent of the aggregate number of Units for which
the General Partner has received acceptable subscriptions during the
preceding quarter. Payment of the purchase price for such Units will be
made at the office of the General Partner, Merrill Lynch World
Headquarters, Sixth Floor, South Tower, World Financial Center, New York,
New York 10080-6106, or at such other place as shall be agreed upon between
the Selling Agent and the General Partner, at 10:00 A.M., New York time, on
the fifth full business day after the day on which the General Partner
notifies the Selling Agent of the number of Units for which subscriptions
have been accepted or such other day and time as shall be agreed upon
between the Selling Agent and the General Partner.
(c) No selling commissions will be paid from the proceeds of sales of
Units. The Selling Agent will be credited by the Merrill Lynch organization
with a selling commission of $5 per Unit, a portion of which will be paid
in cash to the Financial Consultants who sell the Units from funds made
available by the General Partner.
The purchase price of Units sold to officers and employees of Merrill
Lynch & Co., Inc. shall be reduced from $100 to $97, the General Partner
itself paying the remaining $3 per Unit to the Partnership (retirement
accounts established for such officers and employees must subscribe at $100
per Unit).
No initial production credits shall be paid on Units sold at $97 per
Unit.
Financial Consultants will receive, in addition to initial production
credits of $5, additional compensation, beginning at the end of the
thirteenth month after Units have been sold, in the form of subsequent
production credits equal to 0.167 of 1% (a 2% annual rate) of the
percentage of the average month-end Net Asset Value of such Units committed
to
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the Trading Advisors for management (initially, 75%, resulting in ongoing
compensation at an annual rate of 1.5% of overall Net Asset Value) and
attributable to Units sold by a Financial Consultant which remain
outstanding (including the month as of the end of which such Unit is
redeemed). Additional compensation will only be paid to Financial
Consultants who agree to provide the additional services described below
and who are registered with the CFTC and who have satisfied all applicable
proficiency requirements (including those imposed by the NASD as a
condition of receiving "trailing commissions") by either passing the Series
31 Futures Managed Funds Exam, or Series 3 National Commodity Futures Exam
or by being "grandfathered" from having to do so. A portion of such credits
will be paid in cash from funds made available by the General Partner.
The additional compensation described in the foregoing paragraph shall
only be paid to otherwise eligible Financial Consultants, provided that the
Selling Agent continues to be registered with the CFTC as a futures
commission merchant or introducing broker and continues to be a member in
good standing of the NFA in such capacity, and is contingent upon the
provision by a Financial Consultant (duly registered and qualified as to
proficiency with the CFTC and NFA as described above) who sold outstanding
Units in his capacity as a registered representative of the Selling Agent
of additional services in connection with such Units, including: (i)
inquiring of the General Partner from time to time, at the request of an
owner of such Units, as to the Net Asset Value of a Unit of the series held
by such owner; (ii) inquiring of the General Partner from time to time, at
the request of an owner of such Units, regarding the commodities markets
and the Partnership; (iii) assisting, at the request of the General
Partner, in the redemption of Units sold by such Financial Consultant; and
(iv) providing such other services to the owners of such Units as the
General Partner may, from time to time, reasonably request.
Additional compensation shall be credited and paid only in respect of
Units sold by Financial Consultants
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who are eligible to receive such additional compensation as described
above. No additional compensation whatsoever shall be credited, paid or
accrued on any Units sold by Financial Consultants not currently eligible
to receive such additional compensation. Such additional compensation shall
be accrued monthly but paid on a calendar-quarter basis.
(d) The Selling Agent will use its best efforts to find eligible
persons to purchase the Units as of the end of each calendar quarter
thereafter on the terms stated herein and in the Registration Statement and
Prospectus. It is understood that the Selling Agent has no commitment with
regard to the sale of the Units other than to use its best efforts. In
connection with the offer and sale of the Units, the Selling Agent
represents that it will comply fully with all applicable laws, and the
rules of the NASD, the SEC, the CFTC, state securities administrators and
any other regulatory body. In particular, and not by way of limitation, the
Selling Agent represents and warrants that it is aware of Appendix F of the
NASD Rules of Fair Practice and that it will comply fully with all the
terms thereof in connection with the offering and sale of the Units. The
Selling Agent shall not execute any sales of Units from a discretionary
account over which it has control without prior written approval of the
customer in whose name such discretionary account is maintained.
The Selling Agent agrees not to recommend the purchase of Units to any
subscriber unless the Selling Agent shall have reasonable grounds to
believe, on the basis of information obtained from the subscriber
concerning, among other things, the subscriber's investment objectives,
other investments, financial situation and needs, that the subscriber is or
will be in a financial position appropriate to enable the subscriber to
realize to a significant extent the benefits of the Partnership, including
tax benefits described in the Prospectus; the subscriber has a fair market
net worth sufficient to sustain the risks inherent in participating in the
Partnership, including loss of investment and lack of liquidity; and the
Units are otherwise a suitable investment for the subscriber.
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The Selling Agent agrees to maintain files of information disclosing the
basis upon which the Selling Agent determined that the suitability
requirements of Section 3 of Appendix F of the NASD Rules of Fair Practice
were met as to each subscriber (the basis for determining suitability may
include the Subscription Agreements and Powers of Attorney and other
certificates submitted by subscribers). The Selling Agent represents and
warrants that it has reasonable grounds to believe, based on information in
the Prospectus and information to which the Selling Agent has had access
due to its affiliation with the General Partner, that all material facts
relating to an investment in the Units are adequately and accurately
disclosed in the Prospectus. In connection with making the foregoing
representations and warranties, the Selling Agent further represents and
warrants that it has, among other things, examined the following sections
in the Prospectus and obtained such additional information from the General
Partner and Trading Advisors regarding the information set forth thereunder
as the Selling Agent has deemed necessary or appropriate to determine
whether the Prospectus adequately and accurately discloses all material
facts relating to an investment in the Partnership and provides an adequate
basis to subscribers for evaluating an investment in the Units:
"Risk Factors"
"Investment Factors"
"Performance of the Fund"
"The Advisor Selection Process"
"Leverage Considerations"
"The ML&Co. Guarantee"
"Charges"
"MLIP and MLF"
"Conflicts of Interest"
"Federal Income Tax Consequences"
"Appendix I - The 'Core' Trading Advisors"
"Appendix III - The Role of Managed Futures in an Investment
Portfolio"
In connection with making the representations and warranties set forth in
this paragraph, the Selling Agent has not relied on inquiries made by or on
behalf of any other parties.
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The Selling Agent agrees to inform all prospective purchasers of Units
of all pertinent facts relating to the liquidity and marketability of the
Units as set forth in the Prospectus.
(e) None of the Selling Agent, the Partnership or the General Partner
shall, directly or indirectly, pay or award any finder's fees, commissions
or other compensation to any person engaged by a potential investor for
investment advice as an inducement to such advisor to advise the purchase
of Units; provided, however, the normal sales commissions payable to a
registered broker-dealer or other properly licensed person for selling
Units shall not be prohibited hereby.
(f) The Partnership is reimbursing the General Partner for
organizational and initial offering costs in 36 equal monthly installments
of $6,642 ending October 31, 1997.
(g) All payments for subscriptions shall be made by debiting
subscriber's customer securities account maintained with the Selling Agent
as described in the Prospectus (except for the investment of certain of the
Trading Advisors).
(h) The General Partner agrees to cause its counsel to prepare and
deliver to the Selling Agent an updated Blue Sky Survey which shall set
forth, for the guidance of the Selling Agent, in which United States
jurisdictions the Units may be offered and sold. It is understood and
agreed that the Selling Agent may rely, in connection with the offering and
sale of Units in any jurisdiction, on advice given by such counsel as to
the legality of the offer or sale of the Units in such jurisdiction,
provided, however, that the Selling Agent shall be responsible for
compliance with all applicable laws, rules and regulations with respect to
the actions of its employees, acting as such, in connection with sales of
Units in any jurisdiction.
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Section 5. Covenants of the General Partner.
--------------------------------
(a) The General Partner will notify the Selling Agent, the Commodity
Broker and the Trading Advisors immediately and confirm such notification
in writing (i) when any amendment to the Registration Statement shall have
become effective, (ii) of the receipt of any comments from the SEC, CFTC or
any other Federal or state regulatory body with respect to the Registration
Statement, (iii) of any request by the SEC, CFTC or any other Federal or
state regulatory body for any amendment to the Registration Statement or
any amendment or supplement to the Prospectus or for additional information
relating thereto and (iv) of the issuance by the SEC, CFTC or any other
Federal or state regulatory body of any order suspending the effectiveness
of the Registration Statement under the 1933 Act, the CFTC registration or
NFA membership of the General Partner as a commodity pool operator, or the
registration of Units under the Blue Sky or securities laws of any state or
other jurisdiction or any order or decree enjoining the offering or the use
of the then current Prospectus or of the institution, or notice of the
intended institution, of any action or proceeding for that purpose.
(b) It will deliver to the Selling Agent, as soon as available, two
signed copies of each amendment to the Registration Statement as originally
filed and two sets of exhibits thereto, and will also deliver to the
Selling Agent such number of conformed copies of the Registration Statement
as originally filed and of each amendment thereto (without exhibits) as the
Selling Agent shall reasonably require.
(c) It will take all necessary regulatory steps, make all necessary
ongoing regulatory filings and obtain all necessary regulatory approvals to
maintain the ongoing offering of the Units, unless the General Partner
notifies the Selling Agent of the Offering Termination Date.
(d) It will deliver to the Selling Agent as promptly as practicable
from time to time during the period when the Prospectus is required to be
delivered under the 1933 Act, such number of copies of the Pro-
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spectus (as amended or supplemented) as the Selling Agent may reasonably
request for the purposes contemplated by the 1933 Act or the SEC
Regulations.
(e) During the period when the Prospectus is required to be delivered
pursuant to the 1933 Act, the General Partner, the Partnership and the
Trading Partnership will use best efforts to comply with all requirements
imposed upon them by the 1933 Act and the Commodity Act, each as now and
hereafter amended, and by the SEC Regulations and rules and regulations of
the CFTC, as from time to time in force, so far as necessary to permit the
continuance of sales of, or dealings in, the Units during such period in
accordance with the provisions hereof and as set forth in the Prospectus.
(f) If any event relating to or affecting the General Partner, the
Partnership and the Trading Partnership shall occur as a result of which it
is necessary, in the reasonable opinion of the Selling Agent, to amend or
supplement the Prospectus in order to make the Prospectus not materially
misleading in light of the circumstances existing at the time it is
delivered to a subscriber, the General Partner, the Partnership and the
Trading Partnership will forthwith prepare and furnish to the Selling
Agent, at the expense of the General Partner, a reasonable number of copies
of an amendment or amendments of, or a supplement or supplements to, the
Prospectus which will amend or supplement the Prospectus so that as amended
or supplemented it will not contain an untrue statement of a material fact
or omit to state a material fact necessary in order to make the statements
therein, in light of the circumstances existing at the time the Prospectus
is delivered to a subscriber, not misleading. No such amendment or
supplement shall be filed without the approval of the Selling Agent, the
Commodity Broker and the Trading Advisors, in each case together with their
respective counsel.
(g) It will use best efforts to qualify the Units for offer and sale
under applicable securities or "Blue Sky" laws and continue such
qualification throughout the Offering Period, provided that in no event
shall
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the General Partner or the Partnership be obligated to (i) take any action
which would subject it to service of process in suits other than those
arising out of the offering or sale of the Units, or taxes, in any
jurisdiction where either is not now so subject, (ii) change any material
term in the Registration Statement, or (iii) expend a sum of money
considered unreasonable by the General Partner.
Section 6. Covenants of the Trading Advisors.
---------------------------------
(a) Each Trading Advisor agrees to cooperate, to the extent
reasonably requested by the General Partner, in the preparation of any
amendments or supplements relating to itself to the Registration Statement
and the Prospectus.
(b) With respect to each "core" Trading Advisor, during the period
when the Prospectus is required to be delivered under the 1933 Act, each
"core" Trading Advisor agrees to notify the General Partner immediately if
such "core" Trading Advisor has reason to believe that the Prospectus may
contain a misleading or untrue statement of a material fact or omit to
state a material fact necessary to make the statements therein not
misleading, in light of the circumstances under which such statements were
made, in each case regarding it, its operations or any of its principals or
of the occurrence of any event or of any change in circumstances which
would result in the Prospectus not including all information relating to
the "core" Trading Advisor and its principals required pursuant to CFTC
regulations.
With respect to each non-"core" Trading Advisor, during the period
when the Prospectus is required to be delivered under the 1933 Act, each
non-"core" Trading Advisor agrees to notify the General Partner immediately
if such non-"core" Trading Advisor has reason to believe that the
Prospectus Supplement may contain a misleading or untrue statement
regarding it, its operations or any of its principals or of the occurrence
of any event or of any change in circumstances which would result in the
Disclosure Document furnished by the non-"core" Trading Advisor to
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the General Partner not being accurate and complete in all material
respects or not including all information relating to the non-"core"
Trading Advisor and its principals required pursuant to CFTC regulations.
(c) Each Trading Advisor agrees to assist, and cause its principals
or agents to assist, in "road show" presentations relating to the offering
of the Units at the reasonable request of the Selling Agent and at the
expense of the General Partner, provided that no such assistance shall
result in any action which any such principal or agent reasonably believes
may require registration of the Trading Advisor or any such principal or
agent as a broker-dealer or salesman or interfere materially with a Trading
Advisor's normal daily business activities.
Section 7. Payment of Expenses and Fees. The General Partner pays
all expenses incident to the performance of the obligations of the General
Partner, the Partnership and the Trading Partnership hereunder, including: (i)
the printing and delivery to the Selling Agent in quantities as hereinabove
stated of copies of the Registration Statement and all amendments thereto, of
the Prospectus and any supplements or amendments thereto, and of any
supplemental sales materials; (ii) the reproduction of this Agreement and the
printing and filing of the Registration Statement and the Prospectus (and, in
certain cases, the exhibits thereto) with the SEC, CFTC and NFA; (iii) the
qualification of the Units under the securities or "Blue Sky" laws in the
various jurisdictions, including filing fees and the fees and disbursements of
the General Partner's counsel incurred in connection therewith; (iv) the
services of counsel and accountants for the General Partner and the Partnership,
including certain services of Deloitte & Touche in connection with their review
of the Performance Summaries in the Prospectus; (v) the printing or reproduction
and delivery to the Selling Agent of such number of copies as it may reasonably
request of the Blue Sky Survey; and (vi) "road show" presentations (including
the expenses of the Trading Advisors and their personnel).
The General Partner and the Selling Agent are each aware of the
limitations imposed by Appendix F of the NASD Rules of Fair Practice on the
aggregate compensation which may be received by the Selling Agent in connection
with the offering and
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sale of the Units. The General Partner will in no event make any payments to the
Selling Agent as described above, which might reasonably be considered expenses
properly considered to be for the account of the Selling Agent and which, when
added to the 5% with which the Selling Agent will be credited on each sale of
Units ($5 per Unit), would exceed 10% of the gross proceeds of the Units sold to
the public. The General Partner shall not reimburse the Selling Agent for any
due diligence expenses in connection with the offering.
Section 8. Conditions of Closing. The obligations of each of the
parties hereunder are subject to the accuracy of the representations and
warranties of the other parties hereto, to the performance by such other parties
of their respective obligations hereunder and to the following further
conditions :
(a) As of each Additional Closing Time, no order suspending the
effectiveness of the Registration Statement shall have been issued under
the 1933 Act or proceeding therefor initiated or threatened by the SEC and
no objection to the content thereof shall have been expressed or threatened
by the CFTC or the NFA.
(b) At the Additional Closing Time, Sidley & Austin, counsel to the
General Partner and the Partnership, shall deliver to all the parties
hereto its opinion, in form and substance satisfactory to each of the
parties hereto.
In rendering such opinion, Sidley & Austin may rely, as to matters of
Delaware law, upon the opinion of Messrs. Richards, Layton & Finger,
Wilmington, Delaware, and as to matters relating to Merrill Lynch & Co.,
Inc. on internal Merrill Lynch & Co., Inc. counsel.
(c) At the Additional Closing Time on or about September 30, 1996, Mr.
William T. Maitland, counsel to the Commodity Broker, shall deliver to all
the parties hereto, an opinion in form and substance satisfactory to each
of the parties hereto.
(d) At the Additional Closing Time on or about September 30, 1996,
counsel to each Trading Advisor shall deliver to all the parties hereto an
opinion
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relating to each such Trading Advisor, respectively, in form and substance
satisfactory to the parties hereto.
(e) At the Additional Closing Time on or about September 30, 1996, the
General Partner shall deliver a certificate to the effect that: (i) no
order suspending the effectiveness of the Registration Statement has
been issued and to the best of its knowledge no proceedings therefor have
been instituted or threatened by the SEC, the CFTC or any other regulatory
body; (ii) the representations and warranties of the General Partner
contained herein are true and correct with the same effect as though
expressly made at the Initial Closing Time and in respect of the
Registration Statement as in effect at the Initial Closing Time; and (iii)
the General Partner has performed all covenants and agreements herein
contained to be performed on its part at or prior to such Additional
Closing Time. Such certificate may state that the General Partner has
relied upon the representations of the Trading Advisors included herein.
(f) The Trading Advisors shall deliver a report dated as of the
Additional Closing Time on or about September 30, 1996, which shall
present, for the period from the date after the last day covered by the
actual Performance Summaries in Appendix I in the Prospectus (with respect
to the "core" Trading Advisors) or the last day covered by the actual
performance records in the Performance Summaries included in the materials
provided by the non-"core" Trading Advisor to the General Partner (with
respect to the non-"core" Trading Advisors) to the latest practicable day
before the Additional Closing Time on or about September 30, 1996, figures
which shall be a continuation of such Summaries and which shall certify
that such figures are accurate in all material respects. The Trading
Advisors shall also certify that such Tables have been calculated in
accordance with the notes to the applicable Summaries in the Prospectus
(with respect to the "core" Trading Advisors) or in the Disclosure Document
furnished by the non-"core" Trading Advisor to the General Partner (with
respect to the non-"core" Trading Advisors).
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(g) At the time the Registration Statement becomes effective, Deloitte
& Touche shall have delivered a letter, substantially in the form
previously agreed upon by the Selling Agent and the General Partner.
(h) At the Additional Closing Time on or about September 30, 1996,
Deloitte & Touche shall deliver a letter in a form satisfactory to the
Selling Agent and the General Partner, substantially the same in scope and
substance as the letter described in paragraph (g) of this Section 8, dated
as of the Additional Closing Time.
(i) At the Additional Closing Time on or about September 30, 1996,
each Trading Advisor shall deliver a certificate to the effect that (i) the
representations and warranties of such Trading Advisor contained herein are
true and correct with the same effect as though expressly made at such
Additional Closing Time and in respect of the Registration Statement as in
effect at such Additional Closing Time, and (ii) such Trading Advisor has
performed all covenants and agreements herein contained to be performed on
its part at or prior to such Additional Closing Time.
(j) The Commodity Broker shall deliver a certificate to the effect
that the representations and warranties of the Commodity Broker contained
herein are true and correct with the same effect as though expressly made
at the Additional Closing Time on or about September 30, 1996, and in
respect of the Registration Statement as in effect at such Additional
Closing Time.
(k) The parties hereto shall have been furnished with such additional
information, opinions, certificates and documents, including supporting
documents relating to parties described in the Prospectus and certificates
signed by such parties with regard to information relating to them and
included in the Prospectus as they may reasonably require for the purpose
of enabling them to pass upon the sale of the Units as herein contemplated
and related proceedings, in order to evidence the accuracy or completeness
of any of the
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representations or warranties or the fulfillment of any of the conditions
herein contained; and all actions taken by the parties hereto in connection
with the sale of the Units as herein contemplated shall be reasonably
satisfactory in form and substance to Sidley & Austin, counsel to the
Trading Advisors and Mr. Maitland.
(l) At each Additional Closing Time thereafter, the parties hereto
shall have been furnished with such information, opinions and certified
documents as the General Partner and the Selling Agent may deem to be
necessary or appropriate.
If any of the conditions specified in this Section 8 shall not have
been fulfilled when and as required by this Agreement to be fulfilled, this
Agreement and all obligations hereunder may be cancelled by any party
hereto by notifying the other parties hereto of such cancellation in
writing or by telegram at any time at or prior to the Additional Closing
Time, and any such cancellation or termination shall be without liability
of any party to any other party except as otherwise provided in Section 7.
Section 9. Indemnification and Exculpation.
-------------------------------
(a) Indemnification by the General Partner. The General Partner agrees
to indemnify and hold harmless the Selling Agent and each Trading Advisor
and each person, if any, who controls the Selling Agent or each Trading
Advisor within the meaning of Section 15 of the 1933 Act, as follows:
(i) against any and all loss, liability, claim, damage and
expense whatsoever arising out of any untrue statement or alleged
untrue statement of a material fact contained in the Registration
Statement (or any amendment thereto) or any omission or alleged
omission therefrom of a material fact required to be stated therein or
necessary in order to make the statements therein not misleading or
arising out of any untrue statement or alleged untrue statement of a
material fact contained in the Prospectus (or
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any amendment or supplement thereto) or the omission or alleged
omission therefrom of a material fact necessary in order to make the
statements therein, in light of the circumstances under which they
were made, not misleading, unless (a) in the case of the "core"
Trading Advisors, such untrue statement or omission or alleged untrue
statement or omission was made in reliance upon and in conformity with
information relating to such "core" Trading Advisor and furnished or
approved in writing by such "core" Trading Advisor, or (b) in the case
of the non-"core" Trading Advisors, such untrue statement or alleged
untrue statement was made in reliance upon and in conformity with
information relating to such non-"core" Trading Advisor and furnished
or approved in writing by such non-"core" Trading Advisor or (c) in
the case of the Selling Agent, such untrue statement or omission or
alleged untrue statement or omission was made in reliance upon and in
conformity with information relating to the Selling Agent or furnished
or approved by the Selling Agent.
(ii) against any and all loss, liability, claim, damage and
expense whatsoever to the extent of the aggregate amount paid in
settlement of any litigation, or any investigation or proceeding by
any governmental agency or body commenced or threatened, or of any
claim whatsoever based upon any such untrue statement or omission or
any such alleged untrue statement or omission (any settlement to be
subject to indemnity hereunder only if effected with the written
consent of the General Partner); and
(iii) against any and all expense whatsoever (including the fees
and disbursements of counsel) reasonably incurred in investigating
preparing or defending against litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
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threatened, or any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission, to the extent that any such expense is not paid under
clauses (i) or (ii) above.
In no case shall the General Partner be liable under this indemnity
agreement with respect to any claim made against any indemnified party
unless the General Partner shall be notified in writing of the nature of
the claim within a reasonable time after the assertion thereof, but failure
to so notify the General Partner shall not relieve the General Partner from
any liability which it may have otherwise than on account of this indemnity
agreement. The General Partner shall be entitled to participate at its own
expense in the defense or, if it so elects within a reasonable time after
receipt of such notice, to assume the defense of that portion of any suit
so brought relating to the General Partner's indemnification obligations
hereunder, which defense shall be conducted by counsel chosen by it and
satisfactory to the indemnified party or parties, defendant or defendants
therein. In the event that the General Partner elects to assume the defense
of any such suit and retain such counsel, the indemnified party or parties,
defendant or defendants in the suit, shall bear the fees and expenses of
any additional counsel thereafter retained by it or them.
In no event, however, shall the General Partner be obligated to
indemnify the Selling Agent hereunder, and the Selling Agent agrees not to
attempt to obtain any indemnity from the General Partner hereunder, to the
extent that the General Partner and the Selling Agent are advised by
counsel reasonably satisfactory to the General Partner and the Selling
Agent that payment of such indemnity could adversely affect the
classification of the Partnership as a partnership for Federal income tax
purposes.
The General Partner agrees to notify each Trading Advisor and the
Selling Agent within a reasonable time of the assertion of any claim in
connection with the sale of the Units against it or any of its officers or
-31-
<PAGE>
directors or any person who controls the General Partner within the
meaning of Section 15 of the 1933 Act.
