-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UWu7NJhJ84OO2VCCeD/1y3U5px2hThpzoCeezmEF07ZL5J8CFG9YHsQHK3rHJCGS P/gzblB+eAgjy7RA5q8Jhw== 0000950131-96-003174.txt : 19960705 0000950131-96-003174.hdr.sgml : 19960705 ACCESSION NUMBER: 0000950131-96-003174 CONFORMED SUBMISSION TYPE: S-1 PUBLIC DOCUMENT COUNT: 21 REFERENCES 429: 033-73914 FILED AS OF DATE: 19960703 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML PRINCIPAL PROTECTION PLUS LP CENTRAL INDEX KEY: 0000917259 STANDARD INDUSTRIAL CLASSIFICATION: SECURITY & COMMODITY BROKERS, DEALERS, EXCHANGES & SERVICES [6200] IRS NUMBER: 133750642 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-07593 FILM NUMBER: 96591163 BUSINESS ADDRESS: STREET 1: 6TH FL, SOUTH TOWER, M L WORLD HDQR STREET 2: C/O ML FUTURES INVESTMENT PARTNERS INC CITY: NEW YORK STATE: NY ZIP: 10080-6106 BUSINESS PHONE: 2122364161 MAIL ADDRESS: STREET 1: C/O MERRILL LYNCH INVESTMENT PARTNERS IN STREET 2: WORLD FINANCIAL CENTER S TOWER 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 FORMER COMPANY: FORMER CONFORMED NAME: SECTOR STRATEGY FUND VII LP DATE OF NAME CHANGE: 19940107 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML PRINCIPAL PROTECTION PLUS TRADING LP CENTRAL INDEX KEY: 0000925433 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 133775509 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1 SEC ACT: 1933 Act SEC FILE NUMBER: 333-07593-01 FILM NUMBER: 96591164 BUSINESS ADDRESS: STREET 1: ML INVESTMENT PARTNERS INC STREET 2: WORLD FINANCIAL CENTER S TOWER 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 BUSINESS PHONE: 2122364167 MAIL ADDRESS: STREET 1: MERRILL LYNCH INVESTMENT PARTNERS STREET 2: WORLD FINANCIAL CENTER S TOWER 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 S-1 1 FORM S-1 As filed with the Securities and Exchange Commission on July 3, 1996 REGISTRATION NO. 33-73914 ================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------------------- FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------------- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) ML PRINCIPAL PROTECTION TRADING L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS TRADING L.P.) (RULE 140 CO-REGISTRANT) (Exact name of registrant as specified in its charter) 13-3750642 (REGISTRANT) DELAWARE 6793 13-3775509(CO-REGISTRANT) (State of Organization) (Primary Standard Industrial ------------------------- Classification Code Number) (IRS Employer C/O MERRILL LYNCH INVESTMENT Identification Number) PARTNERS INC. SIXTH FLOOR SOUTH TOWER MERRILL LYNCH WORLD HEADQUARTERS WORLD FINANCIAL CENTER NEW YORK, NEW YORK 10080-6106 (212) 236-4167 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) JOHN R. FRAWLEY, JR. SIXTH FLOOR SOUTH TOWER MERRILL LYNCH WORLD HEADQUARTERS WORLD FINANCIAL CENTER NEW YORK, NEW YORK 10080-6106 (212) 236-4167 (Name, address, including zip code, and telephone number, including area code, of agent for service) --------------------- COPIES TO: David R. Sawyier James B. Biery Sidley & Austin One First National Plaza Chicago, Illinois 60603 --------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT. --------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the "Securities Act") check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If delivery of the Prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] __________
============================================================================================================ Title of Each Class of Additional Maximum Offering Maximum Aggre- Amount of Additional Securities Amount Price gate Additional to be Registered being Registered Per Unit Offering Price Registration Fee - ------------------------------------------------------------------------------------------------------------ Units of Limited 250,000 $100 $25,000,000 $8,621 Partnership Interest ============================================================================================================
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. PURSUANT TO THE PROVISIONS OF RULE 429 OF THE RULES AND REGULATIONS OF THE SECURITIES AND EXCHANGE COMMISSION UNDER THE SECURITIES ACT OF 1933, THE FORM OF PROSPECTUS SET FORTH HEREIN ALSO RELATES TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 (REGISTRATION NO. 33-73914) DECLARED EFFECTIVE ON JULY 14, 1994. THIS REGISTRATION STATEMENT ALSO CONSTITUTES POST-EFFECTIVE AMENDMENT NO. 5 WITH RESPECT TO THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1, NO. 33-73914. ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) CROSS REFERENCE SHEET
ITEM No. PROSPECTUS HEADING - ----- ----------------------- 1. Forepart of the Registration Statement and Outside Front Cover Page of Prospectus......... Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus............................ Inside Cover Page; Table of Contents 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Charges............. Summary; Risk Factors 4. Use of Proceeds................................. Use of Proceeds 5. Determination of Offering Price................. Inside Cover Page; Plan of Distribution 6. Dilution........................................ Not Applicable 7. Selling Security Holders........................ Not Applicable 8. Plan of Distribution............................ Inside Cover Page; Plan of Distribution d. Description of Securities to Be Registered..................................... Cover Page; The Limited Partnership Agreement 10. Interests of Named Experts and Counsel....................................... Legal Matters; Experts 11. Information with Respect to the Registrant..................................... Summary; Risk Factors; Investment Factors; Performance of the Fund; Management's Discussion and Analysis of Financial Condition and Results of Operations; The Advisor Selection Process; The Advisors; MLIP and MLF; The ML&Co. Guarantee; Use of Proceeds; Charges; Conflicts of Interest; The Limited Partnership Agreement; Index to Financial Statements 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities................................ Not Applicable
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. PRELIMINARY PROSPECTUS DATED JULY 3, 1996 -- SUBJECT TO COMPLETION ML PRINCIPAL PROTECTION L.P. $100,000,000 UNITS OF LIMITED PARTNERSHIP INTEREST (CURRENTLY AVAILABLE FOR SALE) ML PRINCIPAL PROTECTION L.P. (THE "FUND") is a multi-strategy, multi- market managed futures investment, employing a range of strategies diversified across major markets of the global economy -- financials, currencies, energy, metals and agriculture. The Fund's objectives are achieving substantial capital appreciation over time while controlling performance volatility. MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP") is the general partner of the Fund, and MERRILL LYNCH FUTURES INC. ("MLF") is its commodity broker. MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM") provides cash management services. The Fund trades under the direction of multiple independent trading advisors ("TRADING ADVISORS" OR "ADVISORS") selected and monitored by MLIP. MERRILL LYNCH & CO., INC. ("ML&CO.") has agreed to make sufficient payments to the Fund, if necessary, to ensure that the Net Asset Value of each Unit outstanding as of the fifth anniversary (the "Principal Assurance Date") of such Unit's issuance will be at least the $100 subscription price. The Fund began trading October 12, 1994 with an initial capitalization of $32 million. The Units are continuously offered and sold as of the beginning of each calendar quarter at $100 per Unit. As of June 1, 1996, seven series of Units had been sold, the Fund's aggregate capitalization was approximately $92.8 million and the initial series of Units had recognized a cumulative rate of return of 13.82% in the first 19-2/3 months of trading. The minimum initial investment is 50 Units ($5,000); the minimum investment for existing Limited Partners is 10 Units ($1,000). Investors may purchase any whole number of Units over the minimum. Units may be redeemed as of the end of any calendar month, subject to 3% redemption charges payable to MLIP through the end of the twelfth month after sale. MLIP may make distributions to the Unitholders, but does not presently intend to do so. _________________________ THE UNITS ARE SPECULATIVE SECURITIES. AN INVESTMENT IN THE FUND INVOLVES SIGNIFICANT RISKS. . INVESTORS MUST BE PREPARED TO LOSE THE ENTIRE TIME VALUE OF THEIR INVESTMENT. AT A 7% INTEREST RATE, THE PRESENT VALUE OF RECEIVING THE ASSURED MINIMUM $100 PER UNIT FIVE YEARS IN THE FUTURE WOULD BE ONLY APPROXIMATELY $71. . PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. . THE FUND TRADES WITH A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS. . THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND SUBSTANTIALLY REDUCES PROFIT POTENTIAL ALTHOUGH IT IS HIGHLY UNLIKELY TO BE OF ANY VALUE TO INVESTORS. . THE FUND IS SUBJECT TO SUBSTANTIAL CHARGES. ESTIMATED GROSS TRADING PROFITS OF 7.58% OF THE FUND'S AVERAGE MONTH-END NET ASSETS MUST BE EARNED DURING THE FIRST YEAR AFTER A UNIT IS SOLD IN ORDER FOR THE REDEMPTION VALUE OF SUCH UNIT TO EQUAL ITS INITIAL $100 SUBSCRIPTION PRICE. . RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING OR TERMINATING TRADING. . CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS PERIODS WITHOUT MAJOR PRICE MOVEMENTS -- SIGNIFICANTLY REDUCE THE ADVISORS' ABILITY TO TRADE SUCCESSFULLY. SEE "RISK FACTORS" BEGINNING AT PAGE 9. _________________________ SUBSCRIBERS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES IN THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY. _________________________ THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED UPON THE ADEQUACY OR ACCURACY OF THIS DISCLOSURE DOCUMENT. _________________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. _________________________
================================================================================ UNITS OF PRICE TO SELLING PROCEEDS TO LIMITED PARTNERSHIP INTEREST PUBLIC(1) COMMISSIONS(2)(3) FUND(2)(3) - -------------------------------------------------------------------------------- PER UNIT...................... $100 NONE $100 ================================================================================
SEE NOTES ON PAGE (i). MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED MERRILL LYNCH INVESTMENT PARTNERS INC. GENERAL PARTNER THE DATE OF THIS PROSPECTUS IS JULY ___, 1996 (NOT FOR USE AFTER MARCH 31, 1997) NOTES TO COVER PAGE (1) The Units are continuously offered on a "best efforts" basis without any firm underwriting commitment through Merrill Lynch, Pierce, Fenner & Smith Incorporated and its affiliates ("MLPF&S" or the "Selling Agent"). Subscriptions for Units are accepted throughout each calendar quarter. Pending investment in the Fund as of the beginning of the following quarter, subscription funds are held in escrow at The Bank of New York (the "Escrow Agent") in New York City. There is no minimum number of Units that must be sold at the beginning of a calendar quarter for any Units then to be sold at such time. Subscribers receive all interest earned, and no fees or costs are assessed, on subscriptions while held in escrow. See "Plan of Distribution -- Subscription Procedure" at page 52. (2) See "Plan of Distribution -- Selling Agent Compensation" at page 53 for information relating to indemnification arrangements with respect to the Selling Agent. (3) No selling commissions are paid from the proceeds of subscriptions. MLIP credits the Selling Agent with "production credits" of $5 per Unit on all Units at the time of sale (no such initial production credits are payable on sales to officers and employees of ML&Co. and its affiliates, who purchase Units at $97 rather than $100 per Unit). Beginning with the thirteenth full month after a series of Units is sold, the Selling Agent receives ongoing production credits on all outstanding Units of such series (including Units sold at a 3% discount to officers and employees of ML&Co. and its affiliates); provided that such Units were sold by Financial Consultants who are registered with the Commodity Futures Trading Commission (the "CFTC") and who have passed either the Series 3 National Commodity Futures Examination or the Series 31 Managed Futures Fund Examination. Such ongoing production credits continue to accrue from the beginning of such thirteenth month for as long as the Units remain outstanding, at the rate of 2% per annum of the average month-end Net Assets attributable to such Unit committed to trading; 75% of the capital attributable to each Unit sold under this Prospectus will be initially committed to trading, resulting in annual ongoing production credits of 1.5%. _________________________ THIS PROSPECTUS IS ACCOMPANIED BY (1) A PROSPECTUS SUPPLEMENT CONTAINING CERTAIN CFTC-REQUIRED INFORMATION REGARDING THE CURRENT ADVISORS; AND (2) SUMMARY FINANCIAL INFORMATION FOR THE FUND CURRENT WITHIN 60 CALENDAR DAYS. _________________________ NO DEALER, SALESMAN OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION ABOUT THE FUND OR TO MAKE ANY REPRESENTATION CONCERNING NOT CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE FUND, MLIP, MLAM, THE SELLING AGENT, ANY TRADING ADVISOR OR ANY OTHER PERSON. _________________________ THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION MAY NOT LAWFULLY BE MADE. -i- _________________________ THE BOOKS AND RECORDS OF THE FUND ARE MAINTAINED AT ITS PRINCIPAL OFFICE, C/O MERRILL LYNCH INVESTMENT PARTNERS INC., MERRILL LYNCH WORLD HEADQUARTERS, SIXTH FLOOR, SOUTH TOWER, WORLD FINANCIAL CENTER, NEW YORK, NEW YORK 10080-6106. DURING NORMAL BUSINESS HOURS, LIMITED PARTNERS MAY INSPECT AND COPY SUCH BOOKS AND RECORDS FOR ANY PURPOSE REASONABLY RELATED TO THEIR INTEREST AS LIMITED PARTNERS. MLIP DISTRIBUTES MONTHLY REPORTS, SUMMARY PERFORMANCE INFORMATION FOR THE FUND TO ALL LIMITED PARTNERS. LIMITED PARTNERS RECEIVE CERTIFIED AUDITED FINANCIAL STATEMENTS AND ALL TAX INFORMATION RELATING TO THE FUND NECESSARY FOR THE PREPARATION OF LIMITED PARTNERS' ANNUAL FEDERAL INCOME TAX RETURNS. _________________________ THE FUND IS SUBJECT TO THE INFORMATIONAL REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934 AND IN ACCORDANCE THEREWITH FILES REPORTS AND OTHER INFORMATION WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"). REPORTS, PROXIES (IF ANY), INFORMATION STATEMENTS (IF ANY), AND OTHER INFORMATION FILED BY THE FUND, CAN BE INSPECTED AND COPIED AT THE PUBLIC REFERENCE FACILITIES MAINTAINED BY THE SEC AT 450 FIFTH STREET, N.W. WASHINGTON, DC 20549 AND AT CERTAIN OF ITS REGIONAL OFFICES LOCATED AT 7 WORLD TRADE CENTER, SUITE 1300, NEW YORK, NY 10048 AND CITICORP CENTER, 500 WEST MADISON STREET, SUITE 1400, CHICAGO, IL 60661. COPIES OF SUCH MATERIAL CAN BE OBTAINED FROM THE PUBLIC REFERENCE SECTION OF THE SEC, 450 FIFTH STREET, N.W., WASHINGTON, DC 20549, AT PRESCRIBED RATES. _________________________ ML PRINCIPAL PROTECTION L.P. IS NOT A "MUTUAL FUND" OR ANY OTHER TYPE OF "INVESTMENT COMPANY" WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940, AND IS NOT SUBJECT TO REGULATION THEREUNDER. -ii- COMMODITY FUTURES TRADING COMMISSION RISK DISCLOSURE STATEMENT YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS. SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE POOL. FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED THIS POOL AT PAGE 34 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 8. THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE, BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK FACTORS OF THIS INVESTMENT, AT PAGE 9. YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES, INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED. -1- SPECIAL DISCLOSURES REGARDING THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND 1. ML&CO'S GUARANTEE IS NOT A GUARANTEE OF PROFIT. IF INVESTORS' UNITS ARE WORTH NO MORE ON THEIR PRINCIPAL ASSURANCE DATE (FIVE YEARS AFTER ISSUANCE) THAN THE GUARANTEED MINIMUM $100 PER UNIT, INVESTORS WILL HAVE LOST THE ENTIRE USE OF THEIR CAPITAL. AT A 7% INTEREST RATE, THE PRESENT VALUE OF RECEIVING $100 FIVE YEARS IN THE FUTURE IS ONLY APPROXIMATELY $71. 2. THE FUND'S MULTI-ADVISOR STRATEGY MAKES LOSSES WHICH WOULD REQUIRE ML&CO. TO MAKE ANY PAYMENTS UNDER ITS GUARANTEE HIGHLY UNLIKELY. MOREOVER, MLIP CONTROLS THE LEVERAGE AT WHICH THE FUND TRADES SPECIFICALLY IN ORDER TO PREVENT ML&CO. INCURRING ANY SUCH LIABILITY. 3. IN ORDER TO PROTECT ML&CO. FROM ANY LIABILITY UNDER ITS GUARANTEE, ALL UNITS BEGIN WITH ONLY 75% OF THEIR ASSETS ALLOCATED TO TRADING. THIS DELEVERAGING SUBSTANTIALLY REDUCES PROFIT POTENTIAL. 4. RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING OR EVEN TERMINATING TRADING. MLIP WOULD TERMINATE TRADING IF A NEWLY-ISSUED UNIT LOST ONLY APPROXIMATELY $22 (AT CURRENT INTEREST RATES), AND WOULD FURTHER DELEVERAGE TRADING BELOW 75% WELL BEFORE THAT POINT. 5. IRRESPECTIVE OF LOSSES, IN THE EVENT THAT THE FUND DOES NOT EARN SUFFICIENT PROFITS, MLIP WILL FURTHER DELEVERAGE, SUSPEND OR TERMINATE TRADING. 6. IF THE FUND IS SUCCESSFUL, ITS PERFORMANCE WOULD HAVE BEEN SUBSTANTIALLY BETTER WITHOUT "PRINCIPAL PROTECTION." 7. "PRINCIPAL PROTECTION" DOES NOT PROTECT INVESTORS AGAINST THE EFFECTS OF INFLATION. 8. "PRINCIPAL PROTECTION" DOES NOT TAKE INTO CONSIDERATION THE TAX CONSEQUENCES OF INVESTING IN THE FUND. 9. THE ML&CO. GUARANTEE IS EFFECTIVE ONLY ON UNITS OUTSTANDING ON THEIR PRINCIPAL ASSURANCE DATE. 10. THE ML&CO. GUARANTEE IS A CONTRACT BETWEEN ML&CO. AND THE FUND. INVESTORS COULD ENFORCE THE GUARANTEE ONLY THROUGH BRINGING A DERIVATIVE ACTION IN THE NAME OF THE FUND. 11. THE ML&CO. GUARANTEE IS A GENERAL, UNSECURED OBLIGATION OF ML&CO. 12. AN INVESTOR COULD CONTROL THE ASSETS HE OR SHE COMMITTED TO THE FUTURES MARKET SO AS TO ACHIEVE THE SAME "PRINCIPAL PROTECTION" OFFERED BY THE FUND, WITHOUT BEING SUBJECT TO THE FUND'S REDEMPTION OR OTHER RESTRICTIONS. 13. PROSPECTIVE INVESTORS MUST CONSIDER CAREFULLY WHETHER THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND MERITS THE OPPORTUNITY COSTS INVOLVED, __________________ SEE "RISK FACTORS" AT PAGE 9, "LEVERAGE CONSIDERATIONS" AT PAGE 30 AND "THE ML&CO. GUARANTEE" AT PAGE 31. -2- ML PRINCIPAL PROTECTION L.P. TABLE OF CONTENTS
PROSPECTUS SECTION PAGE - ------------------ ---- SUMMARY........................................ 5 Introduction................................. 5 Risk Factors................................. 5 The Fund and Its Objectives.................. 6 "Breakeven Table"............................ 8 RISK FACTORS................................... 9 (1) Investors May Incur Substantial Losses... 9 (2) Past Performance......................... 9 (3) Volatile Markets; Highly Leveraged Trading................................. 9 (4) The Costs of "Principal Protection"...... 9 (5) Substantial Charges...................... 9 (6) Further Deleveraging..................... 9 (7) Importance of General Market Conditions.............................. 9 (8) Series Issued After July 1, 1996......... 10 (9) Combining Independent Strategies......... 10 (10) Systematic Strategies.................... 10 (11) Discretionary Strategies................. 10 (12) Increased Assets Under Management........ 10 (13) Advisors' Continued Services Uncertain............................... 10 (14) Changes in Trading Strategy.............. 10 (15) Illiquid Markets......................... 10 (16) Cash Management Risks.................... 11 (17) Non-Correlation Not Negative Correlation.................... 11 (18) Redemptions Restricted................... 11 (19) Trading on Non-U.S. Exchanges............ 11 (20) Conflicts of Interest.................... 11 (21) Use of Graphs............................ 11 (22) Limited Partners Taxed Currently......... 11 (23) "Investment Advisory Fees"............... 11 (24) Taxation of Interest Income.............. 11 (25) Tax Audit................................ 12 (26) Bankruptcy or Default.................... 12 (27) Regulatory Change........................ 12 INVESTMENT FACTORS............................. 12 PERFORMANCE OF THE FUND........................ 14 PERFORMANCE OF THE OTHER MLIP MULTI-ADVISOR FUNDS........................... 15 SELECTED FINANCIAL DATA........................ 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS................................. 20 THE ADVISOR SELECTION PROCESS.................. 22 THE ADVISORS................................... 25 MLIP AND MLF................................... 26 Background.................................... 26 Principals.................................... 27 MLF........................................... 28 FIDUCIARY OBLIGATIONS OF MLIP.................. 28 LEVERAGE CONSIDERATIONS........................ 30 THE ML&CO. GUARANTEE........................... 31 USE OF PROCEEDS................................ 33 CHARGES........................................ 34 Charges Paid by the Fund...................... 35 Organization and Initial Offering Costs..................................... 35 Brokerage Commissions...................... 36 Administrative Fees........................ 37 "Bid-Ask" Spreads.......................... 37 Service Fees; "EFP" Differentials.......... 37 Securities Mark-Ups........................ 37 Profit Shares.............................. 37 Extraordinary Expenses..................... 39 Charges Paid by Merrill Lynch................. 39 Selling Commissions; Ongoing Compensation.............................. 39 Consulting Fees............................ 39 MLAM Fees.................................. 40 Redemption Charges......................... 40 CERTAIN LITIGATION............................. 40 CONFLICTS OF INTEREST.......................... 44 Merrill Lynch Affiliated Entities.......... 44 General.................................... 45 MLIP....................................... 45 MLF; MLIB; MLAM............................ 46 The Trading Advisors....................... 46 Financial Consultants...................... 47 Proprietary Trading........................ 47
-3- ML PRINCIPAL PROTECTION L.P. TABLE OF CONTENTS (CONT.)
PROSPECTUS SECTION PAGE - ------------------ ---- THE LIMITED PARTNERSHIP AGREEMENT................ 47 FEDERAL INCOME TAX CONSEQUENCES.................. 49 PLAN OF DISTRIBUTION............................. 52 Subscription Procedure.......................... 52 Purchases by Employee Benefit Plans............. 53 Selling Agent Compensation...................... 53 LEGAL MATTERS.................................... 54 EXPERTS.......................................... 54 ADDITIONAL INFORMATION........................... 54 INDEX OF TERMS................................... 55 ORGANIZATIONAL CHART............................. 56 INDEX TO FINANCIAL STATEMENTS.................... 57 APPENDIX I -- THE "CORE" TRADING ADVISORS...................................... APPI-1 APPENDIX II -- PERFORMANCE OF THE PUBLIC SINGLE-ADVISOR FUTURES FUNDS OPERATED BY MLIP.......................... APPII-1 APPENDIX III -- THE ROLE OF MANAGED FUTURES IN AN INVESTMENT PORTFOLIO.............. APPIII-1 APPENDIX IV -- BLUE SKY GLOSSARY................. APPIV-1 EXHIBIT A -- THIRD AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT................... A-1 EXHIBIT B -- AMENDED FORM OF GUARANTEE AGREEMENT....................................... B-1 EXHIBIT C -- SUBSCRIPTION REQUIREMENTS........... SR-1 EXHIBIT D -- SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY........................... SA-(i)
-------------------- MERRILL LYNCH INVESTMENT PARTNERS INC. GENERAL PARTNER SOUTH TOWER, 6TH FLOOR WORLD FINANCIAL CENTER NEW YORK, NEW YORK 10080-6106 TELEPHONE: (212) 236-4167 -4- SUMMARY The merits and risks of an investment in the Fund are complex and must be reviewed carefully by any person considering purchasing Units. The following summary is qualified in its entirety by the information set forth elsewhere in this Prospectus. ____________________ INTRODUCTION THE FUND AND THE OFFERING ML Principal Protection L.P. trades in the international futures, commodity options and forward markets, with the objectives of achieving substantial capital appreciation over time while controlling performance volatility. MLIP selects and monitors the Fund's multiple independent Advisors, as well as allocating and reallocating the Fund's trading assets among them. $32,000,000 was invested in the Fund's initial Series A Units as of October 12, 1994, and a total of an additional $60,256,700 in the six subsequent quarter-end closings through June 1, 1996. Through June 1, 1996, an aggregate of 932,567 of Units had been sold and 117,917 redeemed. As of June 1, 1996, the Fund's capitalization was $84,609,493. PERFORMANCE As of June 1, 1996, the Net Asset Value of the series of Units issued at different times, in each case for $100 per Unit, were as follows:
Unit June 1, 1996 Series Date of Issuance Net Asset Value - ------ ---------------- --------------- A October 12, 1994 $107.82 ($6.00 distribution, 10/1/95) B January 9, 1995 $105.20 ($6.00 distribution, 1/1/96) C April 10, 1995 $100.66 ($3.50 distribution, 4/1/96) D July 11, 1995 $103.11 E October 11, 1995 $103.49 F January 17, 1996 $100.44 G April 19, 1996 $ 98.95
As of June 1, 1996, the Fund had a total of 4080 Limited Partners. All series of Units issued to date have traded with 60% of their capital allocated to trading. Units sold pursuant to this Prospectus will commence trading with 75% of their assets so allocated. RISK FACTORS THE FOLLOWING ARE CERTAIN OF THE SIGNIFICANT RISKS OF THIS AN INVESTMENT. . INVESTORS MUST BE PREPARED TO LOSE THE ENTIRE TIME VALUE OF THEIR INVESTMENT. AT A 7% INTEREST RATE, THE PRESENT VALUE OF RECEIVING THE ASSURED MINIMUM $100 PER UNIT FIVE YEARS IN THE FUTURE WOULD BE ONLY APPROXIMATELY $71. SEE "THE ADVISOR SELECTION PROCESS" AT PAGE 22 AND "RISK FACTOR (1) -- INVESTORS MAY INCUR SUBSTANTIAL LOSSES" AT PAGE 9. . PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. SEE "COMMODITY FUTURES TRADING COMMISSION--RISK DISCLOSURE STATEMENT" AT PAGE 1 AND "RISK FACTOR (2) -- PAST PERFORMANCE" AT PAGE 9. -5- SUMMARY (contd.) RISK FACTORS (CONT.) . THE FUND TRADES WITH A HIGH DEGREE OF LEVERAGE IN VOLATILE MARKETS. SEE "RISK FACTOR (3) -- VOLATILE MARKETS; HIGHLY LEVERAGED TRADING" AT PAGE 9. . THE "PRINCIPAL PROTECTION" FEATURE OF THE FUND SUBSTANTIALLY REDUCES PROFIT POTENTIAL ALTHOUGH IT IS HIGHLY UNLIKELY TO BE OF ANY VALUE TO INVESTORS. SEE "RISK FACTOR (4) -- THE COSTS OF 'PRINCIPAL PROTECTION'" AT PAGE 9. . THE FUND IS SUBJECT TO SUBSTANTIAL CHARGES. ESTIMATED GROSS TRADING PROFITS OF 7.58% OF THE FUND'S AVERAGE MONTH-END NET ASSETS MUST BE EARNED DURING THE FIRST YEAR AFTER A UNIT IS SOLD IN ORDER FOR THE REDEMPTION VALUE OF SUCH UNIT TO EQUAL ITS INITIAL $100 SUBSCRIPTION PRICE. SEE "CHARGES" AT PAGE 34 AND "RISK FACTOR (5) -- SUBSTANTIAL CHARGES" AT PAGE 9. . RELATIVELY SMALL LOSSES COULD RESULT IN MLIP FURTHER DELEVERAGING OR TERMINATING TRADING. SEE "RISK FACTOR (6) -- FURTHER DELEVERAGING" AT PAGE 9. . CERTAIN GENERAL TYPES OF MARKET CONDITIONS -- IN PARTICULAR, TRENDLESS PERIODS WITHOUT MAJOR PRICE MOVEMENTS -- SIGNIFICANTLY REDUCE THE ADVISORS' ABILITY TO TRADE SUCCESSFULLY. SEE "RISK FACTOR (7) -- IMPORTANCE OF GENERAL MARKET CONDITIONS" AT PAGE 9. NO SUBSCRIBER SHOULD INVEST MORE THAN 10% OF HIS OR HER READILY MARKETABLE ASSETS IN THE FUND. SEE "RISK FACTORS" AT PAGES 9 THROUGH 12. THE FUND AND ITS OBJECTIVES A MULTI-STRATEGY APPROACH The Fund is a multi-strategy, multi-market managed futures investment, employing a range of strategies diversified across major sectors of the global economy -- financials, currencies, energy, metals and agriculture. MLIP allocates Fund assets both to Advisors specializing in particular market sectors and to Advisors which trade broadly diversified portfolios. The Fund has to date retained between five and ten Advisors, trading independently of each other and employing diverse trading methods. MLIP allocates a substantial portion of the Fund's assets to a limited group of "core" Advisors, each of which receives significant allocations -- typically 20% or more of the assets committed to trading. The remainder is allocated in smaller percentages to a group of non-"core" Advisors, certain of which may be newer to the business or may implement specialized strategies. At this point in the economic cycle, MLIP believes there may be substantial profit opportunities in the traditional commodity markets -- energy, metals and agriculture -- over the medium to long term. Traditional commodities represent approximately 30% to 40% of the Fund's holdings. The Fund offers a means of diversifying a limited portion of the risk segment of a portfolio into an investment with the potential to exhibit a high degree of non-correlation with traditional stock and bond investments. If such non-correlation is, in fact, achieved, and the Fund is profitable, investing in the Units has the potential to enhance the reward/risk ratio of an overall portfolio. See Appendix III -- The Role of Managed Futures in an Investment Portfolio. -6- SUMMARY (CONT.) MLIP MLIP, a Delaware corporation, is one of the largest managed futures sponsors in the United States (or elsewhere) in terms of both financial and personal resources and assets under management. As of June 1, 1996, MLIP was serving as sponsor or trading manager for futures funds with total capital in excess of $1.3 billion. THE ADVISORS As of May 31, 1996, the current "core" Advisors retained for the Fund were collectively managing approximately $2.0 billion in managed futures accounts in which their clients (and in certain cases the Advisors themselves) had invested, and approximately $1.4 billion in the trading programs used for the Fund. Many of the Fund's Advisors also manage accounts for other futures funds for which MLIP acts as sponsor or trading manager. See Appendix I for certain performance and other information relating to the current "core" Advisors. The accompanying Prospectus Supplement identifies the current non-"core" Advisors. A number of Advisor changes, as well as reallocations of assets among Advisors, have been made since inception. "PRINCIPAL PROTECTION" ML&Co. has agreed to make any payments to the Fund necessary to ensure that the Net Asset Value of each outstanding Unit, as of its Principal Assurance Date, will be at least $100. The ML&Co. guarantee is effective only on Units still outstanding at their Principal Assurance Date. POTENTIAL YIELD ENHANCEMENT MLIP attempts to increase the yield received by the Fund on its available cash by retaining the services of Merrill Lynch Asset Management, L.P. ("MLAM"). MLAM manages approximately 80% to 90% of the Fund's capital, investing on an unleveraged basis in U.S. Treasury bills, notes and bonds and securities issued by certain U.S. government agencies and instrumentalities (collectively, "Government Securities"), within investment parameters established by MLIP. -7- SUMMARY (CONT.) "BREAKEVEN TABLE"
COLUMN I COLUMN II "BREAKEVEN" "BREAKEVEN" PERCENTAGE RETURN DOLLAR RETURN REQUIRED REQUIRED FIRST ($5,000 INITIAL TWELVE MONTHS INVESTMENT) FIRST OF INVESTMENT TWELVE MONTHS (BASED ON 75% OF OF INVESTMENT (BASED ON EXPENSES AND TOTAL ASSETS ALLOCATED TO 75% OF TOTAL ASSETS INTEREST INCOME TRADING) ALLOCATED TO TRADING) - ------------------------------------------------------------------------------------------------------------------------ Brokerage Commissions 6.94% $347.00 - ------------------------------------------------------------------------------------------------------------------------ Administrative Fees 0.19 $ 9.50 - ------------------------------------------------------------------------------------------------------------------------ Organizational and Initial Offering Costs(1) 0.10 $ 5.00 - ------------------------------------------------------------------------------------------------------------------------ F/X Service Desk and Related Fees(2) 0.25 $ 12.50 - ------------------------------------------------------------------------------------------------------------------------ Profit Shares(3) 2.00 $100.00 - ------------------------------------------------------------------------------------------------------------------------ Redemption Charge(4) 3.10 $155.00 - ------------------------------------------------------------------------------------------------------------------------ Interest Income(5) (7.58)% $(250.00) - ------------------------------------------------------------------------------------------------------------------------ TRADING PROFITS REQUIRED FOR AN INITIAL $5,000 INVESTMENT TO 7.58% $379.00 "BREAKEVEN" - ------------------------------------------------------------------------------------------------------------------------ NOTES TO "BREAKEVEN TABLE" (1) Estimated, based on the Fund's June 1, 1996 capitalization. (2) Estimated; paid on a per-transaction basis. "Bid-ask" spreads are difficult to estimate and are not included as an expense in the "Breakeven Table." (3) It is not possible to predict the Profit Shares which might be paid in a "breakeven" year. MLIP believes, based on the experience of the Fund to date, that 2.00% of average month-end capitalization is a reasonable estimate, but actual Profit Shares could differ. (4) Redemption charges would equal 3.1% of the initial $5,000 investment because these charges would equal 3% of the $5,155 Net Asset Value required in order for the investor to receive net redemption proceeds of $5,000 after subtracting the 3% redemption charge. (5) Estimated, based on current 91-day Treasury bill rates. ------------- If the percentage of a series' capital allocated to trading were to increase, so would brokerage commissions and Administrative Fees as a percentage of such capital. At 100% leverage, the Fund's annual brokerage commissions and Administrative Fees would equal 9.25% and 0.25%, respectively, of average month-end Net Assets and the Trading Profits required for an initial $5,000 investment to "breakeven" would increase to 9.95% or $497.50.
-8- RISK FACTORS The markets in which the Fund trades are speculative and highly leveraged. An investment in the Fund involves significant risks. There can be no assurance that the Fund will trade successfully. If an investor receives from the Fund only the "guaranteed" minimum Net Asset Value per Unit, the investor will have incurred substantial losses. If the Fund does not trade successfully, it cannot serve as a useful or effective diversification for an overall portfolio. _______________ (1) INVESTORS MAY INCUR SUBSTANTIAL LOSSES INVESTORS MUST BE PREPARED TO LOSE THE USE OF THEIR INVESTED CAPITAL FOR THE ENTIRE FIVE-YEAR "TIME HORIZON" FROM A UNIT'S ISSUANCE TO ITS PRINCIPAL ASSURANCE DATE. AT A 7% INTEREST RATE, THIS WOULD CONSTITUTE APPROXIMATELY A 30% LOSS. (2) PAST PERFORMANCE Past performance is not necessarily indicative of future results. Neither the Advisors' nor the Fund's past performance to date may be representative of how they or it will trade in the future. (3) VOLATILE MARKETS; HIGHLY LEVERAGED TRADING Futures and forward trading is highly leveraged, and market price levels are volatile and materially affected by unpredictable factors such as weather and governmental intervention. The combination of leverage and volatility creates a high degree of risk. (4) THE COSTS OF "PRINCIPAL PROTECTION" The Fund's "principal protection" substantially reduces profit potential by causing MLIP to deleverage trading. However, losses sufficient to require any payment under the ML&Co. guarantee are highly unlikely because of the Fund's multi-advisor strategy. Furthermore, MLIP's management of the Fund's trading leverage is principally directed towards protecting ML&Co. from having to make any such payments. (5) SUBSTANTIAL CHARGES The Fund is subject to substantial charges. It is particularly important, due to the "principal protection" structure of the Fund, that capital not be depleted by expenses. Any such depletion could result in the further deleveraging or termination of trading. The charges assessed on Units sold under this Prospectus will be greater as a percentage of their total equity than the charges reflected in the Fund's performance to date because the newly-issued Units will begin trading at 75% rather than the 60% leverage used by previous series. Brokerage commissions as well as Administrative Fees are based on the assets committed by each series. At the same time, however, the increased leverage of these Units will correspondingly increase their profit potential (as well as risk). (6) FURTHER DELEVERAGING In the event that the Fund incurs relatively small losses (even if it had previously traded profitably), MLIP could to further deleverage or terminate trading. (7) IMPORTANCE OF GENERAL MARKET CONDITIONS There appears to be a tendency for managed futures products to be generally profitable or generally unprofitable at approximately the same times. Overall market or economic conditions -- which neither MLIP nor any Advisor can predict or control -- have a material effect on performance. -9- (8) SERIES ISSUED AFTER JULY 1, 1996 All series of Units issued after July 1, 1996 will commence trading at 75% leverage. Previously issued series began trading at 60% leverage and have maintained that leverage to date. Consequently, the new series issued under this Prospectus will generally be more highly leveraged and their trading results correspondingly more volatile than that of previous series. If MLIP makes a leverage adjustment to any series issued under this Prospectus, MLIP must make corresponding adjustments to the other series so that all series trade at the same level of leverage. This regulatory requirement of uniform leverage could adversely affect certain series. For example, a series might have traded profitably and generated sufficient profits that MLIP would have otherwise upleveraged its trading but cannot do so because that would require upleveraging other series which had not been comparably profitable because sold at different times. MLIP does not intend to make any distributions on newly issued Units. (9) COMBINING INDEPENDENT STRATEGIES Combining independent trading strategies involves substantial opportunity costs, since one Advisor's profits are frequently offset by another Advisor's losses. Different Advisors often take opposite positions for the Fund, eliminating the profit potential of the combined positions. (10) SYSTEMATIC STRATEGIES The widespread use of technical trading systems frequently results in numerous managers attempting to execute similar trades at or about the same time, altering trading patterns and affecting market liquidity. Furthermore, the profit potential of trend-following systems may be diminished by the changing character of the markets, which may make historical price data (on which technical programs are based) only marginally relevant to future market patterns. (11) DISCRETIONARY STRATEGIES Discretionary trading managers may be prone to "emotionalism" and a lack of discipline in their trading. Reliance on subjective trading judgment may produce less consistent results than systematic approaches. (12) INCREASED ASSETS UNDER MANAGEMENT There appears to be a tendency for the rates of return achieved by managed futures advisors to decline as assets under management increase. None of the Advisors has agreed to limit the amount of additional equity which it may manage, and most of them have recently accepted substantial additional customer funds. (13) ADVISORS' CONTINUED SERVICES UNCERTAIN There is no assurance that any Trading Advisor will be willing or able to continue to provide advisory services to the Fund. There is severe competition for the services of qualified Advisors, and the Fund may not be able to retain satisfactory replacement or additional Advisors on acceptable terms. MLIP must allocate Advisor availability among its different funds, including the Fund. (14) CHANGES IN TRADING STRATEGY An Advisor may make significant changes in its trading strategies without the knowledge of MLIP. (15) ILLIQUID MARKETS Certain instruments traded by the Fund may become illiquid preventing a Trading Advisor from acquiring positions otherwise indicated by its strategy or making it impossible for a Trading Advisor to close out positions against which the market is moving. -10- (16) CASH MANAGEMENT RISKS It is possible that the Fund could incur losses in its cash management program. (17) NON-CORRELATION NOT NEGATIVE CORRELATION MLIP anticipates that the Fund's performance will be non-correlated, not negatively correlated, with general equity and debt price levels. The Fund may or may not be profitable during upward or downward cycles in the stock and bond markets. (18) REDEMPTIONS RESTRICTED Investors' limited ability to redeem Units could result in there being a significant difference between a Unit's redemption value and its Net Asset Value as of the cut-off date for irrevocable redemption requests. (19) TRADING ON NON-U.S. EXCHANGES The Trading Advisors trade extensively on non-U.S. exchanges. These exchanges are not regulated by any United States governmental agency. The Fund could incur substantial losses trading on foreign exchanges to which it would not have been subject had the Trading Advisors limited their trading to U.S. markets. (20) CONFLICTS OF INTEREST The Fund is subject to a number of material actual and potential conflicts of interest, raising the possibility that investors will be financially disfavored to the benefit of MLIP, the Trading Advisors or their respective principals and affiliates. No formal policies or procedures have been adopted to resolve these conflicts. (21) USE OF GRAPHS Appendix III -- The Role of Managed Futures in an Investment Portfolio contains various graphic comparisons of the performance of the Fund and a managed futures index to broad-based stock and bond market indices. The format of graphics can have a significant impact on their effect on a reader. (22) LIMITED PARTNERS TAXED CURRENTLY Each year, Limited Partners are taxed on their allocable share of any Fund profits. If an investor purchased stocks or bonds, on the other hand, there would generally be no tax due on the appreciation in the value of such holdings until disposition. The performance information included in this Prospectus is presented exclusively on a pre-tax basis. (23) "INVESTMENT ADVISORY FEES" Limited Partners could be required to treat the Profit Shares as well as certain other expenses of the Fund as "investment advisory fees," which are subject to substantial restrictions on deductibility for most individual taxpayers. MLIP has not been classifying the Profit Share or such expenses as "investment advisory fees," a position to which the Internal Revenue Service (the "IRS") may object. (24) TAXATION OF INTEREST INCOME The Fund's trading losses will be almost exclusively capital losses against ordinary income only to the extent of $3,000 per year. If an individual Limited Partner had, for example, an allocable trading loss of $10,000 and -11- allocable interest income of $5,000, he or she would incur a net loss of $5,000 but would recognize taxable interest income of $2,000. (25) TAX AUDIT There can be no assurance that the Fund's tax returns will not be audited by the IRS. If such an audit results in an adjustment, Limited Partners could be required to pay back taxes, additions to such taxes, interest and penalties and could themselves be audited. PROSPECTIVE INVESTORS ARE STRONGLY URGED TO CONSULT THEIR OWN TAX ADVISERS AND COUNSEL WITH RESPECT TO THE POSSIBLE TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND. SEE "FEDERAL INCOME TAX CONSEQUENCES" AT PAGE 49. (26) BANKRUPTCY OR DEFAULT The Fund could be unable to recover its assets from MLF or Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in the event of the bankruptcy of such entities. In its off-exchange trading, the Fund deals with its counterparties as principals and is subject to the full risk of their default or insolvency. Investors could incur substantial losses, despite the Fund having been otherwise highly profitable, in the event of the bankruptcy or default of a Merrill Lynch entity or a market counterparty. (27) REGULATORY CHANGE In the past several years, considerable international regulatory attention has been focused on the activities of "non-traditional" investment funds such as the Fund. There have also been a number of U.S. tax proposals which would affect the Fund adversely. Future regulatory change could have material negative consequences for an investment in the Units. ____________________ INVESTMENT FACTORS The following summarizes certain of the principal potential advantages which MLIP believes may be associated with an investment in the Fund. There are also substantial risks associated with such an investment. See "Risk Factors" beginning at page 9. ____________________ (1) MLIP MLIP is a major futures fund sponsor. MLIP's experience and familiarity with the industry assists MLIP in its ongoing monitoring of the Trading Advisors' performance as well as in the administration of the Fund. MLIP combines experience in its trading advisor selection process with an active approach to its general partner and trading manager roles. (2) THE TRADING ADVISORS All Advisors selected by MLIP for the Fund are successful, full- time professionals, specializing in the trading strategies which they implement for the Fund. The broad diversification of the Fund's Advisor group has the potential to increase profit opportunities as well as risk control. (3) MARKET AND STRATEGY DIVERSIFICATION MLIP emphasizes broad diversification and participation in numerous global markets in its Advisor selections. MLIP focuses on combining Advisors that collectively implement a wide range of qualitatively different strategies and trading methods. Although the current Advisor group emphasizes technical, trend-following methods, in the future MLIP may favor fundamental and/or discretionary Advisors for the Fund. -12- (4) PORTFOLIO DIVERSIFICATION The performance of the Fund should exhibit a substantial degree of non-correlation with the performance of traditional stock and bond portfolio components. Diversifying assets among different investments that generate positive but non-correlated returns has the potential to decrease risk without a corresponding decrease in returns -- enhancing the reward/risk profile of a portfolio. (5) GLOBAL TRADING As global markets and investing become more complex, professionally managed futures may increasingly continue to be included in traditional portfolios of stocks and bonds managed by advisors seeking improved balance and diversification. By allocating a portion of the risk segment of their portfolios to selected advisors specializing in futures and forward trading, investors have the potential, if their futures investment is successful, to enhance their prospects for superior performance as well as to reduce both the volatility of their portfolios over time and their dependence on a single nation's economy. Global trading, with the ability to move capital rapidly among the world's economies and markets, can both spread risk and multiply the profit opportunities available to the Fund. (6) OPPORTUNITY TO PROFIT IN RISING AS WELL AS DECLINING MARKETS The futures markets offer the ability to trade either side of any market. Unlike short selling in the securities markets, selling futures short is no more difficult than establishing a long position. The profit and loss potential of futures trading is not dependent upon economic prosperity or interest rate or currency stability. It may be advantageous for an overall portfolio to include investments that have the potential to appreciate during periods of generally declining prices, financial disruption, or economic instability. (7) YIELD ENHANCEMENT MLAM manages a substantial portion (approximately 80% to 90%) of the Fund's available assets in the Government Securities markets -- subject to investment parameters established by MLIP as general partner of the Fund. Through July 1, 1996, MLAM's cash management had returned a yield enhancement for the Fund of approximately 1.02% (annualized) over the prevailing 91-day Treasury bill rates. As of April 30, 1996, MLAM and its affiliates, collectively, had a total of approximately $207.7 billion in investment company and other portfolio assets under management, including accounts of certain affiliates of MLAM. (8) SMALL MINIMUM INVESTMENT; SMALLER MINIMUM ADDITIONAL INVESTMENT The initial minimum investment in the Fund is 50 Units ($5,000), and the minimum additional investment only 10 Units ($1,000). Larger investments are permitted in any whole Unit multiples. (9) MERRILL LYNCH EMPLOYEE DISCOUNT Officers and employees of ML&Co. and its affiliates subscribe for Units at the discounted price of $97 per Unit. MLIP contributes the remaining $3 per Unit so that other subscribers' investments are not diluted. (Due to regulatory considerations, the employee discount is not available to retirement accounts. Such accounts are free to purchase Units, but must do so at $100 per Unit.) (10) ADMINISTRATIVE CONVENIENCE The Fund is structured so as to minimize the administrative burden to Limited Partners. Limited Partners receive, directly from MLIP, monthly unaudited and annual certified financial reports as well as all tax information relating to the Fund necessary for Limited Partners to complete their federal income tax returns. The approximate Net Asset Value of an investor's Units is available at any time from MLIP upon request. -13- PERFORMANCE OF THE FUND ML PRINCIPAL PROTECTION L.P. JUNE 1, 1996 Type of Pool: Multi-Advisor; Selected Advisor/Publicly-Offered/ "Principal Protected"/(1)/ Inception of Trading: October 12, 1994 Aggregate Subscriptions: $92,863,020 Current Capitalization: $89,609,493 Worst Monthly Drawdown (Month/Year): (3.70)% (2/96) Worst Peak-to-Valley Drawdown (Period)/(2)/: (3.70)% (2.96)
============================================================ MONTHLY RATES OF RETURN/(3)/ ------------------------------------ MONTH 1996 1995 1994 ------------------------------------------------------------ January 2.45% (0.55)% -- ------------------------------------------------------------ February (3.70)% 2.24% -- ------------------------------------------------------------ March 1.06% 4.17% -- ------------------------------------------------------------ April 3.10% 0.91% -- ------------------------------------------------------------ May (1.98)% 1.20% -- ------------------------------------------------------------ June (0.21)% -- ------------------------------------------------------------ July (1.30)% -- ------------------------------------------------------------ August 0.95% -- ------------------------------------------------------------ September (0.32)% -- ------------------------------------------------------------ October 0.29% 1.04% ------------------------------------------------------------ November 0.69% 0.32% ------------------------------------------------------------ December 2.12% 0.40% ------------------------------------------------------------ Compound Annual 0.76% 10.51% 1.76% Rate of Return (5 months) (2-2/3 months) ============================================================
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. --------------------------- THE UNITS ISSUED UNDER THIS PROSPECTUS WILL COMMENCE TRADING AT 75% LEVERAGE. ALL SERIES OF UNITS ISSUED TO DATE HAVE TRADED AT 60% LEVERAGE. INCREASING TRADING LEVERAGE SHOULD INCREASE PROFIT POTENTIAL, RISK AND VOLATILITY. (1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund is defined as one that allocates no more than 25% of its traded assets to any single manager. The Fund does not currently allocate more than 25% of its trading assets to a single Advisor but may do so in the future; consequently, it is referred to as a "Multi-Advisor; Selected Advisor" fund. Applicable CFTC regulations define a "Principal Protected" fund as one which is designed to limit the loss of participants' initial investment. (2) "Worst peak-to-valley drawdown" represents the greatest percentage decline from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equalled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the "peak-to-valley drawdown" would still be continuing at the end of April in the amount of approximately (3)% whereas if the Monthly Rate of Return had been approximately 3% in March, the "peak-to-valley drawdown" would have ended as of the end of February at approximately the (2)% level. (3) The composite record does not reflect the performance of any single series of Units (although it closely matches that of the Series A Units, which have traded since inception). In no month has any series had a rate of return 10% higher or lower than any other series. SEE ALSO APPENDIX I -- NOTES TO THE PERFORMANCE SUMMARIES; NOTES 10 AND 11 ON PAGES APPI-3 AND APPI-4. --------------------------- -14- PERFORMANCE OF THE OTHER MLIP MULTI-ADVISOR FUTURES FUNDS The following performance summaries present the past performance of other "selected-advisor"/"multi-advisor"; "principal protected"/non-"principal protected" funds sponsored by MLIP. Funds with different "principal protection" features allocate substantially different percentages of their assets to trading. Each series of Units sold pursuant to this Prospectus will initially allocate 75% of its assets to trading. However, all series sold on or before June 30, 1996 initially allocated only 60% of their assets to trading. The SECTOR Strategy Funds, whose performance summaries are set forth below, each began trading with approximately 70% of their assets allocated to trading, and certain of such SECTOR Strategy Funds have traded at significantly more than 70% leverage over time. The MLIP funds without "principal protection" features all generally trade at 100% leverage. MLIP funds are each different investments, have different advisors and different numbers of advisors, and allocate different percentages of assets to trading in general as well as among such advisors. All of the "principal protected" MLIP funds (other than The Growth and Guarantee Fund L.P., see Appendix II) are also "multi-advisor" funds. As of the date of this Prospectus, each of the current Advisors is managing one or more accounts for other MLIP multi- or selected-advisor funds. However, no MLIP fund has ever had the same Advisor group as does the Fund. The fee structure and interest income arrangements of the various MLIP "multi-" and "selected-advisor" funds vary somewhat, but all are generally comparable to those of the Fund. ML Principal Protection Ltd. (see page 16) has operated as the offshore "sister" pool of the Fund. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND MATERIAL DIFFERENCES EXIST BETWEEN THE FUNDS WHOSE PERFORMANCE SUMMARIES ARE SET FORTH ON THE FOLLOWING PAGES AND THE FUND. TO DATE, THE FUND HAS NOT PERFORMED IN A MANNER COMPARABLE TO OTHER MLIP-SPONSORED FUNDS, AND IT IS UNLIKELY THAT THE FUND WILL PERFORM IN A MANNER COMPARABLE TO MANY OF SUCH FUNDS IN THE FUTURE. INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT PORTION OF A COMMODITY POOL'S INCOME AND, IN CERTAIN INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED AND UNREALIZED LOSSES FROM COMMODITY TRADING. -15-
- ------------------------------------------------------------------------------------------------------------------------------------ MLIP SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS WITH "PRINCIPAL PROTECTION" FEATURES - ------------------------------------------------------------------------------------------------------------------------------------ Worst Worst Monthly Peak-to-valley Type of Inception Aggregate Current Drawdown Drawdown NAME OF FUND Offering of Trading Subscriptions Capitalization % Date % Period - ------------------------------------------------------------------------------------------------------------------------------------ ML Principal Protection Plus Ltd. (Offshore Counterpart of the Fund) Private Oct. 1994 $273,427,700 $259,303,924 (1.27)% (7/95) (1.46)% (6/95-7/95) - ------------------------------------------------------------------------------------------------------------------------------------ The S.E.C.T.O.R. Strategy Fund(SM) L.P. Public July 1990 $125,853,001 $34,302,882 (5.87)% (1/92) (13.78)% (1/92-5/92) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) II L.P. Public Dec. 1990 $136,410,000 $22,119,944 (4.53)% (1/92) (15.93)% (8/93-1/95) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) II L.P. (SECTOR III Units) Public July 1991 $194,005,000 $37,612,177 (7.10)% (1/92) (14.25)% (1/92-5/92) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) IV L.P. Public July 1992 $75,646,400 $5,845,344 (4.96)% (7/95) (8.98)% (6/95-10/95) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) International V L.P. (Series A Units) Public July 1993 $137,500,000 $25,031,062 (3.24)% (7/95) (7.91)% (6/95-10/95) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) VI L.P. Public Sept. 1993 $108,693,900 $53,903,016 (2.71)% (7/95) (7.29)% (9/93-4/94) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) International II Ltd. Private Dec. 1990 $55,181,600 $3,627,565 (4.56)% (8/94) (16.49)% (8/93-1/95) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) II Ltd. (SECTOR III Shares) Private July 1991 $85,701,800 $10,891,584 (7.10)% (1/92) (14.25)% (1/92-5/92) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) International IV Ltd. Series A Shares Private July 1992 $55,189,400 $9,304,153 (2.78)% (8/94) (8.32)% (1/94-1/95) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) International V. Ltd. Private Jan. 1993 $81,252,600 $10,343,566 (3.41)% (7/95) (8.00)% (6/95-10/95) - ------------------------------------------------------------------------------------------------------------------------------------ ML Japan Investment (YEN) (YEN) Partners Ltd. Private Aug. 1993 1,050,000,000 1,012,582,786 (3.52)% (7/94) (7.32)% (1/94-2/95) - ------------------------------------------------------------------------------------------------------------------------------------ SECTOR International Ltd. Private Sept. 1993 $163,806,100 $35,818,055 (4.60)% (2/94) (10.43)% (9/93-2/94) - ------------------------------------------------------------------------------------------------------------------------------------ (YEN) (YEN) Yen Linked ML PPP Ltd. Private Oct. 1995 5,283,000,000 5,387,536,662 (1.67)% (2/96) (1.67)% (2/96) - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ 1996 Cumula- Compound 1995 1994 1993 1992 1991 tive Rate of Compound Compound Compound Compound Compound Rate of Return Rate of Rate of Rate of Rate of Rate of NAME OF FUND Return (5 months) Return Return Return Return Return - ----------------------------------------------------------------------------------------------------------------------------------- ML Principal Protection Plus Ltd. (Offshore Counterpart of 10.97% 1.47% the Fund) composite (1.35)% 11.10% (2-2/3 mos.) N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------ The S.E.C.T.O.R. Strategy Fund(SM) L.P. 51.67% (1.24)% 19.25% (9.29)% 19.36% (3.43)% 23.18% - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) II L.P. 24.71% (1.31)% 13.50% (9.93)% 5.49% (2.76)% 20.50% - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) 13.99% II L.P. (SECTOR III Units) 20.96% (5.69)% 9.30% (3.22)% 15.99% (8.30)% (6 mos.) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) 0.51% IV L.P. 13.75% (3.57)% 9.78% (5.73)% 13.40% (6 mos.) N/A - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) International V L.P. 4.99% (Series A Units) 6.85% (7.49)% 14.22% (3.68)% (6 mos.) N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) (1.72)% N/A N/A VI L.P. 3.23% (0.78)% 6.72% (0.80)% (4 mos.) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) International II Ltd. 34.45% N/A 21.27% (9.64)% 5.49% (2.76)% 20.50% - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) 13.99% II Ltd. (SECTOR III Shares) 18.89% (5.38)% 2.84% 0.77% 15.99% (8.30)% (6 mos.) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) International IV Ltd. 0.51% Series A Shares 14.18% (3.46)% 11.84% (7.21)% 13.40% (6 mos.) N/A - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) International V. Ltd. 9.85% (1.96)% 11.11% (3.94)% 4.99% N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------ ML Japan Investment 1.13% Partners Ltd. (1.56)% (0.43)% 3.95% (5.95)% (5 mos.) N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------ (3.25)% SECTOR International Ltd. 0.77% (0.77)% 7.65% (3.99)% (3-2/3 mos.) N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------ (0.16)% Yen Linked ML PPP Ltd. (0.30)% (0.46)% (3 mos.) N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS (OTHER THAN ML PRINCIPAL PROTECTION PLUS LTD.) ARE EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY DIFFERENT OBJECTIVES THAN THE FUND. -16-
- ------------------------------------------------------------------------------------------------------------------------------------ ML SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS WITHOUT "PRINCIPAL PROTECTION" FEATURES JUNE 1, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ Worst Worst Monthly Peak-to-valley Type of Inception Aggregate Current Drawdown Drawdown NAME OF FUND Offering of Trading Subscriptions Capitalization % Month % Period - ------------------------------------------------------------------------------------------------------------------------------------ ML Global Horizons L.P. Public Jan. 1994 $95,759,901 $82,916,686 (3.15)% (7/95) (4.98)% (6/95-10/95) - ------------------------------------------------------------------------------------------------------------------------------------ ML Global Horizons Ltd. (Series A) Public Jan. 1994 $71,325,088 $49,728,598 (3.39)% (7/95) (5.57)% (6/95-9/95) - ----------------------------------------------------------------------------------------------------------------------------------- ML Global Horizons Ltd. (Series B) Public Sept. 1994 $3,708,415 $2,785,641 (3.43)% (7/95) (5.73)% (6/95-9/95) - ----------------------------------------------------------------------------------------------------------------------------------- ML Futures Investments II L.P. Public May 1988 $269,809,800 $15,195,377 (10.34)% (1/91) (17.81)% (11/90-8/91) - ------------------------------------------------------------------------------------------------------------------------------------ Canadian Diversified Futures ceased trading Fund Limited Partnership Public July 1989 $13,060,222 12/31/93 (6.53)% (5/90) (18.38)% (12/90-8/91) - ------------------------------------------------------------------------------------------------------------------------------------ The John W. Henry & Co./Millburn L.P. Series A Units Public Jan. 1990 $18,182,000 $13,377,039 (15.99)% (1/92) (34.39)% (1/92-5/92) - ------------------------------------------------------------------------------------------------------------------------------------ The John W. Henry & Co./Millburn L.P. Series B Units Public Jan. 1991 $50,636,000 $29,249,070 (15.01)% (1/92) (32.38)% (1/92-5/92) - ------------------------------------------------------------------------------------------------------------------------------------ The John W. Henry & Co./Millburn L.P. Series C Units Public Jan. 1992 $40,000,000 $16,326,835 (7.97)% (1/94) (24.13)% (1/92-5/92) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) IV L.P. Series B Units Public July 1992 $13,353,600 $1,961,618 (6.08)% (7/95) (11.10)% (6/95-10/95) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) IV Ltd. Series B Shares Private July 1992 $9,131,000 $684,651 (3.66)% (1/94) (10.79)% (1/94-1/95) - ------------------------------------------------------------------------------------------------------------------------------------ ML Futures Investments L.P. Private Mar. 1989 $86,500,700 $27,352,649 (5.09)% (2/91) (8.33)% (6/95-10/95) - ------------------------------------------------------------------------------------------------------------------------------------
1996 Cumula- Compound 1995 1994 1993 1992 1991 tive Rate of Compound Compound Compound Compound Compound Rate of Return Rate of Rate of Rate of Rate of Rate of NAME OF FUND Return (5 months) Return Return Return Return Return - ------------------------------------------------------------------------------------------------------------------------------------ ML Global Horizons L.P. 17.82% (5.25)% 19.48% 4.08% N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------ ML Global Horizons Ltd. (Series A) 18.49% (5.01)% 19.77% 4.15% N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------ ML Global Horizons Ltd. (Series B) 20.78% (5.16)% 22.62% 3.86% N/A N/A N/A (4 mos.) - ------------------------------------------------------------------------------------------------------------------------------------ ML Futures Investments II L.P. 26.99% (0.36)% 17.07% (1.36)% 18.67% (3.17)% (3.95)% - ------------------------------------------------------------------------------------------------------------------------------------ Canadian Diversified Futures Fund Limited Partnership (15.21)% N/A N/A N/A N/A N/A (15.21)% - ------------------------------------------------------------------------------------------------------------------------------------ The John W. Henry & Co./Millburn L.P. Series A Units 58.70% (0.39)% 34.89% (8.64)% 20.64% (16.65)% 28.57% - ------------------------------------------------------------------------------------------------------------------------------------ The John W. Henry & Co./Millburn L.P. Series B Units 71.14% 0.07% 34.49% (8.43)% 19.74% (13.88)% 34.67% - ------------------------------------------------------------------------------------------------------------------------------------ The John W. Henry & Co./Millburn L.P. Series C Units 33.80% (0.02)% 35.08% (7.88)% 14.77% (6.30)% N/A - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) IV L.P. Series B Units 20.41% (3.59)% 12.01% (7.44)% 19.56% 0.76% N/A (6 mos.) - ------------------------------------------------------------------------------------------------------------------------------------ The SECTOR Strategy Fund(SM) IV Ltd. 20.09% (3.96)% 14.51% (9.37)% 19.56% 0.76% N/A Series B Shares (6 mos.) - ------------------------------------------------------------------------------------------------------------------------------------ ML Futures Investments L.P. 41.49% (1.26)% 11.80% 2.95% 16.56% 4.06% 2.64% - ------------------------------------------------------------------------------------------------------------------------------------
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY DIFFERENT OBJECTIVES THAN THE FUND. -17- - -------------------------------------------------------------------------------- ML SELECTED-ADVISOR AND MULTI-ADVISOR FUNDS WITHOUT "PRINCIPAL PROTECTION" FEATURES JUNE 1, 1996 - --------------------------------------------------------------------------------
Worst Worst Monthly Peak-to-valley Type of Inception Aggregate Current Drawdown Drawdown NAME OF FUND Offering of Trading Subscriptions Capitalization % Month % Period - ------------------------------------------------------------------------------------------------------------------------------------ ML Futures dissolved as of Investments Ltd. Private Mar. 1989 $ 68,202,237 8/31/94 (6.17)% (2/94) (11.10)% (1/94-2/94) Currency Investment dissolved as of Partners Ltd. Private April 1991 $ 55,114,566 8/31/94 (5.13)% (8/91) (16.10)% (7/91-5/94) The Managed Futures Trust dissolved as of Fund L.P. Private May 1991 $ 11,090,759 9/24/93 (6.22)% (7/91) (14.50)% (1/92-5/92) Commodity Trading dissolved as of Company, Ltd. Private July 1991 $ 25,797,626 10/31/94 (6.47)% (2/94) (23.31)% (1/92-12/92) Permal F/X, Financials & Futures Ltd. Private July 1992 $106,495,710 $48,660,183 (5.67)% (2/94) (12.24)% (2/94-4/94) ML Institutional dissolved as of Partners L.P. Public Feb. 1992 $ 57,312,700 12/31/94 (3.58)% (1/94) (8.78)%(10/93-4/94) Futures Opportunities dissolved as of Limited Private Dec. 1988 $ 45,310,202 8/1/92 (13.70)% (5/90) (17.34)% (1/92-5/92) Daiwa Hudson River Fund Private Feb. 1994 $ 7,044,701 $5,576,266 (4.72)% (3/94) (17.20)% (2/94-1/95) The JLI Trading Co. Fund Private Mar. 1995 $ 14,300,136 $13,925,926 (6.93)% (2/96) (6.93)% (2/96)
1996 Cumula- Compound 1995 1994 1993 1992 1991 tive Rate of Compound Compound Compound Compound Compound Rate of Return Rate of Rate of Rate of Rate of Rate of NAME OF FUND Return (5 months) Return Return Return Return Return - ----------------------------------------------------------------------------------------------------------------------------------- ML Futures (3.78)% Investments Ltd. 13.39% N/A N/A (8 mos.) 15.26% 3.12% (0.85)% Currency Investment (4.05)% (7.52)% Partners Ltd. (14.25)% N/A N/A (8 mos.) 2.06% (1.57)% (9 mos.) The Managed Futures Trust 20.58% 10.06% Fund L.P. 36.19% N/A N/A N/A (8-2/3 mos.) 2.63% (8 mos.) Commodity Trading 6.21% (3.50)% Company, Ltd. (14.46)% N/A N/A (10 mos.) 14.91% 23.31% (6 mos.) Permal F/X, Financials & (5.79)% Futures Ltd. 18.61% 4.33% 14.77% (5.33)% 11.05% (6 mos.) N/A ML Institutional (3.51)% Partners L.P. (0.35)% N/A N/A (4.06)% 7.65% (11 mos.) N/A Futures Opportunities (13.56)% Limited (1.86)% N/A N/A N/A N/A (7 mos.) 13.54% Daiwa Hudson (16.22)% River Fund (0.65)% 0.26% 19.82% (11 mos.) N/A N/A N/A The JLI Trading 2.45% Co. Fund (2.64)% (4.97)% (10 mos.) N/A N/A N/A N/A
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY DIFFERENT OBJECTIVES THAN THE FUND. -18- SELECTED FINANCIAL DATA The following Selected Financial Data is derived: (i) from the financial statements of the Fund for the period from October 12, 1994 (commencement of operations) to December 31, 1994 and for the fiscal year ended December 31, 1995, which has been audited by Deloitte & Touche LLP, independent auditors, as stated in their report included in this Prospectus (see "Index to Financial Statements"), and is included herein in reliance upon the authority of Deloitte & Touche LLP as experts in auditing and accounting; and (ii) from the unaudited financial statements of the Fund for the period from January 1, 1996 to May 31, 1996 and January 1, 1995 to May 31, 1995.
