<PAGE>
As filed with the Securities and Exchange Commission on August 27, 1996
Registration No. 333-7593
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________________
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________________
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
ML PRINCIPAL PROTECTION TRADING L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS TRADING L.P.)
(RULE 140 CO-REGISTRANT)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
13-3750642(REGISTRANT)
DELAWARE 6793 13-3775509(CO-REGISTRANT)
(State of Organization) (Primary Standard Industrial (IRS Employer
Classification Code Number) Identification Number)
</TABLE>
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
SIXTH FLOOR
SOUTH TOWER
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
(212) 236-4167
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
JOHN R. FRAWLEY, JR.
SIXTH FLOOR
SOUTH TOWER
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
(212) 236-4167
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
_____________________
COPIES TO:
David R. Sawyier
James B. Biery
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
_____________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
_____________________
PURSUANT TO THE PROVISIONS OF RULE 429 OF THE RULES AND REGULATIONS OF
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, THE
FORM OF PROSPECTUS SET FORTH HEREIN ALSO RELATES TO THE REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-1 (REGISTRATION NO. 33-73914) DECLARED
EFFECTIVE ON JULY 14, 1994.
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM
NO. PROSPECTUS HEADING
- ----- ----------------------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus ....... Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus .......................... Inside Cover Page; Table of Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges ........... Summary; Risk Factors
4. Use of Proceeds ................................ Use of Proceeds
5. Determination of Offering Price ................ Inside Cover Page; Plan of Distribution
6. Dilution ....................................... Not Applicable
7. Selling Security Holders ....................... Not Applicable
8. Plan of Distribution ........................... Inside Cover Page; Plan of Distribution
9. Description of Securities to Be
Registered ................................... Cover Page; The Limited Partnership Agreement
10. Interests of Named Experts and
Counsel ...................................... Legal Matters; Experts
11. Information with Respect to the
Registrant ................................... Summary; Risk Factors; Investment Factors; Performance of the Fund;
Selected Financial Data; Management's Discussion and Analysis of
Financial Condition and Results of Operations; The Advisor Selection
Process; The Advisors; MLIP and MLF; The ML&Co. Guarantee; Use of
Proceeds; Charges; Conflicts of Interest; The Limited Partnership
Agreement; Index to Financial Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities .............................. Not Applicable
</TABLE>
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
SERIES I UNITS
PROSPECTUS SUPPLEMENT DATED AUGUST __, 1996
TO
PROSPECTUS DATED AUGUST __, 1996
The Series I Units will be sold on or about January __, 1997 to the
extent that acceptable subscriptions are received on or before December 31,
1996. The "Principal Assurance Date" for the Series I Units will be December
31, 2002. Distributions on the Series I Units, if any, will be in the
discretion of MLIP, although none are anticipated.
Series I Units are offered at $100 per Share ($97 in the case of
Merrill Lynch officers and employees) MLIP will initially commit 75% of the
Series I Units' assets to trading.
In addition to this Prospectus Supplement, the Prospectus must be
accompanied by recent monthly reports relating to ML Principal Protection L.P.
The Series I Units will have their own Net Asset Value, independent of that of
the other outstanding series of Units. Past performance is not necessarily
indicative of future results.
Information Regarding Certain of the Fund's Advisors
----------------------------------------------------
John W. Henry & Company, Inc. ("JWH"), a "core" Advisor, has had the
following change in personnel: Peter F. Karpen announced his resignation from
JWH on March 18, 1996 but will continue in his present capacity for 6 months
from that date.
-------------
The other side of this Prospectus Supplement provides certain outline
information regarding the Fund's current Advisors.
-------------
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED
UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS
THE COMMISSION PASSED UPON THE ADEQUACY OR ACCURACY
OF THIS DISCLOSURE DOCUMENT AS SUPPLEMENTED.
-------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS AS SUPPLEMENTED. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
-------------
Merrill Lynch, Pierce, Fenner & Smith Incorporated
Selling Agent
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
<PAGE>
ML PRINCIPAL PROTECTION L.P.
The Prospectus sets forth more detailed information concerning the "core"
Advisors. The non-"core" Advisors are identified below. As of August 1, 1996,
the allocation of the Fund's trading assets among the Advisors is set forth
below in the parentheses following the Advisors' names. See "The Advisors" in
the Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
--------------------------------------------------------------------
ANNUALIZED
WORST/BEST STANDARD GENERAL
MONTHLY DEVIATION ASSETS UNDER TRADING
RATE OF RETURN/1/ OF RETURN/2/ MANAGERMENT/3/ STRATEGY
--------------------------------------------------------------------
<S> <C> <C> <C> <C>
"CORE" ADVISORS
Chesapeake Capital Corporation (10.98)%/15.99% 22.78% $757 million Technical;
Diversified Trading Program (20%) trend-following
John W. Henry & Co., Inc. (27.3)%/44.2% 32.0% $880 million Technical;
Financial and Metals Portfolio (20%) trend-following
NON-"CORE" ADVISORS
AIS Futures Management, Inc. (10.64)%/13.39% 18.4% $98 million Systematic;
MAAP-2x-4x Program (8.5%) trend-following
ARA Portfolio Management Company, L.L.C. (13.3)%/14.4% 21.92% $121.5 million Technical;
Gamma Program (8.5%) trend-following
AIB Investment Managers Limited (1.29)%/2.98% 2.60% $40 million Discretionary;
Currency Program (7.0%) fundamental
Millburn Ridgefield Corporation (9.04)%/19.38% 17.5% $194 million Technical;
Global Portfolio - Normal Leverage trend-following
(8.0%)
Trendstat Capital Management, Inc. (5.83)%/10.71% 10.35% $150.9 million Technical;
World Currency Program (8.5%) trend and counter
trend-following
West Course Capital Inc. (7.86)%/14.12% 17.0% $112 million Discretionary;
(8.5%) fundamental
Graham Capital Management L.P. (6.31)%/12.33% 15.66% $112.1 million Technical;
Diversified Program (5.5%) trend-following
Quantitative Financial Strategies Inc. /4/ (7.62)%/13.29% 14.1% $56 million Systematic;
The Currency Program (5.5%) fundamental;
not trend-following
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
-------------
Futures trading is highly leveraged, as is each Advisor's trading program. No
Advisor has been asked to make any special adjustments to its leveraging
policies in the case of the Fund. See "Leverage Considerations" and "Risk
Factors" in the Prospectus. MLIP expects that, in general, the non-"core"
Advisors trading at "standard" leverage will hold positions in the range of
200% to 400% of the net equity in their accounts and commit as margin 15% to
30% of the Fund's assets allocated to them. Trading at this degree of leverage
implies that any non-"core" Advisor whose open positions incur a 10% loss will
cause a 20% to 40% loss to its Fund account.
In considering the leverage and volatility at which the different non-"core"
Advisors trade, prospective investors should recognize that due to the limited
percentage of the Fund's assets allocated to each of them, none of these
Advisors, individually, is likely to make a material contribution over the
short-term to either the return achieved by, or the performance volatility of,
the Fund. It would require (i) monthly returns outside of historical highs and
lows for the non-"core" Advisors with the largest percentage asset allocation
to affect the Fund's overall monthly rate of return by as much as 2% (e.g.,
from a 10% to an 8% or 12% rate of return), and (ii) historical volatility
increased by a factor of approximately 4 for such non-"core" Advisor's
performance to increase the range of the Fund's overall standard deviation by
as much as 30%. The smaller the allocations to a non-"core" Advisor, the less
the contribution of such Advisor's performance and volatility to the overall
performance and volatility the Fund. The non-"core" Advisors as a whole can
have a significant effect on performance. However, the likely non-correlation
among at least certain of these six Advisors reduces the likelihood of any
major short-term effect.
---------------------
1 The lowest and the highest monthly rate of return through June 30, 1996 for
the program traded for the Fund since January 1, 1991 (or the inception of
trading if later).
2 An annualized standard deviation of 2% and a mean return of 1% would mean
that most (approximately two-thirds) of all monthly returns during a year
have historically fallen between (l)% and 3%, i.e., within a range
(deviation) of 2% above or below the mean. Standard deviation is one
widely accepted measure of risk, as standard deviation indicates the
variability of tbe returns. The more variable an Advisor's historical
returns, the greater the risk that substantial losses have been included
witnin the historical range of returns. Annualized Standard Deviation of
Return is with respect to the program used for the Fund and covers the
period beginning with January 1, 1991 (or the inception of trading if
later) through June 30, 1996.
3 Assets under management in the program used for the Fund ("notional" funds
excluded).
4 "Notional" funds are included in assets under management for Quantitative
Financial Strategies Inc.
-2-
<PAGE>
PRELIMINARY PROSPECTUS DATED AUGUST __, 1996 -- SUBJECT TO COMPLETION
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.
ML PRINCIPAL PROTECTION L.P.
$100,000,000
UNITS OF LIMITED PARTNERSHIP INTEREST
ML PRINCIPAL PROTECTION L.P. (THE "FUND") is a multi-strategy, multi-market
managed futures investment, employing a range of strategies diversified across
major markets of the global economy -- financials, currencies, energy, metals
and agriculture. The Fund's objectives are achieving long-term capital
appreciation while controlling performance volatility. MERRILL LYNCH INVESTMENT
PARTNERS INC. ("MLIP") is the general partner of the Fund, and MERRILL LYNCH
FUTURES INC. ("MLF") is its commodity broker. MERRILL LYNCH ASSET MANAGEMENT,
L.P. ("MLAM") provides cash management services within parameters established by
MLIP. The Fund trades under the direction of multiple independent trading
advisors ("TRADING ADVISORS" OR "ADVISORS") selected and monitored by MLIP.
MERRILL LYNCH & CO., INC. ("ML&CO.") has agreed to make sufficient payments to
the Fund, if necessary, to ensure that the Net Asset Value of each Unit
outstanding as of the fifth anniversary (the "Principal Assurance Date") of such
Unit's issuance will be at least the $100 subscription price.
The Fund began trading October 12, 1994 with an initial capitalization of
$32 million. The Units are continuously offered and sold as of the beginning of
each calendar quarter at $100 per Unit. As of July 1, 1996, seven series of
Units had been sold, the Fund's aggregate capitalization was approximately $83.7
million and the initial series of Units had recognized a cumulative rate of
return of approximately 14.89% in the first 20-2/3 months of trading.
The minimum initial investment is 50 Units ($5,000); the minimum investment
for existing Limited Partners is 10 Units ($1,000). Investors may purchase any
whole number of Units over the minimum. See "Investment Factors -- (8) Small
Minimum Investments, Smaller Minimum Additional Investment" at page 16.
Units may be redeemed as of the end of any calendar month, subject to 3%
redemption charges payable to MLIP through the end of the twelfth month after
sale. See "Charges -- Redemption Charges" at page 46.
MLIP may make distributions to the Unitholders, but does not presently
intend to do so. See "Risk Factor -- (11) Series Issued after July 1, 1996" at
page 11.
_________________________
THE UNITS ARE SPECULATIVE SECURITIES. AN INVESTMENT
IN THE FUND INVOLVES SIGNIFICANT RISKS.
. INVESTORS MUST BE PREPARED TO LOSE THE ENTIRE TIME VALUE OF THEIR INVESTMENT.
AT A 7% INTEREST RATE, THE PRESENT VALUE OF RECEIVING THE ASSURED MINIMUM $100
PER UNIT FIVE YEARS IN THE FUTURE WOULD BE ONLY APPROXIMATELY $71.
. PAST PERFORMANCE OF THE FUND AND ITS ADVISORS IS NOT NECESSARILY INDICATIVE OF
FUTURE RESULTS.
. THE FUND TRADES WITH A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS.
. THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND INVOLVES SIGNIFICANT
OPPORTUNITY COSTS. MLIP INITIALLY DELEVERAGES EACH SERIES' TRADING IN ORDER TO
PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS GUARANTEE, CORRESPONDINGLY
REDUCING PROFIT POTENTIAL.
. MLIP'S DELEVERAGING OF THE FUND'S TRADING MAKES IT HIGHLY UNLIKELY THAT THE
ML&CO. GUARANTEE WILL EVER BE OF ANY VALUE TO INVESTORS, DESPITE THE REDUCTION
IN PROFIT POTENTIAL CAUSED BY SUCH DELEVERAGING.
. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING OR
TERMINATING TRADING.
. EVEN APART FROM ITS DELEVERAGED TRADING, THE RISK CONTROL FEATURES EXPECTED
FROM THE FUND'S MULTI-ADVISOR STRUCTURE MAKE IT HIGHLY UNLIKELY THAT THE
ML&CO. GUARANTEE WILL EVER BENEFIT INVESTORS.
. THE FUND IS SUBJECT TO SUBSTANTIAL CHARGES. ESTIMATED GROSS TRADING PROFITS OF
APPROXIMATELY 7.75% OF THE FUND'S AVERAGE MONTH-END NET ASSETS MUST BE EARNED
DURING THE FIRST YEAR AFTER A UNIT IS SOLD IN ORDER FOR ITS REDEMPTION VALUE
TO EQUAL THE INITIAL $100 SUBSCRIPTION PRICE.
. CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS PERIODS
WITHOUT MAJOR PRICE MOVEMENTS -- SIGNIFICANTLY REDUCE THE ADVISORS' ABILITY TO
TRADE SUCCESSFULLY.
SEE "RISK FACTORS" BEGINNING AT PAGE 10.
_________________________
SUBSCRIBERS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES IN
THEIR SUBSCRIPTION AGREEMENTS AND POWERS OF ATTORNEY.
_________________________
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
_________________________
<TABLE>
<CAPTION>
================================================================================
UNITS OF PRICE TO SELLING PROCEEDS TO
LIMITED PARTNERSHIP INTEREST PUBLIC(1) COMMISSIONS(2)(3) FUND(2)(3)
================================================================================
<S> <C> <C> <C>
PER UNIT...................... $100 NONE $100
================================================================================
</TABLE>
SEE NOTES ON PAGE (I).
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
THE DATE OF THIS PROSPECTUS IS AUGUST ___, 1996
(NOT FOR USE AFTER APRIL 31, 1997)
<PAGE>
NOTES TO COVER PAGE
(1) The Units are continuously offered on a "best efforts" basis
exclusively through Merrill Lynch, Pierce, Fenner & Smith Incorporated and its
affiliate ("MLPF&S" or the "Selling Agent") without any firm underwriting
commitment.
Subscriptions for Units are accepted throughout each calendar quarter.
Pending investment in the Fund as of the beginning of the following quarter,
subscription funds are held in escrow at The Bank of New York (the "Escrow
Agent") in New York City. There is no minimum number of Units that must be sold
at the beginning of a calendar quarter for any Units then to be sold.
Subscribers receive all interest earned, and no fees or costs are
assessed, on subscriptions while held in escrow.
See "Plan of Distribution -- Subscription Procedure" at page 59.
(2) See "Plan of Distribution -- Selling Agent Compensation" at page
60 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 (the individual Merrill Lynch, Pierce, Fenner & Smith
Incorporated brokers) who are registered with the Commodity Futures Trading
Commission (the "CFTC") and who have passed either the Series 3 National
Commodity Futures Examination or the Series 31 Managed Futures Fund Examination.
Such ongoing production credits continue to accrue from the beginning of such
thirteenth month for as long as the Units remain outstanding, at the rate of 2%
per annum of the average month-end Net Assets attributable to such Unit
committed to trading; 75% of the capital attributable to each Unit sold under
this Prospectus will initially be committed to trading, resulting in annual
ongoing production credits of 1.5%.
If a Limited Partner redeems Units during or as of the end of a
calendar quarter, and subscribes as of the date of redemption to the new series
of Units to be issued immediately following such quarter, any otherwise
applicable 3% charge is waived to the extent that the redemption proceeds are so
reinvested.
Financial Consultants receive no initial production credits on new
Units purchased with the proceeds of Units redeemed during or as of the end of
the preceding quarter. However, the 2% ongoing production credits, described
above, will begin, to the extent that the redemption proceeds are reinvested, in
the thirteenth month after the sale of the Units redeemed, not in the thirteenth
month after reinvestment.
_________________________
THIS PROSPECTUS 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 THE UNITS OR TO MAKE ANY REPRESENTATION
CONCERNING THE FUND OR THE UNITS NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN
-i-
<PAGE>
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.
_________________________
THE BOOKS AND RECORDS OF THE FUND ARE MAINTAINED AT ITS PRINCIPAL
OFFICE, C/O MERRILL LYNCH INVESTMENT PARTNERS INC., MERRILL LYNCH WORLD
HEADQUARTERS, SIXTH FLOOR, SOUTH TOWER, WORLD FINANCIAL CENTER, NEW YORK, NEW
YORK 10080-6106. LIMITED PARTNERS MAY INSPECT AND COPY SUCH BOOKS AND RECORDS
DURING NORMAL BUSINESS HOURS FOR ANY PURPOSE REASONABLY RELATED TO THEIR
INTEREST AS LIMITED PARTNERS.
MLIP DISTRIBUTES MONTHLY REPORTS CONTAINING 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 ITS REGIONAL OFFICES LOCATED AT 7 WORLD TRADE CENTER, SUITE
1300, NEW YORK, NY 10048 AND CITICORP CENTER, 500 WEST MADISON STREET, SUITE
1400, CHICAGO, IL 60661. COPIES OF SUCH MATERIAL CAN BE OBTAINED FROM THE PUBLIC
REFERENCE SECTION OF THE SEC, 450 FIFTH STREET, N.W., WASHINGTON, DC 20549, AT
PRESCRIBED RATES. THE FUND IS AN ELECTRONIC FILER. THE SEC MAINTAINS A WEB SITE
THAT CONTAINS REPORTS, PROXY AND INFORMATION STATEMENTS, AND OTHER INFORMATION
REGARDING REGISTRANTS THAT FILE ELECTRONICALLY WITH THE SEC, AT
HTTP://WWW.SEC.GOV.
_________________________
ML PRINCIPAL PROTECTION L.P. IS NOT A "MUTUAL FUND" OR ANY OTHER TYPE
OF "INVESTMENT COMPANY" WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF
1940, AND IS NOT SUBJECT TO REGULATION THEREUNDER.
-ii-
<PAGE>
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS
YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT
FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS.
SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND
CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS
ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE
POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS
THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE 40 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 10.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED
STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE
SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE
POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE
UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR
MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY
BE EFFECTED.
-1-
<PAGE>
SPECIAL DISCLOSURES REGARDING THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND
1. ML&CO'S GUARANTEE IS NOT A GUARANTEE OF PROFIT. IF INVESTORS'
UNITS ARE WORTH NO MORE ON THEIR PRINCIPAL ASSURANCE DATE (FIVE YEARS AFTER
ISSUANCE) THAN THE GUARANTEED MINIMUM $100 PER UNIT, INVESTORS WILL HAVE LOST
THE ENTIRE USE OF THEIR CAPITAL FOR FIVE YEARS. AT A 7% INTEREST RATE, THE
PRESENT VALUE OF RECEIVING $100 FIVE YEARS IN THE FUTURE IS ONLY APPROXIMATELY
$71.
2. IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS
GUARANTEE, ALL UNITS BEGIN WITH ONLY 75% OF THEIR ASSETS ALLOCATED TO TRADING.
THIS DELEVERAGING SUBSTANTIALLY REDUCES PROFIT POTENTIAL.
3. ON AN ONGOING BASIS, MLIP CONTROLS THE LEVERAGE AT WHICH THE FUND
TRADES SPECIFICALLY IN ORDER TO PREVENT ML&CO. FROM INCURRING ANY LIABILITY
UNDER ITS GUARANTEE.
4. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING
OR EVEN TERMINATING TRADING. MLIP WOULD TERMINATE TRADING IF A NEWLY-ISSUED UNIT
LOST ONLY APPROXIMATELY $22 (AT CURRENT INTEREST RATES), AND WOULD FURTHER
DELEVERAGE TRADING BELOW 75% WELL BEFORE THAT POINT.
5. IRRESPECTIVE OF LOSSES, IN THE EVENT THAT THE FUND DOES NOT EARN
SUFFICIENT PROFITS, MLIP WILL FURTHER DELEVERAGE, SUSPEND OR TERMINATE TRADING.
6. IF THE FUND IS SUCCESSFUL, ITS PERFORMANCE WOULD HAVE BEEN
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 IN SUCH A WAY SO AS TO ACHIEVE THE SAME "PRINCIPAL PROTECTION"
OFFERED BY THE FUND, WITHOUT SUBJECTING HIMSELF OR HERSELF TO THE FUND'S
REDEMPTION RESTRICTIONS.
13. THE MULTI-ADVISOR STRATEGY OF THE FUND MAKES VERY SLIGHT THE
POSSIBILITY OF LOSSES OF A MAGNITUDE THAT COULD RESULT IN THE NET ASSET VALUE
PER UNIT DECLINING BELOW THE DISCOUNTED VALUE OF $100 -- EVEN IF THE FUND HAD NO
"PRINCIPAL PROTECTION" FEATURE (AND NONE OF THE RESULTING OPPORTUNITY
COSTS).
14. PROSPECTIVE INVESTORS MUST CONSIDER CAREFULLY WHETHER THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND MERITS THE OPPORTUNITY COSTS
INVOLVED.
__________________
SEE "RISK FACTORS" AT PAGE 10, "LEVERAGE
CONSIDERATIONS" AT PAGE 35 AND "THE ML&CO. GUARANTEE" AT PAGE 36.
-2-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SECTION PAGE
- ------------------ ----
<S> <C>
SUMMARY ................................................................ 5
Introduction ........................................................ 5
Risk Factors ........................................................ 6
The Fund and Its Objectives ......................................... 6
"Breakeven Table" ................................................... 8
Federal Income Tax Consequences ..................................... 9
RISK FACTORS............................................................ 10
(1) Investors May Incur Substantial Losses ......................... 10
(2) Past Performance ............................................... 10
(3) Volatile Markets; Highly Leveraged Trading ..................... 10
(4) The Costs of "Principal Protection" ............................ 10
(5) Deleveraged Trading ............................................ 10
(6) Further Deleveraging of Trading ................................ 10
(7) Multi-Advisor Risk Control and "Principal Protection" .......... 11
(8) Substantial Charges ............................................ 11
(9) Importance of General Market Conditions ........................ 11
(10) No Diversification Benefits if the the Fund Is Not Profitable .. 11
(11) Series Issued After July 1, 1996 ............................... 11
(12) Combining Independent Strategies ............................... 12
(13) Systematic Strategies .......................................... 12
(14) Discretionary Strategies ....................................... 12
(15) Increased Assets Under Management .............................. 12
(16) Advisors' Continued Services Uncertain ......................... 12
(17) Changes in Trading Strategy .................................... 12
(18) Illiquid Markets ............................................... 12
(19) Cash Management Risks .......................................... 12
(20) No Assurance of Non-Correlation; Limitations on Non-Correlation
if Achieved .................................................. 13
(21) Redemptions Restricted ......................................... 13
(22) Trading on Non-U.S. Exchanges .................................. 13
(23) Conflicts of Interest .......................................... 13
(24) Use of Graphs .................................................. 13
(25) Limited Partners Taxed Currently ............................... 13
(26) "Investment Advisory Fees" ..................................... 13
(27) Taxation of Interest Income .................................... 14
(28) Tax Audit ...................................................... 14
(29) Bankruptcy or Default .......................................... 14
(30) Regulatory Change .............................................. 14
INVESTMENT FACTORS ..................................................... 15
PERFORMANCE OF THE FUND ................................................ 17
<CAPTION>
PROSPECTUS SECTION PAGE
- ------------------ ----
<S> <C>
PERFORMANCE OF THE OTHER MLIP
MULTI-ADVISOR FUNDS .................................................. 18
SELECTED FINANCIAL DATA ................................................ 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS ........................................................ 23
THE ADVISOR SELECTION PROCESS .......................................... 28
THE ADVISORS ........................................................... 30
MLIP AND MLF ........................................................... 31
Background ........................................................... 31
Principals ........................................................... 32
MLF .................................................................. 33
FIDUCIARY OBLIGATIONS OF MLIP .......................................... 33
LEVERAGE CONSIDERATIONS ................................................ 35
THE ML&CO. GUARANTEE ................................................... 36
USE OF PROCEEDS ........................................................ 38
CHARGES ................................................................ 40
Charges Paid by the Fund ............................................. 40
Organizational and Initial Offering Costs ......................... 41
Brokerage Commissions ............................................. 41
Administrative Fees ............................................... 42
"Bid-Ask" Spreads ................................................. 43
Service Fees; "EFP" Differentials ................................. 43
Securities "Bid-Ask" Spreads ...................................... 43
Profit Shares ..................................................... 43
Extraordinary Expenses ............................................ 45
Charges Paid by Merrill Lynch ........................................ 45
Selling Commissions; Ongoing
Compensation ..................................................... 45
Consulting Fees ................................................... 45
MLAM Fees ......................................................... 46
Redemption Charges ................................................... 46
CERTAIN LITIGATION ..................................................... 46
</TABLE>
-3-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
TABLE OF CONTENTS (CONT.)
<TABLE>
<CAPTION>
PROSPECTUS SECTION PAGE
- ------------------ ----
<S> <C>
CONFLICTS OF INTEREST .................................................. 51
Merrill Lynch Affiliated Entities ................................. 51
General ........................................................... 51
MLIP .............................................................. 52
MLF; MLIB; MLAM ................................................... 52
The Trading Advisors .............................................. 53
Financial Consultants ............................................. 53
Proprietary Trading ............................................... 53
THE LIMITED PARTNERSHIP AGREEMENT ...................................... 54
FEDERAL INCOME TAX CONSEQUENCES ........................................ 55
PLAN OF DISTRIBUTION ................................................... 59
Subscription Procedure ................................................ 59
Purchases by Employee Benefit Plans ................................... 60
Selling Agent Compensation ............................................ 60
LEGAL MATTERS .......................................................... 61
EXPERTS ................................................................ 61
RECENT INFORMATION RELATING TO THE FUND ................................ 61
ADDITIONAL INFORMATION ................................................. 61
INDEX OF TERMS ......................................................... 63
ORGANIZATIONAL STRUCTURE ............................................... 64
INDEX TO FINANCIAL STATEMENTS .......................................... 65
<CAPTION>
PROSPECTUS SECTION PAGE
- ------------------ ----
<S> <C>
THE "CORE" TRADING ADVISORS ............................................ 84
PERFORMANCE OF THE PUBLIC SINGLE-ADVISOR FUTURES
FUNDS OPERATED BY MLIP .............................................. 108
THE ROLE OF MANAGED FUTURES IN AN
INVESTMENT PORTFOLIO ................................................ 111
APPENDIX -- BLUE SKY GLOSSARY .......................................... APP-1
EXHIBIT A -- THIRD AMENDED AND RESTATED LIMITED
PARTNERSHIP AGREEMENT ............................................... A-1
EXHIBIT B -- AMENDED FORM OF GUARANTEE AGREEMENT ....................... B-1
EXHIBIT C -- SUBSCRIPTION REQUIREMENTS ................................. SR-1
EXHIBIT D -- SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY .............. SA-(i)
</TABLE>
____________________
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
SOUTH TOWER, 6TH FLOOR
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
TELEPHONE: (212) 236-4167
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-6-
<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 long-
term capital appreciation while controlling performance volatility. MLIP selects
and monitors the Fund's multiple independent Advisors, and allocates and
reallocates the Fund's trading assets among them.
$32,000,000 was invested in the Fund's initial Series A Units as of
October 12, 1994, and a total of an additional $61,256,700 in the six subsequent
quarter-end closings through July 1, 1996. Through July 1, 1996, an aggregate of
932,567 of Units had been sold and 117,918 redeemed. As of July 1, 1996, the
Fund's capitalization was $83,708,660.
PERFORMANCE
As of July 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 July 1, 1996
Series Date of Issuance Net Asset Value
------ ---------------- ---------------
<S> <C> <C>
A October 12, 1994 $109.33 ($6.00 distribution, 10/1/95)
B January 9, 1995 $106.67 ($6.00 distribution, 1/1/96)
C April 10, 1995 $102.05 ($3.50 distribution, 4/1/96)
D July 11, 1995 $104.51 ($3.50 distribution, 7/1/96)
E October 11, 1995 $104.86 (no distributions paid yet)
F January 17, 1996 $101.72 (no distributions paid yet)
G April 19, 1996 $100.35 (no distributions paid yet)
</TABLE>
As of July 1, 1996, the Fund had a total of 3,862 Limited
Partners.
The Series H Units began trading on July 15, 1996 with an initial
capitalization of $8,646,836.
During July 1996, the Fund incurred a loss of (1.68)%.
ALL SERIES OF UNITS ISSUED TO DATE HAVE TRADED WITH 60% OF THEIR
CAPITAL ALLOCATED TO TRADING AND HAD A PRINCIPAL ASSURANCE DATE SEVEN YEARS
AFTER ISSUANCE. UNITS SOLD PURSUANT TO THIS PROSPECTUS WILL COMMENCE TRADING
WITH 75% OF THEIR ASSETS SO ALLOCATED AND HAVE A PRINCIPAL ASSURANCE DATE FIVE
YEARS AFTER ISSUANCE.
-7-
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<PAGE>
================================================================================
SUMMARY (CONT.)
RISK FACTORS
The following are certain of the significant risks of this
investment.
. Investors must be prepared to lose the entire time value of their
investment. At a 7% interest rate, the present value of receiving the
assured minimum $100 per Unit five years in the future would be only
approximately $71. See "The Advisor Selection Process" at page 28 and
"Risk Factor (1) -- Investors May Incur Substantial Losses" at page
10.
. Past performance of the Fund and its Advisors is not necessarily
indicative of future results. See "Commodity Futures Trading Commission--
Risk Disclosure Statement" at page 1 and "Risk Factor (2)-- Past
Performance" at page 10.
. The Fund trades with a high degree of leverage in volatile markets. See
"Risk Factor (3) -- Volatile Markets; Highly Leveraged Trading" at page
10.
. The "principal protection" feature of the Fund involves significant
opportunity costs. MLIP initially deleverages each series' trading in
order to protect ML&Co. from any liability under its guarantee,
correspondingly reducing profit potential. See "Risk Factor (4) --The
Costs Of 'principal Protection'" at page 10.
. MLIP's deleveraging of the Fund's trading makes it highly unlikely that
the ML&Co. guarantee will ever be of any value to investors, despite the
reduction in profit potential caused by such deleveraging. See "Risk
Factor (5) -- Deleveraged Trading" at page 10.
. Relatively small losses could result in MLIP further deleveraging or
terminating trading. See "Risk Factor (6) --Further Deleveraging of
Trading" at page 10.
. Even apart from its deleveraged trading, the risk control features
expected from the Fund's multi-advisor structure makes it highly unlikely
that the ML&Co. guarantee will ever benefit investors. See "Risk Factor
(7) -- Multi-Advisor Risk Control and 'Principal Protection'" at
page 11.
. The Fund is subject to substantial charges. Estimated gross trading
profits of 7.75% of the Fund's average month-end Net Assets must be
earned during the first year after a Unit is sold in order for its
redemption value to equal the initial $100 subscription price. See "--
Breakeven Table" below at page 8, "Charges" at page 40 and "Risk Factor
(8) -- Substantial Charges" at page 11.
. 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 (9) --
Importance of General Market Conditions" at page 11.
No subscriber should invest more than 10% of his or
her readily marketable assets in the Fund.
See "Risk Factors" at pages 10 through 14.
THE FUND AND ITS OBJECTIVES
A Multi-Strategy Approach
The Fund is a multi-strategy, multi-market managed futures investment,
employing a range of strategies diversified across major sectors of the
global economy -- financials, currencies, energy, metals and agriculture.
MLIP allocates Fund assets both to Advisors specializing in particular market
sectors and to Advisors which trade broadly diversified portfolios. See "The
Advisor Selection Process" at page 28.
-8-
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<PAGE>
================================================================================
SUMMARY (CONT.)
The Fund has to date retained between five and ten Advisors, trading
independently of each other and employing diverse trading methods. MLIP
allocates a substantial portion of the Fund's assets to a limited group of
"core" Advisors, each of which receives significant allocations -- typically
20% or more of the assets committed to trading (Advisors allocated 10% or
more of the Fund's trading assets for management). The remainder is allocated
in smaller percentages to a group of non-"core" Advisors, some of which may
be newer to the business or may implement specialized strategies (Advisors
allocated less than 10% of the Fund's trading assets for management). See
"The Advisor Selection Process" at page 28 and "The 'Core' Trading Advisors"
at page 84.
Since inception, traditional commodities -- energy, metals and
agriculture -- have represented approximately 30% to 40% of the Fund's
holdings, with the remainder of its market commitment in currencies and
financial instruments.
The Fund offers a means of diversifying a limited portion of the risk
segment of a portfolio into an investment with the potential to exhibit a
high degree of non-correlation with traditional stock and bond investments.
If such non-correlation is in fact achieved and the Fund is profitable,
investing in the Units has the potential to enhance the reward/risk ratio of
an overall portfolio. See "The Role of Managed Futures in an Investment
Portfolio" at page 111.
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 August 1, 1996, MLIP
was serving as sponsor or trading manager for futures funds with total
capital of approximately $1.6 billion.
THE ADVISORS
As of July 1, 1996, the current "core" Advisors retained for the Fund
were collectively managing approximately $2.1 billion in managed futures
accounts in which their clients (and in certain cases the Advisors
themselves) had invested, and approximately $1.6 billion in the trading
programs used for the Fund. Many of the Fund's Advisors also manage accounts
for other futures funds for which MLIP acts as sponsor or trading
manager.
See "The 'Core' Trading Advisors" beginning at page 84 for certain
performance and other information relating to the current "core" Advisors.
The accompanying Prospectus Supplement identifies the current non-"core"
Advisors. A number of Advisor changes, as well as reallocations of assets
among Advisors, have been made since inception.
"PRINCIPAL PROTECTION"
ML&Co. has agreed to make any payments to the Fund necessary to ensure
that the Net Asset Value of each Unit still outstanding, as of its Principal
Assurance Date, will be at least $100.
The ML&Co. guarantee is effective only on Units still outstanding at
their Principal Assurance Date.
POTENTIAL YIELD ENHANCEMENT
MLIP attempts to increase the yield received by the Fund on its
available cash by retaining the services of Merrill Lynch Asset Management,
L.P. ("MLAM"). MLAM manages over 90% of the Fund's capital, investing on an
unleveraged basis in U.S. Treasury bills, notes and bonds, and securities
issued by certain U.S. government agencies and instrumentalities
(collectively, "Government Securities"), within investment parameters
established by MLIP.
THERE CAN BE NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS OBJECTIVES OR
AVOID SUBSTANTIAL LOSSES. NO MERRILL LYNCH ENTITY OR ADVISOR HAS GUARANTEED
THE SUCCESS OF THE FUND IN ANY RESPECT.
-9-
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<PAGE>
================================================================================
SUMMARY (CONT.)
-10-
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<PAGE>
<TABLE>
<CAPTION>
____________________________________________________________________________________________________________________________________
SUMMARY (CONT.)
"BREAKEVEN TABLE"
---------------------------------------------------------------------------------------------------------------
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)/ (5.00)% $(250.00)
---------------------------------------------------------------------------------------------------------------
TRADING PROFITS REQUIRED FOR
AN INITIAL $5,000 INVESTMENT TO 7.58% $379.00
"BREAKEVEN"/(6)/
---------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO "BREAKEVEN TABLE"
(1) Estimated, based on the Fund's July 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." The F/X Service Desk is the Foreign Exchange
Service Desk organized by MLIP through which the Fund trades
forward currency contracts. The F/X Service Desk has, MLIP
believes, reduced the overall risk of the Fund's currency
trading. See "Charges" at page 40.
(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 of "breakeven" Profit
Share expense, 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.
(6) On the Cover Page and in the Summary, the "breakeven" point has
been rounded up to the nearest quarter percentage point.
_____________________
If the percentage of a series' capital allocated to trading were
to increase, so would brokerage commissions and Administrative
Fees as a percentage of such capital. At 100% leverage, the
Fund's annual brokerage commissions and Administrative Fees would
equal 9.25% and 0.25%, respectively, of average month-end Net
Assets and the Trading Profits required for an initial $5,000
investment to "breakeven" would increase to 9.95% or $497.50.
-11-
________________________________________________________________________________
<PAGE>
================================================================================
SUMMARY (CONT.)
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of counsel, the Fund is properly classified as a
partnership for federal income tax purposes. Limited Partners will pay tax
each year on their allocable share of the Fund's taxable income, if any,
whether or not they receive any distributions from the Fund or redeem any
Units. Substantially all of the Fund's trading gains and losses will be
treated as capital gains or losses for tax purposes; interest income received
by the Fund will be treated as ordinary income.
SUITABILITY
The Fund trades at a high degree of leverage in highly volatile
markets. An investment in the Units is speculative and involves a high degree
of risk. There can be no assurance that the Fund will achieve its objectives
or avoid substantial losses.
No subscriber may invest more than 10% of his or her readily
marketable assets in the Fund. Subscribers must be prepared to lose all or
substantially all of their investment.
THE UNITS ARE SPECULATIVES AND INVOLVE A HIGH DEGREE OF RISK
-12-
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<PAGE>
RISK FACTORS
AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF
RISK.
NO ONE SHOULD INVEST MORE THAN 10% OF HIS OR HER
READILY MARKETABLE ASSETS IN THE FUND.
_______________
(1) INVESTORS MAY INCUR SUBSTANTIAL LOSSES
INVESTORS MUST BE PREPARED TO LOSE THE USE OF THEIR INVESTED CAPITAL
FOR THE ENTIRE FIVE-YEAR "TIME HORIZON" FROM A UNIT'S ISSUANCE TO ITS PRINCIPAL
ASSURANCE DATE. AT A 7% INTEREST RATE, THIS WOULD CONSTITUTE APPROXIMATELY A 30%
LOSS.
(2) PAST PERFORMANCE
Past performance is not necessarily indicative of future results.
Neither the Advisors' nor the Fund's past performance to date is representative
of how they or it, respectively, will trade in the future.
(3) VOLATILE MARKETS; HIGHLY LEVERAGED TRADING
Futures and forward trading is highly leveraged, and market price
levels are volatile and materially affected by unpredictable factors such as
weather and governmental intervention. The combination of leverage and
volatility creates a high degree of risk.
(4) THE COSTS OF "PRINCIPAL PROTECTION"
The 'principal protection' feature of the Fund involves significant
opportunity costs. MLIP initially deleverages each series' trading in order to
protect ML&Co. from any liability under its guarantee, correspondingly reducing
profit potential.
MLIP's deleveraging of the Fund's trading makes it highly unlikely
that the ML&Co. guarantee will ever be of any value to investors, despite the
reduction in profit potential caused by such deleveraging.
Even apart from its trading deleveraging, the risk control feature
expected from the Fund's multi-advisor structure make it highly unlikely that
the ML&Co. guarantee will ever benefit investors.
(5) DELEVERAGED TRADING
The initial deleveraging of trading will by no means disappear over
time. On the contrary, unless the Fund is profitable MLIP will continue to
deleverage trading further as the discounted value of $100 (the minimum Net
Asset Value assured to investors as of their Principal Assurance Date) converges
to the current actual Net Asset Value per Unit.
(6) FURTHER DELEVERAGING OF TRADING
In the event that the Fund incurs relatively small losses (even if it
had previously traded profitably), MLIP could further deleverage or terminate
trading.
-13-
<PAGE>
(7) MULTI-ADVISOR RISK CONTROL AND "PRINCIPAL PROTECTION"
In addition to the opportunity costs of the Fund's "principal
protection," the multi-advisor structure of the Fund involves its own
opportunity costs and makes it highly unlikely that the Fund will incur losses
of such a magnitude as to result in any such payment obligation under the ML&Co.
guarantee.
(8) SUBSTANTIAL CHARGES
The Fund is subject to substantial charges. Due to the "principal
protection" structure of the Fund, it is particularly important that capital not
be depleted by expenses. Any such depletion could result in the further
deleveraging or termination of trading. The charges assessed on Units sold under
this Prospectus will be greater as a percentage of their total equity than the
charges reflected in the Fund's performance to date because the newly-issued
Units will begin trading at 75% rather than the 60% leverage used by previous
series. Brokerage commissions as well as Administrative Fees are based on the
assets committed to trading by each series. At the same time, the increased
leverage of these Units will correspondingly increase their profit potential and
risk of loss.
The Profit Shares paid to Advisors are based on the individual
performance of each Advisor, not the overall performance of the Fund.
