<PAGE>
As filed with the Securities and Exchange Commission on March 31, 1999
Registration Nos. 333-07593
333-07593-01
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
POST-EFFECTIVE AMENDMENT NO. 1
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------
ML PRINCIPAL PROTECTION L.P.
ML PRINCIPAL PROTECTION TRADING L.P.
(RULE 140 CO-REGISTRANT)
(Exact name of registrant as specified in its charter)
13-3750642 (REGISTRANT)
DELAWARE 6793 13-3775509(CO-REGISTRANT)
(State of Organization) (Primary Standard Industrial (IRS Employer
Classification Code Number) Identification Number)
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
PRINCETON CORPORATE CAMPUS
800 SCUDDERS MILL ROAD
SECTION 2G
PLAINSBORO, NEW JERSEY 08536
(609) 282-8560
(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.
PRINCETON CORPORATE CAMPUS
800 SCUDDERS MILL ROAD
SECTION 2G
PLAINSBORO, NEW JERSEY 08536
(609) 282-8560
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------
COPIES TO:
James B. Biery
Catherine L. Fletcher
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.
<PAGE>
[MERRILL LYNCH BULL LOGO]
PART ONE
DISCLOSURE DOCUMENT
- --------------------------------------------------------------------------------
ML PRINCIPAL PROTECTION L.P.
2,500,000
LIMITED PARTNERSHIP UNITS
<TABLE>
<S> <C> <C>
THE FUND THE GENERAL PARTNER AND THE UNITS
TRADING MANAGER
A multi-strategy, multi-market A new series of Units is issued as of
managed futures investment which Merrill Lynch the beginning of each calendar quarter
trades in the U.S. and international Investment Partners Inc. at $100 per Unit.
futures and forward markets under
the direction of multiple Offering managed futures, hedge fund This is a best efforts offering. No
independent Advisors. and currency investments for individuals, minimum number of Units of a
corporations and financial institutions. series need be sold for any Units of
Seeks, through speculative trading, As of March 1, 1999, there was such series to be sold. All series of
long-term capital appreciation while approximately $3 billion invested in Units trade in the same account, but
controlling performance volatility. funds sponsored by MLIP. fees and Net Asset Values are
calculated separately in respect of
Provides "principal protection" Selects the Fund's independent Advisors each series.
through ML&Co. and allocates and reallocates the Fund's
trading assets among them. As of March 1, 1999, the Net Asset
Potentially provides a valuable Value of a Series A Unit initially
element of diversification to a MERRILL LYNCH & CO., INC. issued at $100 per Unit as of
traditionally structured portfolio. October 12, 1994 had increased by
ML&Co. guarantees that the Net Asset 34.74% to $134.36 (adding back
Began trading on October 12, 1994 Value of each Unit as of the fifth distributions of $19.00). PAST
with a capitalization of $32 million; anniversary of its issuance will be no PERFORMANCE IS NOT NECESSARILY
as of March 1, 1999 its capitalization less than its initial $100 purchase price. INDICATIVE OF FUTURE RESULTS.
was approximately $79 million.
</TABLE>
THE RISKS
These are speculative securities. Before you decide whether to invest, read this
entire prospectus carefully and consider The Risks You Face beginning on page 8.
o The Fund is speculative and leveraged. The face amount of the Fund's open
positions can be as much as 5 to 10 times the amount of assets allocated to
trading.
o You could lose all or substantially all of the time value of your
investment in the Fund.
o Because of the ML&Co. guarantee, MLIP currently does not allocate all of
any series' assets to trading. This de leveraging reduces profit potential.
o The Fund's substantial expenses must be offset by trading profits and
interest income or the Net Asset Value per Unit will drop, and trading may
be deleveraged or even terminated.
o The Fund trades to a substantial degree on non-U.S. markets which are not
subject to the same degree of regulation as are their U.S. counterparts.
o Investors are required to make representations and warranties in connection
with their investment. Each investor is encouraged to discuss the
investment with his/her individual financial, legal and tax advisor.
o There is no market for the Units, and they may only be redeemed as of the
end of a calendar month.
MINIMUM INVESTMENTS
FIRST-TIME INVESTORS:
50 Units ($5,000);
IRAS/TAX EXEMPTS:
20 Units ($2,000);
CURRENT INVESTORS:
10 Units ($1,000)
THIS PROSPECTUS IS IN TWO PARTS: A DISCLOSURE DOCUMENT AND A STATEMENT OF
ADDITIONAL INFORMATION. THESE PARTS ARE BOUND TOGETHER, AND BOTH
CONTAIN IMPORTANT INFORMATION.
--------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR
DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
--------------------
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE
MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED
ON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
--------------------
MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED
SELLING AGENT
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
_______ , 1999
<PAGE>
COMMODITY FUTURES TRADING COMMISSION
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU
TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT
FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS.
SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND
CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS
ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE
POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS
THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGES 35 TO 38
AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAKEVEN, THAT IS, TO
RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 7.
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 8 TO 13.
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.
--------------------------
THIS PROSPECTUS DOES NOT INCLUDE ALL OF THE INFORMATION OR EXHIBITS IN THE
FUND'S REGISTRATION STATEMENT. YOU CAN READ AND COPY THE ENTIRE REGISTRATION
STATEMENT AT THE PUBLIC REFERENCE FACILITIES MAINTAINED BY THE SEC IN
WASHINGTON, D.C.
THE FUND FILES QUARTERLY AND ANNUAL REPORTS WITH THE SEC. YOU CAN READ AND
COPY THESE REPORTS AT THE SEC PUBLIC REFERENCE FACILITIES IN CHICAGO, NEW YORK
OR WASHINGTON, D.C. PLEASE CALL THE SEC AT 1-800-SEC-0300 FOR FURTHER
INFORMATION.
THE FUND'S FILINGS ARE POSTED AT THE SEC WEBSITE AT HTTP://WWW.SEC.GOV.
-------------------------
MERRILL LYNCH INVESTMENT PARTNERS INC.
GENERAL PARTNER
PRINCETON CORPORATE CAMPUS
800 SCUDDERS MILL ROAD
SECTION 2G
PLAINSBORO, NEW JERSEY 08536
(609) 282-8560
-1-
<PAGE>
SPECIAL DISCLOSURES REGARDING THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND
1. ML&CO'S GUARANTEE IS NOT A GUARANTEE OF PROFIT. AT A 5% ANNUAL
INTEREST RATE, THE PRESENT VALUE OF RECEIVING $100 IN FIVE YEARS IS ONLY $78.35.
2. IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS
GUARANTEE, ALL UNITS WILL BEGIN WITH APPROXIMATELY 85% TO 95% OF THEIR ASSETS
ALLOCATED TO TRADING. THIS INITIAL DELEVERAGING REDUCES PROFIT POTENTIAL.
3. 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 WELL BEFORE LOSSES APPROACHING 20% HAD BEEN INCURRED.
4. UNLESS THE FUND EARNS SUFFICIENT PROFITS FOR THE NET ASSET VALUE
PER UNIT TO INCREASE, AFTER ALL FEES, MLIP WILL FURTHER DELEVERAGE OR TERMINATE
TRADING.
5. IF MLIP DELEVERAGES OR TERMINATES THE TRADING OF ANY SERIES OF
UNITS, IT MUST DO SO FOR ALL SERIES. (TO DATE, MLIP HAS NOT TERMINATED THE
TRADING OF ANY SERIES.)
6. MLIP MONITORS 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
GUARANTEE.
7. IF THE ADVISORS' TRADING FOR FUND IS SUCCESSFUL, THE FUND'S
PERFORMANCE WOULD HAVE BEEN SUBSTANTIALLY BETTER WITHOUT ITS "PRINCIPAL
PROTECTION" FEATURE.
8. "PRINCIPAL PROTECTION" DOES NOT TAKE INTO CONSIDERATION INFLATION
OR THE TAX CONSEQUENCES OF INVESTING IN THE FUND.
9. THE ML&CO. GUARANTEE ONLY APPLIES TO UNITS WHICH REMAIN
OUTSTANDING ON THEIR RESPECTIVE PRINCIPAL ASSURANCE DATES.
10. THE ML&CO. GUARANTEE IS A CONTRACT BETWEEN ML&CO. AND THE
FUND, NOT BETWEEN ML&CO. AND THE INVESTORS. INVESTORS COULD ENFORCE THIS
GUARANTEE ONLY THROUGH BRINGING A DERIVATIVE ACTION IN THE NAME OF THE FUND.
11. THE ML&CO. GUARANTEE IS A GENERAL, UNSECURED OBLIGATION OF
ML&CO.
12. AN INVESTOR COULD CONTROL THE ASSETS HE OR SHE COMMITTED TO THE
FUTURES MARKET IN SUCH A WAY SO AS TO ACHIEVE THE SAME "PRINCIPAL PROTECTION"
OFFERED BY THE FUND, WITHOUT BEING SUBJECT TO THE FUND'S REDEMPTION RESTRICTIONS
OR COST STRUCTURE.
13. IRRESPECTIVE OF THE FUND'S "PRINCIPAL PROTECTION" FEATURE, ITS
MULTI-ADVISOR STRATEGY MAKES IT UNLIKELY THAT IT WILL INCUR MAJOR LOSSES.
14. PROSPECTIVE INVESTORS MUST CAREFULLY CONSIDER WHETHER THE
"PRINCIPAL PROTECTION" FEATURE OF THE FUND MERITS THE OPPORTUNITY COSTS
INVOLVED.
------------------
SEE "LEVERAGING CONSIDERATIONS" AND "THE ML&CO. GUARANTEE."
-2-
<PAGE>
ORGANIZATIONAL CHART
ML PRINCIPAL PROTECTION L.P.
[GRAPHIC OMITTED]
OTHER THAN THE ADVISORS, ALL ENTITIES INDICATED IN THE ORGANIZATIONAL CHART ARE
MERRILL LYNCH AFFILIATES. SEE "CONFLICTS OF INTEREST" AT PAGE 47 AND
"TRANSACTIONS BETWEEN THE FUND AND MERRILL LYNCH" AT PAGE 50.
FOR CONVENIENCE, ML&CO. AND ENTITIES AFFILIATED WITH IT ARE SOMETIMES
COLLECTIVELY REFERRED TO AS "MERRILL LYNCH."
-3-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
CONTENTS
PART ONE
DISCLOSURE DOCUMENT
SECTION PAGE
- ------- ----
Summary......................................................................4
The Risks You Face...........................................................8
How the Fund Works...........................................................13
Performance of the Fund......................................................15
Selected Financial Data......................................................17
Management's Analysis of Operations..........................................18
Quantitative and Qualitative Disclosures About the
Fund's Market Risk........................................................23
The Advisor Selection Process................................................27
Leverage Considerations......................................................28
The ML&Co. Guarantee.........................................................29
Interest Income Arrangements.................................................31
Net Asset Value .............................................................33
The Two-Tier Structure of the Fund...........................................34
Analysis of Fees and Expenses Paid
by the Fund...............................................................35
Managed Futures Funds in General.............................................39
The Role of Managed Futures in
Your Portfolio............................................................40
Merrill Lynch Investment Partners Inc........................................45
Conflicts of Interest........................................................47
Transactions Between the Fund and
Merrill Lynch.............................................................50
Summary of the Limited Partnership
Agreement..................................................................50
Tax Consequences.............................................................51
Selling Commissions..........................................................53
Lawyers; Accountants.........................................................53
Index to Financial Statements................................................54
PART TWO
STATEMENT OF
ADDITIONAL INFORMATION
Futures Markets and Trading Methods..........................................1
- ---------------
Exhibit A -- Limited Partnership Agreement...............................LPA-1
Exhibit B -- Subscription Requirements....................................SR-1
Exhibit C -- Subscription Agreement.......................................SA-1
------------------
THE SERIES OF UNITS ISSUED AFTER MAY 1, 1997 HAVE A 5-YEAR TIME HORIZON,
DO NOT PAY ANY DISTRIBUTIONS AND MUST BE UPLEVERAGED OR DELEVERAGED TOGETHER.
UNITS ISSUED BEFORE MAY 1, 1997 HAVE SEVEN-YEAR TIME HORIZONS, PAY ANNUAL
DISTRIBUTIONS AND MAY BE UPLEVERAGED AND DELEVERAGED SEPARATELY, ON A
SERIES-BY-SERIES BASIS. ALL REFERENCES IN THIS PROSPECTUS ARE TO THE POST-MAY 1,
1997 SERIES UNLESS THE CONTEXT OTHERWISE REQUIRES.
SUMMARY
THE FUND
ML PRINCIPAL PROTECTION L.P. 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.
The Fund's trading assets are allocated and reallocated by MLIP to the
management of independent professional trading advisors (the "Advisors")
applying proprietary strategies in numerous markets.
THE OFFERING
The Fund generally issues a new series of Units each quarter. All Units are
issued at $100 per Unit.
PERFORMANCE OF THE FUND
The Fund began trading in October 1994. Its annual rates of return since
inception have been:
1994 (22/3 mos.) 1.76%
1995 10.55
1996 9.36
1997 6.01
1998 4.60
Through March 1, 1999, the highest Net Asset Value per Series A Unit
was $135.27 (September 1998) (adding back $15.50 in distributions) and the
lowest $101.04 (October 1994).
The Fund's rates of return are materially affected by the percentage of
its assets allocated to trading. This percentage has increased substantially
over time. All series of Units issued prior to May 1, 1997 began trading with
only 60% of their assets allocated to trading. Units issued after May 1, 1997
-4-
<PAGE>
began trading with 75% of their assets allocated to trading, and this percentage
was increased, in respect of all Units issued after May 1, 1997, to 85% as of
May 1, 1998. Since May 1, 1998, all new series of Units allocate at least 85% of
their assets to trading, and certain series are currently trading at
approximately a 95% allocation.
ML&CO. GUARANTEE
ML&Co. has agreed to make any payments to the Fund necessary to ensure
that the Net Asset Value per Unit of each series will be no less than $100 as of
its Principal Assurance Date. The Principal Assurance Date for each series will
occur approximately five years from each series' date of issuance.
The ML&Co. guarantee is effective only in respect of Units outstanding on
their Principal Assurance Date and is not a guarantee of profit nor a guarantee
that the Fund will achieve its objectives or avoid substantial present value
losses. See "Risk Factors," "Leverage Considerations," "The ML&Co. Guarantee"
and "Conflicts of Interest" in this Prospectus.
THE FUND'S MULTI-ADVISOR APPROACH
The Fund is a multi-strategy, multi-market managed futures investment,
employing a range of proprietary 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,
each trading independently of each other and employing diverse trading methods.
Numerous Advisor changes and asset reallocations have been made over time.
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 also profitable,
investing in the Units has the potential to enhance the risk/reward profile 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 Your Portfolio" at page 40.
MLIP
GENERAL
Offering managed futures, hedge funds 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
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 March 1, 1999, MLIP was acting as trading manager
or sponsor to funds in which approximately $3 billion of client assets were
invested.
SEE THE ORGANIZATIONAL CHART OF THE MERRILL LYNCH ENTITIES AT PAGE 3 AND
"TRANSACTIONS BETWEEN THE FUND AND MERRILL LYNCH" AT PAGE 50.
MARKETS TRADED BY THE FUND
The Advisors participate in most major sectors of the global economy,
including but not limited to:
CURRENCIES
- ------------------------------------------------------------------------------
Australian Dollar New Zealand Dollar
British Pound Norwegian Kron
Canadian Dollar Singapore Dollar
Euro South African Rand
Hong Kong Dollar Swedish Krone
Japanese Yen Swiss Franc
FINANCIAL INSTRUMENTS
- ------------------------------------------------------------------------------
Australian (90-day) French PIBOR
Bank Bills German Bonds
Australian (3-year and Italian Bonds
10-year) Treasury Bonds Japanese Bonds
Canadian Bonds Spanish Bonds
Eurodollar Spanish MIBOR
Eurolira U.K. Long "Gilts"
Euromark U.K. Short Sterling
Euroswiss U.S. 10-year Treasury
Euroyen Notes
French Notionnel Bonds U.S. Treasury Bonds
-5-
<PAGE>
STOCK INDICES
- ------------------------------------------------------------------------------
Australian All Ordinaries FTSE 100 (UK) Index
CAC 40 Stock Index New York Composite
(France) Nikkei 225 Index
DAX (Germany) (Japan)
S&P 500 Stock Index
METALS
- ------------------------------------------------------------------------------
Aluminum Palladuim
Copper Platinum
Gold Silver
Lead Tin
Nickel Zinc
AGRICULTURAL PRODUCTS
- ------------------------------------------------------------------------------
Cattle Orange Juice
Cocoa Soybeans
Coffee Soymeal
Corn Soy Oil
Cotton Sugar
Hogs Wheat
Lumber
ENERGY
- ------------------------------------------------------------------------------
Crude Oil No. 2 Heating Oil
Natural Gas Unleaded Gasoline
THERE IS NO WAY TO PREDICT WHICH MARKETS THE FUND WILL TRADE OR WHAT ITS
RELATIVE COMMIT MENTS TO DIFFERENT MARKETS WILL BE.
CASH MANAGEMENT
Merrill Lynch Asset Management, L.P. provides cash management services to
the Fund, investing in U.S. Government and agency securities within parameters
established by MLIP for which MLAM assumes no responsibility. As of December 31,
1998, the Asset Management Group of ML&Co. (which includes MLAM) had a total of
approximately $501 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., 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, a structure which ensures
that the assets attributable to one series of Units cannot become subject to
trading losses attributable to any other series.
MAJOR RISKS OF THE FUND
Although the Fund has a principal protection feature, it is a speculative
investment. It is not possible to predict how the Fund will perform over either
the long or short term.
Investors must be prepared to lose all or substantially all of the time
value of their investment in the Units.
There can be no assurance that the past performance of the Fund is
indicative of how it will perform in the future.
The performance of many of the Advisors is dependent upon market trends of
the type that their trading models are designed to identify. Trendless periods
are frequent, and during such periods the Fund is unlikely to be profitable.
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 approximately 85% to 95% of each series'
capital to trading in order to protect ML&Co. from any liability under its
guarantee. There is also the risk of MLIP further deleveraging or even
terminating trading in the event that the Fund does not realize sufficient
profits for the Net Asset Value per Unit of any series 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, MLIP must make the same
leverage changes with respect to all series. (This restriction applies only to
series issued after May 1, 1997.)
The risk control characteristics of the Fund's multi-advisor approach make
it highly unlikely that the ML&Co. guarantee will ever benefit investors,
despite its significant opportunity costs.
ML&Co. provides guarantees like that provided to the Fund to many MLIP
funds; ML&Co. has never had to make any payment under any such guarantees.
-6-
<PAGE>
The Fund is subject to substantial charges. The Fund must earn overall
trading profits and interest income of approximately 9% of its average Net Asset
Value each year simply to break even after operating expenses.
Because its performance is entirely unpredictable, there is no way of
telling when is a good time to invest in the Fund. Investors have no means of
knowing whether they are buying Units at a time when profitable periods are
ending, beginning, or not in progress.
The Units are not transferable and may only be redeemed once a month.
Because investors must submit irrevocable redemption notices at least 10
days before the redemption of Units, they cannot know the Net Asset Value at
which they will redeem Units. Investors cannot control the maximum losses on
their Units because they cannot be sure of the redemption value of their Units.
As limited partners, investors have no voice in the operation of the Fund;
they are entirely dependent on the management of MLIP and the Advisors for the
success of their investment.
FEES AND EXPENSES
The Profit Shares payable to the Advisors are calculated based on the
individual performance of each Advisor and, consequently, could be substantial
even in a breakeven or losing year. The Fund's other significant expenses are
its Brokerage Commissions and Administrative Fees. If the Fund's Net Asset Value
increases, the absolute dollar amount of these percentage-of-assets fees will
also, but they will have the same effect on the Fund's rate of return.
Investors pay redemption charges on all Units redeemed 2 years or less
after purchase. These charges are payable to MLIP (reducing the redemption
proceeds otherwise payable to investors).
In order for an investor to "break-even" on an investment during the first
year, an initial investment of $5,000 must earn trading profits of $193.75, or
3.875% (without including the redemption charge).
BREAKEVEN TABLE
TWELVE-MONTH
DOLLAR
TWELVE-MONTH BREAKEVEN
PERCENTAGE ($5,000 INITIAL
EXPENSES BREAKEVEN INVESTMENT)++
- -------- --------- -------------
Brokerage Commissions+ 6.375% $ 318.75
Administrative Fees 0.25% $ 12.50
Profit Share* 2.00% $ 100.00
Currency Trading Costs* 0.25% $ 12.50
Interest Income* (5.00)% $(250.00)
TWELVE-MONTH
BREAKEVEN WITHOUT
REDEMPTION CHARGE 3.875% $ 193.75
Redemption Charge
(first 24 months only) 3.10%* $ 155.00
TWELVE-MONTH
BREAKEVEN WITH
REDEMPTION CHARGE 6.975% $ 348.75
- ---------------
+ Assumes 85% of assets allocated to trading.
* Estimated. The Profit Shares are generally 15%-20% of any annual or
quarterly New Trading Profits achieved by each Advisor (irrespective of the
overall performance of the Fund).
** The redemption charge is 3% of the month-end Net Asset Value per Unit
which, after subtraction of such charge, equals $100. ++ Assumes a constant
$5,000 Net Asset Value.
SEE "ANALYSIS OF FEES AND EXPENSES
PAID BY THE FUND" AT PAGE 35.
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 a maximum 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 more than 12 months, 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. However,
capital losses in excess of capital gains may only be deducted against ordinary
income to the extent of $3,000 per year.
-7-
<PAGE>
Consequently, investors could pay tax on the Fund's interest income even though
they have lost money on their Units. See "Tax Consequences" beginning at page
51.
AN INVESTMENT IN THE UNITS SHOULD BE CONSIDERED AS A 3 TO 5 YEAR COMMITMENT
The market conditions in which the Fund has the best opportunity to
recognize significant profits occur infrequently. An investor should plan to
hold Units for long enough to have a realistic chance for a number of such
trends to develop. Furthermore, allocating less than 100% of the Fund's assets
to trading reduces profit potential. Even if successful, the Fund's objective is
long-term capital appreciation, not significant short-term gain.
MLIP believes that investors should consider the Units at least a 3 to 5
year commitment. The ML&Co. guarantee itself is effective only as of a series'
Principal Assurance Date -- the end of the 5th year after such series is issued.
However, Limited Partners may redeem their Units as of the end of any calendar
month subject to redemption charges through the end of the 24th month after
sale.
SEE "EXHIBIT B -- SUBSCRIPTION REQUIREMENTS."
IS THE FUND A SUITABLE INVESTMENT FOR YOU?
You should consider investing in the Fund if you are interested in its
potential to produce, over the long-term, enhanced returns that are generally
noncorrelated to the returns of the traditional debt and equity markets. The
Fund may be a suitable investment if you are interested in a managed futures
fund with a principal protection feature and are prepared to risk losing the
entire time value of your investment for 5 years.
The Fund is not a complete investment program. MLIP offers the Fund as a
diversification opportunity, and an investment in the Fund should only represent
a limited portion of an investor's overall portfolio.
No one should invest more than 10% of their readily marketable assets in
the Fund.
Your Financial Consultant can assist you in deciding whether the Units are
suitable for you.
THE RISKS YOU FACE
POSSIBLE TOTAL LOSS OF THE TIME VALUE OF YOUR INVESTMENT
You could lose all or substantially all of the time value of your
investment. At a 5% annual interest rate, this would constitute a loss of
approximately 25% over a 5-year Time Horizon.
NO ASSURANCE OF ANY MINIMUM NET ASSET VALUE PER UNIT PRIOR TO ITS PRINCIPAL
ASSURANCE DATE
The ML&Co. guarantee is effective only as of the Principal Assurance Date for a
given series of Units. Prior to such Date, the Net Asset Value per Unit could be
well below $100.
INVESTORS MUST NOT RELY ON THE PAST PERFORMANCE OF THE FUND IN DECIDING WHETHER
TO BUY UNITS
The performance of the Fund is entirely unpredictable, and its past
performance is not necessarily indicative of its future results.
The price data which the Advisors have researched in developing their
strategies may not reflect the changing dynamics of future markets. If not, the
Advisors would have little chance of being profitable. An influx of new market
participants, changes in market regulation, international political
developments, demographic changes and numerous other factors can contribute to
once-successful strategies becoming outdated. Not all of these factors can be
identified, much less quantified. There can be no assurance that the Advisors
will trade profitably.
THE OPPORTUNITY COSTS AND RISKS OF "PRINCIPAL PROTECTION"
MLIP currently allocates 85% to 95% of each series' assets to the Advisors
for trading. Allocating less than 100% of a series' assets to trading reduces
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 the guarantee minimum $100.
-8-
<PAGE>
In the event that the Fund incurs even relatively small losses, MLIP may
significantly deleverage or even terminate trading.