January 1, 1996 January 1, 1995 October 12, 1994 to to January 1, 1995 (Commencement May 31, 1996 May 31, 1995 to of Operations) to Income Statement Data (Unaudited) (Unaudited) December 31, 1995 December 31, 1994 - --------------------- --------------- --------------- ----------------- ----------------- Revenues: Realized Gain (Loss) $2,856,105 $2,364,339 $4,407,833 $ (363,054) Unrealized (Loss) Gain (2,015,889) 1,466,799 1,355,377 1,115,935 ---------- ---------- ---------- ---------- Total Trading Results 840,216 3,831,138 5,763,210 752,881 Interest Income 1,927,550 1,083,661 3,415,670 377,303 ---------- ---------- ---------- ---------- Total Revenues 2,767,766 4,914,799 9,178,880 1,130,184 Expenses: Administrative Fees/1/ 53,617 --- --- --- Profit Shares 110,738 505,860 652,366 129,169 Brokerage Commissions 1,983,811 1,051,336 3,303,292 416,617 Total Expenses 2,148,166 1,557,196 3,955,658 545,786 ---------- ---------- ---------- ---------- Net Income (Loss) Before Minority Interest 619,600 3,357,603 5,223,222 584,398 Minority Interest/2/ (1,846) 27,376 (36,730) (4,504) ---------- ---------- ---------- ---------- Net Income $ 617,754 $3,330,227 $5,186,492 $ 579,894 ========== ========== ========== ========== May 31, 1996 December 31, 1995 (Unaudited) ------------------------------ --------------------------- Redemption Redemption Purposes GAAP/3/ Purposes GAAP/3/ ------------- ----------- ----------- ---------- Aggregate Net Asset Value (Series A-E) Net Asset $74,988,233 $74,846,544 Value (Series $84,609,493 $84,501,012 A-G) Net Asset Value per Unit Net Asset Series A $106.96/4/ $106.74/4/ Value per Unit Series B $110.36 $110.15 Series A $107.82/4/ $107.69/4/ Series C $103.35 $103.16 Series B $105.20/4/ $105.03/4/ Series D $102.34 $102.15 Series C $100.66/4/ $100.52/4/ Series E $102.72 $102.53 Series D $103.11 $102.98 Series E $103.49 $103.36 Series F $100.44 $100.31 Series G $ 98.95 $ 98.82 - ---------------------
1 As of January 1, 1996, a portion of the Brokerage Commissions were reclassified as Administrative Fees, at no additional cost to the Fund. 2 MLIP is general partner of the "trading partnership" (of which the Fund is the sole limited partner and MLIP the general partner) through which the Fund trades. Because the Fund owns substantially all of the "trading partnership," "trading partnership" activities are referred to as Fund activities in this Prospectus. The minority interest represents MLIP's share of the trading partnership's profit or loss. 3 In accordance with Generally Accepted Accounting Principles ("GAAP"), the full amount of the organizational and initial offering costs were deducted from Partners' capital from inception. The Fund, however, reduces Net Asset Value for these costs only as the monthly reimbursement payments are actually made. This difference will be eliminated as of October 31, 1997 when reimbursement payments end. 4 Net of annual distributions of $6.00 on the Series A and B and $3.50 on the Series C Units. _________________ PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. -19- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATIONAL OVERVIEW; ADVISOR SELECTIONS The Fund's results of operations depend on MLIP's ability to select Advisors as well as on the Advisors' ability to trade profitably. MLIP's selection procedures and trading leveraging analysis, as well as the Advisors' trading methods, are confidential, so that substantially the only available information relevant to the Fund's results of operations is its actual performance record to date. Because of the speculative nature of its trading, the Fund's past performance is not necessarily indicative of future results. As of July 1, 1996, the trading assets attributable to each series of Units were allocated approximately as follows: Chesapeake Capital Corporation 25.0% John W. Henry & Company, Inc 25.0% Non-"Core" Advisors 50.0% ------ Total 100.0% ====== In the Fund's first 19-2/3 months of trading, MLIP (i) terminated one "core" Advisor, (ii) added 4 non-"core" Advisors, (iii) terminated 3 non-"core" Advisors, and (iv) reallocated trading assets as of the beginning of 8 different months. MLIP expects to continue to change both allocations and Advisor selections from time to time without advance notice to existing investors. MLIP has no timetable or schedule for making Advisor changes or reallocations, and generally makes a medium- to long-term commitment to all Advisors selected. However, there can be no assurance as to the frequency or number of the Advisor changes that may take place in the future, or as to how long any of the current Advisors will continue to manage assets for the Fund. Results of Operations General - ------- MLIP believes that multi-Advisor futures funds should be regarded as medium- to long-term invest ments, but it is difficult to identify "trends" in the Fund's operations and virtually impossible to make any predictions regarding future results based on the results to date. Markets with sustained price trends tend to be more favorable to managed futures investments than "whipsaw," "choppy" markets, but (i) this is not always the case, (ii) it is impossible to predict when price trends will occur and (iii) different Advisors are affected differently by trending markets as well as by particular types of trends. The Fund controls credit risk in its derivatives trading by trading only through Merrill Lynch entities. The Fund attempts to control the market risk inherent in stock trading in the manner described under "The Advisor Selection Process -- MLIP and Its Advisor Selection and Monitoring Process" at page 22 and "Leverage Considerations" at page 30. The market risk to the Fund is, in any event, limited by the deleveraged character of its trading and its "principal protection" feature. See "Leverage Considerations" at page 30 and "The ML&Co. Guarantee" at page 31. Through May 31, 1996, all series of Units traded with approximately 60% of their assets allocated to trading. All series of Units sold pursuant to this Prospectus will start trading with 75% of their assets so allocated. The performance of the different series of Units differs somewhat over the same period, because the various series begin trading at different times and pay different Profit Shares. -20- Performance Summary ------------------- 1994 (2-2/3 months)-1995 STATISTICS. During 1994 (2-2/3 months), the Fund's average month- end Net Assets equalled $32,552,448, and the Fund recognized gross trading gains of $752,881 or 2.31% of such average month-end Net Assets. Brokerage commissions of $416,617 or 1.28% and Profit Shares of $129,169 or 0.4% of average month-end Net Assets were paid. Interest income of $377,303 or 1.16% of average month-end Net Assets resulted in net income of $579,894 (before organizational and initial offering cost reimbursement payments of $17,712) or 1.78% of average month-end Net Assets, which resulted in a 1.76% increase in the Net Asset Value per Series A Unit, the only series outstanding in 1994. During 1995, the Fund's average month-end Net Assets equalled $55,827,125, and the Fund recognized gross trading gains of $5,763,210 or 10.32% of such average month-end Net Assets. Brokerage commissions of $3,303,292 or 5.92% and Profit Shares of $652,366 or 1.17% of average month-end Net Assets were paid. Interest income of $3,415,670 or 6.12% of average month-end Net Assets resulted in net income of $5,186,492 (before organizational and initial offering cost reimbursement payments of $79,700) or 9.29% of average month-end Net Assets, which resulted in a 10.57% increase in the overall Net Asset Value of the Fund. OVERVIEW. In 1994-1995, prevailing price trends in several key markets enabled the Fund's Trading Advisors to trade profitably for the Fund. Although trading in many of the traditional commodity markets may have been lackluster, the currency and financial markets offered exceptional trading opportunities. Soaring stock prices and falling interest rates, coupled with significant currency moves, resulted in profitable trading opportunities in these markets throughout the year. After months characterized by very difficult trading environments, solid price trends across many markets began to emerge during the first quarter of 1995. In February, bond markets worldwide recovered some of the ground lost in the previous year. Specifically, U.S. Treasury prices improved, a development spurred by the belief that growth in the U.S. economy was slowing enough for inflation to stabilize. The Fund was also able to profit in the non-dollar markets, as German and Japanese bonds rallied. In the currency markets, long positions in the Deutsche mark versus the U.S. dollar resulted in strong profits for the Fund as the Deutsche mark hit a two-year high against the dollar on February 24. In the second quarter of 1995, market volatility once again began to affect trading, as many previously strong price trends began to weaken and, in some cases, reverse. During April, the U.S. dollar hit new lows versus the Japanese yen and Deutsche mark before rebounding sharply. The U.S. dollar enjoyed another sharp rally in May, due to the intervention of major central banks, potential trade sanctions against Japan and United States Congressional action to reduce the federal deficit. In June, strong indications that the U.S. economy was slowing, coupled with a failure of the Bundesbank to lower the Lombard rate, stalled a rally in the German bond market. In July the Federal Reserve Board Chairman Alan Greenspan's optimistic comments concerning the U.S. economy led to a sudden correction in U.S. bond prices after several months of a strong uptrend. Despite exposure to the global interest-rate markets, the Fund's long bias in U.S. Treasury bonds had a negative impact on the Fund. Throughout August and into September, the U.S. dollar rallied sharply against the Japanese yen and the Deutsche mark. The dollar's rally was supported by coordinated intervention by major central banks and further bolstered on August 30 by widespread recognition of the growing banking crisis in Japan. Despite continued price volatility during the final quarter of 1995, the Trading Advisors were able to identify several trends in key markets. U.S. Treasury bond prices continued their strong move upward throughout November, due both to weak economic data and optimism on Federal budget talks. By month-end, the 30-year Treasury bond rate was pushed to its lowest level in more than two years. During December, U.S. bond prices weakened further as government budget talks continued to stall. By year-end, however, prices strengthened somewhat as the yield on the U.S. long bond fell below 6% for the first time in over two years. -21- 1996 (5 months) STATISTICS. From January 1, 1996 through May 31, 1996, the Fund's average month-end Net Assets equalled $83,860,013 and the Fund recognized gross trading gains of $840,216 or 1.00% of such average month-end Net Assets. Brokerage commissions of $1,983,811 or 2.37%, administrative expenses of $53,617 or 0.06% and Profit Shares of $110,738 or 0.13% of average month-end Net Assets were paid. Interest income of $1,927,550 or 2.30% of average month-end Net Assets resulted in a net gain of $617,754 (before organizational and initial offering cost reimbursement payments of $33,208 and after deducting MLIP's "minority interest" in the trading partnership), or 0.74% of average month-end Net Assets which resulted in a 0.86% increase in the Net Asset Value of the Series A Units, a 0.84% increase in the Net Asset Value of the Series B Units, a 0.81% increase in the Net Asset Value of the Series C Units, a 0.77% increase in the Net Asset Value of the Series D and Series E Units, a 0.44% increase in the Net Asset Value of the Series F Units and a 1.05% decrease in the Net Asset Value of the Series G Units (since April 19, 1996, when Series G Units were issued). The performance of the different series of Units differs somewhat over the same period due primarily to Profit Share calculation differences resulting from the different times at which the various series of Units began trading. OVERVIEW. The first five months of 1996 have included the largest single monthly drawdown as well as two of the three most profitable months in the Fund's history. The year began with the East Coast blizzard, continuing difficulties in the U.S. federal budget talks and an economic slowdown having a negative impact on many markets. The Fund was profitable in January due to the strong profits in currency trading as the dollar reached a 23-month high against the Yen. In February, however, the Fund incurred its largest monthly loss due to the sudden reversals in several strong price trends and considerable volatility in the currency and financial markets. During March, large profits were taken in the crude oil and gasoline markets as strong demand continued and talks between the United Nations and Iraq were suspended. This trend continued into the second quarter, during which strong gains were also recognized in the agricultural markets as a combination of drought and excessive rain drove wheat and grain prices to historic highs. In May, however, the Fund gave back much of these gains as difficult trading conditions in many markets prevailed and a lack of clear price trends in key markets negatively impacted the Fund's performance. LIQUIDITY AND CAPITAL RESOURCES The amount of capital raised for the Fund does not have a significant impact on its operations. This is because (leaving aside the de minimis organizational and initial offering cost reimbursement obligation) the Fund has no capital expenditure or working capital requirements other than paying trading losses and costs, both of which should be generally proportional to the capital available. In addition, within broad ranges of capitalization, the Advisors' trading positions should increase or decrease in approximate proportion to the size of the Fund account managed by each of them, respectively. The Fund raises additional capital only through the continuous offering of its Units. Inflation is not a significant factor in the Fund's profitability, although inflationary cycles can give rise to the type of major price movements that can have a materially favorable or adverse impact on the Fund's performance. Changes in the level of prevailing interest rates could have a material effect on the Fund's trading leverage. Interest rates directly affect the calculation of the discounted value of the guaranteed $100 per Unit and, accordingly, the assets available for trading. -22- THE ADVISOR SELECTION PROCESS MLIP AND ITS ADVISOR SELECTION AND MONITORING PROCESS MLIP, a wholly-owned indirect subsidiary of ML&Co., is an integrated business whose capabilities include research, trading, finance, administration, systems, operations, sales and marketing. Since its inception, MLIP has concentrated primarily on the structuring of multi- Advisor products, and has devoted substantial resources to the development of the capacity to formulate advantageous trading advisor combinations, as well as to assess trading advisors on an individual basis. Advisor analysis includes the quantitative appraisal of an Advisor's strategy and performance combined with quantitative statistical evaluation of the performance of individual advisors and of different possible Advisor combinations. MLIP's trading advisor analysis professionals monitor the performance of several hundred advisors. Both quantitative and qualitative criteria have been factored into MLIP's selection process, including the following: type of trading program; risk control; duration and speed of recovery from drawdowns; experience; organizational infrastructure; and low correlation with traditional investments such as stocks and bonds. Advisors' past records are evaluated comparatively with a view to combining Advisors whose respective trading results have historically demonstrated not only a low degree of correlation with stocks and bonds but also with the other advisors selected. Certain mathematical optimization procedures are then used to develop an advisor combination which, based on a hypothetical composite of the past performance of the respective advisors, exhibits a risk/reward profile consistent with MLIP's objectives. By identifying advisor combinations on this basis, MLIP hopes to maintain profit potential while also materially reducing the risk of major drawdowns. In selecting Advisors for the Fund, MLIP emphasizes retaining multiple Advisors, trading in multiple markets and implementing multiple strategies. Certain of the Advisors will trade limited portfolios -- for example, focusing on currencies or financial instruments. Other Advisors will trade on a broadly diversified basis. MLIP evaluates the overall market diversification and emphasis that particular Advisor combinations would give the Fund. Discretionary as well as systematic, fundamental as well as technical, Advisors are retained. By diversifying strategies as well as markets, MLIP can, if successful, create Advisor combinations for the Fund that should have good profit potential across a wide range of different market cycles. Since inception, the Fund's Advisor portfolio has emphasized technical and trend-following methods. MLIP's primary emphasis is on a qualitative assessment of each Advisor, including, among other considerations, an evaluation of each Advisor's basic trading approach, markets traded, prior experience, past performance, fee requirements and assets under management. Although different factors may be considered in the case of different Advisors (and no representation is made that any given factor will be considered in selecting any given Advisor), subjective evaluation of each prospective Advisor by principals of MLIP is an important factor in all of MLIP's Advisor selections. Quantitative non-correlation analysis and volatility studies are employed in developing the overall Advisor mix, but the principal objective is to identify Advisors MLIP believes to have excellent potential to trade successfully. No Advisor selected by MLIP (other than MLAM) will have any affiliation with Merrill Lynch, other than managing the trading of the Fund and other futures funds or accounts sponsored or managed by MLIP. Furthermore, none of the Advisors will be affiliated with any other Advisor. MLIP monitors the performance of the Fund and its Advisors on a day-to-day basis, and, from time to time, reallocates assets among, terminates and/or appoints new Advisors. At least quarterly, MLIP formally reviews the performance of the Fund and each Advisor in order to assess whether to change Advisor selections or allocations. MLIP anticipates that a number of additional adjustments may be made over time, as they have been to date; but there can be no assurance that the Fund's Advisor portfolio may not remain static for significant periods of time. On the other hand, MLIP may, on short notice, terminate or allocate assets away from an Advisor if MLIP has reason to believe that the Advisor is deviating from historical trading patterns, violating the Advisor's risk management policies or has otherwise given MLIP what it considers to be cause for termination. -23- ACCESS TO GLOBAL MARKETS The Fund has access to global markets including, but not limited to, the following: CURRENCIES -------------------------------------------------------------- Australian Dollar Irish Punt Belgian Franc Italian Lira British Pound Japanese Yen Canadian Dollar New Zealand Dollar Danish Krone Norwegian Krone Deutsche Mark Singapore Dollar Dutch Guilder Spanish Peseta European Currency Unit Swedish Krona Finnish Markka Swiss Franc French Franc United States Dollar FINANCIAL INSTRUMENTS -------------------------------------------------------------- Australian Bonds Major Market Stock Index (U.S.) Australian Treasury Bills MEFF&S Stock Index (Spain) Canadian Bonds Nikkei Stock Average (Japan) CAC 40 Stock Index (France) PIBOR Eurodollars S&P 500 Stock Index (U.S.) Eurolira Spanish Bonds Euromarks Tokyo Stock Price Index Euroswiss U.K. "Gilts" Euroyen U.K. Short Sterling Financial Times 100 Stock U.S. Dollar Index Index (U.K.) U.S. Treasury Bills French Bonds U.S. Treasury Bonds German Bonds U.S. Treasury Notes Italian Bonds Value Line Stock Index (U.S.) Japanese Bonds METALS -------------------------------------------------------------- Aluminum Platinum Gold Silver Lead Tin Nickel Zinc ENERGY PRODUCTS -------------------------------------------------------------- Crude Oil No. 2 Heating Oil Gas Oil Propane Heavy Fuel Oil Residual Fuel Oil Natural Gas Unleaded Gasoline AGRICULTURAL PRODUCTS -------------------------------------------------------------- Cocoa Orange Juice Coffee Pork Bellies Corn Soybeans Cotton Soymeal Feeder Cattle Soy Oil Live Hogs Sugar Oats Wheat The Fund has not traded in all of the foregoing markets. There can be no assurance as to which markets the Fund will trade in over time. -24- THE ADVISORS "CORE" ADVISOR SUMMARIES As of May 31, 1996, the "core" Advisors were, in the aggregate, managing approximately $2.0 billion of customer assets in the futures, cash and forward markets, of which approximately $1.4 billion was being traded in the programs used for the Fund. THE CURRENT "CORE" ADVISORS ARE AS FOLLOWS:
JUNE 1, 1996 ALLOCATION APRIL 30, 1996 GENERAL TRADING OF TRADING ASSETS UNDER ADVISOR APPROACH ASSETS MANAGEMENT* ------- --------------- ------------ -------------- Chesapeake Capital Technical; 25% $819 million (total) Corporation trend-following $770 million (Diversified Program) John W. Henry & Technical; 25% $1.3 billion (total) Company, Inc. trend-following $880 million (Financial and Metals Portfolio)
____________________ /*/ Excluding "notional funds." "Notional" funds represent the difference between the level at which an advisor is instructed to trade an account and the capital actually committed to the account. _________________________ CHESAPEAKE CAPITAL CORPORATION (25% ALLOCATION AS OF JULY 1, 1996) -- Chesapeake Capital Corporation ("Chesapeake") has offered investment advisory and portfolio management services to clients since 1988. Chesapeake currently trades three programs, relying primarily on technical analysis and "charting" in its evaluation of historical commodity price movements. In the Diversified Program that Chesapeake trades for the Fund, Chesapeake applies its trend-following system to a global portfolio of futures and forward markets, including agricultural products, precious and industrial metals, currencies, financial instruments, and stock, financial and economic indices. Chesapeake may trade these markets on any U.S. or foreign exchange. As of April 30, 1996, Chesapeake was managing approximately $770 million of customer funds in the Diversified Program ("notional" funds excluded) and approximately $819 million of customer funds in all of its programs ("notional" funds excluded). Chesapeake has traded the Diversified Program since February 1988. The compound annual rates of return achieved by the Diversified Program since January 1, 1990 have been 43.12%, 12.51%, 1.81%, 61.82%, 15.87%, 2.67% and 0.98% (5 months), respectively. During that period, the largest monthly drawdown was (10.98)% (1/92) and the largest peak-to- valley drawdown (16.62)% (1/92-5/92). See pages APPI-9 through APPI-10 for performance information relating to Chesapeake. JOHN W. HENRY & COMPANY, INC. (25% ALLOCATION AS OF JULY 1, 1996) - John W. Henry & Company, Inc. ("JWH") operates eleven trading programs for U.S. and non-U.S. investors. These programs, other than the InterRate(TM) program, emphasize intermediate- and long-term, quantitative trend analysis models. The Financial and Metals Portfolio used for the Fund implements a technical, trend-following system which participates in four major market sectors -- interest rates, world currencies, stock indices and precious metals -- and initiates trades according to trend- emergence and computerized determination of relative risk. As of April 30, 1996, JWH was trading approximately $880 million of customer funds in the Financial and Metals Portfolio ("notional" funds excluded) and approximately $1.3 billion of customer funds in all of its programs ("notional" funds excluded). JWH has traded the Financial and Metals Portfolio with client capital since October 1984. Since inception, the Financial and Metals Portfolio has been traded at generally the same degree of leverage, although under certain market conditions JWH may reduce position size or even withdraw from the market altogether. The compound annual rates of return achieved by the Financial and Metals Portfolio since January 1, 1990 have been 83.59%, 61.87%, (10.89)%, 46.82%, (5.32)% 38.54% and 3.89% (5 months), respectively. During that period the largest monthly drawdown was (22.7)% (5/90) and the largest peak-to-valley drawdown (39.5)% (12/91- 5/92). -25- See pages APPI-20 through APPI-23 for performance information relating to JWH. More complete descriptions and the performance summaries for the "core" Advisors are included in Appendix I of this Prospectus. Read Appendix I carefully before you decide whether to invest. See "Risk Factors -- (2) Past Performance" at page 9. THE ADVISORY AGREEMENTS The Advisory Agreements among the Fund, MLIP and each Advisor terminate approximately one year after the Advisor begins managing an account for the Fund, subject to up to two one-year renewals, on the same terms, at the option of MLIP (most of the current Advisory Agreements are in their first renewal period as of the date of this Prospectus). Each Advisory Agreement provides that the Fund will indemnify the Trading Advisor and related parties for losses and expenses resulting from any claims or proceedings against them relating to the activities of the Fund, provided that the conduct which was the subject of such claim or proceeding does not constitute negligence or misconduct or breach of the Advisory Agreement or of any fiduciary obligation to the Fund and was done in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the Fund. Each Advisory Agreement further provides that this indemnity provision will not increase the liability of any Limited Partner to the Fund beyond the amount of such Limited Partner's capital and profits, if any, in the Fund ("capital and profits," for such purposes, does not include any distributions previously received or other returns of capital and profits, including redemptions). Under the exculpatory provisions of the Advisory Agreements, none of the Trading Advisors or any related parties is liable to the Fund or to any of the Partners except by reason of conduct in violation of the foregoing standards for indemnification by the Fund. Most Advisors agree to invest $10,000 in the Fund as a precondition to being retained by the Fund. MLAM'S INVESTMENT ADVISORY CONTRACT The Investment Advisory Contract executed and delivered among MLIP, the Fund, MLF and MLAM exculpates MLAM for actions or omissions in connection with managing the Fund's portfolio of Government Securities, provided such actions or omissions do not constitute gross negligence or willful and reckless misconduct. Under the Investment Advisory Contract, MLF is obligated to pay MLAM's management fees, and MLIP will be responsible for paying these fees should MLF for some reason fail to do so. In the Limited Partnership Agreement, MLIP agrees to indemnify and hold harmless the Fund for any loss or expense the Fund may incur as a result of the difference between MLAM's standard of liability under the Investment Advisory Contract and MLIP's standard of liability under the Limited Partnership Agreement. MLIP AND MLF BACKGROUND MLIP is the sole promoter of the Fund. None of MLAM, MLF, MLIB or MLPF&S acts as a promoter with respect to the organization of the Fund or the offering of the Units. Merrill Lynch Investment Partners Inc., a Delaware corporation, was organized in 1986 principally in order to serve as the general partner and commodity pool operator of commodity pools for which MLF acts as commodity broker and MLPF&S acts as selling agent. MLIP became registered with the CFTC as a commodity pool operator and commodity trading advisor in October 1986 and April 1990, respectively, and is a member of the National Futures Association ("NFA") in such capacities. MLIP has sponsored in excess of 35 managed futures funds and, as of June 1, 1996, there were in excess of $1.3 billion in funds for which MLIP serves as trading manager or sponsor. The principal offices of MLIP are located at Merrill Lynch World Headquarters, Sixth Floor, South Tower, World Financial Center, New York, New York 10080-6106; telephone (212) 236-4167. MLIP is a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in turn, is wholly-owned by Merrill Lynch & Co., Inc. -26- The registration of MLIP with the CFTC, and MLIP's membership in the NFA, must not be taken as an indication that any such agency or self-regulatory body has recommended or approved either MLIP or an investment in the Fund. Since its inception in 1986, MLIP has operated with one primary objective -- to provide investors with an opportunity for long-term capital appreciation and diversification through quality investments in the futures, commodity options and forward markets. MLIP, as general partner or sponsor, structures and promotes managed futures investments in an effort to meet the objectives of a wide variety of clients. MLIP attempts to combine a detailed Advisor selection process with active monitoring of its existing funds and their Advisors. MLIP does not manage client assets directly, but rather specializes in selecting groups of independent trading advisors to do so. PRINCIPALS The officers of MLIP and their business backgrounds are as follows.
John R. Frawley, Jr. Chief Executive Officer, President and Director James M. Bernard Chief Financial Officer, Senior Vice President and Treasurer Jeffrey F. Chandor Senior Vice President and Director of Sales, Marketing and Research William T. Maitland Secretary and Director Allen N. Jones Chairman and Director
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief Executive Officer, President and a Director of MLIP and Co-Chairman of MLF. He joined MLPF&S in 1966 and has served in various positions, including Retail and Institutional Sales, Manager of New York Institutional Sales, Director of Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets, and Director of International Institutional Sales. Mr. Frawley holds a Bachelor of Science degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory Coordination Advisory Committee from its inception in 1990 through its dissolution in 1994. Mr. Frawley is currently a member of the CFTC's Financial Products Advisory Committee. In January 1996, he was re-elected to a one-year term as Chairman of the Managed Futures Association, the national trade association of the United States managed futures industry. Mr. Frawley is also a Director of that organization, and a Director of the Futures Industry Institute. James M. Bernard was born in 1950. Mr. Bernard is Chief Financial Officer, Senior Vice President and Treasurer of MLIP. He joined MLF in 1983. Before that he was the Commodity Controller for Nabisco Brands Inc. from November 1976 to 1982 and a Supervisor at Ernst & Whinney from 1972 to November 1976. Mr. Bernard is a member of the American Institute of Certified Public Accountants and holds a Bachelor of Science degree from St. John's University and a Master of Business Administration degree from Fordham University. Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice President and the Director of Sales, Marketing and Research of MLIP. He joined MLPF&S in 1971 and has served as the Product Manager of International Institutional Equities, Derivatives and Mortgage-Backed Securities as well as Managing Director of International Sales in the United States, and Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts degree from Trinity College, Hartford, Connecticut. William T. Maitland was born in 1949. From MLIP's inception in August 1986 through June 1, 1988, Mr. Maitland was the Secretary and a Director of MLIP and, on August 15, 1992, he again assumed these positions. Mr. Maitland is the General Counsel for Futures & Options for MLPF&S, a position he has held since November 1990, and is a member of the Board of Directors of MLF. In 1971, Mr. Maitland graduated with a Bachelor of Arts degree from Fordham University where his field of concentration was economics. In 1974, he received his Juris Doctor degree from Fordham Law School. Mr. Maitland joined MLPF&S in 1979. Mr. Maitland is presently a member of the Board of Directors of the NFA and the Futures Industry Association ("FIA") and a past President of the Executive Committee -27- of the Law & Compliance Division of the FIA. He is a member of the Committee on Commodities Regulation of the Association of the Bar of the City of New York. Allen N. Jones was born in 1942. Mr. Jones is Chairman and a Director of MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has held the position of Senior Vice President of MLPF&S. From June 1992 through February 1994, Mr. Jones was the President and Chief Executive Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of Directors of MLIG and its subsidiary companies. In February 1994, Mr. Jones became the Director of Individual Financial Services of the Merrill Lynch Private Client Group. From January 1992 to June 1992, he held the position of First Vice President of MLPF&S. From January 1990 to June 1992, he held the position of District Director of MLPF&S. Before January 1990, he held the position of Senior Regional Vice President of MLPF&S. MLIP acts as general partner to thirteen public futures funds whose units of limited partnership interest are registered under the Securities Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, The Growth and Guarantee Fund L.P., Merrill Lynch Investments II L.P. (formerly The Futures Dimension Fund II L.P.), Merrill Lynch Investments L.P. (formerly The Tudor Prime Advisors Fund L.P.), John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R. Strategy Fund/sm/ L.P., The SECTOR Strategy Fund/sm/ II L.P., The SECTOR Strategy Fund/sm/ IV L.P., The SECTOR Strategy Fund/sm/ V L.P., The SECTOR Strategy Fund/sm/ VI L.P., ML Global Horizons L.P., ML JWH Strategic Allocation Fund L.P. and the Fund. Because MLIP serves as the sole general partner of each of these funds, the officers and directors of MLIP effectively manage them as officers and directors of such funds. The principals of MLIP do not currently intend to acquire any personal investment in the Fund. As of June 1, 1996, MLIP's interest in the Fund was valued at $636,761. MLIP is required to maintain at least a 1% interest in each series of Units at all times. MLF MLF is a clearing member of The Board of Trade of the City of Chicago, the Chicago Mercantile Exchange, the New York Futures Exchange and all other principal United States commodity exchanges. The principal office of MLF is located at World Financial Center, 250 Vesey Street, 23rd Floor, New York, New York 10281-1323. The Customer Agreement between MLF and the Fund provides that MLF shall not be liable for actions taken pursuant to the Customer Agreement except for actions constituting negligence or misconduct, and that MLF shall not be responsible for actions taken by it under the Customer Agreement in compliance with instructions given by any Trading Advisor or the Fund. FIDUCIARY OBLIGATIONS OF MLIP NATURE OF FIDUCIARY OBLIGATIONS; CONFLICTS OF INTEREST As general partner of the Fund, MLIP is a "fiduciary" to the Limited Partners under both statutory and common law and has a responsibility to exercise good faith, fairness and loyalty in all dealings affecting the Fund. The scope of MLIP's fiduciary obligations are defined and established, in large part, by the consent of each subscribing Limited Partner to the business terms of the Fund as embodied in the Limited Partnership Agreement and as described in this Prospectus. Certain of the conflicts of interest involved in the operation of the Fund -- for example, the Fund's trading currency forward contracts with an affiliate of MLIP -- might be impermissible under the fiduciary principles applied in certain other investment contexts -- for example, "investment advisers" are prohibited from trading securities with their clients on a principal-to-principal basis. In the case of the Fund, such activities are authorized by disclosure and the informed consent of subscribers. There are substantial and inherent conflicts of interest in the structure of the Fund. One of the purposes underlying the disclosures set forth in this Prospectus is to disclose these conflicts of interests to all prospective Limited Partners so that MLIP may have the opportunity to obtain their informed consent to them. Prospective investors who are not willing to consent to the various conflicts of interest described herein are ineligible to invest in the Fund. See "Conflicts of Interest" at page 44. Having once established the business terms of the Fund, MLIP is effectively precluded from changing these terms in a manner that disproportionately benefits MLIP, since any such change could constitute self- dealing under common law fiduciary standards, and it is virtually impossible to obtain the consent of the existing Limited Partners to -28- such self-dealing (given adequate disclosure, on the other hand, new investors to the Fund should be deemed to have given their consent to its business terms by the act of subscribing). MLIP has selected the Trading Advisors and the Trading Advisors are required to clear (although not to execute) the Fund's futures trades through MLF, as well as to execute and maintain the Fund's forward currency trades through the F/X Desk. MLIP has no control or input into the trades ordered for the Fund by the Trading Advisors, and the brokerage commissions paid by the Fund are assessed on a flat-rate, not a per-trade, basis. Nevertheless, prospective investors must recognize that by subscribing to the Fund they have consented to its basic structure, in which affiliates of MLIP, and MLIP itself, receive substantial revenues from the Fund and do not negotiate on behalf of the Fund to achieve lower rates from the Merrill Lynch entities which provide services to it. The Fund, as a publicly-offered "commodity pool," is subject to the Statement of Policy of the North American Securities Administrators Association, Inc. relating to the registration, for public offering, of commodity pool interests (the "NASAA Guidelines"). These NASAA Guidelines explicitly prohibit a general partner of a commodity pool from "contracting away the fiduciary obligation owed to [investors] under the common law." The Limited Partnership Agreement provides that MLIP and its affiliates shall have no liability to the Fund or to any Limited Partner for any loss suffered by the Fund that arises out of any action or inaction of MLIP or its affiliates if MLIP or its affiliates, in good faith, determined that such course of conduct was in the best interests of the Fund, and such course of conduct did not constitute negligence or misconduct by MLIP or its affiliates. The Fund has agreed to indemnify MLIP and certain of its affiliates against claims, losses or liabilities based on their conduct relating to the Fund, provided that the conduct resulting in the claims, losses or liabilities for which indemnity is sought did not constitute negligence or misconduct and was done in good faith and in a manner reasonably believed to be in the best interests of the Fund. The NASAA Guidelines prescribe the maximum permissible extent to which the Fund can indemnify MLIP and its affiliates and prohibit the Fund from purchasing insurance to cover indemnification which the Fund itself could not undertake directly. REMEDIES AVAILABLE TO LIMITED PARTNERS Under Delaware law, a limited partner may, in certain circumstances, institute legal action on behalf of himself or herself and all other similarly situated limited partners (a "class action") to recover damages from a general partner for violations of fiduciary duties, or on behalf of a partnership (a partnership "derivative action") to recover damages from a third party where a general partner has failed or refused to institute proceedings to recover such damages. In addition, limited partners may have the right, subject to applicable procedural, jurisdictional and substantive requirements, to bring actions in federal court to enforce their rights under the federal securities laws and the rules and regulations promulgated thereunder by the SEC. For example, limited partners who have suffered losses in connection with the purchase or sale of their interests in a limited partnership may be able to recover such losses from a general partner where the losses result from his violating of the anti-fraud provisions of the federal securities laws. In certain circumstances, Limited Partners also have the right to institute a reparations proceeding before the CFTC against MLIP (a registered commodity pool operator), MLF (a registered futures commission merchant) and the Trading Advisors (registered commodity trading advisors), as well as those of their respective employees who are required to be registered under the Commodity Exchange Act and the rules and regulations promulgated thereunder. There is a private right of action under the Commodity Exchange Act. Investors in commodities and commodity pools (such as the Fund) may, therefore, invoke its protections. In the case of most public companies, the management is required to make numerous decisions in the course of the day-to-day operations of the company and is protected in doing so by the so-called "business judgment rule." This rule protects management from liability for decisions made in the course of operating a business if the decisions are made on an informed basis and with the honest belief that the decision is in the best interests of the corporation. MLIP believes that similar principles apply to MLIP in its management of the Fund. Limited Partners should consult their own counsel regarding their possible rights of action in respect of the Fund. -29- LEVERAGE CONSIDERATIONS TRADING LEVERAGE ADJUSTED TO PROTECT ML&CO. MLIP, in consultation with ML&Co. personnel, controls the percentage of the Fund's assets committed to trading with the objective of eliminating market exposure before any losses are incurred that would require ML&Co. to make any payment under its guarantee. MLIP will terminate all trading if the Net Asset Value per Unit of any series falls to 110% or less of the then present value of $100 discounted back from the Principal Assurance Date for such series at ML&Co.'s cost of borrowing for the period remaining to such Principal Assurance Date. For example, assume when a particular series of Units commences trading that the present value of the $100 as of the Principal Assurance Date was, at ML&Co.'s five-year cost of funding (assume 7%), approximately $71. As of the date that such series is sold, MLIP would terminate trading when the Net Asset Value per Unit of such series declined to approximately 110% of $71 or approximately $78. At the beginning of the second year of trading, the trading termination point would be determined by calculating 11% of $100 discounted for four years at ML&Co.'s four-year cost of funding, and so on. Unless a series of Units recognizes revenues sufficient both to (i) cover all expenses and (ii) increase the Net Asset Value per Unit at a rate faster than the increase in the mandatory trading termination level, the assets available to support such series' trading will be diminished or eliminated. Declining interest rates would adversely affect the Fund in two respects. First, such declines would reduce the yield earned by the Fund on its Government Securities and cash deposits. Second, by decreasing the discount rate used by MLIP in calculating the mandatory trading termination point, such declines would reduce the assets available for trading. One "principal protection" fund sponsored by a major investment bank was, in fact, compelled to terminate trading and dissolve, due primarily to a drop in interest rates which caused the net asset value of the fund and the present value of its guarantee to converge. POSSIBLE UPLEVERAGING Any deleveraging of trading involves an inherent opportunity cost, sacrificing profit potential in return for reducing the risk of major losses. If the Fund achieves sufficient profits, MLIP intends to commit more than 75% of all series' capital to trading. To date, MLIP has not upleveraged any series of Units, and MLIP must upleverage all series issued after July 1, 1996 to the same level if it upleverages any such series. (Such discretionary upleveraging is to be distinguished from the upleveraging caused simply by the reinvestment of trading profits if any in the Fund's trading component, which can lead to the different series trading at different levels of leverage.) THE EFFECT OF PARTIAL DELEVERAGING IN HIGHLY LEVERAGED MARKETS There is very little direct connection between the amount of assets allocated to a particular Advisor and the face value of the positions which such Advisor acquires for the Fund. Market positions with an aggregate face value ranging up to $100 million or more could be acquired for a $10 million Fund account, depending upon an Advisor's strategy. Even though only 75% of each series' capital is initially allocated to trading, each Advisor has broad flexibility in determining the appropriate market exposure for its Fund account. Consequently, MLIP's adjustment of the leverage at which the Units trade will not necessarily result in a corresponding adjustment in the market exposure of the Fund. -30- THE ML&CO. GUARANTEE The ML&Co. Guarantee The ML&Co. guarantee that the Net Asset Value of each Unit will be at least $100 as of such Unit's Principal Assurance Date is effective only in respect of Units which remain outstanding on their Principal Assurance Date. The ML&Co. guarantee is irrevocable unless the Limited Partners exercise their voting rights under the Limited Partnership Agreement either to remove MLIP as the general partner or dissolve the Fund. If the Fund is otherwise dissolved (for example, due to the bankruptcy of MLIP), the ML&Co. guarantee will continue in full force and effect. MLIP has undertaken that it will not take any action voluntarily to dissolve the Fund prior to the latest Principal Assurance Date established for any outstanding series of Units. There is no assurance that the ML&Co. guarantee will be renewed in respect of any series of Units subsequent to such series' Principal Assurance Date. However, MLIP will provide all investors in each series of Units with information concerning the proposed operation of their series following its Principal Assurance Date, and those who wish to do so may redeem, without penalty and with the full benefits of the ML&Co. guarantee, as of such Principal Assurance Date. See "Special Disclosures Regarding the 'Principal Protection' Feature of the Fund" at page 2 and "Leverage Considerations" at page 30. THE GUARANTOR ML&Co., a Delaware corporation, is a holding company that, through its subsidiaries and affiliates, provides investment, financing, insurance and related services. Its principal subsidiary, Merrill Lynch, Pierce, Fenner & Smith Incorporated, which traces its origin to a brokerage business founded in 1820, is one of the largest securities firms in the world. Merrill Lynch, Pierce, Fenner & Smith Incorporated is a broker in securities, options contracts, commodity and financial futures contracts and selected insurance products, a dealer in options and in corporate and municipal securities, and an investment banking firm. ML&Co. and certain subsidiaries engage in lending activities, including bridge financing, and extend credit to leveraged companies in the form of senior term and subordinated debt. Merrill Lynch International Incorporated, through its branches, subsidiaries and affiliates, provides financial services outside the United States and Canada similar to those of Merrill Lynch, Pierce, Fenner & Smith Incorporated. Merrill Lynch Canada Inc., a subsidiary of Merrill Lynch, Pierce, Fenner & Smith Incorporated, provides institutional securities and futures sales, trading and financing, corporate finance, and mergers and acquisitions services in Canada. MLIB and subsidiaries and affiliates of Merrill Lynch International Incorporated engage in international banking and foreign exchange activities. Merrill Lynch Government Securities Inc. is a primary dealer in obligations issued by the U.S. Government or guaranteed or issued by federal agencies or instrumentalities. MLAM manages mutual funds and provides investment advisory services. ML&Co.'s insurance operations consist of the underwriting of life insurance and annuity products by Merrill Lynch Life Insurance Company and ML Life Insurance Company of New York, and the sale of life insurance and annuities through Merrill Lynch Life Agency Inc. and other life insurance agencies associated with Merrill Lynch, Pierce, Fenner & Smith Incorporated. ML&Co. also provides investment, financing and related services through Merrill Lynch Money Markets Inc., Merrill Lynch Mortgage Capital Inc., Merrill Lynch Capital Services, Inc., Merrill Lynch Derivative Products, Inc., Merrill Lynch Specialists Inc., Merrill Lynch Capital Partners, Inc., Merrill Lynch Interfunding Inc., MLIP, Merrill Lynch Credit Corporation, Merrill Lynch Business Financial Services Inc., Merrill Lynch Hubbard Inc. and other subsidiaries of ML&Co. As of March 30, 1996, the aggregate net worth (stockholders' equity) of ML&Co. was approximately $6.08 billion. -31- The following is certain summary financial information for ML&Co. for the fiscal year ended December 29, 1995 and the fiscal quarters ended March 30, 1996 and March 30, 1995. Because the ML&Co. guarantee is a general, unsecured obligation of ML&Co., the value of the ML&Co. guarantee is dependent upon the continued financial soundness of ML&Co. MERRILL LYNCH & CO., INC. SUMMARY FINANCIAL INFORMATION (DOLLARS IN MILLIONS, EXCEPT WHERE INDICATED) (UNAUDITED)
YEAR ENDED QUARTER ENDED QUARTER ENDED DECEMBER 29, 1995 MARCH 30, 1996 MARCH 30, 1995 ----------------- -------------- -------------- INCOME STATEMENT DATA Revenues........................... $ 21,513 $ 2,682 $ 2,302 Earnings before income taxes and cumulative effect of changes in accounting principles.......... $ 1,811 $ 485 $ 389 Net earnings....................... $ 1,114 $ 300 $ 232 SHARE DATA Average number of primary shares outstanding....................... 236,330,162 196,395,000 209,030,000 Common shares outstanding.......... 236,330,162 236,330,162 236,330,162 BALANCE SHEET DATA Total assets (billions)............ $ 176.86 $ 185.47 $ 168.39 Total liabilities (billions)....... $ 170.72 $ 179.39 $ 162.69 Stockholders' equity (billions).... $ 6.14 $ 6.08 $ 5.70
__________________________ The financial results for ML&Co. are more fully set forth in the Annual Report to Stockholders for the 1995 fiscal year and in the Quarterly Report on Form 10-Q for the quarter ended March 30, 1996. MLIP will provide, without charge, copies of the Annual Report and Quarterly Report to any prospective or existing investor upon written or oral request to MLIP at Merrill Lynch World Headquarters, Sixth Floor, South Tower, World Financial Center, New York, New York 10080-6106; telephone: (212) 236-4167. -32- USE OF PROCEEDS SUBSCRIPTION PROCEEDS MLIP pays from its own funds all selling commissions incurred on the sale of the Units. 100% of the proceeds of such sales are available to the Fund. The Fund uses the proceeds of the Units to support, both as margin and reserve funds, the speculative trading of the Advisors. The Fund's margin commitments to date have averaged approximately 20% of its Net Assets (trading at 60% leverage). CASH MANAGEMENT MLAM has been retained by MLIP to invest the Fund's available assets (generally approximately 80% to 90% of total Fund capital) in Government Securities, maintaining a short-term portfolio with a maximum duration of two years. CUSTODY OF FUNDS; INTEREST INCOME All of the Fund's assets are deposited with either MLF or MLPF&S. The assets of the Fund held to margin futures contracts traded on United States exchanges are deposited, together with the assets of numerous other MLF customers, in CFTC-regulated "customer segregated funds accounts" at MLF or MLPF&S. MLF and MLPF&S credit the Fund with interest on the total assets so deposited (i.e., the cash on deposit adjusted to include open-trade equity and funds in collection or settlement), and not invested at the direction of MLAM, at prevailing 91-day Treasury bill rates less 0.50% per annum. The assets of the Fund used for trading on foreign futures exchanges are held at MLF in its "foreign futures and foreign options secured amount account." These assets are held in the functional currency of the respective foreign markets on which the Fund trades, and MLF credits the Fund with interest on the total assets so held at 0.50% per annum below the prevailing short-term government interest rate in the country in question. The Fund is subject to exchange-rate risk in respect of such investments. In some cases, certain of the Fund's assets held to margin foreign futures and options trading may be held in non-interest bearing accounts, either as required by the applicable rules of various foreign exchanges or due simply to considerations of practicality. The assets of the Fund not held to margin U.S. and foreign futures trading are held in "unregulated" accounts at MLPF&S. Substantially all such assets are managed by MLAM. Any assets held at MLPF&S and not managed by MLAM are credited with interest by MLPF&S on the same basis as MLF credits the Fund with interest on assets held at MLF not managed by MLAM. Assets held in MLF's "foreign futures and options secured amount account" or in unregulated MLPF&S (in respect of which no regulatory net capital requirement is assessed) would not have the benefit of the same protections that are afforded "customer segregated funds" in the event of the bankruptcy of MLF or MLPF&S. Of the 10% to 20% of the Fund's assets not managed by MLAM, a substantial portion is held by MLF or MLPF&S, as the case may be, in "offset accounts" ("customer segregated funds" as well as funds held in "unregulated" accounts may be held in "offset"). "Offset accounts" involve the banks with which MLF or MLPF&S maintain their customer accounts making available to ML&Co. and certain of its affiliates interest-free overnight credits in an amount not to exceed the daily cash balances in such accounts. The net benefit to Merrill Lynch from the offset account arrangement -- i.e., the difference between the savings recognized by Merrill Lynch entities from the overnight credits which they receive and the 0.50% below the 91-day Treasury bill rate which they pay out to the Fund -- has not to date exceeded approximately 0.25% to 0.50% per annum of the average daily cash balances held in "offset." MLF and MLPF&S also invest a portion of the customer assets held by them in Treasury bills of up to one-year duration. In crediting the Fund with interest on its total assets on deposit with them (including assets invested in Treasury bills) at 0.50% per annum below the 91-day Treasury bill rate, MLF and MLPF&S earn a spread comparable to the net benefit which they receive from maintaining such assets in "offset." -33- FORWARD TRANSACTIONS Spot and forward contracts on foreign currencies and foreign futures and options contracts are the only non-CFTC regulated instruments currently traded by the Fund. The forward markets are unregulated and involve certain risks -- in particular, risk of counterparty default -- additional to the risks of trading CFTC-regulated futures contracts. To date, approximately 20% to 30% of the Fund's trades by volume have been in forward currency contracts, but from time to time the percentage of the Fund's trading represented by forward currency trades may fall substantially outside this range. MLIP, through the F/X Desk, has arranged lines of credit with various counterparties for the Fund's forward currency trades. Because MLIP has made arrangements so that the Fund need not deposit any margin with the various counterparties with which the F/X Desk executes currency forward trades on the Fund's behalf, the Fund's additional risk in trading in such unregulated markets should be limited to a possible loss of unrealized profits on open forward positions which a counterparty would not, in the event of its bankruptcy, be able to pay to the Fund. CHARGES The following table summarizes the charges paid by the Fund during 1994 (2-2/3 months), 1995 and 1996 (5 months). Beginning January 1, 1996, 0.25 of the 9.5% annual brokerage commissions were recharacterized as Administrative Fees and paid directly by the Fund to MLIP.
1/1/96 - 5/31/96 1/1/95 - 12/31/95 10/12/94 -12/31/94 ---------------- ----------------- ------------------ COST AS A % OF AVERAGE MONTH- COST AS A % OF END NET COST AS A % OF AVERAGE MONTH- DOLLAR ASSETS DOLLAR AVERAGE MONTH- DOLLAR END NET ASSETS COST AMOUNT (ANNUALIZED) AMOUNT END NET ASSETS AMOUNT (ANNUALIZED) - --------------------------- ---------------- -------------- ----------------- -------------- ---------- -------------- Brokerage Commissions $1,983,811 5.68% $3,303,922 5.92% $416,617 5.76% Administrative Fee 53,617 O.15 -- -- -- -- Reimbursement of Organizational and Initial Offering Costs 33,208 0.10 79,700 0.14 17,712 0.24 Profit Shares 110,738 0.32 652,366 1.17 129,169 1.79 ---------- ---- ---------- ---- -------- ---- Total $2,181,374 6.25% $4,035,988 7.23% $563,498 7.79% ========== ==== ========== ==== ======== ====
The Fund's average month-end Net Assets during 1994 (2-2/3 months), 1995 and 1996 (5 months) equalled $32,552,448, $55,827,125 and $83,860,013, respectively. The foregoing table does not reflect the "bid-ask" spreads paid by the Fund on its forward trading. During 1994 (2-2/3 months), 1995 and 1996 (5 months), the Fund earned $377,303, $3,415,670 and $1,927,550, respectively, in interest income, or approximately 1.16%, 6.12% and 2.30%, respectively, of the Fund's average month- end Net Assets. See also the "Breakeven Table" included in the "Summary" at page 8. ______________________________ -34-
CHARGES PAID BY THE FUND RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT - ----------------------- ----------------------- -------------------------------------------------- MLIP Organizational and The Fund is reimbursing MLIP in 36 monthly initial offering costs installments of $6,642 ending October 31, 1997. Merrill Lynch Brokerage commissions A flat-rate monthly commission of 0.7708 of 1% Futures of the month-end assets committed to trading (a 9.25% annual rate; 6.94% at 75% leverage). MLIP Administrative Fees A flat-rate monthly charge, payable to MLIP, of 0.020833 of 1% of the month-end assets com- mitted to trading (a 0.25 of 1% annual rate; 0.1875 of 1% at 75% leverage). MLIP pays all of the Fund's routine administrative costs. MLIB "Bid-ask" spreads Under MLIP's F/X Desk arrangements, MLIB receives "bid-ask" spreads on all forward trades executed on behalf of the Fund with MLIB. Other "Bid-ask" spreads The counterparties other than MLIB with which Counterparties the F/X Desk deals each receive "bid-ask" spreads on the forward trades executed with the Fund. MLIP Service fees Under the F/X Desk arrangements, MLIP or another Merrill Lynch entity receives a service fee equal, at current exchange rates, to approximately $5.00 to $12.50 on each purchase or sale of each futures contract-equivalent forward contract executed with counterparties other than MLIB. MLIB EFP "differentials" MLIB or an affiliate receives a "differential" spread for exchanging the Fund's cash currency positions for equivalent futures positions. Government Securities "Bid-ask" spreads The dealers with which MLAM executes Govern- Dealers ment Securities trades include "bid-ask" spreads in the prices they quote to the Fund. Trading Advisors Quarterly Profit Shares Currently, 15% or 20% of any New Trading Profit (depending on the Trading Advisor) as of the end of each calendar quarter and upon redemption of Units. Profit Shares are calculated separately with respect to each series of Units. MLF; Extraordinary charges Actual costs; none incurred to date, and expected Others to be negligible. --------------------------
ORGANIZATIONAL AND INITIAL OFFERING COSTS MLIP advanced the organizational and initial offering costs of the Fund, which totaled $239,100. The Fund is reimbursing MLIP for such costs in 36 equal monthly installments of $6,642 each, through October 31, 1997. The accrued liability for the remaining reimbursement of organizational and initial offering costs does not reduce Net Assets for any purpose (other than financial reporting). -35- BROKERAGE COMMISSIONS Commodity brokerage commissions for futures trades are typically paid on the completion or liquidation of a trade and are referred to as "round-turn commissions," which cover both the initial purchase (or sale) of a commodity futures contract and the subsequent offsetting sale (or purchase). However, the Fund pays commissions at a monthly flat rate of 0.7708 of 1% (a 9.25% annual rate) of the Fund's month-end assets committed to trading. Assets committed to trading are not reduced for purposes of calculating brokerage commissions by any accrued but unpaid Profit Shares, Administrative Fees or the brokerage commissions being calculated. The Fund could obtain lower rates for similar brokerage services at other firms. The Fund initially commits 75% of the capital attributable to each series of Units to the Trading Advisors for management. At this leverage factor, the brokerage commissions equal 6.94% per annum of the average total month-end assets attributable to each series, including assets not allocated to trading. The Fund's brokerage commissions are allocated among the outstanding series of Units pro rata based on the respective amount of assets which each series commits to trading, without reduction for accrued but unpaid brokerage commissions, Profit Shares or Administrative Fees. During 1994 (2-2/3 months), 1995 and 1996 (5 months), the Fund paid brokerage commissions of $416,617, $4,404,292 and $1,983,811, respectively; these flat-rate brokerage commissions were the approximate equivalent of per- trade commissions of $53, $134 and $117, respectively, per "round-turn" futures trade. These "round-turn" equivalent rates were somewhat higher than those of most MLIP funds. The per-trade equivalent of the Fund's flat-rate commissions varies over time with market conditions and different Advisor combinations. The annual reports distributed by MLIP to Limited Partners include the approximate round-turn equivalent commission rate paid by the Fund during the previous year. State securities administrators require MLIP to state that brokerage commissions paid by the Fund shall not be increased while redemption charges are in effect. Moreover, MLIP has undertaken to various state securities commissions that in no event will MLIP increase the original 9.5% annual brokerage commissions (now recharacterized as 9.25% annual brokerage commissions and 0.25% annual Administrative Fees) without the unanimous consent of all Limited Partners. In fact, MLIP has never raised the futures brokerage commissions paid by any of its funds and has on a number of occasions reduced such charges. In addition, MLIP has been required by various state regulators to make the following disclosure: The Fund's "brokerage commissions" constitute a "wrap fee." This "wrap fee" (including the component of such "wrap fee" reclassified as Administrative Fees) is Merrill Lynch's only source of revenues from the Fund (other than "offset account" and interest credit benefits as described under "Use of Proceeds"), from which revenues Merrill Lynch must pay a variety of different costs and expenses. The level of the "wrap fee" is set with these costs and expenses in mind. Different Merrill Lynch entities pay the following costs and expenses with respect to the operation of the Fund: (a) administrative expenses; (b) selling commissions; (c) ongoing compensation to Financial Consultants; (d) all costs of executing the Fund's futures trades; (e) the Advisors' consulting fees; (f) MLAM's advisory fees; and (g) Merrill Lynch employee discounts. All of these costs and expenses, not only execution costs, are reflected in the 9.5% annual "wrap fee" (including both the brokerage commissions and the Administrative Fees) charged to the Fund. PROSPECTIVE INVESTORS MUST BE AWARE THAT THE "BROKERAGE COMMISSIONS" AND "ADMINISTRATIVE FEES" CHARGED TO THE FUND IN FACT INCLUDE A SIGNI- FICANT NUMBER OF COSTS OTHER THAN THOSE OF ACTUALLY EXECUTING THE FUND'S TRADES OR PROVIDING ADMINISTRATIVE SERVICES TO IT. SUCH FLAT-RATE "BROKERAGE COMMISSIONS" AND "ADMINISTRATIVE FEES" MAY NOT BE INCREASED ABOVE THE CURRENT ANNUAL LEVEL OF 9.5% OF THE AVERAGE MONTH-END NET ASSETS COMMITTED TO TRADING WITHOUT THE UNANIMOUS CONSENT OF ALL LIMITED PARTNERS. -36- MLF pays, from the brokerage commissions received by it, all costs of executing the Fund's futures trades, including the NFA transaction fees assessed on the Fund's futures trading on United States exchanges. Such fees currently equal $0.14 per round-turn trade of a futures contract and $0.07 for each trade of a commodity option contract. ADMINISTRATIVE FEES Since January 1, 1996, MLIP has been charging flat-rate monthly Administrative Fees of 0.020833 of 1% of each series of Units' month-end assets committed to trading (a 0.25 of 1% annual rate). Month-end assets for such purposes are not reduced by accrued but unpaid Profit Shares or brokerage commissions or by the Administrative Fees being calculated. As of January 1, 1996, the Fund's flat-rate brokerage commissions have been reduced in an amount corresponding to the Administrative Fees so that there has been no increased expense to the Fund. MLIP pays the ongoing administrative costs of the Fund, including the expense of updating this Prospectus. During 1994 (2-2/3 months), 1995 and 1996 (5 months), MLIP paid $36,900, $31,142 and $53,617, respectively, in administrative expenses relating to the Fund. "BID-ASK" SPREADS Many of the Fund's currency trades are executed in the forward markets, in which participants include in their pricing a spread between the prices at which they are prepared to buy and sell a particular currency. The fact that the Fund pays such "spreads" does not reduce the flat-rate brokerage commissions paid by the Fund. SERVICE FEES; "EFP" DIFFERENTIALS The Fund trades forward contracts through the F/X Desk. The F/X Desk gives the Fund access to counterparties in addition to (but also including) MLIB. MLIP (or another Merrill Lynch entity) charges a service fee equal to, at current exchange rates, approximately $5.00 to $12.50 on each purchase or sale of a futures contract-equivalent face amount of a given currency traded in the forward markets. No service fees are charged on trades awarded to MLIB (which receives "bid-ask" spreads on such trades). In its EFP trading with Merrill Lynch, the Fund acquires spot or forward (collectively, "cash") currency positions through MLIP's F/X Desk in the same manner and on the same terms as in the case of the Fund's other F/X Desk trading. When the Fund exchanges these positions for futures, there is a "differential" between the prices of the two positions. This "differential" reflects, in part, the different settlement dates of the cash and the futures contracts and prevailing interest rates, but also includes a pricing spread in favor of MLIB or another Merrill Lynch entity. These F/X Desk service fees and EFP differentials, combined, are estimated to total no more than 0.25 of 1% of the Fund's average month-end traded assets on an annual basis. SECURITIES MARK-UPS The Fund's Government Securities trades are executed with dealers unaffiliated with any Merrill Lynch entity at competitive "bid-ask" spreads. PROFIT SHARES John W. Henry & Company, Inc. receives a quarterly Profit Share of 15% and Chesapeake Capital Corporation of 20%, in each case of any New Trading Profit earned by such Advisors, respectively, for each series of Units considered independently. Advisors could receive Profit Shares from one series of Units but not from others due to the different times at which the series began trading. The quarterly Profit Shares paid to the non-"core" Advisors are calculated in the same manner as described below. As of the date of this Prospectus, these Profit Shares equal 15% or 20% of any New Trading Profit generated by each such Trading Advisor, depending upon the Advisor. The Profit Shares paid to certain Advisors ("core" or non-"core") in the future may fall outside of the 15% to 20% range. -37- New Trading Profit for purposes of calculating each Trading Advisor's Profit Share includes (i) realized trading profit (loss) plus or minus (ii) the change in unrealized trading profit (loss) on open positions and is calculated after payment of all or a portion of the monthly brokerage commissions and Administrative Fees, but is not reduced by Profit Shares previously paid. New Trading Profit does not include interest or any yield enhancement return earned on the Fund's assets. Organizational and initial offering cost reimbursement payments do not reduce New Trading Profits for purposes of calculating Profit Shares. New Trading Profit is only generated to the extent that a Trading Advisor's cumulative New Trading Profit exceeds the highest level of cumulative New Trading Profit achieved by such Advisor as of the end of any previous calendar quarter (or $0, if an Advisor has traded unprofitably for a series of Units). Assume that as of the end of a series' first calendar quarter of trading, 1996, Chesapeake Capital Corporation ("Chesapeake") had, after all or a portion of the allocable monthly brokerage commissions and Administrative Fees, a realized profit of $50,000 and an unrealized profit of $150,000 in respect of such series' New Trading Profit would equal $200,000. The entire amount would represent an increase in cumulative Trading Profit allocable to such series and 20%, or $40,000 would be paid by such series to Chesapeake. Assume also that during the second quarter of such series' trading, again after all or a portion of allocable monthly brokerage commissions and Administrative Fees, the Chesapeake account had realized additional profits of $60,000 on its closed-out positions but incurred a decrease in the unrealized profits on its open positions of $50,000 in respect of such series. Cumulative Chesapeake Trading Profit allocable to such series would have increased to $210,000, and 20% of such $10,000 increase or $2,000 would be paid by such series to Chesapeake. If the assets allocable to the series and managed by Chesapeake were subsequently to sustain losses, Chesapeake would not be required to refund any of the Profit Shares previously paid by the series, but it would not be until Chesapeake's cumulative Trading Profit allocable to exceeded $210,000 as of a calendar quarter-end that Chesapeake would again generate New Trading Profit in respect of such series that would be subject to additional Profit Share accruals. The Fund pays Profit Shares in respect of each series of Units to each Trading Advisor based on each such Advisor's individual performance, rather than paying Profit Shares based on the overall performance of any such series. It is likely that there will be periods when the aggregate New Trading Profits on which Profit Shares are paid by a series to one or more Trading Advisors are exceeded by the losses incurred in respect of such series by one or more of the other Trading Advisors. Termination of the Fund's Advisory Agreement with a Trading Advisor is treated as if the date of termination were a calendar quarter-end for purposes of calculating any Profit Shares due to such Trading Advisor. If a new or replacement Trading Advisor is retained, such Trading Advisor calculates its Profit Shares without regard to any losses previously incurred by any series of Units. The Profit Shares are calculated separately in respect of each series of Units. In the case of Units redeemed as of the end of any month that is not the end of a calendar quarter, the Net Asset Value at which such Units are redeemed is reduced by any accrued Profit Shares, calculated in the same manner as described above. The amounts so deducted and paid to the appropriate Trading Advisor(s) as of such month-end are not subject to being returned to the Fund or the redeeming Limited Partner, irrespective of subsequent losses during the quarter. Reduction of the assets attributable to a particular series of Units managed by a Trading Advisor, whether due to redemptions, distributions or reallocations of assets by MLIP away from such Trading Advisor (but not as a result of trading losses), results in (i) a proportional pay-out of any accrued Profit Shares and (ii) a proportional decrease in any cumulative loss carryforwards (i.e., shortfalls between the current level of Trading Profit and the "high water mark" level of cumulative Trading Profits as of cumulative the end of any previous calendar quarter, or $0 if higher) for Profit Share calculation purposes. In calculating New Trading Profit, Profit Shares paid at previous quarter-ends do not reduce cumulative New Trading Profit in subsequent periods (i.e., the Trading Advisors do not have to earn back their Profit Shares before their trading can generate additional New Trading Profit). Redemption charges do not affect the Profit Shares assessed on Units being redeemed. -38- Profit Shares paid may have little direct correlation with Limited Partners' investment experience in the Fund. MLIP's multi-advisor funds have historically paid substantial Profit Shares even during periods when they were incurring losses. During 1994 (2-2/3 months), 1995 and 1996 (five months), the Fund paid Profit Shares of $129,169, $652,366 and $110,738, respectively, and had net income of $579,894 and $5,186,492 and $617,754, respectively. These Profit Shares equalled 0.4%, 1.17% and 0.13% of average month-end Net Assets, and 22%, 12.6% and 17.9% of net income during such periods. EXTRAORDINARY EXPENSES The Fund is required to pay any extraordinary costs (such as taxes) incidental to its operations. In MLIP's experience, such charges have been negligible. No such costs have been paid by the Fund (or any other MLIP fund) to date. ____________________ MLIP sends a monthly statement to each Limited Partner describing the Fund's performance during the prior month and itemizing brokerage commissions, Administrative Fees paid and Profit Shares or accrued during such month and on a year-to-date basis. ____________________ CHARGES PAID BY MERRILL LYNCH The following costs are paid by the Merrill Lynch entities indicated below. In each case, these entities receive substantial revenues, directly or indirectly, from the Fund. SELLING COMMISSIONS; ONGOING COMPENSATION MLIP pays the selling commissions due on the Units, as well as the ongoing compensation on Units which remain outstanding for more than twelve months. See "Plan of Distribution -- Selling Agent Compensation" at page 53. MLIP paid a total of $4,089,835 in selling commissions (in the form of "production credits," not cash out-of-pocket) on sales of the first seven series of Units. The first monthly installments of ongoing compensation began to accrue as of October 1, 1995 on the Series A Units sold as of October 1, 1994. Through May 31, 1996, MLIP paid a total of $148,727 in ongoing compensation (in the form of "production credits," not cash out-of-pocket). CONSULTING FEES The Trading Advisors each enter into a Consulting Agreement with MLF pursuant to which MLF pays monthly consulting fees to them: Chesapeake receives 0.167% (2% annually), and JWH 0.333% (4% annually) of the month-end assets of the Fund committed to them, respectively. Currently all non-"core" Advisors receive consulting fees equal to 0.167% (2% annually) of the month-end Fund assets committed to their management. MLIP anticipates that the consulting fees paid to Advisors in the future will generally fall within the range of 1% to 4% annual rate, but such fees could fall outside of such range in certain cases. During 1994 (2-2/3 months), 1995 and 1996 (5 months), MLF paid consulting fees of $106,951, $858,044 and $533,705, respectively, or approximately 0.33%, 1.54% and 0.64% of the Fund's average month-end Net Assets during these periods. -39- MLAM FEES MLF pays MLAM annual management fees of 0.20% on the first $25 million of Fund capital managed by MLAM, 0.15% on the next $25 million of capital, 0.125% on the next $50 million, and 0.10% on capital in excess of $100 million. Such fees are paid quarterly in arrears and are calculated on the basis of the average daily assets managed by MLAM. In the event that MLF for some reason fails to make prompt payment to MLAM, MLIP is responsible for doing so. During 1994 (2-2/3 months), 1995 and 1996 (5 months), MLF expensed approximately $11,319, $70,670 and $57,067, respectively, in cash management fees paid or accrued to MLAM. REDEMPTION CHARGES Units redeemed on or prior to the end of the twelfth full month after issuance are subject to redemption charges of 3% of the Net Asset Value at which they are redeemed. Such charges are paid to MLIP and are intended to compensate MLIP for the financial burden to MLIP associated with paying selling commissions on short-term investments. Receipt of redemption charges does not reduce the Fund's reimbursement obligations to MLIP for organizational and initial offering costs. During 1994 (2-2/3 months), 1995 and 1996 (5 months), MLIP received a total of $7,436, $57,489 and $25,438, respectively, in redemption charges. CERTAIN LITIGATION ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc. (which is the sole stockholder of MLIP and MLF) and of MLPF&S, and the 100% indirect owner of all Merrill Lynch entities involved in the operation of the Fund -- as well as certain of its subsidiaries have been named as defendants in numerous civil actions arising out of their respective business activities. The following actions have been filed against or on behalf of ML&Co. in connection with ML&Co.'s business activities with the Treasurer- Tax Collector of Orange County, California ("Orange County") or from the purchase of debt instruments issued by Orange County that were underwritten by MLPF&S. On December 6, 1994, bankruptcy petitions were filed on behalf of Orange County and the Orange County Investment Pools (the "Pools") in the United States Bankruptcy Court for the Central District of California (the "Bankruptcy Court"). The Pools' bankruptcy petition subsequently was dismissed. The currently pending actions involving ML&Co. and Orange County include, in the order summarized below: an action in the names of Orange County and the current Orange County Treasurer-Tax Collector; actions by investors and participants in the Pools; actions by investors in ML&Co. or affiliated entities; and actions by holders of bonds or other debt instruments issued by or on behalf of Orange County and other public entities which had funds controlled by the Orange County Treasurer-Tax Collector. On January 12, 1995, an action was commenced in the Bankruptcy Court by Orange County and the Pools against ML&Co. and certain of its subsidiaries (the "Orange County Action"). Orange County filed a first amended complaint on June 6, 1995, which was dismissed on October 17, 1995. Orange County filed a second amended complaint on October 25, 1995 adding John M.W. Moorlach, the current Orange County Treasurer-Tax Collector, as a plaintiff, and alleging, among other things, that ML&Co.'s liquidation of certain securities entitles the plaintiffs to relief under Sections 362, 502, 510, 549 and 922 of Title 11 of the United States Code (the "Bankruptcy Code"), that various securities transactions between Orange County and/or the Pools and ML&Co. and its subsidiaries violated California law and are null and void, that ML&Co. and its subsidiaries violated Section 10(b) of the Securities Exchange Act of 1934 (the "Exchange Act") and Rule 10b-5 promulgated thereunder, Section 25401 of the California Corporations Code (the "California Code"), Section 17200 of the California Business and Professions Code, Sections 1709-10 of the California Civil Code, breached fiduciary duties, aided and abetted breaches of fiduciary duty and conspired to make unauthorized use of public funds. Damages in excess of $2 billion, injunctive and declaratory relief are sought. On March 1, 1995, the parties entered into an agreement pursuant to which the proceeds from the sale of securities purchased by ML&Co. from Orange County pursuant to certain master repurchase agreements are to be used -40- to purchase short-term Treasury bills or Treasury notes that will be identifiable and held separate and subject to any rights that ML&Co. may have in the master repurchase agreements. This agreement may be terminated by ML&Co. upon 30 days' written notice. On December 13, 1994, a purported class action was commenced in the Superior Court of the State of California, Orange County, on behalf of individuals whose funds were deposited with the Orange County Treasurer-Tax Collector pursuant to proceedings in California Superior Court (the "DeLeon Action"). On December 27, 1994, plaintiffs filed a first amended class action complaint; on April 19, 1995, plaintiffs filed a second amended complaint which was dismissed on November 13, 1995; and on December 18, 1995 plaintiffs filed a third amended complaint. As amended, the DeLeon Action is brought on behalf of the same individuals on whose behalf the action was originally brought and on behalf of individuals who invested funds in the Pools representing deferred compensation and/or retirement funds. The defendants include ML&Co., a subsidiary of ML&Co. and an employee of ML&Co. Plaintiffs allege, among other things, that the defendants breached fiduciary duties, aided and abetted breaches of fiduciary duties, conspired to breach a fiduciary duty and committed professional negligence in connection with ML&Co.'s business activities with the Orange County Treasurer-Tax Collector. Damages in an unspecified amount are sought. The parties have agreed to stay this action pending developments in the Orange County Action described above. On January 10, 1995, a purported class action was commenced in the Superior Court of the State of California, Orange County, on behalf of persons whose funds were deposited in the Pools pursuant to proceedings in California Superior Court (the "Small Action"). ML&Co., a subsidiary of ML&Co., an employee of ML&Co. and Robert L. Citron, formerly the Treasurer-Tax Collector of Orange County, are named as defendants. Plaintiffs allege claims for breach of fiduciary duty and fraud in connection with ML&Co.'s business activities with the Orange County Treasurer-Tax Collector. Injunctive relief and damages in an unspecified amount are sought. The complaint in this action was never served. On September 15, 1995, an action was commenced in the Superior Court for the State of California, San Francisco County, by twelve California public entities (the "Atascadero State Court Action"). Named as defendants are ML&Co., certain subsidiaries of ML&Co. and an employee of ML&Co. The complaint alleges, among other things, that the defendants committed fraud and deceit, negligence and negligent misrepresentation, breached fiduciary duties, aided and abetted breaches of fiduciary duty, and violated California Penal Code Section 496 and the California Unfair Business Practices Act, in connection with ML&Co.'s business activities with the Orange County Treasurer-Tax Collector. Injunctive relief, rescission, restitution and damages in excess of $50 million are sought. The case has been transferred to Contra Costa County, California. On November 27, 1995, an action was commenced in the United States District Court for the Central District of California by fourteen California public entities (the "Atascadero Federal Court Action"). On March 22, 1996, an amended complaint was filed. Named as defendants are ML&Co., certain subsidiaries of ML&Co. and three past or present employees of ML&Co. (two of whom have been dismissed without prejudice by agreement of the parties). John Moorlach is named as a nominal defendant. The complaint alleges, among other things, that defendants violated Sections 10(b) and 20(a) of the Exchange Act and Rule 10b-5 promulgated thereunder, Sections 25400, 25401, 25500 and 25501 of the California Code, Section 496 of the California Penal Code, the California Unfair Business Practices Act, and the Racketeer Influenced and Corrupt Organizations Act ("RICO"), committed fraud and deceit, negligence and negligent misrepresentation, conversion, breached fiduciary duties, and aided and abetted breaches of fiduciary duty, in connection with ML&Co.'s business activities with the Orange County Treasurer-Tax Collector. Rescission, restitution and damages in excess of $50 million are sought. The complaint in this action has not been served. Beginning on December 5, 1994, five derivative actions purportedly brought on behalf of ML&Co. were filed in the Supreme Court of the State of New York, New York County (the "Wilson Actions"). On February 21, 1995, the court consolidated the actions and an amended consolidated complaint was filed on June 5, 1995 naming as defendants 22 present or past directors, officers or employees of ML&Co. and/or certain of its subsidiaries. The complaint alleges, among other things, breach of fiduciary duty and oversight failures, waste of corporate assets and claims for indemnification in connection with ML&Co.'s business activities with the Orange County Treasurer-Tax Collector. ML&Co. is named as a nominal defendant in these actions. Damages in an unspecified amount are sought on behalf of ML&Co. against the individuals named as defendants. On December 16, 1994, a purported class action was commenced in the United States District Court for the Southern District of New York (the "Balan Action"). An amended complaint was filed on June 15, 1995. As -41- amended, the Balan Action is brought on behalf of purchasers of ML&Co.'s common stock between March 31, 1994 and December 6, 1994, and names as defendants ML&Co. and two of its directors and officers. The plaintiff alleges, among other things, violations of Sections 10(b) and 20(a) of the Exchange Act and Rule 10b- 5 promulgated thereunder in connection with ML&Co.'s disclosure with respect to its business activities with the Orange County Treasurer-Tax Collector. Damages in an unspecified amount are sought. Beginning on December 8, 1994, ten purported class actions were commenced in the United States District Court for the Central District of California on behalf of individuals who purchased bonds or other debt instruments issued by or on behalf of Orange County during various periods of time (the "Smith Federal Court Action"). Plaintiffs filed an amended consolidated complaint on January 27, 1995, and a first amended consolidated complaint on February 27, 1995. As amended, the Smith Federal Court Action purports to be brought on behalf of all persons who purchased bonds or other debt instruments between July 1, 1992 and December 6, 1994 that were issued by Orange County or other public entities with funds controlled by the Orange County Treasurer-Tax Collector. The defendants in the first amended consolidated complaint are ML&Co., an employee of ML&Co., PaineWebber, Inc., CS First Boston Corp., Smith Barney, Inc., Lehman Brothers, Inc., Donaldson, Lufkin & Jenrette, Inc., Kidder, Peabody & Co. Incorporated, Stone & Youngberg, Rauscher Pierce Refsnes, Inc., Leifer Capital, Inc., Fieldman Rolapp & Associates, Inc., CGMS, Inc. and O'Brien Partners, Inc. Following a stipulation and order filed on July 17, 1995 dismissing certain state law claims without prejudice, the plaintiffs allege, among other things, that the defendants affiliated with ML&Co. violated Section 10(b) of the Exchange Act and Rule 10b-5 promulgated thereunder with respect to the sale of bonds and other debt instruments issued by Orange County and other public entities. Damages in an unspecified amount are sought. On April 1, 1996, the court granted a motion by plaintiffs to dismiss this action without prejudice. On September 28, 1995, a purported class action was commenced in the Superior Court for the State of California, Orange County, asserting the state law claims previously dismissed in the Smith Federal Court Action (the "Smith State Court Action"). The Smith State Court Action is brought on behalf of the same purported class as the Smith Federal Court Action. Named as defendants are ML&Co., an employee of ML&Co. and the same defendants not affiliated with ML&Co. as in the Smith Federal Court Action and, in addition, KPMG Peat Marwick. Violations of Sections 25400, 25401, 25500, 25501 and 25504.1 of the California Code and fraud and deceit are alleged in connection with disclosure made with respect to the sale of bonds and other debt instruments issued by Orange County or other public entities with funds controlled by the Orange County Treasurer- Tax Collector. Damages in an unspecified amount are sought. Certain of the defendants in the Smith Federal Court Action and the Smith State Court Action other than ML&Co. and the employee of ML&Co. named as a defendant have entered into settlement agreements with the plaintiffs in these cases. On March 9, 1995, an action (the "Kemper Action") was commenced in the Circuit Court of Cook County, Illinois, Chancery Division, by five money market mutual funds managed by Kemper Financial Services, Inc. (namely, the Cash Account Trust, Cash Equivalent Fund, Kemper Investors Fund, Kemper Money Market Fund and Kemper Portfolios). Named as defendants are a subsidiary of ML&Co. and an employee of ML&Co. The complaint alleges, among other things, that the defendants violated Sections 12A, 12F, 12G and 12I of the Illinois Securities Act and committed common law fraud with respect to disclosure made in connection with the issuance and sale of 1994-95 Taxable Notes that were issued by Orange County on July 8, 1994. Rescission and damages in an unspecified amount are sought. This action has been stayed until June 30, 1996. ML&Co. has also received formal and informal inquiries from various governmental entities and agencies examining the events underlying the above described litigation and is cooperating with these inquiries. On November 3, 1995, a purported derivative action on behalf of ML&Co. was filed in the Supreme Court of the State of New York, New York County, naming 12 present or past directors of ML&Co. as defendants. Damages in an unspecified amount are sought on behalf of ML&Co. The complaint alleges, among other things, claims for breach of fiduciary duty, indemnification and corporate waste in connection with (i) certain of ML&Co.'s municipal finance activities, including certain contractual arrangements that led to a civil settlement of approximately $12 million with the United States Attorney for the District of Massachusetts, the Massachusetts Attorney General and the SEC and to the issuance by the SEC of an order censuring MLPF&S and an order directing MLPF&S to cease and desist from committing or causing any violation or future violation of Rule G-17 of the Municipal Securities Rulemaking Board (as to which MLPF&S consented without admitting or denying any of the findings or allegations contained in the orders) and (ii) certain basket trading activities in Japan that led to administrative sanctions by Japanese securities regulators consisting of a 48-hour suspension of arbitrage trading by ML&Co. for its own account in Japan. -42- On December 16, 1994, a consolidated amended complaint was filed In Re NASDAQ Market-Makers Antitrust Litigation, MDL No. 1023, in the United States District Court for the Southern District of New York. As subsequently amended, the complaint alleges that 33 market-makers, including MLPF&S, engaged in a conspiracy with respect to the "spread" between "bid" and "ask" prices for certain securities traded on NASDAQ by refusing to quote "bid" and "ask" prices in so-called "odd-eighths." The complaint purports to be brought on behalf of all persons who purchased or sold these securities between June 1, 1989 and May 27, 1994. The complaint alleges violations of antitrust laws and seeks compensatory damages in an unspecified amount, treble damages, declaratory and injunctive relief, and attorneys' fees and costs. Judgment against each of the defendants is sought on a joint and several basis. MLPF&S has filed an answer denying the allegations in the complaint. Discovery is proceeding. In connection with their industry-wide investigations into the NASDAQ market, ML&Co., along with other named defendants, has received inquiries from the Antitrust Division of the Department of Justice and the SEC and is cooperating with these inquiries. In each of the legal proceedings described below except for the stockholder derivative actions, the claims against the Merrill Lynch defendants (as defined below) have now either been dismissed pursuant to settlements or under the terms of a settlement for which court approval has been granted will be dismissed. All the actions arise from certain securities trading transactions that occurred at year-end 1984, 1985, 1986 and 1988 between MLPF&S and Merrill Lynch Government Securities Inc. ("MLGSI") and a Florida insurance company, Guarantee Security Life Insurance Company ("GSLIC"), which was taken into liquidation. A principal focus of the allegations in the following civil proceedings is an assertion that GSLIC's purpose in engaging in the year-end transactions was to distort its apparent financial condition. It is claimed that GSLIC's former officers and employees improperly took assets from the company and its investment portfolio declined substantially in value before its true financial condition became known to insurance regulators, GSLIC's policyholders, and the creditors of GSLIC and its parent company, Transmark USA, Inc. ("Transmark"). On December 20, 1991, an action (the "Receiver Action") was commenced by the Florida Department of Insurance as Receiver of GSLIC (the "Receiver") in the Fourth Judicial Circuit Court in Duval County, Florida naming as defendants former officers, directors and shareholders of GSLIC and Transmark, GSLIC's former outside attorneys and accountants, MLPF&S, MLGSI and a former managing director of MLPF&S (the Merrill Lynch parties in the Receiver Action being referred to collectively as the "Merrill Lynch defendants"). The complaint alleges state law claims against the above-mentioned Merrill Lynch defendants for fraud, breach of fiduciary duty, conspiracy and aiding and abetting a breach of duty arising from their involvement in the year-end trades with GSLIC, alleges that GSLIC was damaged in excess of $300 million and seeks relief in an unspecified amount from the Merrill Lynch defendants. On July 14, 1995, an agreement was signed among the Receiver of GSLIC, the Merrill Lynch defendants, along with certain other named defendants, to settle this action. The court has entered an order severing for purposes of trial the claims against the settling defendants and otherwise staying all further proceedings in respect of such defendants. Pursuant to the terms of the final settlement agreement (executed on October 19, 1995) and subject to the finality of the court's Order of Final Approval of Settlement dated March 8, 1996, the Merrill Lynch defendants will pay $45 million to the Receiver, and the Receiver's claims against them will be dismissed in their entirety. Substantially the same defendants are named in two consolidated lawsuits brought in federal court in Jacksonville, Florida on October 15, 1991 and on February 28, 1992 on behalf of an uncertified alleged class of purchasers of GSLIC insurance policies and annuities between 1984 and 1991 (the "Haag/Levine Action"). The complaint alleges substantially the same claims as the Receiver Action as well as claims under RICO and Section 10(b) of the Exchange Act and seeks unspecified money damages. The court has stayed the Haag/Levine Action pending the resolution of the Receiver Action. A condition of the settlement in the Receiver Action is dismissal of the claims in the Haag/Levine Action against the Merrill Lynch defendants, at no further cost to the Merrill Lynch defendants. Unopposed motions seeking this dismissal have been submitted to the court. The Resolution Trust Corporation ("RTC"), as receiver for four failed savings institutions (CenTrust Association Savings Bank, Imperial Savings Association, FarWest Savings and Loan Association and Columbia Savings and Loan Association) in January 1993 and April 1993 filed civil actions in federal court in Jacksonville, Florida against ML&Co., MLPF&S, MLGSI, a former MLPF&S managing director, and former officers, directors and employees of Transmark and GSLIC (the "RTC Action"). The action seeks to recover damages as a result of purchases by the four above-named institutions of securities issued by Transmark, GSLIC's parent corporation. The claims alleged are sub- -43- stantially similar to those in the Haag/Levine Action mentioned above. In April 1993, Trans-Resources Inc., a company that alleges it also purchased Transmark securities, filed a complaint in the federal court in Jacksonville, Florida substantially following the allegations of the RTC Action and naming substantially the same defendants (the "Trans-Resources Action"). The RTC Action and Trans-Resources Action each seek compensatory and punitive damages in unspecified amounts, trebling of