Historically, the Fund has paid substantial Profit Shares to certain Advisors
during periods when the performance of the Fund as a whole was "breakeven" or
unprofitable.
(9) IMPORTANCE OF GENERAL MARKET CONDITIONS
Overall market or economic conditions -- which neither MLIP nor any
Advisor can predict or control -- have a material effect on performance.
Furthermore, such overall conditions can adversely affect the performance of
numerous Advisors at or about the same time, despite their implementing
different and independent strategies. Consequently, the multi-advisor structure
of the Fund does not assure that its performance will not be adversely affected
by future market or economic conditions.
(10) NO DIVERSIFICATION BENEFITS IF THE FUND IS NOT PROFITABLE
If the Fund does not trade successfully -- after deduction of all fees
and charges -- it cannot serve as an effective diversification element in a
traditional portfolio.
(11) SERIES ISSUED AFTER JULY 1, 1996
All series of Units issued after July 1, 1996 will commence trading at
75% leverage. Previously issued series began trading at 60% leverage and have
maintained that leverage to date. Consequently, the new series issued under this
Prospectus will generally be more highly leveraged and their trading results
correspondingly more volatile than that of previous series.
If MLIP makes a leverage adjustment to any series issued under this
Prospectus, MLIP must make corresponding adjustments to the other series issued
after July 1, 1996 so that all such series trade at the same level of leverage.
This regulatory requirement of uniform leverage could affect certain series
adversely. For example, a series might have traded profitably and generated
profit sufficient to cause MLIP to upleverage that series' trading were it not
for the fact that another series not comparably profitable because sold at a
different time, could not prudently be upleveraged also.
MLIP does not presently intend to make any distributions on Units
issued after July 1, 1996.
-14-
<PAGE>
(12) COMBINING INDEPENDENT STRATEGIES
Combining independent trading strategies involves substantial
opportunity costs, as one Advisor's profits are frequently offset by another
Advisor's losses. Different Advisors often take opposite positions for the Fund,
eliminating the profit potential of the combined positions.
(13) SYSTEMATIC STRATEGIES
Most of the Fund's current Advisors rely on technical, systematic
strategies. The widespread use of technical trading systems frequently results
in numerous managers attempting to execute similar trades at or about the same
time, altering trading patterns and affecting market liquidity. Furthermore, the
profit potential of trend-following systems may be diminished by the changing
character of the markets, which may make historical price data (on which
technical programs are based) only marginally relevant to future market
patterns.
(14) DISCRETIONARY STRATEGIES
Some of the Fund's current Advisors are discretionary rather than
systematic traders. Discretionary trading managers may be prone to
"emotionalism" and a lack of discipline in their trading. Relying on subjective
trading judgment may produce less consistent results than those obtained by more
systematic approaches.
(15) INCREASED ASSETS UNDER MANAGEMENT
There appears to be a tendency for the rates of return achieved by
managed futures advisors to decline as assets under management increase. None of
the Advisors has agreed to limit the amount of additional equity it may manage,
and most of them have recently accepted substantial additional customer
funds.
(16) 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.
(17) CHANGES IN TRADING STRATEGY
An Advisor may make certain changes (i.e., changing certain of the
futures contracts in which it trades) in its trading strategies without the
knowledge of MLIP.
(18) 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.
(19) CASH MANAGEMENT RISKS
The possibility of increasing yields over the risk-free rate
necessarily implies increasing risk and, accordingly, the possibility of
incurring losses -- not only of yield but also of principal. MLAM has not
guaranteed in any respect either that there will be an increase in the yield
recognized on the Fund's assets or that there will not be a loss of principal as
a result of the Fund's yield enhancement strategies.
(20) NO ASSURANCE OF NON-CORRELATION; LIMITATIONS ON NON-CORRELATION IF
ACHIEVED
Not only is the past performance of the Fund not necessarily
indicative of its future results (due to the speculative character of managed
futures), but also there can be no assurance that, however the Fund may perform,
the Fund's results will be non-correlated (i.e., unrelated) with the general
stock and bond markets. If the Fund is not non-correlated to these markets, the
Fund cannot serve its objective of diversifying an overall portfolio.
Furthermore, investors must evaluate an investment in the Fund in terms of the
alternative of an
-15-
<PAGE>
investment in a cash equivalent, such as 91-day Treasury bills, which can be
relied upon to (i) be generally non-correlated with equity and debt price
levels, (ii) generate a positive yield and cash flow, (iii) be highly liquid and
(iv) incur virtually no loss of principal.
Even if the Fund's performance is both profitable and non-correlated
to the general stock and bond markets, there are highly likely to be significant
periods during which the Fund's results are similar to those of an investor's
stock and bond holdings. Consequently, during unfavorable economic cycles, an
investment in the Fund may increase rather than mitigate a portfolio's aggregate
losses.
(21) REDEMPTIONS RESTRICTED
Investors' limited ability to redeem Units could result in there being
a significant difference between a Unit's redemption value and its Net Asset
Value as of the cut-off date for irrevocable redemption requests. Redemption
charges of 3% apply through the end of the twelfth month after Units are
sold.
(22) TRADING ON NON-U.S. EXCHANGES
The Trading Advisors trade extensively on non-U.S. exchanges. These
exchanges are not regulated by any United States governmental agency. The Fund
could incur substantial losses trading on foreign exchanges to which it would
not have been subject had the Trading Advisors limited their trading to U.S.
markets.
The trading profits and losses derived from trading foreign futures
and options (as well as the margin deposits made available to the Fund by MLF)
will generally be denominated in foreign currencies so that the Fund will be
subject to a certain degree of exchange rate risk in trading in such
contracts.
(23) CONFLICTS OF INTEREST
The Fund is subject to a number of material actual and potential
conflicts of interest, raising the possibility that investors will be
disadvantaged to the benefit of MLIP, the Trading Advisors or their respective
principals and affiliates. No formal policies or procedures have been adopted to
resolve these conflicts. See "Conflicts of Interest" at page 51.
(24) USE OF GRAPHS
"The Role of Managed Futures in an Investment Portfolio" at page 111
uses graphs to compare (i) the performance of the Fund and (ii) the performance
of an index of MLIP-managed futures funds to the broad-based stock and bond
market indices as well as the 91-day Treasury bill return. Such graphs must be
reviewed only in conjunction with the accompanying textual disclosures and
qualifications, which are an integral part of such graphs. The comparison of
managed futures performance to passive indices of securities returns has certain
inherent and material limitations.
(25) 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.
(26) "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.
-16-
<PAGE>
(27) TAXATION OF INTEREST INCOME
The Fund's trading losses will be almost exclusively capital losses.
Capital losses may be offset against ordinary income only to the extent of
$3,000 per year. If an individual Limited Partner had, for example, an allocable
trading loss of $10,000 and allocable interest income of $5,000, he or she would
incur a net loss of $5,000 but would recognize taxable interest income of
$2,000.
(28) 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, particularly since the tax consequences of any such
investment may differ for different investors. See "Federal Income Tax
Consequences" at page 55.
(29) 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 their
bankruptcy. In its off-exchange trading, the Fund deals with its counterparties
as principals and is subject to the full risk of their default or insolvency.
Investors could incur substantial losses, despite the Fund having been otherwise
highly profitable, in the event of the bankruptcy or default of a Merrill Lynch
entity or a market counterparty. Certain of the assets of the Fund will be held
in "unregulated" or only partially regulated accounts, which would have less
protection in the event of the bankruptcy of MLF or MLPF&S than would the assets
of certain other customers of these firms. In fact, in respect of these firms'
unregulated accounts, the Fund would constitute no more than a general,
unsecured creditor of these entities with respect to its assets on deposit in
unregulated accounts with them.
(30) 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.
____________________
-17-
<PAGE>
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 10.
____________________
(1) MLIP
MLIP is a major sponsor of futures funds. 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 (in terms of
achieving significantly high cumulative rates of return through a variety of
different market cycles, while maintaining what MLIP regards as an acceptable
level of performance volatility), and are full-time professionals, specializing
in the trading strategies 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
In its Advisor selections, MLIP emphasizes broad diversification and
participation in numerous global markets. MLIP focuses on combining Advisors
that collectively implement a wide range of qualitatively different strategies
and trading methods. Although the current Advisor group emphasizes technical,
trend-following methods, in the future MLIP may favor fundamental and/or
discretionary Advisors for the Fund. See "The 'Core' Trading Advisors -- Futures
Trading Methods in General" at 84 and 85.
(4) PORTFOLIO DIVERSIFICATION
The performance of the Fund should exhibit a substantial degree of
non-correlation (not, however, necessarily negative correlation) with the
performance of traditional stock and bond portfolio components. 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 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.
-18-
<PAGE>
(7) YIELD ENHANCEMENT
Subject to investment guidelines established by MLIP, MLAM manages
substantially all (over 90%) of the Fund's assets in the Government Securities
markets. The remainder of the Fund's assets are credited with interest by MLF at
approximately .50% per annum below the prevailing 91-day Treasury bill rate.
Although MLAM makes no assurances that its "yield enhancement" services will
result in increased yields or avoid the loss of principal, from inception
through July 1, 1996, the overall yield on the Fund's assets managed by MLAM had
equalled approximately 1% per annum over such Treasury bill rate.
As of July 31, 1996, MLAM and its affiliates, collectively, had a
total of approximately $207.3 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 in order 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 fund-related tax
information necessary for Limited Partners to complete their federal income tax
returns. The approximate Net Asset Value of an investor's Units is available at
any time from MLIP upon request.
-19-
<PAGE>
PERFORMANCE OF THE FUND
ML PRINCIPAL PROTECTION L.P.
JULY 1, 1996
Type of Pool: Multi-Advisor; Selected Advisor/Publicly-Offered/"Principal
Protected"/(1)/
Inception of Trading: October 12, 1994
Aggregate Subscriptions: $93,726,380
Current Capitalization: $83,708,660
Worst Monthly Drawdown (Month/Year): (3.70)% (2/96)
Worst Peak-to-Valley Drawdown (Period)/(2)/: (3.70)% (2/96)
<TABLE>
<CAPTION>
----------------------------------------------------------------
MONTHLY RATES OF RETURN/(3)/
----------------------------
MONTH 1996 1995 1994
---------------------------------------------------------------
<S> <C> <C> <C>
January 2.45% (0.55)% --
---------------------------------------------------------------
February (3.70)% 2.24% --
---------------------------------------------------------------
March 1.06% 4.17% --
---------------------------------------------------------------
April 3.10% 0.91% --
---------------------------------------------------------------
May (1.98)% 1.20% --
---------------------------------------------------------------
June 1.36% (0.21)% --
---------------------------------------------------------------
July (1.30)% --
---------------------------------------------------------------
August 0.95% --
---------------------------------------------------------------
September (0.32)% --
---------------------------------------------------------------
October 0.29% 1.04%
---------------------------------------------------------------
November 0.69% 0.32%
---------------------------------------------------------------
December 2.12% 0.40%
---------------------------------------------------------------
Compound Annual 2.13% 10.55% 1.76%
Rate of Return (6 months) (2-2/3 months)
---------------------------------------------------------------
</TABLE>
DURING JULY 1996 THE FUND'S MONTHLY RATE OF RETURN WAS (1.68)%
FOR A COMPOUND ANNUAL RATE OF RETURN FOR 1996 (SEVEN MONTHS) OF 0.42%.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
_________________________
THE UNITS ISSUED UNDER THIS PROSPECTUS WILL COMMENCE TRADING AT 75%
INITIAL LEVERAGE. ALL SERIES OF UNITS ISSUED TO DATE HAVE TRADED AT 60%
LEVERAGE. INCREASING TRADING LEVERAGE SHOULD INCREASE PROFIT POTENTIAL, RISK AND
VOLATILITY.
(1) PURSUANT TO APPLICABLE CFTC REGULATIONS, A "MULTI-ADVISOR" FUND IS
DEFINED AS ONE THAT ALLOCATES NO MORE THAN 25% OF ITS TRADED ASSETS TO ANY
SINGLE MANAGER. THE FUND DOES NOT CURRENTLY ALLOCATE MORE THAN 25% OF ITS
TRADING ASSETS TO A SINGLE ADVISOR BUT MAY DO SO IN THE FUTURE; CONSEQUENTLY, IT
IS REFERRED TO AS A "MULTI-ADVISOR; SELECTED ADVISOR" FUND. APPLICABLE CFTC
REGULATIONS DEFINE A "PRINCIPAL PROTECTED" FUND AS ONE WHICH IS DESIGNED TO
LIMIT THE LOSS OF PARTICIPANTS' INITIAL INVESTMENT.
(2) "WORST PEAK-TO-VALLEY DRAWDOWN" REPRESENTS THE GREATEST PERCENTAGE
DECLINE FROM A MONTH-END CUMULATIVE MONTHLY RATE OF RETURN WITHOUT SUCH
CUMULATIVE MONTHLY RATE OF RETURN BEING EQUALLED OR EXCEEDED AS OF A SUBSEQUENT
MONTH-END. FOR EXAMPLE, IF THE MONTHLY RATE OF RETURN WAS (1)% IN EACH OF
JANUARY AND FEBRUARY, 1% IN MARCH AND (2)% IN APRIL, THE "PEAK-TO-VALLEY
DRAWDOWN" WOULD STILL BE CONTINUING AT THE END OF APRIL IN THE AMOUNT OF
APPROXIMATELY (3)%, WHEREAS IF THE MONTHLY RATE OF RETURN HAD BEEN APPROXIMATELY
3% IN MARCH, THE "PEAK-TO-VALLEY DRAWDOWN" WOULD HAVE ENDED AS OF THE END OF
FEBRUARY AT APPROXIMATELY THE (2)% LEVEL.
(3) MONTHLY RATE OF RETURN IS THE NET PERFORMANCE OF THE FUND DURING
THE MONTH OF DETERMINATION (INCLUDING INTEREST INCOME AND AFTER ALL EXPENSES
ACCRUED OR PAID) DIVIDED BY THE TOTAL EQUITY OF THE FUND AS OF THE BEGINNING OF
SUCH MONTH. THE COMPOSITE RETURNS OF THE FUND REFLECT THE RESULTS OF THE FUND AS
A WHOLE, NOT THE PERFORMANCE OF ANY SINGLE SERIES OF UNITS (ALTHOUGH THE
COMPOSITE RETURNS CLOSELY MATCH THOSE OF THE SERIES A UNITS, WHICH HAVE TRADED
SINCE INCEPTION). ALTHOUGH THE SERIES BEGIN TRADING AT DIFFERENT TIMES AND,
ACCORDINGLY, HAVE MATERIALLY DIFFERENT CUMULATIVE RETURNS, AS ALL SERIES
PARTICIPATE IN THE SAME TRADING ACCOUNT AND AT APPROXIMATELY THE SAME DEGREE OF
LEVERAGE, THE ONLY SIGNIFICANT DIFFERENCE BETWEEN THE PERFORMANCE OF DIFFERENT
SERIES DURING A GIVEN MONTH IS TYPICALLY THE DIFFERENT AMOUNT OF PROFIT SHARES
PAID. IN NO MONTH HAS ANY SERIES HAD A RATE OF RETURN 10% HIGHER OR LOWER THAN
ANY OTHER SERIES.
SEE ALSO "THE 'CORE' ADVISORS -- NOTES TO THE PERFORMANCE SUMMARIES,"
-20-
<PAGE>
NOTES 10 AND 11 ON PAGES 86 AND 87.
__________________________
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(SM),
whose performance summaries are set forth below, each began trading with
approximately 70% of their assets allocated to trading, and certain of such
SECTOR Strategy Funds(SM) have traded at significantly more than 70% leverage
over time. The MLIP funds without "principal protection" features all generally
trade at 100% leverage.
MLIP funds are each different investments, have different advisors and
different numbers of advisors, and allocate different percentages of assets to
trading in general as well as among such advisors.
All of the "principal protected" MLIP funds (other than The Growth and
Guarantee Fund L.P., see "Performance of the Public Single-Advisor Futures Funds
Operated by MLIP" at page 108) are also "multi-advisor" funds.
As of the date of this Prospectus, each of the current Advisors is
managing one or more accounts for other MLIP multi- or selected-advisor funds.
However, no MLIP fund has ever had the same Advisor group as does the Fund.
The fee structure and interest income arrangements of the various MLIP
"multi-" and "selected-advisor" funds vary somewhat, but all are generally
comparable to those of the Fund.
ML Principal Protection Plus Ltd. (see page 19) 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.
-21-
<PAGE>
MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITH "PRINCIPAL PROTECTION" FEATURES
JULY 1, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
WORST WORST
INCEPTION MONTHLY PEAK-TO-VALLEY CUMULATIVE
TYPE OF OF AGGREGATE CURRENT DRAWDOWN DRAWDOWN RATE OF
NAME OF FUND OFFERING TRADING SUBSCRIPTIONS CAPITALIZATION % DATE % PERIOD RETURN
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Principal Protection Private Oct. 1994 $388,508,666 $321,943,613 (3.72)% (3.72)% (2/96)15.46%
Plus Ltd. (Offshore (2/96) composite
Counterpart of the Fund)
- ---------------------------------------------------------------------------------------------------------------------------------
The S.E.C.T.O.R. Strategy Public July 1990 $125,853,001 $ 31,003,630 (6.09)% (13.78)% 56.23%
Fund(SM) L.P. (2/96) (1/92-5/92)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) Public Dec. 1990 $136,410,000 $ 15,352,414 (4.73)% (15.93)% 22.86%
II L.P. (SECTOR II Units) (2/96) (8/93-1/95)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) Public July 1991 $194,005,000 $ 29,365,600 (8.64)% (14.25)% 23.53%
II L.P. (SECTOR III Units) (2/96) (1/92-5/92)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) Public July 1992 $75,646,400 $ 4,376,421 (6.41)% (8.98)% 11.57%
IV L.P. (Series A Units) (2/96) (6/95-10/95)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) Public Jan. 1993 $137,500,000 $ 14,756,091 (7.51)% (10.14)% 3.83%
V L.P. (2/96) (2/96-6/96)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) Public Sept. 1993 $108,693,900 $ 35,708,601 (3.91)% (7.29)% 4.48%
VI L.P. (2/96) (9/93-4/94)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) Private Dec. 1990 $ 55,181,600 dissolved as of (4.56)% (16.49)% 34.45%
International II Ltd. 12/31/95 (8/94) (8/93-1/95)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) Private July 1991 $ 85,701,800 $ 8,476,250 (7.10)% (14.25)% 24.33%
II Ltd. (SECTOR III (1/92) (1/92-5/92)
Shares)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) Private July 1992 $ 55,189,400 $ 6,545,231 (6.22)% (8.32)% 16.41%
International IV Ltd. (2/96) (1/94-1/95)
(Series A Shares)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) Private Jan. 1993 $ 81,252,600 $ 6,194,137 (3.41)% (8.00)% 6.08%
International V Ltd. (7/95) (6/95-10/95)
- ---------------------------------------------------------------------------------------------------------------------------------
ML Japan Investment Private Aug. 1993 (Yen)1,050,000,000 dissolved as of (3.52)% (7.32)% (2.80)%
Partners Ltd. 6/30/96 (7/94) (1/94-2/95)
- ---------------------------------------------------------------------------------------------------------------------------------
SECTOR(SM) International Private Sept. 1993 $163,806,100 $ 15,897,200 (4.60)% (10.43)% 1.53%
Limited (2/94) (9/93-2/94)
- ---------------------------------------------------------------------------------------------------------------------------------
Yen Linked ML PPP Ltd. Private Oct. 1995 (Yen)8,723,000,000 (Yen)8,765,721,567 (1.67)% (1.67)% 0.75%
(2/96) (2/96)
- ---------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------
1996
COMPOUND
RATE OF 1995 1994 1993 1992 1991
RETURN COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
(6 RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND MONTHS) RETURN RETURN RETURN RETURN RETURN
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Principal Protection 2.41% 11.10% 1.48% N/A N/A N/A
Plus Ltd. (Offshore (2-1/2
Counterpart of the Fund) mos.)
- ----------------------------------------------------------------------------------------------
The S.E.C.T.O.R. Strategy 1.72% 19.25% (9.29)% 19.36% (3.43)% 23.18%
Fund(SM) L.P.
- ----------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (2.77)% 13.50% (9.93)% 5.49% (2.76)% 20.50%
II L.P. (SECTOR II Units)
- ----------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (3.69)% 9.30% (3.22)% 15.99% (8.30)% 13.99%
II L.P. (SECTOR III Units) (6 mos.)
- ----------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (5.42)% 9.78% (5.73)% 13.40% 0.51% N/A
IV L.P. (Series A Units) (6 mos.)
- ----------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (10.11)% 14.22% (3.68)% 4.99% N/A N/A
V L.P. (6 mos.)
- ----------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) 0.42% 6.72% (0.80)% (1.72)% N/A N/A
VI L.P. (4 mos.)
- ----------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) N/A 21.27% (9.64)% 5.49% (2.76)% 20.50%
International II Ltd.
- ----------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (1.06)% 2.84% 0.77% 15.99% (8.30)% 13.99%
II Ltd. (SECTOR III (6 mos.)
Shares)
- ----------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (1.58)% 11.84% (7.21)% 13.40% 0.51% N/A
International IV Ltd. (6 mos.)
(Series A Shares)
- ----------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (5.34)% 11.11% (3.94)% 4.99% N/A N/A
International V Ltd.
- ----------------------------------------------------------------------------------------------
ML Japan Investment (1.65)% 3.95% (5.95)% 1.13% N/A N/A
Partners Ltd. (5 mos.)
- ----------------------------------------------------------------------------------------------
SECTOR(SM) International 1.53% 7.65% (3.99)% (3.25)% N/A N/A
Limited (3-2/3
mos.)
- ----------------------------------------------------------------------------------------------
Yen Linked ML PPP Ltd. 0.59% 0.16% N/A N/A N/A N/A
(3 mos.)
- ----------------------------------------------------------------------------------------------
</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.
-22-
<PAGE>
ML SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
JULY 1, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
WORST WORST
INCEPTION MONTHLY PEAK-TO-VALLEY CUMULATIVE
TYPE OF OF AGGREGATE CURRENT DRAWDOWN DRAWDOWN RATE OF
NAME OF FUND OFFERING TRADING SUBSCRIPTIONS CAPITALIZATION % MONTH % PERIOD RETURN
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Global Horizons L.P. Public Jan. 1994 $117,734,69 $87,370,476 (6.42)% (6.42)% 23.50%
(2/96) (2/96)
- --------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd. Private Jan. 1994 $87,173,843 $49,526,196 (6.29)% (6.29)% 28.53%
(Series A Shares) (2/96) (2/96)
- ---------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd. Private Sept. 1994 $3,708,415 $2,380,400 (5.66)% (5.73)% 30.23%
(Series B Shares) (2/96) (6/95-9/95)
- ---------------------------------------------------------------------------------------------------------------------------
ML Futures Investments II
L.P. Public May 1988 $269,809,880 $14,669,077 (10.34)% (17.81)% 25.57%
(1/91) (11/90-8/91)
- ---------------------------------------------------------------------------------------------------------------------------
Canadian Diversified
Futures Fund Limited ceased trading
Partnership Public July 1989 $13,060,222 12/31/93 (6.42)% (18.38)% (15.21)%
(4/91) 12/90-8/91)
- ---------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
(Series A Units) Public Jan. 1990 $18,182,000 $12,258,393 (15.99)% (34.39)% 56.98%
(1/92) (1/92-5/92)
- ---------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
(Series B Units) Public Jan. 1991 $50,636,000 $26,272,483 (15.01)% (32.38)% 68.66%
(1/92) (1/92-5/92)
- ---------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L. P.
(Series C Units) Public Jan. 1992 $40,000,000 $14,287,153 (9.54)% (24.13)% 31.79%
(2/96) (1/92-5/92)
- ---------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV L.P.
(Series B Units) Public July 1992 $13,353,600 $1,030,016 (7.04)% (11.10)% 17.93%
(2/96) (6/95-10/95)
- ---------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) International IV
Ltd. (Series B Shares) Private July 1992 $9,131,000 $515,780 (7.32)% (10.79)% 22.80%
(2/96) (1/94-1/95)
- ---------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------
1996
COMPOUND 1995 1994 1993 1992 1991
RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND (6 MONTHS) RETURN RETURN RETURN RETURN RETURN
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Global Horizons L.P. 2.70% 19.48% 4.08% N/A N/A N/A
- ---------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series A Shares) 3.04% 19.77% 4.15% N/A N/A N/A
- ---------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series B Shares) 2.26% 22.62% 3.86% N/A N/A N/A
(4 mos.)
- ---------------------------------------------------------------------------------------------
ML Futures Investments II
L.P. (1.48)% 17.07% (1.36)% 18.67% (3.17)% (3.95)
- ---------------------------------------------------------------------------------------------
Canadian Diversified
Futures Fund Limited
Partnership N/A N/A N/A N/A N/A (15.21)%
- ---------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
(Series A Units) (1.47)% 34.89% (8.64)% 20.64% (16.65)% 28.57%
- ---------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P.
(Series B Units) (1.38)% 34.49% (8.43)% 19.74% (13.88)% 34.67%
- ---------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L. P.
(Series C Units) (1.52)% 35.08% (7.88)% 14.78% (6.30)% N/A
- ---------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV L.P.
(Series B Units) (5.57)% 12.01% (7.44)% 19.56% 0.76% N/A
(6 mos.)
- ---------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) International IV
Ltd. (Series B Shares) (1.79%) 14.51% (9.37)% 19.56% 0.76% N/A
(6 mos.)
- ---------------------------------------------------------------------------------------------
</TABLE>
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE
IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS
(OTHER THAN ML PRINCIPAL PROTECTION PLUS LTD.) ARE EACH
TRADED PURSUANT TO MATERIALLY DIFFERENT
PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN
THE FUND.
-23-
<PAGE>
<TABLE>
<CAPTION>
ML. Futures Investments L.P. Public Mar.1989 $86,500,700 $24,807,137 (509)% (2/91) (8.33)% (6/95-10/95) 36.13%
- ------------------------------------------------------------------------------------------------------------------------------
ML SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
JULY 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
WORST RETURN
WORST PEAK-TO-VALLEY JAN. 1991 -
TYPE OF INCEPTION AGGREGATE CURRENT MONTHLY DRAWDOWN JUNE 30,
NAME OF FUND OFFERING OF SUBSCRIPTION CAPITALIZATION DRAWDOWN % PERIOD 1996 (OR
TRADING % MONTH DISSOLUTION)
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
dissolved as
Private Mar. 1989 $68,202,237 of 8/31/94 (6.17)% (11.10)% 13.39%
ML Futures Investments Ltd. (2/94) (1/94-2/94)
- ------------------------------------------------------------------------------------------------------------------------------
Currency Investment Private April 1991 $55,114,566 dissolved as (5.13)% (16.10)% (14.25)%
Partners Ltd. of 8/31/94 (8/91) (7/91-5/94)
- ------------------------------------------------------------------------------------------------------------------------------
The Managed Futures Trust dissolved as
Fund L.P. Private May 1991 $11,090,759 of 9/24/93 (6.22)% (14.50)% 36.19%
(7/91) (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------
Commodity Trading Company, dissolved as
Ltd. Private July 1991 $25,797,626 of 10/31/94 (6.47)% (23.31)% (14.46)%
(2/94) (1/92-12/92)
- ------------------------------------------------------------------------------------------------------------------------------
MLIP ceased
Permal F/X, Financials & acting as
Futures Ltd. Private July 1992 $106,495,710 trading (5.67)% (12.24)% 21.22%
manager as of (2/94) (2/94-4/94)
April 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------
ML Institutional Partners Public Feb. 1992 57,312,700 dissolved as (3.58)% (8.78)% (0.35)%
L.P. of 12/31/94 (1/94) (10/93-4/94)
- ------------------------------------------------------------------------------------------------------------------------------
Futures Opportunities Private Dec. 1988 $45,310,202 dissolved as (8.94)% (17.34)% (1.86)%
Limited of 7/31/92 (1/92) (1/92-5/92)
- ------------------------------------------------------------------------------------------------------------------------------
dissolved as
Daiwa Hudson River Fund Private Feb. 1994 $7,044,701 of 2/29/96 (4/72)% (17.21)% 0.65%
(3/94) (2/94-1/95)
- ------------------------------------------------------------------------------------------------------------------------------
The JLI Trading Co. Fund Private Mar. 1995 $14,300,136 $15,131,079 (6.93)% (6.93)% 4.87%
(2/96) (2/96)
- ------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
5.00% 11.80% 2.95% 16.56% 4.06% 2.64%
- ------------------------------------------------------------------------------------------------
1996
COMPOUND 1995 1994 1993 1992 1991
RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
NAME OF FUND RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
(6 MONTHS) RETURN RETURN RETURN RETURN RETURN
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(3.78)%
N/A N/A (8 mos.) 15.26% 3.12% (0.85)%
ML Futures Investments Ltd.
- ----------------------------------------------------------------------------------------------
Currency Investment N/A N/A (4.05)% (7.52)%
Partners Ltd. (8 mos.) (2.06)% (1.57)% (9 mos.)
- ----------------------------------------------------------------------------------------------
The Managed Futures Trust
Fund L.P. N/A N/A N/A 20.58% 10.06%
(8-2/3 mos.) 2.63% (8 mos.)
- ----------------------------------------------------------------------------------------------
Commodity Trading 6.21% 3.50%
Company, Ltd. N/A N/A (10 mos.) 14.91% 23.31% (6 mos.)
- ----------------------------------------------------------------------------------------------
Permal F/X, Financials &
Futures Ltd. 6.63% 14.78% (5.33)% 11.05% (5.79)%
(3 mos.) (6 mos.) N/A
- ----------------------------------------------------------------------------------------------
ML Institutional Partners N/A N/A (4.06)% 7.65% (3.51)% N/A
L.P. (11 mos.)
- ----------------------------------------------------------------------------------------------
(13.56)%
Futures Opportunities N/A N/A N/A N/A (7 mos.) 13.54%
Limited
- ----------------------------------------------------------------------------------------------
Daiwa Hudson River Fund 0.26% 19.82% 16.22% N/A N/A N/A
(2 mos.) (11 mos.)
- ----------------------------------------------------------------------------------------------
The JLI Trading Co. Fund 3.28% 2.43% N/A N/A N/A N/A
(10 mos.)
- ----------------------------------------------------------------------------------------------
</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.
-24-
<PAGE>
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.
-25-
<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 June 30, 1996 and January 1, 1995 to June 30, 1995.
<TABLE>
<CAPTION>
JANUARY 1, 1996 JANUARY 1, 1995 OCTOBER 12, 1994
TO TO JANUARY 1, 1995 (COMMENCEMENT
JUNE 30, 1996 JUNE 30, 1995 TO OF OPERATIONS) TO
INCOME STATEMENT DATA (UNAUDITED) (UNAUDITED) DECEMBER 31, 1995 DECEMBER 31, 1994
- --------------------- ----------- ----------- ----------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Realized Gain (Loss) $3,956,033 $4,229,696 $4,407,833 $ (363,054)
Unrealized (Loss) Gain (1,754,109) (561,845) 1,355,377 1,115,935
----------- ----------- ---------- ----------
Total Trading Results 2,201,924 3,667,851 5,763,210 752,881
Interest Income 2,289,595 1,351,723 3,415,670 377,303
----------- ----------- ---------- ----------
Total Revenues 4,491,519 5,019,574 $9,178,880 $1,130,184
Expenses:
Administrative Fees/1/ $ 64,625 $ 33,720 $ 86,928 $ 10,964
Profit Shares 243,602 474,205 652,366 129,169
Brokerage Commissions 2,391,123 1,247,658 3,216,364 405,653
----------- ----------- ---------- ----------
Total Expenses $2,699,350 $ 1,755,583 $3,955,658 $ 545,786
----------- ----------- ---------- ----------
Net Income (Loss) Before
Minority Interest $1,792,169 3,263,991 $5,223,222 $ 584,398
Minority Interest/2/ (13,806) $ (25,322) (36,730) (4,504)
----------- ----------- ---------- ----------
Net Income $1,778,363 $ 3,238,669 $5,186,492 $ 579,894
=========== =========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
BALANCE SHEET DATA DECEMBER 31, 1995 (UNAUDITED)
- ------------------- ----------------- -----------
<S> <C> <C> <C>
Aggregate Net Asset
Value/3/ Net Asset
(Series A-E) $74,988,233 Value/3/ (Series A-G) $83,708,660
Net Asset Value Net Asset Value
per Unit/4/ per Unit/3/
Series A $106.96 Series A $109.33
Series B $110.36 Series B $106.67
Series C $103.35 Series C $102.05
Series D $102.34 Series D $104.51
Series E $102.72 Series E $104.86
Series F $101.72
Series G $100.35
</TABLE>
____________________
1 As of January 1, 1996, a portion of the Brokerage Commissions were
reclassified as Administrative Fees, at no additional cost to the Fund.
2 MLIP is general partner of the "trading partnership" (of which the Fund is
the sole limited partner and MLIP the general partner) through which the Fund
trades. Because the Fund owns substantially all of the "trading partnership,"
"trading partnership" activities are referred to as Fund activities in this
Prospectus. The minority interest represents MLIP's share, as general partner of
the trading partnership, of the trading partner ship's profit or loss.
3 Balance sheet information is based on redemption values which differ
immaterially from Generally Accepted Accounting Principals ("GAAP") Net Asset
Values due to the treatment of organization and initial offering cost
reimbursements.
4 Net of annual distributions of $6.00 on the Series A and B and $3.50 on the
Series C Units.
_________________
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
-26-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
TWO-TIER STRUCTURE OF THE FUND
The Fund has been organized so that it does not trade directly, but
rather invests all its capital in a "second-tier" limited partnership, ML
Principal Protection Trading L.P. (the "Trading Partnership"), of which the Fund
is the sole limited partner and MLIP the sole general partner.
The CFTC does not permit series which trade at different degrees of
leverage (or with different advisor or strategy portfolios -- possible variables
not relevant to the Units, all of which share the same trading accounts) to
trade through the same legal entity due to concerns that one series' capital
could be subject to paying a deficit balance incurred in another series'
trading. Consequently, MLIP developed, in consultation with the CFTC, the two-
tier structure so that all assets of all series allocated to trading would trade
at the same degree of leverage --although the amount so allocated might
represent a different percentage of the total capital attributable to the
various series. The assets of the different series not allocated to trading are
retained at the Fund level and are not subject to any trading loss experienced
at the Trading Partnership level, irrespective of which series incurs a deficit
balance.
All series of Units begin trading with 75% of their total capital
allocated to trading (i.e., invested in the Trading Partnership). Over time,
however, this percentage will change as a result of trading profits or losses,
which are allocable to each series' investment in the Trading Partnership and,
accordingly, affect the percentage of a series' overall capital invested in the
Trading Partnership, as opposed to the Fund. All capital invested in the Trading
Partnership, irrespective of the series to which it is attributable, is entirely
fungible in respect of its sharing in the profits and losses of the Trading
Partnership; different series simply have different investments in the Trading
Partnership, both as a percentage of the Trading Partnership's total assets and
as a percentage of the capital attributable to the respective series.
The following diagram outlines the Trading Partnership/Partnership
structure:
[CHART OF TRADING PARTNERSHIP/PARTNERSHIP STRUCTURE APPEARS HERE]
-27-
<PAGE>
The two-tier structure of the Fund has been designed to be
"transparent" to investors. It simply permits different series of Units to trade
at different degrees of leverage without violating applicable CFTC policies.
MLAM is equally able to manage the Fund's assets -- other than a small
(approximately 5% of total capital) "liquidity reserve" held by the Trading
Partnership -- whether they are invested at the Fund or at the Trading
Partnership level.
The only difference between the Fund and the Trading Partnership,
insofar as the operations of these two entities are concerned, is that only the
Trading Partnership's assets are subject to the risk of trading losses.
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 August 1, 1996, the trading assets attributable to each series
of Units were allocated approximately as follows:
<TABLE>
<S> <C>
Chesapeake Capital Corporation 20.0%
John W. Henry & Company, Inc 20.0%
Non-"Core" Advisors 60.0%
Total 100.0%
======
</TABLE>
In the Fund's first 20-2/3 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's decision to terminate or reallocate assets among Trading Advisors is
based on a combination of the numerous factors described under "The Advisor
Selection Process" at page 28. Frequently, Advisors are terminated primarily for
unsatisfactory performance, but other factors -- for example, a change in MLIP's
or an Advisor's market outlook, apparent deviation from announced risk control
policies, excessive turnover of positions, changes in principals, commitment of
resources to other business activities, etc. -- may also have a role in the
termination or reallocation decision. The market judgment and experience of
MLIP's principals is an important factor in its allocation decisions.
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. However, there can be no assurance as to the frequency or
number of the Advisor changes that may take place in the future, or as to how
long any of the current Advisors will continue to manage assets for the Fund.
-28-
<PAGE>
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.
MLIP attempts to control credit risk in the Fund's futures and forward
trading (the Fund does not trade any derivatives other than futures and forward
contracts and options thereon) by trading only through MLF. MLF acts solely as a
broker or counterparty to the Fund's trades; it does not advise with respect to
or direct any such trading.
The Fund attempts to control the market risk inherent in such trading
in the manner described under "The Advisor Selection Process --MLIP and Its
Advisor Selection and Monitoring Process" at page 28 and "Leverage
Considerations" at page 35. The market risk to the Fund is, in any event,
limited by the deleveraged character of its trading, its "principal protection"
feature and its multi-advisor strategy. MLIP reviews the positions acquired by
the Advisors on a daily basis in an effort to determine whether the overall
positions of the Fund may have become excessively concentrated in a limited
number of markets or under the direction of generally similar strategies -- in
which case MLIP may, as of the next month-end or quarter-end, adjust the Fund's
Advisor combination and/or allocations so as to attempt to minimize the risk of
such over-concentration occurring in the future. See "Leverage Considerations"
at page 35 and "The ML&Co. Guarantee" at page 36.
Through June 30, 1996, all series of Units traded with approximately
60% of their assets allocated to trading. All series of Units sold pursuant to
this Prospectus will start trading with 75% of their assets so allocated.
The performance of the different series of Units differs somewhat over
the same period, because the various series begin trading at different times and
pay different Profit Shares.
Performance Summary
- -------------------
1994 (2-2/3 months)
STATISTICS. During 1994 (2-2/3 months), the Fund's average month-end
Net Assets equalled $32,552,448, and the Fund recognized gross trading gains of
$752,881 or 2.31% of such average month-end Net Assets. Brokerage commissions of
$416,617 (inclusive of Administrative Fees of $10,964) or 1.28% and Profit
Shares of $129,169 or 0.4% of average month-end Net Assets (31% of net trading
gain prior to Profit Share allocations) were paid. Interest income of $377,303
or 1.16% of average month-end Net Assets resulted in net income of $579,894
(before organizational and initial offering cost reimbursement payments of
$17,712) or 1.78% of average month-end Net Assets, which resulted in a 1.76%
increase in the Net Asset Value per Series A Unit, the only series outstanding
in 1994.
OVERVIEW. The 2-2/3 months of trading during 1994 were characterized
by relatively quiet markets without noticeable major trends. United States
interest rates generally declined and as they did so, so did the U.S. dollar as
compared to the Deutschemark. During this period, the Fund recorded a modest
gain, of which approximately 40% was allocated to Profit Shares as different
Advisors had significantly different trading performance in largely trendless
markets.
1995
STATISTICS. During 1995, the Fund's average month-end Net Assets
equalled $55,827,125, and the Fund recognized gross trading gains of $5,763,210
or 10.32% of such average month-end Net Assets. Brokerage commissions of
$3,303,292 (inclusive of Administrative Fees of $86,928) or 5.92% and Profit
Shares of $652,366 or 1.17% of
-29-
<PAGE>
average month-end Net Assets (25% of net trading gain prior to Profit Share
allocations) were paid. Interest income of $3,415,670 or 6.12% of average month-
end Net Assets resulted in net income of $5,186,492 (before organizational and
initial offering cost reimbursement payments of $79,700) 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 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 environments, solid price
trends across many markets began to emerge during the first quarter of 1995. In
February, bond markets worldwide recovered some of the ground lost in the
previous year. Specifically, U.S. Treasury prices improved, a development
spurred by the belief that growth in the U.S. economy was slowing enough for
inflation to stabilize. The Fund was also able to profit in the non-dollar
markets, as German and Japanese bonds rallied. In the currency markets, long
positions in the Deutschemark versus the U.S. dollar resulted in strong profits
for the Fund as the Deutschemark hit a two-year high against the dollar on
February 24, 1995.
