<PAGE>
As filed with the Securities and Exchange Commission on March 25, 1997
REGISTRATION NO. 333-7593
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
POST-EFFECTIVE AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
______________
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
ML PRINCIPAL PROTECTION TRADING L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS TRADING L.P.)
(RULE 140 CO-REGISTRANT)
(Exact name of registrant as specified in its charter)
13-3750642 (REGISTRANT)
DELAWARE 6793 13-3775509(CO-REGISTRANT)
(State of Organization) (Primary Standard Industrial (IRS Employer
Classification Code Number) Identification Number)
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
MERRILL LYNCH WORLD HEADQUARTERS
SIXTH FLOOR, SOUTH TOWER
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
(212) 236-4167
(Address, including zip code, and telephone number, including area code,
of registrant's principal executive offices)
JOHN R. FRAWLEY, JR.
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
MERRILL LYNCH WORLD HEADQUARTERS
SIXTH FLOOR, SOUTH TOWER
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
(212) 236-4167
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
________________
COPIES TO:
James B. Biery
Kirsten Carlson
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
________________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
________________
PURSUANT TO THE PROVISIONS OF RULE 429 OF THE RULES AND REGULATIONS OF
THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, THE
FORM OF PROSPECTUS SET FORTH HEREIN ALSO RELATES TO THE REGISTRANT'S
REGISTRATION STATEMENT ON FORM S-1 (REGISTRATION NO. 33-73914) DECLARED
EFFECTIVE ON JULY 14, 1994.
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
FORM S-1 ITEM NO. PROSPECTUS HEADING
- ------------------ ----------------------------------------
<S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus............ Cover Page
2. Inside Front and Outside Back Cover
Pages of Prospectus............................... Inside Cover Page; Table of Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges................ Summary; Risk Factors
4. Use of Proceeds.................................... Use of Proceeds and Cash Management Income
5. Determination of Offering Price.................... Inside Cover Page; Plan of Distribution
6. Dilution........................................... Not Applicable
7. Selling Security Holders........................... Not Applicable
8. Plan of Distribution............................... Inside Cover Page; Plan of Distribution
9. Description of Securities to Be
Registered........................................ Cover Page; The Limited Partnership
Agreement
10. Interests of Named Experts and
Counsel........................................... Legal Matters; Experts
11. Information with Respect to the
Registrant........................................ Summary; Risk Factors; Investment Factors;
Performance of the Fund; Selected Financial
Data; The Two-Tier Structure of the Fund;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations; The Advisor Selection Process;
The Advisors; MLIP and MLF; Leverage
Considerations; The ML&Co. Guarantee; Use of
Proceeds and Cash Management Income; Charges;
Certain Litigation; Conflicts of Interest;
The Limited Partnership Agreement; Index to
Financial Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities................................... Not Applicable
</TABLE>
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
SERIES L UNITS
PROSPECTUS SUPPLEMENT DATED APRIL __, 1997
TO
PROSPECTUS DATED APRIL __, 1997
____________________
The Series L Units will be sold on or about May 1, 1997 pursuant to
acceptable subscriptions received on or before April 30, 1997. The Principal
Assurance Date for the Series L Units will be April 30, 2002.
Series L Units are offered at $100 per Unit ($97 in the case of
officers and employees of Merrill Lynch & Co., Inc. and its affiliates). The
minimum initial investment is 50 Units ($5,000); the minimum investment for
existing Limited Partners is 10 Units ($1,000). Any greater number of whole
Units may be purchased.
75% of the capital attributable to Series L Units will initially be
committed to trading.
No distributions are presently contemplated to be made on the Series L
Units.
The Series L Units may be redeemed as of the end of any calendar month
at Net Asset Value, subject to a 3% redemption charge payable to MLIP on
redemptions made on or prior to April 30, 1998.
_________________________
The reverse side of this Prospectus Supplement provides certain
outline information regarding the Fund's current Advisors.
_________________________
IN ADDITION TO THIS PROSPECTUS SUPPLEMENT, THE PROSPECTUS MUST BE ACCOMPANIED
BY SUMMARY FINANCIAL INFORMATION FOR ML PRINCIPAL PROTECTION L.P. CURRENT
WITHIN 60 CALENDAR DAYS
_________________________
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS
OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED UPON
THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS SUPPLEMENT.
_________________________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS
THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS SUPPLEMENT. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
_________________________
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
Selling Agent
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
_______________
As of March 1, 1997, the Net Asset Value of a Series A Unit initially
issued for $100 as of October 12, 1994 had risen to $126.63 (adding back to Net
Asset Value aggregate distributions of $12.00 per Series A Unit).
_______________
The allocation of the Fund's trading assets (75% of the capital initially
attributable to each series of Units sold subsequent to January 1, 1997) among
its Advisors as of April 1, 1997 is set forth below in the parentheses following
each Advisor's name. The accompanying Prospectus includes more detailed
information concerning the core Advisors. See "The Advisors" and "The Core
Advisors" in the Prospectus.
Core Advisors is the term used by MLIP to refer to Advisors allocated 10%
or more of the Fund's trading assets for management.
<TABLE>
<CAPTION>
ANNUALIZED ASSETS UNDER
WORST/BEST STANDARD MANAGEMENT GENERAL
MONTHLY DEVIATION IN STRATEGY
RATE OF RETURN/1/ OF RETURN/2/ FUND PROGRAM/3/ CLASSIFICATION/4/
------------------ ------------- --------------- -----------------
<S> <C> <C> <C> <C>
CORE ADVISORS
Chesapeake Capital Corporation (10.98)%/15.99% 17.9% $862 million Technical;
Diversified Trading Program (19%) trend-following
John W. Henry & Company, Inc. (27.7)%/5//25.5% 25.9% $1.2 billion Technical;
Financial and Metals Portfolio (15%) trend-following
NON-CORE ADVISORS
AIS Futures Management, Inc. (10.64)%/13.39% 18.0% $107 million Systematic;
MAAP-2x-4x Program (8.5%) trend-following
ARA Portfolio Management Company, L.L.C. (6.48)%/5//7.89% 10.8% $ 28 million Technical;
Alpha Program (8.5%) trend-following
Graham Capital Management, L.P. (6.31)%/12.33% 13.7% $207 million Technical;
Diversified Program (8.5%) trend-following
Trendstat Capital Management, Inc. (5.83)%/10.28% 11.9% $148 million Technical;
World Currency Program (8.5%) trend-related
Hill Financial Group, Ltd. (6.2)%/9.9% 11.3% $ 57 million Technical;
Multiple Strategy Program (7.5%) systematic
Millburn Ridgefield Corporation (9.04)%/19.38% 17.6% $224 million Technical;
Global Portfolio - Normal Leverage (7.2%) trend-following
Quantitative Financial Strategies, Inc. (7.62)%/13.29% 15.4% $127 million/6/ Systematic;
The Currency Program (5.5%) fundamental
Range Wise, Inc. (6.92)%/12.91% 12.7% $ 31 million Discretionary;
Range Wise Trading Program (5.0%) fundamental
Allied Irish Capital Management Ltd. (2.11)%/2.80% 3.6% $169 million Discretionary;
Worldwide Financial Futures Program (4.3%) fundamental
Fundamental Futures, Inc. (10.66)%/11.23% 14.6% $ 67 million Discretionary;
Fundamental Futures Trading Program (2.5%) fundamental
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PERFORMANCE AND ASSETS UNDER MANAGEMENT INFORMATION IS CURRENT AS OF JANUARY 31,
1997.
PERFORMANCE FIGURES ARE NOT AUDITED.
Futures trading is highly leveraged, as is each Advisor's trading program.
No Advisor has been asked to make any special adjustments to its leveraging
policies in the case of the Fund. See "Leverage Considerations" and "Risk
Factors" in the Prospectus.
In considering the leverage at which the different Advisors trade and the
volatility of their performance, prospective investors should recognize that due
to the limited percentage of the Fund's trading assets allocated to each of
them, none of the non-core Advisors, individually, is likely to have a material
effect, over the short-term, on either the overall return or the overall
performance volatility of the Fund. The non-core Advisors as a group can have a
significant effect on performance. However, the likely performance non-
correlation among at least certain of these Advisors reduces the likelihood of
any major short-term effect.
The current non-core Advisors each receive Consulting Fees of up to 2% per
annum of the Fund's assets managed by each of them respectively, plus quarterly
or annual Profit Shares of either 15% or 20% of any cumulative New Trading
Profits achieved by each such Advisor.
_________________________
/1/ The lowest and the highest monthly rate of return for the program traded
for the Fund. Performance information is presented for the period from
January 1, 1992 (or inception, if later) through January 31, 1997.
/2/ An annualized standard deviation of 2% and a mean return of 1% would
indicate that approximately two-thirds of all monthly returns during a year
have historically fallen between (1)% and 3%, i.e., within a range
(deviation) of 2% above or below the mean. Standard deviation is one
widely-accepted measure of risk, as standard deviation indicates the
variability of returns. In general, the more variable an Advisor's
historical returns, the greater the risk that substantial losses have been
included within the historical range of returns.
/3/ Assets under management in the program traded for the Fund ("notional"
funds excluded, except as described in Note (6), below).
/4/ See "The Core Advisors" in the Prospectus for a description of these
strategy classifications.
/5/ The worst Monthly Rate of Return of any individual account, not of the
program on a composite basis.
/6/ "Notional" funds are included in assets under management for Quantitative
Financial Strategies, Inc.
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
$100,000,000
UNITS OF LIMITED PARTNERSHIP INTEREST
ML PRINCIPAL PROTECTION L.P. (THE "FUND"), a limited partnership, is a
multi-strategy, multi-market managed futures investment, employing a range of
proprietary strategies diversified across major markets of the global economy --
financials, currencies, energy, metals and agriculture. The Fund's objectives
are achieving, through speculative trading, long-term capital appreciation while
controlling performance volatility. MERRILL LYNCH INVESTMENT PARTNERS INC.
("MLIP") is the general partner of the Fund, and MERRILL LYNCH FUTURES INC.
("MLF") is its commodity broker. MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM")
provides cash management services to the Fund within parameters established by
MLIP for which MLAM assumes no responsibility. The Fund trades under the
direction of multiple independent trading advisors ("TRADING ADVISORS" OR
"ADVISORS") selected and monitored by MLIP.
MERRILL LYNCH & CO., INC. ("ML&CO.") has agreed to make sufficient payments
to the Fund, if necessary, to ensure that the Net Asset Value of each Unit
outstanding as of the fifth anniversary (THE "PRINCIPAL ASSURANCE DATE") of such
Unit's issuance will be no less than the initial $100 per Unit subscription
price. The ML&Co. undertaking is effective only in respect of Units outstanding
as of their respective Principal Assurance Dates.
The Fund began trading October 12, 1994 with an initial capitalization of
$32 million. The Units are continuously offered and sold as of May 1, 1997 and
as of the beginning of each calendar quarter thereafter at $100 per Unit. As of
March 1, 1997, eight series of Units had been sold, the Fund's aggregate
capitalization was $77,491,500, and the initial series of Units had recognized a
cumulative rate of return of approximately 26.63% during its first 28 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). Any whole number of Units
over the minimum may be purchased.
Units may be redeemed as of the end of any calendar month, subject to 3%
redemption charges payable to MLIP through the end of the twelfth month after
sale.
No distributions on the Units offered hereby are presently contemplated by
MLIP.
______________________
THE UNITS ARE SPECULATIVE SECURITIES.
AN INVESTMENT IN THE FUND INVOLVES SIGNIFICANT RISKS.
______________________
THE FOLLOWING ARE CERTAIN OF THE SIGNIFICANT RISKS OF THIS INVESTMENT.
. INVESTORS MAY LOSE ALL OR SUBSTANTIALLY ALL OF THE TIME VALUE OF THEIR
INVESTMENT IN THE FUND. AT A 7% ANNUAL INTEREST RATE, THE PRESENT VALUE, AS
OF THE DATE OF A UNIT'S ISSUANCE, OF RECEIVING THE ASSURED MINIMUM $100 NET
ASSET VALUE PER UNIT FIVE YEARS IN THE FUTURE (AT SUCH UNIT'S PRINCIPAL
ASSURANCE DATE) WOULD BE ONLY APPROXIMATELY $71.
. THE PAST PERFORMANCE OF THE FUND AND ITS ADVISORS IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
. THE FUND TRADES WITH A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS.
. THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND INVOLVES BOTH IMMEDIATE
OPPORTUNITY COSTS AND THE RISK OF SIGNIFICANTLY INCREASED OPPORTUNITY COSTS
IN THE FUTURE. MLIP INITIALLY ALLOCATES ONLY 75% OF EACH SERIES' CAPITAL TO
TRADING IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS GUARANTEE,
CORRESPONDINGLY REDUCING PROFIT POTENTIAL. THERE IS ALSO THE RISK OF FURTHER
DELEVERAGING OR EVEN TERMINATING TRADING IN THE EVENT THAT THE FUND DOES NOT
RECOGNIZE SUFFICIENT PROFITS FOR THE NET ASSET VALUE OF A SERIES OF UNITS TO
INCREASE ABOVE ITS INITIAL $100 PER UNIT AFTER ALL FEES AND EXPENSES.
. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING OR
TERMINATING TRADING.
. IF MLIP DELEVERAGES ANY ONE SERIES OF UNITS, IT MUST SIMILARLY DELEVERAGE ALL
SERIES.
. IRRESPECTIVE OF THE DELEVERAGING OF THE FUND'S TRADING, THE RISK CONTROL
CHARACTERISTICS OF THE FUND'S MULTI-ADVISOR APPROACH MAKE IT HIGHLY UNLIKELY
THAT THE ML&CO. GUARANTEE, DESPITE ITS SIGNIFICANT OPPORTUNITY COSTS, WILL
EVER BENEFIT INVESTORS.
. WERE ML&CO. TO INCUR A LIABILITY UNDER ITS GUARANTEE, INVESTORS COULD ONLY
ENFORCE SUCH LIABILITY THROUGH BRINGING A DERIVATIVE ACTION IN THE NAME OF
THE FUND, AS THIS GUARANTEE DOES NOT RUN DIRECTLY TO INVESTORS.
. THE FUND IS SUBJECT TO SUBSTANTIAL CHARGES. ESTIMATED GROSS TRADING PROFITS
OF APPROXIMATELY 7.20% OF THE FUND'S AVERAGE MONTH-END NET ASSETS MUST BE
EARNED DURING THE FIRST YEAR AFTER A UNIT IS SOLD IN ORDER FOR ITS REDEMPTION
VALUE TO EQUAL ITS INITIAL $100 SUBSCRIPTION PRICE.
. CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS
PERIODS WITHOUT MAJOR PRICE MOVEMENTS -- MAKE IT DIFFICULT FOR THE ADVISORS
TO TRADE SUCCESSFULLY.
SEE "RISK FACTORS" BEGINNING AT PAGE 11.
__________________
SUBSCRIBERS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES
IN THEIR SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY.
__________________
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
=======================================================================================================
UNITS OF LIMITED
PARTNERSHIP INTEREST PRICE TO PUBLIC (1) SELLING COMMISSIONS(2)(3) PROCEEDS TO FUND (2)(3)
=======================================================================================================
<S> <C> <C> <C>
PER UNIT........... $100 NONE $100
=======================================================================================================
</TABLE>
SEE NOTES ON PAGE (I).
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SELLING AGENT
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
THE DATE OF THIS PROSPECTUS IS APRIL __, 1997
<PAGE>
NOTES TO COVER PAGE
- -------------------
(1) The Units are continuously offered on a best efforts basis
without any firm underwriting commitment exclusively through MERRILL LYNCH,
PIERCE, FENNER & SMITH INCORPORATED AND ITS AFFILIATES ("MLPF&S" OR THE "SELLING
AGENT").
All Units for which subscriptions are accepted during a calendar
quarter are issued as of a single closing date as of the beginning of the
immediately following quarter (for instance, all subscriptions received during
April 1997 will be sold in a single closing on May 1, 1997). Units participate
in the profits and losses of the Fund on and after such closing date.
Subscriptions for Units are accepted throughout each calendar quarter.
Subscribers' Merrill Lynch customer securities accounts are debited in the
amount of their respective subscriptions, on a settlement date designated by
MLPF&S approximately five business days after their subscriptions are accepted
by MLIP.
A closing will be held as of May 1, 1997 and as of the beginning of
each calendar quarter thereafter (beginning with July 1, 1997).
Pending investment in the Fund as of the beginning of the following
quarter, subscription funds are held in escrow at THE BANK OF NEW YORK (THE
"ESCROW AGENT") in New York City. Subscribers receive all interest earned, and
no fees or costs are assessed, on subscriptions while held in escrow.
There is no minimum number of Units that must be sold as of the
beginning of any given calendar quarter for any Units then to be sold.
(2) See "Plan of Distribution -- Selling Agent Compensation"
beginning at page 64 for information relating to indemnification arrangements
with respect to the Selling Agent.
(3) No selling commissions are paid from the proceeds of
subscriptions. MLIP credits the Selling Agent with production credits of $5 per
Unit on all Units at the time of sale. No such initial production credits are
payable on sales to officers and employees of ML&Co. and its affiliates
(collectively, "Merrill Lynch"), who purchase Units at $97 rather than $100 per
Unit with MLIP contributing the difference to the Fund in order to avoid
dilution of other investors' interests.
Beginning with the thirteenth full month after a series of Units is
sold (Units are sold as of the beginning of the calendar quarter immediately
following the quarter during which the related subscriptions were accepted), the
Selling Agent receives ongoing production credits on all Units of such series
which remain outstanding (including Units purchased at a 3% discount by officers
and employees of Merrill Lynch) and which were sold by Financial Consultants
(the individual MLPF&S brokers) registered with the COMMODITY FUTURES TRADING
COMMISSION (THE "CFTC") and who have passed either the Series 3 National
Commodity Futures Examination or the Series 31 Managed Futures Fund Examination.
Such ongoing production credits continue to accrue from the beginning of such
thirteenth month after a Unit is sold for as long as such Unit remains
outstanding. These ongoing production credits equal 2% per annum of the average
month-end Net Assets attributable to each Unit committed to trading; 75% of the
capital attributable to each Unit sold pursuant to this Prospectus will
initially be committed to trading, which would result in annual ongoing
production credits of 1.5% of the average month-end Net Assets of Units sold
through such Financial Consultants.
MLIP provides all initial and ongoing production credits to the
Selling Agent at no additional cost to the Fund.
Financial Consultants receive no initial production credits on new
Units acquired with the proceeds of redemptions during or as of the end of the
preceding calendar quarter. However, the 2% ongoing production credits,
described above, will accrue on the new Units beginning with the thirteenth
month after the sale of the Units being redeemed, rather than only beginning
with the thirteenth month after the reinvestment of the redemption proceeds of
such Units in the newly issued Units.
If a Limited Partner redeems Units during or as of the end of a
calendar quarter, and subscribes on or before the redemption date to the new
series of Units to be issued as of the beginning of the following quarter (or
redeems Units during April 1997 and subscribes for Units to be issued as of May
1, 1997), any otherwise applicable 3% redemption charge is waived on reinvested
redemption proceeds. (The 3% redemption charge is primarily intended to
reimburse MLIP for selling commissions paid by it on Units which remain
outstanding for a year or less. No initial production credits are generated by
the reinvestment of redemption proceeds.) The Units acquired with redemption
proceeds are subject to a 3% redemption charge through the end of the twelfth
month after their date of sale.
_________________________
-i-
<PAGE>
REGULATORY NOTICES
- ------------------
THIS PROSPECTUS MUST BE ACCOMPANIED BY: (1) A PROSPECTUS SUPPLEMENT
CONTAINING CERTAIN CFTC-REQUIRED INFORMATION REGARDING THE CURRENT ADVISORS; AND
(2) SUMMARY FINANCIAL INFORMATION FOR THE FUND CURRENT WITHIN 60 CALENDAR DAYS.
_________________________
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE
ANY INFORMATION, OR TO MAKE ANY REPRESENTATION CONCERNING THE FUND OR THE UNITS
NOT CONTAINED IN THIS PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT AND
SUMMARY FINANCIAL INFORMATION, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRE
SENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, MLIP,
MLAM, MLF, MLPF&S, ANY TRADING ADVISOR OR ANY OTHER PERSON.
_________________________
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANY
PERSON 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 STATUS
AS LIMITED PARTNERS.
_________________________
MLIP DISTRIBUTES MONTHLY REPORTS INCLUDING SUMMARY FINANCIAL
INFORMATION FOR THE FUND TO ALL LIMITED PARTNERS. LIMITED PARTNERS ALSO RECEIVE
CERTIFIED AUDITED FINANCIAL STATEMENTS AND ALL TAX INFORMATION RELATING TO THE
FUND NECESSARY FOR THE PREPARATION OF LIMITED PARTNERS' ANNUAL FEDERAL INCOME
TAX RETURNS.
_________________________
THE FUND IS SUBJECT TO THE INFORMATIONAL REQUIREMENTS OF THE
SECURITIES EXCHANGE ACT OF 1934, AND IN ACCORDANCE THEREWITH FILES REPORTS AND
OTHER INFORMATION WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC").
REPORTS, PROXIES (IF ANY), INFORMATION STATEMENTS (IF ANY), AND OTHER
INFORMATION FILED BY THE FUND, CAN BE INSPECTED AND COPIED AT THE PUBLIC
REFERENCE FACILITIES MAINTAINED BY THE SEC AT 450 FIFTH STREET, N.W. WASHINGTON,
DC 20549 AND AT ITS REGIONAL OFFICES LOCATED AT 7 WORLD TRADE CENTER, SUITE
1300, NEW YORK, NY 10048 AND CITICORP CENTER, 500 WEST MADISON STREET, SUITE
1400, CHICAGO, IL 60661. COPIES OF SUCH MATERIAL CAN BE OBTAINED FROM THE
PUBLIC REFERENCE SECTION OF THE SEC, 450 FIFTH STREET, N.W., WASHINGTON, DC
20549, AT PRESCRIBED RATES. THE FUND IS AN ELECTRONIC FILER. THE SEC MAINTAINS A
WEB SITE THAT CONTAINS REPORTS, SUCH AS THE FUND, 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, 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 BEGINNING AT PAGE
43 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO
RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 9.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE,
BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY
STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT, AT PAGES 11-14.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN
FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE
UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY
BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE
POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE
UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR
MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY
BE EFFECTED.
-1-
<PAGE>
SPECIAL DISCLOSURES REGARDING THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND
1. ML&CO'S GUARANTEE IS NOT A GUARANTEE OF PROFIT. IF AN INVESTOR'S
UNITS ARE WORTH NO MORE ON THEIR PRINCIPAL ASSURANCE DATE (FIVE YEARS AFTER
ISSUANCE) THAN THE GUARANTEED MINIMUM $100 PER UNIT, SUCH INVESTOR WILL HAVE
LOST THE ENTIRE USE OF HIS OR HER CAPITAL FOR FIVE YEARS. AT A 7% ANNUAL
INTEREST RATE, THE PRESENT VALUE OF RECEIVING $100 FIVE YEARS IN THE FUTURE IS
ONLY APPROXIMATELY $71.
2. IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS
GUARANTEE, ALL UNITS BEGIN WITH ONLY 75% OF THEIR ASSETS ALLOCATED TO TRADING.
THIS INITIAL DELEVERAGING OF TRADING SUBSTANTIALLY REDUCES PROFIT POTENTIAL.
3. ON AN ONGOING BASIS, MLIP CONTROLS THE LEVERAGE AT WHICH THE FUND
TRADES WITH THE PRIMARY OBJECTIVE OF PREVENTING ML&CO. FROM INCURRING ANY
LIABILITY UNDER ITS GUARANTEE.
4. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING
OR EVEN TERMINATING TRADING. MLIP WOULD TERMINATE TRADING IF THE NET ASSET
VALUE OF A NEWLY-ISSUED UNIT DECLINED BY ONLY APPROXIMATELY 20%, AND WOULD BEGIN
TO DELEVERAGE TRADING BELOW ITS INITIAL 75% LEVEL WELL BEFORE LOSSES
APPROACHING 20% PER UNIT HAD BEEN INCURRED.
5. EVEN IF THE FUND AVOIDS TRADING LOSSES, UNLESS THE FUND EARNS
SUFFICIENT PROFITS, MLIP WILL FURTHER DELEVERAGE OR TERMINATE TRADING.
6. IF ONE SERIES OF UNITS IS REQUIRED TO DELEVERAGE OR TERMINATE
TRADING, ALL SERIES OF UNITS WILL BE REQUIRED TO DO SO.
7. IF THE FUND IS SUCCESSFUL, ITS PERFORMANCE WOULD HAVE BEEN
SUBSTANTIALLY BETTER WITHOUT ITS "PRINCIPAL PROTECTION" FEATURE.
8. "PRINCIPAL PROTECTION" DOES NOT PROTECT INVESTORS AGAINST THE
EFFECTS OF INFLATION.
9. "PRINCIPAL PROTECTION" DOES NOT TAKE INTO CONSIDERATION THE TAX
CONSEQUENCES OF INVESTING IN THE FUND.
10. THE ML&CO. GUARANTEE IS EFFECTIVE ONLY IN RESPECT OF UNITS OUT
STANDING ON THEIR RESPECTIVE PRINCIPAL ASSURANCE DATES.
11. THE ML&CO. GUARANTEE IS A CONTRACT BETWEEN ML&CO. AND THE FUND.
INVESTORS COULD ENFORCE THE GUARANTEE ONLY THROUGH BRINGING A DERIVATIVE ACTION
IN THE NAME OF THE FUND.
12. THE ML&CO. GUARANTEE IS A GENERAL, UNSECURED OBLIGATION OF ML&CO.
13. AN INVESTOR COULD CONTROL THE ASSETS HE OR SHE COMMITTED TO THE
FUTURES MARKET IN SUCH A WAY SO AS TO ACHIEVE THE SAME "PRINCIPAL PROTECTION"
OFFERED BY THE FUND, WITHOUT BEING SUBJECT TO THE FUND'S REDEMPTION RESTRICTIONS
OR COST STRUCTURE.
14. IRRESPECTIVE OF THE FUND'S "PRINCIPAL PROTECTION" FEATURE (AND
RESULTING OPPORTUNITY COSTS), ITS MULTI-ADVISOR STRATEGY SIGNIFICANTLY REDUCES
THE POSSIBILITY OF THE NET ASSET VALUE PER UNIT DECLINING BELOW THE GUARANTEED
LEVEL, CORRESPONDINGLY REDUCING THE LIKELIHOOD OF THE GUARANTEE EVER BEING OF
ANY BENEFIT TO INVESTORS.
15. PROSPECTIVE INVESTORS MUST CAREFULLY CONSIDER WHETHER THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND MERITS THE OPPORTUNITY COSTS
INVOLVED,
__________________
SEE "RISK FACTORS" BEGINNING AT PAGE 11, "LEVERAGE CONSIDERATIONS"
BEGINNING AT PAGE 36 AND "THE ML&CO. GUARANTEE" BEGINNING AT PAGE 37.
-2-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SECTION PAGE
- ------------------ ----
<S> <C>
SUMMARY................................................................ 5
The Fund.............................................................. 5
Risk Factors.......................................................... 6
Fund Operations....................................................... 7
Breakeven Table....................................................... 9
Federal Income Tax Consequences....................................... 10
Suitability........................................................... 10
RISK FACTORS........................................................... 11
(1) Investors May Incur Substantial Losses........................... 11
(2) Past Performance Not Necessarily
Indicative of Future Results................................... 11
(3) Volatile Markets; Highly Leveraged
Trading........................................................ 11
(4) The Opportunity Costs and Risks of
"Principal Protection"......................................... 11
(5) Multi-Advisor Risk Control and
"Principal Protection"........................................ 12
(6) Substantial Charges.............................................. 12
(7) Importance of General Market
Conditions.................................................... 12
(8) No Diversification Benefits if the
Fund Is Not Profitable........................................ 12
(9) No Assurance of Non-Correlation;
Limited Value of Non-Correlation
Even if Achieved.............................................. 12
(10) The New Series of Units.......................................... 13
(11) Combining Independent Trading
Strategies.................................................... 13
(12) Systematic Strategies............................................ 13
(13) Discretionary Strategies......................................... 13
(14) Increased Assets Under Management................................ 13
(15) No Assurance of Advisors' Continued
Services...................................................... 13
(16) Changes in Trading Strategy...................................... 13
(17) Illiquid Markets................................................. 13
(18) Cash Management Risks............................................ 13
(19) Redemptions Restricted........................................... 14
(20) Trading on Non-U.S. Exchanges.................................... 14
(21) Conflicts of Interest............................................ 14
(22) Limited Partners Taxed Currently................................. 14
(23) "Investment Advisory Fees"....................................... 14
(24) Taxation of Interest Income...................................... 14
(25) Tax Audit........................................................ 14
(26) Bankruptcy or Default............................................ 14
(27) Regulatory Change................................................ 14
INVESTMENT FACTORS..................................................... 15
PERFORMANCE OF THE FUND................................................ 17
PERFORMANCE OF THE OTHER MLIP
MULTI-ADVISOR FUTURES FUNDS............................................ 18
SELECTED FINANCIAL DATA................................................ 23
THE TWO-TIER STRUCTURE OF THE FUND.................................... 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS
OF OPERATIONS........................................................ 25
THE ADVISOR SELECTION PROCESS.......................................... 29
THE ADVISORS........................................................... 31
MLIP AND MLF........................................................... 32
Background........................................................... 32
Principals........................................................... 33
MLF.................................................................. 34
FIDUCIARY OBLIGATIONS OF MLIP.......................................... 35
LEVERAGE CONSIDERATIONS................................................ 36
THE ML&CO. GUARANTEE................................................... 37
USE OF PROCEEDS AND CASH MANAGEMENT
INCOME.............................................................. 39
CHARGES................................................................ 43
Charges Paid by the Fund............................................. 44
Organizational and Initial Offering
Cost Reimbursements............................................. 45
Brokerage Commissions............................................. 45
Use of Fund Assets................................................ 46
Administrative Fees............................................... 46
Bid-Ask Spreads................................................... 46
F/X Desk Service Fees;
EFP Differentials............................................... 46
Securities Bid-Ask Spreads........................................ 47
Profit Shares..................................................... 47
Extraordinary Expenses............................................ 49
Charges Paid by Merrill Lynch........................................ 49
Selling Commissions; Ongoing
Compensation.................................................... 49
Consulting Fees................................................... 49
MLAM Fees......................................................... 49
Redemption Charges................................................... 50
</TABLE>
-3-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
TABLE OF CONTENTS (CONT.)
<TABLE>
<CAPTION>
PROSPECTUS SECTION PAGE
- ------------------ ----
<S> <C>
CERTAIN LITIGATION.................................................. 50
CONFLICTS OF INTEREST............................................... 54
Merrill Lynch Affiliated Entities.............................. 54
General........................................................ 54
MLIP........................................................... 54
MLF; MLIB; and MLAM............................................ 55
The Trading Advisors........................................... 55
Financial Consultants.......................................... 56
Proprietary Trading............................................ 56
THE LIMITED PARTNERSHIP AGREEMENT................................... 57
FEDERAL INCOME TAX CONSEQUENCES..................................... 58
PLAN OF DISTRIBUTION................................................ 62
General........................................................ 62
Subscription Procedure......................................... 62
Purchases by Employee Benefit Plans............................ 63
Selling Agent Compensation..................................... 64
LEGAL MATTERS....................................................... 64
EXPERTS............................................................. 65
ADDITIONAL INFORMATION.............................................. 65
INDEX OF TERMS...................................................... 66
INDEX TO FINANCIAL STATEMENTS....................................... 67
THE CORE ADVISORS................................................... 88
PERFORMANCE OF THE
SINGLE-ADVISOR FUTURES
FUNDS OPERATED BY MLIP........................................... 115
THE ROLE OF MANAGED
FUTURES IN AN INVESTMENT PORTFOLIO............................... 117
APPENDIX -- BLUE SKY GLOSSARY....................................... APP-1
EXHIBIT A -- THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT.................................... LPA-1
EXHIBIT B -- AMENDED FORM OF GUARANTEE
AGREEMENT........................................................ B-1
EXHIBIT C -- SUBSCRIPTION REQUIREMENTS.............................. SR-1
EXHIBIT D -- SUBSCRIPTION AGREEMENT
AND POWER OF ATTORNEY............................................. SA-(i)
</TABLE>
____________________
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
MERRILL LYNCH WORLD HEADQUARTERS
SOUTH TOWER, SIXTH FLOOR
WORLD FINANCIAL CENTER
NEW YORK, NEW YORK 10080-6106
TELEPHONE: (212) 236-4167
-4-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY
The nature of an investment in the Fund is complex and must be reviewed
carefully by
any person considering purchasing Units. The following summary is qualified in
its entirety by the information set forth elsewhere in this Prospectus.
____________________
THE FUND
ML PRINCIPAL PROTECTION L.P. (THE "FUND") is a limited partnership
which trades in the international futures, commodity options and forward
markets, with the objectives of achieving, through speculative trading, long-
term capital appreciation while controlling performance volatility. The general
partner of the Fund is MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP").
The Fund's assets are allocated and reallocated by MLIP to the trading
management of independent professional advisors (THE "TRADING ADVISORS" OR THE
"ADVISORS") applying proprietary strategies in numerous markets.
The Fund offers the Units, and receives and processes subscriptions,
on a continuous basis, throughout each calendar quarter at $100 per Unit.
Investors whose subscriptions are accepted at any time during a calender quarter
are admitted to the Fund as Limited Partners as of the beginning of the
immediately following quarter (and also as of May 1, 1997). Investors' customer
securities accounts are debited in the amount of their subscriptions on
settlement dates throughout each quarter shortly after their subscriptions are
accepted by MLIP. Subscription proceeds received during a quarter are held in
escrow pending investment in Units as of the beginning of the following quarter.
All interest earned on subscriptions while held in escrow is paid to the
investors.
The Fund began trading on October 12, 1994 with an initial
capitalization of $32,000,000. Through February 28, 1997, a total of an
additional $69,903,535 has been invested in the Units at seven subsequent
quarter-end closings (the last sale of the Units occurred as of July 16, 1996).
Through February 28, 1997, an aggregate of 1,019,035.35 Units had been sold and
325,721.10 redeemed. As of March 1, 1997, the Fund's capitalization was
$77,491,500, and the Fund had a total of 3,284 Limited Partners.
Through February 28, 1997, the highest month-end Net Asset Value of a
Series A Unit was $126.63 (February 28, 1997; adding back to Net Asset Value
aggregate distributions of $12.00 per Series A Unit ) and the lowest $101.04
(October 31, 1994). See "Performance of the Fund" at page 17 and "Selected
Financial Data" at page 23.
As of February 28, 1997, the Net Asset Value (as defined in the
Fund's Limited Partnership Agreement -- Exhibit A to this Prospectus) of the
different series of Units, each issued at $100 per Unit as of the beginning of
successive calendar quarters, were as follows:
<TABLE>
<CAPTION>
February 28, 1997
Unit February 28, 1997 Net Asset Value per Unit
Series Date of Issuance Net Asset Value per Unit Adding back Distributions
-------- ---------------- ------------------------ -------------------------
<S> <C> <C> <C>
A October 12, 1994 $114.63 $126.63
B January 9, 1995 $111.53 $124.03
C April 10, 1995 $113.17 $116.67
D July 11, 1995 $111.98 $115.48
E October 12, 1995 $112.39 $115.89
F January 16, 1996 $106.53 $112.53
G April 19, 1996 $111.08 $111.08
H July 16, 1996 $110.26 $110.26
</TABLE>
Distributions of $6.00 per Series A Units were paid as of October 1, 1995 and
October 1, 1996, distributions of $6.00 per Series B Units were paid as of
January 1, 1996, and distributions of $6.50 per Series B Units were paid as of
January 1, 1997. Distributions of $3.50 per Series C, Series D and Series E
Units were paid on April 1, 1996, July 1, 1996 and October 1, 1996,
respectively. Distributions of $6.00 per Series F Units were paid as of January
1, 1997. No distributions for Series G and Series H Units had been paid as of
February 28, 1997.
No distributions on the Units sold pursuant to this Prospectus are
currently contemplated by MLIP.
- --------------------------------------------------------------------------------
-5-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY (CONT.)
MERRILL LYNCH & CO. INC. ("ML&CO.") has agreed to contribute
sufficient assets to the Fund so that the Net Asset Value of each Unit
outstanding as of its Principal Assurance Date (five years from the date of
issuance) will be no less than such Unit's initial $100 subscription price. In
order to prevent trading losses which might require ML&Co. to make payments
under such undertaking, each series of Units commences trading with only 75% of
its assets allocated to the Advisors for management. On an ongoing basis, MLIP
controls the percentage of each series' assets allocated to trading primarily in
order to protect ML&Co. from any liability under its guarantee.
ALL SERIES OF UNITS ISSUED TO DATE HAVE (I) TRADED WITH 60% OF THEIR
CAPITAL ALLOCATED TO TRADING, (II) RECEIVED ANNUAL FIXED-RATE AND POSSIBLE
DISCRETIONARY DISTRIBUTIONS AND (III) HAD A PRINCIPAL ASSURANCE DATE SEVEN YEARS
AFTER ISSUANCE. UNITS SOLD PURSUANT TO THIS PROSPECTUS AND IN THE FUTURE WILL
(X) COMMENCE TRADING WITH 75% OF THEIR ASSETS ALLOCATED TO TRADING, (Y) RECEIVE
(IN ALL LIKELIHOOD) NO DISTRIBUTIONS AND (Z) HAVE A PRINCIPAL ASSURANCE DATE
FIVE YEARS AFTER ISSUANCE. THESE DIFFERENT LEVERAGE, DISTRIBUTION AND PRINCIPAL
ASSURANCE DATE PARAMETERS COULD MATERIALLY AFFECT BOTH RATES OF RETURN AND
VOLATILITY.
RISK FACTORS
THE FOLLOWING ARE CERTAIN OF THE SIGNIFICANT RISKS OF THIS INVESTMENT.
. INVESTORS MAY LOSE ALL OR SUBSTANTIALLY ALL OF THE TIME VALUE OF THEIR
INVESTMENT. AT A 7% ANNUAL INTEREST RATE, THE PRESENT VALUE OF RECEIVING
THE ASSURED MINIMUM $100 PER UNIT FIVE YEARS IN THE FUTURE WOULD BE ONLY
APPROXIMATELY $71. SEE "RISK FACTORS -- (1) INVESTORS MAY INCUR
SUBSTANTIAL LOSSES" AT PAGE 11.
. THE PAST PERFORMANCE OF THE FUND AND ITS ADVISORS IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS. SEE "COMMODITY FUTURES TRADING COMMISSION--
RISK DISCLOSURE STATEMENT" AT PAGE 1 AND "RISK FACTORS -- (2) PAST
PERFORMANCE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS" AT PAGE 11.
. THE FUND TRADES WITH A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS. SEE
"RISK FACTORS -- (3) VOLATILE MARKETS; HIGHLY LEVERAGED TRADING" AT PAGE
11.
. THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND INVOLVES BOTH IMMEDIATE
OPPORTUNITY COSTS AND THE RISK OF SIGNIFICANTLY INCREASED OPPORTUNITY COSTS
IN THE FUTURE. MLIP INITIALLY ALLOCATES ONLY 75% OF EACH SERIES' CAPITAL TO
TRADING IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS GUARANTEE,
CORRESPONDINGLY REDUCING PROFIT POTENTIAL. THERE IS ALSO THE RISK OF
FURTHER DELEVERAGING OR EVEN TERMINATING TRADING IN THE EVENT THAT THE FUND
DOES NOT MAKE SUFFICIENT PROFITS FOR THE NET ASSET VALUE OF A SERIES OF
UNITS TO INCREASE ABOVE ITS INITIAL $100 PER UNIT, AFTER ALL FEES AND
EXPENSES. SEE "RISK FACTORS -- (4) THE OPPORTUNITY COSTS AND RISKS OF
'PRINCIPAL PROTECTION'" AT PAGE 11.
. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING OR
TERMINATING TRADING. SEE "RISK FACTORS -- (4) THE OPPORTUNITY COSTS AND
RISKS OF 'PRINCIPAL PROTECTION'" AT PAGE 11.
. IF MLIP DELEVERAGES ANY ONE SERIES OF UNITS, IT MUST SIMILARLY DELEVERAGE
ALL SERIES. SEE "RISK FACTORS -- (4) THE OPPORTUNITY COSTS AND RISKS OF
'PRINCIPAL PROTECTION'" AT PAGE 11.
. IRRESPECTIVE OF THE DELEVERAGING OF THE FUND'S TRADING, THE RISK CONTROL
CHARACTERISTICS OF THE FUND'S MULTI-ADVISOR APPROACH MAKE IT HIGHLY
UNLIKELY THAT THE ML&CO. GUARANTEE, DESPITE ITS SIGNIFICANT OPPORTUNITY
COSTS, WILL EVER BENEFIT INVESTORS. SEE "RISK FACTORS -- (5) MULTI-ADVISOR
RISK CONTROL AND 'PRINCIPAL PROTECTION'" AT PAGE 12.
. WERE ML&CO. TO INCUR A LIABILITY UNDER ITS GUARANTEE, INVESTORS COULD ONLY
ENFORCE SUCH LIABILITY THROUGH BRINGING A DERIVATIVE ACTION IN THE NAME OF
THE FUND, AS THIS GUARANTEE DOES NOT RUN DIRECTLY TO INVESTORS. SEE "RISK
FACTORS -- (4) THE OPPORTUNITY COSTS AND RISKS OF 'PRINCIPAL PROTECTION'"
AT PAGE 11.
- --------------------------------------------------------------------------------
-6-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY(CONT.)
. THE FUND IS SUBJECT TO SUBSTANTIAL CHARGES. ESTIMATED GROSS TRADING
PROFITS OF 7.20% OF THE FUND'S AVERAGE MONTH-END NET ASSETS MUST BE EARNED
DURING THE FIRST YEAR AFTER A UNIT IS SOLD IN ORDER FOR ITS REDEMPTION
VALUE TO EQUAL THE INITIAL $100 SUBSCRIPTION PRICE. SEE "-- BREAKEVEN
TABLE" BELOW AT PAGE 9, "CHARGES" AT PAGE 43 AND "RISK FACTORS -- (6)
SUBSTANTIAL CHARGES" AT PAGE 12.
. CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS
PERIODS WITHOUT MAJOR PRICE MOVEMENTS -- MAKE IT DIFFICULT FOR THE ADVISORS
TO TRADE SUCCESSFULLY. SEE "RISK FACTORS -- (7) IMPORTANCE OF GENERAL
MARKET CONDITIONS" AT PAGE 12.
NO SUBSCRIBER SHOULD INVEST MORE THAN 10% OF HIS OR
HER READILY MARKETABLE ASSETS IN THE FUND.
SEE "RISK FACTORS" AT PAGES 11 THROUGH 14.
FUND OPERATIONS
THE FUND'S MULTI-ADVISOR APPROACH
The Fund is a multi-strategy, multi-market managed futures investment,
employing a range of strategies diversified across major sectors of the global
economy -- financials, currencies, energy, metals and agriculture. MLIP
allocates Fund assets both to Advisors specializing in particular market sectors
and to Advisors which trade broadly diversified portfolios.
The Fund has to date retained between five and fifteen Advisors at any
one time, trading independently of each other and employing diverse trading
methods. A number of Advisor changes, as well as reallocations of assets among
Advisors, have been made since inception. MLIP allocates a substantial portion
of the Fund's trading assets to a limited group of core Advisors, each of which
receives significant allocations -- approximately 15% or more of the assets
committed to trading. ("Core Advisors" is the term used by MLIP to identify
Advisors allocated 10% or more of the Fund's trading assets for management.)
The remainder is allocated in smaller percentages to a group of non-core
Advisors, some of which may be newer to the business or may implement
specialized strategies. See "-- The Advisors," below, "The Advisor Selection
Process" at page 29 and "The Core Advisors" at page 88.
Since inception, traditional commodities -- energy, metals and
agriculture -- have represented approximately 20% to 40% of the Fund's holdings,
with the remainder of its market commitments in currencies and financial
instruments.
The Fund offers investors the opportunity to diversify a limited
portion of the risk segment of their portfolios into an investment field that
has historically often demonstrated a low degree of performance correlation with
traditional stock and bond holdings. If such non-correlation is in fact
achieved and the Fund is profitable, investing in the Units has the potential to
enhance the reward/risk ratio of an overall portfolio. Since it began trading,
the Fund's returns have, in fact, frequently been significantly non-correlated
(not, however, negatively correlated) with the United States stock and bond
markets. See "The Role of Managed Futures in an Investment Portfolio" at page
117.
MLIP
MLIP is one of the largest managed futures sponsors in the United
States (or elsewhere) in terms of both financial and personnel resources and
assets under management. As of March 1, 1997, MLIP was serving as sponsor or
trading manager for futures funds with total capital of approximately $2.1
billion.
- -------------------------------------------------------------------------------
-7-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY (CONT.)
THE ADVISORS
The Fund's assets are traded by both core and non-core Advisors. The
two current core Advisors (collectively managing approximately 34% of the Fund's
trading assets as of April 1, 1997) were, as of January 31, 1997, collectively
managing approximately $2.9 billion in managed futures accounts in which their
clients (and in certain cases the Advisors themselves) had invested, and
approximately $2.0 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 Advisors" beginning at page 31 and "The Core Advisors"
beginning at page 88 for certain performance and other information relating to
the current core Advisors. The accompanying Prospectus Supplement identifies
the current non-core Advisors.
"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 a Unit's Principal Assurance
Date.
Units redeemed before their Principal Assurance Date are entitled to
no benefits under the ML&Co. guarantee, and there is no assurance as to any
minimum redemption value for such Units.
POTENTIAL YIELD ENHANCEMENT
MLIP attempts to increase the return (including both interest income
and capital gain) received by the Fund on its available cash by retaining the
services of its affiliate, MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM"). MLAM
manages approximately 80% of the Fund's capital, investing on an unleveraged
basis in U.S. Treasury bills, notes and bonds, as well as securities issued by
certain U.S. government agencies and instrumentalities (collectively,
"Government Securities"), within investment parameters established by MLIP for
which MLAM assumes no responsibility. MLF pays MLAM's fees from the brokerage
commissions paid by the Fund. There can be no assurance that MLAM's cash
management will be able to achieve higher yields for the Fund or to avoid losses
of principal.
As of December 31, 1996, MLAM and its affiliates, collectively, had a
total of approximately $234.1 billion in investment company and other portfolio
assets under management, including accounts of certain affiliates of MLAM.
TWO-TIER STRUCTURE OF THE FUND
The Fund does not trade in the futures and forward markets directly,
but rather through a subsidiary limited partnership, ML PRINCIPAL PROTECTION
TRADING L.P. (THE "TRADING PARTNERSHIP"), of which the Fund is the sole limited,
and MLIP the sole general, partner. The Fund's liability for any trading losses
is limited to the Fund's investment in the Trading Partnership. Trading through
the limited liability conduit of the Trading Partnership rather than directly
makes it possible for MLIP to ensure, as required by applicable CFTC rules, that
the assets attributable to any one series of Units cannot become subject to
paying trading losses attributable to any other series. The combination of the
pro rata sharing of losses at the Trading Partnership level and the insulation
of the Fund assets not invested in the Trading Partnership from the risk of
trading losses eliminates the possibility of one series' assets paying debts
attributable to another. See "The Two-Tier Structure of the Fund" at page 24
and "Leverage Considerations" at page 36.
THERE CAN BE NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS OBJECTIVES OR AVOID
SUBSTANTIAL LOSSES.
NO ADVISOR OR MERRILL LYNCH ENTITY HAS GUARANTEED THE SUCCESS OF THE FUND. THE
ML&CO.
GUARANTEE OF THE MINIMUM NET ASSET VALUE PER UNIT AS OF ITS PRINCIPAL
ASSURANCE DATE IS NOT A GUARANTEE OF SUCCESS OR OF AVOIDING
SUBSTANTIAL PRESENT VALUE LOSSES.
- --------------------------------------------------------------------------------
-8-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY (CONT.)
BREAKEVEN TABLE
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
COLUMN I COLUMN II
BREAKEVEN
BREAKEVEN DOLLAR RETURN REQUIRED
PERCENTAGE RETURN ($5,000 INITIAL
REQUIRED FIRST INVESTMENT) FIRST
TWELVE MONTHS TWELVE MONTHS
OF INVESTMENT OF INVESTMENT
(BASED ON A CONSTANT (BASED ON A CONSTANT
EXPENSES AND 75% ALLOCATION OF 75% ALLOCATION OF
CASH MANAGEMENT INCOME ASSETS TO TRADING) ASSETS TO TRADING)
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
Brokerage Commissions/(1)/ 6.56% $ 328.00
- ------------------------------------------------------------------------------------------------
Administrative Fee/(2)/ 0.19% $ 9.50
- ------------------------------------------------------------------------------------------------
Organizational and Initial Offering Costs /(3)/ 0.10% $ 5.00
- ------------------------------------------------------------------------------------------------
F/X Desk Service and Related Fees /(4)/ 0.25% $ 12.50
- ------------------------------------------------------------------------------------------------
Profit Shares /(5)/ 2.00% $ 100.00
- ------------------------------------------------------------------------------------------------
Redemption Charge /(6)/ 3.10% $ 155.00
- ------------------------------------------------------------------------------------------------
Cash Management Income/(7)/ (5.00)% $(250.00)
- ------------------------------------------------------------------------------------------------
RETURN ON A $5,000 INITIAL INVEST-
MENT REQUIRED TO BREAKEVEN 7.20% $ 360.00
- ------------------------------------------------------------------------------------------------
</TABLE>
NOTES TO BREAKEVEN TABLE
(1) Brokerage Commissions include the Consulting Fees payable to the Advisors
by MLF. Consulting Fees generally average approximately 2% per annum of
Fund assets managed, depending on the Advisor. As of January 1, 1997, the
9.25% per annum Brokerage Commissions were reduced to 8.75%.
(2) Beginning January 1, 1996, the annual Brokerage Commissions payable by MLF
were reduced to 9.25% from 9.50% with 0.25% per annum being
recharacterized as an Administrative Fee payable directly to MLIP by the
Fund. This recharacterization had no economic effect on the Fund.
(3) Estimated; based on the Fund's March 1, 1997 capitalization.
(4) Estimated; paid on a per-transaction basis. The bid-ask spreads paid on
forward currency trades are difficult to estimate and are not included as
an expense in the Breakeven Table. The F/X Desk is the Foreign Exchange
Desk organized by MLIP through which the Fund trades forward currency
contracts. See "Charges -- F/X Desk Service Fees; EFP Differentials" at
page 46.
(5) It is not possible to predict the Profit Shares which might be paid in a
breakeven year. MLIP believes, based on the experience of the Fund to
date, that 2.00% of average month-end capitalization is a reasonable
estimate of breakeven Profit Share expense; however, actual Profit Shares
could differ.
(6) Redemption charges would equal 3.1% of the initial $5,000 investment
because these charges would equal 3% of the $5,155 year-end Net Asset
Value necessary in order for the investor to receive net redemption
proceeds of $5,000 after subtracting the 3% redemption charge.
(7) Estimated. The total yield earned on the Fund's assets, including the
results of MLAM's cash management services, is assumed to approximate the
91-day Treasury bill rate for purposes of this estimate; in fact, however,
MLAM's cash management may be unable to produce an enhanced yield or avoid
a loss of principal. Such estimate does not reflect the annual benefit
derived by Merrill Lynch from the deposit of certain of the Fund's U.S.
dollar Available Assets in offset accounts. See "Use of Proceeds and Cash
Management Income" beginning at page 39.
________________
If the percentage of a series' capital allocated to trading were to
increase, so would Brokerage Commissions and Administrative Fee (as well
as F/X Desk service and related fees) as a percentage of total capital. At
100% leverage, the Fund's annual Brokerage Commissions and Administrative
Fee would equal 8.75% 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 9.45% or $472.50.
- --------------------------------------------------------------------------------
-9-
<PAGE>
- --------------------------------------------------------------------------------
SUMMARY (CONT.)
FEDERAL INCOME TAX CONSEQUENCES
In the opinion of counsel, the Fund and the Trading Partnership are each
properly classified as partnerships for federal income tax purposes. Limited
Partners pay tax each year on their allocable share of the Fund's taxable
income, if any, whether or not they receive any distributions from the Fund or
redeem any Units. Substantially all of the trading gains and losses allocable
to the Fund are treated as capital gains or losses for tax purposes; interest
income received by the Fund is treated as ordinary income. The Fund could be
allocated significant capital losses from the Trading Partnership, and investors
nevertheless be required to pay tax on their allocable share of the Fund's
ordinary income.
SUITABILITY
THE FUND TRADES AT A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS. THERE
CAN BE NO ASSURANCE THAT THE FUND WILL ACHIEVE ITS OBJECTIVES OR AVOID
SUBSTANTIAL LOSSES.
THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND LIMITS THE MAXIMUM LOSS
WHICH AN INVESTOR CAN INCUR BUT IN NO RESPECTS GUARANTEES THAT THE FUND WILL BE
SUCCESSFUL.
NO SUBSCRIBER SHOULD INVEST MORE THAN 10% OF HIS OR HER READILY MARKETABLE
ASSETS IN THE FUND. SUBSCRIBERS MUST BE PREPARED TO LOSE ALL OR SUBSTANTIALLY
ALL OF THE TIME VALUE OF THEIR INVESTMENT.
THE UNITS ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
- --------------------------------------------------------------------------------
-10-
<PAGE>
RISK FACTORS
AN INVESTMENT IN THE FUND IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
NO SUBSCRIBER SHOULD INVEST MORE THAN 10% OF HIS OR HER
READILY MARKETABLE ASSETS IN THE FUND.
_______________
(1) INVESTORS MAY INCUR SUBSTANTIAL LOSSES
INVESTORS MUST BE PREPARED TO LOSE ALL OR SUBSTANTIALLY ALL OF THE TIME
VALUE OF THEIR INVESTMENT IN THE FUND FOR THE ENTIRE FIVE-YEAR TIME HORIZON FROM
A UNIT'S ISSUANCE TO ITS PRINCIPAL ASSURANCE DATE. AT A 7% ANNUAL INTEREST
RATE, THIS WOULD CONSTITUTE APPROXIMATELY A 30% LOSS.
(2) PAST PERFORMANCE NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
Past performance is not necessarily indicative of future results. Neither
the Advisors' nor the Fund's past performance may be representative of how they
or it, respectively, may trade in the future.
(3) VOLATILE MARKETS; HIGHLY LEVERAGED TRADING
Futures and forward trading is highly leveraged, and market price levels
are volatile and materially affected by unpredictable factors such as weather
and governmental intervention. The combination of leverage and volatility
creates a high degree of risk.
(4) THE OPPORTUNITY COSTS AND RISKS OF "PRINCIPAL PROTECTION"
The "principal protection" feature of the Fund involves both actual
opportunity costs and the risk of significantly increased opportunity costs in
the future. MLIP initially deleverages each series' trading, correspondingly
reducing profit potential, in order to protect ML&Co. from any liability under
its guarantee. In addition to the opportunity costs of this initial
deleveraging, there is the risk of further deleveraging in the event that the
Fund does not recognize sufficient profits for the Net Asset Value per Unit of a
given series to increase above its initial $100 per Unit. Unless the Net Asset
Value per Unit increases, MLIP will further deleverage trading as the discounted
value of $100 (the minimum Net Asset Value per Unit assured to investors as of
their Principal Assurance Date) converges to the current Net Asset Value per
Unit, eliminating any assets available to support trading. In the event that the
Fund incurs even relatively small losses (as opposed to merely breakeven
performance), MLIP might rapidly and significantly deleverage or even terminate
trading.
The "principal protection" feature of the Fund creates the risk that the
need to ensure that the Net Asset Value per Unit does not decline below the
present value of $100 will reduce or eliminate the Fund's profit potential by
diminishing or terminating its ability to trade, to the material detriment of
investors.
In the event that MLIP deleverages any particular series of Units, it must
deleverage all series to the same degree. A series could be deleveraged as a
result of losses which accrued subsequent to such series having recognized
profits more than sufficient to offset such losses, but which were earned before
a more recent series was issued and, consequently, were not available to offset
the same losses incurred by such series. Conversely, losses incurred before a
particular series is issued could indirectly cause a further deleveraging of
such series' trading due to the effect of such losses on the leverage which MLIP
believes it is appropriate to use for an earlier-issued series.
The ML&Co. guarantee does not run directly to investors but only to the
Fund itself. Consequently, were ML&Co. to incur a liability under its
guarantee, investors could only enforce such liability through bringing a
derivative action in the name of the Fund. Derivative actions are subject to a
number of procedural requirements not applicable to claims brought directly on
behalf of the plaintiff.
-11-
<PAGE>
(5) MULTI-ADVISOR RISK CONTROL AND "PRINCIPAL PROTECTION"
In addition to the opportunity costs of the deleveraged trading resulting
from the Fund's "principal protection" feature, the multi-advisor strategy of
the Fund involves the inherent opportunity costs of combining independent
trading strategies into a single portfolio. The Advisors trade pursuant to
their respective trading strategies without regard to the positions taken by any
other Advisor. Consequently, the profits earned by certain Advisors are
frequently offset, in whole or in part, by losses incurred by others, decreasing
the likelihood of material gains or losses. The loss reduction features of
MLIP's multi-advisor strategy -- irrespective of the deleveraging of the Fund's
trading as a result of the Fund's "principal protection" -- significantly
reduces the possibility of the ML&Co. guarantee ever being of any tangible
benefit to investors. See "-- (11) Combining Independent Trading Strategies,"
below at page 13.
(6) SUBSTANTIAL CHARGES
The Fund is subject to substantial charges. Due to the "principal
protection" structure of the Fund, it is particularly important that the capital
of any series not be depleted by expenses. Any such depletion could result in
the further deleveraging or termination of trading in respect of all outstanding
series. The charges assessed on Units sold under this Prospectus will be
greater as a percentage of their total equity than the charges reflected in the
Fund's performance to date because the newly-issued Units will begin trading at
75% leverage rather than the 60% leverage used by previous series. Brokerage
Commissions as well as Administrative Fees and the Fund's per-trade costs (for
example, F/X Desk service fees) are based on the assets committed to trading by
each series. At the same time, the increased leverage of the Units issued
pursuant to this Prospectus will correspondingly increase their profit potential
and risk of loss.
The Profit Shares paid to the Advisors are based on the individual
performance of each Advisor, not the overall performance of the Fund.
Historically, the Fund has paid substantial Profit Shares to certain Advisors
during periods when the performance of the Fund as a whole was breakeven or
unprofitable.
(7) IMPORTANCE OF GENERAL MARKET CONDITIONS
Overall market or economic conditions -- which neither MLIP nor any Advisor
can predict or control -- have a material effect on performance. Furthermore,
such overall conditions can adversely affect the performance of different
Advisors at or about the same time, despite their implementing different and
independent strategies. The multi-advisor structure of the Fund does not assure
that its performance will not be adversely affected by future market or economic
conditions.
(8) NO DIVERSIFICATION BENEFITS IF THE FUND IS NOT PROFITABLE
If the Fund does not trade successfully -- after deduction of all fees and
charges -- it cannot serve as an effective diversification for a traditional
portfolio.
(9) NO ASSURANCE OF NON-CORRELATION; LIMITED VALUE OF NON-CORRELATION EVEN IF
ACHIEVED
Not only is the past performance of the Fund not necessarily indicative of
its future results (due to the speculative character of managed futures), but
also there can be no assurance that, however the Fund may perform, the Fund's
results will be non-correlated with (i.e., unrelated to) the general stock and
bond markets. If the Fund's performance is not non-correlated to these markets,
the Fund cannot help diversify an overall portfolio.
Investors should evaluate an investment in the Fund in terms of the
alternative of an investment in a cash equivalent, such as 91-day Treasury
bills, which can be relied upon to (i) be generally non-correlated with equity
and debt price levels, (ii) generate a positive yield and cash flow, (iii) be
highly liquid, (iv) have almost no risk of loss of principal, and (v) incur
virtually no costs or expenses.
Even if the Fund's performance is generally both profitable and non-
correlated to the general stock and bond markets, there are highly likely to be
significant periods during which the Fund's results are similar to those of an
investor's stock and bond holdings, thereby reducing or eliminating the Fund's
diversification benefits. During unfavorable economic cycles, an investment in
the Fund may increase rather than mitigate a portfolio's aggregate losses.
-12-
<PAGE>
(10) THE NEW SERIES OF UNITS
All series of Units issued under this Prospectus will commence trading at
75% leverage. Previously issued series began trading at 60% leverage and have
maintained that leverage to date. (The previously issued series of Units have
mandatory distribution policies which increase the risk of their trading being
deleveraged. Consequently, MLIP reduces the initial leverage at which these
Units trade.) The higher leverage applied by the new series of Units will
result in their expected performance being more volatile and involving a higher
degree of risk (as well as profit potential) than is the case with Units issued
prior to the date hereof.
If MLIP makes a leverage adjustment to any series issued under this
Prospectus, MLIP must make corresponding adjustments to the leverage used by all
other series issued hereunder (or subsequently), so that all such series trade
at the same level of leverage. This regulatory requirement could affect certain
series adversely. See "-- (4) The Opportunity Costs and Risks of 'Principal
Protection'," above at page 11.