damages under the RICO claim, rescissory relief and reimbursement of the costs of suit. On August 10, 1995, an agreement was signed among the RTC and these Merrill Lynch defendants to settle the RTC Action, as well as all other pending litigation brought by the RTC against ML&Co. or its affiliates. Pursuant to the agreement, $4.5 million has been paid to the RTC in respect of the RTC Action, and the RTC's claims against these Merrill Lynch defendants have been dismissed in their entirety. On December 22, 1995, an agreement was signed among Trans-Resources and these Merrill Lynch defendants to settle the Trans-Resources Action. Pursuant to the agreement, $150,000 has been paid to Trans-Resources, and claims against the Merrill Lynch defendants in this action have been dismissed in their entirety. In October 1991, Messrs. Miller and Steiner commenced derivative actions, now consolidated, purportedly brought on behalf of ML&Co., in New York State Supreme Court, New York County, naming as defendants directors of ML&Co. who were directors at the time of the year-end securities transactions in question, among others. The plaintiffs assert claims of breach of fiduciary duties in connection with the year-end securities transactions with GSLIC and other claims against Transmark and one of Transmark's principals. The damages sought in this action are unspecified. The court has stayed the action for all purposes pending a resolution of the above-mentioned related litigation in Florida. ML&Co. believes it has strong defenses to, and will vigorously contest, the actions described above. Although the ultimate outcome of the actions described above and other civil actions, arbitration proceedings and claims pending against ML&Co. or its subsidiaries as of the date of this Prospectus cannot be ascertained at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of the management of ML&Co. that the resolution of these actions will not have a material adverse effect on the financial condition or the results of operations of ML&Co. CONFLICTS OF INTEREST Merrill Lynch Affiliated Entities Other than the Trading Advisors, all parties involved in the operations of the Fund are affiliated with Merrill Lynch. Consequently, many of the business terms of the Fund have not been negotiated at arm's-length. Were investors to seek redress from Merrill Lynch for damages relating to the offering of the Units or the operations of the Fund, they (i) would be unlikely to have recourse against any Merrill Lynch entity (other than MLIP or the Fund itself) which is not in direct privity with the Fund, and (ii) would be likely only to have such recourse even in case of entities which are in such privity only on a derivative basis, suing not individually but in the right of the Fund. -44- ML PRINCIPAL PROTECTION L.P. ASSOCIATED MERRILL LYNCH ENTITIES [SET CHART HERE] GENERAL No Merrill Lynch entity or Trading Advisor has established any formal procedures to resolve the conflicts of interest described below. Limited Partners are dependent on the good faith of the respective parties subject to such conflicts to resolve such conflicts equitably. MLIP and its affiliates will assert that Limited Partners have consented to the following conflicts of interest by subscribing to the Fund. MLIP Relationship among the Merrill Lynch Entities As MLIP sponsored the Fund, MLIP and its affiliates are its service providers, other than the Trading Advisors, and will continue to be so even if other firms might be more advantageous for the Fund. Other Funds Sponsored by MLIP MLIP might be able to add more value to the Fund were certain MLIP personnel to focus exclusively on managing the Fund, but none do so. MLIP's benefits from accounts other than the Fund because such accounts generate significant revenues for it, and also diversify MLIP's exposure to one or more of such accounts performing poorly. -45- There is, in general, a shortage of qualified futures trading advisors available to manage customer assets. MLIP has a conflict of interest in selecting Trading Advisors for the Fund and for other accounts sponsored by MLIP. MLIP has a conflict of interest in allocating assets among the Trading Advisors in that MLF receives more net benefit from the brokerage commissions paid by the Fund the more infrequently an Advisor trades. MLIP also has a conflict of interest in selecting Advisors due to different advisory fee structures being more likely than others to result in a greater net revenues for MLIP. A number of Advisors are willing to accept a lower consulting fee, paid by MLF, in return for a higher Profit Share. Profit Shares are paid by the Fund, not MLIP. Leveraging Considerations MLIP has a conflict of interest in determining the Fund's trading leverage between MLIP's interest in maintaining the leverage which it believes to be best for the Limited Partners and its interest in protecting ML&Co.'s guarantee liability. Although the brokerage commissions and the Administrative Fees paid increase as trading leverage is increased, added revenues are not a significant factor in MLIP's leverage policy, compared with the need to avoid any ML&Co. payments under the guarantee. MLF; MLIB; MLAM MLF has numerous clients and executes trades for a numerous different clients in the same markets and at the same time. Executing orders for different, and possibly competing, customers at the same time involves an inherent conflict of interest. As a result of executing orders for many other clients, MLF also has fewer resources to allocate to the Fund's account. Certain clients of MLF pay materially lower brokerage rates than does the Fund. These lower rates are due in large part to the costs associated with sponsoring and operating a publicly-offered commodity pool. See "Charges -- Charges Paid by Merrill Lynch" at page 39 above. In the case of institutional accounts, these costs are not incurred by the Merrill Lynch organization, so that the brokerage commissions charged to such accounts can be correspondingly reduced without reducing the net revenue received by Merrill Lynch. Nevertheless, even in terms of the "net brokerage commissions," certain institutional clients of MLF receive, as a result of arm's-length negotiations, a better rate than the Fund. MLIB and MLIB each also have numerous clients and they have financial incentives to favor certain accounts over the Fund. THE TRADING ADVISORS Other Clients and Business Activities of the Trading Advisors The Fund might benefit significantly from an exclusive focus on the Fund by certain of the Trading Advisors' other accounts, including accounts owned by their principals. The Fund could be adversely affected by the fact that the Trading Advisors trade other accounts at the same time that they are managing the Fund. The Trading Advisors and their principals devote a substantial portion of their business time to ventures and accounts other than managing their Fund account, including, in some cases, ventures which are unrelated to futures trading. Certain of the Trading Advisors do now, or may in the future, act as sponsors of their own single or multi-advisor futures funds which may, from time to time, be in direct competition with the Fund for positions in the market. Other client accounts managed by a Trading Advisor may significantly outperform its Fund account. Brokers and Dealers Selected by Trading Advisors Certain of the Trading Advisors have required, as a condition of their management of a Fund account, that such account trade through certain non-Merrill Lynch brokers with which such Trading Advisors have ongoing -46- business dealings. Such Trading Advisors may have a conflict of interest between insisting on the use of such brokers and using the brokers most advantageous for the Fund. Certain of the Trading Advisors execute a number of the trades for their Fund accounts through affiliated floor brokers. FINANCIAL CONSULTANTS Financial Consultants receive initial selling commissions and ongoing compensation on the Units. Consequently, Financial Consultants have a financial incentive to encourage investors to purchase Units and to discourage them from redeeming their Units. PROPRIETARY TRADING The Trading Advisors, MLIP, their respective affiliates and such affiliates' respective principals may trade in the commodity markets for their own accounts and for the accounts of their clients, and in doing so may take positions which are the same as or opposite to those held by the Fund. Prospective investors should be aware that -- as a result of a neutral allocation system, testing a new trading system, trading their proprietary accounts more aggressively or other actions not in violation of their fiduciary or other duties -- such persons may from time to time take positions in their proprietary accounts ahead of the positions taken for the Fund and on occasion orders may be filled more advantageously for the account of one or more such persons than for the Fund's account. Records of this trading will not be available for inspection by Limited Partners. ___________________ While it is generally true that it is in the best interests of MLIP, the Trading Advisors and their respective affiliates and principals for the Fund to trade successfully, in particular circumstances any of the foregoing parties may receive significantly more benefit from acting in a manner adverse to the Fund than from acting in, or not opposed to, the Fund's best interests. It is very difficult, if not impossible, for Limited Partners to know or confirm that any of the foregoing persons is equitably resolving the conflicts of interest described above. THE LIMITED PARTNERSHIP AGREEMENT A copy of the Limited Partnership Agreement is included as Exhibit A to this Prospectus and is incorporated herein by reference. Section and page references below are to the Limited Partnership Agreement. LIMITED LIABILITY OF SUBSCRIBERS The Limited Partnership Agreement provides that (except as otherwise provided by law -- for example, if the Fund is bankrupt or insolvent at the time that a distribution is made to a Limited Partner), no Limited Partner shall be personally liable for the debts of the Fund beyond the amount invested by such Limited Partner in the Fund, plus his share of any undistributed profits. (Section 7(e) at page A-6). ASSIGNMENTS; REDEMPTIONS Units may only be transferred with the consent of the General Partner, although the assignment of the economic interest represented by the Units (but not any of the other rights, such as the right to vote and receive monthly reports) does not require such consent. A Limited Partner may redeem any or all of his Units at Net Asset Value as of the last business day of any month upon ten calendar days' irrevocable notice to his Merrill Lynch Financial Consultant. Payment of the redemption price of Units is generally made within ten business days of the effective date of redemption. If Units are redeemed on or prior to the end of the twelfth full calendar month after their sale, 3% of such Units' redemption proceeds are paid to MLIP as an early redemption charge. -47- In general, redemption requests need not be made in writing. Limited Partners may simply contact their Merrill Lynch Financial Consultant. A Limited Partner who no longer has a Merrill Lynch account must request redemption in writing (signature guaranteed), by corresponding with MLIP at: Merrill Lynch World Headquarters, Sixth Floor, South Tower, World Financial Center, New York, New York 10080-6106. (Section 11 at page A-11). MANAGEMENT OF PARTNERSHIP AFFAIRS; VOTING RIGHTS Limited Partners take no part in the management and have no voice in the operation of the Fund. (Section 8(a) at page A-7). Limited Partners may remove and replace MLIP as general partner of the Fund, and may, with the consent of MLIP, amend the Limited Partnership Agreement, except in certain limited respects, by the affirmative vote of holders of Units representing more than fifty percent (50%) of the outstanding Units of each series owned by Limited Partners. (Section 17(b) at page A-15). A majority of the Units held by Limited Partners may also compel dissolution of the Fund. (Section 17(b) at page A-15). Ten percent (10%) of the Units held by Limited Partners have the right to bring a matter before a vote of the Limited Partners. (Section 17(c) at page A-15). MLIP has no power under the Limited Partnership Agreement to restrict any of the Limited Partners' voting rights. (Section 17(c) at page A-15). Any Units purchased by MLIP or its affiliates are non-voting. (Section 6 at page A-3). MLIP has the right unilaterally to amend the Limited Partnership Agreement to the extent that such amendment is not adverse to the Limited Partners and also in certain unusual circumstances -- for example, if doing so is necessary to effect the intent of the Fund's tax allocations or to comply with certain regulatory requirements. (Section 17(a) at page A-15). In the event that MLIP or the Limited Partners vote to amend the Limited Partnership Agreement in any material respect, the amendment will not become effective prior to all Limited Partners having an opportunity to redeem their Units. (Section 17(c) at page A-15). REPORTS TO LIMITED PARTNERS AND ACCESS TO RECORDS The books and records of the Fund (including a list of Limited Partners and their addresses) are maintained at MLIP's principal office, and Limited Partners and their duly authorized representatives have the right during normal business hours upon reasonable notice to MLIP to inspect such books and records for any purpose reasonably related to their interest as Limited Partners. MLIP will also mail copies of such books and records to Limited Partners upon request and receipt of reasonable reproduction and mailing costs. (Section 9 at page A-9). Each month MLIP distributes summary performance reports to all Limited Partners. All tax information relating to the Fund necessary for the preparation of Limited Partners' federal income tax are distributed no later than March 15 of each year. Audited financial statements are distributed by March 31 of each year. (Section 9 at page A-9). GENERAL In compliance with the Statement of Policy of the North American Securities Administrators Association, Inc. relating to the registration of commodity pool programs under state securities or "Blue Sky" laws (the "Guidelines"), the Limited Partnership Agreement provides that: (i) the Fund will make no loans (Section 8(c) at page A-8); (ii) no rebates or give-ups, among other things, may be received from the Fund by any Trading Advisor, MLIP, MLF, MLIB, MLAM or any affiliate of the foregoing, and such restriction may not be circumvented by reciprocal business arrangements among any Trading Advisor, MLIP, MLF, MLIB, MLAM or any of their respective affiliates and the Fund (Section 8(d) at page A-8); (iii) any agreements between the Fund and MLIP, MLF, MLIB, MLAM or any affiliate of MLIP, MLF, MLIB or MLAM must be terminable by the Fund upon no more than 60 days' written notice (Section 8(e) at page A-8); and (iv) the assets of the Fund will not be commingled with the assets of any other person (deposit of assets with a commodity broker, clearinghouse or forward dealer does not constitute commingling for these purposes). (Section 8(c) at page A-8). All Advisors must meet the experience requirements of the Guidelines. (Section 8(f) at page A-8). -48- MLIP has agreed in the Limited Partnership Agreement to reimburse the Fund, with interest, for any advisory or other fees paid by the Fund during any fiscal year to any Advisor which exceed the 6% annual management fees and 15% quarterly incentive fees permitted by the Guidelines. (Section 8(a) at page A-7). FEDERAL INCOME TAX CONSEQUENCES MLIP has been advised by its counsel, Sidley & Austin, that, in its opinion, the following Summary correctly describes the material federal income tax consequences, as of the date hereof, to a United States individual taxpayer of acquiring, owning and disposing of Units. PARTNERSHIP TAX STATUS OF THE FUND MLIP has been advised by its counsel, Sidley & Austin, that, in its opinion, each of the Fund and the trading partnership in which the Fund invests is properly classified as a partnership for federal income tax purposes. MLIP believes that all of the income generated by the Fund to date has constituted and all income expected to be generated will constitute "qualifying income." Accordingly, Sidley & Austin has advised MLIP that, in its opinion, the Fund will not be subject to federal income tax as a corporation under the provisions applicable to "publicly-traded partnerships." TAXATION OF PARTNERS ON PROFITS OR LOSSES OF THE FUND Each Partner is required for federal income tax purposes to take into account his allocable share of all items of Fund income, gain, loss or deduction. A Partner's share of such items for tax purposes generally is determined by the allocations in the Limited Partnership Agreement unless such allocations do not have "substantial economic effect" or are not in accordance with the Partners' interests in the Fund. Under the Limited Partnership Agreement, allocations are generally made in proportion to the capital accounts of each Unit of such series, and therefore such allocations should have substantial economic effect. However, in cases in which a Partner redeems part or all of his Units in the Fund the allocations of capital gain or loss specified in the Limited Partnership Agreement will not be in proportion to capital accounts. Because such allocations are consistent with the economic effect of the Limited Partnership Agreement, MLIP files the Fund's tax return based upon such allocations. However, it is not certain that such allocations will be respected. If such allocations were challenged and not sustained, some or all of a redeeming Partner's capital gain or loss could be converted from short-term to long-term, and each remaining Partner's share of the capital gain or loss that is the subject of such allocations could be increased (solely for tax purposes). LIMITATIONS ON DEDUCTIBILITY OF FUND LOSSES The amount of any Fund loss that a Partner is entitled to include in his personal income tax return is limited to his tax basis for his Units as of the end of the year in which such loss occurred. Generally, a Partner's tax basis for his Units is the amount paid for such Units reduced (but not below zero) by his share of any Fund distributions, realized losses and expenses and increased by his share of the Fund's realized income and gains. In addition, losses of the Fund may be limited under the "at risk" rules. Because of the limitations imposed upon the deductibility of capital losses (see "-- Tax on Capital Gains and Losses," at page 50 below), a Partner's distributive share of any capital losses of the Fund will not materially reduce the federal income tax payable on his ordinary income (including his allocable share of the Fund's ordinary income). TREATMENT OF INCOME AND LOSS UNDER THE "PASSIVE ACTIVITY LOSS RULES" The Internal Revenue Code of 1986 (the "Code") contains rules (the "Passive Activity Loss Rules") designed to prevent the deduction of losses from "passive activities" against income not derived from such activities, including salary income from investment activities not constituting a trade or business, such as interest and dividends ("Portfolio Income"). The trading activities of the Fund will not constitute a "passive activity," and income derived from the Fund will constitute Portfolio Income or other income not from a "passive activity." -49- REDEMPTIONS OF UNITS Cash received from the Fund by a Partner generally is not reportable as taxable income by a Partner, except as described below. Rather, such receipt reduces (but not below zero) the total tax basis of all of the Units held by the Partner after the redemption. Redemption for cash of all of a Partner's Units will result in the recognition of gain or loss for federal income tax purposes. Such gain or loss will be equal to the difference, if any, between the amount received and the Partner's adjusted tax basis for his Units. Assuming that the Partner has held his Units for more than one year, such gain or loss will be long-term capital gain or loss. GAIN OR LOSS ON SECTION 1256 CONTRACTS Under the "mark-to-market" system of taxing futures and commodity options contracts traded on United States exchanges and certain foreign currency forward contracts ("Section 1256 Contracts"), any unrealized profit or loss on positions in such Section 1256 Contracts open as of the end of a fiscal year is treated as if such profit or loss had been realized for tax purposes as of such time. In general, 60% of the net gain or loss which is generated as a result of the "mark-to-market" system is treated as long-term capital gain or loss, and the remaining 40% of such net gain or loss is treated as short-term capital gain or loss. GAIN OR LOSS ON NON-SECTION 1256 CONTRACTS Except as described below with respect to Section 988 transactions entered into by a qualified fund, gain or loss with respect to contracts that are non-Section 1256 Contracts is taken into account for tax purposes only when realized. "Section 988 transactions" include entering into or acquiring any forward contract, futures contract or similar instrument if the amount paid or received is denominated in terms of (or determined by reference to the value of) a foreign currency other than the taxpayer's functional currency or if the underlying property to which the contract or instrument ultimately relates is a foreign currency other than the taxpayer's functional currency. In general, foreign currency gain or loss on Section 988 transactions is treated as ordinary income or loss. However, under the "qualified fund election" made by the Fund, gain or loss with respect to all Section 988 transactions will be capital gain or loss. In addition, all such transactions are subject to the "mark-to-market" rules (see "-- Gain or Loss on Section 1256 Contracts," above). TAX ON CAPITAL GAINS AND LOSSES Net long-term capital gains (i.e., the excess of net long-term capital gain over net short-term capital loss) will be taxed for individual taxpayers at a maximum rate of 28%. See "Limitation on Deductibility of Interest on Investment Indebtedness" at page 51 for a discussion of the reduction in the amount of an individual taxpayer's net capital gain for a taxable year to the extent such gain is taken into account as investment income. The Fund's trading generates almost exclusively capital gain or loss. Capital losses are deductible by individual taxpayers only to the extent of capital gains for the taxable year plus $3,000. Accordingly, the Fund could incur significant capital losses but an investor, nevertheless, be required to pay substantial taxes in respect of such investor's allocable share of the Fund's interest and other ordinary income. See "Risk Factors -- (25) Taxation of Interest Income" at page 11. If an individual taxpayer incurs a net capital loss for a year, the portion thereof, if any, which consists of a net loss on Section 1256 Contracts may, at the election of the taxpayer, be carried back three years. Losses so carried back may be deducted only against net capital gain for such year to the extent that such gain includes gains on Section 1256 Contracts. Losses so carried back will be deemed to consist of 60% long-term capital loss and 40% short-term capital loss (see "-- Gain or Loss on Section 1256 Contracts," above). To the extent that such losses are not used to offset gains on Section 1256 Contracts in a carryback year, they will carry forward indefinitely as losses on Section 1256 Contracts in future years. LIMITED DEDUCTION FOR CERTAIN EXPENSES The Code provides that, for individual taxpayers who itemize deductions when computing taxable income, expenses of producing income, including "investment advisory fees," are aggregated with unreimbursed employee business expenses, other expenses of producing income and certain other deductions (collectively, "Aggregate Investment Expenses"), and that the aggregate amount of such expenses is deductible only to the extent that such amount -50- exceeds 2% (the "2% floor") of an individual taxpayer's adjusted gross income. In addition, Aggregate Investment Expenses in excess of the 2% floor, when combined with a taxpayer's deductions for certain other items, are subject to a reduction (the "3% phase-out") equal to, generally, 3% of the taxpayer's adjusted gross income in excess of a certain threshold amount. Moreover, such Aggregate Investment Expenses are miscellaneous itemized deductions which are not deductible by individual taxpayers in calculating his alternative minimum tax. Based on the contemplated trading activities of the trading partnership in which the Fund invests, in the opinion of Sidley & Austin, the trading partnership should be treated as engaged in the conduct of a trade or business for federal income tax purposes. As a result, the ordinary and necessary business expenses incurred by the trading partnership in conducting its commodity futures trading business should not be subject to the 2% Floor or the 3% Phase-Out. Substantially all of the expenses related to an investment in the Fund are incurred and paid by the trading partnership. Investors should be aware that an opinion of counsel is not binding on the IRS or on any court and it is possible that the IRS could contend, or that a court could decide, that the contemplated trading activities of the trading partnership do not constitute a trade or business for federal income tax purposes. To the extent the characterization of the trading partnership's expenses as investment advisory expenses were to be sustained, each non-corporate Partner's pro rata share of the amounts so characterized would be deductible only to the extent that such non-corporate Partner's Aggregate Investment Expenses exceeded the 2% Floor and, when combined with certain other itemized deductions, exceeded the 3% Phase-Out. In addition, each non-corporate Partner's distributive share of the income allocated to the Fund by the trading partnership would be increased (solely for tax purposes) by such Partner's pro rata share of the amounts so recharacterized. TAXATION OF GOVERNMENT SECURITIES INVESTMENTS The Fund's purchase and sale of Government Securities generates capital gain or loss -- generally short-term -- as well as interest income. Taxable income is recognized on any interest accrued on zero- coupon Government Securities acquired for the Fund, even though no interest is paid on such Government Securities until they mature. SYNDICATION FEES The $239,100 in organizational and initial offering costs, for which MLIP is being reimbursed by the Fund in 36 equal monthly installments, have been treated as a non-deductible, non-amortizable, syndication expense by the Fund. The IRS could take the position that a portion of the brokerage commissions paid to MLF constitutes non- deductible syndication expenses. LIMITATION ON DEDUCTIBILITY OF INTEREST ON INVESTMENT INDEBTEDNESS Interest paid or accrued on indebtedness properly allocable to property held for investment constitutes "investment interest." Interest expense incurred by a Limited Partner to acquire or carry his Units (as well as other investments) will constitute "investment interest." Such interest is generally deductible by individual taxpayers only to the extent that it does not exceed net investment income (that is, generally, the excess of (i) gross income from interest, dividends, rents and royalties, which would include a Partner's share of the Fund's interest income, and (ii) certain gains from the disposition of investment property, over the expenses directly connected with the production of such investment income). Any investment interest expense disallowed as a deduction in a taxable year solely by reason of the above limitation is treated as investment interest paid or accrued in the succeeding taxable year. An individual taxpayer's net capital gain from the disposition of investment property is included in clause (ii) of the second preceding sentence only to the extent that such taxpayer elects to make a corresponding reduction in the amount of net capital gain that is subject to tax at the maximum 28% rate described above. (See "--Tax on Capital Gains and Losses," at page 50 above.) POSSIBLE PAYMENTS UNDER THE ML&CO. GUARANTEE Any payment to the Fund pursuant to the ML&Co. guarantee in respect of a series will give rise to taxable income in the amount of such payment to the Partners who hold Units of the recipient series. MLIP'S CONTRIBUTION TO THE PURCHASE PRICE OF CERTAIN UNITS MLIP contributes $3 to the Fund for each Unit purchased by officers and employees of ML&Co. or its affiliates, who subscribe for Units at $97. The $3 MLIP contribution is taxed as ordinary income in the year of purchase, and subscribers will acquire a tax basis of $100 in their Units. "UNRELATED BUSINESS TAXABLE INCOME" MLIP has been advised by its counsel, Sidley & Austin, that income earned by the Fund does not constitute "unrelated business taxable income" under Section 511 of the Code to employee benefit plans and other tax-exempt entities which purchase Units; provided that Units purchased by such plans and entities are not "debt-financed." IRS AUDITS OF THE FUND AND ITS PARTNERS The tax treatment of Fund-related items is determined at the Fund level rather than at the Partner level. MLIP is the Fund's "tax matters partner" with general authority to determine the Fund's responses to an audit. The limitations period for assessment of deficiencies and claims for refunds with respect to items related to the Fund is three years after the Fund's return for the taxable year in question is filed, and MLIP has the authority to extend such period with respect to all Limited Partners. -51- If an audit results in an adjustment, all Partners may be required to pay additional taxes plus interest as well as penalties and additional taxes. Partners may themselves also be subject to audits as the result of an audit of the Fund. STATE AND OTHER TAXES In addition to the federal income tax consequences described above, the Fund and the Partners may be subject to various state and other taxes. Certain of such taxes could, if applicable, have a significant effect on the amount of tax payable in respect of an investment in the Fund. ____________________ THE FOREGOING DISCUSSION IS NOT INTENDED AS TAX ADVICE, PARTICULARLY AS CERTAIN OF THE INCOME TAX CONSEQUENCES OF AN INVESTMENT IN THE FUND MAY NOT BE THE SAME FOR ALL TAXPAYERS. ACCORDINGLY, PROSPECTIVE INVESTORS IN THE FUND ARE URGED TO CONSULT THEIR TAX ADVISERS WITH SPECIFIC REFERENCE TO THEIR SITUATION UNDER FEDERAL, STATE AND OTHER LAWS BEFORE DETERMINING WHETHER TO SUBSCRIBE FOR UNITS. PLAN OF DISTRIBUTION SUBSCRIPTION PROCEDURE In order to purchase Units, an investor must complete, execute and deliver to the Selling Agent a copy of the Signature Page to the Subscription Agreement and Power of Attorney included in Exhibit D to this Prospectus. Subscription payments are made by authorizing the Selling Agent to debit an investor's customer securities account in the amount of his subscription. (Prospective subscribers must open an MLPF&S customer securities account in order to purchase Units.) Accounts are debited, and subscriptions transmitted directly by the Selling Agent to The Bank of New York at its offices in New York, New York by Selling Agent wire transfer or check made payable to "THE BANK OF NEW YORK, AS ESCROW AGENT FOR ML PRINCIPAL PROTECTION L.P., ESCROW ACCOUNT NO. 328436," on the settlement dates. Settlement dates are specified by the Selling Agent and occur not later than five business days following notification by MLIP of the acceptance of an investor's subscription (which will be received within five business days of subscription). No sale of Units of any series will be completed until at least 5 business days after the date a subscriber has executed, dated and submitted the Signature Page to the Subscription Agreement and Power of Attorney. Subscriptions must generally be received no less than 5 business days prior to issuance of the Units to be purchased. Existing Limited Partners subscribing for additional Units need not (except in certain states) submit a new Signature Page to the Subscription Agreement and Power of Attorney, but must be in possession of a current Prospectus as well as recent summary financial information relating to the Fund (current within 60 calendar days). FINANCIAL CONSULTANTS ARE REQUIRED TO RECONFIRM THE SUITABILITY OF EXISTING LIMITED PARTNERS TO MAKE AN ADDITIONAL INVESTMENT IN THE FUND. Subscriptions are held in escrow pending investment in the Units as of the beginning of the calendar quarter immediately following the acceptance of such subscriptions. Each subscriber is paid the interest actually earned on his subscription funds while held in escrow, generally by credit to subscribers' customer securities accounts. Subscription funds are invested in United States Treasury bills or comparable authorized instruments while held in escrow and earn interest at prevailing "risk- free" rates. The Units are being sold when, as and if subscriptions are accepted by MLIP, subject to the satisfaction of certain conditions set forth in the Selling Agreement and to the approval by counsel of certain legal matters. The Units are offered on a continuous basis. MLIP may terminate but not suspend the offering. FOREIGN PERSONS AND ENTITIES NOT OTHERWISE SUBJECT TO U.S. FEDERAL INCOME TAX MAY NOT INVEST IN THE FUND. -52- PURCHASES BY EMPLOYEE BENEFIT PLANS SPECIAL INVESTMENT CONSIDERATIONS. In general, the terms "employee benefit plan" as defined in the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and "plan" as defined in Section 4975 of the Code together refer to any plan or account of various types which provide retirement benefits or welfare benefits. Such plans and accounts include, but are not limited to, corporate pension and profit sharing plans, "simplified employee pension plans," KEOGH plans for self- employed individuals (including partners), individual retirement accounts and medical plans (collectively, "Plans," and the fiduciaries of such plans with investment discretion, "Plan Fiduciaries"). Each Plan Fiduciary must give appropriate consideration to the facts and circumstances that are relevant to an investment in the Fund, including the role that an investment in the Fund plays in the Plan's overall investment portfolio. Each Plan Fiduciary, before deciding to invest in the Fund, must be satisfied that investment in the Fund is a prudent investment for the Plan, that the investments of the Plan, including the investment in the Fund, are diversified so as to minimize the risk of large losses and that an investment in the Fund complies with the Plan and related trust documentation. THE FUND DOES NOT HOLD "PLAN ASSETS." A regulation issued under ERISA contains rules for determining when an investment by a Plan in an equity interest of a limited partnership will result in the underlying assets of the partnership being considered to constitute assets of the Plan for purposes of ERISA and Section 4975 of the Code (i.e., "plan assets"). Those rules provide in pertinent part that assets of a limited partnership will not be considered assets of a Plan which purchases an equity interest if interest is a "publicly-offered security." This exception is satisfied with respect to the Units. Therefore, the underlying assets of the Fund are not considered to constitute "plan assets." INELIGIBLE PURCHASERS. Units may not be purchased with the assets of a Plan if MLIP, any Advisor, the Selling Agent, any Financial Consultant, MLF, MLIB, ML&Co., MLAM or any of their respective affiliates either: (a) has investment discretion with respect to the investment of such plan assets; (b) has authority or responsibility to give or regularly gives investment advice with respect to such plan assets, for a fee, and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to such plan assets and that such advice will be based on the particular investment needs of the plan; or (c) is an employer maintaining or contributing to such plan. As a matter of policy, MLIP limits each investor's subscriptions to the Fund to no more than 10% of such investor's readily marketable assets. In the case of IRA, BASIC and SEP accounts, this 10% limitation applies to the beneficiary of such accounts, while such accounts themselves may not invest more than 50% of their readily marketable assets in the Fund. ACCEPTANCE OF SUBSCRIPTIONS ON BEHALF OF INDIVIDUAL RETIREMENT ACCOUNTS OR OTHER EMPLOYEE BENEFIT PLANS IS IN NO RESPECT A REPRESENTATION BY ANY PARTY THAT AN INVESTMENT IN THE UNITS IS APPROPRIATE OR AUTHORIZED FOR ANY PARTICULAR PLAN. EACH PLAN FIDUCIARY CONSIDERING ACQUIRING UNITS MUST CONSULT WITH ITS OWN LEGAL AND TAX ADVISERS BEFORE DOING SO. SELLING AGENT COMPENSATION No selling commissions are paid from the proceeds of subscriptions. MLIP credits the Selling Agent with "production credits," a portion of which are paid to the Selling Agent in cash by MLIP. Pursuant to standard Selling Agent compensation procedures, a percentage of the amount credited to the Selling Agent is paid out in cash by the Selling Agent to Financial Consultants who sell Units. The Selling Agent is credited with production credits of $5 per Unit on all sales, provided that no initial production credits accrue to the Selling Agent or Financial Consultants in respect of sales of Units at $97 per Unit to officers and employees of ML&Co. and its affiliates. MLIP credits the Selling Agent with ongoing production credits, a portion of which are paid in cash, with respect to Units which remain outstanding more than twelve months. Such ongoing production credits will begin to accrue with the start of the thirteenth month after sale (i.e., after subscription funds are released from escrow, not when Subscription Agreements are submitted or investors' funds deposited in escrow) on Units sold by Financial Consultants who are registered with the CFTC, have passed either the Series 3 National Commodity Futures Examination or the Series 31 Managed Futures Fund Examination and agree to provide certain ongoing services to investors, upon request. Such production credits equal 2% per annum of the average month-end Net Assets attributable to such Units committed -53- to trading. There can be no assurance as to what percentage of any particular series' assets will be allocated to trading. This percentage begins at 75% and may vary substantially over time. The Selling Agent will, in turn, pay out a portion of the amounts so received to qualified Financial Consultants. Ongoing production credits accrue monthly and are paid quarterly. In the Selling Agreement, each Trading Advisor and MLIP have agreed to indemnify the Selling Agent against certain liabilities that the Selling Agent may incur in connection with the offering and sale of the Units, including liabilities under the Securities Act of 1933 and the Commodity Exchange Act. Certain of the offering costs paid by MLIP might be deemed to have constituted costs properly allocated to the account of the Selling Agent. Such costs, which included the expense of producing a revised sales brochure and organizing certain seminars (such costs did not exceed $100,000 in the aggregate), were in addition to the selling commissions credited to the Selling Agent. MLIP pays the costs of the ongoing offering of the Units. In no event will any such costs, properly allocated to the account of the Selling Agent, when added to the selling commissions paid by MLIP, exceed an aggregate of $10 per Unit. LEGAL MATTERS Sidley & Austin, Chicago, Illinois and New York, New York passes upon certain legal matters for MLIP, MLF and the Selling Agent in connection with the offering of the Units. Sidley & Austin relies as to matters of Delaware law upon the opinion of Richards, Layton & Finger, Wilmington, Delaware. In the future, Sidley & Austin may advise MLIP (and its affiliates) with respect to its responsibilities as general partner of, and with respect to matters relating to, the Fund. Sidley & Austin does not represent either the Limited Partners or the Fund. Sidley & Austin has reviewed the statements under "Federal Income Tax Consequences." EXPERTS The balance sheet of MLIP as of December 29, 1995, and the consolidated financial statements of the Fund as of December 31, 1995 and 1994 included in this Prospectus, have been audited by Deloitte & Touche LLP, independent auditors, as stated in their reports appearing herein, and have been so included in reliance upon such reports given upon the authority of that firm as experts in auditing and accounting. ADDITIONAL INFORMATION This Prospectus constitutes part of the Registration Statement filed by the Fund with the SEC in Washington, D.C. This Prospectus does not contain all of the information set forth in such Registration Statement, certain portions of which have been omitted pursuant to the rules and regulations of the SEC including, without limitation, certain exhibits thereto (for example, the forms of the Selling Agreement, the Advisory Agreements, the Investment Advisory Contract and the Customer Agreement). The descriptions contained herein of agreements included as exhibits to the Registration Statement are necessarily summaries; the exhibits themselves may be inspected without charge at the public reference facilities maintained by the SEC in Washington, D.C., and copies of all or part thereof may be obtained from the SEC upon payment of the prescribed fees. -54- INDEX OF TERMS A number of specialized terms are used in this Prospectus. The respective descriptions or definitions of such terms may be found on the following pages of this Prospectus.
Terms Page(s) Terms Page(s) - ----- ------------- ----- ------------- Administrative Fee................... 37 ML&Co................................ Cover page Advisors............................. Cover page MLIP................................. Cover page "Bid-ask" spreads.................... 35 MLIB................................. 35 "Breakeven" level.................... 8 Monthly drawdown..................... 14 Brokerage commissions................ 36 New Trading Profit................... 38 CFTC................................. -i- NFA.................................. 26 Clearinghouses....................... APPIII-6 Non-"core" Trading Advisors.......... 6 Consulting fees...................... 39 "Offset accounts".................... 33 "Core" Trading Advisors.............. 6 Ongoing production credits........... -i- "Customer segregated funds".......... 33 Organizational and initial offering Daily limits......................... APPIII-6 cost reimbursement................ 35 Differential......................... 35 Peak-to-valley drawdown.............. 14 EFP.................................. 37 Principal Assurance Date............. Cover page Employee benefit plan................ 53 "Principal protection"............... 7 ERISA................................ 53 Profit Shares........................ 37 Escrow Agent......................... -i- Redemption charges................... 40 Forward contracts.................... APPIII-5 Selling Agent........................ -i- Futures contracts.................... APPIII-5 Selling commissions.................. -i- F/X Desk............................. 8 Service fees......................... 37 Government Securities................ 7 Speculative position limits.......... APPIII-6 Guarantee............................ 31 Time Horizon......................... 9 Initial margin....................... APPIII-6 Trading Advisors..................... Cover page Maintenance margin................... APPIII-6 Variation margin..................... APPIII-6 Margin call.......................... APPIII-6 Yield enhancement.................... 7 MLF.................................. Cover page "Zero-sum" trading................... 11 MLAM................................. Cover page
_________________________ -55- ORGANIZATIONAL STRUCTURE
Investors MLPF&S Custody Limited Partnership Cash Agreement Units Management of Fund Assets Sole General ML Principal Partner MLIP MLAM Investment Protection L.P. Advisory Contract Cash Sole Sole Management Limited Partner General of Fund Assets Partner Customer ML Principal Agreement Protection Trading MLF L.P. F/X Desk Service Agreement CTA CTA CTA International Futures and Forward Markets
-56- INDEX TO FINANCIAL STATEMENTS PAGE ---- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.)
Independent Auditors' Report............................. 58 Consolidated Statements of Financial Condition........... 59 Consolidated Statements of Income........................ 60 Consolidated Statements of Changes in Partners' Capital.. 61 Notes to Consolidated Financial Statements............... 62
MERRILL LYNCH INVESTMENT PARTNERS INC. Independent Auditors' Report............................. 71 Balance Sheets........................................... 72 Notes to Balance Sheets.................................. 73 ____________________ Schedules are omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto. -57- INDEPENDENT AUDITORS' REPORT To the Partners of ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.) We have audited the accompanying consolidated statements of financial condition of ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.) (a Delaware limited partnership; the "Partnership") as of December 31, 1995 and 1994, and the related consolidated statements of income and changes in partners' capital for the year ended December 31, 1995 and the period from October 12, 1994 (commencement of operations) to December 31, 1994. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, these consolidated financial statements present fairly, in all material respects, the financial position of ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.) (a Delaware limited partnership) as of December 31, 1995 and 1994, and the results of their operations for the year ended December 31, 1995 and the period from October 12, 1994 (commencement of operations) to December 31, 1994 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP January 26, 1996 New York, New York -58- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION MAY 31, 1996 (UNAUDITED), DECEMBER 31, 1995 AND 1994 - --------------------------------------------------------------------------------
May 31, 1996 1995 1994 ------------ ----------- ----------- (unaudited) ASSETS Cash $ 856 $ 19,332 $ -- Accrued interest receivable (Note 2) 684,607 17,852 65,078 U. S. Government Securities 79,566,875 74,280,477 30,850,465 Equity in commodity futures trading accounts: Cash and option premiums 8,691,996 1,586,839 993,636 Net unrealized gain on open contracts 57,649 2,073,538 1,115,935 ----------- ----------- ----------- TOTAL $89,001,983 $77,978,038 $33,025,114 =========== =========== =========== LIABILITIES AND PARTNERS' CAPITAL - --------------------------------- LIABILITIES: Administrative Expenses $ 11,197 $ -- $ -- Settlement payment due to broker -- 1,496,925 -- Redemptions payable 3,299,502 539,877 213,696 Brokerage commissions payable (Note 2) 414,276 356,607 156,876 Profit shares payable 24,113 78,840 129,169 Organization and initial offering costs payable (Note 1) 115,122 148,331 228,030 ----------- ----------- ----------- Total liabilities 3,864,210 2,620,580 727,771 ----------- ----------- ----------- Minority Interest 636,761 510,914 204,504 ----------- ----------- ----------- PARTNERS' CAPITAL: General Partner (19,785.98, 16,603.42 and 10,572 units) 2,087,012 1,766,403 1,074,985 Limited Partners (794,863.18, 697,715.56 and 306,990 units) 82,414,000 73,080,141 31,017,854 ----------- ----------- ----------- Total partners' capital 84,501,012 74,846,544 32,092,839 ----------- ----------- ----------- TOTAL $89,001,983 $77,978,038 $33,025,114 =========== =========== =========== NET ASSET VALUE PER UNIT (Note 5)
See notes to consolidated financial statements. -59- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ CONSOLIDATED STATEMENTS OF INCOME FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - --------------------------------------------------------------------------------
January 1, 1996 January 1, 1995 October 12, 1994 to to to May 31, 1996 May 31, 1995 1995 December 31, 1994 --------------- --------------- ---------- ----------------- REVENUES: Trading profit (loss): Realized $ 2,856,105 $2,364,339 $4,407,833 $ (363,054) Change in unrealized (2,015,889) 1,466,799 1,355,377 1,115,935 ----------- ---------- ---------- ----------- Total trading results 840,216 3,831,138 5,763,210 752,881 Interest income (Note 2) 1,927,550 1,083,661 3,415,670 377,303 ----------- ---------- ---------- ----------- Total revenues 2,767,766 4,914,799 9,178,880 1,130,184 ----------- ---------- ---------- ----------- EXPENSES: Administrative Fees 53,617 -- -- -- Profit shares 110,738 505,860 652,366 129,169 Brokerage commissions 1,983,811 1,051,336 3,303,292 416,617 ----------- ---------- ---------- ----------- Total expenses 2,148,166 1,557,196 3,955,658 545,786 ----------- ---------- ---------- ----------- INCOME BEFORE MINORITY INTEREST 619,600 3,357,603 5,223,222 584,398 ----------- ---------- ---------- ----------- Minority interest in income (1,846) (27,376) (36,730) (4,504) ----------- ---------- ---------- ----------- NET INCOME $ 617,754 $3,330,227 $5,186,492 $ 579,894 =========== ========== ========== =========== NET INCOME PER UNIT OF PARTNERSHIP INTEREST: Weighted average number of Units outstanding (Note 6) 825,563 410,286 551,944 319,887 =========== ========== ========== =========== Weighted average net income per Unit $ .75 $ 8.12 $ 9.40 $ 1.81 =========== ========== ========== ===========
See notes to consolidated financial statements. -60- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------
Limited General Units Partners Partner Total ---------- ----------- ---------- ----------- Initial offering 320,000.00 $30,942,800 $1,057,200 $32,000,000 Organization and initial offering costs -- (237,615) (1,485) (239,100) Redemptions (2,438.00) (247,955) -- (247,955) Net income -- 560,624 19,270 579,894 ---------- ----------- ---------- ----------- PARTNERS' CAPITAL, DECEMBER 31, 1994 317,562.00 31,017,854 1,074,985 32,092,839 Redemptions (47,810.02) (5,054,249) -- (5,054,249) Subscriptions 444,567.00 43,851,304 605,396 44,456,700 Distributions -- (1,771,806) (63,432) (1,835,238) Net income -- 5,037,038 149,454 5,186,492 ---------- ----------- ---------- ----------- PARTNERS' CAPITAL, DECEMBER 31, 1995 714,318.98 73,080,141 1,766,403 74,846,544 Redemptions (67,669.82) (7,155,421) -- (7,155,421) Subscriptions 168,000.00 16,481,744 318,256 16,800,000 Distributions -- (595,090) (12,775) (607,865) Net income -- 602,626 15,128 617,754 ---------- ----------- ---------- ----------- PARTNERS' CAPITAL, MAY 31, 1996 814,649.16 $82,414,000 $2,087,012 $84,501,012 ========== =========== ========== ===========
See notes to consolidated financial statements. -61- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.) (the "Partnership") was organized as an open-ended fund under the Delaware Revised Uniform Limited Partnership Act on January 3, 1994 and commenced trading activities on October 12, 1994. The Partnership engages both in speculative trading of futures, options and forward contracts on a wide range of commodities -- through ML Principal Protection Trading L.P. (the "Trading Partnership"; formerly ML Principal Protection Plus Trading L.P.), of which the Partnership is the sole limited partner -- and in investing in U.S. Government Securities, as defined. Merrill Lynch Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.) (the "General Partner" or "MLIP"), a wholly-owned subsidiary of Merrill Lynch Group, Inc. ("Merrill Lynch"), which in turn is a wholly-owned subsidiary of Merrill Lynch & Co., Inc., is the general partner of both the Partnership and the Trading Partnership, and Merrill Lynch Futures Inc. ("MLF"), also a Merrill Lynch affiliate, is its commodity broker. Merrill Lynch Asset Management, L.P. ("MLAM"), another affiliate of Merrill Lynch, provides cash management services to the Partnership, and substantially all of the Partnership's assets are held in accounts maintained at Merrill Lynch, Pierce, Fenner & Smith Incorporated, a Merrill Lynch affiliate. The General Partner has agreed to maintain a general partner's interest of at least 1% of the total equity interest in each of the Partnership and the Trading Partnership. The General Partner and the Limited Partners share in the profits and losses of the Partnership, and the General Partner and the Partnership share in the profits and losses of the Trading Partnership, in proportion to the respective interests in the Partnership and the Trading Partnership owned by each. The consolidated financial statements include the accounts of the Trading Partnership in which the Partnership is the sole limited partner. All related transactions and intercompany balances between the Partnership and the Trading Partnership are eliminated in consolidation. The ownership by the General Partner in the Trading Partnership represents a minority interest when the financial results of the Trading Partnership are consolidated into those of the Partnership. The General Partner's share of the Trading Partnership's profits and losses is deducted from the Consolidated Statements of Income, and the General Partner's interest in the Trading Partnership reduces partners' capital on the Consolidated Statements of Financial Condition and the Consolidated Statements of Changes in Partners' Capital. The Partnership issues units of limited partnership interest ("Units") as of the beginning of each calendar quarter. Each series has its own Net Asset Value per Unit. Different series may allocate different percentages of their total capital to trading, but all series trade under the direction of the same combination of advisors (the "Trading Advisors" or the "Advisors"), chosen from time to time by MLIP to manage the Trading Partnership's trading. MLIP selects the Advisors to manage the Partnership's assets, and allocates and reallocates the Partnership's trading assets among existing, replacement and additional Advisors. MLIP also determines what percentage of the Partnership's total capital to allocate to trading from time to time. Estimates --------- The preparation of consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities -62- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------- and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition ------------------- Commodity futures, options and forward contract transactions are recorded on the trade date and open contracts are reflected in the consolidated financial statements at their fair value on the last business day of the reporting period. The difference between the original contract amount and fair value is reflected in income as an unrealized gain or loss. Fair value is based on quoted market prices. All commodity futures, options and forward contracts are reflected at fair value in the consolidated financial statements. U.S. Government Securities -------------------------- The Partnership invests a portion of its assets in obligations of the U.S. Treasury and other U.S. Government agencies. These investments are carried at fair value. Organization and Initial Offering Costs, Operating Expenses and --------------------------------------------------------------- Selling Commissions ------------------- The General Partner advanced all organization and initial offering costs relating to the Partnership and the Trading Partnership. The Partnership is reimbursing the General Partner for such costs in 36 equal monthly installments. For financial reporting purposes, the Partnership deducted the organization and initial offering reimbursement costs of $239,100 from partners' capital at inception. For all other purposes (including determining the Net Asset Values of the Units), the Partnership deducts organization and initial offering cost reimbursements only as actually paid. The General Partner pays for all routine operating costs (including legal, accounting, printing and similar administrative expenses) of the Partnership and the Trading Partnership, including the cost of the ongoing offering of the Units. The General Partner receives a portion of the brokerage commissions paid to MLF by the Partnership as reimbursement for the foregoing expenses. No selling commissions were or are paid by Limited Partners. Income Taxes ------------ No provision for income taxes has been made in the accompanying consolidated financial statements as each partner is individually responsible for reporting income or loss based on such partner's respective share of the Partnership's consolidated income and expenses as reported for income tax purposes. Redemptions ----------- A limited partner may require the Partnership to redeem some or all of such partner's Units at their Net Asset Value as of the close of business on the last business day of any calendar month upon ten calendar days' notice. Units redeemed on or prior to the end of the twelfth full month after purchase are assessed an early redemption charge of 3% of their Net Asset Value as of the date of redemption. -63- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------- Dissolution of the Partnership ------------------------------ The Partnership will terminate on December 31, 2024 or at an earlier date if certain conditions occur, as well as under certain other circumstances as set forth in the Limited Partnership Agreement. 2. RELATED PARTY TRANSACTIONS A portion of the Partnership's assets are held by MLF as margin deposits in respect of the Partnership's futures trading. As a means of approximating the interest rate which would be earned by the Partnership were 100% of its Net Assets on deposit with MLF been invested in 91-day Treasury bills, MLF pays the Partnership interest on its account equity on deposit with MLF at a rate of 0.5 of 1% per annum below the prevailing 91-day U.S. Treasury bill rates. In the case of its trading in certain foreign futures contracts, the Partnership deposits margin in foreign currency denominated instruments or cash and earns interest generally at the prevailing London Clearing Broker Rate less 0.5 of 1% per annum. Any additional benefit derived from possession of the Partnership's assets accrues to MLF and its affiliates. The Partnership pays brokerage commissions to MLF, at a flat monthly rate equal to 0.7917 of 1% (a 9.5% annual rate) of the Partnership's month-end assets allocated to trading. Assets committed to trading are not reduced for purposes of calculating brokerage commissions by any accrued but unpaid brokerage commissions, profit shares or other fees or charges. The General Partner estimates that the round-turn equivalent commission rate charged to the Partnership during the period ended May 31, 1996, year ended December 31, 1995 and the period ended December 31, 1994 was approximately $117, $134 and $53, respectively (not including, in calculating round-turn equivalents, forward contracts on a futures-equivalent basis). MLF pays MLAM annual management fees of 0.20 of 1% on the first $25 million of Partnership capital managed by MLAM, 0.15 of 1% on the next $25 million of capital, 0.125 of 1% on the next $50 million, and 0.10 of 1% on capital in excess of $100 million. Such fees are paid quarterly in arrears and are calculated on the basis of the average daily assets managed by MLAM. MLF pays the Trading Advisors annual Consulting Fees, generally ranging from 1% to 4% of the Partnership's average month-end assets allocated to them for management, after reduction for a portion of the brokerage commissions accrued in respect of such assets. The Partnership trades forward contracts through a Foreign Exchange Desk (the "F/X Desk") established by MLIP that contacts at least two counterparties along with Merrill Lynch International Bank ("MLIB") for all of the Partnership's currency transactions. All counterparties other than MLIB are unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service fee (at current exchange rates) equal to approximately $5.00 to $12.50 on each purchase or sale of a futures- contract equivalent face amount of a foreign currency. No service fee is charged on trades awarded to MLIB (on which MLIB receives a "bid- ask" spread). MLIB is awarded trades only if its price (without the service fee) is equal to or better than the best price (including the service fee) offered by any of the other counterparties contacted. The F/X Desk trades using credit lines provided by a Merrill Lynch entity. The Partnership is not required to margin or otherwise guarantee its F/X Desk trading. Certain of the Partnership's currency trades are executed in the form of "exchange of futures for physical" ("EFP") transactions involving MLIB and MLF. In these transactions, a spot or forward (collectively referred to as "cash") currency position is acquired and exchanged for an equivalent futures position on the Chicago Mercantile -64- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------- Exchange's International Monetary Market. In its EFP trading, the Partnership acquires cash currency positions through the F/X Desk in the same manner and on the same terms as in the case of the Partnership's other F/X Desk trading. When the Partnership exchanges these positions for futures, there is a "differential" between the prices of these two positions. This "differential" reflects, in part, the different settlement dates of the cash and the futures contracts as well as prevailing interest rates, but also includes a pricing spread in favor of MLIB or another Merrill Lynch entity. The Partnership's F/X Desk service fee and EFP differential costs have to date totaled no more than 0.25 of 1% of the Partnership's average month-end Net Assets on an annual basis. 3. ANNUAL DISTRIBUTIONS The Partnership makes annual fixed-rate distributions, payable irrespective of profitability, of between $2 and $5 per Unit on the Series A-H Units. The Partnership may also pay discretionary distributions on such series of Units of up to 50% of any Distributable New Appreciation, as defined. For the period ended December 31, 1994, no distributions were made by the Partnership, as no Units had been outstanding for a year as of such date. The first such distribution was made, with respect to the Series A Units, as of October 1, 1995, the first Issuance Anniversary, as defined, of such series. At such time, Series A Unitholders received a fixed-rate distribution equal to $3.50 per Series A Unit and a discretionary distribution equal to $2.50 per Series A Unit (for a total distribution of $6.00 per Series A Unit). The first such distribution with respect to Series B Units was announced as of January 1, 1996, the first Series B Issuance Anniversary, and also consisted of an annual fixed-rate distribution equal to $3.50 per Series B Unit as well as a discretionary distribution equal to $2.50 per Series B Unit (for a total distribution equal to $6.00 per Series B Unit). As of April 1, 1996, the Series C Units received a $3.50 fixed-rate distribution but no discretionary distribution. Any distributions made on all series of Units issued after Series H will be entirely in the discretion of the General Partner, which does not presently intend to make any such distributions. 4. AGREEMENTS The Partnership and the Trading Advisors have each entered into Advisory Agreements. These Advisory Agreements generally terminate one year after they are entered into, subject to certain renewal rights exercisable by the Partnership. The Trading Advisors determine the commodity futures and forward contract trades to be made on behalf of their respective Partnership accounts, subject to certain trading policies and to certain rights reserved for the General Partner. Profit Shares, generally ranging from 15% to 25% of any New Trading Profit, as defined, recognized by each Advisor (individually, irrespective of the overall performance of the Partnership) as of the end of each calendar quarter are paid to the appropriate Trading Advisors. Such payments are also made in respect of Units redeemed as of each of the interim months during a quarter to the extent of the applicable percentage of any New Trading Profit attributable to such Units. 5. NET ASSET VALUE PER UNIT For financial reporting purposes, the Partnership deducted the total organization and initial offering costs payable to the General Partner at inception for purposes of determining Net Asset Value. For all other purposes (including computing Net Asset Value for redemptions), the Partnership deducts the organization and initial offering cost reimbursements only as actually paid. At December 31, 1994 and 1995 and May 31, 1996 , the Net Asset Values of the different series of Units for financial reporting purposes and for all other purposes were: -65- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - --------------------------------------------------------------------------------
Net Asset Value Net Asset Value per Unit -------------------------------- -------------------------------------------- All Other Financial Number of All Other Financial Purposes Reporting Units Purposes Reporting ------------ ----------- --------- ---------- ---------- December 31, 1994 ------------------------------------------------------------------------------------- Series A Units $32,314,228 $32,092,839 317,562.00 $101.76 $101.06 December 31, 1995 ------------------------------------------------------------------------------------- Series A Units $29,380,564 $29,321,472 274,693.00 $106.96 $106.74 Series B Units 7,011,988 6,999,016 63,540.00 110.36 110.15 Series C Units 6,800,466 6,788,236 65,800.00 103.35 103.16 Series D Units 20,522,519 20,485,530 200,540.00 102.34 102.15 Series E Units 11,272,696 11,252,290 109,745.98 102.72 102.53 ----------- ----------- ----------- Total $74,988,233 $74,846,544 714,318.98 =========== =========== =========== May 31, 1996 ------------------------------------------------------------------------------------- Series A Units $26,328,980 $26,295,156 244,184.00 $107.82* $107.69* Series B Units 4,643,764 4,636,165 44,140.00 105.20** 105.03** Series C Units 5,776,782 5,768,884 57,390.00 100.66*** 100.52*** Series D Units 20,459,691 20,434,711 198,430.00 103.11 102.98 Series E Units 11,202,499 11,188,821 108,252.16 103.49 103.36 Series F Units 9,667,326 9,654,916 96,253.00 100.44 100.31 Series G Units 6,530,451 6,522,359 66,000.00 98.95 98.82 ----------- ----------- ----------- Total $84,609,493 $84,501,012 $814,649.16 =========== =========== ===========
* After reduction for the $6.00 per Series A Unit distribution made as of October 1, 1995. ** After reduction for the $6.00 per Series B Unit distribution made as of January 1, 1996. *** After reduction for the $3.50 per Series C Unit distribution made as of April 1, 1996. -66- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------- 6. WEIGHTED AVERAGE NUMBER OF UNITS The weighted average number of Units outstanding was computed for purposes of disclosing consolidated net income per weighted average Unit. The weighted average number of Units for a period equals the number of Units outstanding at the end of such period, adjusted proportionately for Units redeemed or issued based on how long such Units were outstanding during such period. 7. MERRILL LYNCH & CO., INC. GUARANTEE Merrill Lynch & Co., Inc. has guaranteed to the Partnership that it will have sufficient net assets, as of the Principal Assurance Date, as defined, for each series of Units, that the Net Asset Value per Unit of such series as of such Principal Assurance Date will equal, after adjustment for all liabilities to third parties, not less than $100. 8. FAIR VALUE AND OFF-BALANCE SHEET RISK The Partnership trades futures, options and forward contracts on interest rates, stock indices, commodities, currencies, energy and metals. The Partnership's revenues by reporting category were as follows:
1995 1996 (through May 31) Trading Results Trading Results --------------- --------------------- Interest Rates $ 3,933,366 $ (630,236) Stock Indices 587,931 108,652 Commodities (447,486) 256,197 Currencies 2,914,300 1,470,278 Energy 238,988 764,038 Metals (1,463,889) (1,128,713) --------------- --------------------- $ 5,763,210 $ 840,216 =============== =====================
Market Risk ----------- Derivative instruments involve varying degrees of off-balance sheet market risk, and changes in the level or volatility of interest rates, foreign currency exchange rates or the market values of the financial instruments or commodities underlying such derivative instruments frequently result in changes in the Partnership's unrealized gain or loss on such derivative instruments as reflected in the Consolidated Statements of Financial Condition as of the end of the period. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Trading Partnership as well as the volatility and liquidity of the markets in which the derivative instruments are traded. The General Partner has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of the Advisors selected from time to time for the Partnership, adjusting the percentage of the Partnership's total assets allocated to trading with -67- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------- respect to each Series of Units, calculating the Net Asset Value of the Advisors' respective Partnership accounts as of the close of business on each day and reviewing outstanding positions for over-concentrations -- both on an Advisor-by-Advisor and on an overall Partnership basis. While the General Partner will not itself intervene in the markets to hedge or diversify the Partnership's market exposure, the General Partner may urge Advisors to reallocate positions, or itself reallocate Partnership assets among Advisors (although typically only as of the end of a month), in an attempt to avoid over- concentrations. However, such interventions are unusual. Except in cases in which it appears that an Advisor has begun to deviate from past practice or trading policies or to be trading erratically, the General Partner's basic risk control procedures consist simply of the ongoing process of Advisor monitoring and selection, with the market risk controls being applied by the Advisors themselves. Fair Value - ---------- The derivative instruments traded by the Trading Partnership are marked to market daily with the resulting unrealized gains or losses recorded in the Consolidated Statements of Financial Condition and the related income or loss reflected in trading revenues in the Consolidated Statements of Income. The contract/notional values of the Trading Partnership's open derivative instrument positions as of May 31, 1996, December 31, 1995 and 1994 were as follows:
May 31, 1996 ------------------------------------------------------ Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------- ------------------- Interest Rates $125,192,569 $ 98,591,010 Stock Indices 12,881,277 226,160 Commodities 18,708,993 5,281,790 Currencies 108,971,043 159,714,003 Energy 7,809,490 -- Metals 18,331,244 25,241,476 ------------------ ------------------ $291,892,616 $289,054,439 ================== ==================
December 31, 1995 December 31, 1994 ---------------------------------- ---------------------------------- Commitment to Commitment to Commitment to Commitment to Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures, Options & Options & Options & Options & Forwards) Forwards) Forwards) Forwards) ------------------ -------------- ------------------ -------------- Interest Rates $230,060,441 $ 37,950,386 $69,728,257 $64,233,570 Stock Indices 8,866,682 152,858 922,700 1,106,848 Commodities 17,582,456 3,850,643 7,859,990 1,576,977 Currencies 34,118,884 71,457,359 8,884,733 20,155,361 Energy 9,047,015 3,440,800 1,330,952 983,996 Metals 7,796,167 11,765,623 4,270,470 8,486,235 ------------------ -------------- ------------------ --------------
-68- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), FOR THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------- $307,471,645 $128,617,669 $92,997,102 $96,542,987 ============== ============== ============= ============= Substantially all of the Trading Partnership's open derivative instruments outstanding as of May 31, 1996 expire within one year. The contract/notional value of the Trading Partnership's exchange-traded and non-exchange-traded derivative instrument positions as of December 31, 1995 was as follows:
Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------- ------------------- Exchange-Traded $238,654,840 $ 76,980,099 Non-Exchange-Traded 68,816,805 51,637,570 ------------------- ------------------- $307,471,645 $128,617,669 =================== ===================
The average fair value of the Trading Partnership's derivative instrument positions which were open as of the end of each calendar month during the year ended December 31, 1995 was as follows:
Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------- ------------------- Interest Rates $170,252,009 $14,100,439 Stock Indices 5,390,839 1,288,747 Commodities 9,360,681 2,915,357 Currencies 36,054,488 38,557,545 Energy 2,823,925 2,417,008 Metals 6,113,263 10,207,341 ------------------- ------------------- $229,995,205 $69,486,437 =================== ===================
A portion of the amounts indicated as off-balance sheet risk reflects offsetting commitments to purchase and to sell the same derivative instrument on the same date in the future. These commitments are economically offsetting but are not, as a technical matter, offset in the forward markets until the settlement date. Credit Risk - ----------- The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the -69- ML PRINCIPAL PROTECTION L.P. (FORMERLY ML PRINCIPAL PROTECTION PLUS L.P.) (A DELAWARE LIMITED PARTNERSHIP) ------------------------------ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIODS JANUARY 1, 1996 TO MAY 31, 1996 (UNAUDITED), JANUARY 1, 1995 TO MAY 31, 1995 (UNAUDITED), THE YEAR ENDED DECEMBER 31, 1995 AND THE PERIOD FROM OCTOBER 12, 1994 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1994 - -------------------------------------------------------------------------------- exchange is pledged to support the financial integrity of the exchange. In over- the-counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may require margin in the over-the-counter markets. The fair value amounts in the above tables represent the extent of the Trading Partnership's market exposure in the particular class of derivative instrument, but not the credit risk associated with counterparty nonperformance. The credit risk associated with these instruments, from counterparty nonperformance, is the net unrealized gain, if any, included on the Consolidated Statements of Financial Condition. The Trading Partnership also has credit risk because the sole counterparty or broker with respect to most of the Trading Partnership's assets is MLF. As of December 31, 1995, $10,444,577 of the Trading Partnership's assets were held in segregated accounts in accordance with Commodity Futures Trading Commission regulations. Substantially all of the Partnership's assets were held in unregulated accounts maintained at MLF, Merrill Lynch Pierce, Fenner & Smith Incorporated or certain of their affiliates. The gross unrealized gain and the net unrealized gain on the Trading Partnership's open derivative instrument positions as of December 31, 1995 were as follows:
Gross Unrealized Net Unrealized Gain Gain (Loss) ---------------- -------------- Exchange-Traded $2,942,622 $2,223,484 Non-Exchange-Traded 352,246 (149,946) ---------------- ---------------- $3,294,868 $2,073,538 ================ ================
The Partnership controls credit risk by dealing almost exclusively with Merrill Lynch entities as brokers and counterparties. -70- INDEPENDENT AUDITORS' REPORT MERRILL LYNCH INVESTMENT PARTNERS INC. We have audited the accompanying balance sheet of Merrill Lynch Investment Partners Inc. (the "Company") (formerly, ML Futures Investment Partners Inc.) as of December 29, 1995. This financial statement is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the balance sheet is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the balance sheet. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall balance sheet presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, such balance sheet presents fairly, in all material respects, the financial position of the Company as of December 29, 1995 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP January 26, 1996 New York, New York -71- MERRILL LYNCH INVESTMENT PARTNERS INC. (FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.) BALANCE SHEETS DECEMBER 29, 1995 AND MAY 31, 1996 (UNAUDITED) - -------------------------------------------------------------------------------
MAY 31, 1996 (UNAUDITED) DECEMBER 29, 1995 ------------ ----------------- ASSETS Cash $ 61,267 $ 17,738 Investments in affiliated partnerships 8,611,221 8,397,789 Other investments 613,792 579,127 Due from parent and affiliate 77,088,690 69,476,980 Receivables from affiliated partnerships 3,361,869 3,525,337 Deferred charges 13,804,132 11,759,885 Advances and other receivables 9,204,410 7,742,943 Fixed assets-net of accumulated depreciation of $1,016,602 144,892 119,823 Other assets 100,000 130,000 ------------ ------------ TOTAL ASSETS $112,990,273 $101,749,622 ============ ============ LIABILITIES AND STOCKHOLDER'S EQUITY LIABILITIES: Accounts payable and accrued expenses $ 2,371,687 $ 1,759,019 Due to affiliate 1,757,315 1,568,396 Current and deferred income taxes 8,376,580 7,162,014 ------------ ------------ Total liabilities 12,505,582 10,489,429 ------------ ------------ STOCKHOLDER'S EQUITY: Preferred stock, par value $10.00 per share; 1,000 shares authorized none outstanding -- -- Common stock, par value $10.00 per share; 1,000 shares authorized 100 shares outstanding 1,000 1,000 Additional paid-in capital 16,915,000 16,915,000 Retained earnings 83,568,691 74,344,193 ------------ ------------ Total stockholder's equity 100,484,691 91,260,193 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $112,990,273 $101,749,622 ============ ============
See Notes to Balance Sheet. PURCHASER OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -72- MERRILL LYNCH INVESTMENT PARTNERS INC. (FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.) NOTES TO BALANCE SHEETS DECEMBER 29, 1995 AND MAY 31, 1996 (UNAUDITED) - -------------------------------------------------------------------------------- 1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION - Merrill Lynch Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.) (the "Company") is a wholly-owned subsidiary of Merrill Lynch Group Inc., a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). The Company is registered as a commodity pool operator and a commodity trading advisor. The Company serves as the sole general partner of The Futures Expansion Fund Limited Partnership, The Growth and Guarantee Fund L.P., ML Futures Investments II L.P. (formerly, The Futures Dimension Fund II L.P.), ML Futures Investments L.P. (formerly The Tudor Prime Advisors Fund L.P.), John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R. Strategy Fund(SM) L.P., The SECTOR Strategy Fund(SM) II L.P., The JWH Global Asset Fund L.P., The SECTOR Strategy Fund(SM) IV L.P., The SECTOR Strategy Fund(SM) V L.P., ML Global Horizons L.P., ML Chesapeake L.P., The SECTOR Strategy Fund(SM) VI L.P., RXR Defensive Equity Alternative Account L.P. I, ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.) and ML JWH Strategic Allocation Fund L.P. (collectively, the "Affiliated Partnerships"). Additionally, the Company has sponsored or initiated the formation of various offshore entities engaged in the speculative trading of futures and forward contracts. ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. INVESTMENTS IN AFFILIATED PARTNERSHIPS - The Company's investments in its Affiliated Partnerships are accounted for under the equity method of accounting. DEFERRED CHARGES - Deferred charges represent compensation to ML&Co. affiliates for the sale of fund units to their customers. Such costs are amortized over 6, 12, 24, 36 or 48-month periods. 2. RELATED PARTIES Certain of the Company's officers and directors are also officers of other subsidiaries of ML&Co. An affiliate bears all of the Company's facilities and employee costs, for which it is reimbursed by the Company. Another affiliate, Merrill Lynch Futures Inc., executes and clears the Affiliated Partnerships' trades, as well as those of various offshore funds sponsored or managed by the Company, for which it receives a fee, generally based on the net assets of the Affiliated Partnerships and offshore funds. ML&Co. is holder of the Company's excess cash, which is available on demand to meet current liabilities. ML&Co. credits the Company with interest, at a floating rate approximating ML&Co.'s average borrowing rate, based on the Company's average daily balances receivable. At December 29, 1995 and May 31, 1996, approximately $69,500,000 and $77,100,000, respectively, was subject to this agreement. At December 29, 1995 and May 31, 1996, the Company had receivables from Affiliated Partnerships and offshore funds for certain administrative, management and redemption fees, all of which are expected to be collected within 90 days. Additionally, the Company had receivables from certain Affiliated Partnerships and offshore funds for organizational and initial offering costs paid on behalf of such funds which are being reimbursed to the Company over various time periods (not exceeding three years). During 1995 and the first five months of 1996, the Company did not declare or pay a dividend. PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -73- MERRILL LYNCH INVESTMENT PARTNERS INC. (FORMERLY, ML FUTURES INVESTMENT PARTNERS INC.) NOTES TO BALANCE SHEETS DECEMBER 29, 1995 AND MAY 31, 1996 (UNAUDITED) (CONTINUED) ================================================================================ 3. INVESTMENTS IN AFFILIATED PARTNERSHIPS Under the terms of the limited partnership agreements of the Affiliated Partnerships, the Company is required to maintain an investment in each Affiliated Partnership of at least one percent of the total contributions to such Partnership. At May 31, 1996 and December 29, 1995, the Company's investments in its Affiliated Partnerships were as follows:
May 31, 1996 December 29, 1995 ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.).. $2,718,963 $2,324,996 ML Global Horizons L.P..................................................... 1,056,916 1,068,112 The SECTOR Strategy Fund/(SM)/ II L.P...................................... 749,441 770,619 John W. Henry & Company/Millburn L.P....................................... 674,195 728,350 The SECTOR Strategy Fund/(SM)/ VI L.P...................................... 728,659 725,174 RXR Defensive Equity Alternative Account L.P. I............................ 468,060 546,428 The JWH Global Asset Fund L.P.............................................. 495,178 492,278 The S.E.C.T.O.R. Strategy Fund/(SM)/ L.P................................... 412,851 441,992 ML Futures Investments L.P................................................. 330,311 356,788 The SECTOR Strategy Fund/(SM)/ V L.P....................................... 307,846 339,622 ML Futures Investments II L.P.............................................. 207,247 213,181 The Growth and Guarantee Fund L.P.......................................... 173,804 155,787 The Futures Expansion Fund Limited Partnership............................. 113,716 121,808 The SECTOR Strategy Fund/(SM)/ IV L.P...................................... 95,036 111,654 ML JWH Strategic Allocation Fund L.P....................................... 1,000 1,000 ML Chesapeake L.P.......................................................... 78,000 -- ---------- ---------- Total...................................................................... $8,611,223 $8,397,789 ========== ==========
The following represents condensed combined financial information of the Affiliated Partnerships as of May 31, 1996 and December 29, 1995 (in thousands):
May 31, 1996 December 29, 1995 Assets..................................................................... $465,129 $528,180 ======== ======== Liabilities................................................................ 24,733 15,836 Partners' capital.......................................................... 440,396 512,344 -------- -------- Total................................................................. $465,129 $528,180 ======== ========