In the event that MLIP deleverages any series, it must deleverage all
series to the same degree. This significantly increases the risk of
deleveraging.
Were MLIP to terminate trading, a particular series of Units may not have
had a realistic opportunity to trade profitably.
MULTI-ADVISOR RISK CONTROL AND "PRINCIPAL PROTECTION"
The multi-advisor strategy of the Fund involves the opportunity costs of
combining independent trading strategies. Each Advisor trades without regard to
the positions taken by any other Advisor. Consequently, the profits earned by
certain Advisors are frequently offset by losses incurred by others. The loss
control features of MLIP's multi- advisor strategy significantly reduce the
possibility of the ML&Co. guarantee ever being of any tangible benefit to
investors.
THE LARGE SIZE OF THE FUND'S TRADING POSITIONS INCREASES THE RISK OF SUDDEN,
MAJOR LOSSES
The Fund takes positions with face values up to as much as approximately 5
to 10 times its assets allocated to trading. Consequently, even small price
movements can cause major losses.
A NUMBER OF ADVISORS ANALYZE ONLY TECHNICAL MARKET DATA, NOT ANY ECONOMIC
FACTORS EXTERNAL TO MARKET PRICES
The strategies used by a number of the Advisors focus exclusively on
statistical analysis of market prices. Consequently, any factor external to the
market itself which dominates prices is likely to cause major losses. For
example, a pending political or economic event may be very likely to cause a
major price movement, but a number of Advisors would not adjust their positions
until their programs indicated that they should do so as a result of market
price movements.
The likelihood of the Units being profitable could be materially
diminished during periods when events external to the markets are dictating
prices.
LACK OF PARTICULAR TYPES OF PRICE TRENDS MAY CAUSE MAJOR LOSSES
The Fund's profit potential is reduced during periods without major price
trends. Many markets are trendless most of the time, and in static markets
without the type of price trends certain Advisors' systems or strategies have
been designed to identify, the Fund is likely to incur losses. In fact, a number
of Advisors expect more than half of their trades to be unprofitable, depending
on significant gains from a few major trends to offset these losses.
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, systematic Advisors are
likely to establish a series of losing positions based on incorrectly
identifying both the brief upward or downward price movements as trends.
THE SIMILARITIES AMONG CERTAIN ADVISORS' STRATEGIES REDUCE DIVERSIFICATION,
INCREASING THE RISK OF LOSS
The similarities among a number of Advisors' strategies reduce the Fund's
diversification. The less diversification, the higher the risk that the market
will move against a large number of positions held by different Advisors at the
same time, increasing losses.
OVERLAP OF THE MARKETS TRADED BY CERTAIN ADVISORS ALSO REDUCES DIVERSIFICATION,
INCREASING THE RISK OF LOSS
The Advisors as a group emphasize trading in the financial instrument and
currency markets. The degree of market overlap changes with the Advisor mix.
However, in general, MLIP expects a minimum 50% concentration in these two
sectors. Market concentration increases the risk of major losses and unstable
Unit values, as the same price movements adversely affect many of the Fund's
positions at or about the same time.
SYSTEMATIC STRATEGIES
A number of Advisors implement technical, systematic strategies. The
widespread use of technical trading systems frequently results in numerous
managers attempting to execute similar trades at or
-9-
<PAGE>
about the same time, altering trading patterns and adversely affecting market
liquidity.
DISCRETIONARY STRATEGIES
Certain of the Fund's Advisors are discretionary rather than systematic
traders. Relying on subjective trading judgment may produce less consistent
results than systematic approaches.
THE FUND'S SUBSTANTIAL EXPENSES WILL CAUSE LOSSES UNLESS OFFSET BY PROFITS
The Fund pays fixed annual expenses of approximately 9% of its average
month-end assets (not including the redemption charges in effect for the first
twenty-four months after a Unit is issued). In addition to expenses, the Fund is
also subject to Profit Shares payable separately to each Advisor based on such
Advisor's individual performance. Profit Shares could represent a substantial
expense to the Fund even in a breakeven or losing year.
The Fund's expenses could, over time, result in significant losses.
Moreover, if these expenses deplete Net Assets to even a limited extent, MLIP
might deleverage or even terminate trading. Except for the Profit Shares, these
expenses are not contingent and are payable whether or not the Fund is
profitable. See "Summary -- Fees and Expenses" at page 7.
UNIT VALUES ARE UNPREDICTABLE AND VARY SIGNIFICANTLY MONTH-TO-MONTH
The Net Asset Value per Unit of any series can vary significantly
month-to-month.
The only way to take money out of the Fund is to redeem Units. You can
only redeem Units at month-end upon at least 10 days' advance notice and subject
to possible redemption charges. Investors cannot know at the time they submit a
redemption request what the redemption value of their Units will be, and the
restrictions imposed on redemptions limit your ability to protect yourself
against major losses by redeeming Units.
Your ability to transfer Units is restricted. There is no market in the
Units.
UNCERTAIN TIMING OF SUBSCRIPTIONS
Investors are unable to know whether they are subscribing for Units after
a significant upswing in profits -- often a time when the Fund has an increased
probability of entering into a losing period.
INVESTING IN THE UNITS MIGHT NOT DIVERSIFY AN OVERALL PORTFOLIO
One of the objectives of the Fund is to add an element of diversification
to a traditional securities portfolio. While the Fund may perform in a manner
largely independent from the general stock and bond markets, there is no
assurance it will do so. An investment in the Fund could increase rather than
reduce overall portfolio losses during periods when the Fund as well as stocks
and bonds decline in value. There is no way of predicting whether the Fund will
lose more or less than stocks and bonds in declining markets. Investors must not
consider the Fund to constitute a hedge against losses in their core securities
portfolios.
Prospective investors should consider whether diversification in itself is
worthwhile even if the Fund is unprofitable.
INCREASED COMPETITION COULD REDUCE ADVISORS' PROFITABILITY
There has been a dramatic increase over the past 20 years in the amount of
assets invested in managed futures. In 1980, the amount of assets in the managed
futures industry were estimated at approximately $300 million; by the end of
1998, this estimate had risen to approximately $34.9 billion. This means
increased trading competition. The more competition there is for the same
positions, the more costly and harder they are to acquire.
THE AMOUNT OF ADVISORS' EQUITY UNDER MANAGEMENT COULD LEAD TO DIMINISHED RETURNS
All of the Advisors have a significant amount of assets under management;
some Advisors are at all-time highs in client accounts. The more money an
Advisor manages, the more difficult it may be to trade profitably because of the
difficulty of trading larger positions without adversely affecting prices and
performance. Large trades may result in more price slippage than smaller orders.
-10-
<PAGE>
NO ASSURANCE OF ANY ADVISOR'S CONTINUED SERVICES; COMPETITION FOR ADVISORS
There is no assurance that any Advisor will be willing or able to continue
to provide advisory services to the Fund. There is strong competition for the
services of successful 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.
ILLIQUID MARKETS COULD MAKE IT IMPOSSIBLE FOR THE ADVISORS TO REALIZE PROFITS OR
LIMIT LOSSES
In illiquid markets, an Advisor could be unable to capitalize on trading
opportunities or close out losing positions. There are numerous different
factors which can contribute to market illiquidity, far too many for Advisors to
be able to predict illiquid markets. There can be no assurance that a market
which has been highly liquid in the past will not experience periods of
unexpected illiquidity.
Unexpected market illiquidity has caused major losses in recent years in
such sectors as emerging markets, fixed income relative value strategies and
mortgage-backed securities. There can be no assurance that the same will not
happen to the Fund 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.
THE FUND TRADES EXTENSIVELY IN FOREIGN MARKETS; THESE MARKETS ARE LESS REGULATED
THAN U.S. MARKETS AND ARE SUBJECT TO EXCHANGE RATE, MARKET PRACTICE AND
POLITICAL RISKS
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 many 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.
POSSIBLE EFFECTS OF THE EUROPEAN MONETARY UNION
Most of the Advisors trade European currencies. The January 1, 1999
inauguration of the Euro and the market's reaction to the Euro, or to any
nation's possible future withdrawal from the European Monetary Union, may
adversely affect the trading opportunities, or trading results generally, of
currency traders. The absence of historical Euro pricing data may also be
detrimental to certain Advisors' technical, systematic strategies.
The conversion to a single euro-currency is a very significant and novel
political and economic event. There can be no certainty about its direct or
indirect future effects on the currency markets. Unforeseen effects of the
European Monetary Union could result in trading losses for the Fund.
During the last quarter of 1998, a number of Advisors phased out positions
in the various European currencies which were replaced by the Euro on January 1,
1999. Euro risk, in the form of Euro forward contracts and futures contracts on
Euro- denominated bond interest rates, were introduced by most of the Advisors
and gradually increased over the first quarter of 1999. This process is expected
to ultimately restore the Fund's European currency exposure to a level similar
to its aggregate pre-Euro weightings.
Most of the Advisors have been ready to accept and process data relating
to the Euro since January 1, 1999. If unanticipated difficulties arise in
connection with adapting to the Euro, the Advisors have each undertaken to
notify MLIP in a timely manner, and MLIP will promptly notify investors.
-11-
<PAGE>
THE FUND'S CASH MANAGEMENT STRATEGIES COULD LOSE BOTH YIELD AND PRINCIPAL
MLAM's cash management attempts to generate yields in excess of the 91-day
Treasury bill rate. However, there can be no assurance that the securities MLAM
buys for the Fund will not lose value. The Fund could lose not only its
aggregate interest income, but also the principal managed by MLAM.
THE FUND COULD LOSE ASSETS AND HAVE ITS TRADING DISRUPTED DUE TO THE BANKRUPTCY
OF MLF OR OTHERS
The Fund is subject to the risk of MLF, exchange or clearinghouse
insolvency. Fund assets could be lost or impounded during lengthy bankruptcy
proceedings. Were a substantial portion of the Fund's capital tied up in a
bankruptcy, MLIP might suspend or limit trading, perhaps causing the Fund to
miss significant profit opportunities. No MLIP fund has ever lost any assets due
to the bankruptcy or default of a broker, exchange or clearinghouse, but there
can be no assurance that this will not happen in the future.
REGULATORY CHANGES COULD RESTRICT THE FUND'S OPERATIONS
The Fund implements speculative, highly leveraged strategies. 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
recently blamed the collapse of its currency on speculative funds and imposed
restrictions on speculative trading in certain markets.
Regulatory changes could adversely affect the Fund by restricting its
markets, limiting its trading and/or increasing the taxes to which Unitholders
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, 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.
PREMATURE TERMINATION OF THE FUND
MLIP may withdraw as general partner upon 120 days' notice, which would
cause the Fund to terminate unless a substitute general partner were obtained.
Other events, such as substantial losses, could also cause the Fund to terminate
before the expiration of its stated term. This could force you to prematurely
liquidate your investments and upset the overall maturity and timing of your
investment portfolio.
--------------------
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.
INVESTORS ARE TAXED EVERY YEAR ON THEIR SHARE OF THE FUND'S PROFITS -- NOT ONLY
WHEN THEY REDEEM, AS WOULD BE THE CASE IF THEY HELD STOCKS OR BONDS
Investors are taxed each year on their, share of the Fund's income and
gains irrespective of whether they redeem any Units.
All performance information included in this prospectus is presented on a
pre-tax basis; the investors who experienced such performance had to pay the
related taxes from other sources.
Over time, the compounding effects of the annual taxation of the Fund's
income are material to the economic consequences of investing in the Fund. For
example, a 10% compound annual rate of return over five years would result in an
initial $10,000 investment compounding to $16,105. However, if one factors in a
30% tax rate each year, the result would be $14,025.
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.
-12-
<PAGE>
TAX COULD BE DUE FROM INVESTORS ON THEIR SHARE OF THE FUND'S INTEREST INCOME
DESPITE OVERALL LOSSES
Investors may be required to pay tax on their allocable share of the
Fund's interest income, even if the Fund incurs overall losses. Trading
losses can only be used to offset trading gains and $3,000 of ordinary income
(including interest income) each year. Consequently, if an investor were
allocated $5,000 of interest income and $10,000 of net trading losses, the
investor would owe tax on $2,000 of interest income even though the investor
would have a $5,000 loss for the year. The $7,000 capital loss would carry
forward, but subject to the same limitation on its deductibility against
interest income.
HOW THE FUND WORKS
BUYING UNITS
You buy Units as of the first business day of any calendar quarter at $100
per Unit. Your subscrip tion must be submitted by the 20th day of the preceding
month.
MLIP has no present intention to terminate the offering, but may do so at
any time.
Merrill Lynch officers and employees subscribe at $97 per Unit. MLIP adds
the remaining $3 to their subscriptions, so that the Fund receives subscription
proceeds of $100 per Unit.
Only first-time investors need to submit Subscription Agreements, unless
the Selling Agent feels it is necessary to reconfirm their suitability in
writing. To purchase additional Units, contact your Financial Consultant.
The minimum purchase for first-time investors is 50 Units ($5,000); 20
Units ($2,000) for IRAs and other tax exempt accounts; 10 Units ($1,000) for
current investors.
You must have a Merrill Lynch customer securities account in order to buy
Units.
USE OF PROCEEDS
100% of all subscription proceeds are invested into the Fund. Neither the
Fund nor any subscriber pays any selling commissions directly. MLIP pays all
such commissions as part of the ongoing offering costs of the Fund. In return,
MLIP receives substantial revenues from the Fund over time.
The Fund uses subscription proceeds to margin its speculative futures
trading, as well as to pay trading losses and expenses. At the same time that
the Fund's assets are being used as margin, they are also available for cash
management. Substantially all the cash management return earned on the Fund's
assets is paid to the Fund, although Merrill Lynch does retain certain economic
benefits from possession of the Fund's assets, as described in more detail under
"Interest Income Arrangements" beginning at page 31.
The Fund's assets are held either in bank custodial accounts or in
regulated customer accounts maintained at one or more Merrill Lynch entities.
MLAM applies its yield-enhancement strategies to approximately 70% of the Fund's
assets. As mentioned above, while being managed by MLAM, these assets are also
available to support the Fund's futures and forward trading.
REDEEMING UNITS
You can redeem Units monthly. To redeem at month-end, contact your
Financial Consultant by the 20th of the month. Financial Consultants may be
contacted by telephone; written redemption requests are not required. Your
Merrill Lynch customer securi ties account will be credited with the proceeds
within 10 business days of redemption.
Those limited partners who no longer have a Merrill Lynch account must
send their redemption requests in writing (signature guaranteed) directly to
MLIP, Attention: Mr. Winston Clinton, Princeton Corporate Campus, 800 Scudders
Mill Road, Plainsboro, New Jersey 08536.
Units redeemed 12 months or less after issuance are subject to 3%, Units
redeemed 18 or less but more than 12 months after issuance to a 1.5%, and Units
redeemed 24 or less but more than 18 months after issuance to a 1%, redemption
charge. These charges are paid to MLIP.
-13-
<PAGE>
UNCERTAIN REDEMPTION VALUE OF UNITS
The Fund redeems Units at redemption date Net Asset Value, not at the Net
Asset Value as of the date that redemption requests are submitted. Investors
must submit irrevocable redemption requests at least 10 days prior to the
effective date of redemption. Because of the volatility of Unit values, this
delay means that investors cannot know the value at which they will redeem their
Units.
POSSIBILITY OF MATERIAL ADVERSE DEVELOPMENTS BETWEEN REDEMPTION REQUEST AND
REDEMPTION
Materially adverse changes in the Fund's financial position could occur
between the time an investor irrevocably commits to redeem Units and the time
the redemption is made.
DISTRIBUTIONS
No distributions have been made to date on any Units issued after May 1,
1997, and none are anticipated.
SMALL MINIMUM INVESTMENT
By investing in the Fund, you participate in multiple trading strategies
with a minimum investment of only 50 Units ($5,000); 20 Units ($2,000) for IRAs
and other tax exempt accounts; 10 Units ($1,000) for existing investors.
A direct investment with many of the Advisors would require a minimum
commitment of at least $1 million. A prospective investor could trade futures
directly or invest in other managed futures accounts for much less than $1
million but not under the direction of the Advisors.
LIMITED LIABILITY FOR FUND INVESTORS
Investors who open individual futures accounts are personally liable for
all losses, including margin calls potentially in excess of their investment. As
a Unitholder, you can never lose more than your investment and profits.
ADMINISTRATIVE CONVENIENCE
MLIP provides all administrative services needed for the Fund, including
trade processing and financial and tax reporting.
The Net Asset Value per Unit of each series is available at any time upon
request. Contact your Financial Consultant or MLIP at (800) 765-0995.
Investors receive monthly financial summaries and annual audited
financials.
-14-
<PAGE>
PERFORMANCE OF THE FUND
The following are the monthly rates of return from the inception of the
Fund through December 31, 1998. THERE CAN BE NO ASSURANCE THAT THE FUND WILL
CONTINUE TO PERFORM IN THE FUTURE THE WAY IT HAS IN THE PAST.
TYPE OF POOL: Multi-Advisor; Publicly-Offered/"Principal Protected"
INCEPTION OF TRADING: October 12, 1994
AGGREGATE SUBSCRIPTIONS: $162,932,895
CURRENT CAPITALIZATION: $79,106,838
WORST MONTHLY DRAWDOWN: (3.70)% (2/96)
WORST PEAK-TO-VALLEY DRAWDOWN: (3.70)% (2/96)
-------------
NET ASSET VALUE PER SERIES A UNIT, MARCH 1, 1999: $134.36 (adding back $19.00 in
distributions) The Fund's monthly rates of return in January and February 1999
were (1.09)% and 0.84%, respectively.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
MONTHLY RATES OF RETURN
- ----------------------------------------------------------------------------------------
MONTH 1998 1997 1996 1995 1994
- ---------------- ------------ ------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
January 0.07% 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 (1.96)% (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 (0.67)% 3.14% (1.68)% (1.30)% --
- ---------------- ------------ ------------ ------------ ------------ -------------
August 4.80% (2.71)% 0.49% 0.95% --
- ---------------- ------------ ------------ ------------ ------------ -------------
September 3.55% 0.86% 1.62% (0.32)% --
- ---------------- ------------ ------------ ------------ ------------ -------------
October 0.06% (0.43)% 4.25% 0.29% 1.04%
- ---------------- ------------ ------------ ------------ ------------ -------------
November (1.00)% 0.80% 2.50% 0.69% 0.32%
- ---------------- ------------ ------------ ------------ ------------ -------------
December 0.20% 2.22% (0.20)% 2.12% 0.40%
- ---------------- ------------ ------------ ------------ ------------ -------------
Compound 4.60% 6.01% 9.36% 10.55% 1.76%
Rate of Return (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 AFTER MAY 1, 1997 WITH 75%, OF THEIR ASSETS ALLOCATED TO TRADING.
BEGINNING MAY 1, 1998, ALL UNITS ISSUED AFTER MAY 1, 1997 HAVE ALLOCATED 85% TO
95% OF THEIR ASSETS TO TRADING, AS WILL THE UNITS ISSUED UNDER THIS PROSPECTUS.
CONSEQUENTLY, THE COMPOSITE PAST PERFORMANCE OF THE FUND MAY NOT BE
REPRESENTATIVE OF HOW THE UNITS WOULD HAVE PERFORMED OVER THE SAME PERIOD. THE
GREATER THE PERCENTAGE OF A SERIES' ASSETS ALLOCATED TO TRADING, THE GREATER THE
RISK AS WELL AS THE PROFIT POTENTIAL.
-------------------------
CUMULATIVE STATISTICS
CORRELATION COEFFICIENT VS. S&P 500: 0.05
BETA VS. S&P 500: 0.02
SHARPE RATIO: 0.40
SEE NOTES TO PERFORMANCE OF THE FUND ON PAGE 16.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
-15-
<PAGE>
NOTES TO PERFORMANCE OF THE FUND
MONTHLY RATES OF RETURN are calculated by dividing the Fund's net
performance during a month by the Fund's Net Asset Value as of the beginning
of such month. The Monthly Rates of Return reflect the Fund's aggregate
performance, not the performance of any single series.
COMPOUND (ANNUAL) RATE OF RETURN is calculated by compounding the
monthly rates of return. For example, the compound rate of return for 1994
was calculated by multiplying (1.0104 x 1.0032 x 1.0040) - 1 = 1.76%
WORST PEAK-TO-VALLEY DECLINE is the largest decline in the Net Asset Value
per Unit of any series without such Net Asset Value per Unit being subsequently
equaled or exceeded. For example, if the Net Asset Value per Unit of a given
series dropped (1)% in each of January and February, rose 1% in March and
dropped (2)% in April, the peak-to-valley decline would still be continuing at
the end of April in the amount of approximately (3)%, whereas if such Net Asset
Value per Unit had risen approximately 2% or more in March, the peak-to-valley
decline would have ended as of the end of February at approximately the (2)%
level.
CORRELATION COEFFICIENT VS. S&P 500: Every investment asset, by
definition, has a correlation coefficient of 1.0 with itself; 1.0 indicates 100%
POSITIVE CORRELATION. Two investments that always move in the opposite direction
from each other have a correlation coefficient of -1.0; -1.0 indicates 100%
NEGATIVE CORRELATION. Two investments that perform entirely independently of
each other have a correlation coefficient of 0; 0 indicates non- correlation.
Since inception, the Fund has had a positive correlation coefficient of 0.05
with the S&P 500. For every up-move of the S&P 500 above its average monthly
return, the Fund has moved in the same direction above its average monthly
return in approximately 5% of the months.
BETA VS. S&P 500: Beta is a measure of the sensitivity of the returns of
an investment to the returns of a benchmark such as the S&P 500. A Beta of 1.5
would indicate that for every 1% move up in the S&P, the investment moves up
1.5% on average. Consequently, the Fund's Beta of 0.02 indicates that, to date,
it has a 2% sensitivity to movements in the S&P 500.
SHARPE RATIO: The Sharpe Ratio compares the annualized rate of return
minus the annualized risk-free rate of return to the annualized variability --
often referred to as the "standard deviation" -- of the monthly rates of return.
A Sharpe Ratio of 1:1 or higher indicates that, according to the measures used
in calculating the Ratio, the rate of return achieved by a particular strategy
has equaled or exceeded the risks assumed by such strategy. The Fund's 0.40
Sharpe Ratio indicates that to date the Fund's return has been marginally less
than its risk, as compared to a "risk-free" 91-day Treasury bill.
---------------
-16-
<PAGE>
SELECTED FINANCIAL DATA
THE FOLLOWING SELECTED FINANCIAL DATA IS DERIVED FROM THE CONSOLIDATED FINANCIAL
STATEMENTS OF THE FUND FOR THE YEARS ENDED DECEMBER 31, 1998, 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 YEAR ENDED DECEMBER 31, 1995 AND THE
PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994,
ALSO AUDITED BY DELOITTE & TOUCHE LLP BUT NOT INCLUDED IN THIS PROSPECTUS. THE
FOLLOWING INFORMATION, AS WELL AS THE FINANCIAL STATEMENTS OF THE FUND FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996, 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 54 .
--------------------
<TABLE>
<CAPTION>
OCT. 12, 1994
JAN. 1, 1998 JAN. 1, 1997 JAN. 1, 1996 JAN. 1, 1995 (COMMENCEMENT
TO TO TO TO OF OPERATIONS) TO
INCOME STATEMENT DATA DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
- --------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized $ 8,746,563 $ 5,412,457 $ 9,038,064 $ 4,407,833 $ (363,054)
Change in Unrealized (2,053,193) 1,083,826 (396,221) 1,355,377 1,115,935
------------ ------------ ------------ ------------ ------------
Total Trading Results 6,693,370 6,496,283 8,641,843 5,763,210 752,881
Interest Income 5,434,851 4,873,872 4,545,186 3,415,670 377,303
------------ ------------ ------------ ------------ ------------
Total Revenues 12,128,221 11,370,155 13,187,029 9,178,880 1,130,184
------------ ------------ ------------ ------------ ------------
Expenses:
Brokerage Commissions 6,159,359 4,833,598 4,775,116 3,216,364 405,653
Administrative Fees1 193,861 138,103 129,057 86,928 10,964
Profit Shares 1,658,306 931,522 978,264 652,366 129,169
------------ ------------ ------------ ------------ ------------
Total Expenses 8,011,526 5,903,223 5,882,437 3,955,658 545,786
------------ ------------ ------------ ------------ ------------
Income Before
Minority Interest 4,116,695 5,466,932 7,304,592 5,223,222 584,398
Minority Interest2 (27,056) (46,687) (81,228) (36,730) (4,504)
------------ ------------ ------------ ------------ ------------
Net Income $ 4,089,639 $ 5,420,245 $ 7,223,364 $ 5,186,492 $ 579,894
============ ============ ============ ============ ============
BALANCE SHEET DATA3 DEC. 31, 1998 DEC. 31, 1997 DEC. 31, 1996 DEC. 31, 1995 DEC. 31, 1994
- ------------------- ------------- ------------- ------------- ------------- -------------
Fund Net Asset Value $ 79,106,838 $101,226,685 $ 78,905,273 $ 74,988,233 $ 32,314,228
------------ ------------ ------------ ------------ ------------
NET ASSET VALUE PER UNIT4
Series A $115.74 $113.73 $110.70 $106.96 $101.76
Series B 113.98 114.15 114.24 110.36 --
Series C 108.92 108.15 109.33 103.35 --
Series D 111.45 109.94 108.19 102.34 --
Series E 111.14 109.40 108.58 102.72 --
Series F 108.95 109.04 108.92 -- --
Series G 107.67 106.52 107.32 -- --
Series H 107.81 106.62 106.47 -- --
Series K 109.61 104.77 -- -- --
Series L 106.81 102.08 -- -- --
Series M 108.34 103.70 -- -- --
Series N 104.43 -- -- -- --
Series O 104.77 -- -- -- --
Series P 106.92 -- -- -- --
Series Q 98.86
</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 12, 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 MAY 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% TO 95% LEVERAGE, WHEREAS THE UNITS
PREVIOUSLY ISSUED BEGAN TRADING AT 60% TO 75% LEVERAGE (ALTHOUGH ALL UNITS
ISSUED AFTER MAY 1, 1997 BEGAN TO ALLOCATE 85% OF THEIR ASSETS TO TRADING AS OF
MAY 1, 1998). HIGHER LEVERAGE INVOLVES HIGHER RISK AS WELL AS GREATER PROFIT
POTENTIAL.