MLIP does not presently intend to make any distributions on Units issued
under this or subsequent Prospectuses.
(11) COMBINING INDEPENDENT TRADING STRATEGIES
Combining independent trading strategies involves substantial opportunity
costs, as one Advisor's profits are frequently offset by another Advisor's
losses. Different Advisors often take opposite positions for the Fund,
eliminating the profit potential of the combined positions. See "-- (5) Multi-
Advisor Risk Control and 'Principal Protection'," above at page 12.
(12) SYSTEMATIC STRATEGIES
Most of the Fund's trading assets have been allocated since inception to
Advisors which rely on technical, systematic strategies. The widespread use of
technical trading systems frequently results in numerous managers attempting to
execute similar trades at or about the same time, altering trading patterns and
affecting market liquidity. Furthermore, the profit potential of trend-
following systems may be diminished by the changing character of the markets,
which may make historical price data (on which technical programs are based)
only marginally relevant to future market patterns.
(13) DISCRETIONARY STRATEGIES
Certain of the Fund's Advisors 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.
(14) INCREASED ASSETS UNDER MANAGEMENT
There appears to be a tendency for the rates of return achieved by managed
futures advisors to decline as assets under management increase. None of the
Advisors has agreed to limit the amount of additional equity which it may
manage, and most of them are at or near their all-time high in assets under
management.
(15) NO ASSURANCE OF ADVISORS' CONTINUED SERVICES
There is no assurance that any Trading Advisor will be willing or able to
continue to provide advisory services to the Fund. There is severe competition
for the services of qualified Advisors, and the Fund may not be able to retain
satisfactory replacement or additional Advisors on acceptable terms. MLIP must
allocate Advisor availability among its different funds, including the Fund,
and, accordingly, may not at all times select for the Fund those Advisors which
MLIP would otherwise believe to be in its best interests.
(16) CHANGES IN TRADING STRATEGY
An Advisor may make changes in its trading strategies without the knowledge
of MLIP.
(17) ILLIQUID MARKETS
Certain positions held by the Fund may become illiquid, preventing a
Trading Advisor from acquiring positions otherwise indicated by its strategy or
making it impossible for a Trading Advisor to close out positions against which
the market is moving.
(18) CASH MANAGEMENT RISKS
The possibility of the Fund's cash management program increasing the non-
trading income received on the Fund's assets over the risk-free rate necessarily
implies increasing risk and, accordingly, the possibility of incurring losses --
not
-13-
<PAGE>
only of yield but also of principal. MLAM has not guaranteed in any respect
either that there will be an increase in the non-trading income recognized on
the Fund's assets or that there will not be a loss of principal as a result of
the Fund's "yield enhancement" strategies.
(19) REDEMPTIONS RESTRICTED
Investors' limited ability to redeem Units could result in there being a
substantial difference between a Unit's redemption value and its Net Asset Value
as of the date by which irrevocable redemption requests must be received.
Redemption charges of 3% apply through the end of the twelfth month after a Unit
is sold.
(20) TRADING ON NON-U.S. EXCHANGES
The Trading Advisors trade extensively on non-U.S. exchanges. These
exchanges are not regulated by any United States governmental agency. The Fund
could incur substantial losses trading on foreign exchanges to which it would
not have been subject had the Trading Advisors limited their trading to U.S.
markets.
The profits and losses derived from trading foreign futures and options
will generally be denominated in foreign currencies; consequently, the Fund will
be subject to a certain degree of exchange-rate risk in trading such contracts.
(21) CONFLICTS OF INTEREST
The Fund is subject to a number of material actual and potential conflicts
of interest, raising the possibility that investors will be disadvantaged to the
benefit of MLIP, the Trading Advisors or their respective principals and
affiliates. No formal policies or procedures have been adopted to resolve these
conflicts. See "Conflicts of Interest" beginning at page 54.
(22) LIMITED PARTNERS TAXED CURRENTLY
Each year, Limited Partners are taxed on their allocable share of any Fund
profits. If an investor purchased stocks or bonds, on the other hand, there
would generally be no tax due on the appreciation in the value of such holdings
until disposition.
All performance information in this Prospectus is presented exclusively on
a pre-tax basis.
(23) "INVESTMENT ADVISORY FEES"
Limited Partners could be required to treat the Profit Shares as well as
certain other expenses of the Fund, as "investment advisory fees," which are
subject to substantial restrictions on deductibility for individual taxpayers.
MLIP has not, to date, been classifying the Profit Share or such expenses as
"investment advisory fees," a position to which the (24Internal Revenue Service
(the "IRS") might object.
(24) TAXATION OF INTEREST INCOME
The Fund's trading losses are almost exclusively capital losses for tax
purposes. Capital losses may be offset against ordinary income only to the
extent of $3,000 per year for individual taxpayers. If an individual Limited
Partner had, for example, an allocable trading loss of $10,000 and allocable
interest income of $5,000, he or she would incur a net loss of $5,000 but would
recognize taxable interest income of $2,000.
(25) TAX AUDIT
There can be no assurance that the Fund's tax returns will not be audited
by the IRS. If such an audit were to result in an adjustment, Limited Partners
could be required to pay back taxes, interest and penalties, and could
themselves be audited.
Prospective investors are strongly urged to consult their own tax advisers
and counsel with respect to the possible tax consequences of an investment in
the Fund, particularly since such tax consequences may differ among investors.
See "Federal Income Tax Consequences" at page 58.
(26) BANKRUPTCY OR DEFAULT
In the event of the bankruptcy of MLF, the Fund could be unable to recover
its assets, and investors could incur substantial losses, despite the Fund
having been otherwise highly profitable.
(27) REGULATORY CHANGE
Future regulatory changes could be materially adverse to the Fund.
_______________
-14-
<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 11.
____________________
(1) MLIP
MLIP is a major sponsor of futures funds. MLIP's experience and
familiarity with the managed futures industry assist MLIP in its ongoing
monitoring of the Trading Advisors' performance as well as in the administration
of the Fund. MLIP combines experience in the trading advisor selection process
with an active approach to its general partner and trading manager roles.
(2) THE TRADING ADVISORS
The Advisors selected by MLIP for the Fund generally satisfy MLIP's
criteria of having performed successfully for a significant period of time (no
less than approximately 12-18 months) prior to their selection. MLIP evaluates
successful performance in a variety of ways, including cumulative profitability,
performance volatility and the duration and frequency of drawdowns. Although
MLIP uses a variety of statistical measures in assessing prospective Advisors'
performance, because of the inherent uncertainty of future performance, MLIP
relies heavily on its subjective evaluation of a prospective Advisor's abilities
in the selection process. Other than in exceptional circumstances, prospective
Advisors who do not satisfy MLIP's quantitative past performance criteria are
not given further consideration. However, even Advisors which are considered
eligible on the basis of past performance must also meet MLIP's qualitative
standards (e.g., trading discipline, market view, reputation in the industry,
past experience, willingness to negotiate fees, etc.) in order to be selected.
(3) MARKET AND STRATEGY DIVERSIFICATION
In its asset allocation, MLIP emphasizes broad diversification and
participation in numerous global markets. MLIP focuses on combining Advisors
that collectively implement a wide range of qualitatively different strategies
and trading methods. Although since inception the Advisor group selected for
the Fund has emphasized technical, trend-following methods, in the future MLIP
may favor fundamental and/or discretionary Advisors in its selections for the
Fund. See "The Core Advisors -- Futures Trading Methods in General" at pages 88
and 89.
(4) PORTFOLIO DIVERSIFICATION
The performance of the Fund should exhibit a substantial degree of non-
correlation (not, however, necessarily negative correlation) with the
performance of traditional stock and bond portfolio components. Unlike short
selling in the securities markets, selling futures short is no more difficult
than establishing a long position. The profit and loss potential of futures
trading is not dependent upon economic prosperity or interest rate or currency
stability. Diversifying assets among different investments that generate
positive but non-correlated returns has the potential to decrease risk without a
corresponding decrease in returns -- enhancing the reward/risk profile of a
portfolio. Non-correlation without positive performance will not provide any
diversification advantages, and there can be no assurance that the Fund will
trade profitably.
Non-correlated performance must be distinguished from negatively correlated
performance. MLIP has no expectation that the performance of the Fund will be
inversely related to that of the general debt and equity markets, i.e., likely
to be profitable when the latter are unprofitable or vice versa. This would be
negative correlation. Non-correlation means only that the performance of the
Fund has, in MLIP's judgment, a good likelihood of being unrelated to the
performance of stocks and bonds, reflecting MLIP's belief that certain factors
which affect stock and bond prices may affect the Fund differently and that
certain factors which affect the former may not affect the latter. The Net
Asset Value per Unit may decline more or less than, or be more or less
profitable than, stocks and bonds during both bear and bull markets.
(5) GLOBAL TRADING
As global markets and investing become more complex, professionally managed
futures may increasingly be included in traditional portfolios of stocks and
bonds managed by advisors seeking improved balance and diversification. By
allocating a limited portion of the risk segment of their portfolios to a
managed futures investment such as the Fund with selected advisors specializing
in global futures and forward trading with the ability to move capital rapidly
among the world's economies and markets, investors have the potential, if their
managed futures investment is, in fact, profitable as well as non-correlated
with stocks and bonds, to add a valuable aspect of diversification to a
traditionally structured portfolio. Doing so may permit them to enhance their
prospects for superior performance as well as to reduce both the volatility of
their portfolios over time and their dependence on any single nation's economy.
-15-
<PAGE>
(6) POTENTIAL "YIELD ENHANCEMENT"
MLAM manages approximately 80% of the Fund's assets through investments in
Government Securities, maintaining a short-term portfolio with a maximum
duration of two years (i.e., the overall portfolio has a maximum exposure to
changes in prevailing interest rates comparable to that of a Treasury note with
a maturity of slightly longer than two years). See "Use of Proceeds and Cash
Management Income" beginning at page 39. MLAM makes no assurances that its cash
management services will result in increased yields or avoid the loss of
principal. If interest rates rise significantly, the Fund could incur material
losses in the market value of its Government Securities. Prospective investors
must recognize that there is a risk of loss, not only of yield but also of
principal, in MLAM's management of a Government Securities portfolio for the
Fund.
Although implementation of any cash management strategy involves
incremental risk, if the Fund's cash management program can increase the return
earned by the Fund from sources other than speculative trading, it can increase
the ability of the Fund to absorb its substantial costs, thereby potentially
reducing the risk of MLIP deleveraging or terminating trading as a result of the
Fund's charges depleting its equity base. See "Use of Proceeds and Cash
Management Income" beginning at page 39.
(7) SMALL MINIMUM INVESTMENT; SMALLER MINIMUM ADDITIONAL INVESTMENT
The initial minimum investment in the Fund is 50 Units ($5,000), and the
minimum additional investment for existing Limited Partners only 10 Units
($1,000). Any greater number of whole Units may be purchased.
The small minimum investment required by the Fund makes it possible for
first-time investors to gain exposure to managed futures through investing in
the Fund without having to commit large amounts of capital and also permits
smaller investors who wish to do so to include an investment in the Fund as a
limited portion of the risk segment of their portfolios.
(8) MERRILL LYNCH EMPLOYEE DISCOUNT
Officers and employees of Merrill Lynch subscribe for Units at the
discounted price of $97 per Unit. MLIP itself provides the remaining $3 per
Unit to the Fund so that other subscribers' investments are not diluted. (Due
to regulatory considerations, the employee discount is not available to
retirement accounts. Such accounts are free to purchase Units, but must do so
at $100 per Unit.)
The employee discount permits eligible investors to share in a portion of
the benefit derived by MLIP from not having to pay initial selling commissions
on sales of Units within the Merrill Lynch organization.
(9) ADMINISTRATIVE CONVENIENCE
The Fund is structured in order to minimize the administrative burden
to Limited Partners. Limited Partners receive, directly from MLIP, monthly
unaudited statements of account and annual certified financial reports as well
as all Fund-related tax information necessary for Limited Partners to complete
their federal income tax returns. The approximate Net Asset Value of an
investor's Units is available at any time upon request.
-16-
<PAGE>
PERFORMANCE OF THE FUND
ML PRINCIPAL PROTECTION L.P.
MARCH 1, 1997
Type of Pool: Multi-Advisor; Selected Advisor/Publicly-Offered/"Principal
Protected"/(1)/
Inception of Trading: October 12, 1994
Aggregate Subscriptions: $101,903,535
Current Capitalization: $77,491,500
Worst Monthly Drawdown:/(2)/ (3.70)% (2/96)
Worst Peak-to-Valley Drawdown:/(3)/ (3.70)% (2/96)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------
MONTHLY RATES OF RETURN/(4)/
-------------------------------------------------------------------------
MONTH 1997 1996 1995 1994
-------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January 2.06% 2.45% (0.55)% --
-------------------------------------------------------------------------
February 1.44% (3.70)% 2.24% --
-------------------------------------------------------------------------
March -- 1.06% 4.17% --
-------------------------------------------------------------------------
April -- 3.10% 0.91% --
-------------------------------------------------------------------------
May -- (1.98)% 1.20% --
-------------------------------------------------------------------------
June -- 1.36% (0.21)% --
-------------------------------------------------------------------------
July -- (1.68)% (1.30)% --
-------------------------------------------------------------------------
August -- 0.49% 0.95% --
-------------------------------------------------------------------------
September -- 1.62% (0.32)% --
-------------------------------------------------------------------------
October -- 4.25% 0.29% 1.04%
-------------------------------------------------------------------------
November -- 2.50% 0.69% 0.32%
-------------------------------------------------------------------------
December -- (0.20)% 2.12% 0.40%
-------------------------------------------------------------------------
Compound 3.53% 9.36% 10.55% 1.76%
Rate of Return (2 months) (2 2/3 months)
-------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
_________________________
THE UNITS ISSUED UNDER THIS PROSPECTUS WILL COMMENCE TRADING WITH 75% OF
THEIR ASSETS ALLOCATED TO TRADING. ALL SERIES OF UNITS ISSUED TO DATE HAVE
TRADED AT ONLY APPROXIMATELY 60% LEVERAGE. INCREASING TRADING LEVERAGE SHOULD
INCREASE MONTHLY RATES OF RETURN (BOTH POSITIVE AND NEGATIVE), DRAWDOWNS, PROFIT
POTENTIAL, RISK AND VOLATILITY.
_________________________
(1) PURSUANT TO APPLICABLE CFTC REGULATIONS, A "MULTI-ADVISOR" FUND IS
DEFINED AS ONE THAT ALLOCATES NO MORE THAN 25% OF ITS TRADING ASSETS TO ANY
SINGLE MANAGER. THE FUND DOES NOT CURRENTLY ALLOCATE MORE THAN 25% OF ITS
TRADING ASSETS TO ANY SINGLE ADVISOR BUT MAY DO SO IN THE FUTURE; CONSEQUENTLY,
IT IS REFERRED TO AS A"MULTI-ADVISOR; SELECTED ADVISOR"FUND. APPLICABLE CFTC
REGULATIONS DEFINE A "PRINCIPAL PROTECTED" FUND AS ONE WHICH IS DESIGNED TO
LIMIT THE LOSS OF PARTICIPANTS' INITIAL INVESTMENT. MLIP'S TRADING LEVERAGE
POLICIES AND THE ML&CO. GUARANTEE LIMIT LIMITED PARTNERS' LOSSES ON THEIR UNITS
TO THE TIME VALUE OF THEIR INVESTMENT.
(2) WORST MONTHLY DRAWDOWN REPRESENTS THE LARGEST NEGATIVE MONTHLY RATE
OF RETURN EXPERIENCED BY THE FUND; A DRAWDOWN IS MEASURED ON THE BASIS OF MONTH-
END NET ASSET VALUE ONLY, AND DOES NOT REFLECT INTRA-MONTH FIGURES.
(3) WORST PEAK-TO-VALLEY DRAWDOWN REPRESENTS THE GREATEST PERCENTAGE
DECLINE FROM A MONTH-END CUMULATIVE MONTHLY RATE OF RETURN WITHOUT SUCH
CUMULATIVE MONTHLY RATE OF RETURN BEING EQUALLED OR EXCEEDED AS OF A SUBSEQUENT
MONTH-END. FOR EXAMPLE, IF THE MONTHLY RATE OF RETURN WAS (1)% IN EACH OF
JANUARY AND FEBRUARY, 1% IN MARCH AND (2)% IN APRIL, THE PEAK-TO-VALLEY DRAWDOWN
WOULD STILL BE CONTINUING AT THE END OF APRIL IN THE AMOUNT OF APPROXIMATELY
(3)%, WHEREAS IF THE MONTHLY RATE OF RETURN HAD BEEN APPROXIMATELY 3% IN MARCH,
THE PEAK-TO-VALLEY DRAWDOWN WOULD HAVE ENDED AS OF THE END OF FEBRUARY AT
APPROXIMATELY THE (2)% LEVEL.
(4) MONTHLY RATE OF RETURN IS THE NET PERFORMANCE OF THE FUND DURING THE
MONTH OF DETERMINATION (INCLUDING INTEREST INCOME AND AFTER ALL EXPENSES ACCRUED
OR PAID) DIVIDED BY THE TOTAL EQUITY OF THE FUND AS OF THE BEGINNING OF SUCH
MONTH. THE COMPOSITE RETURNS OF THE FUND REFLECT THE RESULTS OF THE FUND AS A
WHOLE, NOT THE PERFORMANCE OF ANY SINGLE SERIES OF UNITS (HOWEVER, THE COMPOSITE
RETURNS CLOSELY MATCH DURING THE SAME PERIOD THE PERFORMANCE OF ALL SERIES THEN
OUTSTANDING). ALTHOUGH THE SERIES BEGIN TRADING AT DIFFERENT TIMES AND,
ACCORDINGLY, HAVE MATERIALLY DIFFERENT CUMULATIVE RETURNS, AS ALL SERIES
PARTICIPATE IN THE SAME TRADING ACCOUNT AND AT APPROXIMATELY THE SAME DEGREE OF
LEVERAGE, THE ONLY SIGNIFICANT DIFFERENCE BETWEEN THE PERFORMANCE OF DIFFERENT
SERIES DURING A GIVEN MONTH IS TYPICALLY THE DIFFERENT AMOUNT OF PROFIT SHARES
PAID. IN NO MONTH HAS ANY SERIES HAD A RATE OF RETURN 10% HIGHER OR LOWER THAN
ANY OTHER SERIES.
__________________________
-17-
<PAGE>
PERFORMANCE OF THE OTHER MLIP
MULTI-ADVISOR FUTURES FUNDS
The following performance summaries present the past performance of other
funds sponsored by MLIP which allocate their assets to more than one advisor.
The performance of certain single advisor funds sponsored by MLIP is set forth
beginning at page 115. MLIP, in general, specializes in sponsoring "multi-
advisor" and "selected-advisor" funds.
The MLIP funds with "principal protection" features, such as the Fund,
generally allocate less than all of their capital to trading as a means of
managing the risk of losses which could lead to the further deleveraging or even
termination of their trading. Different MLIP "principal protection" funds have,
however, come over time to allocate substantially different percentages of their
assets to trading. Each series of Units sold pursuant to this Prospectus will
initially allocate 75% of its assets to trading. However, all series currently
outstanding initially allocated only 60% of their assets to trading. The SECTOR
Strategy Funds(SM) (with the exception of The SECTOR Strategy Fund(SM) IV L.P.
(Series B Units) and The SECTOR Strategy Fund(SM) International IV Ltd. (Series
B Shares) which do not have "principal protection" features) each began trading
with approximately 70% of their respective assets allocated to trading, and
certain of such SECTOR Strategy Funds(SM) have traded at significantly more or
less than 70% leverage over time. The MLIP funds without "principal protection"
features generally trade at 100% leverage.
A number of offshore funds sponsored by MLIP began operations investing in
a domestic MLIP fund implementing the same trading strategy. Consequently, the
subscriptions to such offshore funds are also reflected as subscriptions to
their domestic counterparts.
All but one of the "principal protected" MLIP funds are "multi-advisor" or
"selected-advisor" funds.
The fee structures of the various MLIP "multi-advisor" and "selected-
advisor" funds vary somewhat. However, to date the aggregate fees of such
funds, as a percentage of their respective assets allocated to trading, have not
differed materially.
ML Principal Protection Plus Ltd. (see page 19) has operated to date as an
offshore counterpart of the Fund. However, in the future it will trade at a
different degree of leverage and maintain a different distribution policy than
will be applicable to the Units issued pursuant to this Prospectus.
The MLIP funds are each different investments, have different advisors and
different numbers of advisors, and may allocate different percentages of assets
to trading in general as well as among their respective advisors.
As of the date of this Prospectus, each of the current Advisors is managing
one or more accounts for other MLIP Funds. However, no MLIP Fund has the same
Advisor group as does the Fund.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND
MATERIAL DIFFERENCES EXIST BETWEEN SUBSTANTIALLY ALL OF THE FOLLOWING FUNDS AND
THE FUND.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT
PORTION OF A COMMODITY POOL'S INCOME AND, IN CERTAIN INSTANCES, MAY GENERATE
PROFITS WHERE THERE HAVE BEEN REALIZED AND UNREALIZED LOSSES FROM COMMODITY
TRADING.
-18-
<PAGE>
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
MLIP "SELECTED-ADVISOR" AND "MULTI-ADVISOR" FUNDS
WITH "PRINCIPAL PROTECTION" FEATURES
FEBRUARY 28, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
WORST
WORST MONTHLY PEAK-TO-VALLEY
TYPE OF INCEPTION AGGREGATE CURRENT DRAWDOWN/(1)(2)/ DRAWDOWN/(3)/
NAME OF FUND OFFERING OF TRADING SUBSCRIPTIONS CAPITALIZATION % MONTH % PERIOD
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Principal Protection
Plus Ltd. (offshore
counterpart of the Fund) Private Oct. 1994 $587,148,275 $461,848,839 (3.72)% (2/96) (3.72)% (2/96)
- ----------------------------------------------------------------------------------------------------------------------------------
The S.E.C.T.O.R. Strategy
Fund(SM) L.P. Public July 1990 $125,853,001 $ 31,402,751 (6.09)% (2/96) (13.78)%(1/92-5/92)
- ----------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. (SECTOR II Units) Public Dec. 1990 $136,410,000 $ 15,284,928 (4.73)% (2/96) (15.93)%(8/93-1/95)
- ----------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. (SECTOR III Units) Public July 1991 $194,005,000 $ 27,667,188 (8.64)% (2/96) (14.25)%(1/92-5/92)
- ----------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International II Ltd.
(SECTOR III Shares) Private July 1991 $85,701,800 $ 5,465,160 (7.10)% (1/92) (14.25)%(1/92-5/92)
- ----------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
IV L.P. (Series A Units) Public July 1992 $75,646,400 $ 4,180,766 (6.41)% (2/96) (10.45)%(2/96-7/96)
- ----------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International IV Ltd.
(Series A Shares) Private July 1992 $55,189,400 $ 1,974,785 (6.22)% (2/96) (8.30)% (1/94-1/95)
- ----------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
V L.P. Public Jan. 1993 $137,500,000 $ 13,772,588 (7.51)% (2/96) (10.14)%(2/96-6/96)
- ----------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International V Ltd. Private Jan. 1993 $81,252,600 $ 5,407,479 (3.41)% (7/95) (8.00)%(6/95-10/95)
- ----------------------------------------------------------------------------------------------------------------------------------
SECTOR(SM) International
Limited Private Sept. 1993 $163,806,100 $ 9,128,420 (4.60)% (2/94) (10.43)%(9/93-2/94)
- ----------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
VI L.P. Public Sept. 1993 $108,693,900 $ 30,842,011 (5.89)% (7/96) (8.97)% (5/96-7/96)
- ----------------------------------------------------------------------------------------------------------------------------------
Yen Linked ML PPP Ltd. Private Oct. 1995 (Yen)10,223,000,000 (Yen)8,875,604,327 (2.12)% (7/96) (3.25) %(5/96-7/96)
- ----------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) dissolved as of
International II Ltd. Private Dec. 1990 $ 55,181,600 12/31/95 (4.56)% (8/94) (16.49)%(8/93-1/95)
- ----------------------------------------------------------------------------------------------------------------------------------
ML Japan Investment dissolved as of
Partners Ltd. Private Aug. 1993 (Yen)1,050,000,000 6/30/96 (3.52)% (7/94) (7.32)% (1/94-2/95)
- ----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
RETURN
JAN. 1, 1992
(OR
INCEPTION) - 1997
FEB. 28, COMPOUND 1996 1995 1994 1993 1992
1997 (OR RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
DISSOLUTION) RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND (2 MONTHS) RETURN RETURN RETURN RETURN RETURN
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Principal Protection 1.48%
Plus Ltd. (offshore 28.81% 3.85% 10.01% 11.10% (2 1/2 mos.)
counterpart of the Fund) (composite)* (composite)* (composite)* (composite)* (composite)* N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
The S.E.C.T.O.R. Strategy
Fund(SM) L.P. 43.86% 2.65% 12.40% 19.25% (9.29)% 19.36% (3.43)%*
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. (SECTOR II Units) 15.42% (3.96)% 14.60% 13.50% (9.93)% 5.49% (2.76)%
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
II L.P. (SECTOR III Units) 31.09% 6.17% 9.74% 9.30% (3.22)% 15.99% (8.30)%
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International II Ltd.
(SECTOR III Shares) 26.37% 0.56% 14.01% 2.84% 0.77% 15.99% (8.30)%
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) 0.51%
IV L.P. (Series A Units) 35.00% 4.03% 10.02% 9.78% (5.73)% 13.40% (6 mos.)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International IV Ltd. 0.51%
(Series A Shares) 34.56% 6.26% 7.06% 11.84% (7.21)% 13.40% (6 mos.)
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
V L.P. 24.41% 4.46% 3.11% 14.22% (3.68)% 4.99% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International V Ltd. 29.26% 2.20% 12.87% 11.11% (3.94)% 4.99% N/A
- ---------------------------------------------------------------------------------------------------------------------------------
SECTOR(SM) International (3.25)%
Limited 6.89% 2.16% 4.62% 7.65% (3.99)% (3-2/3 mos.) N/A
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM) (1.72)%
VI L.P. 12.35% 3.21% 4.61% 6.72% (0.80)% (4 mos.) N/A
- ---------------------------------------------------------------------------------------------------------------------------------
4.85% 0.16%
Yen Linked ML PPP Ltd. (composite)* 2.18% 2.78% (3 mos.) N/A N/A N/A
- ---------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy Fund(SM)
International II Ltd. 12.41% N/A N/A 21.27% (9.64)% 5.49% (2.76)%
- ---------------------------------------------------------------------------------------------------------------------------------
ML Japan Investment (1.69)% 1.13%
Partners Ltd. (2.80)% N/A (6 mos.) 3.95% (5.95)% (5 mos.) N/A
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
* The composite return of the fund, not the performance of any individual series
of shares/units.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. THESE FUNDS
(OTHER THAN ML PRINCIPAL PROTECTION PLUS LTD.) ARE EACH TRADED PURSUANT TO
MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY DIFFERENT OBJECTIVES
THAN THE FUND. THE NOTES ON PAGE 22 ARE AN INTEGRAL PART OF THE ABOVE
PERFORMANCE INFORMATION.
-19-
<PAGE>
- --------------------------------------------------------------------------------
MLIP "SELECTED-ADVISOR" AND "MULTI-ADVISOR" FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
FEBRUARY 28, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
WORST
WORST MONTHLY PEAK-TO-VALLEY
TYPE OF INCEPTION AGGREGATE CURRENT DRAWDOWN/(1)(2)/ DRAWDOWN/(3)/
NAME OF FUND OFFERING OF TRADING SUBSCRIPTIONS CAPITALIZATION % MONTH % PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ML Futures Investments II L.P. Public May 1988 $269,809,800 $14,749,781 (9.93)% (7/96) (16.76)% (5/96-7/96)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments L.P. Public Mar. 1989 $86,500,700 $26,470,179 (5.14)% (12/96) (10.85)% (6/95-7/96)
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P. Public Jan. 1990 $18,182,000 $14,916,212 (15.99)% (1/92) (34.39)% (1/92-5/92)
(Series A Units)
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P. Public Jan. 1991 $50,636,000 $32,312,852 (15.01)% (1/92) (32.38)% (1/92-5/92)
(Series B Units)
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L. P. Public Jan. 1992 $40,000,000 $17,058,147 (9.54)% (2/96) (24.13)% (1/92-5/92)
(Series C Units)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV L.P. Public July 1992 $13,353,600 $981,070 (7.04)% (2/96) (11.45)% (2/96-7/96)
(Series B Units)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) International IV Ltd. Private July 1992 $9,131,000 $577,687 (7.32)% (2/96) (10.79)% (1/94-1/95)
(Series B Shares)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons L.P. Public Jan. 1994 $116,181,819 $88,294,058 (6.42)% (2/96) (6.42)% (2/96)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series A) Private Jan. 1994 $104,269,781 $57,260,728 (6.29)% (2/96) (6.29)% (2/96)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series B) Private Sept. 1994 $3,708,415 $2,530,929 (5.66)% (2/96) (5.73)% (6/95-9/95)
- ------------------------------------------------------------------------------------------------------------------------------------
The JLI Trading Co. Fund Private Mar. 1995 $14,300,136 $16,598,280 (6.93)% (2/96) (8.22)% (5/96-7/96)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
RETURN
JAN. 1, 1992
(OR
INCEPTION) - 1997
FEB. 28, COMPOUND 1996 1995 1994 1993 1992
1997 (OR RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
DISSOLU- RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND TION) (2 MONTHS) RETURN RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
ML Futures Investments II L.P. 42.92% 5.54% 2.05% 17.07% (1.36)% 18.67% (3.17)%
- ------------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments L.P. 57.02% 6.24% 5.87% 11.80% 2.95% 16.56% 4.06%
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P. 59.44% 7.14% 20.09% 34.89% (8.64)% 20.64% (16.65)%
(Series A Units)
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L.P. 63.33% 7.15% 20.03% 34.49% (8.43)% 19.74% (13.88)%
(Series B Units)
- ------------------------------------------------------------------------------------------------------------------------------------
The John W. Henry &
Co./Millburn L. P. 71.40% 7.14% 19.54% 35.08% (7.88)% 14.78% (6.30)%
(Series C Units)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) IV L.P. 46.45% 4.23% 12.50% 12.01% (7.44)% 19.56% 0.76%
(Series B Units) (6 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
The SECTOR Strategy
Fund(SM) International IV Ltd. 42.62% 6.64% 6.97% 14.51% (9.37)% 19.56% 0.76%
(Series B Shares) (6 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons L.P. 51.85% 6.22% 14.96% 19.48% 4.08% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series A) 52.42% 5.78% 15.51% 19.77% 4.15% N/A N/A
- ------------------------------------------------------------------------------------------------------------------------------------
ML Global Horizons Ltd.
(Series B) 46.40% 6.21% 15.63% 22.62% 3.86% N/A N/A
(4 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
The JLI Trading Co. Fund 21.76% 7.38% 10.68% 2.45% N/A N/A N/A
(10 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. THESE FUNDS ARE
EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN THE FUND.
THE NOTES ON PAGE 22 ARE AN INTEGRAL PART OF THE ABOVE PERFORMANCE
INFORMATION.
-20-
<PAGE>
- --------------------------------------------------------------------------------
MLIP "SELECTED-ADVISOR" AND "MULTI-ADVISOR" FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
FEBRUARY 28, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
WORST
WORST MONTHLY PEAK-TO-VALLEY
TYPE OF INCEPTION AGGREGATE CURRENT DRAWDOWN/(1)(2)/ DRAWDOWN/(3)/
NAME OF FUND OFFERING OF TRADING SUBSCRIPTIONS CAPITALIZATION % MONTH % PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Futures Opportunities Limited Private Dec. 1988 $45,310,202 dissolved as of (8.94)% (1/92) (17.34)% (1/92-5/92)
7/31/92
- ------------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments Ltd. Private Mar. 1989 $68,202,237 dissolved as of (6.17)% (2/94) (11.10)% (1/94-2/94)
8/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
Currency Investment Partners Ltd. Private April 1991 $55,114,566 dissolved as of (3.44)% (12/92) (16.10)% (7/91-5/94)
8/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
dissolved as of
The Managed Futures Trust Fund Private May 1991 $11,090,759 9/24/93 (6.18)% (1/92) (14.50)% (1/92-5/92)
L.P.
- ------------------------------------------------------------------------------------------------------------------------------------
dissolved as of
Commodity Trading Company, Ltd. Private July 1991 $25,797,626 10/31/94 (6.47)% (2/94) (23.31)% (1/92-12/92)
- ------------------------------------------------------------------------------------------------------------------------------------
dissolved as of
ML Institutional Partners L.P. Public Feb. 1992 $57,312,700 12/31/94 (3.58)% (1/94) (8.78)% (10/93-4/94)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
RETURN 1997
JAN. 1, 1992 COMPOUND 1996 1995 1994 1993 1992
(OR RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
INCEPTION) - RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND DISSOLUTION) (2 MONTHS) RETURN RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Futures Opportunities Limited (13.56)% N/A N/A N/A N/A N/A (13.56)%
- ------------------------------------------------------------------------------------------------------------------------------------
ML Futures Investments Ltd. 14.36% N/A N/A N/A (3.78)% 15.26% 3.12%
(8 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
Currency Investment Partners Ltd. (7.50)% N/A N/A N/A (4.05)% (2.06)% (1.57)%
(8 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
The Managed Futures Trust Fund 24.73% N/A N/A N/A N/A 21.35% 2.63%
L.P. (8-2/3 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
Commodity Trading Company, Ltd. (6.40)% N/A N/A N/A 6.21% 14.91% (23.31)%
- ------------------------------------------------------------------------------------------------------------------------------------
ML Institutional Partners L.P. (0.35)% N/A N/A N/A (4.06)% 7.65% (3.51)%
(composite)* (11 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
*The composite return of the fund, not the performance of any individual series
of shares/units.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. THESE FUNDS ARE
EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN THE FUND.
THE NOTES ON THIS PAGE 22 ARE AN INTEGRAL PART OF THE ABOVE PERFORMANCE
INFORMATION.
-21-
<PAGE>
- --------------------------------------------------------------------------------
MLIP "SELECTED-ADVISOR" AND "MULTI-ADVISOR" FUNDS
WITHOUT "PRINCIPAL PROTECTION" FEATURES
FEBRUARY 28, 1997
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
WORST
WORST MONTHLY PEAK-TO-VALLEY
TYPE OF INCEPTION OF AGGREGATE CURRENT DRAWDOWN/(1)(2)/ DRAWDOWN/(3)/
NAME OF FUND OFFERING TRADING SUBSCRIPTIONS CAPITALIZATION % MONTH % PERIOD
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Permal F/X, Financials & Private July 1992 $106,495,710 MLIP resigned as (5.67)% (2/94) (12.24)% (2/94-4/94)
Futures Ltd. trading manager
as of 3/31/96
- ------------------------------------------------------------------------------------------------------------------------------------
dissolved as of
Private Feb. 1994 $7,044,701 2/29/96 (4.72)% (3/94) (17.21)% (2/94-1/95)
Daiwa Hudson River Fund
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE 1997
RATE OF COMPOUND 1996 1995 1994 1993 1992
RETURN RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
INCEPTION) TO RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND DISSOLUTION) (2 MONTHS) RETURN RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Permal F/X, Financials & 21.22% N/A 6.63% 14.78% (5.33)% 11.05% (5.79)%
Futures Ltd. (3 mos) (6 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
0.65% N/A 0.26% 19.82% (16.22)% N/A N/A
Daiwa Hudson River Fund (2 mos.) (11 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
NOTES:
(1) WORST MONTHLY DRAWDOWN REPRESENTS THE LARGEST NEGATIVE MONTHLY RATE OF
RETURN EXPERIENCED BY THE FUND; A DRAWDOWN IS MEASURED ON THE BASIS OF MONTH-END
NET ASSET VALUE ONLY, AND DOES NOT REFLECT INTRA-MONTH FIGURES.
(2) MONTHLY RATE OF RETURN, ON THE BASIS OF WHICH WORST MONTHLY DRAWDOWN, WORST
PEAK-TO-VALLEY DRAWDOWN, CUMULATIVE RATE OF RETURN AND COMPOUND RATE OF RETURN
IS CALCULATED, IS THE NET PERFORMANCE DURING THE MONTH OF DETERMINATION
(INCLUDING INTEREST INCOME AND AFTER ALL EXPENSES ACCRUED OR PAID) DIVIDED BY
THE TOTAL EQUITY AS OF THE BEGINNING OF SUCH MONTH.
(3) WORST PEAK-TO-VALLEY DRAWDOWN REPRESENTS THE GREATEST PERCENTAGE DECLINE
FROM A MONTH-END CUMULATIVE MONTHLY RATE OF RETURN WITHOUT SUCH CUMULATIVE
MONTHLY RATE OF RETURN BEING EQUALLED OR EXCEEDED AS OF A SUBSEQUENT MONTH-END.
FOR EXAMPLE, IF THE MONTHLY RATE OF RETURN WAS (1)% IN EACH OF JANUARY AND
FEBRUARY, 1% IN MARCH AND (2)% IN APRIL, THE PEAK-TO-VALLEY DRAWDOWN WOULD STILL
BE CONTINUING AT THE END OF APRIL IN THE AMOUNT OF APPROXIMATELY (3)%, WHEREAS
IF THE MONTHLY RATE OF RETURN HAD BEEN APPROXIMATELY 3% IN MARCH, THE PEAK-TO-
VALLEY DRAWDOWN WOULD HAVE ENDED AS OF THE END OF FEBRUARY AT APPROXIMATELY THE
(2)% LEVEL.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. THESE FUNDS ARE
EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY
DIFFERENT OBJECTIVES THAN THE FUND.
THE NOTES ON THIS PAGE 22 ARE AN INTEGRAL PART OF THE ABOVE PERFORMANCE
INFORMATION.
-22-
<PAGE>
SELECTED FINANCIAL DATA
The following Selected Financial Data is derived: 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 years ended December 31,
1995 and December 31, 1996, which have been audited by Deloitte & Touche llp,
independent auditors, as stated in their report included in this Prospectus, and
which are included herein in reliance upon the authority of Deloitte & Touche
llp as experts in auditing and accounting. See "Index to Financial Statements"
at page 67.
_____________________
<TABLE>
<CAPTION>
OCTOBER 12, 9994
JANUARY 1, 1996 JANUARY 1, 1995 (COMMENCEMENT
TO TO OF OPERATIONS) TO
INCOME STATEMENT DATA DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
- --------------------- ------------------ ------------------ ------------------
<S> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized Gain (Loss) $ 9,038,064 $ 4,407,833 $ (363,054)
Change in Unrealized Gain (Loss) (396,221) 1,355,377 1,115,935
----------- ----------- -----------
Total Trading Results 8,641,843 5,763,210 752,881
Interest Income 4,545,186 3,415,670 377,303
----------- ----------- -----------
Total Revenues 13,187,029 9,178,880 1,130,184
Expenses:
Brokerage Commissions 4,775,116 3,216,364 405,653
Administrative Fees/1/ 129,057 86,928 10,964
Profit Shares 978,264 652,366 129,169
----------- ----------- -----------
Total Expenses 5,882,437 3,955,658 545,786
Net Income Before
Minority Interest 7,304,592 5,223,222 584,398
Minority Interest/2/ (81,228) (36,730) (4,504)
----------- ----------- -----------
Net Income $ 7,223,364 $ 5,186,492 $ 579,894
=========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA/3/ DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C>
AGGREGATE
NET ASSET VALUE (Series A-H)
$78,905,274 $74,988,233 $32,314,228
NET ASSET VALUE
PER UNIT
Series A $ 110.70/4/ $ 106.96/5/ $101.76
Series B $ 114.24/4/ $ 110.36
Series C $ 109.33/4/ $ 103.35
Series D $ 108.19/4/ $ 102.34
Series E $ 108.58/4/ $ 102.72
Series F $ 108.92
Series G $ 107.32
Series H $ 106.47
</TABLE>
_____________________
/1/ As of January 1, 1996, a portion of the Brokerage Commissions was
recharacterized as an Administrative Fee. This recharacterization had no
economic effect on the Fund. Accordingly, certain Brokerage Commissions in
prior periods have been reclassified to conform to the current period
presentation. As of January 1, 1997, the Brokerage Commission rate was reduced
from 9.25% to 8.75% per annum.
/2/ MLIP is general partner of the Trading Partnership. Because the Fund owns
substantially all of the Trading Partnership, Trading Partnership activities are
referred to as Fund activities in this Prospectus. The minority interest
represents MLIP's share, as general partner of the Trading Partnership, of the
Trading Partnership's profit or loss.
/3/ Balance Sheet Data is based on redemption values which differ immaterially
from Net Asset Values as determined under Generally Accepted Accounting
Principals ("GAAP") due to the treatment of organizational and initial offering
cost reimbursements.
/4/ Net of aggregate distributions of $12.00 on the Series A Units, $6.00 on
the Series B Units and $3.50 on the Series C, D and E Units.
/5/ Net of the distribution of $6.00 per Series A Unit.
____________________
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
-23-
<PAGE>
THE TWO-TIER STRUCTURE OF THE FUND
The Fund does not trade directly through opening managed accounts with
the Advisors, but rather through investing in the Trading Partnership. The
Trading Partnership, in turn, allocates its capital to the Advisors, and the
different series of Units share pro rata in the overall profits and losses of
the Trading Partnership based on their respective investments in it. No series
of Units can lose more in its trading than the amount which such series has
invested in the Trading Partnership.
Although different series of Units invest different percentages of
their overall capital in the Trading Partnership, all assets so invested are
100% allocated to trading. All trading losses are shared pro rata among the
different series based on their respective investments in the Trading
Partnership.
The use of the Trading Partnership by the Fund has no effect on the
leverage at which the different series of Units trade. The Fund trades through
investing in the Trading Partnership rather than directly, solely in order to
eliminate the highly unlikely risk that one series of Units might be subject to
paying trading debts attributable to another. This risk arises because it is
theoretically possible that catastrophic losses could deplete all the assets of
a particular series allocated to the Advisors for management. Any remaining
losses would remain a debt of the Fund to which all other series' capital would
be subject. The Fund/Trading Partnership structure eliminates the risk of such
inter-series liability. The CFTC would not permit the Fund to continue the
offering of the Units unless such inter-series liability were eliminated.
For example, assume that each of Series I and Series II Units had $10
million in capital, and Series I allocated $9.5 million (95% leverage) and
Series II $8.5 million (85% leverage) to the Trading Partnership. If losses
bankrupted the Trading Partnership, each Series' trading account would share pro
rata in such losses. The Series I Units would create a larger deficit balance
because of the higher degree of leverage at which that Series traded. However,
there would be no risk that, for example, a $3 million deficit balance allocable
to Series I trading account would be subject to being repaid from any of the
$1.5 million withheld from trading by the Series II Units (or from any of the
$0.5 million withheld from trading by the Series I Units, for that matter),
because the Fund itself is not liable for the debts of its subsidiary Trading
Partnership. Any deficit balance incurred by a bankrupt Trading Partnership
would become an uncollectible debt due to MLF. MLF accepts such deficit balance
risk each time it accepts a limited liability entity such as the Trading
Partnership as a client.
There is no benefit (or detriment) to investors from the two-tier
Fund/Trading Partnership structure other than permitting the Fund to issue the
series of Units at different times, which series, may, over time, trade with
different percentages of their capital allocated to trading.
[GRAPH APPEARS HERE]
-24-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATIONAL OVERVIEW; ADVISOR SELECTIONS
The Fund's results of operations depend on MLIP's ability to select
Advisors and the Advisors' ability to trade profitably. MLIP's selection
procedures and trading leveraging analysis, as well as the Advisors' trading
methods, are confidential, so that substantially the only available information
relevant to the Fund's results of operations is its actual performance record to
date. Because of the speculative nature of its trading, the Fund's past
performance is not necessarily indicative of its future results.
In the Fund's 28 2/3 months of trading through February 1997, MLIP has
(i) terminated one core Advisor, (ii) added 7 non-core Advisors, (iii)
terminated 3 non-core Advisors, and (iv) reallocated trading assets as of the
beginning of 10 different months. MLIP expects to continue making frequent
changes to both allocations and Advisor combinations. All series of Units trade
under the direction of the same Advisor allocation and combination, as the same
may be changed from time to time by MLIP. See the Prospectus Supplement
accompanying this Prospectus.
As of April 1, 1997, the trading assets attributable to each series
of Units were allocated approximately as follows:
<TABLE>
<S> <C>
Chesapeake Capital Corporation 19.0%
John W. Henry & Company, Inc 15.0%
Non-Core Advisors 66.0%
-------
Total 100.0%
=======
</TABLE>
MLIP's decision to terminate or reallocate assets among Trading
Advisors is based on a combination of numerous factors, as described under "The
Advisor Selection Process" beginning at page 29. Advisors are, in general,
terminated primarily for unsatisfactory performance, but other factors -- for
example, a change in MLIP's or an Advisor's market outlook, apparent deviation
from announced risk control policies, excessive turnover of positions, changes
in principals, commitment of resources to other business activities, etc. -- may
also have a role in the termination or reallocation decision. The market
judgment and experience of MLIP's principals is an important factor in its
allocation decisions.
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. There can be no assurance as to the frequency or number of
the Advisor changes that may take place in the future, or as to how long any of
the current Advisors will continue to manage assets for the Fund.
RESULTS OF OPERATIONS
General
- -------
MLIP believes that multi-advisor futures funds should be regarded as
medium- to long-term (i.e., three to five year) investments, but it is difficult
to identify trends in the Fund's operations and virtually impossible to make any
predictions regarding future results based on the results to date.
Markets with sustained price trends tend to be more favorable to
managed futures investments than whipsaw, choppy markets, but (i) this is not
always the case, (ii) it is impossible to predict when price trends will occur
and (iii) different Advisors are affected differently by trending markets as
well as by particular types of trends.
MLIP attempts to control credit risk in the Fund's futures, forward
and options trading (the Fund does not trade derivatives other than futures and
forward contracts and options thereon) by trading only through MLF. MLF acts
solely as a broker or counterparty to the Fund's trades; it does not advise with
respect to, or direct, any such trading.
-25-
<PAGE>
MLIP attempts to control the market risk inherent in the Fund's
trading in the manner described under "The Advisor Selection Process -- MLIP and
Its Advisor Selection and Monitoring Process" at page 29 and "Leverage
Considerations" beginning at page 36. The market risk to the Fund is, in any
event, limited by the deleveraged character of its trading, its "principal
protection" feature and its multi-advisor strategy. MLIP reviews the positions
acquired by the Advisors on a daily basis in an effort to determine whether the
overall positions of the Fund may have become what MLIP analyzes as being
excessively concentrated in a limited number of markets or under the direction
of generally similar strategies -- in which case MLIP may, as of the next month-
end or quarter-end, adjust the Fund's Advisor combination and/or allocations so
as to attempt to reduce the risk of such over-concentration occurring in the
future. See "Leverage Considerations" beginning at page 36 and "The ML&Co.
Guarantee" beginning at page 37.
To date, all series of Units have allocated approximately 60% of their
assets to trading. All series of Units sold pursuant to this Prospectus will
initially allocate 75% of their assets to trading.
MLIP may consider making distributions on the Units offered pursuant
to this Prospectus under certain circumstances (for example, if substantial
profits are recognized); however, MLIP does not presently intend to do so. MLIP
has, however, undertaken to make certain distributions on all Units issued prior
to date of this Prospectus.
The performance of the different series of Units differs somewhat over
the same period, primarily, because as the various series begin trading at
different times, they pay different Profit Shares (although at the same base
rates), during the same periods.
Performance Summary
- -------------------
1994 (2 2/3 months)
STATISTICS. During 1994 (2 2/3 months), the Fund's average month-end
Net Assets equalled $32,552,448, and the Fund recognized gross trading gains of
$752,881 while incurring Brokerage Commissions of $405,653, Administrative Fees
of $10,964 and Profit Shares of $129,169 (2.31%, 1.25%, 0.03% and 0.40%,
respectively, of average month-end Net Assets). Interest income of $377,303 or
1.16% of average month-end Net Assets resulted in net income of $579,894 (before
organizational and initial offering cost reimbursement payments of $17,712 and
after deducting MLIP's $4,504 minority interest in the profits and losses of the
Trading Partnership) or 1.78% of average month-end Net Assets, which resulted in
a 1.76% increase in the Net Asset Value per Series A Unit, the only series
outstanding in 1994.
OVERVIEW. The 2 2/3 months of trading during 1994 were characterized
by relatively quiet markets without many major price trends. United States
interest rates generally declined during the period and as they did, so did the
U.S. dollar as compared to the Deutschemark and certain other major currencies.
During this period, the Fund recorded a modest gain.
1995
STATISTICS. During 1995, the Fund's average month-end Net Assets
equalled $55,827,125, and the Fund recognized gross trading gains of $5,763,210
while incurring Brokerage Commissions of $3,216,364, Administrative Fees of
$86,928 and Profit Shares of $652,366 (10.32%, 5.76%, 0.16% and 1.17%,
respectively, of average month-end Net Assets). Interest income of $3,415,670 or
6.12% of average month-end Net Assets resulted in net income of $5,186,492
(before organizational and initial offering cost reimbursement payments of
$79,700 and after deducting MLIP's $36,730 minority interest in the profits and
losses of the Trading Partnership) or 9.29% of average month-end Net Assets.
OVERVIEW. In 1995, prevailing price trends in several key markets
enabled the Advisors to trade profitably for the Fund. Although trading in many
of the traditional commodity markets may have been lackluster, the currency and
financial markets offered exceptional trading conditions. After months
characterized by very difficult trading environments, solid price trends across
many markets (including U.S. Treasury and non-dollar bond markets) began to
emerge during the first quarter of 1995. In the second quarter of 1995, market
volatility once again began to affect trading, as many previously strong price
trends began to weaken and, in some cases, reverse. The U.S. dollar hit new
lows versus the Japanese yen and Deutschemark before rebounding sharply. In
addition, there were strong indications that the U.S. economy was slowing which,
when coupled with a failure of the German Central Bank to lower interest rates,
stalled a rally in the German bond market. During the third quarter there was a
correction in U.S. bond prices after several months of a strong uptrend.
Despite exposure to the global interest-rate markets, the Fund's long positions
in U.S. Treasury bonds had a negative impact on performance. Throughout August
and into September, the U.S. dollar rallied sharply against the
-26-
<PAGE>
Japanese yen and the Deutschemark as a result of the coordinated intervention by
major central banks and widespread recognition of the growing banking crisis in
Japan. Despite continued price volatility during the final quarter of 1995, the
Trading Advisors were able to identify several trends in key markets. U.S.
Treasury bond prices continued their strong move upward throughout November, due
both to weak economic data and optimism on federal budget talks. As the year
ended, the yield on the 30-year Treasury bond was pushed to its lowest level in
more than two years.
1996
STATISTICS. During 1996, the Fund's average month-end Net Assets
equalled $82,789,767 and the Fund recognized gross trading gains of $8,641,843
while incurring Brokerage Commissions of $4,775,116, Administrative Fees of
$129,057 and Profit Shares of $978,264 (10.44%, 5.77%, 0.16% and 1.18%,
respectively, of average month-end Net Assets). Interest income of $4,545,186
or 5.49% of average month-end Net Assets resulted in net income of $7,223,364
(before organizational and initial offering cost reimbursement payments of
$79,700 and after deducting MLIP's $81,228 minority interest in the profits and
losses of the Trading Partnership) or 8.72% of average month-end Net
Assets.
OVERVIEW. 1996 included the two worst single monthly drawdowns as
well as two of the three most profitable months in the Fund's history. The year
began with the East Coast blizzard, continuing difficulties in the U.S. federal
budget talks and an economic slowdown having a negative impact on many markets.
The Fund was profitable in January due to the strong profits in currency trading
as the U.S. dollar reached a 23-month high against the Japanese yen. In
February, however, the Fund incurred its worst monthly loss due to the sudden
reversals in several strong price trends and considerable volatility in the
currency and financial markets. During March, large profits were taken in the
crude oil and gasoline markets as strong demand continued and talks between the
United Nations and Iraq were suspended. This trend continued into the second
quarter, during which strong gains were also recognized in the agricultural
markets as a combination of drought and excessive rain drove wheat and grain
prices to historic highs. In the late summer and early fall months, the Fund
continued to trade profitably as trending prices in a number of key markets
favorably impacted the Fund's performance. In September, heating oil hit a
five-year high on soaring prices in Europe, and the Fund was also able to
capitalize on downward trends in the metals markets. Strong trends in the
currency and global bond markets produced significant gains in October and
November, but the year ended with declining performance as December witnessed
the reversal of several strong upward trends and increased volatility in key
markets.
RESULTS OF OPERATIONS IN GENERAL
The principal variables which determine the net performance of the
Fund are gross profitability and interest income. During all periods set forth
under "Selected Financial Data," the interest rates in many countries were at
unusually low levels. This negatively impacted revenue because interest income
is typically a major component of commodity pool profitability. In addition,
low interest rates are frequently associated with reduced fixed income market
volatility, and in static markets the Fund's profit potential generally tends to
be diminished. On the other hand, during periods of higher interest rates, the
relative attractiveness of a high risk investment such as the Fund may be
reduced as compared to high yielding and much lower risk fixed-income
investments.
The Fund's Brokerage Commissions and Administrative Fees are a
constant percentage of assets allocated to trading. The only Fund costs (other
than the insignificant F/X Desk service fees, EFP differentials and
organizational and offering cost reimbursement payments) which are not based on
a percentage of the Fund's assets allocated to trading are the Profit Shares
payable to the Trading Advisors on an Advisor-by-Advisor basis. During periods
when Profit Shares are a high percentage of net trading gains, it is likely that
there has been substantial performance non-correlation among Advisors (so that
the total Profit Shares paid to those Advisors which have traded profitably are
a high percentage, or perhaps even in excess, of total profits recognized, as
other Advisors have incurred offsetting losses, reducing overall trading gains
but not the Profit Shares paid to successful Advisors) -- suggesting the
likelihood of generally trendless, non-consensus markets.
The events that primarily determine the 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 more likely to be
able to profit from sustained trends, irrespective of their direction, than from
static markets. During the course of the Fund's performance to date, such
events have ranged from Federal Reserve Board reductions in interest rates, the
apparent refusal of Iraq to arrive at a settlement which would permit it to sell
oil internationally, the inability of the U.S. government to agree upon a
federal budget, and a combination of drought and excessive rain negatively
impacting U.S. agricultural harvesting as well as planting. While these events
are representative of the type of circumstances which materially affect the
Fund, the specific events which will do so in the future cannot be predicted or
identified.
-27-
<PAGE>
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 -- regulatory approvals, cost
of goods sold, employee relations and the like -- which often materially affect
an operating business have virtually no impact on the Fund.
THE DIFFERENT SERIES OF UNITS
All series of Units to be issued under this Prospectus and thereafter
will begin trading with the same percentage (75%) of their total capital
allocated to trading (by investment in the Trading Partnership). All series
trade in a common trading account and are subject to the same method of
calculating their fees. Furthermore, any discretionary action taken by MLIP --
e.g., making a distribution or adjusting trading leverage -- must be done in
such a way, that all Units receive the same distributions (if any) as well as
having the same percentage of capital allocated to trading after the adjustment.
Despite these fundamental similarities among the different series, because the
series begin trading at different times they are likely to come, as a result of
trading profits and losses, to have different percentages of their capital
allocated to trading, pay different Profit Shares (although to the same group of
Advisors) and have different Net Asset Values.
LIQUIDITY AND CAPITAL RESOURCES
The amount of capital raised for the Fund should not, except at
extremely high levels of capitalization, have a significant impact on its
operations. The Fund's costs are generally proportional to its asset base and,
within broad ranges of capitalization, the Advisors' trading positions (and the
resulting gains and losses) should increase or decease in approximate proportion
to the size of the Fund account managed by each of them, respectively.
The Fund raises additional capital only through the continuous
offering of its Units. The Fund does not borrow, and sells no securities other
than the Units.
Inflation per se is not a significant factor in the Fund's
profitability, although inflationary cycles can give rise to the type of major
price movements that can have a materially favorable or adverse impact on the
Fund's performance.
Changes in the level of prevailing interest rates could have a
material effect on the Fund's trading leverage. Interest rates directly affect
the calculation of the discounted value (discounted back from the relevant
Principal Assurance Date) of the guaranteed $100 minimum Net Asset Value per
Unit and, accordingly, the assets which a given series of Units has available
for trading.
In its trading to date, the Fund has from time to time had substantial
unrealized gains and losses on its open positions. These gains or losses are
paid on a periodic basis as part of the routine clearing cycle on exchanges or
in the over-the-counter markets (the only over-the-counter market in which the
Fund trades is the inter-bank forward market in currencies). In highly unusual
circumstances, market illiquidity could make it difficult for certain Advisors
to close out open positions, and any such illiquidity could expose the Fund to
significant losses, or cause it to be unable to recognize unrealized gains.
However, in general, there is no meaningful difference between the Fund's
realized and unrealized gains.
In terms of cash flow, it makes little difference whether a market
position remains open, (so that the profit or loss on such position remains
"unrealized"), as cash settlement of "unrealized" gains and losses occurs
periodically whether or not positions are closed out. The only meaningful
difference between realized and unrealized gains or losses in the case of the
Fund is that unrealized items reflect gains or losses on positions which the
Advisors have determined not to close out (presumably, in the hope of future
profits), whereas realized gains or losses reflect amounts received or paid in
respect of positions no longer being maintained.
-28-
<PAGE>
THE ADVISOR SELECTION PROCESS
MLIP AND ITS ADVISOR SELECTION AND MONITORING PROCESS
MLIP, a wholly-owned indirect subsidiary of ML&Co., is an integrated
business whose capabilities include research, trading, finance, administration,
systems, operations, sales and marketing. Since its inception, MLIP has
concentrated primarily on the structuring of multi-advisor products, and has
devoted substantial resources to the development of the capacity to formulate
advantageous trading advisor combinations, as well as to assess trading advisors
on an individual basis. Advisor analysis includes the qualitative appraisal of
an Advisor's strategy and performance combined with quantitative statistical
evaluation of the performance of individual Advisors and of different possible
Advisor combinations.
MLIP's trading advisor analysis professionals monitor the performance
of several hundred advisors. Both quantitative and qualitative criteria have
been factored into MLIP's selection process, including the following: type of
trading program; risk control; duration and speed of recovery from drawdowns;
experience; organizational infrastructure; and low correlation in the past with
traditional investments such as stocks and bonds. Advisors' past records are
evaluated comparatively with a view to combining Advisors whose respective
trading results have historically demonstrated not only a low degree of
correlation with stocks and bonds but also with the other Advisors selected. In
addition to certain qualitative factors concerning the Advisors, certain
mathematical optimization procedures are used to develop an Advisor combination
which, based on a trading scenario in which the past performance of the
respective Advisors is combined for purposes of MLIP's selection analysis,
exhibits a reward/risk profile consistent with MLIP's objectives. By identifying
Advisor combinations on this basis, MLIP hopes to maintain profit potential
while also materially reducing the risk of major equity declines.
In selecting Advisors for the Fund, MLIP emphasizes retaining multiple
Advisors, trading in multiple markets and implementing multiple strategies. MLIP
also evaluates the overall market diversification and emphasis that different
possible Advisor combinations would give the Fund. Discretionary as well as
systematic, fundamental as well as technical, Advisors may be retained. MLIP may
allocate Fund assets both to Advisors specializing in particular market sectors
and to Advisors which trade broadly diversified portfolios. See "The Core
Advisors --Futures Trading Methods in General" at pages 88 and 89. By
diversifying strategies as well as markets, MLIP can, if successful, create
Advisor combinations for the Fund that should have good profit potential across
a wide range of different market cycles. Since inception, the Fund's Advisor
portfolio has emphasized technical and trend-following methods.
MLIP's primary emphasis is on a qualitative assessment of each
Advisor, including, among other considerations, an evaluation of each Advisor's
basic investment management approach, markets traded, prior experience, past
performance, fee requirements and assets under management. Although different
factors may be considered in the case of different Advisors (and no
representation is made that any given factor will be considered in selecting any
given Advisor), subjective evaluation of each prospective Advisor by principals
of MLIP is an important factor in all of MLIP's Advisor selections. Quantitative
non-correlation analysis and volatility studies are employed in developing the
overall Advisor mix, but the principal objective is to identify Advisors which
MLIP believes to have excellent potential to trade successfully.
No Advisor selected by MLIP has any affiliation with Merrill Lynch,
other than managing the trading of the Fund and other futures funds or accounts
sponsored or managed by MLIP. Furthermore, none of the Advisors is affiliated
with any other Advisor. (MLAM, which was selected by MLIP to provide cash
management services to the Fund, is affiliated with Merrill Lynch.)