The Company's Affiliated Partnerships trade various futures, futures options and forward contracts. Risk to such Partnerships arises from the possible adverse changes in the market value of such contracts and the potential inability of counterparties to perform under the terms of the contracts. The risk to the Company is represented by the portion of its investments in Affiliated Partnerships derived from the unrealized gains contained in such Partnerships' net asset values. PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -74- MERRILL LYNCH INVESTMENT PARTNERS INC. (Formerly, ML Futures Investment Partners Inc.) NOTES TO BALANCE SHEETS December 29, 1995 and May 31, 1996 (Unaudited) (Continued) ================================================================================ 4. INCOME TAXES The results of operations of the Company are included in the consolidated federal and combined state and local income tax return of ML&Co. It is the policy of ML&Co. to allocate current and deferred taxes associated with such operating results to its respective subsidiaries in a manner which approximates the separate company method. ML&Co. and its affiliates use the asset and liability method in providing income tax on all transactions that have been recognized in the financial statements. The Company provides for deferred income taxes resulting from temporary differences which arise from recording deferred charges in different years for income tax reporting purposes than for financial reporting purposes. At May 31, 1996 and December 29, 1995, the Company had no deferred tax assets. Deferred tax liabilities ($4,880,601) consisted of the following: May 31, 1996 December 29, 1995 State and local $ 986,962 $1,176,130 Federal 3,108,570 3,704,471 ---------- ---------- $4,095,532 $4,880,601 ========== ========== As part of the consolidated group, the Company transfers to ML&Co. its current federal, state and local tax liabilities. During 1995 and the first five months of 1996, the Company transferred $10,707,045 and $4,639,743, respectively, in current taxes payable to ML&Co. At May 31, 1996 and December 29, 1995, the Company had a current tax payable with ML&Co. of $2,647,203 and $2,281,413, respectively. 5. NET WORTH AGREEMENTS Pursuant to the limited partnership agreements of the Affiliated Partnerships, the Company is required to maintain a "substantial net worth," as defined. The Company's net worth, as defined, approximated $88,512,000 and $79,337,000 at May 31, 1996 and December 29, 1995, respectively, which, in the opinion of the Company's counsel, met the definition of "substantial net worth." 6. COMMITMENTS The Company is obligated to pay to affiliates, from its own funds and without reimbursement by the Affiliated Partnerships ongoing fees for units in such partnerships outstanding as of the end of various periods. PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THIS COMPANY -75- APPENDIX I THE "CORE" TRADING ADVISORS ____________ FUTURES TRADING METHODS IN GENERAL Systematic and Discretionary Trading Approaches Managed futures strategies are generally classified as either systematic or discretionary (or both). A systematic trader will generally rely to some degree on judgmental decisions concerning, for example, what markets to follow and commodities to trade, but his primary reliance is on trading programs or models which generate trading signals. The systems utilized to generate trading signals are changed from time to time (although generally infrequently), but the trading instructions generated by the systems being used are followed without significant additional analysis or interpretation. Discretionary traders, on the other hand, while they may utilize market charts, computer programs and compilations of quantifiable fundamental information to assist them in making trading decisions, make such decisions on the basis of their own judgment and "trading instinct," not on the basis of trading signals generated by any program or model. Each approach involves certain inherent risks. For example, systematic traders may incur substantial losses when fundamental or unexpected forces dominate the markets, while discretionary traders may overlook price trends which would have been clearly signaled by a trading system. Systematic traders tend to rely more on computerized programs than do discretionary traders, and some consider the discipline of a systematic trading process to be advantageous. However, any trader, systematic or discretionary, may suffer substantial losses by misjudging the market analysis. Technical and Fundamental Analysis Managed futures trading analysis are generally classified as either technical or fundamental (or both). Technical analysis is based on the theory that the commodities markets themselves provide a means of anticipating future prices. Technical analysis operates on the theory that market prices and momentum at any given point in time reflect all known factors affecting the supply and demand for a particular commodity. Consequently, technical analysis focuses not on evaluating those factors directly but on an analysis of price histories, movements and patterns, theorizing that a detailed analysis of market date is the most effective means of attempting to predict the future course of prices. Fundamental analysis, in contrast, focuses on the study of factors external to the trading markets that affect the supply and demand of a particular commodity. Such factors might include weather, the economy of a particular country, government policies, domestic and foreign political and economic events, and changing trade prospects. Fundamental analysis theorizes that by monitoring relevant supply and demand factors for a particular commodity, a state of current or potential disequilibrium of market conditions may be identified that has yet to be reflected in the price level of that commodity. Fundamental analysis assumes that markets are imperfect, that information is not instantaneously assimilated or disseminated and that econometric models can be constructed that generate equilibrium prices that reflect "true value" and may indicate market mispricing. Trend-Following "Trend-following" advisors gear their trading approaches towards positioning themselves to take advantage of major price movements. "Trend- following" traders are to be contrasted with traders who seek to achieve overall profitability by making numerous small profits on short-term trades, or through arbitrage techniques. APPI-1 "Trend-following" traders assume that most of their trades will be unprofitable. Their objective is to make a few large profits, more than offsetting their more numerous but (hopefully) smaller losses, from capitalizing on major trends. During periods when no major price trends develop in a market, a "trend- following" trading advisor is likely to incur substantial losses. Risk Control Techniques Trading advisors often adopt fairly rigid "risk management" or "money management" principles. Such principles typically restrict the size of positions which will be taken as well as establishing "stop-loss" points at which losing positions must be liquidated. No risk control technique is "fail safe," and none can, in fact, assure that major drawdowns will be avoided. Not only do estimates of market volatility themselves require judgmental input, but also market illiquidity can make it impossible for an account to liquidate a position against which the market is moving strongly, whatever risk management principles are utilized. The Advisors' risk management principles should be seen more as a discipline applied to their trading in highly speculative markets than as an effective protection against loss. THE "CORE" TRADING ADVISORS The following descriptions of the current "core" Advisors, their respective trading systems, methods and strategies and their respective principals are general and are not intended to be exhaustive. Trading methods are proprietary and confidential. No attempt has been or could be made to provide a precise description of any Advisor's method. MLIP believes that the following descriptions may be of interest to prospective investors. However, investors must be aware of the inherent limitations of such descriptions. FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THERE CAN BE NO ASSURANCE THAT ANY ADVISOR WILL TRADE PROFITABLY OR AVOID SUBSTANTIAL LOSSES. __________________________ Chesapeake Capital Corporation, one of the two current "core" Advisors, will, if requested, trade "notional" equity for clients -- i.e., trade such clients' accounts as if more equity were committed to such accounts than is, in fact, the case. The Fund's accounts do not include any notional equity. APPI-2 NOTES TO THE PERFORMANCE SUMMARIES 1. Name of CTA is the name of the "core" Advisor which directed the accounts included in the performance summary. 2. Name of program is the name of the trading program used by the "core" Advisor in directing the accounts included in the performance summary. 3. Inception of client account trading by CTA is the date on which the relevant "core" Advisor began directing client accounts. 4. Inception of client account trading in program is the date on which the relevant "core" Advisor began directing client accounts pursuant to the program shown in the performance summary. 5. Number of open accounts is the number of accounts directed by the relevant "core" Advisor pursuant to the program shown in the performance summary, as of the end of the period covered by the performance summary. 6. Aggregate assets (excluding "notional" equity) overall is the aggregate amount of actual assets under the management of the relevant "core" Advisor in all programs operated by such "core" Advisor, as of the end of the period covered by the performance summary. With respect to Chesapeake, these numbers include client funds only. With respect to JWH, these numbers also include proprietary funds; however, all proprietary funds are traded in the same manner and charged the same fees as client funds, and the proprietary funds are, in any event, not material in terms of the overall assets managed by JWH. 7. Aggregate assets (excluding "notional" equity) in program is the aggregate amount of actual assets under the management of the relevant "core" Advisor in the program shown in the performance summary, as of the end of the period covered by the performance summary. With respect to Chesapeake, these numbers include client funds only. With respect to JWH, these numbers may also include proprietary funds (as described in the performance summaries); however, all proprietary funds are traded in the same manner and charged the same fees as client funds, and the proprietary funds are, in any event, not material in terms of the overall assets managed by JWH. 8. Aggregate assets (including "notional" equity) overall is the aggregate amount of total equity, including "notional" equity, under the management of the relevant "core" Advisor in all programs operated by such "core" Advisor, as of the end of the period covered by the performance summary. "Notional" equity represents the additional amount of equity which exceeds the amount of equity actually committed to the "core" Advisor for management. With respect to Chesapeake, these numbers include client funds only. With respect to JWH, these numbers also include proprietary funds; however, all proprietary funds are traded in the same manner and charged the same fees as client funds, and the proprietary funds are, in any event, not material in terms of the overall assets managed by JWH. 9. Aggregate assets (including "notional" equity) in program is the aggregate amount of total equity, including "notional" equity, under the management of the relevant "core" Advisor in the program shown in the performance summary, as of the end of the period covered by the performance summary. "Notional" equity represents the additional amount of equity which exceeds the amount of equity actually committed to the "core" Advisor for management. With respect to Chesapeake, these numbers include client funds only. With respect to JWH, these numbers may also include proprietary funds (as described in the performance summaries); however, all proprietary funds are traded in the same manner and charged the same fees as client funds, and the proprietary funds are, in any event, not material in terms of the overall assets managed by JWH. APPI-3 NOTES TO THE PERFORMANCE SUMMARIES (Cont.) 10. Largest monthly drawdown is the largest monthly loss experienced by the relevant program on a composite basis in any calendar month covered by the performance summary. "Loss" for these purposes is calculated on the basis of the loss experienced by the program as a composite, expressed as a percentage of the total equity (including "notional" equity) in the program. Individual accounts of a "core" Advisor may have experienced larger monthly drawdowns. Largest monthly drawdown information includes the month and year of such drawdown. 11. Largest peak-to-valley drawdown is the largest percentage decline (after eliminating the effect of additions and withdrawals) during the period covered by the performance summary from any month-end net asset value, without such month-end net asset value being equaled or exceeded as of a subsequent month-end. Largest peak-to-valley drawdown is calculated on the basis of the loss experienced by the program as a composite, expressed as a percentage of the total equity (including "notional" equity) in the program. Individual accounts managed by a "core" Advisor may have experienced larger peak-to-valley drawdowns. JWH calculates the period over which the largest peak-to-valley drawdown of a program has occurred as beginning with the last profitable month immediately preceding the drawdown. Chesapeake calculates such period as beginning with the first unprofitable month of the drawdown. 12. Monthly Rates of Return, in accordance with CFTC rules, are shown only for the specific programs currently being traded by the "core" Advisors for the Fund. With respect to Chesapeake's Diversified Trading Program, the Monthly Rate of Return for each month beginning January 1994 is calculated by dividing the net performance of the "Fully-Funded Subset" by the beginning equity of the Fully-Funded Subset, except in periods of significant additions or withdrawals to the accounts in the Fully-Funded Subset. In such instances, the Fully-Funded Subset is adjusted to exclude accounts with significant additions or withdrawals, whose inclusion would materially distort the rate of return calculated pursuant to the Fully-Funded Subset method. The Monthly Rate of Return for each month prior to January 1992 is calculated using the Only Accounts Traded (OAT) method (see "Chesapeake Capital Corporation -- Past Performance" in this Appendix I), which uses net performance divided by beginning equity, subject to certain adjustments. In this calculation, accounts are excluded from both net performance and beginning equity if their inclusion would materially distort the Monthly Rate of Return. The excluded accounts include (1) accounts for which there has been a material addition or withdrawal during the month, (2) accounts which were open for only part of the month or (3) accounts which had no open positions during the month due to the intention to permanently close the account. Such accounts were not charged with material nonrecurring costs during the month. The Monthly Rate of Return for the months from January 1992 through April 1994 was calculated using both the Fully-Funded Subset and OAT methods of computation, as described herein. No material differences were noted between the Monthly Rates of Return computed using each method. With respect to JWH's Financial and Metals Portfolio, the Monthly Rate of Return for each month is calculated by dividing net performance by the sum of beginning equity plus additions and minus withdrawals. For such purposes, all additions and withdrawals are effectively treated as if they had been made on the first day of the month even if, in fact, they occurred later, unless, beginning in December 1991, they are material to the performance of the Financial and Metals Portfolio, in which case they are time-weighted. The Monthly Rates of Return for both of the current "core" Advisors are, in certain cases, calculated on the basis of assets under management including proprietary capital. However, both of the current "core" Advisors believe that the inclusion of such capital has had no material effect on their Monthly Rates of Return. 13. Compound Rate of Return is calculated by multiplying on a compound basis each of the Monthly Rates of Return and not by adding or averaging such Monthly Rates of Return. For periods of less than one year, the results are year-to-date. APPI-4 CHESAPEAKE CAPITAL CORPORATION JULY 1, 1996 ALLOCATION OF TRADED ASSETS: 25% BACKGROUND Chesapeake Capital Corporation ("Chesapeake") was incorporated under the laws of the Commonwealth of Virginia in February 1988 for the purpose of offering investment advisory and portfolio management services to both retail and institutional investors in trading in the futures and forward markets. On August 19, 1991, Chesapeake was merged into Chesapeake Capital Corporation, an Illinois corporation formed on August 13, 1991. References herein to "Chesapeake" refer to the Virginia corporation prior to August 19, 1991 and to the Illinois corporation on and after August 19, 1991. Chesapeake is registered as a CTA and a CPO with the CFTC, and is also a member in good standing of the NFA. Chesapeake has been registered with the CFTC as a CTA and a CPO since June 20, 1988 and May 8, 1991, respectively, and a member of the NFA since June 20, 1988. Mr. R. Jerry Parker, Jr. is the Chairman, Chief Executive Officer, Director, sole shareholder and a principal of Chesapeake. Mr. Parker received his B.S. in Commerce, with an emphasis in Accounting, from the University of Virginia in January 1980. Mr. Parker worked in the accounting field for four years after graduating from college and became a licensed Certified Public Accountant in Virginia in 1982. From January 1983 until November 1983, Mr. Parker was a CPA at Wilkinson & Lester, a certified public accounting firm based in Richmond, Virginia. From November 1983 until January 1987, Mr. Parker was employed as an exempt CTA by Richard J. Dennis, a principal and shareholder of Richard J. Dennis & Company (a Chicago-based CTA and CPO registered with the CFTC) in his "Turtle" training program. From January 1987 until February 1988, Mr. Parker traded for Mr. Thomas Dennis as an exempt CTA. During these periods, Mr. Parker had complete discretionary trading authority over a futures account of $1 million to $1.5 million. In February 1988, Mr. Parker ceased trading for Mr. Thomas Dennis and formed Chesapeake, where he serves as the Chairman, Chief Executive Officer and Chief Trader. Mr. John M. Hoade is President, Secretary and a principal of Chesapeake. Mr. Hoade received a B.S. degree in Business Administration from Lynchburg College in 1978. From 1976 through 1990, Mr. Hoade was employed by Thurston Metals, Inc., located in Lynchburg, Virginia, in sales, marketing and general management. Mr. Hoade joined Chesapeake in December 1990 to direct its operations and marketing efforts. TRADING STRATEGY Chesapeake trades pursuant to its "Diversified Program" for the Fund. The Diversified Program emphasizes diversification with a global portfolio of futures, forward and cash markets which include, but are not limited to, agricultural products, precious and industrial metals, currencies, financial instruments, and stock, financial and economic indices. Chesapeake trades on numerous U.S. and non-U.S. exchanges. The investment portfolios currently offered by Chesapeake are the "Diversified Program," the "Diversified 2XL Program" and the "Financials and Metals Program" (the "Trading Programs"). The Diversified Program is Chesapeake's longest operating investment portfolio, with a performance record beginning in February 1988. While all of the Trading Programs employ the same general trading methodology, as described below, they differ in their emphasis on certain markets or market sectors and the exclusion of others. The following overview is not intended as a detailed or exhaustive description of the trading methodologies or strategies employed by Chesapeake, as the exact nature of these methods and strategies is proprietary and confidential. Relying primarily on technical analysis, Chesapeake believes that future price movements in all markets may be more accurately anticipated by analyzing historical price movements within a quantitative framework than by attempting to predict or forecast changes in price through fundamental economic analysis. The trading methodologies employed by Chesapeake are based on programs analyzing a large number of interrelated mathematical and statistical formulas and techniques which are quantitative, proprietary in nature and which have been either learned or developed by Mr. Parker. In addition to such mathematical evaluations, Chesapeake employs a technique of technical analysis generally known as "charting" in order to attempt to determine optimal support and resistance levels and entry and exit APPI-5 points in the various markets. In an effort to determine the overall technical condition of the market and as a timing mechanism for trades, Chesapeake also makes extensive use of internally-generated market information, which includes but is not limited to price volatility, open interest, daily price action, volume and market psychology or sentiment. The profitability of the Chesapeake Trading Programs, traded pursuant to technical analysis emphasizing mathematical and charting approaches, will depend upon the occurrence in the future, as in the past, of major trends in some markets. If there are no trends, the Trading Programs are likely to be unprofitable. There have been trendless periods in the past which can be expected to recur, and any factor which lessens the prospect of trends in the future, such as increased governmental control, regulation, or participation as a purchaser or seller in the futures markets (including joint governmental control or regulation of, or participation in, international currency markets), lessens the prospect that programs utilizing technical analysis, including the Chesapeake Trading Programs, will be profitable in the future. In addition, the future profitability of the Trading Programs would also be adversely affected by factors which increase the number of signals leading to unprofitable trades. For example, a significant increase in technically-oriented trading (trend- following or otherwise) in a particular commodity might cause a change in the pattern of price movements in a manner which might be unfavorable. Trend-following trading systems, such as those employed by Chesapeake, will seldom effect market entry or exit at the most favorable price in the particular market trend. Rather, this type of trading system seeks to close out losing positions quickly and to hold portions of profitable positions for as long as the trading system determines that the particular market trend continues to exist. There can be no assurance, however, that profitable positions can be liquidated at the most favorable price in a particular trend. As a result, the number of losing transactions may exceed substantially the number of profitable transactions. However, if Chesapeake's approach is successful, these losses should generally be relatively small and more than offset by gains on profitable transactions. The Trading Programs are oriented toward the preservation of original equity. The commencement of trading or a drawdown from starting equity are considered the situations of highest risk, and risk management techniques at this point are emphasized over those which invite greater risk in the interest of enhancing performance. These risk management techniques include diversification. Also, the Trading Programs adhere to the requirements of a money management system which determines and limits the equity committed to each trade, each market, each commodity complex (in Trading Programs which trade in more than one commodity complex) and each account. Chesapeake believes that a long-term commitment to its Trading Programs is necessary for profitable trading. Chesapeake attempts to take a limited number of positions over the long term in an attempt capture major price movements while limiting downside risk on open positions. Decisions concerning the liquidation of positions, the commodities to be traded and the size of positions to be taken or maintained will require to some degree the exercise of judgment by Chesapeake. The decision not to trade futures interest contracts for a certain period, or not to trade certain futures interest contracts due to lack of discernible price movements (trends) or lack of liquidity, may result at times in clients (such as the Fund) missing significant profit opportunities which might otherwise have been captured by Chesapeake. Futures contracts which are traded by Chesapeake may include, but are not limited to, agricultural products, precious and industrial metals, currencies, financial instruments, and stock, financial and economic indices. Exchanges on which these transactions take place include, but are not limited to, all exchanges in the United States, as well as non-U.S. exchanges (e.g., the Belgian Futures and Options Exchange (BELFOX), the London International Financial Futures and Options Exchange Ltd. (LIFFE), the International Petroleum Exchange of London Ltd., the London Metal Exchange, the London Commodity Exchange (LCE), the Italian Derivatives Market (IDEM), the Marche a Terme International de France (MATIF), the Deutsche Terminborse, the Hong Kong Futures Exchange Ltd., the Montreal Exchange (ME), the Tokyo Commodity Exchange, the Tokyo International Financial Futures Exchange (TIFFE), the Tokyo Stock Exchange (TSE), the Singapore International Monetary Exchange (SIMEX), the Sydney Futures Exchange Ltd., and the Winnipeg Commodity Exchange). In addition, Chesapeake continually monitors numerous markets, both U.S. and non-U.S., and will generally initiate trades at such point that Chesapeake determines that a market is sufficiently liquid and tradeable using the methods employed by Chesapeake. Chesapeake engages in transactions in physical commodities, including EFPs. APPI-6 Chesapeake generally uses between 15% and 30% of an account's assets as original margin for trading in the Diversified Program, but at times this percentage can be higher. The trading strategy utilized by Chesapeake's Trading Programs, including the Diversified Program, may be revised from time to time by Chesapeake as a result of ongoing research and development which seeks to devise new trading systems, as well as test methods currently employed. The trading methods used by Chesapeake in the future may differ significantly from those presently used, due to the changes which may result from this research. Since the Trading Programs utilized by Chesapeake are proprietary and confidential, the above discussion is general in nature and is not intended to be exhaustive. PAST PERFORMANCE The following information describes the composite actual performance of all customer accounts managed by Chesapeake. Chesapeake trades its Diversified Trading Program on behalf of the Fund. As of April 30, 1996, Chesapeake was managing approximately $819 million (excluding "notional" funds) of customer funds in the futures and forwards markets. All performance information is current as of April 30, 1996. Performance information is set forth for the most recent five full years for each Chesapeake Trading Program or, in the event that a Trading Program has been trading for less than five years, performance information is set forth from the inception of trading. Performance information prior to January 1, 1991 has been excluded in accordance with CFTC regulations. Chesapeake has adopted a method of computing rate of return and performance disclosure, referred to as the "Fully-Funded Subset" method, pursuant to an Advisory (the "Fully-Funded Subset Advisory") published in February 1993 by the CFTC. To qualify for the use of the Fully-Funded Subset method, the Fully-Funded Subset Advisory requires that certain computations be made in order to arrive at the Fully-Funded Subset and that the accounts for which performance is so reported meet two tests which are designed to provide assurance that the Fully-Funded Subset and the resultant rates of return are representative of the trading program. Chesapeake has performed these computations for periods subsequent to January 1, 1992. However, for periods prior to January 1, 1992, due to cost considerations, the Fully-Funded Subset method has not been used. Instead, the rates of return reported are based on a computation which uses the nominal account sizes of all of the accounts included, calculated in accordance with the "Only Accounts Traded" ("OAT") method, also permitted in certain circumstances by the CFTC. Chesapeake believes that this method yields substantially the same rates of return as would the Fully-Funded Subset method and that the rates of return in the performance summaries are representative of the Trading Programs for the periods presented. For the periods from January 1, 1992 through December 31, 1993, Chesapeake compared the OAT method and the Fully-Funded Subset method and found that the two methods yielded substantially the same rates of return. Consequently, Chesapeake continued to use the OAT method until the end of 1993 (the Fully- Funded Subset Advisory was released in February 1993). From January 1, 1994 on, Chesapeake has been using the Fully-Funded Subset method. In reviewing the following information, prospective investors should understand that performance is "net" of all actual fees and charges and includes interest income applicable to the accounts comprising each composite performance summary. Such composite performance is not necessarily indicative of the performance of any individual account. The fees and charges applicable to individual accounts are not specifically described herein. However, set forth below is a general description of the charges applicable to such accounts. Brokerage commissions are accounted for monthly and include the total amount of all brokerage commissions and other trading fees paid during the month plus or minus the change in brokerage commissions and other trading fees accrued on open positions from the preceding month. Brokerage commissions are calculated on a round-turn or flat-rate basis. Round-turn commissions have ranged from approximately $7 per round-turn to approximately $50 per round-turn. Flat-rate commissions have ranged from approximately 2% of equity to approximately 9% of equity. Interest income is earned on U.S. government obligations and cash on deposit with futures commission merchants and is recorded on the accrual basis. Management fees are accrued monthly and are charged at rates ranging from 0% to 8% of equity. Incentive fees are accrued monthly and are charged at rates ranging from 12.5% to 30% of new trading profits. On certain accounts, incentive fees are reduced by the management fees paid over an agreed upon period. APPI-7 The "Notes to the Performance Summaries" are set forth on pages APPI-3 through APPI-4. The information presented has not been audited. However, Chesapeake believes that such information is accurate and fairly presented. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. FURTHERMORE, THE RATES OF RETURN ACHIEVED WHEN AN ADVISOR IS MANAGING A LIMITED AMOUNT OF EQUITY MAY HAVE LITTLE RELATIONSHIP TO THE RATES OF RETURN WHICH SUCH ADVISOR MAY BE ABLE TO ACHIEVE MANAGING LARGER AMOUNTS OF EQUITY. THE FOLLOWING FIGURES HAVE IN NO RESPECT BEEN ADJUSTED TO REFLECT THE CHARGES TO THE FUND. CERTAIN OF THE ACCOUNTS INCLUDED IN THE FOLLOWING PERFORMANCE SUMMARIES PAID FEES MATERIALLY DIFFERENT FROM, AND IN SOME CASES MATERIALLY LOWER THAN, THOSE CHARGED TO THE FUND. COMMODITY INTEREST TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. THERE CAN BE NO ASSURANCE THAT THE TRADING ADVISOR WILL TRADE PROFITABLY OR AVOID INCURRING SUBSTANTIAL LOSSES. INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT PORTION OF A COMMODITY TRADING ADVISOR'S TOTAL INCOME AND, IN CERTAIN INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED OR UNREALIZED LOSSES FROM COMMODITIES TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. See "Risk Factors -- (2) Past Performance." APPI-8 CHESAPEAKE CAPITAL CORPORATION DIVERSIFIED PROGRAM JANUARY 1991 - APRIL 1996 The following performance summary and chart reflect the composite performance results from January 1991 through April 1996 of the Diversified Program. Chesapeake trades this program on behalf of the Fund. The performance of the program from February 1988 (inception) through December 1990, while profitable, includes the program's two largest drawdowns, the larger of which occurred during the period August 1989 through October 1989 and was (20.58)%. The program has been utilized in trading for 199 accounts since its inception. As of April 30, 1996, 134 accounts had been closed and 63 accounts remained open. Of the closed accounts, 106 were profitable and 30 were unprofitable at their closing. Of the 63 open accounts, 59 were profitable and 4 were unprofitable as of April 30, 1996. Name of CTA: Chesapeake Capital Corporation Name of program: Diversified Program Inception of client account trading by CTA: February 1988 Inception of client account trading in program: February 1988 Number of open accounts: 63 Aggregate assets (excluding "notional" equity) overall: $819 million Aggregate assets (excluding "notional" equity) in program: $770 million Aggregate assets (including "notional" equity) overall: $991 million Aggregate assets (including "notional" equity) in program: $939 million Largest monthly drawdown: (10.98)% (1/92) Largest peak-to-valley drawdown: (16.62)% (1/92-5/92)
Monthly Performance 1996 1995 1994 1993 1992 1991 - ----------------------------------------------------------------------------- January 1.69% (3.23)% (3.33)% 0.42% (10.98)% (1.29)% - ----------------------------------------------------------------------------- February (4.26) (4.39) (4.88) 15.99 (2.86) 4.84 - ----------------------------------------------------------------------------- March 0.28 8.60 0.09 5.86 0.53 2.32 - ----------------------------------------------------------------------------- April 10.16 1.45 (0.60) 7.38 (0.44) (2.80) - ----------------------------------------------------------------------------- May 6.84 9.06 0.40 (3.66) 0.27 - ----------------------------------------------------------------------------- June 0.88 7.02 0.98 6.52 (1.25) - ----------------------------------------------------------------------------- July (3.09) (1.70) 9.49 12.96 (1.75) - ----------------------------------------------------------------------------- August (2.66) (2.98) 5.88 3.16 (3.32) - ----------------------------------------------------------------------------- September 0.20 3.49 (2.63) (6.78) 4.39 - ----------------------------------------------------------------------------- October (1.11) 1.97 (0.06) 5.21 4.21 - ----------------------------------------------------------------------------- November 1.76 4.83 1.03 2.27 (4.68) - ----------------------------------------------------------------------------- December 9.18 2.86 5.77 (1.93) 12.08 - ----------------------------------------------------------------------------- Compound Annual 7.55% 14.09% 15.87% 61.82% 1.81% 12.51% Rate of Return (4 months) - -----------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES APPI-3 THROUGH APPI-4. APPI-9
OTHER CHESAPEAKE CAPITAL CORPORATION PROGRAMS - ------------------------------------------------------------------------------------------------------------------------------- NAME OF CTA: Chesapeake Capital Chesapeake Capital Chesapeake Capital Chesapeake Capital Corporation Corporation Corporation Corporation - ------------------------------------------------------------------------------------------------------------------------------------ NAME OF PROGRAM: Financials and Metals Pacific Rim Program Diversified 2XL Program Foreign Financials Program Program - ------------------------------------------------------------------------------------------------------------------------------------ INCEPTION OF CLIENT ACCOUNT February 1988 February 1988 February 1988 February 1988 TRADING BY CTA: - ------------------------------------------------------------------------------------------------------------------------------------ INCEPTION OF CLIENT ACCOUNT March 1992 June 1994 April 1994 June 1992 TRADING IN PROGRAM: ceased trading 8/95 ceased trading 6/94 - ------------------------------------------------------------------------------------------------------------------------------------ NUMBER OF OPEN ACCOUNTS: 6 0 4 0 - ------------------------------------------------------------------------------------------------------------------------------------ AGGREGATE ASSETS (EXCLUDING $819 million $819 million $819 million $819 million "NOTIONAL" EQUITY) OVERALL: - ------------------------------------------------------------------------------------------------------------------------------------ AGGREGATE ASSETS (EXCLUDING $26 million N/A $23 million N/A "NOTIONAL" EQUITY) IN PROGRAM: - ------------------------------------------------------------------------------------------------------------------------------------ AGGREGATE ASSETS (INCLUDING $991 million $991 million $991 million $991 million "NOTIONAL" EQUITY) OVERALL: - ------------------------------------------------------------------------------------------------------------------------------------ AGGREGATE ASSETS (INCLUDING $30 million N/A $23 million N/A "NOTIONAL" EQUITY) IN PROGRAM: - ------------------------------------------------------------------------------------------------------------------------------------ LARGEST MONTHLY DRAWDOWN: (5.65)% (2/94) (3.30)% (7/95) (9.38)% (2/96) (5.77)% (9/92) - ------------------------------------------------------------------------------------------------------------------------------------ LARGEST PEAK-TO-VALLEY (10.36)% (1/94-2/94) (3.30)% (7/95) (15.07)% (1/95-2/95) (5.77)% (9/92) DRAWDOWN: - ------------------------------------------------------------------------------------------------------------------------------------ 1996 COMPOUND RATE OF RETURN: 2.79% (4 months) N/A 11.17% (4 months) N/A - ------------------------------------------------------------------------------------------------------------------------------------ 1995 COMPOUND RATE OF RETURN: 12.61% 37.04% (8 months) 18.77% N/A - ------------------------------------------------------------------------------------------------------------------------------------ 1994 COMPOUND RATE OF RETURN: 3.22% (2.76)% (7 months) 26.88% (9 months) (1.77)% (6 months) - ------------------------------------------------------------------------------------------------------------------------------------ 1993 COMPOUND RATE OF RETURN: 68.53% N/A N/A 21.90% - ------------------------------------------------------------------------------------------------------------------------------------ 1992 COMPOUND RATE OF RETURN: 24.19% (10 months) N/A N/A 21.42% (7 months) - ------------------------------------------------------------------------------------------------------------------------------------ 1991 COMPOUND RATE OF RETURN: N/A N/A N/A N/A - ------------------------------------------------------------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS. ---------------- SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES APPI-3 THROUGH APPI-4. APPI-10 JOHN W. HENRY & COMPANY, INC. JULY 1, 1996 ALLOCATION OF TRADED ASSETS: 25% BACKGROUND John W. Henry & Company began managing assets in 1981 as a sole proprietorship and was later incorporated in the state of California as John W. Henry & Co., Inc. ("JWH"), to conduct business as a commodity trading advisor. JWH trades numerous contracts on a 24-hour basis in the United States, Europe and Asia, and has grown to be one of the largest advisors in the managed futures industry, managing approximately $1.3 billion (excluding "notional" funds) in customer capital. The sole shareholder of JWH is the John W. Henry Trust dated July 27, 1990. The trustee and sole beneficiary of the Trust is John W. Henry. JWH's registration as a CTA became effective in February 1982 and its registration as a CPO became effective in July 1989. JWH is a member of the NFA in these capacities. Mr. John W. Henry is Chairman of the JWH Board of Directors and is trustee and sole beneficiary of The John W. Henry Trust dated July 27, 1990. He currently concentrates his activities at JWH on portfolio management, business issues and frequent dialogue with trading supervisors. Mr. Henry is the exclusive owner of certain trading systems licensed to Elysian Licensing Corporation, a corporation wholly-owned by Mr. Henry and sublicensed by Elysian Licensing Corporation to JWH and utilized by JWH in managing client accounts. Over the last fifteen years, Mr. Henry has developed many innovative investment programs. Mr. Henry has served on the Board of Directors of the National Association of Futures Trading Advisors ("NAFTA"), the Managed Futures Trade Association ("MFTA") and has served on the nominating committee of the NFA. Mr. Henry currently serves on the Board of Directors of the Futures Industry Association ("FIA") and is chairman of the FIA Task Force on Derivatives for Investment. He also currently serves on a panel created by the Chicago Mercantile Exchange and the Chicago Board of Trade to study cooperative efforts related to electronic trading, common clearing and the issues regarding a potential merger. In 1989, Mr. Henry established residency in Florida and since that time has performed services from that location as well as at the principal offices of JWH. Mr. Henry is a principal of Westport Capital Management Corporation, Global Capital Management Limited, JWH Investments, Inc., JWH Risk Management Inc., and JWH Asset Management, Inc., all of which are affiliates of JWH. Since the beginning of 1987, Mr. Henry has and will continue to devote considerable time to business activities unrelated to JWH and its affiliates. Mr. Mark H. Mitchell is Vice Chairman, Executive Vice President and a member of JWH Board of Directors. He is also Vice Chairman and a director of JWH Risk Management, Inc., director of JWH Asset Management, Inc., Vice President of JWH Investments, Inc., and Vice President of Westport Capital Management Corporation. Prior to his employment at JWH commencing in January 1994, Mr. Mitchell was a partner of Chapman and Cutler, a Chicago law firm, where he had headed its futures law practice since August 1983. From August 1980 to March 1991, he served as General Counsel of the NAFTA and, from March 1991 to December 1993, he served as General Counsel of the Managed Futures Association ("MFA"). Mr. Mitchell is currently a member of the CPO/CTA Advisory Committee and the Special Committee for the Review of the Multi-Tiered Regulatory Approach to NFA Rules, both of the NFA; and the Executive Committee of the Law and Compliance Division of the FIA. In 1985, he received the Richard P. Donchian Award for Outstanding Contributions to the Field of Commodity Money Management. He has been an editor of Futures International Law Letter and its predecessor publication, Commodities Law Letter. He received an A.B. with honors from Dartmouth College and a J.D. from the University of California at Los Angeles, where he was named to the Order of the Coif, the national legal honorary society. Mr. David R. Bailin is an Executive Vice President and a member of the Operating Committee of JWH. He is also President of JWH Investments, Inc., JWH Risk Management, Inc., JWH Asset Management, president and director of Westport Capital Management Corporation and President and Chairman of the Board of Directors of Global Capital Management Limited. He is responsible for the development, implementation and management of JWH's sales and marketing infrastructure. Prior to joining JWH in December 1995, Mr. Bailin was Managing Director-Development since April 1994 for Global Asset Management (GAM), a Bermuda-based investment management firm with over $7 billion in managed assets. He was responsible for overseeing the international distribution of GAM's funds as well as for establishing new distribution relationships and channels. Prior to his employment with GAM, Mr. Bailin headed the APPI-11 real estate asset management division of Geometry Asset Management beginning in July 1992. Prior to that time, beginning in 1988, he was President of Warner Financial, an investment advisory business in Boston, Massachusetts. Mr. Bailin received a B.A. from Amherst College and an M.B.A. from Harvard Business School. Mr. Peter F. Karpen is a Managing Director and a member of the Operating Committee of JWH. Mr. Karpen announced his resignation from JWH on March 18, 1996 but will continue in his present capacity for approximately six months from that date. Mr. Karpen joined JWH in June 1995 from CS First Boston where he had been Director of Futures and Options since 1988 and Vice President since 1981. Mr. Karpen has been a member of the board of the FIA since 1984 and a member of its executive committee since 1988. Mr. Karpen was chairman of the FIA in 1994 and 1995. In addition, he is public director of the New York Cotton Exchange and serves on the CFTC's Financial Products Advisory Committee. He has been a Trustee of the Futures Industry Institute, a member of the CFTC's Regulatory Coordination Advisory Committee and a member of several commodities and securities exchanges in the United States. He received his B.A. from Boston University and M.B.A. from Boston College. Mr. James E. Johnson, Jr., is chief financial officer and chief administrative officer for JWH. He also serves as a member of the Company's Operating Committee. In addition, beginning in March 1996, Mr. Johnson is also a principal of Westport Capital Management Corporation, JWH Investments, Inc., JWH Risk Management, Inc. and JWH Asset Management, Inc. Mr. Johnson joined JWH in May of 1995 from Bankers Trust Company where he had been managing director and chief financial officer for their institutional asset management division since January 1983. His areas of responsibility included finance, operations, and technology. Prior to joining Bankers Trust, Mr. Johnson was a product manager at American Express Company responsible for research and market strategies for the Gold Card. He received a B.A. with honors from Columbia University and an M.B.A. in Finance and Marketing from New York University. Ms. Elizabeth A.M. Kenton is a Senior Vice President, the Director of Compliance and a member of the Operating Committee of JWH. Since joining JWH in March 1989, Ms. Kenton has held positions of increasing responsibility in Research and Development, Administration and Regulatory Compliance. Ms. Kenton is also a Senior Vice President of JWH Risk Management, Inc., a Vice President of JWH Asset Management, Inc. a Director of Westport Capital Management Corporation, the Executive Vice President of JWH Investments, Inc., and a Director of Global Capital Management Limited. Prior to her employment at JWH, Ms. Kenton was Associate Manager of Finance and Trading Operations at Krieger Investments, a currency and commodity trading firm. From July 1987 to September 1988, Ms. Kenton worked for Bankers Trust Company as a Product Specialist for foreign exchange and Treasury options trading. She received a B.S. in Finance from Ithaca College. Ms. Mary Beth Hardy is Senior Vice President and Director of Trading Administration and a member of the Operating Committee of JWH. Since joining JWH in September 1990, Ms. Hardy has held positions of increasing responsibility in Research and Development and Trading. Prior to her employment at JWH, beginning in 1989 Ms. Hardy held the position of Associate Editor at Waters Information Services, a publishing company, where she wrote weekly articles covering technological advances in the securities and futures markets. Prior to joining Waters in 1989, Ms. Hardy was at Shearson Lehman Brothers, Inc. where she held the position of assistant director of the Managed Futures Trading Department. Prior to that, Ms. Hardy was an institutional salesperson at Shearson in a group specializing in financial futures and options. Previously, Ms. Hardy was an institutional salesperson for Donaldson, Lufkin and Jenrette with a group which also specialized in financial futures and options. Ms. Hardy serves on the Board of Directors of the Managed Futures Association and chairs its Trading and Markets Committee. She received a B.B.A. in Finance from Pace University. Mr. David M. Kozak is Counsel to the firm, Vice President and Secretary of JWH. He is also secretary of JWH Risk Management, Inc., JWH Asset Management, Inc. and Assistant Secretary of Westport Capital Management. Prior to joining JWH in September 1995, Mr. Kozak was employed at the law firm of Chapman and Cutler, where he was an associate from September 1983 and a partner from 1989. Mr. Kozak has concentrated in commodity futures law since 1981, with emphasis in the area of commodity money management. During the time he was employed at Chapman and Cutler, he served as outside counsel to NAFTA and the MFA. Mr. Kozak is currently a member of the NFA Special Committee on CPO/CTA Disclosure Issues and the Visiting Committee of The University of Chicago Library. He received a B.A. from Lake Forest College, an M.A. from The University of Chicago, and a J.D. from Loyola University of Chicago. APPI-12 Mr. Kevin S. Koshi is a Senior Vice President and Chief Trader of JWH. Mr. Koshi is responsible for the supervision and administration of all aspects of order execution strategies and the implementation of trading policies and procedures. Mr. Koshi joined JWH in August 1988 as a professional in the Finance Department, and since 1990 has held positions of increasing responsibility in the Trading Department. He received a B.S. in Finance from California State University at Long Beach. Mr. Barry S. Fox is the Director of Research and is responsible for the design and testing of new programs. He also supports and maintains proprietary algorithms used to generate JWH trades. Mr. Fox joined JWH in March 1991, and since that time he has held positions of increasing responsibility in the Research and Product Development Departments. Prior to his employment at JWH, Mr. Fox provided sales and financial analysis support since October 1990 for Spreadsheet Solutions, a financial software development company. Prior to joining Spreadsheet Solutions, Mr. Fox operated a trading company where he traded his own proprietary capital. Before that, he was employed with Bankers Trust as a product specialist for foreign exchange and treasury options trading. He received a B.S. in Business Administration from the University of Buffalo. Ms. Glenda G. Twist is a Director of JWH and has held that position since August 1993. Ms. Twist joined JWH in September 1991 with responsibilities for corporate liaison, and she continues her duties in that area. Her responsibilities include assistance in the day-to-day administration of the Florida office, and review and compilation of financial information for JWH. Ms. Twist was President of J.W. Henry Enterprises Corp., for which she performed financial, consulting and administrative services from January 1991 to August 1991. From 1988 to December 1990, Ms. Twist was Executive Director of Cities in Schools, a program in Arkansas designed to prevent students from leaving school before completing their high school education. She received her B.S. in Education from Arkansas State University. Mr. Michael D. Gould is Director of Investor Services at JWH. He is responsible for general business development and oversees the investor services function. He joined JWH in April 1994 from Smith Barney Inc. where he served as senior sales manager and vice president-futures for the Managed Futures Department. He held the identical position with the predecessor firms of Shearson Lehman Bros. and Lehman Bros. from October 1991. Prior to that time, he was engaged in a proprietary trader development program at Tricon USA from September 1990 to October 1991. He was a registered financial consultant with Merrill Lynch from 1985 through August 1990. His professional career began in 1982 as an owner-operator of a nonferrous metals trading and export business which he ran until September 1985. Mr. Jack M. Ryng, C.P.A., joined JWH as the Controller in November 1991. Mr. Ryng is also Chief Financial Officer and Secretary of JWH Investments, Inc. Prior to that time, he was a Senior Manager with Deloitte & Touche where he held positions of increasing responsibility since September 1985 for commodities and securities industry clients. Prior to his employment by the Financial Services Center of Touche Ross & Co. (the predecessor firm of Deloitte & Touche), he was a senior accountant for Leonard Rosen & Co. Mr. Ryng is a member of AICPA and the New York C.P.A. Society, and is a member of the board of the New York Operations Division of the FIA. He received a B.S. in Business Administration from Duquesne University. Mr. Michael J. Scoyni is a Managing Director of JWH and is a principal of Westport Capital Management Corporation. Mr. Scoyni has been associated with Mr. Henry since 1974 and with JWH since 1982. He was engaged in research and development for John W. Henry & Company (JWH's predecessor) from November 1981 to December 1982 and subsequently has been employed in positions of increasing responsibility. He received a B.A. in Anthropology from California State University. Mr. Christopher E. Deakins is a Vice President of JWH. He is responsible for general business development and investor services support. Prior to joining JWH in August 1995, he was a vice president, national sales, and a member of the Management Team for RXR Capital Management, Inc. His responsibilities consisted of business development, institutional sales, and broker dealer support. Prior to joining RXR in August 1986, he was engaged as an account executive for Prudential-Bache Securities starting in February 1985. Prior to that, Mr. Deakins was an account executive for Merrill Lynch. He received a B.A. in Economics from Hartwick College. Mr. Chris J. Lautenslager is a vice president of JWH. He is responsible for general business development and investor services support. Prior to joining JWH in April 1996, he was the vice president of institutional sales for I/B/E/S International, Inc., a distributor of corporate earnings estimate information. His responsibilities APPI-13 consisted of business development and support of global money managers and investment bankers. Prior to his employment with I/B/E/S, Mr. Lautenslager devoted time to personal activities from April 1994 to March 1995, following the closing of the Stamford, Connecticut office of Gruntal & Co., where he had worked as a proprietary equity trader since November 1993. Before that, he held the same position at S.A.C. Capital Management starting in February 1993. From October 1987 to December 1993, Mr. Lautenslager was a partner and managing director to Limitless Option Partners, a registered Chicago Mercantile Exchange trading and brokerage organization, where he traded currency futures and options. He received a B.S. in Accounting from the University of Colorado and a Masters in Management from Northwestern University. Mr. Edwin B. Twist is a Director of JWH and has held that position since August 1993. Mr. Twist is also a director of JWH Risk Management, Inc. Mr. Twist joined JWH as Internal Projects Manager in September 1991. Mr. Twist's responsibilities include assistance in the day-to-day administration of JWH's Florida office and internal projects. Mr. Twist was Secretary and Treasurer at J.W. Henry Enterprises Corp., a Florida corporation engaged in administrative and financial consulting services, for which he performed financial, consulting and administrative services from January 1991 to August 1991. Prior to his employment at JWH, Mr. Twist was an owner and manager for 16 years of a 2,500- acre commercial farm in eastern Arkansas. Ms. Nancy O. Fox, C.P.A., is a Vice President and the director of investment support of JWH. She is responsible for the day-to-day activities of the Investment Support Department, including all aspects of operations and performance reporting. Prior to joining JWH in January 1992, Ms. Fox was a senior accountant at Deloitte & Touche, where she served commodities and securities industry clients and held positions of increasing responsibility since July 1987. Ms. Fox is a member of the AICPA and the New Jersey Society of C.P.A.s. She received a B.S. in Accounting and Finance from Fairfield University and an M.B.A. from the University of Connecticut. TRADING STRATEGY JWH specializes in managing institutional and individual capital in the global futures, interest rate and foreign exchange markets. Since 1981, JWH has developed and implemented proprietary trend-following trading techniques that focus on long-term rather than short-term, day-to-day trends. JWH currently operates thirteen trading programs. JWH implements the Financial and Metals Portfolio for the Fund. The quantitative models of JWH are guided by a proprietary set of mathematical formulas that provide signals for investment decisions integrated within a disciplined money-management framework. JWH's investment techniques focus on long-term trends rather than day-to-day price fluctuations. Positions held for two to four months are not unusual, and certain positions have been held for more than one year. Historically, only thirty to forty percent of all trades traded pursuant to the trading methods have been profitable. Large profits on a few trades in positions that typically exist for several months have produced favorable overall results. Generally, the majority of losing positions have been liquidated within weeks. The maximum equity retracement JWH has experienced in any single program was nearly sixty percent (60)%. Similar or greater drawdowns are possible in the future. There can be no assurance that JWH will trade profitably for the Fund or avoid losses of such magnitude. JWH at its sole discretion may override computer-generated signals, and may at times use discretion in the application of its quantitative models which may affect performance positively or negatively. Subjective aspects of JWH's quantitative models also include the determination of portfolio leverage, commencement of trading in an account, contracts traded, contract month selection, margin utilization and effective trade execution. In an effort to maintain and improve trading performance, JWH has engaged, and continues to engage, in an extensive program of research. While the basic philosophy underlying the firm's investment approach have remained intact throughout its history, the potential benefits of employing more than one investment methodology, alternatively, or in varying combinations, is a subject of continual testing, review and evaluation. Extensive research and analysis may suggest substitution of alternative methodologies with respect to particular contracts in light of relative differences in historical performance achieved through testing different methodologies. In addition, risk management research and analysis may suggest modifications regarding the relative weighting among various contracts, the addition or deletion of particular contracts for a program or a change in the degree of leverage employed. APPI-14 As capital in each JWH trading program increases, additional emphasis and weighting may be placed on certain markets which have historically demonstrated the greatest liquidity and profitability. Furthermore, the weighting of capital committed to various markets in the trading programs is dynamic, and JWH may vary the weighting at its discretion as market conditions, liquidity, position limit considerations and other factors warrant. MLIP will generally not be informed of any such changes. Leverage adjustments have been and continue to be an integral part of JWH's investment strategy. At its discretion, JWH may adjust leverage in certain markets or entire programs. Factors which may affect the decision to adjust leverage include: ongoing research; program volatility; current market volatility; risk exposure; and subjective judgment and evaluation of these and other general market conditions. Such decisions to change leverage may positively or negatively affect performance, and will alter risk exposure for an account. Leverage adjustments may lead to greater profits or losses, more frequent and larger margin calls and greater brokerage expense. No assurance is given that such leverage adjustments will be to the financial advantage of investors in the Fund. JWH has developed procedures for trading pool accounts, such as the Fund, that provide for the addition, redemption and/or reallocation of capital. Investors who purchase or redeem units in a fund are most frequently permitted to do so at a price equal to the net asset value per unit on the close of business on the last business day of the month or quarter. In addition, funds often may reallocate capital among advisors at the close of business on the last business day of the month. In order to provide market exposure commensurate with the equity in the account on the date of these transactions, JWH's practice is to adjust positions as nearly as possible to the close of business on the last trading date of the month. The intention is to provide for additions, redemptions and reallocations at a net asset value per unit that will be the same for each of these transactions and to eliminate possible variations in the net asset value per unit that could occur as a result of inter-day price changes when additions are calculated on the first day of the subsequent month. Therefore JWH may, in its sole discretion, adjust its investment of the assets associated with the addition, redemption and reallocation of capital as nearly as possible to the close of business on the last trading day of the month to reflect the amount then available for trading. Based on JWH's determination of liquidity or other market conditions, JWH may decide to commence trading earlier in the day on, or even before the last business day of the month. In the case of an addition to a fund account, JWH may also, in its sole discretion, delay the actual start of trading for those new assets. No assurance is given that JWH will be able to achieve the objectives described above in connection with funding level changes. The use of discretion by JWH in the application of this procedure may affect performance positively or negatively, and may cause one series of Units to under- or outperform other series during the same time periods. JWH may from time to time trade in physical or cash commodities for immediate or deferred delivery, including specifically gold bullion, as well as futures, options, and forward contracts when JWH believes that cash markets offer comparable or superior market liquidity or ability to execute transactions at a single price. Cash transactions, as opposed to futures transactions, relate to the purchase and sale of specific physical commodities. Whereas futures contracts are generally uniform except for price and delivery time, cash contracts may differ from each other with respect to such terms as quantity, grade, mode of shipment, terms of payment, penalties, risk of loss and the like. There is no limitation on the daily price movements of cash or forward contracts transacted through banks, brokerage firms or government dealers, and those entities are not required to continue to make markets in any commodity. In addition, the CFTC does not comprehensively regulate cash transactions, which are subject to the risk of these entities' failure, inability or refusal to perform with respect to such contracts. The Financial and Metals Portfolio Researched through 1983, a systematic method was first traded in a format using solely financial and metals futures in August 1984. That program, the Financial and Metals Portfolio, used by JWH in managing Fund assets, uses quantitative, trend analysis models, participates in four major market sectors - -- interest rates, world currencies, stock indices and precious metals -- and initiates trades according to trend-emergence and computerized determination of relative risk. The Financial and Metals Portfolio may take long, short or neutral positions in up to 39 markets within the four market sectors traded, may use stop orders and generally commits 10% to 30% of equity to margin on open positions. Because assets are concentrated in interest rates, currencies, stock indices and metals only, volatility can be higher than in a more diversified portfolio. APPI-15 Other JWH Programs In addition to the Financial and Metals Portfolio, JWH currently operates twelve other trading programs for U.S. and non-U.S. investors, none of which are utilized by JWH for the Fund. Each program is operated separately and independently. With the exception of InterRate, a yield enhancement strategy, these programs emphasize intermediate and long-term, quantitative, trend- analysis models designed with the objective of achieving speculative rates of return. The Original Investment Program, which began in 1981, uses long-term, quantitative models. This program trades in seven different market sectors trading 20 to 25 commodities on both U.S. and non-U.S. exchanges. The KT Diversified Program began in 1983 and ceased trading in February 1994. This program utilized a neutral phase, and thus did not maintain constant positions in the markets. This program participated in eight market sectors and traded 19 to 24 commodities only on U.S. exchanges. The Global Diversified Portfolio invests in futures and forward contracts in a number of different markets, sectors, and countries and is JWH's most diversified trading program. This program has been trading for investors since June 1988. The International Foreign Exchange Program, begun in 1986, concentrates exclusively on trading between 10 to 15 foreign currencies in outright and cross-rate positions, primarily through forward contracts. Portfolios are dynamic and include from time to time various matrices of futures positions. InterRate, which commenced trading in November 1987, uses a portfolio of foreign currency contracts that seeks to capture interest-rate differentials between countries. This program utilizes leverage that is significantly lower than other JWH programs, reducing risk as it seeks to generate returns significantly enhanced over the prevailing 91-day U.S. government securities rate. The World Financial Perspective, which began in 1986, trades the financial and energy sector markets from the perspective of the Japanese yen, German mark, Swiss franc, British pound, Australian dollar, French franc, Canadian dollar and the U.S. dollar. The pricing of key global markets in terms of foreign currencies provides a level of diversification not generally found in futures portfolios. In February 1991, JWH began trading a portfolio in which the same techniques utilized in the International Foreign Exchange Program are primarily applied to the currencies of the major industrial nations, known as "the Group of Seven" and Switzerland. These currencies are the Japanese yen, British pound, Canadian dollar, German mark, French franc, Italian lira, the U.S. dollar and Swiss franc and are among the most liquid, actively traded currencies in the world. The G-7 Currency Portfolio makes use of both outright positions and cross-rate positions. Positions are primarily taken in the interbank market and from time to time on U.S. futures exchanges. The Yen Financial Portfolio began in August 1991 and uses the same quantitative models used in the Financial and Metals Portfolio. The Yen Financial Portfolio trades futures on the Japanese yen, the 10-year Japanese Government Bond, the Euroyen and the Nikkei 225 stock index. The International Currency and Bond Portfolio, begun in January 1993, combines the techniques employed in the G-7 Currency Portfolio and the global bond sector of the Financial and Metals Portfolio to trade a combined portfolio of currencies and international long-term bonds. In June 1994, JWH began trading the Global Financial Portfolio, which utilizes the same reversal approach as the Original Investment Program. The program trades in four market sectors: interest rates, stock indices, currencies and energy. The Dollar Program began trading proprietary capital in June 1994. This program is designed to capitalize on price movements in the U.S. Dollar utilizing intermediate-term and long-term quantitative trend analysis models, and takes outright positions in the Japanese yen, German mark, Swiss franc, and British pound versus the U.S. dollar. (No performance summary is included for the Dollar Program because no client accounts had been managed pursuant to that Program as of April 30, 1996.) The Worldwide Bond Program (WWB) began trading proprietary capital in 1994. WWB invests in the long-term portion of global interest rate markets, including the U.S. 30-year bond, U.S. 10-year note, British long gilt, the French, German and Italian bond, and Australian 10-year bond. Although WWB concentrates on one sector, diversification is achieved by trading the interest rate instruments of numerous countries. Unlike most fixed income investments, WWB is not limited to investments that have the potential to profit in a stable or declining interest rate environment. Rather, WWB is designed to capitalize on dominant trends, whether rising or falling, in worldwide bond markets. The Delevered Yen Denominated Financial and Metals Profile which began trading in October 1995 seeks to capitalize on sustained moves in global financial markets utilized intermediate-term and long-term quantitative APPI-16 trend analysis models, some of which attempt to employ neutral stances during periods of nontrending markets. This portfolio is traded at approximately one half of the leverage of the traditional Financial and Metals portfolio and is traded from the perspective of the Japanese yen. PAST PERFORMANCE The following information describes the composite actual performance of all customer and proprietary accounts managed by JWH and JWH Investments Inc. JWH trades its Financial and Metals Portfolio on behalf of the Fund. As of April 30, 1996, JWH was managing approximately $1.3 billion (excluding "notional" funds) of customer funds in the futures and forwards markets. All performance information is current as of April 30, 1996. Performance information is set forth for the most recent five full years for each JWH and JWH Investments, Inc. program or, in the event that a program has been trading for less than five years, performance information is set forth from the inception of client account trading in such program. Performance information prior to January 1, 1991 has been excluded in accordance with CFTC regulations. The "Notes to the Performance Summaries" are set forth on pages APPI-3 through APPI-4. An investor should note that in a presentation of past performance data, different accounts, even though traded according to the same investment program, can have varying investment results. The reasons for this include numerous material differences among accounts including, but not limited to: (a) procedures governing timing for the commencement of trading and means of moving toward full portfolio commitment of new accounts; (b) the periods during which accounts are active; (c) the investment program used (even if all accounts may be traded in accordance with the same approach, such approach may be modified periodically as a result of ongoing research and development by JWH); (d) leverage employed; (e) the size of the account, which can influence the size of positions taken and restrict the account from participating in all markets available to an investment program; (f) the amount of interest income earned by an account, which will depend on the rates paid by a futures commission merchant on equity deposits and/or on the portion of an account invested in interest- bearing obligations such as U.S. Treasury bills; (g) the amount of management and incentive fees paid to a trading manager and the amount of brokerage commissions paid; (h) the timing of orders to open or close positions; (i) the market conditions which in part determine the quality of trade executions; and (j) trading instructions/restrictions of the client. During the periods covered by the performance summaries, and particularly since 1989, JWH increased and decreased leverage in certain markets and entire trading programs, and also altered the composition of the markets and contracts that it traded for certain programs. In general, before 1993 JWH traded its programs with greater leverage than it does currently. In addition, the subjective aspects of JWH's trading methods may have been utilized more often in recent years and, therefore, have had a more pronounced effect on performance results during recent periods. In reviewing the JWH performance summaries, prospective investors should bear in mind the possible effects of these, and other, variations on rates of return and in the application of JWH's investment methods. The composite rates of return indicated should not be taken as representative of any rate of return actually achieved by any of the accounts represented in the performance summaries. Investors are further cautioned that the data set forth in the performance summaries is not indicative of any trading results which may be attained by JWH in the future, since past performance is not necessarily indicative of future results. On several occasions, JWH has decreased leverage over the last five years, in certain markets as well as in entire trading programs. These actions have reduced the volatility of certain trading programs when compared to the volatility prior to the decreases in leverage. While historical returns represent actual performance achieved, investors should be aware that the degree of leverage currently utilized may be significantly different from that used during previous time periods. Prior to December 1991 for JWH, and July 1992 for JWH Investments, Inc., performance summaries are presented on a cash basis except as otherwise stated herein. The recording of items on a cash basis should not, for most months, be materially different from presenting such rates of return on an accrual basis. Any differences in the monthly rates of return between the two methods would be immaterial to the overall performance presented. Beginning with the change to the accrual basis of accounting for incentive fees (in December 1991 for JWH and July 1992 for JWH Investments, Inc.), the net effect on monthly net performance and the monthly rates of return APPI-17 in the performance summaries of continuing to record interest income, management fees, commissions and other expenses on a cash basis differs immaterially from the results which would be obtained using accrual basis accounting. Advisory fees vary from account to account managed pursuant to all programs. Management fees vary from 0% to 6% of assets under management; incentive fees vary from 0% to 25% of profits. Such variations in advisory fees may have a material impact on the performance of an account from time to time. The Notes to the Performance Summaries are an integral part of such performance summaries, which are presented on a cash basis except as otherwise described herein. ADDITIONAL NOTE TO THE FINANCIAL AND METALS PORTFOLIO COMPOSITE PERFORMANCE SUMMARY In May 1992, 35 percent of the assets in the Financial and Metals Portfolio was deleveraged 50 percent at the request of a client. The deleveraging materially affected the rates of return achieved. The 1992 annual rate of return for these deleveraged accounts was negative 24.3 percent. The 1992 annual rate of return for the Financial and Metals Portfolio performance summary was negative 10.9 percent. If these accounts had been excluded from the Financial and Metals Portfolio performance summary, the 1992 annual rate of return would have been negative 3.9 percent. The effect of this deleveraging was eliminated in September 1992. Additionally, the Financial and Metals Portfolio composite performance summary includes the performance of several accounts that do not participate in global markets due to their smaller account equities which do not meet the minimums established for this program. Accounts not meeting such minimums can experience performance materially different than the performance of an account which meets the minimum account size. The performance of such accounts has no material effect on the overall Financial and Metals Portfolio performance summary. ADDITIONAL NOTE TO THE YEN FINANCIAL PORTFOLIO COMPOSITE PERFORMANCE SUMMARIES The Yen Financial Portfolio is traded from the Japanese yen perspective. Accounts may be opened with either U.S. dollar or Japanese yen deposits. Accounts originally opened with U.S. dollars establish additional interbank positions in Japanese yen in an effort to enable such accounts to generate returns similar to returns generated by accounts with yen-denominated balances. Over time, as profits and losses are recognized in yen-denominated Japanese markets, accounts may hold varying levels of U.S. dollars and Japanese yen. Additionally, the interbank positions are adjusted periodically to reflect the actual portions of the account balances remaining in U.S. dollars. Because performance may be affected by fluctuations in the dollar/yen conversion rate, and investors may open accounts with either U.S. dollar or Japanese yen deposits, performance records from the perspective of both denominations are presented. Accordingly, as the equity mix between U.S. dollars and Japanese yen varies, performance from each perspective will also vary. Investors should be aware that their individual account performance may differ from the composite performance summaries presented in relation to the perspective of their base currency. Such differences arise from exchange rate movements, percentage of account balances held in yen, and fee arrangements. The performance summary as presented from the U.S. dollar perspective includes all of the performance included in the yen perspective performance summary, plus any additional gains and losses from currency fluctuations. The performance summary as presented from the Japanese yen perspective reflects the trading activity of an account which deposits and maintains all equity balances in Japanese yen. ADDITIONAL NOTE TO THE GLOBAL FINANCIAL PORTFOLIO COMPOSITE PERFORMANCE SUMMARY Since the inception of the Global Financial Portfolio, the timing of individual account openings has had a material impact on compound rates of return. Based on the account startup methodology used by JWH, the performance of individual accounts composing the Global Financial Portfolio composite performance summary has varied. In 1994, the two accounts that were open generated separate rates of return of negative 44 percent and negative 17 percent, respectively. For the period January 1995 through June 1995, the three open accounts achieved separate rates of return of 101 percent, 75 percent and 67 percent, respectively. As of June 1995, these accounts now maintain mature positions and are performing consistently with each other. APPI-18 ADDITIONAL NOTE TO THE SUMMARIES PRESENTED WHICH UTILIZE THE FULLY-FUNDED SUBSET METHOD -- I.E., THE JWH GLOBAL DIVERSIFIED PORTFOLIO AND JWH INVESTMENTS, INC. INTERRATE(TM) (THE "FULLY-FUNDED SUBSET SUMMARIES") The level of actual funds in the accounts that comprise these two performance summaries currently requires additional disclosure. Actual funds are the amount of margin-qualifying assets on deposit. Nominal account size is a dollar amount which clients have agreed to in writing and which determines the level of trading in the account regardless of the amount of actual funds. Notional funds are the amount by which the nominal account size exceeds the amount of actual funds. The amount of notional equity in the accounts that compose these summaries requires additional disclosure under current CFTC policy. The Fully-Funded Subset Summaries include notional equity in excess of the 10% disclosure threshold established by the CFTC and reflect the adoption of a method of presenting rate-of-return and performance disclosure authorized by the CFTC, referred to as the Fully-Funded Subset method. See "Chesapeake Capital Corporation -- Past Performance" in this Appendix I. This method permits notional and fully-funded accounts to be included in a single performance summary. To qualify for the use of the Fully-Funded Subset method, the Fully- Funded Subset Advisory requires that certain computations be made in order to arrive at the Fully-Funded Subset and that the accounts for which performance is so reported meet two tests which are designed to provide assurance that the Fully-Funded Subset and the resultant rates of return are representative of the programs. These computations have been performed since January 1, 1992 for JWH as well as since the inception of JWH Investments, Inc.'s InterRate(TM). They were designed to provide assurance that the performance presented in the Fully-Funded Subset Summaries and calculated on a Fully-Funded Subset basis would be representative of such performance calculated on a basis which includes notional funds in beginning equity. The rates of return in the Fully-Funded Subset Summaries are calculated by dividing net performance by the sum of beginning equity plus additions minus withdrawals. JWH and JWH Investments, Inc. believe that this method yields substantially the same adjusted rates of return as would the Fully-Funded Subset method were there any "fully-funded" accounts, and that the rates of return for the Fully-Funded Subset Summaries are representative of the performance of the programs for the periods presented. The information presented has not been audited. However, JWH and JWH Investments, Inc. believe that such information is accurate and fairly presented. INTERRATE(TM) IS QUALITATIVELY DIFFERENT FROM THE METHODS WHICH GENERATED THE COMPOSITE PERFORMANCE SUMMARIES OF OTHER JWH INVESTMENT PROGRAMS. THE PROGRAMS REPRESENTED IN THE COMPOSITE PERFORMANCE RECORD DIFFER FROM INTERRATE(TM) WITH RESPECT TO: (a) FEES CHARGED; (b) LENGTH OF TIME FOR WHICH POSITIONS ARE HELD; (c) POSITIONS TAKEN; (d) LEVERAGE USED; AND (e) RATE OF RETURN OBJECTIVES. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. FURTHERMORE, THE RATES OF RETURN EARNED WHEN AN ADVISOR IS MANAGING A LIMITED AMOUNT OF EQUITY MAY HAVE LITTLE RELATIONSHIP TO THE RATES OF RETURN WHICH SUCH ADVISOR MAY BE ABLE TO ACHIEVE MANAGING LARGER AMOUNTS OF EQUITY. A NUMBER OF THE ACCOUNTS INCLUDED IN THE FOLLOWING PERFORMANCE SUMMARIES WERE TRADED IN A MANNER MATERIALLY DIFFERENT FROM THAT IN WHICH JWH TRADES ON BEHALF OF THE FUND. THE FOLLOWING PERFORMANCE SUMMARIES HAVE IN NO RESPECT BEEN ADJUSTED TO REFLECT THE CHARGES TO THE FUND. CERTAIN OF THE ACCOUNTS INCLUDED IN THE FOLLOWING PERFORMANCE SUMMARIES PAID FEES MATERIALLY DIFFERENT FROM, AND IN SOME CASES MATERIALLY LOWER THAN, THOSE CHARGED THE FUND. APPI-19 INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT PORTION OF A COMMODITY TRADING ADVISOR'S TOTAL INCOME AND, IN CERTAIN INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED OR UNREALIZED LOSSES FROM COMMODITIES TRADING. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. See "Risk Factors -- (2) Past Performance." APPI-20 JOHN W. HENRY & CO., INC. FINANCIAL AND METALS PORTFOLIO JANUARY 1991 - APRIL 1996 The following performance summary and chart reflect the composite performance results from January 1991 through April 1996 of the Financial and Metals Portfolio. JWH trades this program on behalf of the Fund. The program has been utilized in trading for 350 accounts since its inception. As of April 30, 1996, 270 accounts had been closed and 80 client accounts remained open. Of the closed accounts, 233 were profitable and 37 were unprofitable at their closing. Of the 80 open client accounts, 78 were profitable and 2 were unprofitable as of April 30, 1996. Name of CTA: John W. Henry & Co., Inc. Name of program: Financial and Metals Portfolio Inception of client account trading by CTA: October 1982 Inception of client account trading in program: October 1984 Number of open client accounts: 80 Aggregate assets (excluding "notional" equity) overall: $1.3 billion Aggregate assets (excluding "notional" equity) in program: $880 million Aggregate assets (including "notional" equity) overall: $1.3 billion Aggregate assets (including "notional" equity) in program: $880 million Largest monthly drawdown: (18.0)% (1/92) Largest peak-to-valley drawdown: (39.5)% (12/91-5/92)
========================================================================================== Monthly Performance 1996 1995 1994 1993 1992 1991 - ------------------------------------------------------------------------------------------ January 6.0%* (3.8)%* (2.9)%* 3.3%* (18.0)%* (2.3)% - ------------------------------------------------------------------------------------------ February (5.5)* 15.7* (0.6)* 13.9* (13.5)* 3.8 - ------------------------------------------------------------------------------------------ March 0.7* 15.3* 7.2* (0.3)* 3.0* 4.5 - ------------------------------------------------------------------------------------------ April 7.3* 6.1* 0.9* 9.3* (12.2)* (0.8) - ------------------------------------------------------------------------------------------ May 1.2* 1.3* 3.3* (5.7)* (0.3)* - ------------------------------------------------------------------------------------------ June (1.7)* 4.5* 0.1* 21.9* (1.3)* - ------------------------------------------------------------------------------------------ July (2.3)* (6.1)* 9.7* 25.5* (13.4)* - ------------------------------------------------------------------------------------------ August 2.1* (4.1)* (0.8)* 10.2* 4.8* - ------------------------------------------------------------------------------------------ September (2.1) 1.5* 0.2* (5.2)* 25.8* - ------------------------------------------------------------------------------------------ October 0.3 1.7* (1.1)* (4.5)* (7.7)* - ------------------------------------------------------------------------------------------ November 2.6 (4.4)* (0.3)* (0.8)* 6.6* - ------------------------------------------------------------------------------------------ December 1.7 (3.5)* 2.9* (2.6)* 39.4* - ------------------------------------------------------------------------------------------ Compound Annual 7.5%* 38.50%* (5.32)%* 46.82%* (10.89)%* 61.88%* Rate of Return (4 months) ==========================================================================================
The rates of return marked by an asterisk (*) indicate the presence of proprietary capital included in the performance of the program. In May 1991, one proprietary account commenced trading and in March 1992 a second proprietary account commenced trading. Both accounts appear in the capsule performance from their inception until August 1995. The maximum percentage of proprietary funds during this time period was less than 0.50%. These proprietary funds had no material effect on the rate of return. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES APPI-3 THROUGH APPI-4. APPI-21
- ---------------------------------------------------------------------------------------------------------------------------------- OTHER JOHN W. HENRY & CO., INC. PROGRAMS - ---------------------------------------------------------------------------------------------------------------------------------- NAME OF CTA: John W. Henry John W. Henry John W. Henry John W. Henry & Co., Inc. & Co., Inc. & Co., Inc. & Co., Inc. - ---------------------------------------------------------------------------------------------------------------------------------- NAME OF PROGRAM: Original Investment Global Diversified KT Diversified The World Financial Program Program Program Perspective - ---------------------------------------------------------------------------------------------------------------------------------- INCEPTION OF CLIENT ACCOUNT October 1982 October 1982 October 1982 October 1982 TRADING BY CTA: - ---------------------------------------------------------------------------------------------------------------------------------- INCEPTION OF CLIENT ACCOUNT October 1982 June 1988 January 1984; April 1987 TRADING IN PROGRAM: ceased trading 2/94 - ---------------------------------------------------------------------------------------------------------------------------------- NUMBER OF OPEN ACCOUNTS: 22 21 0 5 - ---------------------------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (EXCLUDING "NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion $1.3 billion - ---------------------------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (EXCLUDING "NOTIONAL" EQUITY) IN PROGRAM: $117 million $109 million N/A $15 million - ---------------------------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (INCLUDING "NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion $1.3 billion - ---------------------------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (INCLUDING "NOTIONAL" EQUITY) IN PROGRAM: $117 million $127 million N/A $15 million - ---------------------------------------------------------------------------------------------------------------------------------- LARGEST MONTHLY DRAWDOWN: (14.1)% (10/94) (16.8)% (7/91) (19.2)% (7/91) (21.6)% (1/92) - ---------------------------------------------------------------------------------------------------------------------------------- LARGEST PEAK-TO-VALLEY DRAWDOWN: (26.2)% (6/94-10/94) (29.1)% (12/91-5/92) (40.6)% (1/91-3/92) (32.0)% (12/91-10/92) - ---------------------------------------------------------------------------------------------------------------------------------- 1996 COMPOUND RATE OF RETURN: 2.3% (4 months) (3)% (4 months) N/A 11% (4 months) - ---------------------------------------------------------------------------------------------------------------------------------- 1995 COMPOUND RATE OF RETURN: 53% (20)% N/A 32% - ---------------------------------------------------------------------------------------------------------------------------------- 1994 COMPOUND RATE OF RETURN: (6)% 10% (14)% (2 months) (15)% - ---------------------------------------------------------------------------------------------------------------------------------- 1993 COMPOUND RATE OF RETURN: 41% 60% 21% 14% - ---------------------------------------------------------------------------------------------------------------------------------- 1992 COMPOUND RATE OF RETURN: 11% (13)% (12)% (23)% - ---------------------------------------------------------------------------------------------------------------------------------- 1991 COMPOUND RATE OF RETURN: 5% 40% (2)% 15% - ----------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------- NAME OF CTA: John W. Henry John W. Henry John W. Henry & Co., Inc. & Co., Inc. & Co., Inc. - ---------------------------------------------------------------------------------------------------------------------- NAME OF PROGRAM: Yen Financial Portfolio Yen Financial Portfolio Global Financial (U.S. dollars) (Japanese yen) Portfolio - ---------------------------------------------------------------------------------------------------------------------- INCEPTION OF CLIENT ACCOUNT TRADING BY CTA: October 1982 October 1982 October 1982 - ---------------------------------------------------------------------------------------------------------------------- INCEPTION OF CLIENT ACCOUNT TRADING IN PROGRAM: January 1992 January 1992 June 1994 - ---------------------------------------------------------------------------------------------------------------------- NUMBER OF OPEN ACCOUNTS: 7 9 4 - ---------------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (EXCLUDING "NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion - ---------------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (EXCLUDING "NOTIONAL" EQUITY) IN PROGRAM: $42 million (Yen)6010 million $22 million - ---------------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (INCLUDING "NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion - ---------------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (INCLUDING "NOTIONAL" EQUITY) IN PROGRAM: $42 million (Yen)6010 million $22 million - ---------------------------------------------------------------------------------------------------------------------- LARGEST MONTHLY DRAWDOWN: (14.4)% (2/92) (13.0)% (5/92) (17.4)% (11/94) - ---------------------------------------------------------------------------------------------------------------------- LARGEST PEAK-TO-VALLEY DRAWDOWN: (27.0)% (4/95-4/96) (20.5)% (12/93-1/95) (46.0)% (6/94-1/95) - ---------------------------------------------------------------------------------------------------------------------- 1996 COMPOUND RATE OF RETURN: ___ (4 months) ___ (4 months) 4% (4 months) - ---------------------------------------------------------------------------------------------------------------------- 1995 COMPOUND RATE OF RETURN: 20% (10 months) 23% (10 months) 86% - ---------------------------------------------------------------------------------------------------------------------- 1994 COMPOUND RATE OF RETURN: (9)% (19)% (38)% (7 months) - ---------------------------------------------------------------------------------------------------------------------- 1993 COMPOUND RATE OF RETURN: 66% 49% N/A - ---------------------------------------------------------------------------------------------------------------------- 1992 COMPOUND RATE OF RETURN: 24% (11 months) 24% (11 months) N/A - ---------------------------------------------------------------------------------------------------------------------- 1991 COMPOUND RATE OF RETURN: N/A N/A N/A - ----------------------------------------------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS. ----------------------------- SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES APPI-3 THROUGH APPI-4. APP1-22
- --------------------------------------------------------------------------------------------------------------- OTHER JOHN W. HENRY & CO., INC. PROGRAMS - --------------------------------------------------------------------------------------------------------------- NAME OF CTA: John W. Henry John W. Henry John W. Henry & Co., Inc. & Co., Inc. & Co., Inc. - --------------------------------------------------------------------------------------------------------------- NAME OF PROGRAM: International Currency International Foreign and Bond Portfolio Exchange Program G-7 Currency Portfolio - --------------------------------------------------------------------------------------------------------------- INCEPTION OF CLIENT ACCOUNT TRADING BY CTA: October 1982 October 1982 October 1982 - --------------------------------------------------------------------------------------------------------------- INCEPTION OF CLIENT ACCOUNT TRADING IN PROGRAM: January 1993 August 1986 February 1991 - --------------------------------------------------------------------------------------------------------------- NUMBER OF OPEN ACCOUNTS: 1 7 9 - --------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (EXCLUDING "NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion - --------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (EXCLUDING "NOTIONAL" EQUITY) IN PROGRAM: $2 million $75 million $86 million - --------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (INCLUDING "NOTIONAL" EQUITY) OVERALL: $1.3 billion $1.3 billion $1.3 billion - --------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (INCLUDING "NOTIONAL" EQUITY) IN PROGRAM: $2 million $75 million $86 million - --------------------------------------------------------------------------------------------------------------- LARGEST MONTHLY DRAWDOWN: (6.7)% (7/94) (12.0)% (1/92) (10.7)% (1/92) - --------------------------------------------------------------------------------------------------------------- LARGEST PEAK-TO-VALLEY DRAWDOWN: (20.1)% (6/94-1/95) (24.1)% (12/91-4/92) (19.5)% (7/93-1/95) - --------------------------------------------------------------------------------------------------------------- 1996 COMPOUND RATE OF RETURN: 0% (4 months) 1% (4 months) 1% (5 months) - --------------------------------------------------------------------------------------------------------------- 1995 COMPOUND RATE OF RETURN: 37% 17% 32% - --------------------------------------------------------------------------------------------------------------- 1994 COMPOUND RATE OF RETURN: (2)% (6)% (5)% - --------------------------------------------------------------------------------------------------------------- 1993 COMPOUND RATE OF RETURN: 15% (5)% (6)% - --------------------------------------------------------------------------------------------------------------- 1992 COMPOUND RATE OF RETURN: N/A 5% 15% - --------------------------------------------------------------------------------------------------------------- 1991 COMPOUND RATE OF RETURN: N/A 39% 49% (11 months) - ---------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------- NAME OF CTA: John W. Henry & Co., Inc. JWH Investments, Inc. JWH Investments, Inc. - --------------------------------------------------------------------------------------------------------------- NAME OF PROGRAM: Financials And Metals Interrate(SM) Portfolio Interrate(SM) - --------------------------------------------------------------------------------------------------------------- INCEPTION OF CLIENT ACCOUNT TRADING BY CTA: October 1982 September 1991 September 1981 - --------------------------------------------------------------------------------------------------------------- INCEPTION OF CLIENT ACCOUNT September 1991; February 1992; TRADING IN PROGRAM: December 1988 ceased trading 7/95 ceased trading 11/93 - --------------------------------------------------------------------------------------------------------------- NUMBER OF OPEN ACCOUNTS: 1 0 0 - --------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (EXCLUDING "NOTIONAL" EQUITY) OVERALL: $1.3 billion N/A N/A -------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (EXCLUDING "NOTIONAL" EQUITY) IN PROGRAM: $17 million N/A N/A - --------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (INCLUDING "NOTIONAL" EQUITY) OVERALL: $1.3 billion N/A N/A - --------------------------------------------------------------------------------------------------------------- AGGREGATE ASSETS (INCLUDING "NOTIONAL" EQUITY) IN PROGRAM: $17 million N/A N/A -------------------------------------------------------------------------------------------------------------- LARGEST MONTHLY DRAWDOWN: (9.71)% (9/92) (16.6)% (1/92) (9.3)% (9/92) - --------------------------------------------------------------------------------------------------------------- LARGEST PEAK-TO-VALLEY DRAWDOWN: (17.8)% (8/92-2/94) (34.4)% (12/91-5/92) (20.6)% (8/92-11/93) - --------------------------------------------------------------------------------------------------------------- 1996 COMPOUND RATE OF RETURN: 5% (4 months) N/A N/A - --------------------------------------------------------------------------------------------------------------- 1995 COMPOUND RATE OF RETURN: 5% 30% (7 months) N/A - --------------------------------------------------------------------------------------------------------------- 1994 COMPOUND RATE OF RETURN: 3% (1)% N/A - --------------------------------------------------------------------------------------------------------------- 1993 COMPOUND RATE OF RETURN: (5)% 46% (10)% (11 months) - --------------------------------------------------------------------------------------------------------------- 1992 COMPOUND RATE OF RETURN: (1)% (4)% (3)% (11 months) - --------------------------------------------------------------------------------------------------------------- 1991 COMPOUND RATE OF RETURN: 9% 59% (4 months) N/A - ---------------------------------------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE FUND'S ACCOUNT IS NOT TRADED PURSUANT TO THE FOREGOING PROGRAMS. -------------------------------------- SEE THE "NOTES TO THE PERFORMANCE SUMMARIES" ON PAGES APPI-3 THROUGH APPI-4. APPI-23 APPENDIX II PERFORMANCE OF THE PUBLIC SINGLE-ADVISOR FUTURES FUNDS OPERATED BY MLIP GENERAL The following is summary performance information for the four single- advisor funds which MLIP has distributed other than as part of its "Managed Account Program" -- consists of private placements and "feeder funds" which invest all of their assets directly into different managers' private funds. All summary performance information is current as of June 1, 1996. Performance information is set forth for the most recent five full years of each fund. Performance information prior to January 1, 1991 has not been included, in accordance with CFTC regulations. Two of the funds presented (The Futures Expansion Fund Limited Partnership and World Currencies Limited) have fee structures and interest arrangements generally comparable to that of the Fund (although these funds, being single- advisor pools, pay profit shares only in respect of overall fund performance, not on an advisor-by-advisor basis). The other funds, The Growth and Guarantee Fund L.P. and InterRate/tm/ Limited, were designed as "index" and yield enhancement funds, respectively, and pay (paid, in the case of The Growth and Guarantee Fund L.P. -- Series B and InterRate/tm/ Limited, each of which has dissolved) reduced fees. THE FUNDS WHOSE PERFORMANCE IS SUMMARIZED IN THIS APPENDIX II ARE MATERIALLY DIFFERENT FROM THE FUND, AND THE PERFORMANCE SUMMARIES OF SUCH FUNDS ARE NOT REPRESENTATIVE OF HOW THE FUND HAS PERFORMED TO DATE NOR INDICATIVE OF HOW THE FUND WILL PERFORM IN THE FUTURE. "MANAGED ACCOUNT PROGRAM" SINGLE-ADVISOR FUNDS NOT PRESENTED MLIP currently has sponsored, and continues to operate, five single-advisor funds, as well as several single-advisor "feeder funds," as part of MLIP's Managed Account Program. These funds are in addition to the four single- advisor funds the records of which are summarized herein. MLIP selects the professional advisors for the funds in the Managed Account Program. However, each client determines with which, if any, of such advisors the client will invest. The Managed Account Program emphasizes single-advisor funds. In its single-advisor funds, MLIP does not implement asset allocation strategies which MLIP does for the Fund. Nor is MLIP's trading leverage analysis of any relevance in the context of single-advisor funds. All the assets of such funds are simply allocated to their respective advisors. Managed Account Program funds are privately distributed with a minimum investment of $100,000 (although MLIP has from time to time permitted investments of $50,000). Although MLIP's ability to select advisors for the Managed Account Program might be regarded as a reflection on MLIP's ability to select advisors for its multi-advisor funds, MLIP regards the Managed Account Program and MLIP's multi- advisor funds as qualitatively different investments. Consequently, while MLIP will furnish, without charge, full performance records of all MLIP single- advisor funds upon the request of any existing or prospective investor in the Fund, such records are not set forth herein. APPII-1 The three worst performing of the single-advisor Managed Account Program funds sponsored by MLIP had, as of June 1, 1996, cumulative rates of return, since inception, of (53.27)% (18 months), (17.67)% (43 months) and (6.20)% (27 months). PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND MATERIAL DIFFERENCES EXIST BETWEEN THE FUNDS SET FORTH IN THIS APPENDIX II AND THE FUND. TO DATE, THE FUND HAS NOT PERFORMED IN A MANNER COMPARABLE TO MANY OF THESE SINGLE-ADVISOR MLIP-SPONSORED FUNDS, AND THERE IS NO REASON TO EXPECT THAT THE FUND WILL PERFORM IN A MANNER COMPARABLE TO ANY OF SUCH FUNDS IN THE FUTURE. INVESTORS SHOULD NOTE THAT INTEREST INCOME MAY CONSTITUTE A SIGNIFICANT PORTION OF A COMMODITY POOL'S INCOME AND, IN CERTAIN INSTANCES, MAY GENERATE PROFITS WHERE THERE HAVE BEEN REALIZED AND UNREALIZED LOSSES FROM COMMODITY TRADING. ____________________________ "WORST MONTHLY DRAWDOWN" AS USED IN THIS APPENDIX II MEANS THE LARGEST NEGATIVE MONTHLY RATE OF RETURN EXPERIENCED BY THE RELEVANT FUND DURING THE PERIOD COVERED BY THE PERFORMANCE SUMMARY. A "DRAWDOWN" IS MEASURED ON THE BASIS OF MONTH-END FIGURES ONLY, AND DOES NOT REFLECT INTRA-MONTH PERFORMANCE. "WORST PEAK-TO-VALLEY DRAWDOWN" AS USED IN THIS APPENDIX II MEANS THE GREATEST PERCENTAGE DECLINE, DURING THE PERIOD COVERED BY THE PERFORMANCE SUMMARY, FROM A MONTH-END CUMULATIVE MONTHLY RATE OF RETURN WITHOUT SUCH CUMULATIVE MONTHLY RATE OF RETURN BEING EQUALLED OR EXCEEDED AS OF A SUBSEQUENT MONTH-END. FOR EXAMPLE, IF THE MONTHLY RATE OF RETURN OF A PARTICULAR FUND WAS (1)% IN EACH OF JANUARY AND FEBRUARY, 1% IN MARCH AND (2)% IN APRIL, A "PEAK-TO- VALLEY DRAWDOWN" ANALYSIS CONDUCTED AS OF THE END OF APRIL WOULD CONSIDER THAT "DRAWDOWN" TO BE STILL CONTINUING AND TO BE APPROXIMATELY (3)% IN AMOUNT, WHEREAS IF THE MONTHLY RATE OF RETURN HAD BEEN APPROXIMATELY 3% IN MARCH, THE JANUARY-FEBRUARY DRAWDOWN WOULD HAVE ENDED AS OF THE END OF FEBRUARY AT APPROXIMATELY THE (2)% LEVEL. APPII-2
MLIP PUBLIC SINGLE-ADVISOR FUNDS JUNE 1, 1996 - ------------------------------------------------------------------------------------------------------------------------------------ WORST MONTHLY TYPE OF INCEPTION AGGREGATE CURRENT DRAWDOWN NAME OF FUND OFFERING OF TRADING SUBSCRIPTIONS CAPITALIZATION PERIOD - ------------------------------------------------------------------------------------------------------------------------------------ The Futures Expansion Fund Public Jan. 1987 $ 56,741,035 $9,345,919 (9.29)% (1/92) Limited Partnership - ---------------------------------------------------------------------------------------------------------------------------------- The Growth & Guarantee Fund Public Aug. 1987 $148,349,450 $8,248,271 (4.28)% (6/91) L.P. - Series A Units - ---------------------------------------------------------------------------------------------------------------------------------- The Growth & Guarantee Fund Public Sept. 1987 $ 84,282,707 dissolved as (7.63)% (8/90) L.P. - Series B Units of 1/31/91 - ----------------------------------------------------------------------------------------------------------------------------------- World Currencies Limited Public Aug. 1987 $ 47,814,293 $4,038,708 (13.41)% (4/92) dissolved as of 4/11/96 - ----------------------------------------------------------------------------------------------------------------------------------- InterRate/(TM)/ Limited Public Dec. 1988 $ 7,429,200 dissolved as (10.08)% (9/92) of 1/31/94 - -----------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ WORST 1996 1995 1994 1993 1992 1991 PEAK-TO-VALLEY CUMULATIVE COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND COMPOUND DRAWDOWN RATE OF RATE OF RATE OF RATE OF RATE OF RATE OF RATE OF NAME OF FUND PERIOD RETURN RETURN RETURN RETURN RETURN RETURN RETURN - ----------------------------------------------------------------------------------------------------------------------------------- The Futures Expansion Fund (17.32)% (1/91-11/91) 94.92% (8.13)% 21.95% 5.55% 3.36% 9.23% (1.79)% Limited Partnership (5 months) - ------------------------------------------------------------------------------------------------------------------------------------ The Growth & Guarantee Fund (10.19)% (9/89-10/90) 60.37% 6.19% 32.01% (2.34)% 5.20% 3.75% 23.30% L.P. - Series A Units (5 months) - ------------------------------------------------------------------------------------------------------------------------------------ The Growth & Guarantee Fund (10.93)% (6/90-9/90) 6.93% N/A N/A N/A N/A N/A 11.77% L.P. - Series B Units - ------------------------------------------------------------------------------------------------------------------------------------ World Currencies Limited (35.81)% (9/92-1/95) 73.85% (0.48)% 12.40% (12.84)% (10.46)% (3.10)% 35.28% (4 1/2 months) - ------------------------------------------------------------------------------------------------------------------------------------ InterRate/(TM)/ Limited (13.49)% (9/92-1/93) 30.04% N/A N/A 0.55% (7.02)% (2.63)% 11.03% (1 month) - ------------------------------------------------------------------------------------------------------------------------------------
