<PAGE>
<TABLE>
<S> <C>
As filed with the Securities and Exchange Commission on August 4, 1998 Registration Nos. 333-_________
333-_____-01
==============================================================================================================
</TABLE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------------
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
ML PRINCIPAL PROTECTION TRADING L.P.
(formerly, ML Principal Protection Plus Trading L.P.)
(Rule 140 Co-Registrant)
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
13-3750642 (Registrant)
Delaware 6793 13-3775509(Co-Registrant)
(State of Organization) (Primary Standard Industrial (IRS Employer
Classification Code Number) Identification Number)
</TABLE>
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters
South Tower
World Financial Center
New York, New York 10080
(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
South Tower
World Financial Center
New York, New York 10080
(212) 236-4167
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
---------------------
Copies to:
David R. Sawyier
James B. Biery
Sidley & Austin
One First National Plaza
Chicago, Illinois 60603
---------------------
Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act of 1933 (the "Securities Act") check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the
following box and list the Securities Act registration statement number of
the earlier effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 426(d)
under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [_]
If delivery of the Prospectus is expected to be made pursuant to Rule
434, please check the following box. [_]
---------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until this Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- ----------------------------------------------------------------------------------------------------------------
Title of each Maximum Maximum
class of additional securities Amount being offering price aggregate Amount of
being registered registered per unit offering price registration fee
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Units of Limited Partnership Interest 3,000,000 Units $100 $300,000,000 $88,500*
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
* As of the date hereof, Registrant has $62,886,000 of registered but
unsold Units under Registrant's previous Registration Statement on Form S-1
(Registration No. 333-7593). This Registration Statement carries forward
the unsold balance of $62,886,000 of Units from Registration No. 333-7593
and registers an additional $237,114,000 of Units. 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, and the Registrant's Registration Statement on Form S-1
(Registration No. 333-7593) declared effective November 29, 1996.
<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell
or the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION - August 4, 1998
ML PRINCIPAL PROTECTION L.P.
$300,000,000
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 the month when trading began with respect to such Unit 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 generally sold as of the
beginning of each calendar quarter at $100 per Unit. As of July 1, 1998, 14
series of Units had been sold, the Fund's aggregate capitalization was $98.6
million, and the initial series of Units had recognized a cumulative rate of
return of 27.2% (approximately a 6.6% average compounded annualized return)
during 3 3/4 years of trading.
The minimum initial investment is 50 Units ($5,000); the minimum
investment for existing Limited Partners is 10 Units ($1,000). Any whole
number of Units over the minimum may be purchased.
Units may be redeemed as of the end of any calendar month, subject to
redemption charges, payable to MLIP through the end of the twenty-fourth
month after trading begins with respect to each series of Units. The
redemption charges on each series are 3% on Units redeemed on or before the
end of the twelfth, 1.5% on Units redeemed after the twelfth but on or before
the end of the eighteenth and 1% on Units redeemed after the end of the
eighteenth but on or before the end of the twenty-fourth month after trading
begins with respect to such series -- in each case, of the redemption date
Net Asset Value per Unit.
MLIP does not presently intend to make any distributions on the Units.
------------------------
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 5% 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 (the Time Horizon between
a Unit's issuance and its Principal Assurance Date) would be $78.35.
. The past performance of the Fund 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 85% rather than 100% 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 changes the leverage of any series of Units with a 5-year Time
Horizon, MLIP must make the same leverage changes with respect to all such
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. ML&Co. has never been required to make
any payment under a guarantee like that provided to that provided to the
Fund.
. 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% 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.
. Because of its unpredictable performance, there is no way to time an
investment in the Fund so as to invest during a favorable period.
. 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 12.
------------------------
SUBSCRIBERS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES
IN THEIR SUBSCRIPTION AGREEMENTS AND POWERS OF ATTORNEY.
------------------------
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED UPON THE ADEQUACY OR
ACCURACY OF THIS PROSPECTUS.
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. 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 August __, 1998
<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. 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.
Pending investment in the Fund as of the beginning of the
following quarter, subscription funds are held in escrow at The Bank of
New York (the "Escrow Agent") in New York City. Subscribers receive all
interest earned, and no fees or costs are assessed, on subscriptions while
held in escrow.
There is no minimum number of Units that must be sold as of the
beginning of any given calendar quarter for any Units then to be sold.
(2) See "Plan of Distribution -- Selling Agent Compensation"
at pages 54 and 55 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
$4 per Unit on all Units at the time of sale. No initial production
credits are payable on sales to officers and employees of ML&Co. and its
affiliates (collectively, "Merrill Lynch"). These officers and employees
purchase Units at $97 rather than $100 per Unit, with MLIP contributing
the difference to the Fund to avoid diluting 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 in which the related subscriptions are
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") 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 the 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 attribu table to each Unit committed to trading; 85% of the
capital attributable to each Unit sold under this Prospectus will
initially be committed to trading, which would result in annual ongoing
production credits of 1.7% of the average month-end Net Assets
attributable to such Units.
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 trading began with respect to the Units being
redeemed, rather than only beginning with the thirteenth month after
trading begins with respect to 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 being issued as of the beginning of the following
quarter, redemption charges are waived on the reinvested redemption
proceeds.
The Units acquired with redemption proceeds are subject to
redemption charges through the end of the twenty-fourth month after
trading begins with respect to such Units, just as in the case of any
other newly-issued Units.
_________________________
-i-
<PAGE>
REGULATORY NOTICES
------------------
THIS PROSPECTUS MUST BE ACCOMPANIED BY: (1) A PROSPECTUS
SUPPLEMENT CONTAINING CERTAIN CFTC-REQUIRED INFORMATION REGARDING THE
CURRENT ADVISORS; AND (2) SUMMARY FINANCIAL INFORMATION FOR THE FUND
CURRENT WITHIN 60 CALENDAR DAYS.
_________________________
NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO
GIVE ANY INFORMATION ABOUT THE FUND OR THE UNITS, OR TO MAKE ANY
REPRESENTATION CONCERNING THE FUND OR THE UNITS NOT CONTAINED IN THIS
PROSPECTUS OR THE ACCOMPANYING PROSPECTUS SUPPLEMENT AND SUMMARY FINANCIAL
INFORMATION, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, MLIP, MLAM,
MLF, MLPF&S, ANY TRADING ADVISOR OR ANY OTHER PERSON.
_________________________
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY TO
ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION MAY NOT LAWFULLY BE MADE.
_________________________
THE BOOKS AND RECORDS OF THE FUND ARE MAINTAINED AT ITS
PRINCIPAL OFFICE, C/O MERRILL LYNCH INVESTMENT PARTNERS INC., MERRILL
LYNCH WORLD HEADQUARTERS, SOUTH TOWER, WORLD FINANCIAL CENTER, NEW YORK,
NEW YORK 10080. 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,
PROXY AND INFORMATION STATEMENTS, AND OTHER INFORMATION REGARDING
REGISTRANTS, SUCH AS THE FUND, 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 38 AND A STATEMENT OF THE PERCENTAGE RETURN
NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL
INVESTMENT, AT PAGE 10.
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 12-16.
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 5% ANNUAL INTEREST RATE, THE PRESENT VALUE OF RECEIVING $100
FIVE YEARS IN THE FUTURE IS $78.35.
2. IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS
GUARANTEE, ALL UNITS ISSUED UNDER THIS PROSPECTUS WILL BEGIN WITH 85%,
RATHER THAN 100%, OF THEIR ASSETS ALLOCATED TO TRADING. THIS INITIAL
DELEVERAGING OF TRADING SUBSTANTIALLY REDUCES PROFIT POTENTIAL.
3. MLIP CONTROLS THE LEVERAGE AT WHICH THE FUND TRADES WITH
THE PRIMARY OBJECTIVE OF PREVENTING ML&CO. FROM INCURRING ANY LIABILITY
UNDER ITS GUARANTEE. ML&CO. HAS NEVER BEEN REQUIRED TO MAKE ANY PAYMENTS
UNDER ITS GUARANTEES TO MLIP FUNDS (ALL OF WHICH ARE SIMILAR TO THE
GUARANTEE PROVIDED TO THE FUND).
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 APPROXIMATELY 20%,
AND WOULD BEGIN TO DELEVERAGE TRADING BELOW ITS INITIAL 85% LEVEL WELL
BEFORE LOSSES APPROACHING 20% 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 ANY SERIES OF UNITS ISSUED AFTER MAY 1, 1997 IS REQUIRED
TO DELEVERAGE OR TERMINATE TRADING, ALL SUCH SERIES OF UNITS (INCLUDING
ALL UNITS ISSUED UNDER THIS PROSPECTUS) 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 ONLY APPLIES TO UNITS WHICH REMAIN 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 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 12, "LEVERAGE
CONSIDERATIONS" BEGINNING AT PAGE 32 AND "THE ML&CO. GUARANTEE" BEGINNING
AT PAGE 33.
-2-
<PAGE>
ORGANIZATIONAL CHART
ML PRINCIPAL PROTECTION L.P.
[CHART OF AFFILIATES AND ASSOCIATES]
With the exception of the Trading Advisors, all entities connected with
the operation of the Fund and the Trading Partnership are affiliated.
For convenience, one or more Merrill Lynch affiliates are hereinafter
sometimes collectively referred to as "Merrill Lynch."
-3-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
Table of Contents
<TABLE>
<CAPTION>
Prospectus Section Page Prospectus Section Page
- ------------------ ---- ------------------ ----
<S> <C> <C> <C>
Summary........................................... 6 Investment Factors................................ 17
The Fund....................................... 6
Different Series of Units...................... 7 Performance of the Fund........................... 19
Risk Factors................................... 7
Fund Operations................................ 8 Selected Financial Data........................... 20
Breakeven Table................................ 10
Principal Tax Aspects of Owning Units.......... 11 The Two-Tier Structure of the Fund................ 21
Suitability.................................... 11
Management's Discussion and Analysis.............. 22
Risk Factors...................................... 12
(1) Investors May Incur Substantial Losses.... 12 The Advisor Selection Process..................... 25
(2) Past Performance Not Necessarily
Indicative of Future Results............ 12 MLIP and MLF...................................... 28
(3) Volatile Markets; Highly Leveraged Background....................................... 28
Trading................................. 12 Principals....................................... 28
(4) The Opportunity Costs and Risks of Year 2000 Compliance............................. 30
"Principal Protection".................. 12 Litigation....................................... 30
(5) Multi-Advisor Risk Control and
"Principal Protection".................. 13 Fiduciary Obligations of MLIP..................... 30
(6) Substantial Charges....................... 13
(7) Unpredictable Performance................. 13 Leverage Considerations........................... 32
(8) Importance of General Market
Conditions.............................. 13 The ML&Co. Guarantee.............................. 33
(9) No Assurance of Non-Correlation;
Limited Value of Non-Correlation Use of Proceeds and Cash Management
Even if Achieved........................ 13 Income......................................... 35
(10) Units Issued Under This Prospectus........ 14
(11) Combining Independent Trading Charges........................................... 38
Strategies.............................. 14 Charges Paid by the Fund........................ 39
(12) Systematic Strategies..................... 14 Brokerage Commissions........................ 40
(13) Discretionary Strategies.................. 14 Use of Fund Assets........................... 41
(14) The Danger to the Fund of "Whipsaw" Administrative Fees.......................... 41
Markets................................. 14 Currency Trading Costs....................... 41
(15) Increased Assets Under Management......... 14 Securities Bid-Ask Spreads................... 41
(16) No Assurance of Advisors' Continued Profit Shares................................ 41
Services; Competition for Advisors...... 15 Extraordinary Expenses....................... 43
(17) Changes in Trading Strategy............... 15 Charges Paid by Merrill Lynch................... 43
(18) Illiquid Markets.......................... 15 Selling Commissions; Ongoing
(19) Cash Management Risks..................... 15 Compensation................................ 43
(20) Uncertain Unit Values..................... 15 Consulting Fees.............................. 43
(21) Trading on Non-U.S. Exchanges............. 15 MLAM Fees.................................... 44
(22) Bankruptcy or Default..................... 15 Redemption Charges.............................. 44
(23) Regulatory Change......................... 16
(A) Limited Partners Taxed Currently.......... 16 Conflicts of Interest............................. 44
(B) The Fund's Trading Gains Taxed General....................................... 44
at Higher Capital Gains Rate............ 16 MLIP.......................................... 45
(C) "Investment Advisory Fees"................ 16 MLF; MLIB; and MLAM........................... 46
(D) Taxation of Interest Income............... 16 The Trading Advisors.......................... 46
(E) Tax Audit................................. 16 Financial Consultants......................... 46
Proprietary Trading........................... 47
Investor Recourse Against
Merrill Lynch Entities....................... 47
</TABLE>
-4-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
Table of Contents (cont.)
<TABLE>
<CAPTION>
Prospectus Section Page
- ------------------ ----
<S> <C>
Transactions between Merrill Lynch
and the Fund......................................................................47
The Limited Partnership Agreement...................................................48
Federal Income Tax Consequences.....................................................49
Plan of Distribution................................................................53
General..........................................................................53
Subscription Procedure...........................................................53
Purchases by Employee Benefit Plans..............................................54
Selling Agent Compensation.......................................................54
Legal Matters.......................................................................55
Experts.............................................................................55
Additional Information..............................................................55
Index of Terms......................................................................56
Index to Financial Statements.......................................................57
Futures Trading Methods in General..................................................81
The Role of Managed
Futures in an Investment Portfolio.................................................82
Appendix -- Blue Sky Glossary....................................................APP-1
Exhibit A -- Fourth 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
World Financial Center
New York, New York 10080
Telephone: (212) 236-4167
-5-
<PAGE>
SUMMARY
The nature of an investment in the Fund is complex and must be carefully
reviewed 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 providing "principal
protection" and 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 at $100 per Unit, and receives and
processes subscriptions, on a continuous basis throughout each calendar
quarter. Investors whose subscriptions are accepted at any time during a
calendar quarter are admitted to the Fund as Limited Partners as of the
beginning of the immediately following quarter. Investors' customer
securities accounts are debited in the amount of their subscriptions on
settlement dates throughout each quarter shortly after their subscriptions
are accepted by MLIP. Subscription proceeds received during a quarter are
held in escrow pending investment in Units as of the beginning of the
following quarter. All interest earned on subscriptions while held in
escrow is paid to the investors.
The Fund began trading on October 12, 1994 with an initial
capitalization of $32,000,000. Through June 30, 1998, a total of an
additional $130,113,095 had been invested in the Units at 13 subsequent
closings. Through June 30, 1998, an aggregate of 1,621,130.95 Units had
been sold and 662,664.30 redeemed. As of July 1, 1998, the Fund's
capitalization was $98,607,509, and the Fund had a total of 3,529 Limited
Partners.
Through June 30, 1998, the highest month-end Net Asset Value of
a Series A Unit was $129.34 (January 31, 1998; adding back to Net Asset
Value aggregate distributions of $15.50 per Series A Unit ) and the lowest
$101.04 (October 31, 1994). See "Performance of the Fund" at page 19 and
"Selected Financial Data" at page 20.
As of July 1, 1998, the Net Asset Value per Unit (as defined in
the Fund's Limited Partnership Agreement -- Exhibit A to this Prospectus)
of the different series, each initially $100 per Unit, were as follows:
<TABLE>
<CAPTION>
July 1, 1998
Unit July 1, 1998 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 $111.69 $127.19
B January 9, 1995 $107.33 $124.83
C April 10, 1995 $103.03 $117.53
D July 11, 1995 $107.98 $115.98
E October 12, 1995 $107.45 $116.45
F January 16, 1996 $102.56 $113.31
G April 19, 1996 $101.28 $111.78
H July 16, 1996 $104.77 $110.77
K May 14, 1997 $102.99 N/A
L July 21, 1997 $ 99.35 N/A
M October 16, 1997 $100.83 N/A
N January 2, 1998 $ 97.25 N/A
O April 1, 1998 $ 97.65 N/A
P May 1, 1998 $ 99.78 N/A
</TABLE>
No distributions have been paid on any series of Units issued after May 1, 1997.
No Series I or J Units were issued.
Effective as of October 1, 1998 (the first sale of Units under
this Prospectus), the Fund's Brokerage Commission rate will be reduced
from 8.75% to 7.5% per annum of assets allocated to trading and the
Administrative Fee will begin to be calculated on the Fund's total, not
traded, assets. See "Charges."
-6-
<PAGE>
SUMMARY (cont.)
Different Series of Units
All series of Units issued on or before May 1, 1997 (i) commenced
trading with 60% of their capital allocated to trading, (ii) receive annual
fixed-rate and possible discretionary distributions and (iii) have 7-year Time
Horizons. Units issued after May 1, 1997 began trading with 75% of their assets
allocated to trading, receive no distributions and have 5-year Time Horizons.
The percentage of the 5-year Time Horizon series' assets allocated to trading
was increased to 85% as of May 1, 1998. All Units sold under this Prospectus
will (x) commence trading with 85% of their assets allocated to trading, (y)
receive no distributions and (z) have a 5-year Time Horizon. Different leverage,
distribution and Time Horizon parameters could materially affect performance
over time.
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 85%, rather
than 100%, of its assets allocated to trading. On an ongoing basis, MLIP
controls the percentage of each series' assets allocated to trading in order to
protect ML&Co. from any liability under its guarantee.
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 5% annual interest rate, the present value, as of the date
of Unit's issuance, of receiving the assured minimum $100 Net Asset Value per
Unit five years in the future is $78.35. See "Risk Factors -- (1) Investors
May Incur Substantial Losses" at page 12.
. The past performance of the Fund 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 12.
. The Fund trades with a high degree of leverage in volatile markets. See "Risk
Factors -- (3) Volatile Markets; Highly Leveraged Trading" at page 12.
. 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 85%, rather than 100%, 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 realize 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 12.
. 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 12.
. If MLIP changes the leverage of any series of Units with a 5-year Time
Horizon, MLIP must make the same leverage changes with respect to all such
series. See "Risk Factors -- (4) The Opportunity Costs and Risks of
'Principal Protection'" at page 12.
. 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. ML&Co. has never been required to make any payment
under a guarantee like that provided to the Fund. See "Risk Factors -- (5)
Multi-Advisor Risk Control and 'Principal Protection'" at page 13.
-7-
<PAGE>
SUMMARY (cont.)
. 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 12.
. The Fund is subject to substantial charges. Estimated gross trading profits
of approximately 7% 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. See "-- Breakeven Table" below
at page 10, "Charges" at page 38 and "Risk Factors -- (6) Substantial
Charges" at page 13.
. Because of its unpredictable performance, there is no way to time an
investment in the Fund so as to invest during a favorable period. See "Risk
Factors -- (7) Unpredictable Performance" at page 13.
. 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 -- (8) Importance of General Market
Conditions" at page 13.
No subscriber should invest more than 10% of his or
her readily marketable assets in the Fund.
See "Risk Factors" at pages 12 through 16.
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 7 and 18 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. Because no Advisor is allocated as much as 10%
of the Fund's trading assets for management, any Advisor-specific information is
set forth in the Prospectus Supplement accompanying this Prospectus.
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 been non-correlated 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 risk/reward
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 82.
MLIP
Merrill Lynch Investment Partners Inc., a Delaware corporation, is the
general partner of the Fund. Offering hedge funds, managed futures and currency
investments for individuals and financial institutions, MLIP has operated with
one primary objective since its inception in 1986 -- to provide investors with
an opportunity for long-term capital appreciation and diversification through
professionally managed investments in equity, debt, currency, interest rate,
metals, energy and agricultural markets, utilizing a wide variety of instruments
and trading strategies. As of July 1, 1998, MLIP was acting as trading manager
or sponsor to funds in which approximately $2.8 billion of client assets were
invested.
"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.
-8-
<PAGE>
SUMMARY (cont.)
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 and, possibly in the future, certain mortgage-backed
securities (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 May 1, 1998, the Asset Management Group of ML&Co. (which
includes MLAM) had a total of approximately $485 billion in investment
company and other portfolio assets under management. This figure includes
assets managed for some of MLAM's affiliates.
Two-Tier Structure of the Fund
The Fund trades through a subsidiary limited partnership, ML
Principal Protection Trading L.P. (the "Trading Partnership"), of which
the Fund is the sole limited partner and MLIP the sole general partner.
The Fund's liability for any trading losses is limited to the Fund's
investment in the Trading Partnership which makes it possible to ensure,
as required by applicable CFTC rules, that the assets attributable to one
series of Units cannot become subject to trading losses attributable to
any other series. See "The Two-Tier Structure of the Fund" at page 21 and
"Leverage Considerations" at page 32.
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 each Unit's Principal Assurance Date is not a guarantee of success
or of avoiding substantial present value losses.
-9-
<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
Expenses of Investment/(1)/ of Investment/(1)/
<S> <C> <C>
Brokerage Commissions/(2)/ 6.375% $ 318.75
Administrative Fee/(3)/ 0.25% $ 12.50
Currency Trading Costs/(4)/ 0.25% $ 12.50
Profit Shares/(5)/ 2.00% $ 100.00
Cash Management Income/(6)/ (5.00)% $(250.00)
TWELVE-MONTH BREAKEVEN
WITHOUT REDEMPTION CHARGE 3.875% $ 193.75
----- --------
Redemption Charge/(7)/ 3.10% $ 155.00
TWELVE-MONTH BREAKEVEN
WITH REDEMPTION CHARGE 6.975% $ 348.75
----- --------
</TABLE>
Notes to Breakeven Table
(1) Assumes a constant 85% allocation of assets to trading.
(2) Brokerage Commissions include the Consulting Fees payable to the
Advisors by MLF. Consulting Fees generally average approximately 1.5%
to 2% per annum of Fund assets managed, depending on the Advisor.
(3) The Administrative Fee is charged on the total assets of the
Partnership, not only on assets allocated to trading.
(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. See "Charges --
Currency Trading Costs" at page 41.
(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) 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. MLAM's
cash management may be unable to produce an enhanced yield or avoid a
loss of principal. See "Use of Proceeds and Cash Management Income"
beginning at page 35.
(7) 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.
________________
At 100% leverage, the Fund's annual Brokerage Commissions would equal
7.5% of average month-end assets, and the trading profits required for
an initial $5,000 investment to breakeven would increase to 8.1% or
$405.00.
-10-
<PAGE>
SUMMARY (cont.)
Principal Tax Aspects of Owning Units
Investors are taxed each year on any gains recognized by the
Fund whether or not they redeem any Units or receive any distributions
from the Fund.
40% of any trading profits on U.S. exchange-traded contracts are
taxed as short-term capital gains at the 39.6% ordinary income rate, while
60% of such gains are taxed as long-term capital gain at a 20% maximum
rate for individuals. The Fund's trading gains from other contracts will
be primarily short-term capital gain. This tax treatment applies
regardless of how long an investor holds Units. If, on the other hand, an
investor held a stock or bond for 12 months or longer, all the gain
realized on its sale would generally be taxed at a 20% maximum rate.
Losses on the Units may be deducted against capital gains. Any
losses in excess of capital gains may only be deducted against ordinary
income to the extent of $3,000 per year. Consequently, investors could
pay tax on the Fund's interest income even though they have lost money on
their Units. See "Federal Income Tax Consequences" beginning at page 49.