In the second quarter of 1995, market volatility once again began to
affect trading, as many previously strong price trends began to weaken and, in
some cases, reverse. During April, the U.S. dollar hit new lows versus the
Japanese yen and Deutschemark before rebounding sharply. The U.S. dollar enjoyed
another sharp rally in May, due to the intervention of major central banks,
potential trade sanctions against Japan and United States Congressional action
to reduce the federal deficit. In June, strong indications that the U.S. economy
was slowing, coupled with a failure of the German Central Bank to lower interest
rates, stalled a rally in the German bond market.
In July the Federal Reserve Board Chairman Alan Greenspan's 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 positions in U.S. Treasury bonds had a
negative impact on the Fund. Throughout August and into September, the U.S.
dollar rallied sharply against the Japanese yen and the Deutschemark. 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.
1996 (6 months)
STATISTICS. From January 1, 1996 through June 30, 1996, the Fund's
average month-end Net Assets equalled $83,909,857 and the Fund recognized gross
trading gains of $2,201,924 or 2.62% of such average month-end Net Assets.
Brokerage commissions of $2,391,123 or 2.85%, administrative expenses of $64,625
or 0.08% and Profit Shares of $243,602 or 0.29% of average month-end Net Assets
were paid. Interest income of $2,289,595 or 2.73% of average month-end Net
Assets resulted in a net gain of $1,153,967 (before organizational and initial
offering cost reimbursement payments of $39,852 and after deducting MLIP's
"minority interest" in the trading partnership), or 1.38% of average month-end
Net Assets which resulted in a 2.37% increase in the Net Asset Value of the
Series A Units, a 2.31% increase in the Net Asset Value of the Series B Units, a
2.20% increase in the Net Asset Value of the Series C Units, a 2.17% increase in
the Net Asset Value of the Series D Units, a 2.14% increase in the Net Asset
Value of the Series E Units, a 1.72% increase in the Net Asset Value of the
Series F Units and a 0.35% increase in the Net Asset Value of the Series G Units
(since April 19, 1996, when the 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.
-30-
<PAGE>
OVERVIEW. The first six months of 1996 included the two largest
single monthly drawdowns as well as two of the three most profitable months in
the Fund's history. The year began with the East Coast blizzard, continuing
difficulties in the U.S. federal budget talks and an economic slowdown having a
negative impact on many markets. The Fund was profitable in January due to the
strong profits in currency trading as the 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 and June, however, the Fund gave back much of
these gains as difficult trading conditions in many markets prevailed and a lack
of clear price trends in key markets negatively impacted the Fund's performance.
RESULTS OF OPERATIONS IN GENERAL
The principal variables which determine the net performance of the
Fund are gross profitability and interest income. As the Fund's brokerage
commissions and Administrative Fees are a constant flat-rate charge, these costs
do not vary from period to period. The only marginal costs which the Fund has
are the Profit Shares payable to the Advisors on an Advisor-by-Advisor basis.
During periods when Profit Shares are a high percentage of net trading gains
(due to the Profit Share allocations), it is likely that there has been
substantial non-correlation among the Advisors -- suggesting the likelihood of
generally trendless, non-consensus markets.
During all periods set forth in "Selected Financial Data," United
States interest rates were at unusually low levels. This negatively impacts
performance because interest income is typically a major component of commodity
pool profitability. In addition, low interest rates are frequently associated
with reduced fixed income market volatility, and in static markets the Fund's
profitability generally tends to be diminished. On the other hand, during
periods of higher interest rates, the relative attractiveness of a high risk
investment such as the Fund may be reduced as compared to high yielding and much
lower risk fixed-income instruments.
The events that determine the Fund's profitability are those that
produce sustained and major price movements. It does not matter whether such
movements are up or down -- the Advisors are generally likely to be able to
profit from sustained trends, irrespective of their direction. During the Fund's
relatively short period of trading, such events have ranged from Federal Reserve
Board reductions in interest rates, the apparent refusal of Iraq to arrive at a
settlement which would permit it to sell oil internationally, the inability of
the U.S. government to agree upon a budget, and a combination of drought and
excessive rain negatively impacting U.S. agricultural harvesting as well as
planting. While these events are representative of the type of circumstances
which materially affect the Fund, the specific events which will do so in the
future cannot be predicted or identified.
Unlike many investment fields, there is no meaningful distinction in
the operation of the Fund between realized and unrealized profits. Most of the
contracts traded by the Fund are highly liquid and can be closed out at any
time. Furthermore, the profits on many open positions are effectively realized
on a daily basis through the payment of "variation margin." Except in unusual
circumstances, factors other than its costs and market conditions in which the
Advisors are likely to achieve trading profits amid prevailing interest rates --
for example, illiquid investments, longer-term contributions, regulatory
approvals, cost of goods sold, employee relations and all the other myriad
factors likely to affect an operating business, etc. -- have virtually no impact
on the Fund.
THE DIFFERENT SERIES OF UNITS
All series of Units will begin trading with the same percentage of
their total capital allocated to trading (by investment in the Trading
Partnership). All series will trade in a common trading account and be subject
to the same method of calculating their fees. Furthermore, any discretionary
action taken by MLIP -- i.e., making a distribution or adjusting trading
leverage -- must be done in such a way that all Units receive the same
distribution and have the same percentage of capital allocated to trading after
the adjustment. Despite these fundamental similarities among the different
series, because the series begin trading at different times they are likely over
time to have different percentages of their capital allocated to trading, pay
different Profit Shares (although to the same groups of Advisors) and have
different Net Asset Values.
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<PAGE>
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.
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 infrastruc ture; and low correlation with traditional
investments such as stocks and bonds. Advisors' past records are evaluated
comparatively with a view to combining Advisors whose respective trading results
have historically demonstrated not only a low degree of correlation with stocks
and bonds but also with the other advisors selected. Certain mathematical
optimization procedures are then used to develop an advisor combination which,
based on a hypothetical composite of the past performance of the respective
advisors, exhibits a risk/reward profile consistent with MLIP's objectives. By
identifying advisor combinations on this basis, MLIP hopes to maintain profit
potential while also materially reducing the risk of major equity declines.
In selecting Advisors for the Fund, MLIP emphasizes retaining multiple
Advisors, trading in multiple markets and implementing multiple strategies. MLIP
also evaluates the overall market diversification and emphasis that different
possible Advisor combinations would give the Fund. Discretionary as well as
systematic, fundamental as well as technical, Advisors may be retained. See
"Performance of the 'Core' Trading Advisors--Futures Trading Methods in General"
at pages 84 and 85. By diversifying strategies as well as markets, MLIP can, if
successful, create Advisor combinations for the Fund that should have good
profit potential across a wide range of different market cycles. Since
inception, the Fund's Advisor portfolio has emphasized technical and trend-
following methods.
MLIP's primary emphasis is on a qualitative assessment of each
Advisor, including, among other considerations, an evaluation of each Advisor's
basic investment management approach, markets traded, prior experience, past
performance, fee requirements and assets under management. Although different
factors may be considered in the case of different Advisors (and no
representation is made that any given factor will be considered in selecting any
given Advisor), subjective evaluation of each prospective Advisor by principals
of MLIP is an important factor in all of MLIP's Advisor selections. Quantitative
non-correlation analysis and volatility studies are employed in developing the
overall Advisor mix, but the principal objective is to identify Advisors MLIP
believes to have excellent potential to trade successfully.
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<PAGE>
No Advisor selected by MLIP 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. MLAM, which was selected by MLIP, is
affiliated with Merrill Lynch.
MLIP monitors the performance of the Fund and its Advisors on a
day-to-day basis, and, from time to time, reallocates assets among, terminates
and/or appoints new Advisors. At least quarterly, MLIP formally reviews the
performance of the Fund and each Advisor in order to assess whether to change
Advisor selections or allocations. MLIP anticipates that a number of additional
adjustments may be made over time, as they have been to date; but there can be
no assurance that the Fund's Advisor portfolio may not remain static for
significant periods of time. On the other hand, MLIP may, on short notice,
terminate or allocate assets away from an Advisor if MLIP has reason to believe
that the Advisor is deviating from historical trading patterns, violating the
Advisor's risk management policies or has otherwise given MLIP what it considers
to be cause for termination.
ACCESS TO GLOBAL MARKETS
The Fund has access to global markets including, but not limited
to, the following:
CURRENCIES
--------------------------------------------------------------------
Australian Dollar Irish Punt
Belgian Franc Italian Lira
British Pound Japanese Yen
Canadian Dollar New Zealand Dollar
Danish Krone Norwegian Krone
Deutsche Mark Singapore Dollar
Dutch Guilder Spanish Peseta
European Currency Unit Swedish Krona
Finnish Markka Swiss Franc
French Franc United States Dollar
FINANCIAL INSTRUMENTS
---------------------------------------------------------------------
Australian Bonds Major Market Stock Index
(U.S.)
Australian Treasury Bills MEFF&S Stock Index (Spain)
Canadian Bonds Nikkei Stock Average (Japan)
CAC 40 Stock Index (France) PIBOR
Eurodollars S&P 500 Stock Index (U.S.)
Eurolira Spanish Bonds
Euromarks Tokyo Stock Price Index
Euroswiss U.K. "Gilts"
Euroyen U.K. Short Sterling
Financial Times 100 Stock Index (U.K.) U.S. Dollar Index
French Bonds U.S. Treasury Bills
German Bonds U.S. Treasury Bonds
Italian Bonds U.S. Treasury Notes
Japanese Bonds Value Line Stock Index (U.S.)
METALS
---------------------------------------------------------------------
Aluminum Platinum
Gold Silver
Lead Tin
Nickel Zinc
ENERGY PRODUCTS
---------------------------------------------------------------------
Crude Oil No. 2 Heating Oil
Gas Oil Propane
Heavy Fuel Oil Residual Fuel Oil
Natural Gas Unleaded Gasoline
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<PAGE>
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.
CONSOLIDATION OF TRADING ACCOUNTS
MLIP is in the process of consolidating the trading accounts of a
significant number of its funds, so that instead of each such fund having to
maintain an individual futures trading account with each of its advisors, all
such funds will place their assets under the management of the same advisor by
investing in a single private entity sponsored by MLIP. Investing in such
entities rather than through individual accounts should have no adverse, or even
noticeable, effect on any fund. On the other hand, this consolidation of trading
accounts is expected to produce significant administrative and transactional
savings for MLF while ensuring that even the smaller MLIP funds continue to have
access to the full advisor combinations selected for them by MLIP. In the near
future MLIP anticipates that a substantial portion of its asset allocations will
be effected by investing, redeeming and reinvesting the funds' assets in the
securities issued by these private entities sponsored by MLIP.
THE ADVISORS
"CORE" ADVISOR SUMMARIES
As of July 1, 1996, the "core" Advisors were, in the aggregate,
managing approximately $2.1 billion of customer assets in the futures, cash and
forward markets, of which approximately $1.6 billion was being traded in the
programs used for the Fund.
THE CURRENT "CORE" ADVISORS ARE AS FOLLOWS:
<TABLE>
<CAPTION>
AUGUST 1, 1996
ALLOCATION JULY 1, 1996
GENERAL TRADING OF TRADING ASSETS UNDER
ADVISOR APPROACH ASSETS MANAGEMENT*
------- --------------- ------------- --------------
<S> <C> <C> <C>
Chesapeake Capital Technical; 20% $809 million (total)
Corporation trend-following $757 million (Diversified Program)
John W. Henry & Technical; 20% $1.3 billion (total)
Company, Inc. trend-following $881 million (Financial and Metals Portfolio)
</TABLE>
____________________
/*/ Excluding "notional funds." "Notional" funds represent the difference
between the level at which an advisor is instructed to trade an account and the
capital actually committed to the account. The Fund does not trade "notional
funds."
_________________________
CHESAPEAKE CAPITAL CORPORATION (20% ALLOCATION AS OF AUGUST 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 July 1, 1996,
Chesapeake
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<PAGE>
was managing approximately $757 million of customer funds in the Diversified
Program ("notional" funds excluded) and approximately $809 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, 1991 have been 12.51%, 1.81%, 61.82%, 15.87%, 14.09% and 7.33% (6
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 92 and 93 for performance information relating to
Chesapeake.
JOHN W. HENRY & COMPANY, INC. (20% ALLOCATION AS OF AUGUST 1, 1996) -
John W. Henry & Company, Inc. ("JWH") operates thirteen 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 July 1, 1996, JWH was trading
approximately $881 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, 1991 have been 61.88%, (10.89)%, 46.82%,
(5.32)%, 38.53% and 3.56% (6 months), respectively. During that period the
largest monthly drawdown was (18.0)% (1/92) and the largest peak-to-valley
drawdown (39.5)% (12/91-5/92).
See pages 103 through 107 for performance information relating to
JWH.
More complete descriptions and the performance summaries for the
"core" Advisors are included at pages 88-91 and 94-102 of this Prospectus. See
"Risk Factors -- (2) Past Performance" at page 10.
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.
In general, MLIP requires Advisors to agree to invest at least $10,000
in the Fund, as a token of their commitment to the project, as a precondition to
being retained by the Fund.
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<PAGE>
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, Merrill
Lynch International Bank ("MLIB") or MLPF&S acts as a promoter with respect to
the organization of the Fund or the offering of the Units.
Merrill Lynch Investment Partners Inc., a Delaware corporation, was
organized in 1986 principally in order to serve as the general partner and
commodity pool operator of commodity pools for which MLF -- the "futures
commission merchant" for the Fund -- acts as commodity broker and MLPF&S acts as
selling agent. MLIP became registered with the CFTC as a commodity pool operator
and commodity trading advisor in October 1986 and April 1990, respectively, and
is a member of the National Futures Association ("NFA") in such capacities. MLIP
has sponsored in excess of 35 managed futures funds and, as of August 1, 1996,
there were approximately $1.6 billion in funds for which MLIP serves as trading
manager or sponsor. The principal offices of MLIP are located at Merrill Lynch
World Headquarters, Sixth Floor, South Tower, World Financial Center, New York,
New York 10080-6106; telephone (212) 236-4167. MLIP is a wholly-owned subsidiary
of Merrill Lynch Group, Inc., which, in turn, is wholly-owned by Merrill Lynch &
Co., Inc.
The registration of MLIP with the CFTC, and MLIP's membership in the
NFA, must not be taken as an indication that any such agency or self-regulatory
body has recommended or approved either MLIP or an investment in the Fund.
Since its inception in 1986, MLIP has operated with one primary
objective -- to provide investors with an opportunity for long-term capital
appreciation and diversification through quality investments in the futures,
commodity options and forward markets. MLIP, as general partner or sponsor,
structures and promotes managed futures investments in an effort to meet the
objectives of a wide variety of clients. MLIP attempts to combine a detailed
Advisor selection process with active monitoring of its existing funds and their
Advisors. MLIP does not manage client assets directly, but rather specializes in
selecting groups of independent trading advisors to do so.
MLIP acts as general partner to thirteen public futures funds whose
units of limited partnership interest are registered under the Securities
Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, The Growth
and Guarantee Fund L.P., 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.
PRINCIPALS
The officers of MLIP and their business backgrounds are as follows.
John R. Frawley, Jr. Chief Executive Officer, President
and Director
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<PAGE>
James M. Bernard Chief Financial Officer,
Senior Vice President and Treasurer
Jeffrey F. Chandor Senior Vice President and Director of
Sales, Marketing and Research
Allen N. Jones Chairman and Director
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief Executive
Officer, President and a Director of MLIP and Co-Chairman of MLF. He joined
MLPF&S in 1966 and has served in various positions, including Retail and
Institutional Sales, Manager of New York Institutional Sales, Director of
Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets,
and Director of International Institutional Sales. Mr. Frawley holds a Bachelor
of Science degree from Canisius College. Mr. Frawley served on the CFTC's
Regulatory Coordination Advisory Committee from its inception in 1990 through
its dissolution in 1994. Mr. Frawley is currently a member of the CFTC's
Financial Products 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 1944. Mr. Chandor is Senior Vice
President and the Director of Sales, Marketing and Research of MLIP. He joined
MLPF&S in 1971 and has served as the Product Manager of Equity, Derivatives and
Mortgage-Backed Securities as well as Managing Director of International Sales
in the United States, and Managing Director of Sales in Europe. Mr. Chandor
holds a Bachelor of Arts degree from Trinity College, Hartford, Connecticut.
Allen N. Jones was born in 1942. Mr. Jones is Chairman and a Director
of MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of
Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has
held the position of Senior Vice President of MLPF&S. From June 1992 through
February 1994, Mr. Jones was the President and Chief Executive Officer of
Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of
Directors of MLIG and its subsidiary companies. In February 1994, Mr. Jones
became the Director of Individual Financial Services of the Merrill Lynch
Private Client Group. From January 1992 to June 1992, he held the position of
First Vice President of MLPF&S. From January 1990 to June 1992, he held the
position of District Director of MLPF&S. Before January 1990, he held the
position of Senior Regional Vice President of MLPF&S.
The principals of MLIP do not currently intend to acquire any personal
investment in the Fund. As of August 1, 1996, MLIP's interest in the Fund was
valued at $2,615,037. Under currently effective tax regulations, MLIP is
required to maintain at least a 1% interest in the Fund at all times in order to
ensure that the Fund will be taxed as a partnership for federal income tax
purposes.
MLF
MLF, the exclusive clearing "futures commission merchant" for the
Fund, is a clearing member of The Board of Trade of the City of Chicago, the
Chicago Mercantile Exchange, the New York Mercantile Exchange and all other
principal United States commodity exchanges. The principal office of MLF is
located at World Financial Center, 250 Vesey Street, 23rd Floor, New York, New
York 10281-1323.
The Customer Agreement between MLF and the Fund provides that MLF
shall not be liable for actions taken pursuant to the Customer Agreement except
for actions constituting negligence or misconduct, and that MLF shall
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<PAGE>
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 51.
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 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. See "Charges -- Service Fees; 'EFP'
Differentials" at page 43. 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
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<PAGE>
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.
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.
Due to its trading leverage policies, declining interest rates would
adversely affect the Fund in two respects. First, such declines would reduce the
yield earned by the Fund on its Government Securities and cash deposits. Second,
by decreasing the discount rate used by MLIP in calculating the mandatory
trading termination point, such declines would reduce the assets available for
trading. One "principal protection" fund sponsored by a major investment bank
was, in fact, compelled to terminate trading and dissolve, due primarily to a
drop in interest rates which caused the net asset value of the fund and the
present value of its guarantee to converge.
POSSIBLE UPLEVERAGING
Any deleveraging of trading involves an inherent opportunity cost,
sacrificing profit potential in return for reducing the risk of major losses. If
the Fund achieves sufficient profits, MLIP intends to commit more than 75% of
all series' capital to trading. To date, MLIP has not upleveraged any series of
Units, and MLIP must upleverage all series issued after July 1, 1996 to the same
level if it upleverages any such series. (Such discretionary upleveraging is
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<PAGE>
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.
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 35.
THE GUARANTOR
ML&Co., a Delaware corporation, is a holding company that, through its
subsidiaries and affiliates, provides investment, financing, insurance and
related services. Its principal subsidiary, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, which traces its origin to a brokerage business founded in
1820, is one of the largest securities firms in the world. Merrill Lynch,
Pierce, Fenner & Smith Incorporated is a broker in securities, options
contracts, commodity and financial futures contracts and selected insurance
products, a dealer in options and in corporate and municipal securities, and an
investment banking firm. ML&Co. and certain subsidiaries engage in lending
activities, including bridge financing, and extend credit to leveraged companies
in the form of senior term and subordinated debt.
ML&Co.'s major subsidiaries include the following:
Merrill Lynch International Incorporated, through its branches,
subsidiaries and affiliates, provides financial services outside the United
States and Canada similar to those of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Merrill Lynch Canada Inc., a subsidiary of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, provides institutional securities and futures
sales, trading and financing, corporate finance, and mergers and acquisitions
services in Canada. MLIB and subsidiaries and affiliates of Merrill Lynch
International Incorporated engage in international banking and foreign exchange
activities.
Merrill Lynch Government Securities Inc. is a primary dealer in
obligations issued by the U.S. Government or guaranteed or issued by federal
agencies or instrumentalities. MLAM manages mutual funds and provides investment
advisory services. ML&Co.'s insurance operations consist of the underwriting of
life insurance and annuity
-40-
<PAGE>
products by Merrill Lynch Life Insurance Company and ML Life Insurance Company
of New York, and the sale of life insurance and annuities through Merrill Lynch
Life Agency Inc. and other life insurance agencies associated with Merrill
Lynch, Pierce, Fenner & Smith Incorporated.
ML&Co. also provides investment, financing and related services
through Merrill Lynch Money Markets Inc., Merrill Lynch Mortgage Capital Inc.,
Merrill Lynch Capital Services, Inc., Merrill Lynch Derivative Products, Inc,
Merrill Lynch Specialists Inc., Merrill Lynch Capital Partners, Inc., Merrill
Lynch Interfunding Inc., MLIP, Merrill Lynch Credit Corporation, Merrill Lynch
Business Financial Services Inc., Merrill Lynch Hubbard Inc. and other
subsidiaries of ML&Co.
As of June 28, 1996, the aggregate net worth (stockholders' equity) of
ML&Co. was approximately $6.51 billion.
The following is certain summary financial information for ML&Co. for
the fiscal year ended December 29, 1995 and the fiscal quarters ended June 28,
1996 and June 30, 1995. Because the ML&Co. guarantee is a general, unsecured
obligation of ML&Co., the value of the ML&Co. guarantee is dependent upon the
continued financial soundness of ML&Co.
MERRILL LYNCH & CO., INC.
SUMMARY FINANCIAL INFORMATION
(DOLLARS IN MILLIONS, EXCEPT WHERE INDICATED)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED QUARTER ENDED QUARTER ENDED
DECEMBER 29, 1995 JUNE 28, 1996 JUNE 30, 1995
----------------- ------------- -------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Revenues........................... $21,513 $3,380 $2,549
Earnings before income taxes and
cumulative effect of changes
in accounting principles........ $1,811 $698 $464
Net earnings....................... $1,114 $433 $283
SHARE DATA
Average number of primary shares
outstanding...................... 236,330,162 192,900,000 193,300,000
Common shares outstanding.......... 236,330,162 236,330,162 236,330,162
BALANCE SHEET DATA
Total assets (billions)........... $176.86 $205.18 $176.86
Total liabilities (billions)...... $170.72 $198.66 $170.72
Stockholders' equity (billions)... $6.14 $6.51 $6.14
</TABLE>
_________________________
The financial results for ML&Co. are more fully set forth in the
Annual Report to Stockholders for the 1995 fiscal year and in the Quarterly
Report on Form 10-Q for the quarter ended June 28, 1996. MLIP will provide,
without charge, copies of the Annual Report and Quarterly Report to any
prospective or existing investor upon written or oral request to MLIP at Merrill
Lynch World Headquarters, Sixth Floor, South Tower, World Financial Center, New
York, New York 10080-6106; telephone: (212) 236-4167.
In addition, ML&Co. is an electronic filer of information with the
SEC. The SEC maintains a Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC at http://www.sec.gov.
-41-
<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
MLIP has retained MLAM to invest the Fund's available assets
(generally approximately 90% to 95% of total Fund capital) in Government
Securities, maintaining a short-term portfolio with a maximum duration of two
years pursuant to guidelines established by MLIP. MLAM makes no representation
whatsoever as to whether its cash management will be successful or avoid losses.
MLAM, in performing cash management services for the Fund, will do so pursuant
to general instructions issued by MLIP, for which MLAM assumes no
responsibility. Fund assets are available for cash management whether held by
the Fund itself or by its subsidiary partnership, the Trading Partnership. (See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Two-Tier Structure of the Fund" at page 23.) The only assets of
the Fund not available for cash management are a limited cash reserve to meet
liquidity needs (e.g., daily margin payments and the funding of redemptions and
expenses). Consequently, although each series of Units will commence trading
with 75% of its capital invested in the Trading Partnership, MLAM is typically
able to manage approximately 90% to 95% of total Fund capital.
CUSTODY OF FUNDS; INTEREST INCOME
All of the Fund's assets are deposited with either MLF or MLPF&S and
are potentially available for cash management by MLAM.
<TABLE>
<CAPTION>
ML PRINCIPAL PROTECTION L.P.
CUSTODY ALLOCATIONS
PURPOSE CASH HELD AS A % OF CAPITAL HELD IN CUSTODY IN:
<S> <C> <C>
Margin on U.S. Exchanges 20%-30% "Customer segregated funds
accounts"
Margin on Foreign Exchanges 10%-20% "Foreign futures and foreign options
secured amount accounts"
Reserves 50%-70% Unregulated accounts
</TABLE>
The assets of the Fund held to margin futures contracts traded on United
States exchanges are deposited, together with the assets of numerous other MLF
customers, in CFTC-regulated "customer segregated funds accounts" at MLF.
Potentially all such assets are managed by MLAM. MLF credits the Fund with
interest on any of the assets so deposited (i.e., the cash on deposit adjusted
to include open-trade equity and funds in collection or settlement), and not
invested at the direction of MLAM, at prevailing 91-day Treasury bill rates less
0.50% per annum.
The assets of the Fund used for trading on foreign futures exchanges
are held at MLF, together with the assets of numerous other MLF customers, in
its "foreign futures and foreign options secured amount account."
-42-
<PAGE>
Due to MLF's recently inaugurated "single currency margining system" all such
assets are held in U.S. dollars and available for MLAM's cash management.
The assets of the Fund not held to margin U.S. and foreign futures
trading are held in "unregulated" accounts at MLF or MLPF&S.
Assets held in MLF's "foreign futures and options secured amount
account" or in unregulated MLPF&S accounts (no regulatory capital requirements
in respect of Fund assets are held in unregulated accounts) would not have the
benefit of the same protections that are afforded "customer segregated funds" in
the event of the bankruptcy of MLF or MLPF&S.
MLAM is able to manage over 90% of total Fund capital (MLAM manages
assets held directly by the Fund as well as by the Trading Partnership). MLIP
maintains a limited amount of funds in cash in order to meet margin requirements
without need of ongoing purchases and sales of short-term interest-rate
instruments. Any assets held at MLF or MLPF&S and not managed by MLAM are
credited with interest by MLF or MLPF&S, as the case may be, at prevailing 91-
day Treasury bill rates minus 0.50% per annum. Of the approximately 5% to 10% 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 foreign futures and foreign options "secured amount
accounts" or 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."
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.
In executing transactions through the F/X Desk, the Fund will be
dealing with MLF as its sole counterparty. MLF will, in turn, deal with MLIB and
the other counterparties accessed by the F/X Desk. Having the Fund (and the
other MLIP clients using the F/X Desk) trade through the F/X Desk on the basis
of MLIP's credit lines (and without any requirement to deposit margin in respect
of such trading with MLF) permits the F/X Desk to access a wide range of
counterparties without need of such counterparties' evaluating the individual
credit of the Fund or requiring margin from it.
-43-
<PAGE>
CHARGES
The following table summarizes the charges paid by the Fund during
1994 (2-2/3 months), 1995 and 1996 (6 months).
<TABLE>
<CAPTION>
1/1/96 - 6/30/96 1/1/95 - 12/31/95 10/12/94 - 12/31/94
---------------- ----------------- -------------------
COST AS A % OF COST AS A % OF
AVERAGE MONTH- COST AS A % OF AVERAGE MONTH-
DOLLAR END NET ASSETS DOLLAR AVERAGE MONTH- DOLLAR END NET ASSETS
COST AMOUNT (ANNUALIZED) AMOUNT END NET ASSETS AMOUNT (ANNUALIZED)
- ---- ------ ---------- ------ -------------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Brokerage Commissions* $2,391,123 6.84% $3,216,364 5.76% $405,653 5.61%
Administrative Fee* 64,625 0.18 86,928 0.16 10,964 0.15
Reimbursement of
Organizational and Initial
Offering Costs 39,850 0.11 79,700 0.14 17,712 0.24
Profit Shares 243,602 0.70 652,366 1.17 129,169 1.79
---------- ---- ---------- ---- -------- ----
Total $2,739,200 7.83 $4,035,358 7.23% $563,498 7.79%
========== ==== ========== ==== ======== ====
</TABLE>
___________________________
* Certain amounts in prior periods have been reclassified to conform to the
current period presentation.
The Fund's average month-end Net Assets during 1994 (2-2/3 months),
1995 and 1996 (6 months) equalled $32,552,448, $55,827,125 and $83,909,857,
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 (6 months), the Fund earned
$377,303, $3,415,670 and $2,289,595, respectively, in interest income, or
approximately 1.16%, 6.12% and 2.73%, respectively, of the Fund's average month-
end Net Assets.
See also the "Breakeven Table" included in the "Summary" at page 8.
______________________________
CHARGES PAID BY THE FUND
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
MLIP Organizational and The Fund is reimbursing MLIP in 36 monthly
initial offering costs installments of $6,642 ending October 31, 1997.
Merrill Lynch Brokerage commissions A flat-rate monthly commission of 0.7708 of 1%
Futures of the month-end assets committed to trading (a
9.25% annual rate; 6.94% at 75% leverage).
</TABLE>
-44-
<PAGE>
CHARGES PAID BY THE FUND (CONT.)
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
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).
BROKERAGE COMMISSIONS
Commodity brokerage commissions for futures trades are typically paid
on the completion or liquidation of a trade and are referred to as "round-turn
commissions," which cover both the initial purchase (or sale) of a commodity
futures contract and the subsequent offsetting sale (or purchase). However, the
Fund pays commissions at a monthly flat rate of 0.7708 of 1% (a 9.25% annual
rate) of the Fund's month-end assets committed to trading. These
commissions
-45-
<PAGE>
include the Advisors' consulting fees and all execution and clearing costs.
Assets committed to trading are not reduced for purposes of calculating
brokerage commissions by any accrued but unpaid Profit Shares, Administrative
Fees or the brokerage commissions being calculated. The Fund could obtain lower
rates for similar brokerage services at other firms.
The Fund initially commits 75% of the capital attributable to each
series of Units to the Trading Advisors for management. At this leverage factor,
the brokerage commissions equal 6.94% per annum of the average total month-end
assets attributable to each series, including assets not allocated to trading.
The Fund's brokerage commissions are allocated among the outstanding
series of Units pro rata based on the respective amount of assets which each
series commits to trading, without reduction for accrued but unpaid brokerage
commissions, Profit Shares or Administrative Fees.
During 1994 (2-2/3 months), 1995 and 1996 (6 months), the Fund paid
brokerage commissions of $416,617, $3,303,292 and $2,391,123, respectively;
these flat-rate brokerage commissions were the approximate equivalent of per-
trade commissions of $53, $134 and $114, 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 9.25% annual brokerage
commissions or the 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" and Administrative Fees
constitute a "wrap fee", ML&Co.'s only source of revenues from
the Fund (other than "offset account" and interest credit
benefits as described under "Use of Proceeds"), from which
revenues ML&Co. must pay a variety of different costs and
expenses. The level of the "wrap fee" is set with these costs and
expenses in mind. Different ML&Co .entities pay the following
costs and expenses with respect to the operation of the Fund: (a)
administrative expenses; (b) selling commissions; (c) ongoing
compensation to Financial Consultants; (d) all costs of executing
the Fund's futures trades; (e) the Advisors' consulting fees; (f)
MLAM's advisory fees; and (g) ML&Co. employee discounts. All of
these costs and expenses, not only execution costs, are reflected
in the 9.5% annual "wrap fee" (including both the brokerage
commissions and the Administrative Fees) charged to the
Fund.
PROSPECTIVE INVESTORS MUST BE AWARE THAT THE "BROKERAGE
COMMIS-SIONS" 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, IN THE AGGREGATE,
ABOVE THE CURRENT ANNUAL LEVEL OF 9.5% OF THE AVERAGE MONTH-END
NET ASSETS COMMITTED TO TRADING WITHOUT THE UNANIMOUS CONSENT OF
ALL LIMITED PARTNERS.
MLF pays, from the brokerage commissions received by it, all costs of
executing the Fund's futures trades, including the NFA transaction fees assessed
on the Fund's futures trading on United States exchanges. Such fees currently
equal $0.14 per round-turn trade of a futures contract and $0.07 for each trade
of a commodity option contract.
ADMINISTRATIVE FEES
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
-46-
<PAGE>
being calculated. As of January 1, 1996, the Fund's flat-rate brokerage
commissions were reduced in an amount corresponding to the Administrative Fees
so that there 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
(6 months), MLIP paid $36,900, $31,142 and $64,625, 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 "exchange of futures for physical" ("EFP") trading with Merrill
Lynch, the Fund acquires spot or forward (collectively, "cash") currency
positions through MLIP's F/X Desk in the same manner and on the same terms as in
the case of the Fund's other F/X Desk trading. EFPs are used relatively
infrequently by the Advisors, but are a trading technique which effectively
permits an Advisor to establish a futures position out of normal exchange hours
as well as to obtain a single price for an entire large order, whereas when
large orders are executed on the futures exchange floor, they tend to be broken
up into a number of different futures trades, each of which may be bought or
sold at a different price. The current Advisor group makes very little use of
the EFP technique. When the Fund exchanges these positions for futures, there is
a "differential" between the prices of the two positions. This "differential"
reflects, in part, the different settlement dates of the cash and the futures
contracts and prevailing interest rates, but also includes a pricing spread in
favor of MLIB or another Merrill Lynch entity.
These F/X Desk service fees and EFP differentials, combined, are
estimated to total no more than 0.25 of 1% of the Fund's average month-end
traded assets on an annual basis.
SECURITIES "BID-ASK" SPREADS
The Fund's Government Securities trades are executed with dealers
unaffiliated with any Merrill Lynch entity on an arm's-length "best net price
and execution" basis. MLAM is required to use unaffiliated dealers to execute
the Fund's securities trades, because applicable SEC rules prohibit an
"investment adviser" such as MLAM from executing -- either itself or through an
affiliate -- any securities trades on a principal-to-principal basis with a
client (virtually all Government Securities trades are executed on a principal-
to-principal basis in the over-the-counter, rather than on an agency basis on an
exchange, market).
PROFIT SHARES
John W. Henry & Company, Inc. receives a quarterly Profit Share of 15%
and Chesapeake Capital Corporation of 20%, in each case of any New Trading
Profit earned by such Advisors, respectively, for each series of Units
considered independently. Advisors could receive Profit Shares from one series
of Units but not from others due to the different times at which the series
began trading. For example, the account managed by an Advisor for the series of
Units sold as of October 1, 1996 might incur losses during the fourth quarter of
1996. Accordingly, such Advisor will have a loss carryforward with respect to
such series at the time that the series sold as of January 1, 1997 was issued.
The January 1, 1997 series would not, of course, be issued with any loss
carryforward (as such series would have incurred no losses as of its date of
issuance). Consequently, if such Advisor traded profitably in the first quarter
of 1997, such Advisor would be entitled to a Profit Share in respect of the
January 1, 1997 series, although such Advisor may not have recognized the losses
incurred by the October 1, 1996 series during the fourth quarter of 1996.
-47-
<PAGE>
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.
New Trading Profit for purposes of calculating each Trading Advisor's
Profit Share includes (i) realized trading profit (loss) plus or minus (ii) the
change in unrealized trading profit (loss) on open positions and is calculated
after payment of all or a portion of the monthly brokerage commissions and
Administrative Fees, but is not reduced by Profit Shares previously paid. New
Trading Profit does not include interest or any yield enhancement return earned
on the Fund's assets. Organizational and initial offering cost reimbursement
payments do not reduce New Trading Profits for purposes of calculating Profit
Shares. New Trading Profit is only generated to the extent that a Trading
Advisor's cumulative New Trading Profit exceeds the highest level of cumulative
New Trading Profit achieved by such Advisor as of the end of any previous
calendar quarter (or $0, if an Advisor has traded unprofitably for a series of
Units).
Assume that as of the end of a series' first calendar quarter of
trading, 1996, Chesapeake Capital Corporation ("Chesapeake") had, after all or a
portion of the allocable monthly brokerage commissions and Administrative Fees,
a realized profit of $50,000 and an unrealized profit of $150,000 in respect of
such series' New Trading Profit would equal $200,000. The entire amount would
represent an increase in cumulative Trading Profit allocable to such series and
20%, or $40,000 would be paid by such series to Chesapeake. Assume also that
during the second quarter of such series' trading, again after all or a portion
of allocable monthly brokerage commissions and Administrative Fees, the
Chesapeake account had realized additional profits of $60,000 on its closed-out
positions but incurred a decrease in the unrealized profits on its open
positions of $50,000 in respect of such series. Cumulative Chesapeake Trading
Profit allocable to such series would have increased to $210,000, and 20% of
such $10,000 increase or $2,000 would be paid by such series to Chesapeake. If
the assets allocable to the series and managed by Chesapeake were subsequently
to sustain losses, Chesapeake would not be required to refund any of the Profit
Shares previously paid by the series, but it would not be until Chesapeake's
cumulative Trading Profit allocable to the series exceeded $210,000 as of a
calendar quarter-end that Chesapeake would again generate New Trading Profit in
respect of such series that would be subject to additional Profit Share
accruals. The Fund pays Profit Shares in respect of each series of Units to each
Trading Advisor based on each such Advisor's individual performance, rather than
paying Profit Shares based on the overall performance of any such series. It is
likely that there will be periods when the aggregate New Trading Profits on
which Profit Shares are paid by a series to one or more Trading Advisors are
exceeded by the losses incurred in respect of such series by one or more of the
other Trading Advisors.
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.
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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.
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 (6 months), the Fund paid
Profit Shares of $129,169, $652,362 and $243,602, respectively, and had net
income of $579,894 and $5,186,492 and $1,778,363, respectively. These Profit
Shares equalled 0.4%, 1.17% and 0.29% of average month-end Net Assets, and 22%,
12.6% and 2.12% 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
60.
MLIP paid a total of $4,615,146 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
June 30, 1996, MLIP paid a total of $148,729 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.
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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 (6 months), MLF paid
consulting fees of $106,951, $858,044 and $642,935, respectively, or
approximately 0.33%, 1.54% and 0.76% of the Fund's average month-end Net Assets
during these periods.
MLAM FEES
MLF pays MLAM annual management fees of 0.20% on the first $25 million
of Fund capital managed by MLAM, 0.15% on the next $25 million of capital,
0.125% on the next $50 million, and 0.10% on capital in excess of $100 million.
Such fees are paid quarterly in arrears and are calculated on the basis of the
average daily assets managed by MLAM. In the event that MLF for some reason
fails to make prompt payment to MLAM, MLIP is responsible for doing so.
During 1994 (2-2/3 months), 1995 and 1996 (6 months), MLF expensed
approximately $11,319, $70,670 and $68,562, respectively, in cash management
fees paid or accrued to MLAM.
REDEMPTION CHARGES
Units redeemed on or prior to the end of the twelfth full month after
issuance are subject to redemption charges of 3% of the Net Asset Value at which
they are redeemed. Such charges are paid to MLIP and are intended to compensate
MLIP for the financial burden to MLIP associated with paying selling commissions
on short-term investments.
If a Limited Partner redeems Units during or as of the end of a
calendar quarter, and subscribes as of the date of redemption to the new series
of Units to be issued immediately following such quarter, any otherwise
applicable 3% charge is waived to the extent that the redemption proceeds are
reinvested. The Units acquired upon reinvestment are subject to a 3% redemption
charge from the date of issuance.
Receipt of redemption charges does not reduce the Fund's reimbursement
obligations to MLIP for organizational and initial offering costs.
During 1994 (2-2/3 months), 1995 and 1996 (6 months), MLIP received a
total of $7,436, $57,489 and $26,309, 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
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on October 25, 1995 adding John M.W. Moorlach, the current Orange County
Treasurer-Tax Collector, as a plaintiff, and alleging, among other things, that
ML&Co.'s liquidation of certain securities entitles the plaintiffs to relief
under Sections 362, 502, 510, 549 and 922 of Title 11 of the United States Code
(the "Bankruptcy Code"), that various securities transactions between Orange
County and/or the Pools and ML&Co. and its subsidiaries violated California law
and are null and void, that ML&Co. and its subsidiaries violated Section 10(b)
of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5
promulgated thereunder, Section 25401 of the California Corporations Code (the
"California Code"), Section 17200 of the California Business and Professions
Code, Sections 1709-10 of the California Civil Code, breached fiduciary duties,
aided and abetted breaches of fiduciary duty and conspired to make unauthorized
use of public funds. Damages in excess of $2 billion, injunctive and declaratory
relief are sought.