(b) Indemnification by the Trading Advisors. Each Trading Advisor
agrees to indemnify and hold harmless the Selling Agent, the Commodity
Broker, the General Partner, the Partnership and each person, if any, who
controls the Selling Agent, the Commodity Broker, the Partnership or the
General Partner within the meaning of Section 15 of the 1933 Act (and, in
the case of the General Partner and the Partnership, each person who signed
the Registration Statement or is a director of the General Partner), to the
same extent as the indemnity from the General Partner set forth in Section
9(a) hereof, but only insofar as the losses, claims, damages, liabilities
or expenses indemnified against arise out of or are based upon (i) in the
case of the "core" Trading Advisors, any untrue statement or omission or
alleged untrue statement or omission relating or with respect to such
"core" Trading Advisor or any principal of such "core" Trading Advisor, or
their operations, trading systems, methods or performance, which was made
in the Registration Statement or the Prospectus or any amendment or
supplement thereto and furnished by or approved by such "core" Trading
Advisor for inclusion therein, and (ii) in the case of the non-"core"
Trading Advisors, (A) any untrue statement or alleged untrue statement
relating or with respect to such non-"core" Trading Advisor or any
principal of such non-"core" Trading Advisor, or their operations, trading
systems, methods or performance which was made in the Registration
Statement or the Prospectus or any amendment or supplement thereto and
furnished by or approved by such non-"core" Trading Advisor for inclusion
therein, or (B) any materially inaccurate or incomplete statement relating
or with respect to such non-"core" Trading Advisor or any principal of such
non-"core" Trading Advisor, or their operations, trading systems, methods
or performance which was made in the Disclosure Document furnished by the
non-"core" Trading Advisor to the General Partner.
(c) Limitation on Certain Indemnifications and Exculpations. The
exculpation provisions in the Advisory Agreements and the Consulting
Agreements shall not
-32-
<PAGE>
relieve the Trading Advisors from any liability they may have or incur to
the Partnership, the General Partner, the Selling Agent or the Commodity
Broker under this Agreement (including, without limitation, pursuant to the
provisions of Section 9(b) hereof). Nor shall the Trading Advisors be
entitled to be indemnified by the General Partner, pursuant to the
indemnification provisions contained in the Advisory Agreements, or by the
Commodity Broker under the Consulting Agreements, against any loss,
liability, damage, cost or expense it may incur under this Agreement. The
General Partner shall not be entitled to be indemnified by the Partnership,
pursuant to the indemnification provisions contained in the Limited
Partnership Agreement against any loss, liability, damage, cost or expense
it may incur under this Agreement.
Section 10. Status of Parties. In selling the Units for the
Partnership, the Selling Agent is acting solely as an agent for the Partnership
and not as a principal. The Selling Agent will use its best efforts to assist
the Partnership in obtaining performance by each purchaser whose offer to
purchase Units from the Partnership has been accepted on behalf of the
Partnership, but the Selling Agent shall not have any liability to the
Partnership in the event that Subscription Agreements and Powers of Attorney are
improperly completed or any such purchase is not consummated for any reason.
Although the Trading Advisors, the Partnership and the Trading
Partnership have entered into the Advisory Agreements, all parties hereto
acknowledge that none of such parties has the power to act for another in any
respect, except as set forth in the Advisory Agreements, and that in no event
shall the Partnership or the Trading Partnership be held responsible hereunder
for the acts and omissions of the Trading Advisors (or, conversely, the Trading
Advisors be held responsible for acts and omissions of the Partnership or the
Trading Partnership) resulting from conduct consistent with and taken in
connection with or as a consequence of the Advisory Agreements.
Section 11. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or contained in certificates of any party hereto submitted pursuant
hereto shall remain operative and in full force and effect, regardless of any
investigation
-33-
<PAGE>
made by, or on behalf of, the Selling Agent, the General Partner, the
Partnership, the Trading Partnership, the Commodity Broker, the Trading Advisors
or any person who controls any of the foregoing and shall survive the Initial
and each Additional Closing Time in the form restated and reaffirmed as of each
such Closing Time.
Section 12. Termination. The General Partner shall have the right to
terminate this Agreement at any time by giving written notice of such
termination to the Trading Advisors, the Selling Agent and the Commodity Broker.
Section 13. Notices and Authority to Act. All communications
hereunder shall be in writing and, if sent to the Selling Agent, the General
Partner, the Partnership or the Trading Partnership, shall be mailed, delivered
or telegraphed and confirmed to it at Merrill Lynch World Headquarters, 6th
Floor, South Tower, World Financial Center, New York, New York 10080-6106,
Attention: Mr. John R. Frawley, Jr.; if sent to a the Commodity Broker shall be
mailed, delivered or telegraphed and confirmed to it at, Merrill Lynch World
Headquarters, 250 Vesey Street, 23rd Floor, New York, New York 10281-1323,
Attention: Mr. William T. Maitland; if sent to a Trading Advisor shall be
mailed, delivered or telegraphed and confirmed to it at the address furnished
from time to time in writing by such Trading Advisor to the General Partner.
Section 14. Parties. This Agreement shall inure to the benefit of
and be binding upon the Selling Agent, the Partnership, the Trading Partnership,
the General Partner, the Commodity Broker, the Trading Advisors and such
parties' respective successors to the extent provided herein. This Agreement
and the conditions and provisions hereof are intended to be and are for the sole
and exclusive benefit of the parties hereto and their respective successors,
assigns and controlling persons and parties indemnified hereunder, and for the
benefit of no other person, firm or corporation. No purchaser of a Unit shall be
considered to be a successor or assign solely on the basis of such purchase.
SECTION 15. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES CREATED HEREBY SHALL BE GOVERNED BY THE LAWS OF THE
STATE OF NEW YORK.
-34-
<PAGE>
Section 16. Requirements of Law. Whenever in this Agreement it is
stated that a party will take or refrain from taking a particular action, such
party may nevertheless refrain from taking or take such action if advised by
counsel that doing so is required by law or advisable to ensure compliance with
law, and shall not be subject to any liability hereunder for doing so, although
such action shall permit termination of the Agreement by the other parties
hereto.
-35-
<PAGE>
If the foregoing is in accordance with each party's understanding of
its agreement, each party is requested to sign and return to the General Partner
a counterpart hereof, whereupon this instrument along with all counterparts will
become a binding agreement among them in accordance with its terms effective as
of the date first above written.
Very truly yours,
ML PRINCIPAL PROTECTION L.P.
BY: MERRILL LYNCH INVESTMENT
PARTNERS INC., General
Partner
By:________________________________
James M. Bernard,
Chief Financial Officer
ML PRINCIPAL PROTECTION
TRADING L.P.
BY: MERRILL LYNCH INVESTMENT
PARTNERS INC., General
Partner
By:________________________________
James M. Bernard,
Chief Financial Officer
MERRILL LYNCH FUTURES INC.
By:_______________________________
Name:
Title:
MERRILL LYNCH INVESTMENT
PARTNERS INC.
-36-
<PAGE>
By:
-----------------------------
James M. Bernard,
Chief Financial Officer
"CORE" TRADING ADVISORS
-----------------------
CHESAPEAKE CAPITAL CORPORATION
By:
-----------------------------
Name:
Title:
JOHN W. HENRY & CO., INC.
By:
-----------------------------
Name:
Title:
NON-"CORE" TRADING ADVISORS
----------------------------
AIS FUTURES MANAGEMENT, INC.
By:
-----------------------------
Name:
Title:
ARA PORTFOLIO MANAGEMENT COMPANY
By:
-----------------------------
Name:
Title:
-37-
<PAGE>
WEST COURSE CAPITAL INC.
By:
-----------------------------
Name:
Title:
TRENDSTAT CAPITAL MANAGEMENT, INC.
By:
-----------------------------
Name:
Title:
MILLBURN RIDGEFIELD CORPORATION
By:
-----------------------------
Name:
Title:
AIB INVESTMENT MANAGERS LIMITED
By:
-----------------------------
Name:
Title:
-38-
<PAGE>
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
Selling Agent
By: ____________________
John R. Frawley, Jr.
-39-
<PAGE>
Exhibit 3.01(i)
AMENDED AND RESTATED CERTIFICATE OF LIMITED PARTNERSHIP
OF
ML PRINCIPAL PROTECTION PLUS L.P.
This Amended and Restated Certificate of Limited Partnership of ML
Principal Protection Plus L.P. (the "Partnership"), dated as of the 1st day of
July, 1996, is being duly executed and filed by the undersigned in accordance
with the provisions of 6 Del.C. (S)17-210 to amend and restate the original
Certificate of Limited Partnership of the Partnership, which was filed on
January 3, 1994, with the Secretary of State of the State of Delaware, as
heretofore amended, (the "Certificate"), to form a limited partnership under the
Delaware Revised Uniform Limited Partnership Act (6 Del.C. (S)17-101, et seq.).
The original name of the limited partnership was The SECTOR Strategy Fund/SM/
VII L.P.
The Certificate is hereby amended and restated in its entirety to read as
follows:
1. Name. The name of the limited partnership formed hereby is "ML
Principal Protection L.P."
2. Registered Office. The address of the registered office of the
Partnership in the State of Delaware is c/o The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801.
<PAGE>
3. Registered Agent. The name and address of the registered agent for
service of process on the Partnership in the State of Delaware is The
Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,
Wilmington, New Castle County, Delaware 19801.
4. General Partner. The name and the business address of the sole
general partner of the Partnership is:
Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters
Sixth Floor, South Tower
World Financial Center
New York, New York 10080-6106
IN WITNESS WHEREOF, the undersigned general partner has duly executed this
Amended and Restated Certificate of Limited Partnership as of the date first-
above written
Merrill Lynch Investment Partners Inc.
General Partner
James M. Bernard
-------------------------------------
James M. Bernard, Chief Financial
Officer, Vice President and Treasurer
<PAGE>
Exhibit 3.02(i)
AMENDED AND RESTATED CERTIFICATE OF LIMITED PARTNERSHIP
OF
ML PRINCIPAL PROTECTION PLUS TRADING L.P.
This Amended and Restated Certificate of Limited Partnership of ML
Principal Protection Plus Trading L.P. (the "Partnership"), dated as of the 1st
day of July, 1996, is being duly executed and filed by the undersigned in
accordance with the provisions of 6 Del.C. (S)17-210 to amend and restate the
original Certificate of Limited Partnership of the Partnership, which was filed
on May 6, 1994, with the Secretary of State of the State of Delaware, as
heretofore amended, (the "Certificate"), to form a limited partnership under the
Delaware Revised Uniform Limited Partnership Act (6 Del.C. (S)17-101, et seq.).
The original name of the limited partnership was ML SECTOR Plus Trading L.P.
The Certificate is hereby amended and restated in its entirety to read as
follows:
1. Name. The name of the limited partnership formed hereby is "ML
Principal Protection Trading L.P."
2. Registered Office. The address of the registered office of the
Partnership in the State of Delaware is c/o The Corporation Trust Company,
Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County,
Delaware 19801.
3. Registered Agent. The name and address of the registered agent for
service of process on the Partnership in the
<PAGE>
State of Delaware is The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
4. General Partner. The name and the business address of the sole general
partner of the Partnership is:
Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters
Sixth Floor, South Tower
World Financial Center
New York, New York 10080-6106
IN WITNESS WHEREOF, the undersigned general partner has duly executed this
Amended and Restated Certificate of Limited Partnership as of the date first-
above written.
Merrill Lynch Investment Partners Inc.
General Partner
James M. Bernard
-------------------------------------
James M. Bernard, Chief Financial
Officer, Vice President and Treasurer
<PAGE>
EXHIBIT 3.03(ii)
ML PRINCIPAL PROTECTION TRADING L.P.
(formerly, ML Principal Protection Plus Trading L.P.)
SECOND AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
Dated as of
_________, 1996
<PAGE>
ML PRINCIPAL PROTECTION TRADING L.P.
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
<S> <C>
Page
----
1. Formation and Name.................................................... 1
2. Principal Office...................................................... 1
3. Business.............................................................. 2
4. Term, Dissolution, Fiscal Year and Net Asset Value.................... 3
(a) Term............................................................. 3
(b) Dissolution...................................................... 3
(c) Fiscal Year...................................................... 3
5. Net Worth of General Partner.......................................... 3
6. Capital Contributions................................................. 3
7. Allocation of Profits and Losses...................................... 4
(a) Capital Accounts and Allocations................................. 4
(b) Allocation of Profit and Loss for Federal Income Tax Purposes.... 5
(c) Expenses......................................................... 5
(d) Limited Liability of the Limited Partner......................... 5
(e) Return of Capital Contributions.................................. 5
8. Management............................................................ 6
9. Reports............................................................... 8
10. Non-Assignability of Limited Partnership Interest..................... 8
11. Withdrawals of Capital; Distributions................................. 8
(a) Withdrawals of Capital........................................... 8
(b) Distributions.................................................... 9
</TABLE>
-i-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Page
----
12. Withdrawal of a Partner............................................... 9
13. Standard of Liability; Indemnification................................ 9
(a) Standard of Liability for the General Partner.................... 9
(b) Indemnification of the General Partner by the Trading Partnership 9
14. Governing Law......................................................... 11
15. Miscellaneous......................................................... 11
(a) Notices.......................................................... 11
(b) Binding Effect................................................... 11
(c) Certification of Facts........................................... 11
(d) Qualified Income Offset.......................................... 12
(e) Captions......................................................... 12
</TABLE>
-ii-
<PAGE>
ML PRINCIPAL PROTECTION TRADING L.P.
AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
This Second Amended and Restated Limited Partnership Agreement (the
"Limited Partnership Agreement") is made as of July 3, 1996, by and between
MERRILL LYNCH INVESTMENT PARTNERS INC., a Delaware corporation, as the sole
general partner (the "General Partner"; formerly, ML Futures Investment Partners
Inc.), and ML PRINCIPAL PROTECTION TRADING L.P., as the sole limited partner --
(the "Limited Partner"; formerly, ML Principal Protection Plus Trading L.P.)
(the General Partner and the Limited Partner being collectively referred to
herein as "Partners").
WITNESSETH:
WHEREAS, the Limited Partner hereby invests in the Trading Partnership
(defined below) in order to engage in the speculative trading of futures,
forwards and options contracts.
NOW, THEREFORE, the parties hereto agree as follows:
1. Formation and Name.
The parties hereto do hereby form and continue a limited partnership under
the Delaware Revised Uniform Limited Partnership Act, as amended and in effect
on the date hereof (6 Del. C. (S)(S) 17-101, et seq.) (the "Act"). The name of
the limited partnership is ML PRINCIPAL PROTECTION TRADING L.P. (the "Trading
Partnership"). The General Partner shall execute and file a Certificate of
Limited Partnership in accordance with the provisions of the Act and execute,
file, record and publish (as may in the reasonable judgment of the General
Partner be required by law) such amendments and other documents as are or become
necessary or advisable in connection with the operation of the Trading
Partnership, as determined by the General Partner, and shall take all steps
which the General Partner may deem necessary or advisable to allow the Trading
Partnership to conduct business in any jurisdiction where the Trading
Partnership conducts business and to otherwise provide that the Limited Partner
will have limited liability with respect to the activities of the Trading
Partnership in all such jurisdictions.
<PAGE>
2. Principal Office.
The address of the principal office of the Trading Partnership shall be c/o
the General Partner, Merrill Lynch World Headquarters, 6th Floor, South Tower,
World Financial Center, New York, New York 10080-6106; telephone (212) 236-4167
or such other place as the General Partner may designate from time to time.
The address of the registered office of the Partnership in the State of
Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209
Orange Street, Wilmington, New Castle County, Delaware 19801, and the name and
address of the registered agent for service of process on the Partnership in the
State of Delaware is The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
The General Partner may change the registered office of the Trading
Partnership upon notice to the Limited Partner.
3. Business.
The Limited Partner will operate through the Trading Partnership and under
the management of the General Partner, in the same manner that a "holding
company" operates through an "operating subsidiary." The Trading Partnership's
business and purpose is, for the benefit of the Limited Partner, to trade, buy,
sell or otherwise acquire, hold or dispose of futures and forward contracts for
commodities, financial instruments and currencies, any rights pertaining thereto
and any options thereon or on physical commodities and to engage in all
activities incident thereto. The Trading Partnership may also engage in
"hedge," arbitrage and cash trading of commodities, futures, forwards and
options. The objective of the Trading Partnership's business is appreciation of
its assets through speculative trading.
In addition to its trading activities, as described above, the Trading
Partnership shall retain MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM") to
implement cash management strategies in -- in MLAM's absolute discretion within
investment parameters established by, and the responsibility of, the General
Partner -- United States Treasury securities and securities issued by U.S.
government agencies and instrumentalities. The Trading Partnership shall
instruct Merrill Lynch Futures Inc., the Trading
-2-
<PAGE>
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 Trading Partnership, (ii) arrange for Merrill Lynch Futures Inc.
to pay MLAM's fees for such advice and services, (iii) establish investment
parameters for MLAM's cash management advice for the Trading Partnership; and
(iv) establish custodial account arrangements on behalf of the Trading
Partnership. In the event that Merrill Lynch Futures Inc. does not pay MLAM's
cash management fees, the General Partner, not the Trading Partnership, shall
be responsible for doing so.
4. Term, Dissolution, Fiscal Year and Net Asset Value.
(a) Term. The term of the Trading Partnership shall commence on the day
on which the Certificate of Limited Partnership is filed with the Secretary of
State of the State of Delaware pursuant to the provision 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 notice to dissolve the Trading Partnership at a
specified time from the Limited Partner; (3) withdrawal, insolvency or
dissolution of the General Partner; (4) dissolution and complete winding up of
the Limited Partner; (5) any event which shall make it unlawful for the
existence of the Trading Partnership to be continued or require termination of
the Trading Partnership.
(b) Dissolution. Upon the occurrence of an event causing the termination
of the Trading Partnership, the Trading Partnership shall terminate and be
dissolved. Dissolution, payment of creditors and distribution of the Trading
Partnership's assets shall be effected as soon as practicable in accordance with
the Act, and the General Partner and the Limited Partner shall share in the
assets pro rata in accordance with their respective positive capital accounts in
the Trading Partnership, less any amount owing by each such Partner to the
Trading Partnership.
(c) Fiscal Year. The fiscal year of the Trading Partnership shall begin
on January 1 of each year and end on the following December 31.
-3-
<PAGE>
5. Net Worth of General Partner.
The General Partner agrees that at all times so long as it remains General
Partner of the Trading Partnership, it will maintain its Net Worth (as defined
below) at an amount which is sufficient, in the opinion of counsel for the
Trading Partnership, for the Trading Partnership to be taxed as a partnership
for federal income tax purposes.
6. Capital Contributions.
The General Partner shall invest in the Trading Partnership, as a general
partnership interest, no less than 1% of the aggregate contributions (which
includes capital committed by the Limited Partner as described below) to the
Trading Partnership. So long as it is a general partner of the Trading
Partnership, the General Partner will maintain this required minimum investment.
The General Partner may withdraw any interest it may have as a general partner
in excess of such requirement.
The Limited Partner shall contribute capital as described in the Prospectus
of ML Principal Protection L.P. Capital contributed at different times by the
Limited Partner shall be allocated to separate capital accounts. The Limited
Partner may also commit capital to cover the trading losses and cash of the
Trading Partnership as contemplated by Section 16(e) of the Limited Partner's
Amended and Restated Limited Partnership Agreement, and such commitment shall be
reflected in the Trading Partnership's allocation of trading gain and loss, as
provided in Section 7 below.
The Partners' respective contributions of the capital of the Trading
Partnership shall be as shown on the books and records of the Trading
Partnership.
The aggregate of all capital contributions shall be available to the
Trading Partnership to carry on its business, and no interest shall be paid by
the Trading Partnership on any such contribution.
7. Allocation of Profits and Losses.
(a) Capital Accounts and Allocations. A capital account shall be
established for the Limited Partner (for each series of units of limited
partnership interests issued by the
-4-
<PAGE>
Limited Partner) and for the General Partner. The initial balance of each
capital account shall be the amount contributed to it. After the Trading
Partnership begins operations, the following allocations shall be made:
(1) 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 Trading Partnership's U.S. Treasury and U.S. government agency
securities and short-term foreign sovereign debt instruments, as well as
any increase or decrease in the Trading Partnership's cash (in each case,
excluding increases attributable to increases in capital contributed to the
Trading Partnership), plus (ii) any increase or decrease in the Net Asset
Value of the Trading Partnership resulting from trading gains or losses and
attributable to capital (a) contributed to the Trading Partnership or (b)
committed to the Trading Partnership by the Partnership pursuant to Section
6, shall be allocated between the General Partner and the Limited Partner,
in the case of (i) above, pro rata based on the relative capital
contributions to the Trading Partnership as of the close of business on the
last day of the immediately preceding month and, in the case of (ii) above,
pro rata based on the relative amounts set forth in (ii)(a) and (b) as of
the close of business on the last day of the immediately preceding month.
(2) The amount of any distributions to either Partner as of the end of
such month and any amount paid upon withdrawal of a portion of a Partner's
capital account as of the end of such month shall then be charged against
the capital account of such Partner.
(b) Allocation of Profit and Loss for Federal Income Tax Purposes. The
Trading Partnership's tax allocations shall be made as of the end of each year.
Items of profit and loss shall be allocated to the Partners in the same manner
as the financial allocations set forth in Section 7(a) hereof are effected.
The allocations of profit and loss to the Partners shall not exceed the
allocations permitted under Subchapter K of the Internal Revenue Code, as
amended, as determined by the General Partner, whose determination shall be
binding.
-5-
<PAGE>
(c) Expenses. The General Partner shall pay the Trading Partnership's
routine legal, accounting and administrative expenses, and none of the General
Partner's "overhead" expenses incurred in connection with the administration of
the Trading Partnership (including, but not limited to, salaries, rent and
travel expenses) will be charged to the Trading Partnership. All deductions of
the Trading Partnership, if any, attributable to such expenses shall be
specially allocated to the General Partner. 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 the Net Asset Value of interests in the
Trading Partnership for all purposes.
(d) Limited Liability of the Limited Partner. Any provisions of this
Limited Partnership Agreement to the contrary notwithstanding, except as
otherwise provided by law, the Limited Partner shall not be liable for Trading
Partnership obligations in excess of the capital contributed or committed by the
Limited Partner, plus its share of undistributed profits and assets, including
its obligation as required by law, under certain circumstances, to return to the
Trading Partnership distributions and returns of contributions.
The Limited Partner hereby agrees with the General Partner that, upon
written demand therefor by the General Partner, the Limited Partner will
promptly pay to the Trading Partnership all amounts which the Limited Partner
has committed to the Trading Partnership or its creditors under Section 16(e) of
the Limited Partner's Amended and Restated Limited Partnership Agreement or
under the Act.
(e) Return of Capital Contributions. Neither Partner shall have any
right to demand the return of its capital contribution or any profits added
thereto, except through withdrawal or upon termination and dissolution of the
Trading Partnership, in each case as provided herein. In no event shall either
Partner be entitled to demand or receive property other than cash.
8. Management.
The General Partner, to the exclusion of the Limited Partner, shall
control, conduct and manage the business of the Trading Partnership. The
Limited Partner shall not participate in the management, control, administration
or business of the
-6-
<PAGE>
Trading Partnership or use its name in the business or perform any actions
prohibited to limited partners under the laws of the State of Delaware or the
laws of any other jurisdiction where the Trading Partnership conducts business.
The Limited Partner shall have no power to represent, act for, sign for or bind
the General Partner or the Trading Partnership. The Limited Partner shall not be
entitled to any salary, draw or other compensation from the Trading Partnership
on account of their investment in the Trading Partnership. The General Partner
shall have sole discretion in determining what distributions of profits and
income, if any, shall be made to the Partners (subject to the allocation
provisions hereof) as described in the Limited Partner's Prospectus dated
_______, 1996 (the "Prospectus"), and to supervise the liquidation of the
Trading Partnership if an event causing termination of the Trading Partnership
occurs. In the event that the General Partner has been removed or becomes
bankrupt or insolvent, the Limited Partner may select a representative to
supervise the liquidation of the Trading Partnership.
The General Partner shall act in accordance with its undertakings and
obligations as set forth in Section 8(i) of the Limited Partner's Amended and
Restated Limited Partnership Agreement dated as of _________, 1996 and such
Section 8(i) is hereby incorporated by reference herein and made a part hereof
as appropriate with respect to the General Partner and the Trading Partnership.
The General Partner may in furtherance of the business of the Trading
Partnership cause the Trading Partnership to buy, sell, hold, or otherwise
acquire or dispose of commodities, futures contracts and options traded on
exchanges or otherwise, arbitrage positions, repurchase agreements, interest-
bearing securities, equity securities, deposit accounts and similar instruments
and other assets, or cause the Trading Partnership's trading to be limited to
only certain of the foregoing instruments. In addition, the General Partner on
behalf of the Trading Partnership will retain a Trading Advisor or Advisors to
make any or all trading and investment decisions regarding the Trading
Partnership to accomplish the effect described in the Prospectus.
The General Partner may commit to the management of the Trading Advisor
more assets than are actually held by the Trading Partnership; provided that the
total amount so committed may not exceed the consolidated assets of the Limited
Partner and the
-7-
<PAGE>
Trading Partnership; and provided further that the ratio between the trading
assets committed and the actual assets held in each of the Trading Partnership's
capital accounts must be equal.