PURCHASERS OF UNITS WILL ACQUIRE NO INTEREST IN THESE FUNDS. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS, AND THESE FUNDS ARE EACH TRADED PURSUANT TO MATERIALLY DIFFERENT PROGRAMS AND WITH MATERIALLY DIFFERENT OBJECTIVES THAN THE FUND. APPII-3 APPENDIX III THE ROLE OF MANAGED FUTURES IN AN INVESTMENT PORTFOLIO MANAGED FUTURES AS AN ELEMENT IN MODERN PORTFOLIOS A global investment perspective may be appropriate in seeking investment opportunity while attempting to control portfolio risk. The globalization of the world's economy offers significant new opportunities. However, world political and economic events have an influence -- often a dramatic influence -- on its markets, creating increased risk and volatility. The market volatility of recent years suggests that stable growth may be becoming increasingly difficult to achieve. Over the long term, portfolios must have the ability to adapt to changing social, political and economic trends. A well-diversified asset allocation strategy enhances this ability and offers a flexible approach to the objective of building and protecting wealth in today's economic environment. Incorporating a managed futures investment into portfolios as part of a well-diversified asset allocation strategy has the potential, if the managed futures investment is successful, to increase profits while reducing overall portfolio risk. There can be no assurance that the Fund will trade successfully, and if it does not do so an investment in the Fund cannot provide beneficial diversification to a portfolio. The past performance of the Fund may not be representative of its future results. An asset allocation strategy involves diversifying a portfolio into a variety of different components such as stocks, bonds and cash equivalents. Such a strategy may also include, to a limited extent, non-traditional investments such as managed futures, real estate and hard assets (among a variety of alternatives). The goal is to achieve the twin investment objectives of long- term total return combined with reduced portfolio volatility and limited risk of major losses. An investment's anticipated return, relative risk level and historical correlation with the other components in the portfolio are principal factors taken into account in allocating assets. Different investment components are expected to respond differently to changing economic conditions. Consequently, combining a number of such components may add a potentially valuable element of diversification to an overall portfolio. PROFESSIONALLY MANAGED FUTURES An investment in managed futures consists of professionally managed trading in the global commodity markets, including financials, currencies, energy, metals and agriculture. These markets are traded through futures, commodity options and forward contracts, and offer the ability to trade either side of a market and at a wide range of different leverage factors. The Fund does not trade in all available markets, and its positions may frequently be concentrated in limited markets and sectors. FUTURES VOLUME BY MARKET SECTOR [PIE CHARTS APPEAR HERE] 1980 1995 Total Volume: 92 million contracts Total Volume: 1.4 billion contracts The futures volume figures and market sector distributions presented above include both speculative and hedging transactions as well as options on futures. Source: U.S. Futures Industry Association Once confined to a few basic agricultural commodities, the futures markets have expanded to include a wide range of instruments representing major sectors of the world's economy. Coinciding with access to an increasingly broad range of markets has been greatly expanded liquidity. The expansion of futures trading on major exchanges in Chicago; Frankfurt, London, New York, Paris, Singapore, Sydney and Tokyo offers the possibility of access to international market sectors as well as the potential for a global diversification of portfolios traditionally concentrated in a single nation's economy and currency. Managed futures advisors are able quickly to deploy and redeploy capital across a wide range of international markets. APPIII-1 At the same time that the rapid geographical expansion of the available markets and the introduction of an array of innovative products have created new opportunities for both profit and diversification, they have made trading very much more complex and difficult for the individual investor. Managed futures investments offer the investor the opportunity to participate in the global financial, currency, energy, metals and agriculture sectors through the futures, forward and commodity options markets utilizing professional money managers. Managed futures has profit potential, but also involves a high degree of risk. A managed futures investment is suitable only for a limited portion of the risk segment of a portfolio. The expansion of the futures markets internationally does not necessarily imply an expansion of the markets traded by the Fund. SUBSTANTIAL INVESTOR PARTICIPATION A large number of investors, both individuals and institutions, have committed a limited portion of their assets to managed futures during the last 10 to 15 years. In 1980, assets in the managed futures industry were estimated by Managed Account Reports ("MAR"), a leading industry publication, at approximately $0.3 billion. As of the end of 1995, the same publication estimated client assets at approximately $18 billion. The assets comniitted to managed futures are invested in a wide range of different products, including single-advisor and multi-advisor funds, "funds of funds," "principal protection" pools (in which only a fraction of the assets invested are committed to trading) and individual managed accounts. Many of these investments are materially different from the Fund in design and fee structure as well as in performance and risk control objectives. The Fund trades at lower leverage, and with correspondingly less profit potential, than many other futures funds. NON-CORRELATION -- AN IMPORTANT COMPONENT OF RISK REDUCTION Historically, the returns of many managed futures investments have exhibited a substantial degree of non correlation with the performance of the general equity and debt markets, suggesting that a managed futures component, if successful, may provide a valuable complement to a traditional portfolio. Modern portfolio theory suggests that investments with positive returns and low correlation with other elements of a portfolio can improve the risk/reward characteristics of an investor's overall holdings. Consequently, allocating a limited portion of the risk segment of a portfolio to managed futures, if the managed futures performance is, in fact, profitable as well as noncorrelated with stocks and bonds, can potentially add a valuable aspect of diversification to a traditionally structured portfolio. There can be no assurance that any managed futures investment will be successful, avoid substantial losses or generate performance non-correlated with the equity or debt markets. Furthermore, non-correlation is not negative correlation. Even if the performance of the Fund is non-correlated with these markets, this does not mean that the Fund's results will not parallel either or both during significant periods of time. In any event, unless a managed futures investment is successful, it cannot add a potentially valuable element of diversification to a portfolio. Allocating assets to non-traditional investments ("alternative investments") is based on the premise that while securities (e.g., stocks and bonds) prices are often affected by overall market price trends, alternative investments may not be, at least to the same degree. In addition, the results of many types of alternative investments have historically been largely non-correlated with each other. This creates the possibility of assembling a portfolio whose various investments have been developed with the objective of participating successfully in different economic cycles and national financial markets, potentially multiplying profit opportunities while decreasing the effect of price movements in any given market on the overall volatility of the portfolio. The following chart depicts the performance of the MLIP Index, the S&P 500 Stock Index and the ML Domestic Master Bond Index. The MLIP Index is an index of all futures funds for which MLIP serves or has served as its trading manager or sponsor. It includes a total of 45 different funds, 9 of which are no longer operating. The MLIP Index includes "principal protection" funds such as the Fund, which trade with only a limited portion of their assets committed to trading, as well as funds which allocate all, or even more than all, of their assets to trading. Although MLIP's first fund began operations in January 1987, the following comparison begins in 1990 because that was the year in which MLIP first began to act as trading manager for multi-advisor funds. The MLIP Index includes all MLIP funds, including single advisor funds for which MLIP does not act as trading manager. The performance of each fund included in the MLIP Index is weighted on the basis of relative month-end capitalization (irrespective of the percentage of such capitalization allocated to trading). The S&P 500 Stock Index is a capitalization- weighted index of the common stocks of publicly-traded United States issuers. The ML Domestic Master Bond Index is a total return index comprised of 6,632 APPIII-2 investment-grade corporate bonds, Treasuries and mortgage issues; average maturity 12.70 years (calculated on a market-weighted basis as of June 30, 1996). The non-correlation among these different indices is indicated by the fact that during certain periods their movements roughly parallel each other while in other periods they diverge. The past performance of a particular MLIP fund during any period of time is not necessarily indicative of how such fund will perform in the future. If the past performance of a given MLIP fund is not necessarily indicative of how such fund itself will perform in the future, much less so is the past performance of other, unrelated funds combined into a composite presentation in either the MLIP Index or the MAR Public Funds Index (see below). The MLIP Index and the MAR Public Funds Index are included herein, not as being representative of how the Fund can be expected to perform, but as an indication of how a variety of different managed futures investments have performed. COMPARISON OF THE MLIP INDEX AND CERTAIN GENERAL SECURITIES MARKET INDICES [CHART APPEARS HERE] COMPARISON OF MLIP INDEX AND CERTAIN GENERAL SECURTIES MARKET INDICES JAN. 1990-APR. 1996 1-Jan-90 1000 31-Mar-96 1700 All graphs in this section reflect percentage changes from a "normalized" starting point of 1,000. Past performance is not necessarily indicative of future results. The compilation of an index of actively managed futures funds as well as the comparison of such index to passive indices of securities returns has certain inherent and material limitations. There can be no assurance that a managed futures investment will, in fact, perform in a manner non-correlated with traditional portfolio components. The deleveraging of the Fund's trading reduces profit potential as well as volatility. If a series of Units is required to further deleverage its trading below the 75% level, the Fund's ability to achieve its objectives, or to provide diversification to an overall portfolio, will be materially impaired. The MLIP Index is a composite of the performance of all funds for which MLIP has acted or acts as trading manager or sponsor. The MLIP Index includes single-advisor, multi-advisor, "principal protection" and non-"principal protection "funds. Forty-five different funds, including 9 which have been closed, are included in the MLIP Index, certain of which are simply "feeder funds" through which Merrill Lynch clients invest in funds sponsored by third parties. Certain of these funds are materially different investment products from the Fund, and their fee structures vary. The MLIP Index does not reflect the historical results of any actual futures fund, and combining the performance of funds with materially different investment characteristics has certain inherent and material limitations. In addition, due to the unusually wide range of leverage factors at which futures funds may trade, compositing their performance on the basis of month-end capitalization may have certain distorting effects. During its first 19-2/3 months of operations, the Fund's performance demonstrated a significant degree of non-correlation with the S&P 500 Stock Index as well as with the ML Domestic Master Bond Index. Non- correlation does not mean negative correlation. Investors must not anticipate that when the stock or bond market drops, the Fund will necessarily be profitable or vice versa. To date there have been, and MLIP anticipates that there will continue to be, periods during which the Fund's performance roughly parallels that of the general securities market indices. However, during a substantial portion of its brief trading history to date, the performance of the Fund has appeared generally unrelated to the performance of such indices. APPIII-3 COMPARISON OF ML PRINCIPAL PROTECTION L.P. AND CERTAIN GENERAL SECURITIES MARKET INDICES [CHART APPEARS HERE] COMPARISON OF ML PRINCIPAL PROTECTION PLUS L.P. AND CERTAIN GENERAL SECURITIES MARKET INDICES OCT. 1994-APR. 1996 10/12/94 1000 4/30/96 1000 Past performance is not necessarily indicative of future results, particularly in the case of performance information for as brief a period as twelve and two-thirds months. The comparison of the performance of the Fund, an actively managed futures and forward market investment, to passive and unleveraged indices of general securities returns has certain inherent and material limitations. The S&P 500 Stock Index and the ML Domestic Master Bond Index reflect the price movements of unmanaged and unleveraged groups of publicly-traded stocks and bonds. The MLIP Index and the MAR Public Funds Index, on the other hand, represent the composite performance of actively managed, highly leveraged futures funds. Although it is common to evaluate the performance of financial assets against general stock and bond market indices, there are material differences between passive indices of equity and debt prices and indices of managed products, as well as between leveraged and unleveraged accounts. In addition, the MLIP Index and the MAR Public Funds Index reflect the performance of futures based, not securities, products. The futures markets are different from the securities markets in a number of respects, and any comparison between them is subject to certain inherent and material limitations. MLIP INDEX COMPARED TO THE MAR PUBLIC FUNDS INDEX The MAR Public Funds Index represents a combination of the performance of a large number of publicly offered futures funds, weighting the returns recognized by each such fund on the basis of relative capitalization. The funds included in the MAR Public Funds Index represent a wide variety of materially different products, including single and multi-advisor funds, as well as funds with and without "principal protection" features. As in the case of the MLIP Index, combining the results of funds with materially different performance objectives and fee structures into a single index is subject to certain inherent, and material limitations. Nevertheless, the MAR Public Funds Index is one of several widely-used benchmarks of general managed futures industry performance. The following chart depicts the relative movements of the MLIP Index and the MAR Public Funds Index over the January 1990 through May 1996 period. COMPARISON OF MLIP INDEX TO MAR PUBLIC FUNDS INDEX [CHART APPEAR HERE] COMPARISON OF MLIP INDEX TO MAR PUBLIC FUNDS INDEX JAN. 1990 - MAR. 1996 1-Jan-90 1000 31-Mar-96 1000 Past performance is not necessarily indicative of future results. Neither the MLIP nor the MAR Public Funds Index purports to indicate either the results or the objectives of any actual or proposed fund. Furthermore, there can be no assurance that the MAR Public Funds Index is in fact representative of the performance of the managed futures industry as a whole. APPIII-4 The MAR Public Funds Index represents the composite performance of a large group of single and multi- advisor public futures funds with widely disparate performance objectives, "principal protection" parameters and fee structures, trading pursuant to a broad range of different and independent strategies. While reference to the MAR Public Funds Index may indicate certain performance characteristics which may reasonably be considered as objectives of a managed futures investment, there can be no assurance that the MAR Public Funds Index provides any meaningful indication of how the Fund, or managed futures investments in general, have performed in the past or will perform in the future. The distorting effect of composite treatment may be greater in the case of the MAR Public Funds Index than in the case of the MLIP Index, due to the inclusion in the former of a wider variety of funds as well as of funds operated by independent sponsors. While graphic presentation of comparative performance results facilitates illustrating certain performance characteristics, e.g., non- correlation, prospective investors must be aware that alternative graphic presentations of the same information can appear materially different. For example, the use of a logarithmic rather than a standard scale de- emphasizes both apparent volatilitv and rate of return, while the use of a standard, or simply a larger lologarithmic, scale accentuates both. MLIP believes that the graphs presented above are reasonable representations of the information intended to be conveyed, but prospective investors must recognize both the general nature and limited significance of such information and that such information could have been depicted in a number of materially different graphic presentations. SUMMARY Participation in a professionally managed futures program, obtaining access to the experience and expertise of professional trading managers and trading, advisors, involves significant risks but offers the opportunity to potentially: . Diversify globally into a wide range of financial and non-financial markets. . Profit (or incur losses) in rising as well as falling markets. . Increase portfolio returns as well as reduce total portfolio risk (through adding an investment component with the potential for performance non-correlated with other portfolio components). . Participate in the highly leveraged futures, commodity options and currency markets with liability limited, in the case of the Fund, to the partial loss of the use of the funds invested. Prudence demands that an investor carefully examine all aspects of a managed futures investment and weigh the associated benefits of profit potential and possible access to diversification against the risks involved. A managed futures investment is not suitable for all investors, and different managed futures investments have materially different objectives and risk reward profiles. However, for the investor who can tolerate the risks, a managed futures investment, if successful, has the potential to yield important benefits in portfolio diversification and management. See "Risk Factors." THE FUTURES AND FORWARD MARKETS Futures and Forward Contracts Commodity futures contracts in the United States are required to be made on approved commodity exchanges and call for the future delivery of various commodities at a specified time and place. These contractual obligations, depending on whether one is a buyer or a seller, may be satisfied either by taking or making physical delivery of an approved grade of the particular commodity (or, in the case of some contracts, by cash settlement) or by making an offsetting sale or purchase of an equivalent commodity futures contract on the same exchange prior to the designated date of delivery. Currencies may be purchased or sold for future delivery through banks or dealers pursuant to what are commonly referred to as "forward contracts." In such instances, the bank or dealer generally acts as principal in the transaction and includes its anticipated profit and the costs of the transaction in the prices it quotes for such contract; such mark-ups are known as "bid-ask" spreads. Brokerage commissions are typically not charged in forward trading. APPIII-5 Hedgers and Speculators The two broad classifications of persons who trade in commodity futures are "hedgers" and "speculators." Commercial interests that market or process commodities use the futures markets for hedging against losses that may occur because of price fluctuations, for example, between the time a merchandiser or processor makes a contract to sell a raw or processed commodity and the time he must perform the contract. The commodity markets enable the hedger to shift the risk of price fluctuations to the speculator. The speculator, unlike the hedger, generally expects neither to deliver nor receive the physical commodity; rather, the speculator risks his capital with the hope of making profits from price fluctuations in commodity futures contracts. Exchanges; Speculative Position Limits; Margins Commodity exchanges provide centralized market facilities for trading in futures contracts relating to specified commodities. Each of the commodity exchanges in the United States has an associated "clearinghouse." Once trades made between members of an exchange have been confirmed, the clearinghouse becomes substituted for the clearing member acting on behalf of each buyer and each seller of contracts traded on the exchange and in effect becomes the other party to the trade. Thereafter, each clearing member party to the trade looks only to the clearinghouse for performance. Foreign commodity exchanges differ in certain respects from their United States counterparts and are not subject to regulation by any United States governmental agency. Accordingly, the protections afforded by such regulation are not available to the Fund to the extent that it trades on such exchanges. In its trading on foreign exchanges, the Fund is subject to the risk of fluctuations in the exchange rate between the currencies in which the contracts traded on such foreign exchanges are denominated and United States dollars (as well as to the risk that exchange controls could be imposed in the future). The CFTC and the United States exchanges have established limits, referred to as "speculative position limits," on the maximum net long or net short position that any person (other than a hedger) may hold or control. Most financial markets have replaced position limits with "position accountability," under which the only limits imposed on a trader's positions are those related to the trader's financial ability to support such positions. However, such limits continue to be applicable in a number of important (primarily agricultural) markets. These limits may restrict the Trading Advisors' ability to acquire positions on behalf of the Fund. Most United States exchanges limit the maximum permissible fluctuation in futures contract prices during any single trading day. These regulations establish what are commonly referred to as "daily limits." Daily limits restrict the maximum amount by which the price of a futures contract may vary, either up or down, from the previous day's settlement price. Once the daily limit has been reached, it becomes difficult and costly to execute any trades in the affected contract. Because these limits apply on a day-to-day basis, they do not limit ultimate losses, but may reduce or eliminate liquidity. Daily limits are generally not applicable to currency futures or to forward contracts. Margin represents a security deposit to assure futures traders' performance under their open positions. When a position is established, "initial margin" is deposited and at the close of each trading day "variation margin" is either credited or debited from a trader's account, representing the unrealized gain or loss on the open positions. If "variation margin" payments cause a trader's "initial margin" to fall below "maintenance margin" levels (usually approximately one-half to two- thirds of "initial margin"), a "margin call" will be made, requiring the trader to deposit additional margin (up to the "initial margin" level) or have his position closed out. APPIII-6 APPENDIX IV BLUE SKY GLOSSARY The following definitions are included in this Appendix IV in compliance with the requirements of various state securities administrators who review public futures fund offerings for compliance with the "Guidelines for the Registration of Commodity Pool Programs" Statement of Policy promulgated by the North American Securities Administrators Association, Inc. The following definitions are reprinted verbatim from such Guidelines and may, accordingly, not in all cases be relevant to an investment in the Fund. DEFINITIONS -- As used in the Guidelines, the following terms have the following meanings: Administrator -- The official or agency administering the security laws of a state. Advisor -- Any person who for any consideration engages in the business of advising others, either directly or indirectly, as to the value, purchase, or sale of commodity contracts or commodity options. Affiliate -- An Affiliate of a Person means: (a) any Person directly or indirectly owning, controlling or holding with power to vote 10% or more of the outstanding voting securities of such Person; (b) any Person 10% or more of whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote, by such Person; (c) any Person, directly or indirectly, controlling, controlled by, or under common control of such Person; (d) any officer, director or partner of such Person; or (e) if such Person is an officer, director or partner, any Person for which such Person acts in any such capacity. Capital Contributions -- The total investment in a Program by a Participant or by all Participants, as the case may be. Commodity Broker -- Any Person who engages in the business of effecting transactions in commodity contracts for the account of others or for his own account. Commodity Contract -- A contract or option thereon providing for the delivery or receipt at a future date of a specified amount and grade of a traded commodity at a specified price and delivery point. Cross Reference Sheet -- A compilation of the Guideline sections, referenced to the page of the Prospectus, Program agreement, or other exhibits, and justification of any deviation from the Guidelines. Net Assets -- The total assets, less total liabilities, of the Program determined on the basis of generally accepted accounting principles. Net Assets shall include any unrealized profits or losses on open positions, and any fee or expense including Net Asset fees accruing to the Program. Net Asset Value Per Program Interest -- The Net Assets divided by the number of Program Interests outstanding. Net Worth -- The excess of total assets over total liabilities as determined by generally accepted accounting principles. Net Worth shall be determined exclusive of home, home furnishings and automobiles. New Trading Profits -- The excess, if any, of Net Assets at the end of the period over Net Assets at the end of the highest previous period or Net Assets at the date trading commences, whichever is higher, and as further adjusted to eliminate the effect on Net Assets resulting from new Capital Contributions, redemptions, or capital distributions, if any, made during the period decreased by interest or other income, not directly related to trading activity, earned on Program assets during the period, whether the assets are held separately or in margin account. Organizational and Initial Offering Expenses -- All expenses incurred by the Program in connection with and in preparing a Program for registration and subsequently offering and distributing it to the public, including, but not limited to, total underwriting and brokerage discounts and commissions (including fees of the underwriter's attorneys), APPIV-1 expenses for printing, engraving, mailing, salaries of employees while engaged in sales activity, charges of transfer agents, registrars, trustees, escrow holders, depositories, experts, expenses of qualification of the sale of its Program Interest under federal and state law, including taxes and fees, accountants' and attorneys' fees. Participant -- The holder of a Program Interest. Person -- Any natural Person, partnership, corporation, association or other legal entity. Pit Brokerage Fee -- Pit Brokerage Fee shall include floor brokerage, clearing fees, National Futures Association fees, and exchange fees. Program -- A limited partnership, joint venture, corporation, trust or other entity formed and operated for the purpose of investing in Commodity Contracts. Program Broker -- A Commodity Broker that effects trades in Commodity Contracts for the account of a Program. Program Interest -- A limited partnership interest or other security representing ownership in a Program. Pyramiding -- A method of using all or a part of an unrealized profit in a Commodity Contract position to provide margin for any additional Commodity Contracts of the same or related commodities. Sponsor -- Any Person directly or indirectly instrumental in organizing a Program or any Person who will manage or participate in the management of a Program, including a Commodity Broker who pays any portion of the Organizational Expenses of the Program, and the general partner(s) and any other Person who regularly performs or selects the Persons who perform services for the Program. Sponsor does not include wholly independent third parties such as attorneys, accountants, and underwriters whose only compensation is for professional services rendered in connection with the offering of the units. The term "Sponsor" shall be deemed to include its Affiliates. Valuation Date -- The date as of which the Net Assets of the Program are determined. Valuation Period -- A regular period of time between Valuation Dates. APPIV-2 EXHIBIT A ML PRINCIPAL PROTECTION L.P. THIRD AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT Dated as of July 1, 1996 ML PRINCIPAL PROTECTION L.P. THIRD AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT TABLE OF CONTENTS
SECTION PAGE - ------- ---- 1. Formation and Name................................... A-1 2. Principal Office..................................... A-1 3. Business............................................. A-1 4. Term, Dissolution, Fiscal Year and Net Asset Value... A-2 5. Net Worth of General Partner......................... A-3 6. Capital Contributions; Units......................... A-3 7. Allocation of Profits and Losses..................... A-3 (a) Capital Accounts and Allocations................ A-3 (b) Allocation of Profit and Loss for Federal Income Tax Purposes................................... A-4 (c) Adjustments..................................... A-6 (d) Expenses........................................ A-6 (e) Limited Liability of Limited Partners........... A-6 (f) Return of Capital Contributions................. A-6 8. Management of the Partnership........................ A-7 (a) General......................................... A-7 (b) Fiduciary Duties................................ A-8 (c) Loans; Investments.............................. A-8 (d) Certain Conflicts of Interest Prohibited........ A-8 (e) Certain Contracts............................... A-8 (f) Trading Advisors................................ A-8 (g) Other Activities................................ A-9 (h) Tax Matters Partner............................. A-9 (i) The Trading Partnership......................... A-9 (j) "Pyramiding" Prohibited......................... A-9 9. Audits and Reports to Limited Partners............... A-9 10. Assignability of Units............................... A-10 11. Redemptions; Distributions........................... A-11 12. Offering of Units.................................... A-12 13. Additional Offerings................................. A-12 14. Special Power of Attorney............................ A-12 15. Withdrawal of a Partner.............................. A-12 16. Standard of Liability; Indemnification............... A-13 17. Amendments; Meetings................................. A-15 (a) Amendments with Consent of the General Partner.. A-15 (b) Amendments and Actions without Consent of the General Partner................................ A-15 (c) Meetings; Other................................. A-15 18. Governing Law........................................ A-16 19. Miscellaneous........................................ A-16 A-1
ML PRINCIPAL PROTECTION L.P. THIRD AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT This Third Amended and Restated Limited Partnership Agreement (this "Limited Partnership Agreement") is made as of July 1, 1996, by and among MERRILL LYNCH INVESTMENT PARTNERS INC., a Delaware corporation, as general partner (the "General Partner"), and each other party who becomes a party to this Limited Partnership Agreement as a limited partner (individually, a "Limited Partner" or, collectively, the "Limited Partners") (the General Partner and the Limited Partners being collectively referred to herein as "Partners"). WITNESSETH: 1. Formation and Name. The parties hereto do hereby form and continue a limited partnership under the Delaware Revised Uniform Limited Partnership Act, as amended (the "Act"). The name of the limited partnership is ML PRINCIPAL PROTECTION L.P. (the "Partnership"). 2. Principal Office. The address of the principal office of the Partnership shall be c/o the General Partner, Merrill Lynch World Headquarters, 6th Floor, South Tower, World Financial Center, New York, New York 10080-6106; telephone: (212) 236-4167. The address of the registered office of the Partnership in the State of Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, and the name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. 3. Business. The Partnership's business and purpose is to trade, buy, sell or otherwise acquire, hold or dispose of forward and futures contracts for all manner of commodities, financial instruments and currencies, any rights pertaining thereto and any options thereon or on physical commodities, as well as securities and any rights pertaining thereto, and to engage in all activities necessary, convenient or incidental thereto. The Partnership may also engage in "hedge," arbitrage and cash trading of commodities, futures, forwards and options, as well as in yield enhancement and other fixed-income strategies. The objective of the Partnership's business is appreciation of its assets through speculative trading. The Partnership may engage in the foregoing speculative trading directly, through investing in other partnerships and funds and through investing in subsidiary limited partnerships or other limited liability entities structured so that, to the maximum extent permitted by law, Limited Partners can be assured that the assets attributable to one series of units of limited partnership interest ("Units") in the Partnership will never be used to pay losses or expenses attributable to any other series. In particular, it is contemplated that the Partnership shall engage in speculative trading through ML PRINCIPAL PROTECTION PLUS TRADING L.P. (the "Trading Partnership"), of which the General Partner shall be the sole general partner, and the Partnership the sole limited partner. In addition to its trading activities, as described above, the Partnership and the Trading Partnership retain MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM") to implement cash management strategies in -- in MLAM's absolute discretion within investment parameters established by, and the responsibility of, the General Partner -- United States Treasury securities and securities issued by U.S. government agencies and instrumentalities. The Partnership instructs Merrill Lynch Futures Inc., the Trading Partnership's commodity broker, to pay MLAM's fees for such cash management services from the flat-rate brokerage commissions paid by the Trading Partnership to Merrill Lynch Futures Inc., and the General Partner is hereby specifically empowered to (i) retain MLAM to provide cash management advice and services to the Partnership and the Trading Partnership, (ii) arrange for Merrill Lynch Futures Inc. to pay MLAM's fees for such advice and services and (iii) establish investment parameters for MLAM's cash management services for the Partnership and the Trading Partnership. In the event that Merrill Lynch Futures Inc. does not pay MLAM's cash management fees, the General Partner, not the Partnership, shall be responsible for doing so. A-1 The Partnership has been formed in conjunction with a "principal protection" undertaking by Merrill Lynch & Co., Inc. ("ML&Co."), the indirect parent of the General Partner, pursuant to which ML&Co. has agreed to make sufficient payments to the Partnership, to be allocated to the appropriate series of units of limited partnership interest ("Units") in the Partnership, so that the Net Asset Value per Unit of all Units of such series outstanding on such series' Principal Assurance Date, as defined in the Prospectus of the Partnership, as amended and updated from time to time (the "Prospectus"), in each case relating to the public offering of the Units, will equal at least $100. Other than as set forth above, it is specifically intended that the Partnership function in a manner analogous to a "commercial paper issuer" so as to have no operations and incur no debts or obligations whatsoever, except as explicitly set forth herein (including, without limitation, in Section 16(e)). In no event shall the Partnership as a whole, or any series of Units, considered individually, be permitted to operate as an entity which is principally engaged in trading or investing in securities, as opposed to in futures and forward contracts and options thereon. 4. Term, Dissolution, Fiscal Year and Net Asset Value. (a) Term. The term of the Partnership commenced on the day on which the Certificate of Limited Partnership was filed with the Secretary of State of the State of Delaware pursuant to the provisions of the Act and shall end upon the first to occur of the following: (1) December 31, 2024; (2) receipt by the General Partner of an approval to dissolve the Partnership at a specified time by Limited Partners owning Units representing more than fifty percent (50%) of the outstanding Units of each series then owned by Limited Partners, notice of which is sent by certified mail, return receipt requested, to the General Partner not less than ninety (90) days prior to the effective date of such dissolution; (3) the death, insanity, bankruptcy, retirement, resignation, expulsion or dissolution of the General Partner or any other event that causes the General Partner to cease to be a general partner unless (i) at the time of such event there is at least one remaining general partner of the Partnership who carries on the business of the Partnership (and each remaining general partner of the Partnership is hereby authorized to carry on the business of the Partnership in such an event), or (ii) within ninety (90) days after such event all Partners agree in writing to continue the business of the Partnership and to the appointment, effective as of the date of such event, of one or more general partners of the Partnership; (4) a decline in the aggregate Net Assets of the Partnership to less than $250,000; (5) dissolution of the Partnership pursuant hereto; or (6) any other event which shall make it unlawful for the existence of the Partnership to be continued or requires termination of the Partnership. (b) Dissolution. Upon the occurrence of an event causing the dissolution of the Partnership, the Partnership shall be dissolved and terminated. (c) Fiscal Year. The fiscal year of the Partnership shall begin on January 1 of each year and end on the following December 31. (d) Net Asset Value. Net Assets of the Partnership are its assets less its liabilities determined in accordance with generally accepted accounting principles. If an open position cannot be liquidated on the day with respect to which Net Assets are being determined, the settlement price on the first subsequent day on which the contract can be liquidated shall be the basis for determining the liquidating value of such contract for such day, or such other value as the General Partner may deem fair and reasonable. The liquidating value of a commodity futures or option contract not traded on a United States commodity exchange shall mean its liquidating value as determined by the General Partner on a basis consistently applied for each different variety of contract. The Net Asset Value of the Partnership's investment in the Trading Partnership will be valued in accordance with the foregoing principles. The Partnership's accrued but unpaid liability for reimbursement to the General Partner of the Partnership's organizational and initial offering costs shall not reduce Net Asset Value for any purpose, including cal culating brokerage commissions, the Administrative Fees or the redemption value of Units. Reimbursement payments will reduce Net Asset Value (for all such purposes) only as actually paid out in the manner described in the Prospectus. A-2 5. Net Worth of General Partner. The General Partner agrees that at all times so long as it remains general partner of the Partnership, it will maintain its net worth -- determined without reference to the General Partner's interests in the Partnership or any other limited partnership or to any notes or accounts receivable from and payable to any limited partners in which the General Partner has an interest -- at an amount not less than 5% of the total contributions by all partners to the Partnership and all other partnerships of which the General Partner is general partner. The General Partner will not permit its net worth to decline below $10 million without the approving majority vote of each series of Units then owned by Limited Partners. The requirements of the first sentence of the preceding paragraph may be modified if the General Partner obtains an opinion of counsel for the Partnership that a proposed modification will not adversely affect the classification of the Partnership as a partnership for federal income tax purposes, and if such modification will reflect or exceed applicable state securities and Blue Sky laws and qualify under any guidelines or statements of policy promulgated by any body or agency constituted by the various state securities administrators having jurisdiction in the premises. 6. Capital Contributions; Units. The Partners' respective capital contributions to the Partnership shall be as shown on the books and records of the Partnership. The General Partner shall invest in the Partnership, as a general partner interest, no less than 1% of the total contributions to the Partnership (including the General Partner's contribution) made with respect to each series of Units issued by the Partnership. The General Partner, so long as it is a general partner of the Partnership, or any substitute general partner, shall maintain a minimum investment of 1% of the outstanding contributions to the Partnership with respect to each series of Units. The General Partner need not maintain an equal percentage investment in each series, but must maintain at least a 1% investment in each. The General Partner may withdraw any interest it may have as a general partner in excess of the foregoing requirement, and may redeem any Units of any series which it may acquire as of any month-end on the same terms as any Limited Partner, provided that the General Partner must, at all times while it is the sole general partner of the Partnership, maintain the minimum 1% interest in each series of Units described in the preceding sentence. Units of any series acquired by the General Partner or any of its affiliates will be non-voting, and will not be considered outstanding for purposes of determining whether the majority approval of the outstanding Units of such series has been obtained. 7. Allocation of Profits and Losses. (a) Capital Accounts and Allocations. A capital account shall be established for each series of Units sold by the Partnership and, within each such series a capital account shall be established for each Unit of such series as well as for the General Partner's interest in such series on a Unit-equivalent basis. The initial balance of each series' and of each Unit's capital account shall be the amount contributed to the Partnership with respect to such series or Unit. As of the close of business (as determined by the General Partner) on the last day of each month, (i) any increase or decrease in the value of the Partnership's U.S. Treasury and federal government agency or instrumentality securities and short-term foreign sovereign debt instruments, as well as any increase or decrease in the Partnership's cash (other than as a result of distributions, redemptions or payments described in the following paragraphs of this Section 7(a)), plus (ii) any increase or decrease in the Net Asset Value of the Partnership's capital account in the Trading Partnership attributable to capital (a) invested in the Trading Partnership or (b) committed to the Trading Partnership by the Partnership pursuant to Section 16(e), shall be allocated among the series, in the case of (i) above, pro rata based on the relative amounts of assets (without regard to accrued but unpaid brokerage commissions, Administrative Fees or Profit Shares) attributable to each series as of the close of business on the last day of the immediately preceding month (after deducting amounts payable as a result of the redemption of Units as of the last day of such immediately preceding month) and, in the case of (ii) above, pro rata based on the relative amounts set forth in (ii)(a) and (b) with respect to each series as of the close of business on the last day of the immediately preceding month (after deducting amounts payable as a result of the redemption of Units as of the last day of such immediately preceding month). A-3 The capital accounts of each series of Units shall be reduced by the amount of any distributions, redemption payments and related redemption charges paid out with respect to such series. Any Profit Share payments made by the Partnership shall be allocated among the series based upon the Profit Shares that would have been paid by the Partnership for the relevant period if the Partnership's only assets during such period had been those of the appropriate series. Any reimbursement of organizational and initial offering costs made pursuant to Section 7(d) as of the last day of any given month shall be allocated among the series based on the relative net asset value (without regard to accrued but unpaid brokerage commissions, Administrative Fees or Profit Shares) of each series as of the last day of the immediately preceding month (after deducting amounts payable as a result of the redemption of Units on the last day of such immediately preceding month). Any payments made under the Merrill Lynch & Co., Inc. guarantee of the minimum Net Asset Value per Unit of each series, as of the "Principal Assurance Date," as defined in the Prospectus, for such series and any indemnity payments by the General Partner pursuant to Section 16(d) hereof shall be allocated to the appropriate series. The amounts allocated to a series shall be allocated equally among the Units of such series outstanding as of the last day of such month (including Units redeemed as of such day), except that redemption payments, related redemption charges and Profit Shares payable upon the redemption of Units as of a date other than the last day of a calendar quarter shall be allocated solely to the redeemed Units. For purposes of maintaining capital accounts, amounts paid or payable to the General Partner for items such as reimbursement of organizational and initial offering costs and service fees shall be treated as if paid or payable to a third party and, except for the General Partner's pro rata share of such amounts, shall not affect the capital account of the interest held by the General Partner. (b) Allocation of Profit and Loss for Federal Income Tax Purposes. As of the end of each fiscal year, the Partnership's income, expense, Capital Gain and Capital Loss shall be allocated among the series of Units, and among the Partners of each such series, pursuant to the following subparagraphs for federal income tax purposes. Such allocations shall, as among the series and as among Partners holding the same series, be pro rata from the short-term Capital Gain and Capital Loss and long- term Capital Gain and Capital Loss of the Partnership or allocated to such series, as the case may be. For purposes of this Section 7(b), Capital Gain and Capital Loss shall be allocated separately and not netted. (1) Income, expense, Capital Gain and Capital Loss shall be allocated to each series of Units in the same manner that the financial allocations are made to each such series as provided in Section 7(a). The following allocations relate to the allocations of income, expense, Capital Gain and Capital Loss among the Partners holding Units of the same series. (2) First, the series' share of the items of ordinary income and expense (other than Profit Shares, which shall be allocated as set forth in Section 7(b)(3)) and of any Capital Gain and Capital Loss that is not attributable to the activities of the Trading Partnership shall be allocated equally among the Units of such series outstanding as of the end of each month in which such items accrue. (3) Second, the series' share of any Profit Share paid to the Advisors for any calendar quarter with respect to Units redeemed as of a date other than the last day of such calendar quarter shall be allocated to such Units based upon the Profit Share that was taken into account in determining the Net Asset Value of such Units as of their redemption date, and the series' share of any additional Profit Share paid to the Advisors for such calendar quarter shall be allocated equally among the Units outstanding at the end of such calendar quarter. (4) Third, the series' share of the Capital Gain and Capital Loss attributable to the activities of the Trading Partnership ("Trading Capital Gain" or "Trading Capital Loss") shall be allocated as follows: A-4 (A) There shall be established a tax account with respect to each outstanding Unit of such series. The initial balance of such tax account shall be the amount contributed to the Partnership for such Unit. For each of the first 36 months of the Partnership's operations, the balance of such tax account shall be reduced by the Unit's allocable share of the series' share of the amount payable as of the end of such month by the Partnership to the General Partner in respect of the reimbursement of organizational and initial offering costs, as described in the Prospectus. The adjustment to reflect the reimbursement of organizational and initial offering costs shall be made prior to the allocations of Trading Capital Gain and Trading Capital Loss (and shall be taken into account in making such allocations). As of the end of each fiscal year: (i) Each tax account shall be increased by the amount of income allocated to such Unit pursuant to Sections 7(b)(2) and 7(b)(4)(C). (ii) Each tax account shall be decreased by the amount of expense or loss allocated to such Unit pursuant to Sections 7(b)(2), 7(b)(3) and 7(b)(4)(E) and by the amount of any distributions paid out with respect to such Unit other than upon redemption. (iii) When a Unit is redeemed, the tax account attributable to such Unit (determined after making all allocations described in this Section 7(b)) shall be eliminated. (B) Each Partner who redeems Units of a given series (including Units redeemed as of the end of the last day of such fiscal year) shall be allocated such series' share of Trading Capital Gain, if any, up to the amount of the excess, if any, of the aggregate amount received in respect of such Units (before taking into account any early redemption charges) over the aggregate tax accounts for such Partner's redeemed Units (determined after making the allocations described in Sections 7(b)(2) and 7(b)(3), but prior to making the allocations described in this Section 7(b)(4)(B)) allocable to such Units (a "Positive Excess"). In the event the series' share of Trading Capital Gain is less than the aggregate amount of Trading Capital Gain to be allocated pursuant to the first sentence of this Section 7(b)(4)(B), the series' share of Trading Capital Gain shall be allocated among all such redeeming Partners in the ratio which each such Partner's Positive Excess bears to the aggregate Positive Excess of all such Partners. (C) The series' share of Trading Capital Gain remaining after the allocation described in Section 7(b)(4)(B) shall be allocated among all Partners who hold Units in such series outstanding as of the end of the applicable fiscal year (other than Units redeemed as of the end of the last day of such fiscal year) equally among such Units. (D) Each Partner who redeems Units of a given series (including Units redeemed as of the end of the last day of such fiscal year) shall be allocated such series' share of Trading Capital Loss, if any, up to the excess of the aggregate tax accounts for such Partner's redeemed Units (determined after making the allocations described in Sections 7(b)(2) and 7(b)(3), but prior to making the allocations described in this Section 7(b)(4)(D)) over the aggregate amount received in respect of such Units (before taking into account any early redemption charges) (a "Negative Excess"). In the event the series' share of Trading Capital Loss is less than the aggregate amount of Trading Capital Loss to be allocated pursuant to the first sentence of this Section 7(b)(4)(D), the series' share of Trading Capital Loss shall be allocated among all such redeeming Partners in the ratio that each such Partner's Negative Excess bears to the aggregate Negative Excess of all such Partners. (E) The series' share of Trading Capital Loss remaining after the allocation described in Section 7(b)(4)(D) shall be allocated among all Partners who hold Units in such series outstanding as of the end of the applicable fiscal year (other than Units redeemed as of the end of the last day of such fiscal year) equally among such Units. (F) For purposes of this Section 7(b), "Capital Gain" or "Capital Loss" shall mean gain or loss characterized as gain or loss from the sale or exchange of a capital asset, by the Internal Revenue Code of 1986, as amended (the "Code"), including, but not limited to, gain or loss required to be taken into account pursuant to Sections 988 and 1256 thereof. (G) The foregoing allocations shall be made separately in respect of each series of Units as if each such series constituted a separate partnership, irrespective of whether the same Partner owns Units of more than A-5 one series. Without limiting the foregoing, Limited Partners who redeem their Unit(s) in one series and invest in another shall be treated no differently than Limited Partners making their initial investment in the latter series. (5) The allocation of profit and loss for federal income tax purposes set forth herein is intended to allocate taxable profit and loss among Partners generally in the ratio and to the extent that profit and loss are allocated to such Partners so as to eliminate, to the extent possible, any disparity between a Partner's capital account and his tax account, consistent with principles set forth in Section 704 of the Code, including, without limitation, a "Qualified Income Offset." (6) The allocations of profit and loss to the Partners in respect of the Units shall not exceed the allocations permitted under Subchapter K of the Code, as determined by the General Partner, whose determination shall be binding. For purposes of this Section 7(b), unless specified to the contrary, Units redeemed as of the end of any month shall be considered outstanding as of the end of such month. (c) Adjustments. The General Partner may adjust the allocations set forth in Section 7(b), in the General Partner's discretion, if the General Partner believes that doing so will achieve more equitable allocations or allocations more consistent with the Code. (d) Expenses. The General Partner has paid $239,100 incurred as organizational and initial offering costs in connection with the initial public offering of Units, for which the General Partner is being reimbursed by the Partnership in equal monthly installments of $6,642 through October 31, 1997, as described in the Prospectus; provided that in the event that the Partnership dissolves at any time prior to the end of such 36-month period, any remaining reimbursement obligation of the Partnership to the General Partner shall be extinguished. The General Partner shall not be paid interest on any funds advanced for organizational and initial offering costs. The General Partner shall pay, without reimbursement, the selling commissions and ongoing compensation relating to the offering of the Units. The Partnership shall not itself pay any advisory fees due to MLAM or any other manager providing cash management services to the Partnership. All such fees shall be paid by Merrill Lynch Futures Inc., or, if Merrill Lynch Futures Inc. does not do so, by the General Partner. The Partnership shall bear all of any taxes applicable to it. The Partnership shall pay to the General Partner Administrative Fees as described in the Prospectus, and the General Partner shall pay all of the Partnership's routine legal, accounting and administrative expenses. None of the General Partner's "overhead" expenses incurred in connection with the administration of the Partnership (includ ing, but not limited to, salaries, rent and travel expenses) will be charged to the Partnership. Any goods and services provided to the Partnership by the General Partner shall be provided at rates and terms at least as favorable as those which may be obtained from third parties in arm's-length negotiations. All of the expenses which are for the Partnership's account shall be billed directly to the Partnership. Appropriate reserves may be created, accrued and charged against Net Assets for contingent liabilities, if any, as of the date any such contingent liability becomes known to the General Partner. Such reserves shall reduce Net Asset Value for all purposes. Reserves may, in circumstances in which the General Partner believes it to be appropriate to do so, be established in respect of one or more but less than all series of Units. (e) Limited Liability of Limited Partners. Each Unit, when purchased in accordance with this Limited Partnership Agreement, shall, except as otherwise provided by law, be fully paid and nonassessable. Any provisions of this Limited Partnership Agreement to the contrary notwithstanding, except as otherwise provided by law, no Limited Partner shall be liable for Partnership obligations in excess of the capital contributed by such Limited Partner, plus his share of undistributed profits and assets. (f) Return of Capital Contributions. No Partner or subsequent assignee shall have any right to demand the return of his capital contribution or any profits added thereto, except through redeeming Units as provided in Section 11(a) or upon dissolution of the Partnership, in each case as provided herein. In no event shall a Partner or subsequent assignee be entitled to demand or receive any property from the Partnership other than cash. A-6 8. Management of the Partnership. (a) General. The General Partner, to the exclusion of all Limited Partners, shall control, conduct and manage the business of the Partnership as well as of the Trading Partnership, and have full authority to retain brokers, dealers, advisors, cash management advisors and other service providers on their behalf. The General Partner shall execute various documents on behalf of the Partnership and the Partners pursuant to powers of attorney and supervise the liquidation of the Partnership if an event causing dissolution of the Partnership occurs. The General Partner may in furtherance of the business of the Partnership cause the Partnership to buy, sell, hold or otherwise acquire or dispose of commodities, futures contracts and options traded on exchanges or otherwise, arbitrage positions, repurchase agreements, debt securities, deposit accounts and similar instruments and other assets, as well as cause the Partnership's trading to be limited to only certain of the foregoing instruments. The General Partner is specifically authorized to enter into, on behalf of the Partnership and the Trading Partnership, (A) the Investment Advisory Contract with MLAM, whereby it is contemplated that MLAM will manage the available assets of the Partnership and the Trading Partnership pursuant to the investment parameters established by the General Partner (in its capacity as respective general partner of each of the Partnership and Trading Partnership), and the Customer Agreement with Merrill Lynch Futures Inc., which will receive futures brokerage commissions from the Trading Partnership, and will pay MLAM's cash management fees for services rendered to the Partnership and the Trading Partnership as described in the Prospectus, and (B) "offset account" arrangements as described in the Prospectus. Effective January 1, 1996, a portion of the Partnership's brokerage commissions, in the amount of 0.25 of 1% per annum of the Partnership's average month-end assets committed to trading, has been recharacterized as Administrative Fees payable directly to the General Partner -- the Partnership hereby agreeing to make such payments -- and, accordingly, the Partnership's brokerage commissions has been correspondingly reduced from 9.5% to 9.25% of the Partnership's average month-end assets committed to trading. The General Partner may engage, and compensate on behalf of the Partnership from funds of the Partnership, or agree to share profits and losses with, such persons, firms or corporations, including (except as described in this Limited Partnership Agreement) the General Partner and any affiliated person or entity, as the General Partner in its sole judgment shall deem advisable for the conduct and operation of the business of the Partnership; provided, that no such arrangement shall allow brokerage commissions paid by the Partnership in excess of the amount described in the Prospectus or as permitted under applicable North American Securities Administrators Association, Inc. Guidelines for the Registration of Commodity Pool Programs (the "NASAA Guidelines") in effect as of the date of the Prospectus (i.e., 80% of the published retail rate plus pit brokerage fees, or 14% annually -- including pit brokerage and F/X Desk service fees -- of average Partnership Net Assets, excluding Partnership Net Assets not directly related to trading activity), whichever is higher. The General Partner is hereby specifically authorized to enter into, on behalf of the Partnership and/or the Trading Partnership, the Advisory Agreements, the Investment Advisory Contract, the Guarantee Agreement and the Selling Agreement as referred to in the Prospectus. The Partnership's brokerage commissions will not be increased during the period in which redemption charges are in effect with respect to any series of Units, unless such charges are waived or the series to which redemption charges are still applicable are not subject to such increase. The Partnership's brokerage commissions may not be increased without prior written notice to Limited Partners within sufficient time for the exercise of their redemption rights. Such notification shall contain a description of Limited Partners' voting and redemption rights and a description of any material effect of such increases. The Partnership's brokerage commissions and Administrative Fees, taken together, may not be increased above an annual level of 9.5% of the average month-end assets committed to trading without the unanimous consent of all Limited Partners. The General Partner may at any time and without the consent of any Partners of the Partnership admit persons acquiring any series of Units as Limited Partners of the Partnership. The General Partner may take such other actions on behalf of the Partnership as it deems necessary or desirable to manage the business of the Partnership, including without limitation all actions in connection with the future issuance of Units of different series. In addition to any specific contract or agreement described herein, the Partnership, either directly through the Trading Partnership or together with the Trading Partnership, may enter into any other contracts or agreements specifically described in or contemplated by the Prospectus without any further act, approval or vote of the Limited Partners, notwithstanding any other provisions of this Limited Partnership Agreement, the Act or any applicable law, rule or regulations. A-7 (b) Fiduciary Duties. The General Partner shall be under a fiduciary duty to conduct the affairs of the Partnership in the best interests of the Partnership. The Limited Partners will under no circumstances be deemed to have contracted away the fiduciary obligations owed them by the General Partner under the common law. The General Partner's fiduciary duty includes, among other things, the safekeeping of all Partnership funds and assets and the use thereof for the benefit of the Partnership. The General Partner shall at all times act with integrity and good faith and exercise due diligence in all activities relating to the conduct of the business of the Partnership and in resolving conflicts of interest. The Partnership's brokerage arrangements shall be non-exclusive, and the brokerage commissions paid by the Partnership shall be competitive. The Partnership shall seek the best price and services available for its commodity transactions. (c) Loans; Investments. The Partnership shall make no loans to any party, and the funds of the Partnership will not be commingled with the funds of any other person or entity (deposit of funds with a commodity broker, securities dealer, clearinghouse or forward dealer or entering into joint ventures or partnerships shall not be deemed to constitute "commingling" for these purposes). The General Partner shall make no loans to the Partnership unless approved by the Limited Partners in accordance with Section 17(a) of this Limited Partnership Agreement. If the General Partner makes a loan to the Partnership, the General Partner shall not receive interest in excess of its interest costs, nor may the General Partner receive interest in excess of the amounts which would be charged the Partnership (without reference to the General Partner's financial resources or guarantees) by unrelated banks on comparable loans for the same purpose. The General Partner shall not receive "points" or other financing charges or fees regardless of the amount. The Partnership shall not invest in any debt instruments other than Treasury securities, securities issued by U.S. government agencies or instrumentalities, other CFTC-authorized investments and foreign sovereign debt instruments acquired in connection with the Trading Partnership's trading of foreign futures and options, and shall not invest in any equity security (other than as a limited partner in the Trading Partnership) without prior notice to all Limited Partners. (d) Certain Conflicts of Interest Prohibited. No person or entity may receive, directly or indirectly, any advisory, management or incentive fees, or any profit-sharing allocation from joint ventures, partnerships or similar arrangements in which the Partnership participates, for investment advice or management, who shares or participates in any commodity brokerage commissions; no broker may pay, directly or indirectly, rebates or give-ups to any trading advisor or manager or to the General Partner or any of their respective affiliates; and such prohibitions may not be circumvented by any reciprocal business arrangements. No trading advisor for the Partnership shall be affiliated with Merrill Lynch Futures Inc., the General Partner or any of their respective affiliates (this prohibition shall not preclude (i) the General Partner retaining a manager for which the General Partner provides administrative services or (ii) MLAM from providing cash management services to the Partnership, provided that MLAM's fees are paid either by Merrill Lynch Futures Inc. or by the General Partner, and that MLAM does not execute transactions for the account of either the Partnership or the Trading Partnership through any Merrill Lynch affiliate). (e) Certain Contracts. The maximum period covered by any contract entered into by the Partnership, except for the various provisions of the Selling Agreement which survive the closing of the sale of the Units, shall not exceed one year. Any agreements between the Partnership and the General Partner or any affiliate of the General Partner shall be terminable by the Partnership upon no more than 60 days' written notice. All sales of Units in the United States will be conducted by registered brokers. (f) Trading Advisors. All trading advisors for the Partnership must meet the NASAA Guidelines' minimum experience requirement. The General Partner shall reimburse the Partnership for any advisory or other fees (including Profit Shares) paid by the Partnership to any trading advisor over the course of any fiscal year, to the extent that such fees exceed the 6% annual management fees and the 15% quarterly incentive fees (calculating New Trading Profit, as defined in the Prospectus, after all expenses and without including interest income or any yield enhancement return) contemplated by the NASAA Guidelines during such year. Any such reimbursement shall be made on a present value basis, fully compensating the Partnership for having made payments at any time during the year which would not otherwise have been due from it. The General Partner shall disclose any such reimbursement in the next Annual Report delivered to Limited Partners. A-8 (g) Other Activities. The General Partner is engaged, and may in the future engage, in other business activities and shall not be required to refrain from any other activity nor forego any profits from any such activity, whether or not in competition with the Partnership. Limited Partners may similarly engage in any such other business activities. The General Partner shall devote to the Partnership such time as the General Partner may deem advisable to conduct the Partnership's business and affairs. (h) Tax Matters Partner. The General Partner is hereby authorized to perform all other duties imposed by Sections 6221 through 6232 of the Code on the General Partner as the "tax matters partner" of the Partnership. (i) The Trading Partnership. The General Partner shall not permit the Partnership to undertake any debts or obligations other than as set forth herein, including without limitation pursuant to Section 16(e). The General Partner further covenants and agrees that as general partner of the Trading Partnership, the General Partner will not permit the Trading Partnership (A) to engage in any activities or incur any obligations except in respect of the Trading Partnership's speculative futures and forward trading on behalf of the Partnership or (B) to enter into any brokerage, F/X or other agreement or undertaking, unless all other parties to such agreement explicitly acknowledge and agree that (i) they will in no event seek to assert, other than pursuant to and to the extent of the Partnership's undertaking set forth in Section 16(e), that the Partnership or any of its assets is in any respects subject to any debts of or claims against the Trading Partnership, either through "piercing the corporate veil," "substantive consolidation" or any other theory, and (ii) they will take no action and institute no action or proceeding seeking to adjudicate the Trading Partnership a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for the Trading Partnership or for any substantial part of its property. The General Partner shall ensure that (i) the Partnership is at all times the sole limited partner of the Trading Partnership and (ii) the General Partner is at all times the sole general partner of the Trading Partnership and at all times controls the Trading Partnership, by virtue of the Partnership's equity ownership of the Trading Partnership and the General Partner's serving as sole general partner of both the Partnership and the Trading Partnership -- the intent of the parties being that the Trading Partnership should function solely as a conduit for the Partnership's own trading activities and not as any form of investment by the Partnership. The General Partner, as general partner of the Trading Partnership, will cause the Trading Partnership to comply with all provisions of the NASAA Guidelines. The General Partner is, by way of greater certainty and not by way of limitation, specifically authorized as general partner of the Partnership and the Trading Partnership to retain the General Partner's affiliate, MLAM, to provide cash management services to the Partnership and the Trading Partnership and to instruct and authorize Merrill Lynch Futures Inc. to pay the cash management fees due to MLAM from the futures brokerage commissions received by Merrill Lynch Futures Inc. from the Trading Partnership. In the event that Merrill Lynch Futures Inc. does not pay MLAM's fees, the General Partner will do so without reimbursement from either the Partnership or the Trading Partnership. (j) "Pyramiding" Prohibited. The Partnership is prohibited from employing the trading technique commonly known as "pyramiding," and will not permit the Trading Partnership to employ any such technique. A trading manager or advisor of the Partnership taking into account the Partnership's open trade equity on existing positions in determining generally whether to acquire additional commodity positions on behalf of the Partnership will not be considered to constitute "pyramiding." 9. Audits and Reports to Limited Partners. The Partnership books shall be audited annually by an independent certified public accountant. The Partnership will use its best efforts to cause each Limited Partner to receive (i) within ninety (90), but in no event later than one hundred twenty (120), days after the close of each fiscal year certified financial statements of the Partnership for the fiscal year then ended, (ii) within ninety (90) days of the end of each fiscal year (but in no event later than March 15 of each year) such tax information relating to the Partnership as is necessary for a Limited Partner to complete his federal income tax return and (iii) such other annual and monthly information as the Commodity Futures Trading A-9 Commission may by regulation require. The General Partner shall include in the annual reports sent to Limited Partners an approximate estimate (calculated as accurately as may be reasonably practicable) of the round-turn equivalent brokerage commission rate paid by the Trading Partnership during the preceding year. Limited Partners or their duly authorized representatives may inspect the Partnership books and records for any purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership during normal business hours upon reasonable written notice to the General Partner. Copies of such records may be made upon payment of reasonable reproduction costs for any purpose reasonably related to such Limited Partner's interest as a limited partner in the Partnership and, upon request, shall be sent to any Limited Partner upon payment of reasonable reproduction and mailing costs. The General Partner shall calculate the approximate Net Asset Value per Unit of each series on a daily basis and furnish such information upon request to any Limited Partner. The General Partner will send written notice to each Limited Partner within seven (7) days of any decline in the aggregate Net Asset Value attributable to any series of Units held by such Limited Partner or in the Net Asset Value per Unit of any such series to 50% or less of such Net Asset Value as of the previous month-end. Any such notice shall contain a description of Limited Partners' voting rights. The General Partner shall maintain and preserve all Partnership records for a period of not less than six (6) years. Not by way of qualifying the General Partner's obligations under Section 8(a) to ensure that the Partnership's brokerage commissions are competitive, but rather as a means of providing additional information to the Limited Partners, the General Partner will, with the assistance of the Partnership's commodity broker, make an annual review of the commodity brokerage arrangements applicable to the Partnership (including the commodity brokerage arrangements applicable to any subsidiary entity, such as the Trading Partnership, through which the Partnership trades). In connection with such review, the General Partner will ascertain, to the extent practicable, the commodity brokerage rates charged to other major commodity pools whose trading and operations are, in the opinion of the General Partner, comparable to those of the Partnership in order to assess whether the rates charged the Partnership are competitive in light of the services it receives. If, as a result of such review, the General Partner determines that such rates are not competitive in light of the services provided to the Partnership, the General Partner will notify the Limited Partners, setting forth the rates charged to the Partnership and several funds which are, in the General Partner's opinion, comparable to the Partnership. The General Partner shall also conduct a similar review of the Partnership's forward trading arrangements. In addition to the undertakings in the preceding paragraph, the Partnership will seek the best price and services available in its commodity brokerage transactions. All brokerage transactions will be effected at competitive rates. Brokerage fees may not exceed the cap in Section 8(a). The General Partner will annually review rates to guarantee that the criteria of this paragraph is followed. The General Partner may not rely solely on the rates charged by other major commodity pools to make its determinations. 10. Assignability of Units. Each Limited Partner expressly agrees that he will not assign, transfer or dispose of, by gift or otherwise, any of his Units or all or any part of his right, title and interest in the capital or profits of the Partnership in violation of any applicable federal or state securities laws or without giving written notice to the General Partner. No assignment, transfer or disposition by an assignee of Units or of all or any part of his right, title and interest in the capital or profits of the Partnership shall be effective against the Partnership or the General Partner until the General Partner receives written notice of the assignment; and the General Partner shall not be required to give any assignee any rights hereunder prior to receipt of such notice. The General Partner may, in its sole discretion, waive any such notice. No such assignee, except with the consent of the General Partner, which consent may be withheld in its sole and absolute discretion, may become a substituted Limited Partner, nor will the estate or any beneficiary of a deceased Limited Partner or assignee have any right to withdraw or receive assets from the Partnership except by redemption as provided in Section 11(a) or upon dissolution of the Partnership. Each Limited Partner agrees that with the consent of the General Partner any assignee may become a substituted Limited Partner without need of any further act or approval of any Limited Partner. If the General Partner withholds consent, an assignee shall not become a substituted Limited Partner, A-10 and shall not have any of the rights of a Limited Partner, except that the assignee shall be entitled to receive that share of capital and profits and shall have that right of redemption and those rights upon dissolution to which his assignor would otherwise have been entitled. No assignment, transfer or disposition of Units shall be effective against the Partnership or the General Partner until the first day of the month succeeding the month in which the General Partner receives notice of such assignment, transfer or disposition. 11. Redemptions; Distributions. A Limited Partner, the General Partner to the extent that it owns Units or any assignee of Units of whom the General Partner has received written notice as described above, may redeem all or any of his Units (a "redemption"), effective as of the close of business (as determined by the General Partner) on the last business day of any month, provided, that (i) all liabilities, contingent or otherwise, of the Partnership (including the Partnership's allocable share of the liabilities, contingent or otherwise, of any entities, such as the Trading Partnership, in which the Partnership invests), except any liability to Partners on account of their capital contributions, have been paid or there remains property of the Partnership sufficient to pay them and (ii) the General Partner shall have timely received a request for redemption. Units redeemed on or before the end of the twelfth full month after they are issued are subject to redemption charges of 3% of the Net Asset Value at which they are redeemed. Such charges shall be paid to the General Partner. Redemption charges shall not apply to distributions. Requests for redemption must be received by the General Partner at least ten (10) calendar days, or such lesser period as shall be acceptable to the General Partner, in advance of the requested effective date of redemption. Such requests need not be in writing so long as the Limited Partner has a Merrill Lynch customer securities account. If a redeeming Limited Partner no longer has a Merrill Lynch customer securities account, requests for redemption must be submitted in writing and with the signature guaranteed (not notarized; guaranteed) by a member firm of the National Association of Securities Dealers, Inc. The General Partner may waive any of the foregoing charges or restrictions on redemptions in the General Partner's discretion, and may declare additional redemption dates upon notice to the Limited Partners as well as to those assignees of whom the General Partner has received notice as described above. Payment will be made within ten (10) business days after the month-end of redemption, except that under special circumstances, including, but not limited to, inability to liquidate commodity positions as of a redemption date or default or delay in payments due the Trading Partnership or the Partnership from commodity brokers, banks or other persons or entities, the Partnership may in turn delay payment to Partners or assignees requesting redemption of their Units of the proportionate part of the Net Asset Value of such Units equal to the proportionate part of the Partnership's aggregate Net Asset Value allocable to all series of Units being redeemed, and represented by the sums which are the subject of such default or delay. The General Partner may require a Limited Partner to redeem all or a portion of such Partner's Units if the General Partner considers doing so to be desirable for the protection of the Partnership, and will do so to the extent the General Partner deems appropriate or necessary to prevent the Partnership or any series of Units considered individually from being deemed to hold "plan assets" within the meaning of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or the Code, with respect to any "employee benefit plan" as defined in and subject to ERISA or with respect to any "plan" as defined in Section 4975 of the Code. The General Partner may, in its discretion, establish "Special Redemption Dates" in respect of one or more series of Units as a means of implementing "stop loss" or similar policies. "Special Redemption Dates" may require the suspension of all trading and the liquidation of all open positions held with respect to such series. The General Partner may -- but shall be under no obligation whatsoever (and does not presently intend) to -- make any distributions in respect of the Units. Any such distributions would be made pro rata to all outstanding series of Units and would not reduce the $100 minimum Net Asset Value per Unit guaranteed to investors as of the Principal Assurance Date for their series of Units, as described in the Prospectus. A-11 12. Offering of Units. The General Partner on behalf of the Partnership shall (i) cause to be filed such Prospectus Supplements and amended Registration Statements as the General Partner may deem advisable, with the Securities and Exchange Commission for the registration and public offering of Units, (ii) use its best efforts to maintain the qualification of the Units for sale under the securities laws of such States of the United States or other jurisdictions as the General Partner shall deem advisable and (iii) take such action with respect to the matters described in (i) and (ii) as the General Partner shall deem advisable or necessary. The General Partner shall not accept any subscriptions for Units if doing so would cause the Partnership, or any series of Units considered individually, to have "plan assets" status under ERISA. If an ERISA subscriber has its subscription reduced in order to avoid "plan assets" status, such subscriber shall be entitled to rescind its subscription in its entirety even though subscriptions are otherwise irrevocable. 13. Additional Offerings. The General Partner may, in its discretion, continue the ongoing offering of Units contemplated by the Prospectus as well as make additional public or private offerings of Units, provided that doing so does not dilute existing Limited Partners' economic interest in the Partnership. No Limited Partner shall have any preemptive, preferential or other rights with respect to the issuance or sale of any additional Units, other than as set forth in the preceding sentence. The General Partner intends to offer series of Units for sale as of the beginning of each calendar quarter, subject to the General Partner's absolute right to terminate the offering at any time, in the General Partner's discretion, and to the minimum investment and minimum capitalization requirements set forth in the Prospectus; provided that, unless otherwise expressly required by law, the assets attributable to each such series shall under no circumstances be subject to being used in any respect to satisfy or discharge any debt or obligation of any other such series. Each additional series of Units issued hereunder must comply with the NASAA Guidelines in the same manner and to the same extent as the initial series of Units issued hereunder. 14. Special Power of Attorney. Each Limited Partner by his execution of this Limited Partnership Agreement does hereby irrevocably constitute and appoint the General Partner and each officer of the General Partner, with power of substitution, as his true and lawful attorney-in-fact, in his name, place and stead, to execute, acknowledge, swear to (and deliver as may be appropriate) on his behalf and file and record in the appropriate public offices and publish (as may in the reasonable judgment of the General Partner be required by law): (i) this Limited Partnership Agreement, including any amendments and/or restatements hereto duly adopted as provided herein; (ii) certificates of limited partnership in various jurisdictions, and amendments and/or restatements thereto, and of assumed name or of doing business under a fictitious name with respect to the Partnership; (iii) all conveyances and other instruments which the General Partner deems appropriate to qualify or continue the Partnership in the State of Delaware and the jurisdictions in which the Partnership may conduct business, or which may be required to be filed by the Partnership or the Partners under the laws of any jurisdiction or under any amendments or successor statutes to the Act, to reflect the dissolution or termination of the Partnership or the Partnership being governed by any amendments or successor statutes to the Act or to reorganize or refile the Partnership in a different jurisdiction; and (iv) to file, prosecute, defend, settle or compromise litigation, claims or arbitrations on behalf of the Partnership. The Power of Attorney granted herein shall be irrevocable, deemed to be a power coupled with an interest (including, without limitation, the interest of the other Partners in the General Partner being able to rely on the General Partner's authority to act as contemplated by this Section 14) and shall survive and shall not be affected by the subsequent incapacity, disability or death of a Limited Partner. 15. Withdrawal of a Partner. The Partnership shall be dissolved upon the withdrawal, dissolution, admitted or court-decreed insolvency or removal of the General Partner, or any other event that causes the General Partner to cease to be a general A-12 partner under the Act, unless the Partnership is continued pursuant to the terms of Section 4. In addition, the General Partner may withdraw from the Partnership, without any breach of this Limited Partnership Agreement, at any time upon one hundred and twenty (120) days' written notice by first class mail, postage prepaid, to each Limited Partner and assignee of whom the General Partner has notice. If the General Partner withdraws as general partner and the Partnership's business is continued, the withdrawing General Partner shall pay all expenses incurred as a result of its withdrawal. The General Partner may not assign its general partner interest or its obligation to direct the management or trading of the Partnership's or the Trading Partnership's assets without the consent of each Limited Partner. The General Partner will notify all Limited Partners of any change in the principals of the General Partner. The death, incompetency, withdrawal, insolvency or dissolution of a Limited Partner or any other event that causes a Limited Partner to cease to be a limited partner of the Partnership shall not terminate or dissolve the Partnership, and a Limited Partner, his estate, custodian or personal representative shall have no right to redeem, receive proceeds from or value such Limited Partner's interest in the Partnership except as provided in Sections 11(a) and 11(b) hereof and upon dissolution of the Partnership. Each Limited Partner expressly agrees that in the event of his death, he waives on behalf of himself and his estate, and directs the legal representatives of his estate and any person interested therein to waive, the furnishing of any inventory, accounting or appraisal of the assets of the Partnership and any right to an audit or examination of the books of the Partnership. Nothing in this Section 15 shall, however, waive any right given elsewhere in this Limited Partnership Agreement for a Limited Partner to be informed of the Net Asset Value of his Units, to receive periodic reports, audited financial statements and other information from the General Partner or the Partnership or to redeem or transfer Units. 16. Standard of Liability; Indemnification. (a) Standard of Liability for the General Partner. The General Partner and its Affiliates, as defined below, shall have no liability to the Partnership or to any Partner for any loss suffered by the Partnership which arises out of any action or inaction of the General Partner or its Affiliates if the General Partner or such Affiliates, in good faith, determined that such course of conduct was in the best interests of the Partnership, and such course of conduct did not constitute negligence or misconduct by the General Partner or its Affiliates. (b) Indemnification of the General Partner by the Partnership. To the fullest extent permitted by law, subject to this Section 16, the General Partner and its Affiliates, shall be indemnified by the Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Partnership; provided that such claims were not the result of negligence or misconduct on the part of the General Partner or its Affiliates, and the General Partner or such Affiliates, in good faith, determined that such conduct was in the best interests of the Partnership; and provided further that Affiliates of the General Partner shall be entitled to indemnification only for losses incurred by such Affiliates in performing the duties of the General Partner and acting wholly within the scope of the authority of the General Partner. Notwithstanding anything to the contrary contained in the preceding two paragraphs, the General Partner and its Affiliates and any persons acting as selling agent for the Units shall not be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws unless (1) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee and the court approves indemnification of the litigation costs, or (2) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee and the court approves indemnification of the litigation costs, or (3) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made. In any claim for indemnification for federal or state securities law violations, the party seeking indemnification shall place before the court the position of the Securities and Exchange Commission, the Massachusetts Securities Division, the Pennsylvania Securities Commission, the Tennessee Securities Division, the Texas Securities Board, and any other state or applicable regulatory authority with respect to the issue of indemnification for securities law violations. The Partnership shall not incur the cost of that portion of any insurance which insures any party against any liability the indemnification of which is herein prohibited. A-13 For the purposes of this Section 16, the term "Affiliates" shall mean any person acting on behalf of or performing services on behalf of the Partnership who: (1) directly or indirectly controls, is controlled by, or is under common control with the General Partner; or (2) owns or controls 10% or more of the outstanding voting securities of the General Partner; or (3) is an officer or director of the General Partner; or (4) if the General Partner is an officer, director, partner or trustee, is any entity for which the General Partner acts in any such capacity. Advances from Partnership funds to the General Partner and its Affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner by a Limited Partner are prohibited. Advances from Partnership funds to the General Partner and its Affiliates for legal expenses and other costs incurred as a result of a legal action will be made only if the following three conditions are satisfied: (1) the legal action relates to the performance of duties or services by the General Partner or its Affiliates on behalf of the Partnership; (2) the legal action is initiated by a third party who is not a Limited Partner; and (3) the General Partner or its Affiliates undertake to repay the advanced funds, with interest from the initial date of such advance, to the Partnership in cases in which they would not be entitled to indemnification under this Section 16. In no event shall any indemnity or exculpation provided for herein be more favorable to the General Partner or any Affiliate than that contemplated by the NASAA Guidelines as in effect on the date of this Limited Partnership Agreement. In no event shall any indemnification permitted by this Section 16(b) be made by the Partnership unless all provisions of this Section for the payment of indemnification have been complied with in all respects. Furthermore, it shall be a precondition of any such indemnification that the Partnership receive a determination of qualified independent legal counsel in a written opinion that the party which seeks to be indemnified hereunder has met the applicable standard of conduct set forth herein. Receipt of any such opinion shall not, however, in itself, entitle any such party to indemnification unless indemnification is otherwise proper hereunder. Any indemnification payable by the Partnership hereunder shall be made only as provided in the specific case. In no event shall any indemnification obligations of the Partnership under this Section 16(b) subject a Limited Partner to any liability in excess of that contemplated by Section 7(e). (c) Indemnification of the Partnership by the Partners. In the event that the Partnership is made a party to any claim, dispute or litigation or otherwise incurs any loss or expense as a result of or in connection with any Partner's activities, obligations or liabilities unrelated to the Partnership's business, such Partner shall indemnify and reimburse the Partnership for all loss or expense incurred, including reasonable attorneys' fees. The General Partner shall indemnify and hold the Partnership harmless from all loss or expense which the Partnership may incur (including, without limitation, any indemnity payments) as a result of (i) the differences between MLAM's standard of liability under the Investment Advisory Contract and MLIP's standard of liability as set forth herein or (ii) the differences between Merrill Lynch, Pierce, Fenner & Smith Incorporated's standard of liability under the Custody Agreement and MLIP's standard of liability as set forth herein. (d) Series Default Indemnification of the Partners by the General Partner. In addition, and not by way of limitation of the provisions of Section 13, the General Partner shall indemnify and hold harmless each Limited Partner against all loss or expense incurred by the Units of any series held by such Limited Partner, which loss or expense is properly attributable to trading losses or expenses allocable to any other series of Units. (e) Undertaking to Make Additional Payments to the Trading Partnership. The Partnership hereby agrees and undertakes that it will pay to the Trading Partnership or the Trading Partnership's estate, or to the Trading Partnership's brokers and dealers, an amount equal to the excess, if any, between the amount which the Trading Partnership commits, at the direction of the General Partner and on behalf of the Partnership, to the Trading Advisors for trading and the amount of assets invested in the Trading Partnership by the Partnership. In the event that the Partnership is obligated to make any payments pursuant to this undertaking, it shall allocate such payments among the different series of Units pro rata based on the respective excesses between the respective amounts committed to trading in respect of each such series by the Trading Partnership and the amount of assets invested in the Trading Partnership A-14 and attributable to such series. The General Partner is authorized and directed to provide in the Trading Partnership's brokerage and dealer agreements that the amounts agreed to be paid to the Partnership hereunder may be debited directly from the Partnership's account without need of giving any advance notice of any such debit to the Partnership. 