On March 1, 1995, the parties entered into an agreement pursuant to
which the proceeds from the sale of securities purchased by ML&Co. from Orange
County pursuant to certain master repurchase agreements are to be used to
purchase short-term Treasury bills or Treasury notes that will be identifiable
and held separate and subject to any rights that ML&Co. may have in the master
repurchase agreements. This agreement may be terminated by ML&Co. upon 30 days'
written notice.
On December 13, 1994, a purported class action was commenced in the
Superior Court of the State of California, Orange County, on behalf of
individuals whose funds were deposited with the Orange County Treasurer-Tax
Collector pursuant to proceedings in California Superior Court (the "DeLeon
Action"). On December 27, 1994, plaintiffs filed a first amended class action
complaint; on April 19, 1995, plaintiffs filed a second amended complaint which
was dismissed on November 13, 1995; and on December 18, 1995 plaintiffs filed a
third amended complaint. As amended, the DeLeon Action is brought on behalf of
the same individuals on whose behalf the action was originally brought and on
behalf of individuals who invested funds in the Pools representing deferred
compensation and/or retirement funds. The defendants include ML&Co., a
subsidiary of ML&Co. and an employee of ML&Co. Plaintiffs allege, among other
things, that the defendants breached fiduciary duties, aided and abetted
breaches of fiduciary duties, conspired to breach a fiduciary duty and committed
professional negligence in connection with ML&Co.'s business activities with the
Orange County Treasurer-Tax Collector. Damages in an unspecified amount are
sought. On May 10, 1996, the Superior Court for the State of California, Orange
County, entered an order staying this action pending final resolution of the
Orange County Action described above.
On January 10, 1995, a purported class action was commenced in the
Superior Court of the State of California, Orange County, on behalf of persons
whose funds were deposited in the Pools pursuant to proceedings in California
Superior Court (the "Small Action"). ML&Co., a subsidiary of ML&Co., an employee
of ML&Co. and Robert L. Citron, formerly the Treasurer-Tax Collector of Orange
County, are named as defendants. Plaintiffs allege claims for breach of
fiduciary duty and fraud in connection with ML&Co.'s business activities with
the Orange County Treasurer-Tax Collector. Injunctive relief and damages in an
unspecified amount are sought. The complaint in this action was never served.
On September 15, 1995, an action was commenced in the Superior Court
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
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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.
In the Atascadero Federal Court Action and the Atascadero State Court
Action, the two employees of ML&Co. who were added as defendants in the amended
complaints were dismissed as defendants without prejudice on May 15, 1996, and
July 5, 1996, respectively.
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 August 7,
1996, the Wilson Actions were dismissed.
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 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
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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. The Supreme Court
of the State of New York, New York County, dismissed this action on July 2,
1996.
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.
On July 17, 1996 the Antitrust Division of the United State Department
of Justice filed a civil antitrust complaint against firms that make markets in
NASDAQ securities, including Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The complaint alleged that the firms violated Section 1 of the Sherman Act
through a "common understanding" to follow a "quoting convention" that the
complaint asserts had inflated the "inside spread" (the difference between the
best quoted buying price and the best quoted selling price on NASDAQ) in certain
NASDAQ stocks. This allegedly resulted in investors having to pay higher
transaction costs for buying and selling stocks than they would have paid
otherwise. At the same time the complaint was filed, a proposed settlement of
the action was announced, pursuant to which the market maker defendants in the
action have agreed not to engage in certain conduct. The proposed settlement,
which is subject to court approval, provides, among other things, for the
monitoring and tape recording by each of the market maker defendants of not less
than 3.5 percent, or a maximum of 70 hours per week, of telephone conversations
by its over-the-counter desk traders; the provision to the Department of Justice
of any taped conversation that may violate the terms of the settlement; and for
Department of Justice representatives to appear unannounced, during regular
business hours, for the purpose of monitoring trader conversations as the
conversations occur.
In each of the legal proceedings described below except for the
stockholder derivative actions, the claims against the Merrill Lynch defendants
(as defined below) have now either been dismissed pursuant to settlements or
under the terms of a settlement for which court approval 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
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transactions was to distort its apparent financial condition. It is claimed that
GSLIC's former officers and employees improperly took assets from the company
and its investment portfolio declined substantially in value before its true
financial condition became known to insurance regulators, GSLIC's policyholders,
and the creditors of GSLIC and its parent company, Transmark USA, Inc.
("Transmark").
On December 20, 1991, an action (the "Receiver Action") was commenced
by the Florida Department of Insurance as Receiver of GSLIC (the "Receiver") in
the Fourth Judicial Circuit Court in Duval County, Florida naming as defendants
former officers, directors and shareholders of GSLIC and Transmark, GSLIC's
former outside attorneys and accountants, MLPF&S, MLGSI and a former managing
director of MLPF&S (the Merrill Lynch parties in the Receiver Action being
referred to collectively as the "Merrill Lynch defendants"). The complaint
alleges state law claims against the above-mentioned Merrill Lynch defendants
for fraud, breach of fiduciary duty, conspiracy and aiding and abetting a breach
of duty arising from their involvement in the year-end trades with GSLIC,
alleges that GSLIC was damaged in excess of $300 million and seeks relief in an
unspecified amount from the Merrill Lynch defendants. On July 14, 1995, an
agreement was signed among the Receiver of GSLIC, the Merrill Lynch defendants,
along with certain other named defendants, to settle this action. The court has
entered an order severing for purposes of trial the claims against the settling
defendants and otherwise staying all further proceedings in respect of such
defendants. Pursuant to the terms of the final settlement agreement (executed on
October 19, 1995) and subject to the finality of the court's Order of Final
Approval of Settlement dated March 8, 1996, the Merrill Lynch defendants will
pay $45 million to the Receiver, and the Receiver's claims against them will be
dismissed in their entirety. On July 12, 1996, the plaintiffs in the Receiver
Action entered a stipulation of discontinuance with prejudice with respect to
all claims asserted against all defendants, including the Merrill Lynch
defendants.
Substantially the same defendants are named in two consolidated
lawsuits brought in federal court in Jacksonville, Florida on October 15, 1991
and on February 28, 1992 on behalf of an uncertified alleged class of purchasers
of GSLIC insurance policies and annuities between 1984 and 1991 (the
"Haag/Levine Action"). The complaint alleges substantially the same claims as
the Receiver Action as well as claims under RICO and Section 10(b) of the
Exchange Act and seeks unspecified money damages. The court has stayed the
Haag/Levine Action pending the resolution of the Receiver Action. A condition of
the settlement in the Receiver Action is dismissal of the claims in the
Haag/Levine Action against the Merrill Lynch defendants, at no further cost to
the Merrill Lynch defendants. Unopposed motions seeking this dismissal have been
submitted to the court.
The Resolution Trust Corporation ("RTC"), as receiver for four failed
savings institutions (CenTrust Association Savings Bank, Imperial Savings
Association, FarWest Savings and Loan Association and Columbia Savings and Loan
Association) in January 1993 and April 1993 filed civil actions in federal court
in Jacksonville, Florida against ML&Co., MLPF&S, MLGSI, a former MLPF&S managing
director, and former officers, directors and employees of Transmark and GSLIC
(the "RTC Action"). The action seeks to recover damages as a result of purchases
by the four above-named institutions of securities issued by Transmark, GSLIC's
parent corporation. The claims alleged are sub 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.
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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 or Merrill Lynch, Pierce, Fenner & Smith Incorporated in the case of
claims relating to the offering of the Units) which is not in direct privity
with the Fund, and (ii) would be likely only to have such recourse even in case
of entities which are in such privity only on a derivative basis, suing not
individually but in the right of the Fund.
ML PRINCIPAL PROTECTION L.P.
ASSOCIATED MERRILL LYNCH ENTITIES
[CHART OF ASSOCIATED MERRILL LYNCH ENTITIES APPEARS HERE]
GENERAL
No Merrill Lynch entity or Trading Advisor has established any formal
procedures to resolve the conflicts of interest described below. Limited
Partners are dependent on the good faith of the respective parties subject to
such conflicts to resolve such conflicts equitably.
MLIP and its affiliates will assert that Limited Partners have
consented to the following conflicts of interest by subscribing to the Fund.
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MLIP
Relationship among the Merrill Lynch Entities
As MLIP sponsored the Fund, MLIP and its affiliates are its service
providers, other than the Trading Advisors, and will continue to be so even if
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.
There is, in general, a shortage of qualified futures trading advisors
available to manage customer assets. MLIP has a conflict of interest in
selecting Trading Advisors for the Fund and for other accounts sponsored by
MLIP.
MLIP has a conflict of interest in allocating assets among the Trading
Advisors in that MLF receives more net benefit from the brokerage commissions
paid by the Fund the more infrequently an Advisor trades. MLF receives a flat-
rate fee for executing the Fund's futures trades. However, MLF incurs an out-of-
pocket cost in executing each such trade. The more frequently an Advisor trades,
the less these out-of-pocket costs are to MLF and the greater its net revenues
from the Fund (brokers which require per-trade compensation, and their
affiliates, have a conflict of interest in that they will receive more revenues
the more frequently an Advisor trades; brokers which receive a flat-rate will
have exactly the opposite conflict).
Leveraging Considerations
MLIP has a conflict of interest in determining the Fund's trading
leverage between MLIP's interest in maintaining the leverage which it believes
to be best for the Limited Partners and its interest in protecting ML&Co.'s
guarantee liability. Although the brokerage commissions and the Administrative
Fees paid increase as trading leverage is increased, added revenues are not a
significant factor in MLIP's leverage policy, compared with the need to avoid
any ML&Co. payments under the guarantee.
MLF; MLIB; MLAM
MLF has numerous different clients and executes trades for a wide
range of such clients in the same markets at or about the same time. Executing
orders for different, and possibly competing, customers at the same time
involves an inherent conflict of interest. As a result of executing orders for
many other clients, MLF also has fewer resources to allocate to the Fund's
account.
Certain clients of MLF pay materially lower brokerage rates than does
the Fund. In the case of a number of such clients, particularly clients with an
account as large as that of the Fund, the lower fees paid by its clients can be
in large part attributable to the fact that the significant costs incurred by
MLIP and the ML&Co. group in sponsoring the Fund become embedded in the Fund's
brokerage commission structure, as it is only through receipt of brokerage
commissions that the ML&Co. group can be reimbursed for the amounts so expended.
In the case of institutional accounts, these costs are not incurred by the
Merrill Lynch organization, so that the brokerage commissions charged to such
accounts can be correspondingly reduced without reducing the net revenue
received by Merrill Lynch. See "Charges -- Charges Paid by Merrill Lynch" at
page 45 above. Nevertheless, even in terms of the "net brokerage commissions,"
certain institutional clients of MLF receive, as a result of arm's-length
negotiations, a better rate than the Fund.
MLIB and MLAM each also have numerous clients and they have financial
incentives to favor certain accounts over the Fund.
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THE TRADING ADVISORS
Other Clients and Business Activities of the Trading Advisors
The Fund might benefit significantly from an exclusive focus on the
Fund by certain of the Trading Advisors' 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 business
dealings. Such Trading Advisors may have a conflict of interest between
insisting on the use of such brokers and using the brokers most advantageous for
the Fund.
Certain of the Trading Advisors execute a number of the trades for
their Fund accounts through affiliated floor brokers.
FINANCIAL CONSULTANTS
Financial Consultants (the individual MLPF&S brokers) receive initial
selling commissions and ongoing compensation on the Units. Consequently,
Financial Consultants have a financial incentive to encourage investors to
purchase Units and to discourage them from redeeming their Units.
PROPRIETARY TRADING
The Trading Advisors, MLIP, their respective 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
posi tions which are the same as or opposite to those held by the Fund.
Prospective investors should be aware that -- as a result of a neutral
allocation system, testing a new trading system, trading their proprietary
accounts more aggressively or other actions not in violation of their fiduciary
or other duties -- such persons may from time to time take positions in their
proprietary accounts ahead of the positions taken for the Fund and on occasion
orders may be filled more advantageously for the account of one or more such
persons than for the Fund's account. Records of this trading will not be
available for inspection by Limited Partners.
___________________
While it is generally true that it is in the best interests of MLIP,
the Trading Advisors and their respective affiliates and principals for the Fund
to trade successfully, in particular circumstances any of the foregoing parties
may receive significantly more benefit from acting in a manner adverse to the
Fund than from acting in, or not opposed to, the Fund's best interests. It is
very difficult, if not impossible, for Limited Partners to know or confirm that
any of the foregoing persons is equitably resolving the conflicts of interest
described above.
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THE LIMITED PARTNERSHIP AGREEMENT
A copy of the Limited Partnership Agreement is included as Exhibit A
to this Prospectus and is incorporated herein by reference. Section and page
references below are to the Limited Partnership Agreement.
LIMITED LIABILITY OF SUBSCRIBERS
The Limited Partnership Agreement provides that (except as otherwise
provided by law -- for example, if the Fund is bankrupt or insolvent at the time
that a distribution is made to a Limited Partner), no Limited Partner shall be
personally liable for the debts of the Fund beyond the amount invested by such
Limited Partner in the Fund, plus his share of any undistributed profits.
(Section 7(e) at page A-7).
ASSIGNMENTS; REDEMPTIONS
Units may only be transferred with the consent of the General Partner,
although the assignment of the economic interest represented by the Units (but
not any of the other rights, such as the right to vote and receive monthly
reports) does not require such consent. The General Partner will generally
consent to assignees being substitute Limited Partners unless doing so would
have adverse federal income tax consequences.
A Limited Partner may redeem any or all of his Units at Net Asset
Value as of the last business day of any month upon ten calendar days'
irrevocable notice to his Merrill Lynch Financial Consultant. Payment of the
redemption price of Units is generally made within ten business days of the
effective date of redemption.
If Units are redeemed on or prior to the end of the twelfth full
calendar month after their sale, 3% of such Units' redemption proceeds are paid
to MLIP as an early redemption charge.
In general, redemption requests need not be made in writing. Limited
Partners may simply contact their Merrill Lynch Financial Consultant. A Limited
Partner who no longer has a Merrill Lynch account must request redemption in
writing (signature guaranteed), by corresponding with MLIP at: Merrill Lynch
World Headquarters, Sixth Floor, South Tower, World Financial Center, New York,
New York 10080-6106. (Section 11 at page A-12).
MANAGEMENT OF PARTNERSHIP AFFAIRS; VOTING RIGHTS
Limited Partners take no part in the management and have no voice in
the operation of the Fund. (Section 8(a) at page A-8). Limited Partners may
remove and replace MLIP as general partner of the Fund, and may, with the
consent of MLIP, amend the Limited Partnership Agreement, except in certain
limited respects, by the affirmative vote of holders of Units representing more
than fifty percent (50%) of the outstanding Units of each series owned by
Limited Partners. (Section 17(b) at page A-17). A majority of the Units held by
Limited Partners may also compel dissolution of the Fund. (Section 17(b) at page
A-17). 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-
18).
MLIP has no power under the Limited Partnership Agreement to restrict
any of the Limited Partners' voting rights. (Section 17(c) at page A-18). 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-17).
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-18).
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
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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-11).
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-11).
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-9); (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-9); (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-9); 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-9).
All Advisors must meet the experience requirements of the Guidelines.
(Section 8(f) at page A-9).
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-
8).
FEDERAL INCOME TAX CONSEQUENCES
MLIP has been advised by its counsel, Sidley & Austin, that, in its
opinion, the following Summary correctly describes the material federal income
tax consequences, as of the date hereof, to a United States individual taxpayer
of acquiring, owning and disposing of Units.
PARTNERSHIP TAX STATUS OF THE FUND
MLIP has been advised by its counsel, Sidley & Austin, that, in its
opinion, each of the Fund and the trading partnership in which the Fund invests
is properly classified as a partnership for federal income tax purposes. MLIP
believes that all of the income generated by the Fund to date has constituted
and all income expected to be generated will constitute "qualifying income."
Accordingly, Sidley & Austin has advised MLIP that, in its opinion, the Fund
will not be subject to federal income tax as a corporation under the provisions
applicable to "publicly-traded partnerships."
TAXATION OF PARTNERS ON PROFITS OR LOSSES OF THE FUND
Each Partner is required for federal income tax purposes to take into
account his allocable share of all items of Fund income, gain, loss or
deduction. A Partner's share of such items for tax purposes generally is
determined by the allocations in the Limited Partnership Agreement unless such
allocations do not have "substantial economic effect" or are not in accordance
with the Partners' interests in the Fund. Under the Limited Partnership
Agreement, allocations are generally made in proportion to the capital accounts
of each Unit of such series, and therefore such allocations should have
substantial economic effect. However, in cases in which a Partner redeems part
or all of his Units in the Fund the allocations of capital gain or loss
specified in the Limited Partnership Agreement will not be in proportion to
capital accounts. Because such allocations are consistent with the economic
effect of the Limited Partnership Agreement, MLIP files the Fund's tax return
based upon such allocations. In the opinion of Sidley & Austin, the foregoing
allocations should be upheld if audited by the IRS. Nevertheless, a legal
opinion is not binding on the IRS and it is not certain that such allocations
would, in fact, be respected upon audit. If such allocations were challenged and
not sustained, some or all of a redeeming Partner's capital gain or loss could
be converted from short-term to long-term, and each
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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 57 below), a Partner's
distributive share of any capital losses of the Fund will not materially reduce
the federal income tax payable on his ordinary income (including his allocable
share of the Fund's ordinary income).
TREATMENT OF INCOME AND LOSS UNDER THE "PASSIVE ACTIVITY LOSS RULES"
The Internal Revenue Code of 1986 (the "Code") contains rules (the
"Passive Activity Loss Rules") designed to prevent the deduction of losses from
"passive activities" against income not derived from such activities, including
salary income from investment activities not constituting a trade or business,
such as interest and dividends ("Portfolio Income"). The trading activities of
the Fund will not constitute a "passive activity," and income derived from the
Fund will constitute Portfolio Income or other income not from a "passive
activity."
REDEMPTIONS OF UNITS
Cash received from the Fund by a Partner generally is not reportable
as taxable income by a Partner, except as described below. Rather, such receipt
reduces (but not below zero) the total tax basis of all of the Units held by the
Partner after the redemption.
Redemption for cash of all of a Partner's Units will result in the
recognition of gain or loss for federal income tax purposes. Such gain or loss
will be equal to the difference, if any, between the amount received and the
Partner's adjusted tax basis for his Units. Assuming that the Partner has held
his Units for more than one year, such gain or loss will be long-term capital
gain or loss.
GAIN OR LOSS ON SECTION 1256 CONTRACTS
Under the "mark-to-market" system of taxing futures and commodity
options contracts traded on United States exchanges and certain foreign currency
forward contracts ("Section 1256 Contracts"), any unrealized profit or loss on
positions in such Section 1256 Contracts open as of the end of a fiscal year is
treated as if such profit or loss had been realized for tax purposes as of such
time. In general, 60% of the net gain or loss which is generated as a result of
the "mark-to-market" system is treated as long-term capital gain or loss, and
the remaining 40% of such net gain or loss is treated as short-term capital gain
or loss.
GAIN OR LOSS ON NON-SECTION 1256 CONTRACTS
Except as described below with respect to Section 988 transactions
entered into by a qualified fund, gain or loss with respect to contracts that
are non-Section 1256 Contracts is taken into account for tax purposes only when
realized.
"Section 988 transactions" include entering into or acquiring any
forward contract, futures contract or similar instrument if the amount paid or
received is denominated in terms of (or determined by reference to the value of)
a foreign currency other than the taxpayer's functional currency or if the
underlying property to which the contract or instrument ultimately relates is a
foreign currency other than the taxpayer's functional currency. In general,
foreign currency gain or loss on Section 988 transactions is treated as ordinary
income or loss. However, under the "qualified fund election" made by the Fund,
gain or loss with respect to 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).
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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 58 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 -- (27) Taxation of Interest Income" at page 14.
If an individual taxpayer incurs a net capital loss for a year, the
portion thereof, if any, which consists of a net loss on Section 1256 Contracts
may, at the election of the taxpayer, be carried back three years. Losses so
carried back may be deducted only against net capital gain for such year to the
extent that such gain includes gains on Section 1256 Contracts. Losses so
carried back will be deemed to consist of 60% long-term capital loss and 40%
short-term capital loss (see "-- Gain or Loss on Section 1256 Contracts,"
above). To the extent that such losses are not used to offset gains on Section
1256 Contracts in a carryback year, they will carry forward indefinitely as
losses on Section 1256 Contracts in future years.
LIMITED DEDUCTION FOR CERTAIN EXPENSES
The Code provides that, for individual taxpayers who itemize
deductions when computing taxable income, expenses of producing income,
including "investment advisory fees," are aggregated with unreimbursed employee
business expenses, other expenses of producing income and certain other
deductions (collectively, "Aggregate Investment Expenses"), and that the
aggregate amount of such expenses is deductible only to the extent that such
amount exceeds 2% (the "2% floor") of an individual taxpayer's adjusted gross
income. In addition, Aggregate Investment Expenses in excess of the 2% floor,
when combined with a taxpayer's deductions for certain other items, are subject
to a reduction (the "3% phase-out") equal to, generally, 3% of the taxpayer's
adjusted gross income in excess of a certain threshold amount. Moreover, such
Aggregate Investment Expenses are miscellaneous itemized deductions which are
not deductible by individual taxpayers in calculating his alternative minimum
tax.
Based on the contemplated trading activities of the trading
partnership in which the Fund invests, in the opinion of Sidley & Austin, the
trading partnership should be treated as engaged in the conduct of a trade or
business for federal income tax purposes. As a result, the ordinary and
necessary business expenses incurred by the trading partnership in conducting
its commodity futures trading business should not be subject to the 2% Floor or
the 3% Phase-Out. Substantially all of the expenses related to an investment in
the Fund are incurred and paid by the trading partnership. Investors should be
aware that an opinion of counsel is not binding on the IRS or on any court and
it is possible that the IRS could contend, or that a court could decide, that
the contemplated trading activities of the trading partnership do not constitute
a trade or business for federal income tax purposes. To the extent the
characterization of the trading partnership's expenses as investment advisory
expenses were to be sustained, each non-corporate Partner's pro rata share of
the amounts so characterized would be deductible only to the extent that such
non-corporate Partner's Aggregate Investment Expenses exceeded the 2% Floor and,
when combined with certain other itemized deductions, exceeded the 3% Phase-Out.
In addition, each non-corporate Partner's distributive share of the income
allocated to the Fund by the trading partnership would be increased (solely for
tax purposes) by such Partner's pro rata share of the amounts so
recharacterized.
TAXATION OF GOVERNMENT SECURITIES INVESTMENTS
The Fund's purchase and sale of Government Securities generates
capital gain or loss -- generally short-term -- as well as interest income.
Taxable income is recognized on any interest accrued on zero-coupon Government
Securities acquired for the Fund, even though no interest is paid on such
Government Securities until they mature.
SYNDICATION FEES
The $239,100 in organizational and initial offering costs, for which
MLIP is being reimbursed by the Fund in 36 equal monthly installments, have been
treated as a non-deductible, non-amortizable, syndication expense by the Fund.
The IRS could take the position that a portion of the brokerage commissions paid
to MLF constitutes non-deductible syndication expenses.
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LIMITATION ON DEDUCTIBILITY OF INTEREST ON INVESTMENT INDEBTEDNESS
Interest paid or accrued on indebtedness properly allocable to
property held for investment constitutes "investment interest." Interest expense
incurred by a Limited Partner to acquire or carry his Units (as well as other
investments) will constitute "investment interest." Such interest is generally
deductible by individual taxpayers only to the extent that it does not exceed
net investment income (that is, generally, the excess of (i) gross income from
interest, dividends, rents and royalties, which would include a Partner's share
of the Fund's interest income, and (ii) certain gains from the disposition of
investment property, over the expenses directly connected with the production of
such investment income). Any investment interest expense disallowed as a
deduction in a taxable year solely by reason of the above limitation is treated
as investment interest paid or accrued in the succeeding taxable year. An
individual taxpayer's net capital gain from the disposition of investment
property is included in clause (ii) of the second preceding sentence only to the
extent that such taxpayer elects to make a corresponding reduction in the amount
of net capital gain that is subject to tax at the maximum 28% rate described
above. (See "-- Tax on Capital Gains and Losses," at page 57 above.)
POSSIBLE PAYMENTS UNDER THE ML&CO. GUARANTEE
Any payment to the Fund pursuant to the ML&Co. guarantee in respect of
a series will give rise to taxable income in the amount of such payment to the
Partners who hold Units of the recipient series.
MLIP'S CONTRIBUTION TO THE PURCHASE PRICE OF CERTAIN UNITS
MLIP contributes $3 to the Fund for each Unit purchased by officers
and employees of ML&Co. or its affiliates, who subscribe for Units at $97. The
$3 MLIP contribution is taxed as ordinary income in the year of purchase, and
subscribers will acquire a tax basis of $100 in their Units.
"UNRELATED BUSINESS TAXABLE INCOME"
In the opinion of Sidley & Austin, income earned by the Fund will not
constitute "unrelated business taxable income" under Section 511 of the Code to
employee benefit plans and other tax-exempt entities which purchase Units;
provided that Units purchased by such plans and entities are not "debt-
financed."
IRS AUDITS OF THE FUND AND ITS PARTNERS
The tax treatment of Fund-related items is determined at the Fund
level rather than at the Partner level. MLIP is the Fund's "tax matters partner"
with general authority to determine the Fund's responses to an audit. The
limitations period for assessment of deficiencies and claims for refunds with
respect to items related to the Fund is three years after the Fund's return for
the taxable year in question is filed, and MLIP has the authority to extend such
period with respect to all Limited Partners.
If an audit results in an adjustment, all Partners may be required to
pay additional taxes plus interest as well as penalties. Partners may themselves
also be subject to audits as the result of an audit of the Fund.
FOREIGN LIMITED PARTNERS NOT PERMITTED
No person who is a non-resident alien individual, foreign corporation,
foreign partnership, foreign trust or foreign estate for federal income tax
purposes may invest in the Fund.
STATE AND OTHER TAXES
In addition to the federal income tax consequences described above,
the Fund and the Partners may be subject to various state and other taxes.
Certain of such taxes could, if applicable, have a significant effect on the
amount of tax payable in respect of an investment in the Fund.
____________________
THE FOREGOING DISCUSSION IS NOT INTENDED AS TAX ADVICE, PARTICULARLY
AS CERTAIN OF THE INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND MAY NOT
BE THE SAME FOR ALL TAXPAYERS. ACCORDINGLY, PROSPECTIVE INVESTORS IN THE FUND
ARE URGED TO CONSULT THEIR TAX ADVISERS WITH SPECIFIC REFERENCE TO THEIR
SITUATION UNDER FEDERAL, STATE AND OTHER LAWS BEFORE DETERMINING WHETHER TO
SUBSCRIBE FOR UNITS.
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PLAN OF DISTRIBUTION
SUBSCRIPTION PROCEDURE
THE UNITS ARE OFFERED TO THE PUBLIC ON A CONTINUOUS BASIS.
SUBSCRIPTIONS MAY BE SUBMITTED AT ANY TIME FOR INVESTMENT (IF ACCEPTED) IN THE
UNITS AS OF THE FIRST DAY OF THE IMMEDIATELY FOLLOWING CALENDAR QUARTER. THERE
IS NO MINIMUM NUMBER OF UNITS WHICH MUST BE SOLD AS OF THE BEGINNING OF ANY
CALENDAR QUARTER FOR ANY UNITS THEN TO BE SOLD, AND GIVEN THE "BEST EFFORTS"
NATURE OF THE OFFERING, THERE CAN BE NO ASSURANCE AS TO HOW MANY UNITS OF ANY
PARTICULAR SERIES WILL BE SOLD. MLPF&S ACTS AS THE EXCLUSIVE SELLING AGENT FOR
THE UNITS; SEE "-- SELLING AGENT COMPENSATION" BELOW. THERE IS NO MARKET FOR THE
UNITS AND MLPF&S WILL NOT ENGAGE IN ANY FORM OF MARKET-MAKING ACTIVITIES WITH
RESPECT TO THE UNITS.
In order to purchase Units, an investor must complete, execute and
deliver to the Selling Agent a copy of the Signature Page to the Subscription
Agreement and Power of Attorney included in Exhibit D to this Prospectus.
Subscription payments are made by authorizing the Selling Agent to debit an
investor's customer securities account in the amount of his subscription.
(Prospective subscribers must open an MLPF&S customer securities account in
order to purchase Units.) Accounts are debited, and subscriptions transmitted
directly by the Selling Agent to The Bank of New York at its offices in New
York, New York by Selling Agent wire transfer or check made payable to "THE BANK
OF NEW YORK, AS ESCROW AGENT FOR ML PRINCIPAL PROTECTION L.P., ESCROW ACCOUNT
NO. 328436," on the settlement dates. Settlement dates are specified by the
Selling Agent and occur not later than five business days following notification
by MLIP of the acceptance of an investor's subscription (which will be received
within five business days of subscription). No sale of Units of any series will
be completed until at least 5 business days after the date a subscriber has
executed, dated and submitted the Signature Page to the Subscription Agreement
and Power of Attorney. Subscriptions must generally be received no less than 5
business days prior to issuance of the Units to be purchased.
Existing Limited Partners subscribing for additional Units need not
(except in certain states) submit a new Signature Page to the Subscription
Agreement and Power of Attorney, but must be in possession of a current
Prospectus as well as recent summary financial information relating to the Fund
(current within 60 calendar days).
FINANCIAL CONSULTANTS (THE INDIVIDUAL MLPF&S BROKERS) ARE REQUIRED TO
RECONFIRM THE SUITABILITY OF EXISTING LIMITED PARTNERS TO MAKE AN ADDITIONAL
INVESTMENT IN THE FUND.
Subscriptions are held in escrow pending investment in the Units as of
the beginning of the calendar quarter immediately following the acceptance of
such subscriptions. Each subscriber is paid the interest actually earned on his
subscription funds while held in escrow, generally by credit to subscribers'
customer securities accounts. Subscription funds are invested in United States
Treasury bills or comparable authorized instruments while held in escrow and
earn interest at prevailing "risk-free" rates.
The Units are being sold when, as and if subscriptions are accepted by
MLIP, subject to the satisfaction of certain conditions set forth in the Selling
Agreement and to the approval by counsel of certain legal matters. The Units are
offered on a continuous basis. MLIP may terminate but not suspend the offering.
FOREIGN PERSONS AND ENTITIES NOT OTHERWISE SUBJECT TO U.S. FEDERAL INCOME TAX
MAY NOT INVEST IN THE FUND.
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PURCHASES BY EMPLOYEE BENEFIT PLANS
SPECIAL INVESTMENT CONSIDERATIONS. In general, the terms "employee
benefit plan" as defined in the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), and "plan" as defined in Section 4975 of the Code together
refer to any plan or account of various types which provide retirement benefits
or welfare benefits. Such plans and accounts include, but are not limited to,
corporate pension and profit sharing plans, "simplified employee pension plans,"
KEOGH plans for self-employed individuals (including partners), individual
retirement accounts and medical plans (collectively, "Plans," and the
fiduciaries of such plans with investment discretion, "Plan Fiduciaries").
Each Plan Fiduciary must give appropriate consideration to the facts
and circumstances that are relevant to an investment in the Fund, including the
role that an investment in the Fund plays in the Plan's overall investment
portfolio. Each Plan Fiduciary, before deciding to invest in the Fund, must be
satisfied that investment in the Fund is a prudent investment for the Plan, that
the investments of the Plan, including the investment in the Fund, are
diversified so as to minimize the risk of large losses and that an investment in
the Fund complies with the Plan and related trust documentation.
THE FUND DOES NOT HOLD "PLAN ASSETS." A regulation issued under ERISA
contains rules for determining when an investment by a Plan in an equity
interest of a limited partnership will result in the underlying assets of the
partnership being considered to constitute assets of the Plan for purposes of
ERISA and Section 4975 of the Code (i.e., "plan assets"). Those rules provide in
pertinent part that assets of a limited partnership will not be considered
assets of a Plan which purchases an equity interest if 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
PARTIC ULAR PLAN. EACH PLAN FIDUCIARY CONSIDERING ACQUIRING UNITS MUST CONSULT
WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO.
SELLING AGENT COMPENSATION
No selling commissions are paid from the proceeds of subscriptions.
MLIP credits the Selling Agent with "production credits," a portion of which are
paid to the Selling Agent in cash by MLIP. "Production credits" do not represent
actual cash payments but rather internal bookkeeping entries relating to the
securities sold through different Financial Consultants. Pursuant to standard
Selling Agent compensation procedures, a percentage of the amount credited to
the Selling Agent is paid out in cash by the Selling Agent to Financial
Consultants who sell Units. The Selling Agent is credited with production
credits of $5 per Unit on all sales, provided that no initial production credits
accrue to the Selling Agent or Financial Consultants in respect of sales of
Units at $97 per Unit to officers and employees of ML&Co. and its
affiliates.
MLIP credits the Selling Agent with ongoing production credits,
a portion of which are paid in cash, with respect to Units which remain
outstanding more than twelve months. Such ongoing production credits will
begin to accrue with the start of the thirteenth month after sale (i.e.,
after subscription funds are released from escrow, not when Subscription
Agreements are submitted or investors' funds deposited in escrow) on Units
sold by Financial Consultants who are registered with the CFTC, have
passed either the Series 3 National Commodity Futures Examination or the
Series
-64-
<PAGE>
31 Managed Futures Fund Examination and agree to provide certain ongoing
services to investors, upon request. Such production credits equal 2% per annum
of the average month-end Net Assets attributable to such Units committed to
trading. There can be no assurance as to what percentage of any particular
series' assets will be allocated to trading. This percentage begins at 75% and
may vary substantially over time. The Selling Agent will, in turn, pay out a
portion of the amounts so received to qualified Financial Consultants (the
individual MLPF&S brokers).
Financial Consultants receive no initial production credits on new
Units purchased with the proceeds of Units redeemed during or as of the end of
the preceding quarter (irrespective of whether redemption charges were paid on
such Units). However, the 2% ongoing production credits, described above, will
begin, to the extent that the redemption proceeds are reinvested, in the
thirteenth month after the sale of the Units redeemed, not in the thirteenth
month after reinvestment.
Ongoing production credits accrue monthly and are paid quarterly.
In the Selling Agreement, each Trading Advisor and MLIP have agreed to
indemnify the Selling Agent against certain liabilities that the Selling Agent
may incur in connection with the offering and sale of the Units, including
liabilities under the Securities Act of 1933 and the Commodity Exchange Act. The
SEC is of the view that indemnification for liabilities arising under the
Securities Act of 1933 is against public policy as expressed in such Act and is,
therefore, unenforceable.
Certain of the 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. 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.
RECENT INFORMATION RELATING TO THE FUND
Pursuant to applicable CFTC regulations, prospective subscribers must
receive recent financial information (current within 60 calendar days) relating
to the Fund together with this Prospectus, unless the material that would
otherwise be included in such Report or information has been otherwise included
herein.
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
-65-
<PAGE>
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.
-66-
<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)
- ----- -----------
<S> <C>
Administrative Fee................... 42
Advisors............................. Cover page
"Bid-ask" spreads.................... 43
"Breakeven" level.................... 8
Brokerage commissions................ 41
CFTC................................. -i-
Clearinghouses....................... 118
Consulting fees...................... 45
"Core" Trading Advisors.............. 7
"Customer segregated funds".......... 38
Daily limits......................... 118
Differential......................... 43
EFP.................................. 43
Employee benefit plan................ 60
ERISA................................ 60
Escrow Agent......................... -i-
Forward contracts.................... 117
Futures contracts.................... 117
F/X Desk............................. 8
Government Securities................ 7
Guarantee............................ 36
Initial margin....................... 118
Maintenance margin................... 118
Margin call.......................... 118
MLF.................................. Cover page
MLAM................................. Cover page
ML&Co................................ Cover page
MLIP................................. Cover page
MLIB................................. 31
MLPF&S............................... -i-
Monthly drawdown..................... 17
New Trading Profit................... 44
NFA.................................. 32
Non-"core" Trading Advisors.......... 7
"Offset accounts".................... 39
Ongoing production credits........... -i-
Organizational and initial offering
cost reimbursement................ 41
Peak-to-valley drawdown.............. 17
Principal Assurance Date............. Cover page
"Principal protection"............... 7
Profit Shares........................ 43
Redemption charges................... 46
Selling Agent........................ -i-
Selling commissions.................. -i-
Service fees......................... 43
Speculative position limits.......... 118
Time Horizon......................... 10
Trading Advisors..................... Cover page
Variation margin..................... 118
Yield enhancement.................... 7
</TABLE>
___________________
-67-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
ORGANIZATIONAL STRUCTURE
[ORGANIZATIONAL CHART OF ML PRINCIPAL PROTECTION L.P. APPEARS HERE]
-68-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ML PRINCIPAL PROTECTION L.P.
Independent Auditors' Report............................. 64
Consolidated Statements of Financial Condition........... 65
Consolidated Statements of Income........................ 66
Consolidated Statements of Changes in Partners' Capital.. 67
Notes to Consolidated Financial Statements............... 68
MERRILL LYNCH INVESTMENT PARTNERS INC.
Independent Auditors' Report............................. 77
Balance Sheets........................................... 78
Notes to Balance Sheets.................................. 79
</TABLE>
____________________
Schedules are omitted for the reason that they are not required
or are not applicable or that equivalent information has been included
in the financial statements or notes thereto.
-69-
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Partners of
ML Principal Protection L.P.
We have audited the accompanying consolidated statements of financial condition
of ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.) (a
Delaware limited partnership; the "Partnership") as of December 31, 1995 and
1994, and the related consolidated statements of income and changes in partners'
capital for the year ended December 31, 1995 and the period from October 12,
1994 (commencement of operations) to December 31, 1994. These consolidated
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of ML Principal Protection L.P.
(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
-70-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1996 (UNAUDITED), DECEMBER 31, 1995 AND 1994
-----------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30,
1996
(unaudited) 1995 1994
-------------- --------------- -----------------
<S> <C> <C> <C>
ASSETS
Cash $ 150,524 $ 19,332 $ --
Accrued interest receivable (Note 2) 774,459 17,852 65,078
U. S. Government Securities 78,437,029 74,280,477 30,850,465
Equity in commodity futures trading accounts:
Cash and option premiums 7,312,678 1,586,839 993,636
Net unrealized gain on open contracts 319,429 2,073,538 1,115,935
-------------- --------------- -----------------
TOTAL $86,994,119 $77,978,038 $33,025,114
-------------- --------------- -----------------
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Administrative Expenses $ 11,008 $ -- $ --
Settlement payment due to broker -- 1,496,925 --
Redemptions payable 2,054,800 539,877 213,696
Brokerage commissions payable (Note 2) 407,312 356,607 156,876
Profit shares payable 156,977 78,840 129,169
Organization and initial offering costs payable (Note 1) 108,481 148,331 228,030
-------------- --------------- -----------------
Total liabilities 2,738,578 2,620,580 727,771
-------------- --------------- -----------------
Minority Interest 648,720 510,914 204,504
-------------- --------------- -----------------
PARTNERS' CAPITAL:
General Partner (19,785.98, 16,603.42 and 10,572 units) 2,115,818 1,766,403 1,074,985
Limited Partners (794,863.18, 697,715.56 and 306,990 81,491,003 73,080,141 31,017,854
units) -------------- --------------- -----------------
Total partners' capital $83,606,821 74,846,544 32,092,839
-------------- --------------- -----------------
TOTAL $86,994,119 $77,978,038 $33,025,114
============== =============== =================
NET ASSET VALUE PER UNIT (Note 5)
</TABLE>
See notes to consolidated financial statements.