The Trading Partnership shall make no loans, and the funds of the Trading
Partnership will not be commingled with the funds of any other person (deposit
of funds with a commodity broker or clearinghouse or entering into joint
ventures or partnerships shall not be deemed to constitute "commingling" for
these purposes). The maximum period covered by any contract entered into by the
Trading Partnership shall not exceed one year. Any agreements between the
Trading Partnership and the General Partner or any affiliate of the General
Partner shall be terminable by the Trading Partnership upon no more than 60
days' written notice.
The General Partner may take such actions on behalf of the Trading
Partnership as it deems necessary or desirable to manage the business of the
Trading Partnership. The Trading Partnership will not engage in "churning" of
its assets.
The General Partner is engaged, and may in the future engage, in other
business activities and, subject to Paragraphs 5 and 6 hereof, shall not be
required to refrain from any other activity nor forego any profits from any such
activity, including without limitation, whether as general partner, commodity
broker or advisor of additional partnerships for investment in the commodity
markets or otherwise and whether or not in competition with the Trading
Partnership.
Neither the Limited Partner nor the Trading Partnership may engage in any
activities or incur any obligations except as specifically contemplated under
their respective Limited Partnership Agreements as the same may be in effect
from time to time. The General Partner shall devote to the Trading Partnership
such time as it may deem advisable to conduct the Trading Partnership's
business and affairs.
No person dealing with the General Partner shall be required to determine
its authority to make any undertaking on behalf of the Trading Partnership, nor
to determine any fact or circumstance bearing upon the existence of its
authority.
It is the intention of the parties hereto that the Trading Partnership
function as a subsidiary of the Limited
-8-
<PAGE>
Partner in order to effectuate the Trading Partnership's purpose of serving as a
vehicle through which the Limited Partner trades in the futures, forward and
options markets. The limited partners of the Limited Partner may remove and
replace the General Partner as general partner of the Trading Partnership by a
majority vote of such limited partners.
9. Reports.
The Trading Partnership will use its best efforts to cause the Limited
Partner to receive within 90 days of the end of each fiscal year (but in no
event later than March 15 of each year) such tax information as is necessary for
the Limited Partner to transmit necessary tax information to investors in the
Limited Partner. The duly authorized representatives of each such investor may
inspect the Trading Partnership's books and records during normal business hours
upon reasonable written notice to the General Partner, for any just, reasonable
and non-commercial purpose. Copies of such records may be made upon payment of
reasonable reproduction costs.
The General Partner shall prepare or cause to be prepared and shall file
on or before the due date (or any extension thereof) any federal, state or local
tax returns required to be filed by the Trading Partnership. The General
Partner shall pay any taxes payable by the Trading Partnership; provided,
however, that such taxes need not be paid if the General Partner is in good
faith and by appropriate legal proceedings contesting the validity,
applicability or amount thereof and such contest does not materially endanger
any right or interest of the Trading Partnership.
10. Non-Assignability of Limited Partnership Interest.
The Limited Partner expressly agrees that it will not assign, transfer or
dispose of, by gift or otherwise, any of its interest in the Trading Partnership
or any part or all of its right, title and interest in the capital or profits of
the Trading Partnership without the consent of the General Partner, which
consent may be withheld in the General Partner's sole discretion.
No limited partner other than the Limited Partner may be admitted to the
Trading Partnership.
-9-
<PAGE>
11. Withdrawals of Capital; Distributions.
(a) Withdrawals of Capital. Partners may withdraw capital as of the last
day of each month. Payment will be made within ten business days after the
effective date of withdrawal, except that under special circumstances,
including, but not limited to, inability to liquidate commodity positions as of
a withdrawal date or default or delay in payments due the Trading Partnership
from commodity brokers, banks or other persons, the Trading Partnership may in
turn delay payment to Partners of the proportionate part of any proposed
withdrawal equal to that proportionate part of the Trading Partnership's
aggregate Net Asset Value represented by the sums which are the subject of such
default or delay.
(b) Distributions. The General Partner in its sole discretion may from
time to time make distributions to the Partners provided that no distribution
shall cause a deficit balance in any Partner's capital account.
12. Withdrawal of a Partner.
The Trading Partnership shall terminate and be dissolved upon the
withdrawal, dissolution, admitted or court-decreed insolvency or the removal of
the General Partner. The General Partner may withdraw from the Trading
Partnership, without any breach of this Limited Partnership Agreement, at any
time.
If the General Partner ceases to be general partner of the Limited Partner,
the General Partner shall ipso facto cease to be General Partner of the Trading
Partnership.
13. 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 Trading
Partnership or to the Limited Partner for any loss suffered by the Trading
Partnership which arises out of any action or inaction of the General Partner or
its Affiliates if the General Partner, or its Affiliates, in good faith,
determined that such course of conduct was in the best interests of the Trading
Partnership and such course of conduct did not constitute negligence or
misconduct of the General Partner or its Affiliates.
-10-
<PAGE>
(b) Indemnification of the General Partner by the Trading Partnership.
The General Partner, and its Affiliates shall be indemnified by the Trading
Partnership against any losses, judgments, liabilities, expenses and amounts
paid in settlement of any claims sustained by them in connection with the
Trading Partnership; provided that the same were not the result of negligence or
misconduct on the part of the General Partner or its Affiliates; and provided
further that Affiliates 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 the above, the General Partner and its Affiliates 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, 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 applicable regulatory
authority with respect to the issue of indemnification for securities law
violations.
The Trading Partnership shall not incur the cost of that portion of any
insurance, other than public liability insurance, which insures any party
against any liability the indemnification of which is herein prohibited.
For the purposes of this Paragraph 13, the term "Affiliates" shall mean any
person performing services on behalf of the Trading Partnership who: (1)
directly or indirectly controls, is controlled by, or is under common control
with the
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<PAGE>
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 Trading Partnership funds to the General Partner and its
Affiliates for legal expenses and other costs incurred as a result of any legal
action initiated against the General Partner by the Limited Partner are
prohibited.
Advances from Trading Partnership funds to the General Partner and its
Affiliates for legal expenses and other costs incurred as a result of a legal
action will be made only if the following three conditions are satisfied: (1)
the legal action relates to the performance of duties or services by the General
Partner or its Affiliates on behalf of the Trading Partnership; (2) the legal
action is initiated by a third party who is not the Limited Partner; and (3) the
General Partner or its Affiliates undertake to repay the advanced funds to the
Trading Partnership in cases in which they would not be entitled to
indemnification under the first paragraph of this Section 13(b).
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
"Guidelines for the Registration of Commodity Pool Programs" promulgated by the
North American Securities Administrators Association, Inc. as in effect on the
date of this Limited Partnership Agreement.
In no event shall any indemnification permitted by this Section 13(b) be
made by the Trading Partnership unless all provisions of this Section for the
payment of indemnification have been complied with in all respects.
Furthermore, it shall be a precondition of any such indemnification that the
Trading Partnership receive a determination of 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 Trading Partnership hereunder shall be made only as provided in
the specific case.
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<PAGE>
In no event shall any indemnification obligations of the Trading
Partnership under this Section 13(b) subject the Limited Partner to any
liability in excess of that contemplated by Section 7(d) hereof.
The General Partner shall indemnify and hold the Trading Partnership
harmless from all loss or expense which the Trading Partnership may incur
(including, without limitation, any indemnity payments) as a result of the
differences between Merrill Lynch Asset Management, L.P.'s standard of liability
under the Investment Advisory Contract the General Partner's standard of
liability as set forth herein.
14. Governing Law.
The validity and construction of this Limited Partnership Agreement shall
be determined and governed by the laws of the State of Delaware.
15. Miscellaneous.
(a) 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.
(b) Binding Effect. This Limited Partnership Agreement shall inure to
and be binding upon all of the parties, their successors and assigns.
(c) Certification of Facts. Any person dealing with the Trading
Partnership or the General Partner may rely upon a certificate signed by the
General Partner as to: (i) the existence or nonexistence of any fact or facts
which constitute a condition precedent to acts by the General Partner or which
are in any other manner germane to the affairs of the Trading Partnership; (ii)
the persons who are authorized to execute and deliver any instrument or document
of the Trading Partnership; or (iii) any act or failure to act by the Trading
Partnership or as to any other matter whatever involving the Trading Partnership
or either Partner.
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<PAGE>
(d) Qualified Income Offset. If either Partner unexpectedly receives any
adjustments, allocations or distributions described in Treasury Regulation
Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Trading Partnership income
and gain shall be specially allocated to such Partner, before any other
allocation of Trading Partnership items for such year is made, in an amount and
manner sufficient to eliminate a deficit in its capital account created by such
adjustments, allocations or distributions as quickly as possible. This Section
is intended to constitute a "qualified income offset" within the meaning of
Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3).
(e) 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.
IN WITNESS WHEREOF, the parties hereto have executed this Limited
Partnership Agreement as of the day and year first above written.
General Partner: Limited Partner:
MERRILL LYNCH INVESTMENT ML PRINCIPAL PROTECTION L.P.
PARTNERS INC.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.
By:___________________________ General Partner
James M. Bernard
Vice President
By:___________________________
James M. Bernard
Vice President
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<PAGE>
Exhibit 5.01 (a)
[LETTERHEAD OF SIDLEY & AUSTIN]
July 3, 1996
Merrill Lynch Investment Partners Inc.,
General Partner (the "General Partner")
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.
1,000,000 UNITS OF LIMITED PARTNERSHIP INTEREST (THE "UNITS")
Dear Sir or Madam:
We refer to the Registration Statement on Form S-1, 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 July 3,
1996, which also relates to and constitutes Post-Effective Amendment No. 5 to
the Registration Statement on Form S-1 declared effective on July 14, 1994
(Registration No. 33-73914).
We are familiar with the proceedings to date with respect to the
proposed issuance and sale of the Units and have examined such records,
documents and questions of law, and satisfied ourselves as to such matters of
fact, as we have considered relevant and necessary as a basis for this opinion.
For purposes of rendering this opinion, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
originals of all documents submitted to us as certified or photostatic copies,
and the authenticity of the original of such copies.
Based on the foregoing, we are of the opinion that:
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").
<PAGE>
SIDLEY & AUSTIN CHICAGO
Merrill Lynch Investment Partners, Inc.
April 22, 1996
Page 2
2. The General Partner has taken all corporate action required to be
taken by it to authorize the issuance and sale of Units to the Limited Partners
and to authorize the admission to the Partnership of the 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 the Subscribers as limited partners of the Partnership to the
Partnership, (iii) the payment of each Subscriber to the Partnership of the full
consideration due from it for the Units subscribed to by it, (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 (it is our
opinion that acting in accordance with the Limited Partnership Agreement
included as Exhibit A to the Prospectus included in the Registration Statement
will not cause the Subscribers to be deemed to participate in the control of the
business of the Partnership), (v) that the Units are offered and sold as
described in the Registration Statement and the Limited Partnership Agreement,
and (vi) 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 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, and in acquiring which the
Subscribers will become limited partners of the Partnership, and 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).
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.
In giving this opinion, except as to paragraph 2 above, we have relied
exclusively on the opinion dated on or about July 3, 1996 of Messrs. Richards,
Layton & Finger, Wilmington, Delaware, a copy of which is attached hereto, which
is limited to the laws of the state of Delaware. With respect to paragraph 2
above, our opinion is limited to the general corporation laws of the state of
Delaware.
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. We hereby authorize Messrs. Richards, Layton
& Finger to rely on paragraph 2 of our opinion.
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
Exhibit 5.01(b)
[LETTERHEAD OF RICHARDS, LAYTON & FINGER]
July 3, 1996
Sidley & Austin
One First National Plaza
Chicago, IL 60603
Re: ML Principal Protection L.P. and
ML Principal Protection Trading L.P.
------------------------------------
Gentlemen:
We have acted as special Delaware counsel for ML Principal Protection L.P., a
Delaware limited partnership (the "Partnership"), and ML Principal Protection
Trading L.P., a Delaware limited partnership (the "Trading Partnership"), in
connection with the matters set forth herein. At your request, this opinion is
being furnished to you.
For purposes of giving the opinions hereinafter set forth, our examination of
documents has been limited to the examination of executed or conformed
counterparts, or copies otherwise proved to our satisfaction, of the following:
<PAGE>
Sidley & Austin
July 3, 1996
Page 2
(a) The Certificate of Limited Partnership of the Partnership (which was
originally named "The SECTOR Strategy Fund/SM/ VII L.P."), dated as of January
3, 1994, as filed in the office of the Secretary of State of the State of
Delaware (the "Secretary of State") on January 3, 1994;
(b) The Amended and Restated Certificate of Limited Partnership of the
Partnership, dated as of May 11, 1994, as filed in the office of the Secretary
of State on May 13, 1994;
(c) The Certificate of Amendment to the Certificate of Limited Partnership of
the Partnership (whose name was changed thereby to "ML SECTOR Plus L.P."), dated
as of May 26, 1994, as filed in the office of the Secretary of State on May 26,
1994;
(d) The Amended and Restated Certificate of Limited Partnership of the
Partnership (whose name was changed thereby to "ML Principal Protection Plus
L.P."), dated as of June 6, 1994, as filed in the office of the Secretary of
State on June 7, 1994;
(e) The Amended and Restated Certificate of Limited Partnership of the
Partnership, dated as of July 27, 1995, as filed in the office of the Secretary
of State on July 27, 1995;
(f) The Amended and Restated Certificate of Limited Partnership of the
Partnership (whose name was changed thereby to "ML Principal Protection L.P."),
<PAGE>
Sidley & Austin
July 3, 1996
Page 3
dated as of July 1, 1996, as filed in the office of the Secretary of State on
July 1, 1996 (the "Certificate");
(g) The Limited Partnership Agreement of the Partnership, dated as of January
3, 1994;
(h) The Amended and Restated Limited Partnership Agreement of the
Partnership, dated as of October 1, 1994 (the "Original Agreement");
(i) The Amendment to the Original Agreement, dated as of July 26, 1995;
(j) The Second Amended and Restated Limited Partnership Agreement of the
Partnership, dated as of December 1, 1995;
(k) The Certificate of Limited Partnership of the Trading Partnership (which
was originally named "ML SECTOR Plus Trading L.P."), dated as of May 26, 1994,
as filed in the office of the Secretary of State on May 26, 1994;
(l) The Amended and Restated Certificate of Limited Partnership of the
Trading Partnership (whose name was changed thereby to "ML Principal Protection
Plus Trading L.P."), dated as of June 6, 1994, as filed in the office of the
Secretary of State on June 7, 1994;
(m) The Amended and Restated Certificate of Limited Partnership of the
Trading Partnership, dated as of October 9, 1995, as filed in the office of the
Secretary of State on October 10, 1995;
<PAGE>
Sidley & Austin
July 3, 1996
Page 4
(n) The Amended and Restated Certificate of Limited Partnership of the
Trading Partnership (whose name was changed thereby to "ML Principal Protection
Trading L.P."), dated as of July 1, 1996, as filed in the office of the
Secretary of State on July 1, 1996 (the "Trading Partnership Certificate");
(o) The Agreement of Limited Partnership of the Trading Partnership, dated as
of May 26, 1994;
(p) The Amended and Restated Limited Partnership Agreement of the Trading
Partnership, dated as of October 1, 1994 (the "Original Trading Partnership
Agreement");
(q) The Amendment to the Original Trading Partnership Agreement, dated as of
July 26, 1995;
(r) The Second Amended and Restated Limited Partnership Agreement of the
Trading Partnership, dated as of July 3, 1996 (the "Trading Partnership
Agreement");
(s) A registration statement (the "Initial Registration Statement") on Form
S-1 (Registration No. 33-73914), filed by the Partnership with the Securities
and Exchange Commission (the "SEC") on January 7, 1994, as amended by Amendment
No. 1 to the Initial Registration Statement, filed by the Partnership and the
Trading Partnership with the SEC on June 14, 1994 ("Amendment No. 1"), Amendment
No. 2 (First Post-Effective) to the Initial Registration Statement, filed by the
Partnership and the Trading Partnership with the SEC on March 24, 1995
("Amendment No. 2"),
<PAGE>
Sidley & Austin
July 3, 1996
Page 5
Amendment No. 3 (Second Post-Effective) to the Initial Registration Statement,
filed by the Partnership and the Trading Partnership with the SEC on December 8,
1995 ("Amendment No. 3"), Post-Effective Amendment No. 3 to the Initial
Registration Statement, filed by the Partnership and the Trading Partnership
with the SEC on January 25, 1996 ("Post-Effective Amendment No. 3"), Post-
Effective Amendment No. 4 to the Initial Registration Statement, filed by the
Partnership and the Trading Partnership with the SEC on April 4, 1996 ("Post-
Effective Amendment No. 4"), and a registration statement on Form S-1 (Post-
Effective Amendment No. 5 to the Initial Registration Statement, pursuant to
Rule 429), including a related prospectus (the "Prospectus"), to be filed by the
Partnership and the Trading Partnership with the SEC on or about July 3, 1996
("Post-Effective Amendment No. 5") (the Initial Registration Statement as
amended by Amendment No. 1, Amendment No. 2, Amendment No. 3, Post-Effective
Amendment No. 3, Post-Effective Amendment No. 4 and Post Effective Amendment No.
5 being hereinafter referred to as the "Registration Statement");
(t) A form of Third Amended and Restated Limited Partnership Agreement of the
Partnership (the "Agreement"), attached to the Prospectus as Exhibit "A";
(u) A form of Subscription Agreement and Power of Attorney, including a
Subscription Agreement and Power of Attorney Signature Page of the Partnership
(the "Subscription Agreement"), attached to the Prospectus as Exhibit "D";
<PAGE>
Sidley & Austin
July 3, 1996
Page 6
(v) A Certificate of Good Standing for the Partnership, dated July 3, 1996,
obtained from the Secretary of State; and
(w) A Certificate of Good Standing for the Trading Partnership, dated July
3, 1996, obtained from the Secretary of State.
Initially capitalized terms used herein and not otherwise defined are used
as defined in the Agreement.
For purposes of this opinion, we have not reviewed any documents other than
the documents listed above, and we have assumed that there exists no provision
in any document not listed above that bears upon or is inconsistent with the
opinions stated herein. We have conducted no independent factual investigation
of our own, but rather have relied solely upon the foregoing documents, the
statements and information set forth therein and the additional matters recited
or assumed herein, all of which we have assumed to be true, complete and
accurate in all material respects.
With respect to all documents examined by us, we have assumed that (i) all
signatures on documents examined by us are genuine, (ii) all documents submitted
to us as originals are authentic, and (iii) all documents submitted to us as
copies conform with the original copies of those documents.
For purposes of this opinion, we have assumed (i) the due authorization,
execution and delivery by all parties thereto of all documents examined by us,
including, without limitation, the Agreement by each partner of the Partnership,
the
<PAGE>
Sidley & Austin
July 3, 1996
Page 7
Certificate by the General Partner, the Subscription Agreement by each Limited
Partner (as defined below), the Trading Partnership Agreement by each partner of
the Trading Partnership and the Trading Partnership Certificate by the general
partner of the Trading Partnership, (ii) that any amendment or restatement of
any document reviewed by us has been accomplished in accordance with, and was
permitted by, the relevant provisions of said document prior to its amendment
and restatement from time to time, (iii) that after the issuance and sale of
units of limited partner interest of the Partnership (the "Units") under the
Registration Statement and the Agreement, the dollar amount of the Units issued
by the Partnership will equal or exceed the minimum, and the dollar amount of
the Units issued and reserved for issuance by the Partnership will not exceed
the maximum, dollar amount of the Units which may be issued by the Partnership
under the Registration Statement and the Agreement, (iv) that each of the
Agreement and the Trading Partnership Agreement constitutes the entire agreement
among the parties thereto with respect to the subject matter thereof, including
with respect to the admission of partners to, and the creation, operation and
termination of, the Partnership and the Trading Partnership, respectively, and
that the Agreement, the Trading Partnership Agreement, the Certificate and the
Trading Partnership Certificate are in full force and effect, have not been
amended and no amendment of the Agreement, the Trading Partnership Agreement,
the Certificate or the Trading Partnership Certificate is pending or has been
proposed, and (v) except for the due formation and valid existence
<PAGE>
Sidley & Austin
July 3, 1996
Page 8
in good standing of the Partnership and the Trading Partnership as limited
partnerships under the Delaware Revised Uniform Limited Partnership Act (6
Del.C. (S)17-101, et seq.) (the "Act"), the due organization or due formation,
as the case may be, and valid existence in good standing of each party to the
documents examined by us under the laws of the jurisdiction governing its
organization or formation and the capacity of persons and entities who are
parties to the documents examined by us. Insofar as the opinions expressed
herein relate to the Units and persons and entities to be admitted to the
Partnership as limited partners of the Partnership in connection with the
Registration Statement (the "Limited Partners"), the opinions expressed herein
relate solely to the Limited Partners to be admitted to the Partnership, and the
Units to be issued in connection with the Registration Statement. We have not
participated in the preparation of the Registration Statement and assume no
responsibility for its contents.
This opinion is limited to the laws of the State of Delaware (excluding the
securities laws of the State of Delaware), and we have not considered and
express no opinion on the laws of any other jurisdiction, including federal laws
and rules and regulations relating thereto. Our opinions are rendered only with
respect to Delaware laws and rules, regulations and orders thereunder which are
currently in effect.
Based upon the foregoing, and upon our examination of such questions of law
and statutes of the State of Delaware as we have considered necessary or
appropriate,
<PAGE>
Sidley & Austin
July 3, 1996
Page 9
and subject to the assumptions, qualifications, limitations and exceptions set
forth herein, we are of the opinion that:
1. The Partnership has been duly formed and is validly existing in good
standing as a limited partnership under the Act.
2. The Trading Partnership has been duly formed and is validly existing in
good standing as a limited partnership under the Act.
3. Assuming (i) that the General Partner has taken all corporate action
required to be taken by it to authorize the issuance and sale of Units to the
Limited Partners and to authorize the admission to the Partnership of the
Limited Partners as limited partners of the Partnership, (ii) the due
authorization, execution and delivery to the General Partner of a Subscription
Agreement by each subscriber for Units (the "Subscribers"), (iii) the due
acceptance by the General Partner of each Subscription Agreement and the due
acceptance by the General Partner of the admission of the Subscribers as limited
partners of the Partnership to the Partnership, (iv) the payment by each
Subscriber to the Partnership of the full consideration due from it for the
Units subscribed to by it, (v) the due authorization, execution and delivery by
all parties thereto, including the Subscribers as limited partners of the
Partnership, of the Agreement, (vi) that the books and records of the
Partnership set forth all information required by the Agreement and the Act,
including all information with respect to all persons and entities to be
admitted as Partners and their contributions to the
<PAGE>
Sidley & Austin
July 3, 1996
Page 10
Partnership, (vii) that the Subscribers, as limited partners of the Partnership,
do not participate in the control of the business of the Partnership, and (viii)
that the Units are offered and sold as described in the Registration Statement
and the Agreement, the Units to be issued to the Subscribers will represent
valid limited partner interests in the Partnership and, subject to the
qualifications set forth herein, 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 Agreement and their share of the
Partnership's assets and undistributed profits (subject to the obligation of a
Limited Partner to repay any funds wrongfully distributed to it).
4. There are no provisions in the Agreement the inclusion of which,
subject to the terms and conditions set forth 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.
We understand that you will rely as to matters of Delaware law upon this
opinion in connection with an opinion to be submitted by you to the Partnership
and the Trading Partnership and filed by them with the SEC as an exhibit to the
Registration Statement in connection with the filing by the Partnership and the
Trading Partnership of the Registration Statement under the Securities Act of
1933, as amended. In
<PAGE>
Sidley & Austin
July 3, 1996
Page 11
connection with such opinion, we hereby consent to your relying as to matters of
Delaware law upon this opinion. This opinion is rendered solely for your benefit
in connection with the foregoing. We hereby consent to the use of this opinion
as an exhibit to the Registration Statement and to the use of our name under the
heading "Legal Matters" in the Prospectus. In giving the foregoing consent, we
do not thereby admit that we are in the category of persons whose consent is
required under Section 7 of the Securities Act of 1933 or the rules and
regulations of the SEC thereunder. Except as stated above, without our prior
consent, this opinion may not be furnished or quoted to, or relied upon by, any
other person or entity for any purpose.
Very truly yours,
/s/ RICHARDS, LAYTON & FINGER
MIL/DAF/sc
<PAGE>
EXHIBIT 8.01
July 3, 1996
Merrill Lynch Investment Partners Inc.
General Partner of
ML Principal Protection L.P.
Merrill Lynch World Headquarters
South Tower, 6th Floor
World Financial Center
New York, New York 10080-6106
Re: Registration Statement on Form S-1
----------------------------------
Dear Sir or Madam:
We refer to the Registration Statement on Form S-1, 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 July 3,
1996, which also relates to and constitutes Post-Effective Amendment No. 5 to
the Registration Statement on Form S-1 declared effective on July 14, 1994
(Registration No. 33-73914).