MLIP monitors the performance of the Fund and its Advisors on a
day-to-day basis, and, from time to time, reallocates assets among, terminates
and/or appoints new Advisors. At least quarterly, MLIP formally reviews the
performance of the Fund and each Advisor in order to assess whether to change
Advisor selections or allocations. MLIP anticipates that a number of additional
adjustments may be made over time, as they have been to date; but there can be
no assurance that the Fund's Advisor portfolio will not remain static for
significant periods of time. On the other hand, MLIP may, on short notice,
terminate or allocate assets away from an Advisor if MLIP has reason to believe
that the Advisor is deviating from historical trading patterns, violating the
Advisor's risk management policies or has otherwise given MLIP what it considers
to be cause for termination.
-29-
<PAGE>
ACCESS TO GLOBAL MARKETS
The Fund has access to global markets including, but not limited to,
the following:
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
INTEREST RATES
Australian Bonds German Bonds
Australian Treasury Bills Italian Bonds
Canadian Bonds Japanese Bonds
Eurodollars PIBOR
Eurolira Spanish Bonds
Euromarks U.K. Gilts
Euroswiss U.K. Short Sterling
Euroyen U.S. Treasury Bills
French Bonds U.S. Treasury Bonds
U.S. Treasury Notes
STOCK INDICES
CAC 40 Stock Index (France) S&P 500 Stock Index (U.S.)
Financial Times 100 Stock Index (U.K.) Tokyo Stock Price Index
Major Market Stock Index (U.S.) U.S. Dollar Index
MEFF&S Stock Index (Spain) Value Line Stock Index (U.S.)
Nikkei Stock Average (Japan)
METALS
Aluminum Platinum
Gold Silver
Lead Tin
Nickel Zinc
ENERGY PRODUCTS
Crude Oil No. 2 Heating Oil
Gas Oil Propane
Heavy Fuel Oil Residual Fuel Oil
Natural Gas Unleaded Gasoline
AGRICULTURAL PRODUCTS
Cocoa Orange Juice
Coffee Pork Bellies
Corn Soybeans
Cotton Soymeal
Feeder Cattle Soy Oil
Live Hogs Sugar
Oats Wheat
The Fund has not traded, and may never trade, in all of the foregoing markets.
There can be no assurance as to which markets the Fund will trade,
either over time or from time to time.
-30-
<PAGE>
THE ADVISORS
CORE ADVISOR SUMMARIES
As of January 31, 1997, the two core Advisors which were, in the
aggregate, managing approximately 34% of the Fund's trading assets as of April
1, 1997, were managing approximately $2.9 billion of customer assets in the
futures, cash and forward markets, of which approximately $2.0 billion was being
traded in the programs used for the Fund.
THE CORE ADVISORS
<TABLE>
<CAPTION>
APPROXIMATE
APRIL 1, 1997 ASSETS UNDER MANAGEMENT
ADVISOR TRADING ASSET ALLOCATION JANUARY 31, 1997
------- ------------------------ ----------------------------------
<S> <C> <C>
Chesapeake Capital Corporation 19% $915 million (total)
$862 million (Diversified Program)
John W. Henry & Company, Inc. 15% $2.0 billion (total)
---
34% $1.2 billion (Financial and Metals
=== Portfolio)
</TABLE>
_________________________
Each of the current core Advisors is a systematic, technical, trend-
following trader.
More complete descriptions of the core Advisors are included
under "The Core Advisors" beginning at page 88. See "Risk Factors -- (2) Past
Performance Not
Necessarily Indicative of Future Results at page 11.
_________________________
CHESAPEAKE CAPITAL CORPORATION (19% ALLOCATION OF TRADING ASSETS AS OF
APRIL 1, 1997) -- Chesapeake has offered investment advisory and portfolio
management services to clients since 1988. Chesapeake currently trades three
programs, relying primarily on technical analysis and charting in its evaluation
of historical commodity price movements. In the Diversified Program which
Chesapeake trades for the Fund, Chesapeake applies its trend-following system to
a global portfolio of futures and forward markets, including agricultural
products, precious and industrial metals, currencies, financial instruments and
stock, financial and economic indices. Chesapeake may trade these markets on any
U.S. or foreign exchange. As of January 31, 1997, Chesapeake was managing
approximately $862 million of customer funds in the Diversified Program and
approximately $915 million of customer funds in all of its programs.
Chesapeake has traded the Diversified Program since February 1988. The
compound annual rates of return achieved by the Diversified Program from January
1, 1992 through January 31, 1997 have been 1.81%, 61.82%, 15.87%, 14.09%, 15.05%
and 1.87% (1 month), respectively. During such period, the worst monthly
drawdown was (10.98)% (1/92) and the worst peak-to-valley drawdown (16.62)%
(1/92-5/92).
See pages 92 through 95 for performance information relating to
Chesapeake.
JOHN W. HENRY & COMPANY, INC. (15% ALLOCATION OF TRADING ASSETS AS OF
APRIL 1, 1997) -- JWH operates eleven trading programs for U.S. and non-U.S.
investors. These programs emphasize intermediate and long-term, quantitative
trend analysis models. The Financial and Metals Portfolio which JWH trades for
the Fund implements a technical, trend-following system which participates in
four major market sectors -- global interest rates, foreign exchange, global
stock indices and precious metals -- and seeks to capitalize on sustained moves
in global financial markets. As of January 31, 1997, JWH was trading
approximately $1.2 billion of customer funds in the Financial and Metals
Portfolio and approximately $2.0 billion of customer funds in all of its
programs.
JWH has traded the Financial and Metals Portfolio since October 1984.
Since inception, the Financial and Metals Portfolio has been traded at generally
the same degree of leverage, although under certain market conditions JWH may
reduce position size or even withdraw from the market altogether. The compound
annual rates of return achieved by the Financial and Metals Portfolio from
January 1, 1992 through January 31, 1997 have been (10.89)%, 46.82%, (5.32)%,
38.53% 29.66% and 4.41% (1 month), respectively. During such period the worst
monthly drawdown on an individual account basis was (27.7)% (1/92) and the worst
peak-to-valley drawdown on an individual account basis (58.8)%
(12/91-5/92).
See pages 104 through 112 for performance information relating to
JWH.
MORE COMPLETE DESCRIPTIONS OF, AND PERFORMANCE SUMMARIES FOR, THE CORE ADVISORS
ARE INCLUDED UNDER "THE CORE
ADVISORS" BEGINNING AT PAGE 88. SEE "RISK FACTORS -- (2) PAST PERFORMANCE NOT
NECESSARILY INDICATIVE OF
FUTURE RESULTS" AT PAGE 11.
-31-
<PAGE>
THE ADVISORY AGREEMENTS
The Advisory Agreements among the Fund, MLIP and each Advisor
terminate at various times. MLIP generally attempts to negotiate advisory
agreements with comparable terms (although advisory fees differ) for all of the
public funds which MLIP sponsors. MLIP, but generally not the Advisors, has the
right to terminate any Advisory Agreement at will and upon short notice.
Each Advisory Agreement provides that the Fund will indemnify the
Advisor and its affiliates, as well as their respective officers, shareholders,
directors, employees, partners and controlling persons for conduct taken as an
Advisor or in connection with the Advisory Agreement, provided that such conduct
does not constitute negligence, misconduct or breach of the Advisory Agreement
or of any fiduciary obligation to the Fund and was done in good faith and in a
manner reasonably believed to be in, or not opposed to, the best interests of
the Fund. Each Advisory Agreement further provides that this indemnity provision
will not increase the liability of any Limited Partner to the Fund beyond the
amount of such Limited Partner's capital and profits, if any, in the Fund.
Under the exculpatory provisions of the Advisory Agreements, none of
the Advisors or any related parties will be liable to the Fund or to any of the
Partners except by reason of conduct in violation of the foregoing standards for
indemnification by the Fund.
All Advisors (which would not, due to their non-U.S. person status,
incur adverse U.S. income tax consequences, or are not otherwise prohibited from
doing so by applicable non-United States securities, tax or other laws), are
required by MLIP to invest $10,000 in the Fund during their tenure of providing
advisory services to it. MLIP has, for some years, required such investments
from all the Advisors selected for its domestic funds as a token of the
Advisors' commitment to managing such accounts.
THE MLAM INVESTMENT ADVISORY CONTRACT
The Investment Advisory Contract executed and delivered among MLIP,
the Fund, the Trading Partnership, 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 (MLIP, not the Fund,
would 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 March 1, 1997,
approximately $2.1 billion was invested in funds for which MLIP was serving as
sponsor or trading manager. 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
ML&Co.
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.
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<PAGE>
Since its inception in 1986, MLIP has operated with one primary
objective -- to provide investors with an opportunity for long-term capital
appreciation and diversification through quality investments in the futures,
commodity options and forward markets. MLIP, as general partner or sponsor,
structures and promotes managed futures investments in an effort to meet the
objectives of a wide variety of clients. MLIP attempts to combine a detailed
advisor selection process with active monitoring of its existing funds and their
advisors. MLIP does not manage client assets directly, but rather specializes in
selecting groups of independent trading advisors to do so.
MLIP acts as general partner to thirteen public futures funds whose
units of limited partnership interest are registered under the Securities
Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, The Growth
and Guarantee Fund L.P., ML Futures Investments II L.P. (formerly, The Futures
Dimension Fund II L.P.), ML Futures Investments L.P. (formerly, The Tudor Prime
Advisors Fund L.P.), John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R.
Strategy Fund(SM) L.P., The SECTOR Strategy Fund(SM) II L.P., The SECTOR
Strategy Fund(SM) IV L.P., The SECTOR Strategy Fund(SM) V L.P., The SECTOR
Strategy Fund(SM) VI L.P., ML Global Horizons L.P., ML JWH Strategic Allocation
Fund L.P. and the Fund. Because MLIP serves as the sole general partner of each
of these funds, the officers and directors of MLIP effectively manage them as
officers and directors of such funds.
PRINCIPALS
The principal officers of MLIP and their business backgrounds are as
follows.
<TABLE>
<CAPTION>
<S> <C>
John R. Frawley, Jr. Chief Executive Officer, President
and Director
James M. Bernard Chief Financial Officer,
Senior Vice President and Treasurer
Michael A. Karmelin Chief Financial Officer, Vice
President and Treasurer (effective
April 14, 1997)
Jeffrey F. Chandor Senior Vice President, Director of
Sales, Marketing and Research and
Director
Allen N. Jones Chairman and Director
Steven B. Olgin Vice President, Secretary and
Director of Administration
</TABLE>
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief Executive
Officer, President and a Director of MLIP as well as Co-Chairman of MLF. He
joined MLPF&S in 1966 and has served in various positions, including Retail and
Institutional Sales, Manager of New York Institutional Sales, Director of
Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets,
and Director of International Institutional Sales. Mr. Frawley holds a Bachelor
of Science degree from Canisius College. Mr. Frawley served on the CFTC's
Regulatory Coordination Advisory Committee from its inception in 1990 through
its dissolution in 1994. Mr. Frawley is currently a member of the CFTC's
Financial Products Advisory Committee. In January 1996, he was re-elected to a
one-year term as Chairman of the Managed Futures Association, the national trade
association of the United States managed futures industry. Mr. Frawley is a
Director of that organization. Mr. Frawley also currently serves on a panel
created by the Chicago Mercantile Exchange and The Board of Trade of the City of
Chicago to study cooperative efforts related to electronic trading, common
clearing, and issues regarding a potential merger.
James M. Bernard was born in 1950. Mr. Bernard is Chief Financial
Officer, Senior Vice President and Treasurer of MLIP. He joined MLF in 1983.
Before that he was the Commodity Controller for Nabisco Brands Inc. from
November 1976 to 1982 and a Supervisor at Ernst & Whinney from 1972 to November
1976. Mr. Bernard is a member of the American Institute of Certified Public
Accountants and holds a Bachelor of Science degree from St. John's University
and a Master of Business Administration degree from Fordham University. As of
April 14, 1997, Mr. Bernard will no longer act as Chief Financial Officer of
MLIP. Mr. Bernard will remain a Senior Vice President of MLIP with continued
responsibilities for controller operations as well as commodity finance and
Investment Committee activities. Mr. Bernard will also assume new
responsibilities focused on the transactional needs of MLIP's funds and
advisors.
-33-
<PAGE>
Michael A. Karmelin was born in 1947. Mr. Karmelin will assume the
duties of Chief Financial Officer, Vice President and Treasurer of MLIP as of
April 14, 1997, when he has completed his tenure as Chief Financial Officer of
Merrill Lynch, Hubbard Inc. ("ML Hubbard"), a sponsor of real estate limited
partnerships. Mr. Karmelin joined ML Hubbard in January 1994 and is a Vice
President of ML Hubbard. Since May 1994, he has been the Chief Financial Officer
of ML Hubbard, responsible for its accounting, treasury and tax functions. Prior
to joining ML Hubbard, Mr. Karmelin held several senior financial positions with
ML&Co. and MLPF&S from December 1985 to December 1993, including Vice
President/Senior Financial Officer Corporate Real Estate and Purchasing, Manager
Commitment Control/Capital Budgeting, and Senior Project Manager/Project
Analysis. Prior to joining ML&Co., Mr. Karmelin was employed at Avco Corporation
for 17 years, where he held a variety of financial positions. Mr. Karmelin holds
a B.B.A. degree in Accounting from Baruch College, C.U.N.Y. and a Master of
Business Administration degree in Corporate Strategy and Finance from New York
University. Mr. Karmelin passed the Certified Public Accountant examination in
1974 and is a member of the Treasury Management Association, the Institute of
Management Accountants and The Strategic Leadership Forum.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice
President and the Director of Sales, Marketing and Research and a Director of
MLIP. He joined MLPF&S in 1971 and has served as the Product Manager of Equity,
Derivative Products and Mortgage-Backed Securities as well as Managing Director
of International Sales in the United States, and Managing Director of Sales in
Europe. Mr. Chandor holds a Bachelor of Arts degree from Trinity College,
Hartford, Connecticut.
Allen N. Jones was born in 1942. Mr. Jones is Chairman and a Director
of MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of
Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has
held the position of Senior Vice President of MLPF&S. From June 1992 through
February 1994, Mr. Jones was the President and Chief Executive Officer of
Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of
Directors of MLIG and its subsidiary companies. In February 1994, Mr. Jones
became the Director of Individual Financial Services of the Merrill Lynch
Private Client Group. From January 1992 to June 1992, he held the position of
First Vice President of MLPF&S. From January 1990 to June 1992, he held the
position of District Director of MLPF&S. Before January 1990, he held the
position of Senior Regional Vice President of MLPF&S.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice President,
Secretary and the Director of Administration of MLIP. He joined MLIP in July
1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr.
Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin
graduated from The American University with a Bachelor of Science degree in
Business Administration and a Bachelor of Arts degree in Economics. In 1986, he
received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is
a member of the Managed Futures Association's Government Relations Committee and
has served as an arbitrator for the NFA.
At its December 1996 Board of Directors meeting, MLIP formed a Finance
Committee composed of representatives of several different operating and
administrative units at Merrill Lynch to oversee the financial controls and
accounting procedures implemented by MLIP. The Finance Committee will meet
periodically to review MLIP's financial reporting, monitoring and record
keeping, as well as all proposed changes -- other than the selection of
Advisors--affecting the operations of the Fund.
As of March 1, 1997, the principals of MLIP had investments in the
Fund valued at $6,069 and MLIP's general partner interest in the Fund was valued
at approximately $2.4 million.
MLF
MLF, the exclusive clearing futures commission merchant (commodity
broker) for the Fund, is a clearing member of The Board of Trade of the City of
Chicago, the Chicago Mercantile Exchange, the New York Mercantile Exchange and
all other principal United States commodity exchanges. The principal office of
MLF is located at World Financial Center, 250 Vesey Street, 23rd Floor, New
York, New York 10281-1323.
The Customer Agreement between MLF and the Fund provides that MLF
shall not be liable for actions taken pursuant to the Customer Agreement except
for actions constituting negligence or misconduct, and that MLF shall not be
responsible for actions taken by it under the Customer Agreement in compliance
with instructions given by any Trading Advisor or the Fund.
-34-
<PAGE>
FIDUCIARY OBLIGATIONS OF MLIP
NATURE OF FIDUCIARY OBLIGATIONS; CONFLICTS OF INTEREST
As general partner of the Fund, MLIP is a fiduciary to the Limited
Partners under both statutory and common law and has a responsibility to
exercise good faith, fairness and loyalty in all dealings affecting the Fund.
The scope of MLIP's fiduciary obligations is defined and established, in large
part, by the consent of each subscribing Limited Partner to the business terms
of the Fund as embodied in the Limited Partnership Agreement and as described in
this Prospectus. There are substantial and inherent conflicts of interest in the
structure of the Fund. One of the purposes underlying the disclosures set forth
in this Prospectus is to disclose these conflicts of interests to all
prospective Limited Partners so that MLIP may have the opportunity to obtain
their informed consent to these conflicts prior to, and as a condition of their
becoming Limited Partners. Prospective investors who are not willing to consent
to the various conflicts of interest described herein are ineligible to invest
in the Fund. See "Conflicts of Interest" beginning at page 54.
Having once established the business terms of the Fund, MLIP may be
effectively precluded from changing these terms in a manner that
disproportionately benefits MLIP, as any such change could constitute self-
dealing unless consented to by investors in the Fund.
The Trading Advisors selected by MLIP are required to clear (although
not to execute) the Fund's futures trades through MLF, as well as to execute and
maintain the Fund's forward currency trades through the F/X Desk. See "Charges--
F/X Desk Service Fees; EFP Differentials" at page 46. MLIP has no control or
input into the trades ordered for the Fund by the Trading Advisors, and the
Brokerage Commissions paid by the Fund are assessed on a flat-rate, not a per-
trade, basis. Nevertheless, prospective investors must recognize that by
subscribing to the Fund they have consented to its basic structure, in which
affiliates of MLIP, and MLIP itself, receive substantial revenues from the Fund
and there is no party which negotiates on behalf of the Fund to obtain lower
rates from the Merrill Lynch entities which provide services to it.
The Fund, as a publicly-offered commodity pool, is subject to the
Statement of Policy of the North American Securities Administrators Association,
Inc. relating to the registration, for public offering, of commodity pool
interests (the "NASAA Guidelines"). These NASAA Guidelines explicitly prohibit a
general partner of a commodity pool from "contracting away the fiduciary
obligation owed to [investors] under the common law."
The Limited Partnership Agreement provides that MLIP and its
affiliates shall have no liability to the Fund or to any Limited Partner for any
loss suffered by the Fund that arises out of any action or inaction of MLIP or
its affiliates if MLIP or its affiliates, in good faith, determined that such
course of conduct was in the best interests of the Fund, and such course of
conduct did not constitute negligence or misconduct by MLIP or its affiliates.
The Fund has agreed to indemnify MLIP and certain of its affiliates against
claims, losses or liabilities based on their conduct relating to the Fund,
provided that the conduct resulting in the claims, losses or liabilities for
which indemnity is sought did not constitute negligence or misconduct and was
done in good faith and in a manner reasonably believed to be in the best
interests of the Fund. The NASAA Guidelines prescribe the maximum permissible
extent to which the Fund can indemnify MLIP and its affiliates, and prohibit the
Fund from purchasing insurance to cover indemnification of MLIP which the Fund
itself could not undertake directly.
The Limited Partnership Agreement provides that MLIP and its
affiliates (as well as any persons acting as selling agent for the Units) shall
not be indemnified for any losses, liabilities or expenses arising from or out
of an alleged violation of federal or state securities laws unless (1) there has
been a successful adjudication on the merits of each count involving alleged
securities law violations as to the particular indemnitee and the court approves
indemnification of the litigation costs, or (2) such claims have been dismissed
with prejudice on the merits by a court of competent jurisdiction as to the
particular indemnitee and the court approves indemnification of the litigation
costs, or (3) a court of competent jurisdiction approves a settlement of the
claims against a particular indemnitee and finds that indemnification of the
settlement and related costs should be made.
The Limited Partnership Agreement provides that in the event of any
claim for indemnification for federal or state securities law violations, the
party seeking indemnification shall place before the court the position of the
SEC with respect to the issue of indemnification for securities law violations.
In the view of the SEC, any such indemnification is contrary to the federal
securities laws and therefore unenforceable.
-35-
<PAGE>
REMEDIES AVAILABLE TO LIMITED PARTNERS
Under Delaware law, a limited partner may, in certain circumstances,
institute legal action on behalf of himself or herself and all other similarly
situated limited partners (a "class action") to recover damages from a general
partner for violations of fiduciary duties, or on behalf of a partnership (a
partnership derivative action) to recover damages from a third party where a
general partner has failed or refused to institute proceedings to recover such
damages. In addition, limited partners may have the right, subject to applicable
procedural, jurisdictional and substantive requirements, to bring actions in
federal court to enforce their rights under the federal securities laws and the
rules and regulations promulgated thereunder by the SEC. For example, limited
partners who have suffered losses in connection with the purchase or sale of
their interests in a limited partnership may be able to recover such losses from
a general partner in cases in which the losses result from the general partner's
violation of the anti-fraud provisions of the federal securities laws.
In certain circumstances, Limited Partners also have the right to
institute a reparations proceeding before the CFTC against MLIP (a registered
commodity pool operator and commodity trading advisor), MLF (a registered
futures commission merchant) and the Trading Advisors (registered commodity
trading advisors), as well as those of their respective employees who are
required to be registered under the Commodity Exchange Act and the rules and
regulations promulgated thereunder. There is a private right of action under the
Commodity Exchange Act available to investors in commodity pools (such as the
Fund).
In the case of most public companies, management is required to make
numerous decisions in the course of the day-to-day operations of the company and
is protected in doing so by the so-called business judgment rule. This rule
protects management from liability for decisions made in the course of operating
a business if the decisions are made on an informed basis and in the honest
belief that the decision is in the best interests of the corporation. MLIP
believes that similar principles apply to MLIP in its management of the Fund.
Limited Partners should, as they may deem appropriate, 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 losses are incurred that might require ML&Co. to make any
payment under its guarantee.
MLIP will terminate all trading if the Net Asset Value per Unit of any
series falls to 110% or less of the then present value of $100 discounted back
from the Principal Assurance Date for such series at ML&Co.'s cost of borrowing
for the period remaining to such Principal Assurance Date.
For example, assume that when a particular series of Units is issued
the present value of the $100 subscription price per Unit as of its Principal
Assurance Date (five years from when such series was issued) is approximately
$71 (assuming ML&Co.'s five-year cost of funding to be 7%). As of the date that
such series is issued, MLIP would terminate trading when the Net Asset Value per
Unit of such series declined to approximately 110% of $71 or approximately $78.
At the beginning of the second year after issuance, the trading termination
point would be determined by calculating 110% of the then present value of $100
discounted back from the Principal Assurance Date at approximately ML&Co.'s
four-year cost of funding, and so on.
Unless a series of Units recognizes revenues sufficient both to (i)
cover all expenses and (ii) increase the Net Asset Value per Unit at a rate
faster than the increase in the mandatory trading termination level, resulting
from the diminution in the time remaining until such series' Principal Assurance
Date, the assets available to support such series' trading will be diminished or
eliminated.
Due to its trading leverage policies, declining interest rates would
adversely affect the Fund in two respects. First, such declines would reduce the
yield earned by the Fund on its Government Securities and cash deposits. Second,
by decreasing the discount rate used by MLIP in calculating the mandatory
trading termination point such declines would reduce the assets available for
trading. At least one "principal protection" fund sponsored by a major
investment bank
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<PAGE>
was compelled to terminate trading and dissolve, due in part to a drop in
interest rates which caused the net asset value of the fund and the present
value of its guarantee to converge.
POSSIBILITY OF ONE SERIES HAVING TO DELEVERAGE AS A RESULT OF LOSSES INCURRED BY
ANOTHER SERIES
In order to be able to continue to offer its Units on a continuous
basis under applicable SEC rules, the Fund has agreed that if it deleverages any
series of Units issued after the date hereof, all such series will be comparably
deleveraged. This policy could require a series to deleverage or even terminate
trading under circumstances in which it would not otherwise have been required
to do so. If a series has been profitable, it will trade with an increasingly
high degree of leverage as the percentage of its assets allocated to trading
increases as a fraction of the overall capital attributable to such series. The
higher the leverage with which a series trades, the lower the opportunity cost
of the Fund's "principal protection" feature. The risk that a series which has
been profitable might have to deleverage its trading because a subsequently
issued series (which had not participated during earlier profitable periods) is
required to do so materially increases the potential opportunity costs of the
Fund's "principal protection." See "Risk Factors -- (10) The New Series of
Units" at page 13.
REDUCED POSSIBILITY OF UPLEVERAGING
Any deleveraging of trading involves an inherent opportunity cost,
sacrificing profit potential in return for reducing the risk of major losses. If
the Fund achieves sufficient profits, MLIP intends to commit more than 75% of
all series' capital to trading. However, to date, MLIP has not upleveraged any
series of Units, and MLIP must upleverage all series issued after the date
hereof to the same level if MLIP upleverages any such series -- a constraint
which substantially reduces the prospects of any upleveraging occurring.
(Discretionary upleveraging is to be distinguished from the upleveraging caused
simply by the reinvestment over time of the different series' trading profits,
if any, in the Trading Partnership. Such reinvestment can and will, over time,
lead to different series trading at different levels of leverage, but is
nevertheless permissible under applicable regulatory interpretations concerning
what constitutes a continuous offering of the Units.)
THE EFFECT OF PARTIAL DELEVERAGING IN HIGHLY LEVERAGED MARKETS
There is very little direct connection between the amount of assets
allocated to a particular Advisor and the face value of the positions which such
Advisor acquires for the Fund. Market positions with an aggregate face value
ranging up to $100 million or more could be acquired for a $10 million Fund
account, depending upon an Advisor's strategy. Even though only 75% of each
series' capital is initially allocated to trading, each Advisor has broad
flexibility in determining the appropriate market exposure for its Fund account.
Consequently, even should MLIP intervene to adjust the leverage at which the
Units trade, there will not necessarily be a corresponding adjustment in the
market exposure of the Fund.
THE ML&CO. GUARANTEE
THE ML&CO. GUARANTEE
The ML&Co. guarantee that the Net Asset Value of each Unit will be at
least $100 as of such Unit's Principal Assurance Date is effective only in
respect of Units which remain outstanding on their Principal Assurance Date.
The ML&Co. guarantee is irrevocable unless the Limited Partners
exercise their voting rights under the Limited Partnership Agreement either to
remove MLIP as the general partner or dissolve the Fund. If the Fund is
otherwise dissolved (for example, due to the bankruptcy of MLIP), the ML&Co.
guarantee will continue in full force and effect. MLIP has undertaken that it
will not take any action voluntarily to dissolve the Fund prior to the latest
Principal Assurance Date established for any outstanding series of Units.
There is no assurance that the ML&Co. guarantee will be renewed in
respect of any series of Units subsequent to such series' Principal Assurance
Date. However, MLIP will provide all investors in each series of Units with
advance information concerning the proposed operation of their series following
its Principal Assurance Date, and those who wish to do so may redeem, without
penalty and with the full benefits of the ML&Co. guarantee, as of such Principal
Assurance Date.
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<PAGE>
The ML&Co. guarantee has been obtained privately by the Fund; it is
not offered to, and it does not directly benefit, investors. Consequently,
Limited Partners could only enforce such guarantee through a derivative action
on behalf of the Fund. Derivative actions are subject to a variety of
potentially material procedural requirements that would not be applicable to
actions brought in the names of the Limited Partners themselves. In evaluating
the "principal protection" feature of the Fund, prospective investors should
consider not only that this feature is highly unlikely to be of any value to
investors, but also that they would be in a materially worse position to enforce
the ML&Co. guarantee than other creditors of ML&Co. would be to enforce their
claims.
See "Special Disclosures Regarding the 'Principal Protection' Feature of
the Fund" at page 2 and "Leverage Considerations" beginning at page 36.
THE GUARANTOR
ML&Co., a Delaware corporation, is a holding company that, through its
subsidiaries and affiliates, provides investment, financing, insurance and
related services. Its principal subsidiary, Merrill Lynch, Pierce, Fenner &
Smith Incorporated, which traces its origin to a brokerage business founded in
1820, is one of the largest securities firms in the world. Merrill Lynch,
Pierce, Fenner & Smith Incorporated is a broker in securities, options
contracts, commodity and financial futures contracts and selected insurance
products, a dealer in options and in corporate and municipal securities, and an
investment banking firm. ML&Co. and certain subsidiaries engage in lending
activities, including bridge financing, and extend credit to leveraged companies
in the form of senior term and subordinated debt.
ML&Co.'s major subsidiaries include the following:
Merrill Lynch International Incorporated, through its branches,
subsidiaries and affiliates, provides financial services outside the United
States and Canada similar to those of Merrill Lynch, Pierce, Fenner & Smith
Incorporated. Merrill Lynch Canada Inc., a subsidiary of Merrill Lynch, Pierce,
Fenner & Smith Incorporated, provides institutional securities and futures
sales, trading and financing, corporate finance, and mergers and acquisitions
services in Canada. MLIB and subsidiaries and affiliates of Merrill Lynch
International Incorporated engage in international banking and foreign exchange
activities.
Merrill Lynch Government Securities Inc. is a primary dealer in
obligations issued by the U.S. Government or guaranteed or issued by federal
agencies or instrumentalities. MLAM manages mutual funds and provides investment
advisory services. ML&Co.'s insurance operations consist of the underwriting of
life insurance and annuity products by Merrill Lynch Life Insurance Company and
ML Life Insurance Company of New York, and the sale of life insurance and
annuities through Merrill Lynch Life Agency Inc. and other life insurance
agencies associated with Merrill Lynch, Pierce, Fenner & Smith Incorporated.
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., ML Hubbard and other subsidiaries of
ML&Co.
As of December 27, 1996, the aggregate net worth (stockholders'
equity) of ML&Co. was approximately $6.89 billion.
The following is certain summary financial information for ML&Co. for
fiscal years ended December 27, 1996 and December 29, 1995. Because the ML&Co.
guarantee is a general, unsecured obligation of ML&Co., the value of the ML&Co.
guarantee is dependent upon the continued financial soundness of ML&Co.
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<PAGE>
MERRILL LYNCH & CO., INC.
SUMMARY FINANCIAL INFORMATION
(IN MILLIONS, EXCEPT WHERE INDICATED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 27, 1996 DECEMBER 29, 1995
----------------- -----------------
<S> <C> <C>
INCOME STATEMENT DATA
Net revenues...................... $13,116 $10,265
Earnings before income taxes and
cumulative effect of changes
in accounting principles....... $ 2,566 $ 1,811
Net earnings...................... $ 1,619 $ 1,114
SHARE DATA
Average number of primary shares
outstanding...................... 191.8 196.0
Common shares outstanding.......... 164.1 171.4
BALANCE SHEET DATA
Total assets (billions)........... $213.02 $176.86
Total liabilities (billions)...... $205.80 $170.66
Stockholders' equity (billions)... $ 6.89 $ 6.14
</TABLE>
_______________
The financial results for ML&Co. are more fully set forth in its
Annual Report to Stockholders for the 1996 fiscal year. MLIP will provide,
without charge, copies of such Annual Report to any prospective or existing
investor upon written or oral request to MLIP at Merrill Lynch World
Headquarters, Sixth Floor, South Tower, World Financial Center, New York, New
York 10080-6106; telephone: (212) 236-4167.
In addition, ML&Co. is an electronic filer of information with the
SEC. The SEC maintains a Website that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC at http://www.sec.gov.
USE OF PROCEEDS AND CASH MANAGEMENT INCOME
SUBSCRIPTION PROCEEDS
MLIP pays from its own funds the selling commissions relating to the
sale of the Units. Accordingly, 100% of the proceeds of Unit sales are received
in cash by the Fund and available for use in its speculative trading. In such
trading, the Fund's assets are not used to purchase or acquire any asset but
rather held as security for and to pay the Fund's trading losses as well as any
expenses and redemptions. The primary use of the proceeds of the sale of the
Units is to permit the Advisors to trade on a speculative basis in a wide range
of different futures, forwards and options on futures markets on behalf of the
Fund. While being used for this purpose, the Fund's assets are also generally
available for cash management, as more fully described below under "-- Available
Assets" at page 40.
MARKET SECTORS
The Fund trades in a diversified group of markets under the direction
of multiple independent Advisors. These Advisors can, and do, from time to time
materially alter the allocation of their overall trading commitments among
different market sectors. Except in the case of certain trading programs which
are purposefully limited in the markets which they trade, there is essentially
no restriction on the commodity interests which may be traded by any Advisor or
the rapidity with which an Advisor may alter its market sector allocations.
-39-
<PAGE>
In its Diversified Program, Chesapeake Capital Corporation applies its
trend-following system to a global portfolio of futures and forward markets,
including agricultural products, precious and industrial metals, currencies,
financial instruments, and stock, financial and economic indices.
The Financial and Metals Portfolio of John W. Henry & Company, Inc.
utilizes intermediate- and long-term quantitative trend analysis models which
participate in four major market sectors -- global interest rates, foreign
exchange, global stock indices and precious metals -- and seeks to capitalize on
sustained moves in global financial markets.
The Fund's financial statements contain information relating to the
market sectors traded by the Fund. There can, however, be no assurance as to
which markets may be included in the Fund's portfolio or as to in which market
sectors the Fund's trading may be concentrated at any one time or over time.
See "Index to Financial Statements" at page 67.
MARKET TYPES
The Fund trades on a variety of United States and foreign futures
exchanges. Applicable exchange rules differ significantly among different
countries and exchanges. Substantially all of the Fund's off-exchange trading
takes places in the highly liquid, institutionally based currency forward
markets. The forward markets are generally unregulated, and in its forward
trading the Fund does not deposit margin with respect to its positions. The
Fund's forward currency trading is executed exclusively through the F/X Desk,
with MLF as the back-to-back intermediary to the ultimate counterparties (which
include MLIB) with which the Advisors trade on behalf of the Fund.
As in the case of its market sector allocations, the Fund's
commitments to different types of markets -- U.S. and non-U.S., regulated and
unregulated -- differ substantially from time to time as well as over time. The
Fund has no policy restricting its relative commitment to any of these different
types of markets, although generally the bulk of the Fund's trading takes place
on regulated exchanges.
The Fund's financial statements contain information relating to the
types of markets traded by the Fund. There can, however, be no assurance as to
in which markets the Fund may trade or the Fund's trading may be concentrated at
any one time or over time.
CUSTODY OF ASSETS
All of the Fund's assets -- other than the assets managed by MLAM and
held in a custodial account as described below under "--The Fund's U.S. Dollar
Available Assets Managed by MLAM" at page 41 -- are currently held in customer
accounts at Merrill Lynch. (ML&Co. and entities affiliated with ML&Co. are
herein sometimes collectively referred to as "Merrill Lynch.")
AVAILABLE ASSETS
The Fund earns income, as described below, on its "Available Assets,"
which can be generally described as the cash actually held by the Fund or
invested in short-term Treasury bills. Available Assets are held primarily in
U.S. dollars or in U.S. dollar denominated Government Securities, and to a
lesser extent in foreign currencies, and are comprised of the following: (a)
the Fund's cash balances managed by MLAM or held in the offset accounts (as
described below) -- which include "open trade equity" (unrealized gain and loss
on open positions) on United States futures contracts, which is paid into or out
of the Fund's account on a daily basis; (b) short-term Treasury bills purchased
by the Fund; and (c) the Fund's cash balance in foreign currencies derived from
its trading in non-U.S. dollar denominated futures and options contracts, which
includes open trade equity on those exchanges which settle gains and losses on
open positions in such contracts prior to closing out such positions. Available
Assets do not include, and the Fund does not earn interest on, the Fund's gains
or losses on its open forward, commodity option and certain foreign futures
positions since such gains and losses are not collected or paid until such
positions are closed out.
The Fund's Available Assets may be greater than, less than or equal to
the Fund's Net Asset Value (on which the redemption value of the Units is based)
primarily because Net Asset Value reflects all gains and losses on open
positions as well as accrued but unpaid expenses.
-40-
<PAGE>
The interest income arrangements for the Fund's U.S. dollar Available
Assets differ from those applicable to its non-U.S. dollar Available Assets.
Interest income, once accrued by the Fund, is subject to the risk of trading
losses.
THE FUND'S U.S. DOLLAR AVAILABLE ASSETS MANAGED BY MLAM
Approximately 80% of the Fund's U.S. dollar Available Assets are
managed directly by MLAM, pursuant to guidelines established by MLIP, for which
MLAM assumes no responsibility, in the Government Securities markets. MLIP's
objective in retaining MLAM to provide cash management services to the Fund is
to enhance the return earned on the Fund's U.S. dollar Available Assets managed
by MLAM to slightly above the 91-day Treasury bill rate, while maintaining
minimal (but by no means eliminating) market risk in the Fund's cash management
operations.
The Government Securities acquired by MLAM on behalf of the Fund are
maintained in a custodial account at a Merrill Lynch affiliate and are
specifically traceable to the Fund. All income earned on such Government
Securities inures to the benefit of the Fund.
MLF pays all fees due to MLAM in respect of its management of a
portion of the Fund's U.S. dollar Available Assets, at no additional cost to the
Fund.
There can be no assurance that MLAM's cash management will achieve returns for
the Fund in excess
of the 91-day Treasury bill rate or avoid a loss of yield, of principal or of
both.
MLAM does business as Merrill Lynch Asset Management. MLAM is a
limited partnership. ML&Co. is its limited partner, and Princeton Services,
Inc., a wholly-owned subsidiary of ML&Co., is the general partner. As of
December 31, 1996, MLAM and its affiliates, collectively, had a total of
approximately $234.1 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of MLAM.
INTEREST EARNED ON THE FUND'S U.S. DOLLAR AVAILABLE ASSETS NOT MANAGED BY MLAM
The following description relates to the approximately 20% of the
Fund's U.S. dollar Available Assets not managed by MLAM.
Offset Accounts and Short-Term Treasury Bills
The Fund's U.S. dollar Available Assets not managed by MLAM are held
in cash in offset accounts and in short-term Treasury bills purchased from
dealers unaffiliated with Merrill Lynch. Offset accounts are non-interest
bearing demand deposit accounts maintained with banks unaffiliated with Merrill
Lynch. An integral feature of the offset arrangements is that the participating
banks specifically acknowledge that the offset accounts are MLF customer
accounts, not subject to any Merrill Lynch liability.
MLF credits the Fund, as of the end of each month, with interest at
the effective daily 91-day Treasury bill rate on the average daily U.S. dollar
Available Assets held in the offset accounts during such month. The Fund
receives all the interest paid on the short-term Treasury bills in which it
invests.
Possible Discontinuation of the Offset Accounts
The use of the offset account arrangements for the Fund's U.S. dollar
Available Assets not managed by MLAM may be discontinued by Merrill Lynch
whether or not Merrill Lynch otherwise continues to maintain its offset
arrangements. The offset arrangements are dependent on the banks' continued
willingness to make overnight credits available to Merrill Lynch, which, in
turn, is dependent on the credit standing of ML&Co. If Merrill Lynch were to
determine that the offset arrangements had ceased to be practicable (either
because ML&Co. credit lines at participating banks were exhausted or for any
other reason), Merrill Lynch would thereafter attempt to invest all of the
Fund's U.S. dollar Available Assets not managed by MLAM to the maximum
practicable extent in short-term United States Treasury bills. All interest
earned on the U.S. dollar Available Assets so invested would be paid to the
Fund, but MLIP would expect the amount of such interest to be less than that
available to the Fund under the offset account arrangements. The remaining U.S.
dollar Available Assets of the Fund not managed by MLAM would be kept in cash to
meet variation margin payments and pay expenses, but would not earn interest for
the Fund.
-41-
<PAGE>
Offset Account Benefit to Merrill Lynch
The banks at which the offset accounts are maintained make available
to Merrill Lynch interest-free overnight credits, loans or overdrafts in the
amount of the Fund's U.S. dollar Available Assets held in the offset accounts,
charging Merrill Lynch a small fee for this service. The economic benefits
derived by Merrill Lynch -- net of the interest credits paid to the Fund and the
fee paid to the offset banks -- from the offset accounts have not exceeded 3/4
of 1% per annum of the Fund's average daily U.S. dollar Available Assets not
managed by MLAM and held in the offset accounts. These revenues to Merrill Lynch
are in addition to the Brokerage Commissions and Administrative Fees paid by the
Fund to MLF and MLIP, respectively.
INTEREST PAID BY MERRILL LYNCH ON THE FUND'S NON-U.S. DOLLAR AVAILABLE ASSETS
Under the single currency margining system implemented for the Fund,
the Fund itself does not deposit foreign currencies to margin trading in non-
U.S. dollar denominated futures contracts and options. MLF provides the
necessary margin, permitting the Fund to retain the monies which would otherwise
be required for such margin as part of the Fund's U.S. dollar Available Assets.
Consequently, the Fund does not earn interest on foreign margin deposits. The
Fund does, however, earn interest on its non-U.S. dollar Available Assets.
Specifically, the Fund is credited by Merrill Lynch with interest at the local
short-term rate on realized and unrealized gains on non-U.S. dollar denominated
positions for such gains actually held in cash by the Fund (MLAM does not manage
any of the Fund's non-U.S. dollar Available Assets.). Merrill Lynch charges the
Fund Merrill Lynch's cost of financing realized and unrealized losses on such
positions.
In order to avoid the expense of daily currency conversions, the Fund
holds foreign currency gains and finances foreign currency losses on an interim
basis until converted into U.S. dollars and either paid into or out of the
Fund's U.S. dollar Available Assets. Foreign currency gains or losses on open
positions are not converted into U.S. dollars until the positions are closed.
Assets of the Fund while held in foreign currencies are subject to exchange rate
risk.
FORWARD TRANSACTIONS
Spot and forward currency contracts are the only non-exchange traded
instruments held by the Fund.
To date, approximately 20% to 30% of the Fund's trades by volume have
been in forward currency contracts, but from time to time the percentage of the
Fund's trading represented by forward currency trades may fall substantially
outside this range. In using the F/X Desk, the Fund trades through MLF.
Because the Fund need not deposit any margin with MLF in respect of the Fund's
forward trading, the Fund's additional risk in trading in such unregulated
markets should be limited to a possible loss of unrealized profits on open
forward positions which a counterparty accessed through MLF would not, in the
event of its bankruptcy, be able to pay to MLF for the account of the Fund.
Having the Fund (and the other MLF clients using the F/X Desk) trade
through the F/X Desk on the basis of MLF's credit lines permits the F/X Desk to
access a wide range of counterparties without the need of such counterparties
evaluating the individual credit of the Fund (or any other MLF client).
-42-
<PAGE>
CHARGES
The following table summarizes the charges incurred by the Fund during
1994 (2 2/3 months), 1995 and 1996.
<TABLE>
<CAPTION>
1/1/96 - 12/31/96 1/1/95 - 12/31/95 10/12/94 - 12/31/94
----------------- ----------------- -------------------
% OF % OF
% OF AVERAGE AVERAGE AVERAGE
DOLLAR MONTH-END DOLLAR MONTH-END DOLLAR MONTH-END
COST AMOUNT NET ASSETS* AMOUNT NET ASSETS* AMOUNT NET ASSETS*
---- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C>
Brokerage
Commissions** $4,775,116 5.77% $3,216,364 5.76% $405,653 5.61%
Administrative
Fees** 129,057 0.16 86,928 0.16 10,964 0.15
Reimbursement of
Organizational and
Initial Offering
Costs 79,700 0.10 79,700 0.14 17,712 0.24
Profit Shares 978,264 1.18 652,366 1.17 129,169 1.79
------- ---- ------- ---- ------- ----
Total $5,962,137 7.21% $4,035,358 7.23% $563,498 7.79%
========== ========== ==== ======== ====
</TABLE>
__________________
* Only approximately 60% of the Fund's average month-end Net Assets were
allocated to trading during the periods presented. Units issued under this
Prospectus and thereafter will commence trading with 75% of their assets
allocated to trading. Consequently, the percentage figures presented would
be correspondingly higher as a percentage of the Fund's average month-end
Net Assets. Percentages are annualized for the period ending December 31,
1994.
** A portion of the Brokerage Commissions in prior periods have been
reclassified to conform to the current period presentation of the
Administrative Fees.
____________________
THE FLAT-RATE BROKERAGE COMMISSIONS AND ADMINISTRATIVE FEES WILL IN
THE FUTURE BE HIGHER THAN THOSE IN THE FOREGOING TABLE AS THE UNITS ISSUED UNDER
THIS PROSPECTUS WILL TRADE AT 75% RATHER THAN 60% INITIAL LEVERAGE.
____________________
The Fund's average month-end Net Assets during 1994 (2 2/3 months),
1995 and 1996 equalled $32,552,448, $55,827,125 and $82,789,767,
respectively.
The foregoing table does not reflect the bid-ask spreads paid by the
Fund on its forward trading, or the benefits which MLF derives from possession
of the Fund's assets. See "Use of Proceeds and Cash Management Income" at page
39.
During 1994 (2 2/3 months), 1995 and 1996, the Fund earned $377,303,
$3,415,670 and $4,545,186 in interest income, or approximately 1.16%, 6.12% and
5.49% of the Fund's average month-end Net Assets.
See the Breakeven Table included in the "Summary" at page 9.
Effective January 1, 1997, MLIP reduced the Fund's annual Brokerage
Commission from 9.25% to 8.75% of trading assets.
____________________
-43-
<PAGE>
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 for organizational
initial offering cost and initial offering costs in 36 monthly installments
reimbursement of $6,642 (a total of $239,100) ending October 31,
1997.
MLF Brokerage Commissions A flat-rate monthly commission of 0.7291 of 1% (an
8.75% annual rate) of the Fund's month-end assets
committed to trading. The Fund will initially commit
75% of the capital attributable to each series of
Units issued pursuant to this Prospectus to trading.
MLF Use of Fund assets MLF derives an annual benefit from the deposit of
certain of the Fund's U.S. dollar Available Assets
not managed by MLAM in offset accounts which to date
has not exceeded 3/4 of 1% of such average daily
U.S. dollar Available Assets.
MLIP Administrative Fees A flat-rate monthly charge, payable to MLIP, of
0.020833 of 1% (a 0.25 of 1% annual rate) of the
Fund's month-end assets committed to trading. The
Fund will initially commit 75% of the capital
attributable to each series of Units issued pursuant
to this Prospectus to trading. MLIP pays all of the
Fund's routine administrative costs.
MLIB Bid-ask spreads Under MLIP's F/X Desk arrangements, MLIB receives
bid-ask spreads on the forward trades it executes
with the Fund.
Other Bid-ask spreads The counterparties other than MLIB with which the F/X
Counterparties Desk deals each also receive bid-ask spreads on the
forward trades it executes with the Fund.
MLIP F/X Desk service fees Under the F/X Desk arrangements, MLIP or another
Merrill Lynch entity receives a service fee equal, at
current exchange rates, to approximately $5.00 to
$12.50 on each purchase or sale of each futures
contract-equivalent forward contract executed with
counterparties other than MLIB.
MLIB EFP differentials MLIB or an affiliate receives a differential spread
for exchanging the Fund's spot currency positions
(which are acquired through the F/X Desk, as
described above) for equivalent futures positions.
Government Securities Bid-ask spreads The dealers with which MLAM executes Government
Dealers Securities trades include bid-ask spreads in the
prices they quote to the Fund.
</TABLE>
-44-
<PAGE>
CHARGES PAID BY THE FUND
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
Trading Advisors Profit Shares As of the date of this Prospectus, 15% or 20%
(depending on the Trading Advisor) of any New
Trading Profit as of the end of each calendar quarter
or year and upon redemption of Units. New Trading
Profit is calculated separately in respect of each
Advisor's individual performance for each series of
Units, not the overall performance of such series.
MLF; Extraordinary expenses Actual costs incurred; none paid to date, and
Others expected to be negligible.
</TABLE>
___________________
ORGANIZATIONAL AND INITIAL OFFERING COST REIMBURSEMENTS
MLIP advanced the organizational and initial offering costs of the
Fund. The Fund is reimbursing MLIP for such costs in the aggregate amount of
$239,100 in 36 equal monthly installments of $6,642 each, through October 31,
1997. The accrued liability for the remaining reimbursement of organizational
and initial offering costs does not reduce Net Assets for any purpose (other
than financial reporting).
BROKERAGE COMMISSIONS
Commodity brokerage commissions are typically paid on the completion
or liquidation of a trade and are referred to as round-turn commissions, which
cover both the initial purchase (or sale) and the subsequent offsetting sale (or
purchase) of a commodity futures contract. The Fund does not pay its commodity
brokerage commissions on a per-trade basis, but rather at a monthly flat rate of
0.7291 of 1% of the Fund's month-end assets committed to trading (an 8.75%
annual rate). MLF receives these flat-rate payments irrespective of the number
of trades executed on the Fund's behalf. These Brokerage Commissions include the
Advisors' Consulting Fees and all execution and clearing costs. Month-end
assets committed to trading are not reduced for purposes of calculating
Brokerage Commissions by any accrued but unpaid Profit Shares, Administrative
Fees or the accrued Brokerage Commissions being calculated. The Fund could
obtain lower rates for similar brokerage services from firms other than MLF.
The Fund initially commits 75% of the capital attributable to each
series of Units to the Trading Advisors for management. At this leverage
factor, the Brokerage Commissions equal 6.56% per annum of the average total
month-end assets attributable to each series, including assets not allocated to
trading.
The Fund's Brokerage Commissions are allocated among the outstanding
series of Units pro rata based on the respective month-end assets which each
series commits to trading, without reduction for accrued but unpaid Profit
Shares, Administrative Fees or Brokerage Commissions.
During 1994 (2 2/3 months), 1995 and 1996, the Fund paid Brokerage
Commissions of $416,617, $3,303,292 and $4,904,173, respectively (including the
Administrative Fee portion of the Brokerage Commissions which was
recharacterized as such as of January 1, 1996), these flat-rate Brokerage
Commissions were the approximate equivalent of round-turn commissions of $53,
$134 and $116, respectively. These "round-turn" equivalent rates were somewhat
higher than those of most MLIP funds. The per-trade equivalent of the Fund's
flat-rate Brokerage Commissions varies over time depending upon the frequency
with which the Advisors trade.
The audited financial statements distributed by MLIP to Limited
Partners include the approximate round-turn equivalent commission rate paid by
the Fund during the previous year.
State securities administrators require MLIP to state that the
Brokerage Commissions paid by the Fund shall not be increased while redemption
charges are in effect. Moreover, MLIP has undertaken to various state
securities commissions that in no event will MLIP increase the 9.0% annual "wrap
fee" (which includes the 8.75% annual Brokerage Commissions and the 0.25% annual
Administrative Fees) without the unanimous consent of all Limited Partners. In
fact,
-45-
<PAGE>
MLIP has never raised the brokerage commissions paid by any of its funds and has
on a number of occasions reduced such charges. In addition, MLIP has been
required by various state regulators to make the following disclosure:
The Fund's Brokerage Commissions and Administrative Fees constitute a "wrap
fee." The "wrap fee" is ML&Co.'s only source of revenues from the Fund (other
than bid-ask spreads, F/X Desk service fees, EFP differentials and the benefits
derived from the deposit of certain of the Fund's assets in offset accounts as
described under "Use of Proceeds and Cash Management Income" at pages 39-42),
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 and offering expenses; (b)
selling commissions; (c) ongoing compensation to Financial Consultants (the
individual MLPF&S brokers); (d) all costs of executing the Fund's futures
trades; (e) the Advisors' Consulting Fees; (f) MLAM's advisory fees; and (g)
Merrill Lynch employee discounts. All of these costs and expenses, not only
execution costs, are reflected in the 9.0% annual "wrap fee" (including both the
Brokerage Commissions and the Administrative Fees) charged to the Fund.
PROSPECTIVE INVESTORS MUST BE AWARE THAT THE BROKERAGE COMMISSIONS AND
ADMINISTRATIVE FEES CHARGED TO THE FUND IN FACT INCLUDE A SIGNIFICANT NUMBER OF
COSTS OTHER THAN THOSE OF ACTUALLY EXECUTING THE FUND'S TRADES OR PROVIDING
ADMINISTRATIVE SERVICES TO IT. SUCH FLAT-RATE BROKERAGE COMMISSIONS AND
ADMINISTRATIVE FEES MAY NOT BE INCREASED, IN THE AGGREGATE, ABOVE THE CURRENT
ANNUAL LEVEL OF 9.0% OF THE AVERAGE MONTH-END ASSETS COMMITTED TO TRADING
WITHOUT THE UNANIMOUS CONSENT OF ALL LIMITED PARTNERS.
MLF pays, from the Brokerage Commissions received by it, all costs of
executing the Fund's futures trades, including the NFA transaction fees assessed
on the Fund's futures trading on United States exchanges. Such fees currently
equal $0.14 for each round-turn trade of a futures contract and $0.07 for each
trade of a commodity option contract.
A number of the Advisors execute trades through brokers other than
MLF, in which case the trades are "given-up" to be cleared by MLF. The
additional costs involved in such third-party trade executions are paid by MLF.
USE OF FUND ASSETS
As described under "Use of Proceeds and Cash Management Income" at
pages 39-42, Merrill Lynch derives an annual benefit from the deposit of certain
of the Fund's U.S. dollar Available Assets not managed by MLAM (approximately
10% to 20% of the total Available Assets of the Fund) in offset accounts which
to date has not exceeded 3/4 of 1% per annum of such average daily U.S. dollar
Available Assets.
ADMINISTRATIVE FEES
As of January 1, 1996, MLIP began charging flat-rate monthly
Administrative Fees of 0.020833 of 1% of each series of Units' month-end assets
committed to trading (a 0.25 of 1% annual rate). Month-end assets for such
purposes are not reduced by accrued but unpaid Profit Shares, Brokerage
Commissions or the accrued Administrative Fees being calculated. At the time
that the Administrative Fees were introduced, the Fund's flat-rate Brokerage
Commissions were reduced in an amount corresponding to the Administrative Fees,
so that there was no increased expense to the Fund.
MLIP pays the ongoing administrative costs of the Fund, including the
expense of updating this Prospectus.
BID-ASK SPREADS
Many of the Fund's currency trades are executed in the forward
markets, in which participants include in their pricing a spread between the
prices at which they are prepared to buy and sell a particular currency. The
fact that the Fund pays such spreads does not reduce the flat-rate Brokerage
Commissions paid by the Fund.
F/X DESK SERVICE FEES; EFP DIFFERENTIALS
The Fund trades forward contracts through the F/X Desk. Conversions
of the Fund's foreign currency gains and losses are also effected through the
F/X Desk on the same basis as the Fund's forward trading. 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
-46-
<PAGE>
contract-equivalent face amount of a given currency traded in the forward
markets. No service fees are charged on trades awarded to MLIB (which receives
bid-ask spreads on such trades).
In its exchange of futures for physical ("EFP") trading with Merrill
Lynch, the Fund acquires spot or forward (collectively, "cash") currency
positions through the F/X Desk in the same manner and on the same terms as in
the case of the Fund's other F/X Desk trading. When the Fund exchanges these
positions for futures, there is a differential between the prices of the two
positions. This differential reflects, in part, the different settlement dates
of the cash and the futures contracts and prevailing interest rates, but also
includes a pricing spread in favor of MLIB or another Merrill Lynch entity.
EFPs are a trading technique which effectively permits an Advisor to establish a
futures position out of normal exchange hours as well as to obtain a single
price for an entire large order, whereas when large orders are executed on the
futures exchange floor, they tend to be broken up into a number of different
futures trades, each of which may be bought or sold at a different price. The
current Advisor group makes very little use of EFPs.
The combined F/X Desk service fees and EFP differentials have not to
date exceeded 1/4 of 1% of the Fund's average month-end traded assets on an
annual basis.
SECURITIES BID-ASK SPREADS
The Fund's Government Securities trades are executed with dealers
unaffiliated with any Merrill Lynch entity on an arm's-length best net price and
execution basis. MLAM is required to use unaffiliated dealers to execute the
Fund's securities trades, because applicable SEC rules prohibit an investment
adviser such as MLAM from executing -- either itself or through an affiliate --
any securities trades on a principal-to-principal basis with a client (virtually
all Government Securities trades are executed on a principal-to-principal basis
in the over-the-counter, rather than on an agency basis on an exchange, market).
PROFIT SHARES
John W. Henry & Company, Inc. receives a quarterly Profit Share of 15%
and Chesapeake Capital Corporation an annual Profit Share of 20%, in each case
of any New Trading Profit earned by such Advisors, respectively, for each series
of Units considered independently. The non-core Advisors generally receive
quarterly or annual Profit Shares of between 15% and 20% of any New Trading
Profit which they earn for each series, also considered individually. Advisors
could receive Profit Shares from one series of Units but not from others due to
the different times at which the series began trading. For example, the account
managed by an Advisor for the series of Units sold as of April 1, 1997 might
incur losses during the second quarter of 1997. Accordingly, such Advisor would
have a loss carryforward with respect to such series at the time that the series
sold as of July 1, 1997 was issued. The July 1, 1997 series would not, of
course, be issued with any loss carryforward (as such series would have incurred
no losses as of its date of issuance). Consequently, if such Advisor traded
profitably in the third quarter of 1997, such Advisor (if receiving a quarterly
Profit Share) would be entitled to a Profit Share in respect of the July 1, 1997
series, although such Advisor may not have recovered the losses previously
incurred by the April 1, 1997 series.
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 year, depending on whether the Profit Share is calculated on
a quarterly or annual basis (or $0, if an Advisor has traded unprofitably for a
series of Units).
In the case of certain Advisors, New Trading Profit is not reduced by
the full amount of the Brokerage Commissions paid by their Fund account.
In the case of Units redeemed as of the end of any month that is not
the end of a Profit Share calculation period, the Net Asset Value at which such
Units are redeemed will reflect a reduction for the Profit Share accrued on the
series of Units in question in respect of each Advisor's account (equally
reducing the attributable Net Asset Value of each Unit) as if the redemption
date were the end of a Profit Share calculation period. The amounts so deducted
will be paid to
-47-
<PAGE>
the appropriate Advisor(s) and will not be subject to being returned to the Fund
or the redeeming Limited Partners, irrespective of subsequent losses during the
quarter or year.
Assume that as of the end of a series' first calendar quarter of
trading, JWH, which receives a quarterly Profit Share, had, after all or a
portion of the allocable monthly Brokerage Commissions and Administrative Fees,
a realized profit of $50,000 and an unrealized profit of $150,000 in respect of
such series. The New Trading Profit in respect of such series would equal
$200,000. The entire amount would represent an increase in cumulative Trading
Profit allocable to such series and 15%, or $30,000 would be paid by such series
to JWH. 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 JWH 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. The cumulative Trading
Profit allocable to such series would have increased to $210,000, and 15% of
such $10,000 increase, or $1,500 would be paid by such series to JWH. If the
assets allocable to such series managed by JWH were subsequently to sustain
losses, JWH would not be required to refund any of the Profit Shares previously
paid by the series, but it would not be until JWH's cumulative Trading Profit
allocable to such series exceeded $210,000 as of a calendar quarter-end that JWH
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 such 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. There have been and it is likely that
there will continue to be periods when the aggregate New Trading Profits on
which Profit Shares are paid by a series to one or more Trading Advisors are
exceeded by the losses incurred in respect of such series by one or more of the
other Trading Advisors.
In calculating New Trading Profit, Profit Shares previously paid do
not reduce cumulative New Trading Profit in subsequent periods. Accordingly,
the Trading Advisors do not have to earn back Profit Shares previously paid to
them in order for the Fund account managed by them to generate additional New
Trading Profit on which an incremental Profit Share will accrue.
Redemption charges do not reduce New Trading Profit for purposes of
calculating the Profit Shares.
Termination of an Advisory Agreement is treated as if the date of
termination were the end of a Profit Share calculation period for purposes of
calculating any Profit Shares due to an Advisor.
When a new or replacement Advisor is retained, such Advisor calculates
its New Trading Profit from the date such Advisor's Fund account began trading
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.
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 the end of any
previous calendar quarter, or $0 if higher) for Profit Share calculation
purposes.
During the last 2 2/3 months of 1994, 1995 and 1996, the Fund paid
Profit Shares of $129,169, $652,366 and $978,264, and had net income of
$579,894, $5,186,492 and $7,223,364, respectively. These Profit Shares equalled
0.4%, 1.17% and 1.18% of average month-end Net Assets.
Because certain Profit Shares are calculated on a quarterly basis, it
is possible, irrespective of the fact that the Profit Shares are paid separately
to each Advisor based on its individual performance for each series, that a
series will pay substantial Profit Shares during a year even though the Net
Asset Value per Unit of such series declines substantially during such year.
Profit Shares paid may have little direct correlation with Limited
Partners' investment experience in the Fund. MLIP's multi-advisor funds have
historically paid substantial Profit Shares even during periods when they were
incurring losses.
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EXTRAORDINARY EXPENSES
The Fund is required to pay any extraordinary charges (such as taxes)
incidental to its trading. No extraordinary charges have been paid by the Fund
to date, and in MLIP's experience such charges have been negligible for the
funds which it sponsors and manages.
____________________
MLIP sends each Limited Partner a monthly statement that includes a
description of performance during the prior month and sets forth, among other
things, the Brokerage Commissions, Administrative Fees and Profit Shares paid or
accrued during such month 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 due on Units which remain outstanding for more than twelve
months. See "Plan of Distribution -- Selling Agent Compensation" at page
64.