-17-
<PAGE>
MANAGEMENT'S ANALYSIS OF OPERATIONS
RESULTS OF OPERATIONS
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
trading asset allocations among Advisors and Advisor combinations as well as
from time to time adjusting the percentage of the Fund's assets committed to
trading. 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.
MLIP's decision to terminate or reallocate assets among Advisors is based
on a combination of numerous factors, as described under "The Advisor Selection
Process" beginning at page 27. 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 asset 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.
GENERAL
A number of the Advisors are trend-following traders, whose programs do
not attempt to predict price movements. No fundamental economic supply or demand
analyses are used by these Advisors, and no macroeconomic assessments of the
relative strengths of different national economies or economic sectors. Instead,
the programs apply proprietary computer models to analyzing past market data,
and from this data alone attempt to determine whether market prices are
trending. These technical traders base their strategies on the theory that
market prices reflect the collective judgment of numerous different traders and
are, accordingly, the best and most efficient indication of market movements.
However, there are frequent periods during which fundamental factors external to
the market dominate prices.
If a trend-following Advisor's models identify a trend, they signal
positions which follow it. When these models identify the trend as having ended
or reversed, these positions are either closed out or reversed. Due to their
trend-following character, these Advisors' programs do not predict either the
commencement or the end of a price movement. Rather, their objective is to
identify a trend early enough to profit from it and to detect its end or
reversal in time to close out the Fund's positions while retaining most of the
profits made from following the trend.
In analyzing the performance of trend-following programs, economic
conditions, political events, weather factors, etc., are not directly relevant
because only market data has any input into trading results. Furthermore, there
is no direct connection between particular market conditions and price trends.
There are so many influences on the markets that the same general type of
economic event may lead to a price trend in some cases but not in others. The
analysis is further complicated by the fact that the programs are designed to
recognize only certain types of trends and to apply only certain criteria of
when a trend has begun. Consequently, even though significant price trends may
occur, if these trends are not comprised of the type of intra-period price
movements which the programs are designed to identify, a trend-following Advisor
may miss the trend altogether.
In the case of the Advisors which implement strategies which rely more on
discretion and market judgment, it is not possible to predict, from their
-18-
<PAGE>
performance during past market cycles, how they will respond to future market
events.
PERFORMANCE SUMMARY
This performance summary is an outline description of how the Fund
performed in the past, not necessarily any indication of how it will perform in
the future. In addition, the general causes to which certain price movements are
attributed may or may not in fact have caused such movements, but simply
occurred at or about the same time.
The Advisors, as a group, 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, under
any given market condition, markets in which substantial and sustained price
movements occur typically offer the best profit potential for the Fund.
1998
SECTOR GAIN (LOSS)
------------
Interest Rates............. $7,116,336
Stock Indices ............. 824,905
Agricultural .............. (967,695)
Currencies................. 2,085,218
Metals..................... (1,482,985)
Energy..................... (882,409)
------------
Total $6,693,370
============
Global interest rate markets provided the Fund with its most profitable
positions in the first quarter, 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 increase in
European growth. In the second quarter, swings in the U.S. dollar and
developments in Japan affected bond markets, resulting in losses in the Fund's
interest rate trading. However, in the third quarter, the "Market Crisis"
developed in the securities markets, the Fund's performance was significantly
non-correlated with the general equity and debt markets, and trading was
particularly profitable in positions in Eurodollars, German and Japanese bonds,
and U.S. Treasury notes and bonds. Global investors staged a major flight to
quality, resulting in a significant widening of credit spreads on a global
basis. In October, investors pushed the yields on U.S. Treasury bonds to a
31-year low. In all, the long bond yield fell approximately 75 basis points in
1998 as the world economy slowed more than expected, inflation continued to
fall, the anticipated small U.S. budget deficit turned into substantial surplus,
and the Fed lowered interest rates.
In energy markets, trading was unprofitable. Initially buoyed by concerns
about a U.S.-led military strike against Iraq, crude oil fell to a 9-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. Short heating oil positions in the
third quarter proved profitable for the Fund as the market for heating oil
prices dropped to its lowest level in more than a decade. In early December, oil
and natural gas prices dropped sharply, causing continued problems for many
emerging market countries that depend on commodity exports for economic growth
and government financing. These price pressures were mainly due to excessive
supply availability and near-term weather indications that inventories would
remain at more than adequate levels even in the event of a cold Northern
Hemisphere winter. Also, the December U.S. air attack on Iraq failed to cause
any damage to oil pumping and shipping operations, and oil prices fell over 10%.
In the currency markets, results early in the year were mixed, although
marginally profitable. During the second quarter, strong gains were realized in
positions in the Japanese yen, which weakened during June to an 8-year low
versus the U.S. dollar. Significant gains from Japanese yen trading continued
into the third quarter, and Japan's economic problems spread to other sectors of
the global economy, causing commodities prices to decline as demand from the
Asian economies weakened. Japan's deepening recession and credit crunch
continued through the fourth quarter, and the Fund profited from long yen
positions.
Gold prices began the year drifting sideways, and continued to weaken
following news in the second quarter of a European Central Bank consensus that
ten to fifteen percent of reserves should be made up of gold bullion, which was
at the low end of expectations. Gold was unable to extend third quarter rallies
or to build any significant upside momentum, resulting in a trendless
environment. This was also
-19-
<PAGE>
the case in the fourth quarter, as gold's cost of production declined. Also,
sliver markets remained range-bound, while also experiencing a significant
selloff in November, and aluminum traded at its lowest levels since 1994, with
many aluminum smelters operating at a loss.
Trading results in stock index markets were mixed in early 1998, despite a
strong first-quarter performance by the U.S. equity market. Second quarter
results were profitable as the Asia-Pacific region's equity markets weakened
across the board. In particular, Hong Kong's Hang Seng index trended downward
during most of the second quarter and traded at a three-year low. As U.S. equity
markets declined in July and August, the Fund profited from short positions in
the S&P 500, most notably during August, when the index dropped 14.5%.
Volatility in September made for a difficult trading environment in the stock
index sector, and the Fund incurred modest losses, although results remained
profitable for the quarter and the year overall in these markets
In agricultural markets, 1998 began with strong gains as live cattle and
hog prices trended downward throughout the first quarter. In the second quarter,
although the U.S. soybean crop got off to a good start which contributed to
higher yield expectations and a more plentiful supply outlook, soybean prices
traded in a volatile pattern. Sugar futures maintained mostly a downtrend, as no
major buyers emerged to support the market. Similarly, coffee prices trended
downward, as good weather conditions in Central America and Mexico increased the
prospects of more output from these countries. The third quarter resulted in
losses as the estimated size of the U.S. soybean crop increased relative to the
USDA's production estimate as a result of timely rains, contributing to lower
prices. These losses continued into the fourth quarter as the Fund was caught on
the short side of the soybean complex when the predicted soybean supply surplus
became more manageable following the November 10th USDA reports, causing prices
to gain upward momentum.
1997
SECTOR GAIN (LOSS)
- ------ -----------
Interest Rates............. $ 1,706,686
Stock Indices ............. 232,314
Commodities................ 679,157
Currencies................. 3,911,109
Metals..................... 1,245,020
Energy..................... $(1,278,003)
-----------
Total $ 6,496,283
===========
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
-20-
<PAGE>
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
SECTOR GAIN (LOSS)
- ------ -----------
Interest Rates............. $3,183,955
Stock Indices ............. (746,255)
Commodities................ 20,119
Currencies................. 3,301,360
Metals..................... (398,013)
Energy..................... $3,280,677
----------
Total $8,641,343
==========
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.
VARIABLES AFFECTING PERFORMANCE
MLIP believes that 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. 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 or total) are the Profit Shares payable to the Advisors on an
Advisor-by-Advisor basis. During periods when Profit Shares are a high
percentage of net trading gains, 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.
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.
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.
-21-
<PAGE>
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 have the same percentage of capital allocated to trading after
the adjustment (this restructuring applies only to Units issued after May 1,
1997). Despite these fundamental similarities among the different series,
because the series begin trading at different times they are likely, as a result
of trading profits and losses, to pay different Profit Shares (although to the
same group of Advisors) and have different Net Asset Values.
LIQUIDITY AND CAPITAL RESOURCES
The amount of assets invested in the Fund generally does not affect its
trading, as typically this amount is not a limiting factor on the positions
acquired by the Advisors and the Fund's expenses are primarily charged as a
fixed percentage of its asset base, however large.
The Fund sells no securities other than the Units. The Fund borrows only to
a limited extent and only on a strictly short-term basis in order to finance
losses on non-U.S. dollar denominated trading positions pending the conversion
of the Fund's dollar deposits. These borrowings are at a prevailing short-term
local rate in the relevant currency. They have been immaterial to the Fund's
operation to date and are expected to continue to be so. See "Interest Income
Arrangements -- Interest Paid by Merrill Lynch on the Fund's Non-U.S. Dollar
Available Assets" at page 33.
The Fund's assets are held primarily in short-term debt securities with
maturities under one year, and to a lesser extent in short- and mid-term debt
securities with maturities up to five years, as well as in cash. The Net Asset
Value of the Fund's cash and financial instruments is not materially affected by
inflation. Changes in interest rates, which are often associated with inflation,
could cause the value of certain of the Fund's debt securities to decline, but
only to a limited extent. More importantly, changes in interest rates could
cause periods of strong up or down price trends, during which the Fund's profit
potential generally increases. Inflation in commodity prices could also generate
price movements which the strategies might successfully follow.
The Fund's assets are held in cash and highly liquid U.S. government
securities. Accordingly, except in very unusual circumstances, the Fund should
be able to close out any or all of its open trading positions and liquidate any
or all of its securities holdings quickly and at market prices. This permits an
Advisor to limit losses as well as reduce market exposure on short notice should
its strategies indicate doing so. In addition, because there is a readily
available market value for the Fund's positions and assets, the Fund's monthly
Net Asset Value calculations are precise, and investors need only wait 10
business days to receive the full redemption proceeds of their Units.
YEAR 2000 ISSUE
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). The Fund could be adversely
affected if the computer systems used by MLIP, the Advisors or other Fund
service providers do not properly address this problem before January 1, 2000.
MLIP expects to have addressed this problem before then, and does not anticipate
that the services it provides will be adversely affected. The Fund will bear no
costs in connection with addressing the Year 2000 Problem. The Fund's other
service providers, including the Advisors, have told MLIP that they also expect
to resolve their Year 2000 Problems, and MLIP will continue to monitor the
situation as the Year 2000 approaches. However, if the problem has not been
fully addressed, the Fund could be negatively affected. The Year 2000 Problem
could also have a negative impact on the exchanges or markets in which the Fund
trades, and this could hurt the Fund's returns.
A possible worst case scenario is that the Year 2000 Problem could make it
impossible for the Fund to continue trading. If MLIP or the Advisors foresee
such a situation in advance of December 31, 1999, the Fund will either attempt
to liquidate its positions prior to that date and/or establish relationships
with additional counterparties to permit trading to continue. However, there can
be assurance that MLIP, the Advisors or the Fund's other service providers have
anticipated, or will anticipate, every step necessary to avoid any adverse
effect on the Fund attributable to the Year 2000 Problem.
-22-
<PAGE>
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT THE FUND'S MARKET RISK
INTRODUCTION
The Fund is a speculative commodity pool. Unlike an operating company, the
risk of market sensitive instruments traded by it is integral, not incidental,
to the Fund's main line of business.
Market movements result in frequent changes in the fair market value of the
Fund's open positions and, consequently, in its earnings and cash flow. The
Fund's market risk is influenced by a wide variety of factors, including the
level and volatility of interest rates, exchange rates, equity price levels, the
market value of financial instruments and contracts, the diversification effects
among the Fund's open positions and the liquidity of the markets in which it
trades.
The Fund, under the direction of the Advisors, rapidly acquires and
liquidates both long and short positions in a wide range of different markets.
Consequently, it is not possible to predict how a possible future market
scenario will affect performance, and the Fund's past performance is not
necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Fund could
reasonably be expected to lose in a given market sector. However, the inherent
uncertainty of the Fund's speculative trading and the recurrence in the markets
traded by the Fund of market movements far exceeding expectations could result
in actual trading or non-trading losses far beyond the indicated Value at Risk
or the Fund's experience to date (I.E., "risk of ruin"). In light of the
foregoing as well as the risks and uncertainties intrinsic to all future
projections, the inclusion of the quantification included in this section should
not be considered to constitute any assurance or representation that the Fund's
losses in any market sector will be limited to Value at Risk or by the Fund's
attempts to manage its market risk.
QUANTIFYING THE FUND'S TRADING VALUE AT RISK
QUANTITATIVE FORWARD-LOOKING STATEMENTS
THE FOLLOWING QUANTITATIVE DISCLOSURES REGARDING THE FUND'S MARKET RISK
EXPOSURES CONTAIN "FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE SAFE
HARBOR FROM CIVIL LIABILITY PROVIDED FOR SUCH STATEMENTS BY THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 (SET FORTH IN SECTION 27A OF THE
SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934).
ALL QUANTITATIVE DISCLOSURES IN THIS SECTION ARE DEEMED TO BE FORWARDLOOKING
STATEMENTS FOR PURPOSES OF THE SAFE HARBOR, EXCEPT FOR STATEMENTS OF HISTORICAL
FACT.
The Fund's risk exposure in the various market sectors traded by the
Advisors is quantified below in terms of Value at Risk. Due to the Fund's
mark-to-market accounting, any loss in the fair value of the Fund's open
positions is directly reflected in the Fund's earnings (realized or unrealized)
and cash flow (at least in the case of exchange-traded contracts in which
profits and losses on open positions are settled daily through variation
margin).
Exchange maintenance margin requirements have been used by the Fund as the
measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum loss in the fair value of any given
contract incurred in 95% to 99% of the one-day time periods included in the
historical sample (generally approximately one year) researched for purposes of
establishing margin levels. The maintenance margin levels are established by
dealers and exchanges using historical price studies as well as an assessment of
current market volatility and economic fundamentals to provide a probabilistic
estimate of the maximum expected near-term one-day price fluctuation.
In the case of market sensitive instruments which are not exchange-traded
(almost exclusively currencies in the case of the Fund), the margin requirements
for the equivalent futures positions have been used as Value at Risk. In those
rare cases in which a futures-equivalent margin is not available, dealers'
margins have been used.
The fair value of the Fund's futures and forward positions does not have
any optionally component. However, certain of the Advisors trade commodity
options. The Value at Risk associated with options is reflected in the following
table as the margin requirement attributable to the instrument underlying each
option.
100% positive correlation in the different positions held in each market
risk category has been assumed. Consequently, the margin requirements
-23-
<PAGE>
applicable to the open contracts have been aggregated to determine each trading
category's aggregate Value at Risk. The diversification effects (which would
reduce the Value at Risk estimates) resulting from the fact that the Fund's
positions are rarely, if ever, 100% positively correlated have not been
reflected.
THE FUND'S TRADING VALUE AT RISK IN DIFFERENT
MARKET SECTORS
The following table indicates the trading Value at Risk associated with the
Fund's open positions by market category as of December 31, 1998. As of December
31, 1998, the Fund's total capitalization was approximately $79,106,838 million,
of which approximately $63,015,168 was allocated to trading.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------------------
PERCENTAGE
PERCENTAGE OF ASSETS
MARKET VALUE OF TOTAL ALLOCATED
SECTOR AT RISK CAPITALIZATION TO TRADING
- ------ --------- -------------- ----------
<S> <C> <C> <C>
Interest Rates $ 567,386 0.71% 0.89%
Currencies $1,050,731 1.33% 1.65%
Stock Indices 283,117 0.36% 0.45%
Metals 315,100 0.40% 0.50%
Commodities 280,302 0.35% 0.44%
Energy 226,400 0.29% 0.36%
---------- -------------- ----------
Total $2,723,036 3.44% 4.29%
---------- -------------- ----------
</TABLE>
MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK
The face value of the market sector instruments held by the Fund is
typically many times the applicable maintenance margin requirement (maintenance
margin requirements generally ranging between approximately 1% and 10% of
contract face value) as well as many times the capitalization of the Fund. The
magnitude of the Fund's open positions creates a "risk of ruin" not typically
found in most other investment vehicles. Because of the size of its positions,
certain market conditions -- unusual, but historically recurring from time to
time -- could cause the Fund to incur severe losses over a short period of time.
Even comparatively minor losses could cause MLIP to further deleverage or
terminate the Fund's trading. The foregoing Value at Risk table -- as well as
the past performance of the Fund -- give no indication of this "risk of ruin."
NON-TRADING RISK
FOREIGN CURRENCY BALANCES; CASH ON DEPOSIT WITH MLF
The Fund has non-trading market risk on its foreign cash balances not
needed for margin. However, these balances (as well as the market risk they
represent) are immaterial.
The Fund also has non-trading market risk on the approximately 20% of its
assets which are held in cash at MLF. The value of this cash is not interest
rate sensitive, but there is cash flow risk in that if interest rates decline so
will the cash flow generated on these monies. This cash flow risk is immaterial.
MLAM'S CASH MANAGEMENT
MLAM invests approximately 70% of the Fund's assets in Government
Securities. As of December 31, 1998, the Fund's MLAM account totalled
approximately $61,154,183.
As of December 31, 1998, the Fund's MLAM account held the following
securities.
MATURITY INTEREST
DESCRIPTION DATE RATE
- ----------- -------- --------
LONG-TERM
U.S. Treasury Note 02/29/00 5.500%
U.S. Treasury Note 05/15/00 6.375%
U.S. Treasury Note 08/15/00 6.000%
U.S. Treasury Note 11/15/00 5.750%
U.S. Treasury Note 11/30/00 5.625%
U.S. Treasury Note 12/31/99 5.625%
U.S. Treasury Note 03/31/00 5.500%
U.S. Treasury Note 05/15/00 6.375%
U.S. Treasury Note 09/30/00 4.500%
U.S. Treasury Note 11/15/00 5.750%
U.S. Treasury Note 11/30/00 5.625%
U.S. Treasury Note 02/15/01 5.375%
U.S. Treasury Note 04/30/03 5.750%
U.S. Treasury Note 08/15/03 5.250%
Federal National Mortgage Association 12/18/00 4.820%
Federal National Mortgage Association 01/09/01 5.720%
Federal National Mortgage Association 01/23/01 4.820%
Federal National Mortgage Association 01/09/01 5.720%
Federal National Mortgage Association 01/23/01 5.420%
SHORT-TERM
U.S. Treasury Note 12/31/99 5.625%
Federal Home Loan Mortgage Association 01/08/99 5.090%
Federal Home Loan Mortgage Corporation 01/08/99 5.090%
Federal Home Loan Mortgage Corporation 01/11/99 5.100%
-24-
<PAGE>
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
THE FOLLOWING QUALITATIVE DISCLOSURES REGARDING THE FUND'S MARKET RISK
EXPOSURES -- EXCEPT FOR (I) THOSE DISCLOSURES THAT ARE STATEMENTS OF HISTORICAL
FACT AND (II) THE DESCRIPTIONS OF HOW THE FUND MANAGES ITS PRIMARY MARKET RISK
EXPOSURES -- CONSTITUTE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION
27A OF THE SECURITIES ACT AND SECTION 21E OF THE SECURITIES EXCHANGE ACT. THE
FUND'S PRIMARY MARKET RISK EXPOSURES AS WELL AS THE STRATEGIES USED AND TO BE
USED BY MLIP AND THE ADVISORS FOR MANAGING SUCH EXPOSURES ARE SUBJECT TO
NUMEROUS UNCERTAINTIES, CONTINGENCIES AND RISKS, ANY ONE OF WHICH COULD CAUSE
THE ACTUAL RESULTS OF THE FUND'S RISK CONTROLS TO DIFFER MATERIALLY FROM THE
OBJECTIVES OF SUCH STRATEGIES. GOVERNMENT INTERVENTIONS, DEFAULTS AND
EXPROPRIATIONS, ILLIQUID MARKETS, THE EMERGENCE OF DOMINANT FUNDAMENTAL FACTORS,
POLITICAL UPHEAVALS, CHANGES IN HISTORICAL PRICE RELATIONSHIPS, AN INFLUX OF NEW
MARKET PARTICIPANTS, INCREASED REGULATION AND MANY OTHER FACTORS COULD RESULT IN
MATERIAL LOSSES AS WELL AS IN MATERIAL CHANGES TO THE RISK EXPOSURES AND THE
RISK MANAGEMENT STRATEGIES OF THE FUND. THERE CAN BE NO ASSURANCE THAT THE
FUND'S CURRENT MARKET EXPOSURE AND/OR RISK MANAGEMENT STRATEGIES WILL NOT CHANGE
MATERIALLY OR THAT ANY SUCH STRATEGIES WILL BE EFFECTIVE IN EITHER THE SHORT- OR
LONG-TERM. INVESTORS MUST BE PREPARED TO LOSE ALL OR SUBSTANTIALLY ALL OF THE
TIME VALUE OF THEIR INVESTMENT IN THE FUND.
The following were the primary trading risk exposures of the Fund as of
December 31, 1998, by market sector.
INTEREST RATES. Interest rate risk is the principal market exposure of the
Fund. Interest rate movements directly affect the price of the sovereign bond
positions held by the Fund and indirectly the value of its stock index and
currency positions. Interest rate movements in one country as well as relative
interest rate movements between countries materially impact the Fund's
profitability. The Fund's primary interest rate exposure is to interest rate
fluctuations in the United States and the other G-7 countries. However, the Fund
also takes positions in the government debt of smaller nations -- E.G., New
Zealand and Australia. MLIP anticipates that G-7 interest rates will remain the
primary market exposure of the Fund for the foreseeable future.
CURRENCIES. The Fund trades in a large number of currencies. However, the
Fund's major exposures have typically been in the dollar/yen, dollar/mark and
dollar/pound positions. MLIP does not anticipate that the risk profile of the
Fund's currency sector will change significantly in the future, although it is
difficult at this point to predict the effect of the introduction of the Euro on
the Advisors' currency trading strategies. The currency trading Value at Risk
figure includes foreign margin amounts converted into U.S. dollars with an
incremental adjustment to reflect the exchange rate risk of maintaining Value at
Risk in a functional currency other than dollars.
STOCK INDICES. The Fund's primary equity exposure is to G-7 equity index
price movements. As of December 31, 1998, the Fund's primary exposures were in
the S&P 500, Financial Times (England), Nikkei (Japan) and DAX (Germany) stock
indices. MLIP anticipates little, if any, trading in non-G-7 stock indices. The
Fund is primarily exposed to the risk of adverse price trends or static markets
in the major U.S., European and Japanese indices.
METALS. The Fund's primary metals market exposure is to fluctuations in
the price of gold and silver. Although certain of the Advisors will from time to
time trade base metals such as aluminum, copper and tin, the principal market
exposures of the Fund have consistently been in the precious metals, gold and
silver (and, to a much lesser extent, platinum). The Advisors' gold trading has
been increasingly limited due to the long-lasting and mainly non-volatile
decline in the price of gold over the last 10-15 years. However, silver prices
have remained volatile over this period, and the Advisors have from time to time
taken substantial positions as they have perceived market opportunities to
develop. MLIP anticipates that gold and silver will remain the primary metals
market exposure for the Fund.