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 (the "Prospectus")
constituting a part of the Registration Statement 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 Investment Partners Inc. makes a
capital contribution to each of the Partnership and the Trading Partnership in
at least the amount contemplated by the Prospectus); and (ii) based upon the
contemplated trading activities of the Trading Partnership, the Trading
Partnership should be treated as engaged in the conduct of a trade or business
for federal income tax purposes, and, as a result, the ordinary and necessary
business expenses incurred by the Trading Partnership in conducting its
commodity futures
<PAGE>
Merrill Lynch Investment Partners Inc.
July 3, 1996
Page 2
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.
We also advise you that in our opinion the description set forth under
the caption "Federal Income Tax Consequences" in the Prospectus correctly
describes (subject to the uncertainties referred to therein) the material
aspects of the federal income tax treatment to United States investors, as of
the date hereof, of an investment in the Partnership.
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
EXHIBIT 10.01
FORM
OF
--
ADVISORY AGREEMENT
------------------
AMONG
ML PRINCIPAL PROTECTION L.P.
ML PRINCIPAL PROTECTION TRADING L.P.
MERRILL LYNCH INVESTMENT PARTNERS INC.
AND
[TRADING ADVISOR]
Dated as of ________, 1996
<PAGE>
ML PRINCIPAL PROTECTION L.P.
FORM OF ADVISORY AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<C> <S> <C>
1. Undertakings in Connection with Offering
of Units.......................................................................... 2
a. Undertakings by the Parent and the
General Partner.............................................................. 2
b. Undertakings by the Trading Advisor............................................ 2
c. Withdrawal of Prospectus; Termination
of Offering; Termination of
Agreement Prior to Initial Closing........................................... 3
d. Use of Prospectus and Other
Solicitation Material........................................................ 3
e. Updated Performance Information................................................ 3
f. Access to Books and Records.................................................... 4
2. Duties of the Trading Advisor....................................................... 4
a. Speculative Trading............................................................ 4
b. List of Commodity Interests Traded
by the Trading Advisor....................................................... 5
c. Investment of Assets Held in
Securities and Cash.......................................................... 5
d. Trading Authorization.......................................................... 6
e. Delivery of Disclosure Documents............................................... 6
3. Trading Advisor Independent......................................................... 6
4. Commodity Broker; Floor Brokers;
F/X Desk.......................................................................... 6
5. Allocation of Trading Partnership Assets to Trading
Advisor........................................................................... 7
6. Profit Share........................................................................ 8
7. Term and Termination................................................................ 9
a. Term and Renewal............................................................... 9
b. Termination.................................................................... 9
</TABLE>
-i-
<PAGE>
Page
----
8. Right to Advise Others; Uniformity
of Acts and Practices........................................... 9
9. Speculative Position Limits....................................... 11
10. Additional Undertakings by the
Trading Advisor................................................. 11
11. Representations and Warranties.................................... 11
12. Entire Agreement.................................................. 12
13. Standard of Liability; Indemnification............................ 12
14. Assignment........................................................ 14
15. Amendment; Waiver................................................. 14
16. Severability...................................................... 14
17. Notices........................................................... 15
18. Governing Law..................................................... 15
19. Consent to Jurisdiction........................................... 15
20. Remedies.......................................................... 16
21. Promotional Material.............................................. 16
22. Confidentiality................................................... 16
23. Survival.......................................................... 16
24. Counterparts...................................................... 17
25. Headings.......................................................... 17
Appendix A - Commodity Interests
Traded by Trading Advisor................................ 19
Appendix B - Commodity Trading Authority.............................. 20
-ii-
<PAGE>
<TABLE>
<S> <C>
Page
----
Appendix C - Acknowledgement of Receipt of
Disclosure Document.................................... 21
Appendix D - Committed Funds Letter................................. 22
</TABLE>
-iii-
<PAGE>
ADVISORY AGREEMENT
THIS ADVISORY AGREEMENT (the "Agreement"), made as of this ______ day of
_______, 1996, among ML PRINCIPAL PROTECTION TRADING L.P., a Delaware limited
partnership (the "Trading Partnership"; formerly, ML Principal Protection Plus
Trading L.P.), ML PRINCIPAL PROTECTION L.P. (the "Parent"; formerly, ML
Principal Protection Plus L.P.), MERRILL LYNCH INVESTMENT PARTNERS INC., a
Delaware corporation (the "General Partner"; formerly ML Futures Investment
Partners Inc.), and _____________________, a __________ corporation (the
"Trading Advisor");
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Trading Partnership trades buys, sells or otherwise acquires,
holds or disposes of forward contracts, futures contracts for commodities,
financial instruments and currencies on United States and foreign exchanges, any
rights pertaining thereto and any options thereon or on physical commodities
and engages from time to time in all manner of activities incident thereto (the
foregoing forms of investment being collectively referred to herein as
"commodity interests");
WHEREAS, the General Partner is the general partner of the Trading
Partnership and the Parent is the sole limited partner of the Trading
Partnership;
WHEREAS, the Parent is continuously offering its Units of Limited
Partnership Interests ("Units") for sale to investors in an offering registered
with the Securities and Exchange Commission ("SEC") under the Securities Act of
1933, as amended (the "1933 Act") and SEC Rule 415 thereunder, as described in
the prospectus and registration statement filed with the SEC under the 1933 Act,
which also constitutes a disclosure document that has been filed with the
Commodity Futures Trading Commission (the "CFTC") and the National Futures
Association (the "NFA") pursuant to the Commodity Exchange Act, as amended (the
"CEA"), the commodity pool operators and commodity trading advisors regulations
promulgated under the CEA by the CFTC (the "Commodity Regulations"), and NFA
rules promulgated under the CEA (the "NFA Rules") (said prospectuses,
registration statements and disclosure documents as further amended and
supplemented from time to time by the Trading Partnership, including further
amendments, supplements and additional prospectuses, registration statements and
disclosure documents necessary to offer and sell Units as of
<PAGE>
the beginning of each calendar quarter beginning October 1, 1996 under the 1933
Act, the CEA, the Commodity Regulations, the NFA Rules or otherwise, shall
hereinafter be referred to as the "Prospectus");
WHEREAS, the Parent uses a substantial portion of the proceeds of the sale
of each series of the Units to make a capital contribution to the Trading
Partnership attributable to such series, which the Trading Partnership employs
in speculative futures and forward trading;
WHEREAS, the Parent agreed (as set forth in Section 16(e) of its Third
Amended and Restated Limited Partnership Agreement which is Exhibit A of the
Prospectus) to be liable for all debts incurred by the Trading Partnership in an
amount not to exceed the difference between the equity in the Trading
Partnership and the amount of assets committed to the Trading Partnership's
trading advisors, including the Trading Advisor, for management.
WHEREAS, the Trading Advisor is engaged in the business of, among other
things, making trading decisions on behalf of in vestors in the purchase and
sale of certain commodity interests; and
WHEREAS, the Parent and the Trading Partnership desire the Trading Advisor,
upon the terms and conditions set forth herein, to act as a trading advisor for
the Trading Partnership and to make commodity interests investment decisions for
the Trading Partnership with respect to the Trading Partnership's assets
allocated to the Trading Advisor, and the Trading Advisor desires to so act;
NOW, THEREFORE, the parties hereto do hereby agree as follows:
1. Undertakings in Connection with Offering of Units
-------------------------------------------------
(a) Undertakings by the Parent and the General Partner. The Parent and
the General Partner agree to use their best efforts: (i) to complete the
preparation of the amended Prospectus, to file the amended Prospectus with the
SEC as required by the 1933 Act and with the CFTC and NFA as the disclosure
document required by Section 4.21 of the Commodity
-2-
<PAGE>
Regulations and the NFA Rules, and when it is necessary or desirable to amend or
supplement the amended Prospectus, to prepare such further amendments and
supplements and file the same with the SEC, CFTC and NFA; and (ii) to take
action at any time and from time to time to qualify by registration or exemption
from registration the Units for offer and sale under the securities and Blue Sky
laws of such jurisdictions as the General Partner deems necessary or desirable.
(b) Undertakings by the Trading Advisor. The Trading Advisor agrees to
use its best efforts to cooperate with the Parent and the General Partner in
effecting the registration and continuous offering of the Units as contemplated
by Section 1(a) above, including without limitation by providing, as promptly as
may be reasonably practicable, all information regarding the Trading Advisor and
its principals which the General Partner reasonably believes to be necessary or
advisable to include in the Prospectus, as the same may be amended from time to
time.
The Trading Advisor has made an investment in the Parent in the amount of
100 Series A Units. The Trading Advisor agrees not to redeem its investment as
long as the Trading Advisor continues to manage assets for the Trading
Partnership.
As used in this Agreement, the term "principal" shall have the same meaning
given to such term in Section 4.10(e) of the Commodity Regulations, and the term
"affiliate" shall mean an individual or entity (including a stockholder,
director, officer, employee, agent, or principal) that directly or indirectly
controls, is controlled by, or is under common control with any other
individual or entity.
(c) Withdrawal of Prospectus; Termination of Offering; Termination of
Agreement Prior to Initial Closing. Notwithstanding any provision of this
Agreement to the contrary, the General Partner or the Parent at any time, in its
sole discretion, may: (i) notify the Trading Advisor that the Parent shall have
determined that it is not advisable to have the Trading Advisor manage any
portion of the Parent's or the Trading Partnership's assets, in which case this
Agreement shall terminate as provided in Section 7(b) without any further
obligation of any party hereunder (other than to settle any outstanding
accounts); (ii) withdraw the Prospectus from the SEC, CFTC and NFA or any
applications or other documents filed with the authorities of any
-3-
<PAGE>
jurisdiction to qualify by registration or exemption from registration the
Units for offer and sale under the securities or Blue Sky law of such
jurisdiction; (iii) terminate the registration or exemption from registration,
or qualification of Units with any of such agencies or authorities; or (iv)
discontinue the offering of the Units.
(d) Use of Prospectus and Other Solicitation Material. Neither the Trading
Advisor, its principals nor any of its employees, affiliates or agents, the
employees, affiliates or agents of such affiliates, or their respective
successors or assigns shall use, publish, circulate or distribute the Prospec-
tus (including any amendment or supplement thereto) or any related solicitation
material nor shall any of the foregoing engage in any marketing, sales or
promotional activities in connection with the offering of Units, except as may
be requested by the General Partner and agreed to by the Trading Advisor.
(e) Updated Performance Information. While the continuous offering of the
Units is in progress, at the written request of the Parent or the General
Partner or as otherwise required under this Agreement in order for the Parent to
prepare an amendment or supplement to the Prospectus pursuant to the 1933 Act,
the Commodity Regulations and/or NFA Rules, the Trading Advisor, at its own
expense, shall promptly provide the Parent and the General Partner with: (i)
Performance summaries reflecting the actual performance, on a monthly basis, of
the accounts directed by the Trading Advisor up to the latest practicable date
(consistent with Section 4.35(a) of the Commodity Regulations) prior to the date
of the Prospectus as amended or supplemented, together with any reports or
letters relating to such performance data received from accountants and in the
possession of the Trading Advisor; and (ii) a letter from the Trading Advisor
addressed to the Parent and in form and substance satisfactory to the Parent and
its counsel, containing representations by the Trading Advisor that, except as
otherwise disclosed in the table(s) described in Section l(e)(i) and the
explanations and footnotes thereto, the actual performance of all accounts
directed by the Trading Advisor and its principals during the period of time
covered by the table(s) and that such performance data and the explanations and
footnotes thereto are fairly presented and are true, correct and complete in all
material respects.
-4-
<PAGE>
(f) Access to Books and Records. Upon reasonable notice to the Trading
Advisor, the Parent or the General Partner shall have the right to have access
to the Trading Advisor's offices in order to inspect and copy such books and
records during normal business hours as may enable them to verify the accuracy
and completeness of or to supplement as necessary the data furnished by the
Trading Advisor pursuant to Section l(e) of this Agreement or to verify
compliance with the terms of this Agreement (subject to such restrictions as the
Trading Advisor may reasonably deem necessary or advisable so as to preserve the
confidentiality of proprietary information concerning such trading systems,
methods, models, strategies and formulas and of the identity of the Trading
Advisor's clients).
2. Duties of the Trading Advisor
-----------------------------
(a) Speculative Trading. The Trading Advisor shall act as a trading
advisor for the Trading Partnership, acting independently from any other
advisors or managers selected to direct accounts on behalf of the Trading
Partnership, and pursuant to the trading strategies described in the Disclosure
Document provided by the Trading Advisor to the General Partner as the same may
be developed and modified over time (the "Disclosure Document"). The Trading
Advisor may trade a different portfolio in managing the Trading Partnership's
account only with the consent of the General Partner. Except as provided
otherwise in this Section 2, the Trading Advisor shall have sole and exclusive
authority and responsibility for directing the investment and reinvestment of
the Trading Partnership's assets allocated to the Trading Advisor utilizing the
designated trading program pursuant to and in accordance with the Trading
Advisor's best judgment and its approach as described in the Disclosure
Document and as refined and modified from time to time in the future in
accordance herewith, for the period and on the terms and conditions set forth
herein and as described in the Prospectus and the Third Amended and Restated
Limited Partnership Agreement of the Trading Partnership (the "Limited
Partnership Agreement"). Notwithstanding the foregoing, the Trading Partnership
or the General Partner may override the trading instructions of the Trading
Advisor to the extent necessary: (i) to fund any distributions or redemptions of
Units to be made by the Parent; (ii) to pay any Parent or Trading Partnership
expenses; (iii) to deleverage the Trading Partnership's trading in order to
provide the "principal protection" feature of the
-5-
<PAGE>
Trading Partnership without requiring Merrill Lynch & Co., Inc. to make any
payments under its Guarantee, as described in the Prospectus; and/or (iv) to
comply with speculative position limits; provided that the Parent and the
General Partner shall permit the Trading Advisor three days in which to
liquidate positions for the purposes set forth in clauses (i)-(ii) prior to
exercising its override authority. The Trading Advisor will have no liability
for the results of any of the General Partner's interventions in (i)-(iv),
above.
The Parent, the Trading Partnership and the General Partner each
specifically acknowledge that in agreeing to manage an account for the Trading
Partnership the Trading Advisor is in no respects making any guarantee of
profits or of protections against loss.
The Trading Advisor shall give the Parent prompt written notice of any
proposed material change in the Trading Advisor's trading approach or the manner
in which trading decisions are to be made or implemented and shall not make any
such proposed change with respect to trading for the Trading Partnership without
having given the Parent and the General Partner at least 30 days' prior written
notice of such change. The addition and/or deletion of commodity interests from
the Trading Partnership's portfolio managed by the Trading Advisor shall not be
deemed a change in the Trading Advisor's trading approach and prior written
notice to the Trading Partnership or the General Partner shall not be required
therefor, except as set forth in section 2(b) below; provided that, with respect
to the Trading Partnership, the Trading Advisor may only utilize a trading
program other than that described in the Prospectus as traded on behalf of the
Trading Partnership with the consent of the General Partner.
(b) List of Commodity Interests Traded by the Trading Advisor. The Trading
Advisor shall provide the Parent and the General Partner with a complete list of
commodity interests which it intends to trade on the Trading Partnership's
behalf. All commodity interests other than regulated futures contracts and
options on regulated futures contracts traded on a qualified
board or exchange in the United States shall be listed on Appendix A to this
Agreement. The addition of commodity interests (other than forward contracts on
foreign currencies) to the Trading Partnership's portfolio managed by the
Trading
-6-
<PAGE>
Advisor as set forth in Appendix A to this Agreement shall require prior
written notice to the Parent or the General Partner and an amendment to Appendix
A.
(c) Investment of Assets Held in Securities and Cash. Notwithstanding any
provision of this Agreement to the contrary, the Parent and the General Partner,
and not the Trading Advisor, shall have the sole and exclusive authority and
responsibility with regard to the investment, maintenance and management of the
Trading Partnership's assets other than in respect of the Trading Advisor's
trading of the Trading Partnership's assets in commodity interests.
(d) Trading Authorization. Prior to the Trading Partnership's acceptance
of trading advice from the Trading Advisor in accordance with this Agreement,
the Trading Partnership shall deliver to the Trading Advisor a trading
authorization in the form of Appendix B hereto appointing the Trading Advisor as
an agent of the Trading Partnership and attor ney-in-fact for such purpose.
(e) Delivery of Disclosure Documents. The Trading Advisor shall, during
the term of this Agreement, deliver to the Trading Partnership copies of all
disclosure documents filed with the CFTC or NFA by the Trading Advisor promptly
following such filing and the Trading Partnership shall, if requested, sign the
Acknowledgement of Receipt of Disclosure Document in the form of Appendix C
hereto, for each disclosure document so delivered.
3. Trading Advisor Independent
---------------------------
For all purposes of this Agreement, the Trading Advisor shall be deemed to
be an independent contractor and shall have no authority to act for or represent
the Parent or the Trading Partnership in any way and shall not otherwise be
deemed to be an agent of the Parent or the Trading Partnership. Nothing con-
tained herein shall create or constitute the Trading Advisor and any other
trading advisor for the Trading Partnership, the Parent or the General Partner
as a member of any partnership, joint venture, association, syndicate,
unincorporated business or other separate entity, nor shall be deemed to confer
on any of them any express, implied, or apparent authority to incur any
obligation or liability on behalf of any other. The parties acknowledge
-7-
<PAGE>
that the Trading Advisor has not been an organizer or promoter of the Parent or
the Trading Partnership.
4. Commodity Broker; Floor Brokers; F/X Desk
-----------------------------------------
The Trading Advisor shall clear orders for all commodity interest
transactions for the Trading Partnership through such commodity broker or
brokers as the Parent shall designate from time to time in its sole discretion
(the Parent initially so designating Merrill Lynch Futures Inc.). The Trading
Advisor will not, without the consent of the General Partner, trade on a "give
up" basis through floor brokers not associated with Merrill Lynch Futures Inc.
Even if such floor brokers are permitted to execute trades on behalf of the
Trading Partnership, all such trades will be "given-up" so as to be carried as a
Merrill Lynch Futures Inc. account. The Trading Advisor shall receive copies of
daily and monthly brokerage statements. All forward trades for the Trading
Partnership shall be executed through the forward trading facilities of the
counterparties selected by the Parent's affiliated Foreign Exchange Desk, unless
the General Partner consents to some other forward trading arrangement. The
Trading Advisor shall only use such other banks or dealers for what the Trading
Advisor, in good faith, believes to be good cause.
5. Allocation of Assets Committed to Trading to Trading Advisor
------------------------------------------------------------
As of the General Partner shall allocate ___% of the assets initially
committed by the Parent to trading to the Trading Advisor to be managed in
accordance with the terms of this Agreement (none of which shall constitute
"notional funds," see Appendix D hereto). The General Partner may allocate to
the Trading Advisor such percentage of subsequent Unit sales (a new series of
Units to be sold as of each calendar quarter-end) as the General Partner may in
its discretion determine, provided that the General Partner may not allocate in
excess of $50,000,000 to the Trading Advisor for management without the Trading
Advisor's consent.
The General Partner may, in its sole discretion, reallocate assets
committed to trading between the Trading Advisor and any other trading advisor
to the Trading Partnership as of any month-end (although the General Partner
does not intend to make frequent reallocations). In the event the General
-8-
<PAGE>
Partner decides to de-leverage the Trading Partnership's trading, as
contemplated by the Prospectus, as a result of trading losses, the General
Partner may reallocate assets away from the Trading Advisor as of the end of any
day.
Distributions, brokerage commissions and interest income (as well as any
other charges or receipts applicable to the Trading Partnership as a whole)
shall be allocated among the accounts managed by the different trading advisors
for the Trading Partnership pro rata based on the month-end Net Assets held in
each such account. Charges or receipts specific to a particular account (for
example, Profit Shares (as determined pursuant to Section 6 below) or trading
profits and losses) shall be allocated entirely to such account.
The Trading Advisor acknowledges and agrees that certain of the assets
committed to trading may be held by the Parent, not by the Trading Partnership.
The Parent has undertaken in its Third Amended and Restated Limited Partnership
Agreement that any such assets held by the Parent are fully subject to market
risk and available to pay initial and variation margin and other trading losses
upon demand of Merrill Lynch Futures Inc. without need of making any demand upon
the Parent or the General Partner.
The Trading Advisor acknowledges and agrees that although the Trading
Advisor will manage a single account on behalf of the Trading Partnership, the
trading assets committed to such account shall represent the commitments of a
number of different series of Units sold by the Parent, and that Profit Shares
shall be calculated separately with respect to each such series.
6. Profit Share
------------
For the advisory services contemplated by this Agreement, the Trading
Partnership shall allocate to the Trading Advisor a quarterly Profit Share equal
to ___% of any New Trading Profit, as defined in the Prospectus, earned on
assets committed to trading and managed by the Trading Advisor, determined as of
the end of each calendar quarter (irrespective of whether the Trading
Partnership has been trading for the entirety of such quarter). The Profit
Share shall also be paid to the Trading Advisor upon the redemption of Units
(any Profit Share accrued in
-9-
<PAGE>
respect of redeemed Units being paid to the Trading Advisor from the redemption
price of such Units) or the reallocation or distribution of assets from the
Trading Advisor's Account and upon termination of this Agreement.
The assets committed to the Trading Advisor's management shall represent
assets committed by a number of different series of Units sold by the Parent.
The Trading Advisor's Profit Share is to be calculated separately in respect of
each series of Units. Consequently, the Profit Shares payable to the Trading
Advisor may not be the same as would be payable to the Trading Advisor were all
assets committed to the Trading Advisor's management to represent assets
attributable to a single series of Units.
New Trading Profit is calculated on a per-Unit basis so that the redemption
of or sale of Units has no effect on the Profit Share due in respect of other
Units. Interest income shall not be included in New Trading Profit.
The description of the calculation of the Profit Share set forth in the
Prospectus is hereby confirmed in all respects.
Profit Shares shall be paid within ten (10) business days after the end of
each period for which they are payable. At such time as the Trading Partnership
remits each Profit Share payment hereunder to the Trading Advisor, the Trading
Partnership shall also submit a reasonably itemized statement setting forth the
calculation of the amount of the Profit Share due to the Trading Advisor in
respect of such period (and with respect to each series of Shares as
appropriate). If the Trading Advisor does not object to such statement within
ten (10) business days of the receipt thereof, such statement shall for all
purposes be deemed to be conclusively correct.
7. Term and Termination
--------------------
(a) Term and Renewal. This Agreement shall continue in effect for one
year after the end of the calendar quarter in which the Trading Partnership
commences trading. Thereafter, this Agreement is renewable at the option of the
General Partner, on the same terms, for up to two (2) additional twelve-month
periods. In addition, the Trading Advisor hereby agrees to negotiate in good
faith concerning the possibility of four
-10-
<PAGE>
additional one-year renewals on terms to be negotiated by the Trading
Partnership and the Trading Advisor at the time. If no new terms are negotiated
with respect to each of the four additional one-year renewal periods and neither
party hereto has given notice at least 60 days prior to such renewal date to the
other party of its intent to terminate this Agreement at such time, then this
Agreement shall be automatically renewed, on the same terms, for each such
additional one-year period.
(b) Termination. Notwithstanding Section 7(a) hereof, this Agreement
shall terminate:
(i) immediately if the Trading Partnership shall terminate and be
dissolved in accordance with the Limited Partnership Agreement or
otherwise;
(ii) at the discretion of the General Partner as of the end of any
month; or
(iii) at the discretion of the Trading Advisor, as of the following
month-end, should any of the following occur: (1) the assets committed to
the Trading Advisor's management decrease to less than $1,000,000 at the
close of business on any day, or (2) the Trading Advisor has determined to
cease managing any customer accounts pursuant to the same strategy as such
Trading Advisor has been retained to employ on behalf of the Trading
Partnership.
8. Right to Advise Others; Uniformity of Acts and Practices
During the term of this Agreement, the Trading Advisor and its
affiliates shall be free to advise other investors as to the purchase and sale
of commodity interests, to manage and trade other investors' commodity interests
accounts and to trade for and on behalf of their own proprietary commodity
interests accounts. However, under no circumstances shall the Trading Advisor
or any of its affiliates favor any commodity interests account directed by any
of them (regardless of the date on which they began or shall begin to direct
such account) over the Trading Partnership's account, giving due consideration
to the trading program which the General Partner has requested the Trading
Advisor to trade on behalf of the Trading Partnership.
-11-
<PAGE>
For purposes of this Agreement, the Trading Advisor and its affiliates shall not
be deemed to be favoring another commodity interests account over the Trading
Partnership's account if the Trading Advisor or its affiliates, in accordance
with specific instructions of the owner of such account, trade such account at a
degree of leverage or in accordance with trading policies which shall be
different from that which shall normally be applied to substantially all of the
Trading Advisor's other accounts or if the Trading Advisor or its affiliates, in
accordance with the Trading Advisor's money management principles, shall not
trade certain commodity interests contracts for an account based on the amount
of equity in such account.