17. Amendments; Meetings. (a) Amendments with Consent of the General Partner. If at any time during the term of the Partnership the General Partner shall deem it necessary or desirable to amend this Limited Partnership Agreement, the General Partner may proceed to do so, provided that such amendment shall be effective only if embodied in an instrument approved by the General Partner and, subject to the immediately following sentence, by the holders of Units representing more than fifty percent (50%) of the aggregate number of Units then owned by the Limited Partners. In any such vote, Units of different series shall vote separately, and the approving majority vote of each such series must be obtained for approval unless a series is not adversely affected by such amendment, in which case such series shall not have the right to vote with respect to such amendment. No meeting procedure or specified notice period is required in the case of amendments made with the consent of the General Partner, mere receipt of an adequate number of unrevoked written consents being sufficient. The General Partner may amend this Limited Partnership Agreement without the consent of the Limited Partners in order (i) to clarify any clerical inaccuracy or ambiguity or reconcile any inconsistency (including any inconsistency between this Limited Partnership Agreement and the Prospectus), (ii) to effect the intent of the allocations proposed herein to the maximum extent possible in the event of a change in the Code or the interpretations thereof affecting such allocations, (iii) to attempt to ensure that the Partnership is not treated as an association taxable as a corporation for federal income tax purposes, (iv) to qualify or maintain the qualification of the Partnership as a limited partnership in any jurisdiction, (v) to delete or add any provision of or to this Limited Partnership Agreement required to be deleted or added by the Staff of the Commodity Futures Trading Commission, the Securities and Exchange Commission or any other federal agency or any state "Blue Sky" official or similar official or in order to opt to be governed by any amendment or successor statute to the Act, (vi) to better insulate the different series of Units from the risk of paying the debts of any other such series, (vii) to make any amendment to this Limited Partnership Agreement which the General Partner deems advisable provided that such amendment is not adverse to the Limited Partners, or that is required by law, (viii) to make any amendment that is appropriate or necessary, in the opinion of the General Partner, to prevent the Partnership or the General Partner or its directors, officers or controlling persons from in any manner being subjected to the provisions of the Investment Company Act of 1940, as amended, and (ix) to make any amendment that is appropriate or necessary, in the opinion of the General Partner, to avoid causing the assets of the Partnership, or of any series of Units considered individually, from constituting assets of any "employee benefit plan" as defined in and subject to ERISA, or a "plan" as defined in and subject to Section 4975 of the Code. (b) Amendments and Actions without Consent of the General Partner. In any vote called by the General Partner or by a Limited Partner pursuant to Section 17(c), upon the affirmative vote (which may be in person or by proxy) of the holders of Units representing more than fifty percent (50%) of the aggregate number of Units of each series then owned by Limited Partners, the following actions may be taken, irrespective of whether the General Partner concurs: (i) this Limited Partnership Agreement may be amended, provided, however, that approval of all Limited Partners holding Units of any series shall be required in the case of amendments changing or altering this Section 17, extending the term of the Partnership, or materially changing the Partnership's basic investment policies or structure; in addition, reduction of the capital account of any Limited Partner or assignee or modification of the percentage of profits, losses or distributions to which a Limited Partner or an assignee is entitled hereunder shall not be effected by any amendment or supplement to this Limited Partnership Agreement without such Limited Partner's or assignee's written consent; (ii) the Partnership may be dissolved; (iii) the General Partner may be removed and, as of the time of such removal, the General Partner may be replaced; (iv) a new general partner or general partners may be elected if the General Partner withdraws from the Partnership, provided that such election takes place prior to or as of the time the General Partner withdraws; (v) the sale of all or substantially all of the assets of the Partnership may be approved; and (vi) any contract with the General Partner or any affiliate thereof may be disapproved of and, as a result, terminated upon sixty (60) days' notice. In any such vote, Units of different series shall vote separately, and the approving majority vote of each such series must be obtained for approval, except that in the case of clause (i) above, the approval of a series of Units need not be obtained if such series is not adversely affected by the proposed amendment to this Limited Partnership Agreement. (c) Meetings; Other. Any Limited Partner, upon written request addressed to the General Partner, shall be entitled to obtain from the General Partner, upon payment, in advance, of reasonable reproduction and mailing costs, a list of the names and addresses of record of all Limited Partners and the number of Units of each series A-15 held by each (which shall be mailed by the General Partner to the Limited Partner within ten (10) days of the receipt of the request). Upon receipt of a written proposal, signed by Limited Partners owning Units representing at least ten percent (10%) of the aggregate number of Units then owned by Limited Partners of any series, that a meeting of the Partnership (or of any or all series of Units) be called to vote upon any matter upon which the Limited Partners may vote pursuant to this Limited Partnership Agreement, the General Partner shall, by written notice to each Limited Partner of record mailed within fifteen (15) days after such receipt, call a meeting of the Partnership (or of such series of Units). Such meeting shall be held at least thirty (30) but not more than sixty (60) days after the mailing of such notice, and such notice shall specify the date of, a reasonable place and time for, and the purpose of such meeting. The General Partner may not restrict the voting rights of Limited Partners except as set forth herein. In the event that the General Partner or the Limited Partners vote to amend this Limited Partnership Agreement in any material respect, the amendment will not become effective prior to all Limited Partners having an opportunity to redeem their Units. 18. Governing Law. THE VALIDITY AND CONSTRUCTION OF THIS LIMITED PARTNERSHIP AGREEMENT SHALL BE DETERMINED AND GOVERNED BY THE LAWS OF THE STATE OF DELAWARE, INCLUDING SPECIFICALLY THE ACT (WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW); PROVIDED, HOWEVER, CAUSES OF ACTION FOR VIOLATIONS OF FEDERAL OR STATE SECURITIES LAW SHALL NOT BE GOVERNED BY THIS SECTION 18. 19. Miscellaneous. (a) Compliance with the Investment Advisers Act of 1940. No provision of this Limited Partnership Agreement shall be deemed, nor does any such provision purport, to waive compliance with the Investment Advisers Act of 1940, as amended. (b) Notices. All notices under this Limited Partnership Agreement shall be in writing and shall be effective upon personal delivery, or if sent by first class mail, postage prepaid, addressed to the last known address of the party to whom such notice is to be given, upon the deposit of such notice in the United States mails. (c) Binding Effect. This Limited Partnership Agreement shall inure to and be binding upon all of the parties, their successors and assigns, custodians, estates, heirs and personal representatives. For purposes of determining the rights of any Partner or assignee hereunder, the Partnership and the General Partner may rely upon the Partnership records as to who are Partners and assignees, and all Partners and assignees agree that their rights shall be determined and they shall be bound thereby. (d) Captions. Captions in no way define, limit, extend or describe the scope of this Limited Partnership Agreement nor the effect of any of its provisions. Any reference to "persons" in this Limited Partnership Agreement shall also be deemed to include entities, unless the context otherwise requires. A-16 IN WITNESS WHEREOF, the parties hereto have executed this Third Amended and Restated Limited Partnership Agreement as of the day and year first above written. GENERAL PARTNER: LIMITED PARTNERS: MERRILL LYNCH INVESTMENT PARTNERS INC. All Limited Partners now and hereafter admitted as limited partners of the Partnership pursuant to Powers of Attorney now or hereafter executed in favor of, and delivered to, the General Partner. By /s/ John R. Frawley, Jr. ---------------------------------------- John R. Frawley, Jr. President and Chief Executive Officer MERRILL LYNCH INVESTMENT PARTNERS INC. By /s/ John R. Frawley, Jr. ------------------------------ John R. Frawley, Jr. President and Chief Executive Officer A-17 EXHIBIT B ML PRINCIPAL PROTECTION L.P. AMENDED FORM OF GUARANTEE AGREEMENT GUARANTEE AGREEMENT made as of the ___ day of July, 1996 between MERRILL LYNCH & CO., INC., a Delaware corporation ("ML&Co."), and ML PRINCIPAL PROTECTION L.P., a Delaware limited partnership (the "Partnership"). 1. ML&Co. shall make, on September 30, 2003 and as of each calendar quarter-end thereafter (the "Principal Assurance Dates") (subject to adjustment by up to one month in the discretion of MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP")), sufficient payments to the Partnership so that the Net Asset Value per Unit of each series of Units, as of the Principal Assurance Date for such series, which is available for distribution to Limited Partners (after adjustment for all liabilities of the Partnership to third parties) will be at least $100, as of such date. Such $100 minimum Net Asset Value per Unit shall not be reduced by any distributions made by the Partnership in respect of the series of Units in question from the date of issuance of such Units through the Principal Assurance Date for such Units. 2. This Guarantee Agreement -- which supports a corresponding obligation of MLIP, an indirect wholly-owned subsidiary of ML&Co. -- will remain in effect unless the Partnership is dissolved or MLIP is removed as the general partner of the Partnership, in each case with the approving vote of the Limited Partners -- upon either of which events this Guarantee Agreement will terminate without any payment obligation on behalf of ML&Co. 3. ML&Co. acknowledges and agrees that its risk under this Guarantee Agreement is in no respect mitigated by the fact that the Partnership will not trade directly, but rather through a wholly-owned subsidiary limited partnership, ML PRINCIPAL PROTECTION TRADING L.P. (the "Trading Partnership"), because the Partnership will commit to pay losses and expenses incurred by the Trading Partnership in amounts in excess of the capital invested in the Trading Partnership by the Partnership. 4. ML&Co. agrees that in the event it is required to make one or more payments under this Guarantee Agreement, any such payment will be made without recourse to the Partnership, the Trading Partnership, MLIP, Merrill Lynch Futures Inc. or any Limited Partner. 5. ML&Co. shall be obligated to make payments under this Guarantee Agreement only on the Principal Assurance Date for each series and only in respect of Units of such series outstanding on such date (including Units then being redeemed). 6. This Guarantee Agreement is an agreement between ML&Co. and the Partnership; investors in the Partnership are in no respects parties hereto. 7. This Guarantee Agreement will terminate as to each series of Units on the Principal Assurance Date for such series, upon payment by ML&Co. of any amounts due hereunder at such time. No series, except as of the Principal Assurance Date for such series, shall have any rights hereunder. 8. This Guarantee Agreement shall inure to the benefit of the Partnership only in respect of each series of Units as of its Principal Assurance Date, not in respect of Units of other series. 9. This Guarantee Agreement shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law. B-1 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 EXHIBIT C ML PRINCIPAL PROTECTION L.P. -------------------- SUBSCRIPTION REQUIREMENTS By executing a Subscription Agreement and Power of Attorney Signature Page for Limited Partner ship Units ("Units") of ML PRINCIPAL PROTECTION L.P. (the "Fund"), each purchaser ("Purchaser") of Units irrevocably subscribes for Units at the price of $100 per Unit ($97 per Unit in the case of officers and employees of Merrill Lynch & Co., Inc. and its affiliates) as described in the Fund's Prospectus dated July __, 1996, as the same may from time to time be supplemented and amended (the "Prospectus"). EXCEPT AS SET FORTH BELOW IN THE CASE OF MAINE AND MICHIGAN RESIDENTS, INVESTORS WHO ARE CURRENTLY LIMITED PARTNERS IN THE FUND NEED NOT EXECUTE AN ADDITIONAL SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE IN ORDER TO PURCHASE ADDITIONAL UNITS. HOWEVER, SUCH PERSONS MUST RECEIVE A CURRENT PROSPECTUS FOR THE FUND AND CAREFULLY REVIEW THIS EXHIBIT C -- SUBSCRIPTION REQUIREMENTS AS WELL AS THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY. SUCH PERSONS' FINANCIAL CONSULTANTS WILL BE REQUIRED TO RECONFIRM THAT SUCH PERSONS CONTINUE TO MEET THE SUITABILITY REQUIREMENTS SET FORTH BOTH HEREIN AND THEREIN IN ORDER FOR SUCH PERSONS TO BE ABLE TO PURCHASE ADDITIONAL UNITS. By executing a Subscription Agreement and Power of Attorney Signature Page, Purchaser has thereby authorized Merrill Lynch, Pierce, Fenner & Smith Incorporated or one of its affiliates (the "Selling Agent") to debit Purchaser's customer securities account in the full amount of Purchaser's subscription. If Purchaser's Subscription Agreement and Power of Attorney Signature Page is accepted, Purchaser agrees to contribute Purchaser's subscription to the Fund and to be bound by the terms of the Fund's Third Amended and Restated Limited Partnership Agreement, included in the Prospectus as Exhibit A. Purchaser agrees to reimburse the Fund and Merrill Lynch Investment Partners Inc. ("MLIP"), the General Partner of the Fund, for any expense or loss incurred by either as a result of the cancellation of Purchaser's Units due to a failure of the Purchaser to deliver good funds in the full amount of the subscription price of the Units subscribed for by Purchaser. FOREIGN PERSONS AND ENTITIES NOT OTHERWISE SUBJECT TO U.S. FEDERAL INCOME TAX MAY NOT INVEST IN THE UNITS. Representations and Warranties As an inducement to MLIP to accept this subscription, Purchaser, by executing and delivering Purchaser's Subscription Agreement and Power of Attorney Signature Page, represents and warrants to the Fund, ML Principal Protection Plus Trading L.P., MLIP, Merrill Lynch Futures Inc. and the Selling Agent as follows: (a) Purchaser is of legal age to execute the Subscription Agreement and Power of Attorney Signature Page and is legally competent to do so. Purchaser acknowledges that Purchaser has received (prior to any direct or indirect solicitation of Purchaser's investment) a copy of the Prospectus -- including the applicable Prospectus Supplement, the Appendices, the Third Amended and Restated Limited Partnership Agreement and summary financial information relating to the Fund current within 60 calendar days -- the earliest date of such documents to be dated within nine months of the date as of which Purchaser has subscribed to purchase Units. (b) All information that Purchaser has heretofore furnished to MLIP or that is set forth in the Subscription Agreement and Power of Attorney submitted by Purchaser is correct and complete as of the date of such Subscription Agreement and Power of Attorney, and if there should be any change in such information prior to acceptance of Purchaser's subscription, Purchaser will immediately furnish such revised or corrected information to MLIP. (c) Unless (d) below is applicable, Purchaser's subscription is made with Purchaser's funds for Purchaser's own account and not as trustee, custodian or nominee for another. SR-1 (d) The subscription, if made as custodian for a minor, is a gift Purchaser has made to such minor and is not made with such minor's funds or, if not a gift, the representations as to net worth and annual income set forth below apply only to such minor. (e) If Purchaser is subscribing in a representative capacity, Purchaser has full power and authority to purchase the Units and enter into and be bound by the Subscription Agreement and Power of Attorney on behalf of the entity for which Purchaser is acquiring the Units, and such entity has full right and power to purchase such Units and enter into and be bound by the Subscription Agreement and Power of Attorney and to become a Limited Partner pursuant to the Limited Partnership Agreement. (f) If Purchaser is subscribing in a representative capacity, the entity for which the Purchaser is acquiring Units either is not required to be registered with the Commodity Futures Trading Commission ("CFTC") or to be a member of the National Futures Association ("NFA") or, if required to be so, is duly registered with the CFTC and is a member in good standing of the NFA. It is an NFA requirement that MLIP attempt to verify that any entity which seeks to purchase Units be duly registered with the CFTC and a member in good standing of the NFA, if required. Purchaser agrees to supply MLIP with such information as MLIP may reasonably request in order to attempt such verification. (g) If Purchaser is acting on behalf of an "employee benefit plan," as defined in and subject to the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), or any "plan," as defined in Section 4975 of the Internal Revenue Code, as amended (the "Code") (the "Plan"), Purchaser, in addition to the representations and warranties set forth above, hereby further represents and warrants as, or on behalf of, the fiduciary of the Plan responsible for purchasing the Units (the "Plan Fiduciary") that: the Plan Fiduciary has considered an investment in the Units in light of the risks relating thereto; the Plan Fiduciary has determined that, in view of such considerations, an investment in the Fund is consistent with the Plan Fiduciary's responsibilities under ERISA; the Plan's investment in the Fund does not violate and is not otherwise inconsistent with the terms of any legal document constituting the Plan or any trust agreement thereunder; and the Plan Fiduciary (i) is responsible for the decision to invest in the Units, including the determination that such investment is consistent with the requirement imposed by Section 404 of ERISA that Plan investments be diversified so as to minimize the risks of large losses, (ii) is independent of MLIP, Merrill Lynch Asset Management, L.P., any Trading Advisor, the Selling Agent and any of their respective affiliates, (iii) is qualified to make such investment decision, and (iv) none of MLIP, Merrill Lynch Asset Management, L.P., any Trading Advisor, the Selling Agent or any of their respective affiliates or any of their respective employees either: (a) has investment discretion with respect to the investment of assets of the Plan; (b) has authority or responsibility to or regularly gives investment advice with respect to the Plan for a fee and pursuant to an agreement or understanding that such advice will serve as a primary basis for investment decisions with respect to the Plan and that such advice will be based on the particular investment needs of the Plan; or (c) is an employer maintaining or contributing to the Plan. The undersigned will, at the request of MLIP, furnish MLIP with such information as MLIP may reasonably require to establish that the purchase of the Units by the Plan does not violate any provision of ERISA or the Code, including, without limitation, those provisions relating to "prohibited transactions" by "parties in interest" or "disqualified persons." THE REPRESENTATIONS AND STATEMENTS SET FORTH HEREIN MAY BE ASSERTED IN THE DEFENSE OF THE FUND, ML PRINCIPAL PROTECTION L.P., MLIP, MERRILL LYNCH FUTURES INC., THE SELLING AGENT, MLAM, OR OTHERS IN ANY LITIGATION OR OTHER PROCEEDING. Investor Suitability PURCHASER UNDERSTANDS THAT THE PURCHASE OF UNITS MAY BE MADE ONLY BY PERSONS WHO, AT A MINIMUM, HAVE (I) A NET WORTH OF AT LEAST $150,000 (EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES) OR (II) AN ANNUAL GROSS INCOME OF AT LEAST $45,000 AND A NET WORTH OF AT LEAST $45,000 (EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES). RESIDENTS OF THE FOLLOWING STATES MUST MEET THE REQUIREMENTS SET FORTH BELOW ("NET WORTH" FOR SUCH PURPOSES IS IN ALL CASES IS CALCULATED EXCLUSIVE OF HOME, FURNISHINGS AND AUTOMOBILES). IN ADDITION, PURCHASER MAY NOT INVEST MORE THAN 10% OF PURCHASER'S READILY MARKETABLE ASSETS IN THE FUND. 1. Arizona -- Net worth of at least $225,000 or a net worth of at least $60,000 and an annual income of at least $60,000. SR-2 2. California -- Net worth of at least $100,000 and an annual income of at least $50,000. 3. Indiana -- Net worth of at least $250,000 or a net worth of at least $100,000 and an annual income of at least $100,000. 4. Iowa -- Net worth of at least $225,000 or a net worth of at least $60,000 and an annual taxable income of at least $60,000. 5. Maine -- Minimum subscription per investment, both initial and additional, of $5,000; net worth of at least $200,000 or a net worth of at least $50,000 and an annual income of at least $50,000. ALL MAINE RESIDENTS, INCLUDING EXISTING LIMITED PARTNERS IN THE FUND SUBSCRIBING FOR ADDITIONAL UNITS, MUST EXECUTE A SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE. MAINE RESIDENTS MUST SIGN A SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE SPECIFICALLY PREPARED FOR MAINE RESIDENTS, A COPY OF WHICH SHALL ACCOMPANY THIS PROSPECTUS AS DELIVERED TO ALL MAINE RESIDENTS. 6. Massachusetts -- Net worth of at least $250,000 or a net worth of at least $100,000 and an annual income of at least $100,000. 7. Michigan -- Net worth of at least $225,000 or a net worth of at least $60,000 and taxable income in 1995 of at least $60,000. ALL MICHIGAN RESIDENTS, INCLUDING EXISTING LIMITED PARTNERS IN THE FUND SUBSCRIBING FOR ADDITIONAL UNITS, MUST EXECUTE A SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE. 8. Minnesota -- Net worth of at least $250,000 or a net worth of at least $100,000 and an annual income of at least $100,000. 9. Mississippi -- Net worth of at least $225,000 or a net worth of at least $60,000 and an annual income of at least $60,000. 10. Missouri -- Net worth of at least $250,000 or a net worth of at least $100,000 and an annual income of at least $100,000. 11. New Hampshire -- Net worth of at least $250,000 or a net worth of at least $125,000 and an annual income of at least $50,000. 12. North Carolina -- Net worth of at least $225,000 or a net worth of at least $60,000 and an annual income of at least $60,000. 13. Oklahoma -- Net worth of at least $225,000 or a net worth of at least $60,000 and an annual income of at least $60,000. 14. Oregon -- Net worth of at least $225,000 or a net worth of at least $60,000 and an annual taxable income of at least $60,000. 15. Pennsylvania -- Net worth of at least $175,000 or a net worth of at least $100,000 and an annual taxable income of at least $50,000 in the past year and an expectation of the same in the current year. 16. South Carolina -- Net worth of at least $100,000 or a net income in 1995 some portion of which was subject to maximum federal and state income tax. 17. South Dakota -- Net worth of at least $250,000 or a net worth of at least $100,000 and an annual income of at least $100,000. 18. Tennessee -- Net worth of at least $250,000 and gross income during 1995 and an expectation of gross income during 1996 of at least $65,000 or a net worth of at least $500,000. 19. Texas -- Net worth of at least $250,000 or a net worth of at least $100,000 and an annual taxable income of at least $100,000. SR-3 EXHIBIT D ML PRINCIPAL PROTECTION L.P. --------------------------------------- SUBSCRIPTION INSTRUCTIONS ANY PERSON CONSIDERING PURCHASING UNITS SHOULD CAREFULLY READ AND REVIEW THE PROSPECTUS OF THE FUND DATED JULY __, 1996, INCLUDING THE PROSPECTUS SUPPLEMENT AND RECENT FINANCIAL INFORMATION (CURRENT WITHIN 60 CALENDAR DAYS) RELATING TO THE FUND, BOTH OF WHICH ACCOMPANY THE PROSPECTUS. The Units are speculative and involve a high degree of risk. No person may invest more than 10% of his readily marketable assets in the Fund. The Units are sold in separate series as of the beginning of each calendar quarter. Different series of Units are each sold at $100 per Unit but over time come to have different Net Asset Values. Foreign persons and entities not otherwise subject to U.S. federal income tax may not invest in the Fund. EXISTING LIMITED PARTNERS WHO ARE SUBSCRIBING FOR ADDITIONAL UNITS (EXCEPT MAINE AND MICHIGAN RESIDENTS) NEED NOT COMPLETE AN ADDITIONAL SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE BUT MUST CAREFULLY REVIEW THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY AND EXHIBIT C -- SUBSCRIPTION REQUIREMENTS. SUCH LIMITED PARTNERS' FINANCIAL CONSULTANTS MUST RECONFIRM THAT SUCH LIMITED PARTNERS CONTINUE TO MEET THE STANDARDS AND REQUIREMENTS SET FORTH HEREIN AND IN EXHIBIT C -- SUBSCRIPTION REQUIREMENTS IN ORDER FOR SUCH LIMITED PARTNERS TO BE ELIGIBLE TO PURCHASE ADDITIONAL UNITS. ANY ADDITIONAL UNITS PURCHASED BY AN EXISTING LIMITED PARTNER WILL BE A DIFFERENT SERIES OF UNITS THAN THE UNITS ALREADY OWNED BY SUCH LIMITED PARTNER. ------------------------------------- FILL IN ALL OF THE BOXES ON PAGES SA-5 and SA-6; TYPE OR PRINT USING BLACK INK ONLY AND ONE LETTER OR NUMBER PER BOX, AS FOLLOWS: Item 1 -- Financial Consultants must complete the information required. Item 2 -- Enter the number of Units to be purchased. Item 3 -- Enter the dollar amount (no cents) of the purchase (the dollar amount must be $100 per Unit; $97 per Unit for officers and employees of Merrill Lynch & Co., Inc. and its affiliates). Item 4 -- Enter customer's Merrill Lynch Account Number. Item 5 -- Enter the Social Security Number or Taxpayer ID Number. In case of joint ownership, either Social Security Number may be used. The Signature Page is self-explanatory for most types of investors; however, we have provided specific instructions for the following types of investors: Trust -- Enter the Trust name on line 8 and the trustee's name on line 9, followed by "Trustee." If applicable, use line 10 for the custodian's name, followed by "Custodian." Be sure to furnish the Taxpayer ID Number of the Trust. Custodian Under Uniform Gifts to Minors Act -- Complete line 6 with the name of minor followed by "UGMA." On line 9 enter the custodian's name, followed by "Custodian." Be sure to furnish the minor's Social Security Number. SA-(i) Partnership or Corporation -- The Partnership or Corporation name is required on line 8. Enter an officer's or partner's name on line 9. Be sure to furnish the Taxpayer ID Number of the Partnership or Corporation. Items 6, 7, 8 -- Enter the exact name in which the Units are to be held. Items 9, 10 -- Complete information as required. Item 11 -- The investor(s) (EXCEPT CURRENT LIMITED PARTNERS IN THE FUND OTHER THAN RESIDENTS OF MAINE OR MICHIGAN) must execute the Subscription Agreement and Power of Attorney Signature Page (Item 11, Page SA-6) and review the representation relating to backup withholding tax underneath the signature and telephone number lines in Item 11. Item 12 -- Financial Consultants must complete the information required. THE SPECIMEN COPY OF THE SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (PAGES SA-3 AND SA-4) SHOULD NOT BE EXECUTED. Instructions to Financial Consultants: THE EXECUTED SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE MUST BE RETAINED IN THE BRANCH OFFICE. RECONFIRMATIONS (I.E., SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGES EXECUTED BY FINANCIAL CONSULTANTS) OR ANOTHER FORM OF WRITTEN RECONFIRMATION APPROVED BY THE BRANCH OFFICE REGARDING THE CONTINUING SUITABILITY OF EXISTING LIMITED PARTNERS SUBSCRIBING FOR ADDITIONAL UNITS MUST ALSO BE RETAINED IN THE BRANCH OFFICE. SA-(ii) ML PRINCIPAL PROTECTION L.P. LIMITED PARTNERSHIP UNITS ------------------------- BY EXECUTING THIS SUBSCRIPTION AGREEMENT SUBSCRIBERS ARE NOT WAIVING ANY RIGHTS UNDER THE SECURITIES ACT OF 1933 OR THE SECURITIES EXCHANGE ACT OF 1934 ------------------------- SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY ML PRINCIPAL PROTECTION L.P. c/o Merrill Lynch Investment Partners Inc. General Partner Merrill Lynch World Headquarters Sixth Floor South Tower World Financial Center New York, New York 10080-6106 Dear Sirs: 1. Subscription for Units. I hereby subscribe for the number of limited partnership units ("Units") in ML PRINCIPAL PROTECTION L.P. (the "Fund") set forth in the Subscription Agreement and Power of Attorney Signature Page attached hereto; a minimum of 50 Units ($5,000) must be purchased -- 10 Units if I am an existing Limited Partner; any greater number of whole Units may be purchased. The purchase price is $100 per Unit -- $97 per Unit if I am an officer or employee of Merrill Lynch & Co., Inc. or any of its affiliates. The terms of the offering of the Units are described in the Prospectus of the Fund dated July __, 1996, together with the accompanying Prospectus Supplement (collectively, the "Prospectus"). Units are offered as of the beginning of each calendar quarter. Concurrently with or prior to the delivery of this Subscription Agreement and Power of Attorney, I have authorized Merrill Lynch, Pierce, Fenner & Smith Incorporated (the "Selling Agent") to debit my customer securities account in the amount of my subscription. I acknowledge that I must have my subscription payment in such account on but not before the settlement date for my purchase of Units, which will occur no later than five business days after the acceptance of my subscription. My Merrill Lynch Financial Consultant will inform me of such settlement date, on which my account will be debited and the amount so debited transmitted, in the form of a Selling Agent check or wire transfer, directly to the Escrow Agent for the Fund pending investment in the Units, as described in the Prospectus. MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP"), the General Partner of the Fund, may, in its sole and absolute discretion, accept or reject this subscription in whole or in part, except that, if this subscription is to be accepted in part only, it shall not be reduced to an amount less than 50 Units (10 Units if I am an existing Limited Partner). All subscriptions once submitted are irrevocable. All Units are offered subject to prior sale. Foreign persons and entities which are not otherwise subject to U.S. federal income tax may not invest in the Fund. 2. Representations and Warranties of Subscriber. I have received the Prospectus together with summary financial information relating to the Fund current within 60 calendar days. I understand that by submitting this Subscription Agreement and Power of Attorney I am making the representations and warranties set forth in Exhibit C -- Subscription Requirements in the Prospectus, including, without limitation, those representations and warranties relating to my net worth (exclusive of home, furnishings and automobiles), annual income and readily marketable assets. 3. Power of Attorney. In connection with my subscription for Units, I do hereby irrevocably constitute and appoint MLIP, and its successors and assigns, as my true and lawful Attorney-in-Fact, with full power of substitution, in my name, place and stead, to (i) file, prosecute, defend, settle or compromise litigation, claims or SA-1 arbitrations on behalf of the Fund and (ii) make, execute, sign, acknowledge, swear to, deliver, record and file any documents or instruments which may be considered necessary or desirable by MLIP to carry out fully the provisions of the Limited Partnership Agreement of the Fund, including, without limitation, by executing said Limited Partnership Agreement itself, and by effecting all amendments permitted by the terms thereof. I acknowledge that the other investors in the Fund are relying on MLIP's authority to act pursuant to the Power of Attorney granted hereby. The Power of Attorney granted hereby shall be deemed to be coupled with an interest, shall be irrevocable and shall survive, and shall not be affected by, my subsequent death, incapacity, disability, insolvency or dissolution or any delivery by me of an assignment of the whole or any portion of my Units. 4. Irrevocability; Governing Law. I hereby acknowledge and agree that I am not entitled to cancel, terminate or revoke this subscription or any of my agreements hereunder after the Subscription Agreement and Power of Attorney Signature Page attached hereto has been submitted (and not rejected), and that this subscription and such agreements shall survive my death or disability. This Subscription Agreement and Power of Attorney shall be governed by and interpreted in accordance with the laws of the State of New York, without regard to principles of conflicts of law. SA-2 SPECIMEN ------------------------------------------------------------------------------ -------------------- - ------------------------- ---------- 1 Financial Consultant -------------------- - ------------------------- ---------- Name First M.I.Last Sub. Financial Consultant Order Ref. # Phone Number ----- ----- ------ ------ ----- - - Financial Consultant Number ------ Branch Wire Code ----- ----- ------ ----- ------------------------------------------------------------------------------ ML PRINCIPAL PROTECTION L.P. LIMITED PARTNERSHIP UNITS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE PLEASE PRINT OR TYPE. USE BLACK INK ONLY AND ONLY ONE CHARACTER PER BOX. The investor named below, by execution and delivery of this Signature Page, by payment of the purchase price for Limited Partnership Units in ML Principal Protection L.P. and by authorizing Merrill Lynch, Pierce, Fenner & Smith Incorporated to debit investor's customer securities account in the amount set forth below, hereby subscribes for the purchase of Units at a purchase price of $100 per Unit or $97 per Unit for officers and employees of Merrill Lynch & Co., Inc. and its affiliates. The named investor acknowledges receipt of the Prospectus of the Fund dated , 1996, and the accompanying Prospectus Supplement as well as summary financial information current within 60 calendar days, including the Third Amended and Restated Limited Partnership Agreement, the Subscription Requirements and the Subscription Agreement and Power of Attorney set forth therein, the terms of which govern the investment in the Units being subscribed for hereby. If the subscriber is a participant in a Merrill Lynch sponsored IRA, Basic(TM) or SEP account and is purchasing Units for such an account, the subscriber hereby acknowledges that: 1. An amount at least equal to the purchase price for the Units is in an IRA, Basic(TM) or SEP account at Merrill Lynch, Pierce, Fenner & Smith Incorporated; 2. The minimum value of all securities and funds in such IRA, Basic(TM) or SEP account is $10,000; 3. The minimum subscription is 50 Units and the amount of this subscription is no more than 50% of the value of the IRA, Basic(TM) or SEP account on the subscription date; and 4. Each separate IRA, Basic(TM) or SEP account of the subscriber seeking to purchase Units meets the above eligibility requirements. ------------ --------------- ----- -------- 2 3 4 ------------ --------------- ----- -------- Number of Units Total $ Amount - (minimum 50 (No. of Units X Units; 10 Units $100; $97 for Merrill Lynch for existing Merrill Lynch Account # Limited Partners officers and subscribing for employees) additional Units) ----- --- ------ --- ----------- 5 - - - ----- --- ------ --- ----------- Social Security Number or Taxpayer ID Number Limited Partner Name ----------------------------- - ------------------------------- 6 ----------------------------- - ------------------------------- First Name M.I.Last Name Joint Partner Name ----------------------------- - ------------------------------- 7 ----------------------------- - ------------------------------- First Name M.I.Last Name Partnership, Corporate or Trust Limited Partner Name ----------------------------------------------------------------- 8 ----------------------------------------------------------------- ----------------------------------------------------------------- Partner, Officer, Trustee, Beneficiary, Power of Attorney or Custodian under UGMA/UTMA ----------------------------------------------------------------- 9 ----------------------------------------------------------------- ----------------------------------------------------------------- Additional Information ----------------------------------------------------------------- 10 ----------------------------------------------------------------- ----------------------------------------------------------------- Residence Address of Limited Partner (P.O. Box Numbers are Not Acceptable For Residence Address) ---------- ------------------------------------------- -------- ---------- ------------------------------------------- -------- Street Number Street Name Apt. Number -------- ---------------------------------- --- ----------------- -------- ---------------------------------- --- ----------------- Bldg. No. City StateZip Code ----------------------------- ----------------------------- Country (If Other Than U.S.A.) Mailing Address of Limited Partner (If Other Than Residence Address) ---------- ------------------------------------------- -------- ---------- ------------------------------------------- -------- Street Number Street Name Apt. Number -------- ---------- ------------------------------- --- ----------------- -------- ---------- ------------------------------- --- ----------------- Bldg. No. P.O. Box No.City StateZip Code ----------------------------- ----------------------------- Country (If Other Than U.S.A.) - - Check box if Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is custodian. Name of Custodian, if Not Merrill Lynch --------------------------------------------------- --------------------------------------------------- Mailing Address of Custodian, Other Than Merrill Lynch ---------- ------------------------------------------- -------- ---------- ------------------------------------------- -------- Street Number Street Name Apt. Number -------- ---------- ------------------------------- --- ----------------- -------- ---------- ------------------------------- --- ----------------- Bldg. No. P.O. Box No.City StateZip Code ----------------------------- ----------------------------- Country (If Other Than U.S.A.) SA-3 SPECIMEN ML PRINCIPAL PROTECTION L.P. LIMITED PARTNERSHIP UNITS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED) 11 FOR USE BY INVESTOR X-------------------------------- X -------------------------------- Signature of Investor Date Signature of Joint Investor (if any) Date ( ) - Subscription for the series of -------------------------------- Units to be sold as of Telephone Number of Investor [insert date] -------------------------- EXECUTING AND DELIVERING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE SHALL IN NO RESPECT BE DEEMED TO CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES EXCHANGE ACT OF 1934. I ACKNOWLEDGE THAT I HAVE RECEIVED, IN ADDITION TO THE PROSPECTUS DATED , 1996, THE PROSPECTUS SUPPLEMENT AND SUMMARY FINANCIAL INFORMATION RELATING TO THE FUND CURRENT WITHIN 60 CALENDAR DAYS. I have checked the following box if I am subject to backup withholding under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code: [_]. Under the penalties of perjury, by signature above I hereby certify that the Social Security Number or Taxpayer ID Number shown on the front of this Subscription Agreement and Power of Attorney Signature Page next to my name is my true, correct and complete Social Security Number or Taxpayer ID Number and that the information given in the immediately preceding sentence is true, correct and complete. 12 FINANCIAL CONSULTANT MUST SIGN I have reasonable grounds to believe, based on information obtained from the investor concerning his/her investment objectives, other investments, financial situation and needs and any other information known by me, that investment in the Fund is suitable for such investor in light of his/her financial position, net worth and other suitability characteristics. I have also informed the investor of the unlikelihood of a public trading market developing for the Units. The Financial Consultant MUST sign below in order to substantiate compliance with Appendix F to Article 3, Section 34 of the NASD's Rules of Fair Practice. X-------------------------------------------------------------------------- Financial Consultant Signature Date Office Manager approval of Merrill Lynch sponsored retirement account purchases. X-------------------------------------------------------------------------- Office Manager Signature Date - -------------------------------------------------------------------------------- DATE RECEIVED COUNTRY CODE ADDITIONAL ORDER CONTROL NUMBER FOR OFFICE USE ONLY SA-4 EXECUTION COPY ------------------------------------------------------------------------------ -------------------- - ------------------------- ---------- 1 Financial Consultant -------------------- - ------------------------- ---------- Name First M.I.Last Sub. Financial Consultant Order Ref. # Phone Number ----- ----- ------ ------ ----- - - Financial Consultant Number ------ Branch Wire Code ----- ----- ------ ----- ------------------------------------------------------------------------------ ML PRINCIPAL PROTECTION L.P. LIMITED PARTNERSHIP UNITS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE PLEASE PRINT OR TYPE. USE BLACK INK ONLY AND ONLY ONE CHARACTER PER BOX. The investor named below, by execution and delivery of this Signature Page, by payment of the purchase price for Limited Partnership Units in ML Principal Protection L.P. and by authorizing Merrill Lynch, Pierce, Fenner & Smith Incorporated to debit investor's customer securities account in the amount set forth below, hereby subscribes for the purchase of Units at a purchase price of $100 per Unit or $97 per Unit for officers and employees of Merrill Lynch & Co., Inc. and its affiliates. The named investor acknowledges receipt of the Prospectus of the Fund dated , 1996, and the accompanying Prospectus Supplement as well as summary financial information current within 60 calendar days, including the Third Amended and Restated Limited Partnership Agreement, the Subscription Requirements and the Subscription Agreement and Power of Attorney set forth therein, the terms of which govern the investment in the Units being subscribed for hereby. If the subscriber is a participant in a Merrill Lynch sponsored IRA, Basic(TM) or SEP account and is purchasing Units for such an account, the subscriber hereby acknowledges that: 1. An amount at least equal to the purchase price for the Units is in an IRA, Basic(TM) or SEP account at Merrill Lynch, Pierce, Fenner & Smith Incorporated; 2. The minimum value of all securities and funds in such IRA, Basic(TM) or SEP account is $10,000; 3. The minimum subscription is 50 Units and the amount of this subscription is no more than 50% of the value of the IRA, Basic(TM) or SEP account on the subscription date; and 4.Each separate IRA, Basic(TM) or SEP account of the subscriber seeking to purchase Units meets the above eligibility requirements. ------------ --------------- ----- -------- 2 3 4 ------------ --------------- ----- -------- Number of Units Total $ Amount - (minimum 50 (No. of Units X Units; 10 Units $100; $97 for Merrill Lynch for existing Merrill Lynch Account # Limited Partners officers and subscribing for employees) additional Units) ----- --- ------ --- ----------- 5 - - - ----- --- ------ --- ----------- Social Security Number or Taxpayer ID Number Limited Partner Name ----------------------------- - ------------------------------- ----------------------------- - ------------------------------- 6 First Name M.I.Last Name Joint Partner Name ----------------------------- - ------------------------------- 7 ----------------------------- - ------------------------------- First Name M.I.Last Name Partnership, Corporate or Trust Limited Partner Name ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- 8 Partner, Officer, Trustee, Beneficiary, Power of Attorney or Custodian under UGMA/UTMA ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- 9 Additional Information ----------------------------------------------------------------- ----------------------------------------------------------------- ----------------------------------------------------------------- 10 Residence Address of Limited Partner (P.O. Box Numbers are Not Acceptable For Residence Address) ---------- ------------------------------------------- -------- ---------- ------------------------------------------- -------- Street Number Street Name Apt. Number -------- ---------------------------------- --- ----------------- -------- ---------------------------------- --- ----------------- Bldg. No. City StateZip Code ----------------------------- ----------------------------- Country (If Other Than U.S.A.) Mailing Address of Limited Partner (If Other Than Residence Address) ---------- ------------------------------------------- -------- ---------- ------------------------------------------- -------- Street Number Street Name Apt. Number -------- ---------- ------------------------------- --- ----------------- -------- ---------- ------------------------------- --- ----------------- Bldg. No. P.O. Box No.City StateZip Code ----------------------------- ----------------------------- Country (If Other Than U.S.A.) - - Check box if Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch") is custodian. Name of Custodian, if Not Merrill Lynch ---------------------------------------------------- ---------------------------------------------------- Mailing Address of Custodian, Other Than Merrill Lynch ---------- ------------------------------------------- -------- ---------- ------------------------------------------- -------- Street Number Street Name Apt. Number -------- ---------- ------------------------------- --- ----------------- -------- ---------- ------------------------------- --- ----------------- Bldg. No. P.O. Box No.City StateZip Code ----------------------------- ----------------------------- Country (If Other Than U.S.A.) SA-5 EXECUTION COPY ML PRINCIPAL PROTECTION L.P. LIMITED PARTNERSHIP UNITS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE (CONTINUED) 11 FOR USE BY INVESTOR X-------------------------------- X -------------------------------- Signature of Investor Date Signature of Joint Investor (if any) Date ( ) - Subscription for the series of -------------------------------- Units to be sold as of Telephone Number of Investor [insert date] -------------------------- EXECUTING AND DELIVERING THIS SUBSCRIPTION AGREEMENT AND POWER OF ATTORNEY SIGNATURE PAGE SHALL IN NO RESPECT BE DEEMED TO CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THE SECURITIES ACT OF 1933 OR UNDER THE SECURITIES EXCHANGE ACT OF 1934. I ACKNOWLEDGE THAT I HAVE RECEIVED, IN ADDITION TO THE PROSPECTUS DATED , 1996, THE PROSPECTUS SUPPLEMENT AND SUMMARY FINANCIAL INFORMATION RELATING TO THE FUND CURRENT WITHIN 60 CALENDAR DAYS. I have checked the following box if I am subject to backup withholding under the provisions of Section 3406(a)(1)(C) of the Internal Revenue Code: [_]. Under the penalties of perjury, by signature above I hereby certify that the Social Security Number or Taxpayer ID Number shown on the front of this Subscription Agreement and Power of Attorney Signature Page next to my name is my true, correct and complete Social Security Number or Taxpayer ID Number and that the information given in the immediately preceding sentence is true, correct and complete. 12 FINANCIAL CONSULTANT MUST SIGN I have reasonable grounds to believe, based on information obtained from the investor concerning his/her investment objectives, other investments, financial situation and needs and any other information known by me, that investment in the Fund is suitable for such investor in light of his/her financial position, net worth and other suitability characteristics. I have also informed the investor of the unlikelihood of a public trading market developing for the Units. The Financial Consultant MUST sign below in order to substantiate compliance with Appendix F to Article 3, Section 34 of the NASD's Rules of Fair Practice. X-------------------------------------------------------------------------- Financial Consultant Signature Date Office Manager approval of Merrill Lynch sponsored retirement account purchases. X-------------------------------------------------------------------------- Office Manager Signature Date - -------------------------------------------------------------------------------- DATE RECEIVED COUNTRY CODE ADDITIONAL ORDER CONTROL NUMBER FOR OFFICE USE ONLY SA-6 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION. MLIP advanced all initial organization and offering costs (for a total of $239,100), as described in the Prospectus, for which it is being reimbursed by the Registrant in 36 equal monthly installments. MLIP will pay the costs associated with this updating of the Prospectus and Registration Statement. The following is an estimate of such costs:
Approximate Amount ___________ Securities and Exchange Commission Registration Fee.......... $ 8,621* National Association of Securities Dealers, Inc. Filing Fee.. 3,000* Printing Expenses............................................ 125,000 Fees of Certified Public Accountants......................... 50,000 Blue Sky Expenses (Excluding Legal Fees)..................... 10,000 Fees of Counsel.............................................. 100,000 Escrow Fees.................................................. 20,000 Miscellaneous Offering Costs................................. 33,379 Total....................................................... -------- $350,000 ======== - -------------------------- *Fees marked with an asterisk are exact.
____________________ ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Section 16 of the Third Amended and Restated Limited Partnership Agreement (attached as Exhibit A to the Prospectus which forms a part of this Registration Statement) provides for the indemnification of the General Partner, certain of its affiliates and certain of its directors, officers and controlling persons by the Registrant in certain circumstances for any loss suffered by the Registrant which arises out of any action or inaction, if the party, in good faith, determined that such course of conduct was in the best interest of the Registrant and such conduct did not constitute negligence or misconduct. In the Selling Agreement, each Trading Advisor has agreed to indemnify each person who controls MLIP within the meaning of Section 15 of the Securities Act of 1933 and each person who signed this Registration Statement or is a director of MLIP against losses, claims, damages, liabilities or expenses arising out of or based upon any untrue statement or omission or alleged untrue statement or omission relating or with respect to such Trading Advisor or any principal of such Trading Advisor or their operations, trading systems, methods or performance, which was made in this Registration Statement, the Prospectus included in this Registration Statement when declared effective, or in any amendment or supplement thereto and furnished by or approved by such Trading Advisor for inclusion therein. ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES. None. 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 ------- ----------------------- 1.01 Selling Agreement among the Partnership, the Trading Partnership, the General Partner, Merrill Lynch Futures, the Selling Agent and the Trading Advisors. 3.01(i) Amended and Restated Certificate of Limited Partnership of the Partnership. 3.02(i) Amended and Restated Certificate of Limited Partnership of the Trading Partnership. 3.02(ii) Third Amended and Restated Limited Partnership Agreement of the Partnership (included as Exhibit A to the Prospectus). 3.03(ii) Second Amended and Restated Limited Partnership Agreement of the Trading Partnership. 5.01(a) Opinion of Sidley & Austin relating to the legality of the Units. 5.01(b) Opinion of Richards, Layton & Finger relating to the legality of the Units. 8.01 Opinion of Sidley & Austin with respect to federal income tax consequences. 10.01 Form of Advisory Agreement among the Partnership, Trading Partnership, the General Partner and each Trading Advisor. 10.02 Form of Consulting Agreement between Merrill Lynch Futures and each Trading Advisor. 10.03 Form of Customer Agreement between the Trading Partnership and Merrill Lynch Futures. 10.04 Form of Escrow Agreement among the Partnership, the Escrow Agent, the Selling Agent and the General Partner. 10.05 Merrill Lynch & Co., Inc. Guarantee Agreement (included as Exhibit B to the Prospectus). 10.06 Form of Subscription Agreement and Power of Attorney (included as Exhibit D to the Prospectus). 10.07 Foreign Exchange Desk Service Agreement with Amendment adding the Trading Partnership as a party thereto.
S-2
10.08 Investment Advisory Contract among Merrill Lynch Futures, the Partnership, the Trading Partnership and MLAM. 10.09(a) Note from Merrill Lynch Futures Inc. to the Trading Partnership. 10.09(b) Note from Merrill Lynch, Pierce, Fenner & Smith Incorporated to the Partnership. 10.10 Minimum Net Asset Value per Unit undertaking of the General Partner. 10.11 Form of Custody Agreement between Merrill Lynch, Pierce, Fenner & Smith Incorporated and the Partnership. 23.01 Consent of Sidley & Austin. 23.02 Consent of Deloitte & Touche. 23.03 Consent of Richards, Layton & Finger (included in exhibit 5.01(b))
The following exhibits are incorporated by reference herein from the exhibits of the same description and number filed with Post-Effective Amendment No. 4 to the Registrant's Registration Statement on Form S-1, as filed with the Commission on April 4, 1996 (Reg. No. 33-73914).
Exhibit Number Description of Document ------ ----------------------- 23.12 Consent of Deloitte & Touche LLP.
_________________________ The following exhibits are incorporated by reference herein from the exhibits of the same description and number filed with Post-Effective Amendment No. 3 to the Registrant's Registration Statement on Form S-1, as filed with the Commission and which became effective on January 25, 1996.
Exhibit Number Description of Document ------ ----------------------- 1.01 Amendment No. 4 to the Selling Agreement among the Partnership, the Trading Partnership, the General Partner, Merrill Lynch Futures, the Selling Agent and AIB Investment Managers Limited. 3.05(ii) Second Amended and Restated Limited Partnership Agreement of the Partnership (Amended) (included as Exhibit A to the Prospectus). 10.12 Subscription Agreement and Power of Attorney (included as Exhibit D to the (Amended) Prospectus). 23.11 Consent of Deloitte & Touche LLP.
The following exhibits are incorporated by reference herein from the exhibits of the same description and number filed with Amendment No. 3 (Second Post-Effective) to the Registrant's Registration Statement on Form S-1, as filed with the Commission on December 8, 1995: S-3
Exhibit Number Description of Document - ------ ----------------------- 1.01 Amendment No. 2 to the Selling Agreement among the Partnership, the Trading Partnership, the General Partner, Merrill Lynch Futures, the Selling Agent, and the Advisors amending certain provisions thereof; and Amendment No. 3 to the Selling Agreement among the Partnership, the Trading Partnership, the General Partner, Merrill Lynch Futures, the Selling Agent, and Millburn Ridgefield Corporation. 1.02 Form of Assignment of Selling Agreement 3.03(i) Amended and Restated Certificate of Limited Partnership of the Partnership. 3.04(i) Amended and Restated Certificate of Limited Partnership of the Trading Partnership. 3.06(ii) Amendment to the Limited Partnership Agreement of the Trading Partnership. 5.01(a) Opinion of Sidley & Austin relating to the legality of the Units. 5.01(b) Opinion of Richards, Layton & Finger relating to the legality of the Units. 8.01 Opinion of Sidley & Austin with respect to federal income tax consequences. 10.10 Form of Assignment of Advisory Agreement. 10.11 Form of Assignment of Consulting Agreement. 10.13 Amendment No. 1 to the Customer Agreement. 23.08 Consent of Sidley & Austin. 23.10 Consent of Richards, Layton & Finger (contained in their opinion in Exhibit 5.01(b)).
The following exhibits are incorporated by reference herein from the exhibits of the same description and number filed with Amendment No. 2 (First Post-Effective) to the Registrant's Registration Statement on Form S-1, as filed with the commission on March 24, 1995 and which became effective on April 20, 1995: 1.01 Amendment No. 1 to the Selling Agreement among the Partnership, the Trading Partnership, the General Partner, Merrill Lynch Futures, the Selling Agent, Emcor Eurocurrency Management Corporation and Trendstat Capital Management, Inc. 10.09 Custody Agreement among the Partnership and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
The following exhibits are incorporated by reference herein from the exhibits of the same description and number filed with Amendment No. 1 to the Registrant's Registration Statement on Form S-1, as filed with the Commission on June 14, 1994 and which became effective on July 14, 1994: S-4
Exhibit Number Description of Document ------- ----------------------- 1.01 Selling Agreement among the Partnership, the Trading Partnership, the General (Amended) Partner, Merrill Lynch Futures, the Selling Agent and the Trading Advisors. 3.03(ii) Limited Partnership Agreement of the Trading Partnership dated May 26, 1994. 3.04(ii) Form of Amended and Restated Limited Partnership Agreement of the Trading Partnership. 10.01 Form of Advisory Agreement among the Partnership, the Trading Partnership, (Amended) MLFIP and each Trading Advisor. 10.02 Form of Consulting Agreement between Merrill Lynch Futures and each Trading (Amended) Advisor. 10.03 Form of Customer Agreement between the Trading Partnership and Merrill (Amended) Lynch Futures. 10.04 Form of Escrow Agreement among the Partnership, the Escrow Agent, the (Amended) Selling Agent and MLFIP. 10.05 Merrill Lynch & Co., Inc. Guarantee Agreement (included as Exhibit B to the (Amended) Prospectus). 10.07 Foreign Exchange Desk Service Agreement with Amendment adding the Trading (Amended) Partnership as a party thereto. 10.08 Investment Advisory Contract among Merrill Lynch Futures, the Partnership, the Trading Partnership and MLAM.
(b) Financial Statement Schedules. No Financial Schedules are required to be filed herewith. ITEM 17. UNDERTAKINGS. (a) The undersigned registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement; (i) To include any prospectus required by section 10(a)(3) of the Securities Act of 1933; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high and of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. S-5 (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) That, for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (b) Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to officers, directors or controlling persons of the registrant pursuant to the provisions described in Item 14 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933 and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by an officer, director, or controlling person of the registrant in the successful defense of any such action, suit or proceeding) is asserted by such officer, director or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. S-6 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the General Partner of the Registrant has duly caused this Registration Statement Amendment to be signed on its behalf by the undersigned, thereunto duly authorized, in The City of New York in the State of New York on the 3rd day of July, 1996. ML PRINCIPAL PROTECTION L.P. By: Merrill Lynch Investment Partners Inc. General Partner By JOHN R. FRAWLEY, JR. --------------------------- John R. Frawley, Jr. President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Registration Statement Amendment has been signed below by the following persons on behalf of the General Partner of the Registrant in the capacities and on the date indicated. Signature Title With Registrant Date --------- --------------------- ---- JOHN R. FRAWLEY, JR. - ---------------------------- President, Chief Executive July 3, 1996 John R. Frawley, Jr. Officer and Director (Principal Executive Officer) JAMES M. BERNARD - ---------------------------- Chief Financial Officer, July 3, 1996 James M. Bernard Treasurer and Vice-President (Principal Financial and Accounting Officer) WILLIAM T. MAITLAND - ---------------------------- Secretary and Director July 3, 1996 William T. Maitland ALLEN N. JONES - ---------------------------- Director July 3, 1996 Allen N. Jones (Being principal executive officer, the principal financial and accounting officer and a majority of the directors of Merrill Lynch Investment Partners Inc.) Merrill Lynch Investment General Partner of Registrant July 3, 1996 Partners Inc. By JOHN R. FRAWLEY, JR. - ---------------------------- John R. Frawley, Jr. President and Chief Executive Officer S-7 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 3, 1996 REGISTRATION NO. 33-_____ REGISTRATION NO. 33-73914 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 -------------------- EXHIBITS To FORM S-1 REGISTRATION STATEMENT Under The Securities Act of 1933 -------------------- ML PRINCIPAL PROTECTION L.P. (formerly, ML Principal Protection Plus L.P.) ML PRINCIPAL PROTECTION TRADING L.P. (formerly, ML Principal Protection Plus Trading L.P.) (Rule 140 Co-Registrant) ================================================================================ ML PRINCIPAL PROTECTION L.P. ML PRINCIPAL PROTECTION TRADING L.P. EXHIBIT INDEX Exhibit Number Description of Document - -------- ----------------------- 1.01 Selling Agreement among the Partnership, the Trading Partnership, the General Partner, Merrill Lynch Futures, the Selling Agent and the Trading Advisors. 3.01(i) Amended and Restated Certificate of Limited Partnership of the Partnership. 3.02(i) Amended and Restated Certificate of Limited Partnership of the Trading Partnership. 3.02(ii) Third Amended and Restated Limited Partnership Agreement of the Partnership (included as Exhibit A to the Prospectus). 3.03(ii) Second Amended and Restated Limited Partnership Agreement of the Trading Partnership. 5.01(a) Opinion of Sidley & Austin relating to the legality of the Units. 5.01(b) Opinion of Richards, Layton & Finger relating to the legality of the Units. 8.01 Opinion of Sidley & Austin with respect to federal income tax consequences. 10.01 Form of Advisory Agreement among the Partnership, Trading Partnership, the General Partner and each Trading Advisor. 10.02 Form of Consulting Agreement between Merrill Lynch Futures and each Trading Advisor. 10.03 Form of Customer Agreement between the Trading Partnership and Merrill Lynch Futures. 10.04 Form of Escrow Agreement among the Partnership, the Escrow Agent, the Selling Agent and the General Partner. 10.05 Merrill Lynch & Co., Inc. Guarantee Agreement (included as Exhibit B to the Prospectus). 10.06 Form of Subscription Agreement and Power of Attorney (included as Exhibit D to the Prospectus). 10.07 Foreign Exchange Desk Service Agreement with Amendment adding the Trading Partnership as a party thereto. 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. Exhibit Number Description of Document - ------- ----------------------- 10.10 Minimum Net Asset Value per Unit undertaking of the General Partner. 10.11 Form of Custody Agreement between Merrill Lynch, Pierce, Fenner & Smith Incorporated and the Partnership. 23.01 Consent of Sidley & Austin. 23.02 Consent of Deloitte & Touche. 23.03 Consent of Richards, Layton & Finger (included in Exhibit 5.01(b)). EX-1.01 2 SELLING AGREEMENT EXHIBIT 1.01 SELLING AGREEMENT ----------------- ML PRINCIPAL PROTECTION L.P. (FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.) A DELAWARE LIMITED PARTNERSHIP 1,000,000 UNITS OF LIMITED PARTNERSHIP INTEREST Dated as of July 15, 1996 ML PRINCIPAL PROTECTION L.P. SELLING AGREEMENT TABLE OF CONTENTS
Page ---- Section 1. Representations and Warranties of the General Partner.............. 2 Section 2. Representations and Warranties of the Commodity Broker............. 8 Section 3. Representations and Warranties of the Trading Advisors............. 10 Section 4. Offering and Sale of Units......... 13 Section 5. Covenants of the General Partner... 18 Section 6. Covenants of the Trading Advisors.. 20 Section 7. Payment of Expenses and Fees....... 21 Section 8. Conditions of Closing.............. 22 Section 9. Indemnification and Exculpation.... 25 Section 10. Status of Parties.................. 28 Section 11. Representations, Warranties and Agreements to Survive Delivery... 28 Section 12. Termination........................ 29 Section 13. Notices and Authority to Act....... 29 Section 14. Parties............................ 29 Section 15. Governing Law...................... 29 Section 16. Requirements of Law................ 29
ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) 1,000,000 UNITS OF LIMITED PARTNERSHIP INTEREST (SUBSCRIPTION PRICE: $100 PER UNIT, $97 PER UNIT FOR MERRILL LYNCH EMPLOYEES) SELLING AGREEMENT ----------------- July 15, 1996 MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10080-6106 Dear Sirs: Your affiliate, MERRILL LYNCH INVESTMENT PARTNERS INC. (formerly, ML Futures Investment Partners Inc.), a Delaware corporation (referred to herein in its individual corporate capacity and as general partner as the "General Partner"), caused the formation, in 1994, of a limited partnership pursuant to the Revised Uniform Limited Partnership Act of the State of Delaware (the "DRULPA") under the name ML PRINCIPAL PROTECTION PLUS L.P., for the purpose of engaging in speculative trading of futures and forward contracts and commodity options in the international markets. ML Principal Protection Plus L.P. was renamed ML PRINCIPAL PROTECTION L.P. (the "Partnership") as of July 1, 1996. The Partnership does not have any trading operations of its own but rather enters, through its wholly-owned trading subsidiary, ML PRINCIPAL PROTECTION TRADING L.P., (formerly, ML Principal Protection Plus Trading L.P.), a Delaware limited partnership (the "Trading Partnership"), into separate Advisory Agreements with various professional commodity trading advisors which have no affiliation with the General Partner (other than perhaps managing accounts for the clients of the General Partner) (individually, a "Trading Advisor" and, collectively, the "Trading Advisors"). The Trading Partnership engages in speculative trading in the commodities markets as aforesaid, and the Trading Advisors direct such trading; the commodity broker and forward contract dealer for the Partnership is MERRILL LYNCH FUTURES INC., a Delaware corporation and certain of its affiliates (the "Commodity Broker") or such other brokers as approved of in writing by Merrill Lynch Futures Inc.; and the exclusive selling agent for the Partnership is yourself, including, without limitation, ML INTERNATIONAL & CO., C.V.O.A., and certain of your affiliates (herein sometimes collectively referred to as the "Selling Agent"). The Commodity Broker acts as (i) broker for the Partnership pursuant to a customer agreement (the "Customer Agreement") between the Commodity Broker and the Trading Partnership and (ii) forward contract dealer through the Partnership's affiliated Foreign Exchange Desk with respect to the Partnership's forward trading pursuant to a foreign exchange desk service agreement (the "Foreign Exchange Desk Service Agreement") between the Commodity Broker, the General Partner, the Trading Partnership and certain other parties. Each Trading Advisor provides commodity trading advisory services to the Trading Partnership pursuant to an advisory agreement (individually, the "Advisory Agreement" and, collectively, the "Advisory Agreements") between each Trading Advisor, the Partnership, the Trading Partnership and the General Partner. The Trading Advisors provide various commodity-related services to the Commodity Broker pursuant to consulting agreements (individually, the "Consulting Agreement" and, collectively, the "Consulting Agreements") between each Trading Advisor and the Commodity Broker. The Trading Advisors are referred to herein and in the Prospectus (defined below) as either "core" or non-"core" Trading Advisors depending upon the percentage of the Partnership's "trading assets" (i.e., assets invested in the Trading Partnership as well as assets held by the Partnership and committed to paying trading losses) allocated to them. The "core" Trading Advisors are those Trading Advisors who are initially allocated 10% or more of the Partnership's trading assets and for whom disclosure has been given in the Prospectus, including Appendix I thereto, in accordance with the disclosure requirements of the rules and regulations of the Commodity Futures Trading Commission ("CFTC") under the Commodity Exchange Act (the "Commodity Act"). The non-"core" Trading Advisors are those Trading Advisors who are initially allocated less than 10% -2- of the Partnership's trading assets and for whom only summary disclosure has been given in the Prospectus Supplement which accompanies each Prospectus (pursuant to relief granted by the CFTC and the Securities and Exchange Commission ("SEC")). Capitalized terms used herein, unless otherwise indicated, shall have the meanings attributed to them in the Prospectus referred to below. Section 1. Representations and Warranties of the General Partner. The General Partner represents and warrants to the Trading Advisors and the Selling Agent, as follows: (a) The Partnership (and the Trading Partnership as co-registrant) has: provided to the Trading Advisors and to the Selling Agent and filed with the SEC a registration statement on Form S-1 (Registration No. 33- _____), constituting also Post-Effective Amendment No. 3 to Registration No. 33-73914; effective July 14, 1994, as filed with the SEC on July 3, 1996, for the registration, or continued registration pursuant to SEC Rule 429, as the case may be, of Units of Limited Partnership Interest (the "Units") and the interests in the Partnership represented thereby under the Securities Act of 1933, as amended (the "1933 Act"); and has filed two copies thereof with the CFTC under the Commodity Act and one copy with the National Futures Association (the "NFA") in accordance with NFA Compliance Rule 2-13. On July __, 1996 the Partnership filed its final Amendment No. 1 (Post-Effective Amendment No. 4 to Registration No. 33-73914), to the registration statement and a final amended prospectus, with the forms of which all parties hereto are familiar. The Partnership will not, at any time after the date hereof file any other amendment to the registration statement or any other amended prospectus which shall be reasonably objected to in writing by any Trading Advisor or by counsel to any of the Trading Advisors. Amendment No. 1 to the registration statement and the amended prospectus included therein are hereinafter called the "Registration Statement" and the "Prospectus," respectively. If the Partnership files a subsequent post-effective amendment to the Registration Statement, then the term, "Registration Statement," shall, from and after the declaration of the -3- effectiveness of such post-effective amendment, refer to the Registration Statement as amended by such post-effective amendment thereto, and the term, "Prospectus," shall refer to the amended prospectus then on file with the SEC as part of the Registration Statement, or if a subsequent prospectus is filed by the Partnership pursuant to Rule 424 of the rules and regulations of the SEC under the 1933 Act (the "SEC Regulations"), the term, "Prospectus," shall refer to the prospectus most recently filed pursuant to such Rule from and after the date on which it shall have been first used. Except as required by law, the Partnership will not file any amendment to the Registration Statement or any amendment or supplement to the Prospectus which shall be reasonably objected to in writing by any Trading Advisor or by counsel to any Trading Advisor, upon reasonable prior notice. (b) The Certificate of Limited Partnership, as amended (the "Certificate of Limited Partnership"), pursuant to which the Partnership has been formed and the Third Amended and Restated Limited Partnership Agreement of the Partnership (the "Limited Partnership Agreement") each provides for the subscription for and sale of the Units in series; all action required to be taken by the General Partner and the Partnership as a condition to the sale of the Units to qualified subscribers therefor has been, or prior to each Closing Time, as defined in Section 4 hereof, will have been taken; and, upon payment of the consideration therefor specified in all accepted Subscription Agreements and Powers of Attorney, the Units will constitute valid limited partnership interests in the Partnership. (c) Each of the Partnership and the Trading Partnership is a limited partnership duly organized pursuant to the Certificate of Limited Partnership, the Certificate of Limited Partnership of the Trading Partnership, as amended (the "Trading Partnership Certificate"), the Limited Partnership Agreement and the Amended and Restated Limited Partnership Agreement of the Trading Partnership (the "Trading Limited Partnership Agreement"), respectively, and the DRULPA and validly existing under the laws of the State of Delaware with full power and authority to (i) invest in -4- U.S. Treasury securities and securities issued by U.S. government agencies and instrumentalities and in the Trading Partnership, in the case of the Partnership, and (ii) engage in the trading of futures, forward and option contracts, in the case of the Trading Partnership, as described in the Prospectus; each of the Partnership and the Trading Partnership has received a certificate of authority to do business in the State of New York as provided by Article 8-A of the New York Uniform Limited Partnership Act. (d) The General Partner is duly organized and validly existing and in good standing as a corporation under the laws of the State of Delaware and in good standing as a foreign corporation under the laws of the State of New York and in each other jurisdiction in which the nature or conduct of its business requires such qualification and the failure to so qualify would materially adversely affect the Partnership or the General Partner's ability to perform its obligations hereunder. (e) The Partnership, the Trading Partnership and the General Partner have full partnership or corporate power and authority under applicable law to perform their respective obligations under the Limited Partnership Agreement, the Escrow Agreement relating to the offering of the Units (the "Escrow Agreement"), the Advisory Agreements and this Agreement, as described in the Registration Statement and Prospectus. (f) The Registration Statement and Prospectus contain all statements and information required to be included therein by the Commodity Act and the rules and regulations thereunder. When the Registration Statement became effective under the 1933 Act and at all times subsequent thereto up to and including the Closing Time, the Registration Statement and Prospectus did and will comply in all material respects with the requirements of the 1933 Act, the Commodity Act and the rules and regulations under such Acts. The Registration Statement as of its effective date did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not mislead- -5- ing. The Prospectus as of its date of issue and as of the beginning of each calendar quarter as of which Units are sold (an "Additional Closing Time") did not and will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstances under which such statements were made, not misleading. This representation and warranty shall not, however, apply to any statement or omission in the Registration Statement or Prospectus made in reliance upon and in conformity with information relating to the Trading Advisors or the Selling Agent and furnished or approved in writing by the Trading Advisors or the Selling Agent, it being acknowledged that each Trading Advisor has approved the information relating to such Trading Advisor or its principals as set forth in the Prospectus and in the selling brochure of the Partnership dated July 1996. (g) Deloitte & Touche, the accountants who certified the financial statements filed with the SEC as part of the Registration Statement, are, with respect to the General Partner, the Partnership and the Trading Partnership, independent public accountants as required by the 1933 Act and the SEC Regulations. (h) The financial statements filed as part of the Registration Statement and those included in the Prospectus present fairly the financial position of the Partnership, the Trading Partnership and the General Partner as of the dates indicated; and said financial statements have been prepared in conformity with generally accepted accounting principles (as described therein), or, in the case of unaudited financial statements, in substantial conformity with generally accepted accounting principles, applied on a basis which is consistent in all material respects for each balance sheet date presented. (i) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, there has not been any material adverse change in the condition, financial or otherwise, business or prospects of the General Partner, the -6- Partnership or the Trading Partnership, whether or not arising in the ordinary course of business. (j) The General Partner at Closing Time will have a net worth sufficient in amount and satisfactory in form, as set forth in the opinion of Sidley & Austin, counsel for the General Partner, for classification of the Partnership and the Trading Partnership as partnerships for Federal income tax purposes under current interpretations of the Internal Revenue Code of 1954 and the Internal Revenue Code of 1986, as amended (collectively, the "Code"), and the regulations thereunder. (k) The Advisory Agreements, the Limited Partnership Agreement, the Trading Limited Partnership Agreement, the Escrow Agreement and this Agreement have each been duly and validly authorized, executed and delivered by the General Partner on behalf of the Partnership and/or the Trading Partnership, as the case may be, and each constitutes a valid, binding and enforceable agreement of the Partnership and/or the Trading Partnership as the case may be, in accordance with its terms. The Customer Agreement and the Foreign Exchange Desk Service Agreement has been duly and validly authorized, executed and delivered by the General Partner on behalf of the Trading Partnership. (l) The Merrill Lynch & Co., Inc. Guarantee of the General Partner's undertaking to the Partnership that the Net Asset Value per Unit of each series issued by the Partnership will equal no less than $100 as of the Principal Assurance Date for such series, as described in the Prospectus, has been duly and validly authorized, executed and delivered by Merrill Lynch & Co., Inc. and constitutes a valid, binding and enforceable agreement of Merrill Lynch & Co., Inc. in accordance with its terms. (m) The execution and delivery of the Limited Partnership Agreement, the Trading Limited Partnership Agreement, the Escrow Agreement, the Customer Agreement, the Foreign Exchange Desk Service Agreement, the Advisory Agreements and this Agreement, the incurrence of the obligations set forth in each of such -7- agreements and the consummation of the transactions contemplated therein and in the Prospectus will not constitute a breach of, or default under, any instrument by which either the General Partner, the Partnership or the Trading Partnership, as the case may be, is bound or any order, rule or regulation applicable to the General Partner, the Partnership or the Trading Partnership of any court or any governmental body or administrative agency having jurisdiction over the General Partner, the Partnership or the Trading Partnership. (n) There is not pending, or, to the best of the General Partner's knowledge threatened, any action, suit or proceeding before or by any court or other governmental body to which the General Partner, the Partnership or the Trading Partnership is a party, or to which any of the assets of the General Partner, the Partnership or the Trading Partnership is subject, which is not referred to in the Prospectus and which might reasonably be expected to result in any material adverse change in the condition (financial or otherwise), business or prospects of the General Partner, the Partnership or the Trading Partnership or is required to be disclosed in the Prospectus pursuant to applicable CFTC regulations. The General Partner has not received any notice of an investigation or warning letter from the NFA or the CFTC regarding non-compliance by the General Partner with the Commodity Act or the regulations thereunder. (o) The General Partner has all Federal and state governmental, regulatory and commodity exchange approvals and licenses, and has effected all filings and registrations with Federal and state governmental agencies required to conduct its business and to act as described in the Registration Statement and Prospectus or required to perform its obligations as described under the Limited Partnership Agreement, the Trading Limited Partnership Agreement and this Agreement (including, without limitation, registration as a commodity pool operator under the Commodity Act and membership in the NFA as a commodity pool operator), and the performance of such obligations will not contravene or result in a breach of any provision of its -8- certificate of incorporation, by-laws or any agreement, order, law or regulation binding upon it. The principals of the General Partner identified in the Registration Statement are all of the principals of the General Partner, as "principals" is defined by the CFTC regulations. Such principals are duly registered as such on the General Partner's commodity pool operator Form 7-R registration. (p) Neither the Partnership nor the Trading Partnership requires any Federal or state governmental, regulatory or commodity exchange approvals or licenses, or need to effect any filings or registrations with any Federal or state governmental agencies in order to conduct its businesses and to act as contemplated by the Registration Statement and Prospectus and, in the case of the Partnership, to issue and sell the Units (other than filings relating solely to the offering of the Units), and, in the case of Trading Partnership, to trade in the commodity markets. Section 2. Representations and Warranties of the Commodity Broker. The Commodity Broker represents and warrants to the Partnership, the Trading Partnership, the General Partner, the Trading Advisors and the Selling Agent, as follows: (a) The Commodity Broker is a corporation duly organized and validly existing and in good standing under the laws of the State of Delaware and in good standing and qualified to do business in the State of New York and in each other jurisdiction in which the nature or conduct of its business requires such qualification and the failure to be duly qualified would materially adversely affect the Commodity Broker's ability to perform its obligations hereunder or under the Customer Agreement, the Foreign Exchange Desk Service Agreement and the Consulting Agreements. The Commodity Broker has full corporate power and authority to perform its obligations under the Customer Agreement, the Consulting Agreements and this Agreement and as described in the Registration Statement and Prospectus. (b) All references to the Commodity Broker and its principals in the Registration Statement and -9- Prospectus are accurate and complete in all material respects, and set forth in all material respects the information required to be disclosed therein under the Commodity Act and the rules and regulations thereunder. As to the Commodity Broker and its principals, (i) the Registration Statement and Prospectus contain all statements and information required to be included therein under the Commodity Act and the rules and regulations thereunder, (ii) the Registration Statement as of its effective date did not contain any misleading or untrue statement of a material fact or omit to state a material fact which is required to be stated therein or necessary to make the statements therein not misleading and (iii) the Prospectus at its date of issue and as of each Additional Closing Time did not and will not contain an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in light of the circumstances under which such statements were made. (c) The Commodity Broker has all Federal and state governmental, regulatory and commodity exchange licenses and approvals, and has effected all filings and registrations with Federal and state governmental and regulatory agencies required to conduct its business and to act as described in the Registration Statement and Prospectus or required to perform its obligations under the Customer Agreement, the Foreign Exchange Desk Service Agreement, the Consulting Agreements and this Agreement (including, without limitation, registration of the Commodity Broker as a futures commission merchant under the Commodity Act and membership of the Commodity Broker as a futures commission merchant in the NFA), and the performance of such obligations will not violate or result in a breach of any provision of the Commodity Broker's certificate of incorporation, by- laws or any agreement, instrument, order, law or regulation binding upon the Commodity Broker. (d) Each of the Customer Agreement, the Foreign Exchange Desk Service Agreement, the Consulting Agreements and this Agreement has been duly authorized, executed and delivered by the Commodity Broker and each of this Agreement and the Consulting Agreements -10- constitutes a valid, binding and enforceable agreement of the Commodity Broker in accordance with its terms. (e) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as may otherwise be stated in or contemplated by the Registration Statement and the Prospectus, there has not been any material adverse change in the condition, financial or otherwise, business or prospects of the Commodity Broker, whether or not arising in the ordinary course of business. (f) In the ordinary course of its business, the Commodity Broker is engaged in civil litigation and subject to administrative proceedings. Neither the Commodity Broker nor any of its principals have been the subject of any administrative, civil, or criminal actions within the five years preceding the date hereof that would be material to an investor's decision to purchase the Units which are not disclosed in the Prospectus. (g) The execution and delivery of the Customer Agreement, the Foreign Exchange Desk Service Agreement, the Consulting Agreements and this Agreement, the incurrence of the obligations set forth herein and therein and the consummation of the transactions contemplated herein and therein and in the Prospectus will not constitute a breach of, or default under, any instrument by which the Commodity Broker is bound or any order, rule or regulation applicable to the Commodity Broker of any court or any governmental body or administrative agency having jurisdiction over the Commodity Broker. Section 3. Representations and Warranties of the Trading Advisors. Each Trading Advisor represents and warrants to the Partnership, the Trading Partnership, the Selling Agent, the Commodity Broker, the other Trading Advisors and the General Partner as follows: (a) The Trading Advisor is a corporation duly organized and validly existing and in good standing under the laws of its state of incorporation and in good standing as a foreign corporation in each other -11- jurisdiction in which the nature or conduct of its business requires such qualification and the failure to be duly qualified would materially affect the Trading Advisor's ability to perform its obligations under this Agreement, the Consulting Agreement and the Advisory Agreement. The Trading Advisor has full corporate power and authority to perform its obligations under this Agreement, the Consulting Agreement and the Advisory Agreement as described in the Registration Statement and Prospectus. (b) With respect to each "core" Trading Advisor, all references to such "core" Trading Advisor and its principals, and its trading systems, methods and performance in the Registration Statement and the Prospectus are accurate and complete in all material respects. Further, as to such "core" Trading Advisor, each of the principals of the "core" Trading Advisor, and its trading systems, methods and performance: (i) the Registration Statement and Prospectus contain all statements and information required to be included therein under the Commodity Act and the rules and regulations thereunder, (ii) the Registration Statement (with respect to the information relating to the "core" Trading Advisor furnished to the General Partner) as of its effective date did not contain any misleading or untrue statement of a material fact or omit to state a material fact which is required to be stated therein or necessary to make the statements therein not misleading and (iii) the Prospectus (as approved in pertinent part by the "core" Trading Advisor) at its date of issue and as of each Additional Closing Time did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in light of the circumstances under which such statements were made. Except as otherwise disclosed in the Prospectus or identified in writing to the General Partner on or prior to the date hereto, the actual performance of each discretionary account directed by such "core" Trading Advisor or any principal or affiliate of such "core" Trading Advisor for the periods covered by the Performance Summaries set forth in the Prospectus (including Appendix I thereto) is disclosed in accordance with the requirements of the Commodity Act and the rules and -12- regulations thereunder (or as otherwise permitted by the Staff of the Division of Trading and Markets). The information and Performance Summaries relating to the actual performance of the "core" Trading Advisor are complete and accurate in all material respects and comply in all material respects with the disclosure requirements of the rules and regulations of the CFTC under the Commodity Act, including those relating to the inclusion of "notional" equity. The Performance Summaries in the Prospectus (as applicable to the "core" Trading Advisor) have been calculated in the manner set forth in the notes thereto. With respect to the non-"core" Trading Advisors, the foregoing representation and warranty is not applicable. Instead, each such non- "core" Trading Advisor represents and warrants to the Partnership, the Trading Partnership, the Selling Agent, the Commodity Broker, the other Trading Advisors and the General Partner that (i) the Disclosure Document furnished by such non-"core" Trading Advisor to the General Partner is accurate and complete in all material respects and contains all statements and information required to be included therein under the Commodity Act and the rules and regulations thereunder, and (ii) the summary information included in the Prospectus Summary with respect to such non-"core" Trading Advisor (as approved in pertinent part by such non-"core" Trading Advisor) at its date of issue and as of Closing Time did not and will not contain any misleading or untrue statement of a material fact. (c) The Advisory Agreement, the Consulting Agreement and this Agreement have each been duly and validly authorized, executed and delivered on behalf of the Trading Advisor and each constitutes a valid, binding and enforceable agreement of the Trading Advisor in accordance with its terms. (d) The Trading Advisor has all Federal and state governmental, regulatory and commodity exchange licenses and approvals and has effected all filings and registrations with Federal and state governmental and regulatory agencies required to conduct its business and to act as described in the Registration Statement -13- and Prospectus or required to perform its obligations under this Agreement, the Consulting Agreement and the Advisory Agreement (including, without limitation, registration of the Trading Advisor as a commodity trading advisor under the Commodity Act and membership of the Trading Advisor as a commodity trading advisor in the NFA), and the performance of such obligations will not violate or result in a breach of any provision of the Trading Advisor's Certificate of Incorporation, By-laws or any agreement, instrument, order, law or regulation binding on the Trading Advisor. The principals of the Trading Advisor are duly listed as such on the Trading Advisor's commodity trading advisor Form 7-R registration. (e) Management by such Trading Advisor of an account for the Trading Partnership in accordance with the terms hereof and of the Advisory Agreement, and as described in the Prospectus, will not violate the Investment Advisers Act of 1940. (f) Neither the Trading Advisor nor any principal of the Trading Advisor will use or distribute any preliminary prospectus, Prospectus, amended or supplemented Prospectus or selling literature nor engage in any selling activities whatsoever in connection with the offering of the Units, except as may be requested by the General Partner pursuant to Section 6(c) of this Agreement. (g) Since the respective dates as of which information is given in the Registration Statement and the Prospectus, except as may otherwise be stated in or contemplated by the Registration Statement and the Prospectus, there has not been any material adverse change in the condition, financial or otherwise, business or prospects of the Trading Advisor, whether or not arising in the ordinary course of business. In the case of the non-"core" Trading Advisors, the foregoing representation and warranty shall be modified so that the first two clauses of the first sentence read "Since the respective dates as of which information is given in the Prospectus Supplement and in the Disclosure Document furnished by such non-"core" -14- Trading Advisor to the General Partner, except as may otherwise be stated in or contemplated by the Prospectus Supplement and such material...." (h) The execution and delivery of this Agreement, the Consulting Agreement and the Advisory Agreement, the incurrence of the obligations herein and therein set forth and the consummation of the transactions contemplated herein and therein and in the Prospectus will not constitute a breach of, or default under, any instrument by which the Trading Advisor is bound or any order, rule or regulation applicable to the Trading Advisor of any court or any governmental body or administrative agency having jurisdiction over the Trading Advisor. (i) There is not pending, or to the best of the Trading Advisor's knowledge threatened, any action, suit or proceeding before or by any court or other governmental body to which the Trading Advisor is a party, or to which any of the assets of the Trading Advisor is subject, which might reasonably be expected to result in any material adverse change in the condition, financial or otherwise, business or prospects of the Trading Advisor. The Trading Advisor has not received any notice of an investigation or warning letter from the NFA or the CFTC regarding non- compliance by the Trading Advisor with the Commodity Act or the regulations thereunder. (j) The Trading Advisor has not received, and is not entitled to receive, directly or indirectly, any commission, finder's fee, similar fee or rebate from any person in connection with the organization or operation of the Partnership. Section 4. Offering and Sale of Units. -------------------------- (a) The appointment of the Selling Agent as exclusive selling agent of the Partnership for an indefinite period of time (the "Offering Period") is hereby reconfirmed to the Selling Agent to continue to attempt to find acceptable subscribers for up to the number of Units set forth on page 1 hereof through a public offering of different series of Units sold as of -15- the beginning of each calendar quarter beginning October 1, 1996. Any checks received which are made payable to any party other than the Escrow Agent shall be returned to the purchaser who submitted the check and not accepted. Subject to the performance by the General Partner of all its obligations to be performed hereunder, and to the completeness and accuracy in all material respects of all the representations and warranties of the General Partner, the Commodity Broker and the Trading Advisors contained herein, the Selling Agent hereby accepts such agency and agrees on the terms and conditions herein set forth to use its best efforts to find acceptable subscribers for the Units as of each such calendar quarter-end at a public offering price of $100 per Unit, each subscriber being required to subscribe for at least 50 Units, except in the case of existing Limited Partners making additional investments, in which case the minimum investment is 10 Units. Officers and employees of Merrill Lynch & Co., Inc. or any of its affiliates will be permitted to subscribe for Units at a price of $97 per Unit, with the General Partner supplying the remaining $3 per Unit subscription price on such Units (retirement accounts established for such officers and employees must subscribe at $100 per Unit). The offering of the Units must be continuous. The Selling Agent may not, at any time, suspend or defer such offering; provided