-71-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 1, 1996 January 1, 1995 October 12, 1994
to to to
June 30, 1996 June 30, 1995 1995 December 31, 1994
---------------- ----------------- -------------- -------------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 3,956,033 $4,229,697 $4,407,833 $ (363,054)
Change in unrealized (1,754,109) (561,845) 1,355,377 1,115,935
---------------- ----------------- -------------- -------------------
Total trading results 2,201,924 3,667,852 5,763,210 752,881
Interest income (Note 2) 2,289,595 1,351,723 3,415,670 377,303
---------------- ----------------- ------------- -----------------
Total revenues 4,491,519 5,019,575 9,178,880 1,130,184
---------------- ----------------- ------------- -----------------
EXPENSES:
Administrative Fees 64,625 33,720 86,928 10,964
Profit shares 243,602 474,205 652,366 129,169
Brokerage commissions 2,391,123 1,247,658 3,216,364 405,653
---------------- ----------------- ------------- -----------------
Total expenses 2,699,350 1,755,583 3,955,658 545,786
---------------- ----------------- ------------- -----------------
INCOME BEFORE MINORITY
INTEREST 1,792,169 3,263,992 5,223,223 584,398
---------------- ----------------- ------------- -----------------
Minority interest in income (13,806) (25,323) (36,730) (4,504)
---------------- ----------------- ------------- -----------------
NET INCOME $ 1,778,363 $3,238,669 $5,186,492 $ 579,894
================ ================ ============ =================
NET INCOME PER UNIT OF
PARTNERSHIP INTEREST:
Weighted average number of Units
outstanding (Note 6) 823,744 415,968 551,944 319,887
================ ================ ============ =================
Weighted average net income per Unit $2.16 $7.79 $9.40 $1.81
================ ================ ============ =================
</TABLE>
-72-
<PAGE>
See notes to consolidated financial statements.
-73-
<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 JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD
FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
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 (86,844.32) (9,210,221) -- (9,210,221)
Subscriptions 168,000.00 16,481,744 318,256 16,800,000
Distributions -- (595,090) (12,775) (607,865)
Net income -- 1,734,429 43,934 1,778,363
------------ ------------- ------------ --------------
</TABLE>
-74-
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL, $2,115,818
795,474.66 $81,491,003 ==========
JUNE 30, 1996 ========== =========== $83,606,821
===========
</TABLE>
See notes to consolidated financial statements.
-75-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.)
(the "Partnership") was organized as an open-ended fund under the Delaware
Revised Uniform Limited Partnership Act on January 3, 1994 and commenced
trading activities on October 12, 1994. The Partnership engages both in
speculative trading of futures, options and forward contracts on a wide
range of commodities -- through ML Principal Protection Trading L.P. (the
"Trading Partnership"; formerly ML Principal Protection Plus Trading L.P.),
of which the Partnership is the sole limited partner -- and in investing in
U.S. Government Securities, as defined. Merrill Lynch Investment Partners
Inc. (formerly, ML Futures Investment Partners Inc.) (the "General Partner"
or "MLIP"), a wholly-owned subsidiary of Merrill Lynch Group, Inc.("Merrill
Lynch"), which in turn is a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc., is the general partner of both the Partnership and the Trading
Partnership, and Merrill Lynch Futures Inc. ("MLF") also a Merrill Lynch
affiliate, is its commodity broker. Merrill Lynch Asset Management, L.P.
("MLAM"), another affiliate of Merrill Lynch, provides cash management
services to the Partnership, and substantially all of the Partnership's
assets are held in accounts maintained at Merrill Lynch, Pierce, Fenner &
Smith Incorporated, a Merrill Lynch affiliate. The General Partner has
agreed to maintain a general partner's interest of at least 1% of the total
equity interest in each of the Partnership and the Trading Partnership. The
General Partner and the Limited Partners share in the profits and losses of
the Partnership, and the General Partner and the Partnership share in the
profits and losses of the Trading Partnership, in proportion to the
respective interests in the Partnership and the Trading Partnership owned
by each.
The consolidated financial statements include the accounts of the Trading
Partnership in which the Partnership is the sole limited partner. All
related transactions and intercompany balances between the Partnership and
the Trading Partnership are eliminated in consolidation.
The ownership by the General Partner in the Trading Partnership represents
a minority interest when the financial results of the Trading Partnership
are consolidated into those of the Partnership. The General Partner's share
of the Trading Partnership's profits and losses is deducted from the
Consolidated Statements of Income, and the General Partner's interest in
the Trading Partnership reduces partners' capital on the Consolidated
Statements of Financial Condition and the Consolidated Statements of
Changes in Partners' Capital.
The Partnership issues units of limited partnership interest ("Units") as
of the beginning of each calendar quarter. Each series has its own Net
Asset Value per Unit. Different series may allocate different percentages
of their total capital to trading, but all series trade under the direction
of the same combination of advisors (the "Trading Advisors" or the
"Advisors"), chosen from time to time by MLIP to manage the Trading
Partnership's trading.
MLIP selects the Advisors to manage the Partnership's assets, and allocates
and reallocates the Partnership's trading assets among existing,
replacement and additional Advisors;
MLIP also determines what percentage of the Partnership's total capital to
allocate to trading from time to time.
Certain amounts in prior periods have been reclassified to conform to the
current period presentation.
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
-76-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 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 report period. Actual results could differ from those
estimates.
Revenue Recognition
-------------------
Commodity futures, options and forward contract transaction 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.
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.
-77-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
2. RELATED PARTY TRANSACTIONS
A portion of the Partnership's assets are held by MLF as margin deposits in
respect of the Partnership's futures trading. As a means of approximating
the interest rate which would be earned by the Partnership were 100% of its
Net Assets on deposit with MLF been invested in 91-day Treasury bills, MLF
pays the Partnership interest on its account equity on deposit with MLF at
a rate of 0.5 of 1% per annum below the prevailing 91-day U.S. Treasury
bill rates. In the case of its trading in certain foreign futures
contracts, the Partnership deposits margin in foreign currency denominated
instruments or cash and earns interest generally at the prevailing London
Clearing Broker Rate less 0.5 of 1% per annum. Any additional benefit
derived from possession of the Partnership's assets accrues to MLF and its
affiliates.
The Partnership pays brokerage commissions to MLF, at a flat monthly rate
equal to 0.7917 of 1% (a 9.5% annual rate) of the Partnership's month-end
assets allocated to trading. Effective January 1, 1996 this rate was
reduced to 0.7708 of 1% (a 9.25% annual rate), and the Partnership began to
pay MLIP an Administrative Fee of 0.020833 of 1% (a 0.25 of 1% annual
rate). Assets committed to trading are not reduced for purposes of
calculating brokerage commissions by any accrued but unpaid brokerage
commissions, profit shares or other fees or charges. The General Partner
estimates that the round-turn equivalent commission rate charged to the
Partnership during the period ended June 30, 1996, the year ended December
31, 1995 and the period ended December 31, 1994 was approximately $114,
$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 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
-78-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
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 October 1,
1995, the first Issuance Anniversary, as defined, of such series. At such
time, Series A Unitholders received a fixed-rate distribution equal to
$3.50 per Series a Unit and a discretionary distribution equal to $2.50 per
Series A Unit (for a total distribution of $6.00 per Series A Unit). The
first such distribution with respect to Series B Units was announced as of
January 1, 1996, the first Series B Issuance Anniversary, and also
consisted of an annual fixed-rate distribution equal to $3.50 per Series B
Unit as well as a discretionary distribution equal to $2.50 per Series B
Unit (for a total distribution equal to $6.00 per Series B Unit). The first
such distribution with respect to Series C units was announced as of April
1, 1996, the first Series C Issuance Anniversary, and consisted of an
annual fixed-rate distribution equal to $3.50 per Series C Unit but no
discretionary distribution. As of July 1, 1996, the Series D Units
received a $3.50 fixed-rate distribution but no discretionary
distribution.
Any distributions made on all series of Units issued after Series H will be
entirely in the discretion of the General Partner, which does not presently
intend to make any such distributions.
4. ANNUAL DISTRIBUTIONS
The Partnership and the Trading Advisors have each entered into Advisory
Agreements. These Advisory Agreements generaly 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 to 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
June 30, 1996, the Net Asset Values of the different series of Units for
financial reporting purposes and for all other purposes were:
-79-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value Net Asset Value per Unit
--------------------------- --------------------------------------------------
All Other Financial Number of All Other Financial
Purposes Reporting Units Purposes Reporting
------------ ------------- -------------- -------------------- ------------
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, 1994
-------------------------------------------------------------------------------
Series A Units $29,380,564 $29,321,472 274,693.00 $106.96 $106.74
Series B Units 7,011,988 6,999,016 63,540.00 110.36 110.15
Series C Units 6,800,466 6,788,236 65,800.00 103.35 103.16
Series D Units 20,522,519 20,485,530 200,540.00 102.34 102.15
Series E Units 11,272,696 11,252,290 109,745.98 102.72 102.53
------------ ------------- --------------
Total $74,988,233 $74,846,544 $714,318.98
============ ============= ==============
</TABLE>
<TABLE>
<CAPTION> June 30, 1996
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A Units $25,575,643 $234,228.00 $109.33* $109.19*
Series B Units 4,132,236 4,125,002 38,740.00 106.67** 106.48**
Series C Units 5,495,239 5,487,793 53,850.00 102.05*** 101.91***
Series D Units 20,711,439 20,688,066 198,175.00 104.51**** 104.39****
Series E Units 11,350,560 11,337,762 108,246.16 104.86 104.74
Series F Units 9,790,711 9,779,059 96,253.00 101.72 101.60
Series G Units 6,621,076 6,613,496 65,982.50 100.35 100.23
------------ ------------- --------------
Total $82,606,821 $795,474.66
============ ============= ==============
</TABLE>
* After reduction for the $6.00 per Series A Unit distribution made as of
October 1, 1995.
-80-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
** After reduction for the $6.00 per Series B Unit distribution made as of
January 1, 1996.
*** After deduction for the $3.50 per Series C Unit distribution made as of
April 1, 1996.
**** After reduction for the $3.50 per Series D Unit distribution made as of
July 1, 1996.
6. WEIGHTED AVERAGE NUMBER OF UNITS
The weighted average number of Units outstanding was computed for
purposes of disclosing consolidated net income per weighted average
Unit. The weighted average number of Units for a period equals the
number of Units outstanding at the end of such period, adjusted
proportionately for Units redeemed or issued based on how long such
Units were outstanding during such period.
7. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch & Co., Inc. has guaranteed to the Partnership that it
will have sufficient net assets, as of the Principal Assurance Date,
as defined, for each series of Units, that the Net Asset Value per
Unit of such series as of such Principal Assurance Date will equal,
after adjustment for all liabilities to third parties, not less than
$100.
8. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options and forward contracts on
interest rates, stock indices, commodities, currencies, energy and
metals. The Partnership's revenues by reporting category were as
follows:
<TABLE>
<CAPTION>
1996 (through 1995
June 30) Trading Results
Trading Results
------------------------- ---------------------
<S> <C> <C>
Interest Rates $ (863,343) $3,933,366
Stock Indices 147,230 587,931
Commodities 36,109 (447,486)
Currencies 1,745,104 2,914,300
Energy 1,616,592 238,988
Metals (479,768) (1,463,889)
------------------------- ---------------------
$ 2,201,924 $ 5,763,210
========================= =====================
</TABLE>
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the financial instruments
or commodities underlying such derivative instruments frequently result in
changes in the Partnership's unrealized gain or loss on such derivative
instruments as reflected in the Consolidated Statements of Financial
Condition as of the end of the period. The Partnership's exposure to market
risk is influenced by a number of factors, including the relationships
among the derivative instruments held by the Trading Partnership as well as
the volatility and liquidity of the markets in which the derivative
instruments are traded.
The General Partner has procedures in place intended to control market
risk, although there can be no assurance that they will, in fact, succeed
in doing so. These procedures focus primarily on monitoring the trading of
the Advisors selected from time to time for the Partnership, adjusting the
percentage of the Partnership's total assets allocated to trading with
respect to each Series of Units, calculating the Net Asset Value of the
Advisors' respective Partnership accounts as of
-81-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
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 June 30, 1996, December 31, 1995 and 1994 were as follows:
<TABLE>
<CAPTION>
June 30, 1996
--------------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards
------------------------- ------------------------
<S> <C> <C>
Interest Rates $ 89,919,833 $ 66,964,208
Stock Indices 14,749,659 4,105,620
Commodities 16,877,358 6,167,692
Currencies 70,531,505 94,498,431
Energy 10,767,290 --
Metals 10,944,290 29,800,868
------------------------- ------------------------
$ 213,789,935 $201,536,819
========================= ========================
</TABLE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------------------------------ --------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
--------------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Interest Rates $230,060,441 $ 37,950,386 $69,728,257 $64,233,570
Stock Indices 8,866,682 152,858 922,700 1,106,848
Commodities 17,582,456 3,850,643 7,859,990 1,576,977
Currencies 34,118,884 71,457,359 8,884,733 20,155,361
Energy 9,047,015 3,440,800 1,330,952 983,996
Metals 7,796,167 11,765,623 4,270,470 8,486,235
--------------------- ----------------- ------------------ ----------------
$307,471,645 $128,617,669 $92,997,102 $96,542,987
===================== ================= ================== ================
</TABLE>
-82-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
Substantially all of the Trading Partnership's open derivative instruments
outstanding as of June 30, 1996 expire within one year.
The contract/notional value of the Trading Partnership's exchange-traded and
non-exchange-traded derivative instrument positions as of June 30, 1996 and
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------------------------------- -------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options Options Options & Options &
& Forwards) & Forwards) Forwards) Forwards)
------------------------ ---------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Exchange-Traded $150,718,121 $125,366,894 $238,654,840 $ 76,980,099
Non-Exchange-Traded 63,071,814 76,169,925 68,816,805 51,637,570
------------------------ ---------------- --------------------- ------------------
$213,789,935 $201,536,819 $307,471,645 $128,617,669
======================== ================ ===================== ==================
</TABLE>
The average fair value of the Trading Partnership's derivative instrument
positions which were open as of the end of each calendar month during the period
January 1, 1996 to June 30, 1996 and during the year ended December 31, 1995 was
as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------------------------------------ -----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
---------------------- ------------------ --------------------- ------------------
<S> <C> <C> <C> <C>
Interest Rates $162,375,225 $157,736,373 $170,252,009 $14,100,439
Stock Indices 14,607,351 556,147 5,390,839 1,288,747
Commodities 16,577,987 5,721,223 9,360,681 2,915,357
Currencies 70,207,445 114,313,578 36,054,488 38,557,545
Energy 6,994,062 1,940,292 2,823,925 2,417,008
Metals 20,437,590 14,276,337 6,113,263 10,207,341
---------------------- ------------------ --------------------- ------------------
---------------------- ------------------ --------------------- ------------------
$291,199,660 $294,543,950 $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.
-83-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS FROM JANUARY 1, 1996 TO JUNE 30, 1996 (UNAUDITED),
JANUARY 1, 1995 TO JUNE 30, 1995 (UNAUDITED),
THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
Credit Risk
- -----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases limited
in amount, in some cases not) of the members of the exchange is pledged to
support the financial integrity of the exchange. In over-the-counter
transactions, on the other hand, traders must rely solely on the credit of their
respective individual counterparties. Margins, which may be subject to loss in
the event of a default, are generally required in exchange trading, and
counterparties may require margin in the over-the-counter markets.
The fair value amounts in the above tables represent the extent of the Trading
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 June 30, 1996 and December 31, 1995, $3,423,445 and $10,444,577 of the
Trading Partnership's assets were held in segregated accounts in accordance with
Commodity Futures Trading Commission regulations. Substantially all of the
Partnership's assets were held in unregulated accounts maintained at MLF,
Merrill Lynch Pierce, Fenner & Smith Incorporated or certain of their
affiliates.
The gross unrealized gain and the net unrealized gain on the Trading
Partnership's open derivative instrument positions as of June 30, 1996 and
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
June 30, 1996 June 30, 1996
----------------------------------------- ------------------------------------
Gross Unrealized Net Unrealized Gross Net Unrealized
Gain Gain (Loss) Unrealized Gain (Loss)
Gain
---------------------- ------------------ -------------- -------------------
<S> <C> <C> <C> <C>
Exchange-Traded $1,976,626 $1,019,725 $2,942,622 $2,223,484
Non-Exchange-Traded 1,259,714 (700,296) 352,246 (149,946)
---------------------- ------------------ -------------- -------------------
$3,236,340 $ 319,429 $3,294,868 $2,073,538
====================== ================== ============== ===================
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.
The Partnership through its normal course of business enters into various
contracts with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF, such trading which results in receivables from and
payables to MLF will be offset and reported as a net receivable or payable.
-84-
<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
-85-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
BALANCE SHEETS
DECEMBER 29, 1995 AND JUNE 28, 1996 (UNAUDITED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
JUNE 28, 1996
(UNAUDITED) DECEMBER 29,1995
----------- ----------------
ASSETS
<S> <C> <C>
Cash $ 111,073 $ 17,738
Investments in affiliated partnerships 8,232,847 8,397,789
Other investments 556,762 579,127
Due from parent and affiliate 72,549,530 69,476,980
Receivables from affiliated partnerships 3,480,242 3,525,337
Deferred charges 16,703,592 11,759,885
Advances and other receivables 16,352,534 7,742,943
Fixed assets-net of accumulated depreciation of $1,073,865 and $1,016,602 135,373 119,823
Other assets 100,000 130,000
------------ ------------
TOTAL ASSETS $118,221,953 $101,749,622
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 1,906,937 $ 1,759,019
Due to affiliate 4,309,567 1,568,396
Current and deferred income taxes 9.681,414 7,162,014
------------ ------------
Total liabilities 15,897,918 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 85,408,035 74,344,193
------------- ------------
Total stockholder's equity 102,324,035 91,260,193
------------- ------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 118,221,953 $101,749,622
============= ============
</TABLE>
See Notes to Balance Sheet.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-86-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEETS
DECEMBER 29, 1995 AND JUNE 28, 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(TM) L.P., The
SECTOR Strategy Fund(TM) II L.P., The JWH Global Asset Fund L.P., The SECTOR
Strategy Fund(TM) IV L.P., The SECTOR Strategy Fund(TM) V L.P., ML Global
Horizons L.P., ML Chesapeake L.P., The SECTOR Strategy Fund(TM) 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 June 28,
1996, approximately $69,500,000 and $72,500,000, respectively, was subject to
this agreement.
At December 29, 1995 and June 28, 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 six months of 1996, the Company did not declare or pay
a dividend.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-87-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEETS
DECEMBER 29, 1995 AND JUNE 28, 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 June 28, 1996 and December 29, 1995, the Company's investments in its
Affiliated Partnerships were as follows:
<TABLE>
<CAPTION>
June 28, 1996 December 29, 1995
<S> <C> <C>
ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.).. $2,759,628 $2,324,996
ML Global Horizons L.P..................................................... 1,083,939 1,068,112
The SECTOR Strategy Fund(TM) II L.P........................................ 743,405 770,619
John W. Henry & Company/Millburn L.P....................................... 683,846 728,350
The SECTOR Strategy Fund(TM) VI L.P........................................ 726,289 725,174
RXR Defensive Equity Alternative Account L.P. I............................ -0- 546,428
The JWH Global Asset Fund L.P.............................................. 509,635 492,278
The S.E.C.T.O.R. Strategy Fund(TM) L.P..................................... 418,243 441,992
ML Futures Investments L.P................................................. 330,535 356,788
The SECTOR Strategy Fund(TM) V L.P......................................... 306,173 339,622
ML Futures Investments II L.P.............................................. 201,051 213,181
The Growth and Guarantee Fund L.P.......................................... 175,566 155,787
The Futures Expansion Fund Limited Partnership............................. 117,880 121,808
The SECTOR Strategy Fund(TM) IV L.P........................................ 95, 427 111,654
ML JWH Strategic Allocation Fund L.P....................................... 1,000 1,000
ML Chesapeake L.P.......................................................... 80,230 --
---------- ----------
Total...................................................................... $8,232,847 $8,397,789
========== ==========
</TABLE>
The following represents condensed combined financial information of the
Affiliated Partnerships as of June 28, 1996 and December 29, 1995 (in
thousands):
<TABLE>
<CAPTION>
<S>
June 28, 1996 December 29, 1995
<C> <C>
Assets..................................................................... $454,724 $528,180
======== ========
Liabilities................................................................ 21,540 15,836
Partners' capital.......................................................... 433,184 512,344
-------- --------
Total................................................................. $454,724 $528,180
======== ========
</TABLE>
The Company's Affiliated Partnerships trade various futures, options and forward
contracts. Risk to such partnerships arises from the possible adverse changes in
the market value of such contracts and the potential inability of counterparties
to
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-88-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEETS
DECEMBER 29, 1995 AND JUNE 28, 1996 (UNAUDITED)
(CONTINUED)
- --------------------------------------------------------------------------------
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.
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 June 28,
1996 and December 29, 1995, the Company had no deferred tax assets. Deferred tax
liabilities consisted of the following:
<TABLE>
<CAPTION>
June 28, 1996 December 29, 1995
<S> <C> <C>
State and local $1,670,500 $1,176,130
Federal 5,261,738 3,704,471
---------- ----------
$6,932,238 $4,880,601
========== ==========
</TABLE>
As part of the consolidated group, the Company transfers to ML&Co. its current
Federal, state and local tax liabilities. During 1995 and the first six months
of 1996, the Company transferred $10,707,045 and $4,639,743, respectively, in
current taxes payable to ML&Co. At June 28, 1996 and December 29, 1995, the
Company had a current tax payable with ML&Co. of $2,749,176 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 $90,600,000 and $79,337,000 at
June 28, 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 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
-89-
<PAGE>
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 analysts are generally classified as either
technical or fundamental (or both).
Technical analysis is based on the theory that the commodities markets
themselves provide a means of anticipating future prices. Technical analysis
operates on the theory that market prices and momentum at any given point in
time reflect all known factors affecting the supply and demand for a particular
commodity. Consequently, technical analysis focuses not on evaluating those
factors directly but on an analysis of price histories, movements and patterns,
theorizing that a detailed analysis of market date is the most effective means
of attempting to predict the future course of prices.
Fundamental analysis, in contrast, focuses on the study of factors
external to the trading markets that affect the supply and demand of a
particular commodity. Such factors might include weather, the economy of a
particular country, government policies, domestic and foreign political and
economic events, and changing trade prospects. Fundamental analysis theorizes
that by monitoring relevant supply and demand factors for a particular
commodity, a state of current or potential disequilibrium of market conditions
may be identified that has yet to be reflected in the price level of that
commodity. Fundamental analysis assumes that markets are imperfect, that
information is not instantaneously assimilated or disseminated and that
econometric models can be constructed that generate equilibrium prices that
reflect "true value" and may indicate market mispricing.
Trend-Following
"Trend-following" advisors gear their trading approaches towards
positioning themselves to take advantage of major price movements. "Trend-
following" traders are to be contrasted with traders who seek to achieve overall
profitability by making numerous small profits on short-term trades, or through
arbitrage techniques. "Trend-following" traders assume that most of their trades
will be unprofitable. Their objective is to make a few large profits, more than
offsetting their more numerous but (hopefully) smaller losses, from capitalizing
on major trends. During periods when no major price trends develop in a market,
a "trend-following" trading advisor is likely to incur substantial losses.
-90-
<PAGE>
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.
-91-
<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.
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.
-92-
<PAGE>
NOTES TO THE PERFORMANCE SUMMARIES
(CONT.)
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.
-93-
<PAGE>
CHESAPEAKE CAPITAL CORPORATION
AUGUST 1, 1996 ALLOCATION OF TRADED ASSETS: 20%
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 (i.e., a person who, while acting as a "Commodity
Trading Advisor" within the meaning of applicable CFTC rules because he or she
is advising or guiding one or more commodity interest trading accounts, is
exempt from registration with the CFTC as a "Commodity Trading Advisor" because
of the limited number of accounts managed, on a private basis, by such person)
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. (The "Turtles" was the term used by Mr. Dennis to describe in-house
"developing" managers to whom he allocated proprietary funds and who were given
trading discretion over limited accounts of capital, within parameters
established by Mr. Dennis). 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
-94-
<PAGE>
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
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
-95-
<PAGE>
Winnipeg Commodity Exchange). In addition, Chesapeake continually monitors
numerous markets, both U.S. and non-U.S., and will generally initiate trades at
such point that Chesapeake determines that a market is sufficiently liquid and
tradeable using the methods employed by Chesapeake.
Chesapeake engages in transactions in physical commodities, including
EFPs.
Chesapeake generally uses between 15% and 30% of an account's assets
as original margin for trading in the Diversified Program, but at times this
percentage can be higher.
The trading strategy utilized by Chesapeake's Trading Programs,
including the Diversified Program, may be revised from time to time by
Chesapeake as a result of ongoing research and development which seeks to devise
new trading systems, as well as test methods currently employed. The trading
methods used by Chesapeake in the future may differ significantly from those
presently used, due to the changes which may result from this research.
Since the Trading Programs utilized by Chesapeake are proprietary and
confidential, the above discussion is general in nature and is not intended to
be exhaustive.
PAST PERFORMANCE
The following information describes the composite actual performance
of all customer accounts managed by Chesapeake. Chesapeake trades its
Diversified Trading Program on behalf of the Fund. As of July 1, 1996,
Chesapeake was managing approximately $809 million (excluding "notional" funds)
of customer funds in the futures and forwards markets. All performance
information is current as of June 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
-96-
<PAGE>
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.
The "Notes to the Performance Summaries" are set forth on pages 86 and
87.
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."
-97-
<PAGE>
CHESAPEAKE CAPITAL CORPORATION
DIVERSIFIED PROGRAM
JANUARY 1991 -- JUNE 1996
The following performance summary and chart reflect the composite
performance results from January 1991 through June 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 176 accounts since January 1991.
As of June 30, 1996, 113 accounts had been closed and 63 accounts remained open.
Of the closed accounts, 97 were profitable and 16 were unprofitable at their
closing. Of the 63 open accounts, all were profitable of June 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: $982 million
Aggregate assets (excluding "notional" equity) in program: $757 million
Aggregate assets (including "notional" equity) overall: $982 million
Aggregate assets (including "notional" equity) in program: $925 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 (3.04) 6.84 9.06 0.40 (3.66) 0.27
- -------------------------------------------------------------------------------
June 2.92 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 7.33% 14.09% 15.87% 61.82% 1.81% 12.51%
Rate of Return (6 months)
===============================================================================
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 86 AND 87.
-98-
<PAGE>
<TABLE>
<CAPTION>
OTHER CHESAPEAKE CAPITAL CORPORATION PROGRAMS
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAME OF CTA: Chesapeake Capital Chesapeake Capital Chesapeake Capital Chesapeake Capital
Corporation Corporation Corporation Corporation
---------------------------------------------------------------------------------------------
NAME OF PROGRAM: Financials and Metals 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 $809 million $809 million $809 million $809 million
"NOTIONAL" EQUITY) OVERALL:
---------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING $29 million N/A $23 million N/A
"NOTIONAL" EQUITY) IN PROGRAM:
---------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $982 million $982 million $982 million $982 million
"NOTIONAL" EQUITY) OVERALL:
---------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $34 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)
---------------------------------------------------------------------------------------------
</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 86 AND 87.
-99-
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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: 3.95% (6 months) N/A 9.45% (6 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 86 AND 87.
-100-
<PAGE>
JOHN W. HENRY & COMPANY, INC.
AUGUST 1, 1996 ALLOCATION OF TRADED ASSETS: 20%
BACKGROUND
John W. Henry & Company began managing assets in 1981 as a sole
proprietorship and was later incorporated in the state of California as John W.
Henry & Company, Inc. ("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.
Mr. Henry is also a member of the Investment Policy Committee of JWH. He
currently concentrates his activities at JWH on portfolio management, business
issues and frequent dialogue with trading supervisors. Mr. Henry is the
exclusive owner of certain trading systems licensed to Elysian Licensing
Corporation, a corporation wholly-owned by Mr. Henry, and sublicensed by Elysian
Licensing Corporation to JWH and utilized by JWH in managing client accounts.
Over the last fifteen years, Mr. Henry has developed many innovative investment
programs.
Mr. Henry has served on the Board of Directors of the National
Association of Futures Trading Advisors ("NAFTA"), the Managed Futures Trade
Association ("MFTA") and has served on the nominating committee of the NFA. Mr.
Henry currently serves on the Board of Directors of the Futures Industry
Association ("FIA") and is chairman of the FIA Task Force on Derivatives for
Investment. He also currently serves on a panel created by the Chicago
Mercantile Exchange and the Chicago Board of Trade to study cooperative efforts
related to electronic trading, common clearing and the issues regarding a
potential merger. In 1989, Mr. Henry established residency in Florida and since
that time has performed services from that location as well as at the principal
offices of JWH. Mr. Henry is a principal of Westport Capital Management
Corporation, Global Capital Management Limited, JWH Investments, Inc., JWH Risk
Management Inc., and JWH Asset Management, Inc., all of which are affiliates of
JWH. Since the beginning of 1987, Mr. Henry has and will continue to devote
considerable time to business activities unrelated to JWH and its affiliates.
Mr. Mark H. Mitchell is Vice Chairman and a member of the JWH Board of
Directors. He is also Vice Chairman and a director of JWH Risk Management,
Inc., director of JWH Asset Management, Inc., and Vice President of JWH
Investments, Inc. Prior to his employment at JWH commencing in January 1994,
Mr. Mitchell was a partner of Chapman and Cutler, a Chicago law firm, where he
had headed its futures law practice since August 1983. From August 1980 to
March 1991, he served as General Counsel of 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. In addition, he has served as a member of the
Government Relations Committee of the MFA 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, Inc., President and director of
Westport Capital Management Corporation and President and Chairman of the Board
of Directors of Global Capital Management Limited. He is responsible for the
development, implementation and management of JWH's sales and marketing
infrastructure. Prior to joining JWH in December 1995, Mr. Bailin was Managing
Director-Development since April 1994 for Global Asset Management (GAM), a
Bermuda-based investment management firm with over $7 billion in managed assets.
He was responsible for overseeing the international distribution of GAM's funds
as well as for establishing new distribution relationships and channels. Prior
to his employment with GAM, Mr. Bailin headed the real estate asset management
division of Geometry Asset Management beginning in July 1992. Prior to that
time, beginning in 1988, he was President of Warner Financial, an investment
advisory business in Boston, Massachusetts. Mr. Bailin received a B.A. from
Amherst College and an M.B.A. from Harvard Business School.
-101-
<PAGE>
Mr. Peter F. Karpen is a Managing Director of JWH. Mr. Karpen
announced his resignation from JWH on March 18, 1996 but will continue in his
present capacity 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 JWH's Operating
Committee. Mr. Johnson is also a principal of Westport Capital Management
Corporation, JWH Investments, Inc., JWH Risk Management, Inc. and JWH Asset
Management, Inc. Mr. Johnson joined JWH in May of 1995 from Bankers Trust
Company where he had been managing director and chief financial officer for
their institutional asset management division since January 1983. His areas of
responsibility included finance, operations, and technology. Prior to joining
Bankers Trust, Mr. Johnson was a product manager at American Express Company
responsible for research and market strategies for the Gold Card. He received a
B.A. with honors from Columbia University and an M.B.A. in Finance and Marketing
from New York University.
Ms. Elizabeth A.M. Kenton is a Senior Vice President, the Director of
Compliance and a member of the Operating Committee of JWH. Since joining JWH in
March 1989, Ms. Kenton has held positions of increasing responsibility in
Research and Development, Administration and Regulatory Compliance. Ms. Kenton
is also a Senior Vice President of JWH Risk Management, Inc., the Vice President
of JWH Asset Management, Inc., a director of Westport Capital Management
Corporation, the Executive Vice President of JWH Investments, Inc., and a
director of Global Capital Management Limited. Prior to her employment at JWH,
Ms. Kenton was Associate Manager of Finance and Trading Operations at Krieger
Investments, a currency and commodity trading firm. From July 1987 to September
1988, Ms. Kenton worked for Bankers Trust Company as a Product Specialist for
foreign exchange and Treasury options trading. She received a B.S. in Finance
from Ithaca College.
Ms. Mary Beth Hardy is Senior Vice President and Director of Trading
Administration and a member of the Operating and Investment Policy Committees of
JWH. Since joining JWH in September 1990, Ms. Hardy has held positions of
increasing responsibility in Research and Development and Trading. Prior to her
employment at JWH, beginning in 1989 Ms. Hardy held the position of Associate
Editor at Waters Information Services, a publishing company, where she wrote
weekly articles covering technological advances in the securities and futures
markets. Prior to joining Waters in 1989, Ms. Hardy was at Shearson Lehman
Brothers, Inc. where she held the position of assistant director of the Managed
Futures Trading Department. Prior to that, Ms. Hardy was an institutional
salesperson at Shearson in a group specializing in financial futures and
options. Previously, Ms. Hardy was an institutional salesperson for Donaldson,
Lufkin and Jenrette with a group which also specialized in financial futures and
options. Ms. Hardy serves on the Board of Directors of the Managed Futures
Association and chairs its Trading and Markets Committee. She received a B.B.A.
in Finance from Pace University.
Mr. David M. Kozak is Counsel to the firm, Vice President and
Secretary of JWH. He is also secretary of JWH Risk Management, Inc., JWH Asset
Management, Inc. and Assistant Secretary of Westport Capital Management
Corporation. Prior to joining JWH in September 1995, Mr. Kozak was employed at
the law firm of Chapman and Cutler, where he was an associate from September
1983 and a partner from 1989. Mr. Kozak has concentrated in commodity futures
law since 1981, with emphasis in the area of commodity money management. During
the time he was employed at Chapman and Cutler, he served as outside counsel to
NAFTA and the MFA. Mr. Kozak is currently a member of the Government Relations
Committee of the MFA, the NFA Special Committee on CPO/CTA Disclosure Issues and
the Visiting Committee of The University of Chicago Library. He received a B.A.
from Lake Forest College, an M.A. from The University of Chicago, and a J.D.
from Loyola University of Chicago.
Mr. Kevin S. Koshi is a Senior Vice President, Chief Trader and a
member of the Investment Policy Committee of JWH. Mr. Koshi is responsible for
the supervision and administration of all aspects of order execution 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.
-102-
<PAGE>
Mr. Barry S. Fox is the Director of Research and is a member of the
Investment Policy Committee of JWH. Mr. Fox is responsible for the design and
testing of new programs. He also supports and maintains proprietary
systems/models used to generate JWH trades. Mr. Fox joined JWH in March 1991,
and since that time he has held positions of increasing responsibility in the
Research and Product Development Departments. Prior to his employment at JWH,
Mr. Fox provided sales and financial analysis support since October 1990 for
Spreadsheet Solutions, a financial software development company. Prior to
joining Spreadsheet Solutions, Mr. Fox operated a trading company where he
traded his own proprietary capital. Before that, he was employed with Bankers
Trust as a product specialist for foreign exchange and treasury options trading.
He received a B.S. in Business Administration from the University of Buffalo.
Ms. Glenda G. Twist is a Director of JWH and has held that position
since August 1993. Ms. Twist joined JWH in September 1991 with responsibilities
for corporate liaison, and she continues her duties in that area. Her
responsibilities include assistance in the day-to-day administration of the
Florida office, and review and compilation of financial information for JWH.
Ms. Twist was President of J.W. Henry Enterprises Corp., for which she performed
financial, consulting and administrative services from January 1991 to August
1991. From 1988 to December 1990, Ms. Twist was Executive Director of Cities in
Schools, a program in Arkansas designed to prevent students from leaving school
before completing their high school education. She received her B.S. in
Education from Arkansas State University.
Mr. Michael D. Gould is Director of Investor Services at JWH. He is
responsible for general business development and oversees the investor services
function. He joined JWH in April 1994 from Smith Barney Inc. where he served as
senior sales manager and vice president-futures for the Managed Futures
Department. He held the identical position with the predecessor firms of
Shearson Lehman Bros. and Lehman Bros. from October 1991. Prior to that time,
he was engaged in a proprietary trader development program at Tricon USA from
September 1990 to October 1991. He was a registered financial consultant with
Merrill Lynch from 1985 through August 1990. His professional career began in
1982 as an owner-operator of a nonferrous metals trading and export business
which he ran until September 1985.
Mr. Jack M. Ryng, C.P.A., joined JWH as the Controller in November
1991. Mr. Ryng is also Chief Financial Officer and Secretary of JWH
Investments, Inc. Prior to that time, he was a Senior Manager with Deloitte &
Touche where he held positions of increasing responsibility since September 1985
for commodities and securities industry clients. Prior to his employment by the
Financial Services Center of Touche Ross & Co. (the predecessor firm of Deloitte
& Touche), he was a senior accountant for Leonard Rosen & Co. Mr. Ryng is a
member of AICPA and the New York C.P.A. Society, and is a member of the board of
the New York Operations Division of the FIA. He received a B.S. in Business
Administration from Duquesne University.
Mr. Michael J. Scoyni is a Managing Director of JWH and is a principal
of Westport Capital Management Corporation. Mr. Scoyni has been associated with
Mr. Henry since 1974 and with JWH since 1982. He was engaged in research and
development for John W. Henry & Company (JWH's predecessor) from November 1981
to December 1982 and subsequently has been employed in positions of increasing
responsibility. He received a B.A. in Anthropology from California State
University.
Mr. Christopher E. Deakins is a Vice President of JWH. He is
responsible for general business development and investor services support.
Prior to joining JWH in August 1995, he was a vice president, national sales,
and a member of the Management Team for RXR Capital Management, Inc. His
responsibilities consisted of business development, institutional sales, and
broker dealer support. Prior to joining RXR in August 1986, he was engaged as
an account executive for Prudential-Bache Securities starting in February 1985.
Prior to that, Mr. Deakins was an account executive for Merrill Lynch. He
received a B.A. in Economics from Hartwick College.
Mr. Chris J. Lautenslager is a vice president of JWH. He is
responsible for general business development and investor services support.
Prior to joining JWH in April 1996, he was the vice president of institutional
sales for I/B/E/S International, Inc., a distributor of corporate earnings
estimate information. His responsibilities consisted of business development
and support of global money managers and investment bankers. Prior to his
employment with I/B/E/S, Mr. Lautenslager devoted time to personal activities
from April 1994 to March 1995, following the closing of the Stamford,
Connecticut office of Gruntal & Co., where he had worked as a proprietary equity
trader since November 1993. Before that, he held the same position at S.A.C.
Capital Management starting in February 1993. From October 1987 to December
1992, Mr. Lautenslager was a partner and managing director of Limitless Option
Partners, a registered Chicago 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.
-103-
<PAGE>
Mr. Edwin B. Twist is a Director of JWH and has held that position
since August 1993. Mr. Twist is also a director of JWH Risk Management, Inc.
and JWH Asset Management, Inc. Mr. Twist joined JWH as Internal Projects Manager
in September 1991. Mr. Twist's responsibilities include assistance in the day-
to-day administration of JWH's Florida office and internal projects. Mr. Twist
was Secretary and Treasurer at J.W. Henry Enterprises Corp., a Florida
corporation engaged in administrative and financial consulting services, for
which he performed financial, consulting and administrative services from
January 1991 to August 1991. Prior to his employment at JWH, Mr. Twist was an
owner and manager for 16 years of a 2,500-acre commercial farm in eastern
Arkansas.
Ms. Nancy O. Fox, C.P.A., is a Vice President and the director of
investment support of JWH. She is responsible for the day-to-day activities of
the Investment Support Department, including all aspects of operations and
performance reporting. Prior to joining JWH in January 1992, Ms. Fox was a
senior accountant at Deloitte & Touche, where she served commodities and
securities industry clients and held positions of increasing responsibility
since July 1987. Ms. Fox is a member of the AICPA and the New Jersey Society of
C.P.A.s. She received a B.S. in Accounting and Finance from Fairfield
University and an M.B.A. from the University of Connecticut.
THE INVESTMENT POLICY COMMITTEE
The Investment Policy Committee is one vehicle for decision-making at
JWH about the content and application of JWH trading programs. Composition of
the Investment Policy Committee, and participation of its discussions and
decisions by non-members, may vary overtime.
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.
JWH's systematic investment process is designed to generate, over
market cycles, excellent risk-adjusted rates of return under favorable and
adverse market conditions. The JWH process capitalizes on emerging, long-term,
rising and falling price trends and ignores day-to-day price fluctuations. To
ensure disciplined implementation of its investment philosophy, JWH uses
mathemathical models to execute investment decisions in more than 50 global
markets encompassing currencies, commodities and financial securities. All JWH
investment programs follow the strict money management framework outlined
below.
The first step in the JWH investment process is the identification of
a price trend. While there are many ways to identify trends, JWH uses a
methodology which identifies opportunities in order to attempt to capture a
majority of the significant price movements in a given market. The process
presumes that such price movements will often exceed the expectation of the
general marketplace. As such, the JWH discipline is to pare losing positions
relatively quickly while allowing profitable positions to mature. Positions
held for two to four months are not unusual, and certain positions have been
held for more than one year. Historically, only thirty to forty percent of all
trades 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 program leverage,
commencement of trading in an account, contracts traded, contract month
selection, margin utilization and effective trade execution.