The parties hereto acknowledge that the Trading Advisor may, at the
instruction of the General Partner, trade a limited portfolio for the Trading
Partnership, which may significantly underperform the more diversified programs
offered by the Trading Advisor. The reasons for this include numerous material
differences among accounts, including: (1) the period during which accounts are
active; (2) the trading approach used --although all accounts may be traded in
accordance with the same trading approach, such approach can and does change
periodically as a result of an ongoing program of research and development by
the Trading Advisor; (3) the size of accounts -- which influences the number of
commodities and the number of contracts in each commodity traded by the account;
(4) investor's goals and the policies by which accounts are traded -- some
accounts are more highly leveraged at the investor's request producing
commensurately larger gains or losses than other accounts; (5) the rates of
brokerage commissions paid by accounts and when such commissions are charged to
accounts; (6) the amount of interest income earned by accounts, which will
depend on the portion of the account's assets invested in interest-bearing
obligations such as United States Treasury Bills; (7) the rate of management
and/or incentive fees and amount of administrative costs paid by accounts --
some pay management and incentive fees, some pay incentive fees only and some
pay no fees at all; (8) the timing of orders to open or close positions; and (9)
the market conditions in which accounts are traded, which in part determines the
quality of trade executions.
At the request of the Parent, the Trading Advisor and its affiliates
shall promptly make available to the Parent copies of the normal daily, monthly,
quarterly and annual, as the case
-12-
<PAGE>
may be, written reports prepared by the Trading Advisor in the ordinary course,
reflecting the performance of all commodity pool accounts advised, managed,
owned or controlled by the Trading Advisor or its affiliates required to be
delivered to pool participants pursuant to the CEA and similar written
information, including monthly account statements, reflecting the performance of
all other commodity interest accounts advised, managed, owned or controlled by
the Trading Advisor or its affiliates, with respect to which account reports
shall not be required to be delivered to the owners thereof pursuant to the CEA
(subject to the need to preserve the confidentiality of proprietary information
concerning the Trading Advisor's trading systems, methods, models, strategies
and formulas and the identity of the Trading Advisor's clients). At the request
of the Parent, the Trading Advisor or its affiliates shall promptly deliver to
the Trading Partnership a satisfactory written explanation, in the judgment of
the Parent, of the differences, if any, in the performance between the Trading
Partnership's account and such other commodity interest accounts traded
utilizing the same program or portfolio (subject to the need to preserve the
confidentiality of proprietary information concerning the Trading Advisor's
trading systems, methods, models, strategies and formulas and the identity of
the Trading Advisor's clients).
9. Speculative Position Limits
---------------------------
If the Trading Advisor (either alone or aggregated with the positions
of any other person if such aggregation shall be required by the CEA, the CFTC
or any other regulatory authority having jurisdiction) shall exceed or be about
to exceed applicable limits in any commodity interest traded for the Trading
Partnership, the Trading Advisor shall immediately take such action as the
Trading Advisor may deem fair and equitable to comply with the limits, and shall
immediately deliver to the Trading Partnership a written explanation of the
action taken to comply with such limits. If such limits are exceeded by the
Trading Partnership, the General Partner may require the Trading Advisor to
liquidate positions as required.
10. Additional Undertakings by the Trading Advisor
----------------------------------------------
Neither the Trading Advisor nor its employees, affili ates or agents,
the stockholders, directors, officers, employees, principals, affiliates or
agents of such affiliates, or their
-13-
<PAGE>
respective successors or assigns shall: (i) use or distribute for any purpose
whatsoever any list containing the names and/or residential addresses of and/or
other information about the Limited Partners; nor (ii) directly solicit any
Limited Partner for any business purpose whatsoever (unless such Limited Partner
is already a client of the Trading Advisor).
11. Representations and Warranties
------------------------------
(a) The Trading Advisor hereby restates all represen tations and
warranties made by it in the Selling Agreement relating to the offering of the
Units, with the same effect as if such representations and warranties were set
forth verbatim herein.
(b) The General Partner hereby restates all representations and
warranties made by it in the Selling Agreement relating to the offering of the
Units with the same effect as if such representations and warranties were set
forth verbatim herein.
(c) The Parent and the Trading Partnership hereby make, on their own
behalf, the representations and warranties made in the Selling Agreement by the
General Partner relating to the Parent and the Trading Partnership, as if such
representations and warranties were set forth verbatim herein as represen-
tations and warranties of the Parent and the Trading Partnership.
The foregoing representations and warranties shall be continuing
during the entire term of this Agreement and, if at any time, any event shall
occur which would make any of the foregoing representations and warranties no
longer true and accurate, the General Partner shall promptly notify the Trading
Advisor and the Trading Advisor shall promptly notify the General Partner (as
the case may be).
12. Entire Agreement
----------------
This Agreement constitutes the entire agreement between the parties
hereto with respect to the matters referred to herein, and no other agreement,
verbal or otherwise, shall be binding as between the parties unless it shall be
in writing and signed by the party against whom enforcement is sought.
-14-
<PAGE>
13. Standard of Liability; Indemnification
--------------------------------------
The Trading Advisor, its officers, directors, employees and
shareholders shall not be liable to the Trading Partnership, the Parent or their
respective partners, or to any of their successors or assigns except by reason
of acts or omissions in contravention of the express terms of this Agreement, or
due to their misconduct or negligence, or by reason of not having acted in good
faith and in the reasonable belief that such actions or omissions were in, or
not opposed to, the best interests of the Trading Partnership or Parent.
The Parent and the Trading Partnership, jointly and severally, shall
indemnify, defend and hold harmless the Trading Advisor and its affiliates and
their respective directors, officers, shareholders, employees and controlling
persons from and against any and all losses, claims, damages, liabilities (joint
and several), costs and expenses (including any investigatory, legal and other
expenses incurred in connection with, and any amounts paid in, any settlement;
provided that the Trading Partnership shall have approved such settlement)
resulting from a demand, claim, lawsuit, action or proceeding relating to any of
such person's actions or capacities relating to the business or activities of
the Trading Partnership pursuant to this Agreement; provided that the conduct of
such person which was the subject of the demand, claim, lawsuit, action or
proceeding did not constitute negligence, misconduct or a breach of this
Agreement or of any fiduciary obligation to the Trading Partnership and was done
in good faith and in a manner such person reasonably believed to be in, or not
opposed to, the best interests of the Trading Partnership. The termination of
any demand, claim, lawsuit, action or proceeding by settlement shall not, in
itself, create a presumption that the conduct in question was not undertaken in
good faith and in a manner reasonably believed to be in, or not opposed to, the
best interests of the Trading Partnership. No indemnification shall be due
hereunder, however, for any matter for which the Trading Advisor or its
affiliates and their respective directors, officers, shareholders, employees and
controlling persons are indemnified under the Selling Agreement (although
indemnity shall be due under the Selling Agreement).
The Trading Advisor shall indemnify, defend and hold harmless the
Parent, the Trading Partnership, the General Partner, their respective
affiliates and their respective
-15-
<PAGE>
directors, officers, shareholders, employees and controlling persons from and
against any and all losses, claims, damages, liabilities (joint and several),
costs and expenses (including any reasonable investigatory, legal and other
expenses incurred in connection with, and any amounts paid in, any settlement;
provided that the Trading Advisor shall have approved such settlement) resulting
from a demand, claim, lawsuit, action or proceeding relating to any action or
omission of the Trading Advisor or any of its respective officers, directors or
employees relating to the business or activities of such person under this
Agreement or relating to the management of an account of the Trading Partnership
provided: the action or omission of such person which was the subject of the
demand, claim, lawsuit, action or proceeding constituted negligence or
misconduct or a breach of this Agreement or of any fiduciary obligation to the
Trading Partnership or was an action or omission taken otherwise than in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Trading Partnership. No indemnification shall be due hereunder,
however, for any matters for which the Parent, the Trading Partnership, their
respective affiliates and their respective directors, officers, shareholders,
employees or controlling persons are indemnified under the Selling Agreement
(although indemnity shall be due under the Selling Agreement).
The foregoing agreements of indemnity shall be in addition to, and
shall in no respect limit or restrict, any other remedies which may be available
to an indemnified party. This foregoing indemnity provision shall not increase
the liability of any Limited Partner of the Parent beyond the amount of such
Limited Partner's capital and profits (exclusive of distributions previously
received or other returns of capital, including redemptions).
The indemnifying party's right to control the defense of any demand,
claim, lawsuit, action or indemnity for which indemnity is to be sought under
this Section 13 and the requirements relating to notice from the indemnified
party shall be the same as in the indemnification provisions contained in the
Selling Agreement.
No indemnification under this Section 13 shall be made in respect of
any demand, claim, lawsuit, action or proceeding relating to activities of the
person to be indemnified which have
-16-
<PAGE>
been adjudged, by a court having jurisdiction with respect to the matter upon
entry of a final judgment, not to have been done in good faith and in the
reasonable belief that such conduct was in, or not opposed to, the best
interests of the Trading Partnership or to constitute negligence, misconduct or
breach of this Agreement unless, and except to the extent that, such court
determines that, despite such judgment, such person is fairly and reasonably
entitled to indemnity.
Any indemnification required by this Section 13, unless ordered or
expressly permitted by a court, shall be made by the indemnifying party only
upon a determination by independent legal counsel mutually agreeable to the
parties hereto in a written opinion that the conduct which is the subject of the
claim, demand, lawsuit, action or proceeding with respect to which
indemnification is sought meets the applicable standard set forth in this
Section 13.
14. Assignment
----------
This Agreement shall not be assigned by any of the parties hereto
without the prior express written consent of the other parties hereto.
15. Amendment; Waiver
-----------------
This Agreement shall not be amended except by a writing signed by the
parties hereto. No waiver of any provision of this Agreement shall be implied
from any course of dealing between the parties hereto or from any failure by
either party hereto to assert its rights hereunder on any occasion or series of
occasions.
16. Severability
------------
If any provision of this Agreement, or the application of any
provision to any person or circumstance, shall be held to be inconsistent with
any present or future law, ruling, rule or regulation of any court or
governmental or regulatory authority having jurisdiction over the subject matter
hereof, such provision shall be deemed to be rescinded or modified in
accordance with such law, ruling, rule or regulation, and the remainder of this
Agreement, or the application of such provision to persons
-17-
<PAGE>
or circumstances other than those as to which it shall be held inconsistent,
shall not be affected thereby.
17. Notices
-------
Any notice required or desired to be delivered under this Agreement
shall be in writing and shall be delivered by courier service, postage prepaid
mail, telex, telegram or other similar means and shall be effective upon actual
receipt by the party to which such notice shall be directed, addressed as
follows (or to such other address as the party entitled to notice shall
thereafter designate in accordance with the terms hereof):
if to the Parent or the Trading Partnership:
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
Attn: John R. Frawley, Jr.
if to the General Partner:
MERRILL LYNCH INVESTMENT PARTNERS INC.
Merrill Lynch World Headquarters
Sixth Floor, South Tower
World Financial Center
New York, New York 10080-6106
Attn: John R. Frawley, Jr.
if to the Trading Advisor:
__________________________
__________________________
__________________________
__________________________
Attn: ___________________
-18-
<PAGE>
18. GOVERNING LAW
-------------
THIS 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.
19. Consent to Jurisdiction
-----------------------
The parties hereto agree that any action or proceeding arising
directly, indirectly or otherwise in connection with, out of, related to or from
this Agreement, any breach hereof or any transaction covered hereby, shall be
resolved, whether by arbitration or otherwise, within the County of New York,
City of New York, and State of New York. Accordingly, the parties consent and
submit to the jurisdiction of the federal and state courts and any applicable
arbitral body located within the County of New York, City of New York, and State
of New York. The parties further agree that any such action or proceeding
brought by either party to enforce any right, assert any claim, or obtain any
relief whatsoever in connection with this Agreement shall be brought by such
party exclusively in federal or state courts, or if appropriate before any
applicable arbitral body, located within the County of New York, City of New
York, and State of New York.
20. Remedies
--------
In any action or proceeding arising out of any of the provisions of
this Agreement, the Trading Advisor, the General Partner, the Parent and the
Trading Partnership agree that they shall not seek any prejudgment equitable or
ancillary relief. Such parties also agree that their sole remedy in any such
action or proceeding shall be to seek actual monetary damages for any breach of
this Agreement; provided, however, that the Parent and the Trading Partnership
agree that the Trading Advisor and the General Partner may seek declaratory
judgment with respect to the indemnification provisions of this Agreement.
21. Promotional Material
--------------------
None of the parties hereto will make reference to any other such party
in an officially filed or publicly or privately distributed material without
first submitting such material to the party so named for approval a reasonable
period of time in advance of the proposed use of such material.
-19-
<PAGE>
22. Confidentiality
---------------
The Parent, the Trading Partnership and the General Partner
acknowledge that the Trading Advisor's strategies and trades constitute
proprietary data belonging to the Trading Advisor and agree that they will not
disseminate any confidential information regarding any of the foregoing, except
as required by law, and any such information as may be acquired by the General
Partner or the Trading Partnership is to be used solely to monitor the Trading
Advisor's performance on behalf of the Trading Partnership.
23. Survival
--------
The provisions of this Agreement shall survive the termination hereof
with respect to any matter arising while this Agreement shall be in effect.
24. Counterparts
------------
This Agreement may be executed in counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
instrument.
25. Headings
--------
Headings to sections and subsections in this Agreement are for the
convenience of the parties only and are not intended to be a part of or to
affect the meaning or interpretation hereof.
-20-
<PAGE>
IN WITNESS WHEREOF, this Agreement has been executed for and on behalf
of the undersigned on the day and year first written above.
ML PRINCIPAL PROTECTION
TRADING L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.
General Partner
By:________________________________
James M. Bernard, Vice President
ML PRINCIPAL PROTECTION L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.
General Partner
By:________________________________
James M. Bernard, Vice President
MERRILL LYNCH INVESTMENT
PARTNERS INC.
By:________________________________
James M. Bernard, Vice President
[TRADING ADVISOR]
By:________________________________
-21-
<PAGE>
APPENDIX A
COMMODITY INTERESTS TRADED BY [TRADING ADVISOR]
-----------------------------------------------
The undersigned represents that the following is a complete list of
all commodity interests which the undersigned intends to trade on behalf of ML
PRINCIPAL PROTECTION L.P. other than regulated futures contracts and options on
regulated futures contracts traded on a qualified board or exchange in the
United States:
Contract Type
(futures, forward,
option on futures) Exchange Contract
------------------ -------- --------
[TRADING ADVISOR]
By:_____________________
Dated: __________________, 1996
-22-
<PAGE>
APPENDIX B
COMMODITY TRADING AUTHORITY
---------------------------
____________________
____________________
____________________
Attn: _____________
Dear ___________:
ML PRINCIPAL PROTECTION L.P. (the "Partnership") does hereby make,
constitute and appoint you as its attorney-in-fact to buy and sell commodity
futures and forward contracts through Merrill Lynch Futures Inc., as broker and
as principal through the Partnership's affiliated Foreign Exchange Desk,
respectively, in accordance with the Advisory Agreement among the Partnership,
ML Principal Protection L.P. , Merrill Lynch Investment Partners Inc. and
__________________ dated as of _______, 1996. This authorization shall
terminate and be null, void and of no further effect simultaneously with the
termination of the said Advisory Agreement.
Very truly yours,
ML PRINCIPAL PROTECTION
TRADING L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.
General Partner
-23-
<PAGE>
By:_____________________
James M. Bernard,
Vice President
Dated as of _______, 1996
-24-
<PAGE>
APPENDIX C
ACKNOWLEDGEMENT OF RECEIPT
OF DISCLOSURE DOCUMENT
--------------------------
The undersigned hereby acknowledges receipt of _____________________'s
Disclosure Document dated _____________, 1996.
ML PRINCIPAL PROTECTION
TRADING L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.
General Partner
By:________________________________
James M. Bernard, Vice President
Dated: _____________, 1996
-25-
<PAGE>
APPENDIX D
COMMITTED FUNDS LETTER
-26-
<PAGE>
EXHIBIT 10.02
FORM OF
CONSULTING AGREEMENT
BETWEEN
MERRILL LYNCH FUTURES INC.
AND
_________________________
Dated as of _______, 1996
<PAGE>
CONSULTING AGREEMENT
--------------------
This Consulting Agreement dated as of _______, 1996 is between Merrill
Lynch Futures Inc. ("Merrill Lynch Futures") and _________________________
("Consultant").
W I T N E S S E T H:
-------------------
WHEREAS, Merrill Lynch Futures acts as commodity broker for ML Principal
Protection Trading L.P. (the "Partnership"; formerly, ML Principal Protection
Plus Trading L.P.)
WHEREAS, Consultant consults with Merrill Lynch Futures concerning Merrill
Lynch Futures' provision of brokerage services (including forward trading
services) for the Partnership (and other commodity pools, as contemplated
hereby);
WHEREAS, Consultant undertakes certain other obligations to Merrill Lynch
Futures to assist Merrill Lynch Futures in its dealings with the Partnership and
in certain other aspects of the commodities markets as herein set forth.
NOW, THEREFORE, the parties hereto agree as follows:
1. Payment of Consulting Fee.
Merrill Lynch Futures shall remit to Consultant, within ten (10) business
days of the end of each month during the term of this Agreement, a consulting
fee equal to ___ of 1% of the month-end assets of the Partnership committed by
Merrill Lynch Investment Partners Inc. (the "General Partner"; formerly ML
Futures Investment Partners Inc.) for management by Consultant as of the end of
such month (a __% annual rate) after reduction of such assets by __________ of
the brokerage commissions due to Merrill Lynch Futures in respect of such month
but without reduction for any redemptions as of such month-end or for any
accrued Profit Shares as of such month-end, and after including month-end
interest credits (if any), all as described in the Partnership's Prospectus
dated _______, 1996. Merrill Lynch Futures and the Consultants each understand
that certain of the assets committed to trading may be held by the Partnership
and certain of such assets by ML Principal Protection L.P. (formerly, Merrill
Lynch Principal Protection Plus L.P.), the parent of the Partnership.
<PAGE>
Consultant recognizes and agrees that the General Partner has the
authority to reallocate assets away from Consultant's Partnership account at any
time (due, in part, to the "principal protection" feature of the Partnership),
and that the Consulting Fees due hereunder shall reflect any such reallocation
as of its effective date.
The description of the calculation of the Consulting Fee set forth in the
Prospectus is hereby confirmed in all respects.
At such time as Merrill Lynch Futures remits each monthly consulting fee
payment hereunder to Consultant, Merrill Lynch Futures shall also submit a
reasonably itemized statement setting forth the calculation of the amount due to
Consultant in respect of such month. If Consultant does not object to such
statement within ten (10) business days of the receipt thereof, such statement
shall for all purposes be deemed to be conclusively correct.
2. Registration of Consultant.
Consultant represents and warrants that it has all necessary registrations
or memberships with or in the Commodity Futures Trading Commission, the National
Futures Association and any other federal or state governmental body or agency
(if any) required to receive the consulting fee from Merrill Lynch Futures
contemplated hereby and understands and agrees that Merrill Lynch Futures'
obligations to make any such payments shall be suspended (without any obligation
whatsoever to make compensating payments in the future) during any period as to
which Merrill Lynch Futures is advised by counsel that Consultant does not have
all such registrations and memberships. The Consultant need not provide any
services which it believes, in its discretion, might subject it to any provision
of the Investment Advisers Act of 1940 or similar state securities laws.
3. Prorating of Consulting Fee in the Case of Partial Months.
The Consulting Fee due to Consultant hereunder shall be prorated for any
partial month during which this Agreement is in effect, or for any reallocations
during a month, such proration to be made on the basis of the number of business
days during such month for which this Agreement is in effect and Consultant
-2-
<PAGE>
is capable of providing consulting service hereunder, as compared to the total
number of business days in such month.
4. Consulting Services to Be Rendered by Consultant.
Consultant agrees to consult with Merrill Lynch Futures, at the reasonable
request of Merrill Lynch Futures, from time to time during the term of this
Agreement, concerning the commodity markets and the desirability of various
different trading approaches, as well as the possibility of Consultant, or other
trading advisors designated by Merrill Lynch Futures, participating in other
pool offerings sponsored by Merrill Lynch entities. To the extent that computer
services are necessary in the context of such consulting services, Consultant
agrees to utilize its own computer facilities at no cost to Merrill Lynch
Futures, to the extent that Consultant is able to do so without any interference
with its regular business operations. In particular, and not by way of
limitation, Consultant agrees, at the reasonable request of the General Partner,
to review and critique proposed trading method descriptions submitted to Merrill
Lynch Futures by prospective trading advisors.
Consultant need not disclose any information deemed by it to be
confidential in the course of any consultations as contemplated by this Section
4, unless Consultant, in its sole discretion, deems that it has received
adequate assurances of confidentiality.
5. Reports.
During the term of this Agreement, Consultant shall assist Merrill Lynch
Futures in the preparation of any reports and other documents which Merrill
Lynch Futures or any of its affiliates desires to transmit to its futures fund
customers, including investors in commodity pools in which Merrill Lynch Futures
or one of its affiliates participates, to the extent that Merrill Lynch Futures
may reasonably request.
6. Presentations.
During the term of this Agreement, Consultant agrees that, to the extent
consistent and without interference with Consultant's regular business
operation, its principals and agents shall be available to consult concerning
presentations
-3-
<PAGE>
which Merrill Lynch Futures may wish to organize relating to futures trading and
to attend such presentations, in each case to the extent that Merrill Lynch
Futures may reasonably request.
7. Investment Advice.
During the term of this Agreement, Consultant agrees that it will, at the
reasonable request of Merrill Lynch Futures, advise Merrill Lynch Futures
concerning the investment of customer funds held by Merrill Lynch Futures in
futures or forward contracts, provided that Consultant need not give any such
advice which might subject it to the registration requirements under the
Investment Advisers Act of 1940.
8. Consultation Concerning Forward Trading.
During the term of this Agreement, Consultant agrees that it will, to the
extent that Merrill Lynch Futures may reasonably request, cooperate with and
advise Merrill Lynch Futures concerning the operation of the Partnership's
affiliated Foreign Exchange Desk.
9. Consultation Concerning Other Commodity Pools.
During the term of this Agreement, Consultant agrees to discuss with
Merrill Lynch Futures and its representatives the structure and operation of the
other commodity pools for which Consultant acts as a trading advisor (again,
however, Consultant need not disclose any information deemed by it to be
confidential in the course of such consultations).
10. Comparison of Brokerage Arrangements.
As contemplated by the Limited Partnership Agreement of the Partnership and
the Customer Agreement of the Partnership, Merrill Lynch Futures and the General
Partner have agreed to undertake annual reviews of the Partnership's futures and
forward trading. Consultant agrees that it will make available to Merrill Lynch
Futures such comparisons as Merrill Lynch Futures may reasonably request of the
terms on which forward trading facilities are made available to Consultant by
third parties subject to the need to maintain client confidentiality. In
addition, Consultant agrees it will assist in advising Merrill Lynch Futures and
the General Partner in their efforts to compare
-4-
<PAGE>
the futures and forward trading services available to the Partnership and to
other comparable accounts.
11. General Consulting Services.
Consultant acknowledges and agrees that this Agreement contemplates that
Consultant will, to the extent not inconsistent with its responsibilities to
third parties and as Merrill Lynch Futures may reasonably request, advise
Merrill Lynch Futures on its commodity brokerage and related operations.
Consultant hereby agrees that it will in good faith cooperate in assisting
Merrill Lynch Futures in that respect, regardless of whether the specific advice
or service requested of Consultant by Merrill Lynch Futures is explicitly set
forth herein, and give to Merrill Lynch Futures and such of its officers as may
so request the benefit of Consultant's experience and knowledge of the markets
and consult with such persons in an advisory capacity concerning such markets
and related matters. Consultant agrees, insofar as prior obligations shall
permit, to hold itself available to consult and advise with officers and other
representatives of Merrill Lynch Futures on the foregoing and related matters.
12. Term of Agreement.
This Agreement shall continue in effect for three (3) years from the date
hereof. Thereafter this Agreement shall be automatically renewed provided that
the Advisory Agreement between the Partnership, ML Principal Protection L.P.,
the General Partner and the Consultant dated as of the date hereof (the
"Advisory Agreement"), has been automatically renewed pursuant to its original
terms as set forth in such Agreement. Notwithstanding the foregoing, this
Agreement shall automatically terminate upon the termination of the Advisory
Agreement.
13. Status of the Parties.
Nothing herein shall be construed to constitute Consultant and Merrill
Lynch Futures a partnership or association. Nor shall Consultant be deemed an
employee or agent of Merrill Lynch Futures or to have any authority to act for
or represent Merrill Lynch Futures as a consequence hereof.