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.
Subscribers must be prepared to lose all or substantially all of
the time value of their investment.
No subscriber should invest more than 10% of his or her readily
marketable assets in the Fund.
THE UNITS ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK.
-11-
<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
5% annual interest rate, this would constitute a loss of over 20%.
(2) Past Performance Not Necessarily Indicative of Future Results
Past performance is not necessarily indicative of future
results. Neither the Advisors' (see the accompanying Prospectus
Supplement) nor the Fund's past performance may be representative of how
they or it, respectively, may trade in the future. The outstanding series
of Units have traded, and certain series will continue to trade, at
different leverage factors and subject to different fees than the Units
offered under this Prospectus.
(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 Fund takes positions
with face values up to as much as approximately 5 times its total equity.
Consequently, even small price movements can cause major losses. 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 with 5-year Time Horizons 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.
-12-
<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. In
the approximately ten years that ML&Co. has been issuing guarantees like
the Fund's guarantee to MLIP funds, ML&Co. has never been required to make
any guarantee payment. See "-- (11) Combining Independent Trading
Strategies," below at page 14.
(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.
Brokerage Commissions 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. Increasing the percentage of trading assets will
correspondingly increase the costs as well as 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) Unpredictable Performance
Because its performance is entirely unpredictable, there is no
way to time an investment in the Fund. Investors have no means of knowing
whether they are buying Units at a time when major gains or losses, or
neither, are in progress. Many of the Advisors are "trend-following"
managers whose performance is likely to be materially affected by price
trends, or the lack thereof, at the time an investor subscribes. See
"--(20) Uncertain Unit Values," below at page 15.
(8) Importance of General Market Conditions
Overall market or economic conditions -- which neither MLIP nor
any Advisor can predict or control -- have a material effect on
performance. Furthermore, such overall conditions can adversely affect
the performance of numerous Advisors at or about the same time, despite
their implementing different and independent strategies. Consequently, the
multi-advisor structure of the Fund does not assure that its performance
will not be adversely affected by future market or economic conditions.
(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, however the Fund may
perform, that 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.
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.
-13-
<PAGE>
(10) Units Issued Under This Prospectus
All series of Units issued under this Prospectus will commence
trading at 85% leverage. All series previously issued began trading at
60%-75% leverage, although all series with 5-year Time Horizons have
traded at 85% leverage since May 1, 1998. The higher leverage applied by
the current series of Units results in their expected performance being
more volatile and involving a higher degree of risk (as well as profit
potential).
If MLIP makes a leverage adjustment to any series with a 5-year
Time Horizon (i.e, any series issued after May 1, 1997), MLIP must make
corresponding adjustments to the leverage used by all such series. This
regulatory requirement could affect certain series adversely. See "-- (4)
The Opportunity Costs and Risks of 'Principal Protection'," above at page
12.
MLIP does not presently intend to make any distributions on
Units issued after May 1, 1997.
(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 13.
(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.
The objective of trend-following Advisors is to participate in
major price trends -- sustained price movements either up or down. Such
price trends may be relatively infrequent. Trend-following Advisors
anticipate that over half of their positions will be unprofitable. Their
strategy is based on making sufficiently large profits from the trends
which they identify and follow to generate overall profits despite the
more numerous but, hopefully, smaller losses incurred on the majority of
their positions.
Systematic strategies frequently rely exclusively on price data
intrinsic to the market itself, without giving any consideration to
underlying economic factors. Such strategies will maintain positions
contrary to the generally anticipated result of a political, climatic or
financial development until their market price models signal otherwise.
Such signals may only be generated, if at all, after substantial losses
have been incurred.
(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) The Danger to the Fund of "Whipsaw" Markets
Often, the most unprofitable market conditions for the Fund are
those in which prices "whipsaw," moving quickly upward, then reversing,
then moving upward again, then reversing again. In such conditions, many
Advisors may establish positions based on incorrectly identifying both the
brief upward or downward price movements as trends, whereas in fact no
trends sufficient to generate profits develop.
(15) Increased Assets Under Management
The more money an Advisor manages, the more difficult it may be
for the Advisor to trade profitably because of the difficulty of trading
larger positions without adversely affecting prices and performance. Large
trades result in more price slippage than do smaller orders. 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.
-14-
<PAGE>
(16) No Assurance of Advisors' Continued Services; Competition for
Advisors
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.
(17) Changes in Trading Strategy
An Advisor may make certain changes in its trading strategies
without the knowledge of MLIP.
(18) 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.
Unexpected market illiquidity has caused major losses in recent
years in such sectors as emerging markets and mortgage-backed securities.
There can be no assurance that the same will not happen to the Fund at any
time or from time to time. The large size of the positions which the
Advisors acquire for the Fund increases the risk of illiquidity by both
making its positions more difficult to liquidate and increasing the losses
incurred while trying to do so.
(19) 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 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 over the risk-free rate
or that there will not be a loss of principal as a result of the Fund's
"yield enhancement" strategies.
(20) Uncertain Unit Values
The only way to take money out of the Fund is to redeem Units.
An investor can only redeem Units at month-end upon at least 10 days'
advance notice and subject to possible redemption charges. Consequently,
investors cannot know at the time they submit a redemption request what
the redemption value of their Units will be.
The restrictions imposed on redemptions limit investors' ability
to protect themselves against major losses by redeeming part or all of
their Units.
In addition, investors are unable to know whether they are
subscribing after a significant upswing in performance -- often a time
when the Fund has an increased probability of entering into a losing
period.
(21) Trading on Non-U.S. Exchanges
The Advisors trade a great deal outside the U.S. From time to
time, as much as 30%-50% of the Fund's overall market exposure could
involve positions taken on foreign markets. Foreign trading involves
risks -- including exchange-rate exposure, possible governmental
intervention and lack of regulation -- which U.S. trading does not. In
addition, the Fund may not have the same access to certain positions on
foreign exchanges as do local traders, and the historical market data on
which certain Advisors base their strategies may not be as reliable or
accessible as it is in the United States. Certain foreign exchanges may
also be in a more or less developmental stage so that prior price
histories may not be indicative of current price dynamics. The rights of
clients in the event of the insolvency or bankruptcy of a non-U.S. market
or broker are also likely to be more limited than in the case of U.S.
markets or brokers.
(22) 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.
-15-
<PAGE>
(23) Regulatory Change
The Fund implements a speculative, highly leveraged strategy.
From time to time there is governmental scrutiny of these types of
strategies and political pressure to regulate their activities. For
example, the Malaysian government during 1997 blamed the collapse of its
currency on speculative funds and called for international restrictions on
their operations.
Regulatory changes could adversely affect the Fund by
restricting its markets, limiting its trading and/or increasing the taxes
to which the Limited Partners are subject. As an example, in the mid-
1980s the CFTC raised doubts concerning the legality of futures funds
trading currency forwards. If the Advisors could not trade currency
forwards for the Fund, the effect on the Fund could be material and
adverse. MLIP is not aware of any pending or threatened regulatory
developments which might adversely affect the Fund. However, adverse
regulatory initiatives could develop suddenly and without notice.
____________________
The following are not risks, but rather important tax features
of investing in the Fund which all prospective investors should carefully
consider before deciding whether to purchase Units.
(A) 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.
(B) The Fund's Trading Gains Taxed at Higher Capital Gains Rate
Investors are taxed on their share of any trading profits of the
Fund at both short- and long-term capital gain rates depending on the mix
of U.S. exchange-traded contracts and non-U.S. contracts traded. These
tax rates are determined irrespective of how long an investor holds Units.
Consequently, the tax rate on the Fund's trading gains may be higher than
those applicable to other investments held by an investor for a comparable
period.
(C) "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
Shares or such expenses as "investment advisory fees," a position to which
the Internal Revenue Service (the "IRS") might object.
(D) 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.
(E) 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 49.
____________________
-16-
<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 12.
____________________
(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 for the Fund. See "Futures Trading Methods in
General" at page 81.
(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 risk/reward 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 or increase more or less 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
-17-
<PAGE>
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.
(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
35. 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 35.
(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.
-18-
<PAGE>
PERFORMANCE OF THE FUND
ML Principal Protection L.P.
July 1, 1998
Type of Pool: Multi-Advisor; Selected-Advisor/Publicly-Offered/"Principal
Protected"/(1)/
Inception of Trading: October 12, 1994
Aggregate Subscriptions: $162,113,095
Current Capitalization: $98,607,509
Worst Monthly Drawdown/(2)/: (3.70)% (2/96)
Worst Peak-to-Valley Drawdown/(3)/: (3.70)% (2/96)
_____________
Net Asset Value per Series A Unit, July 1, 1998: $127.19 (adding back $15.50
in distributions)
<TABLE>
<CAPTION>
Monthly Rates of Return/(4)/
- -----------------------------------------------------------------------------------
Month 1998 1997 1996 1995 1994
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 0.08% 2.06% 2.45% (0.55)% --
- -----------------------------------------------------------------------------------
February (0.56)% 1.44% (3.70)% 2.24% --
- -----------------------------------------------------------------------------------
March 0.10% 0.05% 1.06% 4.17% --
- -----------------------------------------------------------------------------------
April (1.95)% (0.70)% 3.10% 0.91% --
- -----------------------------------------------------------------------------------
May 0.95% (1.43)% (1.98)% 1.20% --
- -----------------------------------------------------------------------------------
June (0.86)% 0.70% 1.36% (0.21)% --
- -----------------------------------------------------------------------------------
July -- 3.14% (1.68)% (1.30)% --
- -----------------------------------------------------------------------------------
August -- (2.71)% 0.49% 0.95% --
- -----------------------------------------------------------------------------------
September -- 0.86% 1.62% (0.32)% --
- -----------------------------------------------------------------------------------
October -- (0.43)% 4.25% 0.29% 1.04%
- -----------------------------------------------------------------------------------
November -- 0.80% 2.50% 0.69% 0.32%
- -----------------------------------------------------------------------------------
December -- 2.22% (0.20)% 2.12% 0.40%
- -----------------------------------------------------------------------------------
Compound (2.24)% 6.01% 9.36% 10.55% 1.76%
Rate of Return (6 months) (2 2/3 months)
- -----------------------------------------------------------------------------------
</TABLE>
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
_________________________
All Units issued on or prior to May 1, 1997 commenced trading
with 60%, and Units issued on or after May 1, 1997 with 75%, of their
assets allocated to trading. Since May 1, 1998, all Units have initially
allocated 85% of their assets to trading. The Units issued under this
Prospectus will also begin trading with 85% of their assets allocated to
trading. Consequently, the composite past performance of the Fund may not
be representative of how the Units would have performed over the same
period.
_________________________
(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.
__________________________
-19-
<PAGE>
SELECTED FINANCIAL DATA
The following Selected Financial Data is derived, except in respect
of the unaudited information, from the consolidated financial statements of the
Fund for the years ended December 31, 1997 and 1996 which have been audited by
Deloitte & Touche llp, independent auditors, as stated in their report included
in this Prospectus, as well as from the consolidated financial statements for
the period from October 12, 1994 (commencement of operations) to December 31,
1994 and the year ended December 31, 1995 also audited by Deloitte & Touche LLP.
The following information, as well as the financial statements of the Fund for
the years ended December 31, 1997, 1996 and 1995, is included herein in reliance
upon the authority of Deloitte & Touche llp as experts in auditing and
accounting. See "Index to Financial Statements" at page 57.
____________________
<TABLE>
<CAPTION>
Jan. 1, 1998 Jan. 1, 1997 Oct. 12, 1994
to to Jan. 1, 1997 Jan. 1, 1996 Jan. 1, 1995 (commencement
June 30, 1998 June 30, 1997 to to to of operations) to
Income Statement Data (Unaudited) (Unaudited) Dec. 31, 1997 Dec. 31, 1996 Dec. 31, 1995 Dec. 31, 1994
- --------------------- ------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized $ 1,596,744 $ 3,722,347 $ 5,412,457 $ 9,038,064 $ 4,407,833 $ (363,054)
Change in Unrealized (2,938,626) (1,403,567) 1,083,826 (396,221) 1,355,377 1,115,935
----------- ----------- ------------ ----------- ----------- -----------
Total Trading Results (1,341,882) 2,318,780 6,496,283 8,641,843 5,763,210 752,881
Interest Income 2,970,056 2,182,912 4,873,872 4,545,186 3,415,670 377,303
----------- ----------- ------------ ----------- ----------- -----------
Total Revenues 1,628,174 4,501,692 11,370,155 13,187,029 9,178,880 1,130,184
----------- ----------- ------------ ----------- ----------- -----------
Expenses:
Brokerage Commissions 3,254,852 2,141,245 4,833,598 4,775,116 3,216,364 405,653
Administrative Fees/1/ 92,996 61,179 138,103 129,057 86,928 10,964
Profit Shares 704,269 498,398 931,522 978,264 652,366 129,169
----------- ----------- ------------ ----------- ----------- -----------
Total Expenses 4,052,117 2,700,822 5,903,223 5,882,437 3,955,658 545,786
----------- ----------- ------------ ----------- ----------- -----------
(Loss) Income Before
Minority Interest (2,423,943) 1,800,870 5,466,932 7,304,592 5,223,222 584,398
Minority Interest/2/ 38,205 (12,289) (46,687) (81,228) (36,730) (4,504)
----------- ----------- ------------ ----------- ----------- -----------
Net (Loss) Income $(2,385,738) $ 1,788,581 $ 5,420,245 $ 7,223,364 $ 5,186,492 $ 579,894
=========== =========== ============ =========== =========== ===========
June 30, 1998 June 30, 1997 Dec. 31, Dec. 31, Dec. 31, Dec. 31,
Balance Sheet Data/3/ (Unaudited) (Unaudited) 1997 1996 1995 1994
- ------------------ ------------- ------------- ------------- ------------- ------------- -------------
Fund Net Asset Value $98,607,509 $79,399,074 $101,226,685 $78,905,274 $74,988,233 $32,314,228
Net Asset Value per Unit/4/
- ------------------------
Series A $111.69 $113.05 $113.73 $110.70 $106.96 $101.76
Series B 107.33 110.01 114.15 114.24 110.36 --
Series C 103.03 104.22 108.15 109.33 103.35 --
Series D 107.98 110.44 109.94 108.19 102.34 --
Series E 107.45 110.84 109.40 108.58 102.72 --
Series F 102.56 105.06 109.04 108.92 -- --
Series G 101.28 102.65 106.52 107.32 -- --
Series H 104.77 108.73 106.62 106.47 -- --
Series K 102.00 100.71 104.77 -- -- --
Series L 99.35 -- 102.08 -- -- --
Series M 100.83 -- 103.70 -- -- --
Series N 97.25 -- -- -- -- --
Series O 97.65 -- -- -- -- --
Series P 99.78 -- -- -- -- --
</TABLE>
- -------------------
/1/ The Brokerage Commissions have been restated, to reflect the
reclassification of a portion of Brokerage Commissions as Administrative Fees,
for the period from October 1, 1994 to December 31, 1994 and the year ended
December 31, 1995.
/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
Principles ("GAAP") due to the treatment of organizational and initial offering
cost reimbursements.
/4/ Net of distributions. No Series I or J Units were issued.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
AT ANY GIVEN TIME, CERTAIN UNITS MAY HAVE INCREASED IN NET ASSET VALUE FROM THE
DATE OF PURCHASE WHILE OTHERS HAVE DECREASED. OVER TIME, THE DIFFERENT SERIES OF
UNITS MAY TRADE AT DIFFERENT LEVERAGE. THE UNITS SOLD UNDER THIS PROSPECTUS WILL
BEGIN TRADING AT 85% LEVERAGE, WHEREAS THE UNITS PREVIOUSLY ISSUED BEGAN TRADING
AT 60%-75% LEVERAGE (ALTHOUGH ALL UNITS WITH 5-YEAR TIME HORIZONS BEGAN TO
ALLOCATE 85% OF THEIR ASSETS TO TRADING AS OF MAY 1, 1998). HIGHER LEVERAGE
INVOLVES HIGHER RISK.
-20-
<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. 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 profits and 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 the 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.
[CHART OF INVESTORS APPEARS HERE]
See the Organizational Chart on page 3.
-21-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
MLIP has made and 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.
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 25. 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 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
-------
Because many Advisors' systems are designed with the objective of
identifying and profiting from long-term price trends, they are unlikely
to be profitable in markets in which such trends do not occur. Static or
erratic prices are likely to result in losses. Similarly, unexpected
events (for example, a political upheaval, natural disaster or
governmental intervention) can lead to major short-term losses as well as
gains.
While there can be no assurance that any Advisor will be profitable
even in trending markets, markets in which substantial and sustained price
movements occur offer the best profit potential for the Fund.
Performance Summary
-------------------
1998 (6 Months)
The Fund's most profitable positions during the first quarter of 1998
were in the global interest rate markets, particularly in European bonds
where an extended bond market rally continued despite an environment of
robust growth in the United States, Canada and the United Kingdom, as well
as a strong pick-up in growth in continental Europe. Specifically, strong
gains were recorded in French and German bonds. However, during the
second quarter of 1998 swings in the U.S. dollar against other major
currencies and developments in Japan affected the international interest
rate markets and losses were incurred, particularly in Eurodollar deposits
and U.S. Treasury bonds. A dramatic drop in Australian bond prices in
June resulted in significant losses for the Fund.
Gold and crude oil trading resulted in losses throughout the first
half of 1998. Gold prices drifted sideways and lower as Asian demand
continued to slow and demand in the Middle East was affected by low oil
prices. In the second quarter, the gold market was further depressed by
the news of a European Central Bank consensus that only 10%-15% of
reserves should consist of gold bullion. Initially buoyed on concerns
about a U.S.-led military strike against Iraq, crude oil fell to a nine
year low, as the globally warm winter, the return of Iraq as a producer
and the Asian economic crisis added to OPEC's supply glut problems.
Despite production cuts initiated by OPEC at the end of March, world oil
supplies remained excessive and oil prices at low levels.
Trading results in the stock index markets were mixed but marginally
profitable, despite a strong first-quarter performance by the U.S. equity
market as several consecutive weekly gains were recorded with most market
averages setting new highs. In the second quarter, the Fund profited from
short positions as the Asia-Pacific region's equity markets
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weakened across the board. In particular, the Hang Seng Index trended
downward during most of the quarter and traded at a three-year low.
Results in currency trading were also mixed, but marginally profitable.
Strong gains were realized in positions on the Swiss franc, which weakened
versus the U.S. dollar, while trading losses resulted from positions in
the Deutsche mark and the Australian dollar. In June, the Japanese yen
fell to an eight-year low against the U.S. dollar, but many of the gains
recognized from the downward trend were lost as a result of the subsequent
government intervention to support the yen.
Agricultural commodity markets generated profits throughout the first
two quarters. Live cattle and hog prices trended downward throughout the
first quarter resulting in strong gains. In the second quarter it was
sugar and coffee prices which trended downward, price movements identified
and capitalized upon by a number of Advisors. Cotton prices moved mostly
upward during the quarter, but dropped off sharply at the end of March,
causing losses.
1997
In currency markets, the U.S. dollar rallied and started 1997 on a
strong note, rising to a four-year high versus the Japanese yen and two-
and-a-half year highs versus the Deutsche mark and the Swiss franc.
However, the dollar underwent two significant corrections during the year.
The first correction occurred in the Spring against the Japanese yen, due
to the G7 finance ministers' determination that a further dollar advance
would be counter-productive to their current goals. From August through
mid-November, the dollar corrected against the Eurocurrencies in advance
of a well-advertised tightening by the Bundesbank. By mid-December the
dollar had bounced back to new highs against the yen and was rallying
against the mark.
Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. By the middle
of the year, economic data in key countries was positive indicating lower
inflation and igniting a worldwide rally in the bond markets.
Specifically, investor sentiment was particularly strong in the U.S.,
where prices on the 30-year Treasury bond and 10-year Treasury note rose
to their highest levels in over two years. This followed a largely
positive economic report delivered by Federal Reserve Chairman Greenspan
in testimony before Congress. Effects of the plunge in the Hong Kong
stock market in late October spread rapidly throughout the world's
financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets
rallied as a flight to safety from plunging stock markets around the world
occurred in December.
In energy markets, a slump in crude oil prices was characteristic of
its lackluster performance from the beginning of the year. Early in 1997,
volatility returned in the energy markets, reflecting the impact of a
winter significantly warmer than normal. By mid-year, the decline in
prices reversed sharply as Saudi Arabia and Iran, together representing
about 45% of OPEC's oil production, joined forces to pressure oil-
producing nations to stay within OPEC production quotas. In December,
financial and economic problems in Asia reduced demand for oil, and in
combination with ample supplies, resulted in crude oil prices declining
once again.
1996
1996 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.
1995
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
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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 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.
The Fund changes its positions and market focus frequently. Consequently,
the fact that the Fund realized gains or incurred losses in certain
markets (gold, stock indices, currencies, etc.) in the past is not
necessarily indicative of whether the Fund will do so in the future.
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 the Fund's assets allocated to trading and total
assets, respectively. The only Fund costs (other than the insignificant
currency trading costs) 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 the 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 the total
profits recognized, as other Advisors have incurred offsetting losses,
reducing overall trading gains but not the Profit Shares paid to the
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.
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 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., adjusting trading leverage --
must be done in such a way, that all Units with the same initial Time
Horizon have the same percentage of capital allocated to trading after the
adjustment. Despite these fundamental similarities among the different
series, because the series begin trading at different times they are
likely to come, as a result of trading profits and losses, to have
different percentages of their capital allocated to trading, pay different
Profit Shares (although to the same group of Advisors) and have different
Net Asset Values.
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<PAGE>
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 decrease
in approximate proportion to the size of the Fund account managed by each
of them, respectively.
The Fund raises additional capital only through the continuous
offering of its Units. The Fund does not borrow, and sells no 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 positions
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.
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 risk/reward profile consistent with
MLIP's objectives. By identifying Advisor combinations on this basis,
MLIP hopes to maintain profit potential while also materially reducing the
risk of major equity declines.
In selecting Advisors for the Fund, MLIP emphasizes retaining
multiple Advisors, trading in multiple markets and implementing multiple
strategies. MLIP also evaluates the overall market diversification and
emphasis that different possible Advisor combinations would give the Fund.
Discretionary as well as systematic, fundamental as well as technical,
Advisors may be retained. MLIP may allocate Fund assets both to Advisors
specializing in particular market sectors and to Advisors which trade
broadly diversified portfolios. See "Futures Trading Methods in General"
at page 81. By diversifying strategies as well as markets, MLIP can, if
successful, create Advisor combinations for the Fund that should
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<PAGE>
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. (However, MLAM and MLIP
are affiliates.)
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.