PROGRAM MODIFICATIONS
In an effort to maintain and improve trading performance, JWH has
engaged, and continues to engage, in extensive research. While the basic
philosophy underlying the firm's investment methodology has remained intact
throughout its history, the potential benefits of employing more than one
investment methodology, alternatively, or in varying combinations, is a subject
of continual testing, review and evaluation. Extensive research and analysis
may suggest
-104-
<PAGE>
substitution of alternative investment methodologies with respect to particular
contracts in light of relative differences in historical performance achieved
through testing different methodologies. In addition, risk management research
and analysis may suggest modifications regarding the relative weighting among
various contracts, the addition or deletion of particular contracts for a
program or a change in the degree of leverage employed.
As capital in each JWH trading program increases, additional emphasis
and weighting may be placed on certain markets which have historically
demonstrated the greatest liquidity and profitability. Furthermore, the
weighting of capital committed to various markets in the trading programs is
dynamic, and JWH may vary the weighting at its discretion as market conditions,
liquidity, position limit considerations and other factors warrant. MLIP will
generally not be informed of any such changes.
LEVERAGE
Leverage adjustments have been and continue to be an integral part of
JWH's investment strategy. At its discretion, JWH may adjust leverage in
certain markets or entire programs. Factors which may affect the decision to
adjust leverage include: ongoing research; program volatility; current market
volatility; risk exposure; and subjective judgment and evaluation of these and
other general market conditions. Such decisions to change leverage may
positively or negatively affect performance, and will alter risk exposure for an
account. Leverage adjustments may lead to greater profits or losses, more
frequent and larger margin calls and greater brokerage expense. No assurance is
given that such leverage adjustments will be to the financial advantage of
investors in the Fund.
ADDITION, REDEMPTION AND REALLOCATION OF CAPITAL FOR COMMODITY POOL OR FUND
ACCOUNTS
JWH has developed procedures for trading pool accounts, such as the
Fund, that provide for the addition, redemption and/or reallocation of capital.
Investors who purchase or redeem units in a fund are most frequently permitted
to do so at a price equal to the net asset value per unit on the close of
business on the last business day of the month or quarter. In addition, funds
often may reallocate capital among advisors at the close of business on the last
business day of the month. In order to provide market exposure commensurate
with the equity in the account on the date of these transactions, JWH's practice
is to adjust positions as nearly as possible to the close of business on the
last trading date of the month. The intention is to provide for additions,
redemptions and reallocations at a net asset value per unit that will be the
same for each of these transactions and to eliminate possible variations in the
net asset value per unit that could occur as a result of inter-day price changes
when additions are calculated on the first day of the subsequent month.
Therefore JWH may, in its sole discretion, adjust its investment of the assets
associated with the addition, redemption and reallocation of capital as nearly
as possible to the close of business on the last trading day of the month to
reflect the amount then available for trading. Based on JWH's determination of
liquidity or other market conditions, JWH may decide to commence trading earlier
in the day on, or even before the last business day of the month. In the case
of an addition to a fund account, JWH may also, in its sole discretion, delay
the actual start of trading for those new assets. No assurance is given that
JWH will be able to achieve the objectives described above in connection with
funding level changes. The use of discretion by JWH in the application of this
procedure may affect performance positively or negatively, 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
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<PAGE>
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 within the four market sectors traded. Because assets are
concentrated in interest rates, currencies, stock indices and metals only,
volatility can be higher than in a more diversified portfolio.
Other JWH Programs
In addition to the Financial and Metals Portfolio, JWH currently
operates 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(TM), 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(TM), which
commenced trading in November 1987, uses a portfolio of foreign currency
contracts that seeks to capture interest-rate differentials between countries.
This program utilizes leverage that is significantly lower than other JWH
programs, reducing risk as it seeks to generate returns significantly enhanced
over the prevailing 91-day U.S. government securities rate.
The World Financial Perspective, which began in 1986, trades the
financial and energy sector markets from the perspective of the Japanese yen,
German mark, Swiss franc, British pound, Australian dollar, French franc,
Canadian dollar and the U.S. dollar. The pricing of key global markets in terms
of foreign currencies provides a level of diversification not generally found in
futures portfolios. In February 1991, JWH began trading a portfolio in which
the same techniques utilized in the International Foreign Exchange Program are
primarily applied to the currencies of the major industrial nations, known as
"the Group of Seven" and Switzerland. These currencies are the Japanese yen,
British pound, Canadian dollar, German mark, French franc, Italian lira, the
U.S. dollar and Swiss franc and are among the most liquid, actively traded
currencies in the world. The G-7 Currency Portfolio makes use of both outright
positions and cross-rate positions. Positions are primarily taken in the
interbank market and from time to time on U.S. futures exchanges. The Yen
Financial Portfolio began in August 1991 and uses the same quantitative models
used in the Financial and Metals Portfolio. The Yen Financial Portfolio trades
futures on the Japanese yen, the 10-year Japanese Government Bond, the Euroyen
and the Nikkei 225 stock index. The International Currency and Bond Portfolio,
begun in January 1993, combines the techniques employed in the G-7 Currency
Portfolio and the global bond sector of the Financial and Metals Portfolio to
trade a combined portfolio of currencies and international long-term bonds. In
June 1994, JWH began trading the Global Financial Portfolio, which utilizes the
same reversal approach as the Original Investment Program. The program trades
in four market sectors: interest rates, stock indices, currencies and energy.
The Dollar Program began trading 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 June 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. (No
performance summary is included for WWB because no client accounts had been
managed pursuant to this program as of June 30, 1996.)
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<PAGE>
The Delevered Yen Denominated Financial and Metals Profile which began
trading in October 1995 seeks to capitalize on sustained moves in global
financial markets utilized intermediate-term and long-term quantitative trend
analysis models, some of which attempt to employ neutral stances during periods
of nontrending markets. This portfolio is traded at approximately one half of
the leverage of the traditional Financial and Metals portfolio and is traded
from the perspective of the Japanese yen.
PAST PERFORMANCE
The following information describes the composite actual performance
of all customer and proprietary accounts managed by JWH and JWH Investments Inc.
JWH trades its Financial and Metals Portfolio on behalf of the Fund. As of June
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 June 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 86
through 87.
An investor should note that in a presentation of past performance
data, different accounts, even though traded according to the same investment
program, can have varying performance results. The reasons for this include
numerous material differences among accounts including, but not limited to: (a)
procedures governing timing for the commencement of trading and means of moving
toward full portfolio commitment of new accounts; (b) the periods during which
accounts are active; (c) the investment program used (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 JWH and the amount of brokerage commissions paid; (h)
the timing of orders to open or close positions; (i) the market conditions which
in part determine the quality of trade executions; 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
-107-
<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.
ADDITIONAL NOTE TO THE GLOBAL FINANCIAL PORTFOLIO COMPOSITE PERFORMANCE SUMMARY
- -------------------------------------------------------------------------------
Since the inception of the Global Financial Portfolio, the timing of
individual account openings has had a material impact on compound rates of
return. Based on the account startup methodology used by JWH, the performance
of individual accounts composing the Global Financial Portfolio composite
performance summary has varied. In 1994, the two accounts that were open
generated separate rates of return of negative 44 percent and negative 17
percent, respectively. For the period January 1995 through June 1995, the three
open accounts achieved separate rates of return of 101 percent, 75 percent and
67 percent, respectively. As of June 1995, these accounts now maintain mature
positions and are performing consistently with each other. Due to the six month
period in 1995 of varied performance, the three accounts therefore achieved
annual rates of return for 1995 of 122%, 92% and 78%, respectively.
ADDITIONAL NOTE TO THE SUMMARIES PRESENTED WHICH UTILIZE THE FULLY-FUNDED SUBSET
- --------------------------------------------------------------------------------
METHOD -- I.E., THE JWH GLOBAL DIVERSIFIED PORTFOLIO, ORIGINAL INVESTMENT
- -------------------------------------------------------------------------
PROGRAM 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
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<PAGE>
is a dollar amount which clients have agreed to in writing and which determines
the level of trading in the account regardless of the amount of actual funds.
Notional funds are the amount by which the nominal account size exceeds the
amount of actual funds. The amount of notional equity in the accounts that
compose these summaries requires additional disclosure under current CFTC
policy. The Fully-Funded Subset Summaries include notional equity in excess of
the 10% disclosure threshold established by the CFTC and reflect the adoption of
a method of presenting rate-of-return and performance disclosure authorized by
the CFTC, referred to as the Fully-Funded Subset method. See "--Chesapeake
Capital Corporation -- Past Performance," above. This method permits notional
and fully-funded accounts to be included in a single performance summary.
To qualify for the use of the Fully-Funded Subset method, the Fully-
Funded Subset Advisory requires that certain computations be made in order to
arrive at the Fully-Funded Subset and that the accounts for which performance is
so reported meet two tests which are designed to provide assurance that the
Fully-Funded Subset and the resultant rates of return are representative of the
programs.
These computations have been performed for the Original Investment
Program since June 1, 1996 and were performed for the Global Diversified
Portfolio from January 1,1 992 to May 31,1996 and JWH Investments, Inc.'s
InterRate(TM) from inception to its close. They were designed to provide
assurance that the performance presented in the Fully-Funded Subset Summaries
and calculated on a Fully-Funded Subset basis would be representative of such
performance calculated on a basis which includes notional funds in beginning
equity. The rates of return in the Fully-Funded Subset Summaries are calculated
by dividing net performance by the sum of beginning equity plus additions minus
withdrawals. JWH and JWH Investments, Inc. believe that this method yields
substantially the same adjusted rates of return as would the Fully-Funded Subset
method were there any "fully-funded" accounts, and that the rates of return for
the Fully-Funded Subset Summaries are representative of the performance of the
programs for the periods presented.
The information presented has not been audited. However, JWH and JWH
Investments, Inc. believe that such information is accurate and fairly
presented.
INTERRATE(TM) IS QUALITATIVELY DIFFERENT FROM THE METHODS WHICH
GENERATED THE COMPOSITE PERFORMANCE SUMMARIES OF OTHER JWH INVESTMENT PROGRAMS.
THE PROGRAMS REPRESENTED IN THE COMPOSITE PERFORMANCE RECORD DIFFER FROM
INTERRATE(TM) WITH RESPECT TO: (a) FEES CHARGED; (b) LENGTH OF TIME FOR WHICH
POSITIONS ARE HELD; (c) POSITIONS TAKEN; (d) LEVERAGE USED; AND (e) RATE OF
RETURN OBJECTIVES.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FURTHERMORE, THE RATES OF RETURN EARNED WHEN AN ADVISOR IS MANAGING A LIMITED
AMOUNT OF EQUITY MAY HAVE LITTLE RELATIONSHIP TO THE RATES OF RETURN WHICH SUCH
ADVISOR MAY BE ABLE TO ACHIEVE MANAGING LARGER AMOUNTS OF EQUITY.
A NUMBER OF THE ACCOUNTS INCLUDED IN THE FOLLOWING PERFORMANCE
SUMMARIES WERE TRADED IN A MANNER MATERIALLY DIFFERENT FROM THAT IN WHICH JWH
TRADES ON BEHALF OF THE FUND.
THE FOLLOWING PERFORMANCE SUMMARIES HAVE IN NO RESPECT BEEN ADJUSTED
TO REFLECT THE CHARGES TO THE FUND. CERTAIN OF THE ACCOUNTS INCLUDED IN THE
FOLLOWING PERFORMANCE SUMMARIES PAID FEES MATERIALLY DIFFERENT FROM, AND IN SOME
CASES MATERIALLY LOWER THAN, THOSE CHARGED THE FUND.
-109-
<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."
-110-
<PAGE>
JOHN W. HENRY & COMPANY, INC.
FINANCIAL AND METALS PORTFOLIO
JANUARY 1991 - JUNE 1996
The following performance summary and chart reflect the composite
performance results from January 1991 through June 1996 of the Financial and
Metals Portfolio. JWH trades this program on behalf of the Fund. The program
has been utilized in trading for 355 accounts since its inception. As of June
30, 1996, 279 accounts had been closed and 76 client accounts remained open. Of
the closed accounts, 242 were profitable and 37 were unprofitable at their
closing. Of the 76 open client accounts, 74 were profitable and 2 were
unprofitable as of June 30, 1996.
Name of CTA: John W. Henry & Company, Inc.
Name of program: Financial and Metals Portfolio
Inception of client account trading by CTA: October 1982
Inception of client account trading in program: October 1984
Number of open client accounts: 76
Aggregate assets (excluding "notional" equity) overall: $1.3 billion
Aggregate assets (excluding "notional" equity) in program: $881 million
Aggregate assets (including "notional" equity) overall: $1.3 billion
Aggregate assets (including "notional" equity) in program: $881 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 2.3 6.1* 0.9* 9.3* (12.2)* (0.8)
- --------------------------------------------------------------------------------------------
May (1.7) 1.2* 1.3* 3.3* (5.7)* (0.3)*
- --------------------------------------------------------------------------------------------
June 2.2 (1.7)* 4.5* 0.1* 21.9* (1.3)*
- --------------------------------------------------------------------------------------------
July (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 3.56% 38.53%* (5.32)%* 46.82%* (10.89)%* 61.88%*
Rate of Return (6 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 86 AND 87.
-111-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NAME OF CTA: John W. Henry John W. Henry John W. Henry John W. Henry John W. Henry JohnW. Henry
& Company, Inc. & Company, Inc. & Company, Inc. & Company, Inc. & Company, Inc. & Company, Inc.
--------------------------------------------------------------------------------------------------------
NAME OF PROGRAM: Original Global International The World Global Financial Delevered Yen
Investment Diversified Currency and Financial Portfolio Denominated
Program Portfolio Bond Portfolio Perspective Financial and
Metals Profile
--------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT October 1982 October 1982 October 1982 October 1982 October 1982 October 1982
ACCOUNT TRADING BY CTA:
--------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT October 1982 June 1988 January 1993 April 1987 June 1994 October 1995
ACCOUNT TRADING IN
PROGRAM:
--------------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 25 17 1 5 3 1
--------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS $1.3 billion $1.3 billion $1.3 billion $1.3 billion $1.3 billion $ 1.3 billion
(EXCLUDING "NOTIONAL"
EQUITY) OVERALL:
--------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS $109 million $91 million $2 million $15 million $21 million (Yen)554,486,748
(EXCLUDING "NOTIONAL"
EQUITY) IN PROGRAM:
--------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS $1.3 billion $1.3 billion $1.3 billion $1.3 billion $1.3 billion $ 1.3 billion
(INCLUDING "NOTIONAL"
EQUITY) OVERALL:
--------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS $130 million $111 million $2 million $15 million $51 million (Yen)554,486,748
(INCLUDING "NOTIONAL"
EQUITY) IN PROGRAM:
--------------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN: (14.1)% (16.8)% (6.7)% (21.6)% (17.4)% (3.2)%
(10/94) (7/91) (7/94) (1/92) (11/94) (2/96)
--------------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY (26.2)% (29.1)% (20.1)% (32.0)% (46.0)% (3.7)%
DRAWDOWN: (6/94-10/94) (12/91-5/92) (6/94-1/95) (12/91-10/92) (6/94-1/95) (1/96-5/96)
--------------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF (3)% (11)% (1)% 12% 4% (0.7)%
RETURN: (6 months) (6 months) (6 months) (6 months) (6 months) (6 months)
--------------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF 53% 20% 37% 32% 86% 0.2%
RETURN: (3 months)
--------------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF (6)% 10% (2)% (15)% (38)% N/A
RETURN: (7 months)
--------------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF 41% 60% 15% 14% N/A N/A
RETURN:
--------------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF 11% (13)% N/A (23)% N/A N/A
RETURN:
--------------------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF 5% 40% N/A 15% N/A N/A
RETURN:
--------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 86 THROUGH 87.
-112-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NAME OF CTA: John W. Henry John W. Henry John W. Henry John W. Henry JWH JWH
& Company, Inc. & Company, Inc. & Company, Inc. & Company, Inc. Investments, Inc. Investments, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
NAME OF PROGRAM: International G-7 Currency InterRate(TM) KT Financial and InterRate(TM)
Foreign Portfolio Diversified Metals Portfolio
Exchange Program
Program
- ----------------------------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT October 1982 October 1982 October 1982 October 1982 September 1991 September 1991
ACCOUNT TRADING BY CTA:
- ----------------------------------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT August 1986 February 1991 December 1988 January 1984; September 1991; February 1992;
ACCOUNT TRADING IN ceased ceased trading ceased trading
PROGRAM: trading 2/94 7/95 11/93
- ----------------------------------------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 7 8 1 0 0 0
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS $1.3 billion $1.3 billion $1.3 billion $1.3 billion $1.3 billion $1.3 billion
(EXCLUDING "NOTIONAL"
EQUITY) OVERALL:
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS $75 million $86 million $18 million N/A N/A N/A
(EXCLUDING "NOTIONAL"
EQUITY) IN PROGRAM:
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS $1.3 billion $1.3 billion $1.3 billion $1.3 billion $1.3 billion $1.3 billion
(INCLUDING "NOTIONAL"
EQUITY) OVERALL:
- ----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS $75 million $86 million $18 million N/A N/A N/A
(INCLUDING "NOTIONAL"
EQUITY) IN PROGRAM:
- ----------------------------------------------------------------------------------------------------------------------------------
LARGEST MONTHLY DRAWDOWN: (12.0)% (10.7)% (9.71)% (19.2)% (16.6)% (9.3)%
(1/92) (1/92) (9/92) (7/91) (1/92) (9/92)
- ----------------------------------------------------------------------------------------------------------------------------------
LARGEST PEAK-TO-VALLEY (24.1)% (19.5)% (17.8)% (40.6)% (34.4)% (20.6)%
DRAWDOWN: (12/91-4/92) (7/93-1/95) (8/92-2/94) (1/91-3/92) (12/91-5/92) (8/92-11/93)
- ----------------------------------------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF 4% (3)% 8% N/A N/A N/A
RETURN: (6 months) (6 months) (6 months)
- ----------------------------------------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF 17% 32% 5% N/A 30% N/A
RETURN: (7 months)
- ----------------------------------------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF (6)% (5)% 3% (14)% (1)% N/A
RETURN: (2 months)
- ----------------------------------------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF (5)% (6)% (5)% 21% 46% (10)%
RETURN: (11 months)
- ----------------------------------------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF 5% 15% (1)% (12)% (4)% (3)%
RETURN: (11 months)
- ----------------------------------------------------------------------------------------------------------------------------------
1991 COMPOUND RATE OF 39% 49% 9% (2)% 59% N/A
RETURN: (11 months) (4 months)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 86 THROUGH 87.
-113-
<PAGE>
JOHN W. HENRY & COMPANY, INC. TRADING PROGRAMS
PERFORMANCE SUMMARIES
YEN FINANCIAL PORTFOLIO
Name of CTA: John W. henry & Company, Inc.
Inception of client account trading: October 1982
Inception of client account trading in program: January 1992
Number of open accounts: 7
Aggregate assets (excluding "notional" equity) overall: $1.3 billion
Aggregate assets (including "notional" equity) overall: $1.3 billion
Aggregate assets (excluding "notional" equity) in program: $38 billion
Aggregate assets (including "notional" equity) in program: $1.3 billion
See Additional Note on p. 101
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
AGGREGATE LARGEST LARGEST
ACCOUNT NO. INCEPTION OF ASSETS COMPOUND RATE MONTHLY PEAK-TO-VALLEY
TRADING JUNE 30, 1996 OF RETURN (%) DRAWDOWN % DRAWDOWN %
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 1/92 $6 million 1996: (15.4) (6 months) (14.4)-2/92 (26.8)-5/95-5/96
1995: 20.6
1994: (13.0)
1993: 76.4
1992: 20.1
- --------------------------------------------------------------------------------------------------------------------------
2 1/93 $1 million 1996: (15.2) (6 months) (6.9) - 7/95 (25.9) - 4/95-6/96
1995: 21.0
1994: (8.8)
1993: 71.4
- --------------------------------------------------------------------------------------------------------------------------
3 1/94 $900,000 1996: (12.8) (6 months) (6.0) - 7/95 (23.0) - 4/95-5/96
1995: 22.4
1994: (7.5)
- --------------------------------------------------------------------------------------------------------------------------
4 6/94 $22 million 1996: (11.0) (6 months) (6.5) - 7/95 (19.6) - 4/95-5/96
1995: 24.2
1994: (1.6) (6 months)
- --------------------------------------------------------------------------------------------------------------------------
5 8/94 $4 million 1996: (13.3) (6 months) (7.1) - 7/95 (27.3) - 4/95-5/96
1995: 21.1
1994: (4.3) (5 months)
- --------------------------------------------------------------------------------------------------------------------------
6 1/95 $2 million 1996: (17.4) (6 months) (7.5) - 8/95 (32.1) - 5/95-6/96
1995: 13.2
- --------------------------------------------------------------------------------------------------------------------------
7 3/94 (Yen)176 1996: (6.7) (6 months) (4.6) - 5/95 (12.8) - 3/94-1/95
million
1995: 28.1
1994: (11.2) (10 months)
- --------------------------------------------------------------------------------------------------------------------------
8 4/92 closed - 9/93 1993: 62.6 (11.7) - 5/92 (11.7) - 4/92-5/92
1992: 27.0 (9 months)
- --------------------------------------------------------------------------------------------------------------------------
9 2/92 closed - 12/92 1992: 32.7 (11 months) (11.5) - 2/92 (11.5) - 2/92
- --------------------------------------------------------------------------------------------------------------------------
10 3/94 closed - 12/94 1994: (7.4) (10 months) (5.4) - 5/94 (10.5) - 4/94-12/94
- --------------------------------------------------------------------------------------------------------------------------
11 11/93 closed - 8/95 1995: 20.0 (8 months) (9.0) - 8/95 (18.8) - 4/95-8/95
1994: (13.4)
1993: 5.2 (2 months)
- --------------------------------------------------------------------------------------------------------------------------
12 11/93 closed - 1/95 1995: (0.7) (1 month) (6.3) - 5/94 (16.5) - 4/94-1/95
1994: (15.1)
1993: 4.8 (2 months)
- --------------------------------------------------------------------------------------------------------------------------
13 12/92 closed - 3/96 1996: (4.1) (3 months) (4.9) - 7/95 (15.8) - 12/93-1/95
1995: 31.4
1994: (14.1)
1993: 69.2
1992: 0.1 (1 month)
- --------------------------------------------------------------------------------------------------------------------------
14 1/93 closed - 12/95 1995: (10.9) (6.2) - 6/95 (15.8) - 4/95-12/95
1994: (4.1)
1993: 43.6
- --------------------------------------------------------------------------------------------------------------------------
15 4/93 closed - 9/94 1994: (19.0) (9 months) (5.8) - 5/94 (19.9) - 11/93-9/94
1993: 25.3 (9 months)
- --------------------------------------------------------------------------------------------------------------------------
16 1/94 closed - 8/94 1994: (6.7) (8 months) (5.5) - 5/94 (11.0) - 4/94-8/94
- --------------------------------------------------------------------------------------------------------------------------
17 12/92 closed - 1/96 1996: 0.3 (1 month) (6.0) - 7/95 (12.4) - 4/95-10/95
1995: 26.6
1994: (5.1)
1993: 73.9
1992: (1.0) (1 month)
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 86 THROUGH 87.
-114-
<PAGE>
JOHN W. HENRY & COMPANY, INC. TRADING PROGRAMS
PERFORMANCE SUMMARIES
YEN FINANCIAL PORTFOLIO
Name of CTA: John W. Henry & Company, Inc.
Inception of client account trading: October 1982
Inception of client account trading in program: January 1992
Number of open accounts: 7
Aggregate assets (excluding "national" equity) overall: $1.3 billion
Aggregate assets (including "national" equity) overall: $1.3 billion
Aggregate assets (excluding "national" equity) in program: $38 million
Aggregate assets (including "national" equity) in program: $38 million
See Additional Note on p. 101
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
AGGREGATE LARGEST LARGEST
ACCOUNT NO. INCEPTION OF ASSETS COMPOUND RATE MONTHLY PEAK-TO-VALLEY
TRADING JUNE 30, 1996 OF RETURN (%) DRAWDOWN % DRAWDOWN %
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
18 3/94 closed - 4/96 1996: (6.3) (4 months) (6.2) - 7/95 (18.5) - 4/95-4/96
1995: 18.5
1994: (10.1) (10 months)
- -------------------------------------------------------------------------------------------------------------------------------
19 12/94 closed 1996: (7.8) (4 months) (6.6) - 7/95 (21.1) - 4/95-4/96
1995: 18.3
1994: 0.2 (1 month)
- -------------------------------------------------------------------------------------------------------------------------------
20 6/94 closed - 12/94 1994: (7.9) (6 months) (5.1) - 7/94 (10.4) - 6/94-11/94
- -------------------------------------------------------------------------------------------------------------------------------
21 6/94 closed - 3/95 1995: 48.1 (3 months) (3.6) - 7/94 (9.9) - 6/94-1/95
1994: (6.6) (7 months)
- -------------------------------------------------------------------------------------------------------------------------------
22 4/94 closed - 9/94 1994: (4.6) (6 months) (4.7) - 5/94 (7.0) - 4/94-9/94
- -------------------------------------------------------------------------------------------------------------------------------
23 3/94 closed - 9/94 1994: (9.8) (7 months) (6.3) - 5/94 (11.0) - 4/94-9/94
- -------------------------------------------------------------------------------------------------------------------------------
24 4/94 closed - 9/94 1994: (9.8) (6 months) (9.1) - 5/94 (12.9) - 4/94-9/94
- -------------------------------------------------------------------------------------------------------------------------------
25 4/93 closed - 12/94 1994: (16.6) (6.1) - 5/94 (17.9) - 11/93-12/94
1993: 26.5 (9 months)
- -------------------------------------------------------------------------------------------------------------------------------
26 9/93 closed - 12/94 1994: (12.5) (6.0) - 5/94 (14.1) - 4/94-12/94
1993: 3.2 (4 months)
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 86 THROUGH 87.
-115-
<PAGE>
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 July 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 SECTION ARE
MATERIALLY DIFFERENT FROM THE FUND, AND THE PERFORMANCE SUMMARIES OF SUCH FUNDS
ARE NOT REPRESENTATIVE OF HOW THE FUND HAS PERFORMED TO DATE NOR INDICATIVE OF
HOW THE FUND WILL PERFORM IN THE FUTURE.
"MANAGED ACCOUNT PROGRAM" SINGLE-ADVISOR FUNDS NOT PRESENTED
MLIP currently has sponsored, and continues to operate, five single-
advisor funds, as well as several single-advisor "feeder funds," as part of
MLIP's Managed Account Program. These funds are in addition to the 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.
The three worst performing of the single-advisor Managed Account
Program funds sponsored by MLIP had, as of July 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 HEREIN AND THE FUND. TO
DATE, THE FUND HAS NOT PERFORMED IN A MANNER COMPARABLE TO MANY OF THESE SINGLE-
ADVISOR MLIP-SPONSORED FUNDS, AND THERE IS NO REASON TO EXPECT THAT THE FUND
WILL PERFORM IN A MANNER COMPARABLE TO ANY OF SUCH FUNDS IN THE FUTURE.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF A COMMODITY POOL'S INCOME AND, IN CERTAIN INSTANCES, MAY
GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED AND UNREALIZED LOSSES FROM
COMMODITY TRADING.
____________________________
-116-
<PAGE>
"WORST MONTHLY DRAWDOWN" AS USED HEREIN MEANS THE LARGEST NEGATIVE
MONTHLY RATE OF RETURN EXPERIENCED BY THE RELEVANT FUND DURING THE PERIOD
COVERED BY THE PERFORMANCE SUMMARY. A "DRAWDOWN" IS MEASURED ON THE BASIS OF
MONTH-END FIGURES ONLY, AND DOES NOT REFLECT INTRA-MONTH PERFORMANCE.
"WORST PEAK-TO-VALLEY DRAWDOWN" AS USED HEREIN MEANS THE GREATEST
PERCENTAGE DECLINE, DURING THE PERIOD COVERED BY THE PERFORMANCE SUMMARY, FROM A
MONTH-END CUMULATIVE MONTHLY RATE OF RETURN WITHOUT SUCH CUMULATIVE MONTHLY RATE
OF RETURN BEING EQUALLED OR EXCEEDED AS OF A SUBSEQUENT MONTH-END. FOR EXAMPLE,
IF THE MONTHLY RATE OF RETURN OF A PARTICULAR FUND WAS (1)% IN EACH OF JANUARY
AND FEBRUARY, 1% IN MARCH AND (2)% IN APRIL, A "PEAK-TO-VALLEY DRAWDOWN"
ANALYSIS CONDUCTED AS OF THE END OF APRIL WOULD CONSIDER THAT "DRAWDOWN" TO BE
STILL CONTINUING AND TO BE APPROXIMATELY (3)% IN AMOUNT, WHEREAS IF THE MONTHLY
RATE OF RETURN HAD BEEN APPROXIMATELY 3% IN MARCH, THE JANUARY-FEBRUARY DRAWDOWN
WOULD HAVE ENDED AS OF THE END OF FEBRUARY AT APPROXIMATELY THE (2)% LEVEL.
-117-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MLIP PUBLIC SINGLE-ADVISOR FUNDS
JULY 1, 1996
- ------------------------------------------------------------------------------------------------------------------------------------
WORST
WORST MONTHLY PEAK-TO-VALLEY
TYPE OF INCEPTION AGGREGATE CURRENT DRAWDOWN DRAWDOWN
NAME OF FUND OFFEERING OF TRADING SUBSCRIPTIONS CAPITALIZATION PERIOD PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The Futures Expansion Fund Public Jan, 1987 $56,741,035 $9,012,399 (10.92)% (2/96) (17.32)% (1/91-11/91)
Limited Partnership
- ------------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee Fund Public Aug, 1987 $148,349,450 $9,000,141 (4.28)% (6/91) (6.93)% (2/94-6/94)
L.P. - Series A Units
- ------------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee Fund Public Sept, 1987 $84,282,707 dissolved as (3.65)% (6/91) (4.29)% (9/91-11/91)
L.P. - Series B Units of 12/31/91
- ------------------------------------------------------------------------------------------------------------------------------------
World Currencies Limited Private Aug, 1987 $47,814,293 dissolved as (13.41)% (4/92) (35.81)% (9/92-1/95)
L.P. - Series B Units of 4/11/96
- ------------------------------------------------------------------------------------------------------------------------------------
InterRate(TM) Public Dec, 1988 $7,429,200 dissolved as (10.08)% (9/92) (13.49)% (9/92-1/93)
of 1/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
RETURN
JAN, 1991 TO 1996 1995 1994 1993 1992 1991
MAY 31, COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
1996 (OR RATE OF RATE OF RATE OF RATE OF RATE OF RATE OF
DISSOLUTION) RETURN RETURN RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
35.93% (4.76)% 21.95% 5.55% 3.36% 9.23% (1.79)%
(6
months)
85.75% 7.06% 32.01% (2.34)% 5.20% 3.75% 23.30%
(6
months)
11.77% N/A N/A N/A N/A N/A 11.7%
16.19% 1.20% 12.23% (12.84)% (10.46)% (3.10)% 35.28%
(31/2
months)
1.07% N/A N/A 0.55% (7.02)% (2.63)% 11.03%
(1 month)
- ------------------------------------------------------------------------------------------------------------
</TABLE>
-118-
<PAGE>
THE ROLE OF MANAGED FUTURES IN AN INVESTMENT PORTFOLIO
MANAGED FUTURES AS AN ELEMENT IN MODERN PORTFOLIOS
This section presents a general description of the possible role of a
managed futures investment in an overall portfolio. Prospective investors are
cautioned that what may be true of managed futures investments considered in
general may well not be true of the Fund. The Fund does not purport to offer the
full diversification and access to "global trading" which is reflected in the
investment opportunities available in the managed futures industry considered as
a whole. The following statements are qualified in their entirety by the
specific descriptions of the Fund, the Trading Advisors, their strategies and
the markets traded by the Fund set forth herein and elsewhere in this
Prospectus.
A global investment perspective may be appropriate in seeking
investment opportunity while attempting to control portfolio risk. The
internationalization 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 consistent
growth may be 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 a portfolio as part of a well-
diversified asset allocation strategy has the potential, if the managed futures
investment is successful, to increase profits while reducing overall portfolio
risk. The Fund's performance to date has been volatile (volatility being one
commonly accepted measure of risk). There can be no assurance that the Fund will
trade successfully, and if it does not do so an investment in the Fund cannot
provide beneficial diversification to a portfolio. Furthermore, even if
profitable, the Fund may not be a successful diversification of an investor's
stock and bond portfolio because the Fund's performance may be correlated (i.e.,
experiencing generally similar returns during similar periods) with these
portfolio components. The past performance of the Fund is not necessarily
indicative of its future results.
An asset allocation strategy diversifies a portfolio into a variety of
different components such as stocks, bonds and cash equivalents. Such a strategy
may also include, to a limited extent, non-traditional investments such as
managed futures, real estate and hard assets (among a variety of alternatives).
The goal, on an overall portfolio basis, 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. Combining a number of such components may add a potentially valuable
element of diversification to an overall portfolio. There can be no assurance
that the Fund will not respond to prevailing economic conditions in the same
manner, as well as incur losses at or about the same time, as the general debt
and equity markets.
PROFESSIONAL MANAGEMENT
Depending upon the fund and advisor selected, an investment in managed
futures has the potential to offer access to professionally managed trading in a
variety of commodity markets and national economies. These markets may be traded
through futures, options on futures and forward contracts, and generally offer
the ability to trade either side of a market. The Fund does not trade in all, or
even most, of the available markets, and its positions may frequently be
concentrated in particular markets or market sectors.
-119-
<PAGE>
FUTURES VOLUME BY MARKET SECTOR
[PIE GRAPHS APPEARS HERE]
The futures volume figures and market sector distributions presented above
include both speculative and hedging transactions, as well as options on
futures. Source: Futures Industry Association. A significant portion of
currency trading is done in the forward rather than in the futures markets,
and, accordingly, is not reflected in the foregoing chart.
The futures markets have expanded in recent years to include a wide
range of instruments representing major sectors of the world's economy.
Coinciding with the development of an increasingly broad range of markets has
been greatly increased liquidity. The expansion of futures trading on major
exchanges in Chicago, Frankfurt, London, New York, Paris, Singapore, Sydney and
Tokyo offers the possibility of access to international market sectors as well
as the potential for a global diversification of portfolios traditionally
concentrated in a single nation's economy and currency. Managed futures advisors
are often able quickly to deploy and redeploy capital across a wide range of
international markets. No representation is or could be made that the
diversification or internationalization of futures trading in general has been
or will be reflected in the trading of the Fund.
At the same time that the rapid geographical expansion of the
available markets and the introduction of an array of innovative products
have, in the case of certain managers, created new opportunities for both
profit and diversification, these developments have made trading very much
more complex and difficult for the individual investor. Managed futures
investments offer the investor the opportunity to participate in a range
of different economic sectors through the futures, options on futures and
forward markets, utilizing professional money managers. Managed futures
investments have profit potential, but also involve a high degree of risk.
A managed futures investment is suitable only for a limited portion of the
risk segment of a portfolio.
SUBSTANTIAL INVESTOR PARTICIPATION
A large number of investors, both individuals and institutions
(although only a small percentage of the investing public), have committed
a limited portion of their assets to managed futures during the last 10 to
15 years. In 1980, client assets in the managed futures industry were
estimated by Managed Account Reports ("MAR"), a leading industry
publication in the United States, at approximately $0.3 billion. As of
the end of 1995, the same publication estimated such assets, which peaked
at around an estimated $25 billion as of the end of 1993, at approximately
$21.1 billion. The assets invested in managed futures are invested in a
wide range of different products, including single-advisor and multi-
advisor funds, "funds of funds," "principal protection" pools (in which,
as in the case of the Fund, only a fraction of the assets invested are
committed to trading) and individual managed accounts. Many of these
investments are materially different from the Fund in design and fee
structure as well as in investor base, performance and risk control
objectives.
NON-CORRELATION -- A POTENTIALLY IMPORTANT COMPONENT OF RISK REDUCTION
Historically, the returns of many managed futures investments have
exhibited a substantial degree of non-correlation with the performance of the
general equity and debt markets, suggesting that a managed futures component, if
successful, may provide a valuable complement to a traditional portfolio. Modern
portfolio theory
-120-
<PAGE>
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 can, if the managed futures
performance is, in fact, profitable as well as non-correlated with stocks and
bonds, 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. Even if the performance of the Fund is, in fact,
non-correlated with these markets (of which there can be no assurance), this
does not mean that the Fund's results will not parallel general stock and bond
price levels during significant periods of time. Non-correlation is not negative
correlation. The Fund may well incur losses at the same time as an investor's
traditional holdings, increasing, rather than mitigating, overall portfolio
losses. Furthermore, even if a managed futures investment is non-correlated to
general equity and debt prices, it must also be profitable to add any value as
an element of diversification in a portfolio.
Allocating assets to non-traditional investments ("alternative
investments") is based on the premise that while securities (e.g., stocks and
bonds) prices are often affected by overall market price trends, alternative
investments may not be, at least to the same degree. In addition, the results of
many types of alternative investments have historically been largely non-
correlated with each other. This creates the possibility of assembling a
portfolio whose various investments have been selected with the objective of
participating successfully in different economic cycles and national financial
markets, potentially multiplying profit opportunities while decreasing the
effect of price movements in any given market on the overall volatility of the
portfolio. The purely speculative nature of the return recognized from a managed
futures investment such as the Fund indicates that prospective investors must
not rely on such investment either to generate profits or to help diversify a
portfolio, because the actual results of such an investment are entirely
unpredictable.
The following chart depicts the performance of the MLIP Index, the 91-
day Treasury bill, the S&P 500(R) Stock Index and the ML Domestic Master Bond
Index. 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 represents
the composite return of all such funds, weighting their respective performance
as of the end of each month on the basis of relative capitalization. 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.
As the performance summaries of the MLIP multi-advisor funds set forth
under "Performance of the Other MLIP Multi-Advisor Funds" demonstrate, 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. Neither the
past performance of any single MLIP fund nor of any composite of such funds
(such as the MLIP Index or the MAR Public Funds Indices, see below) is
indicative of how any particular MLIP fund will perform in the future. 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.
-121-
<PAGE>
COMPARISON OF MLIP INDEX AND CERTAIN GENERAL
SECURITIES MARKET INDICES
[GRAPH APPEARS HERE]
Past performance is not necessarily indicative of future results. The
compilation of any index of actively managed futures funds as well as the
comparison of such index to passive indices of securities returns has certain
inherent 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 Fund's performance is included in the MLIP Index
beginning with the last quarter of 1994.
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,
the Fund's ability to achieve its objectives, or provide diversification to an
overall portfolio, will be materially impaired.
COMPARISON OF ML PRINCIPAL PROTECTION PLUS L.P. AND
CERTAIN GENERAL SECURITIES MARKET INDICES
[GRAPH APPEARS HERE]
Past performance is not indicative of future results. The inherently speculative
character of managed futures trading results in the Fund's performance to date
not being predictive of its prospects for the future.
The preceding chart depicts the performance of the Fund, the 91-day
Treasury bill, the S&P 500/(R)/ Stock Index and the ML Domestic Master Bond
Index. The 91-day Treasury bill performance is included in the graph to indicate
both the performance and non-correlation which investors could obtain investing
the capital otherwise committed to the Fund on a riskless basis. Many investors
measure the value added by a portfolio component by the extent to which its
return exceeds the risk free rate of return. The S&P 500/(R)/ Stock Index is a
capitalization-weighted index of the common stocks of publicly-traded United
States issuers. The ML Domestic
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<PAGE>
Master Bond Index is a total-return index comprised of 6,471 investment-grade
corporate bonds, Treasuries and mortgage issues; average maturity 12.65 years
(calculated on a market-weighted basis as of June 30, 1996).
The graph reflects the percentage overall returns recognized by the
Fund (not the return of any particular series of Units) as well as by the 91-day
Treasury bill and the stock and bond indices.
All of the performance information in this section, as well as
elsewhere in this Prospectus, is presented on a pre-tax basis. The tax costs of
investing in the Fund are materially higher than those that would be applicable
to an investment in either of the indices included in the foregoing graph.
Investors could obtain the 91-day Treasury bill, the S&P 500/(R)/
Stock Index and ML Domestic Master Bond Index return with minimal expense,
whereas the total charges to the Fund in 1995 were approximately 10% of its
average Net Assets.