that the Selling Agent may terminate the Offering as set forth herein. It is understood that the Selling Agent's agreement to use its best efforts to find acceptable subscribers for the Units as of the beginning of each such calendar quarter shall not prevent it from acting as a selling agent or underwriter for the securities of other issuers which may be offered or sold during the Offering Period. The agency of the Selling Agent hereunder shall continue until the General Partner terminates the Offering Period, upon at least 30 calendar days' notice to the Selling Agent (the date on which the Offering Period terminates being hereinafter referred to as the "Offering Termination Date"), including such additional period as may be required to effect the closing of the sale of the Units, or the -16- Selling Agent terminates this Agreement upon 30 calendar days' notice to the General Partner. (b) Before the end of each calendar quarter, the General Partner shall notify the Selling Agent of the aggregate number of Units for which the General Partner has received acceptable subscriptions during the preceding quarter. Payment of the purchase price for such Units will be made at the office of the General Partner, Merrill Lynch World Headquarters, Sixth Floor, South Tower, World Financial Center, New York, New York 10080-6106, or at such other place as shall be agreed upon between the Selling Agent and the General Partner, at 10:00 A.M., New York time, on the fifth full business day after the day on which the General Partner notifies the Selling Agent of the number of Units for which subscriptions have been accepted or such other day and time as shall be agreed upon between the Selling Agent and the General Partner. (c) No selling commissions will be paid from the proceeds of sales of Units. The Selling Agent will be credited by the Merrill Lynch organization with a selling commission of $5 per Unit, a portion of which will be paid in cash to the Financial Consultants who sell the Units from funds made available by the General Partner. The purchase price of Units sold to officers and employees of Merrill Lynch & Co., Inc. shall be reduced from $100 to $97, the General Partner itself paying the remaining $3 per Unit to the Partnership (retirement accounts established for such officers and employees must subscribe at $100 per Unit). No initial production credits shall be paid on Units sold at $97 per Unit. Financial Consultants will receive, in addition to initial production credits of $5, additional compensation, beginning at the end of the thirteenth month after Units have been sold, in the form of subsequent production credits equal to 0.167 of 1% (a 2% annual rate) of the percentage of the average month-end Net Asset Value of such Units committed to -17- the Trading Advisors for management (initially, 75%, resulting in ongoing compensation at an annual rate of 1.5% of overall Net Asset Value) and attributable to Units sold by a Financial Consultant which remain outstanding (including the month as of the end of which such Unit is redeemed). Additional compensation will only be paid to Financial Consultants who agree to provide the additional services described below and who are registered with the CFTC and who have satisfied all applicable proficiency requirements (including those imposed by the NASD as a condition of receiving "trailing commissions") by either passing the Series 31 Futures Managed Funds Exam, or Series 3 National Commodity Futures Exam or by being "grandfathered" from having to do so. A portion of such credits will be paid in cash from funds made available by the General Partner. The additional compensation described in the foregoing paragraph shall only be paid to otherwise eligible Financial Consultants, provided that the Selling Agent continues to be registered with the CFTC as a futures commission merchant or introducing broker and continues to be a member in good standing of the NFA in such capacity, and is contingent upon the provision by a Financial Consultant (duly registered and qualified as to proficiency with the CFTC and NFA as described above) who sold outstanding Units in his capacity as a registered representative of the Selling Agent of additional services in connection with such Units, including: (i) inquiring of the General Partner from time to time, at the request of an owner of such Units, as to the Net Asset Value of a Unit of the series held by such owner; (ii) inquiring of the General Partner from time to time, at the request of an owner of such Units, regarding the commodities markets and the Partnership; (iii) assisting, at the request of the General Partner, in the redemption of Units sold by such Financial Consultant; and (iv) providing such other services to the owners of such Units as the General Partner may, from time to time, reasonably request. Additional compensation shall be credited and paid only in respect of Units sold by Financial Consultants -18- who are eligible to receive such additional compensation as described above. No additional compensation whatsoever shall be credited, paid or accrued on any Units sold by Financial Consultants not currently eligible to receive such additional compensation. Such additional compensation shall be accrued monthly but paid on a calendar-quarter basis. (d) The Selling Agent will use its best efforts to find eligible persons to purchase the Units as of the end of each calendar quarter thereafter on the terms stated herein and in the Registration Statement and Prospectus. It is understood that the Selling Agent has no commitment with regard to the sale of the Units other than to use its best efforts. In connection with the offer and sale of the Units, the Selling Agent represents that it will comply fully with all applicable laws, and the rules of the NASD, the SEC, the CFTC, state securities administrators and any other regulatory body. In particular, and not by way of limitation, the Selling Agent represents and warrants that it is aware of Appendix F of the NASD Rules of Fair Practice and that it will comply fully with all the terms thereof in connection with the offering and sale of the Units. The Selling Agent shall not execute any sales of Units from a discretionary account over which it has control without prior written approval of the customer in whose name such discretionary account is maintained. The Selling Agent agrees not to recommend the purchase of Units to any subscriber unless the Selling Agent shall have reasonable grounds to believe, on the basis of information obtained from the subscriber concerning, among other things, the subscriber's investment objectives, other investments, financial situation and needs, that the subscriber is or will be in a financial position appropriate to enable the subscriber to realize to a significant extent the benefits of the Partnership, including tax benefits described in the Prospectus; the subscriber has a fair market net worth sufficient to sustain the risks inherent in participating in the Partnership, including loss of investment and lack of liquidity; and the Units are otherwise a suitable investment for the subscriber. -19- The Selling Agent agrees to maintain files of information disclosing the basis upon which the Selling Agent determined that the suitability requirements of Section 3 of Appendix F of the NASD Rules of Fair Practice were met as to each subscriber (the basis for determining suitability may include the Subscription Agreements and Powers of Attorney and other certificates submitted by subscribers). The Selling Agent represents and warrants that it has reasonable grounds to believe, based on information in the Prospectus and information to which the Selling Agent has had access due to its affiliation with the General Partner, that all material facts relating to an investment in the Units are adequately and accurately disclosed in the Prospectus. In connection with making the foregoing representations and warranties, the Selling Agent further represents and warrants that it has, among other things, examined the following sections in the Prospectus and obtained such additional information from the General Partner and Trading Advisors regarding the information set forth thereunder as the Selling Agent has deemed necessary or appropriate to determine whether the Prospectus adequately and accurately discloses all material facts relating to an investment in the Partnership and provides an adequate basis to subscribers for evaluating an investment in the Units: "Risk Factors" "Investment Factors" "Performance of the Fund" "The Advisor Selection Process" "Leverage Considerations" "The ML&Co. Guarantee" "Charges" "MLIP and MLF" "Conflicts of Interest" "Federal Income Tax Consequences" "Appendix I - The 'Core' Trading Advisors" "Appendix III - The Role of Managed Futures in an Investment Portfolio" In connection with making the representations and warranties set forth in this paragraph, the Selling Agent has not relied on inquiries made by or on behalf of any other parties. -20- The Selling Agent agrees to inform all prospective purchasers of Units of all pertinent facts relating to the liquidity and marketability of the Units as set forth in the Prospectus. (e) None of the Selling Agent, the Partnership or the General Partner shall, directly or indirectly, pay or award any finder's fees, commissions or other compensation to any person engaged by a potential investor for investment advice as an inducement to such advisor to advise the purchase of Units; provided, however, the normal sales commissions payable to a registered broker-dealer or other properly licensed person for selling Units shall not be prohibited hereby. (f) The Partnership is reimbursing the General Partner for organizational and initial offering costs in 36 equal monthly installments of $6,642 ending October 31, 1997. (g) All payments for subscriptions shall be made by debiting subscriber's customer securities account maintained with the Selling Agent as described in the Prospectus (except for the investment of certain of the Trading Advisors). (h) The General Partner agrees to cause its counsel to prepare and deliver to the Selling Agent an updated Blue Sky Survey which shall set forth, for the guidance of the Selling Agent, in which United States jurisdictions the Units may be offered and sold. It is understood and agreed that the Selling Agent may rely, in connection with the offering and sale of Units in any jurisdiction, on advice given by such counsel as to the legality of the offer or sale of the Units in such jurisdiction, provided, however, that the Selling Agent shall be responsible for compliance with all applicable laws, rules and regulations with respect to the actions of its employees, acting as such, in connection with sales of Units in any jurisdiction. -21- Section 5. Covenants of the General Partner. -------------------------------- (a) The General Partner will notify the Selling Agent, the Commodity Broker and the Trading Advisors immediately and confirm such notification in writing (i) when any amendment to the Registration Statement shall have become effective, (ii) of the receipt of any comments from the SEC, CFTC or any other Federal or state regulatory body with respect to the Registration Statement, (iii) of any request by the SEC, CFTC or any other Federal or state regulatory body for any amendment to the Registration Statement or any amendment or supplement to the Prospectus or for additional information relating thereto and (iv) of the issuance by the SEC, CFTC or any other Federal or state regulatory body of any order suspending the effectiveness of the Registration Statement under the 1933 Act, the CFTC registration or NFA membership of the General Partner as a commodity pool operator, or the registration of Units under the Blue Sky or securities laws of any state or other jurisdiction or any order or decree enjoining the offering or the use of the then current Prospectus or of the institution, or notice of the intended institution, of any action or proceeding for that purpose. (b) It will deliver to the Selling Agent, as soon as available, two signed copies of each amendment to the Registration Statement as originally filed and two sets of exhibits thereto, and will also deliver to the Selling Agent such number of conformed copies of the Registration Statement as originally filed and of each amendment thereto (without exhibits) as the Selling Agent shall reasonably require. (c) It will take all necessary regulatory steps, make all necessary ongoing regulatory filings and obtain all necessary regulatory approvals to maintain the ongoing offering of the Units, unless the General Partner notifies the Selling Agent of the Offering Termination Date. (d) It will deliver to the Selling Agent as promptly as practicable from time to time during the period when the Prospectus is required to be delivered under the 1933 Act, such number of copies of the Pro- -22- spectus (as amended or supplemented) as the Selling Agent may reasonably request for the purposes contemplated by the 1933 Act or the SEC Regulations. (e) During the period when the Prospectus is required to be delivered pursuant to the 1933 Act, the General Partner, the Partnership and the Trading Partnership will use best efforts to comply with all requirements imposed upon them by the 1933 Act and the Commodity Act, each as now and hereafter amended, and by the SEC Regulations and rules and regulations of the CFTC, as from time to time in force, so far as necessary to permit the continuance of sales of, or dealings in, the Units during such period in accordance with the provisions hereof and as set forth in the Prospectus. (f) If any event relating to or affecting the General Partner, the Partnership and the Trading Partnership shall occur as a result of which it is necessary, in the reasonable opinion of the Selling Agent, to amend or supplement the Prospectus in order to make the Prospectus not materially misleading in light of the circumstances existing at the time it is delivered to a subscriber, the General Partner, the Partnership and the Trading Partnership will forthwith prepare and furnish to the Selling Agent, at the expense of the General Partner, a reasonable number of copies of an amendment or amendments of, or a supplement or supplements to, the Prospectus which will amend or supplement the Prospectus so that as amended or supplemented it will not contain an untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in light of the circumstances existing at the time the Prospectus is delivered to a subscriber, not misleading. No such amendment or supplement shall be filed without the approval of the Selling Agent, the Commodity Broker and the Trading Advisors, in each case together with their respective counsel. (g) It will use best efforts to qualify the Units for offer and sale under applicable securities or "Blue Sky" laws and continue such qualification throughout the Offering Period, provided that in no event shall -23- the General Partner or the Partnership be obligated to (i) take any action which would subject it to service of process in suits other than those arising out of the offering or sale of the Units, or taxes, in any jurisdiction where either is not now so subject, (ii) change any material term in the Registration Statement, or (iii) expend a sum of money considered unreasonable by the General Partner. Section 6. Covenants of the Trading Advisors. --------------------------------- (a) Each Trading Advisor agrees to cooperate, to the extent reasonably requested by the General Partner, in the preparation of any amendments or supplements relating to itself to the Registration Statement and the Prospectus. (b) With respect to each "core" Trading Advisor, during the period when the Prospectus is required to be delivered under the 1933 Act, each "core" Trading Advisor agrees to notify the General Partner immediately if such "core" Trading Advisor has reason to believe that the Prospectus may contain a misleading or untrue statement of a material fact or omit to state a material fact necessary to make the statements therein not misleading, in light of the circumstances under which such statements were made, in each case regarding it, its operations or any of its principals or of the occurrence of any event or of any change in circumstances which would result in the Prospectus not including all information relating to the "core" Trading Advisor and its principals required pursuant to CFTC regulations. With respect to each non-"core" Trading Advisor, during the period when the Prospectus is required to be delivered under the 1933 Act, each non-"core" Trading Advisor agrees to notify the General Partner immediately if such non-"core" Trading Advisor has reason to believe that the Prospectus Supplement may contain a misleading or untrue statement regarding it, its operations or any of its principals or of the occurrence of any event or of any change in circumstances which would result in the Disclosure Document furnished by the non-"core" Trading Advisor to -24- the General Partner not being accurate and complete in all material respects or not including all information relating to the non-"core" Trading Advisor and its principals required pursuant to CFTC regulations. (c) Each Trading Advisor agrees to assist, and cause its principals or agents to assist, in "road show" presentations relating to the offering of the Units at the reasonable request of the Selling Agent and at the expense of the General Partner, provided that no such assistance shall result in any action which any such principal or agent reasonably believes may require registration of the Trading Advisor or any such principal or agent as a broker-dealer or salesman or interfere materially with a Trading Advisor's normal daily business activities. Section 7. Payment of Expenses and Fees. The General Partner pays all expenses incident to the performance of the obligations of the General Partner, the Partnership and the Trading Partnership hereunder, including: (i) the printing and delivery to the Selling Agent in quantities as hereinabove stated of copies of the Registration Statement and all amendments thereto, of the Prospectus and any supplements or amendments thereto, and of any supplemental sales materials; (ii) the reproduction of this Agreement and the printing and filing of the Registration Statement and the Prospectus (and, in certain cases, the exhibits thereto) with the SEC, CFTC and NFA; (iii) the qualification of the Units under the securities or "Blue Sky" laws in the various jurisdictions, including filing fees and the fees and disbursements of the General Partner's counsel incurred in connection therewith; (iv) the services of counsel and accountants for the General Partner and the Partnership, including certain services of Deloitte & Touche in connection with their review of the Performance Summaries in the Prospectus; (v) the printing or reproduction and delivery to the Selling Agent of such number of copies as it may reasonably request of the Blue Sky Survey; and (vi) "road show" presentations (including the expenses of the Trading Advisors and their personnel). The General Partner and the Selling Agent are each aware of the limitations imposed by Appendix F of the NASD Rules of Fair Practice on the aggregate compensation which may be received by the Selling Agent in connection with the offering and -25- sale of the Units. The General Partner will in no event make any payments to the Selling Agent as described above, which might reasonably be considered expenses properly considered to be for the account of the Selling Agent and which, when added to the 5% with which the Selling Agent will be credited on each sale of Units ($5 per Unit), would exceed 10% of the gross proceeds of the Units sold to the public. The General Partner shall not reimburse the Selling Agent for any due diligence expenses in connection with the offering. Section 8. Conditions of Closing. The obligations of each of the parties hereunder are subject to the accuracy of the representations and warranties of the other parties hereto, to the performance by such other parties of their respective obligations hereunder and to the following further conditions : (a) As of each Additional Closing Time, no order suspending the effectiveness of the Registration Statement shall have been issued under the 1933 Act or proceeding therefor initiated or threatened by the SEC and no objection to the content thereof shall have been expressed or threatened by the CFTC or the NFA. (b) At the Additional Closing Time, Sidley & Austin, counsel to the General Partner and the Partnership, shall deliver to all the parties hereto its opinion, in form and substance satisfactory to each of the parties hereto. In rendering such opinion, Sidley & Austin may rely, as to matters of Delaware law, upon the opinion of Messrs. Richards, Layton & Finger, Wilmington, Delaware, and as to matters relating to Merrill Lynch & Co., Inc. on internal Merrill Lynch & Co., Inc. counsel. (c) At the Additional Closing Time on or about September 30, 1996, Mr. William T. Maitland, counsel to the Commodity Broker, shall deliver to all the parties hereto, an opinion in form and substance satisfactory to each of the parties hereto. (d) At the Additional Closing Time on or about September 30, 1996, counsel to each Trading Advisor shall deliver to all the parties hereto an opinion -26- relating to each such Trading Advisor, respectively, in form and substance satisfactory to the parties hereto. (e) At the Additional Closing Time on or about September 30, 1996, the General Partner shall deliver a certificate to the effect that: (i) no order suspending the effectiveness of the Registration Statement has been issued and to the best of its knowledge no proceedings therefor have been instituted or threatened by the SEC, the CFTC or any other regulatory body; (ii) the representations and warranties of the General Partner contained herein are true and correct with the same effect as though expressly made at the Initial Closing Time and in respect of the Registration Statement as in effect at the Initial Closing Time; and (iii) the General Partner has performed all covenants and agreements herein contained to be performed on its part at or prior to such Additional Closing Time. Such certificate may state that the General Partner has relied upon the representations of the Trading Advisors included herein. (f) The Trading Advisors shall deliver a report dated as of the Additional Closing Time on or about September 30, 1996, which shall present, for the period from the date after the last day covered by the actual Performance Summaries in Appendix I in the Prospectus (with respect to the "core" Trading Advisors) or the last day covered by the actual performance records in the Performance Summaries included in the materials provided by the non-"core" Trading Advisor to the General Partner (with respect to the non-"core" Trading Advisors) to the latest practicable day before the Additional Closing Time on or about September 30, 1996, figures which shall be a continuation of such Summaries and which shall certify that such figures are accurate in all material respects. The Trading Advisors shall also certify that such Tables have been calculated in accordance with the notes to the applicable Summaries in the Prospectus (with respect to the "core" Trading Advisors) or in the Disclosure Document furnished by the non-"core" Trading Advisor to the General Partner (with respect to the non-"core" Trading Advisors). -27- (g) At the time the Registration Statement becomes effective, Deloitte & Touche shall have delivered a letter, substantially in the form previously agreed upon by the Selling Agent and the General Partner. (h) At the Additional Closing Time on or about September 30, 1996, Deloitte & Touche shall deliver a letter in a form satisfactory to the Selling Agent and the General Partner, substantially the same in scope and substance as the letter described in paragraph (g) of this Section 8, dated as of the Additional Closing Time. (i) At the Additional Closing Time on or about September 30, 1996, each Trading Advisor shall deliver a certificate to the effect that (i) the representations and warranties of such Trading Advisor contained herein are true and correct with the same effect as though expressly made at such Additional Closing Time and in respect of the Registration Statement as in effect at such Additional Closing Time, and (ii) such Trading Advisor has performed all covenants and agreements herein contained to be performed on its part at or prior to such Additional Closing Time. (j) The Commodity Broker shall deliver a certificate to the effect that the representations and warranties of the Commodity Broker contained herein are true and correct with the same effect as though expressly made at the Additional Closing Time on or about September 30, 1996, and in respect of the Registration Statement as in effect at such Additional Closing Time. (k) The parties hereto shall have been furnished with such additional information, opinions, certificates and documents, including supporting documents relating to parties described in the Prospectus and certificates signed by such parties with regard to information relating to them and included in the Prospectus as they may reasonably require for the purpose of enabling them to pass upon the sale of the Units as herein contemplated and related proceedings, in order to evidence the accuracy or completeness of any of the -28- representations or warranties or the fulfillment of any of the conditions herein contained; and all actions taken by the parties hereto in connection with the sale of the Units as herein contemplated shall be reasonably satisfactory in form and substance to Sidley & Austin, counsel to the Trading Advisors and Mr. Maitland. (l) At each Additional Closing Time thereafter, the parties hereto shall have been furnished with such information, opinions and certified documents as the General Partner and the Selling Agent may deem to be necessary or appropriate. If any of the conditions specified in this Section 8 shall not have been fulfilled when and as required by this Agreement to be fulfilled, this Agreement and all obligations hereunder may be cancelled by any party hereto by notifying the other parties hereto of such cancellation in writing or by telegram at any time at or prior to the Additional Closing Time, and any such cancellation or termination shall be without liability of any party to any other party except as otherwise provided in Section 7. Section 9. Indemnification and Exculpation. ------------------------------- (a) Indemnification by the General Partner. The General Partner agrees to indemnify and hold harmless the Selling Agent and each Trading Advisor and each person, if any, who controls the Selling Agent or each Trading Advisor within the meaning of Section 15 of the 1933 Act, as follows: (i) against any and all loss, liability, claim, damage and expense whatsoever arising out of any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto) or any omission or alleged omission therefrom of a material fact required to be stated therein or necessary in order to make the statements therein not misleading or arising out of any untrue statement or alleged untrue statement of a material fact contained in the Prospectus (or -29- any amendment or supplement thereto) or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading, unless (a) in the case of the "core" Trading Advisors, such untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with information relating to such "core" Trading Advisor and furnished or approved in writing by such "core" Trading Advisor, or (b) in the case of the non-"core" Trading Advisors, such untrue statement or alleged untrue statement was made in reliance upon and in conformity with information relating to such non-"core" Trading Advisor and furnished or approved in writing by such non-"core" Trading Advisor or (c) in the case of the Selling Agent, such untrue statement or omission or alleged untrue statement or omission was made in reliance upon and in conformity with information relating to the Selling Agent or furnished or approved by the Selling Agent. (ii) against any and all loss, liability, claim, damage and expense whatsoever to the extent of the aggregate amount paid in settlement of any litigation, or any investigation or proceeding by any governmental agency or body commenced or threatened, or of any claim whatsoever based upon any such untrue statement or omission or any such alleged untrue statement or omission (any settlement to be subject to indemnity hereunder only if effected with the written consent of the General Partner); and (iii) against any and all expense whatsoever (including the fees and disbursements of counsel) reasonably incurred in investigating preparing or defending against litigation, or any investigation or proceeding by any governmental agency or body, commenced or -30- threatened, or any claim whatsoever based upon any such untrue statement or omission, or any such alleged untrue statement or omission, to the extent that any such expense is not paid under clauses (i) or (ii) above. In no case shall the General Partner be liable under this indemnity agreement with respect to any claim made against any indemnified party unless the General Partner shall be notified in writing of the nature of the claim within a reasonable time after the assertion thereof, but failure to so notify the General Partner shall not relieve the General Partner from any liability which it may have otherwise than on account of this indemnity agreement. The General Partner shall be entitled to participate at its own expense in the defense or, if it so elects within a reasonable time after receipt of such notice, to assume the defense of that portion of any suit so brought relating to the General Partner's indemnification obligations hereunder, which defense shall be conducted by counsel chosen by it and satisfactory to the indemnified party or parties, defendant or defendants therein. In the event that the General Partner elects to assume the defense of any such suit and retain such counsel, the indemnified party or parties, defendant or defendants in the suit, shall bear the fees and expenses of any additional counsel thereafter retained by it or them. In no event, however, shall the General Partner be obligated to indemnify the Selling Agent hereunder, and the Selling Agent agrees not to attempt to obtain any indemnity from the General Partner hereunder, to the extent that the General Partner and the Selling Agent are advised by counsel reasonably satisfactory to the General Partner and the Selling Agent that payment of such indemnity could adversely affect the classification of the Partnership as a partnership for Federal income tax purposes. The General Partner agrees to notify each Trading Advisor and the Selling Agent within a reasonable time of the assertion of any claim in connection with the sale of the Units against it or any of its officers or -31- directors or any person who controls the General Partner within the meaning of Section 15 of the 1933 Act. (b) Indemnification by the Trading Advisors. Each Trading Advisor agrees to indemnify and hold harmless the Selling Agent, the Commodity Broker, the General Partner, the Partnership and each person, if any, who controls the Selling Agent, the Commodity Broker, the Partnership or the General Partner within the meaning of Section 15 of the 1933 Act (and, in the case of the General Partner and the Partnership, each person who signed the Registration Statement or is a director of the General Partner), to the same extent as the indemnity from the General Partner set forth in Section 9(a) hereof, but only insofar as the losses, claims, damages, liabilities or expenses indemnified against arise out of or are based upon (i) in the case of the "core" Trading Advisors, any untrue statement or omission or alleged untrue statement or omission relating or with respect to such "core" Trading Advisor or any principal of such "core" Trading Advisor, or their operations, trading systems, methods or performance, which was made in the Registration Statement or the Prospectus or any amendment or supplement thereto and furnished by or approved by such "core" Trading Advisor for inclusion therein, and (ii) in the case of the non-"core" Trading Advisors, (A) any untrue statement or alleged untrue statement relating or with respect to such non-"core" Trading Advisor or any principal of such non-"core" Trading Advisor, or their operations, trading systems, methods or performance which was made in the Registration Statement or the Prospectus or any amendment or supplement thereto and furnished by or approved by such non-"core" Trading Advisor for inclusion therein, or (B) any materially inaccurate or incomplete statement relating or with respect to such non-"core" Trading Advisor or any principal of such non-"core" Trading Advisor, or their operations, trading systems, methods or performance which was made in the Disclosure Document furnished by the non-"core" Trading Advisor to the General Partner. (c) Limitation on Certain Indemnifications and Exculpations. The exculpation provisions in the Advisory Agreements and the Consulting Agreements shall not -32- relieve the Trading Advisors from any liability they may have or incur to the Partnership, the General Partner, the Selling Agent or the Commodity Broker under this Agreement (including, without limitation, pursuant to the provisions of Section 9(b) hereof). Nor shall the Trading Advisors be entitled to be indemnified by the General Partner, pursuant to the indemnification provisions contained in the Advisory Agreements, or by the Commodity Broker under the Consulting Agreements, against any loss, liability, damage, cost or expense it may incur under this Agreement. The General Partner shall not be entitled to be indemnified by the Partnership, pursuant to the indemnification provisions contained in the Limited Partnership Agreement against any loss, liability, damage, cost or expense it may incur under this Agreement. Section 10. Status of Parties. In selling the Units for the Partnership, the Selling Agent is acting solely as an agent for the Partnership and not as a principal. The Selling Agent will use its best efforts to assist the Partnership in obtaining performance by each purchaser whose offer to purchase Units from the Partnership has been accepted on behalf of the Partnership, but the Selling Agent shall not have any liability to the Partnership in the event that Subscription Agreements and Powers of Attorney are improperly completed or any such purchase is not consummated for any reason. Although the Trading Advisors, the Partnership and the Trading Partnership have entered into the Advisory Agreements, all parties hereto acknowledge that none of such parties has the power to act for another in any respect, except as set forth in the Advisory Agreements, and that in no event shall the Partnership or the Trading Partnership be held responsible hereunder for the acts and omissions of the Trading Advisors (or, conversely, the Trading Advisors be held responsible for acts and omissions of the Partnership or the Trading Partnership) resulting from conduct consistent with and taken in connection with or as a consequence of the Advisory Agreements. Section 11. Representations, Warranties and Agreements to Survive Delivery. All representations, warranties and agreements contained in this Agreement or contained in certificates of any party hereto submitted pursuant hereto shall remain operative and in full force and effect, regardless of any investigation -33- made by, or on behalf of, the Selling Agent, the General Partner, the Partnership, the Trading Partnership, the Commodity Broker, the Trading Advisors or any person who controls any of the foregoing and shall survive the Initial and each Additional Closing Time in the form restated and reaffirmed as of each such Closing Time. Section 12. Termination. The General Partner shall have the right to terminate this Agreement at any time by giving written notice of such termination to the Trading Advisors, the Selling Agent and the Commodity Broker. Section 13. Notices and Authority to Act. All communications hereunder shall be in writing and, if sent to the Selling Agent, the General Partner, the Partnership or the Trading Partnership, shall be mailed, delivered or telegraphed and confirmed to it at Merrill Lynch World Headquarters, 6th Floor, South Tower, World Financial Center, New York, New York 10080-6106, Attention: Mr. John R. Frawley, Jr.; if sent to a the Commodity Broker shall be mailed, delivered or telegraphed and confirmed to it at, Merrill Lynch World Headquarters, 250 Vesey Street, 23rd Floor, New York, New York 10281-1323, Attention: Mr. William T. Maitland; if sent to a Trading Advisor shall be mailed, delivered or telegraphed and confirmed to it at the address furnished from time to time in writing by such Trading Advisor to the General Partner. Section 14. Parties. This Agreement shall inure to the benefit of and be binding upon the Selling Agent, the Partnership, the Trading Partnership, the General Partner, the Commodity Broker, the Trading Advisors and such parties' respective successors to the extent provided herein. This Agreement and the conditions and provisions hereof are intended to be and are for the sole and exclusive benefit of the parties hereto and their respective successors, assigns and controlling persons and parties indemnified hereunder, and for the benefit of no other person, firm or corporation. No purchaser of a Unit shall be considered to be a successor or assign solely on the basis of such purchase. SECTION 15. GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES CREATED HEREBY SHALL BE GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. -34- Section 16. Requirements of Law. Whenever in this Agreement it is stated that a party will take or refrain from taking a particular action, such party may nevertheless refrain from taking or take such action if advised by counsel that doing so is required by law or advisable to ensure compliance with law, and shall not be subject to any liability hereunder for doing so, although such action shall permit termination of the Agreement by the other parties hereto. -35- If the foregoing is in accordance with each party's understanding of its agreement, each party is requested to sign and return to the General Partner a counterpart hereof, whereupon this instrument along with all counterparts will become a binding agreement among them in accordance with its terms effective as of the date first above written. Very truly yours, ML PRINCIPAL PROTECTION L.P. BY: MERRILL LYNCH INVESTMENT PARTNERS INC., General Partner By:________________________________ James M. Bernard, Chief Financial Officer ML PRINCIPAL PROTECTION TRADING L.P. BY: MERRILL LYNCH INVESTMENT PARTNERS INC., General Partner By:________________________________ James M. Bernard, Chief Financial Officer MERRILL LYNCH FUTURES INC. By:_______________________________ Name: Title: MERRILL LYNCH INVESTMENT PARTNERS INC. -36- By: ----------------------------- James M. Bernard, Chief Financial Officer "CORE" TRADING ADVISORS ----------------------- CHESAPEAKE CAPITAL CORPORATION By: ----------------------------- Name: Title: JOHN W. HENRY & CO., INC. By: ----------------------------- Name: Title: NON-"CORE" TRADING ADVISORS ---------------------------- AIS FUTURES MANAGEMENT, INC. By: ----------------------------- Name: Title: ARA PORTFOLIO MANAGEMENT COMPANY By: ----------------------------- Name: Title: -37- WEST COURSE CAPITAL INC. By: ----------------------------- Name: Title: TRENDSTAT CAPITAL MANAGEMENT, INC. By: ----------------------------- Name: Title: MILLBURN RIDGEFIELD CORPORATION By: ----------------------------- Name: Title: AIB INVESTMENT MANAGERS LIMITED By: ----------------------------- Name: Title: -38- Confirmed and accepted as of the date first above written: MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED Selling Agent By: ____________________ John R. Frawley, Jr. -39- EX-3.01 3 RESTATED CERT. OF L.P.--PARTNERSHIP Exhibit 3.01(i) AMENDED AND RESTATED CERTIFICATE OF LIMITED PARTNERSHIP OF ML PRINCIPAL PROTECTION PLUS L.P. This Amended and Restated Certificate of Limited Partnership of ML Principal Protection Plus L.P. (the "Partnership"), dated as of the 1st day of July, 1996, is being duly executed and filed by the undersigned in accordance with the provisions of 6 Del.C. (S)17-210 to amend and restate the original Certificate of Limited Partnership of the Partnership, which was filed on January 3, 1994, with the Secretary of State of the State of Delaware, as heretofore amended, (the "Certificate"), to form a limited partnership under the Delaware Revised Uniform Limited Partnership Act (6 Del.C. (S)17-101, et seq.). The original name of the limited partnership was The SECTOR Strategy Fund/SM/ VII L.P. The Certificate is hereby amended and restated in its entirety to read as follows: 1. Name. The name of the limited partnership formed hereby is "ML Principal Protection L.P." 2. Registered Office. The address of the registered office of the Partnership in the State of Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. 3. Registered Agent. The name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. 4. General Partner. The name and the business address of the sole general partner of the Partnership is: Merrill Lynch Investment Partners Inc. Merrill Lynch World Headquarters Sixth Floor, South Tower World Financial Center New York, New York 10080-6106 IN WITNESS WHEREOF, the undersigned general partner has duly executed this Amended and Restated Certificate of Limited Partnership as of the date first- above written Merrill Lynch Investment Partners Inc. General Partner James M. Bernard ------------------------------------- James M. Bernard, Chief Financial Officer, Vice President and Treasurer EX-3.02 4 RESTATED CERT. OF L.P.--TRADING PARTNERSHIP Exhibit 3.02(i) AMENDED AND RESTATED CERTIFICATE OF LIMITED PARTNERSHIP OF ML PRINCIPAL PROTECTION PLUS TRADING L.P. This Amended and Restated Certificate of Limited Partnership of ML Principal Protection Plus Trading L.P. (the "Partnership"), dated as of the 1st day of July, 1996, is being duly executed and filed by the undersigned in accordance with the provisions of 6 Del.C. (S)17-210 to amend and restate the original Certificate of Limited Partnership of the Partnership, which was filed on May 6, 1994, with the Secretary of State of the State of Delaware, as heretofore amended, (the "Certificate"), to form a limited partnership under the Delaware Revised Uniform Limited Partnership Act (6 Del.C. (S)17-101, et seq.). The original name of the limited partnership was ML SECTOR Plus Trading L.P. The Certificate is hereby amended and restated in its entirety to read as follows: 1. Name. The name of the limited partnership formed hereby is "ML Principal Protection Trading L.P." 2. Registered Office. The address of the registered office of the Partnership in the State of Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. 3. Registered Agent. The name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. 4. General Partner. The name and the business address of the sole general partner of the Partnership is: Merrill Lynch Investment Partners Inc. Merrill Lynch World Headquarters Sixth Floor, South Tower World Financial Center New York, New York 10080-6106 IN WITNESS WHEREOF, the undersigned general partner has duly executed this Amended and Restated Certificate of Limited Partnership as of the date first- above written. Merrill Lynch Investment Partners Inc. General Partner James M. Bernard ------------------------------------- James M. Bernard, Chief Financial Officer, Vice President and Treasurer EX-3.03 5 SECOND RESTATED CERT. OF L.P.--TRADING PARTNERSHIP EXHIBIT 3.03(ii) ML PRINCIPAL PROTECTION TRADING L.P. (formerly, ML Principal Protection Plus Trading L.P.) SECOND AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT Dated as of _________, 1996 ML PRINCIPAL PROTECTION TRADING L.P. AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT TABLE OF CONTENTS -----------------
Page ---- 1. Formation and Name.................................................... 1 2. Principal Office...................................................... 1 3. Business.............................................................. 2 4. Term, Dissolution, Fiscal Year and Net Asset Value.................... 3 (a) Term............................................................. 3 (b) Dissolution...................................................... 3 (c) Fiscal Year...................................................... 3 5. Net Worth of General Partner.......................................... 3 6. Capital Contributions................................................. 3 7. Allocation of Profits and Losses...................................... 4 (a) Capital Accounts and Allocations................................. 4 (b) Allocation of Profit and Loss for Federal Income Tax Purposes.... 5 (c) Expenses......................................................... 5 (d) Limited Liability of the Limited Partner......................... 5 (e) Return of Capital Contributions.................................. 5 8. Management............................................................ 6 9. Reports............................................................... 8 10. Non-Assignability of Limited Partnership Interest..................... 8 11. Withdrawals of Capital; Distributions................................. 8 (a) Withdrawals of Capital........................................... 8 (b) Distributions.................................................... 9
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Page ---- 12. Withdrawal of a Partner............................................... 9 13. Standard of Liability; Indemnification................................ 9 (a) Standard of Liability for the General Partner.................... 9 (b) Indemnification of the General Partner by the Trading Partnership 9 14. Governing Law......................................................... 11 15. Miscellaneous......................................................... 11 (a) Notices.......................................................... 11 (b) Binding Effect................................................... 11 (c) Certification of Facts........................................... 11 (d) Qualified Income Offset.......................................... 12 (e) Captions......................................................... 12
-ii- ML PRINCIPAL PROTECTION TRADING L.P. AMENDED AND RESTATED LIMITED PARTNERSHIP AGREEMENT This Second Amended and Restated Limited Partnership Agreement (the "Limited Partnership Agreement") is made as of July 3, 1996, by and between MERRILL LYNCH INVESTMENT PARTNERS INC., a Delaware corporation, as the sole general partner (the "General Partner"; formerly, ML Futures Investment Partners Inc.), and ML PRINCIPAL PROTECTION TRADING L.P., as the sole limited partner -- (the "Limited Partner"; formerly, ML Principal Protection Plus Trading L.P.) (the General Partner and the Limited Partner being collectively referred to herein as "Partners"). WITNESSETH: WHEREAS, the Limited Partner hereby invests in the Trading Partnership (defined below) in order to engage in the speculative trading of futures, forwards and options contracts. NOW, THEREFORE, the parties hereto agree as follows: 1. Formation and Name. The parties hereto do hereby form and continue a limited partnership under the Delaware Revised Uniform Limited Partnership Act, as amended and in effect on the date hereof (6 Del. C. (S)(S) 17-101, et seq.) (the "Act"). The name of the limited partnership is ML PRINCIPAL PROTECTION TRADING L.P. (the "Trading Partnership"). The General Partner shall execute and file a Certificate of Limited Partnership in accordance with the provisions of the Act and execute, file, record and publish (as may in the reasonable judgment of the General Partner be required by law) such amendments and other documents as are or become necessary or advisable in connection with the operation of the Trading Partnership, as determined by the General Partner, and shall take all steps which the General Partner may deem necessary or advisable to allow the Trading Partnership to conduct business in any jurisdiction where the Trading Partnership conducts business and to otherwise provide that the Limited Partner will have limited liability with respect to the activities of the Trading Partnership in all such jurisdictions. 2. Principal Office. The address of the principal office of the Trading Partnership shall be c/o the General Partner, Merrill Lynch World Headquarters, 6th Floor, South Tower, World Financial Center, New York, New York 10080-6106; telephone (212) 236-4167 or such other place as the General Partner may designate from time to time. The address of the registered office of the Partnership in the State of Delaware is c/o The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801, and the name and address of the registered agent for service of process on the Partnership in the State of Delaware is The Corporation Trust Company, Corporation Trust Center, 1209 Orange Street, Wilmington, New Castle County, Delaware 19801. The General Partner may change the registered office of the Trading Partnership upon notice to the Limited Partner. 3. Business. The Limited Partner will operate through the Trading Partnership and under the management of the General Partner, in the same manner that a "holding company" operates through an "operating subsidiary." The Trading Partnership's business and purpose is, for the benefit of the Limited Partner, to trade, buy, sell or otherwise acquire, hold or dispose of futures and forward contracts for commodities, financial instruments and currencies, any rights pertaining thereto and any options thereon or on physical commodities and to engage in all activities incident thereto. The Trading Partnership may also engage in "hedge," arbitrage and cash trading of commodities, futures, forwards and options. The objective of the Trading Partnership's business is appreciation of its assets through speculative trading. In addition to its trading activities, as described above, the Trading Partnership shall retain MERRILL LYNCH ASSET MANAGEMENT, L.P. ("MLAM") to implement cash management strategies in -- in MLAM's absolute discretion within investment parameters established by, and the responsibility of, the General Partner -- United States Treasury securities and securities issued by U.S. government agencies and instrumentalities. The Trading Partnership shall instruct Merrill Lynch Futures Inc., the Trading -2- Partnership's commodity broker, to pay MLAM's fees for such cash management services from the flat-rate brokerage commissions paid by the Trading Partnership to Merrill Lynch Futures Inc., and the General Partner is hereby specifically empowered to (i) retain MLAM to provide cash management advice and services to the Trading Partnership, (ii) arrange for Merrill Lynch Futures Inc. to pay MLAM's fees for such advice and services, (iii) establish investment parameters for MLAM's cash management advice for the Trading Partnership; and (iv) establish custodial account arrangements on behalf of the Trading Partnership. In the event that Merrill Lynch Futures Inc. does not pay MLAM's cash management fees, the General Partner, not the Trading Partnership, shall be responsible for doing so. 4. Term, Dissolution, Fiscal Year and Net Asset Value. (a) Term. The term of the Trading Partnership shall commence on the day on which the Certificate of Limited Partnership is filed with the Secretary of State of the State of Delaware pursuant to the provision of the Act and shall end upon the first to occur of the following: (1) December 31, 2024; (2) receipt by the General Partner of notice to dissolve the Trading Partnership at a specified time from the Limited Partner; (3) withdrawal, insolvency or dissolution of the General Partner; (4) dissolution and complete winding up of the Limited Partner; (5) any event which shall make it unlawful for the existence of the Trading Partnership to be continued or require termination of the Trading Partnership. (b) Dissolution. Upon the occurrence of an event causing the termination of the Trading Partnership, the Trading Partnership shall terminate and be dissolved. Dissolution, payment of creditors and distribution of the Trading Partnership's assets shall be effected as soon as practicable in accordance with the Act, and the General Partner and the Limited Partner shall share in the assets pro rata in accordance with their respective positive capital accounts in the Trading Partnership, less any amount owing by each such Partner to the Trading Partnership. (c) Fiscal Year. The fiscal year of the Trading Partnership shall begin on January 1 of each year and end on the following December 31. -3- 5. Net Worth of General Partner. The General Partner agrees that at all times so long as it remains General Partner of the Trading Partnership, it will maintain its Net Worth (as defined below) at an amount which is sufficient, in the opinion of counsel for the Trading Partnership, for the Trading Partnership to be taxed as a partnership for federal income tax purposes. 6. Capital Contributions. The General Partner shall invest in the Trading Partnership, as a general partnership interest, no less than 1% of the aggregate contributions (which includes capital committed by the Limited Partner as described below) to the Trading Partnership. So long as it is a general partner of the Trading Partnership, the General Partner will maintain this required minimum investment. The General Partner may withdraw any interest it may have as a general partner in excess of such requirement. The Limited Partner shall contribute capital as described in the Prospectus of ML Principal Protection L.P. Capital contributed at different times by the Limited Partner shall be allocated to separate capital accounts. The Limited Partner may also commit capital to cover the trading losses and cash of the Trading Partnership as contemplated by Section 16(e) of the Limited Partner's Amended and Restated Limited Partnership Agreement, and such commitment shall be reflected in the Trading Partnership's allocation of trading gain and loss, as provided in Section 7 below. The Partners' respective contributions of the capital of the Trading Partnership shall be as shown on the books and records of the Trading Partnership. The aggregate of all capital contributions shall be available to the Trading Partnership to carry on its business, and no interest shall be paid by the Trading Partnership on any such contribution. 7. Allocation of Profits and Losses. (a) Capital Accounts and Allocations. A capital account shall be established for the Limited Partner (for each series of units of limited partnership interests issued by the -4- Limited Partner) and for the General Partner. The initial balance of each capital account shall be the amount contributed to it. After the Trading Partnership begins operations, the following allocations shall be made: (1) As of the close of business (as determined by the General Partner) on the last day of each month, (i) any increase or decrease in the value of the Trading Partnership's U.S. Treasury and U.S. government agency securities and short-term foreign sovereign debt instruments, as well as any increase or decrease in the Trading Partnership's cash (in each case, excluding increases attributable to increases in capital contributed to the Trading Partnership), plus (ii) any increase or decrease in the Net Asset Value of the Trading Partnership resulting from trading gains or losses and attributable to capital (a) contributed to the Trading Partnership or (b) committed to the Trading Partnership by the Partnership pursuant to Section 6, shall be allocated between the General Partner and the Limited Partner, in the case of (i) above, pro rata based on the relative capital contributions to the Trading Partnership as of the close of business on the last day of the immediately preceding month and, in the case of (ii) above, pro rata based on the relative amounts set forth in (ii)(a) and (b) as of the close of business on the last day of the immediately preceding month. (2) The amount of any distributions to either Partner as of the end of such month and any amount paid upon withdrawal of a portion of a Partner's capital account as of the end of such month shall then be charged against the capital account of such Partner. (b) Allocation of Profit and Loss for Federal Income Tax Purposes. The Trading Partnership's tax allocations shall be made as of the end of each year. Items of profit and loss shall be allocated to the Partners in the same manner as the financial allocations set forth in Section 7(a) hereof are effected. The allocations of profit and loss to the Partners shall not exceed the allocations permitted under Subchapter K of the Internal Revenue Code, as amended, as determined by the General Partner, whose determination shall be binding. -5- (c) Expenses. The General Partner shall pay the Trading Partnership's routine legal, accounting and administrative expenses, and none of the General Partner's "overhead" expenses incurred in connection with the administration of the Trading Partnership (including, but not limited to, salaries, rent and travel expenses) will be charged to the Trading Partnership. All deductions of the Trading Partnership, if any, attributable to such expenses shall be specially allocated to the General Partner. Appropriate reserves may be created, accrued and charged against Net Assets for contingent liabilities, if any, as of the date any such contingent liability becomes known to the General Partner. Such reserves shall reduce the Net Asset Value of interests in the Trading Partnership for all purposes. (d) Limited Liability of the Limited Partner. Any provisions of this Limited Partnership Agreement to the contrary notwithstanding, except as otherwise provided by law, the Limited Partner shall not be liable for Trading Partnership obligations in excess of the capital contributed or committed by the Limited Partner, plus its share of undistributed profits and assets, including its obligation as required by law, under certain circumstances, to return to the Trading Partnership distributions and returns of contributions. The Limited Partner hereby agrees with the General Partner that, upon written demand therefor by the General Partner, the Limited Partner will promptly pay to the Trading Partnership all amounts which the Limited Partner has committed to the Trading Partnership or its creditors under Section 16(e) of the Limited Partner's Amended and Restated Limited Partnership Agreement or under the Act. (e) Return of Capital Contributions. Neither Partner shall have any right to demand the return of its capital contribution or any profits added thereto, except through withdrawal or upon termination and dissolution of the Trading Partnership, in each case as provided herein. In no event shall either Partner be entitled to demand or receive property other than cash. 8. Management. The General Partner, to the exclusion of the Limited Partner, shall control, conduct and manage the business of the Trading Partnership. The Limited Partner shall not participate in the management, control, administration or business of the -6- Trading Partnership or use its name in the business or perform any actions prohibited to limited partners under the laws of the State of Delaware or the laws of any other jurisdiction where the Trading Partnership conducts business. The Limited Partner shall have no power to represent, act for, sign for or bind the General Partner or the Trading Partnership. The Limited Partner shall not be entitled to any salary, draw or other compensation from the Trading Partnership on account of their investment in the Trading Partnership. The General Partner shall have sole discretion in determining what distributions of profits and income, if any, shall be made to the Partners (subject to the allocation provisions hereof) as described in the Limited Partner's Prospectus dated _______, 1996 (the "Prospectus"), and to supervise the liquidation of the Trading Partnership if an event causing termination of the Trading Partnership occurs. In the event that the General Partner has been removed or becomes bankrupt or insolvent, the Limited Partner may select a representative to supervise the liquidation of the Trading Partnership. The General Partner shall act in accordance with its undertakings and obligations as set forth in Section 8(i) of the Limited Partner's Amended and Restated Limited Partnership Agreement dated as of _________, 1996 and such Section 8(i) is hereby incorporated by reference herein and made a part hereof as appropriate with respect to the General Partner and the Trading Partnership. The General Partner may in furtherance of the business of the Trading Partnership cause the Trading Partnership to buy, sell, hold, or otherwise acquire or dispose of commodities, futures contracts and options traded on exchanges or otherwise, arbitrage positions, repurchase agreements, interest- bearing securities, equity securities, deposit accounts and similar instruments and other assets, or cause the Trading Partnership's trading to be limited to only certain of the foregoing instruments. In addition, the General Partner on behalf of the Trading Partnership will retain a Trading Advisor or Advisors to make any or all trading and investment decisions regarding the Trading Partnership to accomplish the effect described in the Prospectus. The General Partner may commit to the management of the Trading Advisor more assets than are actually held by the Trading Partnership; provided that the total amount so committed may not exceed the consolidated assets of the Limited Partner and the -7- Trading Partnership; and provided further that the ratio between the trading assets committed and the actual assets held in each of the Trading Partnership's capital accounts must be equal. The Trading Partnership shall make no loans, and the funds of the Trading Partnership will not be commingled with the funds of any other person (deposit of funds with a commodity broker or clearinghouse or entering into joint ventures or partnerships shall not be deemed to constitute "commingling" for these purposes). The maximum period covered by any contract entered into by the Trading Partnership shall not exceed one year. Any agreements between the Trading Partnership and the General Partner or any affiliate of the General Partner shall be terminable by the Trading Partnership upon no more than 60 days' written notice. The General Partner may take such actions on behalf of the Trading Partnership as it deems necessary or desirable to manage the business of the Trading Partnership. The Trading Partnership will not engage in "churning" of its assets. The General Partner is engaged, and may in the future engage, in other business activities and, subject to Paragraphs 5 and 6 hereof, shall not be required to refrain from any other activity nor forego any profits from any such activity, including without limitation, whether as general partner, commodity broker or advisor of additional partnerships for investment in the commodity markets or otherwise and whether or not in competition with the Trading Partnership. Neither the Limited Partner nor the Trading Partnership may engage in any activities or incur any obligations except as specifically contemplated under their respective Limited Partnership Agreements as the same may be in effect from time to time. The General Partner shall devote to the Trading Partnership such time as it may deem advisable to conduct the Trading Partnership's business and affairs. No person dealing with the General Partner shall be required to determine its authority to make any undertaking on behalf of the Trading Partnership, nor to determine any fact or circumstance bearing upon the existence of its authority. It is the intention of the parties hereto that the Trading Partnership function as a subsidiary of the Limited -8- Partner in order to effectuate the Trading Partnership's purpose of serving as a vehicle through which the Limited Partner trades in the futures, forward and options markets. The limited partners of the Limited Partner may remove and replace the General Partner as general partner of the Trading Partnership by a majority vote of such limited partners. 9. Reports. The Trading Partnership will use its best efforts to cause the Limited Partner to receive within 90 days of the end of each fiscal year (but in no event later than March 15 of each year) such tax information as is necessary for the Limited Partner to transmit necessary tax information to investors in the Limited Partner. The duly authorized representatives of each such investor may inspect the Trading Partnership's books and records during normal business hours upon reasonable written notice to the General Partner, for any just, reasonable and non-commercial purpose. Copies of such records may be made upon payment of reasonable reproduction costs. The General Partner shall prepare or cause to be prepared and shall file on or before the due date (or any extension thereof) any federal, state or local tax returns required to be filed by the Trading Partnership. The General Partner shall pay any taxes payable by the Trading Partnership; provided, however, that such taxes need not be paid if the General Partner is in good faith and by appropriate legal proceedings contesting the validity, applicability or amount thereof and such contest does not materially endanger any right or interest of the Trading Partnership. 10. Non-Assignability of Limited Partnership Interest. The Limited Partner expressly agrees that it will not assign, transfer or dispose of, by gift or otherwise, any of its interest in the Trading Partnership or any part or all of its right, title and interest in the capital or profits of the Trading Partnership without the consent of the General Partner, which consent may be withheld in the General Partner's sole discretion. No limited partner other than the Limited Partner may be admitted to the Trading Partnership. -9- 11. Withdrawals of Capital; Distributions. (a) Withdrawals of Capital. Partners may withdraw capital as of the last day of each month. Payment will be made within ten business days after the effective date of withdrawal, except that under special circumstances, including, but not limited to, inability to liquidate commodity positions as of a withdrawal date or default or delay in payments due the Trading Partnership from commodity brokers, banks or other persons, the Trading Partnership may in turn delay payment to Partners of the proportionate part of any proposed withdrawal equal to that proportionate part of the Trading Partnership's aggregate Net Asset Value represented by the sums which are the subject of such default or delay. (b) Distributions. The General Partner in its sole discretion may from time to time make distributions to the Partners provided that no distribution shall cause a deficit balance in any Partner's capital account. 12. Withdrawal of a Partner. The Trading Partnership shall terminate and be dissolved upon the withdrawal, dissolution, admitted or court-decreed insolvency or the removal of the General Partner. The General Partner may withdraw from the Trading Partnership, without any breach of this Limited Partnership Agreement, at any time. If the General Partner ceases to be general partner of the Limited Partner, the General Partner shall ipso facto cease to be General Partner of the Trading Partnership. 13. Standard of Liability; Indemnification. (a) Standard of Liability for the General Partner. The General Partner and its Affiliates, as defined below, shall have no liability to the Trading Partnership or to the Limited Partner for any loss suffered by the Trading Partnership which arises out of any action or inaction of the General Partner or its Affiliates if the General Partner, or its Affiliates, in good faith, determined that such course of conduct was in the best interests of the Trading Partnership and such course of conduct did not constitute negligence or misconduct of the General Partner or its Affiliates. -10- (b) Indemnification of the General Partner by the Trading Partnership. The General Partner, and its Affiliates shall be indemnified by the Trading Partnership against any losses, judgments, liabilities, expenses and amounts paid in settlement of any claims sustained by them in connection with the Trading Partnership; provided that the same were not the result of negligence or misconduct on the part of the General Partner or its Affiliates; and provided further that Affiliates shall be entitled to indemnification only for losses incurred by such Affiliates in performing the duties of the General Partner and acting wholly within the scope of the authority of the General Partner. Notwithstanding the above, the General Partner and its Affiliates shall not be indemnified for any losses, liabilities or expenses arising from or out of an alleged violation of federal or state securities laws unless (1) there has been a successful adjudication on the merits of each count involving alleged securities law violations as to the particular indemnitee, or (2) such claims have been dismissed with prejudice on the merits by a court of competent jurisdiction as to the particular indemnitee and the court approves indemnification of the litigation costs, or (3) a court of competent jurisdiction approves a settlement of the claims against a particular indemnitee and finds that indemnification of the settlement and related costs should be made. In any claim for indemnification for federal or state securities law violations, the party seeking indemnification shall place before the court the position of the Securities and Exchange Commission, the Massachusetts Securities Division, the Pennsylvania Securities Commission, the Tennessee Securities Division, the Texas Securities Board and any other applicable regulatory authority with respect to the issue of indemnification for securities law violations. The Trading Partnership shall not incur the cost of that portion of any insurance, other than public liability insurance, which insures any party against any liability the indemnification of which is herein prohibited. For the purposes of this Paragraph 13, the term "Affiliates" shall mean any person performing services on behalf of the Trading Partnership who: (1) directly or indirectly controls, is controlled by, or is under common control with the -11- General Partner; or (2) owns or controls 10% or more of the outstanding voting securities of the General Partner; or (3) is an officer or director of the General Partner; or (4) if the General Partner is an officer, director, partner or trustee, is any entity for which the General Partner acts in any such capacity. Advances from Trading Partnership funds to the General Partner and its Affiliates for legal expenses and other costs incurred as a result of any legal action initiated against the General Partner by the Limited Partner are prohibited. Advances from Trading Partnership funds to the General Partner and its Affiliates for legal expenses and other costs incurred as a result of a legal action will be made only if the following three conditions are satisfied: (1) the legal action relates to the performance of duties or services by the General Partner or its Affiliates on behalf of the Trading Partnership; (2) the legal action is initiated by a third party who is not the Limited Partner; and (3) the General Partner or its Affiliates undertake to repay the advanced funds to the Trading Partnership in cases in which they would not be entitled to indemnification under the first paragraph of this Section 13(b). In no event shall any indemnity or exculpation provided for herein be more favorable to the General Partner or any Affiliate than that contemplated by the "Guidelines for the Registration of Commodity Pool Programs" promulgated by the North American Securities Administrators Association, Inc. as in effect on the date of this Limited Partnership Agreement. In no event shall any indemnification permitted by this Section 13(b) be made by the Trading Partnership unless all provisions of this Section for the payment of indemnification have been complied with in all respects. Furthermore, it shall be a precondition of any such indemnification that the Trading Partnership receive a determination of independent legal counsel in a written opinion that the party which seeks to be indemnified hereunder has met the applicable standard of conduct set forth herein. Receipt of any such opinion shall not, however, in itself, entitle any such party to indemnification unless indemnification is otherwise proper hereunder. Any indemnification payable by the Trading Partnership hereunder shall be made only as provided in the specific case. -12- In no event shall any indemnification obligations of the Trading Partnership under this Section 13(b) subject the Limited Partner to any liability in excess of that contemplated by Section 7(d) hereof. The General Partner shall indemnify and hold the Trading Partnership harmless from all loss or expense which the Trading Partnership may incur (including, without limitation, any indemnity payments) as a result of the differences between Merrill Lynch Asset Management, L.P.'s standard of liability under the Investment Advisory Contract the General Partner's standard of liability as set forth herein. 14. Governing Law. The validity and construction of this Limited Partnership Agreement shall be determined and governed by the laws of the State of Delaware. 15. Miscellaneous. (a) Notices. All notices under this Limited Partnership Agreement shall be in writing and shall be effective upon personal delivery, or if sent by first class mail, postage prepaid, addressed to the last known address of the party to whom such notice is to be given, upon the deposit of such notice in the United States mails. (b) Binding Effect. This Limited Partnership Agreement shall inure to and be binding upon all of the parties, their successors and assigns. (c) Certification of Facts. Any person dealing with the Trading Partnership or the General Partner may rely upon a certificate signed by the General Partner as to: (i) the existence or nonexistence of any fact or facts which constitute a condition precedent to acts by the General Partner or which are in any other manner germane to the affairs of the Trading Partnership; (ii) the persons who are authorized to execute and deliver any instrument or document of the Trading Partnership; or (iii) any act or failure to act by the Trading Partnership or as to any other matter whatever involving the Trading Partnership or either Partner. -13- (d) Qualified Income Offset. If either Partner unexpectedly receives any adjustments, allocations or distributions described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) or (6), items of Trading Partnership income and gain shall be specially allocated to such Partner, before any other allocation of Trading Partnership items for such year is made, in an amount and manner sufficient to eliminate a deficit in its capital account created by such adjustments, allocations or distributions as quickly as possible. This Section is intended to constitute a "qualified income offset" within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(3). (e) Captions. Captions in no way define, limit, extend or describe the scope of this Limited Partnership Agreement nor the effect of any of its provisions. Any reference to "persons" in this Limited Partnership Agreement shall also be deemed to include entities, unless the context otherwise requires. IN WITNESS WHEREOF, the parties hereto have executed this Limited Partnership Agreement as of the day and year first above written. General Partner: Limited Partner: MERRILL LYNCH INVESTMENT ML PRINCIPAL PROTECTION L.P. PARTNERS INC. By: MERRILL LYNCH INVESTMENT PARTNERS INC. By:___________________________ General Partner James M. Bernard Vice President By:___________________________ James M. Bernard Vice President -14- EX-5.01(A) 6 OPINION OF SIDLEY & AUSTIN Exhibit 5.01 (a) [LETTERHEAD OF SIDLEY & AUSTIN] July 3, 1996 Merrill Lynch Investment Partners Inc., General Partner (the "General Partner") ML Principal Protection L.P. Merrill Lynch World Headquarters South Tower, 6th Floor World Financial Center New York, New York 10080-6106 RE: ML PRINCIPAL PROTECTION L.P. 1,000,000 UNITS OF LIMITED PARTNERSHIP INTEREST (THE "UNITS") Dear Sir or Madam: We refer to the Registration Statement on Form S-1, filed by ML Principal Protection L.P. (the "Partnership") and ML Principal Protection Trading L.P. (the "Trading Partnership") with the Securities and Exchange Commission under the Securities Act of 1933 (the "Securities Act") on July 3, 1996, which also relates to and constitutes Post-Effective Amendment No. 5 to the Registration Statement on Form S-1 declared effective on July 14, 1994 (Registration No. 33-73914). We are familiar with the proceedings to date with respect to the proposed issuance and sale of the Units and have examined such records, documents and questions of law, and satisfied ourselves as to such matters of fact, as we have considered relevant and necessary as a basis for this opinion. For purposes of rendering this opinion, we have assumed the genuineness of all signatures, the legal capacity of natural persons, the authenticity of all documents submitted to us as originals, the conformity to originals of all documents submitted to us as certified or photostatic copies, and the authenticity of the original of such copies. Based on the foregoing, we are of the opinion that: 1. The Partnership and the Trading Partnership have each been duly formed and are validly existing in good standing as limited partnerships under the Delaware Revised Uniform Limited Partnership Act (the "Act"). SIDLEY & AUSTIN CHICAGO Merrill Lynch Investment Partners, Inc. April 22, 1996 Page 2 2. The General Partner has taken all corporate action required to be taken by it to authorize the issuance and sale of Units to the Limited Partners and to authorize the admission to the Partnership of the Limited Partners of the Partnership. 3. Assuming (i) the due authorization, execution and delivery to the General Partner of a Subscription Agreement by each subscriber for Units (the "Subscribers"), (ii) the due acceptance by the General Partner of each Subscription Agreement and the due acceptance by the General Partner of the admission of the Subscribers as limited partners of the Partnership to the Partnership, (iii) the payment of each Subscriber to the Partnership of the full consideration due from it for the Units subscribed to by it, (iv) that the books and records of the Partnership set forth all information required by the Limited Partnership Agreement and the Act, including all information with respect to all persons and entities to be admitted as Partners and their contributions to the Partnership, (v) that the Subscribers, as limited partners of the Partnership, do not participate in the control of the business of the Partnership (it is our opinion that acting in accordance with the Limited Partnership Agreement included as Exhibit A to the Prospectus included in the Registration Statement will not cause the Subscribers to be deemed to participate in the control of the business of the Partnership), (v) that the Units are offered and sold as described in the Registration Statement and the Limited Partnership Agreement, and (vi) the Subscribers meet all of the applicable suitability standards set forth in the Prospectus and that the representations and warranties of the Subscribers in their Subscription Agreements are true and correct, the Units to be issued to the Subscribers will represent valid and legally issued limited partner interests in the Partnership and will be fully paid and nonassessable limited partner interests in the Partnership, and in acquiring which the Subscribers will become limited partners of the Partnership, and will have no liability in excess of their obligations to make contributions to the Partnership, their obligations to make other payments provided for in the Limited Partnership Agreement and their share of the Partnership's assets and undistributed profits (subject to the obligation of a Limited Partner to repay funds distributed to such Limited Partner by the Partnership in certain circumstances). We express no opinion as to the application of the securities or blue sky laws of the various states (including the state of Delaware) to the sale of the Units. In giving this opinion, except as to paragraph 2 above, we have relied exclusively on the opinion dated on or about July 3, 1996 of Messrs. Richards, Layton & Finger, Wilmington, Delaware, a copy of which is attached hereto, which is limited to the laws of the state of Delaware. With respect to paragraph 2 above, our opinion is limited to the general corporation laws of the state of Delaware. We hereby consent to the filing of this opinion as an Exhibit to the Registration Statement and to all references to our firm included in or made a part of the Registration Statement. We hereby authorize Messrs. Richards, Layton & Finger to rely on paragraph 2 of our opinion. Very truly yours, SIDLEY & AUSTIN EX-5.01(B) 7 OPINION OF RICHARDS, LAYTON & FINGER Exhibit 5.01(b) [LETTERHEAD OF RICHARDS, LAYTON & FINGER] July 3, 1996 Sidley & Austin One First National Plaza Chicago, IL 60603 Re: ML Principal Protection L.P. and ML Principal Protection Trading L.P. ------------------------------------ Gentlemen: We have acted as special Delaware counsel for ML Principal Protection L.P., a Delaware limited partnership (the "Partnership"), and ML Principal Protection Trading L.P., a Delaware limited partnership (the "Trading Partnership"), in connection with the matters set forth herein. At your request, this opinion is being furnished to you. For purposes of giving the opinions hereinafter set forth, our examination of documents has been limited to the examination of executed or conformed counterparts, or copies otherwise proved to our satisfaction, of the following: Sidley & Austin July 3, 1996 Page 2 (a) The Certificate of Limited Partnership of the Partnership (which was originally named "The SECTOR Strategy Fund/SM/ VII L.P."), dated as of January 3, 1994, as filed in the office of the Secretary of State of the State of Delaware (the "Secretary of State") on January 3, 1994; (b) The Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of May 11, 1994, as filed in the office of the Secretary of State on May 13, 1994; (c) The Certificate of Amendment to the Certificate of Limited Partnership of the Partnership (whose name was changed thereby to "ML SECTOR Plus L.P."), dated as of May 26, 1994, as filed in the office of the Secretary of State on May 26, 1994; (d) The Amended and Restated Certificate of Limited Partnership of the Partnership (whose name was changed thereby to "ML Principal Protection Plus L.P."), dated as of June 6, 1994, as filed in the office of the Secretary of State on June 7, 1994; (e) The Amended and Restated Certificate of Limited Partnership of the Partnership, dated as of July 27, 1995, as filed in the office of the Secretary of State on July 27, 1995; (f) The Amended and Restated Certificate of Limited Partnership of the Partnership (whose name was changed thereby to "ML Principal Protection L.P."), Sidley & Austin July 3, 1996 Page 3 dated as of July 1, 1996, as filed in the office of the Secretary of State on July 1, 1996 (the "Certificate"); (g) The Limited Partnership Agreement of the Partnership, dated as of January 3, 1994; (h) The Amended and Restated Limited Partnership Agreement of the Partnership, dated as of October 1, 1994 (the "Original Agreement"); (i) The Amendment to the Original Agreement, dated as of July 26, 1995; (j) The Second Amended and Restated Limited Partnership Agreement of the Partnership, dated as of December 1, 1995; (k) The Certificate of Limited Partnership of the Trading Partnership (which was originally named "ML SECTOR Plus Trading L.P."), dated as of May 26, 1994, as filed in the office of the Secretary of State on May 26, 1994; (l) The Amended and Restated Certificate of Limited Partnership of the Trading Partnership (whose name was changed thereby to "ML Principal Protection Plus Trading L.P."), dated as of June 6, 1994, as filed in the office of the Secretary of State on June 7, 1994; (m) The Amended and Restated Certificate of Limited Partnership of the Trading Partnership, dated as of October 9, 1995, as filed in the office of the Secretary of State on October 10, 1995; Sidley & Austin July 3, 1996 Page 4 (n) The Amended and Restated Certificate of Limited Partnership of the Trading Partnership (whose name was changed thereby to "ML Principal Protection Trading L.P."), dated as of July 1, 1996, as filed in the office of the Secretary of State on July 1, 1996 (the "Trading Partnership Certificate"); (o) The Agreement of Limited Partnership of the Trading Partnership, dated as of May 26, 1994; (p) The Amended and Restated Limited Partnership Agreement of the Trading Partnership, dated as of October 1, 1994 (the "Original Trading Partnership Agreement"); (q) The Amendment to the Original Trading Partnership Agreement, dated as of July 26, 1995; (r) The Second Amended and Restated Limited Partnership Agreement of the Trading Partnership, dated as of July 3, 1996 (the "Trading Partnership Agreement"); (s) A registration statement (the "Initial Registration Statement") on Form S-1 (Registration No. 33-73914), filed by the Partnership with the Securities and Exchange Commission (the "SEC") on January 7, 1994, as amended by Amendment No. 1 to the Initial Registration Statement, filed by the Partnership and the Trading Partnership with the SEC on June 14, 1994 ("Amendment No. 1"), Amendment No. 2 (First Post-Effective) to the Initial Registration Statement, filed by the Partnership and the Trading Partnership with the SEC on March 24, 1995 ("Amendment No. 2"), Sidley & Austin July 3, 1996 Page 5 Amendment No. 3 (Second Post-Effective) to the Initial Registration Statement, filed by the Partnership and the Trading Partnership with the SEC on December 8, 1995 ("Amendment No. 3"), Post-Effective Amendment No. 3 to the Initial Registration Statement, filed by the Partnership and the Trading Partnership with the SEC on January 25, 1996 ("Post-Effective Amendment No. 3"), Post- Effective Amendment No. 4 to the Initial Registration Statement, filed by the Partnership and the Trading Partnership with the SEC on April 4, 1996 ("Post- Effective Amendment No. 4"), and a registration statement on Form S-1 (Post- Effective Amendment No. 5 to the Initial Registration Statement, pursuant to Rule 429), including a related prospectus (the "Prospectus"), to be filed by the Partnership and the Trading Partnership with the SEC on or about July 3, 1996 ("Post-Effective Amendment No. 5") (the Initial Registration Statement as amended by Amendment No. 1, Amendment No. 2, Amendment No. 3, Post-Effective Amendment No. 3, Post-Effective Amendment No. 4 and Post Effective Amendment No. 5 being hereinafter referred to as the "Registration Statement"); (t) A form of Third Amended and Restated Limited Partnership Agreement of the Partnership (the "Agreement"), attached to the Prospectus as Exhibit "A"; (u) A form of Subscription Agreement and Power of Attorney, including a Subscription Agreement and Power of Attorney Signature Page of the Partnership (the "Subscription Agreement"), attached to the Prospectus as Exhibit "D"; Sidley & Austin July 3, 1996 Page 6 (v) A Certificate of Good Standing for the Partnership, dated July 3, 1996, obtained from the Secretary of State; and (w) A Certificate of Good Standing for the Trading Partnership, dated July 3, 1996, obtained from the Secretary of State. Initially capitalized terms used herein and not otherwise defined are used as defined in the Agreement. For purposes of this opinion, we have not reviewed any documents other than the documents listed above, and we have assumed that there exists no provision in any document not listed above that bears upon or is inconsistent with the opinions stated herein. We have conducted no independent factual investigation of our own, but rather have relied solely upon the foregoing documents, the statements and information set forth therein and the additional matters recited or assumed herein, all of which we have assumed to be true, complete and accurate in all material respects. With respect to all documents examined by us, we have assumed that (i) all signatures on documents examined by us are genuine, (ii) all documents submitted to us as originals are authentic, and (iii) all documents submitted to us as copies conform with the original copies of those documents. For purposes of this opinion, we have assumed (i) the due authorization, execution and delivery by all parties thereto of all documents examined by us, including, without limitation, the Agreement by each partner of the Partnership, the Sidley & Austin July 3, 1996 Page 7 Certificate by the General Partner, the Subscription Agreement by each Limited Partner (as defined below), the Trading Partnership Agreement by each partner of the Trading Partnership and the Trading Partnership Certificate by the general partner of the Trading Partnership, (ii) that any amendment or restatement of any document reviewed by us has been accomplished in accordance with, and was permitted by, the relevant provisions of said document prior to its amendment and restatement from time to time, (iii) that after the issuance and sale of units of limited partner interest of the Partnership (the "Units") under the Registration Statement and the Agreement, the dollar amount of the Units issued by the Partnership will equal or exceed the minimum, and the dollar amount of the Units issued and reserved for issuance by the Partnership will not exceed the maximum, dollar amount of the Units which may be issued by the Partnership under the Registration Statement and the Agreement, (iv) that each of the Agreement and the Trading Partnership Agreement constitutes the entire agreement among the parties thereto with respect to the subject matter thereof, including with respect to the admission of partners to, and the creation, operation and termination of, the Partnership and the Trading Partnership, respectively, and that the Agreement, the Trading Partnership Agreement, the Certificate and the Trading Partnership Certificate are in full force and effect, have not been amended and no amendment of the Agreement, the Trading Partnership Agreement, the Certificate or the Trading Partnership Certificate is pending or has been proposed, and (v) except for the due formation and valid existence Sidley & Austin July 3, 1996 Page 8 in good standing of the Partnership and the Trading Partnership as limited partnerships under the Delaware Revised Uniform Limited Partnership Act (6 Del.C. (S)17-101, et seq.) (the "Act"), the due organization or due formation, as the case may be, and valid existence in good standing of each party to the documents examined by us under the laws of the jurisdiction governing its organization or formation and the capacity of persons and entities who are parties to the documents examined by us. Insofar as the opinions expressed herein relate to the Units and persons and entities to be admitted to the Partnership as limited partners of the Partnership in connection with the Registration Statement (the "Limited Partners"), the opinions expressed herein relate solely to the Limited Partners to be admitted to the Partnership, and the Units to be issued in connection with the Registration Statement. We have not participated in the preparation of the Registration Statement and assume no responsibility for its contents. This opinion is limited to the laws of the State of Delaware (excluding the securities laws of the State of Delaware), and we have not considered and express no opinion on the laws of any other jurisdiction, including federal laws and rules and regulations relating thereto. Our opinions are rendered only with respect to Delaware laws and rules, regulations and orders thereunder which are currently in effect. Based upon the foregoing, and upon our examination of such questions of law and statutes of the State of Delaware as we have considered necessary or appropriate, Sidley & Austin July 3, 1996 Page 9 and subject to the assumptions, qualifications, limitations and exceptions set forth herein, we are of the opinion that: 1. The Partnership has been duly formed and is validly existing in good standing as a limited partnership under the Act. 2. The Trading Partnership has been duly formed and is validly existing in good standing as a limited partnership under the Act. 3. Assuming (i) that the General Partner has taken all corporate action required to be taken by it to authorize the issuance and sale of Units to the Limited Partners and to authorize the admission to the Partnership of the Limited Partners as limited partners of the Partnership, (ii) the due authorization, execution and delivery to the General Partner of a Subscription Agreement by each subscriber for Units (the "Subscribers"), (iii) the due acceptance by the General Partner of each Subscription Agreement and the due acceptance by the General Partner of the admission of the Subscribers as limited partners of the Partnership to the Partnership, (iv) the payment by each Subscriber to the Partnership of the full consideration due from it for the Units subscribed to by it, (v) the due authorization, execution and delivery by all parties thereto, including the Subscribers as limited partners of the Partnership, of the Agreement, (vi) that the books and records of the Partnership set forth all information required by the Agreement and the Act, including all information with respect to all persons and entities to be admitted as Partners and their contributions to the Sidley & Austin July 3, 1996 Page 10 Partnership, (vii) that the Subscribers, as limited partners of the Partnership, do not participate in the control of the business of the Partnership, and (viii) that the Units are offered and sold as described in the Registration Statement and the Agreement, the Units to be issued to the Subscribers will represent valid limited partner interests in the Partnership and, subject to the qualifications set forth herein, will be fully paid and nonassessable limited partner interests in the Partnership, as to which the Subscribers, as limited partners of the Partnership, will have no liability in excess of their obligations to make contributions to the Partnership, their obligations to make other payments provided for in the Agreement and their share of the Partnership's assets and undistributed profits (subject to the obligation of a Limited Partner to repay any funds wrongfully distributed to it). 4. There are no provisions in the Agreement the inclusion of which, subject to the terms and conditions set forth therein, would cause the Limited Partners, as limited partners of the Partnership, to be deemed to be participating in the control of the business of the Partnership. We understand that you will rely as to matters of Delaware law upon this opinion in connection with an opinion to be submitted by you to the Partnership and the Trading Partnership and filed by them with the SEC as an exhibit to the Registration Statement in connection with the filing by the Partnership and the Trading Partnership of the Registration Statement under the Securities Act of 1933, as amended. In Sidley & Austin July 3, 1996 Page 11 connection with such opinion, we hereby consent to your relying as to matters of Delaware law upon this opinion. This opinion is rendered solely for your benefit in connection with the foregoing. We hereby consent to the use of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the Prospectus. In giving the foregoing consent, we do not thereby admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933 or the rules and regulations of the SEC thereunder. Except as stated above, without our prior consent, this opinion may not be furnished or quoted to, or relied upon by, any other person or entity for any purpose. Very truly yours, /s/ RICHARDS, LAYTON & FINGER MIL/DAF/sc EX-8.01 8 OPINION OF SIDLEY & AUSTIN RE: FEDERAL INCOME TAX EXHIBIT 8.01 July 3, 1996 Merrill Lynch Investment Partners Inc. General Partner of ML Principal Protection L.P. Merrill Lynch World Headquarters South Tower, 6th Floor World Financial Center New York, New York 10080-6106 Re: Registration Statement on Form S-1 ---------------------------------- Dear Sir or Madam: We refer to the Registration Statement on Form S-1, filed by ML Principal Protection L.P. (the "Partnership") and ML Principal Protection Trading L.P. (the "Trading Partnership") with the Securities and Exchange Commission under the Securities Act of 1933 (the "Securities Act") on July 3, 1996, which also relates to and constitutes Post-Effective Amendment No. 5 to the Registration Statement on Form S-1 declared effective on July 14, 1994 (Registration No. 33-73914). We have reviewed such data, documents, questions of law and fact and other matters as we have deemed pertinent for the purpose of this opinion. Based upon the foregoing, we hereby confirm our opinions expressed under the caption "Federal Income Tax Consequences" in the Prospectus (the "Prospectus") constituting a part of the Registration Statement that: (i) each of the Partnership and the Trading Partnership in which the Partnership will invest, will be taxed as a partnership for federal income tax purposes (assuming that Merrill Lynch Investment Partners Inc. will, when the Partnership's Units of Limited Partnership Interest are sold to the public, have a capitalization no less than that indicated in the audited financial statements included in the Registration Statement and that Merrill Lynch Investment Partners Inc. makes a capital contribution to each of the Partnership and the Trading Partnership in at least the amount contemplated by the Prospectus); and (ii) based upon the contemplated trading activities of the Trading Partnership, the Trading Partnership should be treated as engaged in the conduct of a trade or business for federal income tax purposes, and, as a result, the ordinary and necessary business expenses incurred by the Trading Partnership in conducting its commodity futures Merrill Lynch Investment Partners Inc. July 3, 1996 Page 2 trading business should not be subject to limitation under section 67 of the Internal Revenue Code of 1986, as amended (the "Code") or under section 68 of the Code. We also advise you that in our opinion the description set forth under the caption "Federal Income Tax Consequences" in the Prospectus correctly describes (subject to the uncertainties referred to therein) the material aspects of the federal income tax treatment to United States investors, as of the date hereof, of an investment in the Partnership. Very truly yours, SIDLEY & AUSTIN EX-10.01 9 ADVISORY AGREEMENT EXHIBIT 10.01 FORM OF -- ADVISORY AGREEMENT ------------------ AMONG ML PRINCIPAL PROTECTION L.P. ML PRINCIPAL PROTECTION TRADING L.P. MERRILL LYNCH INVESTMENT PARTNERS INC. AND [TRADING ADVISOR] Dated as of ________, 1996 ML PRINCIPAL PROTECTION L.P. FORM OF ADVISORY AGREEMENT TABLE OF CONTENTS