-5-
<PAGE>
14. Notices.
All notices required to be delivered under this Agreement shall be in
writing (including telegraphic communication) or by telephone confirmed in
writing, all such writings to be delivered personally or sent by first-class
mail, postage prepaid, as follows:
if to Consultant:
______________________________
______________________________
______________________________
______________________________
Attn: _______________________
if to Merrill Lynch Futures:
MERRILL LYNCH FUTURES INC.
Merrill Lynch World Headquarters
World Financial Center
250 Vesey Street
23rd Floor
New York, New York 10080-1323
Attn: William Maitland, General Counsel
15. No Assignment.
The consulting services hereby contracted for by Merrill Lynch Futures are
personal to Consultant. No party hereto may assign any of its rights hereunder
without the prior written consent of each other party. This Agreement shall not
be construed to confer any benefit on any person other than the parties hereto
and their respective successors and assigns.
16. GOVERNING LAW.
THIS 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
LAWS.
-6-
<PAGE>
17. Entire Agreement; Counterparts.
This Agreement sets forth the entire agreement of the parties relating to
the subject matter hereof except as otherwise set forth herein.
This Agreement may be executed in two or more counterparts each of which
shall constitute one and the same document.
18. No Waiver.
No failure or delay on the part of any party hereto in exercising any
right, power or remedy hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such right, power or remedy preclude any
other or further exercise thereof or the exercise of any other right, power or
remedy. Any waiver granted hereunder must be in writing and shall be valid only
in the specific instance in which given.
19. No Disgorgement.
In no event shall Consultant be required to disgorge any consulting fees
previously paid to it by Merrill Lynch Futures hereunder (unless an invoice
submitted by Merrill Lynch Futures as contemplated hereby shall prove to have
been incorrect). The payments due to Consultant are in no respect contingent on
any event subsequent nor upon the receipt by Merrill Lynch Futures of any
payments from any of its affiliates or any other third party. Both parties
hereto shall, however, be entitled to exercise full remedies at law in the event
of a breach of this Agreement by the other party.
-7-
<PAGE>
IN WITNESS WHEREOF, this Consulting Agreement has been executed by the
parties hereto as of the day and year first above written.
[CONSULTANT]
By:___________________________
[Title]
MERRILL LYNCH FUTURES INC.
By:___________________________
Acknowledged:
ML PRINCIPAL PROTECTION
TRADING L.P.
By: Merrill Lynch Investment
Partners Inc., General Partner
By:_______________________________
James M. Bernard
Vice President
-8-
<PAGE>
EXHIBIT 10.03
CUSTOMER AGREEMENT
AMONG
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.
AND
MERRILL LYNCH FUTURES INC.
DATED AS OF ________________, 1996
<PAGE>
ML PRINCIPAL PROTECTION TRADING L.P.
CUSTOMER AGREEMENT
In consideration of the acceptance by MERRILL LYNCH FUTURES INC. ("Broker")
of one or more accounts of ML PRINCIPAL PROTECTION TRADING L.P., formerly ML
Principal Protection Trading L.P. ("Customer"), it is agreed as follows:
1. Customer acknowledges that the purchase and sale of commodity futures
and forward contracts and commodity options is speculative, involves a high
degree of risk and is suitable only for persons who can assume the risk of
losses in excess of their margin deposits and option premiums. Customer
understands that because of the low margin normally required in commodity
futures and forward trading, small price changes in commodity futures and
forward contracts may result in significant Customer losses, which losses may
substantially exceed Customer's margin deposits and any other deposits Customer
may make. Broker has disclosed all the foregoing risks and information, as well
as the fact that the proposed monthly brokerage commissions of 0.7917 of 1% of
the month-end assets allocated to the Trading Advisors for management (a 9.5%
annual rate), may result in significantly higher brokerage costs than those
charged by Broker to other customers, including other commodity pools such as
Customer. Depending upon the number of trades ordered for Customer by its
advisors (the "Trading Advisors"), the foregoing flat-rate commissions could
constitute a substantial premium over Broker's standard speculative round-turn
commission rates.
Broker agrees to pay all floor brokerage charges relating to Customer's
trading, including any such charges assessed on trades executed by floor brokers
unaffiliated with Broker, provided that such charges do not exceed Broker's
standard rates (provided such rates are competitive).
Broker agrees to pay all fees of Merrill Lynch Asset Management, L.P.,
which will provide cash management services to Customer and to ML Principal
Protection L.P., (formerly, ML Principal Protection Plus L.P.) the sole limited
partner of Customer (the "Parent").
2. Customer authorizes Broker, as Customer's commodity broker and as
Customer's principal, to purchase and sell commodity futures and forward
contracts (and to use the services of other persons designated by Customer in
writing from time to
<PAGE>
time, in doing so) and to purchase, sell and exercise commodity options for
Customer's account in accordance with the written or oral instructions of the
Trading Advisors as described in the Prospectus of Customer and the Parent dated
_______, 1996, including the Prospectus Supplement thereto (as the same may be
amended as supplemented from time to time, the "Prospectus"), which Trading
Advisors have been granted full discretionary trading authority with respect to
Customer's assets, or such other person or persons as Customer may designate to
Broker in writing from time to time. Customer acknowledges and agrees that
Broker shall have no discretion with respect to the trading decisions to be made
for the account of Customer except as may otherwise be agreed upon in writing
between Customer and Broker. Customer has delivered to Broker a true copy of the
Advisory Agreements between Customer and each of the Trading Advisors (the
"Advisory Agreements"). Customer may override the authority of the Trading
Advisors in certain limited circumstances as described in such Advisory
Agreements and the Prospectus. Broker shall be in no respect responsible for any
actions taken in compliance with instructions from the Trading Advisors or from
Customer.
3. Broker shall act as custodian for all assets of Customer on deposit
with Broker. In such capacity, Broker may cause to be held cash and other
assets of Customer by such bank or banks as Broker may select from time to time,
in its sole discretion, subject to the approval of Customer, and may transmit
funds to exchanges as margin. Broker shall not deposit assets of Customer as
margin in respect of Customer's forward trades, which trades shall be effected
pursuant to the Foreign Exchange Desk Service Agreement between Customer,
Broker, Merrill Lynch International Bank, Merrill Lynch Investment Partners
Inc. (formerly, ML Future Investment Partner Inc.) and certain other parties
dated as of July 1, 1993 as amended by the Amendment to Foreign Exchange Desk
Service Agreement dated as of _______, 1996 (the "F/X Desk Agreement"). Broker
will invest such assets in a manner consistent with the "Use of Proceeds"
section in the Prospectus.
Broker may hold Customer assets in unregulated accounts. Assets held in
Customer's name at affiliates of Broker shall be held in unregulated accounts.
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Certain Customer assets will be converted into foreign currencies and used
to margin foreign futures positions held for Customer. Broker will hold such
non-U.S. dollar funds in a "foreign futures secured amount" or a "foreign
options secured amount" account, and will invest such assets, to the extent
practicable, in short-term government securities denominated in such currencies.
All interest earned on such investments shall inure to the benefit of Customer's
account. Customer shall bear the exchange-rate risk involved in converting and
re-converting assets held in Customer's account between U.S. dollars and foreign
currencies.
Broker shall have no liability to Customer in connection with any such
investment except for Broker's negligence or misconduct in connection therewith.
Broker shall be entitled to retain any other economic benefit which may accrue
from its possession of Customer's assets, provided that such benefit could not
reasonably be made available to Customer.
4. Customer shall pay Broker: (a) the applicable initial, maintenance and
variation margin requirements in effect from time to time and the brokerage
commissions described in the Prospectus; and (b) service charges on any Customer
deficit balance at the rates customarily charged by Broker and interest on any
such deficit balance at the rate of one percent (1%) over the average prime rate
announced from time to time by The Morgan Guaranty Trust Company of New York,
with interest to be computed and charged by Broker on a monthly basis, or the
maximum rate allowed by law, whichever is less. All routine charges, including
without limitation, exchange fees, National Futures Association transaction
fees and clearing fees and floor brokerage due in respect of Customer's trading
shall be paid by Broker from the monthly flat-rate commission received by Broker
from Customer. Broker shall pay all "pit brokerage" incurred in respect of
Customer's trading without reimbursement therefor by Customer.
Customer hereby authorizes Broker to pay all fees of Merrill Lynch Asset
Management, L.P., in connection with Merrill Lynch Asset Management, L.P.'s
provision of cash management services to Customer, from the monthly flat-rate
commission received by Broker from Customer.
5. Customer acknowledges that Broker has the right, but no responsibility
or obligation, to limit the number of
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commodity futures, forward and commodity options which Customer may maintain or
acquire through Broker at any time. Broker shall give Customer prior notice of
any such limitation.
6. Customer shall maintain at all times that portion of its assets with
Broker, to be used to provide, and subject to be transmitted to exchanges in
respect of, margins for Customer's account, as required from time to time by
Broker in its sole and absolute discretion. Margin requirements established by
Broker may exceed or differ from the requirements set by any commodity exchange
or third party and may be changed by Broker without notice to Customer, such
changes to apply to existing as well as future positions, should Broker so
elect. If at any time Customer's account does not contain the amount of margin
and/or premium required by Broker, Broker may, at any time, close out Customer's
open positions in whole or in part and take any action described in Section 11
hereof, after giving notice thereof to the Trading Advisors and the Customer.
While Broker has the right to close out Customer's open positions in whole or in
part for failure to maintain the amount of margin required by Broker or pay
premiums due to Broker, Customer understands and agrees that Broker has no
obligation to Customer to do so in the absence of specific instructions from
Customer or the Trading Advisors.
7. All transactions by Broker on Customer's behalf shall be subject to the
applicable constitutional provision, by-laws, rules, regulations, rulings and
interpretations of the contract market on which such transactions are executed
or cleared by Broker or its agents for Customer's account, and to all applicable
governmental acts and statutes (such as the Commodity Exchange Act) and the
rules and regulations made thereunder; Broker shall not be liable to Customer as
a result of any action taken by Broker or its agents that is considered in good
faith by Broker to be required by any such constitutional provision, rule,
regulation, ruling, interpretation, act, statute or regulation. The foregoing
provision is solely for the protection and benefit of Broker, and any failure
by Broker or its agents to comply with any such constitution, rule, regulation,
ruling, interpretation, act, statute or other regulation shall not relieve
Customer of any obligations under this Agreement nor be construed to create
rights hereunder in favor of Customer against Broker.
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8. All monies, securities, commodities, commodity futures contracts,
commodity options or other property, including any property held by banks, now
or at any future time in Customer's account or held by Broker for Customer are
hereby pledged with Broker and shall be subject to a security interest in
Broker's favor to secure any indebtedness at any time owing from Customer to
Broker.
9. All transactions for or on Customer's behalf shall be deemed to be
included in a single account whether or not such transactions are segregated on
Broker's records into separate accounts, either severally or jointly with others
- -- the foregoing provision being solely for Broker's protection.
Broker's rights with respect to Customer's property shall be qualified by
applicable requirements for the segregation of customer property under the
Commodity Exchange Act and the regulations of the Commodity Futures Trading
Commission.
10. The Parent, the sole limited partner of Customer, hereby authorizes and
directs Broker to debit directly from Parent's bank or custodial accounts(s) all
amounts due to Broker from Parent as provided under Section 16(e) of the
Parent's Third Amended Limited Partnership Agreement -- being amounts equal to
the difference between the assets which Customer commits to trading and the
actual equity invested in Customer. Such debits may be made without need of
prior notice to either Customer or the Parent.
11. Broker shall not be responsible for: (1) delays in the transmission
of orders due to breakdown or failure of transmission or communication
facilities or to any other cause beyond Broker's reasonable control or not
resulting from Broker's negligence or misconduct; or (2) any gain or loss to
Customer from fluctuations in currency exchange rates in any foreign currency in
which any commodity futures, forward or commodity option contract or deposited
property is held, except to the extent that any amount may be owing from Broker
to Customer pursuant to any transaction in a foreign currency between Broker and
Customer, provided that there is no negligence or misconduct on the part of
Broker in respect of such loss.
12. In the event that: (a) Customer shall terminate or be dissolved; (b)
a proceeding under the Bankruptcy Code, an
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assignment for the benefit of creditors or an application for a receiver,
custodian or trustee shall be filed or applied for by or against Customer; (c)
any property in Customer's account shall be garnished or attached; (d) the
property held in Customer's account shall be determined by Broker in its sole
and absolute discretion, and regardless of current market quotations, to be
inadequate to secure Customer's account; (e) Customer's account shall incur a
deficit balance; or (f) Customer shall acquire or maintain open positions with
Broker in excess of the limits imposed from time to time by Broker pursuant to
Section 5 hereof, Broker may close out Customer's account in whole or in part,
sell any or all of Customer's property held by Broker, buy or sell any
securities, commodities, commodity futures, forward or commodity options, or any
other property, for Customer's account, or cancel any outstanding orders to
close out any account of Customer or to close out any commitment made by Broker
on behalf of Customer. Such sale, purchase or cancellation may be made at
Broker's discretion on a contract market or at public auction or at private
sale. No prior tender, demand, call or prior notice from Broker of the time and
place of such sale or purchase shall be deemed to be a waiver of Broker's right
to sell or buy any property held by Broker, or owed to Broker by Customer.
Broker may, to the extent permitted by law, purchase the whole or any part of
any such Customer property, free from any right of redemption, and Customer
shall remain liable for and shall pay to Broker the amount of any deficiency
resulting from any such transactions.
13. If at any time Customer shall be unable to deliver to Broker any
property previously sold by Broker on Customer's behalf, Customer authorizes
Broker in its discretion to borrow or to buy any property necessary to make
delivery thereof, and Customer shall pay and reimburse Broker for any cost, loss
and damage (including consequential costs, losses, penalties, fines and damages)
which Broker may sustain thereby and any premiums which Broker may be required
to pay thereon, and for any cost, loss and damage (including consequential
costs, losses, penalties, fines and damages) which Broker may sustain from its
inability to borrow or buy any such property.
14. Broker acknowledges and agrees that Customer is a subsidiary limited
partnership of the Parent, which is the sole limited partner of Customer and
whose general partner is also the general partner of Customer. Broker agrees
that except pursuant to the Parent's undertaking pursuant to Section 16(e) of
the
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Parent's Limited Partnership Agreement, Broker will look only to the assets of
Customer, and not to any assets of the Parent itself, to satisfy any debts or
liabilities due to the Broker hereunder.
Broker also agrees that (i) it will in no event seek to assert, other than
pursuant to and to the extent of the Parent's undertaking set forth in Section
16(e) of the Parent's Limited Partnership Agreement, that the Parent or any of
its assets is in any respects subject to any debts of or claims against
Customer, either through "piercing the corporate veil," "substantive
consolidation" or other theories, and (ii) Broker will take no action and
institute no action or proceeding seeking to adjudicate the Customer 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 it or for any substantial part
of its property.
In no event shall Broker collect any amounts from Customer if doing so
would result in the assets attributable to one series of units of limited
partnership interest sold by Parent being used to pay any losses incurred in
respect of any other such series.
15. In the event Broker does not receive timely instructions with respect
to outstanding options held in Customer's account to liquidate, exercise or
permit such options to expire, Broker shall permit such options in Customer's
account to expire.
Customer shall give liquidating instructions to Broker concerning
Customer's open futures and forward positions maturing in a current month at
least five (5) business days prior to the first notice day, in the case of long
positions, and at least five (5) business days prior to the last trading day, in
the case of short positions. Alternatively, Customer shall deliver to Broker
sufficient funds to take delivery or sufficient funds and/or the necessary
documents to make delivery within the time period hereinabove specified. If
Customer does not either give instructions or deliver the funds and/or documents
hereby required to Broker within such period, Broker may, without
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notice, either liquidate Customer's positions pursuant to Section 11 or take or
make delivery on behalf of Customer upon such terms and in such manner as Broker
determines in its sole and absolute discretion.
16. Customer agrees and acknowledges that with respect to its forward
trading, Customer shall trade through Broker pursuant to the terms of the F/X
Desk Agreement and such trading shall be subject to Broker's standard netting
provisions.
17. Customer agrees that Broker may, from time to time, change the account
number assigned to any account covered by this Agreement, and that this
Agreement shall remain in full force and effect as to any such renumbered
account.
18. Subject to Section 7 hereof, no provision of this Agreement shall in
any respects be waived, altered, modified or amended unless such waiver,
alteration, modification or amendment be committed to writing and signed by
Customer and an officer of Broker.
19. THIS AGREEMENT SHALL BE CONSTRUED ACCORDING TO, AND THE RIGHTS AND
LIABILITIES OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF
NEW YORK.
20. This Agreement shall be binding upon Customer and Customer's assigns.
21. Customer acknowledges that it is an affiliate of Broker. However,
Customer acknowledges and agrees that this Agreement may be enforced against
Customer in accordance with its terms, irrespective of such affiliation.
22. If any term or provision hereof, or the application thereof to any
person or circumstance, shall to any extent be contrary to any exchange or
government regulation or otherwise invalid or unenforceable, the remainder of
this Agreement, or the application of such provision to persons or circumstances
other than those as to which it is contrary, invalid or enforceable, shall not
be affected thereby, and shall be enforced to the fullest extent permitted by
regulation and law, provided such enforcement does not materially alter the
intent of this Agreement or reduce the security, or increase the obligations,
of Broker hereunder.
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<PAGE>
23. The rights and remedies conferred upon the parties hereto shall be
cumulative, and the exercise or waiver of any thereof shall not preclude or
inhibit the exercise of additional rights or remedies.
24. Broker shall be free to render services of the nature to be rendered
to Customer hereunder to persons or parties in addition to Customer, and the
parties acknowledge that Broker does and will render such services, including to
commodity pools similar in nature to Customer, and may do so on terms more
favorable than those granted to Customer hereunder. However, Broker shall not
knowingly or deliberately favor any account over Customer with respect to the
execution of commodity trades.
25. This Agreement shall be cancelable, without penalty, upon sixty (60)
days' notice to the parties hereto by Broker or Customer.
26. Any notices under this Agreement shall be given or confirmed in
writing, delivered personally or sent by mail, as follows:
if to Customer:
ML PRINCIPAL PROTECTION TRADING L.P.
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters
Sixth Floor, South Tower
World Financial Center
New York, New York 10080-6106
Attn: John R. Frawley, Jr.
with a copy to:
MERRILL LYNCH INVESTMENT PARTNERS INC.
Merrill Lynch World Headquarters
Sixth Floor, South Tower
World Financial Center
New York, New York 10080-6106
Attn: John R. Frawley, Jr.
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if to Broker:
MERRILL LYNCH FUTURES INC.
Merrill Lynch World Headquarters
World Financial Center
250 Versey Street
23rd Floor
New York, New York 10080-1323
Attn: William Maitland, Esq.
Notices hereunder shall be effective only when actually received.
27. Customer understands that any of its assets held by the parties with
which Customer trades in the forward markets will not be subject to Commodity
Futures Trading Commission segregation requirements.
28. This Agreement shall inure to the benefit of Broker. This Agreement
shall also inure to the benefit of any of Broker's affiliates through which
Customer may trade and to that of the respective successors (by merger,
consolidation or otherwise) and assigns of each of the foregoing parties, each
of which may transfer Customer's account to any such successors or assigns.
29. Broker and Customer each agree that in the event of inconsistencies
between the terms of this Agreement and the Prospectus, the latter shall control
as if set forth verbatim herein.
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IN WITNESS WHEREOF, this Agreement has been executed for and on behalf of
the undersigned on the day and year first written above.
ML PRINCIPAL PROTECTION
TRADING L.P.
By: Merrill Lynch Investment
Partners
Inc., General Partner
By:________________________________
James M. Bernard, Vice President
Accepted and Confirmed:
MERRILL LYNCH FUTURES INC.
By:_________________________________
Name:
Title:
ML PRINCIPAL PROTECTION L.P.
(solely in respect of Section 10
hereof)
By: Merrill Lynch Investment Partners
Inc., General Partner
By:_________________________________
James M. Bernard, Vice President
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MERRILL LYNCH ASSET MANAGEMENT, L.P.
(solely in respect of Section 1,
paragraph 3 and Section 4, paragraph
2 hereof)
By: Princeton Services, Inc.,
General Partner
By:____________________________
Name:
Title:
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EXHIBIT 10.04
ESCROW AGREEMENT
TO: The Bank of New York
101 Barclay Street
New York, New York 10286
The following property is to be deposited with you as "Escrow Agent":
all proceeds of the subscriptions for the Units of Limited Partnership Interest
(referred to herein as the "Units") of ML PRINCIPAL PROTECTION L.P., (formerly,
ML Principal Protection Plus L.P.), a Delaware limited partnership being offered
pursuant to a continuous public offering of the Units, received by MERRILL
LYNCH, PIERCE, FENNER & SMITH INCORPORATED and certain of its affiliates, as
selling agent ("Selling Agent") for ML PRINCIPAL PROTECTION L.P., which are
accepted by MERRILL LYNCH INVESTMENT PARTNERS INC. (formerly ML Futures
Investment Partners Inc.), the general partner ("General Partner") of ML
PRINCIPAL PROTECTION L.P., Escrow Account No. 328436. The Unit price will be
$100. Such subscriptions may be deposited in the Escrow Account established
under this Escrow Agreement either by certified or clearinghouse check, or
Federal Funds wire transfer, to be determined by the General Partner, duly made
out to the Escrow Agent in the following form: "THE BANK OF NEW YORK, AS
<PAGE>
ESCROW AGENT FOR ML PRINCIPAL PROTECTION L.P., ESCROW ACCOUNT NO. 328436." If
the deposit into the Escrow Account is made by certified check or Federal Funds
wire transfer, the Escrow Agent shall invest the funds deposited on the same day
as deposited, provided such deposit is received by the Escrow Agent by 10:00
a.m. E.S.T. If the deposit into the Escrow Account is made by certified check or
Federal Funds wire transfer and received by the Escrow Agent after 10:00 a.m.
E.S.T., the Escrow Agent shall invest the funds deposited on the next business
day. If the deposit into the Escrow Account is made by clearinghouse check, the
Escrow Agent shall invest the funds deposited on the next business day following
the receipt of the clearinghouse check. The Selling Agent will retain all
Subscription Agreement and Power of Attorney signature pages submitted by
subscribers.
As Escrow Agent, you are hereby directed to hold, deal with and
dispose of the aforesaid property and any other property, including without
limitation, interest earned on funds held in the Escrow Account, at any time
held by you hereunder in the following manner, subject, however, to the terms
and conditions hereinafter set forth:
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Units are sold to the public, on a continuous basis, as of the
beginning of each calendar quarter (hereinafter referred to as a "Closing
Date"). 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. The General
Partner may terminate, but not suspend, the offering at any time upon verbal
notice promptly confirmed in writing to you.
On each Closing Date the Escrow Agent shall, upon (i) written
instructions from the Selling Agent, the General Partner and ML PRINCIPAL
PROTECTION L.P., and (ii) possession in the Escrow Account of cleared funds in
payment of subscriptions, release all funds then held in such Escrow Account,
except as otherwise provided herein, to the ML PRINCIPAL PROTECTION TRADING L.P.
(a Delaware limited partnership which serves as the trading subsidiary of ML
PRINCIPAL PROTECTION L.P. and of which ML PRINCIPAL PROTECTION L.P. is the sole
limited partner and the General Partner is the sole general partner) commodity
trading account maintained with MERRILL LYNCH FUTURES INC. ("Broker"), as
commodity broker for ML PRINCIPAL PROTECTION TRADING L.P., or to the checking
account of ML PRINCIPAL PROTECTION L.P., as the General Partner may direct. No
selling commissions or offering
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or other charges are payable from any amounts held in escrow. The General
Partner shall give you verbal notice (promptly confirmed in writing) of the
Closing Date at least three business days prior thereto. In lieu of liquidating
investments in which the escrow funds are being maintained, the Escrow Agent may
transfer such investments in kind to the checking account of ML PRINCIPAL
PROTECTION L.P., with the consent of the General Partner.
As promptly as practicable (but in no event more than 10 business
days) after each Closing Date, you shall remit to the Selling Agent a check for
all interest earned on subscribers' funds while in escrow. All interest earned
on rejected subscriptions shall be distributed by the Selling Agent (upon
receipt of funds from you) to the appropriate subscribers as described above,
irrespective of amount.
In the event that the General Partner terminates the offering of the
Units at a time when any subscription funds are held in escrow, the Escrow Agent
shall, as promptly as practicable, and in no event later than 5 business days
thereafter, transmit to the Selling Agent a check or checks in
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the amount of the subscriptions received plus the interest actually earned
thereon while held in escrow.