The 91-day Treasury bill, the S&P 500/(R)/ Stock Index and the ML
Domestic Master Bond Index reflect the price movements of selected, unmanaged
groups of securities. The Fund is, on the other hand, actively managed. Although
it is common to evaluate the performance of financial assets against general
"cash equivalent" or stock and bond indices, there are material differences
between passive securities indices and managed products, as well as between
leveraged and unleveraged accounts. In addition, the futures markets are
fundamentally 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 return
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 June 1996 period.
-123-
<PAGE>
COMPARISON OF MLIP INDEX TO
MAR PUBLIC FUNDS INDEX
[GRAPH APPEARS HERE]
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.
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 MAR Public Funds Index does not reflect the historical results
of any actual futures fund, and combining the performance of funds with
different investment characteristics has certain inherent and material
limitations. 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, and to some extent self-selecting,
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, relative return and volatility -- prospective investors must be
aware that different graphic presentations of the same information may appear
materially different. Investors must not review the foregoing graphs without
also considering the accompanying textual disclosures and qualifications which
are an integral part of such graphs. Focusing on such graphs alone without
studying such disclosures and qualifications could be misleading.
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:
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<PAGE>
. Diversify into new markets;
. Profit (or incur losses) in rising as well as falling markets;
. Increase portfolio returns as well as reduce total portfolio risk
(through adding an investment component with the potential for
performance non-correlated with other portfolio components); and
. Participate in the highly leveraged futures, options on futures and
forward markets with liability limited, in the case of the Fund, to
the use of the funds invested.
There are a number of different "alternative investments" to which one
could commit assets with the objective of diversifying and improving the overall
risk/reward ratio of a traditional portfolio --venture capital, natural
resources, real estate, private lending and managed futures are only certain of
the options available. Many "alternative investments" are likely from time to
time to generate results largely non-correlated with those of the debt and
equity markets. A managed futures investment is typically more liquid and more
readily valued than many other alternative investments, but unlike many such
investments does not involve the acquisition of any assets with an intrinsic
value. Although the commodities and instruments which underlie the Fund's
futures and forward contracts have value, the success of its managed futures
program depends on the results of purely speculative trading. The Fund acquires
market exposures hoping to profit from price movements in commodities and
financial instruments which the Fund, in fact, never owns. A fundamental
characteristic of a managed futures investment is that it is a commitment to
trading rather than investing; to speculating on price differences, not to
acquiring assets which grow in value over time.
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. 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.
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.
-125-
<PAGE>
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.
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<PAGE>
APPENDIX
BLUE SKY GLOSSARY
The following definitions are included in this Appendix in
compliance with the requirements of various state securities administrators who
review public futures fund offerings for compliance with the "Guidelines for the
Registration of Commodity Pool Programs" Statement of Policy promulgated by the
North American Securities Administrators Association, Inc. The following defini
tions 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.
APP-1
<PAGE>
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), expenses for
printing, engraving, mailing, salaries of employees while engaged in sales
activity, charges of transfer agents, registrars, trustees, escrow holders,
depositories, experts, expenses of qualification of the sale of its Program
Interest under federal and state law, including taxes and fees, accountants' and
attorneys' fees.
Participant -- The holder of a Program Interest.
Person -- Any natural Person, partnership, corporation,
association or other legal entity.
Pit Brokerage Fee -- Pit Brokerage Fee shall include floor
brokerage, clearing fees, National Futures Association fees, and exchange fees.
Program -- A limited partnership, joint venture, corporation,
trust or other entity formed and operated for the purpose of investing in
Commodity Contracts.
Program Broker -- A Commodity Broker that effects trades in
Commodity Contracts for the account of a Program.
Program Interest -- A limited partnership interest or other
security representing ownership in a Program.
Pyramiding -- A method of using all or a part of an unrealized
profit in a Commodity Contract position to provide margin for any additional
Commodity Contracts of the same or related commodities.
Sponsor -- Any Person directly or indirectly instrumental in
organizing a Program or any Person who will manage or participate in the
management of a Program, including a Commodity Broker who pays any portion of
the Organizational Expenses of the Program, and the general partner(s) and any
other Person who regularly performs or selects the Persons who perform services
for the Program. Sponsor does not include wholly independent third parties such
as attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of the units. The
term "Sponsor" shall be deemed to include its Affiliates.
Valuation Date -- The date as of which the Net Assets of the
Program are determined.
Valuation Period -- A regular period of time between Valuation
Dates.
APP-2
<PAGE>
EXHIBIT A
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
Dated as of July 1, 1996
<PAGE>
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
1. Formation and Name..... A-1
2. Principal Office........................................ A-1
3. Business..................................... A-2
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-4
(a) Capital Accounts and Allocations A-4
(b) Allocation of Profit and Loss for Federal Income
Tax Purposes A-5
(c) Adjustments A-7
(d) Expenses A-7
(e) Limited Liability of Limited Partners A-7
(f) Return of Capital Contributions A-7
8. Management of the Partnership........... A-8
(a) General A-8
(b) Duties............................... A-9
(c) Loans; Investments.......................... A-9
(d) Certain Conflicts of Interest Prohibited.................. A-9
(e) Certain Contracts............................ A-9
(f) Trading Advisors............................. A-9
(g) Other Activities........................... A-10
(h) Tax Matters Partner.............................. A-10
(i) The Trading Partnership.......................... A-10
(j) "Pyramiding" Prohibited........................... A-11
9. Reports to Limited Partners.......... A-11
10. Assignability of Units............................. A-12
11. Redemptions;Distributions........................ A-12
12. Offering of Units................................ A-13
13. Additional Offerings............................ A-14
14. Special Power of Attorney.......................... A-14
15. Withdrawal of a Partner............................ A-14
</TABLE>
A-i
<PAGE>
TABLE OF CONTENTS (COUT.)
<TABLE>
<CAPTION>
SECTION PAGE
- ------- ----
<S> <C>
16. Standard of Liability; Indemnificat ion.............. A-15
17. Amendments; Meetings............................. A-17
(a) Amendments with Consent of the General Partner.. A-17
(b) Amendments and Actions without Consent of the
General Partner A-17
(c) Meetings; Other A-18
18. Governing Law.. A-18
19. Miscellaneous A-18
</TABLE>
A-ii
<PAGE>
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
This Third Amended and Restated Limited Partnership Agreement (this
"Limited Partnership Agreement") is made as of July 1, 1996, by and among
MERRILL LYNCH INVESTMENT PARTNERS INC., a Delaware corporation, as general
partner (the "General Partner"), and each other party who becomes a party to
this Limited Partnership Agreement as a limited partner (individually, a
"Limited Partner" or, collectively, the "Limited Partners") (the General Partner
and the Limited Partners being collectively referred to herein as "Partners").
WITNESSETH:
1. Formation and Name.
(a) The parties hereto do hereby continue a limited partnership
heretofore formed under the Delaware Revised Uniform Limited Partnership Act, as
amended (the "Act"). Subject to Section 1(b) below, the Units, as hereinafter
defined, subscribed for prior to the date hereof shall be subject to the terms
of the Second Amended and Restated Limited Partnership Agreement of the
Partnership (the "Prior Agreement") which shall remain in full force and effect
with respect to those Units and those Units only. The terms of this Limited
Partnership Agreement shall apply to all Units subscribed for on and after the
date hereof. The name of the limited partnership is ML PRINCIPAL PROTECTION L.P.
(the "Partnership").
(b) The Prior Agreement is hereby amended to reflect the change of
the name of this limited partnership to "ML Principal Protection L.P.," and the
change of the name of the Trading Partnership (as hereinafter defined) to "ML
Principal Protection Trading L.P." Notwithstanding any provision in this Limited
Partnership Agreement or the Prior Agreement to the contrary, any and all
references in the Prior Agreement to the "Prospectus" shall be deemed to refer
to the specific prospectus, including any applicable supplements thereto, under
and in connection with which specific Units were issued. The Prior Agreement and
this Limited Partnership Agreement shall be deemed to constitute one agreement,
which shall be the partnership agreement of the Partnership. The Guarantee
Agreement, between ML&Co. (as hereinafter defined) and the Partnership, dated as
of October 11, 1994, shall apply only to the Units subscribed for prior to July
1, 1996. The Guarantee Agreement, between ML&Co. and the Partnership, dated as
of [July 1], 1996, shall apply only to the Units subscribed for on and after
July 1, 1996.
2. Principal Office.
The address of the principal office of the Partnership shall be c/o
the General Partner, Merrill Lynch World Headquarters, 6th Floor, South Tower,
World Financial Center, New York, New York 10080-6106; telephone: (212) 236-
4167. The address of the registered office of the Partnership in the State of
Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209
Orange Street, Wilmington, New Castle County, Delaware 19801, and the name and
address of the registered agent for service of process on the Partnership in the
State of Delaware is The Corporation Trust Company, Corporation Trust Center,
1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
A-1
<PAGE>
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 TRADING L.P. (the "Trading Partnership"), of which the
General Partner shall be the sole general partner, and the Partnership the sole
limited partner.
In addition to its trading activities, as described above, the
Partnership and the Trading Partnership retain MERRILL LYNCH ASSET MANAGEMENT,
L.P. ("MLAM") to implement cash management strategies in -- in MLAM's absolute
discretion within investment parameters established by, and the responsibility
of, the General Partner -- United States Treasury securities and securities
issued by U.S. government agencies and instrumentalities. The Partnership
instructs Merrill Lynch Futures Inc., the Trading Partnership's commodity
broker, to pay MLAM's fees for such cash management services from the flat-rate
brokerage commissions paid by the Trading Partnership to Merrill Lynch Futures
Inc., and the General Partner is hereby specifically empowered to (i) retain
MLAM to provide cash management advice and services to the Partnership and the
Trading Partnership, (ii) arrange for Merrill Lynch Futures Inc. to pay MLAM's
fees for such advice and services and (iii) establish investment parameters for
MLAM's cash management services for the Partnership and the Trading Partnership.
In the event that Merrill Lynch Futures Inc. does not pay MLAM's cash management
fees, the General Partner, not the Partnership, shall be responsible for doing
so.
The Partnership has been formed in conjunction with a "principal
protection" undertaking by Merrill Lynch & Co., Inc. ("ML&Co."), the 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 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
A-2
<PAGE>
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 calculating
brokerage commissions, the Administrative Fees or the redemption value of Units.
Reimbursement payments will reduce Net Asset Value (for all such purposes) only
as actually paid out in the manner described in the Prospectus.
5. Net Worth of General Partner.
The General Partner agrees that at all times so long as it remains
general partner of the Partnership, it will maintain its net worth-- determined
without reference to the General Partner's interests in the Partnership or any
other limited partnership or to any notes or accounts receivable from and
payable to any limited partners in which the General Partner has an interest --
at an amount not less than 5% of the total contributions by all partners to the
Partnership and all other partnerships of which the General Partner is general
partner. The General Partner will not permit its net worth to decline below $10
million without the approving majority vote of each series of Units then owned
by Limited Partners.
The requirements of the first sentence of the preceding paragraph may
be modified if the General Partner obtains an opinion of counsel for the
Partnership that a proposed modification will not adversely affect the
classification of the Partnership as a partnership for federal income tax
purposes, and if such modification will reflect or exceed applicable state
securities and Blue Sky laws and qualify under any guidelines or statements of
policy promulgated by any body or agency constituted by the various state
securities administrators having jurisdiction in the premises.
6. Capital Contributions; Units.
The Partners' respective capital contributions to the Partnership
shall be as shown on the books and records of the Partnership.
A-3
<PAGE>
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).
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.
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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) 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).
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(ii) Each tax account shall be decreased by the amount of
expense or loss allocated to such Unit pursuant to Sections 7(b)(2),
7(b)(3) and 7(b)(4)(E) and by the amount of any distributions paid out
with respect to such Unit other than upon redemption.
(iii) When a Unit is redeemed, the tax account attributable to
such Unit (determined after making all allocations described in this
Section 7(b)) shall be eliminated.
(B) Each Partner who redeems Units of a given series (including Units
redeemed as of the end of the last day of such fiscal year) shall be
allocated such series' share of Trading Capital Gain, if any, up to the
amount of the excess, if any, of the aggregate amount received in respect
of such Units (before taking into account any early redemption charges)
over the aggregate tax accounts for such Partner's redeemed Units
(determined after making the allocations described in Sections 7(b)(2) and
7(b)(3), but prior to making the allocations described in this Section
7(b)(4)(B)) allocable to such Units (a "Positive Excess"). In the event the
series' share of Trading Capital Gain is less than the aggregate amount of
Trading Capital Gain to be allocated pursuant to the first sentence of this
Section 7(b)(4)(B), the series' share of Trading Capital Gain shall be
allocated among all such redeeming Partners in the ratio which each such
Partner's Positive Excess bears to the aggregate Positive Excess of all
such Partners.
(C) The series' share of Trading Capital Gain remaining after the
allocation described in Section 7(b)(4)(B) shall be allocated among all
Partners who hold Units in such series outstanding as of the end of the
applicable fiscal year (other than Units redeemed as of the end of the last
day of such fiscal year) equally among such Units.
(D) Each Partner who redeems Units of a given series (including Units
redeemed as of the end of the last day of such fiscal year) shall be
allocated such series' share of Trading Capital Loss, if any, up to the
excess of the aggregate tax accounts for such Partner's redeemed Units
(determined after making the allocations described in Sections 7(b)(2) and
7(b)(3), but prior to making the allocations described in this Section
7(b)(4)(D)) over the aggregate amount received in respect of such Units
(before taking into account any early redemption charges) (a "Negative
Excess"). In the event the series' share of Trading Capital Loss is less
than the aggregate amount of Trading Capital Loss to be allocated pursuant
to the first sentence of this Section 7(b)(4)(D), the series' share of
Trading Capital Loss shall be allocated among all such redeeming Partners
in the ratio that each such Partner's Negative Excess bears to the
aggregate Negative Excess of all such Partners.
(E) The series' share of Trading Capital Loss remaining after the
allocation described in Section 7(b)(4)(D) shall be allocated among all
Partners who hold Units in such series outstanding as of the end of the
applicable fiscal year (other than Units redeemed as of the end of the last
day of such fiscal year) equally among such Units.
(F) For purposes of this Section 7(b), "Capital Gain" or "Capital
Loss" shall mean gain or loss characterized as gain or loss from the sale
or exchange of a capital asset, by the Internal Revenue Code of 1986, as
amended (the "Code"), including, but not limited to, gain or loss required
to be taken into account pursuant to Sections 988 and 1256 thereof.
(G) The foregoing allocations shall be made separately in respect of
each series of Units as if each such series constituted a separate
partnership, irrespective of whether the same Partner owns Units of more
than one series. Without limiting the foregoing, Limited Partners who
redeem their Unit(s) in one series and invest in another shall be treated
no differently than Limited Partners making their initial investment in the
latter series.
(5) The allocation of profit and loss for federal income tax purposes
set forth herein is intended to allocate taxable profit and loss among Partners
generally in the ratio and to the extent that profit and loss are allocated to
such Partners so as to eliminate, to the extent possible, any disparity between
a Partner's capital account and his tax
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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 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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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.
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In addition to any specific contract or agreement described herein,
the Partnership, either directly through the Trading Partnership or together
with the Trading Partnership, may enter into any other contracts or agreements
specifically described in or contemplated by the Prospectus without any further
act, approval or vote of the Limited Partners, notwithstanding any other
provisions of this Limited Partnership Agreement, the Act or any applicable law,
rule or regulations.
(b) Fiduciary Duties. The General Partner shall be under a fiduciary
duty to conduct the affairs of the Partnership in the best interests of the
Partnership. The Limited Partners will under no circumstances be deemed to have
contracted away the fiduciary obligations owed them by the General Partner under
the common law. The General Partner's fiduciary duty includes, among other
things, the safekeeping of all Partnership funds and assets and the use thereof
for the benefit of the Partnership. The General Partner shall at all times act
with integrity and good faith and exercise due diligence in all activities
relating to the conduct of the business of the Partnership and in resolving
conflicts of interest. The Partnership's brokerage arrangements shall be non-
exclusive, and the brokerage commissions paid by the Partnership shall be
competitive. The Partnership shall seek the best price and services available
for its commodity transactions.
(c) Loans; Investments. The Partnership shall make no loans to any
party, and the funds of the Partnership will not be commingled with the funds of
any other person or entity (deposit of funds with a commodity broker, securities
dealer, clearinghouse or forward dealer or entering into joint ventures or
partnerships shall not be deemed to constitute "commingling" for these
purposes). The General Partner shall make no loans to the Partnership unless
approved by the Limited Partners in accordance with Section 17(a) of this
Limited Partnership Agreement. If the General Partner makes a loan to the
Partnership, the General Partner shall not receive interest in excess of its
interest costs, nor may the General Partner receive interest in excess of the
amounts which would be charged the Partnership (without reference to the General
Partner's financial resources or guarantees) by unrelated banks on comparable
loans for the same purpose. The General Partner shall not receive "points" or
other financing charges or fees regardless of the amount. The Partnership shall
not invest in any debt instruments other than Treasury securities, securities
issued by U.S. government agencies or instrumentalities, other CFTC-authorized
investments and foreign sovereign debt instruments acquired in connection with
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.
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The General Partner shall reimburse the Partnership for any advisory
or other fees (including Profit Shares) paid by the Partnership to any trading
advisor over the course of any fiscal year, to the extent that such fees exceed
the 6% annual management fees and the 15% quarterly incentive fees (calculating
New Trading Profit, as defined in the Prospectus, after all expenses and without
including interest income or any yield enhancement return) contemplated by the
NASAA Guidelines during such year. Any such reimbursement shall be made on a
present value basis, fully compensating the Partnership for having made payments
at any time during the year which would not otherwise have been due from it. The
General Partner shall disclose any such reimbursement in the next Annual Report
delivered to Limited Partners.
(g) Other Activities. The General Partner is engaged, and may in the
future engage, in other business activities and shall not be required to refrain
from any other activity nor forego any profits from any such activity, whether
or not in competition with the Partnership. Limited Partners may similarly
engage in any such other business activities. The General Partner shall devote
to the Partnership such time as the General Partner may deem advisable to
conduct the Partnership's business and affairs.
(h) Tax Matters Partner. The General Partner is hereby authorized to
perform all other duties imposed by Sections 6221 through 6232 of the Code on
the General Partner as the "tax matters partner" of the Partnership.
(i) The Trading Partnership. The General Partner shall not permit the
Partnership to undertake any debts or obligations other than as set forth
herein, including without limitation pursuant to Section 16(e). The General
Partner further covenants and agrees that as general partner of the Trading
Partnership, the General Partner will not permit the Trading Partnership (A) to
engage in any activities or incur any obligations except in respect of the
Trading Partnership's speculative futures and forward trading on behalf of the
Partnership or (B) to enter into any brokerage, F/X or other agreement or
undertaking, unless all other parties to such agreement explicitly acknowledge
and agree that (i) they will in no event seek to assert, other than pursuant to
and to the extent of the Partnership's undertaking set forth in Section 16(e),
that the Partnership or any of its assets is in any respects subject to any
debts of or claims against the Trading Partnership, either through "piercing the
corporate veil," "substantive consolidation" or any other theory, and (ii) they
will take no action and institute no action or proceeding seeking to adjudicate
the Trading Partnership a bankrupt or insolvent, or seeking liquidation, winding
up, reorganization, arrangement, adjustment, protection, relief, or composition
of it or its debts under any law relating to bankruptcy, insolvency or
reorganization or relief of debtors, or seeking the entry of an order for relief
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.
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(j) "Pyramiding" Prohibited. The Partnership is prohibited from
employing the trading technique commonly known as "pyramiding," and will not
permit the Trading Partnership to employ any such technique. A trading manager
or advisor of the Partnership taking into account the Partnership's open trade
equity on existing positions in determining generally whether to acquire
additional commodity positions on behalf of the Partnership will not be
considered to constitute "pyramiding."
9. Audits and Reports to Limited Partners.
The Partnership books shall be audited annually by an independent
certified public accountant. The Partnership will use its best efforts to cause
each Limited Partner to receive (i) within ninety (90), but in no event later
than one hundred twenty (120), days after the close of each fiscal year
certified financial statements of the Partnership for the fiscal year then
ended, (ii) within ninety (90) days of the end of each fiscal year (but in no
event later than March 15 of each year) such tax information relating to the
Partnership as is necessary for a Limited Partner to complete his federal income
tax return and (iii) such other annual and monthly information as the Commodity
Futures Trading Commission may by regulation require. The General Partner shall
include in the annual reports sent to Limited Partners an approximate estimate
(calculated as accurately as may be reasonably practicable) of the round-turn
equivalent brokerage commission rate paid by the Trading Partnership during the
preceding year. Limited Partners or their duly authorized representatives may
inspect the Partnership books and records for any purpose reasonably related to
such Limited Partner's interest as a limited partner in the Partnership during
normal business hours upon reasonable written notice to the General Partner.
Copies of such records may be made upon payment of reasonable reproduction costs
for any purpose reasonably related to such Limited Partner's interest as a
limited partner in the Partnership and, upon request, shall be sent to any
Limited Partner upon payment of reasonable reproduction and mailing costs.
The General Partner shall calculate the approximate Net Asset Value
per Unit of each series on a daily basis and furnish such information upon
request to any Limited Partner.
The General Partner will send written notice to each Limited Partner
within seven (7) days of any decline in the aggregate Net Asset Value
attributable to any series of Units held by such Limited Partner or in the Net
Asset Value per Unit of any such series to 50% or less of such Net Asset Value
as of the previous month-end. Any such notice shall contain a description of
Limited Partners' voting rights.
The General Partner shall maintain and preserve all Partnership
records for a period of not less than six (6) years.
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
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guarantee that the criteria of this paragraph is followed. The General Partner
may not rely solely on the rates charged by other major commodity pools to make
its determinations.
10. Assignability of Units.
Each Limited Partner expressly agrees that he will not assign,
transfer or dispose of, by gift or otherwise, any of his Units or all or any
part of his right, title and interest in the capital or profits of the
Partnership in violation of any applicable federal or state securities laws or
without giving written notice to the General Partner. No assignment, transfer or
disposition by an assignee of Units or of all or any part of his right, title
and interest in the capital or profits of the Partnership shall be effective
against the Partnership or the General Partner until the General Partner
receives written notice of the assignment; and the General Partner shall not be
required to give any assignee any rights hereunder prior to receipt of such
notice. The General Partner may, in its sole discretion, waive any such notice.
No such assignee, except with the consent of the General Partner, which consent
may be withheld in its sole and absolute discretion, may become a substituted
Limited Partner, nor will the estate or any beneficiary of a deceased Limited
Partner or assignee have any right to withdraw or receive assets from the
Partnership except by redemption as provided in Section 11 or upon dissolution
of the Partnership. Each Limited Partner agrees that with the consent of the
General Partner any assignee may become a substituted Limited Partner without
need of any further act or approval of any Limited Partner. If the General
Partner withholds consent, an assignee shall not become a substituted Limited
Partner, and shall not have any of the rights of a Limited Partner, except that
the assignee shall be entitled to receive that share of capital and profits and
shall have that right of redemption and those rights upon dissolution to which
his assignor would otherwise have been entitled. No assignment, transfer or
disposition of Units shall be effective against the Partnership or the General
Partner until the first day of the month succeeding the month in which the
General Partner receives notice of such assignment, transfer or
disposition.
11. Redemptions; Distributions.
A Limited Partner, the General Partner to the extent that it owns
Units or any assignee of Units of whom the General Partner has received written
notice as described above, may redeem all or any of his Units (a "redemption"),
effective as of the close of business (as determined by the General Partner) on
the last business day of any month, provided, that (i) all liabilities,
contingent or otherwise, of the Partnership (including the Partnership's
allocable share of the liabilities, contingent or otherwise, of any entities,
such as the Trading Partnership, in which the Partnership invests), except any
liability to Partners on account of their capital contributions, have been paid
or there remains property of the Partnership sufficient to pay them and (ii) the
General Partner shall have timely received a request for redemption.
If a Limited Partner redeems Units during or as of the end of a
calendar quarter, and subscribes as of the date of redemption to the new series
of Units to be issued immediately following such quarter, any otherwise
applicable 3% charge is waived to the extent that the redemption proceeds are so
reinvested. The Units acquired upon reinvestment are, however, subject to a 3%
redemption charge until the end of the twelfth full month after their
issuance.
Financial Consultants receive no initial production credits on new
Units purchased with the proceeds of Units redeemed during or as of the end of
the preceding quarter. However, the 2% ongoing production credits, described
above, will begin, to the extent that the redemption proceeds are reinvested, in
the thirteenth month after the sale of the Units redeemed, not in the thirteenth
month after reinvestment.
Units redeemed on or before the end of the twelfth full month after
they are issued are subject to redemption charges of 3% of the Net Asset Value
at which they are redeemed. Such charges shall be paid to the General Partner.
Redemption charges shall not apply to distributions.
A-12
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Requests for redemption must be received by the General Partner at
least ten (10) calendar days, or such lesser period as shall be acceptable to
the General Partner, in advance of the requested effective date of redemption.
Such requests need not be in writing so long as the Limited Partner has a
Merrill Lynch customer securities account. If a redeeming Limited Partner no
longer has a Merrill Lynch customer securities account, requests for redemption
must be submitted in writing and with the signature guaranteed (not notarized;
guaranteed) by a member firm of the National Association of Securities Dealers,
Inc.
The General Partner may waive any of the foregoing charges or
restrictions on redemptions in the General Partner's discretion, and may declare
additional redemption dates upon notice to the Limited Partners as well as to
those assignees of whom the General Partner has received notice as described
above.
Payment will be made within ten (10) business days after the month-end
of redemption, except that under special circumstances, including, but not
limited to, inability to liquidate commodity positions as of a redemption date
or default or delay in payments due the Trading Partnership or the Partnership
from commodity brokers, banks or other persons or entities, the Partnership may
in turn delay payment to Partners or assignees requesting redemption of their
Units of the proportionate part of the Net Asset Value of such Units equal to
the proportionate part of the Partnership's aggregate Net Asset Value allocable
to all series of Units being redeemed, and represented by the sums which are the
subject of such default or delay.
The General Partner may require a Limited Partner to redeem all or a
portion of such Partner's Units if the General Partner considers doing so to be
desirable for the protection of the Partnership, and will do so to the extent
the General Partner deems appropriate or necessary to prevent the Partnership or
any series of Units considered individually from being deemed to hold "plan
assets" within the meaning of the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or the Code, with respect to any "employee benefit
plan" as defined in and subject to ERISA or with respect to any "plan" as
defined in Section 4975 of the Code.
The General Partner may, in its discretion, establish "Special
Redemption Dates" in respect of one or more series of Units as a means of
implementing "stop loss" or similar policies. "Special Redemption Dates" may
require the suspension of all trading and the liquidation of all open positions
held with respect to such series.
The General Partner may -- but shall be under no obligation whatsoever
(and does not presently intend) to -- make any distributions in respect of the
Units. Any such distributions would be made pro rata to all outstanding series
of Units and would not reduce the $100 minimum Net Asset Value per Unit
guaranteed to investors as of the Principal Assurance Date for their series of
Units, as described in the Prospectus.
12. Offering of Units.
The General Partner on behalf of the Partnership shall (i) cause to be
filed such Prospectus Supplements and amended Registration Statements as the
General Partner may deem advisable, with the Securities and Exchange Commission
for the registration and public offering of Units, (ii) use its best efforts to
maintain the qualification of the Units for sale under the securities laws of
such States of the United States or other jurisdictions as the General Partner
shall deem 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.
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<PAGE>
13. Additional Offerings.
The General Partner may, in its discretion, continue the ongoing
offering of Units contemplated by the Prospectus as well as make additional
public or private offerings of Units, provided that doing so does not dilute
existing Limited Partners' economic interest in the Partnership. No Limited
Partner shall have any preemptive, preferential or other rights with respect to
the issuance or sale of any additional Units, other than as set forth in the
preceding sentence.
The General Partner intends to offer series of Units for sale as of
the beginning of each calendar quarter, subject to the minimum investment and
minimum capitalization requirements set forth in the Prospectus; provided that,
unless otherwise expressly required by law, the assets attributable to each such
series shall under no circumstances be subject to being used in any respect to
satisfy or discharge any debt or obligation of any other such series.
The General Partner may terminate (subject to the General Partner's
discretion to reopen) but not suspend the offering of Units.
Each additional series of Units issued hereunder must comply with the
NASAA Guidelines in the same manner and to the same extent as the initial series
of Units issued hereunder.
14. Special Power of Attorney.
Each Limited Partner by his execution of this Limited Partnership
Agreement does hereby irrevocably constitute and appoint the General Partner and
each officer of the General Partner, with power of substitution, as his true and
lawful attorney-in-fact, in his name, place and stead, to execute, acknowledge,
swear to (and deliver as may be appropriate) on his behalf and file and record
in the appropriate public offices and publish (as may in the reasonable judgment
of the General Partner be required by law): (i) this Limited Partnership
Agreement, including any amendments and/or restatements hereto duly adopted as
provided herein; (ii) certificates of limited partnership in various
jurisdictions, and amendments and/or restatements thereto, and of assumed name
or of doing business under a fictitious name with respect to the Partnership;
(iii) all conveyances and other instruments which the General Partner deems
appropriate to qualify or continue the Partnership in the State of Delaware and
the jurisdictions in which the Partnership may conduct business, or which may be
required to be filed by the Partnership or the Partners under the laws of any
jurisdiction or under any amendments or successor statutes to the Act, to
reflect the dissolution or termination of the Partnership or the Partnership
being governed by any amendments or successor statutes to the Act or to
reorganize or refile the Partnership in a different jurisdiction; and (iv) to
file, prosecute, defend, settle or compromise litigation, claims or arbitrations
on behalf of the Partnership. The Power of Attorney granted herein shall be
irrevocable, deemed to be a power coupled with an interest (including, without
limitation, the interest of the other Partners in the General Partner being able
to rely on the General Partner's authority to act as contemplated by this
Section 14) and shall survive and shall not be affected by the subsequent
incapacity, disability or death of a Limited Partner.
15. Withdrawal of a Partner.
The Partnership shall be dissolved upon the withdrawal, dissolution,
admitted or court-decreed insolvency or removal of the General Partner, or any
other event that causes the General Partner to cease to be a general partner
under the Act, unless the Partnership is continued pursuant to the terms of
Section 4. In addition, the General Partner may withdraw from the Partnership,
without any breach of this Limited Partnership Agreement, at any time upon one
hundred and twenty (120) days' written notice by first class mail, postage
prepaid, to each Limited Partner and assignee of whom 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.
A-14
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The General Partner may not assign its general partner interest or its
obligation to direct the management or trading of the Partnership's or the
Trading Partnership's assets without the consent of each Limited Partner. The
General Partner will notify all Limited Partners of any change in the principals
of the General Partner.
The death, incompetency, withdrawal, insolvency or dissolution of a
Limited Partner or any other event that causes a Limited Partner to cease to be
a limited partner of the Partnership shall not terminate or dissolve the
Partnership, and a Limited Partner, his estate, custodian or personal
representative shall have no right to redeem, receive proceeds from or value
such Limited Partner's interest in the Partnership except as provided in Section
11 hereof and upon dissolution of the Partnership. Each Limited Partner
expressly agrees that in the event of his death, he waives on behalf of himself
and his estate, and directs the legal representatives of his estate and any
person interested therein to waive, the furnishing of any inventory, accounting
or appraisal of the assets of the Partnership and any right to an audit or
examination of the books of the Partnership. Nothing in this Section 15 shall,
however, waive any right given elsewhere in this Limited Partnership Agreement
for a Limited Partner to be informed of the Net Asset Value of his Units, to
receive periodic reports, audited financial statements and other information
from the General Partner or the Partnership or to redeem or transfer Units.
16. Standard of Liability; Indemnification.
(a) Standard of Liability for the General Partner. The General
Partner and its Affiliates, as defined below, shall have no liability to the
Partnership or to any Partner for any loss suffered by the Partnership which
arises out of any action or inaction of the General Partner or its Affiliates if
the General Partner or such Affiliates, in good faith, determined that such
course of conduct was in the best interests of the Partnership, and such course
of conduct did not constitute negligence or misconduct by the General Partner or
its Affiliates.
(b) Indemnification of the General Partner by the Partnership. To the
fullest extent permitted by law, subject to this Section 16, the General Partner
and its Affiliates, shall be indemnified by the Partnership against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by them in connection with the Partnership; provided that such claims
were not the result of negligence or misconduct on the part of the General
Partner or its Affiliates, and the General Partner or such Affiliates, in good
faith, determined that such conduct was in the best interests of the
Partnership; and provided further that Affiliates of the General Partner shall
be entitled to indemnification only for losses incurred by such Affiliates in
performing the duties of the General Partner and acting wholly within the scope
of the authority of the General Partner.
Notwithstanding anything to the contrary contained in the preceding
two paragraphs, the General Partner and its Affiliates and any persons acting as
selling agent for the Units shall not be indemnified for any losses, liabilities
or expenses arising from or out of an alleged violation of federal or state
securities laws unless (1) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to the
particular indemnitee and the court approves indemnification of the litigation
costs, or (2) such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular indemnitee and the court
approves indemnification of the litigation costs, or (3) a court of competent
jurisdiction approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs should be
made.
In any claim for indemnification for federal or state securities law
violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission, the Massachusetts Securities
Division, the Pennsylvania Securities Commission, the Tennessee Securities
Division, the Texas Securities Board, and any other state or applicable
regulatory authority with respect to the issue of indemnification for securities
law violations.
The Partnership shall not incur the cost of that portion of any
insurance which insures any party against any liability the indemnification of
which is herein prohibited.
A-15
<PAGE>
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
A-16
<PAGE>
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
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
A-17
<PAGE>
of each such series must be obtained for approval, except that in the case of
clause (i) above, the approval of a series of Units need not be obtained if such
series is not adversely affected by the proposed amendment to this Limited
Partnership Agreement.
(c) Meetings; Other. Any Limited Partner, upon written request
addressed to the General Partner, shall be entitled to obtain from the General
Partner, upon payment, in advance, of reasonable reproduction and mailing costs,
a list of the names and addresses of record of all Limited Partners and the
number of Units of each series held by each (which shall be mailed by the
General Partner to the Limited Partner within ten (10) days of the receipt of
the request). Upon receipt of a written proposal, signed by Limited Partners
owning Units representing at least ten percent (10%) of the aggregate number of
Units then owned by Limited Partners of any series, that a meeting of the
Partnership (or of any or all series of Units) be called to vote upon any matter
upon which the Limited Partners may vote pursuant to this Limited Partnership
Agreement, the General Partner shall, by written notice to each Limited Partner
of record mailed within fifteen (15) days after such receipt, call a meeting of
the Partnership (or of such series of Units). Such meeting shall be held at
least thirty (30) but not more than sixty (60) days after the mailing of such
notice, and such notice shall specify the date of, a reasonable place and time
for, and the purpose of such meeting.
The General Partner may not restrict the voting rights of Limited
Partners except as set forth herein.
In the event that the General Partner or the Limited Partners vote to
amend this Limited Partnership Agreement in any material respect, the amendment
will not become effective prior to all Limited Partners having an opportunity to
redeem their Units.
18. Governing Law.
THE VALIDITY AND CONSTRUCTION OF THIS LIMITED PARTNERSHIP AGREEMENT
SHALL BE DETERMINED AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, INCLUDING
SPECIFICALLY THE ACT (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW);
PROVIDED, HOWEVER, CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR STATE
SECURITIES LAW SHALL NOT BE GOVERNED BY THIS SECTION 18.
19. Miscellaneous.
(a) Compliance with the Investment Advisers Act of 1940. No provision
of this Limited Partnership Agreement shall be deemed, nor does any such
provision purport, to waive compliance with the Investment Advisers Act of 1940,
as amended.
(b) Notices. All notices under this Limited Partnership Agreement
shall be in writing and shall be effective upon personal delivery, or if sent by
first class mail, postage prepaid, addressed to the last known address of the
party to whom such notice is to be given, upon the deposit of such notice in the
United States mails.
(c) Binding Effect. This Limited Partnership Agreement shall inure to
and be binding upon all of the parties, their successors and assigns,
custodians, estates, heirs and personal representatives. For purposes of
determining the rights of any Partner or assignee hereunder, the Partnership and
the General Partner may rely upon the Partnership records as to who are Partners
and assignees, and all Partners and assignees agree that their rights shall be
determined and they shall be bound thereby.
(d) Captions. Captions in no way define, limit, extend or describe
the scope of this Limited Partnership Agreement nor the effect of any of its
provisions. Any reference to "persons" in this Limited Partnership Agreement
shall also be deemed to include entities, unless the context otherwise requires.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Limited
Partnership Agreement as of the day and year first above written.
GENERAL PARTNER: LIMITED PARTNERS:
MERRILL LYNCH INVESTMENT PARTNERS INC. All Limited Partners now and hereafter
admitted as limited partners of the
Partnership pursuant to Powers of
Attorney now or hereafter executed in
favor of, and delivered
By /s/ John R. Frawley, Jr. to, the General Partner.
------------------------------------
John R. Frawley, Jr.
President and Chief Executive
Officer
MERRILL LYNCH INVESTMENT PARTNERS INC.
By /s/ John R. Frawley, Jr.
-----------------------------------
John R. Frawley, Jr.
President and Chief Executive
Officer
A-19
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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, 2001 and as of each calendar
quarter-end thereafter (the "Principal Assurance Dates") (subject to adjustment
by up to one month in the discretion of MERRILL LYNCH INVESTMENT PARTNERS INC.
("MLIP")), sufficient payments to the Partnership so that the Net Asset Value
per Unit of each series of Units, as of the Principal Assurance Date for such
series, which is available for 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.
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<PAGE>
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.
IN WITNESS WHEREOF, this Guarantee Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
MERRILL LYNCH & CO., INC.
By:________________________________________
Title:_____________________________________
ML PRINCIPAL PROTECTION L.P.
By: Merrill Lynch Investment Partners Inc.
(General Partner)
By:________________________________________
Title:_____________________________________
B-2
<PAGE>
EXHIBIT C
ML PRINCIPAL PROTECTION L.P.
____________________
SUBSCRIPTION REQUIREMENTS
By executing a Subscription Agreement and Power of Attorney Signature
Page for Limited Partnership Units ("Units") of ML PRINCIPAL PROTECTION L.P.
(the "Fund"), each purchaser ("Purchaser") of Units irrevocably subscribes for
Units at the price of $100 per Unit ($97 per Unit in the case of officers and
employees of Merrill Lynch & Co., Inc. and its affiliates) as described in the
Fund's Prospectus dated August __, 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.
SR-1
<PAGE>
(b) All information that Purchaser has heretofore furnished to MLIP
or that is set forth in the Subscription Agreement and Power of Attorney
submitted by Purchaser is correct and complete as of the date of such
Subscription Agreement and Power of Attorney, and if there should be any
change in such information prior to acceptance of Purchaser's subscription,
Purchaser will immediately furnish such revised or corrected information to
MLIP.
(c) Unless (d) below is applicable, Purchaser's subscription is made
with Purchaser's funds for Purchaser's own account and not as trustee,
custodian or nominee for another.
(d) The subscription, if made as custodian for a minor, is a gift
Purchaser has made to such minor and is not made with such minor's funds
or, if not a gift, the representations as to net worth and annual income
set forth below apply only to such minor.
(e) If Purchaser is subscribing in a representative capacity,
Purchaser has full power and authority to purchase the Units and enter into
and be bound by the Subscription Agreement and Power of Attorney on behalf
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 Manage ment, 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.
SR-2
<PAGE>
Investor Suitability
PURCHASER UNDERSTANDS THAT THE PURCHASE OF UNITS MAY BE MADE ONLY BY
PERSONS WHO, AT A MINIMUM, HAVE (I) A NET WORTH OF AT LEAST $150,000 (EXCLUSIVE
OF HOME, FURNISHINGS AND AUTOMOBILES) OR (II) AN ANNUAL GROSS INCOME OF AT LEAST
$45,000 AND A NET WORTH OF AT LEAST $45,000 (EXCLUSIVE OF HOME, FURNISHINGS AND
AUTOMOBILES). RESIDENTS OF THE FOLLOWING STATES MUST MEET THE REQUIREMENTS SET
FORTH BELOW ("NET WORTH" FOR SUCH PURPOSES IS IN ALL CASES IS CALCULATED
EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES). IN ADDITION, PURCHASER MAY NOT
INVEST MORE THAN 10% OF PURCHASER'S READILY MARKETABLE ASSETS IN THE FUND.