Through December 31, 1996, MLIP had paid a total of $5,037,521 in
selling commissions (in the form of production credits, not cash out-of-pocket)
on sales of the Units.
The first monthly installments of ongoing compensation began to accrue
as of October 1, 1995 on the Series A Units sold as of October 1, 1994. Through
December 31, 1996, MLIP paid a total of $355,697 in ongoing compensation (in the
form of "production credits," not cash out-of-pocket).
CONSULTING FEES
The Trading Advisors each enter into a Consulting Agreement with MLF.
Pursuant to such Consulting Agreements, MLF pays monthly Consulting Fees to each
of the Advisors: Chesapeake receives 0.083% (1% annually), and JWH 0.333% (4%
annually) of the month-end assets of the Fund committed to each of them,
respectively.
As of the date of this Prospectus, all non-core Advisors receive
monthly Consulting Fees equal to or less than 0.167% (2% annually) of the month-
end Fund assets committed to their management.
MLIP anticipates that the Consulting Fees paid to Advisors in the
future will generally fall within the range of a 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, MLF paid Consulting Fees of
$106,951, $858,044 and $1,248,233, respectively, or approximately 0.33%, 1.54%
and 1.51% 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, MLF expensed approximately
$11,319, $70,670 and $146,259, respectively, in cash management fees paid or
accrued to MLAM.
____________________
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REDEMPTION CHARGES
Units redeemed on or prior to the end of the twelfth full month after
issuance are subject to redemption charges of 3% of the Net Asset Value at which
they are redeemed. Such charges are paid to MLIP.
If a Limited Partner redeems Units during or as of the end of a
calendar quarter, and subscribes as of the date of redemption to the new series
of Units to be issued immediately following such quarter, any otherwise
applicable 3% charge is waived to the extent that the redemption proceeds are
reinvested. However, the Units acquired upon reinvestment of redemption
proceeds are subject to a 3% redemption charge for the twelve months following
the date of their issuance, not of the issuance of the redeemed series.
For purposes of determining whether redemption charges apply, Units
are considered to be issued as of the first day of the calendar quarter
immediately following the quarter during which the subscriptions for such Units
are accepted.
Receipt of redemption charges does not reduce the Fund's reimbursement
obligations to MLIP for organizational and initial offering costs or for the
payment of any other expense charged to the Fund as described herein.
During 1994 (2 2/3 months), 1995 and 1996, MLIP received a total of
$7,436, $57,489 and $43,305, respectively, in redemption charges.
CERTAIN LITIGATION
JWH
For a description of certain pending litigation related to JWH, see
"The Core Advisors - John W. Henry & Company, Inc." at page 102.
MLIP
ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc. (which is
the sole stockholder of MLIP and MLF) and of MLPF&S, and the 100% indirect owner
of all Merrill Lynch entities involved in the operation of the Fund -- as well
as certain of its subsidiaries have been named as defendants in numerous civil
actions and arbitration proceedings arising out of their respective business
activities.
The following actions have been filed against or on behalf of ML&Co.
in connection with ML&Co.'s business activities with the Treasurer-Tax Collector
of Orange County, California ("Orange County") or from the purchase 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. On May 17, 1996, the
Bankruptcy Court confirmed a plan pursuant to which Orange County emerged from
bankruptcy. 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 with funds controlled by
the Orange County Treasurer-Tax Collector.
On January 12, 1995, an action was commenced by Orange County and the
Pools against ML&Co. and certain of its subsidiaries in the Bankruptcy Court
pursuant to the automatic reference by law of all proceedings related to
bankruptcy peititions (the "Orange County Action"). Orange County filed a first
amended complaint on June 6, 1995, which was dismissed on October 17, 1995.
Orange County filed a second amended complaint on October 25, 1995 adding John
M.W. Moorlach, the current Orange County Treasurer-Tax Collector, as a
plaintiff, and alleging, among other things, that ML&Co.'s liquidation of
certain securities entitles the plaintiffs to relief under Sections 362, 502,
510, 549 and 922 of 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
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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, punitive damages in an
unspecified amount and injunctive and declaratory relief are sought.
On March 1, 1995, ML&Co. and Orange County entered into an agreement
in order to resolve a motion by Orange County seeking a temporary restraining
order, a preliminary injunction and a constructive trust with respect to the
proceeds realized by ML&Co. from the sale of securities purchased by ML&Co.
pursuant to certain master repurchase agreements. Pursuant to this agreement,
the proceeds from the sale of securities purchased by ML&Co. from Orange County
were used to purchase short-term United States Treasury bills or United States
Treasury Notes that are identifiable and held separate and subject to any rights
that ML&Co. may have in the master repurchase agreements. This agreement may be
terminated by ML&Co. upon 30 days' written notice.
On October 17, 1996, on ML&Co.'s motion, the United States District
Court for the Central District of California (the "District Court") withdrew the
prior automatic reference to the Bankruptcy Court of this Action. The case is
now pending in the District Court.
On December 13, 1994, a purported class action was commenced in the
Superior Court of the State of California, Orange County, on behalf of
individuals whose funds were deposited with the Orange County Treasurer-Tax
Collector pursuant to proceedings in California Superior Court (the "DeLeon
Action"). On December 27, 1994, plaintiffs filed a first amended class action
complaint; on April 19, 1995, plaintiffs filed a second amended complaint which
was dismissed on November 13, 1995; and, on December 18, 1995, plaintiffs filed
a third amended complaint. As amended, the DeLeon Action is brought on behalf
of the same individuals on whose behalf the action was originally brought and on
behalf of individuals who invested funds in the Pools representing deferred
compensation and/or retirement funds. The defendants include ML&Co., a
subsidiary of ML&Co. and an employee of ML&Co. Plaintiffs allege, among other
things, that the defendants breached fiduciary duties, aided and abetted
breaches of fiduciary duties, conspired to breach a fiduciary duty and committed
professional negligence in connection with ML&Co.'s business activities with the
Orange County Treasurer-Tax Collector. Damages and punitive damages in
unspecified amounts are sought. On May 10, 1996, the court stayed 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 involving settlement funds belonging to minor children and other
legally incapacitated or incompetent persons who had been injured in accidents,
and inheritances administered on behalf of minor children and other legally
incapacitated or incompetent persons from estates (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, damages and punitive damages in unspecified amounts are sought. The
complaint was never served.
On September 15, 1995, an action was commenced in the Superior Court
of the State of California, San Francisco County, by twelve California public
entities (the "Atascadero State Court Action"). On January 11, 1996, the case
was transferred to the Superior Court of the State of California, Contra Costa
County. On April 10, 1996, the plaintiff filed an amended complaint which was
dismissed on November 5, 1996 and on December 2, 1996, the plaintiff filed a
second amended complaint adding two California public entities as plaintiffs.
The current plaintiffs are the City of Atascadero, City of Buena Park, The
Community Redevelopment Agency of the City of Buena Park, City of Claremont,
City of Milpitas, City of Montebello, Community Redevelopment Agency of the City
of Montebello, City of Mountain View, City of Santa Barbara, The Redevelopment
Agency of the City of Santa Barbara, City of Yorba Linda, Yorba Linda
Redevelopment Agency, Santiago County Water District and Yorba Linda Water
District. Named as defendants are ML&Co., certain subsidiaries of ML&Co. and
three past or present employees of ML&Co., two of whom were dismissed as
defendants without prejudice on July 5, 1996. As amended, the complaint
alleges, among other things, that the defendants committed fraud, deceit and
negligent misrepresentation, conspired to commit fraud, breached fiduciary
duties, aided and abetted breaches of fiduciary duty and violated California
Penal Code Section 496 and the Racketeer Influenced and Corrupt Organizations
Act ("RICO"), in connection with ML&Co.'s business activities with the Orange
County Treasurer-Tax Collector. Damages, punitive damages and treble damages in
unspecified amounts are sought. On February 10, 1997, the court dismissed this
action.
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On November 27, 1995, an action was commenced in the United States
District Court for the Central District of California by the fourteen California
public entities that are plaintiffs in the Atascadero State Court Action
described above (the "Atascadero Federal Court Action."). On March 22, 1996,
the plaintiffs filed a first amended complaint, which was voluntarily dismissed
without prejudice on September 4, 1996. On February 19, 1997, plaintiffs filed
a new complaint naming as defendants ML&Co. and certain subsidiaries of ML&Co.
The complaint alleges, among other things, that the defendants committed fraud,
deceit, and negligence misrepresentation, conspired to commit fraud, breached
fiduciary duties, aided and abetted breaches of fiduciary duty, and violated
California Penal Code Section 496 and RICO, in connection with ML&Co.'s business
activities with the Orange County Treasurer-Tax Collector. Restitution and
damages, treble damages and punitive damages in unspecified amounts are sought.
On December 20, 1996, an action was commenced in the United States
District Court for the Central District of California by Irvine Ranch Water
District (the "Irvine Action"). ML&Co. is the sole defendant. The complaint
alleges, among other things, that ML& Co. committed intentional and negligent
misrepresentation, concealment and breach of fiduciary duty in connection with
ML & Co.'s business activities with the Orange County Treasurer-Tax Collector.
Damages in excess of $130 million and punitive damages in an unspecified amount
are sought.
Beginning on December 5, 1994, five derivative actions purportedly
brought on behalf of ML&Co. were filed in the Supreme Court of the State of New
York, New York County (the "Wilson Actions"). On February 21, 1995, the court
consolidated the actions and on June 5, 1995 an amended consolidated complaint
was filed naming as defendants twenty-two 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, waste of corporate assets and
claims for indemnification in connection with ML&Co.'s business activities with
the Orange County Treasurer-Tax Collector. Damages in an unspecified amount are
sought on behalf of ML&Co. against the individuals named as defendants. Because
this derivative action purports to be brought on behalf of ML&Co. and any
recovery obtained by plaintiffs would belong to ML&Co., ML&Co. is named as a
nominal defendant in these actions. On August 7, 1996, the Court dismissed this
action. On September 11, 1996 , a notice of appeal was filed.
On December 16, 1994, a purported class action was commenced in the
United States District Court for the Southern District of New York (the "Balan
Action"). An amended complaint was filed on May 15, 1995. As amended, the
Balan Action is brought on behalf of purchasers of ML&Co.'s common stock between
March 31, 1994 and December 6, 1994, and names as defendants ML&Co. and two of
its directors and officers. The plaintiff alleges, among other things,
violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5
promulgated thereunder in connection with ML&Co.'s disclosure with respect to
its business activities with the Orange County Treasurer-Tax Collector. Damages
in an unspecified amount are sought.
Beginning on December 8, 1994, ten purported class actions were
commenced in the United States District Court for the Central District of
California on behalf of individuals who purchased bonds or other debt
instruments issued by or on behalf of Orange County during various periods of
time (the "Smith Federal Court Action"). Plaintiffs filed an amended
consolidated complaint on January 27, 1995, and a first amended consolidated
complaint on February 27, 1995. As amended, the Smith Federal Court Action
purports to be brought on behalf of all persons who purchased bonds or other
debt instruments between July 1, 1992 and December 6, 1994 that were issued by
Orange County or other public entities with funds controlled by the Orange
County Treasurer-Tax Collector. The defendants in the case are ML&Co., an
employee of ML&Co., PaineWebber, Inc., CS First Boston Corp., Smith Barney,
Inc., Lehman Brothers, Inc., Donaldson, Lufkin & Jenrette, Inc., Kidder, Peabody
& Co., Inc., Stone & Youngberg, Rauscher Pierce Refsnes, Inc., Leifer Capital,
Inc., Fieldman Rolapp & Associates, Inc., CGMS, Inc. and O'Brien Partners, Inc.
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 and Sections 25400, 25401, 25500, 25501 and 25504.1 of the California
Code 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. On July 17, 1995, plaintiffs' state law claims
were dismissed without prejudice. On April 1, 1996, all remaining claims were
voluntarily dismissed without prejudice.
On September 28, 1995, a purported class action was commenced in the
Superior Court of the State of California, Orange County, asserting the state
law claims previously dismissed in the Smith Federal Court Action and a claim
for fraud and deceit (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.
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Damages and punitive damages in unspecified amounts are sought. Certain of the
defendants other than ML&Co. and the employee of ML&Co. named as a defendant
have entered into settlement agreements with the plaintiffs.
ML&Co. has also received formal and informal inquiries from various
governmental entities and agencies examining the events underlying the above
described litigation and is cooperating with these inquiries.
On December 16, 1994, a class action complaint consolidating a series
of previously filed actions was filed in the United States District Court for
the Southern District of New York. On August 22, 1995, plaintiffs filed a
complaint entitled "refiled consolidated complaint." As amended, the complaint
alleges that 33 market-makers, including a subsidiary of ML&Co., 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 alleges violations of antitrust laws and seeks
damages in an unspecified amount, treble damages, declaratory and injunctive
relief. On November 27, 1996, the court certified a class consisting of certain
persons who purchased or sold certain securities on NASDAQ during specified time
periods for each security during the period from May 1, 1989 to May 27,
1994.
On July 17, 1996, the Antitrust Division of the United States
Department of Justice filed a civil antitrust complaint against firms that make
markets in NASDAQ securities, including a subsidiary of ML&Co. The complaint
alleges 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 connection with its industry-wide investigations into the NASDAQ
market, ML&Co., along with the other named defendants, has received inquiries
from the SEC and is cooperating with these inquiries.
In October 1991, a derivative action purportedly brought on behalf of
ML&Co. was filed in the Supreme Court of the State of New York, New York County,
involving securities trading transactions that occurred at year-end 1984, 1985,
1986 and 1988 between subsidiaries of ML&Co. and a Florida insurance company,
Guarantee Security Life Insurance Company ("GSLIC") that later was taken into
liquidation. These year-end transactions, it is alleged, were entered into by
GSLIC to distort its financial condition. Named as defendants are directors of
ML&Co. who were directors at the time of the transactions described above and
GSLIC's parent company, Transmark USA, Inc. ("Transmark") and one of Transmark's
principals. The complaint alleges, among other things, breach of fiduciary duty
by the directors of ML&Co. who are named as defendants. Damages in an
unspecified amount are sought. Because this derivative action purports to be
brought on behalf of ML&Co. and any recovery obtained by plaintiff's would
belong to ML&Co., ML&Co. is named as a nominal defendant.
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.
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CONFLICTS OF INTEREST
MERRILL LYNCH AFFILIATED ENTITIES
Other than the Trading Advisors, all parties involved in the
operations of the Fund are affiliated with Merrill Lynch. Consequently, many of
the business terms of the Fund have not been negotiated at arm's-length. Were
investors to seek redress from Merrill Lynch ("Merrill Lynch" is used from time
to time in this Prospectus to refer to certain or all of the Merrill Lynch
affiliated group of companies) for damages relating to the offering of the Units
or the operations of the Fund, they (i) would be unlikely to have recourse
against any Merrill Lynch entity which is not a direct party to an agreement
with the Fund, and (ii) would be likely to have such recourse even in the case
of such entities only on a derivative basis, suing not individually but in the
right of the Fund.
ML PRINCIPAL PROTECTION L.P.
ASSOCIATED MERRILL LYNCH ENTITIES
[GRAPH APPEARS HERE]
GENERAL
No Merrill Lynch entity or Trading Advisor has established any formal
procedures to resolve the conflicts of interest described below. Limited
Partners are dependent on the good faith of the respective parties subject to
such conflicts to resolve such conflicts equitably.
MLIP and its affiliates will, should the occasion arise, assert that
Limited Partners have consented to the following conflicts of interest by
subscribing to the Fund.
MLIP
Relationships among the Merrill Lynch Affiliates
MLIP and its affiliates are the Fund's primary service providers,
other than the Trading Advisors, and will remain so even if using other firms
would be more advantageous for the Fund.
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<PAGE>
Other Funds Sponsored by MLIP
MLIP might be able to add more value to the Fund were certain MLIP
personnel to focus exclusively on managing the Fund, but none do so. MLIP
benefits from operating accounts other than the Fund because such accounts
generate significant revenues for it, and also diversify MLIP's exposure to one
or more of such accounts performing poorly.
There is, in general, a shortage of qualified futures trading advisors
available to manage customer assets. MLIP has a conflict of interest in
selecting Trading Advisors for the Fund and for other accounts sponsored by
MLIP.
MLIP has a conflict of interest in allocating assets among the Trading
Advisors in that MLF receives more net benefit from the Brokerage Commissions
paid by the Fund the more infrequently an Advisor trades and the lower the
Consulting Fees paid to such Advisor. MLF receives a flat-rate fee for
executing the Fund's futures trades. However, MLF incurs out-of-pocket costs in
executing each such trade. The less frequently an Advisor trades, the lower
these out-of-pocket costs to MLF and the greater its net revenues from the Fund.
The Consulting Fees are also paid by MLF from the Brokerage Commissions it
receives.
MLIP may from time to time have a conflict of interest between
facilitating the ongoing offering of the Units and making Advisor or other
changes which MLIP would otherwise believe to be in the best interest of the
Fund.
MLIP sponsors numerous funds and has financial incentives to favor
certain of such funds over the Fund.
Leveraging Considerations
MLIP has a conflict of interest in determining the Fund's trading
leverage between MLIP's interest in maintaining the leverage which it believes
to be best for the Limited Partners and its interest in protecting ML&Co. from
any potential liability under the ML&Co. guarantee. Although the Brokerage
Commissions and the Administrative Fees paid by the Fund increase as trading
leverage is increased, added revenues are not a significant factor in MLIP's
leverage policy, compared with its need to avoid any ML&Co. payments under the
guarantee.
MLF; MLIB; AND MLAM
MLF has numerous different clients and executes trades for a wide
range of such clients in the same markets at or about the same time. Executing
orders for different, and possibly competing, customers at the same time
involves an inherent conflict of interest. Furthermore, as a result of
executing orders for many other clients, MLF also has fewer resources to
allocate to the Fund's account.
Certain clients of MLF pay materially lower brokerage rates than does
the Fund. In the case of a number of such clients, particularly clients with an
account as large as that of the Fund, the lower fees charged by MLF are in large
part attributable to the significant costs incurred by MLIP and the ML&Co. group
in sponsoring the Fund and distributing the Units being embedded in the Fund's
Brokerage Commission costs. In the case of institutional accounts, no
sponsorship or distribution costs are incurred by the Merrill Lynch
organization, so that MLF can lower brokerage commissions without reducing the
net revenue received by Merrill Lynch. See "Charges -- Charges Paid by Merrill
Lynch" beginning at page 49 above. Nevertheless, even factoring in sponsorship
and distribution costs, certain institutional clients of MLF receive, as a
result of arm's-length negotiations, better commission rates than the Fund.
MLF, MLIB and MLAM each have numerous clients, and they have financial
incentives to favor certain of such clients over the Fund.
THE TRADING ADVISORS
Other Clients and Business Activities of the Trading Advisors
The Fund might benefit significantly from an exclusive focus by
certain of the Trading Advisors on the Fund rather than on their other accounts,
including accounts owned by their principals. The Fund could be adversely
affected by the fact that the Trading Advisors trade other accounts at the same
time that they are managing the Fund's account.
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The Trading Advisors and their principals devote a substantial portion
of their business time to ventures and accounts other than managing their Fund
account, including, in some cases, ventures which are unrelated to futures
trading.
Certain of the Trading Advisors act, or may in the future act, as
sponsors of their own single or multi-advisor futures funds. Such funds may,
from time to time, be in direct competition with the Fund for positions in the
market.
Other client accounts managed by a Trading Advisor may significantly
outperform its Fund account.
Each Trading Advisor has numerous clients and financial incentives to
favor certain such clients over the Fund.
Brokers and Dealers Selected by Trading Advisors
Certain of the Trading Advisors have required, as a condition of their
management of a Fund account, that such account trade through certain non-
Merrill Lynch brokers (even though MLF remains the clearing broker for the Fund)
with which such Trading Advisors have ongoing business dealings. Such Trading
Advisors may have a conflict of interest between insisting on the use of such
brokers and using the brokers most advantageous for the Fund.
Certain of the Trading Advisors execute a number of the trades for
their Fund accounts through affiliated floor brokers.
FINANCIAL CONSULTANTS
Financial Consultants (the individual MLPF&S brokers) receive initial
selling commissions and ongoing compensation in respect of the Units sold by
them. Consequently, Financial Consultants have a financial incentive to
encourage investors to purchase, and to discourage them from redeeming, their
Units.
PROPRIETARY TRADING
MLIP, the Advisors, their respective affiliates and related persons
may trade in the commodity markets for their own accounts as well as for the
accounts of their clients. Records of this trading will not be available for
inspection by Limited Partners. In doing so, such persons may take positions
which are the same as or opposite to those held by the Fund. Prospective
investors should be aware that -- as a result of a neutral allocation system,
testing a new trading system, trading their proprietary accounts more
aggressively or other actions not in violation of their fiduciary or other
duties -- such persons may from time to time take positions in their proprietary
accounts ahead of the positions taken for the Fund, as well as that on occasion
orders may be filled more advantageously for the account of one or more such
persons than for the Fund's account.
___________________
WHILE IT IS GENERALLY TRUE THAT IT IS IN THE BEST INTERESTS OF MLIP,
THE TRADING ADVISORS AND THEIR RESPECTIVE AFFILIATES AND PRINCIPALS FOR THE FUND
TO TRADE SUCCESSFULLY, IN PARTICULAR CIRCUMSTANCES ANY OF THE FOREGOING PARTIES
MAY RECEIVE SIGNIFICANTLY MORE BENEFIT FROM ACTING IN A MANNER ADVERSE TO THE
FUND THAN FROM ACTING IN, OR NOT OPPOSED TO, THE FUND'S BEST INTERESTS. IT IS
VERY DIFFICULT, IF NOT IMPOSSIBLE, FOR LIMITED PARTNERS TO KNOW OR CONFIRM THAT
ANY OF THE FOREGOING PERSONS IS EQUITABLY RESOLVING THE CONFLICTS OF INTEREST
DESCRIBED ABOVE.
THE FUND IS SUBJECT TO MATERIAL CONFLICTS OF INTEREST, AND NONE OF THE
FOREGOING PARTIES HAS ADOPTED ANY FORMAL PROCEDURES OR POLICIES FOR RESOLVING
SUCH CONFLICTS.
____________________
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THE LIMITED PARTNERSHIP AGREEMENT
A copy of the Limited Partnership Agreement is included as Exhibit A
to this Prospectus and is incorporated herein by reference. Section and page
references below are to the Limited Partnership Agreement.
LIMITED LIABILITY OF SUBSCRIBERS
The Limited Partnership Agreement provides that (except as otherwise
provided by law -- for example, if the Fund is bankrupt or insolvent at the time
that a distribution is made to a Limited Partner) no Limited Partner shall be
personally liable for the debts of the Fund beyond the amount invested by such
Limited Partner in the Fund, plus his or her Share of any undistributed profits.
(Section 7(e) at page LPA-6).
ASSIGNMENTS; REDEMPTIONS
Units may only be transferred with the consent of the General Partner,
although the assignment of the economic interest represented by the Units (but
not any of the other rights, such as the right to vote or to receive monthly
reports) does not require such consent. The General Partner will generally
consent to assignees becoming substitute Limited Partners unless doing so would
have adverse federal income tax consequences for the Fund.
A Limited Partner may redeem any or all of his or her Units at Net
Asset Value as of the last business day of any month upon ten calendar days'
irrevocable notice to his or her Merrill Lynch Financial Consultant. Payment of
the redemption price of Units is generally made within ten business days of the
effective date of redemption.
If Units are redeemed on or prior to the end of the twelfth full
calendar month after their sale, 3% of such Units' redemption proceeds are paid
to MLIP as an early redemption charge. No such redemption charges are assessed
(even if otherwise applicable) on the redemption proceeds received by a Limited
Partner who redeems Units as of the end of or during a calendar quarter and
subscribes as of the date of redemption to the new series of Units to be issued
as of the beginning of the immediately following quarter. The redemption charge
period for Units acquired with reinvested redemption proceeds will, however,
extend through the end of the twelfth full month after the issuance of such
newly acquired Units.
In general, redemption requests need not be made in writing. Limited
Partners may simply contact their Merrill Lynch Financial Consultant. A Limited
Partner who no longer has a Merrill Lynch account must request redemption in
writing (signature guaranteed), by corresponding with MLIP at: Merrill Lynch
World Headquarters, Sixth Floor, South Tower, World Financial Center, New York,
New York 10080-6106. (Section 11 at page LPA-10).
MANAGEMENT OF PARTNERSHIP AFFAIRS; VOTING RIGHTS
Limited Partners take no part in the management and have no voice in
the operation of the Fund. (Section 8(a) at page LPA-6). Limited Partners may
remove and replace MLIP as general partner of the Fund, and may, with the
consent of MLIP, amend the Limited Partnership Agreement, except in certain
limited respects, by the affirmative vote of holders of Units representing more
than fifty percent (50%) of the outstanding Units of each series owned by
Limited Partners. (Section 17(b) at page LPA-14). A majority of the Units of
each series held by Limited Partners may also compel dissolution of the Fund.
(Section 17(b) at page LPA-14). Ten percent (10%) of the Units then held by
Limited Partners of any series have the right to bring a matter before a vote of
the Limited Partners. (Section 17(c) at page LPA-14).
MLIP has no power under the Limited Partnership Agreement to restrict
any of the Limited Partners' voting rights. (Section 17(c) at page LPA-14).
Any Units purchased by MLIP or its affiliates are non-voting. (Section 6 at
page LPA-3).
MLIP has the right unilaterally to amend the Limited Partnership
Agreement to the extent that such amendment is not adverse to the Limited
Partners and also in certain unusual circumstances -- for example, if doing so
is necessary to effect the intent of the Fund's tax allocations or to comply
with certain regulatory requirements. (Section 17(a) at page LPA-14).
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In the event that MLIP or the Limited Partners vote to amend the
Limited Partnership Agreement in any material respect, the amendment will not
become effective prior to all Limited Partners having an opportunity to redeem
their Units. (Section 17(c) at page LPA-14).
REPORTS TO LIMITED PARTNERS AND ACCESS TO RECORDS
The books and records of the Fund (including a list of Limited
Partners and their addresses) are maintained at MLIP's principal office.
Limited Partners and their duly authorized representatives have the right during
normal business hours upon reasonable notice to MLIP to inspect such books and
records for any purpose reasonably related to their interest as Limited
Partners. MLIP will also mail copies of such books and records to Limited
Partners upon request and receipt of reasonable reproduction and mailing costs.
(Section 9 at page LPA-9).
Each month MLIP distributes summary statements of accounts to all
Limited Partners. All tax information relating to the Fund necessary for the
preparation of Limited Partners' federal income tax is distributed no later than
March 15 of each year. Audited financial statements are distributed by March 31
of each year. (Section 9 at page LPA-9).
GENERAL
In compliance with the NASAA Guidelines (see "Fiduciary Obligations of
MLIP" at page 35), the Limited Partnership Agreement provides that: (i) the
Fund will make no loans (Section 8(c) at page LPA-7); (ii) no rebates or give-
ups, among other things, may be received from the Fund by any Trading Advisor,
MLIP, MLF, MLIB, MLAM or any of their respective affiliates, and such
restriction may not be circumvented by reciprocal business arrangements among
any Trading Advisor, MLIP, MLF, MLIB, MLAM or any of their respective affiliates
and the Fund (Section 8(d) at page LPA-8); (iii) any agreements between the Fund
and MLIP, MLF, MLIB, MLAM or any of their respective affiliates must be
terminable by the Fund upon no more than 60 days' written notice (Section 8(e)
at page LPA-8); and (iv) the assets of the Fund will not be commingled with the
assets of any other person (deposit of assets with a commodity broker,
clearinghouse or forward dealer does not constitute commingling for these
purposes). (Section 8(c) at page LPA-7).
All Advisors must meet the experience requirements of the NASAA
Guidelines. (Section 8(f) at page LPA-8).
MLIP has agreed in the Limited Partnership Agreement to reimburse the
Fund, with interest, for any advisory or other fees paid by the Fund during any
fiscal year to any Advisor which exceed the 6% annual management fees plus the
15% quarterly incentive fees permitted by the NASAA Guidelines. (Section 8(a)
at page LPA-6).
FEDERAL INCOME TAX CONSEQUENCES
MLIP has been advised by its counsel, Sidley & Austin, that, in its
opinion, the following summary correctly describes the material federal income
tax consequences, as of the date hereof, to a United States individual taxpayer
of acquiring, owning and disposing of Units.
PARTNERSHIP TAX STATUS OF THE FUND AND THE TRADING PARTNERSHIP
MLIP has been advised by its counsel, Sidley & Austin, that, in its
opinion, each of the Fund and the Trading Partnership in which the Fund invests
is properly classified as a partnership for federal income tax purposes.
MLIP believes that all of the income generated by the Fund to date has
constituted, and expects all income to be generated by the Fund in the future
will constitute, "qualifying income." Accordingly, Sidley & Austin has advised
MLIP that, in its opinion, the Fund will not be subject to federal income tax as
a corporation under the provisions applicable to "publicly-traded partnerships."
TAXATION OF PARTNERS ON PROFITS OR LOSSES OF THE FUND
Each Partner is required for federal income tax purposes to take into
account his or her allocable share of all items of Fund income, gain, loss or
deduction. A Partner's share of such items for tax purposes generally is
determined by the allocations in the Limited Partnership Agreement unless such
allocations do not have "substantial economic effect" or are not in accordance
with the Partners' interests in the Fund. Under the Limited Partnership
Agreement, allocations are
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generally made in proportion to the capital accounts of each Unit of such
series, and therefore such allocations should have substantial economic effect.
However, in cases in which a Partner redeems part or all of his or her Units in
the Fund the allocations of capital gain or loss specified in the Limited
Partnership Agreement will not be in proportion to the Units' capital accounts.
Because such allocations are consistent with the economic effect of the Limited
Partnership Agreement, MLIP files the Fund's tax return based upon such
allocations. In the opinion of Sidley & Austin, the foregoing allocations should
be upheld if audited by the IRS. Nevertheless, a legal opinion is not binding on
the IRS, and it is not certain that such allocations would, in fact, be
respected upon audit. If such allocations were challenged and not sustained,
some or all of a redeeming Partner's capital gain or loss could be converted
from short-term to long-term, and each remaining Partner's share of the capital
gain or loss that is the subject of such allocations could be increased (solely
for tax purposes).
LIMITATIONS ON DEDUCTIBILITY OF FUND LOSSES
The amount of any Fund loss that a Partner is entitled to include in
his or her personal income tax return is limited to his or her tax basis for his
or her Units as of the end of the year in which such loss occurred. Generally,
a Partner's tax basis for his or her Units is the amount paid for such Units
reduced (but not below zero) by his or her share of any Fund distributions,
realized losses and expenses and increased by his or her share of the Fund's
realized income and gains. In addition, losses of the Fund may be limited under
the "at risk" rules.
Because of the limitations imposed upon the deductibility of capital
losses (see "-- Tax on Capital Gains and Losses" at page 60 below), a Partner's
distributive share of any capital losses of the Fund will not materially reduce
the federal income tax payable on his or her ordinary income (including his or
her allocable share of the Fund's ordinary income).
TREATMENT OF INCOME AND LOSS UNDER THE "PASSIVE ACTIVITY LOSS RULES"
The Internal Revenue Code of 1986 (the "Code") contains rules (the
"Passive Activity Loss Rules") designed to prevent the deduction of losses from
"passive activities" against income not derived from such activities, including
salary income from investment activities not constituting a trade or business,
such as interest and dividends ("Portfolio Income"). The trading activities of
the Trading Partnership do not constitute "passive activities," and income
derived from the Fund constitutes Portfolio Income or other income not from a
"passive activity."
REDEMPTIONS OF UNITS
Cash received from the Fund by a Partner generally is not reportable
as taxable income by a Partner, except as described below. Rather, such receipt
reduces (but not below zero) the total tax basis of the Units held by such
Partner.
Redemption for cash of all of a Partner's Units will result in the
recognition of gain or loss for federal income tax purposes. Such gain or loss
will be equal to the difference, if any, between the amount received and the
Partner's adjusted tax basis for his or her Units. Assuming that the Partner
has held his or her Units for more than one year, such gain or loss will be
long-term capital gain or loss.
GAIN OR LOSS ON SECTION 1256 CONTRACTS
Under the "mark-to-market" system of taxing futures and commodity
options contracts traded on United States exchanges and certain foreign currency
forward contracts ("Section 1256 Contracts"), any unrealized profit or loss on
positions in such Section 1256 Contracts open as of the end of a fiscal year is
treated as if such profit or loss had been realized for tax purposes as of such
time. In general, 60% of the net gain or loss which is generated as a result of
the "mark-to-market" system is treated as long-term capital gain or loss, and
the remaining 40% of such net gain or loss is treated as short-term capital gain
or loss. See "-- Mixed Straddle Account Election" at page 60 below.
GAIN OR LOSS ON NON-SECTION 1256 CONTRACTS
Except as described in the following paragraph with respect to
"Section 988 transactions," gain or loss with respect to contracts that are non-
Section 1256 Contracts is taken into account for tax purposes only when
realized.
"Section 988 transactions" include entering into or acquiring any
forward contract, futures contract or similar instrument if the amount paid or
received is denominated in terms of (or determined by reference to the value
of) a foreign currency other than the taxpayer's functional currency or if the
underlying property to which the contract or instrument ultimately relates is a
foreign currency other than the taxpayer's functional currency. In general,
foreign currency
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gain or loss on Section 988 transactions is treated as ordinary income or loss.
However, under the "qualified fund election" made by the Fund, gain or loss with
respect to certain Section 988 transactions will be capital gain or loss. In
addition, all such transactions are subject to the "mark-to-market" rules,
whether or not they involve Section 1256 contracts (see "-- Gain or Loss on
Section 1256 Contracts," above and "-- Mixed Straddle Account Election,"
below).
MIXED STRADDLE ACCOUNT ELECTION
The Code allows a taxpayer, such as the Trading Partnership, to offset
gains and losses from trading positions that are part of a "mixed straddle." A
"mixed straddle" is any straddle in which one or more but not all positions are
Section 1256 Contracts. The term straddle is defined as offsetting positions in
personal property. To the extent permitted, the Trading Partnership will elect
to establish one or more mixed straddle accounts to account for all of the
Trading Partnership's Section 1256 Contracts and Non-Section 1256 Contracts. The
Treasury regulations governing mixed straddle accounts require a daily marking
to market of all positions and a daily (as well as annual) netting of gains and
losses. Not more than 50% of total annual account net gain for the taxable year
can be treated as long-term capital gain and not more than 40% of total annual
account net loss for the taxable year can be treated as short-term capital loss.
As a result of the Trading Partnership electing to establish one or more mixed
straddle accounts, it is expected that all trading positions of the Trading
Partnership will be marked to market on a daily basis. The Treasury regulations
also provide that the Service may remove positions from an account if not part
of a class of activities which are offsetting. Thus, it is possible that the
Service may attempt to remove positions and reduce the Trading Partnership's
marked to market losses.
TAX ON CAPITAL GAINS AND LOSSES
Net capital gains (i.e., the excess of net long-term capital gain over
net short-term capital loss) will be taxed for individual taxpayers at a maximum
rate of 28%. See "-- Limitation on Deductibility of Interest on Investment
Indebtedness," at page 61 for a discussion of the reduction in the amount of an
individual taxpayer's net capital gain for a taxable year to the extent such
gain is taken into account as investment income. The Fund's trading generates
almost exclusively capital gain or loss. Capital losses are deductible by
individual taxpayers only to the extent of capital gains for the taxable year
plus $3,000. Accordingly, the Fund could incur significant capital losses but
an investor, nevertheless, be required to pay substantial taxes in respect of
such investor's allocable share of the Fund's interest and other ordinary
income. See "Risk Factors -- (24) Taxation of Interest Income" at page 14.
If an individual taxpayer incurs a net capital loss for a year, the
portion thereof, if any, which consists of a net loss on Section 1256 Contracts
may, at the election of the taxpayer, be carried back three years. Losses so
carried back may be deducted only against net capital gain for such year to the
extent that such gain includes gains on Section 1256 Contracts. Losses so
carried back will be deemed to consist of 60% long-term capital loss and 40%
short-term capital loss (see "-- Gain or Loss on Section 1256 Contracts," at
page 59 above). To the extent that such losses are not used to offset gains on
Section 1256 Contracts in a carryback year, they will carry forward
indefinitely as losses on Section 1256 Contracts in future years.
LIMITED DEDUCTION FOR CERTAIN EXPENSES
The Code provides that, for individual taxpayers who itemize
deductions when computing taxable income, expenses of producing income,
including "investment advisory fees," are aggregated with unreimbursed employee
business expenses, other expenses of producing income and certain other
deductions (collectively, "Aggregate Investment Expenses"), and that the
aggregate amount of such expenses is deductible only to the extent that such
amount exceeds 2% (the "2% Floor") of an individual taxpayer's adjusted gross
income. In addition, Aggregate Investment Expenses in excess of the 2% Floor,
when combined with a taxpayer's deductions for certain other items, are subject
to a reduction (the "3% Phase-Out") equal to, generally, 3% of the taxpayer's
adjusted gross income in excess of a certain threshold amount. Moreover, such
Aggregate Investment Expenses are miscellaneous itemized deductions which are
not deductible by individual taxpayers in calculating his or her alternative
minimum tax.
Based on the trading activities of the Trading Partnership to date, in
the opinion of Sidley & Austin, the Trading Partnership should be treated as
engaged in the conduct of a trade or business for federal income tax purposes.
As a result, the ordinary and necessary business expenses incurred by the
Trading Partnership in conducting its commodity futures trading business should
not be subject to the 2% Floor or the 3% Phase-Out. (Substantially all of the
expenses related to an investment in the Fund are incurred and paid by the
Trading Partnership.) This is the position which MLIP has taken to date.
Investors should be aware, however, that an opinion of counsel is not binding on
the IRS or on any court, and that it is possible that the IRS could contend, or
that a court could decide, that the trading activities of the Trading
Partnership do not constitute a trade or business for federal income tax
purposes. To the extent the characterization of the Trading Partnership's
expenses as investment advisory expenses were to be sustained, each non-
corporate Partner's pro rata share of the amounts so characterized would be
deductible only to the extent that such non-corporate Partner's Aggregate
Investment Expenses exceeded the 2% Floor and, when combined with certain other
itemized deductions, exceeded the 3%
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Phase-Out. In addition, each non-corporate Partner's distributive share of the
income allocated to the Fund by the Trading Partnership would be increased
(solely for tax purposes) by such Partner's pro rata share of the amounts so
recharacterized.
TAXATION OF GOVERNMENT SECURITIES INVESTMENTS
The Fund's purchase and sale of Government Securities generates
capital gain or loss -- generally short-term -- as well as interest income.
Taxable income is recognized on any interest accrued on zero-coupon Government
Securities acquired for the Fund, even though no interest is paid on such
Government Securities until they mature.
SYNDICATION FEES
The $239,100 in organizational and initial offering costs, for which
MLIP is being reimbursed by the Fund in 36 equal monthly installments through
October 31, 1997, have been treated as a non-deductible, non-amortizable,
syndication expense by the Fund.
The IRS could take the position that a portion of the Brokerage
Commissions paid to MLF and/or the Administrative Fees paid to MLIP constitutes
non-deductible syndication expenses.
LIMITATION ON DEDUCTIBILITY OF INTEREST ON INVESTMENT INDEBTEDNESS
Interest paid or accrued on indebtedness properly allocable to
property held for investment constitutes "investment interest." Interest
expense incurred by a Limited Partner to acquire or carry his or her Units (as
well as other investments) will constitute "investment interest." Such interest
is generally deductible by individual taxpayers only to the extent that it does
not exceed net investment income (that is, generally, the excess of (A) (i)
gross income from interest, dividends, rents and royalties, which would include
a Partner's share of the Fund's interest income, and (ii) certain gains from the
disposition of investment property, over (B) the expenses directly connected
with the production of such investment income). Any investment interest expense
disallowed as a deduction in a taxable year solely by reason of the above
limitation is treated as investment interest paid or accrued in the succeeding
taxable year. An individual taxpayer's net capital gain from the disposition of
investment property is included in the gains described in clause (ii) of the
second preceding sentence only to the extent that such taxpayer elects to make a
corresponding reduction in the amount of net capital gain that is subject to tax
at the maximum 28% rate described above. (See "-- Tax on Capital Gains and
Losses," above at page 60.)
MLIP'S CONTRIBUTION TO THE PURCHASE PRICE OF CERTAIN UNITS
MLIP contributes $3 to the Fund for each Unit purchased by officers or
employees of Merrill Lynch, who subscribe for Units at $97. The $3 MLIP
contribution is taxed as ordinary income in the year of purchase, and affected
subscribers acquire a tax basis of $100 in their Units.
POSSIBLE PAYMENTS UNDER THE ML&CO. GUARANTEE
Any payment to the Fund pursuant to the ML&Co. guarantee in respect of
a series of Units would give rise to taxable income in the amount of such
payment to the recipient Partners.
"UNRELATED BUSINESS TAXABLE INCOME"
In the opinion of Sidley & Austin, income earned by the Fund will not
constitute "unrelated business taxable income" under Section 511 of the Code to
employee benefit plans and other tax-exempt entities which purchase Units;
provided that Units purchased by such plans and entities are not "debt-financed"
(a contingency which is entirely within the control of the purchasing plans and
entities).
IRS AUDITS OF THE FUND AND ITS PARTNERS
The tax treatment of Fund-related items is determined at the Fund
rather than the Partner level. MLIP is the Fund's "tax matters partner" with
general authority to determine the Fund's responses to a tax 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.
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FOREIGN LIMITED PARTNERS NOT PERMITTED
No person who is a non-resident alien individual, foreign corporation,
foreign partnership, foreign trust or foreign estate for United States federal
income tax purposes may invest in the Fund.
STATE AND OTHER TAXES
In addition to the federal income tax consequences described above,
the Fund and the Partners may be subject to various state and other taxes.
Certain of such taxes could, if applicable, have a significant effect on the
amount of tax payable in respect of an investment in the Fund.
____________________
THE FOREGOING SUMMARY IS NOT INTENDED AS TAX ADVICE, PARTICULARLY AS
CERTAIN OF THE INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND MAY NOT BE
THE SAME FOR ALL TAXPAYERS. ACCORDINGLY, PROSPECTIVE INVESTORS ARE URGED TO
CONSULT THEIR TAX ADVISERS WITH SPECIFIC REFERENCE TO THEIR SITUATION UNDER
FEDERAL, STATE AND OTHER LAWS BEFORE DETERMINING WHETHER TO SUBSCRIBE FOR UNITS.
PLAN OF DISTRIBUTION
GENERAL
The Units are offered to the public on a continuous basis. The
minimum initial investment is 50 Units ($5,000); the minimum additional
investment for existing Limited Partners is 10 Units ($1,000).
The Units will be sold as of May 1, 1997 and as of the beginning of
each calendar quarter thereafter.
Subscriptions may be submitted at any time during a calendar quarter.
If accepted, such subscriptions will be applied to the purchase of Units as of
the first day of the immediately following calendar quarter. Settlement of Unit
purchases generally occurs within five (5) business days of the acceptance of
the related subscriptions.
There is no minimum number of Units which must be sold as of the
beginning of any calendar quarter (or as of May 1, 1997) for any Units then to
be sold. Given the best efforts nature of the offering, there can be no
assurance as to how many Units of any particular series will be sold.
MLPF&S acts as the exclusive Selling Agent for the Units; see "--
Selling Agent Compensation" at page 64, below. There is no market for the
Units, and MLPF&S does not, and does not intend to, engage in any form of
market-making activities with respect to the Units.
SUBSCRIPTION PROCEDURE
In order to purchase Units, an investor must complete, execute and
deliver to the Selling Agent a copy of the Signature Page to the Subscription
Agreement and Power of Attorney included in Exhibit D to this Prospectus.
Subscription payments are made by authorizing the Selling Agent to debit an
investor's customer securities account in the amount of his or her subscription.
(Prospective subscribers must open an MLPF&S customer securities account in
order to purchase Units.) Accounts are debited, and subscriptions transmitted
directly by the Selling Agent to The Bank of New York at its offices in New
York, New York by Selling Agent wire transfer or check made payable to "THE BANK
OF NEW YORK, AS ESCROW AGENT FOR ML PRINCIPAL PROTECTION L.P., ESCROW ACCOUNT
NO. 328436," on the settlement dates specified by the Selling Agent. As
described above under "-- General," settlement dates generally take place not
later than five (5) business days following acceptance of a subscription. No
sale of Units will be completed until at least five (5) business days after the
date a subscriber has executed, dated and submitted such subscriber's
Subscription Agreement and Power of Attorney Signature Page.
Subscriptions must generally be received no less than five (5)
business days prior to the beginning of the calendar quarter (or May 1, 1997) as
of which the Units subscribed for are to be purchased.
Existing Limited Partners subscribing for additional Units need not
(except in certain states) submit a new Subscription Agreement and Power of
Attorney Signature Page, but must be in possession of a current Prospectus and
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Prospectus Supplement as well as recent summary financial information relating
to the Fund (current within 60 calendar days).
FINANCIAL CONSULTANTS (THE INDIVIDUAL MLPF&S BROKERS) ARE REQUIRED TO
RECONFIRM THE SUITABILITY OF EXISTING LIMITED PARTNERS WISHING TO MAKE
ADDITIONAL INVESTMENTS IN THE FUND.
Subscriptions are held in escrow pending investment in the Units as of
the beginning of the calendar quarter immediately following the acceptance of
such subscriptions. Each subscriber is paid the interest actually earned on his
or her subscription funds while held in escrow, generally by credit to
subscribers' customer securities accounts. Subscription funds are invested in
United States Treasury bills or comparable eligible instruments while held in
escrow and earn interest at the 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.
PURCHASES BY EMPLOYEE BENEFIT PLANS
AFFECTED INVESTORS. This section sets forth certain consequences
under the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and the Code, which a fiduciary of an "employee benefit plan" as defined in and
subject to ERISA or of a "plan" as defined in Section 4975 of the Code who has
investment discretion should consider before deciding to invest the plan's
assets in the Fund (such "employee benefit plans" and "plans" being referred to
herein as "Plans," and such fiduciaries being referred to herein as "Plan
Fiduciaries"). In general, the terms "employee benefit plan" as defined in
ERISA and "plan" as defined in Section 4975 of the Code together refer to any
plan or account of various types which provide retirement or welfare benefits.
Such plans and accounts include, but are not limited to, corporate pension and
profit sharing plans, KEOGH plans for self-employed individuals (including
partners), "simplified employee pension plans," individual retirement accounts
and medical benefit plans.
SPECIAL INVESTMENT CONSIDERATIONS. Each Plan Fiduciary must give
appropriate consideration to the facts and circumstances that are relevant to an
investment in the Fund, including the role that an investment in the Fund would
play in the Plan's overall investment portfolio. Each Plan Fiduciary, before
deciding to invest in the Fund, must be satisfied that investment in the Fund is
a prudent investment for the Plan, that the investments of the Plan, including
the investment in the Fund, are diversified so as to minimize the risk of large
losses and that an investment in the Fund complies with the Plan and related
trust documentation. As a matter of policy, MLIP limits each investor's
subscriptions to the Fund to no more than 10% of such investor's readily
marketable assets. In the case of IRA, BASIC(TM) and SEP accounts, this 10%
limitation applies to the beneficiary of such accounts, while such accounts
themselves may not invest more than 50% of their readily marketable assets in
the Fund.
THE FUND SHOULD NOT BE DEEMED TO HOLD "PLAN ASSETS." A regulation
issued under ERISA (the "ERISA Regulation") contains rules for determining when
an investment by a Plan in an equity interest of a limited partnership will
result in the underlying assets of the partnership being considered to
constitute assets of the Plan for purposes of ERISA and Section 4975 of the Code
(i.e., "plan assets"). Those rules provide in pertinent part that assets of a
limited partnership will not be considered assets of a Plan which purchases an
equity interest if such interest is a "publicly-offered security." The Units
should be considered to be publicly-offered securities. Accordingly, the
underlying assets of the Fund should not be considered to constitute "plan
assets."
INELIGIBLE PURCHASERS. Units may not be purchased with the assets of
a Plan if MLIP, any Advisor, the Selling Agent, any Financial Consultant, MLF,
MLIB, ML&Co., MLAM or any of their respective affiliates either: (a) has
investment discretion with respect to the investment of such plan assets; (b)
has authority or responsibility to give or regularly gives investment advice
with respect to such plan assets, for a fee, and pursuant to an agreement or
understanding that such advice will serve as a primary basis for investment
decisions with respect to such plan assets and that such advice will be based on
the particular investment needs of the plan; or (c) is an employer maintaining
or contributing to such Plan.
As a matter of policy, MLIP limits each investor's subscriptions to
the Fund to no more than 10% of such investor's readily marketable assets. In
the case of IRA, BASIC(TM) and SEP accounts, this 10% limitation applies to the
-63-
<PAGE>
beneficiaries 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 AN INDIVIDUAL RETIREMENT
ACCOUNT OR OTHER EMPLOYEE BENEFIT PLAN IS IN NO RESPECT A REPRESENTATION BY ANY
PARTY THAT AN INVESTMENT IN THE UNITS IS APPROPRIATE OR AUTHORIZED FOR SUCH
PLAN. EACH PLAN FIDUCIARY CONSIDERING ACQUIRING UNITS MUST CONSULT WITH ITS OWN
LEGAL AND TAX ADVISERS BEFORE DOING SO.
SELLING AGENT COMPENSATION
No selling commissions are paid from the proceeds of subscriptions.
MLIP credits the Selling Agent with production credits, a portion of which is
paid to the Selling Agent in cash by MLIP. Production credits do not represent
actual cash payments but rather internal bookkeeping entries relating to the
securities sold through different Financial Consultants (the individual MLPF&S
brokers). Pursuant to standard Selling Agent compensation procedures, a
percentage of the production credits awarded to a particular Financial
Consultant is paid out in cash by the Selling Agent to such Financial
Consultant. The Selling Agent is credited with production credits of $5 per
Unit on all sales, provided that no initial production credits accrue to the
Selling Agent or Financial Consultants in respect of sales of Units to officers
and employees of Merrill Lynch at $97 per Unit.
MLIP credits the Selling Agent with ongoing production credits, a
portion of which is paid to the Selling Agent in cash by MLIP, with respect to
Units which remain outstanding more than twelve months. Such ongoing production
credits accrue only with respect to Units sold by Financial Consultants who are
registered with the CFTC, have passed either the Series 3 National Commodity
Futures Examination or the Series 31 Managed Futures Fund Examination and agree
to provide certain ongoing services to investors, upon request. Such production
credits equal 2% per annum of the average month-end Net Assets attributable to
such Units committed to trading. There can be no assurance as to what
percentage of any particular series' assets will be allocated to trading. This
percentage begins at 75% and may vary substantially over time. Ongoing
production credits accrue monthly and are paid quarterly. The Selling Agent
will, in turn, pay out a portion of the amounts so received to qualified
Financial Consultants (the individual MLPF&S brokers).
Financial Consultants receive no initial production credits on new
Units purchased with the proceeds of Units redeemed during or as of the end of
the preceding quarter (irrespective of whether redemption charges were paid on
such Units). However, the 2% ongoing production credits, described above, will
begin, to the extent that the redemption proceeds are reinvested, in the
thirteenth month after the sale of the Units redeemed, not in the thirteenth
month after reinvestment. Ongoing production credits accrue monthly and are
paid quarterly.
In the Selling Agreement, each Trading Advisor and MLIP have agreed to
indemnify the Selling Agent against certain liabilities that the Selling Agent
may incur in connection with the offering and sale of the Units, including
liabilities under the Securities Act of 1933 and the Commodity Exchange Act.
The SEC is of the view that indemnification for liabilities arising under the
Securities Act of 1933 is against public policy as expressed in such Act and is,
therefore, unenforceable.
Certain of the ongoing offering costs paid by MLIP might be deemed to
constitute costs properly allocated to the account of the Selling Agent. Such
costs, which to date have included the expense of producing a revised sales
brochure and organizing certain seminars (but have not exceeded $100,000 in the
aggregate), are in addition to the selling commissions credited to the Selling
Agent. In no event will any such costs, properly allocated to the account of
the Selling Agent, when added to the selling commissions paid by MLIP, exceed an
aggregate of $10 per Unit.
LEGAL MATTERS
Sidley & Austin passes upon legal matters for MLIP, MLF and MLPF&S in
connection with the Units being offered hereby. Sidley & Austin advises MLIP
(and its affiliates) with respect to its responsibilities as general partner of
the Fund, and with respect to related matters Sidley & Austin has reviewed the
statements under the section, "Federal Income Tax Consequences," in this
Prospectus, and rendered the opinions described therein to MLIP.
-64-
<PAGE>
EXPERTS
The balance sheet of MLIP as of December 27, 1996, and the
consolidated financial statements of the Fund as of December 31, 1995 and 1996
included in this Prospectus, have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their reports appearing herein, and have been
so included in reliance upon such reports given upon the authority of that firm
as experts in auditing and accounting.
ADDITIONAL INFORMATION
This Prospectus constitutes part of the Registration Statement filed
by the Fund with the SEC in Washington, D.C. This Prospectus does not contain
all of the information set forth in such Registration Statement, certain
portions of which have been omitted pursuant to the rules and regulations of the
SEC, including, without limitation, certain exhibits thereto (for example, the
forms of the Selling Agreement, the Advisory Agreements, the Investment Advisory
Contract, the Customer Agreement and the Foreign Exchange Desk Service
Agreement). The descriptions contained herein of agreements included as
exhibits to the Registration Statement are necessarily summaries; the exhibits
themselves may be inspected without charge at the public reference facilities
maintained by the SEC in Washington, D.C., and copies of all or part thereof may
be obtained from the SEC upon payment of the prescribed fees. The SEC maintains
a Web Site that contains reports, proxy and information statements and other
information regarding registrants, such as the Fund, that file electronically
with the SEC at http://www.sec.gov.
-65-
<PAGE>
INDEX OF TERMS
A number of specialized terms are used in this Prospectus. The respective
definitions or
descriptions of such terms may be found on the following pages of this
Prospectus.
<TABLE>
<CAPTION>
TERMS PAGE
- ----- ----
<S> <C>
Administrative Fee............................................. 46
Advisors....................................................... Cover page
Available Assets............................................... 40
Bid-ask spreads................................................ 46
Breakeven level................................................ 9
Brokerage Commissions.......................................... 45
CFTC........................................................... -i-
Consulting Fees................................................ 49
Core Advisors.................................................. 7
EFP............................................................ 47
Employee benefit plan.......................................... 63
ERISA.......................................................... 63
Escrow Agent................................................... -i-
F/X Desk....................................................... 9
Fund........................................................... Cover page
Government Securities.......................................... 8
Guarantee...................................................... 37
Limited Partners............................................... Cover page
ML&Co.......................................................... Cover page
MLAM........................................................... Cover page
MLF............................................................ Cover page
MLIB........................................................... 32
MLIP........................................................... Cover page
MLPF&S......................................................... -i-
Net Asset Value................................................ LPA-2
New Trading Profit............................................. 47
NFA............................................................ 32
Non-core Advisors.............................................. 7
Offset accounts................................................ 41
Ongoing production credits..................................... -i-
Opportunity costs.............................................. 11
Organizational and initial offering cost
reimbursement................................................ 45
Peak-to-Valley Drawdown........................................ 17
Principal Assurance Date....................................... Cover page
"Principal protection"......................................... 8
Production credit.............................................. -i-
Profit Shares.................................................. 47
Redemption charges............................................. 50
Round-turn commissions......................................... 45
SEC............................................................ -ii-
Selling Agent.................................................. -i-
Selling commissions............................................ -i-
Service fees................................................... 47
Time Horizon................................................... 11
Trading Advisors............................................... Cover page
Variation Margin............................................... 28
Worst Monthly Drawdown......................................... 17
Worst Peak-to-Valley Drawdown.................................. 17
Yield enhancement.............................................. 8
</TABLE>
-66-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ML PRINCIPAL PROTECTION L.P.
Independent Auditors' Report.......................................... 68
Consolidated Statements of Financial Condition........................ 69
Consolidated Statements of Income..................................... 70
Consolidated Statements of Changes in Partners' Capital............... 71
Notes to Consolidated Financial Statements............................ 72
MERRILL LYNCH INVESTMENT PARTNERS INC.
Independent Auditors' Report.......................................... 82
Balance Sheet......................................................... 83
Notes to Balance Sheet................................................ 84
</TABLE>
____________________
Schedules are omitted for the reason that they are not required
or are not applicable or that equivalent information has been included
in the financial statements or notes thereto.
-67-
<PAGE>
INDEPENDENT AUDITORS' REPORT
TO THE PARTNERS OF
ML PRINCIPAL PROTECTION L.P.
We have audited the accompanying consolidated statements of financial condition
of ML Principal Protection L.P. (formerly, ML Principal Protection Plus L.P.) (a
Delaware limited partnership; the "Partnership") as of December 31, 1996 and
1995, and the related consolidated statements of income and changes in partners'
capital for the years ended December 31, 1996 and 1995 and the period from
October 12, 1994 (commencement of operations) to December 31, 1994. These
consolidated financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of ML Principal Protection L.P. (a
Delaware limited partnership) as of December 31, 1996 and 1995, and the results
of their operations for the years ended December 31, 1996 and 1995 and the
period from October 12, 1994 (commencement of operations) to December 31, 1994
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 3, 1997
New York, New York
-68-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
--------------------- ---------------------
<S> <C> <C>
ASSETS
Cash $ 328 $ 19,332
Accrued interest receivable (Note 2) 23,501 17,852
U. S. Government Securities (Note 1) 72,815,648 74,280,477
Equity in commodity futures trading accounts:
Cash and option premiums 7,177,888 1,586,839
Net unrealized gain on open contracts 1,677,317 2,073,538
--------------------- ---------------------
TOTAL $81,694,682 $77,978,038
===================== =====================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 966,906 $ 539,877
Brokerage Commissions payable (Note 2) 378,291 356,607
Administrative Fees payable (Note 2) 10,224 --
Profit Shares payable (Note 4) 658,800 78,840
Organizational and initial offering costs payable (Note 1) 68,630 148,331
Settlement payment due to broker -- 1,496,925
--------------------- ---------------------
Total liabilities 2,082,851 2,620,580
--------------------- ---------------------
Minority Interest 768,546 510,914
--------------------- ---------------------
PARTNERS' CAPITAL:
General Partner (20,873.06 and 16,603.42 units) 2,301,180 1,766,403
Limited Partners (702,786.91 and 697,715.56 units) 76,542,105 73,080,141
--------------------- ---------------------
Total partners' capital 78,843,285 74,846,544
--------------------- ---------------------
TOTAL $81,694,682 $77,978,038
===================== ====================
NET ASSET VALUE PER UNIT (NOTE 5)
</TABLE>
See Notes to Consolidated Financial Statements.
________________
Past performance is not necessarily indicative of future results.
-69-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 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
DECEMBER 31, 1996 DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- --------------------- ---------------------
<S> <C> <C> <C>
REVENUES
Trading profit (loss):
Realized $ 9,038,064 $4,407,833 $ (363,054)
Change in unrealized (396,221) 1,355,377 1,115,935
--------------------- --------------------- ---------------------
Total trading results 8,641,843 5,763,210 752,881
Interest income (Note 2) 4,545,186 3,415,670 377,303
--------------------- --------------------- ---------------------
Total revenues 13,187,029 9,178,880 1,130,184
--------------------- --------------------- ---------------------
EXPENSES
Profit Shares (Note 4) 978,264 652,366 129,169
Brokerage Commissions (Note 2) 4,775,116 3,303,292 416,617
Administrative Fees (Note 2) 129,057 -- --
--------------------- --------------------- ---------------------
Total expenses 5,882,437 3,955,658 545,786
--------------------- --------------------- ---------------------
INCOME BEFORE MINORITY 7,304,592 5,223,222 584,398
INTEREST
--------------------- --------------------- ---------------------
Minority interest in income (81,228) (36,730) (4,504)
--------------------- --------------------- ---------------------
NET INCOME $ 7,223,364 $5,186,492 $ 579,894
===================== ===================== =====================
NET INCOME PER UNIT OF PARTNERSHIP
INTEREST
Weighted average number of Units
outstanding (Note 6) 754,428 551,944 319,887
===================== ===================== =====================
Net income per weighted average
General Partner and Limited
Partner Unit $ 9.57 $ 9.40 $ 1.81
===================== ===================== =====================
</TABLE>
See Notes to Consolidated Financial Statements.
________________
Past performance is not necessarily indicative of future results.