COMMODITIES. The Fund's primary commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. Soybeans, grains and orange juice accounted for the
substantial bulk of the Fund's commodities exposure as of December 31, 1998. In
the past, the Fund has had material market exposure to live cattle and
hogbellies and may do so again in the future. However, MLIP anticipates that the
Advisors will maintain an emphasis on soybeans, grains and orange juice, in
which the Fund has historically taken its largest positions.
-25-
<PAGE>
ENERGY. The Fund's primary energy market exposure is to gas and oil price
movements, often resulting from political developments in the Middle East.
Although the Advisors trade natural gas to a limited extent, oil is by far the
dominant energy market exposure of the Fund. Oil prices are currently depressed,
but they can be volatile and substantial profits and losses have been and are
expected to continue to be experienced in this market.
QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE
The following were the only non-trading risk exposures of the Fund as of
December 31, 1998.
FOREIGN CURRENCY BALANCES. The Fund's primary foreign currency balances
are in Japanese yen, German marks, British pounds and French francs. The Fund
has DE MINIMIS exchange rate exposure on these balances.
SECURITIES POSITIONS. The Fund holds only cash or interest-bearing
Government Securities. The Fund's market exposure in instruments held other than
for trading is in the interest rate risk exposure of the Fund's Government
Securities portfolio, managed by MLAM pursuant to policies established by MLIP
for which MLAM assumes no responsibility, as well as on the Fund's cash on
deposit with MLF. In a period of rapidly rising interest rates (since the Fund's
inception in 1994, interest rates have generally declined until quite recently),
the Fund could incur marked-to-market losses on its MLAM account, but MLIP would
attempt to prevent or control these losses by further reducing the permissible
durations of the Fund's Government Securities in order to reduce the interest
rate sensitivity of these instruments.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
TRADING RISK
MLIP has procedures in place intended to control market risk, although
there can be no assurance that they will, in fact, succeed in doing so. These
procedures focus primarily on monitoring the trading of the Advisors selected
from time to time for the Fund, adjusting the percentage of the Fund's total
assets investing in the Trading Partnership with respect to each series of Units
and reviewing outstanding positions for over-concentrations -- both on an
Advisor-by-Advisor and on an overall Fund basis. While MLIP does not itself
intervene in the markets to hedge or diversify the Fund's market exposure, MLIP
may urge Advisors to reallocate positions, or itself reallocate 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.
One important aspect of MLIP's risk controls is its adjustments to the
leverage at which each series of Units trades. By controlling the percentage of
each series' assets investing in the Trading Partnership, MLIP can directly
affect the market exposure of the Fund. Leverage control is the principal means
by which MLIP 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, subject to the limitation that all series of Units issued after May 1997
must be adjusted, if any such series is adjusted, so that they all trade at the
same degree of leverage.
At the Advisor level, each Advisor applies its own risk management
policies to its trading. These policies generally limit the total exposure that
may be taken per "risk unit" of assets under management. In addition, many
Advisors follow diversification guidelines (often formulated in terms of the
maximum margin which they will commit to positions in any one contract or group
of related contracts), as well as imposing "stop-loss" points at which open
positions must be closed out. Occasionally, Advisors will limit the market
exposure of their Fund account through acquiring put or call options which
"collar" the risk of open positions. However, because of the typically high
degree of liquidity in the markets traded by the Fund and the expense of
acquiring options, most Advisors rely simply on stop-loss policies, requiring
the liquidation of positions once losses of a certain magnitude have been
incurred.
Certain Advisors treat their risk control policies as strict rules; others
only as general guidelines for controlling risk.
NON-TRADING RISK
The Fund controls the non-trading exchange rate risk by regularly
converting foreign currency balances back into dollars (no less frequently than
twice a month, and more frequently if a particular foreign currency balance
becomes unusually high).
-26-
<PAGE>
MLIP controls the interest-rate risk of the Fund's non-trading instruments
(Government Securities invested by MLAM for cash management purposes) by
limiting the overall duration of such instruments to no more than 2 years and
the maximum duration of any Government Securities held by the Fund to no later
than the Principal Assurance Date for the most recently issued series of Units.
These risk control policies have been successful in the Fund's operations to
date, and MLIP does not anticipate any change in these policies. MLIP has
applied essentially the same risk control policies to the Fund's MLAM account
since inception, and the Fund has never experienced a material loss on this
account. However, were the interest rate environment to change materially, MLIP
might shorten the permissible duration of the Fund's Government Securities
portfolio.
The Fund has cash flow interest rate risk on its cash on deposit with MLF
in that declining interest rates would cause the income from such cash to
decline. However, a certain amount of cash or cash equivalents must be held by
the Fund in order to facilitate margin payments and pay expenses and
redemptions. MLIP does not take any steps to limit the cash flow risk on the
approximately 30% of its cash held on deposit at MLF.
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 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. By diversifying
strategies as well as markets, MLIP can, if successful, create Advisor
combinations for the Fund that should have good profit potential across a wide
range of different market cycles. Since inception, the Fund's Advisor portfolio
has emphasized technical and trend-following methods.
MLIP's primary emphasis is on a qualitative assessment of each Advisor,
including, among other considerations, an evaluation of each Advisor's basic
investment management approach, markets traded, prior experience, past
performance, fee requirements and assets under management. Although different
factors may be considered in the case of different Advisors (and no
representation is made that any given factor will be considered in selecting any
given Advisor), subjective evaluation of each prospective Advisor by principals
of MLIP is an important factor in all of MLIP's Advisor selections. Quantitative
non-correlation analysis and volatility studies are employed in developing the
overall Advisor mix, but the principal objective is to identify Advisors which
-27-
<PAGE>
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.
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.
The Advisors are generally required by MLIP to invest $10,000 in the Fund
during their tenure of providing advisory services to it.
THE MLAM INVESTMENT ADVISORY CONTRACT
The Investment Advisory Contract executed and delivered among MLIP, the
Fund, the Trading Partnership, MLF and MLAM exculpates MLAM for actions or
omissions in connection with managing the Fund's portfolio of Government
Securities, provided such actions or omissions do not constitute gross
negligence or willful and reckless misconduct. Under the Investment Advisory
Contract, MLF is obligated to pay MLAM's management fees (MLIP, not the Fund,
would be responsible for paying these fees should MLF for some reason fail to do
so). In the Limited Partnership Agreement, MLIP agrees to indemnify and hold
harmless the Fund for any loss or expense the Fund may incur as a result of the
difference between MLAM's standard of liability under the Investment Advisory
Contract and MLIP's standard of liability under the Limited Partnership
Agreement.
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 trading of all series of Units (issued after May 1,
1997) if the Net Asset Value per Unit of any series (issued after May 1, 1997)
falls to 110% or less of the present value of $100 discounted back from the
Principal Assurance Date for such series at ML&Co.'s cost of borrowing
-28-
<PAGE>
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 if the Net Asset Value per Unit of such
series declined to approximately 110% of $78.35 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, 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 be required 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."
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 to
the same level if MLIP upleverages any such series -- a constraint which
substantially reduces the prospects of any upleveraging occurring. (Upleveraging
can also be 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.)
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
-29-
<PAGE>
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 38.
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 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 December 25, 1998, the aggregate net worth (stockholders' equity)
of ML&Co. was approximately $10.13 billion.
The following is certain summary financial information for ML&Co. for
fiscal years ended December 25, 1998, December 26, 1997 and December 27, 1996.
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.
-30-
<PAGE>
MERRILL LYNCH & CO., INC.
SUMMARY FINANCIAL INFORMATION*
(IN MILLIONS, EXCEPT WHERE INDICATED)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 25, 1998 DECEMBER 26, 1997 DECEMBER 27, 1996
----------------- ----------------- -----------------
<S> <C> <C> <C>
INCOME STATEMENT DATA
Net revenues ............................... $ 17,547 $ 16,256 $ 13,621
Earnings before income taxes and cumulative
effect of changes in accounting principles $ 2,096 $ 3,111 $ 2,628
Net earnings ............................... $ 1,259 $ 1,935 $ 1,648
SHARE DATA
Average number of basic shares outstanding .. 355.60 340.10 346.40
Common shares outstanding ................... 356.28 339.26 332.35
BALANCE SHEET DATA
Total assets (billions) .................... $ 299.80 $ 296.98 $ 217.27
Total liabilities (billions) ............... $ 289.67 $ 288.44 $ 210.20
Stockholders' equity (billions) ............ $ 10.13 $ 8.54 $ 7.07
</TABLE>
-------------------------
*All Share and per-Share data have been restated for the 1997 two-for-one
common stock split.
The financial results for ML&Co. are more fully set forth in its Annual
Report to Stockholders for the 1998 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 John R. Frawley, Jr., c/o Merrill Lynch
Investment Partners Inc., Princeton Corporate Campus, 800 Scudders Mill Road,
Section 2G, Plainsboro, New Jersey 08536; telephone: (609) 282-8560.
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.
INTEREST INCOME ARRANGEMENTS
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 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
and 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
-31-
<PAGE>
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 70% 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.
INTEREST EARNED ON THE FUND'S U.S. DOLLAR AVAILABLE ASSETS NOT MANAGED BY MLAM
THE FOLLOWING DESCRIPTION RELATES TO THE APPROXIMATELY 30% 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 daily U.S. dollar Available
Assets held in the offset accounts during such month. The Fund receives all the
interest paid on the short-term Treasury bills in which it invests.
POSSIBLE DISCONTINUATION OF THE OFFSET ACCOUNTS
The use of the offset account arrangements for the Fund's U.S. dollar
Available Assets not managed by MLAM may be discontinued by Merrill Lynch
whether or not Merrill Lynch otherwise continues to maintain its offset
arrangements. The offset arrangements are dependent on the banks' continued
willingness to make overnight credits available to Merrill Lynch, which, in
turn, is dependent on the credit standing of ML&Co. If Merrill Lynch were to
determine that the offset arrangements had ceased to be practicable (either
because ML&Co. credit lines at participating banks were exhausted or for any
other reason), Merrill Lynch would thereafter attempt to invest all of the
Fund's U.S. dollar Available Assets not managed by MLAM to the maximum
practicable extent in short-term 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 fee (of
approximately 0.25% per annum) 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.
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<PAGE>
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 prevailing
local short-term rates on realized and unrealized gains on non-U.S. dollar
denominated posi tions 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.
NET ASSET VALUE
The Net Asset Value of each series of Units equals its assets less its
liabilities, as determined generally in accordance with Generally Accepted
Accounting Principles, including any unrealized profits and losses on its open
positions. More specifically, the Net Asset Value of each series of Units equals
the sum of all cash, the liquidating value (or cost of liquidation, as the case
may be) of all futures, forward and options on futures positions and the fair
market value of all other assets of the Fund allocable to such series, less all
liabilities of the Fund (including accrued liabilities, regardless of whether
such liabilities -- for example, Profit Shares -- are ever paid) allocable to
such series, in each case as determined by MLIP generally in accordance with
Generally Accepted Accounting Principles.
-33-
<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.
There is no benefit (or detriment) to investors from the two-tier
Fund/Trading Partnership structure other than permitting the Fund to issue the
series of Units at different times, which series, may, over time, trade with
different percentages of their capital allocated to trading.
[GRAPHIC OMITTED]
SEE THE ORGANIZATIONAL CHART ON PAGE 3.
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<PAGE>
ANALYSIS OF FEES AND EXPENSES PAID BY THE FUND
FEES AND EXPENSES
The following table summarizes the charges incurred by the Fund.
<TABLE>
<CAPTION>
1998** 1997 1996
---------------------------- --------------------------- ---------------------------
$ OF AVERAGE $ OF AVERAGE $ OF AVERAGE
DOLLAR MONTH-END DOLLAR MONTH-END DOLLAR MONTH-END
CHARGES AMOUNT NET ASSETS* AMOUNT NET ASSETS* AMOUNT NET ASSETS*
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brokerage Commissions $6,159,359 6.43% $4,833,598 5.64% $4,775,116 5.77%
Administrative Fees .. 193,861 0.20% 138,103 0.16% 129,057 0.16%
Reimbursement of
Organizational and
Initial Offering Costs -- 0.00% 61,989 0.07% 79,700 0.10%
Profit Shares ........ 1,658,306 1.73% 931,522 1.09% 978,264 1.18%
--------- ---- ------- ---- ------- ----
Total ................ $8,011,526 8.36% $5,965,212 5.96% $5,962,137 7.21%
========== ==== ========== ==== ========== ====
</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, AS DID
ALL UNITS SUBSEQUENTLY ISSUED. UNITS ISSUED UNDER THIS PROSPECTUS WILL
COMMENCE TRADING WITH 85% OF THEIR ASSETS ALLOCATED TO TRADING. AS OF
OCTOBER 31, 1998, ALL UNITS ISSUED AFTER MAY 1, 1998 BEGAN ALLOCATING 95%
OF THEIR ASSETS FOR TRADING. THE HIGHER THE PERCENTAGE OF ASSETS ALLOCATED
TO THE ADVISORS, THE HIGHER THE BROKERAGE COMMISSIONS.
** EFFECTIVE OCTOBER 1, 1998, THE BROKERAGE COMMISSIONS WERE REDUCED FROM
8.75% TO 7.50% PER ANNUM OF ASSETS ALLOCATED TO TRADING. UNITS ISSUED UNDER
THIS PROSPECTUS WILL BEGIN TRADING WITH APPROXIMATELY 85% TO 95% OF THEIR
ASSETS ALLOCATED TO TRADING. IN CONJUNCTION WITH THE BROKERAGE COMMISSION
REDUCTION, THE ADMINISTRATIVE FEE BEGAN TO BE CALCULATED 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 1996, 1997 and 1998 equalled
$82,789,767, $85,646,152 and $95,777,172, 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
"Interest Income Arrangements" at page 31.
During 1996, 1997 and 1998, the Fund earned $4,545,186, $4,873,872 and
$5,434,851 in interest income, or approximately 5.49%, 5.69% and 5.67% of the
Fund's average month-end Net Assets, respectively.
See the Breakeven Table included in the "Summary" at page 7.
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<PAGE>
FEES AND EXPENSES PAID BY THE FUND
THE DOLLAR AMOUNTS INDICATED IN PARENTHESES REPRESENT THE AMOUNT OF THE
RELEVANT FLAT-RATE CHARGE ASSUMING AN AVERAGE FUND CAPITALIZATION OF $100
MILLION (ASSUMING 100% LEVERAGE).
<TABLE>
<CAPTION>
PAID TO TYPE AMOUNT
- ------- ---- ------
<S> <C> <C>
MLF Brokerage Monthly Brokerage Commissions are paid on a percentage-of-assets basis at the
Commissions rate of 0.625 of 1% of the Fund's month-end assets allocated to trading; a 7.50%
annual rate ($7,500,000).
MLIP Administrative Monthly Administrative Fees are paid on a percentage-of-total-assets basis at a
Fees rate of 0.021 of 1% of the Fund's average month-end assets; a 0.25 of 1% annual
rate ($250,000).
MLIB; Other Bid-ask spreads Bid-ask spreads on forward and related trades.
Counterparties
Government Securities Bid-ask spreads Bid-ask spreads on Government Securities trades.
Dealers
All spreads and service fees are estimated not to exceed 0.25% of average
month-end assets annually ($250,000).
Advisors Profit Shares As of the date of this Prospectus, ranging from 15% to 20% (depending on the
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, Others Extraordinary Actual costs incurred; none paid to date.
Expenses
</TABLE>
--------------------
BROKERAGE COMMISSIONS; ADMINISTRATIVE FEES
Month-end assets are not reduced for purposes of calculating Brokerage
Commissions or Administrative Fees by any accrued but unpaid Profit Shares, or
by the accrued Brokerage Commissions or Administrative Fees being calculated.
During 1996, 1997 and 1998, the Fund's percentage-of-assets Brokerage
Commissions were the equivalent of about $116, $116 and $80, respectively, per
round-turn trade. A round-turn trade includes the purchase and sale or sale and
purchase of a single futures contract. However, these Brokerage Commissions are
an all-inclusive "wrap fee" which, together with the Administrative Fee, cover
all of the Fund's costs and expenses other than extraordinary expenses, bid-ask
spreads and certain trading fees. The Fund could negotiate lower rates from
firms other than MLF.
THE FUND'S BROKERAGE COMMISSIONS AND ADMINISTRATIVE FEES CONSTITUTE A "WRAP
FEE," WHICH COVER ALL OF MERRILL LYNCH'S COSTS AND EXPENSES, OTHER THAN BID-ASK
SPREADS AND CERTAIN TRADING FEES, NOT JUST THE COST OF BROKERAGE EXECUTIONS.
THE BROKERAGE COMMISSIONS AND ADMINISTRATIVE FEES MAY NOT BE INCREASED
ABOVE THE CURRENT 7.75% LEVEL WITHOUT THE UNANIMOUS CONSENT OF ALL LIMITED
PARTNERS.
-36-
<PAGE>
CURRENCY TRADING COSTS
Many of the Fund's currency trades are executed in the spot and forward
foreign exchange markets (the "FX Markets") where there are no direct execution
costs. Instead, the participants, banks and dealers in the FX Markets, including
Merrill Lynch International Bank ("MLIB"), take a "spread" between the prices at
which they are prepared to buy and sell a particular currency and such spreads
are built into the pricing of the spot or forward contracts with the Fund. The
General Partner anticipates that some of the Fund's foreign currency trades will
be executed through MLIB, an affiliate of the General Partner. MLIB has
discontinued operation of the foreign exchange service desk, which included
seeking multiple quotes from counterparties unrelated to MLIB.
In its exchange for physical ("EEP") trading, the Fund acquires cash
currency positions through banks and dealers, including Merrill Lynch. The Fund
pays a spread when it exchanges these positions for futures. This spread
reflects, in part, the different settlement dates of the cash and the futures
contracts, as well as prevailing interest rates, but also includes a pricing
spread in favor of the banks and dealers, which may include a Merrill Lynch
entity.
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 Trading Profits for purposes of calculating the Profit
Shares.
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, 1999 might incur losses during the fourth quarter of 1999.
Accordingly, such Advisor would have a loss carryforward with respect to such
series at the time that the series sold as of January 1, 2000 was issued. The
January 1, 2000 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 2000, such Advisor (if receiving a quarterly Profit Share) would be entitled
to a Profit Share in respect of the January 1, 2000 series, although such
Advisor may not have recovered the losses previously incurred by the October 1,
1999 series.
Trading Profit (i) includes realized and unrealized profits and losses,
(ii) excludes interest income and (iii) is reduced by all or a portion of the
annual Brokerage Commissions and Administrative Fees and by no other costs.
Accrued Profit Shares on redeemed Units are allocated to the appropriate
Advisor. Any shortfall between cumulative Trading Profit and the High Water Mark
is proportionately reduced when Units are redeemed.
Trading Profit is not reduced by redemption charges.
For example, assume that as of January 1, 2000, the Fund's account managed
by an Advisor with a 20% quarterly Profit Share is at a High Water Mark. If, at
the end of the month, Trading Profit equaled $500,000, all of such Trading
Profit would be New Trading Profit, resulting in an accrued $100,000 Profit
Share. Assume also that by the end of the next month, losses, Brokerage
Commissions and Administrative Fees have reduced the initial $500,000 Trading
Profit to a loss of $(180,000). If the Fund then withdrew 50% of its assets,
this $(180,000) loss carryforward would be reduced by 50% to ($90,000) for
Profit Share calculation purposes. If during the following month Trading Profit
equaled $200,000, New Trading Profit of $110,000 would be accrued as of the end
of such quarter, and the Advisor would be entitled to a Profit Share of $22,000.
--------------
-37-
<PAGE>
FEES AND EXPENSES PAID BY MERRILL LYNCH
SELLING COMMISSIONS; ONGOING COMPENSATION
MLIP pays all selling commissions due to MLPF&S on initial Unit sales, as
well as all ongoing compensation on Units outstanding for more than twelve
months. See "Selling Commissions" at page 53.
ADVISORS' CONSULTING FEES
The Advisors each enter into a Consulting Agreement with MLF. Pursuant to
such Consulting Agreements, MLF pays monthly Consulting Fees to each of the
Advisors generally ranging from 1.0% to 2.0% annually of the average month-end
assets of the Fund allocated to the management of each of them, respectively.
MLIP anticipates that the Consulting Fees paid to Advisors in the future
will generally fall within the range of a 1.0% to 2.0% annual rate, but such
fees could fall outside of such range in certain cases.
During 1996, 1997 and 1998, MLF paid Consulting Fees of $1,248,233,
$1,095,676 and $1,154,486, respectively, or approximately 1.51%, 1.28% or 1.21%
of the Fund's average month-end Net Assets during these periods.
MLAM FEES
MLAM receives annual cash management fees of approximately 0.20 of 1% on
the first $25 million of certain assets ("Capital") including, but not limited
to, assets of the Fund managed by MLAM, 0.15 of 1% on the next $25 million of
Capital, 0.125 of 1% on the next $50 million, and 0.10 of 1% on Capital in
excess of $100 million.
During 1996, 1997 and 1998, MLF expended approximately $146,259, $80,296
and $101,443, 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 begins 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 month 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 July 1, 1999 will be redeemed with
a 3% redemption charge through June 30, 2000, a 1.5% redemption charge from July
1, 2000 through December 31, 2000 and a 1% redemption charge from January 30,
2001 through June 30, 2001.
Redemption charges are paid to MLIP.
If a Limited Partner redeems Units during or as of the end of a calendar
quarter, AND SUBSCRIBES ON OR BEFORE THE REDEMPTION DATE TO THE NEW SERIES OF
UNITS TO BE ISSUED IMMEDIATELY FOLLOWING SUCH QUARTER, any otherwise applicable
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 following
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 1996, 1997 and 1998, MLIP received a total of $43,305, $33,734 and
$57,359, respectively, in redemption charges.
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<PAGE>
MANAGED FUTURES FUNDS IN GENERAL
THE FUND IS ONE OF MANY VARIETIES OF MANAGED FUTURES FUNDS. ALL OF THESE
INVESTMENTS OFFER, IN VARYING DEGREES, THE POSSIBILITY OF ACHIEVING SUBSTANTIAL
CAPITAL APPRECIATION AS WELL AS DIVERSIFYING A PORTION OF A TRADITIONAL
PORTFOLIO. THE PURPOSE OF THIS SECTION IS TO GIVE PROSPECTIVE INVESTORS A
GENERAL OVERVIEW OF WHERE IN THE SPECTRUM OF MANAGED FUTURES FUNDS THE FUND IS
POSITIONED, AND TO INDICATE THE GENERAL TYPES OF OTHER MANAGED FUTURES FUNDS
AVAILABLE FOR INVESTMENT.
MANAGED FUTURES FUNDS
A futures fund is a professionally managed portfolio typically trading in a
wide range of markets. These markets may include global currencies, interest
rates, energy, metals and agriculture through futures, forwards and options
contracts. Futures funds trade either or both the short or long side of the
market, often on a 24-hour basis, and are generally higher risk and have more
volatile performance than many other investments. Professional management can be
an important advantage in this highly complex and specialized investment area.
Not all managed futures funds are the same. Like other investment products,
futures funds are designed with a variety of risk/reward parameters. The variety
of available funds matches a wide range of individual investment objectives.
THE DIFFERENT TYPES OF MANAGED FUTURES FUNDS
Risk/reward parameters of a managed futures fund may be modified by
adjusting the number of Advisors, trading strategies and/or markets traded.
Increasing diversification in one or more of these categories is generally
expected to produce lower but more consistent returns.
Certain managed futures funds are more aggressive than others. For example,
single advisor, single strategy funds are typically expected to have higher
profit potential as well as risk because of their dependence upon just one
advisor's performance and, in many cases, a limited number of markets traded.
Their returns often fluctuate significantly from month to month.
Volatility can be reduced by a multi-advisor approach, such as that
implemented by the Fund. Multi-advisor funds typically have lower returns, but
also lower risk and volatility than single-advisor managed futures funds
(although more than many other investments).
Investors can also choose "principal protected" funds (such as the Fund)
which guarantee at least the return of their initial investment at a future
date. If the fund is profitable, investors receive the benefits. If there are
losses, investors who remain in until the guarantee date are nevertheless
assured of the return of at least their initial subscription, limiting losses to
the time-value of their capital.
MANAGED FUTURES AND THE ASSET ALLOCATION PROCESS
Traditional portfolios invested in stocks, bonds and cash equivalents can
be diversified by allocating a portion of their assets to non-traditional
investments such as managed futures. Because of its potential non-correlation
with the performance of stocks and bonds, the non-traditional component can help
to improve long-term returns and reduce portfolio volatility. (In its
performance to date, the Fund has demonstrated a certain degree of positive
correlation to the S&P 500 Stock Index.) Each investment responds differently to
different economic cycles and market conditions. An investment's profit
potential, risk and the relationship to the rest of the portfolio are the
primary objectives of asset allocation.
"Non-traditional" or "alternative" are terms commonly used to describe
strategies whose profitability is not based exclusively on long positions in
stocks and bonds, but rather on trading approaches whose success should be
largely independent of overall debt and equity market movements.