1. Arizona -- Net worth of at least $225,000 or a net worth of at
least $60,000 and an annual income of at least $60,000.
2. California -- Net worth of at least $100,000 and an annual income
of at least $50,000.
3. Indiana -- Net worth of at least $250,000 or a net worth of at
least $100,000 and an annual income of at least $100,000.
4. Iowa -- Net worth of at least $225,000 or a net worth of at least
$60,000 and an annual taxable income of at least $60,000.
5. Maine -- Minimum subscription per investment, both initial and
additional, of $5,000; net worth of at least $200,000 or a net worth of at least
$50,000 and an annual income of at least $50,000. ALL MAINE RESIDENTS, INCLUDING
EXISTING LIMITED PARTNERS IN THE FUND SUBSCRIBING FOR ADDITIONAL UNITS, MUST
EXECUTE A SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE. MAINE
RESIDENTS MUST SIGN A SUBSCRIPTION AGREEMENT AND 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.
SR-3
<PAGE>
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-4
<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 AUGUST __, 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.
SA-(i)
<PAGE>
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.
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
of the offering of the Units are described in the Prospectus of the Fund dated
August, 1996, together with the accompany Prospectus Supplement (collectively,
the "Prospectus"). Units are offered as of the beginning of each calender
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.
SA-1
<PAGE>
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 calender days. I understand that by submitting this
Subscription Agreement and Power of Attorney I am making the representations and
warranties set forth in Exhibit C -- Subscription Requirements in the
Prospectus, including, without limitation, those representations and warranties
relating to my net worth (exclusive of home, furnishings and automobiles),
annual income and readily marketable assets.
3. Power of Attorney. In connection with my subscription for
Units, I do hereby irrevocably constitute and appoint MLIP, and its successors
and assigns, as my true and lawful Attorney-in-Fact, with full power of
substitution, in my name, place and stead, to (i) file, prosecute, defend,
settle or compromise litigation, claims or arbitrations on behalf 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 therof.
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 agreement 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>
[Speciman]
<TABLE>
<C> <S>
1 Financial Consultant [_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_][_]
Name First M.I. Last Sub. Order Ref. #
Financial Consultant
Phone Number [_][_][_] - [_][_][_] - [_][_][_][_] Financial Consultant Number [_][_][_][_] Branch Wire Code [_][_][_]
</TABLE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE
PLEASE PRINT OR TYPE. USE BLACK INK ONLY AND ONLY ONE CHARACTER PER BOX.
The investor named below, by execution and delivery of this Signature Page,
by payment of the purchase price for Limited Partnership Units in ML
Principal Protection L.P. and by authorizing Merrill Lynch, Pierce, Fenner &
Smith Incorporated to debit investor's customer securities account in the
amount set forth below, hereby subscribes for the purchase of Units at a
purchase price of $100 per Unit or $97 per Unit for officers and employees of
Merrill Lynch & Co., Inc. and its affiliates.
The named investor acknowledges receipt of the Prospectus of the Fund dated
, 1996, and the accompanying Prospectus Supplement as well as summary
financial information current within 60 calendar days, including the Third
Amended and Restated Limited Partnership Agreement, the Subscription
Requirements and the Subscription Agreement and Power of Attorney set forth
therein, the terms of which govern the investment in the Units being
subscribed for hereby.
If the subscriber is a participant in a Merrill Lynch sponsored IRA,
Basic(TM) or SEP account and is purchasing Units for such an account, the
subscriber hereby acknowledges that:
1. An amount at least equal to the purchase price for the Units is in an
IRA, Basic(TM) or SEP account at Merrill Lynch, Pierce, Fenner & Smith
Incorporated;
2. The minimum value of all securities and funds in such IRA, Basic(TM) or
SEP account is $10,000;
3. The minimum subscription is 50 Units and the amount of this subscription
is no more than 50% of the value of the IRA, Basic(TM) or SEP account on
the subscription date; and
4. Each separate IRA, Basic(TM) or SEP account of the subscriber seeking to
purchase Units meets the above eligibility requirements.
<TABLE>
<S> <C> <C>
2[_][_][_][_][_][_][_][_] 3[_][_][_][_][_][_][_][_][_][_] 4[_][_][_] - [_][_][_][_][_]
Number of Units (minimum 50 Units; Total $ Amount (No. of Units X Merrill Lynch Account #
10 Units for existing Limited Partners $100; $97 for Merrill Lynch officers
subscribing for additional Units) and employees)
5 [_][_][_] - [_][_] - [_][_][_][_] [_][_] - [_][_][_][_][_][_][_]
Social Security Number or Taxpayer ID Number
Limited Partner Name
6[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Joint Partner Name
7[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Partnership, Corporate or Trust Limited Partner Name
8 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Partner, Officer, Trustee, Beneficiary, Power of Attorney or Custodian under UGMA/UTMA
9 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Additional Information
10 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Residence Address of Limited Partner (P.O. Box Numbers are Not Acceptable For Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_] [_][_][_][_][_][_][_][_][_][_]
Bldg. No. City State Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
Mailing Address of Limited Partner (If Other Than Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
[_]
Check box if Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is custodian.
Name of Custodian, if Not Merrill Lynch
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Mailing Address of Custodian, Other Than Merrill Lynch
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
</TABLE>
SA-3
<PAGE>
[Specimen]
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED)
- --------------------------------------------------------------------------------
11 FOR USE BY INVESTOR
X X
-------------------------------- -----------------------------------
Signature of Investor Date Signature of Joint Date
Investor (if any)
( ) - Subscription for the series of
-------------------------------- Units to be sold as of
Telephone Number of Investor
[insert date]
----------------------
EXECUTING AND DELIVERING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGE SHALL IN NO RESPECT BE DEEMED TO CONSTITUTE A WAIVER OF ANY
RIGHTS UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES EXCHANGE
ACT OF 1934. I ACKNOWLEDGE THAT I HAVE RECEIVED, IN ADDITION TO THE
PROSPECTUS DATED , 1996, THE PROSPECTUS SUPPLEMENT AND SUMMARY
FINANCIAL INFORMATION RELATING TO THE FUND CURRENT WITHIN 60 CALENDAR DAYS.
I have checked the following box if I am subject to backup withholding
under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code:
[_]. Under the penalties of perjury, by signature above I hereby certify
that the Social Security Number or Taxpayer ID Number shown on the front of
this Subscription Agreement and Power of Attorney Signature Page next to my
name is my true, correct and complete Social Security Number or Taxpayer ID
Number and that the information given in the immediately preceding sentence
is true, correct and complete.
12 FINANCIAL CONSULTANT MUST SIGN
I have reasonable grounds to believe, based on information obtained from
the investor concerning his/her investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the Fund is suitable for such investor in light of his/her
financial position, net worth and other suitability characteristics. I have
also informed the investor of the unlikelihood of a public trading market
developing for the Units.
The Financial Consultant MUST sign below in order to substantiate
compliance with Appendix F to Article 3, Section 34 of the NASD's Rules of
Fair Practice.
X
--------------------------------------------------------------------------
Financial Consultant Signature Date
Office Manager approval of Merrill Lynch sponsored retirement account
purchases.
X
--------------------------------------------------------------------------
Office Manager Signature Date
- --------------------------------------------------------------------------------
FOR OFFICE DATE RECEIVED COUNTRY CODE ADDITIONAL ORDER CONTROL NUMBER
USE ONLY [_][_][_][_][_][_] [_][_] [_] [_][_][_][_][_]
SA-4
<PAGE>
<TABLE>
<C> <S>
EXECUTION COPY
1 Financial Consultant [_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_][_]
Name First M.I. Last Sub. Order Ref. #
Financial Consultant
Phone Number [_][_][_] - [_][_][_] - [_][_][_][_] Financial Consultant Number [_][_][_][_] Branch Wire Code [_][_][_]
</TABLE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE
PLEASE PRINT OR TYPE. USE BLACK INK ONLY AND ONLY ONE CHARACTER PER BOX.
The investor named below, by execution and delivery of this Signature Page,
by payment of the purchase price for Limited Partnership Units in ML
Principal Protection L.P. and by authorizing Merrill Lynch, Pierce, Fenner &
Smith Incorporated to debit investor's customer securities account in the
amount set forth below, hereby subscribes for the purchase of Units at a
purchase price of $100 per Unit or $97 per Unit for officers and employees of
Merrill Lynch & Co., Inc. and its affiliates.
The named investor acknowledges receipt of the Prospectus of the Fund dated
, 1996, and the accompanying Prospectus Supplement as well as summary
financial information current within 60 calendar days, including the Third
Amended and Restated Limited Partnership Agreement, the Subscription
Requirements and the Subscription Agreement and Power of Attorney set forth
therein, the terms of which govern the investment in the Units being
subscribed for hereby.
If the subscriber is a participant in a Merrill Lynch sponsored IRA,
Basic(TM) or SEP account and is purchasing Units for such an account, the
subscriber hereby acknowledges that:
1. An amount at least equal to the purchase price for the Units is in an
IRA, Basic(TM) or SEP account at Merrill Lynch, Pierce, Fenner & Smith
Incorporated;
2. The minimum value of all securities and funds in such IRA, Basic(TM) or
SEP account is $10,000;
3. The minimum subscription is 50 Units and the amount of this subscription
is no more than 50% of the value of the IRA, Basic(TM) or SEP account on
the subscription date; and
4. Each separate IRA, Basic(TM) or SEP account of the subscriber seeking to
purchase Units meets the above eligibility requirements.
<TABLE>
<S> <C> <C>
2[_][_][_][_][_][_][_][_] 3[_][_][_][_][_][_][_][_][_][_] 4[_][_][_] - [_][_][_][_][_]
Number of Units (minimum 50 Units; Total $ Amount (No. of Units X Merrill Lynch Account #
10 Units for existing Limited Partners $100; $97 for Merrill Lynch officers
subscribing for additional Units) and employees)
5 [_][_][_] - [_][_] - [_][_][_][_] [_][_] - [_][_][_][_][_][_][_]
Social Security Number or Taxpayer ID Number
Limited Partner Name
6[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Joint Partner Name
7[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Partnership, Corporate or Trust Limited Partner Name
8 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Partner, Officer, Trustee, Beneficiary, Power of Attorney or Custodian under UGMA/UTMA
9 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Additional Information
10 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Residence Address of Limited Partner (P.O. Box Numbers are Not Acceptable For Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_] [_][_][_][_][_][_][_][_][_][_]
Bldg. No. City State Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
Mailing Address of Limited Partner (If Other Than Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
[_]
Check box if Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is custodian.
Name of Custodian, if Not Merrill Lynch
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Mailing Address of Custodian, Other Than Merrill Lynch
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
</TABLE>
SA-5
<PAGE>
EXECUTION COPY
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED)
- --------------------------------------------------------------------------------
11 FOR USE BY INVESTOR
X X
-------------------------------- -----------------------------------
Signature of Investor Date Signature of Joint Date
Investor (if any)
( ) - Subscription for the series of
-------------------------------- Units to be sold as of
Telephone Number of Investor
[insert date]
----------------------
EXECUTING AND DELIVERING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGE SHALL IN NO RESPECT BE DEEMED TO CONSTITUTE A WAIVER OF ANY
RIGHTS UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES EXCHANGE
ACT OF 1934. I ACKNOWLEDGE THAT I HAVE RECEIVED, IN ADDITION TO THE
PROSPECTUS DATED , 1996, THE PROSPECTUS SUPPLEMENT AND SUMMARY
FINANCIAL INFORMATION RELATING TO THE FUND CURRENT WITHIN 60 CALENDAR DAYS.
I have checked the following box if I am subject to backup withholding
under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code:
[_]. Under the penalties of perjury, by signature above I hereby certify
that the Social Security Number or Taxpayer ID Number shown on the front of
this Subscription Agreement and Power of Attorney Signature Page next to my
name is my true, correct and complete Social Security Number or Taxpayer ID
Number and that the information given in the immediately preceding sentence
is true, correct and complete.
12 FINANCIAL CONSULTANT MUST SIGN
I have reasonable grounds to believe, based on information obtained from
the investor concerning his/her investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the Fund is suitable for such investor in light of his/her
financial position, net worth and other suitability characteristics. I have
also informed the investor of the unlikelihood of a public trading market
developing for the Units.
The Financial Consultant MUST sign below in order to substantiate
compliance with Appendix F to Article 3, Section 34 of the NASD's Rules of
Fair Practice.
X
--------------------------------------------------------------------------
Financial Consultant Signature Date
Office Manager approval of Merrill Lynch sponsored retirement account
purchases.
X
--------------------------------------------------------------------------
Office Manager Signature Date
- --------------------------------------------------------------------------------
FOR OFFICE DATE RECEIVED COUNTRY CODE ADDITIONAL ORDER CONTROL NUMBER
USE ONLY [_][_][_][_][_][_] [_][_] [_] [_][_][_][_][_]
SA-6
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
MLIP advanced all initial organization and offering costs (for a
total of $239,100), as described in the Prospectus, for which it is being
reimbursed by the Registrant in 36 equal monthly installments. MLIP will pay
the costs associated with this updating of the Prospectus and this Amendment
No. 1 to the Registration Statement. The following is an estimate of such
costs:
<TABLE>
<CAPTION>
Approximate
Amount
-----------
<S> <C>
Securities and Exchange Commission Registration Fee.......... $ 8,621*
National Association of Securities Dealers, Inc. Filing Fee.. 3,000*
Printing Expenses............................................ 125,000
Fees of Certified Public Accountants......................... 50,000
Blue Sky Expenses (Excluding Legal Fees)..................... 10,000
Fees of Counsel.............................................. 100,000
Escrow Fees.................................................. 20,000
Miscellaneous Offering Costs................................. 33,379
--------
Total....................................................... $350,000
========
</TABLE>
--------------------------
*Fees marked with an asterisk are exact.
____________________
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 16 of the Third Amended and Restated Limited Partnership
Agreement (attached as Exhibit A to the Prospectus which forms a part of this
Registration Statement) provides for the indemnification of the General
Partner, certain of its affiliates and certain of its directors, officers and
controlling persons by the Registrant in certain circumstances for any loss
suffered by the Registrant which arises out of any action or inaction, if the
party, in good faith, determined that such course of conduct was in the best
interest of the Registrant and such conduct did not constitute negligence or
misconduct.
In the Selling Agreement, each Trading Advisor has agreed to
indemnify each person who controls MLIP within the meaning of Section 15 of
the Securities Act of 1933 and each person who signed this Registration
Statement or is a director of MLIP against losses, claims, damages,
liabilities or expenses arising out of or based upon any untrue statement or
omission or alleged untrue statement or omission relating or with respect to
such Trading Advisor or any principal of such Trading Advisor or their
operations, trading systems, methods or performance, which was made in this
Registration Statement, the Prospectus included in this Registration Statement
when declared effective, or in any amendment or supplement thereto and
furnished by or approved by such Trading Advisor for inclusion therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents (unless otherwise indicated) are filed
herewith and made a part of this Registration Statement:
(a) Exhibits.
The following exhibits are filed herewith.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
1.01 Form of Selling Agreement among the Partnership,
(Amended) the Trading Partnership, the General Partner,
Merrill Lynch Futures, the Selling Agent and the
Trading Advisors.
1.02 Form of Amendment to the Selling Agreement among
the Partnership, the Trading Partnership, the
General Partner, Merrill Lynch Futures, the
Selling Agent and each additional Trading
Advisor.
3.02(ii) Third Amended and Restated Limited Partnership
(Amended) Agreement of the Partnership (included as Exhibit
A to the Prospectus).
5.01 Opinion of Sidley & Austin relating to the
legality of the Units.
8.01 Opinion of Sidley & Austin with respect to
federal income tax consequences.
23.04 Consent of Sidley & Austin.
23.05 Consent of Deloitte & Touche.
27.01 Financial Data Schedule.
</TABLE>
THE FOLLOWING EXHIBITS ARE INCORPORATED BY REFERENCE HEREIN FROM THE
EXHIBITS OF THE SAME DESCRIPTION AND NUMBER FILED WITH REGISTRANT'S REGISTRATION
STATEMENT ON FORM S-1, AS FILED WITH THE COMMISSION ON JULY 3, 1996 (REG. NO.
333-7593) WHICH ALSO CONSTITUTED POST-EFFECTIVE AMENDMENT NO. 5 TO REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-1 (REG. NO. 33-73914).
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
[S] [C]
3.01(i) Amended and Restated Certificate of Limited
Partnership of the Partnership.
3.02(i) Amended and Restated Certificate of Limited
Partnership of the Trading Partnership.
3.03(ii) Second Amended and Restated Limited Partnership
Agreement of the Trading Partnership.
5.01(a) Opinion of Sidley & Austin relating to the
legality of the Units.
5.01(b) Opinion of Richards, Layton & Finger relating to
the legality of the Units.
S-2
<PAGE>
8.01 Opinion of Sidley & Austin with respect to
federal income tax consequences.
10.01 Form of Advisory Agreement among the Partnership,
Trading Partnership, the General Partner and each
Trading Advisor.
10.02 Form of Consulting Agreement between Merrill
Lynch Futures and each Trading Advisor.
10.03 Form of Customer Agreement between the Trading
Partnership and Merrill Lynch Futures.
10.04 Form of Escrow Agreement among the Partnership,
the Escrow Agent, the Selling Agent and the
General Partner.
10.05 Merrill Lynch & Co., Inc. Guarantee Agreement
(included as Exhibit B to the Prospectus).
10.06 Form of Subscription Agreement and Power of
Attorney (included as Exhibit D to the
Prospectus).
10.07 Foreign Exchange Desk Service Agreement with
Amendment adding the Trading Partnership as a
party thereto.
10.08 Investment Advisory Contract among Merrill Lynch
Futures, the Partnership, the Trading Partnership
and MLAM.
10.09(a) Note from Merrill Lynch Futures Inc. to the
Trading Partnership.
10.09(b) Note from Merrill Lynch, Pierce, Fenner & Smith
Incorporated to the Partnership.
10.10 Minimum Net Asset Value per Unit undertaking of
the General Partner.
10.11 Form of Custody Agreement between Merrill Lynch,
Pierce, Fenner & Smith Incorporated and the
Partnership.
23.01 Consent of Sidley & Austin.
23.03 Consent of Richards, Layton & Finger (included in
exhibit 5.01(b)).
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Post-Effective
Amendment No. 4 to the Registrant's Registration Statement on Form S-1, as
filed with the Commission on April 4, 1996 (Reg. No. 33-73914).
Exhibit
Number Description of Document
------- -----------------------
23.12 Consent of Deloitte & Touche LLP.
_________________________
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.
S-3
<PAGE>
Exhibit
Number Description of Document
------- -----------------------
1.01 Amendment No. 4 to the Selling Agreement among
the Partnership, the Trading Partnership, the
General Partner, Merrill Lynch Futures, the
Selling Agent and AIB Investment Managers
Limited.
3.05(ii) Second Amended and Restated Limited Partnership
(Amended) Agreement of the Partnership (included as Exhibit
A to the Prospectus).
10.12 Subscription Agreement and Power of Attorney
(Amended) (included as Exhibit D to the Prospectus).
23.11 Consent of Deloitte & Touche LLP.
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Amendment No. 3 (Second
Post-Effective) to the Registrant's Registration Statement on Form S-1, as
filed with the Commission on December 8, 1995:
Exhibit
Number Description of Document
------- -----------------------
1.01 Amendment No. 2 to the Selling Agreement among
the Partnership, the Trading Partnership, the
General Partner, Merrill Lynch Futures, the
Selling Agent, and the Advisors amending certain
provisions thereof; and
Amendment No. 3 to the Selling Agreement among
the Partnership, the Trading Partnership, the
General Partner, Merrill Lynch Futures, the
Selling Agent, and Millburn Ridgefield
Corporation.
1.02 Form of Assignment of Selling Agreement.
3.03(i) Amended and Restated Certificate of Limited
Partnership of the Partnership.
3.04(i) Amended and Restated Certificate of Limited
Partnership of the Trading Partnership.
3.06(ii) Amendment to the Limited Partnership Agreement of
the Trading Partnership.
5.01(a) Opinion of Sidley & Austin relating to the
legality of the Units.
5.01(b) Opinion of Richards, Layton & Finger relating to
the legality of the Units.
8.01 Opinion of Sidley & Austin with respect to
federal income tax consequences.
10.10 Form of Assignment of Advisory Agreement.
10.11 Form of Assignment of Consulting Agreement.
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)).
S-4
<PAGE>
The following exhibits are incorporated by reference herein
from the exhibits of the same description and number filed with Amendment No.
2 (First Post-Effective) to the Registrant's Registration Statement on Form S-
1, as filed with the commission on March 24, 1995 and which became effective
on April 20, 1995:
1.01 Amendment No. 1 to the Selling Agreement among
the Partnership, the Trading Partnership, the
General Partner, Merrill Lynch Futures, the
Selling Agent, Emcor Eurocurrency Management
Corporation and Trendstat Capital Management,
Inc.
10.09 Custody Agreement among the Partnership and
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.
The following exhibits are incorporated by reference herein
from the exhibits of the same description and number filed with Amendment No.
1 to the Registrant's Registration Statement on Form S-1, as filed with the
Commission on June 14, 1994 and which became effective on July 14, 1994:
Exhibit
Number Description of Document
------- -----------------------
1.01 Selling Agreement among the Partnership, the
(Amended) Trading Partnership, the General Partner, Merrill
Lynch Futures, the Selling Agent and the Trading
Advisors.
3.03(ii) Limited Partnership Agreement of the Trading
Partnership dated May 26, 1994.
3.04(ii) Form of Amended and Restated Limited Partnership
Agreement of the Trading Partnership.
10.01 Form of Advisory Agreement among the Partnership,
(Amended) the Trading Partnership, MLFIP and each Trading
Advisor.
10.02 Form of Consulting Agreement between Merrill
(Amended) Lynch Futures and each Trading Advisor.
10.03 Form of Customer Agreement between the Trading
(Amended) Partnership and Merrill Lynch Futures.
10.04 Form of Escrow Agreement among the Partnership,
(Amended) the Escrow Agent, the Selling Agent and MLFIP.
10.05 Merrill Lynch & Co., Inc. Guarantee Agreement
(Amended) (included as Exhibit B to the Prospectus).
10.07 Foreign Exchange Desk Service Agreement with
(Amended) Amendment adding the Trading Partnership as a
party thereto.
10.08 Investment Advisory Contract among Merrill Lynch
Futures, the Partnership, the Trading Partnership
and MLAM.
(b) Financial Statement Schedules.
No Financial Schedules are required to be filed herewith.
S-5
<PAGE>
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement;
(i) To include any prospectus required by section 10(a)(3)
of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement (or the
most recent post-effective amendment thereof) which, individually or
in the aggregate, represent a fundamental change in the information
set forth in the registration statement. Notwithstanding the
foregoing, any increase or decrease in volume of securities offered
(if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high and of
the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective
registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities under the Securities
Act of 1933 may be permitted to officers, directors or controlling persons of
the registrant pursuant to the provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by an officer, director,
or controlling person of the registrant in the successful defense of any such
action, suit or proceeding) is asserted by such officer, director or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
S-6
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
General Partner of the Registrant has duly caused this Registration Statement
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in The City of New York in the State of New York on the 27th day of
August, 1996.
ML PRINCIPAL PROTECTION L.P.
By: Merrill Lynch Investment Partners
Inc.
General Partner
By /s/ JOHN R. FRAWLEY, JR.
---------------------------
John R. Frawley, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement Amendment has been signed below by the following persons
on behalf of the General Partner of the Registrant in the capacities and on the
date indicated.
<TABLE>
<CAPTION>
Signature Title With Registrant Date
--------- --------------------- ----
<S> <C> <C>
/s/ JOHN R. FRAWLEY, JR. President, Chief Executive August 27, 1996
- --------------------------------
John R. Frawley, Jr. Officer and Director
(Principal Executive Officer)
/s/ JAMES M. BERNARD Chief Financial Officer, August 27, 1996
- --------------------------------
James M. Bernard Treasurer and Vice-President
(Principal Financial and
Accounting Officer)
/s/ ALLEN N. JONES Director August 27, 1996
- --------------------------------
Allen N. Jones
</TABLE>
(Being principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
<TABLE>
<CAPTION>
<S> <C> <C>
Merrill Lynch Investment General Partner of Registrant August 27, 1996
Partners Inc.
By /s/ JOHN R. FRAWLEY, JR.
-----------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
</TABLE>
S-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the General
Partner of the Co-Registrant has duly caused this Registration Statement
Amendment to be signed on its behalf by the undersigned, thereunto duly
authorized, in The City of New York in the State of New York on the 27th day of
August, 1996.
ML PRINCIPAL PROTECTION TRADING L.P.
By: Merrill Lynch Investment Partners Inc.
General Partner
By /s/ JOHN R. FRAWLEY, JR.
--------------------------------------------
John R. Frawley, Jr.
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement Amendment has been signed below by the following persons
on behalf of the General Partner of the Co-Registrant in the capacities and on
the date indicated.
<TABLE>
<CAPTION>
Signature Title With Registrant Date
--------- --------------------- ----
<S> <C> <C>
/s/ JOHN R. FRAWLEY, JR. President, Chief Executive August 27, 1996
- --------------------------------
John R. Frawley, Jr. Officer and Director
(Principal Executive Officer)
/s/ JAMES M. BERNARD Chief Financial Officer, August 27, 1996
- --------------------------------
James M. Bernard Treasurer and Vice-President
(Principal Financial and
Accounting Officer)
/s/ ALLEN N. JONES Director August 27, 1996
- --------------------------------
Allen N. Jones
</TABLE>
(Being principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
<TABLE>
<CAPTION>
<S> <C> <C>
Merrill Lynch Investment General Partner of August 27, 1996
Partners Inc. Co-Registrant
By /s/ JOHN R. FRAWLEY, JR.
-----------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
</TABLE>
S-8
<PAGE>
ML PRINCIPAL PROTECTION L.P.
ML PRINCIPAL PROTECTION TRADING L.P.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------ -----------------------
<S> <C>
1.01 Form of Selling Agreement among the Partnership, the Trading
(Amended) Partnership,the General Partner, Merrill Lynch Futures, the
Selling Agent and the Trading Advisors.
1.02 Form of Amendment to the Selling Agreement among the
Partnership, the Trading Partnership, the General Partner,
Merrill Lynch Futures, the Selling Agent and each additional
Trading Advisor.
3.02(ii) Third Amended and Restated Limited Partnership Agreement of
(Amended) the Partnership (included as Exhibit A to the Prospectus).
5.01 Opinion of Sidley & Austin relating to the legality of the
Units.
8.01 Opinion of Sidley & Austin with respect to federal income tax
consequences.
23.04 Consent of Sidley & Austin.
23.05 Consent of Deloitte & Touche.
27.01 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 1.01
(AMENDED)
SELLING AGREEMENT
-----------------
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 September 16, 1996
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ML PRINCIPAL PROTECTION L.P.
SELLING AGREEMENT
TABLE OF CONTENTS
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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
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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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September 16, 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 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").
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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
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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% 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
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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
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<PAGE>
registration statement on Form S-1 (Registration No. 333-7593),
constituting also Post-Effective Amendment No. 5 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 August ___, 1996 the Partnership filed its final Amendment No. 1
(Post-Effective Amendment No. 6 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 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
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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 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.
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(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 misleading. 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 August 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.
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(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 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 Part nership 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 agreements and the consummation of the
transactions contemplated therein and in the Prospectus will not constitute
a breach of, or default under, any
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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 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,
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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.
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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 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.
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(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 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
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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.
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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 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 State ment 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
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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 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
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and to act as described in the Registration Statement 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" 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
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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.
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(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
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
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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 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
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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 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 provi
sion 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
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<PAGE>
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 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
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<PAGE>
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. 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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<PAGE>
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.
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
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<PAGE>
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 Prospectus (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
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<PAGE>
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 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
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<PAGE>
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 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
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<PAGE>
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 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 obliga tions 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
relating to Merrill Lynch & Co., Inc., upon internal Merrill Lynch & Co.,
Inc. counsel.
(c) At the Additional Closing Time on or about September 30, 1996,
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 relating to each such Trading Advisor, respectively, in form and
substance satisfactory to the parties hereto.
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<PAGE>
(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).
(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)
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<PAGE>
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 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 counsel to the Commodity Broker.
(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
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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 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.
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<PAGE>
(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 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
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<PAGE>
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
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.
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<PAGE>
(c) Limitation on Certain Indemnifications and Exculpations. The
-------------------------------------------------------
exculpation provisions in the Advisory Agreements and the Consulting
Agreements shall not 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 con tained
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 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
-28-
<PAGE>
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: _______________; 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.
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.
-29-
<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.
By:________________________________
James M. Bernard,
Chief Financial Officer
-30-
<PAGE>
"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:
WEST COURSE CAPITAL INC.
By:___________________________
Name:
Title:
TRENDSTAT CAPITAL MANAGEMENT, INC.
By:___________________________
Name:
Title:
-31-
<PAGE>
MILLBURN RIDGEFIELD CORPORATION
By:___________________________
Name:
Title:
AIB INVESTMENT MANAGERS LIMITED
By:___________________________
Name:
Title:
Confirmed and accepted as of
the date first above written:
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
Selling Agent
By: __________________________
John R. Frawley, Jr.
-32-
<PAGE>
EXHIBIT 1.02
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
1,000,000 UNITS OF LIMITED PARTNERSHIP INTERESTS
AMENDMENT NO. TO THE SELLING AGREEMENT
---------------------------------------
Dated as of ____________
MERRILL LYNCH, PIERCE,
FENNER & SMITH INCORPORATED
Merrill Lynch World Headquarters
North Tower
World Financial Center
New York, New York 10080-6106
Dear Sirs:
Your affiliate, Merrill Lynch Investment Partners Inc. (formerly, ML
Futures Investment Partners Inc.), a Delaware corporation (referred to herein in
its individual corporate capacity and as general partner as the "General
Partner"), and an initial limited partner have caused the formation of a limited
partnership pursuant to the Revised Uniform Limited Partnership Act of the State
of Delaware (the "DRULPA") under the name ML PRINCIPAL PROTECTION L.P. (the
"Partnership") (formerly, ML Principal Protection Plus L.P.), for the purpose of
engaging in speculative trading of futures and forward contracts and commodity
options in the international markets. As described in the Prospectus, the
Partnership does not have any trading operations of its own but rather, through
its wholly-owned trading subsidiary, ML PRINCIPAL PROTECTION TRADING L.P., a
Delaware limited partnership (the "Trading Partnership") (formerly, ML Principal
Protection Plus Trading L.P.), has
<PAGE>
entered 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 initial commodity
broker and forward contract dealer for the Partnership is Merrill Lynch Futures
Inc., a Delaware corporation and certain of its affiliates or such other brokers
as approved of in writing by Merrill Lynch Futures Inc.; and the exclusive
selling agent for the Partnership will be yourself, including, without
limitation, Merrill Lynch International & Co., C.V.O.A., and certain of your
affiliates (herein sometimes collectively referred to as the "Selling Agent").
The undersigned hereby agree to be bound by all terms and conditions of the
Selling Agreement between the Partnership, the Trading Partnership, the General
Partner, Merrill Lynch Futures Inc., the Selling Agent and certain trading
advisors dated July 14, 1994 as amended by Amendment No. __ thereto dated
_________(the "Selling Agreement"). References in the Selling Agreement to the
Registration Statement and Prospectus shall, for purposes of this Amendment No.
__ to the Selling Agreement, mean ____________ and the Prospectus dated January
26, 1996 and any subsequent amendments or prospectuses.
-2-
<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.
Very truly yours,
ML PRINCIPAL PROTECTION L.P.
BY: MERRILL LYNCH INVESTMENT
PARTNERS INC., General Partner
By:________________________________
ML PRINCIPAL PROTECTION
TRADING L.P.
BY: MERRILL LYNCH INVESTMENT
PARTNERS INC., General Partner
By:________________________________
[TRADING ADVISOR]
By:________________________________
Name:
Title:
Confirmed and Accepted as of
the date first above written
MERRILL LYNCH, PIERCE, FENNER
& SMITH INCORPORATED
Selling Agent
By:____________________________
-3-
<PAGE>
Exhibit 5.01
[LETTERHEAD OF SIDLEY & AUSTIN APPEARS HERE]
August 27, 1996
Merrill Lynch Investment Partners Inc.,
as general partner of ML Principal Protection L.P.
Merrill Lynch World Headquarters
South Tower, 6th Floor
World Financial Center
New York, New York 10080-6106
RE: ML PRINCIPAL PROTECTION L.P.
$100,000,000 OF UNITS OF LIMITED PARTNERSHIP INTEREST (THE
"UNITS")
Dear Sir or Madam:
We refer to the Registration Statement on Form S-1 (Registration No.
333-7593) (the "Registration Statement") filed by ML Principal Protection L.P.
(formerly, ML Principal Protection Plus L.P.), a Delaware limited partnership
(the "Partnership"), and ML Principal Protection Trading L.P. (formerly, ML
Principal Protection Plus Trading L.P.), a Delaware limited partnership (the
"Trading Partnership"), with the Securities and Exchange Commission under the
Securities Act of 1933, as amended (the "Securities Act"), as amended by
Amendment No. 1 thereto filed with the Securities and Exchange Commission on or
about August 27, 1996. Pursuant to Rule 429 under the Securities Act, the form
of prospectus set forth in the Registration Statement (the "Prospectus") also
relates to the Registration Statement on Form S-1 declared effective on July 14,
1994 (Registration No. 33-73914). Capitalized terms not defined herein have the
meanings specified in the Registration Statement.
We are familiar with the proceedings to date with respect to the
proposed issuance and sale of the Units pursuant to the Prospectus and have
examined such records, documents and questions of law, and satisfied ourselves
as to such matters of fact, as we have considered relevant and necessary as a
basis for this opinion.
For purposes of rendering this opinion, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
originals of all documents submitted to us as certified or photostatic copies
and the authenticity of the original of such copies.
<PAGE>
SIDLEY & AUSTIN CHICAGO
Merrill Lynch Investment Partners Inc.
August 27, 1996
Page 2
Based on the foregoing, we are of the opinion that:
1. The Partnership and the Trading Partnership have each been duly
formed and are validly existing in good standing as limited partnerships under
the Delaware Revised Uniform Limited Partnership Act (the "Act").
2. The General Partner has taken all necessary corporate action
required to be taken by it to authorize the issuance and sale of the Units to
the Limited Partners and to authorize the admission to the Partnership of the
Limited Partners as limited partners of the Partnership.
3. Assuming (i) the due authorization, execution and delivery to the
General Partner of a Subscription Agreement by each subscriber for Units (the
"Subscribers"), (ii) the due acceptance by the General Partner of each
Subscription Agreement and the due acceptance by the General Partner of the
admission of each of the Subscribers as limited partners of the Partnership,
(iii) the payment by each Subscriber of the full consideration due for the Units
to which it subscribed, (iv) that the books and records of the Partnership set
forth all information required by the Limited Partnership Agreement and the Act,
including all information with respect to all persons and entities to be
admitted as Partners and their contributions to the Partnership, (v) that the
Subscribers, as limited partners of the Partnership, do not participate in the
control of the business of the Partnership within the meaning of the Act, (vi)
that the Units are offered and sold as described in the Prospectus and the
Limited Partnership Agreement and (vii) that the Subscribers meet all of the
applicable suitability standards set forth in the Prospectus and that the
representations and warranties of the Subscribers in their respective
Subscription Agreements are true and correct, the Units to be issued to the
Subscribers will represent valid and legally issued limited partner interests in
the Partnership and will be fully paid and nonassessable limited partner
interests in the Partnership, as to which the Subscribers, as limited partners
of the Partnership, will have no liability in excess of their obligations to
make contributions to the Partnership, their obligations to make other payments
provided for in the Limited Partnership Agreement and their share of the
Partnership's assets and undistributed profits (subject to the obligation of a
Limited Partner to repay funds distributed to such Limited Partner by the
Partnership in certain circumstances).
4. There are no provisions in the Limited Partnership Agreement the
inclusion of which, subject to the terms and conditions therein, would cause the
Limited Partners, as limited partners of the Partnership, to be deemed to be
participating in the control of the business of the Partnership within the
meaning of the Act.
This opinion is limited to the Act and the General Corporation Law of
the State of Delaware. We express no opinion as to the application of the
securities or blue sky laws of the various states (including the State of
Delaware) to the sale of the Units.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to all references to our firm included in or made a
part of the Registration Statement.
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
EXHIBIT 8.01
August 27, 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 to Amendment No. 1 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 or about August 27, 1996. Pursuant to Rule 429 under the
Securities Act, the form of prospectus set forth in the Registration Statement
(the "Prospectus") also relates to the Registration Statement on Form S-1
declared effective on July 14, 1994 (Registration No. 33-73914).
We have reviewed such data, documents, questions of law and fact and
other matters as we have deemed pertinent for the purpose of this opinion. Based
upon the foregoing, we hereby confirm our opinions expressed under the caption
"Federal Income Tax Consequences" in the Prospectus that: (i) each of the Part-
nership and the Trading Partnership in which the Partnership will invest, will
be taxed as a partnership for federal income tax purposes (assuming that Merrill
Lynch Investment Partners Inc. will, when the Partnership's Units of Limited
Partnership Interest are sold to the public, have a capitalization no less than
that indicated in the audited financial statements included in the Registration
Statement and that Merrill Lynch Investment Partners Inc. makes a capital
contribution to each of the Partnership and the Trading Partnership in at least
the amount contemplated by the Prospectus); (ii) based upon the contemplated
trading activities of the Trading Partnership, the Trading Partnership should be
treated as engaged in the conduct of a trade or business for federal income tax
purposes, and, as a result, the ordinary and necessary business expenses
incurred by
<PAGE>
Merrill Lynch Investment Partners Inc.
August 27, 1996
Page 2
the Trading Partnership in conducting its commodity futures trading business
should not be subject to limitation under section 67 of the Internal Revenue
Code of 1986, as amended (the "Code") or under section 68 of the Code; and (iii)
based on the contemplated trading activities of the Trading Partnership and of
the Fund, the income earned by the Fund will not constitute "unrelated business
taxable income" under section 511 of the Code to employee benefit plans and
other tax-exempt entities which purchase Units; provided that such Units
purchased by such plans and entities are not "debt-financed" within the meaning
of Section 514 of the Code.
We also advise you that in our opinion the description set forth under
the caption "Federal Income Tax Consequences" in the Prospectus correctly
describes (subject to the uncertainties referred to therein) the material
aspects of the federal income tax treatment to United States investors, as of
the date hereof, of an investment in the Partnership.
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
EXHIBIT 23.04
[LETTERHEAD OF SIDLEY & AUSTIN APPEARS HERE]
CONSENT
OF
SIDLEY & AUSTIN
---------------
Sidley & Austin hereby consents to all references made to it in
Amendment No. 1 to the Registration Statement on Form S-1 of ML Principal
Protection L.P., as filed with the Securities and Exchange Commission on August
27, 1996 (Reg. No. 333-7593).
Date: August 27, 1996
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
Exhibit 23.05
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement No. 333-7593 of ML
Principal Protection L.P. (formerly, ML Principal Protection Plus L.P.) on Form
S-1 of our report dated January 26, 1996 relating to the consolidated financial
statements of ML Principal Protection L.P. and of our report dated January 26,
1996 relating to the balance sheet of Merrill Lynch Investment Partners Inc.
(formerly, ML Futures Investment Partners Inc.), appearing in the Prospectus,
which is a part of such Registration Statement, and to the reference to us under
the headings "Selected Financial Data" and "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
August 26, 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 and Consolidated Statements of Changes in Partner's Capital AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000925433
<NAME> ML PRINCIPAL PROTECTION TRADING L.P.
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 150,524
<SECURITIES> 78,437,029
<RECEIVABLES> 8,406,566
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 86,994,119
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 86,994,119
<CURRENT-LIABILITIES> 3,387,298
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 83,606,821
<TOTAL-LIABILITY-AND-EQUITY> 86,994,119
<SALES> 0
<TOTAL-REVENUES> 4,491,519
<CGS> 0
<TOTAL-COSTS> 2,699,350
<OTHER-EXPENSES> 13,806
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 1,778,363
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,778,363
<EPS-PRIMARY> 2.16
<EPS-DILUTED> 2.16
</TABLE>