-70-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD
FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
UNITS OF
PARTNERSHIP LIMITED GENERAL
INTEREST PARTNERS PARTNER TOTAL
---------------- ------------ ------------ ----------------
<S> <C> <C> <C> <C>
Initial offering 320,000.00 $ 30,942,800 $1,057,200 $ 32,000,000
Organizational and
initial offering costs -- (237,615) (1,485) (239,100)
Redemptions (2,438.00) (247,955) -- (247,955)
Net income -- 560,624 19,270 579,894
---------------- ------------ ------------ ----------------
PARTNERS' CAPITAL
DECEMBER 31, 1994 317,562.00 31,017,854 1,074,985 32,092,839
Redemptions (47,810.02) (5,054,249) -- (5,054,249)
Subscriptions 444,567.00 43,851,304 605,396 44,456,700
Distributions -- (1,771,806) (63,432) (1,835,238)
Net income -- 5,037,038 149,454 5,186,492
---------------- ------------ ------------ ----------------
PARTNERS' CAPITAL
DECEMBER 31, 1995 714,318.98 73,080,141 1,766,403 74,846,544
Redemptions (245,127.36) (25,748,519) -- (25,748,519)
Subscriptions 254,468.35 25,102,217 344,618 25,446,835
Distributions -- (2,833,925) (91,014) (2,924,939)
Net income -- 6,942,191 281,173 7,223,364
---------------- ------------ ------------ ----------------
PARTNERS' CAPITAL
DECEMBER 31, 1996 723,659.97 $ 76,542,105 $2,301,180 $ 78,843,285
================ ============ ============ ================
</TABLE>
See Notes to Consolidated Financial Statements.
________________
Past performance is not necessarily indicative of future results.
-71-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
- --------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
- ------------
ML Principal Protection L.P. (formerly ML Principal Protection Plus
L.P.) (the "Fund") was organized as an open-ended fund under the Delaware
Revised Uniform Limited Partnership Act on January 3, 1994 and commenced trading
activities on October 12, 1994. The Fund engages in both speculative trading of
futures, options on futures and forward contracts on a wide range of commodities
- -- through ML Principal Protection Trading L.P. (formerly, ML Principal
Protection Plus L.P.) (the "Trading Partnership"), of which the Fund 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., which in turn is a wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("Merrill Lynch"), is the general partner of both the Fund and the
Trading Partnership, and Merrill Lynch Futures Inc.("MLF"), also an affiliate of
Merrill Lynch, is the Trading Partnership's commodity broker. Merrill Lynch
Asset Management, L.P. ("MLAM"), another affiliate of Merrill Lynch, provides
cash management services to the Fund, investing in Government Securities, as
defined. Substantially all of the Partnership's assets are held in accounts
maintained at MLF or Merrill Lynch, Pierce, Fenner & Smith Incorporated, a
Merrill Lynch affiliate. MLIP has agreed to maintain a general partner's
interest of at least 1% of the total equity interest in each of the Fund and the
Trading Partnership. MLIP and the Limited Partners share in the profits and
losses of the Fund, and MLIP and the Fund share in the profits and losses of the
Trading Partnership, in proportion to the respective interests in the Fund and
the Trading Partnership owned by each.
The consolidated financial statements include the accounts of the
Trading Partnership in which the Fund is the sole limited partner. All related
transactions and intercompany balances between the Fund and the Trading
Partnership are eliminated in consolidation.
The ownership by 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 Fund. 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 Fund issues units of limited partnership interest ("Units") as of
the beginning of each calendar quarter. Each series has its own Net Asset Value
per Unit. Different series may allocate different percentages of their total
capital to trading, but all series trade under the direction of the same
combination of independent advisors (the "Trading Advisors" or the "Advisors"),
chosen from time to time by MLIP to manage the Trading Partnership's
trading.
MLIP selects the Advisors to manage the Partnership's assets, and
allocates and reallocates the Partnership's trading assets among existing,
replacement and additional Advisors.
MLIP also determines what percentage of the Partnership's total
capital to allocate to trading from time to time, attempting to balance the
desirability of reducing the opportunity costs of the Partnership's "principal
protection" structure by allocating 100% (or more) of the Partnership's assets
to trading against the necessity of preventing Merrill Lynch from ever being
required to make any payments to the Fund under the Merrill Lynch guarantee (see
Note 7). Through December 31, 1996, no series of Units had allocated to trading
a greater percentage of its assets than was so allocated at the time the series
was issued.
Past performance is not necessarily indicative of future results.
-72-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
(CONTINUED)
- --------------------------------------------------------------------------------
ESTIMATES
- ---------
The preparation of consolidated financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements as well as the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
REVENUE RECOGNITION
- -------------------
Commodity futures, options on futures and forward contract
transactions are recorded on the trade date and open contracts are reflected in
net unrealized profit (loss) on open contracts in the Statements of Financial
Condition at the difference between the original contract amount and fair value.
The change in net unrealized profit (loss) on open contracts from one period to
the next is reflected in the Consolidated Statements of Income. Fair value is
based on quoted market prices on the exchange, or market, in which the contract
is traded.
U.S. GOVERNMENT SECURITIES
- --------------------------
The Fund invests a portion of its assets in obligations of the U.S.
Treasury and certain other U.S. government agencies ("Government Securities")
under the direction of MLAM within the parameters established by MLIP for which
MLAM accepts no responsibility. These investments are carried at fair
value.
ORGANIZATIONAL AND INITIAL OFFERING COSTS; OPERATING EXPENSES AND SELLING
- -------------------------------------------------------------------------
COMMISSIONS
- -----------
The General Partner advanced all organizational and initial offering
costs relating to the Fund and the Trading Partnership. The Fund and the
Trading Partnership are reimbursing the General Partner for such costs in 36
equal monthly installments. For financial reporting purposes, the Fund deducted
the organizational and initial offering reimbursement costs of $239,100 from
partners' capital at inception. For all other purposes (including determining
the Net Asset Values of the Units), the Fund deducts organization and initial
offering cost reimbursements only as actually paid.
The General Partner pays all routine operating costs (including legal,
accounting, printing and similar administrative expenses) of the Fund and the
Trading Partnership, including the cost of the ongoing offering of the Units.
The General Partner receives an Administrative Fee as well as a portion of the
Brokerage Commissions paid to MLF by the Fund as reimbursement for the foregoing
expenses.
No selling commissions have been or are paid by Limited Partners.
INCOME TAXES
- ------------
No provision for income taxes has been made in the accompanying
consolidated financial statements as each Partner is individually responsible
for reporting income or loss based on such Partner's respective share of the
Fund's consolidated income and expenses as reported for income tax
purposes.
__________________
Past performance is not necessarily indicative of future results.
-73-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
(CONTINUED)
- --------------------------------------------------------------------------------
REDEMPTIONS
- -----------
A Limited Partner may require the Fund to redeem some or all of such
Partner's Units at Net Asset Value as of the close of business on the last
business day of any month upon ten calendar days' notice. Units redeemed on or
prior to the end of the twelfth full month after purchase are assessed an early
redemption charge of 3% of their Net Asset Value as of the date of
redemption.
DISSOLUTION OF THE FUND
- -----------------------
The Fund will terminate on December 31, 2024 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Limited Partnership Agreement.
(2) RELATED PARTY TRANSACTIONS
A portion of the Partnership's U.S. dollar-denominated assets are held
at MLF in cash or short-term Treasury bills. The Fund receives all interest
paid on such Treasury bills. On the cash held at MLF, the Fund receives
interest from Merrill Lynch at rates ranging from 0.50 of 1% per annum below the
prevailing 91-day Treasury bill rate up to the full prevailing 91-day Treasury
bill rate up to the full prevailing 91-day Treasury bill rate. Merrill Lynch
may derive certain economic benefits, in excess of the interest which Merrill
Lynch pays to the Fund, from possession of such cash.
Merrill Lynch credits the Fund with interest on the Fund's non-U.S.
dollar-denominated available assets based on local short-term rates. Merrill
Lynch charges the Fund Merrill Lynch's cost of financing realized and unrealized
losses on the Partnership's non-U.S. dollar-denominated positions.
Prior to 1996, the Fund paid brokerage commissions to MLF in respect
of each series of Units at a flat monthly rate equal to 0.792 of 1% (a 9.5%
annual rate) of such series' month-end assets allocated to the trading.
Effective January 1, 1996, this rate was reduce to 0.771 of 1% (a 9.25% annual
rate) of each series' month-end assets allocated to trading and the Fund began
to pay MLIP a monthly administrative fee of 0.021 of 1% (a 0.25% annual rate) of
each series' month-end assets allocated to trading (this recharacterization had
no economic effect on the Fund). Assets allocated to trading are not reduced
for purposes of calculating brokerage commissions and administrative fees by any
accrued brokerage commissions, administrative fees, profit shares or other fees
or charges.
The General Partner estimates that the round-turn equivalent
commission rate charged to the Fund during the years ended December 31, 1996 and
1995 and the period from October 12, 1994 to December 31, 1994 was approximately
$116, $134 and $53, respectively, not including, in calculating round-turn
equivalents, forward contracts on a futures-equivalent basis.
MLF pays MLAM annual management fees of 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, ranging up to 4%
of the Partnership's average month-end assets allocated to them from
management, after reduction for a portion of the brokerage commissions accrued
with respect to such assets.
_____________________
Past performance is not necessarily indicative of future results.
-74-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
(CONTINUED)
- --------------------------------------------------------------------------------
The Fund trades forward contracts through a Foreign Exchange Service
Desk (the "F/X Desk") established by MLIP that contacts at least two
counterparties along with Merrill Lynch International Bank ("MLIB") for all of
the Fund's currency transactions. All counterparties other than MLIB are
unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service fee
equal (at current exchange rates) to approximately $5.00 to $12.50 on each
purchase or sale of a futures-contract equivalent face amount of a foreign
currency. No service 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 Fund is not required to margin or otherwise guarantee its F/X Desk
trading.
Certain of the Fund's currency trades are executed in the form of
"exchange of futures for physical" ("EFP") transactions involving MLIB and MLF.
In these transactions, a spot or forward (collectively referred to as "cash")
currency position is acquired and exchanged for an equivalent futures position
on the International Monetary Market of the Chicago Mercantile Exchange. In its
EFP trading, the Fund acquires cash currency positions through the F/X Desk in
the same manner and on the same terms as in the case of the Fund's other F/X
Desk trading. When the Fund exchanges these positions for futures, there is a
"differential" between the prices of these two positions. This "differential"
reflects, in part, the different settlement dates of the cash and the futures
contracts as well as prevailing interest rates, but also includes a pricing
spread in favor of MLIB or another Merrill Lynch entity.
The Fund's F/X Desk service fee and EFP differential costs combined
have, to date, totaled no more than 0.25 of 1% per annum of the Fund's average
month-end assets allocated to trading.
(3) ANNUAL DISTRIBUTIONS
The Trading Partnership makes annual fixed-rate distributions, payable
irrespective of profitability, of between $2 and $6 per Unit on the Series A-H
Units. The Fund may also pay discretionary distributions on such series of
Units of up to 50% of any Distributable New Appreciation, as defined. As of
December 31, 1996, the Fund has made the following distributions:
<TABLE>
<CAPTION>
Series Distribution Fixed-Rate Discretionary
-------- Date Distribution
------------ ------------ -------------
<S> <C> <C> <C> <C>
1996 Series A 10/01/96 $3.50 $2.50
- ---- Series B 01/01/96 3.50 2.50
Series C 04/01/96 3.50 --
Series D 07/01/96 3.50 --
Series E 10/01/96 3.50 --
1995
- ----
Series A 10/01/95 3.50 2.50
</TABLE>
______________________
Past performance is not necessarily indicative of future results.
-75-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
(CONTINUED)
- --------------------------------------------------------------------------------
(4) AGREEMENTS
The Trading Partnership and the Trading Advisors have each entered
into Advisory Agreements. These Advisory Agreements generally terminate one
year after they are entered into, subject to certain renewal rights exercisable
by the Fund. 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 Fund, as of the end of each calendar quarter are paid
to the appropriate Trading Advisors. Profit Shares are also paid out in respect
of Units redeemed as of the end of interim months during a quarter to the extent
of the applicable percentage of any New Trading Profit attributable to such
Units.
(5) NET ASSET VALUE PER UNIT
For financial reporting purposes, the Fund deducted the total
organizational and initial offering costs payable to the General Partner at
inception for purposes of determining Net Asset Value. Such deduction was
allocated pro rata among the outstanding Units of each series based upon the
aggregate Net Asset Value of each series, and then equally among all Units of
the same series. For all other purposes (including computing Net Asset Value
for redemptions), the Fund deducts the organizational and initial offering cost
reimbursements only as actually paid. Consequently December 31, 1996 and 1995,
the Net Asset Values of the different series of Units for financial
reporting purposes and for all other purposes were:
<TABLE>
<CAPTION>
Net Asset Value Number of Net Asset Value
--------------- ---------------
All Other Purposes Financial Reporting Units All Other Purposes Financial Reporting
------------------ ------------------- ----- ------------------ -------------------
1996
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A Units $21,048,780 $21,031,369 190,136.00 $110.70 $110.61
Series B Units 3,447,686 3,444,936 30,179.00 114.24 114.15
Series C Units 4,996,014 4,992,389 45,696.00 109.33 109.25
Series D Units 12,582,502 12,567,310 116,303.00 108.19 108.06
Series E Units 10,484,159 10,476,812 96,561.50 108.58 108.50
Series F Units 10,179,910 10,173,793 93,465.62 108.92 108.85
Series G Units 6,967,116 6,962,973 64,920.50 107.32 107.25
Series H Units 9,199,107 9,193,703 86,398.35 106.47 106.41
--------------- ----------- ----------
Total $78,905,274 $78,843,285 723,659.97
=============== =========== ==========
</TABLE>
________________________________
Past performance is not necessarily indicative of future results.
-76-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
(CONTINUED)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Net Asset Value Number of Net Asset Value
--------------- --------- ---------------
All Other Purposes Financial Reporting Units All Other Purposes Financial Reporting
------------------- ------------------- ----- ------------------ -------------------
1995
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A Units $29,380,564 $29,321,472 274,693.00 *$106.96 *$106.74
Series B Units 7,011,988 6,999,016 63,540.00 110.36 110.15
Series C Units 6,800,466 6,788,236 65,800.00 103.35 103.16
Series D Units 20,522,519 20,485,530 200,540.00 102.34 102.15
Series E Units 11,272,696 11,252,290 109,745.98 102.72 102.53
---------------------- --------------- --------------
Total $74,988,233 $74,846,544 714,318.98
====================== =============== ==============
</TABLE>
(6) WEIGHTED AVERAGE UNITS
Weighted average number of Units outstanding was computed for purposes
of disclosing consolidated net income per weighted average Unit. The weighted
average Units at December 31, 1996, 1995 and 1994 equals the Units outstanding
as of such date, adjusted proportionately for Units redeemed or issued based on
the respective length of time each was outstanding during such period.
(7) MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch has guaranteed to the Fund that it will have sufficient
net assets, as of the Principal Assurance Date, as defined, for each series of
Units, that the Net Asset Value per Unit of such series as of such Principal
Assurance Date will equal, after reduction for all liabilities to third parties
and all distribution paid to such Units, not less than $100.
(8) FAIR VALUE AND OFF-BALANCE SHEET RISK
The Fund trades futures, options on futures and forward contracts on
interest rates, stock indices, commodities, currencies, energy and metals. The
Partnership's trading results by reporting category were as follows:
<TABLE>
<CAPTION>
1996 1995
Total Trading Results Total Trading Results
------------------------ ------------------------
<S> <C> <C>
Interest Rates $3,183,955 $ 3,933,366
Stock Indices (746,255) 587,931
Commodities 20,119 (447,486)
Currencies 3,301,360 2,914,300
Energy 3,280,677 238,988
Metals (398,013) (1,463,889)
------------------------ ------------------------
Total $8,641,843 $ 5,763,210
======================== ========================
</TABLE>
________________________
Past performance is not necessarily indicative of future results.
-77-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
(CONTINUED)
- --------------------------------------------------------------------------------
MARKET RISK
- -----------
Derivative financial instruments involve varying degrees of off-
balance sheet market risk, and changes in the level or volatility of interest
rates, foreign currency exchange rates or the market values of the financial
instruments or commodities underlying such derivative instruments frequently
result in changes in the Fund's unrealized profit (loss) on such derivative
instruments as reflected in the Consolidated Statements of Financial Condition.
The Fund's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the Trading
Partnership as well as the volatility and liquidity of the markets in which
these derivative instruments are traded.
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 Fund, adjusting the percentage of
the Fund's total assets allocated to trading with respect to each series of
Units, calculating the Net Asset Value of the Advisors' respective Trading
Partnership accounts as of the close of business on each day and reviewing
outstanding positions for over-concentrations -- both on an Advisor-by-Advisor
and on an overall Fund basis. While the General Partner will not itself
intervene in the markets to hedge or diversify the Fund's market exposure, MLIP
may urge Advisors to reallocate positions, or itself reallocate Fund assets
among Advisors (although typically only as of the end of a month), in an attempt
to avoid over-concentrations. However, such interventions are unusual. Except
in cases in which it appears that an Advisor has begun to deviate from past
practice or trading policies or to be trading erratically, MLIP's basic risk
control procedures consist simply of the ongoing process of Advisor monitoring
and selection, with the market risk controls being applied by the Advisors
themselves.
One important aspect of the General Partner's risk controls is its
adjustments to the leverage at which each series of Units trades. By controlling
the percentage of each series' assets allocated to trading, the General Partner
can directly affect the market exposure of the Fund. Leverage control is the
principal means by which the General Partner hopes to be able to ensure that
Merrill Lynch is never required to make any payments under its guarantee that
the Net Asset Value per Unit of each series will equal no less than $100 as of
the Principal Assurance Date for such series.
___________________
Past performance is not necessarily indicative of future results.
-78-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
(CONTINUED)
- --------------------------------------------------------------------------------
FAIR VALUE
- ----------
The derivative instruments traded by the Trading Partnership are
marked to market daily with the resulting unrealized profit (loss) recorded in
the Consolidated Statements of Financial Condition and the related profit (loss)
reflected in trading revenues in the Consolidated Statements of Income.
The contract/notional values of the Trading Partnership's open
derivative instrument positions as of December 31, 1996 and 1995 were as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------ ------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
------------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Interest Rates $103,258,306 $ 38,270,540 $230,060,441 $ 37,950,386
Stock Indices 4,259,475 2,340,013 8,866,682 152,858
Commodities 8,541,433 12,761,047 17,582,456 3,850,643
Currencies 53,592,111 86,479,803 34,118,884 71,457,359
Energy 5,566,768 -- 9,047,015 3,440,800
Metals 4,593,702 14,839,516 7,796,167 11,765,623
------------------- -------------- ------------------ ---------------
Total $179,811,795 $154,690,919 $307,471,645 $128,617,669
=================== ============== ================== ===============
</TABLE>
Substantially all of the Trading Partnership's open derivative
instruments outstanding as of December 31, 1996, expire within one year.
The contract/notional value of the Trading Partnership's exchange-
traded and non-exchange-traded derivative instrument positions as of December
31, 1996 and 1995 as follows:
<TABLE>
<CAPTION>
1996 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 $133,757,339 $ 85,639,298 $238,654,840 $ 76,980,099
Non-Exchange-Traded 46,054,456 69,051,621 68,816,805 51,637,570
------------------- -------------- ------------------ --------------
Total $179,811,795 $154,690,919 $307,471,645 $128,617,669
==================== ============== ================== ==============
</TABLE>
______________________
Past performance is not necessarily indicative of future results.
-79-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
(CONTINUED)
- --------------------------------------------------------------------------------
FAIR VALUE (CONT.)
- ----------
The average fair value of the Trading Partnership's derivative
instrument positions which were open as of the end of each calendar month during
the year ended December 31, 1996 and 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------- -----------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
--------------------- --------------- ------------------ --------------
<S> <C> <C> <C> <C>
Interest Rates $224,985,973 $ 91,029,835 $170,252,009 $14,100,439
Stock Indices 10,235,486 2,492,230 5,390,839 1,288,747
Commodities 13,316,970 7,175,841 9,360,681 2,915,357
Currencies 94,601,907 115,671,672 36,054,488 38,557,545
Energy 6,862,906 1,348,945 2,823,925 2,417,008
Metals 13,579,528 19,196,951 6,113,263 10,207,341
--------------------- --------------- ------------------ --------------
Total $363,582,770 $236,915,474 $229,995,205 $69,486,437
===================== =============== ================== ==============
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and to sell the same derivative instrument on
the same date in the future. These commitments are economically offsetting but
are not, as a technical matter, offset in the forward markets until the
settlement date.
CREDIT RISK
- -----------
The risks associated with exchange-traded contracts are typically
perceived to be less than those associated with over-the-counter (non-exchange-
traded) transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases limited
in amount, in some cases not) of the members of the exchange is pledged to
support the financial integrity of the exchange. In over-the-counter
transactions, on the other hand, traders must rely solely on the credit of their
respective individual counterparties. Margins, which may be subject to loss in
the event of a default, are generally required in exchange trading, and
counterparties may require margin in the over-the-counter markets.
The fair value amounts in the above tables represent the extent of the
Trading Partnership's market exposure in the particular class of derivative
instrument, but not the credit risk associated with counterparty nonperformance.
The credit risk associated with these instruments, from counterparty
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.
___________________________
Past performance is not necessarily indicative of future results
-80-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.)
(A DELAWARE LIMITED PARTNERSHIP)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 AND THE PERIOD FROM
OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994
(CONTINUED)
- --------------------------------------------------------------------------------
The gross unrealized profit and the net unrealized profit (loss) on the
Trading Partnership's open derivative instrument positions as of December 31,
1996 and 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------- ------------------------------------
Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized
Profit Profit (Loss) Profit Profit (Loss)
------------------ -------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Exchange-Traded $2,090,698 $1,611,482 $2,942,622 $2,223,484
Non-Exchange-Traded 1,172,965 65,835 352,246 (149,946)
------------------ -------------- ---------------- ---------------
$3,263,663 $1,677,317 $3,294,868 $2,073,538
================== ============== ================ ===============
</TABLE>
The Fund controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
The Fund through its normal course of business enters into various
contracts with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF, to the extent that such trading results in receivables
from and payables to MLF, these receivables and payables are offset and reported
as a net receivable or payable.
(9) SUBSEQUENT EVENT
Effective January 1, 1997, the Brokerage Commissions percentage was
reduced to 0.7291 of 1% (an 8.75% annual rate) of the Partnership's month-end
assets allocated to trading.
____________________
Past performance is not necessarily indicative of future results.
-81-
<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 27, 1996. This financial statement is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall balance sheet presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material respects,
the financial position of the Company at December 27, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
January 31, 1997
New York, New York
-82-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY ML FUTURES INVESTMENT PARTNERS INC.)
BALANCE SHEET
DECEMBER 27, 1996
<TABLE>
<CAPTION>
DECEMBER 27, 1996
-----------------
<S> <C>
ASSETS
Cash $ 63,448
Investments in affiliated partnerships 13,377,941
Due from parent and affiliate 88,281,015
Receivables from affiliated partnerships 4,071,132
Deferred charges 19,723,118
Advances and other receivables 10,914,674
Fixed assets-net of accumulated depreciation of $1,121,007 138,901
Other assets 110,000
------------
TOTAL ASSETS $136,680,229
============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 1,244,670
Due to affiliate 4,595,276
Current and deferred income taxes 14,091,532
------------
Total liabilities 19,931,478
------------
STOCKHOLDERS' 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
Additional paid-in capital 16,915,00
Retained earnings 99,832,751
------------
Total stockholders' equity 116,748,751
------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $136,680,229
============
</TABLE>
See Notes to Balance Sheet.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-83-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEET
DECEMBER 27, 1996
________________________________________________________________________________
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
- ------------
Merrill Lynch Investment Partners Inc. (formerly, ML Futures
Investment Partners Inc.) (the "Company") is a wholly-owned subsidiary of
Merrill Lynch Group Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("ML&Co."). The Company is registered as a commodity pool operator and a
commodity trading advisor. The Company serves as the sole general partner of The
Futures Expansion Fund Limited Partnership, The Growth and Guarantee Fund L.P.,
ML Futures Investments II L.P. (formerly, The Futures Dimension Fund II L.P.),
ML Futures Investments L.P. (formerly The Tudor Prime Advisors Fund L.P.), John
W. Henry & Co./Millburn L.P., The S.E.C.T.O.R. Strategy Fund(SM) L.P., The
SECTOR Strategy Fund(SM) II L.P., The JWH Global Asset Fund L.P., The SECTOR
Strategy Fund(SM) IV L.P., The SECTOR Strategy Fund(SM) V L.P., ML Global
Horizons L.P., The SECTOR Strategy Fund(SM) VI L.P., ML Principal Protection
L.P. (formerly ML Principal Protection Plus L.P.), ML Chesapeake L.P. and ML JWH
Strategic Allocation Fund L.P. (collectively, the "Affiliated Partnerships").
The Company is also an investor in a joint venture which is the general partner
of ML/AIG Multi-Strategy Fund L.P. 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
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.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-84-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEET
DECEMBER 27, 1996
(CONTINUED)
________________________________________________________________________________
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 27, 1996, approximately
$88,300,000 was subject to this agreement.
At December 27, 1996, the Company had receivables from Affiliated
Partnerships and offshore funds for certain administrative, management and
redemption fees, all of which are expected to be collected within 90 days.
Additionally, the Company had receivables from certain Affiliated Partnerships
and offshore funds for 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 1996 the Company did not declare or pay a dividend.
3. INVESTMENTS IN AFFILIATED PARTNERSHIPS
Under the terms of the limited partnership agreements of the
Affiliated Partnerships, the Company is required to maintain an investment in
each Affiliated Partnership of at least one percent of the total contributions
to such partnership.
At December 27, 1996, the Company's investments in its Affiliated
Partnerships were as follows:
<TABLE>
<CAPTION>
<S> <C>
ML Principal Protection L.P. (formerly, ML Principal Protection Plus L.P.)........................................ $ 3,061,749
ML Global Horizons L.P............................................................................................ 1,278,303
The SECTOR Strategy Fund(SM) II L.P............................................................................... 856,584
John W. Henry & Co./Millburn L.P.................................................................................. 832,130
The SECTOR Strategy Fund(SM) VI L.P............................................................................... 756,702
The JWH Global Asset Fund L.P..................................................................................... 632,206
The S.E.C.T.O.R. Strategy Fund(SM) L.P............................................................................ 464,730
ML Futures Investments L.P........................................................................................ 368,402
The SECTOR Strategy Fund(SM) V L.P................................................................................ 351,824
ML Futures Investments II L.P..................................................................................... 208,244
The Growth and Guarantee Fund L.P................................................................................. 206,321
The Futures Expansion Fund Limited Partnership.................................................................... 134,829
The SECTOR Strategy Fund(SM) IV L.P............................................................................... 112,479
ML Chesapeake L.P................................................................................................. 81,043
ML/AIG Multi-Strategy Fund L.P.................................................................................... 2,000,000
ML JWH Strategic Allocation Fund L.P.............................................................................. 2,032,395
-----------
Total............................................................................................................. $13,377,941
===========
</TABLE>
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-85-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(FORMERLY ML FUTURES INVESTMENT PARTNERS INC.)
NOTES TO BALANCE SHEET
DECEMBER 27, 1996
(CONTINUED)
________________________________________________________________________________
The following represents condensed combined financial information of
the Affiliated Partnerships as of December 27, 1996 (in thousands):
<TABLE>
<S> <C>
Assets.......................................................... $637,880
========
Liabilities..................................................... 24,062
Partners' capital............................................... 613,818
-------
Total........................................................ $637,880
========
</TABLE>
The Company's Affiliated Partnerships trade various futures, options
and forward contracts. Risk to such partnerships arises from the possible
adverse changes in the market value of such contracts and the potential
inability of counterparties to perform under the terms of the contracts. The
risk to the Company is represented by the portion of its investments in
Affiliated Partnerships derived from the unrealized gains contained in such
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 December 27, 1996, the Company had no deferred tax assets. Deferred tax
liabilities consisted of the following:
<TABLE>
<S> <C>
State and local $1,972,453
Federal 6,212,889
----------
$8,185.342
==========
</TABLE>
As part of the consolidated group, the Company transfers to ML&Co. its
current Federal, state and local tax liabilities. During 1996, the Company
transferred $12,091,425, in current taxes payable to ML&Co. At December 27,
1996, the Company had a current tax payable with ML&Co. of $5,906,190.
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 SHEET
DECEMBER 27, 1996
(CONTINUED)
________________________________________________________________________________
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 $99,300,000 and at
December 27, 1996, which, in the opinion of the Company's counsel, met the
definition of "substantial net worth."
6. COMMITMENTS
The Company is obligated to pay to affiliates, from its own funds and
without reimbursement by its Affiliated Partnerships, ongoing fees for units in
such partnerships outstanding as of the end of various periods.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-87-
<PAGE>
THE CORE ADVISORS
____________
AS OF APRIL 1, 1997, APPROXIMATELY 34% OF THE FUND'S TRADING ASSETS
WERE ALLOCATED BETWEEN THE TWO CURRENT CORE ADVISORS. BRIEF DESCRIPTIONS AND
PERFORMANCE SUMMARIES FOR THESE ADVISORS ARE INCLUDED HEREIN. HOWEVER, ADVISORS'
TRADING METHODS ARE CONFIDENTIAL AND PROPRIETARY AND PAST PERFORMANCE IS NOT
NECESSARILY INDICATIVE OF FUTURE RESULTS. THE SIGNIFICANCE OF THE FOLLOWING
DESCRIPTIONS AND PERFORMANCE RECORDS TO A DECISION WHETHER TO INVEST IN THE FUND
MUST BE CONSIDERED IN LIGHT OF THESE MATERIAL QUALIFICATIONS.
FUTURES TRADING METHODS IN GENERAL
Systematic and Discretionary Trading Approaches
Managed futures strategies are generally classified as either
systematic or discretionary (or both).
A systematic trader will generally rely to some degree on judgmental
decisions concerning, for example, what markets to follow and commodities to
trade, but his or her primary reliance is on trading programs or models which
generate trading signals. The systems utilized to generate trading signals are
changed from time to time (although generally infrequently), but the trading
instructions generated by the systems being used are followed without
significant additional analysis or interpretation. Discretionary traders, on
the other hand, while they may utilize market charts, computer programs and
compilations of quantifiable fundamental information to assist them in making
trading decisions, make such decisions on the basis of their own judgment and
trading instinct, not on the basis of trading signals generated by any program
or model.
Each approach involves certain inherent risks. For example,
systematic traders may incur substantial losses when fundamental or unexpected
forces dominate the markets, while discretionary traders may overlook price
trends which would have been clearly signaled by a trading system. Systematic
traders tend to rely more on computerized programs than do discretionary
traders, and some consider the discipline of a systematic trading process to be
advantageous. However, any trader, systematic or discretionary, may suffer
substantial losses by misjudging the market analysis.
Technical and Fundamental Analysis
Managed futures trading analysts are generally classified as either
technical or fundamental (or both).
Technical analysis is based on the theory that the commodities markets
themselves provide a means of anticipating future prices. Technical analysis
operates on the theory that market prices and momentum at any given point in
time reflect all known factors affecting the supply and demand for a particular
commodity. Consequently, technical analysis focuses not on evaluating those
factors directly but on an analysis of price histories, movements and patterns,
theorizing that a detailed analysis of market data is the most effective means
of attempting to predict the future course of prices.
Fundamental analysis, in contrast, focuses on the study of factors
external to the trading markets that affect the supply and demand of a
particular commodity. Such factors might include weather, the economy of a
particular country, government policies, domestic and foreign political and
economic events, and changing trade prospects. Fundamental analysis theorizes
that by monitoring relevant supply and demand factors for a particular
commodity, a state of current or potential disequilibrium of market conditions
may be identified that has yet to be reflected in the price level of that
commodity. Fundamental analysis assumes that markets are imperfect, that
information is not instantaneously assimilated or disseminated and that
econometric models can be constructed that generate equilibrium prices that
reflect "true value" and may indicate market mispricing.
-88-
<PAGE>
Trend-Following
Trend-following advisors gear their trading approaches towards
positioning themselves to take advantage of major price movements. Trend-
following traders are to be contrasted with traders who seek to achieve overall
profitability by making numerous small profits on short-term trades, or through
arbitrage techniques. Trend-following traders assume that most of their trades
will be unprofitable. Their objective is to make a few large profits, more than
offsetting their more numerous but (hopefully) smaller losses, from capitalizing
on major trends. During periods when no major price trends develop in a market,
a trend-following trading advisor is likely to incur substantial losses.
Risk Control Techniques
Trading advisors often adopt fairly rigid risk management or money
management principles. Such principles typically restrict the size of positions
which will be taken as well as establishing stop-loss points at which losing
positions must be liquidated. No risk control technique is fail safe, and none
can, in fact, assure that major drawdowns will be avoided. Not only do
estimates of market volatility themselves require judgmental input, but also
market illiquidity can make it impossible for an account to liquidate a position
against which the market is moving strongly, whatever risk management principles
are utilized. The Advisors' risk management principles should be seen more as a
discipline applied to their trading in highly speculative markets than as an
effective protection against loss.
THE CORE ADVISORS
The following descriptions of the current core Advisors, their
respective trading systems, methods and strategies and their respective
principals are general and are not intended to be exhaustive. Trading methods
are proprietary and confidential. No attempt has been or could be made to
provide a precise description of any Advisor's method. MLIP believes that the
following descriptions may be of interest to prospective investors. However,
investors must be aware of the inherent limitations of such descriptions.
____________________
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. THERE CAN BE NO ASSURANCE THAT ANY ADVISOR
WILL TRADE PROFITABLY OR AVOID SUBSTANTIAL LOSSES.
-89-
<PAGE>
CHESAPEAKE CAPITAL CORPORATION
APRIL 1, 1997 TRADING ASSET ALLOCATION: 19%
BACKGROUND
Chesapeake Capital Corporation was incorporated under the laws of the
Commonwealth of Virginia in February 1988 for the purpose of offering investment
advisory and portfolio management services to both retail and institutional
investors in trading in the futures and forward markets. On August 19, 1991,
Chesapeake was merged into Chesapeake Capital Corporation, an Illinois
corporation formed on August 13, 1991. References herein to "Chesapeake" refer
to the Virginia corporation prior to August 19, 1991 and to the Illinois
corporation on and after August 19, 1991. Chesapeake is registered as a CTA and
a CPO with the CFTC, and is also a member in good standing of the NFA.
Chesapeake has been registered with the CFTC as a CTA and a CPO since June 20,
1988 and May 8, 1991, respectively, and a member of the NFA since June 20, 1988.
Mr. R. Jerry Parker, Jr. is the Chairman, Chief Executive Officer,
Director, Chief Trader, sole shareholder and a principal of Chesapeake. Mr.
Parker received his B.S. in Commerce, with an emphasis in Accounting, from the
University of Virginia in January 1980. Mr. Parker worked in the accounting
field for four years after graduating from college and became a licensed
Certified Public Accountant in Virginia in 1982. From January 1983 until
November 1983, Mr. Parker was a CPA at Wilkinson & Lester, a certified public
accounting firm based in Richmond, Virginia. From November 1983 until January
1987, Mr. Parker was employed as an exempt CTA by Richard J. Dennis, a principal
and shareholder of Richard J. Dennis & Company (a Chicago-based CTA and CPO
registered with the CFTC), in his "Turtle" training program. From January 1987
until February 1988, Mr. Parker traded for Mr. Thomas Dennis as an exempt CTA.
During these periods, Mr. Parker had complete discretionary trading authority
over a futures account of $1 million to $1.5 million. In February 1988, Mr.
Parker ceased trading for Mr. Thomas Dennis and formed Chesapeake, where he
serves as the Chairman, Chief Executive Officer, Director and Chief Trader.
Mr. John M. Hoade is President, Secretary and a principal of
Chesapeake. Mr. Hoade received a B.S. degree in Business Administration from
Lynchburg College in 1978. From 1976 through 1990, Mr. Hoade was employed by
Thurston Metals, Inc., located in Lynchburg, Virginia, in sales, marketing and
general management. Mr. Hoade joined Chesapeake in December 1990 to direct its
operations and marketing efforts.
TRADING STRATEGY
The Diversified Program which Chesapeake trades for the Fund
emphasizes diversification with a global portfolio of futures, forward and cash
markets which include, but are not limited to, agricultural products, precious
and industrial metals, currencies, financial instruments, and stock, financial
and economic indices. Chesapeake trades on numerous U.S. and non-U.S.
exchanges.
The investment portfolios currently offered by Chesapeake are the
"Diversified Program," the "Diversified 2XL Program" and the "Financials and
Metals Program" (the "Trading Programs"). The Diversified Program is
Chesapeake's longest operating investment portfolio, with a performance record
beginning in February 1988. While all of the Trading Programs employ the same
general trading methodology, as described below, they differ in their emphasis
on certain markets or market sectors and the exclusion of others. The following
overview is not intended as a detailed or exhaustive description of the trading
methodologies or strategies employed by Chesapeake, as the exact nature of these
methods and strategies is proprietary and confidential.
Relying primarily on technical analysis, Chesapeake believes that
future price movements in all markets may be more accurately anticipated by
analyzing historical price movements within a quantitative framework than by
attempting to predict or forecast changes in price through fundamental economic
analysis. The trading methodologies employed by Chesapeake are based on
programs analyzing a large number of interrelated mathematical and statistical
formulas and techniques which are quantitative, proprietary in nature and which
have been either learned or developed by Mr. Parker.
-90-
<PAGE>
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 Trading Programs, traded pursuant to
technical analysis emphasizing mathematical and charting approaches, will depend
upon the occurrence in the future, as in the past, of major trends in some
markets. If there are no trends, the Trading Programs are likely to be
unprofitable. There have been trendless periods in the past which can be
expected to recur, and any factor which lessens the prospect of trends in the
future, such as increased governmental control, regulation, or participation as
a purchaser or seller in the futures markets (including joint governmental
control or regulation of, or participation in, international currency markets),
lessens the prospect that programs utilizing technical analysis, including the
Trading Programs, will be profitable in the future. In addition, the future
profitability of the Trading Programs would also be adversely affected by
factors which increase the number of signals leading to unprofitable trades.
For example, a significant increase in technically-oriented trading (trend-
following or otherwise) in a particular commodity might cause a change in the
pattern of price movements in a manner which might be unfavorable.
Trend-following trading systems, such as those employed by Chesapeake,
will seldom effect market entry or exit at the most favorable price in the
particular market trend. Rather, this type of trading system seeks to close out
losing positions quickly and to hold portions of profitable positions for as
long as the trading system determines that the particular market trend continues
to exist. There can be no assurance, however, that profitable positions can be
liquidated at the most favorable price in a particular trend. As a result, the
number of losing transactions may exceed substantially the number of profitable
transactions. However, if Chesapeake's approach is successful, these losses
should generally be relatively small and more than offset by gains on profitable
transactions.
The Trading Programs are oriented toward the preservation of original
equity. The commencement of trading or a drawdown from starting equity are
considered the situations of highest risk, and risk management techniques at
this point are emphasized over those which invite greater risk in the interest
of enhancing performance. These risk management techniques include
diversification. Also, the Trading Programs adhere to the requirements of a
money management system which determines and limits the equity committed to each
trade, each market, each commodity complex (in Trading Programs which trade in
more than one commodity complex) and each account.
Chesapeake believes that a long-term commitment to its Trading
Programs is necessary for profitable trading. Chesapeake attempts to take a
limited number of positions over the long term in an attempt to capture major
price movements while limiting downside risk on open positions.
Decisions concerning the liquidation of positions, the commodities to
be traded and the size of positions to be taken or maintained require to some
degree the exercise of judgment by Chesapeake. The decision not to trade
futures interest contracts for a certain period, or not to trade certain futures
interest contracts due to lack of discernible price movements (trends) or lack
of liquidity, may result at times in clients (such as the Fund) missing
significant profit opportunities which might otherwise have been captured by
Chesapeake.
Futures contracts which are traded by Chesapeake may include, but are
not limited to, agricultural products, precious and industrial metals,
currencies, financial instruments, and stock, financial and economic indices.
Exchanges on which these transactions take place include, but are not limited
to, all exchanges in the United States, as well as non-U.S. exchanges (e.g., the
Belgian Futures and Options Exchange (BELFOX), the London International
Financial Futures and Options Exchange Ltd. (LIFFE), the International Petroleum
Exchange of London Ltd. (IPE), the London Metal Exchange (LME), the London
Commodity Exchange (LCE), the Italian Derivatives Market (IDEM), the Marche a
Terme International de France (MATIF), the Deutsche Terminborse, the Hong Kong
Futures Exchange Ltd., the Montreal Exchange (ME), the Tokyo Commodity Exchange,
the Tokyo International Financial Futures Exchange (TIFFE), the Tokyo Stock
Exchange (TSE), the Singapore International Monetary Exchange (SIMEX), the
Sydney Futures Exchange Ltd., and the Winnipeg Commodity Exchange). In
addition, Chesapeake continually monitors numerous markets, both U.S. and non-
-91-
<PAGE>
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 the 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 sets forth the composite actual performance
of all customer accounts managed by Chesapeake. As of January 31, 1997,
Chesapeake was managing approximately $915 million (excluding notional funds) of
customer funds in the futures and forwards markets. All performance information
is current as of January 31, 1997.
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, 1992 has been excluded in accordance with CFTC regulations.
Chesapeake has adopted a methods 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, rates of return reported were 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. The OAT method excludes accounts from the
rate of return calculation if their inclusion would materially distort 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.
Chesapeake believes that this method yields substantially the same rates of
return as would the Fully-Funded Subset method. 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.
A small number of accounts traded by Chesapeake have experienced
peak-to-valley drawdowns which are materially larger than the worst composite
peak-to-valley drawdown. These variances result from such factors as small
account size, intra-month account opening or closing, significant intra-month
additions or withdrawals and investment restrictions imposed by the client. See
also Notes to the Performance Summaries on pages 113-114.
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<PAGE>
In reviewing the following information, prospective investors should
understand that performance is net of all actual fees and charges and includes
interest income applicable to the accounts comprising each composite performance
summary. Such composite performance is not necessarily indicative of the
performance of any individual account. The fees and charges applicable to
individual accounts are not specifically described herein. However, set forth
below is a general description of the charges applicable to such accounts.
Brokerage commissions are accounted for monthly and include the total
amount of all brokerage commissions and other trading fees paid during the month
plus or minus the change in brokerage commissions and other trading fees accrued
on open positions from the preceding month. Brokerage commissions are
calculated on a round-turn or flat-rate basis. Round-turn commissions have
ranged from approximately $7 per round-turn trade to approximately $50 per
round-turn trade. Flat-rate commissions have ranged from approximately 2% of
equity to approximately 9% of equity. Interest income is earned on U.S.
government obligations and cash on deposit with futures commission merchants and
is recorded on the accrual basis. Management fees are accrued monthly and are
charged at rates ranging from 0% to 8% of equity. Incentive fees are accrued
monthly and are charged at rates ranging from 12.5% to 30% of new trading
profits. On certain accounts, incentive fees are reduced by the management fees
paid over an agreed upon period.
See "Notes to the Performance Summaries" set forth on pages 113
through 114.
The following performance information has not been audited. However,
Chesapeake believes that such information is accurate and fairly presented.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FURTHERMORE, THE RATES OF RETURN ACHIEVED WHEN AN ADVISOR IS MANAGING A LIMITED
AMOUNT OF EQUITY MAY HAVE LITTLE RELATIONSHIP TO THE RATES OF RETURN WHICH SUCH
ADVISOR MAY BE ABLE TO ACHIEVE MANAGING LARGER AMOUNTS OF EQUITY.
THE FOLLOWING PERFORMANCE SUMMARIES HAVE IN NO RESPECT BEEN ADJUSTED
TO REFLECT THE CHARGES TO THE FUND. CERTAIN OF THE ACCOUNTS INCLUDED IN THE
FOLLOWING PERFORMANCE SUMMARIES PAID FEES MATERIALLY DIFFERENT FROM, AND IN SOME
CASES MATERIALLY LOWER THAN, THOSE CHARGED TO THE FUND.
COMMODITY INTEREST TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. THERE CAN BE NO ASSURANCE THAT ANY TRADING ADVISOR WILL TRADE
PROFITABLY OR AVOID INCURRING SUBSTANTIAL LOSSES.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF A TRADING ADVISOR'S TOTAL INCOME AND, IN CERTAIN
INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED OR UNREALIZED
LOSSES FROM COMMODITIES TRADING.
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
See "Risk Factors -- (2) Past Performance Not Necessarily Indicative of Future
Results."
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<PAGE>
CHESAPEAKE CAPITAL CORPORATION
DIVERSIFIED PROGRAM
JANUARY 1, 1992 - JANUARY 31, 1997
The following performance summary and chart reflect the composite
performance results from January 1992 through January 1997 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 Diversified Program has been utilized in trading for 204 accounts since
inception. As of January 31, 1997, 148 accounts had been closed and 56
accounts remained open. Of the closed accounts, 120 were profitable and 28 were
unprofitable at their closing. Of the 56 open accounts, all were profitable as
of January 31, 1997.
Inception of client account trading by CTA: February 1988
Inception of client account trading in program: February 1988
Number of open accounts in program: 56
Aggregate assets (excluding notional equity) overall: $915 million
Aggregate assets (excluding notional equity) in program: $862 million
Aggregate assets (including notional equity) overall: $1.1 billion
Aggregate assets (including notional equity) in program: $1.0 billion
Worst monthly drawdown on a composite basis: (10.98)% (1/92)
Worst peak-to-valley drawdown on a composite basis: (16.62)%
(1/92-5/92)
The Diversified Program composite Monthly Rate of Return
for January 1997 was 1.87%.
<TABLE>
<CAPTION>
==============================================================
Monthly
Rates of Return 1996 1995 1994 1993 1992
==============================================================
<S> <C> <C> <C> <C> <C>
January 1.69% (3.23)% (3.33)% 0.42% (10.98)%
--------------------------------------------------------------
February (4.26) (4.39) (4.88) 15.99 (2.86)
--------------------------------------------------------------
March 0.28 8.60 0.09 5.86 0.53
--------------------------------------------------------------
April 10.16 1.45 (0.60) 7.38 (0.44)
--------------------------------------------------------------
May (3.04) 6.84 9.06 0.40 (3.66)
--------------------------------------------------------------
June 3.27 0.88 7.02 0.98 6.52
--------------------------------------------------------------
July (7.64) (3.09) (1.70) 9.49 12.96
--------------------------------------------------------------
August 0.57 (2.66) (2.98) 5.88 3.16
--------------------------------------------------------------
September 6.47 0.20 3.49 (2.63) (6.78)
--------------------------------------------------------------
October 5.92 (1.11) 1.97 (0.06) 5.21
--------------------------------------------------------------
November 6.57 1.76 4.83 1.03 2.27
--------------------------------------------------------------
December (4.30) 9.18 2.86 5.77 (1.93)
--------------------------------------------------------------
Compound Annual
Rate of Return 15.05% 14.09% 15.87% 61.82% 1.81%
==============================================================
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
___________________________
SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 114.
-94-
<PAGE>
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------
OTHER CHESAPEAKE CAPITAL CORPORATION PROGRAMS
JANUARY 1, 1992 - JANUARY 31, 1997
-------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAME OF CTA: Chesapeake Capital Chesapeake Capital Chesapeake Capital Chesapeake Capital
Corporation Corporation Corporation Corporation
-------------------------------------------------------------------------------------------------
NAME OF PROGRAM: Financials and Metals Diversified 2XL Program Pacific Rim Program Foreign Financials
Program Program
-------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT February 1988 February 1988 February 1988 February 1988
TRADING BY CTA:
-------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT March 1992 April 1994 June 1994 June 1992
TRADING IN PROGRAM: ceased trading 8/95 ceased trading 6/94
-------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 2 4 0 0
-------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING $915 million $915 million $915 million $915 million
"NOTIONAL" EQUITY) OVERALL:
-------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING $30 million $22 million N/A N/A
"NOTIONAL" EQUITY) IN PROGRAM:
-------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $1.1 billion $1.1 billion $1.1 billion $1.1 billion
"NOTIONAL" EQUITY) OVERALL:
-------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $38 million $22 million N/A N/A
"NOTIONAL" EQUITY) IN PROGRAM:
-------------------------------------------------------------------------------------------------
WORST MONTHLY DRAWDOWN: (7.83)% (7/96) (16.40)% (7/96) (3.30)% (7/95) (5.77)% (9/92)
-------------------------------------------------------------------------------------------------
WORST PEAK-TO-VALLEY (10.36)% (1/94-2/94) (17.59)% (5/96-7/96) (3.30)% (7/95) (5.77)% (9/92)
DRAWDOWN:
-------------------------------------------------------------------------------------------------
1997 COMPOUND RATE OF RETURN: 1.50% (1 month) 3.26% (1 month) N/A N/A
-------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: 10.35% 18.18% N/A N/A
-------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 12.61% 18.77% 37.04% (8 months) N/A
-------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: 3.22% 26.88% (9 months) (2.76)% (7 months) (1.77)% (6 months)
-------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: 68.53% N/A N/A 21.90%
-------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: 24.19% (10 months) N/A N/A 21.42% (7 months)
-------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
____________________________________
SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 114.
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<PAGE>
JOHN W. HENRY & COMPANY, INC.
APRIL 1, 1997 TRADING ASSET ALLOCATION: 15%
BACKGROUND
John W. Henry & Company began managing assets in 1981 as a sole
proprietorship and was later incorporated in the state of California as John W.
Henry & Company, Inc., to conduct business as a commodity trading advisor. JWH
trades numerous contracts on a 24-hour basis in the United States, Europe and
Asia, and has grown to be one of the largest advisors in the managed futures
industry, managing, as of January 31, 1997, approximately $2.0 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"), as well as of 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 Risk Management
Inc., JWH Asset Management, Inc. and JWH Financial Products, 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, General Counsel and a member of
the JWH Board of Directors. He is also Vice Chairman and a director of JWH Risk
Management, Inc., JWH Asset Management, Inc. and JWH Financial Products, Inc.
Prior to his employment at JWH commencing in January 1994, Mr. Mitchell was a
partner of Chapman and Cutler, a Chicago law firm, where he had headed its
futures law practice since August 1983. From August 1980 to March 1991, he
served as General Counsel of NAFTA and, from March 1991 to December 1993, he
served as General Counsel of the Managed Futures Association ("MFA"). Mr.
Mitchell is currently a member of the CPO/CTA Advisory Committee and the Special
Committee for the Review of the Multi-Tiered Regulatory Approach to NFA Rules,
both of the NFA. In addition, he has served as a member of the Government
Relations Committee of MFA and the Executive Committee of the Law and Compliance
Division of FIA. In 1985, he received the Richard P. Donchian Award for
Outstanding Contributions to the Field of Commodity Money Management. He has
been an editor of Futures International Law Letter and its predecessor
publication, Commodities Law Letter. He received an A.B. with honors from
Dartmouth College and a J.D. from the University of California at Los Angeles,
where he was named to the Order of the Coif, the national legal honorary
society.
Mr. David R. Bailin is an Executive Vice President and a member of the
Operating Committee of JWH. He is also President of JWH Risk Management, Inc.;
President and director of Westport Capital Management Corporation; and President
and Chairman of the Board of Directors of Global Capital Management Limited. He
is responsible for the development, implementation and management of JWH's sales
and marketing infrastructure. Prior to joining JWH in December 1995, Mr. Bailin
was Managing Director-Development since April 1994 for Global Asset Management
("GAM"), a Bermuda-based investment management firm with over $7 billion in
managed assets. He was responsible for overseeing the international distribution
of GAM's funds as well as for establishing new distribution relationships and
channels. Prior to his employment with GAM, Mr. Bailin headed the real estate
asset management division of Geometry Asset Management beginning in July 1992.
Prior to that time, beginning in 1988, he was President of Warner Financial, an
investment advisory business in Boston, Massachusetts. Mr. Bailin received a
B.A. from Amherst College and an M.B.A. from Harvard Business School.
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Mr. James E. Johnson, Jr. is a managing director of JWH, with
responsibilities in the institutional marketing area. Mr. Johnson is also a
principal of Westport Capital Management Corporation, JWH Risk Management, Inc.,
JWH Asset Management, Inc. and JWH Financial Products, 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. and JWH Financial Products, Inc., a director of
Westport Capital Management Corporation, and a director of Global Capital
Management Limited. Prior to her employment at JWH, Ms. Kenton was Associate
Manager of Finance and Trading Operations at Krieger Investments, a currency and
commodity trading firm. From July 1987 to September 1988, Ms. Kenton worked for
Bankers Trust Company as a Product Specialist for foreign exchange and Treasury
options trading. Ms. Kenton is a member of the MFA's Trading and Markets
Committee. She received a B.S. in Finance from Ithaca College.
Ms. Mary Elizabeth Hardy is Senior Vice President and Director of
Trading Administration and a member of the Operating and Investment Policy
Committees of JWH. Ms. Hardy announced her resignation on March 4, 1997 from the
positions listed above, effective April 30, 1997. Thereafter, she may continue
on a part-time basis to assist with transition issues. Since joining JWH in
September 1990, Ms. Hardy has held positions of increasing responsibility in
Research and Development and Trading. Prior to her employment at JWH, beginning
in 1989 Ms. Hardy held the position of Associate Editor at Waters Information
Services, a publishing company, where she wrote weekly articles covering
technological advances in the securities and futures markets. Prior to joining
Waters in 1989, Ms. Hardy was at Shearson Lehman Brothers, Inc. ("Shearson")
where she held the position of assistant director of the Managed Futures Trading
Department. Prior to that, Ms. Hardy was an institutional salesperson at
Shearson in a group specializing in financial futures and options. Previously,
Ms. Hardy was an institutional salesperson for Donaldson, Lufkin & Jenrette Inc.
with a group which also specialized in financial futures and options. Ms. Hardy
serves on the Board of Directors of the MFA 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 JWH Financial Products, Inc. and is 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 Operating and Investment Policy Committees of JWH. Mr. Koshi is
responsible for the supervision and administration of all aspects of order
execution strategies and the implementation of trading policies and procedures.
Mr. Koshi joined JWH in August 1988 as a professional in the Finance Department,
and since 1990 has held positions of increasing responsibility in the Trading
Department. He received a B.S. in Finance from California State University at
Long Beach.
Mr. Barry S. Fox is the Director of Research and is a member of the
Operating and Investment Policy Committees of JWH. Mr. Fox is responsible for
the design and testing of new programs. He also supports and maintains
proprietary systems/models used to generate JWH trades. Mr. Fox joined JWH in
March 1991, and since that time he has held positions of increasing
responsibility in the Research and Product Development Departments. Prior to his
employment at JWH, Mr. Fox provided sales and financial analysis support since
October 1990 for Spreadsheet Solutions, a financial software development
company. Prior to joining Spreadsheet Solutions, Mr. Fox operated a trading
company where he traded his own proprietary capital. Before that, he was
employed with Bankers Trust as a product specialist for foreign exchange and
treasury options trading. He received a B.S. in Business Administration from the
University of Buffalo.
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Ms. Glenda G. Twist is a Director of JWH and has held that position
since August 1993. Ms. Twist announced her resignation from JWH on January 15,
1997, but will continue in her present capacity for the time being. Ms. Twist
joined JWH in September 1991 with responsibilities for corporate liaison, and
she continues her duties in that area. Her responsibilities include assistance
in the day-to-day administration of the Florida office, and review and
compilation of financial information for JWH. Ms. Twist was President of J.W.
Henry Enterprises Corp., for which she performed financial, consulting and
administrative services from January 1991 to August 1991. From 1988 to December
1990, Ms. Twist was Executive Director of Cities in Schools, a program in
Arkansas designed to prevent students from leaving school before completing
their high school education. She received her B.S. in Education from Arkansas
State University.
Mr. John A. F. Ford is the Director of Marketing and a member of the
Operating Committee of JWH. Mr. Ford is responsible for the development and
implementation of strategic marketing and communications programs. He joined JWH
in May 1996 from J.P. Morgan & Co., Incorporated where he had been vice
president and head of corporate communications for the firm's European
operations, responsible for public relations, advertising and marketing, from
February 1994 to October 1995. He was previously in a similar position with J.P.
Morgan & Co., Incorporated at the Euroclear Operations Centre in Brussels from
January 1992 to February 1994. From October 1995 to May 1996 he undertook a
number of consultancy projects while relocating to the United States. Prior to
joining J.P. Morgan & Co. Incorporated, Mr. Ford was managing director of the
European headquarters of Gavin Anderson & Co. (UK), an international corporate
and investor relations consultancy, from February 1987 to December 1991. Mr.
Ford has also been involved in advising the Chicago Mercantile Exchange on
marketing its services to European institutions and advising the International
Petroleum Exchange in London on similar issues. He also helped market Mercury
Asset Management to major institutions and pension funds.
Mr. Michael D. Gould is Director of Investor Services and a member of
the Operating Committee of 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 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 MLPF&S 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., is the Controller and a member of the
Operating Committee of JWH. Prior to joining JWH in 1991, 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, Inc. starting in February
1985. Prior to that, Mr. Deakins was a Financial Consultant for MLPF&S. 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
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I/B/E/S, Mr. Lautenslager devoted time to personal activities from April 1994 to
March 1995, following the closing of the Stamford, Connecticut office of Gruntal
& Co., where he had worked as a proprietary equity trader since November 1993.
Before that, he held the same position at S.A.C. Capital Management starting in
February 1993. From October 1987 to December 1992, Mr. Lautenslager was a
partner and managing director of Limitless Option Partners, a registered Chicago
Mercantile Exchange trading and brokerage organization, where he traded currency
futures and options. He received a B.S. in Accounting from the University of
Colorado and a Masters in Management from Northwestern University.
Mr. Edwin B. Twist is a Director of JWH and has held that position
since August 1993. Mr. Twist is also a director of JWH Risk Management, Inc.,
JWH Asset Management, Inc. and JWH Financial Products, 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, the director of
investment support, and a member of the Operating Committee 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.
Ms. Wendy B. Goodyear is director of the office of the chairman. She
is responsible for managing and coordinating projects involving Mr. Henry. Ms.
Goodyear joined JWH in October 1995 as director of marketing, responsible for
the development and implementation of strategic marketing and communications
programs. Prior to her employment at JWH, Ms. Goodyear was a vice president at
Citibank, N.A. where she held several positions, including product development
manager for the depository receipt business and marketing manager for the
pension business. Prior to joining Citibank in May 1993, Ms. Goodyear was
employed at Bankers Trust Company from 1985 where she held positions of
increasing responsibility in both the private bank and pension businesses. Ms.
Goodyear received a B.A. in History from the University of Virginia and an
M.B.A. from the Stern School of Business at New York University.
Mr. Julius A. Staniewicz is the senior strategist in JWH's Product
Development Department and a member of the Operating Committee of JWH. He is
also President of JWH Asset Management, Inc. and JWH Financial Products, Inc.
Prior to joining JWH in March of 1992, Mr. Staniewicz was employed with Shearson
as a financial consultant starting in April 1991. Prior to that, beginning in
1990, Mr. Staniewicz was a vice president of Phoenix Asset Management, a
commodity pool operator and introducing broker, where he helped develop futures
funds for syndication and institutional investors. From 1986 to 1989, Mr.
Staniewicz worked in the managed futures department at Prudential-Bache
Securities, Inc., lastly as an assistant vice president and co-director of
managed futures. Mr. Staniewicz received a B.A. in Economics from Cornell
University.
Ms. Melanie A. Caldwell is Human Resources and Administrative Director
and a member of the Operating Committee of JWH (NFA registration pending). Ms.
Caldwell is responsible for all aspects of human resources and facilities
management at JWH. Prior to joining JWH in May 1995, Ms. Caldwell operated her
own facilities management consulting business from August 1992 to May 1995.
Prior to operating her own business, Ms. Caldwell was senior vice president of
Greenwich Capital Markets, Inc., a primary dealer in fixed income securities,
from March 1985 to July 1992. Ms. Caldwell received her B.S. in Sociology and
M.S. in Industrial Relations from Purdue University.
Mr. Andrew D. Willard is Director of Technology at JWH and a member of
the Operating Committee of JWH (NFA registration pending). Mr. Willard is
responsible for all aspects of the JWH technology infrastructure, including
future developments. He joined JWH in August 1995 after a 20-year career
starting in January 1973 at Bankers Trust Company in London, Hong Kong and, most
recently, New York where he was head of technology for the bank's International
Investment Management Division. He also served on the bank's steering committee
setting company-wide policies for future use of technology. Prior to his most
recent position at Bankers Trust Company in New York, Mr. Willard was
responsible for all technology support for the bank's offices in Japan, Hong
Kong and Singapore. He attended London Nautical College.
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THE INVESTMENT POLICY COMMITTEE
The Investment Policy Committee is one vehicle for decision-making at
JWH about the content and application of JWH trading programs. Composition of
the Investment Policy Committee, and participation in its discussions and
decisions by non-members, may vary over time. The Investment Policy Committee is
an interdepartmental advisory body which meets periodically to discuss issues
relating to the JWH trading programs and their application to markets, including
research on markets and strategies in relation to the proprietary trading models
employed by JWH. JWH's proprietary research group may determine new markets
which should be traded in given portfolios, or determine markets which should be
removed from given portfolios. Non-proprietary recommendations from research are
then presented to and discussed by the Investment Policy Committee, which may
recommend them to the Chairman, Mr. John W. Henry, for approval. Proprietary
research findings are reviewed directly by the Chairman before implementation.
All recommendations of the Investment Policy Committee are subject to final
approval by the Chairman. The Investment Policy Committee does not make
particular trading decisions. The trading department initiates and liquidates
positions and manages JWH portfolios in accordance with the firm's proprietary
trading methodology, which is not overruled unless the chief trader or director
of trading administration determines that doing so is in the best interest of
clients. No trade indications are overruled without the express approval of the
Chairman. The Chairman may also notify the trading department at any time of
special situations which he deems may require a modification in applying the
methodology.