THE POTENTIAL BENEFITS OF INCORPORATING MANAGED FUTURES INTO A PORTFOLIO
Managed futures investments have often per formed differently from stocks
and bonds. This historical non-correlated performance suggests that such
investments can help diversify a portfolio. Diversification is one of the
primary potential benefits of investing in managed futures.
* * * *
-39-
<PAGE>
You should carefully evaluate managed futures, weighing its return and
diversification potential against the risks, before you invest. These are
speculative investments and are not appropriate for everyone. There can be no
assurance that these investments will be profitable. However, if profitable,
managed futures can provide valuable portfolio diversification and capital
appreciation. Your Financial Consultant can help you decide whether the Fund has
a place in your portfolio.
THE ROLE OF MANAGED FUTURES IN YOUR 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 (there is no reason to believe that the Fund will be negatively
correlated with these markets, moving in the opposite direction to them -- I.E.,
serving as a hedge, not merely as a diversification) 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.
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
-40-
<PAGE>
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.
FUTURES VOLUME BY MARKET SECTOR
[PIE CHART]
1980
Agriculture 64.20%
Currencies 4.60%
Interest Rates 13.50%
Energy 0.30%
Metals 16.30%
Other 1.10%
1997
Agriculture 10.48%
Currencies 6.10%
Interest Rates 52.71%
Energy 5.02%
Metals 6.69%
Other 0.08%
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 1998, the estimate had grown to
approximately $39.9 billion.
GROWTH IN MANAGED FUTURES INDUSTRY
Source: Managed Account Reports, Inc.
[BAR CHART]
GROWTH YEAR BILLIONS
----------- --------
1980 0.3
1981 0.3
1982 0.5
1983 0.5
1984 0.7
1985 1
1986 1.4
1987 2.6
1988 4.3
1989 5.2
1990 8.5
1991 11.4
1992 19
1993 22.6
1994 19.1
1995 22.8
1996 28.8
1997 34.9
1998 39.9
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
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<PAGE>
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 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 -- DECEMBER 31, 1998
[LINE GRAPH]
-42-
<PAGE>
<TABLE>
<CAPTION>
ML Domestic S&P
Master Stock ML Principal
Bond Index Index U.S. 91-Day Protection
(Total (Dividends Treasury L.P.
Return Basis) Reinvested) Bills (Series A)
1000 1000 1000 1000
<S> <C> <C> <C> <C>
10/94 999.11 1022.39 1004.25 1010.40
11/94 996.84 985.21 1008.25 1013.59
12/94 1004.45 999.79 1013.27 1017.59
01/95 1023.99 1025.70 1018.36 1011.97
02/95 1047.65 1065.63 1023.27 1034.64
03/95 1054.66 1097.03 1028.45 1077.81
04/95 1069.24 1129.31 1033.24 1087.58
05/95 1111.21 1174.36 1038.59 1100.69
06/95 1119.58 1201.61 1043.91 1098.42
07/95 1117.15 1241.44 1048.89 1084.17
08/95 1130.21 1244.55 1054.18 1094.43
09/95 1141.15 1297.04 1058.76 1090.89
10/95 1156.98 1292.41 1063.71 1094.00
11/95 1173.83 1349.09 1068.54 1101.56
12/95 1190.50 1375.08 1074.36 1125.15
01/96 1198.26 1421.82 1079.26 1152.72
02/96 1177.20 1435.04 1083.56 1110.02
03/96 1169.51 1448.86 1087.58 1121.81
04/96 1162.60 1470.20 1092.23 1156.58
05/96 1160.41 1508.05 1097.07 1133.68
06/96 1175.09 1513.80 1101.59 1149.15
07/96 1178.43 1446.95 1106.59 1129.84
08/96 1176.64 1477.52 1111.58 1135.41
09/96 1196.74 1560.60 1116.81 1153.77
10/96 1223.12 1603.63 1121.59 1202.80
11/96 1244.46 1724.74 1126.38 1232.89
12/96 1233.24 1690.57 1131.35 1230.43
01/97 1236.72 1796.13 1136.52 1255.78
02/97 1238.93 1810.23 1140.96 1273.84
03/97 1226.42 1735.99 1145.77 1274.51
04/97 1245.10 1839.54 1151.24 1265.62
05/97 1256.21 1951.46 1157.14 1247.52
06/97 1271.19 2038.84 1161.37 1256.22
-43-
<PAGE>
07/97 1305.60 2201.02 1166.59 1295.67
08/97 1294.43 2077.83 1171.59 1260.59
09/97 1313.70 2191.62 1176.95 1271.42
10/97 1333.09 2118.51 1181.97 1265.95
11/97 1338.58 2216.50 1186.57 1276.14
12/97 1352.32 2254.53 1191.67 1304.46
01/98 1370.24 2279.45 1197.24 1305.47
02/98 1369.09 2443.75 1201.49 1298.12
03/98 1374.25 2568.80 1207.18 1299.41
04/98 1380.93 2594.63 1212.60 1273.95
05/98 1394.61 2550.08 1217.64 1286.05
06/98 1406.76 2653.58 1222.74 1274.99
07/98 1409.78 2625.40 1228.16 1266.45
08/98 1432.49 2246.29 1233.76 1326.73
09/98 1466.14 2390.21 1240.06 1369.85
10/98 1459.80 2584.46 1244.94 1370.67
11/98 1466.74 2741.03 1249.08 1356.96
12/98 1472.23 2898.88 1254.02 1359.68
01/99 1482.65 3020.06 1258.47 1344.99
02/99 1454.22 2926.35 1262.08 1355.21
</TABLE>
THE GRAPH REFLECTS THE PERCENTAGE CHANGES IN NET ASSET VALUE SERIES A UNIT
(DISTRIBUTIONS ADDED BACK) 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 DECEMBER 31, 1998).
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.
-44-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
BACKGROUND AND PRINCIPALS
Merrill Lynch Investment Partners Inc., an indirect subsidiary of ML&Co.,
attempts to provide 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. 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 managed futures
and hedge fund investments in the global financial markets. As of March 1, 1999,
MLIP was acting as trading manager or sponsor to futures and hedge funds in
which approximately $3 billion of client capital was invested.
MLIP's registration as a Commodity Pool Operator ("CPO"; a person which
organizes or manages investment funds which trade futures) became effective in
October 1986.
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 (until April 30,
1999)
MICHAEL L. PUNGELLO Vice President, Chief
Financial Officer and
Treasurer (effective
May 3, 1999)
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 from its formation in 1990 through
its dissolution in 1994. Mr. Frawley has served four consecutive one-year terms
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 currently serves as a member
of the CFTC's Global Markets Advisory Committee.
-45-
<PAGE>
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. Mr. Chandor is serving a
two-year term as a director of the Managed Funds Association.
Jo Ann Di Dario was born in 1946. Until April 30, 1999, Ms. Di Dario is
Vice President, Chief Financial Officer and Treasurer of MLIP. Before joining
MLIP in May 1998, she was self-employed 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 1991 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 self-employed. For the previous
five years, 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.
Michael L. Pungello was born in 1957. Effective May 3, 1999, Mr. Pungello
will become Vice President, Chief Financial Officer and Treasurer of MLIP. He
was First Vice President and Senior Director of Finance for Merrill Lynch's
Operations, Services and Technology Group from January 1998 to March 1999. Prior
to that, Mr. Pungello spent over 18 years with Deloitte & Touche LLP, and was a
partner in their financial services practice from June 1990 to December 1997. He
graduated from Fordham University in 1979 with a Bachelor of Science degree in
Accounting and received his Master of Business Administration degree in Finance
from New York University in 1987.
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,
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<PAGE>
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 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.
MERRILL LYNCH FUTURES INC.
MLF, the exclusive clearing futures broker for the Fund, is a clearing
member of The Board of Trade of the City of Chicago, the Chicago Mercantile
Exchange, the New York Mercantile Exchange and all other principal United States
commodity exchanges. The principal office of MLF is located at World Financial
Center, 250 Vesey Street, 23rd Floor, New York, New York 10281- 1323.
The Customer Agreement between MLF and the Fund provides that MLF will not
be liable except for actions constituting negligence or misconduct, or for
actions taken by it in compliance with instructions given by an Advisor.
MERRILL LYNCH LITIGATION
MLIP has never been the subject of any material litigation.
APPLICABLE CFTC RULES REQUIRE THAT THE FOLLOWING PROCEEDING BE DISCLOSED,
ALTHOUGH MLIP DOES NOT CONSIDER IT TO BE MATERIAL.
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.
CONFLICTS OF INTEREST
GENERAL
Neither MLIP nor any Advisor has established any formal procedures to
resolve the following conflicts of interest. Consequently, there is no
independent control on how MLIP or any Advisor resolves these conflicts which
can be relied upon by investors as ensuring that the Fund is treated equitably
with other MLIP or any Advisor's clients.
Because no formal procedures are in place for resolving conflicts, they may
be resolved by MLIP and/or any 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 following conflicts of interest 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. This belief is based on a number of factors,
including the following.
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<PAGE>
(i) The Advisors generally trade all similarly situated accounts in parallel,
placing bulk orders which are allocated among the Advisors' accounts
pursuant to pre-established procedures. Consequently, the Advisors have
little opportunity to prefer another client over the Fund.
(ii) Generally, 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.
(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 when they were initially established. 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
MLIP organized and controls the Fund. MLIP and its affiliates are the
primary service providers to the Fund and will remain so even if using other
firms might be better for the Fund. Futures trading is highly competitive. To
the extent that Merrill Lynch entities continue to be retained by the Fund
despite providing non-competitive services, the Fund is likely to incur losses.
MLIP allocates its resources among a number of different funds. MLIP has
financial incentives to favor certain funds over the Fund.
The business terms of the Fund -- other than the fees and Profit Shares
due to the Advisors which were negotiated between MLIP and each such Advisor --
were not negotiated. MLIP unilaterally established these terms, balancing
marketing and performance considerations and its interest in maximizing the
revenues generated to MLIP.
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. THEORETICALLY, 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 NET ASSET VALUE PER
UNIT TO DECLINE.
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.
MLF; MLIB; MLAM
GENERAL
MLF executes trades for different clients in the same markets at the same
time. Consequently, other clients may receive better prices on the same trades
than the Fund, causing the Fund to pay higher prices for its positions.
Many MLF clients pay lower brokerage rates than the Fund. Brokerage
commissions are a major drag on the Fund's performance, and the cumulative
effect of the higher rates paid by the Fund is material.
MLF and MLIB each must allocate their resources among many different
clients. They all have financial incentives to favor certain accounts over the
Fund. Because of the competitive nature of the markets in which they trade, to
the extent that any of MLF or MLIB prefer other clients over the Fund, the Fund
is likely to incur losses.
-48-
<PAGE>
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 ADVISORS
GENERAL
Each Advisor manages many accounts other than the Fund. Consequently, each
Advisor may devote less resources to the Fund's trading than such Advisor
otherwise might, to the detriment of the Fund.
Certain of the respective Advisors' principals may devote a substantial
portion of their business time to ventures other than managing the Fund,
including ventures unrelated to futures trading. In respect of such Advisors,
the Fund may be at a competitive disadvantage to other accounts which are
managed by advisors who devote their entire attention to futures trading.
Most of the Advisors implement a single strategy, but certain Advisors
offer a number of different strategies. Advisors may not be willing to make
certain highly successful strategies available to the Fund due to the Fund's
expense level or other reasons.
THE LESS SUCCESSFUL THE ADVISORS' STRATEGIES, THE LESS SUCCESSFUL THE FUND
WILL BE. IF AN ADVISOR DOES NOT MAKE CERTAIN PROGRAMS AVAILABLE TO THE FUND FOR
REASONS OTHER THAN WHAT SUCH ADVISOR CONSIDERS TO BE THE FUND'S BEST INTERESTS,
THE FUND WILL SUFFER.
FINANCIAL INCENTIVES TO DISFAVOR THE FUND
If an Advisor incurs losses, such Advisor may have an incentive to prefer
other clients because an Advisor could begin to receive incentive compensation
from such clients without having to earn back any losses.
ANY ACTION WHICH AN ADVISOR TAKES TO MAXIMIZE ITS REVENUES BY DISFAVORING
THE FUND, EITHER IN RESPECT OF THE RESOURCES DEVOTED TO ITS TRADING OR THE
PROGRAMS SELECTED FOR IT, COULD ADVERSELY AFFECT THE FUND'S PERFORMANCE, PERHAPS
TO A MATERIAL EXTENT.
FINANCIAL CONSULTANTS
Financial Consultants are the individual Merrill Lynch brokers who deal
directly with Merrill Lynch clients. Financial Consultants are compensated, in
part, on the basis of the amount of securities commissions which they generate
from client transactions. Financial Consultants receive initial selling
commissions and ongoing compensation on the Units they sell and have a financial
incentive to encourage investors to purchase and not to redeem their Units.
PROPRIETARY TRADING
MLIP, its affiliates and related persons may trade in the commodity
markets for their own accounts as well as for the accounts of their clients.
Such persons may take positions which are the same as or opposite to those held
by the Fund.
The Advisors and their principals may engage in discretionary trading for
their own accounts, and may trade for the purpose of testing new investment
programs and concepts, as long as such trading does not amount to a breach of
fiduciary duty. In the course of such trading, the Advisors and their principals
may take positions in their own accounts which are the same as or opposite to
client positions, due to testing a new quantitative model or program, a neutral
allocation system, and/or trading pursuant to individual discretionary methods;
on occasion, their orders may receive better fills than client accounts. Records
for these accounts will not be made available to limited partners.
Records of proprietary trading will not be available for inspection by
limited partners.
Proprietary trading by MLIP, the Advisors or their respective officers or
employees could, if substantial in size, cause losses for the Fund by increasing
the cost at which it must acquire and liquidate positions. Over time, the losses
resulting from such increased prices could make it difficult for the Fund to
earn profits even if its trading were otherwise successful.
-49-
<PAGE>
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 are 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 bid-ask spreads on forward currency trades. 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 direct 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 month-end percentage of the overall Net
Asset Value per Unit 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," "Interest Income Arrangements" and
"Analysis of Fees and Expenses Paid by the Fund."
SUMMARY OF THE LIMITED
PARTNERSHIP AGREEMENT
The Fund's Limited Partnership Agreement effectively gives MLIP, as
general partner, full control over the management of the Fund. Limited partners
have no voice in its operations. In addition, MLIP in its operation of the Fund
is specifically authorized to engage in the transactions described herein
(including those involving affiliates of MLIP), and is exculpated and
indemnified by the Fund against claims sustained in connection with the Fund,
provided that such claims were not the result of negligence or misconduct and
that MLIP determined that such conduct was in the best interests of the Fund.
Although as limited partners, investors have no right to participate in
the control or management of the Fund, they are entitled to: (i) vote on a
variety of different matters; (ii) receive annual audited financial statements,
unaudited monthly reports and timely tax information; (iii) inspect the Fund's
books and records; (iv) redeem Units; and (v) not to have the business terms of
the Fund changed in a manner which increases the compensation received by MLIP
or its affiliates without their unanimous consent.
Limited partners' voting rights extend to any proposed change in the
Limited Partnership Agreement which would adversely affect them, as well as to
their right to terminate the Fund's contracts with affiliates of MLIP. Limited
partners also have the right to call meetings of the Fund in order to permit
limited partners to vote on any matter on which they are entitled to vote,
including the removal of MLIP as general partner of the Fund.
Limited partners or their duly authorized representatives may inspect the
Fund's books and records, for any purpose reasonably related to their status as
limited partners in the Fund, during normal business hours upon reasonable
written notice to the MLIP. They may also obtain copies of such records upon
payment of reasonable reproduction costs; provided, however, that such limited
partners represent that the inspection and/or copies of such records will not be
for commercial purposes unrelated to such limited partners' interest in the
Fund.
-50-
<PAGE>
The Limited Partnership Agreement contains restrictions on MLIP's ability
to raise Brokerage Commissions, Administrative Fees and other revenues received
by Merrill Lynch from the Fund, as well as certain other limitations on the
various conflicts of interest to which MLIP is subject in operating the Fund.
The Limited Partnership Agreement provides for the economic and tax
allocations of the Fund's profit and loss. Economic allocations are based on
investors' capital accounts, and the tax allocations generally attempt to
equalize tax and capital accounts by, for example, making a priority allocation
of taxable income to limited partners who redeem at a profit.
A limited partner may transfer or assign his units in the Fund only upon
prior written notice to MLIP and subject to approval of the assignee. MLIP will
provide consent when it is satisfied that the transfer complies with applicable
laws, and it has received an opinion of counsel that such transfer will not
adversely affect the tax classification of the Fund as a partnership. An
assignee not admitted to the Fund as a limited partner will have only limited
rights to share the profits and capital of the Fund and a limited redemption
right.
The General Partner may amend the Limited Partnership Agreement in any
manner not adverse to the limited partners without need of obtaining their
consent. These amendments can be for clarification of inaccuracies or
ambiguities, modifications in response to changes in tax code or regulations or
any other changes MLIP deems advisable so long as they do not change the basic
investment policy or structure.
The Fund has agreed to indemnify MLIP, as general partner, for actions
taken on behalf of the Fund, provided that MLIP's conduct was in the best
interests of the Fund and the conduct was not the result of negligence or
misconduct. Indemnification by the Fund for alleged violation of securities laws
is only available if the following conditions are satisfied:
1) a successful adjudication on the merits of each count alleged has
been obtained, or
2) such claims have been dismissed with prejudice on the merits by a
court of competent jurisdiction; or
3) a court of competent jurisdiction approves a settlement of the
claims and finds indemnification of the settlement and related costs
should be made; and
4) in the case of 3), the court has been advised of the position of the
SEC and the states in which the Units were offered and sold as to
indemnification for the violations.
TAX CONSEQUENCES
IN THE OPINION OF SIDLEY & AUSTIN, THE FOLLOWING SUMMARY OF THE TAX
CONSEQUENCES TO UNITED STATES TAXPAYERS WHO ARE INDIVIDUALS IS MATERIALLY
CORRECT. SIDLEY & AUSTIN'S OPINION IS FILED AS AN EXHIBIT TO THE REGISTRATION
STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
PARTNERSHIP TAX STATUS OF THE FUND
Both the Fund and the Trading Partnership are taxed as partnerships and do
not pay federal income tax. Based on the income expected to be earned by the
Fund and the Trading Partnership, neither will be taxed as a "publicly-traded
partnership."
TAXATION OF PARTNERS ON PROFITS OR LOSSES OF THE FUND
Each Partner must pay tax on his share of the Fund's income and gains.
Such share must be included each year in a Partner's taxable income whether or
not such Partner has redeemed Units. In addition, a Partner may be subject to
paying taxes on the Fund's interest income even though the Net Asset Value per
Unit has decreased due to trading losses. See "-- Tax on Capital Gains and
Losses; Interest Income," below.
The Fund provides each Partner with an annual schedule of his share of tax
items. The Fund generally allocates these items equally to each Unit. However,
when a Partner redeems Units, the Fund allocates capital gains or losses so as
to eliminate
-51-
<PAGE>
any difference between the redemption proceeds and the tax accounts of such
Units.
LIMITED DEDUCTIBILITY OF FUND LOSSES AND
DEDUCTIONS
A Partner may not deduct Fund losses or deductions in excess of his tax
basis in his Units as of year-end. Generally, a Partner's tax basis in his Units
is the amount paid for such Units reduced (but not below zero) by his share of
any Fund distributions, losses and deductions and increased by his share of the
Fund's income and gains.
LIMITED DEDUCTIBILITY FOR CERTAIN EXPENSES
Individual taxpayers are subject to material limitations on their ability
to deduct investment advisory expenses and other expenses of producing income.
Sidley & Austin has opined that the amount, if any, of the Fund's expenses which
might be subject to this limitation should be DE MINIMIS. However, the IRS could
take a different position. The IRS could contend that the Profit Shares should
be characterized as an investment advisory expenses. If the Profit Share were
treated as an investment advisory expense, individual taxpayers would pay tax on
every $100 of net profits earned by an Advisor for every $80-$85 increase in Net
Asset Value of their Units, and the Profit Shares would be subject to limited
deductibility.
Individuals cannot deduct investment advisory expenses in calculating
their alternative minimum tax.
YEAR-END MARK-TO-MARKET OF OPEN POSITIONS
Section 1256 Contracts are futures, futures options traded on U.S.
exchanges, certain foreign currency contracts and stock index options. Certain
of the Fund's open positions are Section 1256 Contracts. Section 1256 Contracts
which remain open at the end of each year are treated for tax purposes as if
such positions had been sold and any gain or loss recognized. The gain or loss
on Section 1256 Contracts is characterized as 40% short-term capital gain or
loss and 60% long-term capital gain or loss regardless of how long any given
position has been held. Non-U.S. exchange-traded futures and forwards are
non-Section 1256 Contracts. Gain or loss on non-Section 1256 Contracts will be
recognized when sold by the Fund and will be primarily short-term gain or loss.
TAX ON CAPITAL GAINS AND LOSSES; INTEREST
INCOME
As described under "-- Year-End Mark-to-Market of Open Positions," the
Fund's trading, not including its cash management which generates primarily
ordinary income, generates 60% long-term capital gains or losses and 40%
short-term capital gains or losses from its Section 1256 Contracts and primarily
short-term capital gain or loss from its non-Section 1256 Contracts. Individuals
pay tax on long-term capital gains at a maximum rate of 20%. Short-term capital
gains are subject to tax at the same rates as ordinary income, with a maximum
rate of 39.6% for individuals.
Individual taxpayers may deduct capital losses only to the extent of their
capital gains plus $3,000. Accordingly, the Fund could incur significant losses
but a limited partner be required to pay taxes on his share of the Fund's
interest income.
If an individual taxpayer incurs a net capital loss for a year, he may
elect to carryback (up to three years) the portion of such loss which consists
of a net loss on Section 1256 Contracts. A taxpayer may deduct such losses only
against net capital gain for a carryback year to the extent that such gain
includes gains on Section 1256 Contracts. To the extent that a taxpayer could
not use such losses to offset gains on Section 1256 Contracts in a carryback
year, the taxpayer may carryforward such losses indefinitely as losses on
Section 1256 Contracts.
SYNDICATION EXPENSES
The IRS could contend that a portion of the Brokerage Commissions paid to
MLF and/or the Administrative Fees paid to MLIP constitute non-deductible
syndication expenses.
THE $3 EMPLOYEE DISCOUNT
MLIP contributes $3 of the purchase date Net Asset Value per Unit to the
Fund for each Unit purchased by Merrill Lynch officers and employees.
-52-
<PAGE>
These officers and employees report the MLIP contribution as ordinary income in
the year of purchase, and acquire a tax basis in their Units of $100.
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
Tax-exempt limited partners will not be required to pay tax on their share
of income or gains of the Fund, provided that such limited partners do not
purchase Units with borrowed funds.
IRS AUDITS OF THE FUND AND ITS PARTNERS
The IRS is required to audit Fund-related items 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. If an audit of the
Fund results in an adjustment, all partners may be required to pay additional
taxes plus interest as well as penalties, and could themselves be audited.
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.
--------------------
PROSPECTIVE INVESTORS ARE
URGED TO CONSULT THEIR TAX
ADVISERS BEFORE DECIDING
WHETHER TO INVEST.
SELLING COMMISSIONS
No selling commissions are paid from the proceeds of subscriptions. MLIP
provides production credits to the Selling Agent on Unit sales. Production
credits are internal bookkeeping entries, a percentage of which is paid by MLIP
in cash to the Selling Agent.
The Selling Agent receives initial produc tion credits of $4 on all Units.
However, no initial production credits are provided on sales of Units to
officers and employees of Merrill Lynch at $97.
MLIP also provides ongoing production credits on Units which remain
outstanding more than twelve months. Ongoing production credits are only paid on
Units sold by Financial Consultants registered with the CFTC and who have passed
either the Series 3 National Commodity Futures Examination or the Series 31
Managed Futures Funds Examination. Ongoing production credits equal 2% per annum
of the average month-end Net Asset Value per Unit allocated to trading,
beginning in the second year after sale.
In the Selling Agreement, the Advisors and MLIP have agreed to indemnify
the Selling Agent against certain liabilities that the Selling Agent may incur
as a result of their respective conduct in connection with the offering and sale
of the Units, including liabilities under the Securities Act of 1933 and the
Commodity Exchange Act.
LAWYERS; ACCOUNTANTS
Sidley & Austin has advised MLIP, MLF
and MLPF&S on the offering of the Units. Sidley &
Austin drafted "Tax Consequences."
The balance sheet of MLIP as of December 25, 1998 and the consolidated
financial statements of the Fund as of December 31, 1998 and 1997 included
herein have been audited by Deloitte & Touche LLP.
-53-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
ML PRINCIPAL PROTECTION L.P.