Access to Global Markets
The Fund has access to global markets including, but not limited
to, the following:
<TABLE>
<CAPTION>
Currencies
<S> <C>
Australian Dollar Irish Punt
Belgian Franc Italian Lira
British Pound Japanese Yen
Canadian Dollar New Zealand Dollar
Danish Krone Norwegian Krone
Deutsche Mark Singapore Dollar
Dutch Guilder Spanish Peseta
European Currency Unit Swedish Krona
Finnish Markka Swiss Franc
French Franc United States Dollar
Interest Rates
Australian Bonds German Bonds
Australian Treasury Bills Italian Bonds
Canadian Bonds Japanese Bonds
Eurodollars PIBOR
Eurolira Spanish Bonds
Euromarks U.K. Gilts
Euroswiss U.K. Short Sterling
Euroyen U.S. Treasury Bills
French Bonds U.S. Treasury Bonds
U.S. Treasury Notes
Stock Indices
CAC 40 Stock Index (France) S&P 500 Stock Index (U.S.)
Financial Times 100 Stock Index (U.K.) Tokyo Stock Price Index
Major Market Stock Index (U.S.) U.S. Dollar Index
MEFF&S Stock Index (Spain) Value Line Stock Index (U.S.)
Nikkei Stock Average (Japan)
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Metals
<S> <C>
Aluminum Platinum
Gold Silver
Lead Tin
Nickel Zinc
Energy Products
Crude Oil No. 2 Heating Oil
Gas Oil Propane
Heavy Fuel Oil Residual Fuel Oil
Natural Gas Unleaded Gasoline
Agricultural Products
Cocoa Orange Juice
Coffee Pork Bellies
Corn Soybeans
Cotton Soymeal
Feeder Cattle Soy Oil
Live Hogs Sugar
Oats Wheat
</TABLE>
The Fund has not traded, and may never trade, in all of the foregoing markets.
There can be no assurance as to which markets the Fund will trade, either over
time or from time to time. At certain times, the Fund's positions may be
concentrated in a limited number of market sectors, decreasing diversification
and increasing risk.
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
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<PAGE>
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, 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., an indirect subsidiary
of ML&Co., has as its primary objective providing quality alternative
investments for its clients. MLIP is one of the largest sponsors of
managed futures funds in terms both of assets invested in funds for which
it serves as trading manager or sponsor, and of financial and personnel
resources. Offering hedge fund, managed futures and currency investments
for individuals, corporations and financial institutions, MLIP has
operated with one primary objective since its inception in 1986 -- to
provide investors with an opportunity for long-term capital appreciation
and diversification through quality investments in equity, debt, currency,
interest rate, metals, energy and agricultural markets, utilizing a
variety of instruments and trading strategies. While MLIP concentrated
its efforts primarily on managed futures investments during its early
years of operation, since 1996 MLIP has offered a number of multi-advisor
and single-advisor hedge funds. MLIP has dedicated significant resources
to the growth of its hedge fund business, and has the investment
management, operational, administrative, research and risk management
experience to manage substantial assets in both hedge funds and managed
futures investments in the global financial markets. As of July 1, 1998,
MLIP was acting as trading manager or sponsor to futures and hedge funds
in which approximately $2.8 billion of client capital was invested.
MLIP's registration as a "Commodity Pool Operator" (an entity
which organizes or manages investment funds which trade futures) became
effective with the CFTC and the NFA in October 1986.
Principals
The following are the principal officers and the directors
of MLIP.
John R. Frawley, Jr. Chairman, Chief Executive Officer,
President and Director
Jeffrey F. Chandor Senior Vice President, Director of
Sales, Marketing and Research and
Director
Jo Ann Di Dario Vice President, Chief Financial Officer
and Treasurer
Joseph H. Moglia Director
Allen N. Jones Director
Stephen G. Bodurtha Director
Steven B. Olgin Vice President, Secretary and
Director of Administration
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman,
Chief Executive Officer, President and a Director of MLIP and Co-Chairman
of MLF. He joined MLPF&S in 1966 and has served in various positions,
including Retail and Institutional Sales, Manager of New York
Institutional Sales, Director of Institutional Marketing, Senior Vice
President of Merrill Lynch Capital Markets and Director of International
Institutional Sales. Mr. Frawley holds a Bachelor of Science degree from
Canisius College. Mr. Frawley served on the CFTC's Regulatory
Coordination Advisory Committee
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<PAGE>
from its formation in 1990 through its dissolution in 1994. Mr. Frawley
is currently serving his fourth consecutive one-year term as Chairman of
the Managed Funds Association (formerly, the Managed Futures Association),
a national trade association that represents the managed futures, hedge
funds and fund of funds industry. Mr. Frawley is also a Director of that
organization. Mr. Frawley 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 the issues regarding a potential merger. Mr. Frawley also
currently serves as a member of the CFTC's Global Markets Advisory
Committee.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice
President, 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
International Institutional Equities, Equity Derivatives and Mortgage-
Backed Securities as well as Managing Director of International Sales in
the United States, and Managing Director of Sales in Europe. Mr. Chandor
holds a Bachelor of Arts degree from Trinity College, Hartford,
Connecticut.
Jo Ann Di Dario was born in 1946. Ms. Di Dario is Vice
President, Chief Financial Officer and Treasurer of MLIP. Before joining
MLIP in May 1998, she was unemployed for one year. From February 1996 to
May 1997, she worked as a consultant for Global Asset Management, an
international mutual fund organizer and operator headquartered in London,
where she offered advice on restructuring their back-office operations.
From May 1992 to January 1996, she served as a Vice President of Meridian
Bank Corporation, a regional bank holding company. She was responsible
for managing the treasury operations of Meridian Bank Corporation
including its wholly-owned subsidiary, Meridian Investment Company Inc.
From September 1992 to May 1992, Ms. Di Dario managed the Domestic
Treasury Operations of First Fidelity Bank, a regional bank. From January
1991 to September 1991, Ms. Di Dario was unemployed. For the previous
five years, beginning in December 1990, Ms. Di Dario was Vice President,
Secretary and Controller of Caxton Corporation, a Commodity Pool Operator
and Commodity Trading Advisor. Her background includes seven years of
public accounting experience, and she graduated with high honors from
Stockton State College with a Bachelor of Science degree in Accounting.
Joseph H. Moglia was born in 1949. Mr. Moglia is a Director of
MLIP. In 1971, he graduated from Fordham University with a Bachelor of
Arts degree in Economics. He later received his Master of Science degree
from the University of Delaware. He taught at the high school and college
level for sixteen years. Mr. Moglia joined MLPF&S in 1984, and has served
in a number of senior roles, including Director of New York Fixed Income
Institutional Sales, Director of Global Fixed Income Institutional Sales,
and Director of the Municipal Division. He is currently Senior Vice
President and Director of the Investment Strategy and Product Group in
Merrill Lynch Private Client, and Director of Middle Markets.
Allen N. Jones was born in 1942. Mr. Jones is a Director of
MLIP and, from July 1995 until January 1998, Mr. Jones was also Chairman
of the Board of Directors 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. From February 1994 to April 1997, Mr.
Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director
of Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a
Director of MLIP. In 1980, Mr. Bodurtha graduated from Wesleyan
University, Middletown, Connecticut with a Bachelor of Arts degree in
Government, magna cum laude. From 1980 to 1983, Mr. Bodurtha worked in
the Investment Banking Division of Merrill Lynch. In 1985, he was awarded
his Master of Business Administration degree from Harvard University,
where he also served as Associates Fellow (1985-1986). From 1986 to 1989,
Mr. Bodurtha held the positions of Associate and Vice President with
Kidder, Peabody & Co., Incorporated where he worked in their Financial
Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has held
the position of First Vice President since 1995. He has been the Director
in charge of the Structured Investments Group of MLPF&S since 1995.
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
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<PAGE>
1986, he received his Juris Doctor degree from The John Marshall Law
School. Mr. Olgin is a member of the Managed Funds Association's
Government Relations Committee and has served as an arbitrator for the
NFA. Mr. Olgin is also a member of the Committee on Futures Regulation of
the Association of the Bar of the City of New York.
Year 2000 Compliance
Merrill Lynch's modifications for Year 2000 systems compliance
are proceeding according to plan and are expected to be completed in early
1999. These modifications will include all systems which affect the
operations of the Fund. Based on information currently available, the
remaining expenditures are estimated at $200 million and will cover
hardware and software upgrades, systems consulting and computer
maintenance. These expenditures are not expected to have a material
adverse impact on Merrill Lynch's financial position, results of
operations or cash flows in future periods. However, the failure of
Merrill Lynch's securities exchanges, clearing organizations, vendors,
clients or regulators to resolve their own processing issues in a timely
manner could result in a material financial risk. Merrill Lynch is
devoting the necessary resources to address all Year 2000 issues in a
timely manner.
The Advisors are taking action to identify any of their computer
systems that are Year 2000 vulnerable. If such systems are identified that
negatively affect their services (e.g., trade details, fee information),
they will take action to update those systems, extensively test the
systems internally and, if appropriate, with other parties, to ensure that
system interdependencies have been adequately addressed, and establish
contingency plans and provide such plans in the event of a malfunction of
any part of the systems. Each Advisor has agreed that if it has a Year
2000 vulnerable system which is unable to be corrected on a timely basis,
they will so notify MLIP, and MLIP will promptly notify investors.
Litigation
Applicable CFTC rules require that the following proceeding be
disclosed, although MLIP does not consider it to be material. MLIP itself
has never been subject to any material legal, administrative or court
proceedings.
On June 24, 1997, the CFTC accepted an Offer of Settlement from
MLF and others, in a matter captioned "In the Matter of Mitsubishi
Corporation and Merrill Lynch Futures Inc., et al.," CFTC Docket No. 97-
10, pursuant to which MLF, without admitting or denying the allegations
against it, consented to a finding by the CFTC that MLF had violated
Section 4c(a)(A) of the Commodity Exchange Act, relating to wash sales
(the CFTC alleged that the customer entered nearly simultaneous orders
without the intent to engage in a bona fide trading transaction), and CFTC
Regulation 1.37(a), relating to recordkeeping requirements. MLF agreed to
cease and desist from violating Section 4c(a)(A) of the Act and Regulation
1.37(a), and to pay a civil monetary penalty of $175,000.
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 interest 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 44.
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 all investors in the Fund.
-30-
<PAGE>
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, established by MLIP. See "Charges -- Currency Trading Costs" at
page 41. 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 percentage-of-assets, 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.
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 such 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
-31-
<PAGE>
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 at 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
$78.35 (assuming ML&Co.'s five-year cost of funding to be 5%). 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 $78
or approximately $86.19. 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.
Possibility of One Series Having to Deleverage as a Result of Losses
Incurred by Another Series
If MLIP deleverages any series of Units with a 5-year Time
Horizon, i.e.,any series issued after May 1, 1997, it must similarly
deleverage all such series. Consequently, MLIP could deleverage or even
terminate trading with respect to a series under circumstances in which
MLIP would not otherwise have done so. 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) Units Issued Under This Prospectus" at page 14.
-32-
<PAGE>
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 would intend
to commit more than 85% of all series' capital to trading. However, MLIP
must upleverage all series issued since May 1, 1997 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. 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.
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 32.
The Guarantor
ML & Co. is a holding company that, through its subsidiaries and
affiliates, provides investment, financing, advisory, insurance, and
related services on a global basis. Its principal subsidiary, MLPF & S,
one of the largest securities firms in the world, is a leading broker in
securities, options contracts, and commodity and financial futures
contracts; a
-33-
<PAGE>
leading dealer in options and in corporate and municipal securities; a
leading investment banking firm that provides advice to, and raises
capital for, its clients; an underwriter of selected insurance products,
and a distributor of investment products of the Merrill Lynch Asset
Management group. Other subsidiaries provide financial services on a
global basis similar to those of MLPF&S and are engaged in such other
activities as international banking, lending, and providing other
investment and financing services. Merrill Lynch International
Incorporated, through subsidiaries and affiliates, provides investment,
financing, and related services outside the United States and Canada. The
Company's asset management and investment management activities are
conducted through the Merrill Lynch Asset Management group and Merrill
Lynch Mercury Asset Management, which together constitute one of the
largest asset management organizations in the world. Merrill Lynch
Government Securities Inc. is a primary dealer in obligations issued or
guaranteed by the U.S. Government and its agencies and government-
sponsored entities. Merrill Lynch Capital Services, Inc., Merrill Lynch
Derivative Products AG, and Merrill Lynch International are ML & Co.'s
primary derivative product dealers and enter into interest rate, currency,
and other over-the-counter derivative transactions as intermediaries and
as principals. ML & Co's operations in insurance services consist of the
underwriting and sale of life insurance and annuity products. Banking,
trust, and mortgage lending operations conducted through subsidiaries of
ML & Co. include issuing certificates of deposit, offering money market
deposit accounts, making and purchasing secured loans, providing currency
exchange facilities and other related services, and furnishing trust,
employee benefit, and custodial services.
As of June 26, 1998, the aggregate net worth (stockholders'
equity) of ML & Co. was approximately $9.7 billion.
The following is certain summary financial information for
ML&Co. for fiscal years ended December 26, 1997 and December 27, 1996 and
the fiscal quarters (unaudited) ended June 27, 1997 and June 26, 1998.
Because the ML & Co. guarantee is a general, unsecured obligation of ML &
Co., the value of the ML & Co. guarantee is dependent upon the continued
financial soundness of ML & Co.
MERRILL LYNCH & CO., INC.
SUMMARY FINANCIAL INFORMATION
(in millions, except where indicated)
<TABLE>
<CAPTION>
January 1, 1998 January 1, 1997
to to
June 26, 1998 June 27, 1997 Year Ended Year Ended
(Unaudited) (Unaudited) December 26, 1997 December 27, 1996
---------------- ---------------- ----------------- -----------------
Income Statement Data
<S> <C> <C> <C> <C>
Net revenues........................ $ 9,311 $ 7,808 $15,669 $13,116
Earnings before income taxes and
cumulative effect of changes
in accounting principles........... $ 1,781 $ 1,551 $ 3,050 $ 2,566
Net earnings........................ $ 1,063 $ 947 $ 1,906 $ 1,619
Share Data
Average number of basic shares
outstanding........................ 343.4 330.5 331.5 337.8
Common shares outstanding........... 347.2 329.0 335.1 328.2
Balance Sheet Data
Total assets (billions)............. $365.41 $268.04 $292.82 $213.02
Total liabilities (billions)........ $353.98 $260.14 $283.86 $205.80
Stockholders' equity (billions)..... $ 9.69 $ 7.27 $ 8.33 $ 6.89
------- ------- ------- -------
</TABLE>
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<PAGE>
The financial results for ML&Co. are more fully set forth in its
Annual Report to Stockholders for the 1997 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, South Tower, World Financial Center, New York, New
York 10080; 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."
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.
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 57.
Market Types
The Fund trades on a variety of United States and foreign
futures exchanges. Applicable exchange rules differ significantly among
different countries and exchanges. Substantially all of the Fund's off-
exchange trading takes place in the highly liquid, institutionally based
currency forward markets. The 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 are currently held either in custodial
or customer accounts at Merrill Lynch. Fund assets managed by MLAM are
generally held in custodial accounts at a major bank, separate from all
other Merrill Lynch
-35-
<PAGE>
or banking client assets. Assets held in customer accounts are held at
MLPF & S or MLF. These customer accounts are maintained in the Fund's
name, but the assets deposited by the Fund in such accounts are commingled
with those of other MLPF & S or MLF customers.
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 Treasury bills or Government Securities. 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 assets managed by MLAM and
the Fund's cash balances 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.
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. However, cash management returns cannot be assured,
and there may be losses of principal.
The Government Securities acquired by MLAM on behalf of the Fund
are maintained in a custodial account at Merrill Lynch and are
specifically traceable to the Fund. All income earned on such Government
Securities inures to the benefit of the Fund. All fees due to MLAM are
paid at no additional cost to the Fund.
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.
-36-
<PAGE>
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 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.
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 small fee paid to the offset
banks -- from the offset accounts have not exceeded 0.75% per annum of the
Fund's average daily U.S. dollar Available Assets held in the offset
accounts. These benefits 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, if
any, 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. The Fund does not earn interest on
foreign margin deposits provided by MLF. 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 a prevailing local short-
term bank rate on realized and unrealized gains on non-U.S. dollar
denominated positions for such gains actually held in cash by the Fund.
Merrill Lynch charges the Fund Merrill Lynch's cost of financing realized
and unrealized losses on such positions.
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 such
counterparty's 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).
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<PAGE>
CHARGES
The following table summarizes the charges incurred by the Fund
during 1995, 1996 and 1997.
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
% 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> <C> <C> <C>
Brokerage
Commissions** $4,833,598 5.64% $4,775,116 5.77% $3,216,364 5.76%
Administrative
Fees** 138,103 0.16 129,057 0.16 86,928 0.16
Profit Shares 931,522 1.09 978,264 1.18 652,366 1.17
---------- ---- ---------- ---- ---------- ----
Total $5,903,223 6.89% $5,882,437 7.21% $3,955,658 7.23%
========== ==== ========== ==== ========== ====
</TABLE>
* Only approximately 60% of the Fund's average month-end Net Assets were
allocated to trading until May 1997. Units issued after May 1, 1997
commenced trading with 75% of their assets allocated to trading. Such
Units began to allocate 85% of their assets to trading as of May 1, 1998.
Units issued under this Prospectus will commence trading with 85% of their
assets allocated to trading.
** A portion of the Brokerage Commissions in prior periods has been
reclassified to conform to the current period presentation of the
Administrative Fees.
____________________
Effective October 1, 1998, the Brokerage Commission will be
reduced from 8.75% to 7.5% per annum of assets allocated to trading.
Units issued under this Prospectus will begin trading with 85% of their
assets allocated to trading.
In conjunction with the Brokerage Commission reduction,
effective October 1, 1998 the Administrative Fee, while it will continue
to be calculated at the rate of 0.25% per annum, will be based on the
Fund's total assets (prior to reduction for accrued expenses), not the
Fund's assets allocated to trading.
____________________
The Fund's average month-end Net Assets during 1995, 1996 and
1997 equalled $55,827,125, $82,789,767, and $85,646,152, respectively.
The foregoing table does not reflect the Fund's currency trading
costs, or the benefits which MLF derives from possession of the Fund's
assets. See "Use of Proceeds and Cash Management Income" at pages 35-37.
During 1995, 1996 and 1997, the Fund earned $3,415,670,
$4,545,186 and $4,873,872 in interest income, or approximately 6.12%,
5.49% and 5.69% of the Fund's average month-end Net Assets, respectively.
See the Breakeven Table included in the "Summary" at page 10.
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<PAGE>
<TABLE>
<CAPTION>
Charges Paid by the Fund
Recipient Nature of Payment Amount of Payment
--------- ---------------------- -----------------
<S> <C> <C>
MLF Brokerage Commissions A monthly commission of 0.625 of 1% (a 7.50%
annual rate) of the Fund's month-end assets
committed to trading. The Fund will initially
commit to trading 85% of the capital attributable to
each series of Units issued pursuant to this
Prospectus.
MLF Use of Fund assets MLF derives an economic benefit from the deposit
of certain of the Fund's U.S. dollar Available Assets
not managed by MLAM in offset accounts; this
benefit to date has not exceeded 3/4 of 1% per
annum of such average daily U.S. dollar Available
Assets (not assets committed to trading).
MLIP Administrative Fees A monthly charge, payable to MLIP, of 0.020833 of
1% (a 0.25 of 1% annual rate) of the Fund's month-
end assets.
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
Counterparties F/X Desk deals also each receive bid-ask spreads
on the forward trades they execute 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 (all unaffiliated with Merrill Lynch)
Dealers with which MLAM executes Government Securities
trades include bid-ask spreads in the prices they
quote to the Fund.
Trading Advisors Profit Shares As of the date of this Prospectus, ranging from 15%
to 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 or the Fund's account managed by such
Advisor.
MLF; Extraordinary expenses Actual costs incurred; none paid to date, and
Others expected to be negligible.
</TABLE>
------------------------
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<PAGE>
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 rate of 0.625 of 1% of the Fund's month-end
assets committed to trading (a 7.50% annual rate). MLF receives these
percentage-of-assets 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 will initially commit 85% of the capital attributable
to each series of Units issued under this Prospectus to the Trading
Advisors for management. At this leverage factor, the Brokerage
Commissions equal 0.532 of 1% of each series' total month-end assets (a
6.375% annual rate).
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 1995, 1996 and 1997, the Fund paid Brokerage Commissions
of $3,216,364, $4,775,116 and $4,833,598, these percentage-of-assets
Brokerage Commissions were the approximate equivalent of round-turn trade
commissions of $116, $116 and $134 in each such year. Other firms charge
less for brokerage services similar to those provided by MLF to the Fund.
These "round-turn" equivalent rates were somewhat higher than those of
most MLIP funds. Other firms charge less for brokerage services similar to
those provided by MLF to the Fund. The per-trade equivalent of the Fund's
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, MLIP has never raised
the brokerage commissions paid by any of its funds and has reduced such
charges. In fact, the 8.75% Brokerage Commission rate will be reduced to
7.50% as of October 1, 1998. 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." This "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 35-37), 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 8.75% Brokerage Commissions -- to be reduced from
8.75% to 7.50% as of October 1, 1998 -- and the 0.25% 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
PERCENTAGE-OF-ASSETS BROKERAGE COMMISSIONS AND ADMINISTRATIVE FEES MAY NOT
BE INCREASED, IN THE AGGREGATE, ABOVE THE CURRENT ANNUAL LEVEL OF 9.0% OF
THE FUND'S AVERAGE MONTH-END ASSETS COMMITTED TO TRADING WITHOUT THE
UNANIMOUS CONSENT OF ALL LIMITED PARTNERS. (AS OF OCTOBER 1, 1998, THE
BROKERAGE COMMISSION RATE IS BEING REDUCED TO 8.75%, AND THE
ADMINISTRATIVE FEE CALCULATED ON TOTAL ASSETS, NOT ASSETS ALLOCATED TO
TRADING.)
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<PAGE>
MLF pays, from the Brokerage Commissions received by it, all
costs of executing the Fund's futures trades, including the NFA
transaction fees assessed on the Fund's futures trading on United States
exchanges. Such fees currently equal $0.14 per round-turn trade of a
futures contract and $0.07 for each trade of a commodity option contract.
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 35-37, Merrill Lynch derives an economic benefit from the deposit
of certain of the Fund's U.S. dollar Available Assets not managed by MLAM
(approximately 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
MLIP charges a monthly Administrative Fee of 0.020833 of 1% of
each series of Units' month-end assets (not 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. During 1995, 1996 and 1997,
the Fund paid Administrative Fees of $86,928, $129,057 and $138,103,
respectively, to MLIP or in each year, approximately 0.16%, of the Fund's
average month-end Net Assets.
MLIP pays the ongoing administrative costs of the Fund,
including the expense of updating this Prospectus.
As of October 1, 1998, the Brokerage Commissions are being
reduced from 8.75% to 7.5% per annum, and the Administrative Fee will
begin to be charged on the basis of the Fund's total assets not just the
assets allocated to trading. This change should significantly reduce
overall costs to investors, and MLIP has agreed to waive the
Administrative Fee to the extent necessary to ensure that the Fund does
not pay more under the revised than it would have under the existing fee
structure.