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 eleven trading programs.
JWH's systematic investment process is designed to generate, over
market cycles, excellent risk-adjusted rates of return under favorable and
adverse market conditions. The JWH process capitalizes on emerging, long-term,
rising and falling price trends and ignores day-to-day price fluctuations. To
ensure disciplined implementation of its investment philosophy, JWH uses
mathematical models to execute investment decisions in more than 50 global
markets encompassing currencies, commodities and financial securities. All JWH
investment programs follow the strict money management framework outlined below.
The first step in the JWH investment process is the identification of
a price trend. While there are many ways to identify trends, JWH uses a
methodology which identifies opportunities in order to attempt to capture a
majority of the significant price movements in a given market. The process
presumes that such price movements will often exceed the expectation of the
general marketplace. As such, the JWH discipline is to pare losing positions
relatively quickly while allowing profitable positions to mature. Positions held
for two to four months are not unusual, and certain positions have been held for
more than one year. Historically, only thirty to forty percent of all trades
made pursuant to the trading methods have been profitable. Large profits on a
few trades in positions that typically exist for several months have produced
favorable overall results. Generally, the majority of losing positions have been
liquidated within weeks. The maximum equity retracement JWH has experienced in
any single program was nearly sixty percent (60)%. Similar or greater drawdowns
are possible in the future. There can be no assurance that JWH will trade
profitably for the Fund or avoid losses of such magnitude.
JWH at its sole discretion may override computer-generated signals,
and may at times use discretion in the application of its quantitative models
which may affect performance positively or negatively. Subjective aspects of
JWH's quantitative models also include the determination of program leverage,
commencement of trading in an account, markets traded, contracts traded,
contract month selection, margin utilization and effective trade execution.
JWH's strategy is based on the following guiding principles:
LONG-TERM PERSPECTIVE. JWH's investment strategies rest on a long-
term perspective in the world's financial and commodities markets. JWH believes
that historical performance demonstrates that, because trends often last longer
than most market participants expect, strong returns can be generated from
positions held over the long term.
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DISCIPLINED INVESTMENT PROCESS. The disciplined investment process
utilized by JWH is designed to generate superior, risk-adjusted rates of return
throughout a market cycle. By consistently applying investment techniques in
financial and commodities markets worldwide, JWH is able to participate in
rising and falling markets without bias.
JWH's ongoing research has led to the development of analytical models
which suggest the appropriate content, weighting, exits and entries for each
investment position. Once established, these positions are monitored around the
clock. While many of these positions are closed out within a few days or weeks
at a profit or loss, others are retained where JWH's investment guidelines
indicate potential opportunity for exceptional returns.
TREND IDENTIFICATION. JWH's strategies are nonpredictive. Instead,
based on research into historic pricing data, JWH seeks to recognize the
movement of capital from one market to another after trends have begun.
GLOBAL DIVERSIFICATION. For more than a decade, JWH has recognized
the importance of global trading. Financial markets around the world are
increasingly interrelated, with actions in one country's markets often
influencing markets in other parts of the world. JWH investments are positioned
to provide access to the performance potential offered by the global
marketplace.
COMPREHENSIVE RISK MANAGEMENT. JWH's risk management strategies are
designed with the objective of decreasing volatility and improving the
risk/reward characteristics of investments in futures and forwards by relying
upon carefully formulated risk management algorithms that define controlled loss
parameters prior to execution.
PROGRAM MODIFICATIONS
In an effort to maintain and improve performance, JWH has engaged, and
continues to engage, in extensive research. While the basic philosophy
underlying the firm's investment methodology has remained intact throughout its
history, the potential benefits of employing more than one investment
methodology, alternatively, or in varying combinations, is a subject of
continual testing, review and evaluation. Extensive research and analysis may
suggest substitution of alternative investment methodologies with respect to
particular contracts in light of relative differences in historical performance
achieved through testing different methodologies. In addition, risk management
research and analysis may suggest modifications regarding the relative weighting
among various contracts, the addition or deletion of particular contracts for a
program or a change in the degree of leverage employed.
As capital in each JWH trading program increases, additional emphasis
and weighting may be placed on certain markets which have historically
demonstrated the greatest liquidity and profitability. Furthermore, the
weighting of capital committed to various markets in the trading programs is
dynamic, and JWH may vary the weighting at its discretion as market conditions,
liquidity, position limit considerations and other factors warrant. MLIP will
generally not be informed of any such changes.
LEVERAGE
Leverage adjustments have been and continue to be an integral part of
JWH's investment strategy. At its discretion, JWH may adjust leverage in certain
markets or entire programs. Factors which may affect the decision to adjust
leverage include: ongoing research; program volatility; current market
volatility; risk exposure; and subjective judgment and evaluation of these and
other general market conditions. Such decisions to change leverage may
positively or negatively affect performance, and will alter risk exposure for an
account. Leverage adjustments may lead to greater profits or losses, more
frequent and larger margin calls and greater brokerage expense. No assurance is
given that such leverage adjustments will be to the financial advantage of
investors in the Fund.
ADDITION, REDEMPTION AND REALLOCATION OF CAPITAL FOR COMMODITY POOL ACCOUNTS
JWH has developed procedures for trading pool accounts, such as the
Fund, that provide for the addition, redemption and/or reallocation of capital.
Investors who purchase or redeem units in a fund are most frequently permitted
to do so at a price equal to the net asset value per unit on the close of
business on the last business day of the month or quarter. In addition, funds
often may reallocate capital among advisors at the close of business on the last
business day of the month. In order to provide market exposure commensurate with
the equity in the JWH account on the date of these transactions, JWH's general
practice is to adjust positions as near 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
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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 if, for example, additions were 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 near 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 or, in its sole discretion, delay adjustments to trading for an
account to a date or time after the close of business on the last day of the
month. 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.
PHYSICAL AND CASH COMMODITIES
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 the ability to execute transactions
at a single price. Cash transactions, as opposed to futures transactions, relate
to the purchase and sale of specific physical commodities. Whereas futures
contracts are generally uniform except for price and delivery time, cash
contracts may differ from each other with respect to such terms as quantity,
grade, mode of shipment, terms of payment, penalties, risk of loss and the like.
There is no limitation on the daily price movements of cash or forward contracts
transacted through banks, brokerage firms or government dealers, and those
entities are not required to continue to make markets in any commodity. In
addition, the CFTC does not comprehensively regulate cash transactions, which
are subject to the risk of these entities' failure, inability or refusal to
perform with respect to such contracts.
LEGAL AND ETHICAL CONCERNS
JWH and Mr. Henry may engage in discretionary trading for their own
accounts, and may trade for the purpose of testing new investment programs and
concepts, as long as such trading does not amount to a breach of fiduciary duty.
In the course of such trading, JWH and Mr. Henry may take positions in their own
accounts which are the same or opposite from client positions, due to testing a
new quantitative model or program, a neutral allocation system, and/or trading
pursuant to individual discretionary methods, and on occasion orders may receive
better fills for their accounts than for client accounts. Records for these
accounts will not be made available to clients. Employees and principals of JWH
(other than Mr. Henry) are not permitted to trade on a discretionary basis in
futures, options on futures or forward contracts. However, such principals and
employees may invest in investment vehicles that trade futures, options on
futures or forward contracts, when an independent trader manages trading in that
vehicle, and in the JWH Employee Fund, L.P., for which JWH is the trading
advisor. The records of these accounts also will not be made available to
Limited Partners.
In September 1996, JWH was named as a co-defendant in class action
lawsuits brought in the California Superior Court, Los Angeles County and in the
New York Supreme Court, New York County. In November, JWH was named as a co-
defendant in a class action complaint filed in Superior Court of the State of
Delaware for Newcastle County that contained the same allegations as the New
York and California complaints. The actions, which seek unspecified damages,
purport to be brought on behalf of investors in certain Dean Witter, Discover &
Co. ("Dean Witter") commodity pools, some of which are advised by JWH, and are
primarily directed at Dean Witter's alleged fraudulent selling practices in
connection with the marketing of those pools. JWH is essentially alleged to have
aided and abetted or directly participated with Dean Witter in those practices.
JWH believes the allegations against it are without merit; it intends to contest
these allegations vigorously, and is convinced that it will be shown to have
acted properly and in the best interest of the investors.
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 -- global interest rates, foreign exchange, global stock indices and
precious metals -- and seeks to capitalize on sustained moves in global
financial markets.
The Financial and Metals Portfolio may take long, short or neutral
positions 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.
-102-
<PAGE>
OTHER JWH PROGRAMS
In addition to the Financial and Metals Portfolio, JWH currently
operates ten other trading programs for U.S. and non-U.S. investors, none of
which are utilized by JWH for the Fund. Each program is operated separately and
independently. These programs emphasize intermediate and long-term,
quantitative, trend-analysis models designed with the objective of achieving
speculative rates of return.
The Original Investment Program, which began in 1981, uses long-term,
quantitative models. This program trades in seven different market sectors
trading 20 to 25 commodities on both U.S. and non-U.S. exchanges. The 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.
The World Financial Perspective, which began in 1986, trades the
financial and energy sector markets from the perspective of the Japanese yen,
German mark, Swiss franc, British pound, Australian dollar, French franc,
Canadian dollar and the U.S. dollar. The pricing of key global markets in terms
of foreign currencies provides a level of diversification not generally found in
futures portfolios. In February 1991, JWH began trading a portfolio in which the
same techniques utilized in the International Foreign Exchange Program are
primarily applied to the currencies of the major industrial nations, known as
"the Group of Seven" and Switzerland. These currencies are the Japanese yen,
British pound, Canadian dollar, German mark, French franc, Italian lira, the
U.S. dollar and Swiss franc and are among the most liquid, actively traded
currencies in the world. The G-7 Currency Portfolio makes use of both outright
positions and cross-rate positions. Positions are primarily taken in the
interbank market and from time to time on U.S. futures exchanges. The Yen
Financial Portfolio began in August 1991 and uses the same quantitative models
as the Financial and Metals Portfolio. The Yen Financial Portfolio trades
futures on the Japanese yen, the 10-year Japanese Government Bond, the Euroyen
and the Nikkei 225 stock index. The International Currency and Bond Portfolio,
begun in January 1993, combines the techniques employed in the G-7 Currency
Portfolio and the global bond sector of the Financial and Metals Portfolio to
trade a combined portfolio of currencies and international long-term bonds. In
June 1994, JWH began trading the Global Financial Portfolio, which utilizes the
same reversal approach as the Original Investment Program. The program trades in
four market sectors: interest rates, stock indices, currencies and energy. The
Dollar Program began trading client capital in June 1996. This program is
designed to capitalize on price movements in the U.S. dollar utilizing
intermediate-term and long-term quantitative trend analysis models, and takes
outright positions in the Japanese yen, German mark, Swiss franc, and British
pound versus the U.S. dollar.
The Worldwide Bond Program ("WWB") began trading client capital in
July 1994. WWB invests in the long-term portion of global interest rate markets,
including the U.S. 30-year bond, U.S. 10-year note, British long gilt, the
French, German and Italian bond, and Australian 10-year bond. Unlike most fixed
income investments, WWB is not limited to investments that have the potential to
profit in a stable or declining interest rate environment. Rather, WWB is
designed to capitalize on dominant trends, whether rising or falling, in
worldwide bond markets.
The Delevered Yen Denominated Financial and Metals Profile began
trading in October 1995 and closed in December 1996. This program sought to
capitalize on sustained moves in global financial markets utilizing
intermediate-term and long-term quantitative trend analysis models, some of
which attempted to employ neutral stances during periods of nontrending markets.
This portfolio traded at approximately one half of the leverage of the
traditional Financial and Metals portfolio and traded from the perspective of
the Japanese yen.
InterRate(TM), which commenced trading in November 1987 and closed in
July 1996, used a portfolio of foreign currency contracts that sought to capture
interest-rate differentials between countries. This program utilized leverage
that was significantly lower than other JWH programs, reducing risk as it sought
to generate returns significantly enhanced over the prevailing 91-day U.S.
government securities rate.
The KT Diversified Program began in January 1984 and closed in
February 1994. This program participated in eight market sectors on U.S.
exchanges only.
-103-
<PAGE>
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
January 31, 1997, JWH was managing approximately $2.0 billion (excluding
"notional" funds) of customer funds in the futures and forwards markets and
approximately $1.2 billion (excluding "notional funds") of customer funds in the
Financial and Metals Portfolio. All performance information is current as of
January 31, 1997.
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, 1992 has been excluded in accordance
with CFTC regulations.
An investor should note that in a presentation of past performance
data, different accounts, even though traded according to the same investment
program, can have varying performance results. The reasons for this include
numerous material differences among accounts including: (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) client trading restrictions, including futures vs. forward contracts and
contract markets; (d) trading size equity ratio resulting from procedures for
the commencement of trading and appropriate means of moving to a full portfolio
commitment of new accounts and new capital; (e) 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 which
will vary and will depend on the fees negotiated by the client with the broker;
(h) the timing of orders to open or close positions; (i) the market conditions
which in part determine the quality of trade executions; (j) variations in fill
prices; and (k) the timing of additions and withdrawals.
For the purpose of determining whether there exist material
differences among accounts traded pursuant to the same trading program, JWH
utilizes the method described herein. The gross trading performance of each JWH
investment program and each individual JWH account within the relevant program
is reviewed and the following parameters established by interpretations of the
Division of Trading and Markets of the CFTC are calculated: (i) if the
arithmetic average of two percentages is greater than 10 percentage points and
the difference between the two is less than 10% of their average; (ii) if the
arithmetic average of the two percentages is greater than 5 points but not less
than 10 points and the difference between the two is 1.5 percentage points or
less; and (iii) if the arithmetic average of the two percentages is less than 5
points and the difference between the two is 1.0 percentage point or less. If
one of the parameters (i) - (iii) is satisfied in the review, then the results
within the designated range are deemed "materially the same" or "not materially
different." The parameters (i) - (iii) determine if differences between accounts
are materially different. JWH further evaluates performance on a gross trading
basis for materiality in an overall context for each JWH investment program and
each individual JWH account within the relevant program not satisfying the above
parameters to determine whether any material differences that are detected could
be misleading after review of the reasons for the differences.
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. Additionally, the investment program
used (although all accounts may be traded in accordance with the same approach,
such approach may be modified periodically as a result of ongoing research and
development by JWH) may have an effect on performance results. In reviewing the
JWH performance summaries, prospective investors should bear in mind the
possible effects of these 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
-104-
<PAGE>
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.
Due to the commencement of trading in July 1996 by a new multi-program
fund managed by JWH, JWH developed a new method for treating the accrual of
incentive fees for the multi-advisor funds and multi-program accounts it
manages. For these accounts, JWH agreed that it would earn incentive fees only
when overall fund performance for multi-advisor funds, or overall JWH
performance for multi-program accounts, as the case may be, is profitable. As
applied, this new method presents incentive fees due for each program on a
stand-alone basis--in essence, to reflect the performance results that would
have been experienced by an investor in that program regardless of any external
business arrangements (such as a multi-advisor structure or the use of multiple
JWH programs) that might have affected actual incentive fees paid. The new
method was applied initially in August 1996 performance. In that month, a one-
time adjustment to performance rate of return was made to each affected program
(including the Financial and Metals Portfolio) to show the impact of this
adjustment from program inception through August 1996. In the case of the
Financial and Metals Portfolio, the adjustment reduced the rate of return which
would have been shown from approximately (0.6)% to (0.8)%.
Prior to 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 July 1992 for JWH Investments, Inc.), the net effect on
monthly net performance and the monthly rates of return in the performance
summaries of continuing to record interest income, management fees, commissions
and other expenses on a cash basis differs immaterially from the results which
would be obtained using accrual basis accounting.
Advisory fees vary from account to account managed pursuant to all
programs. Management fees vary from 0% to 6% of assets under management;
incentive fees vary from 0% to 25% of profits. Such variations in advisory fees
may have a material impact on the performance of an account from time to time.
The Notes to the Performance Summaries are an integral part of such
performance summaries, which are presented on a cash basis except as otherwise
described herein.
See Notes to the Performance Summaries set forth on pages 113 through
114.
ADDITIONAL NOTE TO THE FINANCIAL AND METALS PORTFOLIO COMPOSITE PERFORMANCE
- ---------------------------------------------------------------------------
SUMMARY
- -------
In May 1992, 35% of the assets in the Financial and Metals Portfolio
was deleveraged 50% at the request of a client. The deleveraging materially
affected the rates of return achieved. The 1992 annual rate of return for these
deleveraged accounts was (24.3)%. The 1992 annual rate of return for the
Financial and Metals Portfolio performance summary was (10.9)%. If these
accounts had been excluded from the Financial and Metals Portfolio performance
summary, the 1992 annual rate of return would have been (3.9)%. The effect of
this deleveraging was eliminated in September 1992.
Additionally, the Financial and Metals Portfolio composite performance
summary includes the performance of several accounts that do not participate in
global markets due to their smaller account equities which do not meet the
minimums established for this program. Accounts not meeting such minimums can
experience performance materially different than the performance of an account
which meets the minimum account size. The performance of such accounts has no
material effect on the overall Financial and Metals Portfolio performance
summary.
ADDITIONAL NOTE TO THE YEN FINANCIAL PORTFOLIO 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.
-105-
<PAGE>
Accordingly, as the equity mix between U.S. dollars and Japanese yen
varies, performance from each perspective will also vary. Investors should be
aware that their individual account performance may differ from the composite
performance summaries presented in relation to the perspective of their base
currency. Such differences arise from exchange rate movements, percentage of
account balances held in yen, and fee arrangements.
This program began trading client capital in January 1992. In July
1996, one proprietary account commenced trading pursuant to an investment in a
fund. This proprietary account is traded in exactly the same manner that client
funds would be traded, and is subject to all of the same fees and expenses that
would be charged to a client investment in the fund; therefore, there is no
material impact on the rates of return presented for such account.
The performance of the Yen Financial Portfolio is presented on an
individual account basis due to material differences among accounts' historical
performance. Account performance has varied historically due to a number of
factors unique to this portfolio, including whether the portfolio is denominated
in dollars or yen, the extent of hedging currency conversions, the amounts and
frequency of currency conversions, and account size. Several of these factors
that have materially influenced performance depend on clients' specific choices
that effectively result in customized client portfolios.
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 (44)% and (17)%, respectively. For the
period January 1995 through June 1995, the three open accounts achieved separate
rates of return of 101%, 75% and 67%, respectively. Since June 1995, these
accounts maintain mature positions and are performing consistently with each
other. Due to the six month period in 1995 of varied performance, the three
accounts therefore achieved annual rates of return for 1995 of 122%, 92% and
78%, respectively.
The Global Financial Portfolio began trading client capital in June
1994. In July 1995, one proprietary account commenced trading pursuant to an
investment in a fund. This proprietary account is traded in exactly the same
manner that client funds would be traded, and is subject to all of the same fees
and expenses that would be charged a client investment in the fund; therefore,
there is no material impact on the rates of return presented.
ADDITIONAL NOTE TO THE ORIGINAL INVESTMENT PROGRAM COMPOSITE PERFORMANCE SUMMARY
- --------------------------------------------------------------------------------
The Original Investment Program began trading client capital in
October 1982. In November 1994, one proprietary account commenced trading
pursuant to an investment in a fund. This proprietary account is traded in
exactly the same manner that client funds would be traded, and is subject to all
of the same fees and expenses that would be charged a client investment in the
fund; therefore, there is no material impact on the rates of return presented.
ADDITIONAL NOTE TO THE G-7 CURRENCY PORTFOLIO COMPOSITE PERFORMANCE SUMMARY
- ---------------------------------------------------------------------------
The G-7 Currency Portfolio began trading client capital in February
1991. From July 1995 through December 1995 one proprietary account was traded
pursuant to an investment in a fund, and in August 1996 an additional
proprietary account began trading pursuant to an investment in the same fund.
These proprietary accounts have been traded in exactly the same manner that
client funds would be traded, and have been subject to all of the same fees and
expenses that would be charged a client investment in the fund; therefore, there
is no material impact on the rates of return presented.
ADDITIONAL NOTE TO THE SUMMARIES PRESENTED WHICH UTILIZE THE FULLY-FUNDED SUBSET
- --------------------------------------------------------------------------------
METHOD -- I.E., THE GLOBAL DIVERSIFIED PORTFOLIO AND JWH INVESTMENTS, INC.
- --------------------------------------------------------------------------
INTERRATE(TM) (THE "FULLY-FUNDED SUBSET SUMMARIES")
- --------------------------------------------------
Actual funds are the amount of margin-qualifying assets on deposit.
Nominal account size is a dollar amount which clients have agreed to in writing
and which determines the level of trading in the account regardless of the
amount of actual funds. Notional funds are the amount by which the nominal
account size exceeds the amount of actual funds. The amount of notional equity
in the accounts that compose the Fully-Funded Subset Summaries requires
additional disclosure under current CFTC policy. The Fully-Funded Subset
Summaries include notional equity in excess of the 10% disclosure threshold
established by the CFTC and reflect the adoption of a method of presenting rate-
of-return and performance disclosure authorized by the CFTC, referred to as the
Fully-Funded Subset method. See "-- Chesapeake Capital Corporation -- Past
Performance," at page 92. This method permits notional and fully-funded accounts
to be included in a single performance summary.
-106-
<PAGE>
To qualify for the use of the Fully-Funded Subset method, the Fully-
Funded Subset Advisory requires that certain computations be made in order to
arrive at the Fully-Funded Subset and that the accounts for which performance is
so reported meet two tests which are designed to provide assurance that the
Fully-Funded Subset and the resultant rates of return are representative of the
programs.
These computations have been performed for the Global Diversified
Portfolio from January 1, 1992 to February 1, 1997 and for JWH Investments,
Inc.'s InterRate(TM) from inception to its close. They were designed to provide
assurance that the performance presented in the Fully-Funded Subset Summaries
and calculated on a Fully-Funded Subset basis would be representative of such
performance calculated on a basis which includes notional funds in beginning
equity. The rates of return in the Fully-Funded Subset Summaries are calculated
by dividing net performance by the sum of beginning equity plus additions minus
withdrawals. JWH and JWH Investments, Inc. believe that this method yields
substantially the same adjusted rates of return as would the Fully-Funded Subset
method were there any "fully-funded" accounts, and that the rates of return for
the Fully-Funded Subset Summaries are representative of the performance of the
programs for the periods presented.
The following performance information has not been audited. However,
JWH and JWH Investments, Inc. believe that such information is accurate and
fairly presented.
INTERRATE(TM) IS QUALITATIVELY DIFFERENT FROM THE METHODS WHICH
GENERATED THE PERFORMANCE PRESENTED IN THE CASE OF THE OTHER JWH PROGRAMS. THE
OTHER JWH PROGRAMS DIFFER FROM INTERRATE(TM) WITH RESPECT TO: (A) FEES CHARGED;
(B) LENGTH OF TIME FOR WHICH POSITIONS ARE HELD; (C) POSITIONS TAKEN; (D)
LEVERAGE USED; AND (E) RATE OF RETURN OBJECTIVES.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FURTHERMORE, THE RATES OF RETURN EARNED WHEN AN ADVISOR IS MANAGING A LIMITED
AMOUNT OF EQUITY MAY HAVE LITTLE RELATIONSHIP TO THE RATES OF RETURN WHICH SUCH
ADVISOR MAY BE ABLE TO ACHIEVE MANAGING LARGER AMOUNTS OF EQUITY.
A NUMBER OF THE ACCOUNTS INCLUDED IN THE FOLLOWING PERFORMANCE
SUMMARIES WERE TRADED IN A MANNER MATERIALLY DIFFERENT FROM THAT IN WHICH JWH
TRADES ON BEHALF OF THE FUND.
THE FOLLOWING PERFORMANCE SUMMARIES HAVE IN NO RESPECT BEEN ADJUSTED
TO REFLECT THE CHARGES TO THE FUND. CERTAIN OF THE ACCOUNTS INCLUDED IN THE
FOLLOWING PERFORMANCE SUMMARIES PAID FEES MATERIALLY DIFFERENT FROM, AND IN SOME
CASES MATERIALLY LOWER THAN, THOSE CHARGED THE FUND.
COMMODITY INTEREST TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE
OF RISK. THERE CAN BE NO ASSURANCE THAT ANY TRADING ADVISOR WILL TRADE
PROFITABLY OR AVOID INCURRING SUBSTANTIAL LOSSES.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF A TRADING ADVISOR'S TOTAL INCOME AND, IN CERTAIN
INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED OR UNREALIZED
LOSSES FROM COMMODITIES TRADING.
PAST PERFORMANCE IS NOT NECESSARILY
INDICATIVE OF FUTURE RESULTS.
See "Risk Factors -- (2) Past Performance Not Necessarily Indicative of
Future Results."
-107-
<PAGE>
JOHN W. HENRY & COMPANY, INC.
FINANCIAL AND METALS PORTFOLIO
JANUARY 1, 1992 - JANUARY 31, 1997
The following performance summary and chart reflect the composite
performance results from January 1992 through January 1997 of the Financial and
Metals Portfolio. JWH trades this program on behalf of the Fund. The program has
been utilized in trading for 360 accounts since its inception. As of January 31,
1997, 316 accounts had been closed and 44 accounts remained open. Of the 316
closed accounts, 279 were profitable and 37 were unprofitable at their closing.
Of the 44 open accounts, all were profitable as of January 31, 1997.
Name of program: Financial and Metals Portfolio
Inception of client account trading by CTA: October 1982
Inception of client account trading in program: October 1984
Number of open accounts: 44
Aggregate assets (excluding notional equity) overall: $2.0 billion
Aggregate assets (excluding notional equity) in program: $1.2 billion
Aggregate assets (including notional equity) overall: $2.0 billion
Aggregate assets (including notional equity) in program: $1.2 billion
Worst monthly drawdown on an individual account basis: (27.7)% (1/92)
Worst peak-to-valley drawdown on an individual account basis: (58.8)%
(12/91-5/92)
The Financial and Metals Portfolio Composite Monthly
Rate of Return for January 1997 was 4.41%.
<TABLE>
<CAPTION>
==================================================================
Monthly Rates
of Return 1996 1995 1994 1993 1992
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 6.0% (3.8)% (2.9)% 3.3% (18.0)%
------------------------------------------------------------------
February (5.5) 15.7 (0.6) 13.9 (13.5)
------------------------------------------------------------------
March 0.7 15.3 7.2 (0.3) 3.0
------------------------------------------------------------------
April 2.3 6.1 0.9 9.3 (12.2)
------------------------------------------------------------------
May (1.7) 1.2 1.3 3.3 (5.7)
------------------------------------------------------------------
June 2.2 (1.7) 4.5 0.1 21.9
------------------------------------------------------------------
July (1.1) (2.3) (6.1) 9.7 25.5
------------------------------------------------------------------
August (0.8) 2.1 (4.1) (0.8) 10.2
------------------------------------------------------------------
September 3.2 (2.1) 1.5 0.2 (5.2)
------------------------------------------------------------------
October 14.3 0.3 1.7 (1.1) (4.5)
------------------------------------------------------------------
November 10.9 2.6 (4.4) (0.3) (0.8)
------------------------------------------------------------------
December (2.6) 1.7 (3.5) 2.9 (2.6)
------------------------------------------------------------------
Compound Annual
Rate of Return 29.66% 38.53% (5.32)% 46.82% (10.89)%
==================================================================
</TABLE>
In May 1991, one proprietary account commenced trading and in March 1992 a
second proprietary account commenced trading. Both accounts appear in the
summary performance and chart from their inception until August 1995. The
maximum percentage of proprietary funds during this time period was less
than 1/2 of 1%. These proprietary funds had no material effect on the rate
of return calculations.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
__________________________
SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 114.
-108-
<PAGE>
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
JANUARY 1, 1992- JANUARY 31, 1997
--------------------------------------------------------------------------------------------
NAME OF CTA: John W. Henry John W. Henry John W. Henry John W. Henry
& Company, Inc. & Company, Inc. & Company, Inc. & Company, Inc.
<S> <C> <C> <C> <C>
--------------------------------------------------------------------------------------------
NAME OF PROGRAM: Original Investment Global Diversified International Currency The World Financial
Program Portfolio and Bond Portfolio Prospective
--------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING BY CTA October 1982 October 1982 October 1982 October 1982
--------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING IN PROGRAM: October 1982 June 1988 January 1993 April 1987
--------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 29 14 1 5
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) OVERALL: $2.0 billion $2.0 billion $2.0 billion $2.0 billion
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $250 million $158 million $2.5 million $24 million
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $2.0 billion $2.0 billion $2.0 billion $2.0 billion
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING $265 million $169 million $2.5 million $24 million
--------------------------------------------------------------------------------------------
WORST MONTHLY DRAWDOWN ON AN
INDIVIDUAL ACCOUNT BASIS: (18.1)% (2/92) (20.3)% (7/91) (7.8)% (7/94) (25.5)% (1/92)
--------------------------------------------------------------------------------------------
WORST PEAK-TO-VALLEY DRAWDOWN ON AN
INDIVIDUAL ACCOUNT BASIS: (62.1)% (6/88-5/92) (33.2)% (12/91-5/92) (23.6)% (6/94-1/95) (38.4)% (12/91-10/92)
--------------------------------------------------------------------------------------------
1997 COMPOUND RATE OF RETURN: 3.4% (1 month) 1.5% (1 month) 2.2% (1 month) 1.1% (1 month)
--------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: 23% 27% 20% 41%
--------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 53% 20% 37% 32%
--------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: (6)% 10% (2)% (15)%
--------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: 41% 60% 15% 14%
--------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: 11% (13)% N/A (23)%
--------------------------------------------------------------------------------------------
<CAPTION>
--------------------------------------------------------------------------------------------
John W. Henry John W. Henry John W. Henry
NAME OF CTA: & Company, Inc. & Company, Inc. & Company, Inc.
<S> <C> <C> <C>
--------------------------------------------------------------------------------------------
NAME OF PROGRAM: Delevered Yen
Global Financial Portfolio Denominated Financial International Foreign
and Metals Profile Exchange Program
--------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING BY CTA October 1982 October 1982 October 1982
--------------------------------------------------------------------------------------------
INCEPTION OF CLIENT ACCOUNT
TRADING IN PROGRAM: June 1994 October 1995; August 1986
ceased trading 12/96
--------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 5 0 7
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) OVERALL: $2.0 billion $2.0 billion $2.0 billion
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $107 million 0 $71 million
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS (INCLUDING
"NOTIONAL" EQUITY) OVERALL: $2.0 billion $2.0 billion $2.0 billion
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN PROGRAM: $107 million 0 $71 million
--------------------------------------------------------------------------------------------
WORST MONTHLY DRAWDOWN ON AN
INDIVIDUAL ACCOUNT BASIS: (19.5)% (11/94) (3.2)% (2/96) (13.6)% (1/92)
--------------------------------------------------------------------------------------------
WORST PEAK-TO-VALLEY DRAWDOWN ON AN
INDIVIDUAL ACCOUNT BASIS: (48.9)% (6/94-1/95) (5.1)% (1/96-8/96) (35.9)% (8/92-1/95)
--------------------------------------------------------------------------------------------
1997 COMPOUND RATE OF RETURN: 2.7% (1 month) N/A 2.9% (1 month)
--------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF RETURN: 32% 10% 4%
--------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF RETURN: 86% 0.2% (3 months 17%
--------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF RETURN: (38)% (7 months) N/A (6)%
--------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF RETURN: N/A N/A (5)%
--------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF RETURN: N/A N/A (5)%
--------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 114.
-109-
<PAGE>
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
OTHER JOHN W. HENRY & COMPANY, INC. PROGRAMS
JANUARY 1, 1992 - JANUARY 31, 1997
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
NAME OF CTA: John W. Henry John W. Henry John W. Henry John W. Henry
& Company, Inc. & Company, Inc. & Company, Inc. & Company, Inc.
------------------------------------------------------------------------------------------------------
NAME OF PROGRAM: G-7 Currency Portfolio Worldwide Bond Dollar Program InterRate(TM)
Program
------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT
ACCOUNT TRADING BY CTA: October 1982 October 1982 October 1982 October 1982
------------------------------------------------------------------------------------------------------
INCEPTION OF CLIENT February 1991 July 1996 July 1996 December 1988;
ACCOUNT TRADING IN PROGRAM: ceased trading 7/96
------------------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 6 2 2 0
------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) OVERALL: $2.0 billion $2.0 billion $2.0 billion $2.0 billion
------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS (EXCLUDING
"NOTIONAL" EQUITY) IN
PROGRAM: $77 million $18 million $28 million $0
------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(INCLUDING "NOTIONAL"
EQUITY) OVERALL: $2.0 billion $2.0 billion $2.0 billion $2.0 billion
------------------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(INCLUDING "NOTIONAL"
EQUITY) IN PROGRAM: $77 million $18 million $28 million $0
------------------------------------------------------------------------------------------------------
WORST MONTHLY DRAWDOWN ON
AN INDIVIDUAL ACCOUNT
BASIS: (12.3)% (1/92) (3.6)% (12/96) (2.3)% (8/96) (10.2)% (9/92)
------------------------------------------------------------------------------------------------------
WORST PEAK-TO-VALLEY
DRAWDOWN ON AN INDIVIDUAL
ACCOUNT BASIS: (31.4)% (9/92-1/95) (3.6)% (11/96-12/96) (3.5)% (7/96-9/96) (19.0)% (8/92-11/93)
------------------------------------------------------------------------------------------------------
1997 COMPOUND RATE OF
RETURN: 2.5% (1 month) 0.9% (1 month) 7.2% (1 month) N/A
------------------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF
RETURN: 15% 18% (6 months) 11% (6 months) 6% (7 months)
------------------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF
RETURN: 32% N/A N/A 5%
------------------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF
RETURN: (5)% N/A N/A 3%
------------------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF
RETURN: (6) N/A N/A (5)%
------------------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF
RETURN: 15% N/A N/A (1)%
------------------------------------------------------------------------------------------------------
<CAPTION>
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NAME OF CTA: John W. Henry JWH Investments, JWH Investments,
& Company, Inc. Inc. Inc.
--------------------------------------------------------------------------------------------
NAME OF PROGRAM: KT Diversified Program Financial and Metals InterRate(TM)
Portfolio
--------------------------------------------------------------------------------------------
INCEPTION OF CLIENT
ACCOUNT TRADING BY CTA: October 1982 September 1991 September 1991
--------------------------------------------------------------------------------------------
INCEPTION OF CLIENT
ACCOUNT TRADING IN January 1984; September 1991; February 1992;
PROGRAM: ceased trading 7/95 ceased trading 7/95 ceased trading 11/93
--------------------------------------------------------------------------------------------
NUMBER OF OPEN ACCOUNTS: 0 0 0
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(EXCLUDING "NOTIONAL"
EQUITY) OVERALL: $2.0 billion $0 $0
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(EXCLUDING "NOTIONAL"
EQUITY) IN PROGRAM: $0 $0 $0
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(INCLUDING "NOTIONAL"
EQUITY) OVERALL: $2.0 billion $0 $0
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(INCLUDING "NOTIONAL"
EQUITY) IN PROGRAM: $0 $0 $0
--------------------------------------------------------------------------------------------
AGGREGATE ASSETS
(INCLUDING "NOTIONAL"
EQUITY IN PROGRAM: $0 $0 $0
--------------------------------------------------------------------------------------------
WORST MONTHLY DRAWDOWN ON
AN INDIVIDUAL ACCOUNT
BASIS: (28.6)% (1/92) (16.6)% (1/92) (9.3)% (9/92)
--------------------------------------------------------------------------------------------
WORST PEAK-TO-VALLEY
DRAWDOWN ON AN INDIVIDUAL
ACCOUNT BASIS: (50.8)% (1/91-3/92) (34.4)% (12/91-5/92) (20.6)% (8/92-11/93)
--------------------------------------------------------------------------------------------
1997 COMPOUND RATE OF
RETURN: N/A N/A N/A
--------------------------------------------------------------------------------------------
1996 COMPOUND RATE OF
RETURN: N/A N/A N/A
--------------------------------------------------------------------------------------------
1995 COMPOUND RATE OF
RETURN: N/A 30% (7 months) N/A
--------------------------------------------------------------------------------------------
1994 COMPOUND RATE OF
RETURN: (14)% (2 months) (1)% N/A
--------------------------------------------------------------------------------------------
1993 COMPOUND RATE OF
RETURN: 21% 46% (10)% (11 months)
--------------------------------------------------------------------------------------------
1992 COMPOUND RATE OF
RETURN: (12)% (4)% 3% (11 months)
--------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAM.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 114.
-110-
<PAGE>
JOHN W. HENRY & COMPANY, INC. TRADING PROGRAMS
PERFORMANCE SUMMARIES
YEN FINANCIAL PORTFOLIO
January 31, 1997
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: 5
Aggregate assets (excluding notional equity) overall: $2.0 billion
Aggregate assets (excluding notional equity) in program: $39 million
Aggregate assets (including notional equity) overall: $2.0 billion
Aggregate assets (including notional equity) in program: $39 million
See Additional Note on p. 105.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE WORST WORST
ACCOUNT NO. INCEPTION OF ASSETS COMPOUND RATE MONTHLY PEAK-TO-VALLEY
TRADING OCTOBER 31, 1996 OF RETURN % DRAWDOWN % DRAWDOWN %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1 1/92 $5.9 million 1997: 0 (1 month) (14.4) - 2/92 (30.5) - 4/95-7/96
1996: (9)
1995: 21
1994: (13)
1993: 76
1992: 20
- -----------------------------------------------------------------------------------------------------------------------------------
2 1/93 Closed - 1/97 1997: (0.1) (1 month) (6.9) - 7/95 (29.0) - 4/95-7/96
1996: (10)
1995: 21
1994: (9)
1993: 71
- -----------------------------------------------------------------------------------------------------------------------------------
3 1/94 Closed - 1/97 1997: (2) (1 month) (6.0) - 7/95 (26.6) - 4/95-7/96
1996: (11)
1995: 22
1994: (8)
- -----------------------------------------------------------------------------------------------------------------------------------
4 6/94 $25 million 1997: 1 (1 month) (6.5) - 7/95 (22.3) - 4/95-7/96
1996: (0.6)
1995: 24
1994: (2) (7 months)
- -----------------------------------------------------------------------------------------------------------------------------------
5 8/94 $4.9 million 1997: 0 (1 month) (7.1) - 7/95 (30.4) - 4/95-7/96
1996: (6)
1995: 21
1994: (4) (5 months)
- -----------------------------------------------------------------------------------------------------------------------------------
6 1/95 $2.3 million 1997: (0.1) (1 month) (7.5) - 7/95 (35.5) - 5/96-7/96
1996: (14)
1995: 13
- -----------------------------------------------------------------------------------------------------------------------------------
7 3/94 (Yen)213 million 1997: 5 (1 month) (6.7) - 7/96 (15.9) - 2/96-7/96
1996: 8
1995: 28
1994: (11) (10 months)
- -----------------------------------------------------------------------------------------------------------------------------------
8 4/92 closed - 9/93 1993: 63 (9 months) (11.7) - 5/92 (11.7) - 4/92-5/92
1992: 27
- -----------------------------------------------------------------------------------------------------------------------------------
9 2/92 closed - 12/92 1992: 33 (11 months) (11.5) - 2/92 (11.5) - 2/92
- -----------------------------------------------------------------------------------------------------------------------------------
10 3/94 closed - 12/94 1994: (7) (10 months) (5.4) - 5/94 (10.5) - 4/94-12/94
- -----------------------------------------------------------------------------------------------------------------------------------
11 11/93 closed - 8/95 1995: 20 (8 months) (9.0) - 8/95 (18.8) - 4/95-8/95
1994: (13)
1993: 5 (2 months)
- -----------------------------------------------------------------------------------------------------------------------------------
12 11/93 closed - 1/95 1995: (1) (1 month) (6.3) - 5/94 (16.5) - 4/94-1/95
1994: (15)
1993: 5 (2 months)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAM.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 114.
-111-
<PAGE>
JOHN W. HENRY & COMPANY, INC. TRADING PROGRAMS
PERFORMANCE SUMMARIES
YEN FINANCIAL PORTFOLIO
January 31, 1997
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: 5
Aggregate assets (excluding notional equity) overall: $2.0 billion
Aggregate assets (excluding notional equity) in program: $39 million
Aggregate assets (including notional equity) overall: $2.0 billion
Aggregate assets (including notional equity) in program: $39 million
See Additional Note on p. 105.
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AGGREGATE WORST WORST
ACCOUNT NO. INCEPTION OF ASSETS COMPOUND RATE MONTHLY PEAK-TO-VALLEY
TRADING OCTOBER 31, 1996 OF RETURN % DRAWDOWN % DRAWDOWN %
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
13 12/92 closed - 3/96 1996: (4) (3 months) (4.9) - 7/95 (15.8) - 12/93-1/95
1995: 31
1994: (14)
1993: 69
1992: 0.1 (1 month)
- -----------------------------------------------------------------------------------------------------------------------------------
14 1/93 closed - 12/95 1995: (11) (6.2) - 6/95 (15.8) - 4/95-12/95
1994: (4)
1993: 43
- -----------------------------------------------------------------------------------------------------------------------------------
15 4/93 closed -9/94 1994: (19) (9 months) (5.8) - 5/94 (19.9) - 11/93-9/94
1993: 25 (9 months)
- -----------------------------------------------------------------------------------------------------------------------------------
16 1/94 closed - 8/94 1994: (7) (8 months) (5.5) - 5/94 (11.0) - 4/94-8/94
- -----------------------------------------------------------------------------------------------------------------------------------
17 12/92 closed - 1/96 1996: 0.3 (1 month) (6.0) - 7/95 (12.4) - 4/95-10/95
1995: 27
1994: (5)
1993: 74
1992: (1) (1 month)
- -----------------------------------------------------------------------------------------------------------------------------------
18 3/94 closed - 4/96 1996: (6) (4 months) (6.2) - 7/95 (18.5) - 4/95-4/96
1995: 19
1994: (10) (10 months)
- -----------------------------------------------------------------------------------------------------------------------------------
19 12/94 closed - 4/96 1996: (8) (4 months) (6.6) - 7/95 (21.1) - 4/95-4/96
1995: 18
1994: 0.2 (1 month)
- -----------------------------------------------------------------------------------------------------------------------------------
20 6/94 closed - 12/94 1994: (8) (7 months) (5.1) - 7/94 (10.4) - 6/94-11/94
- -----------------------------------------------------------------------------------------------------------------------------------
21 6/94 closed - 3/95 1995: 48 (3 months) (3.6) - 7/94 (9.9) - 6/94-1/95
1994: (7) (7 months)
- -----------------------------------------------------------------------------------------------------------------------------------
22 4/94 closed - 9/94 1994: (5) (6 months) (4.7) - 5/94 (7.0) - 4/94-9/94
- -----------------------------------------------------------------------------------------------------------------------------------
23 3/94 closed - 9/94 1994: (10) (7 months) (6.3) - 5/94 (11.0) - 4/94-9/94
- -----------------------------------------------------------------------------------------------------------------------------------
24 4/94 closed - 9/94 1994: (10) (6 months) (9.1) - 5/94 (12.9) - 4/94-9/94
- -----------------------------------------------------------------------------------------------------------------------------------
25 4/93 closed - 12/94 1994: (17) (6.1) - 5/94 (17.9) - 11/93-12/94
1993: 27 (9 months)
- -----------------------------------------------------------------------------------------------------------------------------------
26 9/93 closed - 12/94 1994: (12) (6.0) - 5/94 (14.1) - 4/94-12/94
1993: 3 (4 months)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAM.
SEE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES 113 THROUGH 114.
-112-
<PAGE>
NOTES TO THE PERFORMANCE SUMMARIES
1. Name of CTA is the name of the core Advisor which directed the accounts
-----------
included in the performance summary.
2. Name of Program is the name of the trading program used by the core Advisor
---------------
in directing the accounts included in the performance summary.
3. Inception of Client Account Trading by CTA is the date on which the
------------------------------------------
relevant core Advisor began directing client accounts.
4. Inception of Client Account Trading in Program is the date on which the
----------------------------------------------
relevant core Advisor began directing client accounts pursuant to the
program shown in the performance summary.
5. Number of Open Accounts is the number of accounts directed by the relevant
-----------------------
core Advisor pursuant to the program shown in the performance summary, as
of the end of the period covered by the performance summary.
6. Aggregate Assets (excluding notional equity) Overall is the aggregate
----------------------------------------------------
amount of actual assets under the management of the relevant core Advisor
in all programs operated by such core Advisor, as of the end of the period
covered by the performance summary. With respect to Chesapeake, these
numbers include client funds only. With respect to JWH, these numbers also
include proprietary funds; however, all proprietary funds are traded in the
same manner and charged the same fees as client funds, and the proprietary
funds are, in any event, not material in terms of the overall assets
managed by JWH.
7. Aggregate Assets (excluding notional equity) in Program is the aggregate
-------------------------------------------------------
amount of actual assets under the management of the relevant core Advisor
in the program shown in the performance summary, as of the end of the
period covered by the performance summary. With respect to Chesapeake,
these numbers include client funds only. With respect to JWH, these
numbers may also include proprietary funds; however, all proprietary funds
are traded in the same manner and charged the same fees as client funds,
and the proprietary funds are, in any event, not material in terms of the
overall assets managed by JWH.
8. Aggregate Assets (including notional equity) Overall is the aggregate
----------------------------------------------------
amount of total equity, including notional equity, under the management of
the relevant core Advisor in all programs operated by such core Advisor, as
of the end of the period covered by the performance summary. Notional
equity represents the additional amount of equity which exceeds the amount
of equity actually committed to the core Advisor for management. With
respect to Chesapeake, these numbers include client funds only. With
respect to JWH, these numbers also include proprietary funds; however, all
proprietary funds are traded in the same manner and charged the same fees
as client funds, and the proprietary funds are, in any event, not material
in terms of the overall assets managed by JWH.
9. Aggregate Assets (including notional equity) in Program is the aggregate
-------------------------------------------------------
amount of total equity, including notional equity, under the management of
the relevant core Advisor in the program shown in the performance summary,
as of the end of the period covered by the performance summary. Notional
equity represents the additional amount of equity which exceeds the amount
of equity actually committed to the core Advisor for management. With
respect to Chesapeake, these numbers include client funds only. With
respect to JWH, these numbers may also include proprietary funds (as
described in the notes to the performance summaries); however, all
proprietary funds are traded in the same manner and charged the same fees
as client funds, and the proprietary funds are, in any event, not material
in terms of the overall assets managed by JWH.
10. Worst Monthly Drawdown is the worst monthly loss experienced by the
----------------------
relevant program on either a composite or individual account basis, unless
noted otherwise, in any calendar month covered by the performance summary
and includes the month and year of such drawdown.
With respect to Chesapeake's programs, worst monthly drawdown is the worst
monthly loss experienced by the program on a composite basis in any
calendar month expressed as a percentage of the total equity (including
notional equity) in the program. A small number of accounts managed by
Chesapeake have experienced monthly drawdowns which are materially larger
than the largest composite monthly drawdown. These variances result from
such factors as small account size, intra-month account opening or closing,
significant intra-month additions or withdrawals and investment
restrictions imposed by the client. Small account size refers to accounts
of $1,000,000 trading level or less, which is substantially below the
minimum account size currently required by Chesapeake for new accounts.
-113-
<PAGE>
NOTES TO THE PERFORMANCE SUMMARIES
(CONT.)
11. Worst Peak-to-Valley Drawdown is the worst percentage decline (after
-----------------------------
eliminating the effect of additions and withdrawals) during the period
covered by the performance summary from any month-end net asset value,
without such month-end net asset value being equalled or exceeded as of a
subsequent month-end. Worst peak-to-valley drawdown is calculated on the
basis of the loss experienced in the program on a composite basis, unless
noted otherwise, expressed as a percentage of the total equity (including
notional equity) in the program. Individual accounts managed by Chesapeake
may have experienced worse peak-to-valley drawdowns. JWH calculates Worst
Peak-to-Valley Drawdown on an individual account basis. JWH calculates the
period over which the worst peak-to-valley drawdown of a program has
occurred as beginning with the last profitable month immediately preceding
the drawdown. Chesapeake calculates such period as beginning with the
first unprofitable month of the drawdown.
With respect to Chesapeake's programs, a small number of accounts managed
by Chesapeake have experienced peak-to-valley drawdowns which are
materially worse than the worst composite peak-to-valley drawdown. These
variances result from such factors as small account size, intra-month
account opening or closing, significant intra-month additions or
withdrawals and investment restrictions imposed by the client.
12. Monthly Rates of Return, in accordance with CFTC rules, are shown only for
-----------------------
the specific programs currently being traded by the core Advisors for the
Fund.
With respect to Chesapeake's Diversified Program, the Monthly Rate of
Return for each month beginning January 1994 is calculated by dividing the
net performance of the Fully-Funded Subset by the beginning equity of the
Fully-Funded Subset, except in periods of significant additions or
withdrawals to the accounts in the Fully-Funded Subset. In such instances,
the Fully-Funded Subset is adjusted to exclude accounts with significant
additions or withdrawals, whose inclusion would materially distort the rate
of return calculated pursuant to the Fully-Funded Subset method.
The Monthly Rate of Return for the months from January 1992 through
December 31, 1993 was calculated using both the Fully-Funded Subset and OAT
(see "Chesapeake Capital Corporation -- Past Performance" at page 92)
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 they are material to the performance of the Financial and
Metals Portfolio, in which case they are time-weighted. If time-weighting
is materially misleading, then the OAT method is utilized.
The Monthly Rates of Return for the current core Advisors are, in certain
cases, calculated on the basis of assets under management including
proprietary capital. However, each of the current core Advisors believes
that the inclusion of such capital has had no material effect on their
respective Monthly Rates of Return.
13. Compound Annual Rate of Return is calculated by compounding the monthly
------------------------------
rates of return over the number of months in a given year. Each month's
rate of return (positive or negative) in hundredths is added to one (1) and
the result is multiplied by the previous month's monthly rate of return
similarly expressed. One (1) is then subtracted from the product. For
period of less than one year, the results are year-to-date. For example,
if a Program recorded monthly rates of return of 5, (3) and 1 for three
consecutive months, the compound rate of return for those three months
would equal 1.05 x 0.97 x 1.01 = 1.029 or 2.9% (approximately).
With respect to Chesapeake's Diversified Program, beginning in March 1995
the monthly rate of return for the majority of the accounts in the capsule
is immaterially lower than the composite Monthly Rate of Return. This is
due to the effect of a large account with a rate of return which is, on a
monthly basis, immaterially higher than most accounts in the program. This
difference in the monthly rate of return is due to a different cost and
interest income structure in the large account. The annual compounded rate
of return for the majority of the accounts is materially lower than the
composite Compound Annual Rate of Return because of the cumulative
difference from the large account.
-114-
<PAGE>
PERFORMANCE OF THE
SINGLE-ADVISOR FUTURES FUNDS OPERATED BY MLIP
GENERAL
The following is summary performance information for the six single-
advisor funds which MLIP has distributed other than as part of its "Managed
Account Program" (which consists of private placements and feeder funds which
invest all of their assets directly into different managers' private funds).
All summary performance information is current as of February 28,
1997. Performance information is set forth for the most recent five full years
of each fund (or such shorter period prior to dissolution or subsequent to
inception as presented). Performance information prior to January 1, 1992 has
not been included, in accordance with CFTC regulations.
Four of the funds presented (The Futures Expansion Fund Limited
Partnership, World Currencies Limited, ML JWH Strategic Allocation Fund L.P. and
ML JWH Strategic Allocation Fund Ltd.) have (had, in the case of World
Currencies Limited, which has dissolved) fee structures and interest
arrangements generally comparable to that of the Fund (although these funds,
being single-advisor pools, pay (paid) 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
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, a number of
single-advisor funds, as well as several single-advisor feeder funds, as part of
MLIP's Managed Account Program. These funds are in addition to the six single-
advisor funds the records of which are summarized herein. MLIP selects the
professional advisors for the funds in the Managed Account Program. However,
each client determines with which, if any, of such advisors the client will
invest. The Managed Account Program emphasizes single-advisor funds.
In its single-advisor funds, MLIP does not implement asset allocation
strategies as MLIP does for the Fund. Nor is MLIP's trading leverage analysis
of any relevance in the context of single-advisor funds. All the assets of such
funds are simply allocated to their respective advisors.
Managed Account Program funds are privately distributed with a minimum
investment of $100,000 (although MLIP has from time to time permitted
investments of $50,000).
Although MLIP's ability to select advisors for the Managed Account
Program might be regarded as a reflection on MLIP's ability to select advisors
for its multi-advisor funds, MLIP regards the Managed Account Program and MLIP's
multi-advisor funds as qualitatively different investments. Consequently, while
MLIP will furnish, without charge, full performance records of all MLIP single-
advisor funds upon the request of any existing or prospective investor in the
Fund, such records are not set forth herein.
The three worst performing of the single-advisor Managed Account
Program funds sponsored by MLIP had, as of February 28, 1997, cumulative rates
of return, since inception, of (53.27)% (18 months), (17.67)% (43 months) and
(6.20)% (27 months).
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
MATERIAL DIFFERENCES EXIST BETWEEN THE FUNDS SET FORTH HEREIN AND THE
FUND. TO DATE, THE FUND HAS NOT PERFORMED IN A MANNER COMPARABLE TO MANY OF
THESE SINGLE-ADVISOR MLIP-SPONSORED FUNDS, AND THERE IS NO REASON TO EXPECT THAT
THE FUND WILL PERFORM IN A MANNER COMPARABLE TO ANY OF SUCH FUNDS IN THE FUTURE.
INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A
SIGNIFICANT PORTION OF A COMMODITY POOL'S INCOME AND, IN CERTAIN INSTANCES, MAY
GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED AND UNREALIZED LOSSES FROM
COMMODITY TRADING.
____________________________
-115-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MLIP SINGLE-ADVISOR FUNDS
JANUARY 1, 1992 - FEBRUARY 28, 1997
- ------------------------------------------------------------------------------------------------------------------------------------
INCEPTION WORST
TYPE OF OF AGGREGATE CURRENT WORST MONTHLY PEAK-TO-VALLEY
NAME OF FUND OFFERING TRADING SUBSCRIPTIONS CAPITALIZATION DRAWDOWN DRAWDOWN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
The Futures Expansion Fund Public Jan. 1987 $ 56,741,035 $ 10,999,118 (10.92)% (2/96) (12.90)% (2/96-5/96)
Limited Partnership
- ------------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee Public Aug. 1987 $148,349,450 $ 9,636,020 (4.21)% (7/96) (6.93)% (2/94-6/94)
Fund L.P. - Series A Units
- ------------------------------------------------------------------------------------------------------------------------------------
ML JWH Strategic Allocation Public July 1996 $199,895,865 $227,658,002 (1.02)% (7/96) (1.12)% (7/96-8/96)
Fund L.P.
- ------------------------------------------------------------------------------------------------------------------------------------
ML JWH Strategic Allocation Private July 1996 $226,168,451 $244,861,065 (1.05)% (7/96) (1.38)% (7/96-8/96)
Fund Ltd.
- ------------------------------------------------------------------------------------------------------------------------------------
World Currencies Limited Private Aug. 1987 $ 47,814,293 dissolved as (13.41)% (4/92) (35.81)% (9/92-1/95)
of 4/11/96
- ------------------------------------------------------------------------------------------------------------------------------------
InterRate(TM) Limited Private Dec. 1988 $ 7,429,200 dissolved as (10.08)% (9/92) (13.49)% (9/92-1/93)
of 1/31/94
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE
RATE OF
RETURN
JAN. 1, 1992
TO 1997
FEB. 28, COMPOUND 1996 1995 1994 1993 1992
1997 RATE OF COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND
(OR RETURN RATE OF RATE OF RATE OF RATE OF RATE OF
NAME OF FUND DISSOLUTION) (2 MONTHS) RETURN RETURN RETURN RETURN RETURN
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
The Futures Expansion Fund 77.98% 12.43% 8.93% 21.95% 5.55% 3.36% 9.23%
Limited Partnership
- ------------------------------------------------------------------------------------------------------------------------------------
The Growth & Guarantee 74.40% 5.85% 17.09% 32.01% (2.34)% 5.20% 3.75%
Fund L.P. - Series A Units
- ------------------------------------------------------------------------------------------------------------------------------------
ML JWH Strategic Allocation 26.80% 2.98% 23.13% N/A N/A N/A N/A
Fund L.P. (6 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
ML JWH Strategic Allocation 24.56% 2.25% 21.82% N/A N/A N/A N/A
Fund Ltd. (6 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
World Currencies Limited (14.11)% N/A 1.20% 12.23% (12.84)% (10.46)% (3.10)%
(3 1/2 mos.)
- ------------------------------------------------------------------------------------------------------------------------------------
InterRate(TM) Limited (8.97)% N/A N/A N/A 0.55% (7.02)% (2.63)%
(1 month)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
WORST MONTHLY DRAWDOWN AS USED HEREIN MEANS THE LARGEST NEGATIVE
MONTHLY RATE OF RETURN EXPERIENCED BY THE RELEVANT FUND DURING THE PERIOD
COVERED BY THE PERFORMANCE SUMMARY. A DRAWDOWN IS MEASURED ON THE BASIS OF
MONTH-END FIGURES ONLY, AND DOES NOT REFLECT INTRA-MONTH PERFORMANCE.
WORST PEAK-TO-VALLEY DRAWDOWN AS USED HEREIN MEANS THE GREATEST
PERCENTAGE DECLINE, DURING THE PERIOD COVERED BY THE PERFORMANCE SUMMARY,
FROM A MONTH-END CUMULATIVE MONTHLY RATE OF RETURN WITHOUT SUCH CUMULATIVE
MONTHLY RATE OF RETURN BEING EQUALLED OR EXCEEDED AS OF A SUBSEQUENT MONTH-
END. FOR EXAMPLE, IF THE MONTHLY RATE OF RETURN OF A PARTICULAR FUND WAS
(1)% IN EACH OF JANUARY AND FEBRUARY, 1% IN MARCH AND (2)% IN APRIL, A
PEAK-TO-VALLEY DRAWDOWN ANALYSIS CONDUCTED AS OF THE END OF APRIL WOULD
CONSIDER THAT DRAWDOWN TO BE STILL CONTINUING AND TO BE APPROXIMATELY (3)%
IN AMOUNT, WHEREAS IF THE MONTHLY RATE OF RETURN HAD BEEN APPROXIMATELY 3%
IN MARCH, THE JANUARY-FEBRUARY DRAWDOWN WOULD HAVE ENDED AS OF THE END OF
FEBRUARY AT APPROXIMATELY THE (2)% LEVEL.
MONTHLY RATE OF RETURN, ON THE BASIS OF WHICH WORST MONTHLY DRAWDOWN,
WORST PEAK-TO-VALLEY DRAWDOWN, CUMULATIVE RATE OF RETURN AND COMPOUND RATE
OF RETURN IS CALCULATED, IS THE NET PERFORMANCE OF THE FUND DURING THE
MONTH OF DETERMINATION (INCLUDING INTEREST INCOME AND AFTER ALL EXPENSES
ACCRUED OR PAID) DIVIDED BY THE TOTAL EQUITY OF THE FUND AS OF THE
BEGINNING OF SUCH MONTH.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. THESE FUNDS ARE
EACH TRADED
PURSUANT TO MATERIALLY DIFFERENT PROGRAMS
AND WITH MATERIALLY DIFFERENT OBJECTIVES THAN THE FUND.
-116-
<PAGE>
THE ROLE OF MANAGED FUTURES IN AN INVESTMENT PORTFOLIO
MANAGED FUTURES AS AN ELEMENT IN MODERN PORTFOLIOS
This section presents a general description of the possible role of a
managed futures investment in an overall portfolio. Prospective investors are
cautioned that what may be true of managed futures investments considered in
general may not be true of the Fund. The Fund does not purport to offer the
full diversification and access to global trading which is reflected in the
investment opportunities available in the managed futures industry considered as
a whole. The following statements are qualified in their entirety by the
specific descriptions of the Fund, the Trading Advisors, their strategies and
the markets traded by the Fund set forth herein and elsewhere in this Prospectus
and the accompanying Prospectus Supplement. In addition, prospective investors
must be aware that the deleveraging of the Fund's trading in conjunction with
its "principal protection" feature reduces the market participation as well as
in the diversification potential of the Fund.
A global investment perspective may be appropriate in seeking
investment opportunity and increased portfolio diversification. The
globalization of the world's economy offers significant new opportunities.
However, world political and economic events have an influence -- often a
dramatic influence -- on its markets, creating increased risk and volatility.
The market volatility of recent years suggests that stable growth may be
becoming increasingly difficult to achieve.
Over the long term, portfolios are benefitted by having the ability to
adapt to changing social, political and economic trends. A well-diversified
asset allocation strategy enhances this ability and offers a flexible approach
to the objective of building and protecting wealth in today's economic
environment. Incorporating a managed futures investment into portfolios as part
of a well-diversified asset allocation strategy has the potential, if the
managed futures investment is successful, to increase profits while reducing
overall portfolio risk. The Fund's performance to date, even trading with only
60% of its assets allocated to trading, has been somewhat volatile (volatility
being one commonly accepted measure of risk). Furthermore, all series of Units
issued under this Prospectus will commence trading with 75% of their assets
allocated to trading, increasing expected volatility and risk. There can be no
assurance that the Fund will trade successfully, and if it does not do so an
investment in the Fund cannot provide beneficial diversification to a portfolio.