Independent Auditors' Report........................................ 55
Consolidated Statements of Financial Condition...................... 56
Consolidated Statements of Income................................... 57
Consolidated Statements of Changes in Partners' Capital............. 58
Notes to Consolidated Financial Statements.......................... 59
MERRILL LYNCH INVESTMENT PARTNERS INC.
Independent Auditors' Report........................................ 68
Balance Sheet....................................................... 69
Notes to Balance Sheets............................................. 70
--------------------
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.
-54-
<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. (the "Partnership") as of December 31, 1998 and
1997, and the related consolidated statements of income and of changes in
partners' capital for each of the three years in the period ended December 31,
1998. 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, such consolidated financial statements present fairly, in all
material respects, the financial position of ML Principal Protection L.P. as of
December 31, 1998 and 1997, and the results of their operations for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 1999
-55-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
----------- -------------
<S> <C> <C>
ASSETS
Equity in commodity futures trading accounts:
Cash and option premiums $20,564,400 $ 6,127,857
Net unrealized profit on open contracts 601,178 2,958,175
Government Securities (Note 1) (Cost: 60,536,271 93,851,028
$60,032,832 and $93,712,418)
Cash 43,497 1,423
Accrued interest receivable (Note 2) 685,821 839,464
----------- -------------
TOTAL $82,431,167 $ 103,777,947
=========== =============
LIABILITIES AND PARTNERS'
CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 2) $ 402,923 $ 494,349
Profit Shares payable (Note 4) 594,328 591,195
Redemptions payable 1,467,829 636,155
Administrative fees payable (Note 2) 16,960 14,330
----------- -------------
Total liabilities 2,482,040 1,736,029
----------- -------------
MINORITY INTEREST 842,289 815,233
----------- -------------
PARTNERS' CAPITAL:
General Partner (6,654.61 Units, and
23,141.61 Units) 735,280 2,564,153
Limited Partners (717,784.1628 Units and
989,140.56 Units) 78,371,558 105,628,837
Subscriptions Receivable (0 Units and
69,663.05 Units) -- (6,966,305)
----------- -------------
Total partners' capital 79,106,838 101,226,685
----------- -------------
TOTAL $82,431,167 $ 103,777,947
=========== =============
</TABLE>
NET ASSET VALUE PER UNIT (NOTE 5)
See notes to consolidated financial statements.
-56-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 8,746,563 $ 5,412,457 $ 9,038,064
Change in unrealized (2,053,193) 1,083,826 (396,221)
------------ ------------ ------------
Total trading results 6,693,370 6,496,283 8,641,843
Interest income (Note 2) 5,434,851 4,873,872 4,545,186
------------ ------------ ------------
Total revenues 12,128,221 11,370,155 13,187,029
------------ ------------ ------------
EXPENSES:
Brokerage commissions
(Note 2) 6,159,359 4,833,598 4,775,116
Profit Shares (Note 4) 1,658,306 931,522 978,264
Administrative fees (Note 2) 193,861 138,103 129,057
------------ ------------ ------------
Total expenses
8,011,526 5,903,223 5,882,437
------------ ------------ ------------
INCOME BEFORE
MINORITY INTEREST 4,116,695 5,466,932 7,304,592
------------ ------------ ------------
Minority interest in income (27,056) (46,687) (81,228)
------------ ------------ ------------
NET INCOME $ 4,089,639 $ 5,420,245 $ 7,223,364
============ ============ ============
NET INCOME PER
UNIT:
Weighted average number
of General Partner and
Limited Partner Units
outstanding (Note 6) 929,254 818,689 754,428
============ ============ ============
Net income per weighted
average General Partner and
Limited Partner Unit $ 4.40 $ 6.62 $ 9.57
============ ============ ============
</TABLE>
See notes to consolidated financial statements.
-57-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
LIMITED GENERAL SUBSCRIPTIONS
UNITS PARTNERS PARTNER RECEIVABLE TOTAL
--------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1995 714,318.9800 73,080,141 1,766,403 -- 74,846,544
Redemptions (245,127.3600) (25,748,519) -- -- (25,748,519)
Subscriptions 254,468.3500 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 723,659.9700 76,542,105 2,301,180 -- 78,843,285
Redemptions (183,442.9100) (19,816,833) -- -- (19,816,833)
Subscriptions 472,065.1100 46,994,656 211,855 -- 47,206,511
Subscriptions Receivable (69,663.0500) -- -- (6,966,305) (6,966,305)
Distributions -- (3,362,913) (97,305) -- (3,460,218)
Net Income -- 5,271,822 168,483 -- 5,420,245
--------------- ------------- ----------- ------------ -------------
PARTNERS' CAPITAL
DECEMBER 31, 1997 942,619.1200 105,628,837 2,564,153 (6,966,305) 101,226,685
Redemptions (426,071.8902) (43,562,357) (1,807,512) -- (45,369,869)
Subscriptions 138,228.4930 13,822,849 -- -- 13,822,849
Subscriptions Receivable 69,663.0500 -- -- 6,966,305 6,966,305
Distributions -- (1,595,262) (33,509) -- (1,628,771)
Net Income -- 4,077,491 12,418 -- 4,089,639
--------------- ------------- ----------- ------------ -------------
PARTNERS' CAPITAL
DECEMBER 31, 1998 724,438.7728 $ 78,371,558 $ 735,280 $ -- $ 79,106,838
=============== ============= =========== ============ =============
</TABLE>
See notes to consolidated financial statements.
-58-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
ORGANIZATION
ML Principal Protection L.P. (the "Partnership") was organized as an
open-end 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, forwards and options on forward contracts on a wide range of
commodities through ML Principal Protection Trading L.P. (the "Trading
Partnership"), of which the Partnership is the sole limited partner and
investing in Government Securities, as defined. Merrill Lynch 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. Merrill Lynch Futures Inc. ("MLF"), an
affiliate of Merrill Lynch, is the Trading Partnership's commodity broker.
Merrill Lynch Asset Management, Inc. ("MLAM"), another affiliate of Merrill
Lynch, provides cash management services to the Partnership investing in
Government Securities. 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 intends to maintain
a general partner's interest of at least 1% of the total capital in each series
of units. The General Partner and the Limited Partners share in the profits and
losses of the Partnership and the Trading Partnership, in proportion to the
respective interests in the Partnership and the Trading Partnership. References
to the Partnership include references to the Trading Partnership unless the
context otherwise requires.
The consolidated financial statements include the accounts of the Trading
Partnership in which the Partnership is the sole limited partner. All related
transactions and intercompany balances between the Partnership and the Trading
Partnership are eliminated in consolidation.
The ownership by the General Partner in the Trading Partnership represents
a minority interest when the financial results of the Trading Partnership are
consolidated into those of the Partnership. The General Partner's share of the
Trading Partnership's profits and losses is deducted from the Consolidated
Statements of Income, and the General Partner's interest in the Trading
Partnership reduces partners' capital on the Consolidated Statements of
Financial Condition and the Consolidated Statements of Changes in Partners'
Capital.
The Partnership issues different series of units of limited partnership
interest ("Units") generally as of the beginning of each calendar quarter. Each
series has its own Net Asset Value per Unit. For series issued prior to May 1,
1997, each series may allocate different percentages of their total capital to
trading. For series issued after May 1, 1997, all such series must allocate the
same percentage of their total capital to trading. All series, regardless of
when issued, 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 trading assets, and
allocates and reallocates the Partnership's trading assets among existing,
replacement and additional Advisors.
MLIP determines what percentage of the Partnership's total capital to
allocate to trading by investing in the Trading Partnership 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
-59-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
Partnership under the Merrill Lynch guarantee (see Note 7), and subject to the
requirement that all series issued after May 1, 1997 must allocate the same
percentage of their capital to trading certain of the prior year balances have
been reclassified to conform with the current year's presentation.
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, forwards and options on forward
contracts 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 market value (for those commodity interests for which market quotations are
readily available) or at fair value. The change in unrealized (loss) profit on
open contracts and Government Securities, as defined below, from one period to
the next is reflected in change in unrealized in the Consolidated Statements of
Income.
FOREIGN CURRENCY TRANSACTIONS
The Partnership's functional currency is the U.S. dollar; however, it
transacts business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are translated
into U.S. dollars at the rates in effect at the dates of the Statements of
Financial Condition. Income and expense items denominated in currencies other
than the U.S. dollar are translated into U.S. dollars at the rates in effect
during the period. Gains and losses resulting from the translation to U.S.
dollars are reported in total trading results currently.
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.
OPERATING EXPENSES AND SELLING COMMISSIONS
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.
No selling commissions have been or are paid directly by the Limited
Partners. All selling commissions are paid by MLIP.
INCOME TAXES
No provision for income taxes has been made in the accompanying
consolidated financial statements as each Partner is individually responsible
for reporting income or loss based on such Partner's respective share of the
Partnership's consolidated income and expenses as reported for income tax
purposes.
REDEMPTIONS
A Limited Partner may require the Partnership to redeem some or all of
such Partner's Units at 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 such Units were issued are
assessed an early redemption
-60-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
charge of 3% of their Net Asset Value as of the date of redemption. Units
redeemed after the twelfth month but on or before the end of the eighteenth
month after such Units were issued 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 such Units were issued are subject to a 1% redemption
charge.
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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 (the "Statement"). Such Statement is
effective for fiscal years commencing after June 15, 1999. The General Partner
does not believe that the Statement will have a significant effect on the
financial statements of the Partnership.
2. RELATED PARTY TRANSACTIONS
MLAM manages a substantial portion of the Partnership's available U.S.
dollar assets, pursuant to guidelines established by MLIP for which MLAM assumes
no responsibility, in the Government Securities markets. MLF pays MLAM annual
management fees of .20 of 1% on the first $25 million of certain assets
("Capital"), including the Partnership's assets 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 is maintained at MLF. On
assets held in U.S. dollars, Merrill Lynch credits the Partnership with interest
at the prevailing 91-day U.S. Treasury bill rate. The Partnership is credited
with interest on any of its net gains actually held by Merrill Lynch in non-U.S.
dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill
Lynch may derive certain economic benefits, in excess of the interest which
Merrill Lynch pays to the Partnership, from possession of such assets.
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 have been credited as their response forms are processed.
The total amount of the adjustment was 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 was
calculated appropriately since November 1996.
Prior to January 1, 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 invested in the Trading
Partnership. Effective January 1, 1996, this rate was reduced to .771 of 1% (a
9.25% annual rate), 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 invested in the Trading Partnership (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). Effective October 1, 1998, the
-61-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
administrative fee calculation base was changed so as to equal .021 of 1% (a
.25% annual rate) of the Partnership's month-end total assets, and each series'
brokerage commission percentage was reduced to .625 of 1% (a 7.50% annual rate).
Assets committed to trading and total assets 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 Trading Partnership during the years ended December 31,
1998, 1997 and 1996, was approximately $80, $116 and $116, respectively (not
including, in calculating round-turn equivalents, forward contracts on a
futures-equivalent basis).
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.
Many of the Partnership's currency trades are executed in the spot and
forward foreign exchange markets (the "FX Markets") where there are no direct
execution costs. Instead, the participants, banks and dealers, including Merrill
Lynch International Bank ("MLIB"), in the FX Markets take a "spread" between the
prices at which they are prepared to buy and sell a particular currency and such
spreads are built into the pricing of the spot or forward contracts with the
Partnership. The General Partner anticipates that some of the Partnership's
foreign currency trades will be executed through MLIB, an affiliate of the
General Partner. MLIB has discontinued the operation of the foreign exchange
service desk, which included seeking multiple quotes from counterparties
unrelated to MLIB for a service fee and trade execution.
In its exchange of futures for physical ("EFP") trading, the Partnership
acquires cash currency positions through banks and dealers, including Merrill
Lynch. The Partnership pays a spread when it exchanges these positions for
futures. This spread reflects, in part, the different settlement dates of the
cash and the futures contracts, as well as prevailing interest rates, but also
includes a pricing spread in favor of the banks and dealers, which may include a
Merrill Lynch entity.
3. ANNUAL DISTRIBUTIONS
The Partnership makes annual fixed-rate distributions, payable
irrespective of profitability, of $3.50 per Unit on Units issued prior to May 1,
1997. 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 May 1, 1997. As of
December 31, 1998, the Partnership has made the following distributions:
<TABLE>
<CAPTION>
DISTRIBUTION FIXED-RATE DISCRETIONARY
SERIES DATE DISTRIBUTION DISTRIBUTION
- ------ ---- ------------ ------------
<S> <C> <C> <C>
1998
Series A 10/1/98 $ 3.50 $ --
Series B 1/1/98 3.50 1.50
Series C 4/1/98 3.50 --
Series D 7/1/98 3.50 --
Series E 10/1/98 3.50 --
Series F 1/1/98 3.50 1.25
Series G 4/1/98 3.50 --
Series H 7/1/98 3.50 --
</TABLE>
<TABLE>
<CAPTION>
DISTRIBUTION FIXED-RATE DISCRETIONARY
SERIES DATE DISTRIBUTION DISTRIBUTION
- ------ ---- ------------ ------------
<S> <C> <C> <C>
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>
-62-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<S> <C> <C> <C>
1996
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 --
</TABLE>
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, options on futures,
forwards and options on forward contract trades to be made on behalf of their
respective Trading Partnership accounts, subject 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 and upon the net reallocation of assets away from an Advisor including
unit redemptions, are paid to the appropriate Advisors to the extent of the
applicable percentage of any New Trading Profit attributable to such Units.
5. NET ASSET VALUE PER UNIT
At December 31, 1998 the Net Asset Values of the different series of Units
were as follows:
<TABLE>
<CAPTION>
NET ASSET
NET ASSET NUMBER VALUE
VALUE OF UNITS PER UNIT
----- -------- --------
<S> <C> <C> <C>
Series A Units $ 12,718,104 109,886.0000 $ 115.74
Series B Units 1,498,896 13,150.0000 113.98
Series C Units 2,145,087 19,694.0000 108.92
Series D Units 6,658,019 59,742.0000 111.45
Series E Units 6,063,352 54,556.5800 111.14
Series F Units 3,285,111 30,152.6400 108.95
Series G Units 2,854,082 26,507.1000 107.67
Series H Units 2,185,925 20,275.7250 107.81
Series K Units 7,063,107 64,436.0000 109.61
Series L Units 9,686,313 90,690.0000 106.81
Series M Units 10,476,381 96,696.0600 108.34
Series N Units 5,800,784 55,546.4250 104.43
Series O Units 7,205,406 68,774.2420 104.77
Series P Units 655,841 6,134.0000 106.92
Series Q Units 810,430 8,198.0008 98.86
------------ ------------
$ 79,106,838 724,438.7728
============ ============
</TABLE>
As of December 31, 1997, the Net Asset Value of the different series of
Units 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
------------ ------------ ------
Total $101,226,685 942,619.12
============ ============
</TABLE>
6. WEIGHTED AVERAGE UNITS
Weighted average number of Units outstanding was computed for purposes of
disclosing consolidated net income per weighted average Unit. The weighted
average number of Units outstanding at December 31, 1998, 1997 and 1996 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 the year.
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 in respect of such Units, not less than $100.
8. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Trading Partnership trades futures, options on futures, forwards and
options on forward contracts on interest rates, stock indices, commodities,
currencies, energy and metals. The Partnership's total trading results by
reporting category for the years ended December 31, 1998, 1997 and 1996 were as
follows:
-63-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
TOTAL TRADING RESULTS
-----------------------------------------------
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest Rates $ 7,116,336 $ 1,706,686 $ 3,183,955
Stock Indices 824,905 232,314 (746,255)
Commodities (967,695) 679,157 20,119
Currencies 2,085,218 3,911,109 3,301,360
Energy (882,409) (1,278,003) 3,280,677
Metals 1,482,985) 1,245,020 (398,013)
----------- ----------- -----------
$ 6,693,370 $ 6,496,283 $ 8,641,843
=========== =========== ===========
</TABLE>
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 net unrealized profit on such derivative instruments as
reflected in the Consolidated Statements of Financial Condition. The Trading
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 such
derivative instruments are traded.
The General Partner has procedures in place intended to control market
risk exposure, although there can be no assurance that they will, in fact,
succeed in doing so. These procedures focus primarily on monitoring the trading
of the Advisors selected from time to time for the Partnership, adjusting the
percentage of the Partnership's total assets investing in the Trading
Partnership 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 the Units trade. If MLIP makes a leverage
adjustment to any series issued after May 1, 1997, a corresponding adjustment is
made to the leverage used by all such series. For series issued prior to May 1,
1997, adjustments to leverage may be made individually by series. By controlling
the percentage of the assets invested in the Trading Partnership, the General
Partner can directly affect the market exposure of the Partner ship. 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 reflected in trading
revenues in the Consolidated Statements of Income.
The contract/notional values of the Trading Partnership's open derivative
instrument positions as of December 31, 1998 and 1997 were as follows:
-64-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
---------------------------------------
COMMITMENT COMMITMENT
TO PURCHASE TO SELL
(FUTURES, OPTIONS (FUTURES, OPTIONS
AND FORWARDS) AND FORWARDS)
------------- -------------
<S> <C> <C>
Interest Rates $ 83,065,616 $ 91,012,676
Stock Indices 3,698,279 1,622,808
Commodities 1,797,931 7,856,776
Currencies 52,385,528 53,181,016
Energy -- 2,079,384
Metals 4,190,146 9,506,207
------------ ------------
$145,137,500 $165,258,867
============ ============
</TABLE>
<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>
Substantially all of the Trading Partnership's open derivative instruments
outstanding as of December 31, 1998 expire within one year.
The contract/notional values of the Trading Partnership's open
exchange-traded and non-exchange-traded derivative instrument positions as of
December 31, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------
COMMITMENT COMMITMENT
TO PURCHASE TO SELL
(FUTURES, OPTIONS (FUTURES, OPTIONS
AND FORWARDS) AND FORWARDS)
------------- -------------
<S> <C> <C>
Exchange-Traded $102,156,889 $116,203,862
Non-Exchange-
Traded 42,980,611 49,055,005
------------ ------------
$145,137,500 $165,258,867
============ ============
</TABLE>
<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>
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 during the years ended December 31, 1998 and 1997
were as follows:
-65-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998
---------------------------------------
COMMITMENT COMMITMENT
TO PURCHASE TO SELL
(FUTURES, OPTIONS (FUTURES, OPTIONS
AND FORWARDS) AND FORWARDS)
------------- -------------
<S> <C> <C>
Interest Rates $221,031,675 $ 98,633,884
Stock Indices 7,202,373 4,205,480
Commodities 9,417,012 14,567,919
Currencies 119,142,464 136,575,495
Energy 1,961,831 4,354,689
Metals 7,976,980 11,836,785
------------ ------------
$366,732,335 $270,174,252
============ ============
</TABLE>
<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>
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 counter party
nonperformance, is the net unrealized profit included on the Consolidated
Statements of Financial Condition.
The gross unrealized profit and the net unrealized profit on the Trading
Partnership's open derivative instrument positions as of December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998
-------------------------------
GROSS NET
UNREALIZED UNREALIZED
PROFIT PROFIT
---------- ----------
<S> <C> <C>
Exchange-Traded $1,271,311 $ 733,034
Non-Exchange-
Traded 911,388 (131,856)
---------- -----------
$2,182,699 $ 601,178
========== ===========
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------
GROSS NET
UNREALIZED UNREALIZED
PROFIT PROFIT
---------- ----------
<S> <C> <C>
Exchange-Traded $3,263,519 $ 2,416,539
Non-Exchange-
Traded 2,119,281 541,636
---------- -----------
$5,382,800 $ 2,958,175
========== ===========
</TABLE>
The Partnership has credit risk in respect of its counterparties and
brokers, but attempts to control this risk by dealing almost exclusively with
Merrill Lynch entities as counterparties and brokers.
-66-
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
The Partnership, in its normal course of business, enters into various
contracts, with MLF acting as its commodity broker. Pursuant to the brokerage
agreement with MLF (which includes a 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
On January 4, 1999, distributions were announced for Series B and Series
F. During 1999, both the Series B Unitholders and the Series F Unitholders
received a fixed-rate distribution of $3.50 per unit.
-67-
<PAGE>
INDEPENDENT AUDITORS' REPORT
MERRILL LYNCH INVESTMENT PARTNERS INC.:
We have audited the accompanying balance sheet of Merrill Lynch Investment
Partners Inc. (the "Company") as of December 25, 1998. This financial statement
is the responsibility of the Company's management. Our responsibility is to
express an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the balance sheet is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the balance sheet. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall balance sheet presentation. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all material
respects, the financial position of the Company at December 25, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 5, 1999
-68-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
BALANCE SHEET
DECEMBER 25, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash $ 937,966
Investments in affiliated partnerships 11,710,545
Due from parent and affiliate 20,683,294
Receivables from affiliated partnerships 5,047,501
Deferred charges 22,982,728
Advances and other receivables 15,055,652
Fixed assets-- net of accumulated depreciation of $1,464,216 464,518
Other assets 1,146,000
-----------
TOTAL ASSETS $78,028,204
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
LIABILITIES:
Accounts payable and accrued expenses $14,502,593
Due to affiliate 2,755,842
Current and deferred income taxes 13,313,206
-----------
Total liabilities 30,571,641
-----------
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
Additional paid-in capital 16,915,000
Retained earnings 30,540,563
-----------
Total stockholder's equity $47,456,563
-----------
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $78,028,204
===========
</TABLE>
See Notes to Balance Sheet.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-69-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
NOTES TO BALANCE SHEET
DECEMBER 25, 1998
- --------------------------------------------------------------------------------
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Merrill Lynch Investment Partners Inc. (the "Company") is a wholly-owned
subsidiary of Merrill Lynch Group, Inc., which, in turn, is 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 and is registered as
an investment adviser under the Investment Advisers Act of 1940. 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., 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., MLS
Managed Futures Fund L.P., ML Principal Protection L.P., ML Select Futures I
L.P. (formerly ML Chesapeake L.P.) and ML JWH Strategic Allocation Fund L.P.
(collectively, the "Affiliated Partnerships"). The Company is also an investor
in a joint venture (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, futures and options on 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.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-70-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
NOTES TO BALANCE SHEET
DECEMBER 25, 1998
- --------------------------------------------------------------------------------
ML&Co. is holder of the Company's excess cash, which is available on
demand to meet current liabilities. ML&Co. credits the Company with interest, at
a floating rate approximating ML&Co.'s average borrowing rate, based on the
Company's average daily balances receivable. At December 25, 1998, approximately
$20,700,000 was subject to this agreement.
At December 25, 1998, the Company had receivables from Affiliated
Partnerships and off shore 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).
On September 25, 1998, the Company paid a dividend to Merrill Lynch Group
Inc., consisting of $140,000,000.
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 $26,500,000 was paid to investors as of December 1998 with the
remaining balance of $2,000,000 recorded 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 December
25, 1998, the Company was in compliance with all such requirements.
At December 25, 1998, the Company's investments in its Affiliated
Partnerships were as follows:
<TABLE>
<S> <C>
ML Principal Protection L.P. $ 1,490,297
ML Global Horizons L.P. 1,450,760
The SECTOR Strategy Fund(sm) II L.P 397,602
John W. Henry & Company/
Millburn L.P. 615,277
The SECTOR Strategy Fund(sm) VI L.P. 244,581
The JWH Global Asset Fund L.P. 529,386
The S.E.C.T.O.R. Strategy Fund(sm) L.P. 203,553
ML Futures Investments L.P. 247,117
The SECTOR Strategy Fund(sm) V L.P. 154,234
ML Futures Investments II L.P. 127,711
The Growth and Guarantee Fund L.P. 148,226
The Futures Expansion Fund Limited
Partnership 92,239
ML Select Futures I L.P. (formerly ML
Chesapeake L.P.) 87,355
ML/AIG Asset Management L.L.C. 2,450,351
ML JWH Strategic Allocation
Fund L.P. 2,557,076
ML Select Hedge Fund L.P. 507,250
ML/AIS L.P. 295,902
MLS Managed Futures Fund L.P. 111,628
-----------
Total $11,710,545
===========
</TABLE>
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-71-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
NOTES TO BALANCE SHEET
DECEMBER 25, 1998
- --------------------------------------------------------------------------------
The following represents condensed combined financial information of the
Affiliated Partnerships as of December 25, 1998 (in thousands):
Assets $955,906
========
Liabilities 67,785
Partners' capital 888,121
--------
Total $955,906
========
The Company's Affiliated Partnerships trade various futures, options on
futures, forwards and options on forward contracts. Risk to such partnerships
arises from the possible adverse changes in the market value of such contracts
and the potential inability of counterparties to perform under the terms of the
contracts. The risk to the Company is represented by the portion of its
investments in Affiliated Partnerships derived from the unrealized gains
contained in such Partnerships' net asset values.