Currency Trading Costs
The Fund trades currency forward contracts and converts foreign
currency gains and losses through the F/X Desk. The F/X Desk gives the
Fund access to MLIB as well as other counterparties. Merrill Lynch
charges a service fee of approximately $5.00 to $12.50 on each purchase or
sale of a futures contract-equivalent amount of a currency. This fee
fluctuates with exchange rates. No service fees are charged on trades
awarded to MLIB because MLIB receives bid-ask spreads on such trades.
In its exchange of futures for physical trading with Merrill
Lynch, the Fund acquires cash currency positions through the F/X Desk.
The Fund pays a spread when it exchanges these positions for futures.
The combined F/X Desk service fees and EFP differentials paid by
the Fund 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
markets, rather than on an agency basis on an exchange market).
Profit Shares
The Advisors generally receive quarterly or annual Profit Shares
ranging from 15% to 20% of any New Trading Profit which they earn for each
series, also considered individually. Advisors could receive Profit
Shares from one series of Units but not from others due to the different
times at which the series begin trading. For example, the account managed
by an Advisor for the series of Units sold as of October 1, 1998 might
incur losses during the fourth quarter of
-41-
<PAGE>
1998. Accordingly, such Advisor would have a loss carryforward with
respect to such series at the time that the series sold as of January 1,
1999 was issued. The January 1, 1999 series would not, of course, be
issued with any loss carryforward (as such series would have incurred no
losses as of its date of issuance). Consequently, if such Advisor traded
profitably in the first quarter of 1999, such Advisor (if receiving a
quarterly Profit Share) would be entitled to a Profit Share in respect of
the January 1, 1999 series, although such Advisor may not have recovered
the losses previously incurred by the October 1, 1998 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 cash management 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 allocable to 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 of such series) as if the redemption date were the end of a
Profit Share calculation period. The amounts so deducted will be paid to
the appropriate Advisor(s) and will not be subject to being returned to
the Fund or the redeeming Limited Partners, irrespective of subsequent
losses during the quarter or year.
Assume that as of the end of a series' first calendar quarter of
trading, an Advisor which receives a quarterly Profit Share had, after a
portion of the allocable monthly Brokerage Commissions and Administrative
Fees, a realized profit of $50,000 and an unrealized profit of $150,000 in
respect of such series. The New Trading Profit in respect of such series
would equal $200,000. The entire amount would represent an increase in
cumulative Trading Profit allocable to such series and 20%, or $40,000,
would be paid by such series to such Advisor. Assume also that during the
second quarter of such series' trading, again after a portion of the
allocable monthly Brokerage Commissions and Administrative Fees, the
Advisor's 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 20% of such $10,000 increase, or $2,000, would be paid by such series
to such Advisor. If the assets allocable to such series managed by the
Advisor were subsequently to sustain losses, such Advisor would not be
required to refund any of the Profit Shares previously paid by the series,
but it would not be until the Advisor's cumulative Trading Profit
allocable to such series exceeded $210,000 as of a calendar quarter-end
that the Advisor 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 accrued 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 the Profit Share 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.
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<PAGE>
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 Profit Share
calculation period, or $0 if higher) for Profit Share calculation
purposes.
During 1995, 1996 and 1997, the Fund paid Profit Shares of
$652,366, $978,264 and $931,522, and had net income of $5,186,492,
$7,223,364 and $5,420,245, respectively. These Profit Shares equalled
1.17%, 1.18% and 1.09% 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 experiences in the Fund. MLIP's multi-
advisor funds have historically paid substantial Profit Shares even during
periods when they were incurring losses.
Extraordinary Expenses
The Fund will be required to pay any extraordinary expenses, such as
taxes, incurred in its operation. The Fund has had no such expenses to
date, and in MLIP's experience, such expenses have been negligible.
Extraordinary expenses, if any, would not reduce New Trading Profit for
purposes of calculating the Profit Shares.
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 pages 54 and 55.
In conjunction with the October 1, 1998 reduction in the
Brokerage Commission rate and adjustment of the asset base on which the
Administrative Fee is calculated, MLIP reduced the selling commissions on
the Units from a $5 to a $4 per Unit production credit. The ongoing
compensation paid by MLIP to MLPF&S was not affected. It remains 2% per
annum of the average month-end assets allocated to trading in respect of
all trading Units outstanding more than twelve months.
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 ranging from 0.083% (1% annually) to 0.333%
(4% annually) of the month-end assets of the Fund committed to each of
them, respectively.
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 1995, 1996 and 1997, MLF paid Consulting Fees of
$858,044, $1,248,233 and $1,095,676, respectively, or approximately 1.54%,
1.51% and 1.28% of the Fund's average month-end Net Assets during these
periods.
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<PAGE>
MLAM Fees
MLF pays MLAM annual cash 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 1995, 1996 and 1997, MLF expensed approximately $70,670,
$146,259 and $80,296, respectively, in cash management fees paid or
accrued to MLAM.
____________________
Redemption Charges
Units redeemed on or prior to the end of the twenty-fourth month
after trading began with respect to such Units are subject to redemption
charges. A 3% redemption charge applies through the end of the twelfth
month after such Units begin trading. Units redeemed after the twelfth
but on or before the end of the eighteenth month after they begin trading
are subject to a redemption charge of 1.5%. Units redeemed after the
eighteenth month but on or before the end of the twenty-fourth month after
they begin trading are subject to a 1% redemption charge. For example,
Units issued October 1, 1998 will be redeemed with a 3% redemption charge
through September 30, 1999, a 1.5% redemption charge from October 1, 1999
through March 31, 2000 and a 1% redemption charge from April 1, 2000
through August 31, 2000.
Redemption 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% redemption charge is waived to the extent that the
redemption proceeds are reinvested. However, the Units acquired upon
reinvestment of redemption proceeds are subject to redemption charges for
the twenty-four months following the date such Units begin trading (just
like any other newly-issued Units), not of the date the redeemed series
began trading.
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 any expense
charged to the Fund as described herein.
During 1995, 1996 and 1997, MLIP received a total of $57,489,
$43,305 and $33,734, respectively, in redemption charges.
CONFLICTS OF INTEREST
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.
Because no formal procedures are in place for resolving
conflicts, they may be resolved by MLIP or an Advisor in a manner which
causes the Fund losses. The value of Limited Partners' investment may be
diminished by actions or omissions which independent third parties could
have prevented or corrected.
Although the conflicts of interest described are present in the
operation of the Fund, MLIP does not believe that they are likely to have
a material adverse effect on its performance because (among other things);
(i) the Advisors generally trade MLIP accounts in parallel, placing bulk
orders which are allocated among such accounts pursuant to pre-
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<PAGE>
established procedures. Consequently, the Advisors have little opportunity
to prefer another MLIP client over the Fund; (ii) MLF simply receives and
executes the Advisors' bulk orders based on pre-established procedures.
MLF has no ability in allocating positions to favor one account over
another; (iii) the Advisors generally charge all similar accounts the same
fees; and (iv) MLIP, as a fiduciary, is prohibited from benefiting itself
at the expense of the Fund.
In MLIP's view, the most important conflict of interest relating
to the Fund is that the business terms applicable to Merrill Lynch's
dealings with the Fund were not negotiated. These business terms are
described in detail in this Prospectus in order to give prospective
investors ample opportunity to accept or reject such terms. However, it
may be difficult for investors to assess, for example, the extent of the
adverse impact which the high level of the Fund's brokerage commissions
has on its long-term prospects for profitability.
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.
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
percentage-of-assets 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 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.
MLIP's interest in maximizing its revenues could cause it to
take actions which are detrimental to the Fund in order to increase MLIP's
income from the Fund or decrease its costs in sponsoring the Fund. Also,
because MLIP does not have to compete with third parties to provide
services to the Fund, there is no independent check on the quality of such
services. MLIP may lower the quality of such services in order to
maximize the net revenues which it receives from the Fund, while at the
same time causing the Fund's Net Asset Value to decline.
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<PAGE>
MLF; MLIB; and MLAM
MLF has numerous different clients and executes trades for a
wide range of such clients in the same markets at or about the same time.
Executing orders for different, and possibly competing, customers at the
same time involves an inherent conflict of interest. Furthermore, as a
result of executing orders for many other clients, MLF also has fewer
resources to allocate to the Fund's account.
Certain clients of MLF pay materially lower brokerage rates than
does the Fund. In the case of a number of such clients, particularly
clients with an account as large as that of the Fund, the lower fees
charged by MLF are in large part attributable to the significant costs
incurred by MLIP and the ML&Co. group in sponsoring the Fund and
distributing the Units being embedded in the Fund's Brokerage Commission
costs. In the case of institutional accounts, no sponsorship or
distribution costs are incurred by the Merrill Lynch organization, so that
MLF can lower brokerage commissions without reducing the net revenue
received by Merrill Lynch. See "Charges -- Charges Paid by Merrill Lynch"
at page 43 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 financial
incentives to favor certain of such clients over the Fund.
MLF, MLIB and MLAM do not have to compete to provide services to
the Fund; consequently, there is no independent check on the quality of
their services.
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.
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 different clients and
financial incentives to favor certain of 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.
Any action which an Advisor takes to maximize its revenues by
disfavoring the Fund could adversely affect the Fund's performance,
perhaps to a material extent.
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.
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<PAGE>
If a Financial Consultant does not give a client the advice
which the Financial Consultant believes to be in the best interests of the
client due to the Financial Consultant's desire to increase his or her
income, the client could incur substantial losses and/or continue to
invest in the Fund even though the Units have become an unsuitable
investment for such client.
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.
Investor Recourse Against Merrill Lynch Entities
Other than the Trading Advisors, all parties involved in the
operations of the Fund are affiliated with Merrill Lynch. However, were
investors to seek redress from Merrill Lynch for damages relating to the
offering of the Units or the operations of the Fund, they (i) would be
unlikely to have recourse against any Merrill Lynch entity which is not a
direct party to an agreement with the Fund, and (ii) would be likely to
have such recourse even in the case of such entities only on a derivative
basis, suing not individually but in the right of the Fund.
___________________
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 conflicts of interest, and none of the
foregoing parties has adopted any formal procedures or policies for
resolving such conflicts.
____________________
TRANSACTIONS BETWEEN MERRILL LYNCH AND THE FUND
All of the service providers to the Fund, other than the
Advisors, are affiliates of Merrill Lynch. Merrill Lynch negotiated with
the Advisors over the level of their advisory fees and Profit Shares.
However, none of the fees paid by the Fund to any Merrill Lynch party were
negotiated, and they may be higher than would have been obtained in arm's-
length bargaining.
The Fund pays Merrill Lynch substantial Brokerage Commissions
and Administrative Fees as well as currency trading costs. The Fund also
pays MLF interest on short-term loans extended by MLF to cover losses on
foreign currency positions and permits Merrill Lynch to retain a portion
of the benefit derived from possession of the Fund's assets.
Within the Merrill Lynch organization, MLIP is the beneficiary
of the revenues received by different Merrill Lynch entities from the
Fund. MLIP controls the management of the Fund and serves as its
promoter. Although MLIP has not sold any assets, directly or indirectly,
to the Fund, MLIP makes substantial profits from the Fund due to the
foregoing revenues.
No loans have been, are or will be outstanding between MLIP or
any of its principals and the Fund.
MLIP pays substantial selling commissions ($4 per Unit) and
trailing commissions (2% annually of the average assets allocated to
trading, beginning in the thirteenth month after a Unit is sold) to MLPF&S
for distributing the Units. MLIP is ultimately paid back for these
expenditures from the revenues it receives from the Fund.
Descriptions of the dealings between the Fund and Merrill Lynch
are set forth under "Selected Financial Data," "Use of Proceeds and Cash
Management Income" and "Charges."
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<PAGE>
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 LPA-7).
Assignments; Redemptions
Units may only be transferred with the consent of the General
Partner, although the assignment of the economic interest represented by
the Units (but not any of the other rights, such as the right to vote 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.
A 3% redemption charge applies to Units redeemed on or prior to
the end of the twelfth full calendar month after trading begins with
respect to such Units. Units redeemed after the twelfth but on or before
the end of the eighteenth month after they begin trading are subject to a
1.5% redemption charge, and Units redeemed after the eighteenth but on or
prior to the twenty-fourth month after they begin trading are subject to a
1% 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 on or before 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 twenty-
fourth full month after trading begins with respect to the new Units, just
as in the case of any newly-issued 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, South
Tower, World Financial Center, New York, New York 10080.
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 LPA-7). Limited
Partners may remove and replace MLIP as general partner of the Fund, and
may, with the consent of MLIP, amend the Limited Partnership Agreement,
except in certain limited respects, by the affirmative vote of holders of
Units representing more than fifty percent (50%) of the outstanding Units
of each series owned by Limited Partners. (Section 17(b) at LPA-16). A
majority of the Units of each series held by Limited Partners may also
compel dissolution of the Fund. (Section 17(b) at LPA-16). 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 LPA-16).
MLIP has no power under the Limited Partnership Agreement to
restrict any of the Limited Partners' voting rights. (Section 17(c) at
LPA-16). Any Units purchased by MLIP or its affiliates are non-voting.
(Section 6 at 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 LPA-
16).
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<PAGE>
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 LPA-16).
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 LPA-10).
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 LPA-10).
General
In compliance with the NASAA Guidelines (see "Fiduciary
Obligations of MLIP" at page 30), the Limited Partnership Agreement
provides that: (i) the Fund will make no loans (Section 8(c) at LPA-8);
(ii) no rebates or give-ups, among other things, may be received from the
Fund by any Trading Advisor, MLIP, MLF, MLIB, MLAM or any 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 LPA-9); (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 LPA-9); and
(iv) the assets of the Fund will not be commingled with the assets of any
other person (deposit of assets with a commodity broker, clearinghouse or
forward dealer does not constitute commingling for these purposes).
(Section 8(c) at LPA-8).
All Advisors must meet the experience requirements of the NASAA
Guidelines. (Section 8(f) at LPA-9).
MLIP has agreed in the Limited Partnership Agreement to
reimburse the Fund, with interest, for any advisory or other fees paid by
the Fund during any fiscal year to any Advisor which exceed the 6% annual
management fees and the 15% quarterly incentive fees permitted by the
NASAA Guidelines. (Section 8(f) at LPA-9).
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 generally made in
proportion to the capital accounts of each Unit of such series, and
therefore such allocations should have substantial economic effect.
However, in cases in which a Partner redeems part or all of his or her
Units in the Fund the
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<PAGE>
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,
certain ordinary deductions recharacterized as reductions in capital gain
or increases in capital loss 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," 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 and income from investment activities not
constituting a trade or business, such as interest and dividends
("Portfolio Income"). The trading activities of the Trading Partnership
do not constitute "passive activities," and income derived from the Fund
constitutes Portfolio Income or other income not from a "passive
activity."
Redemptions of Units
Cash received from the Fund by a Partner generally is not
reportable as taxable income by a Partner, except as described below.
Rather, such receipt reduces (but not below zero) the total tax basis of
the Units held by such Partner.
Redemption for cash of all of a Partner's Units will result in
the recognition of gain or loss for federal income tax purposes. Such
gain or loss will be equal to the difference, if any, between the amount
received and the Partner's adjusted tax basis for his or her Units.
Assuming that the Partner has held his or her Units for more than one
year, such gain or loss will be long-term capital gain or loss.
Gain or Loss on Section 1256 Contracts
Under the "mark-to-market" system of taxing futures and
commodity options contracts traded on United States exchanges and certain
foreign currency forward contracts ("Section 1256 Contracts"), any
unrealized profit or loss on positions in such Section 1256 Contracts open
as of the end of a fiscal year is treated as if such profit or loss had
been realized for tax purposes as of such time. In general, 60% of the
net gain or loss which is generated as a result of the "mark-to-market"
system is treated as long-term capital gain or loss, and the remaining 40%
of such net gain or loss is treated as short-term capital gain or loss.
Gain or Loss on Non-Section 1256 Contracts
Except as described in the following paragraph with respect to
"Section 988 transactions," gain or loss with respect to contracts that
are non-Section 1256 Contracts is taken into account for tax purposes only
when realized.
"Section 988 transactions" include entering into or acquiring
any forward contract, futures contract or similar instrument if the amount
paid or received is denominated in terms of (or determined by reference to
the value of) a foreign currency other than the taxpayer's functional
currency or if the underlying property to which the contract or instrument
ultimately relates is a foreign currency other than the taxpayer's
functional currency. In general, foreign currency gain or loss on Section
988 transactions is treated as ordinary income or loss. However, under the
"qualified fund election" made by the Fund, gain or loss with respect to
certain Section 988 transactions will be capital gain or loss. In
addition, all
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<PAGE>
such transactions are subject to the "mark-to-market" rules, whether or
not they involve Section 1256 Contracts (see "-- Gain or Loss on Section
1256 Contracts," above).
Tax on Capital Gains and Losses
The maximum tax rate for non-corporate taxpayers on adjusted net
capital gains (as defined below) is 20%. Only capital assets held for
more than 12 months (including 60% of the net gain on Section 1256
Contracts) are eligible for the 20% tax rate. Net short-term capital gain
(i.e., net gain on assets held for 12 months or less, including 40% of net
gain on Section 1256 Contracts) is subject to tax at the same rates as
ordinary income. Adjusted net capital gain is the excess of net long-term
capital gain over net short-term capital loss reduced by certain other
amounts, if any. See "-- Limitation on Deductibility of Interest on
Investment Indebtedness," below (for a discussion of the reduction in the
amount of a non-corporate taxpayer's net capital gain for a taxable year
to the extent such gain is taken into account by such taxpayer as
investment income). Capital losses are deductible by non-corporate
taxpayers only to the extent of capital gains for the taxable year plus
$3,000. See "Risk Factors -- (D) Taxation of Interest Income" at page 16.
If a non-corporate taxpayer incurs a net capital loss for a
year, the portion thereof, if any, which consists of a net loss on Section
1256 Contracts may, at the election of the taxpayer, be carried back three
years. Losses so carried back may be deducted only against net capital
gain for such year to the extent that such gain includes gains on Section
1256 Contracts. Losses so carried back will be deemed to consist of 60%
long-term capital loss and 40% short-term capital loss (see "-- Gain or
Loss on Section 1256 Contracts," above at page 50). 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% of an individual taxpayer's adjusted gross
income (the "2% Floor"). 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 equal to, generally, 3% of
the taxpayer's adjusted gross income in excess of a certain threshold
amount (the "3% Phase-Out"). Moreover, such Aggregate Investment Expenses
are miscellaneous itemized deductions which are not deductible by
individual taxpayers in calculating their alternative minimum tax.
Based on the trading activities of the Trading Partnership to
date, in the opinion of Sidley & Austin, the Trading Partnership should be
treated as engaged in the conduct of a trade or business for federal
income tax purposes. As a result, the ordinary and necessary business
expenses incurred by the Trading Partnership in conducting its commodity
futures trading business should not be subject to the 2% Floor or the 3%
Phase-Out. (Substantially all of the expenses related to an investment in
the Fund are incurred and paid by the Trading Partnership.) This is the
position which MLIP has taken to date. Investors should be aware,
however, that an opinion of counsel is not binding on the IRS or on any
court, and that it is possible that the IRS could contend, or that a court
could decide, that the trading activities of the Trading Partnership do
not constitute a trade or business for federal income tax purposes. To
the extent the characterization of the Trading Partnership's expenses as
investment advisory expenses were to be sustained, each non-corporate
Partner's pro rata share of the amounts so characterized would be
deductible only to the extent that such non-corporate Partner's Aggregate
Investment Expenses exceeded the 2% Floor and, when combined with certain
other itemized deductions, exceeded the 3% Phase-Out. In addition, each
non-corporate Partner's distributive share of the income allocated to the
Fund by the Trading Partnership would be increased (solely for tax
purposes) by such Partner's pro rata share of the amounts so
recharacterized.
Taxation of Government Securities Investments
The Fund's purchase and sale of Government Securities generates
capital gain or loss -- generally short-term -- as well as interest
income. Taxable income is recognized on any interest accrued on zero-
coupon Government Securities acquired for the Fund, even though no
interest is paid on such Government Securities until they mature.
Syndication Fees
The 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.
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Limitation on Deductibility of Interest on Investment Indebtedness
Interest paid or accrued on indebtedness properly allocable to
property held for investment constitutes "investment interest." Interest
expense incurred by a Limited Partner to acquire or carry his 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 51.)
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 per Unit 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 a tax
audit of the Fund.
State and Other Taxes
In addition to the federal income tax consequences described
above, the Fund and the Partners may be subject to various state and other
taxes. Certain of such taxes could, if applicable, have a significant
effect on the amount of tax payable in respect of an investment in the
Fund.
____________________
THE FOREGOING 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.
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<PAGE>
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 under this Prospectus as of the beginning
of each calendar quarter beginning October 1, 1998.
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 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, or of all series collectively,
will be sold.
MLPF&S acts as the exclusive Selling Agent for the Units; see "-
- Selling Agent Compensation," at pages 54 and 55 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 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 Prospectus Supplement as well as 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.
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<PAGE>
Purchases by Employee Benefit Plans
Affected Investors. This section sets forth certain
consequences under the Employee Retirement Income Security Act of 1974
("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,
plans include 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 plays or 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 its
investment in the Fund, are diversified so as to minimize the risk of
large losses and that an investment in the Fund complies with the Plan and
related trust documentation.
The Fund 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 therein 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 and SEP accounts, this 10% limitation
applies to the 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 $4 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. The
Selling Agent will, in turn, pay out a portion of the amounts so received
to qualified Financial Consultants (the individual MLPF&S brokers).
-54-
<PAGE>
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 85% when a new series is issued, and may vary
substantially over time. Ongoing production credits accrue monthly and
are paid quarterly.
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 approximately $300,000 in the aggregate), are in
addition to the selling commissions credited to the Selling Agent. In no
event will any of 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 MLIP's responsibilities as
general partner of the Fund and related matters. Sidley & Austin has
reviewed the statements under the section, "Federal Income Tax
Consequences," in this Prospectus, and rendered the opinions described
therein to MLIP.
EXPERTS
The balance sheet of MLIP as of December 26, 1997 and the
consolidated financial statements of the Fund as of December 31, 1996 and
1997 and for the three years in the period ended December 31, 1997,
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.
-55-
<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............. 41
Advisors....................... Cover page
Available Assets............... 36
Bid-ask spreads................ 41
Breakeven level................ 10
Brokerage Commissions.......... 40
CFTC........................... -i-
Consulting Fees................ 43
EFP............................ 65
Employee benefit plan.......... 54
ERISA.......................... 54
Escrow Agent................... -i-
F/X Desk....................... 10
Fund........................... Cover page
Government Securities.......... 9
Guarantee...................... 33
Limited Partners............... Cover page
Merrill Lynch.................. 3
ML&Co.......................... Cover page
MLAM........................... Cover page
MLF............................ Cover page
MLIB........................... 3
MLIP........................... Cover page
MLPF&S......................... -i-
Net Asset Value................ LPA-2-3
New Trading Profit............. 42
Offset accounts................ 36
Ongoing production credits..... -i-
Opportunity costs.............. 12
Peak-to-Valley Drawdown........ 19
Principal Assurance Date....... Cover page
"Principal protection"......... 9
Production credits............. -i-
Profit Shares.................. 41
Redemption charges............. 42
Round-turn commissions......... 40
SEC............................ -ii-
Selling Agent.................. Cover page
Selling commissions............ -i-
Service fees................... 41
Time Horizon................... 12
Trading Advisors............... Cover page
Variation margin............... 24
Worst Monthly Drawdown......... 19
Worst Peak-to-Valley Drawdown.. 19
Yield enhancement 9
</TABLE>
-56-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
ML Principal Protection L.P.