Even if profitable, the Fund may not be a successful diversification of an
investor's stock and bond portfolio because the Fund's performance may be
correlated (i.e., experiencing generally similar returns at or about the same
time) with these markets. The past performance of the Fund is not necessarily
indicative of its future results, or of performance relative to the debt or
equity markets. This may be particularly true in the case of the Fund as newly-
issued Units will trade with a higher initial (and, likely, ongoing) percentage
of their assets allocated to trading than have the Units issued prior to the
date hereof.
An asset allocation strategy diversifies a portfolio into a variety of
different components such as stocks, bonds and cash equivalents. Such a
strategy may also include, to a limited extent, non-traditional investments such
as managed futures (among a variety of alternatives). The goal is to achieve
the twin investment objectives of long-term total return combined with reduced
portfolio volatility and limited risk of major losses. An investment's
anticipated return, relative risk level, historical correlation with other
components in the portfolio and the percentage of an investor's holdings which
can suitably be committed to speculative alternative investments should be
principal factors taken into account in allocating a portfolio's assets.
Different investment components are expected to respond differently to changing
economic conditions. Consequently, combining a number of such components may
add a potentially valuable element of diversification to an overall portfolio.
There can be no assurance that the Fund will not respond to prevailing economic
conditions in the same manner, as well as incur losses at or about the same
time, as the general debt and equity markets.
PROFESSIONAL MANAGEMENT
Depending upon the fund and advisors selected, an investment in
managed futures has the potential to offer access to professionally managed
trading in a variety of commodity markets, including currencies, interest rates,
stock indices, energy, metals and agriculture. These markets may be traded
through futures, options on futures and forward contracts, and offer the ability
to trade either side of a market and at a wide range of different leverage
factors. The Fund does not trade in all, or even most, of the available
markets, and its positions may frequently be concentrated in particular markets
and sectors. There is substantial overlap among the markets traded by the
Advisors, and the deleveraging of the Fund's trading reduces its profit
potential.
-117-
<PAGE>
FUTURES VOLUME BY MARKET SECTOR
[PIE CHART HERE]
The futures volume figures and market sector distributions presented
above include both speculative and hedging transactions, as well as
options on futures. Source: Futures Industry Association. A
significant portion of currency trading is done in the forward rather
than in the futures markets, and, accordingly, is not reflected in the
foregoing chart.
INTERNATIONAL MARKETS
The futures markets have expanded in recent years to include a wide
range of instruments representing major sectors of the world's economy.
Coinciding with the development of an increasingly broad range of markets has
been greatly increased liquidity. The expansion of futures trading on major
exchanges in Chicago, Frankfurt, London, New York, Paris, Singapore, Sydney and
Tokyo offers the possibility of access to international market sectors as well
as the potential for a global diversification of portfolios traditionally
concentrated in a single nation's economy and currency. Managed futures
advisors are often able quickly to deploy and redeploy capital across a wide
range of international markets. No representation is or could be made that the
diversification or internationalization of futures trading in general has been
or will be reflected in the trading of the Fund.
At the same time that the rapid geographical expansion of the
available markets and the introduction of an array of innovative products have,
in the case of certain managers, created new opportunities for both profit and
diversification, these developments have made trading very much more complex and
difficult for the individual investor. Managed futures investments offer the
investor the opportunity to participate in a range of different economic sectors
utilizing professional money managers. Managed futures investments have profit
potential, but also involve a high degree of risk. The "principal protection"
feature of the Fund in no respects assures investors against substantial present
value losses. A managed futures investment is suitable only for a limited
portion of the risk segment of a portfolio which may limit the diversification
potential of the investment in terms of an overall 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 $22.8 billion. Of this amount,
approximately $2.5 billion to $3.5 billion is estimated to be invested in pools,
such as the Fund, publicly distributed in the United States. The assets
invested in managed futures are invested in a wide range of different products,
including single-advisor and multi-advisor funds, funds of funds, "principal
protected" pools (such as the Fund) in which only a fraction of the assets
invested are committed to trading and individual managed accounts. Many of
these investments are materially different from the Fund in design and fee
structure as well as in investor base, performance and risk control
objectives.
-118-
<PAGE>
NON-CORRELATION -- A POTENTIALLY IMPORTANT COMPONENT OF RISK REDUCTION
Historically, the returns of many managed futures investments have
exhibited a substantial degree of non-correlation with the performance of the
general equity and debt markets, suggesting that a managed futures component, if
successful, may provide a valuable complement to a traditional portfolio.
Modern portfolio theory suggests that investments with positive returns and low
correlation with other holdings can improve the reward/risk characteristics of
an investor's overall portfolio. Consequently, allocating a limited portion of
the risk segment of a portfolio to a managed futures investment such as the Fund
- -- if the managed futures performance is, in fact, profitable as well as non-
correlated with stocks and bonds -- can potentially add a valuable aspect of
diversification to a traditionally structured portfolio. On an interim basis, a
non-correlated asset may benefit a portfolio even if that asset is not itself
profitable, by helping to preserve equity during periods when core investments
are incurring significant losses. However, over time an investment can only be
beneficial if it is itself profitable. There can be no assurance that any
managed futures investment will be successful, avoid substantial losses or
generate performance non-correlated with the equity or debt markets. Even if
the performance of the Fund is, in fact, non-correlated with these markets (of
which there can be no assurance), this does not mean that the Fund's results
will not parallel general stock and bond price levels during significant periods
of time. Non-correlation is not negative correlation. The Fund may well incur
losses at or about the same time as an investor's traditional holdings,
increasing, rather than mitigating, overall portfolio losses. Furthermore, even
if a managed futures investment is non-correlated to general equity and debt
prices, it must also be profitable in order to add value as an element of
overall diversification in a portfolio.
Allocating assets to non-traditional, alternative investments is based
on the premise that while securities (e.g., stocks and bonds) prices are often
affected by overall market price trends, alternative investments may not be, at
least to the same degree. In addition, the results of many types of alternative
investments have historically been largely non-correlated with each other. This
creates the possibility of assembling a portfolio whose various investments have
been developed with the objective of participating successfully in different
economic cycles and national financial markets, potentially multiplying profit
opportunities while decreasing the effect of price movements in any given market
on the overall volatility of the portfolio. The speculative nature of the
return recognized from a managed futures investment such as the Fund indicates
that prospective investors must not rely on such investment either to generate
profits or to help diversify a portfolio, because the actual results of such an
investment are entirely unpredictable.
There are a number of different, non-traditional, alternative
investments to which one could commit assets with the objective of diversifying
and improving the overall reward/risk ratio of a traditional portfolio --
venture capital, natural resources, real estate, private lending and managed
futures are only certain of the options available. Many alternative investments
are likely to generate results largely non-correlated with those of the debt and
equity markets. A managed futures investment is typically more liquid and more
readily-valued than many other alternative investments, but unlike many such
investments, does not involve the acquisition of any assets with intrinsic
value. Although the commodities and instruments which underlie the Fund's
futures and forward contracts have value, the success of its managed futures
program depends on the results of speculative trading. No object of value is
acquired by the Fund. Rather, the Fund obtains market exposures, seeking to
profit from price movements in commodities and financial instruments which the
Fund, in fact, never owns. A fundamental characteristic of a managed futures
investment is that it is a commitment to trading rather than to investing; to
speculating on price differences, not to acquiring assets reasonably expected to
grow in value over time. Furthermore, the purely speculative character of the
Fund's profit potential is in no respect reduced or made less speculative by the
Fund's "principal protection" feature.
All performance information in this Prospectus and the accompanying
Prospectus Supplement is presented exclusively on a pre-tax basis. The tax
costs of maintaining an investment in the Fund are materially higher than those
that would be applicable to a "buy and hold" investment in the constituent
securities of a stock or bond index.
Investors could obtain the 91-day Treasury bill or a stock or bond
index return with minimal expense, whereas the total charges to the Fund are
anticipated to be approximately 10% of its average Net Assets per year.
The futures markets are fundamentally different from the securities
markets in a number of respects, and any comparison between them (whether
relating to correlation, volatility or absolute performance) is subject to
certain inherent and material limitations.
-119-
<PAGE>
SUMMARY
Participation in a professionally managed futures program, obtaining
access to the experience and expertise of professional trading managers and
trading advisors, involves significant risks but offers the opportunity to
potentially:
. Diversify into new markets;
. Profit (or incur losses) in rising as well as falling markets;
. Increase portfolio returns as well as reduce total portfolio risk
(through adding an investment component with the potential for
performance non-correlated with other portfolio components); and
. Participate in the highly leveraged futures, options on futures and
forward markets with liability limited to the amount invested, plus
any undistributed profits.
Prudence demands that an investor carefully examine all aspects of a
managed futures investment and weigh the associated benefits of profit potential
and possible portfolio diversification against the risks of such investment. A
managed futures investment is not suitable for all investors, and is not a
suitable investment for more than a limited portion of the risk segment of any
investor's portfolio. Furthermore, different managed futures investments have
materially different objectives and reward/risk profiles. The potential
benefits of a successful managed futures investment must be considered in light
of the limited portion of an overall portfolio which such an investment can
suitably constitute. However, for the investor who can tolerate the risks, a
managed futures investment, if successful, has the potential to yield portfolio
diversification benefits. See "Risk Factors" beginning at page 11.
-120-
<PAGE>
BLUE SKY GLOSSARY
See "Index of Terms" at page 66 for an index of terms directly
relevant to the Fund.
The following definitions are included in this Appendix in compliance
with the requirements of various state securities administrators who review
public futures fund offerings for compliance with the "Guidelines for the
Registration of Commodity Pool Programs" Statement of Policy promulgated by the
North American Securities Administrators Association, Inc. The following
definitions are reprinted verbatim from such Guidelines and may, accordingly,
not in all cases be relevant to an investment in the Fund.
DEFINITIONS -- As used in the Guidelines, the following terms have the
following meanings:
Administrator -- The official or agency administering the securities
laws of a state.
Advisor -- Any Person who for any consideration engages in the
business of advising others, either directly or indirectly, as to the value,
purchase, or sale of Commodity Contracts or commodity options.
Affiliate -- An Affiliate of a Person means: (a) any Person directly
or indirectly owning, controlling or holding with power to vote 10% or more of
the outstanding voting securities of such Person; (b) any Person 10% or more of
whose outstanding voting securities are directly or indirectly owned, controlled
or held with power to vote, by such Person; (c) any Person, directly or
indirectly, controlling, controlled by, or under common control of such Person;
(d) any officer, director or partner of such Person; or (e) if such Person is an
officer, director or partner, any Person for which such Person acts in any such
capacity.
Capital Contributions -- The total investment in a Program by a
Participant or by all Participants, as the case may be.
Commodity Broker -- Any Person who engages in the business of
effecting transactions in Commodity Contracts for the account of others or for
his own account.
Commodity Contract -- A contract or option thereon providing for the
delivery or receipt at a future date of a specified amount and grade of a traded
commodity at a specified price and delivery point.
Cross Reference Sheet -- A compilation of the Guideline sections,
referenced to the page of the prospectus, Program agreement, or other exhibits,
and justification of any deviation from the Guidelines.
Net Assets -- The total assets, less total liabilities, of the Program
determined on the basis of generally accepted accounting principles. Net Assets
shall include any unrealized profits or losses on open positions, and any fee or
expense including Net Asset fees accruing to the Program.
Net Asset Value Per Program Interest -- The Net Assets divided by the
number of Program Interests outstanding.
Net Worth -- The excess of total assets over total liabilities as
determined by generally accepted accounting principles. Net Worth shall be
determined exclusive of home, home furnishings and automobiles.
New Trading Profits -- The excess, if any, of Net Assets at the end of
the period over Net Assets at the end of the highest previous period or Net
Assets at the date trading commences, whichever is higher, and as further
adjusted to eliminate the effect on Net Assets resulting from new Capital
Contributions, redemptions, or capital distributions, if any, made during the
period decreased by interest or other income, not directly related to trading
activity, earned on Program assets during the period, whether the assets are
held separately or in a margin account.
Organizational and Initial Offering Expenses -- All expenses incurred
by the Program in connection with and in preparing a Program for registration
and subsequently offering and distributing it to the public, including, but not
limited to, total underwriting and brokerage discounts and commissions
(including fees of the underwriter's attorneys), expenses for printing,
engraving, mailing, salaries of employees while engaged in sales activity,
charges of transfer agents, registrars, trustees, escrow holders, depositories,
experts, expenses of qualification of the sale of its Program Interest under
federal and state law, including taxes and fees, accountants' and attorneys'
fees.
APP-1
<PAGE>
Participant -- The holder of a Program Interest.
Person -- Any natural Person, partnership, corporation, association or
other legal entity.
Pit Brokerage Fee -- Pit Brokerage Fee shall include floor brokerage,
clearing fees, National Futures Association fees, and exchange fees.
Program -- A limited partnership, joint venture, corporation, trust or
other entity formed and operated for the purpose of investing in Commodity
Contracts.
Program Broker -- A Commodity Broker that effects trades in Commodity
Contracts for the account of a Program.
Program Interest -- A limited partnership interest or other security
representing ownership in a Program.
Pyramiding -- A method of using all or a part of an unrealized profit
in a Commodity Contract position to provide margin for any additional Commodity
Contracts of the same or related commodities.
Sponsor -- Any Person directly or indirectly instrumental in
organizing a Program or any Person who will manage or participate in the
management of a Program, including a Commodity Broker who pays any portion of
the Organizational Expenses of the Program, and the general partner(s) and any
other Person who regularly performs or selects the Persons who perform services
for the Program. Sponsor does not include wholly independent third parties such
as attorneys, accountants, and underwriters whose only compensation is for
professional services rendered in connection with the offering of the units.
The term "Sponsor" shall be deemed to include its Affiliates.
Valuation Date -- The date as of which the Net Assets of the Program
are determined.
Valuation Period -- A regular period of time between Valuation Dates.
APP-2
<PAGE>
EXHIBIT A
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
DATED AS OF
JANUARY 1, 1996
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
<PAGE>
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
- ------- -----
<S> <C> <C>
1. Formation and Name............................................................. LPA-1
2. Principal Office............................................................... LPA-1
3. Business....................................................................... LPA-1
4. Term, Dissolution, Fiscal Year and Net Asset Value............................. LPA-2
5. Net Worth of General Partner................................................... LPA-3
6. Capital Contributions; Units................................................... LPA-3
7. Allocation of Profits and Losses............................................... LPA-3
(a) Capital Accounts and Allocations.......................................... LPA-3
(b) Allocation of Profit and Loss for Federal Income Tax Purposes............. LPA-4
(c) Adjustments............................................................... LPA-6
(d) Expenses.................................................................. LPA-6
(e) Limited Liability of Limited Partners..................................... LPA-6
(f) Return of Capital Contributions........................................... LPA-6
8. Management of the Fund......................................................... LPA-6
(a) General................................................................... LPA-6
(b) Fiduciary Duties.......................................................... LPA-7
(c) Loans; Investments........................................................ LPA-7
(d) Certain Conflicts of Interest Prohibited.................................. LPA-8
(e) Certain Contracts......................................................... LPA-8
(f) Trading Advisors.......................................................... LPA-8
(g) Other Activities.......................................................... LPA-8
(h) Tax Matters Partner....................................................... LPA-8
(i) The Trading Partnership................................................... LPA-8
(j) "Pyramiding" Prohibited................................................... LPA-9
9. Audits and Reports to Limited Partners......................................... LPA-9
10. Assignability of Units......................................................... LPA-10
11. Redemptions; Distributions..................................................... LPA-10
12. Offering of Units.............................................................. LPA-11
13. Continuous Offering; Additional Offerings...................................... LPA-11
14. Special Power of Attorney...................................................... LPA-11
15. Withdrawal of a Partner........................................................ LPA-12
16. Standard of Liability; Indemnification......................................... LPA-12
17. Amendments; Meetings........................................................... LPA-14
(a) Amendments with Consent of the General Partner............................ LPA-14
(b) Amendments and Actions without Consent of the General Partner............. LPA-14
(c) Meetings; Other........................................................... LPA-14
18. Governing Law.................................................................. LPA-15
19. Miscellaneous.................................................................. LPA-15
</TABLE>
LPA-i
<PAGE>
ML PRINCIPAL PROTECTION L.P.
THIRD AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
This Third Amended and Restated Limited Partnership Agreement (this
"Limited Partnership Agreement") is made as of January 1, 1997, by and among
MERRILL LYNCH INVESTMENT PARTNERS INC., a Delaware corporation, as general
partner (the "General Partner"), and each other party who has become or who
becomes a party to this Limited Partnership Agreement as a limited partner
(individually, a "Limited Partner" or, collectively, the "Limited Partners")
(the General Partner and the Limited Partners being collectively referred to
herein as "Partners").
WITNESSETH:
1. Formation and Name.
(a) The parties hereto do hereby continue a limited partnership
heretofore formed under the Delaware Revised Uniform Limited Partnership Act, as
amended (the "Act"). Subject to Section 1(b) below, the Units, as hereinafter
defined, subscribed for prior to the date hereof shall be subject to the terms
of the Second Amended and Restated Limited Partnership Agreement of the
Partnership (the "Prior Agreement") which shall remain in full force and effect
with respect to those Units and those Units only. The terms of this Limited
Partnership Agreement shall apply to all Units subscribed for on and after the
date hereof. The name of the limited partnership is ML PRINCIPAL PROTECTION
L.P. (the "Fund").
(b) The Prior Agreement is hereby amended to reflect the change of
the name of this limited partnership to "ML Principal Protection L.P.," and the
change of the name of the Trading Partnership (as hereinafter defined) to "ML
Principal Protection Trading L.P." Notwithstanding any provision in this Limited
Partnership Agreement or the Prior Agreement to the contrary, any and all
references in the Prior Agreement to the "Prospectus" shall be deemed to refer
to the specific prospectus, including any applicable supplements thereto, under
and in connection with which specific Units were issued. The Prior Agreement and
this Limited Partnership Agreement shall be deemed to constitute one agreement,
which shall be the partnership agreement of the Fund. The Guarantee Agreement,
between ML&Co. (as hereinafter defined) and the Fund, dated as of October 11,
1994, shall apply only to the Units subscribed for prior to the date hereof. The
Guarantee Agreement, between ML&Co. and the Fund, dated as of the date hereof
shall apply only to the Units subscribed for on and after the date hereof.
2. Principal Office.
The address of the principal office of the Fund is c/o the General
Partner, Merrill Lynch World Headquarters, 6th Floor, South Tower, World
Financial Center, New York, New York 10080-6106; telephone: (212) 236-4167.
The address of the registered office of the Fund in the State of Delaware is c/o
The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,
Wilmington, New Castle County, Delaware 19801, and the name and address of the
registered agent for service of process on the Fund in the State of Delaware is
The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street,
Wilmington, New Castle County, Delaware 19801.
3. Business.
The Fund's business and purpose is to trade, buy, sell or otherwise
acquire, hold or dispose of forward and futures contracts for all manner of
commodities, financial instruments and currencies, any rights pertaining thereto
and any options thereon or on physical commodities, as well as securities and
any rights pertaining thereto, and to engage in all activities necessary,
convenient or incidental thereto. The Fund may also engage in "hedge,"
arbitrage and cash trading of commodities, futures, forwards and options, as
well as in yield enhancement and other fixed-income strategies. The objective
of the Fund's business is capital appreciation of its assets through speculative
trading while controlling performance volatility. The Fund may engage in the
foregoing speculative trading directly, through investing in other partnerships
and funds and through investing in subsidiary limited partnerships or other
limited liability entities structured so that, to the maximum extent permitted
by law, Limited Partners can be assured that the assets attributable to one
series of units of limited partnership interest ("Units") in the Fund will never
be used to pay losses or expenses attributable to any other series. In
particular, it is contemplated that the Fund shall continue to engage in
speculative trading solely through investing in ML PRINCIPAL PROTECTION TRADING
L.P. (the "Trading Partnership"), of which the General Partner shall be the sole
general partner, and the Fund the sole limited partner.
In addition to its trading activities, as described above, the Fund
and the Trading Partnership retain MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM")
to implement cash management strategies in -- in MLAM's absolute discretion
within investment parameters established by, and the responsibility of, the
General Partner -- United States
LPA-1
<PAGE>
Treasury securities and securities issued by U.S. government agencies and
instrumentalities. The Fund instructs Merrill Lynch Futures Inc., the Trading
Partnership's commodity broker, to pay MLAM's fees for such cash management
services from the flat-rate Brokerage Commissions paid by the Trading
Partnership to Merrill Lynch Futures Inc., and the General Partner is hereby
specifically empowered to (i) retain MLAM to provide cash management advice and
services to the Fund and the Trading Partnership, (ii) arrange for Merrill Lynch
Futures Inc. to pay MLAM's fees for such advice and services and (iii) establish
investment parameters for MLAM's cash management services for the Fund and the
Trading Partnership. In the event that Merrill Lynch Futures Inc. does not pay
MLAM's cash management fees, the General Partner, not the Fund, shall be
responsible for doing so.
The Fund has been formed in conjunction with a "principal protection"
undertaking by Merrill Lynch & Co., Inc. ("ML&Co."), the indirect parent of the
General Partner, pursuant to which ML&Co. has agreed to make sufficient payments
to the Fund, to be allocated to the appropriate series of Units in the Fund, so
that the Net Asset Value per Unit of all Units of such series outstanding on
such series' Principal Assurance Date, as defined in the Prospectus of the Fund,
as amended and updated from time to time (the "Prospectus"), in each case
relating to the public offering of the Units, will equal at least $100.
Other than as set forth above, it is specifically intended that the
Fund function in a manner analogous to a "commercial paper issuer" so as to have
no operations and incur no debts or obligations whatsoever, except as explicitly
set forth herein (including, without limitation, in Section 16(e)).
In no event shall the Fund as a whole, or any series of Units,
considered individually, be permitted to operate as an entity which is
principally engaged in trading or investing in securities (not, for these
purposes, to include the limited partnership interest in the Trading
Partnership), as opposed to in futures and forward contracts and options
thereon.
4. Term, Dissolution, Fiscal Year and Net Asset Value.
(a) Term. The term of the Fund commenced on the day on which the
Certificate of Limited Partnership was filed with the Secretary of State of the
State of Delaware pursuant to the provisions of the Act and shall end upon the
first to occur of the following: (1) December 31, 2024; (2) receipt by the
General Partner of an approval to dissolve the Fund at a specified time by
Limited Partners owning Units representing more than fifty percent (50%) of the
outstanding Units of each series then owned by Limited Partners, notice of which
is sent by certified mail, return receipt requested, to the General Partner not
less than ninety (90) days prior to the effective date of such dissolution; (3)
the death, insanity, bankruptcy, retirement, resignation, expulsion or
dissolution of the General Partner or any other event that causes the General
Partner to cease to be a general partner unless (i) at the time of such event
there is at least one remaining general partner of the Fund who carries on the
business of the Fund (and each remaining general partner of the Fund is hereby
authorized to carry on the business of the Fund in such an event), or (ii)
within ninety (90) days after such event all Partners agree in writing to
continue the business of the Fund and to the appointment, effective as of the
date of such event, of one or more general partners of the Fund; (4) a decline
in the aggregate Net Assets of the Fund to less than $250,000; (5) dissolution
of the Fund pursuant hereto; or (6) any other event which shall make it unlawful
for the existence of the Fund to be continued or requires termination of the
Fund.
(b) Dissolution. Upon the occurrence of an event causing the
dissolution of the Fund, the Fund shall be dissolved and terminated.
(c) Fiscal Year. The fiscal year of the Fund begins on January 1 of
each year and ends on the following December 31.
(d) Net Asset Value. Net Assets of the Fund are its assets less its
liabilities determined in accordance with generally accepted accounting
principles. If an open position cannot be liquidated on the day with respect to
which Net Assets are being determined, the settlement price on the first
subsequent day on which such position can be liquidated shall be the basis for
determining the liquidating value of such contract for such day, or such other
value as the General Partner may deem fair and reasonable. The liquidating
value of a commodity futures or option contract not traded on a United States
commodity exchange shall mean its liquidating value as determined by the General
Partner on a basis consistently applied for each different variety of contract.
The Net Asset Value of the Fund's investment in the Trading Partnership will be
valued in accordance with the foregoing principles.
The Fund's accrued but unpaid liability for reimbursement to the
General Partner of the Fund's organizational and initial offering costs shall
not reduce Net Asset Value for any purpose, including calculating Brokerage
Commissions, the Administrative Fees or the redemption value of Units.
Reimbursement payments will reduce Net Asset Value (for all such purposes) only
as actually paid out in the manner described in the Prospectus.
LPA-2
<PAGE>
5. Net Worth of General Partner.
The General Partner agrees that at all times so long as it remains
general partner of the Fund, it will maintain its net worth -- determined
without reference to the General Partner's interests in the Fund or any other
limited partnership or to any notes or accounts receivable from and payable to
any limited partners in which the General Partner has an interest -- at an
amount not less than 5% of the total contributions by all partners to the fund
and all other partnerships of which the General Partner is general partner. The
General Partner will not permit its net worth to decline below $10 million
without the approving vote of Limited Partners owning Units representing more
than fifty percent (50%) of the outstanding Units of each series then owned by
Limited Partners.
The requirements of the first sentence of the preceding paragraph may
be modified if the General Partner obtains an opinion of counsel for the
partnership that a proposed modification will not adversely affect the
classification of the Fund as a partnership for federal income tax purposes, and
if such modification will reflect or exceed applicable state securities and Blue
Sky laws and qualify under any guidelines or statements of policy promulgated by
any body or agency constituted by the various state securities administrators
having jurisdiction in the premises.
6. Capital Contributions; Units.
The Partners' respective capital contributions to the Fund shall be as
shown on the books and records of the Fund.
The General Partner shall invest in the Fund, as a general partner
interest, no less than 1% of the total contributions to the Fund (including the
General Partner's contribution) made with respect to each series of Units issued
by the Fund. The General Partner, so long as it is a general partner of the
Fund, or any substitute general partner, shall maintain a minimum investment of
1% of the outstanding contributions to the Fund with respect to each series of
Units. The General Partner need not maintain an equal percentage investment in
each series, but must maintain at least a 1% investment in each. The General
Partner may withdraw any interest it may have as a general partner in excess of
the foregoing requirement, and may redeem any Units of any series which it may
acquire as of any month-end on the same terms as any Limited Partner, provided
that the General Partner must, at all times while it is the sole general partner
of the Fund, maintain the minimum 1% interest in each series of Units described
in the preceding sentence.
The General Partner may, without the consent of any Partners, admit to
the Fund purchasers of Units as limited partners.
Units of any series acquired by the General Partner or any of its
affiliates will be non-voting, and will not be considered outstanding for
purposes of determining whether the majority approval of the outstanding Units
of such series has been obtained.
7. Allocation of Profits and Losses.
(a) Capital Accounts and Allocations. A capital account shall be
established for each series of Units sold by the Fund and, within each such
series a capital account shall be established for each Unit of such series as
well as for the General Partner's interest in such series on a Unit-equivalent
basis. The initial balance of each series' and of each Unit's capital account
shall be the amount contributed to the Fund with respect to such series or Unit.
As of the close of business (as determined by the General Partner) on the last
day of each month, (i) any increase or decrease in the value of the Fund's U.S.
Treasury and federal government agency or instrumentality securities and short-
term foreign sovereign debt instruments, as well as any increase or decrease in
the Fund's cash (other than as a result of distributions, redemptions or
payments described in the following paragraphs of this Section 7(a)), plus (ii)
any increase or decrease in the Net Asset Value of the Fund's capital account in
the Trading Partnership attributable to capital (a) invested in the Trading
Partnership or (b) committed to the Trading Partnership by the Fund pursuant to
Section 16(e), shall be allocated among the series, in the case of (i) above,
pro rata based on the relative amounts of assets (without regard to accrued but
unpaid Brokerage Commissions, Administrative Fees or Profit Shares) attributable
to each series as of the close of business on the last day of the immediately
preceding month (after deducting amounts payable as a result of the redemption
of Units as of the last day of such immediately preceding month) and, in the
case of (ii) above, pro rata based on the relative amounts set forth in (ii)(a)
and (b) with respect to each series as of the close of business on the last day
of the immediately preceding month (after deducting amounts payable as a result
of the redemption of Units as of the last day of such immediately preceding
month).
The capital accounts of each series of Units shall be reduced by the
amount of any distributions or redemption payments paid out with respect to such
series.
LPA-3
<PAGE>
Any Profit Share payments made by the Fund shall be allocated among
the series based upon the Profit Shares that would have been paid by the Fund
for the relevant period if the Fund's only assets during such period had been
those of the appropriate series.
The reimbursement of organizational and initial offering costs made
pursuant to Section 7(d) as of the last day of any given month shall be
allocated among the series based on the relative net asset value (without regard
to accrued but unpaid Brokerage Commissions, Administrative Fees or Profit
Shares) of each series as of the last day of the immediately preceding month
(after deducting amounts payable as a result of the redemption of Units on the
last day of such immediately preceding month).
Any payments made under the Merrill Lynch & Co., Inc. guarantee of the
minimum Net Asset Value per Unit of each series, as of the Principal Assurance
Date, as defined in the Prospectus, for such series and any indemnity payments
by the General Partner pursuant to Section 16(d) hereof shall be allocated to
the appropriate series.
The amounts allocated to a series shall be allocated equally among the
Units of such series outstanding as of the last day of such month (including
Units redeemed as of such day), except that redemption payments, related
redemption charges and Profit Shares payable upon the redemption of Units as of
a date other than the last day of a calendar quarter shall be allocated solely
to the redeemed Units.
For purposes of maintaining capital accounts, amounts paid or payable
to the General Partner for items such as reimbursement of organizational and
initial offering costs, service fees, "exchange of futures for physical" charges
and Administrative Fees shall be treated as if paid or payable to a third party
and, except for the General Partner's pro rata share of such amounts, shall not
affect the capital account of the General Partner.
For purposes of this Section 7, unless specified to the contrary,
Units redeemed as of the end of any month shall be considered outstanding as of
the end of such month.
(b) Allocation of Profit and Loss for Federal Income Tax Purposes. As
of the end of each fiscal year, the Fund's income, expense, Capital Gain and
Capital Loss shall be allocated among the series of Units, and among the
Partners of each such series, pursuant to the following subparagraphs for
federal income tax purposes. Such allocations shall, as among the series and as
among Partners holding the same series, be pro rata from the short-term Capital
Gain and Capital Loss and long-term Capital Gain and Capital Loss of the Fund or
allocated to such series, as the case may be. For purposes of this Section 7(b),
Capital Gain and Capital Loss shall be allocated separately and not netted.
(1) Income, expense, Capital Gain and Capital Loss shall be allocated
to each series of Units in the same manner that the financial allocations are
made to each such series as provided in Section 7(a). The following allocations
relate to the allocations of income, expense, Capital Gain and Capital Loss
among the Partners holding Units of the same series.
(2) First, the series' share of the items of ordinary income and
expense (other than Profit Shares, which shall be allocated as set forth in
Section 7(b)(3)) and of any Capital Gain and Capital Loss that is not
attributable to the activities of the Trading Partnership shall be allocated
equally among the Units of such series outstanding as of the end of each month
in which such items accrue.
(3) Second, the series' share of any Profit Share paid to the
Advisors for any calendar quarter with respect to Units redeemed as of a date
other than the last day of such calendar quarter shall be allocated to such
Units based upon the Profit Share that was taken into account in determining the
Net Asset Value of such Units as of their redemption date, and the series' share
of any additional Profit Share paid to the Advisors for such calendar quarter
shall be allocated equally among the Units outstanding at the end of such
calendar quarter.
(4) Third, the series' share of the Capital Gain and Capital Loss
attributable to the activities of the Trading Partnership ("Trading Capital
Gain" or "Trading Capital Loss") shall be allocated as follows:
(A) There shall be established a tax account with respect to each
outstanding Unit of such series. The initial balance of such tax account
shall be the amount contributed to the Fund for such Unit. For each of the
first 36 months of the Fund's operations, the balance of such tax account
shall be reduced by the Unit's allocable share of the series' share of the
amount payable as of the end of such month by the Fund to the General
Partner in respect of the reimbursement of organizational and initial
offering costs, as described in the Prospectus. The adjustment to reflect
the reimbursement of organizational and initial offering costs shall be
made prior to the allocations of Trading Capital Gain and Trading Capital
Loss (and shall be taken into account in making such allocations). As of
the end of each fiscal year:
LPA-4
<PAGE>
(i) Each tax account shall be increased by the amount of
income allocated to such Unit pursuant to Sections 7(b)(2) and
7(b)(4)(C).
(ii) Each tax account shall be decreased by the amount of
expense or loss allocated to such Unit pursuant to Sections 7(b)(2),
7(b)(3) and 7(b)(4)(E) and by the amount of any distributions paid out
with respect to such Unit other than upon redemption.
(iii) When a Unit is redeemed, the tax account attributable to
such Unit (determined after making all allocations described in this
Section 7(b)) shall be eliminated.
(B) Each Partner who redeems Units of a given series (including Units
redeemed as of the end of the last day of such fiscal year) shall be
allocated such series' share of Trading Capital Gain, if any, up to the
amount of the excess, if any, of the aggregate amount received in respect
of such Units (before taking into account any early redemption charges)
over the aggregate tax accounts for such Partner's redeemed Units
(determined after making the allocations described in Sections 7(b)(2) and
7(b)(3), but prior to making the allocations described in this Section
7(b)(4)(B)) allocable to such Units (a "Positive Excess"). In the event
the series' share of Trading Capital Gain is less than the aggregate amount
of Trading Capital Gain to be allocated pursuant to the first sentence of
this Section 7(b)(4)(B), the series' share of Trading Capital Gain shall be
allocated among all such redeeming Partners in the ratio which each such
Partner's Positive Excess bears to the aggregate Positive Excess of all
such Partners.
(C) The series' share of Trading Capital Gain remaining after the
allocation described in Section 7(b)(4)(B) shall be allocated among all
Partners who hold Units in such series outstanding as of the end of the
applicable fiscal year (other than Units redeemed as of the end of the last
day of such fiscal year) equally among such Units.
(D) Each Partner who redeems Units of a given series (including Units
redeemed as of the end of the last day of such fiscal year) shall be
allocated such series' share of Trading Capital Loss, if any, up to the
excess of the aggregate tax accounts for such Partner's redeemed Units
(determined after making the allocations described in Sections 7(b)(2) and
7(b)(3), but prior to making the allocations described in this Section
7(b)(4)(D)) over the aggregate amount received in respect of such Units
(before taking into account any early redemption charges) (a "Negative
Excess"). In the event the series' share of Trading Capital Loss is less
than the aggregate amount of Trading Capital Loss to be allocated pursuant
to the first sentence of this Section 7(b)(4)(D), the series' share of
Trading Capital Loss shall be allocated among all such redeeming Partners
in the ratio that each such Partner's Negative Excess bears to the
aggregate Negative Excess of all such Partners.
(E) The series' share of Trading Capital Loss remaining after the
allocation described in Section 7(b)(4)(D) shall be allocated among all
Partners who hold Units in such series outstanding as of the end of the
applicable fiscal year (other than Units redeemed as of the end of the last
day of such fiscal year) equally among such Units.
(F) For purposes of this Section 7(b), "Capital Gain" or "Capital
Loss" shall mean gain or loss characterized as gain or loss from the sale
or exchange of a capital asset, by the Internal Revenue Code of 1986, as
amended (the "Code"), including, but not limited to, gain or loss required
to be taken into account pursuant to Sections 988 and 1256 thereof.
(G) The foregoing allocations shall be made separately in respect of
each series of Units as if each such series constituted a separate
partnership, irrespective of whether the same Partner owns Units of more
than one series. Without limiting the foregoing, Limited Partners who
redeem their Unit(s) in one series and invest in another shall be treated
no differently than Limited Partners making their initial investment in the
latter series.
(5) The allocation of profit and loss for federal income tax purposes
set forth herein is intended to allocate taxable profit and loss among Partners
generally in the ratio and to the extent that profit and loss are allocated to
such Partners so as to eliminate, to the extent possible, any disparity between
a Partner's capital account and his or her tax account, consistent with
principles set forth in Section 704 of the Code, including, without limitation,
a "Qualified Income Offset."
(6) The allocations of profit and loss to the Partners in respect of
the Units shall not exceed the allocations permitted under Subchapter K of the
Code, as determined by the General Partner, whose determination shall be
binding. For purposes of this Section 7(b), unless specified to the contrary,
Units redeemed as of the end of any month shall be considered outstanding as of
the end of such month.
LPA-5
<PAGE>
(c) Adjustments. The General Partner may adjust the allocations set
forth in Section 7(b), in the General Partner's discretion, if the General
Partner believes that doing so will achieve more equitable allocations or
allocations more consistent with the Code.
(d) Expenses. The General Partner paid $239,100 incurred as
organizational and initial offering costs in connection with the initial public
offering of Units, for which the General Partner is being reimbursed by the Fund
in equal monthly installments of $6,642 through October 31, 1997, as described
in the Prospectus; provided that in the event that the Fund dissolves at any
time prior to the end of such 36-month period, any remaining reimbursement
obligation of the Fund to the General Partner shall be extinguished. The
General Partner shall not be paid interest on any funds advanced for
organizational and initial offering costs.
The General Partner pays, without reimbursement, the selling
commissions and ongoing compensation relating to the offering of the Units.
The Fund shall not itself pay any advisory fees due to MLAM or any
other manager providing cash management services to the Fund. All such fees
shall be paid by Merrill Lynch Futures Inc., or, if Merrill Lynch Futures Inc.
does not do so, by the General Partner.
The Fund shall bear all of any taxes applicable to it.
The Fund shall pay to the General Partner Administrative Fees of
0.020833 of 1% of the Fund's month-end assets (0.25% annually), as described in
the Prospectus, and the General Partner shall pay all of the Fund's routine
legal, accounting and administrative expenses. None of the General Partner's
"overhead" expenses incurred in connection with the administration of the Fund
(including, but not limited to, salaries, rent and travel expenses) will be
charged to the Fund. Any goods and services provided to the Fund by the General
Partner shall be provided at rates and terms at least as favorable as those
which may be obtained from third parties in arm's-length negotiations. All of
the expenses which are for the Fund's account shall be billed directly to the
Fund. Appropriate reserves may be created, accrued and charged against Net
Assets for contingent liabilities, if any, as of the date any such contingent
liability becomes known to the General Partner. Such reserves shall reduce Net
Asset Value for all purposes. Reserves may, in circumstances in which the
General Partner believes it to be appropriate to do so, be established in
respect of one or more but less than all series of Units.
(e) Limited Liability of Limited Partners. Each Unit, when purchased
in accordance with this Limited Partnership Agreement, shall, except as
otherwise provided by law, be fully paid and nonassessable. Any provisions of
this Limited Partnership Agreement to the contrary notwithstanding, except as
otherwise provided by law, no Limited Partner shall be liable for Fund
obligations in excess of the capital contributed by such Limited Partner, plus
his or her share of undistributed profits and assets.
(f) Return of Capital Contributions. No Partner or subsequent
assignee shall have any right to demand the return of his or her capital
contribution or any profits added thereto, except through redeeming Units as
provided in Section 11 or upon dissolution of the Fund, in each case as provided
herein. In no event shall a Partner or subsequent assignee be entitled to
demand or receive any property from the Fund other than cash.
8. Management of the Fund.
(a) General. The General Partner, to the exclusion of all Limited
Partners, shall control, conduct and manage the business of the Fund as well as
of the Trading Partnership, and have full authority to retain brokers, dealers,
advisors, cash management advisors and other service providers on their behalf.
The General Partner shall execute various documents on behalf of the Fund and
the Partners pursuant to powers of attorney and supervise the liquidation of the
Fund if an event causing dissolution of the Fund occurs.
The General Partner may in furtherance of the business of the Fund
cause the Fund to buy, sell, hold or otherwise acquire or dispose of
commodities, futures contracts and options traded on exchanges or otherwise,
arbitrage positions, repurchase agreements, debt securities, deposit accounts
and similar instruments and other assets, as well as cause the Fund's trading to
be limited to only certain of the foregoing instruments. The General Partner is
specifically authorized to enter into, on behalf of the Fund and the Trading
Partnership, (A) the Investment Advisory Contract with MLAM, pursuant to which
MLAM manages the available assets of the Fund and the Trading Partnership
pursuant to the investment parameters established by the General Partner (in its
capacity as respective general partner of each of the Fund and Trading
Partnership), and the Customer Agreement with Merrill Lynch Futures Inc., which
receives futures Brokerage Commissions from the Trading Partnership, and pays
MLAM's cash management fees for services rendered to the Fund and the Trading
Partnership as described in the Prospectus, and (B) the cash management
arrangements as described under "Use of Proceeds and Cash Management Income"
arrangements as described in the Prospectus.
LPA-6
<PAGE>
Effective January 1, 1996, a portion of the Fund's Brokerage
Commissions, in the amount of 0.25 of 1% per annum of the Fund's average month-
end assets committed to trading, was recharacterized as Administrative Fees
payable directly to the General Partner -- the Fund hereby agreeing to make such
payments -- and, accordingly, the Fund's Brokerage Commissions have been
correspondingly reduced from 9.5% to 9.25% of the Fund's average month-end
assets committed to trading. Effective January 1, 1996, such Brokerage
Commissions will be reduced from 9.25% to 8.75%.
The General Partner may engage, and compensate on behalf of the Fund
from funds of the Fund, or agree to share profits and losses with, such persons,
firms or corporations, including (except as described in this Limited
Partnership Agreement) the General Partner and any affiliated person or entity,
as the General Partner in its sole judgment shall deem advisable for the conduct
and operation of the business of the Fund; provided, that no such arrangement
shall allow Brokerage Commissions paid by the Fund in excess of the amount
described in the Prospectus or as permitted under applicable North American
Securities Administrators Association, Inc. Guidelines for the Registration of
Commodity Pool Programs (the "NASAA Guidelines") in effect as of the date of the
Prospectus (i.e., 80% of the published retail rate plus pit brokerage fees, or
14% annually -- including pit brokerage and F/X Desk service fees -- of average
Fund Net Assets, excluding Fund Net Assets not directly related to trading
activity), whichever is higher. The General Partner is hereby specifically
authorized to enter into, on behalf of the Fund and/or the Trading Partnership,
the Advisory Agreements, the Investment Advisory Contract, the Guarantee
Agreement and the Selling Agreement as referred to in the Prospectus. The
Fund's Brokerage Commissions will not be increased during the period in which
redemption charges are in effect with respect to any series of Units, unless
such charges are waived or the series to which redemption charges are still
applicable are not subject to such increase. The sum of the Fund's Brokerage
Commissions and Administrative Fee may not be increased without prior written
notice to Limited Partners within sufficient time for the exercise of their
redemption rights. Such notification shall contain a description of Limited
Partners' voting and redemption rights and a description of any material effect
of such increases. The sum of the Fund's Brokerage Commissions and
Administrative Fees, taken together, may not be increased above an annual level
of 9.5% of the average month-end assets committed to trading without the
unanimous consent of all Limited Partners.
The General Partner may at any time and without the consent of any
Partners of the Fund admit persons acquiring any series of Units as Limited
Partners of the Fund.
The General Partner may take such other actions on behalf of the Fund
as it deems necessary or desirable to manage the business of the Fund, including
without limitation all actions in connection with the future issuance of Units
of different series.
In addition to any specific contract or agreement described herein,
the Fund, either directly through the Trading Partnership or together with the
Trading Partnership, may enter into any other contracts or agreements
specifically described in or contemplated by the Prospectus without any further
act, approval or vote of the Limited Partners, notwithstanding any other
provisions of this Limited Partnership Agreement, the Act or any applicable law,
rule or regulations.
(b) Fiduciary Duties. The General Partner shall be under a fiduciary
duty to conduct the affairs of the Fund in the best interests of the Fund. The
Limited Partners will under no circumstances be deemed to have contracted away
the fiduciary obligations owed them by the General Partner under the common law.
The General Partner's fiduciary duty includes, among other things, the
safekeeping of all Fund funds and assets and the use thereof for the benefit of
the Fund, all as described under "Use of Proceeds and Cash Management Income" in
the Prospectus. The General Partner shall at all times act with integrity and
good faith and exercise due diligence in all activities relating to the conduct
of the business of the Fund and in resolving conflicts of interest. The Fund's
brokerage arrangements shall be non-exclusive, and the Brokerage Commissions
paid by the Fund shall be competitive. The Fund shall seek the best price and
services available for its commodity transactions.
(c) Loans; Investments. The Fund shall make no loans to any party,
and the funds of the Fund will not be commingled with the funds of any other
person or entity (deposit of funds with a commodity broker, securities dealer,
clearinghouse or forward dealer or entering into joint ventures or partnerships
shall not be deemed to constitute "commingling" for these purposes). The
General Partner shall make no loans to the Fund unless approved by the Limited
Partners in accordance with Section 17(a) of this Limited Partnership Agreement.
If the General Partner (or an affiliate, as in the case of the interim loans
made to the Fund by MLF to cover the Fund by MLF to cover the Fund's losses on
foreign transactions, as described under "Use of Proceeds and Cash Management
Income" in the Prospectus) makes a loan to the Fund, the General Partner shall
not receive interest in excess of its interest costs, nor may the General
Partner receive interest in excess of the amounts which would be charged the
Fund (without reference to the General Partner's financial resources or
guarantees) by unrelated banks on comparable loans for the same purpose. The
General Partner shall not receive "points" or other financing charges or fees
regardless of the amount. The Fund shall not invest in any debt instruments
other than Treasury securities, securities issued by U.S. government agencies or
instrumentalities, other CFTC-authorized investments and foreign sovereign debt
instruments acquired in connection with the Trading Partnership's
LPA-7
<PAGE>
trading of foreign futures and options, and shall not invest in any equity
security (other than as a limited partner in the Trading Partnership) without
prior notice to all Limited Partners.
(d) Certain Conflicts of Interest Prohibited. No person or entity
may receive, directly or indirectly, any advisory, management or incentive fees,
or any profit-sharing allocation from joint ventures, partnerships or similar
arrangements in which the Fund participates, for investment advice or
management, who shares or participates in any commodity Brokerage Commissions;
no broker may pay, directly or indirectly, rebates or give-ups to any trading
advisor or manager or to the General Partner or any of their respective
affiliates; and such prohibitions may not be circumvented by any reciprocal
business arrangements. No trading advisor for the Fund shall be affiliated with
Merrill Lynch Futures Inc., the General Partner or any of their respective
affiliates (this prohibition shall not preclude (i) the General Partner from
retaining a trading advisor for which the General Partner provides
administrative services or (ii) MLAM from providing cash management services to
the Fund, provided that MLAM's fees are paid either by Merrill Lynch Futures
Inc. or by the General Partner, and that MLAM does not execute principal
transactions for the account of either the Fund or the Trading Partnership
through any Merrill Lynch affiliate).
(e) Certain Contracts. The maximum period covered by any contract
entered into by the Fund, except for the various provisions of the Selling
Agreement which survive the final closing of the sale of the Units, shall not
exceed one year. Any agreements between the Fund and the General Partner or any
affiliate of the General Partner shall be terminable by the Fund upon no more
than 60 days' written notice. All sales of Units in the United States will be
conducted by registered brokers.
(f) Trading Advisors. All trading advisors for the Fund must meet
the NASAA Guidelines' minimum experience requirement.
The General Partner shall reimburse the Fund for any advisory or other
fees (including Profit Shares) paid by the Fund to any trading advisor over the
course of any fiscal year, to the extent that such fees exceed the 6% annual
management fees and the 15% quarterly incentive fees (calculating New Trading
Profit, as defined in the Prospectus, after all expenses and without including
interest income or any yield enhancement return) contemplated by the NASAA
Guidelines during such year. Any such reimbursement shall be made on a present
value basis, fully compensating the Fund for having made payments at any time
during the year which would not otherwise have been due from it. The General
Partner shall disclose any such reimbursement in the next Annual Report
delivered to Limited Partners.
(g) Other Activities. The General Partner is engaged, and may in the
future engage, in other business activities and shall not be required to refrain
from any other activity nor forego any profits from any such activity, whether
or not in competition with the Fund. Limited Partners may similarly engage in
any such other business activities. The General Partner shall devote to the Fund
such time as the General Partner may deem advisable to conduct the Fund's
business and affairs.
(h) Tax Matters Partner. The General Partner is hereby authorized to
perform all other duties imposed by Sections 6221 through 6232 of the Code on
the General Partner as the "tax matters partner" of the Fund.
The General Partner may, in its discretion, make a mixed straddle
account election on behalf of the Trading Partnership.
(i) The Trading Partnership. The General Partner shall not permit
the Fund to undertake any debts or obligations other than as set forth herein,
including without limitation pursuant to Section 16(e). The General Partner
further covenants and agrees that as general partner of the Trading Partnership,
the General Partner will not permit the Trading Partnership (A) to engage in any
activities or incur any obligations except in respect of the Trading
Partnership's speculative futures and forward trading on behalf of the Fund or
(B) to enter into any brokerage, F/X or other agreement or undertaking, unless
all other parties to such agreement explicitly acknowledge and agree that (i)
they will in no event seek to assert, other than pursuant to and to the extent
of the Fund's undertaking set forth in Section 16(e), that the Fund or any of
its assets is in any respects subject to any debts of or claims against the
Trading Partnership, either through "piercing the corporate veil," "substantive
consolidation" or any other theory, and (ii) they will take no action and
institute no action or proceeding seeking to adjudicate the Trading Partnership
a bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, trustee, custodian or other similar official for the Trading
Partnership or for any substantial part of its property.
The General Partner shall ensure that (i) the Fund is at all times the
sole limited partner of the Trading Partnership and (ii) the General Partner is
at all times the sole general partner of the Trading Partnership and at all
times controls the Trading Partnership, by virtue of the Fund's equity ownership
of the Trading Partnership and the General
LPA-8
<PAGE>
Partner's serving as sole general partner of both the Fund and the Trading
Partnership -- the intent of the parties being that the Trading Partnership
should function solely as a conduit for the Fund's own trading activities and
not as any form of investment by the Fund.
The General Partner, as general partner of the Trading Partnership,
will cause the Trading Partnership to comply with all provisions of the NASAA
Guidelines.
The General Partner is, by way of greater certainty and not by way of
limitation, specifically authorized as general partner of the Fund and the
Trading Partnership to retain the General Partner's affiliate, MLAM, to provide
cash management services to the Fund and the Trading Partnership and to instruct
and authorize Merrill Lynch Futures Inc. to pay the cash management fees due to
MLAM from the futures Brokerage Commissions received by Merrill Lynch Futures
Inc. from the Trading Partnership. In the event that Merrill Lynch Futures Inc.
does not pay MLAM's fees, the General Partner will do so without reimbursement
from either the Fund or the Trading Partnership.
(j) "Pyramiding" Prohibited. The Fund is prohibited from employing
the trading technique commonly known as "pyramiding," and will not permit the
Trading Partnership to employ any such technique. A trading manager or advisor
of the Fund taking into account the Fund's open trade equity on existing
positions in determining generally whether to acquire additional commodity
positions on behalf of the Fund will not be considered to constitute
"pyramiding."
9. Audits and Reports to Limited Partners.
The Fund books shall be audited annually by an independent certified
public accountant. The Fund will use its best efforts to cause each Limited
Partner to receive (i) within ninety (90), but in no event later than one
hundred twenty (120), days after the close of each fiscal year certified
financial statements of the Fund for the fiscal year then ended, (ii) within
ninety (90) days of the end of each fiscal year (but in no event later than
March 15 of each year) such tax information relating to the Fund as is necessary
for a Limited Partner to complete his or her federal income tax return and (iii)
such other annual and monthly information as the Commodity Futures Trading
Commission may by regulation require. The General Partner shall include in the
annual reports sent to Limited Partners an approximate estimate (calculated as
accurately as may be reasonably practicable) of the round-turn equivalent
Brokerage Commission rate paid by the Trading Partnership during the preceding
year. Limited Partners or their duly authorized representatives may inspect the
Fund books and records, for any purpose reasonably related to such Limited
Partners' interest as limited partners in the Fund during normal business hours
upon reasonable written notice to the General Partner. Copies of such records
may be made upon payment of reasonable reproduction costs for any purpose
reasonably related to such Limited Partner's interest as a limited partner in
the Fund and, upon request, shall be sent to any Limited Partner upon payment of
reasonable reproduction and mailing costs.
The General Partner shall calculate the approximate Net Asset Value
per Unit of each series on a daily basis and furnish such information upon
request to any Limited Partner.
The General Partner will send written notice to each Limited Partner
within seven (7) days of any decline in the aggregate Net Asset Value
attributable to any series of Units held by such Limited Partner or in the Net
Asset Value per Unit of any such series to 50% or less of such Net Asset Value
as of the previous month-end. Any such notice shall contain a description of
Limited Partners' voting rights.
The General Partner shall maintain and preserve all Fund records for a
period of not less than six (6) years after such records are created or after
the event to which such records relate (whichever is later).
Not by way of qualifying the General Partner's obligations under
Section 8(a) to ensure that the Fund's Brokerage Commissions are competitive,
but rather as a means of providing additional information to the Limited
Partners, the General Partner will, with the assistance of the Fund's commodity
broker, make an annual review of the commodity brokerage arrangements applicable
to the Fund (including the commodity brokerage arrangements applicable to any
subsidiary entity, such as the Trading Partnership, through which the Fund
trades). In connection with such review, the General Partner will ascertain, to
the extent practicable, the commodity brokerage rates charged to other major
commodity pools whose trading and operations are, in the opinion of the General
Partner, comparable to those of the Fund in order to assess whether the rates
charged the Fund are competitive in light of the services it receives. If, as a
result of such review, the General Partner determines that such rates are not
competitive in light of the services provided to the Fund, the General Partner
will notify the Limited Partners, setting forth the rates charged to the Fund
and several funds which are, in the General Partner's opinion, comparable to the
Fund. The General Partner shall also conduct a similar review of the Fund's
forward trading arrangements.
In addition to the undertakings in the preceding paragraph, the Fund
will seek the best price and services available in its commodity brokerage
transactions. All brokerage transactions will be effected at competitive rates.
Brokerage fees may not exceed the cap set forth in Section 8(a). The General
Partner will annually review rates to guarantee that the criteria of this
paragraph is followed. The General Partner may not rely solely on the rates
charged by other major commodity pools to make its determinations.
LPA-9
<PAGE>
Each Limited Partner expressly agrees that he or she will not assign,
transfer or dispose of, by gift or otherwise, any of his or her Units or all or
any part of his or her right, title and interest in the capital or profits of
the Fund in violation of any applicable federal or state securities laws or
without giving written notice to the General Partner. No assignment, transfer
or disposition by an assignee of Units or of all or any part of his or her
right, title and interest in the capital or profits of the Fund shall be
effective against the Fund or the General Partner until the General Partner
receives written notice of the assignment; and the General Partner shall not be
required to give any assignee any rights hereunder prior to receipt of such
notice. The General Partner may, in its sole discretion, waive any such notice.
No such assignee, except with the consent of the General Partner, which consent
may be withheld in its sole and absolute discretion, may become a substituted
Limited Partner, nor will the estate or any beneficiary of a deceased Limited
Partner or assignee have any right to withdraw or receive assets from the Fund
except by redemption as provided in Section 11 or upon dissolution of the Fund.
Each Limited Partner agrees that with the consent of the General Partner any
assignee may become a substituted Limited Partner without need of any further
act or approval of any Limited Partner. If the General Partner withholds
consent, an assignee shall not become a substituted Limited Partner, and shall
not have any of the rights of a Limited Partner, except that the assignee shall
be entitled to receive that share of capital and profits (including the right to
receive any payments due under the ML&Co. Guarantee Agreement in respect of his
or her Units) and shall have that right of redemption and those rights upon
dissolution to which his or her assignor would otherwise have been entitled. No
assignment, transfer or disposition of Units shall be effective against the Fund
or the General Partner until the first day of the month succeeding the month in
which the General Partner receives notice of such assignment, transfer or
disposition.
11. Redemptions; Distributions.
A Limited Partner, the General Partner to the extent that it owns
Units or any assignee of Units of whom the General Partner has received written
notice as described above, may redeem all or any of his or her Units (a
"redemption"), effective as of the close of business (as determined by the
General Partner) on the last business day of any month, provided, that (i) all
liabilities, contingent or otherwise, of the Fund (including the Fund's
allocable share of the liabilities, contingent or otherwise, of any entities,
such as the Trading Partnership, in which the Fund invests), except any
liability to Partners on account of their capital contributions, have been paid
or there remains property of the Fund sufficient to pay them and (ii) the
General Partner shall have timely received a request for redemption.
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.
If a Limited Partner redeems Units during or as of the end of a
calendar quarter, and subscribes as of the date of redemption to the new series
of Units to be issued immediately following such quarter, any otherwise
applicable 3% charge is waived to the extent that the redemption proceeds are so
reinvested. The Units acquired upon reinvestment are, however, subject to a 3%
redemption charge until the end of the twelfth full month after their issuance.
Financial Consultants receive no initial production credits on new
Units purchased with the proceeds of Units redeemed during or as of the end of
the preceding quarter (whether or not the 3% redemption charge was waived with
respect to the Units redeemed as described us the preceding paragraphs).
However, the 2% ongoing production credits, described above, will begin, to the
extent that the redemption proceeds are reinvested, in the thirteenth month
after the sale of the Units redeemed, not in the thirteenth month after
reinvestment.
Redemption charges shall not apply to distributions.
Requests for redemption must be received by the General Partner at
least ten (10) calendar days, or such lesser period as shall be acceptable to
the General Partner, in advance of the requested effective date of redemption.
Such requests need not be in writing so long as the Limited Partner has a
Merrill Lynch customer securities account. If a redeeming Limited Partner no
longer has a Merrill Lynch customer securities account, requests for redemption
must be submitted in writing and with the signature guaranteed (not notarized;
guaranteed) by a member firm of the National Association of Securities Dealers,
Inc.
The General Partner may waive any of the foregoing charges or
restrictions on redemptions in the General Partner's discretion, and may declare
additional redemption dates upon notice to the Limited Partners as well as to
those assignees of whom the General Partner has received notice as described
above.
Payment will be made within ten (10) business days after the month-end
of redemption, except that under special circumstances, including, but not
limited to, inability to liquidate commodity positions as of a redemption date
or default or delay in payments due the Trading Partnership or the Fund from
commodity brokers, banks or other persons or entities, the Fund may in turn
delay payment to Partners or assignees requesting redemption of their Units of
the
LPA-10
<PAGE>
proportionate part of the Net Asset Value of such Units equal to the
proportionate part of the Fund's aggregate Net Asset Value allocable to all
series of Units being redeemed, and represented by the sums which are the
subject of such default or delay.
The General Partner may require a Limited Partner to redeem all or a
portion of such Partner's Units if the General Partner considers doing so to be
desirable for the protection of the Fund, and will do so to the extent the
General Partner deems appropriate or necessary to prevent the Fund or any series
of Units considered individually from being deemed to hold "plan assets" within
the meaning of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), or the Code, with respect to any "employee benefit plan" as defined
in and subject to ERISA or with respect to any "plan" as defined in Section 4975
of the Code.
The General Partner may, in its discretion, establish "Special
Redemption Dates" in respect of one or more series of Units as a means of
implementing "stop loss" or similar policies. "Special Redemption Dates" may
require the suspension of all trading and the liquidation of all open positions
held with respect to such series.
The General Partner may -- but shall be under no obligation whatsoever
(and does not presently intend) to -- make any distributions in respect of the
Units. Any such distributions would be made pro rata to all outstanding series
of Units and would not reduce the $100 minimum Net Asset Value per Unit
guaranteed to investors as of the Principal Assurance Date for their series of
Units, as described in the Prospectus.
12. Offering of Units.
The General Partner on behalf of the Fund shall (i) cause to be filed
such Prospectus Supplements and amended Registration Statements as the General
Partner may deem advisable, with the Securities and Exchange Commission for the
ongoing registration of the continuous public offering of Units, (ii) use its
best efforts to maintain the qualification of the Units for sale under the
securities laws of such States of the United States or other jurisdictions as
the General Partner shall deem advisable and (iii) take such action with respect
to the matters described in (i) and (ii) as the General Partner shall deem
advisable or necessary.
The General Partner shall not accept any subscriptions for Units if
doing so would cause the Fund, or any series of Units considered individually,
to have "plan assets" status under ERISA. If an ERISA subscriber has its
subscription reduced in order to avoid "plan assets" status, such subscriber
shall be entitled to rescind its subscription in its entirety even though
subscriptions are otherwise irrevocable.
13. Continuous Offering; Additional Offerings.
The General Partner may, in its discretion, continue the ongoing
offering of Units contemplated by the Prospectus as well as make additional
public or private offerings of Units, provided that doing so does not dilute
existing Limited Partners' economic interest in the Fund or cause the ongoing
offering of the Units (unless otherwise discontinued) not to constitute a
"continuous offering" within the meaning of applicable Securities and Exchange
Commission rules. No Limited Partner shall have any preemptive, preferential or
other rights with respect to the issuance or sale of any additional Units, other
than as set forth in the preceding sentence.