4. INCOME TAXES
The results of operations of the Company are included in the consolidated
Federal and combined state and local income tax return of ML&Co. It is the
policy of ML&Co. to allocate current and deferred taxes associated with such
operating results to its respective subsidiaries in a manner which approximates
the separate Company method. ML&Co. and its affiliates use the asset and
liability method in providing income tax on all transactions that have been
recognized in the financial statements.
The Company provides for deferred income taxes resulting from temporary
differences which arise from recording deferred charges in different years for
income tax reporting purposes than for financial reporting purposes. At December
25, 1998, the Company had no deferred tax assets. Deferred tax liabilities
consisted of the following:
State and local $2,419,343
Federal 7,197,341
----------
$9,616,684
==========
As part of the consolidated group, the Company transfers to ML&Co. its
current Federal, state and local tax liabilities. During 1998, the Company
transferred $25,195,316 in current taxes payable to ML&Co. At December 25, 1998,
the Company had a current tax payable with ML&Co. of $7,998,513.
5. NET WORTH AGREEMENTS
Pursuant to the limited partnership agree ments of the Affiliated
Partnerships, the Company is required to meet certain net worth requirements.
The Company's net worth, as defined, approxi mated $30,700,000 at December 25,
1998, which, in the opinion of the Company's counsel, met all such requirements.
6. COMMITMENTS
The Company is obligated to pay to the affiliates, from its own funds and
without reimbursement by its Affiliated Partnerships, ongoing compensation (a
2-5% annual rate) of the average month-end net assets, accrued monthly and paid
quarterly, for units in such partnerships outstanding for more than twelve
months.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-72-
<PAGE>
MERRILL LYNCH INVESTMENT PARTNERS INC.
NOTES TO BALANCE SHEET
DECEMBER 25, 1998
- --------------------------------------------------------------------------------
7. FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company enters into interest-rate swap transactions involving
off-balance-sheet financial instruments. These off-balance-sheet financial
instruments are subject to varying degrees of market and credit risk.
MARKET RISK - Market risk is the risk that a change in the level of one or
more market prices, rates, indices, volatilities, correlations or other factors,
such as liquidity, will result in losses for a specified position or portfolio.
CREDIT RISK - The Company's exposure to credit risk arises from the
possibility that a counterparty to a transaction might fail to perform under its
contractual commitment, resulting in the Company incurring a loss. The Company
has credit guidelines that limit the Company's transactions to Merrill Lynch
affiliates whose performance is guaranteed by Merrill Lynch.
As of December 31, 1998, the contractual or notional amounts related to
these interest rate swaps was $100,000,000.
Interest rate swaps involve the exchange of payments based on fixed or
floating rates applied to notional amounts. The contractual or notional amounts
related to these financial instruments reflect the volume and activity and do
not reflect the amounts at risk. The amounts at risk are generally limited to
the unrealized market valuation gains on the instruments and will vary based on
changes in market value. Unrealized gains on interest rate swaps are recognized
gross in the balance sheet.
8. CONCENTRATIONS OF CREDIT RISK
The Company has credit risk because the counterparties with respect to the
Company's interest rate swaps are Merrill Lynch or its affiliates.
9. DERIVATIVE FINANCIAL INSTRUMENTS
The Company's interest rate swaps are derivative financial instruments
which are entered into for hedging other transactions.
DERIVATIVE FINANCIAL INSTRUMENTS USED FOR OTHER THAN TRADING PURPOSES --
The Company entered into the interest rate swaps to hedge exposures or to modify
the characteristics of financial instruments or transactions.
Derivatives used for hedging purposes include swaps, forwards, futures and
purchased options. Unrealized gains or losses on these derivative contracts are
recorded on the same basis as the underlying assets or liabilities (that is,
hedges of financial instruments that are marked to market are also market to
market, while hedges of financial instruments recorded at cost or of anticipated
transactions are deferred). Open derivative contracts, which are linked to
assets or liabilities that are sold or otherwise disposed of, are terminated at
the time of disposition.
PURCHASERS OF UNITS WILL
ACQUIRE NO INTEREST IN THIS COMPANY.
-73-
<PAGE>
[MERRILL LYNCH BULL LOGO]
PART TWO
STATEMENT OF ADDITIONAL INFORMATION
ML PRINCIPAL PROTECTION L.P.
2,500,000
LIMITED PARTNERSHIP UNITS
-------------------------
This is a speculative, leveraged investment which involves the risk of loss.
Past performance is not necessarily indicative of future results.
SEE "THE RISKS YOU FACE" BEGINNING AT PAGE 8 IN PART ONE.
----------------------------------------------------
THIS PROSPECTUS IS IN TWO PARTS: THE
DISCLOSURE DOCUMENT AND THE STATEMENT OF
ADDITIONAL INFORMATION. THESE PARTS ARE
BOUND TOGETHER, AND BOTH CONTAIN IMPORTANT
INFORMATION.
----------------------------------------------------
MERRILL LYNCH, PIERCE, FENNER MERRILL LYNCH
& SMITH INCORPORATED INVESTMENT PARTNERS INC.
SELLING AGENT GENERAL PARTNER
-------------------------
<PAGE>
PART TWO
STATEMENT OF ADDITIONAL INFORMATION
TABLE OF CONTENTS
Page
----
Futures Markets and Trading Methods................................... 1
Exhibit A: Fourth Amended and Restated
Limited Partnership Agreement......................................... LPA-i
Exhibit B: Amended Form of Guarantee Agreement....................... B-1
Exhibit C: Subscription Requirements................................. SR-1
Exhibit D: Subscription Instructions................................. SA-(i)
-i-
<PAGE>
FUTURES MARKETS AND TRADING METHODS
THE FUTURES AND FORWARD MARKETS
FUTURES AND FORWARD CONTRACTS
Futures contracts in the United States can only be traded on approved
exchanges and call for the future delivery of various commodities. These
contractual obligations may be satisfied either by taking or making physical
delivery or by making an offsetting sale or purchase of a futures contract on
the same exchange.
Forward currency contracts are traded off-exchange through banks or
dealers. In such instances, the bank or dealer generally acts as principal in
the transaction and charges "bid-ask" spreads.
Futures and forward trading is a "zero-sum," risk transfer economic
activity. For every gain there is an equal and offsetting loss.
HEDGERS AND SPECULATORS
The two broad classifications of persons who trade futures are "hedgers"
and "speculators." Hedging is designed to minimize the losses that may occur
because of price changes, for example, between the time a merchandiser contracts
to sell a commodity and the time of delivery. The futures and forward markets
enable the hedger to shift the risk of price changes to the speculator. The
speculator risks capital with the hope of making profits from such changes.
Speculators, such as the Fund, rarely take delivery of the physical commodity
but rather close out their futures positions through offsetting futures
contracts.
EXCHANGES; POSITION AND DAILY LIMITS; MARGINS
Each of the commodity exchanges in the United States has an associated
"clearinghouse." Once trades made between members of an exchange have been
cleared, each clearing broker looks only to the clearinghouse for all payments
in respect of such broker's open positions. The clearinghouse "guarantee" of
performance on open positions does not run to customers. If a member firm goes
bankrupt, customers could lose money.
The Advisors trade for the Fund on a number of foreign commodity
exchanges. Foreign commodity exchanges differ in certain respects from their
United States counterparts and are not regulated by any United States agency.
The CFTC and the United States exchanges have established "speculative
position limits" on the maximum positions that the Advisors may hold or control
in futures contracts on certain commodities.
Most United States exchanges limit the maximum change in futures prices
during any single trading day. Once the "daily limit" has been reached, it
becomes very difficult to execute trades. Because these limits apply on a
day-to-day basis, they do not limit ultimate losses, but may reduce or eliminate
liquidity.
When a position is established, "initial margin" is deposited. On most
exchanges, at the close of each trading day "variation margin," representing the
unrealized gain or loss on the open positions, is either credited to or debited
from a trader's account. If "variation margin" payments cause a trader's
"initial margin" to fall below "maintenance margin" levels, a "margin call" is
made, requiring the trader to deposit additional margin or have his position
closed out.
TRADING METHODS
Managed futures strategies are generally classified as either (i)
systematic or discretionary; and (ii) technical or fundamental.
SYSTEMATIC AND DISCRETIONARY TRADING APPROACHES
A systematic trader relies on trading programs or models to generate
trading signals. Discretionary traders make trading decisions on the basis of
their own judgment.
Each approach involves inherent risks. For example, systematic traders may
incur substantial
-1-
<PAGE>
losses when fundamental or unexpected forces dominate the markets, while
discretionary traders may overlook price trends which would have been signaled
by a system.
TECHNICAL AND FUNDAMENTAL ANALYSIS
Technical analysis operates on the theory that market prices, momentum and
patterns at any given point in time reflect all known factors affecting the
supply and demand for a particular commodity. Consequently, technical analysis
focuses on market data as the most effective means of attempting to predict
future prices.
Fundamental analysis, in contrast, focuses on the study of factors
external to the markets, for example: weather, the economy of a particular
country, government policies, domestic and foreign political and economic
events, and changing trade prospects. Fundamental analysis assumes that markets
are imperfect and that market mispricings can be identified.
TREND-FOLLOWING
Trend-following advisors try to take advantage of major price movements,
in contrast with traders who focus on making many small profits on short-term
trades or through relative value positions. Trend-following traders assume that
most of their trades will be unprofitable. They look for a few large profits
from big trends. During periods with no major price movements, a trend-following
trading advisor is likely to have big losses.
RISK CONTROL TECHNIQUES
Trading advisors often adopt risk management principles. Such principles
typically restrict the size of positions taken as well as establishing stop-loss
points at which losing positions must be liquidated. However, no risk control
technique can assure that big losses will be avoided.
-2-
<PAGE>
EXHIBIT A
ML PRINCIPAL PROTECTION L.P.
FOURTH AMENDED AND RESTATED
LIMITED PARTNERSHIP AGREEMENT
DATED AS OF
AUGUST 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
Section Page
- ------- ----
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-4
(a) Capital Accounts and Allocations................... LPA-4
(b) Allocation of Profit and Loss for Federal Income
Tax Purposes....................................... LPA-5
(c) Adjustments........................................ LPA-6
(d) Expenses........................................... LPA-7
(e) Limited Liability of Limited Partners.............. LPA-7
(f) Return of Capital Contributions.................... LPA-7
8. Management of the Fund................................... LPA-7
(a) General............................................ LPA-7
(b) Fiduciary Duties................................... LPA-8
(c) Loans; Investments................................. LPA-9
(d) Certain Conflicts of Interest Prohibited........... LPA-9
(e) Certain Contracts.................................. LPA-9
(f) Trading Advisors................................... LPA-9
(g) Other Activities................................... LPA-9
(h) Tax Matters Partner................................ LPA-10
(i) The Trading Partnership............................ LPA-10
(j) "Pyramiding" Prohibited............................ LPA-10
9. Audits and Reports to Limited Partners................... LPA-10
10. Assignability of Units................................... LPA-11
11. Redemptions; Distributions .............................. LPA-12
12. Offering of Units........................................ LPA-13
13. Continuous Offering; Additional Offerings................ LPA-13
14. Special Power of Attorney................................ LPA-14
15. Withdrawal of a Partner.................................. LPA-14
16. Standard of Liability; Indemnification................... LPA-15
17. Amendments; Meetings..................................... LPA-16
(a) Amendments with Consent of the General Partner..... LPA-16
(b) Amendments and Actions without Consent of the
General Partner.................................... LPA-17
(c) Meetings; Other Voting Matters..................... LPA-17
18. GOVERNING LAW............................................ LPA-18
19. Miscellaneous............................................ LPA-18
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 August 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 on or 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
LPA-1
<PAGE>
fixed-income strategies. The objective of the Fund's business is capital
appreciation of its assets through speculative trading while controlling
performance volatility. The Fund may engage in the foregoing speculative trading
directly, through investing in other partnerships and funds and through
investing in subsidiary limited partnerships or other limited liability entities
structured so that, to the maximum extent permitted by law, Limited Partners can
be assured that the assets attributable to one series of units of limited
partnership interest ("Units") in the Fund will never be used to pay losses or
expenses attributable to any other series. In particular, it is contemplated
that the Fund shall continue to engage in speculative trading solely through
investing in ML PRINCIPAL PROTECTION TRADING L.P. (the "Trading Partnership"),
of which the General Partner shall be the sole general partner, and the Fund the
sole limited partner.
In addition to its trading activities, as described above, the Fund and
the Trading Partnership retain MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM") to
implement cash management strategies in -- in MLAM's absolute discretion within
investment parameters established by 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
LPA-2
<PAGE>
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 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
LPA-3
<PAGE>
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 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.
LPA-4
<PAGE>
(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:
(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
LPA-5
<PAGE>
(determined after making the allocations described in Sections 7(b)(2) and
7(b)(3), but prior to making the allocations described in this Section
7(b)(4)(B)) allocable to such Units (a "Positive Excess"). In the event
the series' share of Trading Capital Gain is less than the aggregate
amount of Trading Capital Gain to be allocated pursuant to the first
sentence of this Section 7(b)(4)(B), the series' share of Trading Capital
Gain shall be allocated among all such redeeming Partners in the ratio
which each such Partner's Positive Excess bears to the aggregate Positive
Excess of all such Partners.
(C) The series' share of Trading Capital Gain remaining after the
allocation described in Section 7(b)(4)(B) shall be allocated among all
Partners who hold Units in such series outstanding as of the end of the
applicable fiscal year (other than Units redeemed as of the end of the
last day of such fiscal year) equally among such Units.
(D) Each Partner who redeems Units of a given series (including
Units redeemed as of the end of the last day of such fiscal year) shall be
allocated such series' share of Trading Capital Loss, if any, up to the
excess of the aggregate tax accounts for such Partner's redeemed Units
(determined after making the allocations described in Sections 7(b)(2) and
7(b)(3), but prior to making the allocations described in this Section
7(b)(4)(D)) over the aggregate amount received in respect of such Units
(before taking into account any early redemption charges) (a "Negative
Excess"). In the event the series' share of Trading Capital Loss is less
than the aggregate amount of Trading Capital Loss to be allocated pursuant
to the first sentence of this Section 7(b)(4)(D), the series' share of
Trading Capital Loss shall be allocated among all such redeeming Partners
in the ratio that each such Partner's Negative Excess bears to the
aggregate Negative Excess of all such Partners.
(E) The series' share of Trading Capital Loss remaining after the
allocation described in Section 7(b)(4)(D) shall be allocated among all
Partners who hold Units in such series outstanding as of the end of the
applicable fiscal year (other than Units redeemed as of the end of the
last day of such fiscal year) equally among such Units.
(F) For purposes of this Section 7(b), "Capital Gain" or "Capital
Loss" shall mean gain or loss characterized as gain or loss from the sale
or exchange of a capital asset, by the Internal Revenue Code of 1986, as
amended (the "Code"), including, but not limited to, gain or loss required
to be taken into account pursuant to Sections 988 and 1256 thereof.
(G) The foregoing allocations shall be made separately in respect of
each series of Units as if each such series constituted a separate
partnership, irrespective of whether the same Partner owns Units of more
than one series. Without limiting the foregoing, Limited Partners who
redeem their Unit(s) in one series and invest in another shall be treated
no differently than Limited Partners making their initial investment in
the latter series.
(5) The allocation of profit and loss for federal income tax purposes set
forth herein is intended to allocate taxable profit and loss among Partners
generally in the ratio and to the extent that profit and loss are allocated to
such Partners so as to eliminate, to the extent possible, any disparity between
a Partner's capital account and his or her tax account, consistent with
principles set forth in Section 704 of the Code, including, without limitation,
a "Qualified Income Offset."
(6) The allocations of profit and loss to the Partners in respect of the
Units shall not exceed the allocations permitted under Subchapter K of the Code,
as determined by the General Partner, whose determination shall be binding. For
purposes of this Section 7(b), unless specified to the contrary, Units redeemed
as of the end of any month shall be considered outstanding as of the end of such
month.
(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
LPA-6
<PAGE>
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.
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
LPA-7
<PAGE>
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
LPA-8
<PAGE>
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 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 regard less 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
LPA-9
<PAGE>
any such other business activities. The General Partner shall devote to the Fund
such time as the General Partner may deem advisable to conduct the Fund's
business and affairs.
(h) TAX MATTERS PARTNER. The General Partner is hereby authorized to
perform all other duties imposed by Sections 6221 through 6232 of the Code on
the General Partner as the "tax matters partner" of the Fund.
The General Partner may, in its discretion, make a mixed straddle account
election on behalf of the Trading Partnership.
(i) THE TRADING PARTNERSHIP. The General Partner shall not permit the Fund
to undertake any debts or obligations other than as set forth herein, including
without limitation pursuant to Section 16(e). The General Partner further
covenants and agrees that as general partner of the Trading Partnership, the
General Partner will not permit the Trading Partnership (A) to engage in any
activities or incur any obligations except in respect of the Trading
Partnership's speculative futures and forward trading on behalf of the Fund or
(B) to enter into any brokerage, F/X or other agreement or undertaking, unless
all other parties to such agreement explicitly acknowledge and agree that (i)
they will in no event seek to assert, other than pursuant to and to the extent
of the Fund's undertaking set forth in Section 16(e), that the Fund or any of
its assets is in any respects subject to any debts of or claims against the
Trading Partnership, either through "piercing the corporate veil," "substantive
consolidation" or any other theory, and (ii) they will take no action and
institute no action or proceeding seeking to adjudicate the Trading Partnership
a bankrupt or insolvent, or seeking liquidation, winding up, reorganization,
arrangement, adjustment, protection, relief, or composition of it or its debts
under any law relating to bankruptcy, insolvency or reorganization or relief of
debtors, or seeking the entry of an order for relief or the appointment of a
receiver, trustee, custodian or other similar official for the Trading
Partnership or for any substantial part of its property.
The General Partner shall ensure that (i) the Fund is at all times the
sole limited partner of the Trading Partnership and (ii) the General Partner is
at all times the sole general partner of the Trading Partnership and at all
times controls the Trading Partnership, by virtue of the Fund's equity ownership
of the Trading Partnership and the General 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
LPA-10
<PAGE>
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 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
LPA-11
<PAGE>
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.
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 in 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)
LPA-12
<PAGE>
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.
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.
LPA-13
<PAGE>
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 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
LPA-14
<PAGE>
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
LPA-15
<PAGE>
legal action is initiated by a third party who is not a Limited Partner; and (3)
the General Partner or its Affiliates undertake to repay the advanced funds,
with interest from the initial date of such advance, to the Fund in cases in
which they would not be entitled to indemnification under this Section 16.
In no event shall any indemnity or exculpation provided for herein be more
favorable to the General Partner or any Affiliate than that contemplated by the
NASAA Guidelines as in effect on the date of this Limited Partnership Agreement.
In no event shall any indemnification permitted by this Section 16(b) be
made by the Fund unless all provisions of this Section for the payment of
indemnification have been complied with in all respects. Furthermore, it shall
be a precondition of any such indemnification that the Fund receive a
determination of qualified independent legal counsel in a written opinion that
the party which seeks to be indemnified hereunder has met the applicable
standard of conduct set forth herein. Receipt of any such opinion shall not,
however, in itself, entitle any such party to indemnification unless
indemnification is otherwise proper hereunder. Any indemnification payable by
the Fund hereunder shall be made only as provided in the specific case.
In no event shall any indemnification obligations of the Fund under this
Section 16(b) subject a Limited Partner to any liability in excess of that
contemplated by Section 7(e).
(c) INDEMNIFICATION OF THE FUND BY THE PARTNERS. In the event that the
Fund is made a party to any claim, dispute or litigation or otherwise incurs any
loss or expense as a result of or in connection with any Partner's activities,
obligations or liabilities unrelated to the Fund's business, such Partner shall
indemnify and reimburse the Fund for all loss or expense incurred, including
reasonable attorneys' fees.
The General Partner shall indemnify and hold the Fund harmless from all
loss or expense which the Fund may incur (including, without limitation, any
indemnity payments) as a result of (i) the differences between MLAM's standard
of liability under the Investment Advisory Contract and MLIP's standard of
liability as set forth herein or (ii) the differences between Merrill Lynch,
Pierce, Fenner & Smith Incorporated's standard of liability under the Custody
Agreement and MLIP's standard of liability as set forth herein.
(d) SERIES DEFAULT INDEMNIFICATION OF THE PARTNERS BY THE GENERAL PARTNER.
In addition, and not by way of limitation of the provisions of the second
paragraph Section 13, the General Partner shall indemnify and hold harmless each
Limited Partner against all loss or expense incurred by the Units of any series
held by such Limited Partner, which loss or expense is properly attributable to
trading losses or expenses allocable to any other series of Units.
(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
LPA-16
<PAGE>
following sentence, by the holders of Units representing more than fifty percent
(50%) of the aggregate number of Units then owned by the Limited Partners. In
any such vote, Units of different series shall vote separately, and the
approving majority vote of each such series must be obtained for approval unless
a series is not adversely affected by such amendment, in which case such series
shall not have the right to vote with respect to such amendment. No meeting
procedure or specified notice period is required in the case of amendments made
with the consent of the General Partner, mere receipt of an adequate number of
unrevoked written consents being sufficient. The General Partner may amend this
Limited Partnership Agreement without the consent of the Limited Partners in
order (i) to clarify any clerical inaccuracy or ambiguity or reconcile any
inconsistency (including any inconsistency between this Limited Partnership
Agreement and the Prospectus), (ii) to effect the intent of the allocations
proposed herein to the maximum extent possible in the event of a change in the
Code or the interpretations thereof affecting such allocations, (iii) to attempt
to ensure that the Fund is not treated as an association taxable as a
corporation for federal income tax purposes, (iv) to qualify or maintain the
qualification of the Fund as a limited partnership in any jurisdiction, (v) to
delete or add any provision of or to this Limited Partnership Agreement required
to be deleted or added by the Staff of the Commodity Futures Trading Commission,
the Securities and Exchange Commission or any other federal agency or any state
"Blue Sky" official or similar official or in order to opt to be governed by any
amendment or successor statute to the Act, (vi) to better insulate the different
series of Units from the risk of paying the debts of any other such series,
(vii) to make any amendment to this Limited Partnership Agreement which the
General Partner deems advisable provided that such amendment is not adverse to
the Limited Partners, or that is required by law, (viii) to make any amendment
that is appropriate or necessary, in the opinion of the General Partner, to
prevent the Fund or the General Partner or its directors, officers or
controlling persons from in any manner being subjected to the provisions of the
Investment Company Act of 1940, as amended, and (ix) to make any amendment that
is appropriate or necessary, in the opinion of the General Partner, to avoid
causing the assets of the Fund, or of any series of Units considered
individually, from constituting assets of any "employee benefit plan" as defined
in and subject to ERISA, or a "plan" as defined in and subject to Section 4975
of the Code.
(b) AMENDMENTS AND ACTIONS WITHOUT CONSENT OF THE GENERAL PARTNER. In any
vote called by the General Partner or by a Limited Partner pursuant to Section
17(c), upon the affirmative vote (which may be in person or by proxy) of the
holders of Units representing more than fifty percent (50%) of the aggregate
number of Units of each series then owned by Limited Partners, the following
actions may be taken, irrespective of whether the General Partner concurs: (i)
this Limited Partnership Agreement may be amended, provided, however, that
approval of all Limited Partners holding Units of any series shall be required
in the case of amendments changing or altering this Section 17, extending the
term of the Fund, or materially changing the Fund's basic investment policies or
structure; in addition, reduction of the capital account of any Limited Partner
or assignee or modification of the percentage of profits, losses or
distributions to which a Limited Partner or an assignee is entitled hereunder
shall not be effected by any amendment or supplement to this Limited Partnership
Agreement without such Limited Partner's or assignee's written consent; (ii) the
Fund may be dissolved; (iii) the General Partner may be removed and, as of the
time of such removal, the General Partner may be replaced; (iv) a new general
partner or general partners may be elected if the General Partner withdraws from
the Fund, provided that such election takes place prior to or as of the time the
General Partner withdraws; (v) the sale of all or substantially all of the
assets of the Fund may be approved; and (vi) any contract with the General
Partner or any affiliate thereof may be disapproved of and, as a result,
terminated upon sixty (60) days' notice. In any such vote, Units of different
series shall vote separately, and the approving majority vote of each such
series must be obtained for approval, except that in the case of clause (i)
above, the approval of a series of Units need not be obtained if such series is
not adversely affected by the proposed amendment to this Limited Partnership
Agreement.
(c) MEETINGS; OTHER 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
LPA-17
<PAGE>
reasonable reproduction and mailing costs, a list of the names and addresses of
record of all Limited Partners and the number of Units of each series held by
each (which shall be mailed by the General Partner to the Limited Partner within
ten (10) days of the receipt of the request). Upon receipt of a written
proposal, signed by Limited Partners owning Units representing at least ten
percent (10%) of the aggregate number of Units then owned by Limited Partners of
any series, that a meeting of the Fund (or of any or all series of Units) be
called to vote upon any matter upon which the Limited Partners may vote pursuant
to this Limited Partnership Agreement, the General Partner shall, by written
notice to each Limited Partner of record mailed within fifteen (15) days after
such receipt, call a meeting of the Fund (or of such series of Units). Such
meeting shall be held at least thirty (30) but not more than sixty (60) days
after the mailing of such notice, and such notice shall specify the date of, a
reasonable place and time for, and the purpose of such meeting.