Independent Auditors' Report............................. 58
Consolidated Statements of Financial Condition........... 59
Consolidated Statements of Income........................ 60
Consolidated Statements of Changes in Partners' Capital.. 61
Notes to Consolidated Financial Statements............... 62
</TABLE>
Merrill Lynch Investment Partners Inc.
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report............................. 75
Balance Sheets........................................... 76
Notes to Balance Sheets.................................. 77
</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.
-57-
<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, 1997 and 1996, and the related consolidated statements
of income and changes in partners' capital for each of the three years in
the period ended December 31, 1997. 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. as of December 31, 1997 and 1996, and the results of their operations
for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 6, 1998
-58-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
-------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
JUNE 30, 1998 (UNAUDITED), DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 30, 1998
(unaudited) 1997 1996
----------- ---- ----
<S> <C> <C> <C>
ASSETS
Cash $ 1,242 $ 1,423 $ 328
Accrued interest receivable (Note 2) 903,822 38,562 23,501
U. S. Government obligations (Note 1) 77,010,800 94,651,930 72,815,648
Equity in commodity futures trading accounts:
Cash and option premiums 25,285,239 6,127,948 7,177,888
Net unrealized profit on open contracts 52,514 2,958,084 1,677,317
------------ ------------ -----------
TOTAL $103,253,617 $103,777,947 $81,694,682
============ ============ ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 2,906,480 $ 636,155 $ 966,906
Brokerage commissions payable (Note 2) 553,514 494,349 378,291
Administrative fees payable (Note 2) 15,815 14,330 10,224
Profit Shares payable (Note 4) 393,271 591,195 658,800
Organizational and initial offering costs payable -- -- 68,630
(Note 1)
------------ ------------ -----------
Total liabilities 3,869,080 1,736,029 2,082,851
------------ ------------ -----------
MINORITY INTEREST 777,028 815,233 768,546
------------ ------------ -----------
PARTNERS' CAPITAL:
General Partner (6654.61 Units, 23,141.61 Units 699,455 2,564,153 2,301,180
and 20,873.06 Units)
Limited Partners (951812.247 Units, 97,908,054 105,628,837 76,542,105
989140.56 Units and 702,786.91 Units)
Subscriptions receivable (0 Units, 69,663.05 -- (6,966,305) --
Units and 0 Units)
------------ ------------ -----------
Total partners' capital 98,607,509 101,226,685 78,843,285
------------ ------------ -----------
TOTAL $103,253,617 $103,777,947 $81,694,682
============ ============ ===========
NET ASSET VALUE PER UNIT (NOTE 5)
</TABLE>
See notes to consolidated financial statements.
-59-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
-------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
January 1, 1998 January 1, 1997
to to
June 30, 1998 June 30, 1997
(Unaudited) (Unaudited) 1997 1996 1995
----------- ----------- ---- ---- ----
<S> <C> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 1,596,744 $ 3,722,347 $ 5,412,457 $ 9,038,064 $4,407,833
Change in unrealized (2,938,626) (1,403,567) 1,083,826 (396,221) 1,355,377
----------- ----------- ----------- ----------- ----------
Total trading results (1,341,882) 2,318,780 6,496,283 8,641,843 5,763,210
Interest income (Note 2) 2,970,056 2,182,912 4,873,872 4,545,186 3,415,670
----------- ----------- ----------- ----------- ----------
Total revenues 1,628,174 4,501,692 11,370,155 13,187,029 9,178,880
----------- ----------- ----------- ----------- ----------
EXPENSES:
Profit Shares (Note 4) 704,269 498,398 931,522 978,264 652,366
Brokerage commissions (Note 2) 3,254,852 2,141,245 4,833,598 4,775,116 3,303,292
Administrative fees (Note 2) 92,996 61,179 138,103 129,057 --
----------- ----------- ----------- ----------- ----------
Total expenses 4,052,117 2,700,822 5,903,223 5,882,437 3,955,658
----------- ----------- ----------- ----------- ----------
(LOSS) INCOME
BEFORE MINORITY
INTEREST (2,423,943) 1,800,870 5,466,932 7,304,592 5,223,222
Minority interest in income 38,205 (12,289) (46,687) (81,228) (36,730)
----------- ----------- ----------- ----------- ----------
NET (LOSS) INCOME $(2,385,738) $ 1,788,581 $ 5,420,245 $ 7,223,364 $5,186,492
=========== =========== =========== =========== ==========
NET (LOSS) INCOME PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number of
Units outstanding (Note 6) 1,013,441 723,788 818,689 754,428 551,944
=========== =========== =========== =========== ==========
Net (loss) income per weighted
average General Partner and
Limited Partner Unit $ (2.35) $ 2.47 $ 6.62 $ 9.57 $ 9.40
=========== =========== =========== =========== ==========
</TABLE>
See notes to consolidated financial statements.
-60-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
-------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited General Subscriptions
Units Partners Partner Receivable Total
----------- ------------- ----------- -------------- ------------
<S> <C> <C> <C> <C> <C>
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
Redemptions (95,650.38) (10,424,401) -- -- (10,424,401)
Subscriptions 116,453.00 11,645,300 -- -- 11,645,300
Distributions -- (1,481,675) (33,522) -- (1,515,197)
Net Income -- 1,739,075 49,506 -- 1,788,581
----------- ------------ ----------- ------------ ------------
PARTNERS' CAPITAL,
JUNE 30, 1997 (Unaudited) 744,462.59 $ 78,020,404 $ 2,317,164 $ -- $ 80,337,568
=========== ============ =========== =========== ============
Redemptions (183,442.91) $(19,816,833) $ -- $ -- $(19,816,833)
Subscriptions 472,065.11 46,994,656 211,855 -- 47,206,511
Subscriptions Receivable (69,663.05) -- -- (6,966,305) (6,966,305)
Distributions -- (3,362,913) (97,305) -- (3,460,218)
Net Income -- 5,271,822 148,423 -- 5,420,245
----------- ------------ ----------- ------------ ------------
PARTNERS' CAPITAL
DECEMBER 31, 1997 942,619.12 105,628,837 2,564,153 (6,966,305) 101,226,685
Redemptions (183,846.01) (17,711,435) (1,807,847) -- (19,519,282)
Subscriptions 130,030.49 13,003,049 -- -- 13,003,049
Subscriptions Receivable 69,663.26 -- -- 6,966,305 6,966,305
Distributions -- (661,354) (22,156) -- (683,510)
Net Loss -- (2,351,043) (34,695) -- (2,385,738)
----------- ------------ ----------- ------------ ------------
PARTNERS' CAPITAL
JUNE 30, 1998 (Unaudited) 958,466.86 $ 97,908,054 $ 699,455 $ -- $ 98,607,509
=========== ============ =========== =========== ============
</TABLE>
See notes to consolidated financial statements.
-61-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML Principal Protection L.P. (formerly, ML Principal Protection Plus
L.P.) (the "Partnership") was organized as an open-ended fund under the
Delaware Revised Uniform Limited Partnership Act on January 3, 1994 and
commenced trading activities on October 12, 1994. The Partnership engages in
both the 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 Trading L.P.) (the
"Trading Partnership"), of which the Partnership is the sole limited partner
and 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 Partnership
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 Partnership 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. The General Partner
has agreed to maintain a general partner's interest of at least 1% of the
total capital in each of the Partnership and the Trading Partnership. The
General Partner and the Limited Partners share in the profits and losses of
the Partnership, and the General Partner and the Partnership share in the
profits and losses of the Trading Partnership, in proportion to the
respective interests in the Partnership and the Trading Partnership owned by
each.
The consolidated financial statements include the accounts of the
Trading Partnership in which the Partnership is the sole limited partner.
The Partnership owns in excess of 99% of the equity of the Trading
Partnership and both are controlled by the General Partner which operates the
Trading Partnership in the General Partner's capacity as general partner of
the Partnership. All related transactions and intercompany balances between
the Partnership and the Trading Partnership are eliminated in consolidation.
The ownership by the General Partner in the Trading Partnership
represents a minority interest when the financial results of the Trading
Partnership are consolidated into those of the Partnership. The General
Partner's share of the Trading Partnership's profits and losses is deducted
from the Consolidated Statements of Income, and the General Partner's
interest in the Trading Partnership reduces partners' capital on the
Consolidated Statements of Financial Condition and the Consolidated
Statements of Changes in Partners' Capital.
The Partnership issues units of limited partnership interest
("Units") generally as of the beginning of each calendar quarter (and also
did so as of May 1, 1997). 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 against the necessity of preventing Merrill
Lynch from ever being required to make any payments to the Partnership under
the Merrill Lynch guarantee (see Note 7).
-62-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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.
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 on open contracts in the Consolidated Statements of
Financial Condition at the difference between the original contract value and
the fair value. The change in net unrealized profit (loss) on open contracts
from one period to the next is reflected in change in unrealized in the
Consolidated Statements of Income. Fair value is based on quoted market
prices on the exchange or market on which the contract is traded.
U.S. Government Securities
--------------------------
The Partnership 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 Partnership and the Trading Partnership. The
Partnership and Trading Partnership reimbursed the General Partner for such
costs in 36 monthly installments. For financial reporting purposes, the
Partnership deducted the organizational and initial offering reimbursement
costs of $239,100 from partners' capital at inception. For all other
purposes (including determining Net Asset Values of the Units), the
Partnership deducts the organizational and initial offering cost
reimbursements only as actually paid.
The General Partner pays all routine operating costs (including
legal, accounting, printing, postage and similar administrative expenses) of
the Partnership and the Trading Partnership, including the cost of the
ongoing offering of the Units. The General Partner receives administrative
fees as well as a portion of the brokerage commissions paid to MLF by the
Partnership 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
Partnership's consolidated income and expenses as reported for income tax
purposes.
-63-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
Redemptions
-----------
A Limited Partner may require the Partnership 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 Partnership
------------------------------
The Partnership will terminate on December 31, 2024, or at an earlier
date if certain conditions occur, as well as under certain other
circumstances as set forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
MLAM manages substantially all of the Partnership's available U.S.
dollar assets, pursuant to guidelines established by MLIP for which MLAM
assumes no responsibility, in the U.S. Government Securities markets. MLF
pays MLAM annual management fees of .20 of 1% on the first $25 million of
Partnership capital managed by MLAM, .15 of 1% on the next $25 million of
capital, .125 of 1% on the next $50 million, and .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.
A portion of the Partnership's U.S. dollar assets are held at MLF in
cash. On the cash held at MLF, the Partnership receives interest from
Merrill Lynch at the prevailing 91-day U.S. Treasury bill rate. Merrill
Lynch may derive certain economic benefits, in excess of the interest which
Merrill Lynch pays to the Partnership, from possession of such cash.
Merrill Lynch credits the Partnership with interest on the
Partnership's non-U.S. dollar-denominated assets based on local short-term
rates. Merrill Lynch charges the Partnership Merrill Lynch's cost of
financing realized and unrealized losses on the Partnership's non-U.S.
dollar-denominated positions.
The General Partner has determined that there may have been a
miscalculation in the interest credited to the Partnership for a period prior
to November 1996 (such period may extend prior to that covered by these
financial statements). Accordingly, the General Partner credited current and
former investors who maintained a Merrill Lynch customer account in December
1997 with interest which was compounded. Former investors who do not
maintain a Merrill Lynch customer account will be credited as their response
forms are processed. The total amount of the adjustment is approximately
$54,000. Since this amount was paid directly to investors by the General
Partner, it is not reflected in these financial statements. The General
Partner has determined that interest has been calculated appropriately since
November 1996.
Prior to 1996, the Partnership paid brokerage commissions to MLF in
respect of each series of Units at a flat monthly rate equal to .792 of 1% (a
9.5% annual rate) of such Series' month-end assets allocated to trading.
Effective January 1, 1996, this rate was reduced to .771 of 1% (a 9.25%
annual rate) of each series' month-end assets allocated to trading and the
Partnership began to pay MLIP a monthly administrative fee of .021 of 1% (a
.25% annual rate) of each Series' month-end assets allocated to trading (this
recharacterization had no economic effect on the Partnership). Effective
January 1, 1997, each Series' brokerage commission percentage was reduced to
.729 of 1% (an 8.75% annual rate) of such Series' month-end assets allocated
to trading. Assets committed 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 Partnership during the years ended December
31, 1997, 1996 and 1995, was approximately $116, $116 and $134, respectively,
not including, in calculating round-turn equivalents, forward contracts on a
futures-equivalent basis.
-64-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
MLF pays the Trading Advisors annual Consulting Fees, ranging up to
4% of the Partnership's average month-end assets allocated to them for
management, after reduction for a portion of the brokerage commissions
accrued with respect to such assets.
The Partnership trades forward contracts through a foreign exchange
service desk (the "F/X Desk") established by MLIP. The F/X Desk gives the
Partnership access to counterparties in addition to (but also including)
Merrill Lynch International Bank ("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 (not round-turn) of a
futures contract-equivalent face amount of a given currency traded in the
forward markets. No service fees are charged on trades awarded to MLIB
(which receives bid-ask spreads on such trades).
In its exchange of futures for physical ("EFP") trading with Merrill
Lynch, the Partnership 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 Partnership's other F/X Desk trading. When the
Partnership 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. The Advisors, to date, have made
little use of EFPs.
The Partnership's F/X Desk service fee and EFP differential costs
have, to date, totaled no more than .25 of 1% per annum of the Partnership's
average month-end assets.
3. ANNUAL DISTRIBUTIONS
The Partnership makes annual fixed-rate distributions, payable
irrespective of profitability, of between $2 and $5 per Unit on Units issued
prior to July 16, 1996. The Partnership may also pay discretionary
distributions on such Series of Units of up to 50% of any Distributable New
Appreciation, as defined on such Units. No distributions are payable on
Units issued after July 16, 1996. As of June 30, 1998 the Partnership
has made the following distributions:
<TABLE>
<CAPTION>
Distribution Fixed-Rate Discretionary
Series Date Distribution Distribution
---------------------------------------------------------------
<S> <C> <C> <C>
1998
----
Series B 1/1/98 $3.50 $1.50
Series C 4/1/98 3.50 --
Series F 1/1/98 3.50 1.25
Series G 4/1/98 3.50 --
1997
----
Series A 10/1/97 $3.50 $ --
Series B 1/1/97 3.50 3.00
Series C 4/1/97 3.50 4.00
Series D 7/1/97 3.50 1.00
Series E 10/1/97 3.50 2.00
Series F 1/1/97 3.50 2.50
Series G 4/1/97 3.50 3.50
Series H 7/1/97 3.50 2.50
</TABLE>
-65-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1996
----
<S> <C> <C> <C>
Series A 10/1/96 $3.50 $2.50
Series B 1/1/96 3.50 2.50
Series C 4/1/96 3.50 --
Series D 7/1/96 3.50 --
Series E 10/1/96 3.50 --
1995
----
Series A 10/1/95 3.50 2.50
</TABLE>
Effective January 1, 1998, distributions were announced for Series B
and Series F. The Series B Unitholders received a fixed-rate distribution of
$3.50 per Series B Unit as well as a discretionary distribution equal to
$1.50. The Series F Unitholders received a fixed-rate distribution of $3.50
per Series F Unit as well as a discretionary distribution equal to $1.25.
4. AGREEMENTS
The Trading Partnership and the Advisors have each entered into
Advisory Agreements. These Advisory Agreements generally terminate one year
after they are entered into, subject to certain renewal rights exercisable by
the Partnership. The 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 any series, either as of the end of each calendar
quarter or year, are paid to the appropriate Advisors. Profit Shares are
also paid out in respect of Units redeemed as of the end of interim months to
the extent of the applicable percentage of any New Trading Profit
attributable to such Units.
5. NET ASSET VALUE PER UNIT
For financial reporting purposes, the Partnership deducted the total
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 Partnership deducts the organizational and initial
offering cost reimbursements only as actually paid. The organizational and
initial offering cost reimbursement was completed in October 1997. At June
30, 1998 the Net Asset Values of the different series of Units for financial
reporting purposes and for all other purposes were:
<TABLE>
<CAPTION>
Net Asset
Net Asset Number Value
Value of Units per Unit
-------------------------------------------------------
<S> <C> <C> <C>
Series A Units $14,277,388 127,836.00 $111.69
Series B Units 1,761,344 16,410.00 107.33
Series C Units 2,853,074 27,693.00 103.03
Series D Units 7,325,850 67,842.00 107.98
Series E Units 6,538,511 60,849.04 107.45
Series F Units 4,454,022 43,427.04 102.56
Series G Units 4,245,950 41,921.95 101.28
Series H Units 2,754,573 26,290.73 104.77
Series K Units 7,562,572 74,145.00 102.00
Series L Units 13,541,682 136,301.00 99.35
</TABLE>
-66-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
Series M Units 13,789,850 136,757.56 100.83
Series N Units 6,774,942 69,663.05 97.25
Series O Units 8,109,443 83,046.49 97.65
Series P Units 4,618,308 46,284.00 99.78
----------- ----------
$98,607,509 958,466.86
=========== ==========
</TABLE>
As of December 31, 1997, the Net Asset Value of the different series of
Units for financial reporting purposes and for all other purposes were as
follows:
<TABLE>
<CAPTION>
Net Asset
Net Asset Number Value
Value of Units per Unit
-------------------------------------------------------
<S> <C> <C> <C>
Series A Units $ 17,716,313 155,778.00 $113.73
Series B Units 2,865,130 25,100.00 114.15
Series C Units 4,061,256 37,551.00 108.15
Series D Units 10,499,613 95,504.00 109.94
Series E Units 7,685,677 70,255.86 109.40
Series F Units 6,136,370 56,275.48 109.04
Series G Units 5,470,415 51,354.50 106.52
Series H Units 5,610,794 52,626.22 106.62
Series K Units 12,127,411 115,752.00 104.77
Series L Units 14,732,144 144,314.00 102.08
Series M Units 14,321,562 138,108.06 103.70
------------ ----------
$101,226,685 942,619.12
============ ==========
</TABLE>
As of December 31, 1996, the Net Asset Value of the different series of
Units for financial reporting purposes and for all other purposes were as
follows:
<TABLE>
<CAPTION>
Net Asset Value
Net Asset Value per Unit
------------------------- ---------------------
All Other Financial Number All Other Financial
Purposes Reporting of Units Purposes Reporting
----------- ----------- ---------- --------- ---------
<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>
-67-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
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, 1997, 1996 and 1995 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 Partnership that it will have
sufficient net assets, as of the Principal Assurance Date 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 distributions paid to such Units, not less than $100.
8. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options on futures and forward
contracts on interest rates, stock indices, commodities, currencies, energy and
metals. The Partnership's total trading results by reporting category for the
period January 1, 1998 to June 30, 1998, January 1, 1997 to June 30, 1997, and
the years ended December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Total Trading Results
---------------------------------------
January 1, 1998- January 1, 1997-
June 30, 1998 June 30, 1997
----------------- ----------------
<S> <C> <C>
Interest Rates $ (540,665) $(1,052,121)
Stock Indices 277,773 536,590
Commodities 353,250 1,750,969
Currencies 780,770 1,402,897
Energy (1,285,040) (932,627)
Metals (927,970) 613,072
----------- -----------
$(1,341,882) $ 2,318,780
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Total Trading Results
--------------------------------------
1997 1996 1995
----------- ---------- -----------
<S> <C> <C> <C>
Interest Rates $ 1,706,686 $3,183,955 $ 3,933,366
Stock Indices 232,314 (746,255) 587,931
Commodities 679,157 20,119 (447,486)
Currencies 3,911,109 3,301,360 2,914,300
Energy (1,278,003) 3,280,677 238,988
Metals 1,245,020 (398,013) (1,463,889)
----------- ---------- -----------
$ 6,496,283 $8,641,843 $ 5,763,210
=========== ========== ===========
</TABLE>
-68-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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 market values of the financial
instruments or commodities underlying such derivative instruments frequently
result in changes in the Partnership's unrealized profit on such derivative
instruments as reflected in the Consolidated Statements of Financial Condition.
The Partnership's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the Trading
Partnership as well as the volatility and liquidity in the markets in which the
derivative instruments are traded.
The General Partner has procedures in place intended to control market
risk, although there can be no assurance that they will, in fact, succeed in
doing so. The procedures focus primarily on monitoring the trading of the
Advisors selected from time to time for the Partnership, adjusting the
percentage of the Partnership's total assets allocated to trading with respect
to each Series of Units, calculating the Net Asset Value of the Advisors'
respective Partnership accounts as of the close of business on each day and
reviewing outstanding positions for over-concentrations--both on an Advisor-by-
Advisor and on an overall Partnership basis. While the General Partner does not
itself intervene in the markets to hedge or diversify the Partnership's market
exposure, the General Partner may urge Advisors to reallocate positions, or
itself reallocate Partnership assets among Advisors (although typically only as
of the end of a month), in an attempt to avoid over-concentrations. However,
such interventions are unusual. Except in cases in which it appears that an
Advisor has begun to deviate from past practice and trading policies or to be
trading erratically, the General Partner's basic risk control procedures consist
simply of the ongoing process of Advisor monitoring and selection, with the
market risk controls being applied by the Advisors themselves.
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 Partnership. 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.
Fair Value
The derivative instruments traded by the Trading Partnership are
marked to market daily with the resulting unrealized profit 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 June 30, 1998, December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------
Commitment Commitment
to Purchase to Sell
(Futures, Options (Futures, Options
and Forwards) and Forwards)
------------------ ------------------
<S> <C> <C>
Interest Rates $249,550,041 $135,894,320
Stock Indices 5,325,146 4,915,629
Commodities 10,598,741 11,363,887
Currencies 113,906,739 165,639,599
Energy 1,282,952 3,362,859
Metals 5,397,438 11,361,430
------------ ------------
$386,061,057 $332,537,724
============ ============
</TABLE>
-69-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997
--------------------------------------
Commitment Commitment
to Purchase to Sell
(Futures, Options (Futures, Options
and Forwards) and Forwards)
------------- -------------
<S> <C> <C>
Interest Rates $121,435,283 $ 85,620,621
Stock Indices 1,665,588 8,854,122
Commodities 11,663,786 21,791,599
Currencies 70,272,888 147,312,282
Energy 1,085,885 9,041,759
Metals 4,412,002 19,039,071
------------ ------------
$210,535,432 $291,659,454
============ ============
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------
Commitment Commitment
to Purchase to Sell
(Futures, Options (Futures, Options
and Forwards) and Forwards)
------------- -------------
<S> <C> <C>
Interest Rates $103,258,306 $ 38,270,540
Stock Indices 4,259,475 2,340,013
Commodities 8,541,433 12,761,047
Currencies 53,592,111 86,479,803
Energy 5,566,768 --
Metals 4,593,702 14,839,516
------------ ------------
$179,811,795 $154,690,919
============ ============
</TABLE>
Substantially all of the Trading Partnership's open derivative
instruments outstanding as of December 31, 1997 expire within one year.