The General Partner intends to continue to offer the series of Units
on continuous basis throughout each calendar quarter, the sales of each series
to take place as of the beginning of the immediately following calendar quarter;
provided that, unless otherwise expressly required by law, the assets
attributable to each such series shall under no circumstances be subject to
being used in any respect to satisfy or discharge any debt or obligation of any
other such series.
The General Partner may terminate (subject to the General Partner's
discretion to reopen) but not suspend the offering of Units.
Each additional series of Units issued hereunder must comply with the
NASAA Guidelines in the same manner and to the same extent as the initial series
of Units issued hereunder.
14. Special Power of Attorney.
Each Limited Partner by his or her execution of this Limited
Partnership Agreement does hereby irrevocably constitute and appoint the General
Partner and each officer of the General Partner, with power of substitution, as
his or her true and lawful attorney-in-fact, in his or her name, place and
stead, to execute, acknowledge, swear to (and deliver as may be appropriate) on
his or her behalf and file and record in the appropriate public offices and
publish (as may in the reasonable judgment of the General Partner be required by
law): (i) this Limited Partnership Agreement, including any amendments and/or
restatements hereto duly adopted as provided herein; (ii) certificates of
limited partnership in
LPA-11
<PAGE>
various jurisdictions, and amendments and/or restatements thereto, and of
assumed name or of doing business under a fictitious name with respect to the
Fund; (iii) all conveyances and other instruments which the General Partner
deems appropriate to qualify or continue the Fund in the State of Delaware and
the jurisdictions in which the Fund may conduct business, or which may be
required to be filed by the Fund or the Partners under the laws of any
jurisdiction or under any amendments or successor statutes to the Act, to
reflect the dissolution or termination of the Fund or the Fund being governed by
any amendments or successor statutes to the Act or to reorganize or refile the
Fund in a different jurisdiction; and (iv) to file, prosecute, defend, settle or
compromise litigation, claims or arbitrations on behalf of the Fund. The Power
of Attorney granted herein shall be irrevocable, deemed to be a power coupled
with an interest (including, without limitation, the interest of the other
Partners in the General Partner being able to rely on the General Partner's
authority to act as contemplated by this Section 14) and shall survive and shall
not be affected by the subsequent incapacity, disability or death of a Limited
Partner.
15. Withdrawal of a Partner.
The Fund shall be dissolved upon the withdrawal, dissolution, admitted
or court-decreed insolvency or removal of the General Partner, or any other
event that causes the General Partner to cease to be a general partner under the
Act, unless the Fund is continued pursuant to the terms of Section 4. In
addition, the General Partner may withdraw from the Fund, without any breach of
this Limited Partnership Agreement, at any time upon one hundred and twenty
(120) days' written notice by first class mail, postage prepaid, to each Limited
Partner and assignee of whom the General Partner has notice. If the General
Partner withdraws as general partner and the Fund's business is continued, the
withdrawing General Partner shall pay all expenses incurred as a result of its
withdrawal.
The General Partner may not assign its general partner interest or its
obligation to direct the management or trading of the Fund's or the Trading
Partnership's assets without the consent of each Limited Partner. The General
Partner will notify all Limited Partners of any change in the principals of the
General Partner.
The death, incompetency, withdrawal, insolvency or dissolution of a
Limited Partner or any other event that causes a Limited Partner to cease to be
a limited partner of the Fund shall not terminate or dissolve the Fund, and a
Limited Partner, his or her estate, custodian or personal representative shall
have no right to redeem, receive proceeds from or value such Limited Partner's
interest in the Fund except as provided in Section 11 hereof and upon
dissolution of the Fund. Each Limited Partner expressly agrees that in the
event of his or her death, he or she waives on behalf of himself or herself and
his or her estate, and directs the legal representatives of his or her estate
and any person interested therein to waive, the furnishing of any inventory,
accounting or appraisal of the assets of the Fund and any right to an audit or
examination of the books of the Fund. Nothing in this Section 15 shall,
however, waive any right given elsewhere in this Limited Partnership Agreement
for a Limited Partner to be informed of the Net Asset Value of his or her Units,
to receive periodic reports, audited financial statements and other information
from the General Partner or the Fund or to redeem or transfer Units.
16. Standard of Liability; Indemnification.
(a) Standard of Liability for the General Partner. The General
Partner and its Affiliates, as defined below, shall have no liability to the
Fund or to any Partner for any loss suffered by the Fund which arises out of any
action or inaction of the General Partner or its Affiliates if the General
Partner or such Affiliates, in good faith, determined that such course of
conduct was in the best interests of the Fund, and such course of conduct did
not constitute negligence or misconduct by the General Partner or its
Affiliates.
(b) Indemnification of the General Partner by the Fund. To the
fullest extent permitted by law, subject to this Section 16, the General Partner
and its Affiliates, shall be indemnified by the Fund against any losses,
judgments, liabilities, expenses and amounts paid in settlement of any claims
sustained by them in connection with the Fund; provided that such claims were
not the result of negligence or misconduct on the part of the General Partner or
its Affiliates, and the General Partner or such Affiliates, in good faith,
determined that such conduct was in the best interests of the Fund; and provided
further that Affiliates of the General Partner shall be entitled to
indemnification only for losses incurred by such Affiliates in performing the
duties of the General Partner and acting wholly within the scope of the
authority of the General Partner.
Notwithstanding anything to the contrary contained in the preceding
two paragraphs, the General Partner and its Affiliates and any persons acting as
selling agent for the Units shall not be indemnified for any losses, liabilities
or expenses arising from or out of an alleged violation of federal or state
securities laws unless (1) there has been a successful adjudication on the
merits of each count involving alleged securities law violations as to the
particular indemnitee and the court approves indemnification of the litigation
LPA-12
<PAGE>
costs, or (2) such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction as to the particular indemnitee and the court
approves indemnification of the litigation costs, or (3) a court of competent
jurisdiction approves a settlement of the claims against a particular indemnitee
and finds that indemnification of the settlement and related costs should be
made.
In any claim for indemnification for federal or state securities law
violations, the party seeking indemnification shall place before the court the
position of the Securities and Exchange Commission, the Massachusetts Securities
Division, the Pennsylvania Securities Commission, the Tennessee Securities
Division, the Texas Securities Board, and any other state or applicable
regulatory authority with respect to the issue of indemnification for securities
law violations.
The Fund shall not incur the cost of that portion of any insurance
which insures any party against any liability the indemnification of which is
herein prohibited.
For the purposes of this Section 16, the term "Affiliates" shall mean
any person acting on behalf of or performing services on behalf of the Fund who:
(1) directly or indirectly controls, is controlled by, or is under common
control with the General Partner; or (2) owns or controls 10% or more of the
outstanding voting securities of the General Partner; or (3) is an officer or
director of the General Partner; or (4) if the General Partner is an officer,
director, partner or trustee, is any entity for which the General Partner acts
in any such capacity.
Advances from Fund funds to the General Partner and its Affiliates for
legal expenses and other costs incurred as a result of any legal action
initiated against the General Partner by a Limited Partner are prohibited.
Advances from Fund funds to the General Partner and its Affiliates for
legal expenses and other costs incurred as a result of a legal action will be
made only if the following three conditions are satisfied: (1) the legal action
relates to the performance of duties or services by the General Partner or its
Affiliates on behalf of the Fund; (2) the legal action is initiated by a third
party who is not a Limited Partner; and (3) the General Partner or its
Affiliates undertake to repay the advanced funds, with interest from the initial
date of such advance, to the Fund in cases in which they would not be entitled
to indemnification under this Section 16.
In no event shall any indemnity or exculpation provided for herein be
more favorable to the General Partner or any Affiliate than that contemplated by
the NASAA Guidelines as in effect on the date of this Limited Partnership
Agreement.
In no event shall any indemnification permitted by this Section 16(b)
be made by the Fund unless all provisions of this Section for the payment of
indemnification have been complied with in all respects. Furthermore, it shall
be a precondition of any such indemnification that the Fund receive a
determination of qualified independent legal counsel in a written opinion that
the party which seeks to be indemnified hereunder has met the applicable
standard of conduct set forth herein. Receipt of any such opinion shall not,
however, in itself, entitle any such party to indemnification unless
indemnification is otherwise proper hereunder. Any indemnification payable by
the Fund hereunder shall be made only as provided in the specific case.
In no event shall any indemnification obligations of the Fund under
this Section 16(b) subject a Limited Partner to any liability in excess of that
contemplated by Section 7(e).
(c) Indemnification of the Fund by the Partners. In the event that
the Fund is made a party to any claim, dispute or litigation or otherwise incurs
any loss or expense as a result of or in connection with any Partner's
activities, obligations or liabilities unrelated to the Fund's business, such
Partner shall indemnify and reimburse the Fund for all loss or expense incurred,
including reasonable attorneys' fees.
The General Partner shall indemnify and hold the Fund harmless from
all loss or expense which the Fund may incur (including, without limitation, any
indemnity payments) as a result of (i) the differences between MLAM's standard
of liability under the Investment Advisory Contract and MLIP's standard of
liability as set forth herein or (ii) the differences between Merrill Lynch,
Pierce, Fenner & Smith Incorporated's standard of liability under the Custody
Agreement and MLIP's standard of liability as set forth herein.
(d) Series Default Indemnification of the Partners by the General
Partner. In addition, and not by way of limitation of the provisions of the
second paragraph Section 13, the General Partner shall indemnify and hold
harmless each Limited Partner against all loss or expense incurred by the Units
of any series held by such Limited Partner, which loss or expense is properly
attributable to trading losses or expenses allocable to any other series of
Units.
LPA-13
<PAGE>
(e) Undertaking to Make Additional Payments to the Trading
Partnership. The Fund hereby agrees and undertakes that it will pay to the
Trading Partnership or the Trading Partnership's estate, or to the Trading
Partnership's brokers and dealers, an amount equal to the excess, if any,
between the amount which the Trading Partnership commits, at the direction of
the General Partner and on behalf of the Fund, to the Trading Advisors for
trading and the amount of assets invested in the Trading Partnership by the
Fund. In the event that the Fund is obligated to make any payments pursuant to
this undertaking, it shall allocate such payments among the different series of
Units pro rata based on the respective excesses between the respective amounts
committed to trading in respect of each such series by the Trading Partnership
and the amount of assets invested in the Trading Partnership and attributable to
such series. The General Partner is authorized and directed to provide in the
Trading Partnership's brokerage and dealer agreements that the amounts agreed to
be paid to the Fund hereunder may be debited directly from the Fund's account
without need of giving any advance notice of any such debit to the Fund, in the
same manner as a "safekeeping account."
17. Amendments; Meetings.
(a) Amendments with Consent of the General Partner. If at any time
during the term of the Fund the General Partner shall deem it necessary or
desirable to amend this Limited Partnership Agreement, the General Partner may
proceed to do so, provided that such amendment shall be effective only if
embodied in an instrument approved by the General Partner and, subject to the
immediately following sentence, by the holders of Units representing more than
fifty percent (50%) of the aggregate number of Units then owned by the Limited
Partners. In any such vote, Units of different series shall vote separately,
and the approving majority vote of each such series must be obtained for
approval unless a series is not adversely affected by such amendment, in which
case such series shall not have the right to vote with respect to such
amendment. No meeting procedure or specified notice period is required in the
case of amendments made with the consent of the General Partner, mere receipt of
an adequate number of unrevoked written consents being sufficient. The General
Partner may amend this Limited Partnership Agreement without the consent of the
Limited Partners in order (i) to clarify any clerical inaccuracy or ambiguity or
reconcile any inconsistency (including any inconsistency between this Limited
Partnership Agreement and the Prospectus), (ii) to effect the intent of the
allocations proposed herein to the maximum extent possible in the event of a
change in the Code or the interpretations thereof affecting such allocations,
(iii) to attempt to ensure that the Fund is not treated as an association
taxable as a corporation for federal income tax purposes, (iv) to qualify or
maintain the qualification of the Fund as a limited partnership in any
jurisdiction, (v) to delete or add any provision of or to this Limited
Partnership Agreement required to be deleted or added by the Staff of the
Commodity Futures Trading Commission, the Securities and Exchange Commission or
any other federal agency or any state "Blue Sky" official or similar official or
in order to opt to be governed by any amendment or successor statute to the Act,
(vi) to better insulate the different series of Units from the risk of paying
the debts of any other such series, (vii) to make any amendment to this Limited
Partnership Agreement which the General Partner deems advisable provided that
such amendment is not adverse to the Limited Partners, or that is required by
law, (viii) to make any amendment that is appropriate or necessary, in the
opinion of the General Partner, to prevent the Fund or the General Partner or
its directors, officers or controlling persons from in any manner being
subjected to the provisions of the Investment Company Act of 1940, as amended,
and (ix) to make any amendment that is appropriate or necessary, in the opinion
of the General Partner, to avoid causing the assets of the Fund, or of any
series of Units considered individually, from constituting assets of any
"employee benefit plan" as defined in and subject to ERISA, or a "plan" as
defined in and subject to Section 4975 of the Code.
(b) Amendments and Actions without Consent of the General Partner. In
any vote called by the General Partner or by a Limited Partner pursuant to
Section 17(c), upon the affirmative vote (which may be in person or by proxy) of
the holders of Units representing more than fifty percent (50%) of the aggregate
number of Units of each series then owned by Limited Partners, the following
actions may be taken, irrespective of whether the General Partner concurs: (i)
this Limited Partnership Agreement may be amended, provided, however, that
approval of all Limited Partners holding Units of any series shall be required
in the case of amendments changing or altering this Section 17, extending the
term of the Fund, or materially changing the Fund's basic investment policies or
structure; in addition, reduction of the capital account of any Limited Partner
or assignee or modification of the percentage of profits, losses or
distributions to which a Limited Partner or an assignee is entitled hereunder
shall not be effected by any amendment or supplement to this Limited Partnership
Agreement without such Limited Partner's or assignee's written consent; (ii) the
Fund may be dissolved; (iii) the General Partner may be removed and, as of the
time of such removal, the General Partner may be replaced; (iv) a new general
partner or general partners may be elected if the General Partner withdraws from
the Fund, provided that such election takes place prior to or as of the time the
General Partner withdraws; (v) the sale of all or substantially all of the
assets of the Fund may be approved; and (vi) any contract with the General
Partner or any affiliate thereof may be disapproved of and, as a result,
terminated upon sixty (60) days' notice. In any such vote, Units of different
series shall vote separately, and the approving majority vote of each such
series must be obtained for approval, except that in the case of clause (i)
above, the approval of a series of Units need not be obtained if such series is
not adversely affected by the proposed amendment to this Limited Partnership
Agreement.
(c) Meetings; Other. Any Limited Partner, upon written request
addressed to the General Partner, shall be entitled to obtain from the General
Partner, upon payment, in advance, of reasonable reproduction and mailing
LPA-14
<PAGE>
costs, a list of the names and addresses of record of all Limited Partners and
the number of Units of each series held by each (which shall be mailed by the
General Partner to the Limited Partner within ten (10) days of the receipt of
the request). Upon receipt of a written proposal, signed by Limited Partners
owning Units representing at least ten percent (10%) of the aggregate number of
Units then owned by Limited Partners of any series, that a meeting of the Fund
(or of any or all series of Units) be called to vote upon any matter upon which
the Limited Partners may vote pursuant to this Limited Partnership Agreement,
the General Partner shall, by written notice to each Limited Partner of record
mailed within fifteen (15) days after such receipt, call a meeting of the Fund
(or of such series of Units). Such meeting shall be held at least thirty (30)
but not more than sixty (60) days after the mailing of such notice, and such
notice shall specify the date of, a reasonable place and time for, and the
purpose of such meeting.
The General Partner may not restrict the voting rights of Limited
Partners except as set forth herein.
In the event that the General Partner or the Limited Partners vote to
amend this Limited Partnership Agreement in any material respect, the amendment
will not become effective prior to all Limited Partners having an opportunity to
redeem their Units.
18. Governing Law.
THE VALIDITY AND CONSTRUCTION OF THIS LIMITED PARTNERSHIP AGREEMENT
SHALL BE DETERMINED AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, INCLUDING
SPECIFICALLY THE ACT (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW);
PROVIDED, HOWEVER, CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR STATE
SECURITIES LAW SHALL NOT BE GOVERNED BY THIS SECTION 18.
19. Miscellaneous.
(a) Compliance with the Investment Advisers Act of 1940. No
provision of this Limited Partnership Agreement shall be deemed, nor does any
such provision purport, to waive compliance with the Investment Advisers Act of
1940, as amended.
(b) Notices. All notices under this Limited Partnership Agreement
shall be in writing and shall be effective upon personal delivery, or if sent by
first class mail, postage prepaid, addressed to the last known address of the
party to whom such notice is to be given, upon the deposit of such notice in the
United States mails.
(c) Binding Effect. This Limited Partnership Agreement shall inure
to and be binding upon all of the parties, their successors and assigns,
custodians, estates, heirs and personal representatives. For purposes of
determining the rights of any Partner or assignee hereunder, the Fund and the
General Partner may rely upon the Fund records as to who are Partners and
assignees, and all Partners and assignees agree that their rights shall be
determined and they shall be bound thereby.
(d) Captions. Captions in no way define, limit, extend or describe
the scope of this Limited Partnership Agreement nor the effect of any of its
provisions. Any reference to "persons" in this Limited Partnership Agreement
shall also be deemed to include entities, unless the context otherwise requires.
LPA-15
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Limited
Partnership Agreement as of the day and year first above written.
GENERAL PARTNER: LIMITED PARTNERS:
MERRILL LYNCH INVESTMENT PARTNERS INC. All Limited Partners now and hereafter
admitted as limited partners of the
Fund pursuant to Powers of Attorney
now or hereafter executed in favor of,
By /s/ John R. Frawley, Jr. and delivered to, the General Partner.
------------------------------------
John R. Frawley, Jr.
President and Chief Executive Officer
MERRILL LYNCH INVESTMENT PARTNERS INC.
By /s/ John R. Frawley, Jr.
-----------------------------------
John R. Frawley, Jr.
President and Chief Executive
Officer
LPA-16
<PAGE>
EXHIBIT B
ML PRINCIPAL PROTECTION L.P.
AMENDED
FORM OF
GUARANTEE AGREEMENT
GUARANTEE AGREEMENT made as of the 1st day of January, 1997 between
MERRILL LYNCH & CO., INC., a Delaware corporation ("ML&Co."), and ML PRINCIPAL
PROTECTION L.P., a Delaware limited Partnership (the "Fund").
1. ML&Co. shall make, on April 30, 2002 and as of each calendar
quarter-end thereafter (the "Principal Assurance Dates") (subject to adjustment
by up to one month in the discretion of MERRILL LYNCH INVESTMENT PARTNERS INC.
("MLIP")), sufficient payments to the Fund so that the Net Asset Value per Unit
of each series of Units, as of the Principal Assurance Date for such series,
which is available for distribution to Limited Partners (after adjustment for
all liabilities of the Fund to third parties) will be at least $100, as of such
date. Such $100 minimum Net Asset Value per Unit shall not be reduced by the
distributions, if any, made by the Fund in respect of the series of Units in
question, which distributions are entirely in the discretion of the General
Partner.
2. This Guarantee Agreement -- which supports a corresponding
obligation of MLIP, an indirect wholly-owned subsidiary of ML&Co. -- will remain
in effect unless the Fund is dissolved or MLIP is removed as the general partner
of the Fund, in each case with the approving vote of the Limited Partners --
upon either of which events this Guarantee Agreement will terminate without any
payment obligation on behalf of ML&Co.
3. ML&Co. acknowledges and agrees that its risk under this Guarantee
Agreement is in no respect mitigated by the fact that the Fund will not trade
directly, but rather through a wholly-owned subsidiary limited partnership, ML
PRINCIPAL PROTECTION TRADING L.P. (the "Trading Partnership"), because the Fund
will commit to pay losses and expenses incurred by the Trading Partnership in
amounts in excess of the capital invested in the Trading Partnership by the
Fund.
4. ML&Co. agrees that in the event it is required to make one or more
payments under this Guarantee Agreement, any such payment will be made without
recourse to the Fund, the Trading Partnership, MLIP, Merrill Lynch Futures Inc.
or any Limited Partner.
5. ML&Co. shall be obligated to make payments under this Guarantee
Agreement only on the Principal Assurance Date for each series and only in
respect of Units of such series outstanding on such date (including Units then
being redeemed).
6. This Guarantee Agreement is an agreement between ML&Co. and the
Fund; investors in the Fund are in no respects parties hereto.
7. This Guarantee Agreement will terminate as to each series of Units
on the Principal Assurance Date for such series, upon payment by ML&Co. of any
amounts due hereunder at such time. No series, except as of the Principal
Assurance Date for such series, shall have any rights hereunder.
8. This Guarantee Agreement shall inure to the benefit of the Fund
only in respect of each series of Units as of its Principal Assurance Date, not
in respect of Units of other series.
9. THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES
OF CONFLICTS OF LAW.
B-1
<PAGE>
IN WITNESS WHEREOF, this Guarantee Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
MERRILL LYNCH & CO., INC.
By:______________________________
Title:___________________________
ML PRINCIPAL PROTECTION L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(GENERAL PARTNER)
By:_____________________________
Title:__________________________
B-2
<PAGE>
EXHIBIT C
ML PRINCIPAL PROTECTION L.P.
____________________
SUBSCRIPTION REQUIREMENTS
By executing a Subscription Agreement and Power of Attorney Signature
Page for Limited Partnership Units ("Units") of ML PRINCIPAL PROTECTION L.P.
(the "Fund"), each purchaser ("Purchaser") of Units irrevocably subscribes for
Units at the price of $100 per Unit ($97 per Unit in the case of officers and
employees of Merrill Lynch & Co., Inc. and its affiliates) as described in the
Fund's Prospectus dated April __, 1997, as the same may from time to time be
supplemented and amended (the "Prospectus"). EXCEPT AS SET FORTH BELOW IN THE
CASE OF MAINE AND MICHIGAN RESIDENTS, INVESTORS WHO ARE CURRENTLY LIMITED
PARTNERS IN THE FUND NEED NOT EXECUTE AN ADDITIONAL SUBSCRIPTION AGREEMENT AND
POWER OF ATTORNEY SIGNATURE PAGE IN ORDER TO PURCHASE ADDITIONAL UNITS.
HOWEVER, SUCH PERSONS MUST RECEIVE A CURRENT PROSPECTUS FOR THE FUND AND
CAREFULLY REVIEW THIS EXHIBIT C -- SUBSCRIPTION REQUIREMENTS AS WELL AS THE
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY. SUCH PERSONS' FINANCIAL
CONSULTANTS WILL BE REQUIRED TO RECONFIRM THAT SUCH PERSONS CONTINUE TO MEET THE
SUITABILITY REQUIREMENTS SET FORTH BOTH HEREIN AND THEREIN IN ORDER FOR SUCH
PERSONS TO BE ABLE TO PURCHASE ADDITIONAL UNITS.
By executing a Subscription Agreement and Power of Attorney Signature
Page, Purchaser has thereby authorized Merrill Lynch, Pierce, Fenner & Smith
Incorporated or one of its affiliates (the "Selling Agent") to debit Purchaser's
customer securities account in the full amount of Purchaser's subscription. If
Purchaser's Subscription Agreement and Power of Attorney Signature Page is
accepted, Purchaser agrees to contribute Purchaser's subscription to the Fund
and to be bound by the terms of the Fund's Third Amended and Restated Limited
Partnership Agreement, included in the Prospectus as Exhibit A. Purchaser
agrees to reimburse the Fund and Merrill Lynch Investment Partners Inc.
("MLIP"), the general partner of the Fund, for any expense or loss incurred by
either as a result of the cancellation of Purchaser's Units due to a failure of
the Purchaser to deliver good funds in the full amount of the subscription price
of the Units subscribed for by Purchaser.
FOREIGN PERSONS AND ENTITIES NOT OTHERWISE SUBJECT TO
U.S. FEDERAL INCOME TAX MAY NOT INVEST IN THE UNITS.
Representations and Warranties
As an inducement to MLIP to accept this subscription, Purchaser, by
executing and delivering Purchaser's Subscription Agreement and Power of
Attorney Signature Page, represents and warrants to the Fund, ML Principal
Protection Plus Trading L.P., MLIP, Merrill Lynch Futures Inc. and the Selling
Agent as follows:
(a) Purchaser is of legal age to execute the Subscription Agreement
and Power of Attorney Signature Page and is legally competent to do so.
Purchaser acknowledges that Purchaser has received (prior to any direct or
indirect solicitation of Purchaser's investment) a copy of the Prospectus--
together with the applicable Prospectus Supplement, and summary financial
information relating to the Fund current within 60 calendar days -- dated
within nine months of the date as of which Purchaser subscribed to purchase
Units.
(b) All information that Purchaser has heretofore furnished to MLIP
or that is set forth in the Subscription Agreement and Power of Attorney
submitted by Purchaser is correct and complete as of the date of such
Subscription Agreement and Power of Attorney, and if there should be any
change in such information prior to acceptance of Purchaser's subscription,
Purchaser will immediately furnish such revised or corrected information to
MLIP.
(c) Unless (d) below is applicable, Purchaser's subscription is made
with Purchaser's funds for Purchaser's own account and not as trustee,
custodian or nominee for another.
(d) The subscription, if made as custodian for a minor, is a gift
Purchaser has made to such minor and is not made with such minor's funds
or, if not a gift, the representations as to net worth and annual income
set forth below apply only to such minor.
(e) If Purchaser is subscribing in a representative capacity,
Purchaser has full power and authority to purchase the Units and enter into
and be bound by the Subscription Agreement and Power of Attorney on behalf
of the entity for which Purchaser is acquiring the Units, and such entity
has full right and power to purchase such
SR-1
<PAGE>
Units and enter into and be bound by the Subscription Agreement and Power
of Attorney and to become a Limited Partner pursuant to the Limited
Partnership Agreement.
(f) If Purchaser is subscribing in a representative capacity, the
entity for which the Purchaser is acquiring Units either is not required to
be registered with the Commodity Futures Trading Commission ("CFTC") or to
be a member of the National Futures Association ("NFA") or, if required to
be so, is duly registered with the CFTC and is a member in good standing of
the NFA. It is an NFA requirement that MLIP attempt to verify that any
entity which seeks to purchase Units be duly registered with the CFTC and a
member in good standing of the NFA, if required. Purchaser agrees to
supply MLIP with such information as MLIP may reasonably request in order
to attempt such verification.
(g) If Purchaser is acting on behalf of an "employee benefit plan,"
as defined in and subject to the Employee Retirement Income Security Act of
1974, as amended ("ERISA"), or any "plan," as defined in Section 4975 of
the Internal Revenue Code, as amended (the "Code") (the "Plan"), Purchaser,
in addition to the representations and warranties set forth above, hereby
further represents and warrants as, or on behalf of, the fiduciary of the
Plan responsible for purchasing the Units (the "Plan Fiduciary") that: the
Plan Fiduciary has considered an investment in the Units in light of the
risks relating thereto; the Plan Fiduciary has determined that, in view of
such considerations, an investment in the Fund is consistent with the Plan
Fiduciary's responsibilities under ERISA; the Plan's investment in the Fund
does not violate and is not otherwise inconsistent with the terms of any
legal document constituting the Plan or any trust agreement thereunder; and
the Plan Fiduciary (i) is responsible for the decision to invest in the
Units, including the determination that such investment is consistent with
the requirement imposed by Section 404 of ERISA that Plan investments be
diversified so as to minimize the risks of large losses, (ii) is
independent of MLIP, Merrill Lynch Asset Management, L.P., any Trading
Advisor, the Selling Agent and any of their respective affiliates, (iii) is
qualified to make such investment decision, and (iv) none of MLIP, Merrill
Lynch Asset Management, L.P., any Trading Advisor, the Selling Agent or any
of their respective affiliates or any of their respective employees either:
(a) has investment discretion with respect to the investment of assets of
the Plan; (b) has authority or responsibility to or regularly gives
investment advice with respect to the Plan for a fee and pursuant to an
agreement or understanding that such advice will serve as a primary basis
for investment decisions with respect to the Plan and that such advice will
be based on the particular investment needs of the Plan; or (c) is an
employer maintaining or contributing to the Plan. The undersigned will, at
the request of MLIP, furnish MLIP with such information as MLIP may
reasonably require to establish that the purchase of the Units by the Plan
does not violate any provision of ERISA or the Code, including, without
limitation, those provisions relating to "prohibited transactions" by
"parties in interest" or "disqualified persons."
THE REPRESENTATIONS AND STATEMENTS SET FORTH HEREIN MAY BE ASSERTED IN
THE DEFENSE OF THE FUND, ML PRINCIPAL PROTECTION TRADING L.P., MLIP, MERRILL
LYNCH FUTURES INC., THE SELLING AGENT, MLAM, OR OTHERS IN ANY LITIGATION OR
OTHER PROCEEDING.
Investor Suitability
PURCHASER UNDERSTANDS THAT THE PURCHASE OF UNITS MAY BE MADE ONLY BY
PERSONS WHO, AT A MINIMUM, HAVE (I) A NET WORTH OF AT LEAST $150,000 (EXCLUSIVE
OF HOME, FURNISHINGS AND AUTOMOBILES) OR (II) AN ANNUAL GROSS INCOME OF AT LEAST
$45,000 AND A NET WORTH OF AT LEAST $45,000 (EXCLUSIVE OF HOME, FURNISHINGS AND
AUTOMOBILES). RESIDENTS OF THE FOLLOWING STATES MUST MEET THE REQUIREMENTS SET
FORTH BELOW ("NET WORTH" FOR SUCH PURPOSES IS IN ALL CASES IS CALCULATED
EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES). IN ADDITION, PURCHASER MAY NOT
INVEST MORE THAN 10% OF PURCHASER'S READILY MARKETABLE ASSETS IN THE FUND.
1. Arizona -- Net worth of at least $225,000 or a net worth of at
least $60,000 and an annual income of at least $60,000.
2. California -- Net worth of at least $100,000 and an annual income
of at least $50,000.
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.
SR-2
<PAGE>
6. Massachusetts -- Net worth of at least $250,000 or a net worth of
at least $100,000 and an annual income of at least $100,000.
7. Michigan -- Net worth of at least $225,000 or a net worth of at
least $60,000 and taxable income in 1996 of at least $60,000. ALL MICHIGAN
RESIDENTS, INCLUDING EXISTING LIMITED PARTNERS IN THE FUND SUBSCRIBING FOR
ADDITIONAL UNITS, MUST EXECUTE A SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGE.
8. Minnesota -- Net worth of at least $250,000 or a net worth of at
least $100,000 and an annual income of at least $100,000.
9. Mississippi -- Net worth of at least $225,000 or a net worth of at
least $60,000 and an annual income of at least $60,000.
10. Missouri -- Net worth of at least $250,000 or a net worth of at
least $100,000 and an annual income of at least $100,000.
11. New Hampshire -- Net worth of at least $250,000 or a net worth of
at least $125,000 and an annual income of at least $50,000.
12. North Carolina -- Net worth of at least $225,000 or a net worth of
at least $60,000 and an annual income of at least $60,000.
13. Oklahoma -- Net worth of at least $225,000 or a net worth of at
least $60,000 and an annual income of at least $60,000.
14. Oregon -- Net worth of at least $225,000 or a net worth of at
least $60,000 and an annual taxable income of at least $60,000.
15. Pennsylvania -- Net worth of at least $175,000 or a net worth of
at least $100,000 and an annual taxable income of at least $50,000 in the past
year and an expectation of the same in the current year.
16. South Carolina -- Net worth of at least $100,000 or a net income
in 1996 some portion of which was subject to maximum federal and state income
tax.
17. South Dakota -- Net worth of at least $250,000 or a net worth of
at least $100,000 and an annual income of at least $100,000.
18. Tennessee -- Net worth of at least $250,000 and gross income
during 1996 and an expectation of gross income during 1997 of at least $65,000
or a net worth of at least $500,000.
19. Texas -- Net worth of at least $250,000 or a net worth of at least
$100,000 and an annual taxable income of at least $100,000.
SR-3
<PAGE>
EXHIBIT D
ML PRINCIPAL PROTECTION L.P.
_______________________
SUBSCRIPTION INSTRUCTIONS
ANY PERSON CONSIDERING PURCHASING UNITS SHOULD CAREFULLY READ AND REVIEW THE
PROSPECTUS OF THE FUND DATED APRIL __, 1997 TOGETHER WITH THE CURRENT PROSPECTUS
SUPPLEMENT AND SUMMARY FINANCIAL INFORMATION RELATING TO THE FUND CURRENT WITHIN
60 CALENDAR DAYS WHICH ACCOMPANY THE PROSPECTUS.
The Units are speculative and involve a high degree of risk. No person
may invest more than 10% of his or her readily marketable assets in the Fund.
The Units are sold in separate series as of May 1, 1997 and as of the
beginning of each calendar quarter thereafter. The different series of Units
are each sold at $100 per Unit but over time come to have different Net Asset
Values.
Foreign persons and entities not otherwise subject to U.S. federal
income tax may not invest in the Fund.
EXISTING LIMITED PARTNERS WHO ARE SUBSCRIBING FOR ADDITIONAL UNITS
(EXCEPT MAINE AND MICHIGAN RESIDENTS) NEED NOT COMPLETE AN ADDITIONAL
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE BUT MUST RECEIVE A
CURRENT PROSPECTUS FOR THE FUND (TOGETHER WITH THE CURRENT PROSPECTUS SUPPLEMENT
AND SUMMARY FINANCIAL INFORMATION RELATING TO THE FUND CURRENT WITHIN 60
CALENDAR DAYS) AND CAREFULLY REVIEW THE SUBSCRIPTION AGREEMENT AND POWER OF
ATTORNEY AS WELL AS EXHIBIT C -- SUBSCRIPTION REQUIREMENTS. SUCH LIMITED
PARTNERS' FINANCIAL CONSULTANTS MUST RECONFIRM THAT SUCH LIMITED PARTNERS
CONTINUE TO MEET THE STANDARDS AND REQUIREMENTS SET FORTH HEREIN AND IN EXHIBIT
C -- SUBSCRIPTION REQUIREMENTS IN ORDER FOR SUCH LIMITED PARTNERS TO BE ELIGIBLE
TO PURCHASE ADDITIONAL UNITS.
ANY ADDITIONAL UNITS PURCHASED BY AN EXISTING LIMITED PARTNER WILL BE
A DIFFERENT SERIES OF UNITS THAN THE UNITS ALREADY OWNED BY SUCH LIMITED
PARTNER.
_______________________
FILL IN ALL OF THE BOXES ON PAGES SA-5 and SA-6; TYPE OR PRINT USING BLACK
INK ONLY AND ONE LETTER OR NUMBER PER BOX, AS FOLLOWS:
<TABLE>
<S> <C>
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.
</TABLE>
The Signature Page is self-explanatory for most types of investors;
however, we have provided specific instructions for the following types of
investors:
Trust -- Enter the Trust name on line 8 and the trustee's name on line
9, followed by "Trustee." If applicable, use line 10 for the custodian's name,
followed by "Custodian." Be sure to furnish the Taxpayer ID Number of the Trust.
Custodian Under Uniform Gifts to Minors Act -- Complete line 6 with
the name of minor followed by "UGMA." On line 9 enter the custodian's name,
followed by "Custodian." Be sure to furnish the minor's Social Security Number.
SA-(i)
<PAGE>
Partnership or Corporation -- The Partnership or Corporation name is
required on line 8. Enter an partner's or officer's name on line 9. Be sure to
furnish the Taxpayer ID Number of the Partnership or Corporation.
<TABLE>
<S> <C>
Items 6, 7, 8 -- Enter the exact name in which the Units are to be held.
Items 9, 10 -- Complete information as required.
Item 11 -- The investor(s) (EXCEPT CURRENT LIMITED PARTNERS IN THE
PARTNERSHIP OTHER THAN RESIDENTS OF MAINE OR MICHIGAN) must
execute the Subscription Agreement and Power of Attorney
Signature Page (Item 11, Page SA-6) and review the
representation relating to backup withholding tax underneath
the signature and telephone number lines in Item 11.
Item 12 -- Financial Consultants must complete the information
required.
</TABLE>
THE SPECIMEN COPY OF THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE
PAGE (PAGES SA-3 AND SA-4) SHOULD NOT BE EXECUTED.
Instructions to Financial Consultants:
THE EXECUTED SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE MUST BE
RETAINED IN THE BRANCH OFFICE.
RECONFIRMATIONS (I.E., SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGES EXECUTED BY FINANCIAL CONSULTANTS) OR ANOTHER FORM OF WRITTEN
RECONFIRMATION APPROVED BY THE BRANCH OFFICE REGARDING THE CONTINUING
SUITABILITY OF EXISTING LIMITED PARTNERS SUBSCRIBING FOR ADDITIONAL UNITS MUST
ALSO BE RETAINED IN THE BRANCH OFFICE.
SA-(ii)
<PAGE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
_______________
BY EXECUTING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SUBSCRIBERS ARE NOT WAIVING ANY RIGHTS UNDER THE SECURITIES ACT
OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934
_______________
SUBSCRIPTION AGREEMENT AND
POWER OF ATTORNEY
ML PRINCIPAL PROTECTION L.P.
c/o Merrill Lynch Investment Partners Inc.
General Partner
Merrill Lynch World Headquarters
Sixth Floor
South Tower
World Financial Center
New York, New York 10080-6106
Dear Sirs:
1. Subscription for Units. I hereby subscribe for the number of
limited partnership units ("Units") in ML PRINCIPAL PROTECTION L.P. (the "Fund")
set forth in the Subscription Agreement and Power of Attorney Signature Page
attached hereto; a minimum of 50 Units ($5,000) must be purchased -- 10 Units if
I am an existing Limited Partner; any greater number of whole Units may be
purchased. The purchase price is $100 per Unit-- $97 per Unit if I am an
officer or employee of Merrill Lynch & Co., Inc. or any of its affiliates. The
terms of the offering of the Units are described in the Prospectus of the Fund
dated April __, 1997, together with the accompanying Prospectus Supplement and
summary financial information relating to the Fund current within 60 days
(collectively, the "Prospectus," as the same may be from time to time amended).
Units are continuously offered during each calendar quarter, but generally are
sold only as of the beginning of the immediately following calendar quarter
(until such time as offering is discontinued). Units will also be sold as of
May 1, 1997. Concurrently with or prior to the delivery of this Subscription
Agreement and Power of Attorney, I have authorized Merrill Lynch, Pierce, Fenner
& Smith Incorporated (the "Selling Agent") to debit my customer securities
account in the amount of my subscription. I acknowledge that I must have my
subscription payment in such account on but not before the settlement date for
my purchase of Units. Such settlement date will not be more than five business
days after the purchase date for any Units, which will occur as of the first day
of the calendar quarter immediately following the quarter during which the
subscription is accepted. My Merrill Lynch Financial Consultant will inform me
of such settlement date, on which my account will be debited and the amount so
debited transmitted, in the form of a Selling Agent check or wire transfer,
directly to the Escrow Agent for the Fund pending investment in the Units, as
described in the Prospectus. MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP"),
the General Partner of the Fund, may, in its sole and absolute discretion,
accept or reject this subscription in whole or in part, except that, if this
subscription is to be accepted in part only, it shall not be reduced to an
amount less than 50 Units (10 Units if I am an existing Limited Partner). All
subscriptions once submitted are irrevocable. All Units are offered subject to
prior sale.
Foreign persons and entities which are not otherwise subject to
U.S. federal income tax may not invest in the Fund.
2. Representations and Warranties of Subscriber. I have received
the Prospectus together with a current Prospectus Supplement and summary
financial information relating to the Fund current within 60 calendar days. I
understand that by submitting this Subscription Agreement and Power of Attorney
I am making the representations and warranties set forth in Exhibit C --
Subscription Requirements in the Prospectus, including, without limitation,
those representations and warranties relating to my net worth (exclusive of
home, furnishings and automobiles), annual income and readily marketable assets.
3. Power of Attorney. In connection with my subscription for Units,
I do hereby irrevocably constitute and appoint MLIP, and its successors and
assigns, as my true and lawful Attorney-in-Fact, with full power of
substitution, in my name, place and stead, to (i) file, prosecute, defend,
settle or compromise litigation, claims or arbitrations on behalf of the Fund
and (ii) make, execute, sign, acknowledge, swear to, deliver, record and file
any documents or instruments
SA-1
<PAGE>
which may be considered necessary or desirable by MLIP to carry out fully the
provisions of the Limited Partnership Agreement of the Fund, including, without
limitation, by executing said Limited Partnership Agreement itself, and by
effecting all amendments permitted by the terms thereof. I acknowledge that the
other investors in the Fund are relying on MLIP's authority to act pursuant to
the Power of Attorney granted hereby. The Power of Attorney granted hereby shall
be deemed to be coupled with an interest, shall be irrevocable and shall
survive, and shall not be affected by, my subsequent death, incapacity,
disability, insolvency or dissolution or any delivery by me of an assignment of
the whole or any portion of my Units.
4. Irrevocability; Governing Law. I hereby acknowledge and agree
that I am not entitled to cancel, terminate or revoke this subscription or any
of my agreements hereunder after the Subscription Agreement and Power of
Attorney Signature Page attached hereto has been submitted (and not rejected),
and that this subscription and such agreements shall survive my death or
disability. THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SHALL BE GOVERNED
BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT
REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
SA-2
<PAGE>
<TABLE>
<C> <S>
SPECIMEN
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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
, 1997, and the accompanying Prospectus Supplement as well as summary
financial information current within 60 calendar days, including the Third
Amended and Restated Limited Partnership Agreement, the Subscription
Requirements and the Subscription Agreement and Power of Attorney set forth
therein, the terms of which govern the investment in the Units being
subscribed for hereby.
If the subscriber is a participant in a Merrill Lynch sponsored IRA,
Basic(TM) or SEP account and is purchasing Units for such an account, the
subscriber hereby acknowledges that:
1. An amount at least equal to the purchase price for the Units is in an
IRA, Basic(TM) or SEP account at Merrill Lynch, Pierce, Fenner & Smith
Incorporated;
2. The minimum value of all securities and funds in such IRA, Basic(TM) or
SEP account is $10,000;
3. The minimum subscription is 50 Units and the amount of this subscription
is no more than 50% of the value of the IRA, Basic(TM) or SEP account on
the subscription date; and
4. Each separate IRA, Basic(TM) or SEP account of the subscriber seeking to
purchase Units meets the above eligibility requirements.
<TABLE>
<S> <C> <C>
2[_][_][_][_][_][_][_][_] 3[_][_][_][_][_][_][_][_][_][_] 4[_][_][_] - [_][_][_][_][_]
Number of Units (minimum 50 Units; Total $ Amount (No. of Units X Merrill Lynch Account #
10 Units for existing Limited Partners $100; $97 for Merrill Lynch officers
subscribing for additional Units) and employees)
5 [_][_][_] - [_][_] - [_][_][_][_] [_][_] - [_][_][_][_][_][_][_]
Social Security Number or Taxpayer ID Number
Limited Partner Name
6[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Joint Partner Name
7[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
First Name M.I. Last Name
Partnership, Corporate or Trust Limited Partner Name
8 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Partner, Officer, Trustee, Beneficiary, Power of Attorney or Custodian under UGMA/UTMA
9 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Additional Information
10 [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Residence Address of Limited Partner (P.O. Box Numbers are Not Acceptable For Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_] [_][_][_][_][_][_][_][_][_][_]
Bldg. No. City State Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
Mailing Address of Limited Partner (If Other Than Residence Address)
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
[_] Check box if Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is custodian.
Name of Custodian, if Not Merrill Lynch
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Mailing Address of Custodian, Other Than Merrill Lynch
[_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_]
Street Number Street Name Apt. Number
[_][_][_][_][_] [_][_][_][_][_][_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_]
Bldg. No. P.O. Box No. City State
[_][_][_][_][_][_][_][_][_][_]
Zip Code
[_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_][_]
Country (If Other Than U.S.A.)
</TABLE>
SA-3
<PAGE>
EXECUTION COPY
________________________________________________________________________________
________________________________________________________________________________
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED)
- --------------------------------------------------------------------------------
11 FOR USE BY INVESTOR
X X
-------------------------------- -----------------------------------
Signature of Investor Date Signature of Joint Date
Investor (if any)
( ) - Subscription for the series of
-------------------------------- Units to be sold as of
Telephone Number of Investor
[insert date]
----------------------
EXECUTING AND DELIVERING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGE SHALL IN NO RESPECT BE DEEMED TO CONSTITUTE A WAIVER OF ANY
RIGHTS UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES EXCHANGE
ACT OF 1934. I ACKNOWLEDGE THAT I HAVE RECEIVED, IN ADDITION TO THE
PROSPECTUS DATED , 1997, THE PROSPECTUS SUPPLEMENT AND SUMMARY
FINANCIAL INFORMATION RELATING TO THE FUND CURRENT WITHIN 60 CALENDAR
DAYS.
I have checked the following box if I am subject to backup withholding
under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code:
[_]. Under the penalties of perjury, by signature above I hereby certify
that the Social Security Number or Taxpayer ID Number shown on the front of
this Subscription Agreement and Power of Attorney Signature Page next to my
name is my true, correct and complete Social Security Number or Taxpayer ID
Number and that the information given in the immediately preceding sentence
is true, correct and complete.
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
12 FINANCIAL CONSULTANT MUST SIGN
I have reasonable grounds to believe, based on information obtained from
the investor concerning his/her investment objectives, other investments,
financial situation and needs and any other information known by me, that
investment in the Fund is suitable for such investor in light of his/her
financial position, net worth and other suitability characteristics. I have
also informed the investor of the unlikelihood of a public trading market
developing for the Units.
The Financial Consultant MUST sign below in order to substantiate
compliance with Appendix F to Article 3, Section 34 of the NASD's Rules of
Fair Practice.
X
--------------------------------------------------------------------------
Financial Consultant Signature Date
Office Manager approval of Merrill Lynch sponsored retirement account
purchases.
X
--------------------------------------------------------------------------
Office Manager Signature Date
- --------------------------------------------------------------------------------
FOR OFFICE DATE RECEIVED COUNTRY CODE ADDITIONAL ORDER CONTROL NUMBER
USE ONLY [_][_][_][_][_][_] [_][_] [_] [_][_][_][_][_]
SA-4
<PAGE>
<TABLE>
<S> <C>
EXECUTION COPY
- ------------------------------------------------------------------------------------------------------------------------------------
1 Financial Consultant [_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_][_]
Name First M.I. Last Sub. Order Ref. #
Financial Consultant
Phone Number [_][_][_] - [_][_][_] - [_][_][_][_] Financial Consultant Number [_][_][_][_] Branch Wire Code [_][_][_]
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE
PLEASE PRINT OR TYPE. USE BLACK INK ONLY AND ONLY ONE CHARACTER PER BOX.
The investor named below, by execution and delivery of this Signature Page,
by payment of the purchase price for Limited Partnership Units in ML
Principal Protection L.P. and by authorizing Merrill Lynch, Pierce, Fenner &
Smith Incorporated to debit investor's customer securities account in the
amount set forth below, hereby subscribes for the purchase of Units at a
purchase price of $100 per Unit or $97 per Unit for officers and employees of
Merrill Lynch & Co., Inc. and its affiliates.
The named investor acknowledges receipt of the Prospectus of the Fund dated
, 1997, 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 , 1997, 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 Post-Effective
Amendment No. 2 to the Registration Statement. The following is an estimate of
such costs:
<TABLE>
<CAPTION>
Approximate
Amount
-----------
<S> <C>
Securities and Exchange Commission Registration Fee............ $ 8,621*
National Association of Securities Dealers, Inc. Filing Fee.... 3,000*
Printing Expenses.............................................. 125,000
Fees of Certified Public Accountants........................... 50,000
Blue Sky Expenses (Excluding Legal Fees)....................... 10,000
Fees of Counsel................................................ 100,000
Escrow Fees.................................................... 20,000
Miscellaneous Offering Costs................................... 33,379
--------
Total........................................................ $350,000
========
</TABLE>
_____________
*Fees marked with an asterisk are exact.
____________________
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 16 of the Third Amended and Restated Limited Partnership
Agreement (attached as Exhibit A to the Prospectus which forms a part of this
Registration Statement) provides for the indemnification of the General Partner,
certain of its affiliates and certain of its directors, officers and controlling
persons by the Registrant in certain circumstances for any loss suffered by the
Registrant which arises out of any action or inaction, if the party, in good
faith, determined that such course of conduct was in the best interest of the
Registrant and such conduct did not constitute negligence or misconduct.
In the Selling Agreement, each Trading Advisor has agreed to indemnify
each person who controls MLIP within the meaning of Section 15 of the Securities
Act of 1933 and each person who signed this Registration Statement or is a
director of MLIP against losses, claims, damages, liabilities or expenses
arising out of or based upon any untrue statement or omission or alleged untrue
statement or omission relating or with respect to such Trading Advisor or any
principal of such Trading Advisor or their operations, trading systems, methods
or performance, which was made in this Registration Statement, the Prospectus
included in this Registration Statement when declared effective, or in any
amendment or supplement thereto and furnished by or approved by such Trading
Advisor for inclusion therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents (unless otherwise indicated) are filed
herewith and made a part of this Registration Statement:
(a) Exhibits.
The following exhibits are filed herewith.
Exhibit
Number Description of Document
------ -----------------------
3.01 Third Amended and Restated Limited Partnership
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.
10.01 Amended Form of Merrill Lynch & Co., Inc.
Guarantee Agreement (included as Exhibit B to the
Prospectus).
23.01 Consent of Sidley & Austin (contained in their
opinion in Exhibit 5.01).
23.02 Consent of Deloitte & Touche.
27.01 Financial Data Schedule.
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Post-Effective Amendment
No. 1 to Registrant's Registration Statement on Form S-1 filed with the
Commission on January 28, 1997 (Reg. No. 333-7593).
Exhibit
Number Description of Document
------ -----------------------
10.01 Form of Amendment to the Customer Agreement
between the Trading Partnership and Merrill Lynch
Futures
10.02 Form of Subscription Agreement and Power of
Attorney (included as Exhibit D to the
Prospectus).
10.03 Form of Advisory Agreement among the Partnership,
Trading Partnership, General Partner and each
Trading Advisor.
10.04 Form of Consulting Agreement among the
Partnership, Trading Partnership, General Partner
and each Trading Advisor.
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Amendment No. 1 to
Registrant's Registration Statement on Form S-1 filed with the Commission on
August 27, 1996 (Reg. No. 333-7593).
S-2
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
1.01 Form of Selling Agreement among the Partnership,
(Amended) the Trading Partnership, the General Partner,
Merrill Lynch Futures, the Selling Agent and the
Trading Advisors.
1.02 Form of Amendment to the Selling Agreement among
the Partnership, the Trading Partnership, the
General Partner, Merrill Lynch Futures, the
Selling Agent and each additional Trading Advisor.
3.02(ii) Third Amended and Restated Limited Partnership
(Amended) Agreement of the Partnership (included as Exhibit
A to the Prospectus).
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Registrant's Registration
Statement on Form S-1, as filed with the Commission on July 3, 1996 (Reg. No.
333-7593) which also constituted Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form S-1 (Reg. No. 33-73914).
Exhibit
Number Description of Document
------ -----------------------
3.01(i) Amended and Restated Certificate of Limited
Partnership of the Partnership.
3.02(i) Amended and Restated Certificate of Limited
Partnership of the Trading Partnership.
3.03(ii) Second Amended and Restated Limited Partnership
Agreement of the Trading Partnership.
5.01(a) Opinion of Sidley & Austin relating to the
legality of the Units.
5.01(b) Opinion of Richards, Layton & Finger relating to
the legality of the Units.
8.01 Opinion of Sidley & Austin with respect to federal
income tax consequences.
10.01 Form of Advisory Agreement among the Partnership,
Trading Partnership, the General Partner and each
Trading Advisor.
10.02 Form of Consulting Agreement between Merrill Lynch
Futures and each Trading Advisor.
10.03 Form of Customer Agreement between the Trading
Partnership and Merrill Lynch Futures.
10.04 Form of Escrow Agreement among the Partnership,
the Escrow Agent, the Selling Agent and the
General Partner.
10.05 Merrill Lynch & Co., Inc. Guarantee Agreement
(included as Exhibit B to the Prospectus).
10.06 Form of Subscription Agreement and Power of
Attorney (included as Exhibit D to the
Prospectus).
10.07 Foreign Exchange Desk Service Agreement with
Amendment adding the Trading Partnership as a
party thereto.
S-3
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
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.
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:
S-4
<PAGE>
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)).
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.
S-5
<PAGE>
Exhibit
Number Description of Document
------ -----------------------
3.03(ii) Limited Partnership Agreement of the Trading
Partnership dated May 26, 1994.
3.04(ii) Form of Amended and Restated Limited Partnership
Agreement of the Trading Partnership.
10.01 Form of Advisory Agreement among the Partnership,
the Trading Partnership, (Amended) MLFIP and each
Trading Advisor.
10.02 Form of Consulting Agreement between Merrill
(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.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than
a 20 percent change in the maximum aggregate offering price set forth
in the "Calculation of Registration Fee" table in the effective
registration statement.
S-6
<PAGE>
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities under the Securities
Act of 1933 may be permitted to officers, directors or controlling persons of
the registrant pursuant to the provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by an officer,
director, or controlling person of the registrant in the successful defense of
any such action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Act and will be governed by the final adjudication of such
issue.
S-7
<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 21st day of
March 1997.
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>
JOHN R. FRAWLEY, JR. President, Chief Executive March 21, 1997
- -----------------------------------
John R. Frawley, Jr. Officer and Director
(Principal Executive Officer)
JAMES M. BERNARD Chief Financial Officer, March 21, 1997
- -----------------------------------
James M. Bernard Treasurer and Senior
Vice-President
(Principal Financial and
Accounting Officer)
JEFFREY F. CHANDOR Director March 21, 1997
- -----------------------------------
Jeffrey E. Chandor
ALLEN N. JONES Director March 21, 1997
- -----------------------------------
Allen N. Jones
</TABLE>
(Being principal executive officer, the principal financial and
accounting officer and a majority of the directors of Merrill Lynch Investment
Partners Inc.)
<TABLE>
<S> <C> <C>
Merrill Lynch Investment General Partner of Registrant March 21, 1997
Partners Inc.
By /s/ JOHN R. FRAWLEY, JR.
---------------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
</TABLE>
S-8
<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 21st day of
March, 1997.
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>
JOHN R. FRAWLEY, JR. President, Chief Executive March 21, 1997
- ------------------------------------
John R. Frawley, Jr. Officer and Director
(Principal Executive Officer)
JAMES M. BERNARD Chief Financial Officer, March 21, 1997
- ------------------------------------
James M. Bernard Treasurer and Senior
Vice-President
(Principal Financial and
Accounting Officer)
JEFFREY F. CHANDOR Director March 21, 1997
- ------------------------------------
Jeffrey F. Chandor
ALLEN N. JONES Director March 21, 1997
- ------------------------------------
Allen N. Jones
</TABLE>
(Being principal executive officer, the principal financial and
accounting officer and a majority of the directors of Merrill Lynch Investment
Partners Inc.)
<TABLE>
<S> <C> <C>
Merrill Lynch Investment General Partner of Registrant March 21, 1997
Partners Inc.
By /s/ JOHN R. FRAWLEY, JR.
---------------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
</TABLE>
S-9
<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1997
REGISTRATION NO. 333-7593
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
EXHIBITS
To
Post-Effective
Amendment No. 2
To
FORM S-1
REGISTRATION STATEMENT
Under
The Securities Act of 1933
____________________
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
ML PRINCIPAL PROTECTION TRADING L.P.
(formerly, ML Principal Protection Plus Trading L.P.)
(Rule 140 Co-Registrant)
================================================================================
<PAGE>
ML PRINCIPAL PROTECTION L.P.
ML PRINCIPAL PROTECTION TRADING L.P.
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
- ------- -----------------------
<S> <C>
3.01 Third Amended and Restated Limited Partnership 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.
10.01 Amended Form of Merrill Lynch & Co., Inc. Guarantee Agreement
(included as Exhibit B to the Prospectus).
23.01 Consent of Sidley & Austin (contained in their opinion in Exhibit
5.01).
23.02 Consent of Deloitte & Touche.
27.01 Financial Data Schedule.
</TABLE>
<PAGE>
EXHIBIT 5.01
[LETTERHEAD OF SIDLEY & AUSTIN]
March 25, 1997
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"), declared effective on
November 29, 1996, as amended by Post-Effective Amendment No. 1 thereto filed
with the Securities and Exchange Commission on or about January 28, 1997 and by
Post-Effective Amendment No. 2 thereto filed with the Securities and Exchange
Commission on or about March 25, 1997. Pursuant to Rule 429 under the
Securities Act, the form of prospectus set forth in the Registration Statement
(the "Prospectus") also relates to the Registration Statement on Form S-1
declared effective on July 14, 1994 (Registration No. 33-73914). Capitalized
terms not defined herein have the meanings specified in the Registration
Statement.
We are familiar with the proceedings to date with respect to the
proposed issuance and sale of the Units pursuant to the Prospectus and have
examined such records, documents and questions of law, and satisfied ourselves
as to such matters of fact, as we have considered relevant and necessary as a
basis for this opinion.
For purposes of rendering this opinion, we have assumed the
genuineness of all signatures, the legal capacity of natural persons, the
authenticity of all documents submitted to us as originals, the conformity to
originals of all documents submitted to us as certified or photostatic copies
and the authenticity of the original of such copies.
Based on the foregoing, we are of the opinion that:
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.
<PAGE>
SIDLEY & AUSTIN CHICAGO
Merrill Lynch Investment Partner Inc.
March 25, 1997
Page 2
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
March 25, 1997
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 Post-Effective Amendment No. 2 to the Registration
Statement on Form S-1 (Registration No. 333-7593), filed by ML Principal
Protection L.P. (the "Partnership") and ML Principal Protection Trading L.P.
(the "Trading Partnership") with the Securities and Exchange Commission under
the Securities Act of 1933 (the "Securities Act") on or about March 25, 1997.
Pursuant to Rule 429 under the Securities Act, the form of prospectus set forth
in the Registration Statement (the "Prospectus") also relates to the
Registration Statement on Form S-1 (Reg. No. 33-73914) declared effective on
July 14, 1994.
We have reviewed such data, documents, questions of law and fact and
other matters as we have deemed pertinent for the purpose of this opinion.
Based upon the foregoing, we hereby confirm our opinions expressed under the
caption "Federal Income Tax Consequences" in the Prospectus that: (i) each of
the Partnership and the Trading Partnership in which the Partnership will invest
will be taxed as a partnership for federal income tax purposes (assuming that
Merrill Lynch Investment Partners Inc. makes a capital contribution to the
Trading Partnership in at least the amount contemplated by the Prospectus);
(ii) each Partner will be required to report on his tax return his allocable
share of the Partnership's income, gains, losses, and deductions; (iii) based
upon the contemplated trading activities of the Trading Partnership, the Trading
Partnership should be treated as engaged in the conduct of a trade or business
for federal income tax purposes, and, as a result, the ordinary and necessary
business expenses incurred by
<PAGE>
SIDLEY & AUSTIN CHICAGO
Merrill Lynch Investment Partners Inc.
March 25, 1997
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 (iv)
based on the contemplated trading activities of the Trading Partnership and of
the Partnership, the income earned by the Partnership will not constitute
"unrelated business taxable income" under section 511 of the Code to employee
benefit plans and other tax-exempt entities which purchase Units; provided that
such Units purchased by such plans and entities are not "debt-financed" within
the meaning of Section 514 of the Code.
We also advise you that in our opinion the description set forth under
the caption "Federal Income Tax Consequences" in the Prospectus correctly
describes (subject to the uncertainties referred to therein) the material
aspects of the federal income tax treatment to United States individual
investors, as of the date hereof, of an investment in the Partnership.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the inclusion in the Prospectus of our opinion set
forth under the caption "Federal Income Tax Consequences."
Very truly yours,
SIDLEY & AUSTIN
<PAGE>
EXHIBIT 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No. 2 to the Registration
Statement No. 333-7593 of ML Principal Protection L.P. (formerly, ML Principal
Protection Plus L.P.) on Form S-1 of our report dated February 3, 1997 relating
to the consolidated financial statements of ML Principal Protection L.P. and of
our report dated January 31, 1997 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
March 24, 1997
New York, New York
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
consolidated statements of financial condition, income and changes in partners'
capital and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<CIK> 0000917259
<NAME> ML Principal Protection L.P.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 328
<SECURITIES> 72,815,648
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 81,694,682
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 81,694,682
<CURRENT-LIABILITIES> 2,082,851
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 78,843,285
<TOTAL-LIABILITY-AND-EQUITY> 81,694,682
<SALES> 0
<TOTAL-REVENUES> 13,187,029
<CGS> 0
<TOTAL-COSTS> 5,882,437
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 7,223,364
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,223,364
<EPS-PRIMARY> 9.57
<EPS-DILUTED> 9.57
</TABLE>