The General Partner may not restrict the voting rights of Limited Partners
except as set forth herein.
In the event that the General Partner or the Limited Partners vote to
amend this Limited Partnership Agreement in any material respect, the amendment
will not become effective prior to all Limited Partners having an opportunity to
redeem their Units.
18. GOVERNING LAW.
THE VALIDITY AND CONSTRUCTION OF THIS LIMITED PARTNERSHIP AGREEMENT SHALL
BE DETERMINED AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, INCLUDING
SPECIFICALLY THE ACT (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW);
PROVIDED, HOWEVER, CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR STATE
SECURITIES LAW SHALL NOT BE GOVERNED BY THIS SECTION 18.
19. MISCELLANEOUS.
(a) COMPLIANCE WITH THE INVESTMENT ADVISERS ACT OF 1940. No
provision of this Limited Partnership Agreement shall be deemed, nor does any
such provision purport, to waive compliance with the Investment Advisers Act of
1940, as amended.
(b) NOTICES. All notices under this Limited Partnership Agreement
shall be in writing and shall be effective upon personal delivery, or if sent by
first class mail, postage prepaid, addressed to the last known address of the
party to whom such notice is to be given, upon the deposit of such notice in the
United States mails.
(c) BINDING EFFECT. This Limited Partnership Agreement shall inure
to and be binding upon all of the parties, their successors and assigns,
custodians, estates, heirs and personal representatives. For purposes of
determining the rights of any Partner or assignee hereunder, the Fund and the
General Partner may rely upon the Fund records as to who are Partners and
assignees, and all Partners and assignees agree that their rights shall be
determined and they shall be bound thereby.
(d) CAPTIONS. Captions in no way define, limit, extend or describe
the scope of this Limited Partnership Agreement nor the effect of any of its
provisions. Any reference to "persons" in this Limited Partnership Agreement
shall also be deemed to include entities, unless the context otherwise requires.
IN WITNESS WHEREOF, the parties hereto have executed this Limited
Partnership Agreement as of the day and year first above written.
LPA-18
<PAGE>
GENERAL PARTNER:
MERRILL LYNCH INVESTMENT
PARTNERS INC.
By /s/ JOHN R. FRAWLEY, JR. .
-----------------------------------------
John R. Frawley, Jr.
President and Chief Executive Officer
LIMITED PARTNERS:
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 to, the General Partner
By /s/ JOHN R. FRAWLEY, JR.
-----------------------------------------
John R. Frawley, Jr.
President and Chief Executive
Officer
LPA-19
<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 _________, 1999, 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 Fourth 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, if any, 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
SR-1
<PAGE>
funds for Purchaser's own account and not as trustee, custodian or nominee for
another.
(d) The subscription, if made as custodian for a minor, is a gift
Purchaser has made to such minor and is not made with such minor's funds or, if
not a gift, the representations as to net worth and annual income set forth
below apply only to such minor.
(e) If Purchaser is subscribing in a representative capacity, Purchaser
has full power and authority to purchase the Units and enter into and be bound
by the Subscription Agreement and Power of Attorney on behalf of the entity for
which Purchaser is acquiring the Units, and such entity has full right and power
to purchase such Units and enter into and be bound by the Subscription Agree
ment 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
SR-2
<PAGE>
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.
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
SR-3
<PAGE>
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-4
<PAGE>
EXHIBIT D
ML PRINCIPAL PROTECTION L.P.
-------------------------
SUBSCRIPTION INSTRUCTIONS
ANY PERSON CONSIDERING PURCHASING UNITS SHOULD CAREFULLY READ AND REVIEW THE
PROSPECTUS OF THE FUND DATED _________, 1999, TOGETHER WITH THE CURRENT
PROSPECTUS SUPPLEMENT, IF ANY, 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, IF
ANY, 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-4 and SA-5; 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
SA-(i)
<PAGE>
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.
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-5) 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-2 AND
SA-3) SHOULD NOT BE EXECUTED.
Instructions to Financial Consultants:
THE EXECUTED SUBSCRIPTION AGREEMENT AND
POWER OF ATTORNEY SIGNATURE PAGE MUST
BE RETAINED IN THE BRANCH OFFICE.
RECONFIRMATIONS (I.E., SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY
SIGNATURE PAGES EXECUTED BY FINANCIAL CONSULTANTS) OR ANOTHER FORM OF WRITTEN
RECONFIRMATION APPROVED BY THE BRANCH OFFICE REGARDING THE CONTINUING
SUITABILITY OF EXISTING LIMITED PARTNERS SUBSCRIBING FOR ADDITIONAL UNITS MUST
ALSO BE RETAINED IN THE BRANCH OFFICE.
SA-(ii)
<PAGE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
--------------------
BY EXECUTING THIS SUBSCRIPTION AGREEMENT SUBSCRIBERS ARE
NOT WAIVING ANY RIGHTS UNDER THE SECURITIES ACT
OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934
--------------------
SUBSCRIPTION AGREEMENT
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. I subscribe for the amount of Units indicated on the Subscription
Agreement Signature Page.
The purchase price is the $100 per Unit -- $97 of the Net Asset
Value per Unit if I am a Merrill Lynch officer or employee (retirement accounts
do not qualify for discounts).
The purchase date for my Units is the first day of the calendar
quarter immediately following this subscription being accepted. My Financial
Consultant will tell me the settlement date for my purchase, which will be not
more than 5 business days after the purchase date. I will have the subscription
funds in my Merrill Lynch customer securities account on such settlement date.
2. I have received both parts of the Prospectus -- the Disclosure
Document and the Statement of Additional Information (both parts bound together)
- -- as well as the accompanying summary Fund financial information. I understand
that by submitting this Subscription Agreement I am making the representations
and warranties set forth in Exhibit B -- Subscription Requirements in the
Prospectus.
3. I irrevocably appoint MLIP as my true and lawful
Attorney-in-Fact, with full power of substitution, to execute, deliver and
record any documents or instruments which MLIP considers appropriate to carry
out the provisions of the Limited Partnership Agreement.
4. THIS SUBSCRIPTION AGREEMENT IS GOVERNED BY THE LAWS OF THE STATE
OF NEW YORK.
NO ONE SHOULD INVEST MORE THAN 10% OF HIS OR HER
READILY MARKETABLE ASSETS IN THE FUND.
SA-1
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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
_____________, 1999, 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, if any, 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 20 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> <C>
2 /_/_/_/_/_/_/_/ /_/_/_/_/_/_/_/_/_/ /_/_/_/-/_/_/_/_/_/
Number of Units (minimum 50 Units; Total $ Amount (No. of Units x Merrill Lynch Account #
20 Units for IRAs/Tax Exempts; $100; $97 for Merrill Lynch officers
10 Units for existing Limited Partners and employees)
subscribing for additional Units)
</TABLE>
5 /_/_/_/-/_/_/_/-/_/_/_/_/ /_/_/-/_/_/_/_/_/_/_/
Social Security Number or Taxpayer ID Number
<TABLE>
<S> <C> <C> <C>
Limited Partner Name
6 /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
First Name M.I. Last Name
Joint Partner Name
7 /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
First Name M.I. Last Name
</TABLE>
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 Appropriate
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
<TABLE>
<S> <C> <C> <C> <C> <C>
/_/_/_/_/_/_/ /_/_/_/_/_/_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/_/ /_/_/_/_/_/_/_/_/_/_/
Bldg. No. P.O. Box No. City State Zip Code
</TABLE>
/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
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
/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
<TABLE>
Mailing Address of Custodian Other Than Merrill Lynch
<S> <C> <C>
/_/_/_/_/_/_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/_/_/_/_/_/
Street Number Street Name Apt. Number
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
/_/_/_/_/_/_/ /_/_/_/_/_/_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/_/ /_/_/_/_/_/_/_/_/_/_/
Bldg. No. P.O. Box No. City State Zip Code
</TABLE>
/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
Country (If Other Than U.S.A.)
SA-2
<PAGE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED)
11 FOR USE BY INVESTOR
<TABLE>
<S> <C>
X X
------------------------------------- -------------------------------------------
Signature of Investor Date Signature of Joint Investor (if any) Date
( ) -
------------------------------------- Subscription for the series of Units to be sold as of
Telephone Number of Investor (insert date)
-----------------------------------------------------
</TABLE>
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
____________, 1999, THE ACCOMPANYING PROSPECTUS SUPPLEMENT, IF ANY, 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: 9. 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.
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-3
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C>
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
_____________, 1999, 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, if any, 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 20 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> <C>
2 /_/_/_/_/_/_/_/ /_/_/_/_/_/_/_/_/_/ /_/_/_/-/_/_/_/_/_/
Number of Units (minimum 50 Units; Total $ Amount (No. of Units x Merrill Lynch Account #
20 Units for IRAs/Tax Exempts; $100; $97 for Merrill Lynch officers
10 Units for existing Limited Partners and employees)
subscribing for additional Units)
</TABLE>
5 /_/_/_/-/_/_/_/-/_/_/_/_/ /_/_/-/_/_/_/_/_/_/_/
Social Security Number or Taxpayer ID Number
<TABLE>
<S> <C> <C> <C>
Limited Partner Name
6 /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
First Name M.I. Last Name
Joint Partner Name
7 /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
First Name M.I. Last Name
</TABLE>
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 Appropriate
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
<TABLE>
<S> <C> <C> <C> <C> <C>
/_/_/_/_/_/_/ /_/_/_/_/_/_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/_/ /_/_/_/_/_/_/_/_/_/_/
Bldg. No. P.O. Box No. City State Zip Code
</TABLE>
/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
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
/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
<TABLE>
Mailing Address of Custodian Other Than Merrill Lynch
<S> <C> <C>
/_/_/_/_/_/_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/_/_/_/_/_/
Street Number Street Name Apt. Number
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
/_/_/_/_/_/_/ /_/_/_/_/_/_/ /_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/ /_/_/ /_/_/_/_/_/_/_/_/_/_/
Bldg. No. P.O. Box No. City State Zip Code
</TABLE>
/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/_/
Country (If Other Than U.S.A.)
SA-4
<PAGE>
ML PRINCIPAL PROTECTION L.P.
LIMITED PARTNERSHIP UNITS
SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED)
11 FOR USE BY INVESTOR
<TABLE>
<S> <C>
X X
------------------------------------- -------------------------------------------
Signature of Investor Date Signature of Joint Investor (if any) Date
( ) -
------------------------------------- Subscription for the series of Units to be sold as of
Telephone Number of Investor (insert date)
-----------------------------------------------------
</TABLE>
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
____________, 1999, THE ACCOMPANYING PROSPECTUS SUPPLEMENT, IF ANY, 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: 9. 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.
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-5
<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 Post-Effective Amendment to the
Registration Statement. The following is an estimate of such costs:
<TABLE>
<CAPTION>
Approximate
Amount
-----------
<S> <C>
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................................ 25,000
--------
Total.................................................... $350,000
========
</TABLE>
--------------------
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Section 16 of the Fourth Amended and Restated Limited Partnership
Agreement (attached as Exhibit A to the Prospectus which forms a part of this
Registration Statement) provides for the indemnification of the General Partner,
certain of its affiliates and certain of its directors, officers and controlling
persons by the Registrant in certain circumstances for any loss suffered by the
Registrant which arises out of any action or inaction, if the party, in good
faith, determined that such course of conduct was in the best interest of the
Registrant and such conduct did not constitute negligence or misconduct.
In the Selling Agreement, each Trading Advisor has agreed to indemnify
each person who controls MLIP within the meaning of Section 15 of the Securities
Act of 1933 and each person who signed this Registration Statement or is a
director of MLIP against losses, claims, damages, liabilities or expenses
arising out of or based upon any untrue statement or omission or alleged untrue
statement or omission relating or with respect to such Trading Advisor or any
principal of such Trading Advisor or their operations, trading systems, methods
or performance, which was made in this Registration Statement, the Prospectus
included in this Registration Statement when declared effective, or in any
amendment or supplement thereto and furnished by or approved by such Trading
Advisor for inclusion therein.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
None.
<PAGE>
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
The following documents (unless otherwise indicated) are filed herewith
and made a part of this Registration Statement:
(a) Exhibits.
The following exhibits are filed herewith.
Exhibit
Number Description of Document
- ------ -----------------------
3.01 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 Amended Form of Merrill Lynch & Co., Inc. Guarantee Agreement
(included as Exhibit B to the Prospectus).
10.02 Subscription Agreement and Power of Attorney (included as Exhibit D
to the Prospectus).
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
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 filed with the Commission on August 4 , 1998 (Reg. No.
333-60567).
Exhibit
Number Description of Document
- ------ -----------------------
1.01 Selling Agreement Amendment
10.02 Subscription Agreement and Power of Attorney included as Exhibit D
to the Prospectus.
10.03 Customer Agreement Amendment
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).
Exhibit
Number Description of Document
- ------ -----------------------
10.01 Form of Amendment to the Customer Agreement between the Trading
Partnership and Merrill Lynch Futures
10.03 Form of Advisory Agreement among the Partnership, Trading
Partnership, General Partner and each Trading Advisor.
10.04 Form of Consulting Agreement among the Partnership, Trading
Partnership, General Partner and each Trading Advisor.
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Amendment No. 1 to
Registrant's Registration Statement on Form S-1 filed with the Commission on
August 27, 1996 (Reg. No. 333-7593).
Exhibit
Number Description of Document
- ------ -----------------------
1.01 Form of Selling Agreement among the Partnership, the Trading
(Amended) Partnership, the General Partner, Merrill Lynch Futures, the Selling
Agent and the Trading Advisors.
1.02 Form of Amendment to the Selling Agreement among the Partnership,
the Trading Partnership, the General Partner, Merrill Lynch Futures,
the Selling Agent and each additional Trading Advisor.
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Registrant's Registration
Statement on Form S-1, as filed with the Commission on July 3, 1996 (Reg. No.
333-7593) which also constituted Post-Effective Amendment No. 5 to Registrant's
Registration Statement on Form S-1 (Reg. No. 33-73914).
Exhibit
Number Description of Document
- ------ -----------------------
3.01(i) Amended and Restated Certificate of Limited Partnership of the
Partnership.
3.02(i) Amended and Restated Certificate of Limited Partnership of the
Trading Partnership.
3.03(ii) Second Amended and Restated Limited Partnership Agreement of the
Trading Partnership.
S-3
<PAGE>
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.
10.07 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.
The following exhibit is 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 (Reg. No. 33-73914).
Exhibit
Number Description of Document
- ------ -----------------------
1.01 Amendment No. 4 to the Selling Agreement among the Partnership, the
Trading Partnership, the General Partner, Merrill Lynch Futures, the
Selling Agent and AIB Investment Managers Limited.
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 (Reg. No. 33-73914).
Exhibit
Number Description of Document
- ------ -----------------------
1.01 Amendment No. 2 to the Selling Agreement among the Partnership, the
Trading Partnership, the General Partner, Merrill Lynch Futures, the
Selling Agent, and the Advisors amending certain provisions thereof;
and
S-4
<PAGE>
Amendment No. 3 to the Selling Agreement among the Partnership, the
Trading Partnership, the General Partner, Merrill Lynch Futures, the
Selling Agent, and Millburn Ridgefield Corporation.
1.02 Form of Assignment of Selling Agreement.
3.03(i) Amended and Restated Certificate of Limited Partnership of the
Partnership.
3.04(i) Amended and Restated Certificate of Limited Partnership of the
Trading Partnership.
3.06(ii) Amendment to the Limited Partnership Agreement of the Trading
Partnership.
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.
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 (Reg. No. 33-73914).
Exhibit
Number Description of Document
- ------ -----------------------
1.01 Amendment No. 1 to the Selling Agreement among the Partnership, the
Trading Partnership, the General Partner, Merrill Lynch Futures, the
Selling Agent, Emcor Eurocurrency Management Corporation and
Trendstat Capital Management, Inc.
10.09 Custody Agreement among the Partnership and Merrill Lynch, Pierce,
Fenner & Smith Incorporated.
The following exhibits are incorporated by reference herein from the
exhibits of the same description and number filed with Amendment No. 1 to the
Registrant's Registration Statement on Form S-1, as filed with the Commission on
June 14, 1994 and which became effective on July 14, 1994 (Reg. No. 33-73914).
Exhibit
Number Description of Document
- ------ -----------------------
1.01 Selling Agreement among the Partnership, the Trading Partnership,
(Amended) the General Partner, Merrill Lynch Futures, the Selling Agent and
the Trading Advisors.
10.01 Form of Advisory Agreement among the Partnership, the Trading
(Amended) Partnership, MLFIP and each Trading Advisor.
S-5
<PAGE>
10.02 Form of Consulting Agreement between Merrill Lynch Futures and each
(Amended) Trading Advisor.
10.03 Form of Customer Agreement between the Trading Partnership and
(Amended) Merrill Lynch Futures.
10.04 Form of Escrow Agreement among the Partnership, the Escrow Agent,
(Amended) the Selling Agent and MLFIP.
10.07 Foreign Exchange Desk Service Agreement with Amendment adding the
(Amended) Trading Partnership as a party thereto.
10.08 Investment Advisory Contract among Merrill Lynch Futures, the
Partnership, the Trading Partnership and MLAM.
(b) Financial Statement Schedules.
No Financial Schedules are required to be filed herewith.
ITEM 17. UNDERTAKINGS.
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in
the aggregate, represent a fundamental change in the information set
forth in the registration statement. Notwithstanding the foregoing,
any increase or decrease in volume of securities offered (if the
total dollar value of securities offered would not exceed that which
was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set
forth in the "Calculation of Registration Fee" table in the
effective registration statement.
(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.
S-6
<PAGE>
(b) Insofar as indemnification for liabilities under the Securities
Act of 1933 may be permitted to officers, directors or controlling persons of
the registrant pursuant to the provisions described in Item 14 above, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than the
payment by the registrant of expenses incurred or paid by an officer, director,
or controlling person of the registrant in the successful defense of any such
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
S-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
General Partner of the Registrant has duly caused this Registration Statement 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 26th day of March, 1999.
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.
/s/ JOHN R. FRAWLEY, JR. Chairman, Chief Executive
- -------------------------- Officer, President and Director March 26, 1999
John R. Frawley, Jr. (Principal Executive Officer)
/s/ JO ANN DIDARIO Vice President, Chief
- -------------------------- Financial Officer and Treasurer March 26, 1999
Jo Ann DiDario (Principal Financial
and Accounting Officer)
/s/ JEFFREY F. CHANDOR Senior Vice President,
- -------------------------- Director of Sales, March 26, 1999
Jeffrey F. Chandor Marketing and Research and Director
/s/ STEPHEN G. BODURTHA Director March 26, 1999
- --------------------------
Stephen G. Bodurtha
/s/ ALLEN N. JONES Director March 26, 1999
- --------------------------
Allen N. Jones
/s/ JOSEPH H. MOGLIA Director March 26, 1999
- --------------------------
Joseph H. Moglia
(Being the principal executive officer, the principal financial and
accounting officer and a majority of the directors of Merrill Lynch Investment
Partners Inc.)
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner of Registrant March 26, 1999
By /s/ JOHN R. FRAWLEY, JR.
- ----------------------------
John R. Frawley, Jr.
Chairman, Chief Executive
Officer and President
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 26th day of March, 1999.
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.
/s/ JOHN R. FRAWLEY, JR. Chairman, Chief Executive
- ---------------------------- Officer, President and Director March 26, 1999
John R. Frawley, Jr. (Principal Executive Officer)
/s/ JO ANN DIDARIO Vice President, Chief
- ---------------------------- Financial Officer and Treasurer March 26, 1999
Jo Ann DiDario (Principal Financial
and Accounting Officer)
/s/ JEFFREY F. CHANDOR Senior Vice President,
- ---------------------------- Director of Sales, March 26, 1999
Jeffrey F. Chandor Marketing and Research and Director
/s/ STEPHEN G. BODURTHA Director March 26, 1999
- ----------------------------
Stephen G. Bodurtha
/s/ ALLEN N. JONES Director March 26, 1999
- ----------------------------
Allen N. Jones
/s/ JOSEPH H. MOGLIA Director March 26, 1999
- ----------------------------
Joseph H. Moglia
(Being the principal executive officer, the principal financial and
accounting officer and a majority of the directors of Merrill Lynch Investment
Partners Inc.)
MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner of Registrant March 26, 1999
By /s/ JOHN R. FRAWLEY, JR.
- ----------------------------
John R. Frawley, Jr.
Chairman, Chief Executive
Officer and President
S-9
<PAGE>
PRINCIPAL PROTECTION L.P.
PRINCIPAL PROTECTION TRADING L.P.
EXHIBIT LIST
Exhibit
Number Description of Document
- ------ -----------------------
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 Amended Form of Merrill Lynch & Co., Inc. Guarantee Agreement
(included as Exhibit B to the Prospectus).
10.02 Subscription Agreement and Power of Attorney (included as Exhibit D
to the Prospectus).
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
<PAGE>
Exhibit 5.01
[SIDLEY & AUSTIN LETTERHEAD]
March 29, 1999
Merrill Lynch Investment Partners Inc.,
as general partner of ML Principal Protection L.P.
Princeton Corporate Campus
800 Scudders Mill Road
Section 2G
Plainsboro, New Jersey 08536
RE: ML PRINCIPAL PROTECTION L.P.
2,500,000 UNITS OF LIMITED PARTNERSHIP INTEREST (THE "UNITS")
Dear Sir or Madam:
We refer to Post-Effective Amendment No. 1 to the Registration Statement
on Form S-1 filed by ML Principal Protection L.P., a Delaware limited
partnership (the "Partnership"), and ML Principal Protection Trading L.P., a
Delaware limited partnership (the "Trading Partnership") with the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the
"Securities Act"), on or about March 30, 1999 (the "Registration Statement;"
Registration No. 333-60567). 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.
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
<PAGE>
SIDLEY & AUSTIN CHICAGO
Merrill Lynch Investment Partners Inc.
March 29, 1999
Page 2
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
[SIDLEY & AUSTIN LETTERHEAD]
March 29, 1999
Merrill Lynch Investment Partners Inc.,
as general partner of ML Principal Protection L.P.
Princeton Corporate Campus
800 Scudders Mill Road
Section 2G
Plainsboro, New Jersey 08536
RE: ML PRINCIPAL PROTECTION L.P.
POST-EFFECTIVE AMENDMENT NO. 1 TO THE
REGISTRATION STATEMENT ON FORM S-1
----------------------------------
Dear Sir or Madam:
We have acted as your counsel in connection with the preparation and
filing with the Securities and Exchange Commission (the "SEC") under the
Securities Act of 1933, as amended, of Post-Effective Amendment No. 1 to the
Registration Statement on Form S-1, to be filed with the SEC on or about March
30, 1999 (the "Registration Statement"), of ML Principal Protection L.P. (the
"Fund"), a limited partnership organized under the Delaware Revised Uniform
Limited Partnership Act.
We have reviewed such data, documents, questions of law and fact and
other matters as we have deemed pertinent for the purpose of this opinion. Based
upon the foregoing, we hereby confirm our opinion that the description set forth
under the caption "Tax Consequences" in the Prospectus (the "Prospectus")
constituting a part of the Registration Statement correctly describes (subject
to the uncertainties referred to therein) the material aspects of the United
States federal income tax treatment to a United States individual taxpayer, as
of the date hereof, of an investment in the Fund. 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 23.02
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Post-Effective Amendment No.1 to the
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 4, 1999 relating to the consolidated financial
statements of ML Principal Protection L.P. and of our report dated February
5, 1999 relating to the balance sheet of Merrill Lynch 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 "Lawyers; Accountants" in such Prospectus.
DELOITTE & TOUCHE LLP
New York, New York
March 29, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
ML PRINCIPAL PROTECTION LP CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997 AND CONSOLIDATED STATEMENTS OF INCOME FOR THE
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996.
</LEGEND>
<CIK> 0000925433
<NAME> ML PRINCIPAL PROTECTION TRADING L.P.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,607,897
<SECURITIES> 60,536,271
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 82,431,167
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 82,431,167
<CURRENT-LIABILITIES> 2,482,040
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 79,106,838
<TOTAL-LIABILITY-AND-EQUITY> 82,431,167
<SALES> 0
<TOTAL-REVENUES> 12,128,221
<CGS> 0
<TOTAL-COSTS> 8,011,526
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 4,089,639
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,089,639
<EPS-PRIMARY> 4.40
<EPS-DILUTED> 4.40
</TABLE>