The Escrow Agent shall invest all funds deposited in the Escrow
Account in United States Treasury Bills, time deposits or other securities to
which the General Partner instructs the Escrow Agent in writing. The General
Partner shall instruct the Escrow Agent as to in which securities the funds in
the Escrow Account shall be invested prior to 10:00 a.m. E.S.T. on any date on
which funds shall be invested. In the absence of such instruction the Escrow
Agent is authorized to invest such funds in securities which have the same
maturity as the last set of instructions received.
At any time prior to the release of a subscriber's funds from the
Escrow Account, the General Partner is authorized to notify the Escrow Agent
that such subscription has not been accepted (irrespective of how long such
subscription has been held in the Escrow Account and of whether the General
Partner had previously indicated its willingness to accept such subscription),
and the General Partner is further authorized to direct the Escrow Agent to
return any funds held in the Escrow Account
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to the Selling Agent for the benefit of the person submitting such subscription
(including any interest attributable to such funds while held in the Escrow
Account). In the event a subscription has not been accepted, the Selling Agent
shall provide the Escrow Agent with the name of the subscriber, the number of
Units subscribed for each such subscriber, the amount of principal initially
deposited or the amount debited to the subscriber's customer securities account.
Such refund of subscriptions, plus interest, shall be made in the case of each
rejected subscription in the same manner described above in the event that any
offering of a series of Units is terminated without Units being sold.
The Selling Agent acknowledges and agrees that the method established
pursuant to this Escrow Agreement for the refund of rejected subscriptions and
of interest earned on subscriptions is only acceptable under Rule 15c2-4 of the
Securities Exchange Act of 1934 provided that the Selling Agent informs
subscribers of when their customer securities accounts at the Selling Agent will
be credited with such refunded subscription payments and/or interest income.
Accordingly, the Selling Agent undertakes that it will (a) credit the
appropriate subscribers'
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customer securities accounts as promptly as practicable (and in no event more
than 5 business days) after receipt of the necessary funds from the Escrow
Agent and information indicating the amounts so due, and (b) inform all
subscribers as soon as practicable of the date that the amounts to be credited
will be available in their respective customer accounts.
Interest earned on funds while held in the Escrow Account shall be
allocated among subscribers in proportion to the amounts of their respective
subscriptions and the lengths of time their subscriptions were held in escrow.
--------------------------------------------
Prior to delivery as described above, ML PRINCIPAL PROTECTION L.P.
shall have neither title to nor interest in the funds on deposit in the Escrow
Account, and such funds shall under no circumstances be subject to the
liabilities or indebtedness of ML PRINCIPAL PROTECTION L.P.
All documents, including any instruments necessary to the negotiation
or other transfer of the assets held in the Escrow Account, deposited
simultaneously with the execution of
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this Escrow Agreement are approved by the parties hereto, other than the Escrow
Agent. The Escrow Agent shall not be obliged to inquire as to the form, manner
of execution or validity of any of these documents or of any document hereafter
deposited in the Escrow Account upon the instruction of the General Partner, nor
shall the Escrow Agent be obliged to inquire as to the identity, authority or
rights of the persons executing the same.
The General Partner shall indemnify and save the Escrow Agent harmless
from losses, costs, and expenses (including reasonable attorneys' fees) incurred
by the Escrow Agent in any suit or claim arising out of or in connection with
this Escrow Agreement except claims which are occasioned by the Escrow Agent's
negligence, bad faith, or willful misconduct. This indemnity shall survive the
termination of this Escrow Agreement.
The Escrow Agent shall not be liable for any error of judgment, for
any act done or steps taken or omitted by the Escrow Agent in good faith
(including without limitation the liquidation of investments held in the Escrow
Account), for any mistake of fact or law, or for anything which the Escrow Agent
may do or refrain from doing in connection herewith, except for
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the Escrow Agent's own negligence, bad faith, or willful misconduct. No
provision of this Agreement shall require the Escrow Agent to expand or risk its
own funds or otherwise incur any financial liability in the performance of any
of its duties hereunder.
In case of conflicting demands upon the Escrow Agent, the Escrow Agent
may withhold performance of this Escrow Agreement until such time as said
conflicting demands shall have been withdrawn or the rights of the respective
parties shall have been settled by court adjudication, arbitration, joint order
or otherwise.
Any notice which the Escrow Agent is required or desires to give
hereunder to any of the undersigned shall be in writing and may be given by
mailing the same to the address of the undersigned indicated under their
respective signatures hereon (or to such other address as said undersigned may
substitute therefor by written notification to the Escrow Agent). For all
purposes hereof, any notice shall be effective only when actually received.
Notices to the Escrow Agent shall be in writing and shall not be deemed
effective until actually received
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by the Escrow Agent's trust department. Whenever under the terms hereof the time
for giving notice or performing an act falls upon a Saturday, Sunday or bank
holiday, such time shall be extended to the Escrow Agent's next business day.
The Escrow Agent's duties and responsibilities shall be limited to
those expressly set forth in this Escrow Agreement, and the Escrow Agent shall
not be subject to, nor obligated to recognize, any other agreement between, or
direction or instruction of, any or all of the parties hereto even though
reference thereto may be made herein; provided, however, that with the Escrow
Agent's written consent, this Escrow Agreement may be amended at any time or
times by an instrument in writing signed by all of the then parties in interest.
If any property in the Escrow Account is at any time attached,
garnished or levied upon, under any court order, or in case the payment,
assignment, transfer, conveyance or delivery of any such property shall be
stayed or enjoined by any court order, or in case any order, judgment or decree
shall be made or entered by any court affecting such property, or any part
thereof, then in any of such events, the Escrow Agent is authorized, in its
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sole discretion, to rely upon and comply with any such order, writ, judgment or
decree, which the Escrow Agent is advised by legal counsel of its own choosing
is binding upon the Escrow Agent, and if the Escrow Agent complies with any such
order, writ, judgment or decree, the Escrow Agent shall not be liable to any of
the parties hereto or to any other person, firm or corporation by reason of such
compliance, even though such order, writ, judgment or decree may be subsequently
reversed, modified, annulled, set aside or vacated.
The Escrow Agent may resign by giving fifteen (15) business days'
written notice to the undersigned as aforesaid; and thereafter, subject to the
possible applicability of the provisions of the preceding paragraph hereof in
the event that any property in the Escrow Account has been attached, garnished
or levied upon, shall deliver all remaining property in the Escrow Account upon
the joint written and signed order of the undersigned. If no such order is
received by the Escrow Agent within thirty days after mailing such notice, the
Escrow Agent is unconditionally and irrevocably authorized and empowered to send
any and all property in the Escrow Account by registered mail to the respective
depositors thereof (irrespective of whether the
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Escrow Agent shall have received any certificate regarding, or funds in respect
of, additional interest from the General Partner).
The General Partner may remove the Escrow Agent at any time (with or
without cause) by giving at least 25 days' written notice thereof. Within 10
days after receiving such notice, the General Partner and the Selling Agent
shall jointly agree on and appoint a successor escrow agent at which time the
Escrow Agent shall either distribute the funds held in the Escrow Account, less
its fees, costs and expenses or other obligations owed to it as directed by the
joint instructions of the General Partner and the Selling Agent or hold such
funds, pending distribution, until all such fees, costs and expenses or other
obligations are paid. If a successor escrow agent has not been appointed or has
not accepted such appointment by the end of the 10 day period, the Escrow Agent
may appeal to a court of competent jurisdiction for the appointment of a
successor escrow agent, or for other appropriate relief and the costs, expenses
and reasonable attorneys fees which the Escrow Agent incurs in connection with
such a proceeding shall be paid by the General Partner.
-12-
<PAGE>
The General Partner shall pay the Escrow Agent pursuant to the Escrow
Agent's customary fee schedule. The Escrow Agent agrees that it shall have no
right against ML PRINCIPAL PROTECTION L.P. or its subsidiary, ML PRINCIPAL
PROTECTION TRADING L.P. with respect thereto. This paragraph shall survive
termination of the Agreement.
This agreement shall be construed, enforced, and administered in
accordance with the laws of the State of New York.
In the event of any dispute between or conflicting claims by or among
the General Partner or the Selling Agent and/or any other person or entity with
respect to any funds held in the Escrow Account, the Escrow Agent shall be
entitled, at its sole discretion, to refuse to comply with any and all claims,
demands or instructions with respect to such funds so long as such dispute or
conflict shall continue, and the Escrow Agent shall not be or become liable in
any way to the General Partner or the Selling Agent for its failure or refusal
to comply with such conflicting claims, demands or instructions, except to the
extent under the circumstances such failure would constitute negligence, bad
faith or willful misconduct on the Escrow Agent's
-13-
<PAGE>
part. The Escrow Agent shall be entitled to refuse to act until, at its sole
discretion, either such conflicting or adverse claims or demands shall have been
finally determined in a court of competent jurisdiction or settled by agreement
between the conflicting parties as evidenced in a writing, satisfactory to the
Escrow Agent or the Escrow Agent shall have received security or an indemnity
satisfactory to the Escrow Agent sufficient to save it harmless from and against
any and all loss, liability or expense which it may incur by reason of its
acting. The Escrow Agent may in addition elect at its sole discretion to
commence an interpleader action or seek other judicial relief or orders as the
Escrow Agent may deem necessary.
The invalidity, illegality or unenforceability of any provision of
this Agreement shall in no way affect the validity, legality or enforceability
of any other provision; and if any provision is held to be unenforceable as a
matter of law, the other provisions shall not be affected thereby and shall
remain in full force and effect.
-14-
<PAGE>
This Agreement shall constitute the entire agreement of the parties
with respect to the subject matter and supersedes all prior oral or written
agreements in regard thereto.
The rights and remedies conferred upon the parties hereto shall be
cumulative, and the exercise or waiver of any such right or remedy shall not
preclude or inhibit the exercise of any additional rights or remedies. The
waiver of any right or remedy shall not preclude or inhibit the subsequent
exercise of such right or remedy.
This Agreement may be executed by each of the parties hereto in any
number of counterparts, each of which counterparts, when so executed and
delivered, shall be deemed to be an original and all such counterparts shall
together constitute one and the same agreement.
-15-
<PAGE>
Dated at New York, New York as of ________, 1996
Parties to the Escrow
---------------------
ML PRINCIPAL PROTECTION L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
Merrill Lynch World Headquarters
Sixth Floor
South Tower
World Financial Center
New York, New York 10080-6106
By: _______________________________
James M. Bernard
Vice President
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED, Selling Agent
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10080-6106
By: _______________________________
John R. Frawley, Jr.
Accepted this ____ day of
_____________, 1996
THE BANK OF NEW YORK
101 Barclay Street
New York, New York 10286
By: ________________________
Name:
Title:
-16-
<PAGE>
EXHIBIT 10.07
AMENDMENT
TO
FOREIGN EXCHANGE DESK SERVICE AGREEMENT
This Amendment (the "Amendment") to the Foreign Exchange Desk Service
Agreement dated July 1, 1993 (the "Agreement") among MERRILL LYNCH INTERNATIONAL
BANK ("MLIB"), MERRILL LYNCH FUTURES INC. ("MLF"), MERRILL LYNCH INVESTMENT
PARTNERS INC., formerly, ML Futures Investment Partners Inc. ("MLIP"), and each
of the funds listed on Schedule A thereto, as amended from time to time, is made
as of this __th day of ____, 1996 among the undersigned and ML PRINCIPAL
PROTECTION TRADING L.P., formerly, ML Principal Protection Plus Trading L.P.
(the "Customer").
W I T N E S S E T H:
-------------------
WHEREAS, MLIB, MLF and MLIP have determined to amend the Agreement as
set forth in this Amendment; and
WHEREAS, the Customer has determined to be bound by the terms and
provisions of the Agreement including the amendments to the Agreement pursuant
to this Amendment.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of all of which are hereby acknowledged, the parties
hereto agree as follows:
1. The Customer hereby agrees to be bound by the terms and provisions
of the Agreement including the amendments to the Agreement contained herein.
2. Section 6 of the Agreement shall be amended to add the following
paragraphs after the second paragraph under such section:
"ML Principal Protection L.P. (the "Parent"), the sole limited partner
of Customer, hereby authorizes and directs MLF to debit directly from
Parent's bank or custodial account(s) all amounts due to MLF from Parent as
provided under Section 16(e) of the Parent's Third Amended and Restated
Limited Partnership Agreement dated as of ________, 1996 -- being amounts
equal to
<PAGE>
the difference between the assets which Customer commits to trading and the
actual equity invested in Customer. Such debits may be made without need of
prior notice to either Customer or the Parent.
MLF acknowledges and agrees that Customer is a subsidiary limited
partnership of the Parent, which is the sole limited partner of Customer
and whose general partner is also the general partner of Customer. MLF
agrees that except pursuant to the Parent's undertaking pursuant to Section
16(e) of the Parent's Limited Partnership Agreement, MLF will look only to
the assets of Customer, and not to any assets of the Parent itself, to
satisfy any debts or liabilities due to MLF hereunder.
MLF also agrees that (i) it will in no event seek to assert, other
than pursuant to and to the extent of the Parent's undertaking set forth in
Section 16(e) of the Parent's Third Amended and Restated Amended Limited
Partnership Agreement, that the Parent or any of its assets is in any
respects subject to any debts of or claims against Customer, either through
"piercing the corporate veil," "substantive consolidation" or other
theories, and (ii) MLF will take no action and institute no action or
proceeding seeking to adjudicate the Customer 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 it or for any
substantial part of its property.
In no event shall MLF collect any amounts from Customer if doing so
would result in the assets attributable to one series of units of limited
partnership interest sold by Parent being used to pay any losses incurred
in respect of any other such series."
3. Except as otherwise set forth in this Amendment, the Agreement
shall remain in full force and effect and is hereby ratified and confirmed. All
references to the Agreement in the
-2-
<PAGE>
Agreement or elsewhere shall be deemed to refer to the Agreement as amended
hereby.
4. This Amendment may be executed in any number of counterparts each
of which shall be deemed to be an original but all such separate counterparts
shall constitute but one and the same instrument.
IN WITNESS WHEREOF, this Amendment has been executed by a duly
authorized representative for and on behalf of the undersigned as of the day and
year first above written.
-3-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS MERRILL LYNCH FUTURES INC.
INC.
By:___________________________ By:___________________________
James M. Bernard Name:
Vice President Title:
MERRILL LYNCH INTERNATIONAL ML PRINCIPAL PROTECTION
BANK TRADING L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.,
By:___________________________ General Partner
Name:
Title:
By:___________________________
James M. Bernard
Vice President
Accepted and agreed to with
respect to Section 2 of the
Amendment:
ML PRINCIPAL PROTECTION
L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.,
General Partner
By:___________________________
James M. Bernard
Vice President
-4-
<PAGE>
EXHIBIT 10.08
MERRILL LYNCH ASSET MANAGEMENT, L.P.
----------------------------------------------------------------------
INVESTMENT ADVISORY CONTRACT
We, MERRILL LYNCH ASSET MANAGEMENT, L.P. agree to act as investment
manager for ML PRINCIPAL PROTECTION L.P. and ML PRINCIPAL PROTECTION
TRADING L.P. as follows:
APPOINTMENT
1. We have been appointed investment manager of the investment portfolio (the
"Portfolio") of ML Principal Protection Trading L.P. and ML Principal
Protection L.P. (the "Client"; formerly, ML Principal Protection Plus
Trading L.P. and ML Principal Protection Plus L.P., respectively), and
effective from the time we accept this agreement we agree to continue in
such capacity on the terms set forth herein.
INVESTMENTS
2. Except as limited below, we shall have full discretion, as Client's agent
and attorney-in-fact, to make purchases and sales of investments on Client's
behalf and otherwise to act at our discretion.
3. We will use reasonable efforts to manage the Portfolio in general compliance
with the Investment Guidelines affixed hereto or as may be modified by the
written agreement of the Client and us (the "Investment Guidelines"). We
will submit to the Client monthly reports appraising the portfolio at
current market value.
PORTFOLIO TRANSACTIONS
4. Merrill Lynch Investment Partners Inc. (formerly, ML Futures Investment
Partners Inc.), acting in its respective capacities as general partner of
each of the Client, directs us to effect such transactions with or through
any investment firm that we select on the Client's behalf, excluding any
affiliate of ours ("Merrill Lynch"). Merrill Lynch Investment Partners Inc.,
acting in its respective capacities as general partner of each of the
Client, also authorizes us to establish accounts on the Client's behalf as
the Client's attorney-in-fact in accordance with these directions, and
empowers such investment firms to follow our instructions. No trades for the
Portfolio may be executed with or through Merrill Lynch.
ADMINISTRATION
5. We are a registered investment adviser under the Investment Advisers Act of
1940. Merrill Lynch Asset Management, L.P. is a limited partnership. Merrill
Lynch Investment Management, Inc. and Merrill Lynch & Co., Inc. are its
limited partners. Princeton Services, Inc. a wholly owned, indirect
subsidiary of Merrill Lynch & Co., Inc., is the general partner. We will
undertake to notify you of any change in the membership of our partnership
within a reasonable time of such change.
6. You acknowledge that you have received our disclosure statement. You
represent that the person entering this agreement on your behalf
<PAGE>
has full power and authority to do so and that it is binding. You will not
employ, nor permit any of your affiliates to employ, any publicity
regarding Merrill Lynch Asset Management, L.P. without furnishing the text
of such publicity to Merrill Lynch Asset Management, L.P. for review prior
to its use and obtaining written consent prior to such use. The term
"publicity" as used herein shall include (i) any written document available
to the public or intended for dissemination to the public or to the
Client's or Merrill Lynch Investment Partners Inc.'s or any of their
affiliates' sales or marketing personnel or agents; and (ii) any oral
communication with members of the media, the public or the Client's or ML
Futures Investment Partners Inc.'s or any of their affiliates' sales or
marketing personnel or agents. We hereby consent to the publicity regarding
Merrill Lynch Asset Management, L.P. with respect to our role as investment
manager of the Portfolio of the Client which has been furnished to us and
approved prior to the date set forth below on which we accept this
Agreement.
7. You agree to notify us prior to giving any instruction to an investment
firm or custodian regarding the commitment, withdrawal or investment of the
Portfolio. We are under no duty to enter into any transaction with respect
to assets which are not readily available for delivery.
8. You direct that investment firms with or through which we effect
transactions be instructed to transmit simultaneously to the custodian of
the Portfolio on your behalf and to us all correspondence, including
confirmations and periodic statements. The custodian will be directed to
transmit to you all correspondence, including confirmations and periodic
statements, that it receives from investment firms with respect to the
Portfolio.
9. Employees of our affiliates may receive credits or compensation for
introducing you to us and for transactions effected on your behalf.
10. You represent that the Portfolio is not subject to the Employee Retirement
Income Security Act of 1974 ("ERISA") or the Invest ment Company Act of
1940. You will be exclusively responsible for compliance with the Commodity
Exchange Act and other law, except insofar as we do not comply with the
Investment Guidelines.
11. We will not be liable for the consequences of any investment decision or
related activities made or omitted within the limitations specified
earlier, except for loss incurred as a result of our gross negligence or
willful or reckless misconduct. We will not be liable for loss incurred by
any other person or as a result of any person other than us, whether or not
our affiliate. These limitations of liability also apply to our officers,
employees and agents.
12. We will in no event seek to assert, other than pursuant to and to the
extent of ML Principal Protection L.P.'s undertaking set forth in
-2-
<PAGE>
Section 16(e) of its Amended and Restated Limited Partnership Agreement,
that ML Principal Protection L.P. or any of its assets is in any respects
subject to any debts of or claims against ML Principal Protection Trading
L.P., either through "piercing the corporate veil," "substantive
consolidation" or any other theory, and (ii) we will take no action and
institute no action or proceeding seeking to adjudicate ML Principal
Protection Trading L.P. 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 ML Principal Protection Trading L.P. or for any
substantial part of its property.
Merrill Lynch Investment Partners Inc., acting in its respective capacities
as general partner of each of Merrill Lynch Principal Protection L.P. and
Merrill Lynch Principal Protection Trading L.P., shall ensure that ML
Principal Protection L.P. is at all times the sole limited partner of ML
Principal Protection Trading L.P. and Merrill Lynch Investment Partners
Inc. the sole general partner of both ML Principal Protection L.P. and ML
Principal Protection Trading L.P. -- the intent of the parties being that
ML Principal Protection Trading L.P. should function solely as a conduit
for ML Principal Protection L.P.'s own trading activities and not as any
form of investment by ML Principal Protection L.P.
13. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE
INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT AS MAY BE PREEMPTED BY
UNITED STATES FEDERAL LAW.
CUSTODY
14. You have instructed us that Merrill Lynch, Pierce, Fenner & Smith
Incorporated and Merrill Lynch Futures Inc. will act as custodians,
respectively, of the Portfolio. We will never receive or physically control
the Portfolio.
15. We will not be responsible for making any tax credit or similar claim or
any legal filing on your behalf.
FEES
16. Our fees are calculated, and shall be paid, quarterly in arrears based on
the attached fee schedule as determined in accordance with the valuation
procedures described in paragraph three above. Merrill Lynch Futures Inc.
will pay us our fees out of the amounts paid to Merrill Lynch Futures Inc.
by ML Principal Protection Trading L.P. pursuant to the Customer Agreement
between Merrill Lynch Futures Inc. and ML Principal Protection Trading L.P.
Merrill Lynch Investment Partners Inc. will promptly pay us the shortfall,
if any, between the amount of our fees and the amount paid to us by Merrill
Lynch Futures Inc.
-3-
<PAGE>
TERMINATION
17. This agreement shall remain in force until further notice. You will be
entitled to terminate this agreement any time, effective from the time we
receive written notification or such other time as may be mutually agreed
upon, subject to the settlement of transactions in progress. There will be
no penalty charge on termination. This agreement will also be terminated on
the fifth day after we send you notice in writing of our intent to
terminate this agreement or such other time as may be mutually agreed upon,
also subject to the settlement of transactions in progress. We may not
assign this agreement without your prior consent.
Dated as of __________, 1996 ML PRINCIPAL PROTECTION L.P.
By: Merrill Lynch Investment Partners Inc.,
General Partner
___________________________________________
James M. Bernard
Vice President
ML PRINCIPAL PROTECTION TRADING L.P.
By: Merrill Lynch Investment Partners Inc.,
General Partner
___________________________________________
James M. Bernard
Vice President
MERRILL LYNCH INVESTMENT PARTNERS INC.
___________________________________________
James M. Bernard
Vice President
Signed and accepted, on July __,
1996, on behalf of MERRILL LYNCH MERRILL LYNCH FUTURES INC.
ASSET MANAGEMENT, L.P., IN
PLAINSBORO, NEW JERSEY, U.S.A. ___________________________________________
By: Princeton Services, Inc.,
General Partner Name: _____________________________________
Title: ______________________________
_________________________________
Name: ___________________________
Title: _________________________
-4-
<PAGE>
================================================================================
SCHEDULE OF FEES
Fees payable to the Investment Manager will be calculated in accordance with the
following schedule, on the basis of the average daily investable balance of
assets under management during the period with respect to which such fees are
due. The average daily investable balance for each one month period during the
quarter will be the market value of the securities plus other assets less
liabilities at the beginning of each month plus or minus the weighted cash flows
during such month divided by the number of days in the period.
.20% of the first $25 million
.15% on the next $25 million
.125% on the next $50 million
.10% on assets in excess of $100 million
Minimum annual management fee of $50,000.
Management fees to be paid quarterly in arrears.
MERRILL LYNCH
================================================================================
<PAGE>
INVESTMENT GUIDELINES
The following guidelines are the written instructions of Merrill Lynch
Investment Partners Inc. ("MLIP"), acting in its capacity as respective general
partner of each of ML Principal Protection L.P. and ML Principal Protection
Trading L.P., to Merrill Lynch Asset Management, L.P. pursuant to the Investment
Advisory Contract among the parties named therein dated July __, 1996. MLIP
shall provide all information necessary for MLAM to make the determinations with
respect to Guideline 3 below (i.e., the amount of assets per calendar quarter-
end series of Units and their respective Principal Assurance Dates). MLAM shall
not be responsible for providing or confirming the accuracy or completeness of
any such information and shall not be responsible for any mistakes as a result
of relying on such information.
1. Only U.S. Treasury securities and securities issued by U.S. government
agencies and instrumentalities ("Government Securities") are to be
purchased. No mortgage backed securities, interest-only securities,
principal-only securities or other derivatives may be purchased nor may
repurchase or reverse repurchase agreements be entered into.
2. Overall Portfolio Duration: not to exceed 2 years.
3. The Portfolio shall at no time contain a principal amount of Government
Securities maturing as of a particular date greater than the Net Asset
Value of Units having a Principal Assurance Date on or after such date.
4. A minimum of 20% of the Portfolio must have maturities of 91 days or less
(which may include T-bills held at Merrill Lynch Futures Inc.).