The contract/notional values of the Trading Partnership's exchange-
traded and non-exchange-traded derivative instrument positions as of June 30,
1998, December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------
Commitment Commitment
to Purchase to Sell
(Futures, Options (Futures, Options
and Forwards) and Forwards)
------------- -------------
<S> <C> <C>
Exchange-Traded $287,585,593 $195,946,736
Non-Exchange -
Traded 98,475,464 136,590,988
------------ ------------
$386,061,057 $332,537,724
============ ============
</TABLE>
-70-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997
--------------------------------------
Commitment Commitment
to Purchase to Sell
(Futures, Options (Futures, Options
and Forwards) and Forwards)
------------- -------------
<S> <C> <C>
Exchange-Traded $142,565,779 $183,223,917
Non-Exchange -
Traded 67,969,653 108,435,537
------------ ------------
$210,535,432 $291,659,454
============ ============
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------
Commitment Commitment
to Purchase to Sell
(Futures, Options (Futures, Options
and Forwards) and Forwards)
------------- -------------
<S> <C> <C>
Exchange-Traded $133,757,339 $ 85,639,298
Non-Exchange -
Traded 46,054,456 69,051,621
------------ ------------
$179,811,795 $154,690,919
============ ============
</TABLE>
The average fair values, based on contract/notional values, of the Trading
Partnership's derivative instrument positions which were open as of the end
of each calendar month for the period ended June 30, 1998 and for the years
ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
June 30, 1998
--------------------------------------
Commitment Commitment
to Purchase to Sell
(Futures, Options (Futures, Options
and Forwards) and Forwards)
------------- -------------
<S> <C> <C>
Interest Rates $291,479,051 $124,704,213
Stock Indices 10,507,803 4,125,361
Commodities 11,577,867 18,872,855
Currencies 112,869,157 157,912,629
Energy 2,556,977 5,827,561
Metals 9,957,794 14,795,340
------------ ------------
$438,948,649 $326,237,959
============ ============
</TABLE>
-71-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997
--------------------------------------
Commitment Commitment
to Purchase to Sell
(Futures, Options (Futures, Options
and Forwards) and Forwards)
------------- -------------
<S> <C> <C>
Interest Rates $177,189,103 $ 68,697,138
Stock Indices 7,544,449 4,040,832
Commodities 13,113,725 11,481,639
Currencies 70,061,899 113,287,725
Energy 3,621,533 3,415,726
Metals 7,369,251 14,913,348
------------ ------------
$278,899,960 $215,836,408
============ ============
</TABLE>
<TABLE>
<CAPTION>
1996
--------------------------------------
Commitment Commitment
to Purchase to Sell
(Futures, Options (Futures, Options
and Forwards) and Forwards)
------------- -------------
<S> <C> <C>
Interest Rates $224,985,973 $ 91,029,835
Stock Indices 10,235,486 2,492,230
Commodities 13,316,970 7,175,841
Currencies 94,601,907 115,671,672
Energy 6,862,906 1,348,945
Metals 13,579,528 19,196,951
------------ ------------
$363,582,770 $236,915,474
============ ============
</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 profit, if any, included
on the Consolidated Statements of Financial Condition.
-72-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
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.
The gross unrealized profit and the net unrealized profit on the
Trading Partnership's open derivative instrument positions as of June 30,
1998, December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
June 30, 1998
------------------------
Net
Gross Unrealized
Unrealized Profit
Profit (Loss)
---------- ----------
<S> <C> <C>
Exchange-Traded $1,773,958 $123,092
Non-Exchange-
Traded 2,066,767 (70,578)
---------- --------
$3,840,725 $52,514
========== =======
</TABLE>
<TABLE>
<CAPTION>
1997
-----------------------
Gross Net
Unrealized Unrealized
Profit Profit
---------- ----------
<S> <C> <C>
Exchange-Traded $3,263,519 $2,416,539
Non-Exchange-
Traded 2,119,281 541,545
---------- ----------
$5,382,800 $2,958,084
========== ==========
</TABLE>
<TABLE>
<CAPTION>
1996
-----------------------
Gross Net
Unrealized Unrealized
Profit Profit
---------- ----------
<S> <C> <C>
Exchange-Traded $2,090,698 $1,611,482
Non-Exchange-
Traded 1,172,965 65,835
---------- ----------
$3,263,663 $1,677,317
========== ==========
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
-73-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(formerly, ML Principal Protection Plus L.P.)
(A Delaware Limited Partnership)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIODS JANUARY 1, 1998 TO JUNE 30, 1998 (UNAUDITED)
AND JANUARY 1, 1997 TO JUNE 30, 1997 (UNAUDITED) AND
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
The Partnership, in its normal course of business, enters into
various contracts, with MLF acting as its commodity broker. Pursuant to the
brokerage arrangement with MLF (which includes a master netting arrangement),
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 (UNAUDITED)
On July 1, 1998, distributions were announced with respect to Series
D Units and Series H Units. Series D Units received an annual fixed rate
distribution equal to $3.50 per Unit. Series H Units received an annual
fixed rate distribution equal to $3.50 per Unit.
-74-
<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 26, 1997. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the balance sheet is free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the balance
sheet. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall balance sheet presentation. We believe that our audit provides
a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company as of December 26, 1997
in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 6, 1998
-75-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(formerly, ML Futures Investment Partners Inc.)
BALANCE SHEETS
June 26, 1998 (unaudited) and December 26, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
June 26,
1998 December 26,
(unaudited) 1997
------------ ------------
<S> <C> <C>
ASSETS
Cash $ 470,727 $ 78,186
Investments in affiliated partnerships 10,806,127 15,911,448
Due from parent and affiliate 142,493,284 136,766,271
Receivables from affiliated partnerships 4,149,003 4,292,430
Deferred charges 25,329,330 26,005,943
Advances and other receivables 11,543,311 12,410,505
Fixed assets -- net of accumulated depreciation of $1,330,656
and $1,227,840 455,999 356,102
Other assets 136,000 154,000
------------ ------------
TOTAL ASSETS $195,383,781 $195,974,885
============ ============
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $ 7,854,664 $ 11,194,543
Due to affiliate 1,723,855 23,907,704
Current and deferred income taxes 18,932,111 18,072,851
------------ ------------
Total liabilities 28,510,630 53,175,098
------------ ------------
STOCKHOLDER'S EQUITY:
Preferred stock, par value $10.00 per share --
1,000 shares authorized; none outstanding -- --
Common stock, par value $10.00 per share --
1,000 shares authorized; 100 shares outstanding 1,000 1,000
Additional paid-in capital 16,915,000 16,915,000
Retained earnings 149,957,151 125,883,787
------------ ------------
Total stockholder's equity 166,873,151 142,799,787
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $195,383,781 $195,974,885
============ ============
</TABLE>
See notes to balance sheets.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-76-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(formerly, ML Futures Investment Partners Inc.)
NOTES TO BALANCE SHEETS
June 26, 1998 (unaudited) and December 26, 1997
- --------------------------------------------------------------------------------
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., ML Futures Investments L.P., John W. Henry & Co./Millburn
L.P., The S.E.C.T.O.R. Strategy Fund/SM/ L.P. (Safety of Equity Capital;
Targeting Overall Return), The SECTOR Strategy Fund/SM/ II L.P., The JWH Global
Asset Fund L.P., The SECTOR Strategy Fund/SM/ V L.P., ML Global Horizons L.P.,
ML/AIS L.P., ML Select Hedge I L.P., The SECTOR Strategy Fund/SM/ VI L.P., ML
Principal Protection L.P., ML Chesapeake L.P., ML JWH Strategic Allocation Fund
L.P. (collectively, the "Affiliated Partnerships"). The Company is also an
investor in a joint venture (ML/AIG Asset Management L.L.C.) 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, options on 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 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.
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 June 26, 1998, approximately
$142,500,000 and at December 26, 1997, approximately $136,800,000 was subject to
this agreement.
At June 26, 1998 and December 26, 1997, 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).
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-77-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(formerly, ML Futures Investment Partners Inc.)
NOTES TO BALANCE SHEETS
June 26, 1998 (unaudited) and December 26, 1997
- --------------------------------------------------------------------------------
During 1997 and the first half of 1998, the Company did not declare or pay
a dividend.
The Company has determined that there may have been a miscalculation in the
interest credited by an affiliate of the Company to certain Affiliated
Partnerships and related offshore entities of which the Company is the sponsor,
for a period prior to November 1996. Accordingly, ML&Co. is crediting current
and former investors in affected funds, with additional interest amounts
totaling approximately $28,500,000, which includes compound interest.
Approximately $23,500,000 was paid to investors through June 26, 1998 with the
remaining balance of $5,000,000 as a liability on the balance sheet. The Company
has determined that interest has been calculated appropriately since November
1996.
3. INVESTMENTS IN AFFILIATED PARTNERSHIPS
The limited partnership agreements of the Affiliated Partnerships require
the Company to make certain minimum capital contributions to them. At June 26,
1998 and December 26, 1997, the Company was in compliance with all such
requirements.
At June 26, 1998 and December 26, 1997, the Company's investments in the
Affiliated Partnerships were as follows:
<TABLE>
<CAPTION>
June 26, 1998
(unaudited) December 26, 1997
------------- -----------------
<S> <C> <C>
ML Principal Protection L.P. $ 1,456,798 $ 3,328,707
ML Global Horizons L.P. 1,372,800 1,652,159
The SECTOR Strategy Fund/SM/ II L.P. 368,452 956,384
John W. Henry & Company/Millburn L.P. 539,030 936,678
The SECTOR Strategy Fund/SM/ VI L.P. 229,156 820,070
The JWH Global Asset Fund L.P. 424,430 729,776
The S.E.C.T.O.R. Strategy Fund/SM/ L.P. 198,959 465,225
ML Futures Investments L.P. 228,908 402,373
The SECTOR Strategy Fund/SM/ V L.P. 101,336 391,026
ML Futures Investments II L.P. 118,479 218,183
The Growth and Guarantee Fund L.P. 260,886 332,114
The Futures Expansion Fund Limited Partnership 90,635 142,826
ML Chesapeake L.P. 74,444 90,570
ML/AIG Asset Management L.L.C. 2,434,362 2,309,068
ML JWH Strategic Allocation Fund L.P. 2,077,178 2,461,884
ML Select Hedge I L.P. 522,235 500,000
ML/AIS L.P. 308,037 174,405
----------- -----------
Total $10,806,125 $15,911,448
=========== ===========
</TABLE>
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-78-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS, INC.
(formerly, ML Futures Investment Partners Inc.)
NOTES TO BALANCE SHEETS
June 26, 1998 (unaudited) and December 26, 1997
- -------------------------------------------------------------------------------
The following represents condensed combined financial information of
the Affiliated Partnerships as of June 26, 1998 and December 26, 1997 (in
thousands):
June 26, 1998
-------------
<TABLE>
<CAPTION>
<S> <C>
Assets $746,088
========
Liabilities 30,961
Partners' capital 715,127
--------
Total $746,088
========
</TABLE>
December 26, 1997
-----------------
<TABLE>
<CAPTION>
<S> <C>
Assets $877,131
========
Liabilities 17,325
Partners' capital 859,806
--------
Total $877,131
========
</TABLE>
The Company's Affiliated Partnerships trade various futures, options
on futures 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 June 26, 1998 and December 26, 1997, the Company had no deferred tax assets.
Deferred tax liabilities consisted of the following:
June 26, 1998
-------------
State and local $2,533,075
Federal $7,978,846
-----------
$10,511,921
===========
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-79-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
(formerly, ML Futures Investment Partners Inc.)
NOTES TO BALANCE SHEETS
June 26, 1998 (unaudited) and December 26, 1997
- --------------------------------------------------------------------------------
December 26, 1997
-----------------
State and local $2,600,736
Federal 8,191,979
----------
$10,792,715
===========
As part of the consolidated group, the Company transfers to ML&Co.
its current Federal, state and local tax liabilities. During 1997, the Company
transferred $14,964,135 in current taxes payable to ML&Co. At June 26, 1998 and
December 26, 1997, the Company had a current tax payable with ML&Co. of
$8,420,190 and $7,280,136, respectively.
5. NET WORTH AGREEMENTS
Pursuant to the limited partnership agreements of the Affiliated
Partnerships, the Company is required to meet certain net worth requirements.
The Company's net worth, as defined, approximated $152,000,000 at June 26, 1998
and $122,600,000 at December 26, 1997, which, in the opinion of the Company's
counsel, met all such requirements.
6. COMMITMENTS
The Company is obligated to pay to affiliates, from its own funds and
without reimbursement by the Affiliated Partnerships, ongoing fees for units in
such Partnerships outstanding as of the end of various periods.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY
-80-
<PAGE>
FUTURES TRADING METHODS IN GENERAL
____________
Systematic and Discretionary Trading Approaches
Managed futures strategies are generally classified as either
systematic or discretionary (or both).
A systematic trader will generally rely to some degree on judgmental
decisions concerning, for example, what markets to follow and commodities to
trade, but his or her primary reliance is on trading programs or models which
generate trading signals. The systems utilized to generate trading signals are
changed from time to time (although generally infrequently), but the trading
instructions generated by the systems being used are followed without
significant additional analysis or interpretation. Discretionary traders, on the
other hand, while they may utilize market charts, computer programs and
compilations of quantifiable fundamental information to assist them in making
trading decisions, make such decisions on the basis of their own judgment and
trading instinct, not on the basis of trading signals generated by any program
or model.
Each approach involves certain inherent risks. For example,
systematic traders may incur substantial losses when fundamental or unexpected
forces dominate the markets, while discretionary traders may overlook price
trends which would have been clearly signaled by a trading system. Systematic
traders tend to rely more on computerized programs than do discretionary
traders, and some consider the discipline of a systematic trading process to be
advantageous. However, any trader, systematic or discretionary, may suffer
substantial losses by misjudging the market analysis.
Technical and Fundamental Analysis
Managed futures trading analysts are generally classified as either
technical or fundamental (or both).
Technical analysis is based on the theory that the commodities
markets themselves provide a means of anticipating future prices. Technical
analysis operates on the theory that market prices and momentum at any given
point in time reflect all known factors affecting the supply and demand for a
particular commodity. Consequently, technical analysis focuses not on evaluating
those factors directly but on an analysis of price histories, movements and
patterns, theorizing that a detailed analysis of market data is the most
effective means of attempting to predict the future course of prices.
Fundamental analysis, in contrast, focuses on the study of factors
external to the trading markets that affect the supply and demand of a
particular commodity. Such factors might include weather, the economy of a
particular country, government policies, domestic and foreign political and
economic events, and changing trade prospects. Fundamental analysis theorizes
that by monitoring relevant supply and demand factors for a particular
commodity, a state of current or potential disequilibrium of market conditions
may be identified that has yet to be reflected in the price level of that
commodity. Fundamental analysis assumes that markets are imperfect, that
information is not instantaneously assimilated or disseminated and that
econometric models can be constructed that generate equilibrium prices that
reflect "true value" and may indicate market mispricing.
Trend-Following
Trend-following advisors gear their trading approaches towards
positioning themselves to take advantage of major price movements. Trend-
following traders are to be contrasted with traders who seek to achieve overall
profitability by making numerous small profits on short-term trades, or through
arbitrage techniques. Trend-following traders assume that most of their trades
will be unprofitable. Their objective is to make a few large profits, more than
offsetting their more numerous 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.
____________________
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.
-81-
<PAGE>
THE ROLE OF MANAGED FUTURES IN AN INVESTMENT PORTFOLIO
This section outlines certain points to consider in deciding whether
to diversify a limited portion of your holdings into managed futures. There is
no assurance that an investment in the Fund will achieve any of its intended
objectives.
The Fund in Your Portfolio
The Fund is a speculative investment, and Limited Partners may lose
all or substantially all of the time value of their investment in the Units. If
the Fund is not successful, it cannot serve as a beneficial component of any
asset allocation strategy. However, the Fund does have the potential to be (i)
non-correlated (not, however, negatively correlated) with the debt and equity
markets and (ii) profitable. If the Fund is both, and only if it is both, a
suitably limited investment in the Units can be a beneficial component in an
investor's overall portfolio.
Asset Allocation Strategies
World political and economic events often have a dramatic influence on
the markets. Stable, consistent asset growth can be difficult to achieve in
today's market environment. At the same time, the increasing globalization of
the world's economy offers significant new profit and diversification
opportunities.
Successful portfolios must have the ability to adapt to changing
market conditions resulting from a wide range of social, political and economic
factors. By committing assets to investments which would not otherwise be
represented in a portfolio, a well-diversified asset allocation strategy can
enhance this ability and offer a flexible approach to building and protecting
wealth.
An asset allocation strategy diversifies a portfolio into a variety of
different components, including non-traditional investments such as managed
futures. Managed futures investments do not assure diversification; they may
perform similarly to stocks and bonds during certain periods. However, managed
futures has the potential to produce returns generally non-correlated to the
stock and bond markets. Each investment responds differently to different
economic cycles and shifts in the financial markets, and each makes different
contributions to overall performance.
A wide range of non-traditional, alternative investments are
available--venture capital, hedge funds, natural resources, real estate, private
lending and managed futures are only a few of the options. Many of these
investments are expected to produce results generally non-correlated to the debt
and equity markets. However, managed futures investments, while significantly
less liquid than most stocks and bonds, are generally more liquid than many
alternative investments, and estimated net asset values are generally available
on a daily basis.
A successful managed futures investment may increase portfolio return
while reducing risk. The Fund can be volatile, and there can be no assurance
that an investment in the Units will either increase returns or reduce portfolio
risk. However, if successful, the Fund has the potential to help achieve both
these objectives.
Global Markets
In recent years, the futures markets have expanded to include a wide
range of instruments representing major sectors of the world's economy. The
expansion of trading on major exchanges in Chicago, Frankfurt, London, New York,
Paris, Singapore, Sydney and Tokyo gives investors access to international
markets and global diversification. Futures managers can move capital quickly
across markets, in contrast to the traditional portfolio's dependence on a
single nation's economy and currency.
The internationalization of the markets has greatly expanded the
opportunities for both profit and diversification. Rapid geographical expansion
and the introduction of an array of innovative products have created new
opportunities but also made trading much more complex. Managed futures funds
provide an opportunity to participate in global markets under the direction of
professional advisors.
-82-
<PAGE>
Futures Volume by Market Sector
[GRAPHIC]
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1980 1997
Agriculture 64.20% Agriculture 10.48%
Currencies 4.60% Currencies 6.10%
Interest Rates 13.50% Interest Rates 52.71%
Energy 0.30% Energy 5.02%
Metals 16.30% Metals 6.69%
Other 1.10% Other 0.08%
</TABLE>
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.
Substantial Investor Participation
In 1980, client assets in the managed futures industry were estimated
at approximately $300 million. As of the end of 1997, the estimate had grown to
approximately $34.9 billion.
Growth in Managed Futures Industry
[GRAPHIC]
<TABLE>
<CAPTION>
Source: Managed Account Reports, Inc. $ Billions
<S> <C>
80 0.3
81 0.3
82 0.5
83 0.5
84 0.7
85 1
86 1.4
87 2.6
88 4.3
89 5.2
90 8.5
91 11.4
92 19
93 22.6
94 19.1
95 22.8
96 28.8
97 34.9
</TABLE>
The assets categorized above as invested in managed futures are
invested in a wide range of different products, including single-
advisor and multi-advisor funds, "funds of funds," "principal
protection pools (in which only a fraction of the assets invested are
committed to trading) and individual managed accounts.
Non-Correlation ---- A Potentially Important Component of Risk Reduction
Managed futures investments have often performed differently than
stocks and bonds. In addition, different types of alternative investments are
frequently non-correlated with each other. This creates the potential to
assemble a combination of alternative investments able to profit in different
economic cycles and international markets, while reducing the portfolio
concentration of traditional long equity and debt holdings. (Non-correlation is
not negative correlation; managed futures' performance is not expected to be
generally opposite, but rather unrelated, to stocks and bonds.)
The following chart compares the Fund's performance since inception
with the S&P Stock Index (assuming the reinvestment of all dividends), the ML
Domestic Bond Index (including all interest paid), the MAR (Managed Account
Reports, a managed futures industry trade publication) Public Funds Index and
91-day Treasury bills (including all interest paid). The chart begins with
1,000 as the arbitrary starting point for all five graphics and tracks
-83-
<PAGE>
the monthly rates of return for each. The periods during which the graph of the
Fund's performance diverges from that of an index indicates, when compared to
the periods during which their respective performance graphs are similar, the
extent of the non-correlation between them. Past performance, including past
non-correlation patterns, is not necessarily indicative of future results.
Comparison of ML Principal Protection L.P.
and Certain General Market Indices
October 1994 -- June 1998
[GRAPHIC]
<TABLE>
<CAPTION>
ML Domestic Master S&P 500 Stock
Bond Index (Total Index (Dividends U.S. 91-Day MAR Public Funds ML Principal
Return Basis) Reinvested) Treasury Bills Index Protection L.P.
<S> <C> <C> <C> <C> <C>
1000 1000 1000 1000 1000
Oct-94 999.11 1022.392 1004.25 1000.4 1010.4
Nov-94 996.84202 985.20760 1008.24692 1003.30116 1013.58514
Dec-94 1004.44792 999.79163 1013.26798 989.55593 1017.59297
Jan-95 1023.99448 1025.69823 1018.36472 947.69772 1011.97497
Feb-95 1047.64875 1065.63277 1023.27324 997.64139 1034.63704
Mar-95 1054.65752 1097.02737 1028.45100 1101.49586 1077.81435
Apr-95 1069.24344 1129.30960 1033.24358 1130.68550 1087.58491
May-95 1111.21124 1174.35663 1038.58545 1154.76910 1100.68892
Jun-95 1119.57866 1201.61345 1043.91340 1138.48685 1098.41649
Jul-95 1117.14918 1241.43972 1048.89286 1103.53531 1084.16764
Aug-95 1130.20865 1244.54829 1054.17928 1110.04617 1094.43043
Sep-95 1141.14907 1297.04209 1058.76496 1086.73520 1090.89249
Oct-95 1156.97681 1292.41035 1063.70940 1074.23774 1094.00095
Nov-95 1173.83396 1349.08901 1068.53864 1083.36876 1101.56459
Dec-95 1190.50240 1375.07516 1074.36217 1127.02852 1125.14933
Jan-96 1198.26448 1421.82084 1079.26126 1158.92343 1152.71549
Feb-96 1177.19899 1435.03951 1083.55672 1073.74256 1110.01546
Mar-96 1169.51188 1448.85894 1087.57672 1079.43339 1121.80803
Apr-96 1162.60006 1470.19773 1092.23155 1124.66165 1156.58408
May-96 1160.41438 1508.05386 1097.07013 1089.23481 1133.68349
Jun-96 1175.09362 1513.80105 1101.59006 1099.90931 1149.14550
Jul-96 1178.43088 1446.95159 1106.59128 1083.08070 1129.83986
Aug-96 1176.63967 1477.517 1111.58201 1079.93977 1135.41039
Sep-96 1196.73668 1560.60369 1116.80644 1119.89754 1153.76823
Oct-96 1223.12472 1603.62953 1121.58638 1200.19419 1202.80338
Nov-96 1244.45601 1724.73724 1126.37555 1268.12518 1232.88546
Dec-96 1233.24347 1690.57020 1131.35413 1237.56336 1230.43148
Jan-97 1236.72121 1796.12940 1136.52442 1282.11565 1255.77837
Feb-97 1238.93494 1810.22901 1140.95686 1313.65569 1273.84053
Mar-97 1226.42170 1735.99152 1145.77170 1305.24829 1274.50729
Apr-97 1245.10010 1839.53821 1151.23703 1280.31805 1265.61718
May-97 1256.20640 1951.46123 1157.14288 1259.96099 1247.51886
Jun-97 1271.19294 2038.84181 1161.36645 1270.16668 1256.22073
Jul-97 1305.60413 2201.02148 1166.59260 1351.96541 1295.66606
Aug-97 1294.42816 2077.83031 1171.58561 1299.77955 1260.59030
Sep-97 1313.70219 2191.62269 1176.95148 1314.33708 1271.42068
Oct-97 1333.09244 2118.51016 1181.96529 1293.57055 1265.95357
Nov-97 1338.58478 2216.49761 1186.57495 1306.11819 1276.13507
Dec-97 1352.31866 2254.53492 1191.66536 1331.84872 1304.46163
Jan-98 1370.23688 2279.44528 1197.24236 1334.51241 1305.47198
Feb-98 1369.08588 2443.75453 1201.49257 1322.76870 1298.11655
Mar-98 1374.24734 2568.79656 1207.17563 1324.75286 1299.41467
Apr-98 1380.92618 2594.63095 1212.59584 1271.10037 1273.94614
May-98 1394.61116 2550.08114 1217.64024 1314.06356 1285.60436
Jun-98 1406.75822 2653.58383 1222.74216 1314.06356 1276.57496
</TABLE>
The graph reflects the percentage changes in Net Asset Value per Unit
and in the indices. For comparative purposes, the performance of the
indices has been presented from a "normalized" starting point of 1,000
as of October 1, 1994 The Fund began trading October 12, 1994.
Past results are not necessarily indicative of future performance.
The comparison of the Fund, an actively managed investment, to passive
indices of general securities returns has certain inherent material
limitations.
The S&P Stock Index is a capitalization-weighted index of the common stocks of
publicly-traded United States issuers. The ML Domestic Master Bond Index is a
total-return index comprised of 6,764 investment-grade corporate bonds,
Treasuries and mortgage issues; average maturity 6.17 years (calculated on a
market-weighted basis as of June 30, 1998).
The MAR Public Funds Index represents the composite performance of a large
number of United States publicly-offered futures funds, weighting the returns
recognized by each such fund on the basis of relative capitalization. The funds
included in the MAR Public Funds Index represent a wide variety of materially
different products, including single and multi-advisor funds, as well as funds
with and without "principal protection" features. Combining the results of
funds with materially different performance objectives and fee structures into a
single index is subject to certain inherent and material limitations. There can
be no assurance that the MAR Public Funds Index provides any meaningful
indication of how managed futures investments, in general, have performed in the
past or will perform in the future. Nevertheless, the MAR Public Funds Index is
one of several widely-used benchmarks of general U.S. managed futures industry
performance.
Graphic comparisons of securities indices and the Fund may not adequately
reflect the differences between the securities and futures market or between
passive and managed investments.
Prudence demands that you carefully evaluate managed futures, weighing
its profit and diversification potential against its significant risks. A
managed futures investment is not appropriate for all investors, and no one
should invest more than a limited portion of the risk segment of his or her
portfolio in managed futures. However, for the investor who finds the risks
acceptable, managed futures has the potential to provide profits as well as
portfolio diversification.
-84-
<PAGE>
APPENDIX
BLUE SKY GLOSSARY
See "Index of Terms" at page 56 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.
Organization and 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
APP-1
<PAGE>
holders, depositories, experts, expenses of qualification of the sale of its
Program Interest under federal and state law, including taxes and fees,
accountants' and attorneys' fees.
Participant -- The holder of a Program Interest.
Person -- Any natural Person, partnership, corporation, association
or other legal entity.
Pit Brokerage Fee -- Pit Brokerage Fee shall include floor brokerage,
clearing fees, National Futures Association fees, and exchange fees.
Program -- A limited partnership, joint venture, corporation, trust
or other entity formed and operated for the purpose of investing in Commodity
Contracts.
Program Broker -- A Commodity Broker that effects trades in Commodity
Contracts for the account of a Program.
Program Interest -- A limited partnership interest or other security
representing ownership in a Program.
Pyramiding -- A method of using all or a part of an unrealized profit
in a Commodity Contract position to provide margin for any additional Commodity
Contracts of the same or related commodities.
Sponsor -- Any Person directly or indirectly instrumental in
organizing a Program or any Person who will manage or participate in the
management of a Program, including a Commodity Broker who pays any portion of
the Organization 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.
FOURTH AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
Dated as of
July 1, 1998
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
<PAGE>
ML PRINCIPAL PROTECTION L.P.
FOURTH AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
-------- ------
<C> <S> <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-12
14. Special Power of Attorney ................................. LPA-12
15. Withdrawal of a Partner ................................... LPA-12
16. Standard of Liability; Indemnification .................... LPA-13
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-15
(c) Meetings; Other Voting Matters ....................... LPA-15
18. GOVERNING LAW ............................................. LPA-15
19. Miscellaneous ............................................. LPA-16
</TABLE>
LPA-i
<PAGE>
ML PRINCIPAL PROTECTION L.P.
FOURTH AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
This Fourth Amended and Restated Limited Partnership Agreement (this
"Limited Partnership Agreement") is made as of July 1, 1998, 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 May 1, 1997 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 after
May 1, 1997. 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.," as described in the Prospectus of the
Fund first issued after the date hereof under the Securities Act of 1933, as
the same may be amended and updated from time to time (the "Prospectus").
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
LPA-1
<PAGE>
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 the General Partner
for which MLAM assumes no responsibility -- United States Treasury securities
and securities issued by U.S. government agencies and instrumentalities. The
Fund instructs Merrill Lynch Futures Inc., the Trading Partnership's
commodity broker, to pay MLAM's fees for such cash management services from
the flat-rate Brokerage Commissions paid by the Trading Partnership to
Merrill Lynch Futures Inc., and the General Partner is hereby specifically
empowered to (i) retain MLAM to provide cash management advice and services
to the Fund and the Trading Partnership, (ii) arrange for Merrill Lynch
Futures Inc. to pay MLAM's fees for such advice and services and (iii)
establish investment parameters for MLAM's cash management services for the
Fund and the Trading Partnership. In the event that Merrill Lynch Futures
Inc. does not pay MLAM's cash management fees, the General Partner, not the
Fund, shall be responsible for doing so.
The Fund is operated 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, 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
primarily 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. Accrued Profit Shares (as described in the
Prospectus) shall reduce Net Asset Value, even though such Profit Shares
LPA-2
<PAGE>
may never, in fact, be paid. 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.
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 Fund
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 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
LPA-3
<PAGE>
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.
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.
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 Profit Share calculation
period 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 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 attributable to
MLAM's cash management activities 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 Profit Share calculation period with respect to Units
redeemed as of a date other than the last day of such Profit Share
calculation period 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 Profit Share calculation period
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 (other than MLAM's cash management activities,
as described in Section 7(b)(3)) of the Trading Partnership ("Trading Capital
Gain" or "Trading Capital Loss") shall be allocated as follows:
LPA-4
<PAGE>
(A) There shall be established a tax account with respect to each
outstanding Unit of such series. The initial balance of such tax
account shall be the amount contributed to the 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:
(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
LPA-5
<PAGE>
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.
(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 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, not assets committed to
trading (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. In the event that the aggregate payments made to
the General Partner, as Administrative Fees, plus the payments made by the
Fund to Merrill Lynch Futures as Brokerage Commissions exceeds for any
calendar month the amount of the combined Administrative Fees and Brokerage
Commissions that would have been payable under the method of calculation of
these charges prior to October 1, 1998, the General Partner shall promptly
reimburse the Fund, with interest, for the full amount of such difference,
plus interest, at the 91-day Treasury bill rate as in effect as of the
beginning of such sale month.
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.
LPA-6
<PAGE>
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" in the Prospectus.
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 9.0% 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 Merrill Lynch Futures
Inc. to cover the Fund's losses on foreign transactions, as described under
"Use of
LPA-7
<PAGE>
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 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,
LPA-8
<PAGE>
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 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 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
LPA-9
<PAGE>
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.
10. Assignability of Units.
Each Limited Partner expressly agrees that he or she will not assign,
transfer or dispose of, by gift or otherwise, any of his or her Units or all
or any part of his or her right, title and interest in the capital or profits
of the Fund in violation of any applicable federal or state securities laws
or without giving written notice to the General Partner. No assignment,
transfer or disposition by an assignee of Units or of all or any part of his
or her right, title and interest in the capital or profits of the Fund shall
be effective against the Fund or the General Partner until the General
Partner receives written notice of the assignment; and the General Partner
shall not be required to give any assignee any rights hereunder prior to
receipt of such notice. The General Partner may, in its sole discretion,
waive any such notice. No such assignee, except with the consent of the
General Partner, which consent may be withheld in its sole and absolute
discretion, may become a substituted Limited Partner, nor will the estate or
any beneficiary of a deceased Limited Partner or assignee have any right to
withdraw or receive assets from the Fund except by redemption as provided in
Section 11 or upon dissolution of the Fund. Each Limited Partner agrees that
with the consent of the General Partner any assignee may become a substituted
Limited Partner without need of any further act or approval of any Limited
Partner. If the General Partner withholds consent, an assignee shall not
become a substituted Limited Partner, and shall not have any of the rights of
a Limited Partner, except that the assignee shall be entitled to receive that
share of capital and profits (including the right to receive any payments due
under the ML&Co. Guarantee Agreement in respect of his or her Units) and
shall have that right of redemption and those rights upon dissolution to
which his or her assignor would otherwise have been entitled. No assignment,
transfer or disposition of Units shall be effective against the Fund or the
General Partner until the first day of the month succeeding the month in
which the General Partner receives notice of such assignment, transfer or
disposition.
11. Redemptions; Distributions.
A Limited Partner, the General Partner to the extent that it owns
Units or any assignee of Units of whom the General Partner has received
written notice as described above, may redeem all or any of his or her Units
(a "redemption"), effective as of the close of business (as determined by the
General Partner) on the last business day of any month, provided, that (i)
all liabilities, contingent or otherwise, of the Fund (including the Fund's
allocable share of the liabilities, contingent or otherwise, of any entities,
such as the Trading Partnership, in which the Fund invests), except any
liability to Partners on account of their capital contributions, have been
paid or there remains property of the Fund sufficient to pay them and (ii)
the General Partner shall have timely received a request for redemption.
Units redeemed on or before the end of the twelfth full month after
trading begins with respect to such Units are subject to redemption charges
of 3% of the Net Asset Value at which they are redeemed. Units redeemed
after the end of the twelfth full month but on or before the end of the
eighteenth full month after trading begins with respect to such Units are
subject to redemption charges of 1.5% of the Net Asset Value at which they
are redeemed. Units redeemed after the end of the eighteenth full month but
on or before the end of the twenty-fourth full month after trading begins
with respect to such Units are subject to redemption charges of 1.0% of the
Net Asset Value at which they are redeemed. Units redeemed after he twenty-
fourth month after trading begins with respect to such Units are not subject
to any redemption charge. Redemption 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 redemption charges as set forth in the preceding
paragraph.
LPA-10
<PAGE>
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 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 and
Prospectuses 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.
LPA-11
<PAGE>
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 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
LPA-12
<PAGE>
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 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.
LPA-13
<PAGE>
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.
(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
LPA-14
<PAGE>
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 Voting Matters. Any Limited Partner, upon
written request addressed to the General Partner, shall be entitled to obtain
from the General Partner, upon payment, in advance, of reasonable
reproduction and mailing costs, a list of the names and addresses of record
of all Limited Partners and the number of Units of each series held by each
(which shall be mailed by the General Partner to the Limited Partner within
ten (10) days of the receipt of the request). Upon receipt of a written
proposal, signed by Limited Partners owning Units representing at least ten
percent (10%) of the aggregate number of Units then owned by Limited Partners
of any series, that a meeting of the Fund (or of any or all series of Units)
be called to vote upon any matter upon which the Limited Partners may vote
pursuant to this Limited Partnership Agreement, the General Partner shall, by
written notice to each Limited Partner of record mailed within fifteen (15)
days after such receipt, call a meeting of the Fund (or of such series of
Units). Such meeting shall be held at least thirty (30) but not more than
sixty (60) days after the mailing of such notice, and such notice shall
specify the date of, a reasonable place and time for, and the purpose of such
meeting.
The General Partner may not restrict the voting rights of Limited
Partners except as set forth herein.
In the event that the General Partner or the Limited Partners vote to
amend this Limited Partnership Agreement in any material respect, the
amendment will not become effective prior to all Limited Partners having an
opportunity to redeem their Units.
18. GOVERNING LAW.
THE VALIDITY AND CONSTRUCTION OF THIS LIMITED PARTNERSHIP AGREEMENT
SHALL BE DETERMINED AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE,
INCLUDING SPECIFICALLY THE ACT (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAW); PROVIDED, HOWEVER, CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR STATE
SECURITIES LAW SHALL NOT BE GOVERNED BY THIS SECTION 18.
LPA-15
<PAGE>
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.
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, and delivered
By /s/ JOHN R. FRAWLEY, JR. to, the General Partner.
-----------------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
MERRILL LYNCH INVESTMENT PARTNERS INC.
By /s/ JOHN R. FRAWLEY, JR.
-----------------------------------
John R. Frawley, Jr.
President and Chief
Executive Officer
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 August__, 1998, 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' Merrill Lynch 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.
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 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
SR-1
<PAGE>
Purchaser is acquiring the Units, and such entity has full right and power
to purchase such Units and enter into and be bound by the Subscription
Agreement and Power of Attorney and to become a Limited Partner pursuant to
the Limited Partnership Agreement.
(f) Purchaser (or the entity on behalf of which Purchaser is
subscribing) 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 of the NFA, if
required. Purchaser agrees to supply MLIP with such information as MLIP may
reasonably request in order to attempt such verification. Most entities
which acquire Units will, as a result, themselves become commodity pools
within the intent of applicable CFTC and NFA rules, and their sponsors,
accordingly, will be required to register as commodity pool operators.
(g) If the undersigned 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 of 1986, as amended (the "Code") (each
such employee benefit plan and plan, a "Plan"), the individual signing this
Subscription Agreement and Power of Attorney on behalf of the 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: (i)
the Plan Fiduciary has considered an investment in the Fund for such Plan
in light of the risks relating to the Fund; (ii) the Plan Fiduciary has
determined that an investment in the Fund by such Plan is consistent with
the Plan Fiduciary's responsibilities under ERISA; (iii) 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; (iv) the Plan's investment in the Fund has been duly
authorized and approved by all necessary parties; (v) none of any Advisor
to the Fund, the Selling Agent, Merrill Lynch Futures Inc. ("MLF"), Merrill
Lynch International Bank ("MLIB"), Merrill Lynch Asset Management, L.P.
("MLAM"), any of their respective affiliates or any of their respective
agents or employees (A) has investment discretion with respect to the
investment of assets of the Plan used to purchase Units, (B) has authority
or responsibility to or regularly gives investment advice with respect to
the assets of the Plan used to purchase Units 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; and (vi) the Plan
Fiduciary (A) is authorized to make, and is responsible for, the decision
to invest in the Fund, 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 risk of large losses, (B)
is independent of MLIP, any Advisor to the Fund, the Selling Agent, MLF,
MLIB, MLAM and any of their respective affiliates, and (C) is qualified to
make such investment decision. 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," as defined therein.
The representations and statements set forth herein may be asserted
in the defense of the Fund, ML Principal Protection Trading L.P., MLIP, the
Advisors to the Fund, the Selling Agent, MLF, MLIB, 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 exclusive of home, furnishings and automobiles). In addition,
Purchaser should 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.
SR-2
<PAGE>
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
subsequent, of $5,000; net worth of at least $200,000 or a net worth of at
least $50,000 and an annual income of at least $50,000. All Maine residents,
including existing Limited Partners in the Fund subscribing for additional
Units, must execute a Subscription Agreement and Power of Attorney Signature
Page. Maine residents must sign a Subscription Agreement and Power of
Attorney Signature Page specifically prepared for Maine residents, a copy of
which shall accompany this Prospectus as delivered to all Maine residents.
6. Massachusetts -- Net worth of at least $250,000 or a net worth
of at least $100,000 and an annual income of at least $100,000.
7. Michigan -- Net worth of at least $225,000 or a net worth of at
least $60,000 and taxable income in the immediately preceding year 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
immediately preceding 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 the immediately preceding year 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 the immediately preceding year and an expectation of gross income
during the current year 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 August __, 1998, 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 should invest more than 10% of his or her readily marketable assets in
the Fund.
The different series of Units are each sold at $100 per Unit but over
time come to have different Net Asset Values.
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' Merrill Lynch Financial Consultants must reconfirm that
such Limited Partners continue to meet the standards and requirements set
forth herein and in Exhibit C -- Subscription Requirements in order for such
Limited Partners to be eligible to purchase additional Units.
Any additional Units purchased by an existing Limited Partner will be
a different series of Units than the Units already owned by such Limited
Partner.
------------------
FILL IN ALL OF THE BOXES ON PAGES SA-5 and SA-6; TYPE OR PRINT USING BLACK
INK ONLY AND ONE LETTER OR NUMBER PER BOX, AS FOLLOWS:
Item 1 -- Financial Consultants must complete the information required.
Item 2 -- Enter the number of Units to be purchased.
Item 3 -- Enter the dollar amount (no cents) of the purchase (the
dollar amount must be $100 per Unit; $97 per Unit for officers
and employees of Merrill Lynch & Co., Inc. and its
affiliates).
Item 4 -- Enter customer's Merrill Lynch Account Number.
Item 5 -- Enter the Social Security Number or Taxpayer ID Number. In
case of joint ownership, either Social Security Number may be
used.
The Signature Page is self-explanatory for most types of investors;
however, we have provided specific instructions for the following types of
investors:
Trust -- Enter the Trust name on line 8 and the trustee's name on
line 9, followed by "Trustee." If applicable, use line 10 for the
custodian's name, followed by "Custodian." Be sure to furnish the Taxpayer
ID Number of the Trust.
Custodian Under Uniform Gifts to Minors Act -- Complete line 6 with
the name of minor followed by "UGMA." On line 9 enter the custodian's name,
followed by "Custodian." Be sure to furnish the minor's Social Security
Number.
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.
SA-(i)
<PAGE>
Items 6, 7, 8 -- Enter the exact name in which the Units are to be held.
Item 9 -- Enter a partner's or an officer's name.
Item 10 -- Complete information as required.
Item 11 -- The investor(s) (except current Limited Partners in the
Partnership other than residents of Maine or Michigan)
must execute the Subscription Agreement and Power of
Attorney Signature Page (Item 11, Page SA-6) and review
the representation relating to backup withholding tax
underneath the signature and telephone number lines in
Item 11.
Item 12 -- Financial Consultants must complete the information
required.
The Specimen Copy of the Subscription Agreement and Power of Attorney
Signature Page
(Pages SA-3 and SA-4) should not be executed.
Instructions to Financial Consultants:
The executed Subscription Agreement and Power of Attorney Signature
Page must be retained in the Branch Office.
Reconfirmations (i.e., Subscription Agreement and Power of Attorney
Signature Pages executed by Financial Consultants) or another form of written
reconfirmation approved by the Branch Office regarding the continuing
suitability of existing Limited Partners subscribing for additional Units
must also be retained in the Branch Office.
SA-(ii)
<PAGE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
------------
BY EXECUTING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SUBSCRIBERS ARE NOT WAIVING ANY RIGHTS UNDER THE SECURITIES ACT
OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934
------------
SUBSCRIPTION AGREEMENT AND
POWER OF ATTORNEY
ML Principal Protection L.P.
c/o Merrill Lynch Investment Partners Inc.
General Partner
Merrill Lynch World Headquarters
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 ($1,000) if I am an existing Limited Partner (who is
not, except in the case of Maine and Michigan residents, required to submit a
new Subscription Agreement and Power of Attorney in order to acquire
additional Units); 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
August __, 1998, together with the accompanying Prospectus Supplement and
summary financial information relating to the Fund current within 60 calendar
days (collectively, the "Prospectus," as the same may from time to time be
supplemented or 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 the offering may
be discontinued). Concurrently with or prior to the delivery of this
Subscription Agreement and Power of Attorney, I have authorized Merrill
Lynch, Pierce, Fenner & Smith Incorporated (the "Selling Agent") to debit my
customer securities account in the amount of my subscription. I acknowledge
that I must have my subscription payment in such account on but not before
the settlement date for my purchase of Units. Such settlement date will be
not more than five business days after the acceptance of this subscription.
My Merrill Lynch Financial Consultant will inform me of such settlement date,
on which my account will be debited and the amount so debited transmitted, in
the form of a Selling Agent check or wire transfer, directly to the Escrow
Agent for the Fund pending investment in the Units, as described in the
Prospectus. Merrill Lynch Investment Partners Inc. ("MLIP"), the General
Partner of the Fund, may, in its sole and absolute discretion, accept or
reject this subscription in whole or in part, except that, if this
subscription is to be accepted in part only, it shall not be reduced to an
amount less than 50 Units (10 Units if I am an existing Limited Partner).
All subscriptions once submitted are irrevocable. All Units are offered
subject to prior sale.
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.
SA-1
<PAGE>
3. Power of Attorney. In connection with my subscription for
Units, I do hereby irrevocably constitute and appoint MLIP, and its
successors and assigns, as my true and lawful Attorney-in-Fact, with full
power of substitution, in my name, place and stead, to (i) file, prosecute,
defend, settle or compromise litigation, claims or arbitrations on behalf of
the Fund and (ii) make, execute, sign, acknowledge, swear to, deliver, record
and file any documents or instruments which may be considered necessary or
desirable by MLIP to carry out fully the provisions of the Limited
Partnership Agreement of the Fund, including, without limitation, by
executing said Limited Partnership Agreement itself, and by effecting all
amendments permitted by the terms thereof. I acknowledge that the other
investors in the Fund are relying on MLIP's authority to act pursuant to the
Power of Attorney granted hereby. The Power of Attorney granted hereby shall
be deemed to be coupled with an interest, shall be irrevocable and shall
survive, and shall not be affected by, my subsequent death, incapacity,
disability, insolvency or dissolution or any delivery by me of an assignment
of the whole or any portion of my Units.