Dated: __________, 1996
ML PRINCIPAL PROTECTION L.P. ML PRINCIPAL PROTECTION
TRADING L.P.
By: Merrill Lynch Investment
Partners Inc. By: Merrill Lynch Investment
Partners Inc.
By:_________________________
James M. Bernard By:____________________________
Vice President James M. Bernard
Vice President
MERRILL LYNCH ASSET
MANAGEMENT, L.P.
By: Princeton Services, Inc.,
General Partner
By:_____________________________
Name:__________________________
Title:_________________________
-6-
<PAGE>
EXHIBIT 10.09(a)
NOTE
----
For value received, the undersigned, Merrill Lynch Futures Inc.
("Merrill Lynch Futures"), hereby promises to pay to ML Principal Protection
Trading L.P. (the "Partnership"), a Delaware limited partnership, or to its
registered assigns, the principal sum in the amount of the Net Assets (as
defined in the Partnership's Amended and Restated Limited Partnership Agreement
dated as of _________, 1996 of the Partnership at Merrill Lynch Futures upon the
termination of the Customer Agreement dated as of _______, 1996 between Merrill
Lynch Futures and the Partnership (the "Customer Agreement"), plus interest
income at month-end for each month during the term of this Note at a rate equal
to 0.50% per annum below the average yield on 91-day U.S. Treasury bills issued
during such month on 100% of the Partnership's average daily "total assets"
(cash on deposit adjusted to include open trade equity and funds in collection
or settlement) maintained by the Partnership at Merrill Lynch Futures. Payment
of all interest due hereunder shall be made by direct deposit by Merrill Lynch
Futures to the account of the Partnership carried by Merrill Lynch Futures;
payment of the principal hereunder shall be made by wire transfer to the account
<PAGE>
of the Partnership or its parent, ML Principal Protection L.P., as instructed by
the Partnership.
This Note shall be binding upon and inure to the benefit of Merrill
Lynch Futures and its successors and assigns, and the Partnership and its
successors and registered assignees. The Partnership, or any registered assignee
of this Note, may transfer the right to receive payments hereunder only by
surrendering this Note to Merrill Lynch Futures together with a duly executed,
written instrument of assignment in form and substance acceptable to Merrill
Lynch Futures. Merrill Lynch Futures shall maintain a register (the "Note
Register") in which it shall initially record the name of the Partnership as the
holder of such right. Upon surrender of this Note for assignment as provided
above, Merrill Lynch Futures shall enter the name of the assignee upon the Note
Register and immediately reissue this Note in the name of the registered
assignee. Prior thereto, Merrill Lynch Futures shall treat the party last
appearing on the Note Register as conclusively entitled to receive all payments
under this Note.
This Note shall be effective as of the date of the Customer Agreement
and shall terminate on the date of the
-2-
<PAGE>
termination of the Customer Agreement. If during any month the Customer
Agreement shall terminate other than on the last day of the month, any interest
due hereunder shall be prorated on the basis of the number of days during such
month that the Customer Agreement was in effect compared to the total number of
days in such month.
This Note shall be deemed to be made under, governed by and construed
in accordance with the laws of the State of New York.
MERRILL LYNCH FUTURES INC.
By: _______________________________
Name:________________________
Title:_______________________
Dated: _______ __, 1996
-3-
<PAGE>
EXHIBIT 10.09(b)
NOTE
----
For value received, the undersigned, Merrill Lynch, Pierce, Fenner &
Smith Incorporated ("Merrill Lynch"), hereby promises to pay to ML Principal
Protection L.P. (the "Partnership"), a Delaware limited partnership, or to its
registered assigns, the principal sum in the amount of the Net Assets (as
defined in the Partnership's Third Amended and Restated Limited Partnership
Agreement dated as of _________, 1996 of the Partnership at Merrill Lynch upon
the termination of the Custody Agreement dated as of _______, 1996 between
Merrill Lynch and the Partnership (the "Custody Agreement"), plus interest
income at month-end for each month during the term of this Note at a rate equal
to 0.50% per annum below the average yield on 91-day U.S. Treasury bills issued
during such month on 100% of the Partnership's average daily "total assets"
(cash on deposit adjusted to include open trade equity and funds in collection
or in settlement) maintained at Merrill Lynch. Payment of all interest due
hereunder shall be made by direct deposit by Merrill Lynch to the account of the
Partnership carried by Merrill Lynch; payment of the principal hereunder
<PAGE>
shall be made by wire transfer to the account of the Partnership as instructed
by the Partnership.
This Note shall be binding upon and inure to the benefit of Merrill
Lynch and its successors and assigns, and the Partnership and its successors and
registered assignees. The Partnership, or any registered assignee of this Note,
may transfer the right to receive payments hereunder only by surrendering this
Note to Merrill Lynch together with a duly executed, written instrument of
assignment in form and substance acceptable to Merrill Lynch. Merrill Lynch
shall maintain a register (the "Note Register") in which it shall initially
record the name of the Partnership as the holder of such right. Upon surrender
of this Note for assignment as provided above, Merrill Lynch shall enter the
name of the assignee upon the Note Register and immediately reissue this Note in
the name of the registered assignee. Prior thereto, Merrill Lynch shall treat
the party last appearing on the Note Register as conclusively entitled to
receive all payments under this Note.
This Note shall be effective as of the date of the Custody Agreement
and shall terminate on the date of the
-2-
<PAGE>
termination of the Custody Agreement. If during any month the Custody Agreement
shall terminate other than on the last day of the month, any interest due
hereunder shall be prorated on the basis of the number of days during such month
that the Custody Agreement was in effect compared to the total number of days in
such month.
This Note shall be deemed to be made under, governed by and construed
in accordance with the laws of the State of New York.
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
By: _______________________________
Name:________________________
Title:_______________________
Dated: _______ __, 1996
-3-
<PAGE>
EXHIBIT 10.10
MINIMUM NET ASSET VALUE
PER UNIT UNDERTAKING
MINIMUM NET ASSET VALUE PER UNIT UNDERTAKING made as of the ___ day of
______, 1996 between MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP"), a Delaware
corporation, and ML PRINCIPAL PROTECTION L.P. (the "Partnership"), a Delaware
limited partnership.
1. MLIP hereby undertakes to make, on September 30, 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 MLIP), sufficient
payments to the Partnership so that the Net Asset Value per Unit of each series
of Units as of the Principal Assurance Date for such series which is available
for distribution to Limited Partners (after adjustment for all liabilities of
the Partnership to third parties) will be at least $100, as of such date.
2. This Undertaking will remain in effect unless the Partnership is
dissolved or MLIP is removed as the general partner of the Partnership, in each
case with the approving vote of the Limited Partners -- upon either of which
events this undertaking will terminate without any payment obligation on behalf
of ML&Co.
3. MLIP acknowledges and agrees that its risk under this Undertaking
is in no respect mitigated by the fact that the Partnership will not trade
directly, but rather through a subsidiary limited partnership, ML Principal
Protection Trading L.P. (the "Trading Partnership"), because the Partnership
will commit to pay losses and expenses incurred by the Trading Partnership in
amounts in excess of the capital invested in the Trading Partnership by the
Partnership.
4. MLIP agrees that in the event it is required to make one or more
payments under this Undertaking, any such payment will be made without recourse
to the Partnership, the Trading Partnership, Merrill Lynch Futures Inc. or any
Limited Partner.
5. MLIP shall be obligated to make payments under this Undertaking
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).
<PAGE>
6. This Undertaking is an agreement between MLIP and the Partnership;
investors in the Partnership are in no respects parties hereto.
7. This Undertaking will terminate as to each series of Units on the
Principal Assurance Date for such series, upon payment by MLIP 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 Undertaking shall inure to the benefit of the Partnership
only in respect of each series of Units as of its Principal Assurance Date, not
in respect of Units of other series.
9. This Undertaking 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.
10. The parties hereto acknowledge that this Undertaking is supported
by the Guarantee Agreement of Merrill Lynch & Co., Inc., the indirect parent of
MLIP, in the form attached as Exhibit B to the Prospectus of the Partnership
dated July __, 1996.
-2-
<PAGE>
IN WITNESS WHEREOF, and for good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, this Undertaking has
been executed for and on behalf of the undersigned as of the day and year first
above written.
MERRILL LYNCH INVESTMENT
PARTNERS INC.
By:________________________________
James M. Bernard
Vice President
ML PRINCIPAL PROTECTION L.P.
By: Merrill Lynch Investment
Partners Inc.
(General Partner)
By:________________________________
James M. Bernard
Vice President
-3-
<PAGE>
EXHIBIT 10.11
CUSTODY AGREEMENT
THIS AGREEMENT, made between Merrill Lynch, Pierce, Fenner & Smith
incorporated, a Delaware corporation (the "Custodian"), and ML Principal
Protection L.P. (the "Client").
1. Subject to the administrative and operational requirements of the
Custodian, the Client hereby retains the Custodian to establish and maintain a
custodial account in the name of the Client (the "Custody Account"), and to hold
in the Custody Account assets of the Client (securities and other property
which, together with all additions, substitutions, and alterations thereto, are
hereinafter referred to as "Portfolio"), upon the terms and conditions set forth
herein, and only to the extent. that such Portfolio is actually delivered to the
Custodian.
2. The Client agrees to provide the Custodian with written or oral
instructions (which must be confirmed in writing) as to all matters connected
with the Portfolio, which instructions shall be given by Merrill Lynch Asset
Management, L.P. (the "Authorized Representative") pursuant to that certain
Investment Advisory Contract among the parties named therein, dated ________,
1996, attached hereto as Exhibit A. Written instructions and written
confirmation of oral instructions may be delivered or sent by mail or facsimile
transmission. The Custodian shall be entitled to accept, follow, and rely upon
such instructions from the Authorized Representative, whether given in writing
or orally (and, if oral, whether or not written confirmation is received by the
Custodian) until the Custodian receives written notice from the Client that the
authority of such Authorized Representative has been terminated; provided that
the Portfolio may include only U.S. Treasury securities and securities issued by
agencies and instrumentalities of the U.S. government. The Custodian reserves
the right to reject any transaction which in its sole judgment would expose it
or its agents to regulatory or other legal liabilities.
3. The Custodian shall have the following duties and authority:
(a) To collect all income, or other property payable in connection with any
securities or other property in the Portfolio, as well as any principal due
upon maturity, redemption or sale.
(b) To hold the income or other funds collected in connection with the
Portfolio as directed by the Authorized Representative.
(c) To receive free or against payment, deliver free or against payment, or
exchange securities and other property on instructions from the Client's
Authorized Representative. Unless otherwise agreed by the Client and the
Custodian, orders for purchases and sales shall be placed by the Client or
its Authorized Representative for its account and risk with a broker,
dealer, or agent selected by the Authorized Representative. The Custodian
shall not be liable for any act or omission of such broker, dealer, or
agent, regardless of whether the broker, dealer, or agent is an affiliate
of the Custodian.
<PAGE>
(d) To charge against any funds in the Client's Custody Account the cost of all
securities that the Custodian is instructed to receive against payment.
The Custodian shall not be required to effect any settlement or to make any
payment unless sufficient funds are deposited or have otherwise been made
available in a manner that is satisfactory to the Custodian. In the event
credit is inadvertently extended by the Custodian to the Client in
connection with any settlement, the Client shall hold the Custodian
harmless from and against all loss, liability, damage, cost and expense
(including, but not limited to, fees and expenses of legal counsel) arising
therefrom.
(e) To allocate the called portion of any securities held by the Custodian or
its agents for the Client in any manner deemed equitable.
(f) To hold any securities of the Client in the name of the Custodian or any
subcustodian or affiliate of the Custodian, or a depository or any
affiliate or nominee of any of the foregoing.
(g) To advise the Client, either in electronic or printed form, of each
transaction made for the Portfolio and provide Client with a holding
valuations report and a transaction journal report on a daily basis.
Custodian shall also furnish duplicate copies of such information to:
i) Mr. Bill Fodor
OMR Systems
101 Business Park Drive, Suite 22O
Skillman, New Jersey 08558; and
ii) Mr. James M. Bernard
ML Futures Investment Partners Inc
South Tower, 6th Floor
World Financial Center
New York, New York 10080-6106
iii) Mr. Tim O'Connor
Merrill Lynch Asset Management, L.P.
P.O. Box 9011
Princeton, New Jersey 08543-9011
(h) To execute, as the Client's agent, any and all certificates, instruments,
instructions, or other documents necessary or appropriate to the
performance of the Custodian's duties under this agreement.
4. The Client shall be solely and exclusively responsible for compliance
with any laws, rules, regulations or other obligations as they relate to the
Client, the Portfolio and any actions of the Client or its agents or
representatives taken with respect thereto. The Custodian shall not be liable
for any losses or liability incurred by the Client in connection with this
Agreement, except for such losses or liability as shall result from the gross
negligence or willful misconduct of the Custodian.
-2-
<PAGE>
5. The Client shall indemnify and hold the Custodian harmless from and
against any loss, liability, damage, cost, or expense (including but not limited
to fees and expenses of legal counsel), as incurred, that the Custodian might
incur in connection with this Agreement, except for such loss or liability that
arises out of the gross negligence or willful misconduct of the Custodian.
6. The Client understands and agrees that Custodian will have only those
duties as are specifically set forth in this Agreement. The Custodian will have
no obligation to review, analyze, or appraise assets of the Portfolio or to give
advice or make recommendations regarding the purchase, retention, sale or
exchange of any such assets. The Custodian will have no responsibility or
liability for any loss or damage caused directly or indirectly by any war,
natural disaster, government restriction, exchange or market ruling, suspension
of trading, strikes, or breakdown of communication or transmission facilities,
or other conditions beyond its control.
7. The Client hereby represents and warrants to the Custodian as follows:
(a) Existence. The Client is a corporation or partnership duly organized,
validly existing and in good standing under the laws of the jurisdiction in
which it is incorporated or organized.
(b) Requisite Authority. The Client has all requisite power and authority to
execute and deliver this Agreement and to perform its obligations hereunder, and
the execution and delivery of this Agreement by the Client has been duly
authorized by all necessary action on its part.
(c) Governmental Consents. No consent, authorization or approval of, or
declaration or filing with, any governmental or regulatory agency, board or
commission is required to be obtained or made by the Client in connection with
the execution and delivery of this Agreement or the performance of its
obligations hereunder.
8. The Client agrees to furnish the Custodian with such documents as it may
require in order to enable it to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the agreements or
conditions, herein contained, or as may be reasonably requested by Custodian.
9. The Custodian will be entitled to compensation for its services under this
Agreement according to its fee schedule in effect at the time of the services
and to be reimbursed for any incidental expenses incurred on the Client's
behalf. The custodian shall have a lien on any securities or funds of the
Client in the possession of the Custodian or its affiliates for payment of any
amounts due the Custodian under this Agreement.
10. The Custodian or the Client may terminate this Agreement at any time upon
written notice to the other. Delivery of assets of the Portfolio held in the
Custody Account as the Client directs in writing will release the Custodian from
all further liability and responsibility under this Agreement.
11. The Client is not a trust or plan covered by the Employee Retirement
Income Security Act of 1974, as amended.
-3-
<PAGE>
12. Except as otherwise provided in this Agreement or as separately agreed by
the Client, the Custodian shall hold all information received from the Client in
confidence except where such information is required to be disclosed pursuant to
a subpoena or court order issued by a court of competent jurisdiction or by a
regulatory or self-regulatory agency with authority over the Custodian or the
Client.
13. The Custodian shall not lend to itself or others any of the Client's
securities held by the Custodian.
14. AGREEMENT TO ARBITRATE CONTROVERSIES.
. ARBITRATION IS FINAL AND BINDING ON THE PARTIES.
. THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING
THE RIGHT TO JURY TRIAL.
. PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT
FROM COURT PROCEDURES.
. THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR
LEGAL REASONING, AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION
OF RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED.
. THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS
WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY.
. NOTHING IN THESE TERMS AND CONDITIONS SHALL CONSTITUTE A WAIVER OF THE
RIGHT TO SEEK A JUDICIAL FORUM WHERE SUCH A WAIVER WOULD BE VOID UNDER THE
EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED.
THE CLIENT AGREES THAT ALL CONTROVERSIES WHICH MAY ARISE BETWEEN THE CLIENT AND
THE CUSTODIAN, INCLUDING BUT NOT LIMITED TO THOSE INVOLVING ANY TRANSACTION OR
THE CONSTRUCTION, PERFORMANCE, OR BREACH OF THIS OR ANY OTHER AGREEMENT BETWEEN
THE CLIENT AND THE CUSTODIAN, WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO
THE DATE HEREOF, SHALL BE DETERMINED BY ARBITRATION. ANY ARBITRATION UNDER THIS
AGREEMENT SHALL BE CONDUCTED ONLY BEFORE THE NEW YORK STOCK EXCHANGE, INC., THE
AMERICAN STOCK EXCHANGE, INC. OR ARBITRATION FACILITY PROVIDED BY ANY OTHER
EXCHANGE OF WHICH THE CUSTODIAN IS A MEMBER, OR THE NATIONAL ASSOCIATION OF
SECURITIES DEALERS, INC., AND IN ACCORDANCE WITH ITS RULES THEN IN FORCE. THE
CLIENT MAY ELECT IN THE FIRST INSTANCE WHETHER ARBITRATION SHALL BE CONDUCTED
BEFORE THE NEW YORK STOCK EXCHANGE, INC., THE AMERICAN STOCK EXCHANGE, INC.,
OTHER EXCHANGE OF WHICH THE CUSTODIAN IS A MEMBER, OR THE
-4-
<PAGE>
NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. IF THE CLIENT FAILS TO MAKE
SUCH ELECTION, BY REGISTERED LETTER OR TELEGRAM ADDRESSED TO THE CUSTODIAN
BEFORE THE EXPIRATION OF FIVE DAYS AFTER RECEIPT OR A WRITTEN REQUEST FROM THE
CUSTODIAN TO MAKE SUCH ELECTION, THEN THE CUSTODIAN MAY MAKE SUCH ELECTION.
JUDGMENT UPON THE AWARD OF ARBITRATORS MAY BE ENTERED IN ANY COURT, STATE OR
FEDERAL, HAVING JURISDICTION. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED
CLASS ACTION TO ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION
AGREEMENT AGAINST ANY PERSON WHO HAS INITIATED IN COURT, A PUTATIVE CLASS
ACTION, OR WHO IS A MEMBER OF A PUTATIVE CLASS WHO HAS NOT OPTED OUT OF THE
CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL:
(I) THE CLASS CERTIFICATION IS DENIED;
(II) THE CLASS IS DECERTIFIED; OR
(III) THE CLIENT IS EXCLUDED FROM THE CLASS BY THE COURT.
SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A
WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN.
15. THIS AGREEMENT AND ITS ENFORCEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ITS
CONFLICTS OF LAWS PRINCIPLES, and shall be binding upon and inure to the benefit
of the parties hereto, their successors, agents, and assigns. No provision of
this Agreement may be changed, waived, discharged or terminated orally.
16. The Client acknowledges that the Custodian is a subsidiary of Merrill
Lynch & Co., Inc. and agrees that the Custodian is authorized to engage the
services of Merrill Lynch & Co., Inc., or any of its direct or indirect
subsidiaries and shall include the cost for their services (other than services
for which the Client has contracted directly) as an expense of Portfolio
administration. Without limiting the foregoing authorization, the Custodian
shall be permitted to use the services of any affiliated corporation; to receive
credit or other compensation from any affiliated corporation for any services it
may perform; and otherwise to exchange services with any affiliated corporation
and to compensate them for such services.
17. The Client understands that: (a) any other customers of the Custodian or
its affiliated corporations may have a financial interest in the securities
covered by the Custodian's services to the Client; (b) the Custodian, or its
affiliated corporations, may be purchasing or selling those securities for the
Custodian's or its affiliated corporations' customers; (c) the Custodian or its
affiliated corporations may have business relationships with the companies that
issue those securities; and (d) the Custodian's or its affiliated corporations'
officers and directors may be officers or directors of those companies.
-5-
<PAGE>
18. In the event that one or more provisions of this Agreement are held
invalid, illegal or unenforceable in any respect on the basis of any particular
circumstances or any jurisdiction, the validity, legality and enforceability of
any such provision and the remaining provisions, under other circumstances or in
other jurisdictions will not in any way be affected or impaired.
19. Any and all notices or other communications required or permitted to be
delivered to the Custodian hereunder shall be effective when actually received.
For purposes of all notices, or other communications, the Custodian's address
and the Client's address shall be as indicated on the signature page hereof.
20. This Agreement shall be binding upon all successors, assigns or
transferees of both parties hereto, irrespective of any change with regard to
the name of or the personnel of the Custodian or the client. Any assignment of
this Agreement shall be subject to the requisite review and/or approval of any
regulatory or self-regulatory agency or body whose review and/or approval must
be obtained prior to the effectiveness and validity of such assignment. No
assignment of this Agreement by the Client shall be valid unless the Custodian
consents to such assignment in writing. Any assignment by the Custodian to any
subsidiary that it may create or to a company affiliated with or controlled
directly or indirectly by it will be deemed valid and enforceable in the absence
of any consent from the Client.
21. This Agreement may be executed in counterparts, each of which shall be
deemed an original, but together shall constitute one and the same instrument.
22. The Effective Date of this Agreement shall be the date of its acceptance
by the Custodian.
23. The Client authorizes the Custodian to disclose the Client's identity,
address, and securities positions to issuers of securities held in any of the
Client's Portfolios.
__X__Yes______No
Note: A failure to respond will be regarded as the Client's consent to such
disclosure.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized.
BY SIGNING THIS AGREEMENT, THE CLIENT ACKNOWLEDGES (1) THAT, IN ACCORDANCE WITH
PARAGRAPH 14, THE CLIENT IS AGREEING TO ARBITRATE ANY CONTROVERSIES WHICH MAY
ARISE WITH THE CUSTODIAN, AND (2) RECEIPT OF A COPY OF THIS AGREEMENT.
-6-
<PAGE>
MERRILL LYNCH, PIERCE, FENNER ML PRINCIPAL PROTECTION L.P.
& SMITH INCORPORATED
By: Merrill Lynch Investment Partners Inc.
By:____________________________ By:__________________________________
TITLE: First Vice President TITLE: Vice President and Chief Financial
Officer
ADDRESS: 101 Hudson St. 10th Flr ADDRESS: South Tower, 6th Floor
Jersey City, NJ 07302-3997 NY, NY 10080-6106
TELEPHONE: 201 557-1880 TELEPHONE: 212-236-4161
TELECOPY: 201 557-4220 TELECOPY: 212-236-4809
DATE: October 7. 1994 DATE: October 11, 1994
-7-
<PAGE>
EXHIBIT 23.05
Sidley & Austin
A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
<TABLE>
<CAPTION>
<S> <C> <C> <C>
LOS ANGELES ONE FIRST NATIONAL PLAZA LONDON
______ CHICAGO, ILLINOIS 60603 ______
NEW YORK TELEPHONE 312: 853-7000 SINGAPORE
______ TELEX 25-4364 ______
WASHINGTON, D.C. FACSIMILE 312: 853-7036 TOKYO
FOUNDED 1866
WRITER'S DIRECT NUMBER
</TABLE>
CONSENT
OF
SIDLEY & AUSTIN
---------------
Sidley & Austin hereby consents to all references made to it in the
Registration Statement on Form S-1 of ML Principal Protection L.P., as filed
with the Securities and Exchange Commission on July 3, 1996.
Date: July 3, 1996
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
Exhibit 23.06
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of ML Principal Protection
L.P. (formerly ML Principal Protection Plus L.P.) on Form S-1, which also
relates to and constitutes Post-Effective Amendment No. 5 to the Registration
Statement on Form S-1 declared effective July 14, 1994 (Registration No.
33-73914), of our reports dated January 26, 1996 relating to the consolidated
financial statements of ML Principal Protection L.P. and 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 heading "Experts" in such
Prospectus.
Deloitte & Touche L.L.P.
July 1, 1996
New York, New York
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
Consolidated Statements of Financial Condition, Consolidated Statements of
Income, Consolidated Statements of Changes in Partners' Capital and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000925433
<NAME> ML Principal Protection Plus L.P.
<S> <C>
<PERIOD-TYPE> 5-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAY-31-1996
<CASH> 856
<SECURITIES> 79,566,875
<RECEIVABLES> 9,434,252
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 89,001,983
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 89,001,983
<CURRENT-LIABILITIES> 4,500,971
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 84,501,012
<TOTAL-LIABILITY-AND-EQUITY> 89,001,983
<SALES> 0
<TOTAL-REVENUES> 2,767,766
<CGS> 0
<TOTAL-COSTS> 2,148,166
<OTHER-EXPENSES> 1,846
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 617,754
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 617,754
<EPS-PRIMARY> .75
<EPS-DILUTED> .75
</TABLE>