4. Irrevocability; Governing Law. I hereby acknowledge and agree
that I am not entitled to cancel, terminate or revoke this subscription or
any of my agreements hereunder after the Subscription Agreement and Power of
Attorney Signature Page attached hereto has been submitted (and not
rejected), and that this subscription and such agreements shall survive my
death or disability. THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SHALL
BE GOVERNED BY AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW.
SA-2
<PAGE>
<TABLE>
<C> <S>
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. (the "Fund") 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
, including the Fourth 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, together with the accompanying
Prospectus Supplement and summary financial information relating to the Fund
current within 60 calendar days.
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>
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 , , THE ACCOMPANYING 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 NASD Business Conduct Rule 2810 (formerly, Appendix F to
Article 3, Section 34 of the NASD's Rules of Fair Practice).
X
--------------------------------------------------------------------------
Financial Consultant Signature Date
Office Manager approval of Merrill Lynch sponsored retirement account
purchases.
X
--------------------------------------------------------------------------
Office Manager Signature Date
- --------------------------------------------------------------------------------
FOR OFFICE DATE RECEIVED COUNTRY CODE ADDITIONAL ORDER CONTROL NUMBER
USE ONLY [_][_][_][_][_][_] [_][_] [_] [_][_][_][_][_]
SA-4
<PAGE>
<TABLE>
<C> <S>
EXECUTION COPY
1 Financial Consultant [_][_][_][_][_][_][_][_][_][_][_][_] [_] [_][_][_][_][_][_][_][_][_][_][_][_][_][_][_] [_][_][_][_][_][_]
Name First M.I. Last Sub. Order Ref. #
Financial Consultant
Phone Number [_][_][_] - [_][_][_] - [_][_][_][_] Financial Consultant Number [_][_][_][_] Branch Wire Code [_][_][_]
</TABLE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE
PLEASE PRINT OR TYPE. USE BLACK INK ONLY AND ONLY ONE CHARACTER PER BOX.
The investor named below, by execution and delivery of this Signature Page,
by payment of the purchase price for Limited Partnership Units in ML
Principal Protection L.P. (the "Fund") 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
, including the Fourth 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, together with the accompanying
Prospectus Supplement and summary financial information relating to the Fund
current within 60 calendar days.
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 , , THE ACCOMPANYING 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 NASD Business Conduct Rule 2810 (formerly, 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 will pay the costs associated with preparing, filing and
distributing the Prospectus and this Registration Statement. The following is
an estimate of such costs:
<TABLE>
<CAPTION>
Approximate
Amount
-----------
<S> <C>
Securities and Exchange Commission Registration Fee.......... $ 69,949*
National Association of Securities Dealers, Inc. Filing Fee.. 7,500*
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.................................................. 40,000
Miscellaneous Offering Costs................................. 22,551
--------
Total....................................................... $425,000
========
</TABLE>
- --------------------------
*Fees marked with an asterisk are exact.
____________________
Item 14. Indemnification of Directors and Officers.
Section 16 of the Third Amended and Restated Limited Partnership
Agreement (attached as Exhibit A to the Prospectus which forms a part of this
Registration Statement) provides for the indemnification of the General Partner,
certain of its affiliates and certain of its directors, officers and controlling
persons by the Registrant in certain circumstances for any loss suffered by the
Registrant which arises out of any action or inaction, if the party, in good
faith, determined that such course of conduct was in the best interest of the
Registrant and such conduct did not constitute negligence or misconduct.
In the Selling Agreement, each Trading Advisor has agreed to indemnify
each person who controls MLIP within the meaning of Section 15 of the Securities
Act of 1933 and each person who signed this Registration Statement or is a
director of MLIP against losses, claims, damages, liabilities or expenses
arising out of or based upon any untrue statement or omission or alleged untrue
statement or omission relating or with respect to such Trading Advisor or any
principal of such Trading Advisor or their operations, trading systems, methods
or performance, which was made in this Registration Statement, the Prospectus
included in this Registration Statement when declared effective, or in any
amendment or supplement thereto and furnished by or approved by such Trading
Advisor for inclusion therein.
Item 15. Recent Sales of Unregistered Securities.
None.
<PAGE>
Item 16. Exhibits and Financial Statement Schedules.
The following documents (unless otherwise indicated) are filed herewith
and made a part of this Registration Statement:
(a) Exhibits.
The following exhibits are filed herewith.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.01 Selling Agreement Amendment
3.01 Fourth 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 Subscription Agreement and Power of Attorney (included as
Exhibit D to the Prospectus).
10.02 Customer Agreement Amendment
23.01 Consent of Sidley & Austin (contained in their opinion in
Exhibit 5.01)
23.02 Consent of Deloitte & Touche LLP
27.01 Financial Data Schedule
</TABLE>
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Post-Effective Amendment
No. 2 to Registrant's Registration Statement on Form S-1 filed with the
Commission on March 25, 1997 (Reg. No. 333-7593).
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
10.01 Amended Form of Merrill Lynch & Co., Inc. Guarantee
Agreement (included as Exhibit B to the Prospectus).
</TABLE>
S-2
<PAGE>
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with 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).
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
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.
</TABLE>
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).
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.01 Form of Selling Agreement among the Partnership, the
(Amended) Trading Partnership, the General Partner, Merrill Lynch
Futures, the Selling Agent and the Trading Advisors.
1.02 Form of Amendment to the Selling Agreement among the
Partnership, the Trading Partnership, the General Partner,
Merrill Lynch Futures, the Selling Agent and each
additional Trading Advisor.
3.02(ii) Third Amended and Restated Limited Partnership Agreement
(Amended) of the Partnership (included as Exhibit A to the
Prospectus).
</TABLE>
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Registrant's Registration
Statement on Form S-1, as filed with the Commission on July 3, 1996 (Reg. No.
333-7593) which also constituted Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form S-1 (Reg. No. 33-73914).
S-3
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
3.01(i) Amended and Restated Certificate of Limited Partnership of
the Partnership.
3.02(i) Amended and Restated Certificate of Limited Partnership of
the Trading Partnership.
3.03(ii) Second Amended and Restated Limited Partnership Agreement
of the Trading Partnership.
5.01(a) Opinion of Sidley & Austin relating to the legality of the
Units.
5.01(b) Opinion of Richards, Layton & Finger relating to the
legality of the Units.
8.01 Opinion of Sidley & Austin with respect to federal income
tax consequences.
10.01 Form of Advisory Agreement among the Partnership, Trading
Partnership, the General Partner and each Trading Advisor.
10.02 Form of Consulting Agreement between Merrill Lynch Futures
and each Trading Advisor.
10.03 Form of Customer Agreement between the Trading Partnership
and Merrill Lynch Futures.
10.04 Form of Escrow Agreement among the Partnership, the Escrow
Agent, the Selling Agent and the General Partner.
10.05 Merrill Lynch & Co., Inc. Guarantee Agreement (included as
Exhibit B to the Prospectus).
10.06 Form of Subscription Agreement and Power of Attorney
(included as Exhibit D to the Prospectus).
10.07 Foreign Exchange Desk Service Agreement with Amendment
adding the Trading Partnership as a party thereto.
10.08 Investment Advisory Contract among Merrill Lynch Futures,
the Partnership, the Trading Partnership and MLAM.
10.09(a) Note from Merrill Lynch Futures Inc. to the Trading
Partnership.
10.09(b) Note from Merrill Lynch, Pierce, Fenner & Smith
Incorporated to the Partnership.
10.10 Minimum Net Asset Value per Unit undertaking of the
General Partner.
10.11 Form of Custody Agreement between Merrill Lynch, Pierce,
Fenner & Smith Incorporated and the Partnership.
23.01 Consent of Sidley & Austin.
23.03 Consent of Richards, Layton & Finger (included in Exhibit
5.01(b)).
</TABLE>
S-4
<PAGE>
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Post-Effective Amendment
No. 4 to the Registrant's Registration Statement on Form S-1, as filed with the
Commission on April 4, 1996 (Reg. No. 33-73914).
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- ---------------------------------
<C> <S>
23.12 Consent of Deloitte & Touche LLP.
</TABLE>
_________________________
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Post-Effective Amendment
No. 3 to the Registrant's Registration Statement on Form S-1, as filed with the
Commission and which became effective on January 25, 1996.
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<S> <C>
1.01 Amendment No. 4 to the Selling Agreement among the
Partnership, the Trading Partnership, the General Partner,
Merrill Lynch Futures, the Selling Agent and AIB Investment
Managers Limited.
3.05(ii) Second Amended and Restated Limited Partnership Agreement
(Amended) of the Partnership (included as Exhibit A to the
Prospectus).
10.12 Subscription Agreement and Power of Attorney (included as
(Amended) Exhibit D to the Prospectus).
23.11 Consent of Deloitte & Touche LLP.
</TABLE>
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Amendment No. 3 (Second
Post-Effective) to the Registrant's Registration Statement on Form S-1, as filed
with the Commission on December 8, 1995:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
-------- -----------------------
<S> <C>
1.01 Amendment No. 2 to the Selling Agreement among the
Partnership, the Trading Partnership, the General Partner,
Merrill Lynch Futures, the Selling Agent, and the Advisors
amending certain provisions thereof; and
Amendment No. 3 to the Selling Agreement among the
Partnership, the Trading Partnership, the General Partner,
Merrill Lynch Futures, the Selling Agent, and Millburn
Ridgefield Corporation.
1.02 Form of Assignment of Selling Agreement.
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
<C> <S>
3.03(i) Amended and Restated Certificate of Limited Partnership of
the Partnership.
3.04(i) Amended and Restated Certificate of Limited Partnership of
the Trading Partnership.
3.06(ii) Amendment to the Limited Partnership Agreement of the
Trading Partnership.
5.01(a) Opinion of Sidley & Austin relating to the legality of the
Units.
5.01(b) Opinion of Richards, Layton & Finger relating to the
legality of the Units.
8.01 Opinion of Sidley & Austin with respect to federal income
tax consequences.
10.10 Form of Assignment of Advisory Agreement.
10.11 Form of Assignment of Consulting Agreement.
10.13 Amendment No. 1 to the Customer Agreement.
23.08 Consent of Sidley & Austin.
23.10 Consent of Richards, Layton & Finger (contained in their
opinion in Exhibit 5.01(b)).
</TABLE>
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Amendment No. 2 (First
Post-Effective) to the Registrant's Registration Statement on Form S-1, as
filed with the commission on March 24, 1995 and which became effective on
April 20, 1995:
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.01 Amendment No. 1 to the Selling Agreement among the
Partnership, the Trading Partnership, the General Partner,
Merrill Lynch Futures, the Selling Agent, Emcor Eurocurrency
Management Corporation and Trendstat Capital Management,
Inc.
10.09 Custody Agreement among the Partnership and Merrill Lynch,
Pierce, Fenner & Smith Incorporated.
</TABLE>
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-1, as filed with the Commission on
June 14, 1994 and which became effective on July 14, 1994:
S-6
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.01 Selling Agreement among the Partnership, the Trading
(Amended) Partnership, the General Partner, Merrill Lynch Futures,
the Selling Agent and the Trading Advisors.
3.03(ii) Limited Partnership Agreement of the Trading Partnership
dated May 26, 1994.
3.04(ii) Form of Amended and Restated Limited Partnership Agreement
of the Trading Partnership.
10.01 Form of Advisory Agreement among the Partnership, the
(Amended) Trading Partnership, MLFIP and each Trading Advisor.
10.02 Form of Consulting Agreement between Merrill Lynch Futures
(Amended) and each Trading Advisor.
10.03 Form of Customer Agreement between the Trading Partnership
(Amended) and Merrill Lynch Futures.
10.04 Form of Escrow Agreement among the Partnership, the Escrow
(Amended) Agent, the Selling Agent and MLFIP.
10.05 Merrill Lynch & Co., Inc. Guarantee Agreement (included as
(Amended) Exhibit B to the Prospectus).
10.07 Foreign Exchange Desk Service Agreement with Amendment
(Amended) adding the Trading Partnership as a party thereto.
10.08 Investment Advisory Contract among Merrill Lynch Futures,
the Partnership, the Trading Partnership and MLAM.
</TABLE>
(b) Financial Statement Schedules.
No Financial Schedules are required to be filed herewith.
Item 17. Undertakings.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective
S-7
<PAGE>
amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in
volume of securities offered (if the total dollar value of securities
offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may
be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume
and price represent no more than a 20 percent change in the maximum
aggregate offering price set forth in the "Calculation of Registration
Fee" table in the effective registration statement.
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) Insofar as indemnification for liabilities under the Securities
Act of 1933 may be permitted to officers, directors or controlling persons of
the registrant pursuant to the provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by an officer, director,
or controlling person of the registrant in the successful defense of any such
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
S-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the General
Partner of the Registrant has duly caused this Registration Statement or
Registration Statement Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York in the State of New York on
the 3rd day of August, 1998.
ML Principal Protection L.P.
By: Merrill Lynch Investment Partners Inc.
General Partner
By: /s/ JOHN R. FRAWLEY, JR.
-------------------------------------------
John R. Frawley, Jr.
Chairman, President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Registration Statement Amendment has been signed below
by the following person on behalf of Merrill Lynch Investment Partners Inc.,
General Partner of the Registrant, in the capacities and on the date indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ JOHN R. FRAWLEY, JR. Chairman, Chief Executive
- ----------------------------- Officer, President and Director August 3, 1998
John R. Frawley, Jr. (Principal Executive Officer)
/s/ JO ANN DIDARIO Vice President, Chief
- ----------------------------- Financial Officer and Treasurer August 3, 1998
Jo Ann DiDario (Principal Financial
and Accounting Officer)
/s/ JEFFREY F. CHANDOR Senior Vice President,
- ----------------------------- Director of Sales, August 3, 1998
Jeffrey F. Chandor Marketing and Research and Director
/s/ STEPHEN G. BODURTHA Director August 3, 1998
- -----------------------------
Stephen G. Bodurtha
/s/ ALLEN N. JONES Director August 3, 1998
- -----------------------------
Allen N. Jones
/s/ JOSEPH H. MOGLIA Director August 3, 1998
- -----------------------------
Joseph H. Moglia
</TABLE>
(Being the principal executive officer, the principal financial and
accounting officer and a majority of the directors of Merrill Lynch Investment
Partners Inc.)
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner of Registrant August 3, 1998
By /s/ JOHN R. FRAWLEY, JR.
---------------------------------------------
John R. Frawley, Jr.
Chairman, Chief Executive
Officer and President
</TABLE>
S-9
<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 or
Registration Statement Amendment to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of New York in the State of New York on
the 3rd day of August, 1998.
ML Principal Protection Trading L.P.
By: Merrill Lynch Investment Partners Inc.
General Partner
By: /s/ JOHN R. FRAWLEY, JR.
--------------------------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer
and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement or Registration Statement Amendment has been signed below
by the following person on behalf of Merrill Lynch Investment Partners Inc.,
General Partner of the Co-Registrant, in the capacities and on the date
indicated.
<TABLE>
<CAPTION>
<S> <C> <C>
/s/ JOHN R. FRAWLEY, JR. Chairman, Chief Executive
- ---------------------------- Officer, President and Director August 3, 1998
John R. Frawley, Jr. (Principal Executive Officer)
/s/ JO ANN DIDARIO Vice President, Chief
- ---------------------------- Financial Officer and Treasurer August 3, 1998
Jo Ann Didario (Principal Financial
and Accounting Officer)
/s/ JEFFREY F. CHANDOR Senior Vice President,
- ---------------------------- Director of Sales, August 3, 1998
Jeffrey F. Chandor Marketing and Research and Director
/s/ STEPHEN G. BODURTHA Director August 3, 1998
- ----------------------------
Stephen G. Bodurtha
/s/ ALLEN N. JONES Director August 3, 1998
- ----------------------------
Allen N. Jones
/s/ JOSEPH H MOGLIA Director August 3, 1998
- ----------------------------
Joseph H. Moglia
</TABLE>
(Being the principal executive officer, the principal financial and
accounting officer and a majority of the directors of Merrill Lynch Investment
Partners Inc.)
<TABLE>
<CAPTION>
<S> <C>
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner of Co-Registrant August 3, 1998
By /s/ JOHN R. FRAWLEY, JR.
--------------------------------------
John R. Frawley, Jr.
Chairman, Chief Executive
Officer and President
</TABLE>
S-10
<PAGE>
PRINCIPAL PROTECTION L.P.
PRINCIPAL PROTECTION TRADING L.P.
EXHIBIT LIST
<TABLE>
<CAPTION>
Exhibit
Number Description of Document
------- -----------------------
<C> <S>
1.01 Selling Agreement Amendment
3.01 Fourth 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 Subscription Agreement and Power of Attorney (included as
Exhibit D to the Prospectus).
10.02 Customer Agreement Amendment
23.01 Consent of Sidley & Austin (contained in their opinion in
Exhibit 5.01)
23.02 Consent of Deloitte & Touche LLP
27.01 Financial Data Schedule
</TABLE>
<PAGE>
Exhibit 1.01
AMENDMENT NO. 18 TO THE SELLING AGREEMENT
-----------------------------------------
This Amendment (the "Amendment") to the Selling Agreement dated July 14,
1994 (the "Agreement") between ML Principal Protection L.P. (formerly known as
ML Principal Protection Plus L.P.) (the "Fund"), a Delaware Limited Partnership,
Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPFS") and various other
parties is made as of the 3rd day of August, 1998 by and between the Fund and
MLPFS.
W I T N E S S E T H:
WHEREAS, the Fund and MLPFS desire to amend the Agreement with respect
to certain terms pertaining to them only.
NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of all of which are hereby acknowledged, the parties
hereto agree as follows:
Section 1. Section 4(e) of the Agreement is hereby amended by
replacing the term "$5" with the term "$4" in the first and fifth paragraphs of
Section 4(e).
Section 2. Effective Date. The effective date of this Amendment
shall be October 1, 1998.
Section 3. Miscellaneous.
(a) Except as otherwise set forth in this Amendment, defined terms
used herein shall have the respective meanings ascribed thereto in the
Agreement.
(b) Except as amended hereby, the Agreement shall remain in full
force and effect and is hereby ratified and confirmed.
(c) This Amendment may be executed in any number of counterparts,
each of which shall be deemed to be an original but all such separate
counterparts shall constitute but one and the same instrument.
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Amendment as of the
date written above.
ML PRINCIPAL PROTECTION L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC., General Partner
By:___________________________
Name:
Title:
MERRILL LYNCH, PIERCE, FENNER &
SMITH INCORPORATED
By:___________________________
Name:
Title:
-2-
<PAGE>
Exhibit 5.01
[LETTERHEAD OF SIDLEY & AUSTIN]
August 3, 1998
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.
$300,000,000 of Units of Limited Partnership Interest (the
"Units")
Dear Sir or Madam:
We refer to the Registration Statement on Form S-1 filed by ML Principal
Protection L.P. (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"),
on or about August 4, 1998. 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
November 29, 1996 (Registration No. 333-7593) and 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 Partners Inc.
July 31, 1998
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
[SET LETTERHEAD OF SIDLEY & AUSTIN]
August 3, 1998
Merrill Lynch Investment Partners Inc.
General Partner of
ML Principal Protection L.P.
Merrill Lynch World Headquarters
South Tower, 6th Floor
World Financial Center
New York, New York 10080-6106
Re: Registration Statement on Form S-1
----------------------------------
Dear Sir or Madam:
We refer to the Registration Statement on Form S-1 filed by ML Principal
Protection L.P. (the "Partnership") and ML Principal Protection Trading L.P.
(the "Partnership") with the Securities and Exchange Commission under
the Securities Act of 1933 (the "Securities Act") on or about August 4, 1998.
We have reviewed such data, documents, questions of law and fact and other
matter 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 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
<PAGE>
the Trading Partnership 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 10.02
AMENDMENT NO. 3
TO THE
CUSTOMER AGREEMENT
AMONG
ML PRINCIPAL PROTECTION L.P. (formerly, ML Principal Protection Plus L.P.), ML
PRINCIPAL PROTECTION TRADING L.P. (formerly, ML Principal Protection Plus
Trading L.P.) and MERRILL LYNCH FUTURES INC.
This Amendment ("Amendment") is made as of this 3rd day of August, 1998 by
and among ML Principal Protection Trading L.P. (formerly, ML Principal
Protection Plus Trading L.P.) (the "Trading L.P.") and Merrill Lynch Futures
Inc.
W I T N E S S E T H:
WHEREAS, the parties hereto entered into a Customer Agreement dated
July 14, 1994 relating to the purchase and sale of commodity futures and forward
contracts and commodity options (the "Customer Agreement");
WHEREAS, the parties hereto have previously agreed to reduce the
brokerage commissions paid by the Trading L.P. to Merrill Lynch Futures Inc.
pursuant to the Customer Agreement;
WHEREAS, the parties hereto have again agreed to reduce the brokerage
commissions paid by the Trading L.P. to Merrill Lynch Futures Inc. and wish to
amend the Customer Agreement accordingly;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained in the Customer Agreement and herein, the receipt and sufficiency of
which are hereby acknowledged, the parties hereto agree to amend the Customer
Agreement as follows:
1. Brokerage Commissions. Beginning October 1, 1998, the brokerage
commissions payable by the Trading L.P. to Merrill Lynch Futures Inc. will be
reduced to 0.0063 of 1% of the month-end assets allocated to the Trading
Advisors for management (a 7.5% annual rate). Such brokerage commissions shall
not include any administrative fee paid directly to Merrill Lynch Investment
Partners Inc.
2. Amendment. This Amendment may not be amended except by the written
consent of each of the parties hereto.
3. Counterparts. This Amendment may be executed in one or more
counterparts, each of which shall, however, together constitute one and the same
documents.
<PAGE>
IN WITNESS WHEREOF, this Amendment has been executed by the parties
hereto as of the day and year first above written.
ML PRINCIPAL PROTECTION
TRADING L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC., General Partner
BY:
------------------------------------
Name:
Title:
MERRILL LYNCH FUTURES INC.
BY:
------------------------------------
Name:
Title:
<PAGE>
Exhibit 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of ML Principal Protection
L.P. (formerly, ML Principal Protection Plus L.P.)(a Delaware limited
partnership) on Form S-1 of our report dated February 6, 1998 relating to the
financial statements of ML Principal Protection L.P. and of our report
dated February 6, 1998 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
New York, New York
July 31, 1998
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
<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 set
forth in the Registration Statement and is qualified in its entirety by
reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,242
<SECURITIES> 77,010,800
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 103,253,617
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 103,253,617
<CURRENT-LIABILITIES> 3,869,080
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 98,607,509
<TOTAL-LIABILITY-AND-EQUITY> 103,253,617
<SALES> 0
<TOTAL-REVENUES> 1,628,174
<CGS> 0
<TOTAL-COSTS> 4,052,117
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,385,738)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,385,738)
<EPS-PRIMARY> (2.35)
<EPS-DILUTED> (2.35)
</TABLE>