Page ---- 1. Undertakings in Connection with Offering of Units.......................................................................... 2 a. Undertakings by the Parent and the General Partner.............................................................. 2 b. Undertakings by the Trading Advisor............................................ 2 c. Withdrawal of Prospectus; Termination of Offering; Termination of Agreement Prior to Initial Closing........................................... 3 d. Use of Prospectus and Other Solicitation Material........................................................ 3 e. Updated Performance Information................................................ 3 f. Access to Books and Records.................................................... 4 2. Duties of the Trading Advisor....................................................... 4 a. Speculative Trading............................................................ 4 b. List of Commodity Interests Traded by the Trading Advisor....................................................... 5 c. Investment of Assets Held in Securities and Cash.......................................................... 5 d. Trading Authorization.......................................................... 6 e. Delivery of Disclosure Documents............................................... 6 3. Trading Advisor Independent......................................................... 6 4. Commodity Broker; Floor Brokers; F/X Desk.......................................................................... 6 5. Allocation of Trading Partnership Assets to Trading Advisor........................................................................... 7 6. Profit Share........................................................................ 8 7. Term and Termination................................................................ 9 a. Term and Renewal............................................................... 9 b. Termination.................................................................... 9
-i- Page ---- 8. Right to Advise Others; Uniformity of Acts and Practices........................................... 9 9. Speculative Position Limits....................................... 11 10. Additional Undertakings by the Trading Advisor................................................. 11 11. Representations and Warranties.................................... 11 12. Entire Agreement.................................................. 12 13. Standard of Liability; Indemnification............................ 12 14. Assignment........................................................ 14 15. Amendment; Waiver................................................. 14 16. Severability...................................................... 14 17. Notices........................................................... 15 18. Governing Law..................................................... 15 19. Consent to Jurisdiction........................................... 15 20. Remedies.......................................................... 16 21. Promotional Material.............................................. 16 22. Confidentiality................................................... 16 23. Survival.......................................................... 16 24. Counterparts...................................................... 17 25. Headings.......................................................... 17 Appendix A - Commodity Interests Traded by Trading Advisor................................ 19 Appendix B - Commodity Trading Authority.............................. 20 -ii- Page ---- Appendix C - Acknowledgement of Receipt of Disclosure Document.................................... 21 Appendix D - Committed Funds Letter................................. 22
-iii- ADVISORY AGREEMENT THIS ADVISORY AGREEMENT (the "Agreement"), made as of this ______ day of _______, 1996, among ML PRINCIPAL PROTECTION TRADING L.P., a Delaware limited partnership (the "Trading Partnership"; formerly, ML Principal Protection Plus Trading L.P.), ML PRINCIPAL PROTECTION L.P. (the "Parent"; formerly, ML Principal Protection Plus L.P.), MERRILL LYNCH INVESTMENT PARTNERS INC., a Delaware corporation (the "General Partner"; formerly ML Futures Investment Partners Inc.), and _____________________, a __________ corporation (the "Trading Advisor"); W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Trading Partnership trades buys, sells or otherwise acquires, holds or disposes of forward contracts, futures contracts for commodities, financial instruments and currencies on United States and foreign exchanges, any rights pertaining thereto and any options thereon or on physical commodities and engages from time to time in all manner of activities incident thereto (the foregoing forms of investment being collectively referred to herein as "commodity interests"); WHEREAS, the General Partner is the general partner of the Trading Partnership and the Parent is the sole limited partner of the Trading Partnership; WHEREAS, the Parent is continuously offering its Units of Limited Partnership Interests ("Units") for sale to investors in an offering registered with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933, as amended (the "1933 Act") and SEC Rule 415 thereunder, as described in the prospectus and registration statement filed with the SEC under the 1933 Act, which also constitutes a disclosure document that has been filed with the Commodity Futures Trading Commission (the "CFTC") and the National Futures Association (the "NFA") pursuant to the Commodity Exchange Act, as amended (the "CEA"), the commodity pool operators and commodity trading advisors regulations promulgated under the CEA by the CFTC (the "Commodity Regulations"), and NFA rules promulgated under the CEA (the "NFA Rules") (said prospectuses, registration statements and disclosure documents as further amended and supplemented from time to time by the Trading Partnership, including further amendments, supplements and additional prospectuses, registration statements and disclosure documents necessary to offer and sell Units as of the beginning of each calendar quarter beginning October 1, 1996 under the 1933 Act, the CEA, the Commodity Regulations, the NFA Rules or otherwise, shall hereinafter be referred to as the "Prospectus"); WHEREAS, the Parent uses a substantial portion of the proceeds of the sale of each series of the Units to make a capital contribution to the Trading Partnership attributable to such series, which the Trading Partnership employs in speculative futures and forward trading; WHEREAS, the Parent agreed (as set forth in Section 16(e) of its Third Amended and Restated Limited Partnership Agreement which is Exhibit A of the Prospectus) to be liable for all debts incurred by the Trading Partnership in an amount not to exceed the difference between the equity in the Trading Partnership and the amount of assets committed to the Trading Partnership's trading advisors, including the Trading Advisor, for management. WHEREAS, the Trading Advisor is engaged in the business of, among other things, making trading decisions on behalf of in vestors in the purchase and sale of certain commodity interests; and WHEREAS, the Parent and the Trading Partnership desire the Trading Advisor, upon the terms and conditions set forth herein, to act as a trading advisor for the Trading Partnership and to make commodity interests investment decisions for the Trading Partnership with respect to the Trading Partnership's assets allocated to the Trading Advisor, and the Trading Advisor desires to so act; NOW, THEREFORE, the parties hereto do hereby agree as follows: 1. Undertakings in Connection with Offering of Units ------------------------------------------------- (a) Undertakings by the Parent and the General Partner. The Parent and the General Partner agree to use their best efforts: (i) to complete the preparation of the amended Prospectus, to file the amended Prospectus with the SEC as required by the 1933 Act and with the CFTC and NFA as the disclosure document required by Section 4.21 of the Commodity -2- Regulations and the NFA Rules, and when it is necessary or desirable to amend or supplement the amended Prospectus, to prepare such further amendments and supplements and file the same with the SEC, CFTC and NFA; and (ii) to take action at any time and from time to time to qualify by registration or exemption from registration the Units for offer and sale under the securities and Blue Sky laws of such jurisdictions as the General Partner deems necessary or desirable. (b) Undertakings by the Trading Advisor. The Trading Advisor agrees to use its best efforts to cooperate with the Parent and the General Partner in effecting the registration and continuous offering of the Units as contemplated by Section 1(a) above, including without limitation by providing, as promptly as may be reasonably practicable, all information regarding the Trading Advisor and its principals which the General Partner reasonably believes to be necessary or advisable to include in the Prospectus, as the same may be amended from time to time. The Trading Advisor has made an investment in the Parent in the amount of 100 Series A Units. The Trading Advisor agrees not to redeem its investment as long as the Trading Advisor continues to manage assets for the Trading Partnership. As used in this Agreement, the term "principal" shall have the same meaning given to such term in Section 4.10(e) of the Commodity Regulations, and the term "affiliate" shall mean an individual or entity (including a stockholder, director, officer, employee, agent, or principal) that directly or indirectly controls, is controlled by, or is under common control with any other individual or entity. (c) Withdrawal of Prospectus; Termination of Offering; Termination of Agreement Prior to Initial Closing. Notwithstanding any provision of this Agreement to the contrary, the General Partner or the Parent at any time, in its sole discretion, may: (i) notify the Trading Advisor that the Parent shall have determined that it is not advisable to have the Trading Advisor manage any portion of the Parent's or the Trading Partnership's assets, in which case this Agreement shall terminate as provided in Section 7(b) without any further obligation of any party hereunder (other than to settle any outstanding accounts); (ii) withdraw the Prospectus from the SEC, CFTC and NFA or any applications or other documents filed with the authorities of any -3- jurisdiction to qualify by registration or exemption from registration the Units for offer and sale under the securities or Blue Sky law of such jurisdiction; (iii) terminate the registration or exemption from registration, or qualification of Units with any of such agencies or authorities; or (iv) discontinue the offering of the Units. (d) Use of Prospectus and Other Solicitation Material. Neither the Trading Advisor, its principals nor any of its employees, affiliates or agents, the employees, affiliates or agents of such affiliates, or their respective successors or assigns shall use, publish, circulate or distribute the Prospec- tus (including any amendment or supplement thereto) or any related solicitation material nor shall any of the foregoing engage in any marketing, sales or promotional activities in connection with the offering of Units, except as may be requested by the General Partner and agreed to by the Trading Advisor. (e) Updated Performance Information. While the continuous offering of the Units is in progress, at the written request of the Parent or the General Partner or as otherwise required under this Agreement in order for the Parent to prepare an amendment or supplement to the Prospectus pursuant to the 1933 Act, the Commodity Regulations and/or NFA Rules, the Trading Advisor, at its own expense, shall promptly provide the Parent and the General Partner with: (i) Performance summaries reflecting the actual performance, on a monthly basis, of the accounts directed by the Trading Advisor up to the latest practicable date (consistent with Section 4.35(a) of the Commodity Regulations) prior to the date of the Prospectus as amended or supplemented, together with any reports or letters relating to such performance data received from accountants and in the possession of the Trading Advisor; and (ii) a letter from the Trading Advisor addressed to the Parent and in form and substance satisfactory to the Parent and its counsel, containing representations by the Trading Advisor that, except as otherwise disclosed in the table(s) described in Section l(e)(i) and the explanations and footnotes thereto, the actual performance of all accounts directed by the Trading Advisor and its principals during the period of time covered by the table(s) and that such performance data and the explanations and footnotes thereto are fairly presented and are true, correct and complete in all material respects. -4- (f) Access to Books and Records. Upon reasonable notice to the Trading Advisor, the Parent or the General Partner shall have the right to have access to the Trading Advisor's offices in order to inspect and copy such books and records during normal business hours as may enable them to verify the accuracy and completeness of or to supplement as necessary the data furnished by the Trading Advisor pursuant to Section l(e) of this Agreement or to verify compliance with the terms of this Agreement (subject to such restrictions as the Trading Advisor may reasonably deem necessary or advisable so as to preserve the confidentiality of proprietary information concerning such trading systems, methods, models, strategies and formulas and of the identity of the Trading Advisor's clients). 2. Duties of the Trading Advisor ----------------------------- (a) Speculative Trading. The Trading Advisor shall act as a trading advisor for the Trading Partnership, acting independently from any other advisors or managers selected to direct accounts on behalf of the Trading Partnership, and pursuant to the trading strategies described in the Disclosure Document provided by the Trading Advisor to the General Partner as the same may be developed and modified over time (the "Disclosure Document"). The Trading Advisor may trade a different portfolio in managing the Trading Partnership's account only with the consent of the General Partner. Except as provided otherwise in this Section 2, the Trading Advisor shall have sole and exclusive authority and responsibility for directing the investment and reinvestment of the Trading Partnership's assets allocated to the Trading Advisor utilizing the designated trading program pursuant to and in accordance with the Trading Advisor's best judgment and its approach as described in the Disclosure Document and as refined and modified from time to time in the future in accordance herewith, for the period and on the terms and conditions set forth herein and as described in the Prospectus and the Third Amended and Restated Limited Partnership Agreement of the Trading Partnership (the "Limited Partnership Agreement"). Notwithstanding the foregoing, the Trading Partnership or the General Partner may override the trading instructions of the Trading Advisor to the extent necessary: (i) to fund any distributions or redemptions of Units to be made by the Parent; (ii) to pay any Parent or Trading Partnership expenses; (iii) to deleverage the Trading Partnership's trading in order to provide the "principal protection" feature of the -5- Trading Partnership without requiring Merrill Lynch & Co., Inc. to make any payments under its Guarantee, as described in the Prospectus; and/or (iv) to comply with speculative position limits; provided that the Parent and the General Partner shall permit the Trading Advisor three days in which to liquidate positions for the purposes set forth in clauses (i)-(ii) prior to exercising its override authority. The Trading Advisor will have no liability for the results of any of the General Partner's interventions in (i)-(iv), above. The Parent, the Trading Partnership and the General Partner each specifically acknowledge that in agreeing to manage an account for the Trading Partnership the Trading Advisor is in no respects making any guarantee of profits or of protections against loss. The Trading Advisor shall give the Parent prompt written notice of any proposed material change in the Trading Advisor's trading approach or the manner in which trading decisions are to be made or implemented and shall not make any such proposed change with respect to trading for the Trading Partnership without having given the Parent and the General Partner at least 30 days' prior written notice of such change. The addition and/or deletion of commodity interests from the Trading Partnership's portfolio managed by the Trading Advisor shall not be deemed a change in the Trading Advisor's trading approach and prior written notice to the Trading Partnership or the General Partner shall not be required therefor, except as set forth in section 2(b) below; provided that, with respect to the Trading Partnership, the Trading Advisor may only utilize a trading program other than that described in the Prospectus as traded on behalf of the Trading Partnership with the consent of the General Partner. (b) List of Commodity Interests Traded by the Trading Advisor. The Trading Advisor shall provide the Parent and the General Partner with a complete list of commodity interests which it intends to trade on the Trading Partnership's behalf. All commodity interests other than regulated futures contracts and options on regulated futures contracts traded on a qualified board or exchange in the United States shall be listed on Appendix A to this Agreement. The addition of commodity interests (other than forward contracts on foreign currencies) to the Trading Partnership's portfolio managed by the Trading -6- Advisor as set forth in Appendix A to this Agreement shall require prior written notice to the Parent or the General Partner and an amendment to Appendix A. (c) Investment of Assets Held in Securities and Cash. Notwithstanding any provision of this Agreement to the contrary, the Parent and the General Partner, and not the Trading Advisor, shall have the sole and exclusive authority and responsibility with regard to the investment, maintenance and management of the Trading Partnership's assets other than in respect of the Trading Advisor's trading of the Trading Partnership's assets in commodity interests. (d) Trading Authorization. Prior to the Trading Partnership's acceptance of trading advice from the Trading Advisor in accordance with this Agreement, the Trading Partnership shall deliver to the Trading Advisor a trading authorization in the form of Appendix B hereto appointing the Trading Advisor as an agent of the Trading Partnership and attor ney-in-fact for such purpose. (e) Delivery of Disclosure Documents. The Trading Advisor shall, during the term of this Agreement, deliver to the Trading Partnership copies of all disclosure documents filed with the CFTC or NFA by the Trading Advisor promptly following such filing and the Trading Partnership shall, if requested, sign the Acknowledgement of Receipt of Disclosure Document in the form of Appendix C hereto, for each disclosure document so delivered. 3. Trading Advisor Independent --------------------------- For all purposes of this Agreement, the Trading Advisor shall be deemed to be an independent contractor and shall have no authority to act for or represent the Parent or the Trading Partnership in any way and shall not otherwise be deemed to be an agent of the Parent or the Trading Partnership. Nothing con- tained herein shall create or constitute the Trading Advisor and any other trading advisor for the Trading Partnership, the Parent or the General Partner as a member of any partnership, joint venture, association, syndicate, unincorporated business or other separate entity, nor shall be deemed to confer on any of them any express, implied, or apparent authority to incur any obligation or liability on behalf of any other. The parties acknowledge -7- that the Trading Advisor has not been an organizer or promoter of the Parent or the Trading Partnership. 4. Commodity Broker; Floor Brokers; F/X Desk ----------------------------------------- The Trading Advisor shall clear orders for all commodity interest transactions for the Trading Partnership through such commodity broker or brokers as the Parent shall designate from time to time in its sole discretion (the Parent initially so designating Merrill Lynch Futures Inc.). The Trading Advisor will not, without the consent of the General Partner, trade on a "give up" basis through floor brokers not associated with Merrill Lynch Futures Inc. Even if such floor brokers are permitted to execute trades on behalf of the Trading Partnership, all such trades will be "given-up" so as to be carried as a Merrill Lynch Futures Inc. account. The Trading Advisor shall receive copies of daily and monthly brokerage statements. All forward trades for the Trading Partnership shall be executed through the forward trading facilities of the counterparties selected by the Parent's affiliated Foreign Exchange Desk, unless the General Partner consents to some other forward trading arrangement. The Trading Advisor shall only use such other banks or dealers for what the Trading Advisor, in good faith, believes to be good cause. 5. Allocation of Assets Committed to Trading to Trading Advisor ------------------------------------------------------------ As of the General Partner shall allocate ___% of the assets initially committed by the Parent to trading to the Trading Advisor to be managed in accordance with the terms of this Agreement (none of which shall constitute "notional funds," see Appendix D hereto). The General Partner may allocate to the Trading Advisor such percentage of subsequent Unit sales (a new series of Units to be sold as of each calendar quarter-end) as the General Partner may in its discretion determine, provided that the General Partner may not allocate in excess of $50,000,000 to the Trading Advisor for management without the Trading Advisor's consent. The General Partner may, in its sole discretion, reallocate assets committed to trading between the Trading Advisor and any other trading advisor to the Trading Partnership as of any month-end (although the General Partner does not intend to make frequent reallocations). In the event the General -8- Partner decides to de-leverage the Trading Partnership's trading, as contemplated by the Prospectus, as a result of trading losses, the General Partner may reallocate assets away from the Trading Advisor as of the end of any day. Distributions, brokerage commissions and interest income (as well as any other charges or receipts applicable to the Trading Partnership as a whole) shall be allocated among the accounts managed by the different trading advisors for the Trading Partnership pro rata based on the month-end Net Assets held in each such account. Charges or receipts specific to a particular account (for example, Profit Shares (as determined pursuant to Section 6 below) or trading profits and losses) shall be allocated entirely to such account. The Trading Advisor acknowledges and agrees that certain of the assets committed to trading may be held by the Parent, not by the Trading Partnership. The Parent has undertaken in its Third Amended and Restated Limited Partnership Agreement that any such assets held by the Parent are fully subject to market risk and available to pay initial and variation margin and other trading losses upon demand of Merrill Lynch Futures Inc. without need of making any demand upon the Parent or the General Partner. The Trading Advisor acknowledges and agrees that although the Trading Advisor will manage a single account on behalf of the Trading Partnership, the trading assets committed to such account shall represent the commitments of a number of different series of Units sold by the Parent, and that Profit Shares shall be calculated separately with respect to each such series. 6. Profit Share ------------ For the advisory services contemplated by this Agreement, the Trading Partnership shall allocate to the Trading Advisor a quarterly Profit Share equal to ___% of any New Trading Profit, as defined in the Prospectus, earned on assets committed to trading and managed by the Trading Advisor, determined as of the end of each calendar quarter (irrespective of whether the Trading Partnership has been trading for the entirety of such quarter). The Profit Share shall also be paid to the Trading Advisor upon the redemption of Units (any Profit Share accrued in -9- respect of redeemed Units being paid to the Trading Advisor from the redemption price of such Units) or the reallocation or distribution of assets from the Trading Advisor's Account and upon termination of this Agreement. The assets committed to the Trading Advisor's management shall represent assets committed by a number of different series of Units sold by the Parent. The Trading Advisor's Profit Share is to be calculated separately in respect of each series of Units. Consequently, the Profit Shares payable to the Trading Advisor may not be the same as would be payable to the Trading Advisor were all assets committed to the Trading Advisor's management to represent assets attributable to a single series of Units. New Trading Profit is calculated on a per-Unit basis so that the redemption of or sale of Units has no effect on the Profit Share due in respect of other Units. Interest income shall not be included in New Trading Profit. The description of the calculation of the Profit Share set forth in the Prospectus is hereby confirmed in all respects. Profit Shares shall be paid within ten (10) business days after the end of each period for which they are payable. At such time as the Trading Partnership remits each Profit Share payment hereunder to the Trading Advisor, the Trading Partnership shall also submit a reasonably itemized statement setting forth the calculation of the amount of the Profit Share due to the Trading Advisor in respect of such period (and with respect to each series of Shares as appropriate). If the Trading Advisor does not object to such statement within ten (10) business days of the receipt thereof, such statement shall for all purposes be deemed to be conclusively correct. 7. Term and Termination -------------------- (a) Term and Renewal. This Agreement shall continue in effect for one year after the end of the calendar quarter in which the Trading Partnership commences trading. Thereafter, this Agreement is renewable at the option of the General Partner, on the same terms, for up to two (2) additional twelve-month periods. In addition, the Trading Advisor hereby agrees to negotiate in good faith concerning the possibility of four -10- additional one-year renewals on terms to be negotiated by the Trading Partnership and the Trading Advisor at the time. If no new terms are negotiated with respect to each of the four additional one-year renewal periods and neither party hereto has given notice at least 60 days prior to such renewal date to the other party of its intent to terminate this Agreement at such time, then this Agreement shall be automatically renewed, on the same terms, for each such additional one-year period. (b) Termination. Notwithstanding Section 7(a) hereof, this Agreement shall terminate: (i) immediately if the Trading Partnership shall terminate and be dissolved in accordance with the Limited Partnership Agreement or otherwise; (ii) at the discretion of the General Partner as of the end of any month; or (iii) at the discretion of the Trading Advisor, as of the following month-end, should any of the following occur: (1) the assets committed to the Trading Advisor's management decrease to less than $1,000,000 at the close of business on any day, or (2) the Trading Advisor has determined to cease managing any customer accounts pursuant to the same strategy as such Trading Advisor has been retained to employ on behalf of the Trading Partnership. 8. Right to Advise Others; Uniformity of Acts and Practices During the term of this Agreement, the Trading Advisor and its affiliates shall be free to advise other investors as to the purchase and sale of commodity interests, to manage and trade other investors' commodity interests accounts and to trade for and on behalf of their own proprietary commodity interests accounts. However, under no circumstances shall the Trading Advisor or any of its affiliates favor any commodity interests account directed by any of them (regardless of the date on which they began or shall begin to direct such account) over the Trading Partnership's account, giving due consideration to the trading program which the General Partner has requested the Trading Advisor to trade on behalf of the Trading Partnership. -11- For purposes of this Agreement, the Trading Advisor and its affiliates shall not be deemed to be favoring another commodity interests account over the Trading Partnership's account if the Trading Advisor or its affiliates, in accordance with specific instructions of the owner of such account, trade such account at a degree of leverage or in accordance with trading policies which shall be different from that which shall normally be applied to substantially all of the Trading Advisor's other accounts or if the Trading Advisor or its affiliates, in accordance with the Trading Advisor's money management principles, shall not trade certain commodity interests contracts for an account based on the amount of equity in such account. The parties hereto acknowledge that the Trading Advisor may, at the instruction of the General Partner, trade a limited portfolio for the Trading Partnership, which may significantly underperform the more diversified programs offered by the Trading Advisor. The reasons for this include numerous material differences among accounts, including: (1) the period during which accounts are active; (2) the trading approach used --although all accounts may be traded in accordance with the same trading approach, such approach can and does change periodically as a result of an ongoing program of research and development by the Trading Advisor; (3) the size of accounts -- which influences the number of commodities and the number of contracts in each commodity traded by the account; (4) investor's goals and the policies by which accounts are traded -- some accounts are more highly leveraged at the investor's request producing commensurately larger gains or losses than other accounts; (5) the rates of brokerage commissions paid by accounts and when such commissions are charged to accounts; (6) the amount of interest income earned by accounts, which will depend on the portion of the account's assets invested in interest-bearing obligations such as United States Treasury Bills; (7) the rate of management and/or incentive fees and amount of administrative costs paid by accounts -- some pay management and incentive fees, some pay incentive fees only and some pay no fees at all; (8) the timing of orders to open or close positions; and (9) the market conditions in which accounts are traded, which in part determines the quality of trade executions. At the request of the Parent, the Trading Advisor and its affiliates shall promptly make available to the Parent copies of the normal daily, monthly, quarterly and annual, as the case -12- may be, written reports prepared by the Trading Advisor in the ordinary course, reflecting the performance of all commodity pool accounts advised, managed, owned or controlled by the Trading Advisor or its affiliates required to be delivered to pool participants pursuant to the CEA and similar written information, including monthly account statements, reflecting the performance of all other commodity interest accounts advised, managed, owned or controlled by the Trading Advisor or its affiliates, with respect to which account reports shall not be required to be delivered to the owners thereof pursuant to the CEA (subject to the need to preserve the confidentiality of proprietary information concerning the Trading Advisor's trading systems, methods, models, strategies and formulas and the identity of the Trading Advisor's clients). At the request of the Parent, the Trading Advisor or its affiliates shall promptly deliver to the Trading Partnership a satisfactory written explanation, in the judgment of the Parent, of the differences, if any, in the performance between the Trading Partnership's account and such other commodity interest accounts traded utilizing the same program or portfolio (subject to the need to preserve the confidentiality of proprietary information concerning the Trading Advisor's trading systems, methods, models, strategies and formulas and the identity of the Trading Advisor's clients). 9. Speculative Position Limits --------------------------- If the Trading Advisor (either alone or aggregated with the positions of any other person if such aggregation shall be required by the CEA, the CFTC or any other regulatory authority having jurisdiction) shall exceed or be about to exceed applicable limits in any commodity interest traded for the Trading Partnership, the Trading Advisor shall immediately take such action as the Trading Advisor may deem fair and equitable to comply with the limits, and shall immediately deliver to the Trading Partnership a written explanation of the action taken to comply with such limits. If such limits are exceeded by the Trading Partnership, the General Partner may require the Trading Advisor to liquidate positions as required. 10. Additional Undertakings by the Trading Advisor ---------------------------------------------- Neither the Trading Advisor nor its employees, affili ates or agents, the stockholders, directors, officers, employees, principals, affiliates or agents of such affiliates, or their -13- respective successors or assigns shall: (i) use or distribute for any purpose whatsoever any list containing the names and/or residential addresses of and/or other information about the Limited Partners; nor (ii) directly solicit any Limited Partner for any business purpose whatsoever (unless such Limited Partner is already a client of the Trading Advisor). 11. Representations and Warranties ------------------------------ (a) The Trading Advisor hereby restates all represen tations and warranties made by it in the Selling Agreement relating to the offering of the Units, with the same effect as if such representations and warranties were set forth verbatim herein. (b) The General Partner hereby restates all representations and warranties made by it in the Selling Agreement relating to the offering of the Units with the same effect as if such representations and warranties were set forth verbatim herein. (c) The Parent and the Trading Partnership hereby make, on their own behalf, the representations and warranties made in the Selling Agreement by the General Partner relating to the Parent and the Trading Partnership, as if such representations and warranties were set forth verbatim herein as represen- tations and warranties of the Parent and the Trading Partnership. The foregoing representations and warranties shall be continuing during the entire term of this Agreement and, if at any time, any event shall occur which would make any of the foregoing representations and warranties no longer true and accurate, the General Partner shall promptly notify the Trading Advisor and the Trading Advisor shall promptly notify the General Partner (as the case may be). 12. Entire Agreement ---------------- This Agreement constitutes the entire agreement between the parties hereto with respect to the matters referred to herein, and no other agreement, verbal or otherwise, shall be binding as between the parties unless it shall be in writing and signed by the party against whom enforcement is sought. -14- 13. Standard of Liability; Indemnification -------------------------------------- The Trading Advisor, its officers, directors, employees and shareholders shall not be liable to the Trading Partnership, the Parent or their respective partners, or to any of their successors or assigns except by reason of acts or omissions in contravention of the express terms of this Agreement, or due to their misconduct or negligence, or by reason of not having acted in good faith and in the reasonable belief that such actions or omissions were in, or not opposed to, the best interests of the Trading Partnership or Parent. The Parent and the Trading Partnership, jointly and severally, shall indemnify, defend and hold harmless the Trading Advisor and its affiliates and their respective directors, officers, shareholders, employees and controlling persons from and against any and all losses, claims, damages, liabilities (joint and several), costs and expenses (including any investigatory, legal and other expenses incurred in connection with, and any amounts paid in, any settlement; provided that the Trading Partnership shall have approved such settlement) resulting from a demand, claim, lawsuit, action or proceeding relating to any of such person's actions or capacities relating to the business or activities of the Trading Partnership pursuant to this Agreement; provided that the conduct of such person which was the subject of the demand, claim, lawsuit, action or proceeding did not constitute negligence, misconduct or a breach of this Agreement or of any fiduciary obligation to the Trading Partnership and was done in good faith and in a manner such person reasonably believed to be in, or not opposed to, the best interests of the Trading Partnership. The termination of any demand, claim, lawsuit, action or proceeding by settlement shall not, in itself, create a presumption that the conduct in question was not undertaken in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the Trading Partnership. No indemnification shall be due hereunder, however, for any matter for which the Trading Advisor or its affiliates and their respective directors, officers, shareholders, employees and controlling persons are indemnified under the Selling Agreement (although indemnity shall be due under the Selling Agreement). The Trading Advisor shall indemnify, defend and hold harmless the Parent, the Trading Partnership, the General Partner, their respective affiliates and their respective -15- directors, officers, shareholders, employees and controlling persons from and against any and all losses, claims, damages, liabilities (joint and several), costs and expenses (including any reasonable investigatory, legal and other expenses incurred in connection with, and any amounts paid in, any settlement; provided that the Trading Advisor shall have approved such settlement) resulting from a demand, claim, lawsuit, action or proceeding relating to any action or omission of the Trading Advisor or any of its respective officers, directors or employees relating to the business or activities of such person under this Agreement or relating to the management of an account of the Trading Partnership provided: the action or omission of such person which was the subject of the demand, claim, lawsuit, action or proceeding constituted negligence or misconduct or a breach of this Agreement or of any fiduciary obligation to the Trading Partnership or was an action or omission taken otherwise than in good faith and in a manner reasonably believed to be in, or not opposed to, the best interests of the Trading Partnership. No indemnification shall be due hereunder, however, for any matters for which the Parent, the Trading Partnership, their respective affiliates and their respective directors, officers, shareholders, employees or controlling persons are indemnified under the Selling Agreement (although indemnity shall be due under the Selling Agreement). The foregoing agreements of indemnity shall be in addition to, and shall in no respect limit or restrict, any other remedies which may be available to an indemnified party. This foregoing indemnity provision shall not increase the liability of any Limited Partner of the Parent beyond the amount of such Limited Partner's capital and profits (exclusive of distributions previously received or other returns of capital, including redemptions). The indemnifying party's right to control the defense of any demand, claim, lawsuit, action or indemnity for which indemnity is to be sought under this Section 13 and the requirements relating to notice from the indemnified party shall be the same as in the indemnification provisions contained in the Selling Agreement. No indemnification under this Section 13 shall be made in respect of any demand, claim, lawsuit, action or proceeding relating to activities of the person to be indemnified which have -16- been adjudged, by a court having jurisdiction with respect to the matter upon entry of a final judgment, not to have been done in good faith and in the reasonable belief that such conduct was in, or not opposed to, the best interests of the Trading Partnership or to constitute negligence, misconduct or breach of this Agreement unless, and except to the extent that, such court determines that, despite such judgment, such person is fairly and reasonably entitled to indemnity. Any indemnification required by this Section 13, unless ordered or expressly permitted by a court, shall be made by the indemnifying party only upon a determination by independent legal counsel mutually agreeable to the parties hereto in a written opinion that the conduct which is the subject of the claim, demand, lawsuit, action or proceeding with respect to which indemnification is sought meets the applicable standard set forth in this Section 13. 14. Assignment ---------- This Agreement shall not be assigned by any of the parties hereto without the prior express written consent of the other parties hereto. 15. Amendment; Waiver ----------------- This Agreement shall not be amended except by a writing signed by the parties hereto. No waiver of any provision of this Agreement shall be implied from any course of dealing between the parties hereto or from any failure by either party hereto to assert its rights hereunder on any occasion or series of occasions. 16. Severability ------------ If any provision of this Agreement, or the application of any provision to any person or circumstance, shall be held to be inconsistent with any present or future law, ruling, rule or regulation of any court or governmental or regulatory authority having jurisdiction over the subject matter hereof, such provision shall be deemed to be rescinded or modified in accordance with such law, ruling, rule or regulation, and the remainder of this Agreement, or the application of such provision to persons -17- or circumstances other than those as to which it shall be held inconsistent, shall not be affected thereby. 17. Notices ------- Any notice required or desired to be delivered under this Agreement shall be in writing and shall be delivered by courier service, postage prepaid mail, telex, telegram or other similar means and shall be effective upon actual receipt by the party to which such notice shall be directed, addressed as follows (or to such other address as the party entitled to notice shall thereafter designate in accordance with the terms hereof): if to the Parent or the Trading Partnership: ML PRINCIPAL PROTECTION L.P. c/o Merrill Lynch Investment Partners Inc., General Partner Merrill Lynch World Headquarters Sixth Floor, South Tower World Financial Center New York, New York 10080-6106 Attn: John R. Frawley, Jr. if to the General Partner: MERRILL LYNCH INVESTMENT PARTNERS INC. Merrill Lynch World Headquarters Sixth Floor, South Tower World Financial Center New York, New York 10080-6106 Attn: John R. Frawley, Jr. if to the Trading Advisor: __________________________ __________________________ __________________________ __________________________ Attn: ___________________ -18- 18. GOVERNING LAW ------------- THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAW. 19. Consent to Jurisdiction ----------------------- The parties hereto agree that any action or proceeding arising directly, indirectly or otherwise in connection with, out of, related to or from this Agreement, any breach hereof or any transaction covered hereby, shall be resolved, whether by arbitration or otherwise, within the County of New York, City of New York, and State of New York. Accordingly, the parties consent and submit to the jurisdiction of the federal and state courts and any applicable arbitral body located within the County of New York, City of New York, and State of New York. The parties further agree that any such action or proceeding brought by either party to enforce any right, assert any claim, or obtain any relief whatsoever in connection with this Agreement shall be brought by such party exclusively in federal or state courts, or if appropriate before any applicable arbitral body, located within the County of New York, City of New York, and State of New York. 20. Remedies -------- In any action or proceeding arising out of any of the provisions of this Agreement, the Trading Advisor, the General Partner, the Parent and the Trading Partnership agree that they shall not seek any prejudgment equitable or ancillary relief. Such parties also agree that their sole remedy in any such action or proceeding shall be to seek actual monetary damages for any breach of this Agreement; provided, however, that the Parent and the Trading Partnership agree that the Trading Advisor and the General Partner may seek declaratory judgment with respect to the indemnification provisions of this Agreement. 21. Promotional Material -------------------- None of the parties hereto will make reference to any other such party in an officially filed or publicly or privately distributed material without first submitting such material to the party so named for approval a reasonable period of time in advance of the proposed use of such material. -19- 22. Confidentiality --------------- The Parent, the Trading Partnership and the General Partner acknowledge that the Trading Advisor's strategies and trades constitute proprietary data belonging to the Trading Advisor and agree that they will not disseminate any confidential information regarding any of the foregoing, except as required by law, and any such information as may be acquired by the General Partner or the Trading Partnership is to be used solely to monitor the Trading Advisor's performance on behalf of the Trading Partnership. 23. Survival -------- The provisions of this Agreement shall survive the termination hereof with respect to any matter arising while this Agreement shall be in effect. 24. Counterparts ------------ This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument. 25. Headings -------- Headings to sections and subsections in this Agreement are for the convenience of the parties only and are not intended to be a part of or to affect the meaning or interpretation hereof. -20- IN WITNESS WHEREOF, this Agreement has been executed for and on behalf of the undersigned on the day and year first written above. ML PRINCIPAL PROTECTION TRADING L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner By:________________________________ James M. Bernard, Vice President ML PRINCIPAL PROTECTION L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner By:________________________________ James M. Bernard, Vice President MERRILL LYNCH INVESTMENT PARTNERS INC. By:________________________________ James M. Bernard, Vice President [TRADING ADVISOR] By:________________________________ -21- APPENDIX A COMMODITY INTERESTS TRADED BY [TRADING ADVISOR] ----------------------------------------------- The undersigned represents that the following is a complete list of all commodity interests which the undersigned intends to trade on behalf of ML PRINCIPAL PROTECTION L.P. other than regulated futures contracts and options on regulated futures contracts traded on a qualified board or exchange in the United States: Contract Type (futures, forward, option on futures) Exchange Contract ------------------ -------- -------- [TRADING ADVISOR] By:_____________________ Dated: __________________, 1996 -22- APPENDIX B COMMODITY TRADING AUTHORITY --------------------------- ____________________ ____________________ ____________________ Attn: _____________ Dear ___________: ML PRINCIPAL PROTECTION L.P. (the "Partnership") does hereby make, constitute and appoint you as its attorney-in-fact to buy and sell commodity futures and forward contracts through Merrill Lynch Futures Inc., as broker and as principal through the Partnership's affiliated Foreign Exchange Desk, respectively, in accordance with the Advisory Agreement among the Partnership, ML Principal Protection L.P. , Merrill Lynch Investment Partners Inc. and __________________ dated as of _______, 1996. This authorization shall terminate and be null, void and of no further effect simultaneously with the termination of the said Advisory Agreement. Very truly yours, ML PRINCIPAL PROTECTION TRADING L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner -23- By:_____________________ James M. Bernard, Vice President Dated as of _______, 1996 -24- APPENDIX C ACKNOWLEDGEMENT OF RECEIPT OF DISCLOSURE DOCUMENT -------------------------- The undersigned hereby acknowledges receipt of _____________________'s Disclosure Document dated _____________, 1996. ML PRINCIPAL PROTECTION TRADING L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner By:________________________________ James M. Bernard, Vice President Dated: _____________, 1996 -25- APPENDIX D COMMITTED FUNDS LETTER -26- EX-10.02 10 CONSULTING AGREEMENT EXHIBIT 10.02 FORM OF CONSULTING AGREEMENT BETWEEN MERRILL LYNCH FUTURES INC. AND _________________________ Dated as of _______, 1996 CONSULTING AGREEMENT -------------------- This Consulting Agreement dated as of _______, 1996 is between Merrill Lynch Futures Inc. ("Merrill Lynch Futures") and _________________________ ("Consultant"). W I T N E S S E T H: ------------------- WHEREAS, Merrill Lynch Futures acts as commodity broker for ML Principal Protection Trading L.P. (the "Partnership"; formerly, ML Principal Protection Plus Trading L.P.) WHEREAS, Consultant consults with Merrill Lynch Futures concerning Merrill Lynch Futures' provision of brokerage services (including forward trading services) for the Partnership (and other commodity pools, as contemplated hereby); WHEREAS, Consultant undertakes certain other obligations to Merrill Lynch Futures to assist Merrill Lynch Futures in its dealings with the Partnership and in certain other aspects of the commodities markets as herein set forth. NOW, THEREFORE, the parties hereto agree as follows: 1. Payment of Consulting Fee. Merrill Lynch Futures shall remit to Consultant, within ten (10) business days of the end of each month during the term of this Agreement, a consulting fee equal to ___ of 1% of the month-end assets of the Partnership committed by Merrill Lynch Investment Partners Inc. (the "General Partner"; formerly ML Futures Investment Partners Inc.) for management by Consultant as of the end of such month (a __% annual rate) after reduction of such assets by __________ of the brokerage commissions due to Merrill Lynch Futures in respect of such month but without reduction for any redemptions as of such month-end or for any accrued Profit Shares as of such month-end, and after including month-end interest credits (if any), all as described in the Partnership's Prospectus dated _______, 1996. Merrill Lynch Futures and the Consultants each understand that certain of the assets committed to trading may be held by the Partnership and certain of such assets by ML Principal Protection L.P. (formerly, Merrill Lynch Principal Protection Plus L.P.), the parent of the Partnership. Consultant recognizes and agrees that the General Partner has the authority to reallocate assets away from Consultant's Partnership account at any time (due, in part, to the "principal protection" feature of the Partnership), and that the Consulting Fees due hereunder shall reflect any such reallocation as of its effective date. The description of the calculation of the Consulting Fee set forth in the Prospectus is hereby confirmed in all respects. At such time as Merrill Lynch Futures remits each monthly consulting fee payment hereunder to Consultant, Merrill Lynch Futures shall also submit a reasonably itemized statement setting forth the calculation of the amount due to Consultant in respect of such month. If Consultant does not object to such statement within ten (10) business days of the receipt thereof, such statement shall for all purposes be deemed to be conclusively correct. 2. Registration of Consultant. Consultant represents and warrants that it has all necessary registrations or memberships with or in the Commodity Futures Trading Commission, the National Futures Association and any other federal or state governmental body or agency (if any) required to receive the consulting fee from Merrill Lynch Futures contemplated hereby and understands and agrees that Merrill Lynch Futures' obligations to make any such payments shall be suspended (without any obligation whatsoever to make compensating payments in the future) during any period as to which Merrill Lynch Futures is advised by counsel that Consultant does not have all such registrations and memberships. The Consultant need not provide any services which it believes, in its discretion, might subject it to any provision of the Investment Advisers Act of 1940 or similar state securities laws. 3. Prorating of Consulting Fee in the Case of Partial Months. The Consulting Fee due to Consultant hereunder shall be prorated for any partial month during which this Agreement is in effect, or for any reallocations during a month, such proration to be made on the basis of the number of business days during such month for which this Agreement is in effect and Consultant -2- is capable of providing consulting service hereunder, as compared to the total number of business days in such month. 4. Consulting Services to Be Rendered by Consultant. Consultant agrees to consult with Merrill Lynch Futures, at the reasonable request of Merrill Lynch Futures, from time to time during the term of this Agreement, concerning the commodity markets and the desirability of various different trading approaches, as well as the possibility of Consultant, or other trading advisors designated by Merrill Lynch Futures, participating in other pool offerings sponsored by Merrill Lynch entities. To the extent that computer services are necessary in the context of such consulting services, Consultant agrees to utilize its own computer facilities at no cost to Merrill Lynch Futures, to the extent that Consultant is able to do so without any interference with its regular business operations. In particular, and not by way of limitation, Consultant agrees, at the reasonable request of the General Partner, to review and critique proposed trading method descriptions submitted to Merrill Lynch Futures by prospective trading advisors. Consultant need not disclose any information deemed by it to be confidential in the course of any consultations as contemplated by this Section 4, unless Consultant, in its sole discretion, deems that it has received adequate assurances of confidentiality. 5. Reports. During the term of this Agreement, Consultant shall assist Merrill Lynch Futures in the preparation of any reports and other documents which Merrill Lynch Futures or any of its affiliates desires to transmit to its futures fund customers, including investors in commodity pools in which Merrill Lynch Futures or one of its affiliates participates, to the extent that Merrill Lynch Futures may reasonably request. 6. Presentations. During the term of this Agreement, Consultant agrees that, to the extent consistent and without interference with Consultant's regular business operation, its principals and agents shall be available to consult concerning presentations -3- which Merrill Lynch Futures may wish to organize relating to futures trading and to attend such presentations, in each case to the extent that Merrill Lynch Futures may reasonably request. 7. Investment Advice. During the term of this Agreement, Consultant agrees that it will, at the reasonable request of Merrill Lynch Futures, advise Merrill Lynch Futures concerning the investment of customer funds held by Merrill Lynch Futures in futures or forward contracts, provided that Consultant need not give any such advice which might subject it to the registration requirements under the Investment Advisers Act of 1940. 8. Consultation Concerning Forward Trading. During the term of this Agreement, Consultant agrees that it will, to the extent that Merrill Lynch Futures may reasonably request, cooperate with and advise Merrill Lynch Futures concerning the operation of the Partnership's affiliated Foreign Exchange Desk. 9. Consultation Concerning Other Commodity Pools. During the term of this Agreement, Consultant agrees to discuss with Merrill Lynch Futures and its representatives the structure and operation of the other commodity pools for which Consultant acts as a trading advisor (again, however, Consultant need not disclose any information deemed by it to be confidential in the course of such consultations). 10. Comparison of Brokerage Arrangements. As contemplated by the Limited Partnership Agreement of the Partnership and the Customer Agreement of the Partnership, Merrill Lynch Futures and the General Partner have agreed to undertake annual reviews of the Partnership's futures and forward trading. Consultant agrees that it will make available to Merrill Lynch Futures such comparisons as Merrill Lynch Futures may reasonably request of the terms on which forward trading facilities are made available to Consultant by third parties subject to the need to maintain client confidentiality. In addition, Consultant agrees it will assist in advising Merrill Lynch Futures and the General Partner in their efforts to compare -4- the futures and forward trading services available to the Partnership and to other comparable accounts. 11. General Consulting Services. Consultant acknowledges and agrees that this Agreement contemplates that Consultant will, to the extent not inconsistent with its responsibilities to third parties and as Merrill Lynch Futures may reasonably request, advise Merrill Lynch Futures on its commodity brokerage and related operations. Consultant hereby agrees that it will in good faith cooperate in assisting Merrill Lynch Futures in that respect, regardless of whether the specific advice or service requested of Consultant by Merrill Lynch Futures is explicitly set forth herein, and give to Merrill Lynch Futures and such of its officers as may so request the benefit of Consultant's experience and knowledge of the markets and consult with such persons in an advisory capacity concerning such markets and related matters. Consultant agrees, insofar as prior obligations shall permit, to hold itself available to consult and advise with officers and other representatives of Merrill Lynch Futures on the foregoing and related matters. 12. Term of Agreement. This Agreement shall continue in effect for three (3) years from the date hereof. Thereafter this Agreement shall be automatically renewed provided that the Advisory Agreement between the Partnership, ML Principal Protection L.P., the General Partner and the Consultant dated as of the date hereof (the "Advisory Agreement"), has been automatically renewed pursuant to its original terms as set forth in such Agreement. Notwithstanding the foregoing, this Agreement shall automatically terminate upon the termination of the Advisory Agreement. 13. Status of the Parties. Nothing herein shall be construed to constitute Consultant and Merrill Lynch Futures a partnership or association. Nor shall Consultant be deemed an employee or agent of Merrill Lynch Futures or to have any authority to act for or represent Merrill Lynch Futures as a consequence hereof. -5- 14. Notices. All notices required to be delivered under this Agreement shall be in writing (including telegraphic communication) or by telephone confirmed in writing, all such writings to be delivered personally or sent by first-class mail, postage prepaid, as follows: if to Consultant: ______________________________ ______________________________ ______________________________ ______________________________ Attn: _______________________ if to Merrill Lynch Futures: MERRILL LYNCH FUTURES INC. Merrill Lynch World Headquarters World Financial Center 250 Vesey Street 23rd Floor New York, New York 10080-1323 Attn: William Maitland, General Counsel 15. No Assignment. The consulting services hereby contracted for by Merrill Lynch Futures are personal to Consultant. No party hereto may assign any of its rights hereunder without the prior written consent of each other party. This Agreement shall not be construed to confer any benefit on any person other than the parties hereto and their respective successors and assigns. 16. GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF LAWS. -6- 17. Entire Agreement; Counterparts. This Agreement sets forth the entire agreement of the parties relating to the subject matter hereof except as otherwise set forth herein. This Agreement may be executed in two or more counterparts each of which shall constitute one and the same document. 18. No Waiver. No failure or delay on the part of any party hereto in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. Any waiver granted hereunder must be in writing and shall be valid only in the specific instance in which given. 19. No Disgorgement. In no event shall Consultant be required to disgorge any consulting fees previously paid to it by Merrill Lynch Futures hereunder (unless an invoice submitted by Merrill Lynch Futures as contemplated hereby shall prove to have been incorrect). The payments due to Consultant are in no respect contingent on any event subsequent nor upon the receipt by Merrill Lynch Futures of any payments from any of its affiliates or any other third party. Both parties hereto shall, however, be entitled to exercise full remedies at law in the event of a breach of this Agreement by the other party. -7- IN WITNESS WHEREOF, this Consulting Agreement has been executed by the parties hereto as of the day and year first above written. [CONSULTANT] By:___________________________ [Title] MERRILL LYNCH FUTURES INC. By:___________________________ Acknowledged: ML PRINCIPAL PROTECTION TRADING L.P. By: Merrill Lynch Investment Partners Inc., General Partner By:_______________________________ James M. Bernard Vice President -8- EX-10.03 11 CUSTOMER AGREEMENT EXHIBIT 10.03 CUSTOMER AGREEMENT AMONG ML PRINCIPAL PROTECTION L.P. (FORMERLY, ML PRINCIPAL PROTECTION PLUS L.P.) ML PRINCIPAL PROTECTION TRADING L.P. (FORMERLY, ML PRINCIPAL PROTECTION PLUS TRADING L.P. AND MERRILL LYNCH FUTURES INC. DATED AS OF ________________, 1996 ML PRINCIPAL PROTECTION TRADING L.P. CUSTOMER AGREEMENT In consideration of the acceptance by MERRILL LYNCH FUTURES INC. ("Broker") of one or more accounts of ML PRINCIPAL PROTECTION TRADING L.P., formerly ML Principal Protection Trading L.P. ("Customer"), it is agreed as follows: 1. Customer acknowledges that the purchase and sale of commodity futures and forward contracts and commodity options is speculative, involves a high degree of risk and is suitable only for persons who can assume the risk of losses in excess of their margin deposits and option premiums. Customer understands that because of the low margin normally required in commodity futures and forward trading, small price changes in commodity futures and forward contracts may result in significant Customer losses, which losses may substantially exceed Customer's margin deposits and any other deposits Customer may make. Broker has disclosed all the foregoing risks and information, as well as the fact that the proposed monthly brokerage commissions of 0.7917 of 1% of the month-end assets allocated to the Trading Advisors for management (a 9.5% annual rate), may result in significantly higher brokerage costs than those charged by Broker to other customers, including other commodity pools such as Customer. Depending upon the number of trades ordered for Customer by its advisors (the "Trading Advisors"), the foregoing flat-rate commissions could constitute a substantial premium over Broker's standard speculative round-turn commission rates. Broker agrees to pay all floor brokerage charges relating to Customer's trading, including any such charges assessed on trades executed by floor brokers unaffiliated with Broker, provided that such charges do not exceed Broker's standard rates (provided such rates are competitive). Broker agrees to pay all fees of Merrill Lynch Asset Management, L.P., which will provide cash management services to Customer and to ML Principal Protection L.P., (formerly, ML Principal Protection Plus L.P.) the sole limited partner of Customer (the "Parent"). 2. Customer authorizes Broker, as Customer's commodity broker and as Customer's principal, to purchase and sell commodity futures and forward contracts (and to use the services of other persons designated by Customer in writing from time to time, in doing so) and to purchase, sell and exercise commodity options for Customer's account in accordance with the written or oral instructions of the Trading Advisors as described in the Prospectus of Customer and the Parent dated _______, 1996, including the Prospectus Supplement thereto (as the same may be amended as supplemented from time to time, the "Prospectus"), which Trading Advisors have been granted full discretionary trading authority with respect to Customer's assets, or such other person or persons as Customer may designate to Broker in writing from time to time. Customer acknowledges and agrees that Broker shall have no discretion with respect to the trading decisions to be made for the account of Customer except as may otherwise be agreed upon in writing between Customer and Broker. Customer has delivered to Broker a true copy of the Advisory Agreements between Customer and each of the Trading Advisors (the "Advisory Agreements"). Customer may override the authority of the Trading Advisors in certain limited circumstances as described in such Advisory Agreements and the Prospectus. Broker shall be in no respect responsible for any actions taken in compliance with instructions from the Trading Advisors or from Customer. 3. Broker shall act as custodian for all assets of Customer on deposit with Broker. In such capacity, Broker may cause to be held cash and other assets of Customer by such bank or banks as Broker may select from time to time, in its sole discretion, subject to the approval of Customer, and may transmit funds to exchanges as margin. Broker shall not deposit assets of Customer as margin in respect of Customer's forward trades, which trades shall be effected pursuant to the Foreign Exchange Desk Service Agreement between Customer, Broker, Merrill Lynch International Bank, Merrill Lynch Investment Partners Inc. (formerly, ML Future Investment Partner Inc.) and certain other parties dated as of July 1, 1993 as amended by the Amendment to Foreign Exchange Desk Service Agreement dated as of _______, 1996 (the "F/X Desk Agreement"). Broker will invest such assets in a manner consistent with the "Use of Proceeds" section in the Prospectus. Broker may hold Customer assets in unregulated accounts. Assets held in Customer's name at affiliates of Broker shall be held in unregulated accounts. -2- Certain Customer assets will be converted into foreign currencies and used to margin foreign futures positions held for Customer. Broker will hold such non-U.S. dollar funds in a "foreign futures secured amount" or a "foreign options secured amount" account, and will invest such assets, to the extent practicable, in short-term government securities denominated in such currencies. All interest earned on such investments shall inure to the benefit of Customer's account. Customer shall bear the exchange-rate risk involved in converting and re-converting assets held in Customer's account between U.S. dollars and foreign currencies. Broker shall have no liability to Customer in connection with any such investment except for Broker's negligence or misconduct in connection therewith. Broker shall be entitled to retain any other economic benefit which may accrue from its possession of Customer's assets, provided that such benefit could not reasonably be made available to Customer. 4. Customer shall pay Broker: (a) the applicable initial, maintenance and variation margin requirements in effect from time to time and the brokerage commissions described in the Prospectus; and (b) service charges on any Customer deficit balance at the rates customarily charged by Broker and interest on any such deficit balance at the rate of one percent (1%) over the average prime rate announced from time to time by The Morgan Guaranty Trust Company of New York, with interest to be computed and charged by Broker on a monthly basis, or the maximum rate allowed by law, whichever is less. All routine charges, including without limitation, exchange fees, National Futures Association transaction fees and clearing fees and floor brokerage due in respect of Customer's trading shall be paid by Broker from the monthly flat-rate commission received by Broker from Customer. Broker shall pay all "pit brokerage" incurred in respect of Customer's trading without reimbursement therefor by Customer. Customer hereby authorizes Broker to pay all fees of Merrill Lynch Asset Management, L.P., in connection with Merrill Lynch Asset Management, L.P.'s provision of cash management services to Customer, from the monthly flat-rate commission received by Broker from Customer. 5. Customer acknowledges that Broker has the right, but no responsibility or obligation, to limit the number of -3- commodity futures, forward and commodity options which Customer may maintain or acquire through Broker at any time. Broker shall give Customer prior notice of any such limitation. 6. Customer shall maintain at all times that portion of its assets with Broker, to be used to provide, and subject to be transmitted to exchanges in respect of, margins for Customer's account, as required from time to time by Broker in its sole and absolute discretion. Margin requirements established by Broker may exceed or differ from the requirements set by any commodity exchange or third party and may be changed by Broker without notice to Customer, such changes to apply to existing as well as future positions, should Broker so elect. If at any time Customer's account does not contain the amount of margin and/or premium required by Broker, Broker may, at any time, close out Customer's open positions in whole or in part and take any action described in Section 11 hereof, after giving notice thereof to the Trading Advisors and the Customer. While Broker has the right to close out Customer's open positions in whole or in part for failure to maintain the amount of margin required by Broker or pay premiums due to Broker, Customer understands and agrees that Broker has no obligation to Customer to do so in the absence of specific instructions from Customer or the Trading Advisors. 7. All transactions by Broker on Customer's behalf shall be subject to the applicable constitutional provision, by-laws, rules, regulations, rulings and interpretations of the contract market on which such transactions are executed or cleared by Broker or its agents for Customer's account, and to all applicable governmental acts and statutes (such as the Commodity Exchange Act) and the rules and regulations made thereunder; Broker shall not be liable to Customer as a result of any action taken by Broker or its agents that is considered in good faith by Broker to be required by any such constitutional provision, rule, regulation, ruling, interpretation, act, statute or regulation. The foregoing provision is solely for the protection and benefit of Broker, and any failure by Broker or its agents to comply with any such constitution, rule, regulation, ruling, interpretation, act, statute or other regulation shall not relieve Customer of any obligations under this Agreement nor be construed to create rights hereunder in favor of Customer against Broker. -4- 8. All monies, securities, commodities, commodity futures contracts, commodity options or other property, including any property held by banks, now or at any future time in Customer's account or held by Broker for Customer are hereby pledged with Broker and shall be subject to a security interest in Broker's favor to secure any indebtedness at any time owing from Customer to Broker. 9. All transactions for or on Customer's behalf shall be deemed to be included in a single account whether or not such transactions are segregated on Broker's records into separate accounts, either severally or jointly with others - -- the foregoing provision being solely for Broker's protection. Broker's rights with respect to Customer's property shall be qualified by applicable requirements for the segregation of customer property under the Commodity Exchange Act and the regulations of the Commodity Futures Trading Commission. 10. The Parent, the sole limited partner of Customer, hereby authorizes and directs Broker to debit directly from Parent's bank or custodial accounts(s) all amounts due to Broker from Parent as provided under Section 16(e) of the Parent's Third Amended Limited Partnership Agreement -- being amounts equal to the difference between the assets which Customer commits to trading and the actual equity invested in Customer. Such debits may be made without need of prior notice to either Customer or the Parent. 11. Broker shall not be responsible for: (1) delays in the transmission of orders due to breakdown or failure of transmission or communication facilities or to any other cause beyond Broker's reasonable control or not resulting from Broker's negligence or misconduct; or (2) any gain or loss to Customer from fluctuations in currency exchange rates in any foreign currency in which any commodity futures, forward or commodity option contract or deposited property is held, except to the extent that any amount may be owing from Broker to Customer pursuant to any transaction in a foreign currency between Broker and Customer, provided that there is no negligence or misconduct on the part of Broker in respect of such loss. 12. In the event that: (a) Customer shall terminate or be dissolved; (b) a proceeding under the Bankruptcy Code, an -5- assignment for the benefit of creditors or an application for a receiver, custodian or trustee shall be filed or applied for by or against Customer; (c) any property in Customer's account shall be garnished or attached; (d) the property held in Customer's account shall be determined by Broker in its sole and absolute discretion, and regardless of current market quotations, to be inadequate to secure Customer's account; (e) Customer's account shall incur a deficit balance; or (f) Customer shall acquire or maintain open positions with Broker in excess of the limits imposed from time to time by Broker pursuant to Section 5 hereof, Broker may close out Customer's account in whole or in part, sell any or all of Customer's property held by Broker, buy or sell any securities, commodities, commodity futures, forward or commodity options, or any other property, for Customer's account, or cancel any outstanding orders to close out any account of Customer or to close out any commitment made by Broker on behalf of Customer. Such sale, purchase or cancellation may be made at Broker's discretion on a contract market or at public auction or at private sale. No prior tender, demand, call or prior notice from Broker of the time and place of such sale or purchase shall be deemed to be a waiver of Broker's right to sell or buy any property held by Broker, or owed to Broker by Customer. Broker may, to the extent permitted by law, purchase the whole or any part of any such Customer property, free from any right of redemption, and Customer shall remain liable for and shall pay to Broker the amount of any deficiency resulting from any such transactions. 13. If at any time Customer shall be unable to deliver to Broker any property previously sold by Broker on Customer's behalf, Customer authorizes Broker in its discretion to borrow or to buy any property necessary to make delivery thereof, and Customer shall pay and reimburse Broker for any cost, loss and damage (including consequential costs, losses, penalties, fines and damages) which Broker may sustain thereby and any premiums which Broker may be required to pay thereon, and for any cost, loss and damage (including consequential costs, losses, penalties, fines and damages) which Broker may sustain from its inability to borrow or buy any such property. 14. Broker acknowledges and agrees that Customer is a subsidiary limited partnership of the Parent, which is the sole limited partner of Customer and whose general partner is also the general partner of Customer. Broker agrees that except pursuant to the Parent's undertaking pursuant to Section 16(e) of the -6- Parent's Limited Partnership Agreement, Broker will look only to the assets of Customer, and not to any assets of the Parent itself, to satisfy any debts or liabilities due to the Broker hereunder. Broker also agrees that (i) it will in no event seek to assert, other than pursuant to and to the extent of the Parent's undertaking set forth in Section 16(e) of the Parent's Limited Partnership Agreement, that the Parent or any of its assets is in any respects subject to any debts of or claims against Customer, either through "piercing the corporate veil," "substantive consolidation" or other theories, and (ii) Broker will take no action and institute no action or proceeding seeking to adjudicate the Customer a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property. In no event shall Broker collect any amounts from Customer if doing so would result in the assets attributable to one series of units of limited partnership interest sold by Parent being used to pay any losses incurred in respect of any other such series. 15. In the event Broker does not receive timely instructions with respect to outstanding options held in Customer's account to liquidate, exercise or permit such options to expire, Broker shall permit such options in Customer's account to expire. Customer shall give liquidating instructions to Broker concerning Customer's open futures and forward positions maturing in a current month at least five (5) business days prior to the first notice day, in the case of long positions, and at least five (5) business days prior to the last trading day, in the case of short positions. Alternatively, Customer shall deliver to Broker sufficient funds to take delivery or sufficient funds and/or the necessary documents to make delivery within the time period hereinabove specified. If Customer does not either give instructions or deliver the funds and/or documents hereby required to Broker within such period, Broker may, without -7- notice, either liquidate Customer's positions pursuant to Section 11 or take or make delivery on behalf of Customer upon such terms and in such manner as Broker determines in its sole and absolute discretion. 16. Customer agrees and acknowledges that with respect to its forward trading, Customer shall trade through Broker pursuant to the terms of the F/X Desk Agreement and such trading shall be subject to Broker's standard netting provisions. 17. Customer agrees that Broker may, from time to time, change the account number assigned to any account covered by this Agreement, and that this Agreement shall remain in full force and effect as to any such renumbered account. 18. Subject to Section 7 hereof, no provision of this Agreement shall in any respects be waived, altered, modified or amended unless such waiver, alteration, modification or amendment be committed to writing and signed by Customer and an officer of Broker. 19. THIS AGREEMENT SHALL BE CONSTRUED ACCORDING TO, AND THE RIGHTS AND LIABILITIES OF THE PARTIES HERETO SHALL BE GOVERNED BY, THE LAWS OF THE STATE OF NEW YORK. 20. This Agreement shall be binding upon Customer and Customer's assigns. 21. Customer acknowledges that it is an affiliate of Broker. However, Customer acknowledges and agrees that this Agreement may be enforced against Customer in accordance with its terms, irrespective of such affiliation. 22. If any term or provision hereof, or the application thereof to any person or circumstance, shall to any extent be contrary to any exchange or government regulation or otherwise invalid or unenforceable, the remainder of this Agreement, or the application of such provision to persons or circumstances other than those as to which it is contrary, invalid or enforceable, shall not be affected thereby, and shall be enforced to the fullest extent permitted by regulation and law, provided such enforcement does not materially alter the intent of this Agreement or reduce the security, or increase the obligations, of Broker hereunder. -8- 23. The rights and remedies conferred upon the parties hereto shall be cumulative, and the exercise or waiver of any thereof shall not preclude or inhibit the exercise of additional rights or remedies. 24. Broker shall be free to render services of the nature to be rendered to Customer hereunder to persons or parties in addition to Customer, and the parties acknowledge that Broker does and will render such services, including to commodity pools similar in nature to Customer, and may do so on terms more favorable than those granted to Customer hereunder. However, Broker shall not knowingly or deliberately favor any account over Customer with respect to the execution of commodity trades. 25. This Agreement shall be cancelable, without penalty, upon sixty (60) days' notice to the parties hereto by Broker or Customer. 26. Any notices under this Agreement shall be given or confirmed in writing, delivered personally or sent by mail, as follows: if to Customer: ML PRINCIPAL PROTECTION TRADING L.P. c/o Merrill Lynch Investment Partners Inc. Merrill Lynch World Headquarters Sixth Floor, South Tower World Financial Center New York, New York 10080-6106 Attn: John R. Frawley, Jr. with a copy to: MERRILL LYNCH INVESTMENT PARTNERS INC. Merrill Lynch World Headquarters Sixth Floor, South Tower World Financial Center New York, New York 10080-6106 Attn: John R. Frawley, Jr. -9- if to Broker: MERRILL LYNCH FUTURES INC. Merrill Lynch World Headquarters World Financial Center 250 Versey Street 23rd Floor New York, New York 10080-1323 Attn: William Maitland, Esq. Notices hereunder shall be effective only when actually received. 27. Customer understands that any of its assets held by the parties with which Customer trades in the forward markets will not be subject to Commodity Futures Trading Commission segregation requirements. 28. This Agreement shall inure to the benefit of Broker. This Agreement shall also inure to the benefit of any of Broker's affiliates through which Customer may trade and to that of the respective successors (by merger, consolidation or otherwise) and assigns of each of the foregoing parties, each of which may transfer Customer's account to any such successors or assigns. 29. Broker and Customer each agree that in the event of inconsistencies between the terms of this Agreement and the Prospectus, the latter shall control as if set forth verbatim herein. -10- IN WITNESS WHEREOF, this Agreement has been executed for and on behalf of the undersigned on the day and year first written above. ML PRINCIPAL PROTECTION TRADING L.P. By: Merrill Lynch Investment Partners Inc., General Partner By:________________________________ James M. Bernard, Vice President Accepted and Confirmed: MERRILL LYNCH FUTURES INC. By:_________________________________ Name: Title: ML PRINCIPAL PROTECTION L.P. (solely in respect of Section 10 hereof) By: Merrill Lynch Investment Partners Inc., General Partner By:_________________________________ James M. Bernard, Vice President -11- MERRILL LYNCH ASSET MANAGEMENT, L.P. (solely in respect of Section 1, paragraph 3 and Section 4, paragraph 2 hereof) By: Princeton Services, Inc., General Partner By:____________________________ Name: Title: -12- EX-10.04 12 ESCROW AGREEMENT EXHIBIT 10.04 ESCROW AGREEMENT TO: The Bank of New York 101 Barclay Street New York, New York 10286 The following property is to be deposited with you as "Escrow Agent": all proceeds of the subscriptions for the Units of Limited Partnership Interest (referred to herein as the "Units") of ML PRINCIPAL PROTECTION L.P., (formerly, ML Principal Protection Plus L.P.), a Delaware limited partnership being offered pursuant to a continuous public offering of the Units, received by MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED and certain of its affiliates, as selling agent ("Selling Agent") for ML PRINCIPAL PROTECTION L.P., which are accepted by MERRILL LYNCH INVESTMENT PARTNERS INC. (formerly ML Futures Investment Partners Inc.), the general partner ("General Partner") of ML PRINCIPAL PROTECTION L.P., Escrow Account No. 328436. The Unit price will be $100. Such subscriptions may be deposited in the Escrow Account established under this Escrow Agreement either by certified or clearinghouse check, or Federal Funds wire transfer, to be determined by the General Partner, duly made out to the Escrow Agent in the following form: "THE BANK OF NEW YORK, AS ESCROW AGENT FOR ML PRINCIPAL PROTECTION L.P., ESCROW ACCOUNT NO. 328436." If the deposit into the Escrow Account is made by certified check or Federal Funds wire transfer, the Escrow Agent shall invest the funds deposited on the same day as deposited, provided such deposit is received by the Escrow Agent by 10:00 a.m. E.S.T. If the deposit into the Escrow Account is made by certified check or Federal Funds wire transfer and received by the Escrow Agent after 10:00 a.m. E.S.T., the Escrow Agent shall invest the funds deposited on the next business day. If the deposit into the Escrow Account is made by clearinghouse check, the Escrow Agent shall invest the funds deposited on the next business day following the receipt of the clearinghouse check. The Selling Agent will retain all Subscription Agreement and Power of Attorney signature pages submitted by subscribers. As Escrow Agent, you are hereby directed to hold, deal with and dispose of the aforesaid property and any other property, including without limitation, interest earned on funds held in the Escrow Account, at any time held by you hereunder in the following manner, subject, however, to the terms and conditions hereinafter set forth: -2- Units are sold to the public, on a continuous basis, as of the beginning of each calendar quarter (hereinafter referred to as a "Closing Date"). There is no minimum number of Units which must be sold as of the beginning of any calendar quarter for any Units then to be sold. The General Partner may terminate, but not suspend, the offering at any time upon verbal notice promptly confirmed in writing to you. On each Closing Date the Escrow Agent shall, upon (i) written instructions from the Selling Agent, the General Partner and ML PRINCIPAL PROTECTION L.P., and (ii) possession in the Escrow Account of cleared funds in payment of subscriptions, release all funds then held in such Escrow Account, except as otherwise provided herein, to the ML PRINCIPAL PROTECTION TRADING L.P. (a Delaware limited partnership which serves as the trading subsidiary of ML PRINCIPAL PROTECTION L.P. and of which ML PRINCIPAL PROTECTION L.P. is the sole limited partner and the General Partner is the sole general partner) commodity trading account maintained with MERRILL LYNCH FUTURES INC. ("Broker"), as commodity broker for ML PRINCIPAL PROTECTION TRADING L.P., or to the checking account of ML PRINCIPAL PROTECTION L.P., as the General Partner may direct. No selling commissions or offering -3- or other charges are payable from any amounts held in escrow. The General Partner shall give you verbal notice (promptly confirmed in writing) of the Closing Date at least three business days prior thereto. In lieu of liquidating investments in which the escrow funds are being maintained, the Escrow Agent may transfer such investments in kind to the checking account of ML PRINCIPAL PROTECTION L.P., with the consent of the General Partner. As promptly as practicable (but in no event more than 10 business days) after each Closing Date, you shall remit to the Selling Agent a check for all interest earned on subscribers' funds while in escrow. All interest earned on rejected subscriptions shall be distributed by the Selling Agent (upon receipt of funds from you) to the appropriate subscribers as described above, irrespective of amount. In the event that the General Partner terminates the offering of the Units at a time when any subscription funds are held in escrow, the Escrow Agent shall, as promptly as practicable, and in no event later than 5 business days thereafter, transmit to the Selling Agent a check or checks in -4- the amount of the subscriptions received plus the interest actually earned thereon while held in escrow. The Escrow Agent shall invest all funds deposited in the Escrow Account in United States Treasury Bills, time deposits or other securities to which the General Partner instructs the Escrow Agent in writing. The General Partner shall instruct the Escrow Agent as to in which securities the funds in the Escrow Account shall be invested prior to 10:00 a.m. E.S.T. on any date on which funds shall be invested. In the absence of such instruction the Escrow Agent is authorized to invest such funds in securities which have the same maturity as the last set of instructions received. At any time prior to the release of a subscriber's funds from the Escrow Account, the General Partner is authorized to notify the Escrow Agent that such subscription has not been accepted (irrespective of how long such subscription has been held in the Escrow Account and of whether the General Partner had previously indicated its willingness to accept such subscription), and the General Partner is further authorized to direct the Escrow Agent to return any funds held in the Escrow Account -5- to the Selling Agent for the benefit of the person submitting such subscription (including any interest attributable to such funds while held in the Escrow Account). In the event a subscription has not been accepted, the Selling Agent shall provide the Escrow Agent with the name of the subscriber, the number of Units subscribed for each such subscriber, the amount of principal initially deposited or the amount debited to the subscriber's customer securities account. Such refund of subscriptions, plus interest, shall be made in the case of each rejected subscription in the same manner described above in the event that any offering of a series of Units is terminated without Units being sold. The Selling Agent acknowledges and agrees that the method established pursuant to this Escrow Agreement for the refund of rejected subscriptions and of interest earned on subscriptions is only acceptable under Rule 15c2-4 of the Securities Exchange Act of 1934 provided that the Selling Agent informs subscribers of when their customer securities accounts at the Selling Agent will be credited with such refunded subscription payments and/or interest income. Accordingly, the Selling Agent undertakes that it will (a) credit the appropriate subscribers' -6- customer securities accounts as promptly as practicable (and in no event more than 5 business days) after receipt of the necessary funds from the Escrow Agent and information indicating the amounts so due, and (b) inform all subscribers as soon as practicable of the date that the amounts to be credited will be available in their respective customer accounts. Interest earned on funds while held in the Escrow Account shall be allocated among subscribers in proportion to the amounts of their respective subscriptions and the lengths of time their subscriptions were held in escrow. -------------------------------------------- Prior to delivery as described above, ML PRINCIPAL PROTECTION L.P. shall have neither title to nor interest in the funds on deposit in the Escrow Account, and such funds shall under no circumstances be subject to the liabilities or indebtedness of ML PRINCIPAL PROTECTION L.P. All documents, including any instruments necessary to the negotiation or other transfer of the assets held in the Escrow Account, deposited simultaneously with the execution of -7- this Escrow Agreement are approved by the parties hereto, other than the Escrow Agent. The Escrow Agent shall not be obliged to inquire as to the form, manner of execution or validity of any of these documents or of any document hereafter deposited in the Escrow Account upon the instruction of the General Partner, nor shall the Escrow Agent be obliged to inquire as to the identity, authority or rights of the persons executing the same. The General Partner shall indemnify and save the Escrow Agent harmless from losses, costs, and expenses (including reasonable attorneys' fees) incurred by the Escrow Agent in any suit or claim arising out of or in connection with this Escrow Agreement except claims which are occasioned by the Escrow Agent's negligence, bad faith, or willful misconduct. This indemnity shall survive the termination of this Escrow Agreement. The Escrow Agent shall not be liable for any error of judgment, for any act done or steps taken or omitted by the Escrow Agent in good faith (including without limitation the liquidation of investments held in the Escrow Account), for any mistake of fact or law, or for anything which the Escrow Agent may do or refrain from doing in connection herewith, except for -8- the Escrow Agent's own negligence, bad faith, or willful misconduct. No provision of this Agreement shall require the Escrow Agent to expand or risk its own funds or otherwise incur any financial liability in the performance of any of its duties hereunder. In case of conflicting demands upon the Escrow Agent, the Escrow Agent may withhold performance of this Escrow Agreement until such time as said conflicting demands shall have been withdrawn or the rights of the respective parties shall have been settled by court adjudication, arbitration, joint order or otherwise. Any notice which the Escrow Agent is required or desires to give hereunder to any of the undersigned shall be in writing and may be given by mailing the same to the address of the undersigned indicated under their respective signatures hereon (or to such other address as said undersigned may substitute therefor by written notification to the Escrow Agent). For all purposes hereof, any notice shall be effective only when actually received. Notices to the Escrow Agent shall be in writing and shall not be deemed effective until actually received -9- by the Escrow Agent's trust department. Whenever under the terms hereof the time for giving notice or performing an act falls upon a Saturday, Sunday or bank holiday, such time shall be extended to the Escrow Agent's next business day. The Escrow Agent's duties and responsibilities shall be limited to those expressly set forth in this Escrow Agreement, and the Escrow Agent shall not be subject to, nor obligated to recognize, any other agreement between, or direction or instruction of, any or all of the parties hereto even though reference thereto may be made herein; provided, however, that with the Escrow Agent's written consent, this Escrow Agreement may be amended at any time or times by an instrument in writing signed by all of the then parties in interest. If any property in the Escrow Account is at any time attached, garnished or levied upon, under any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in case any order, judgment or decree shall be made or entered by any court affecting such property, or any part thereof, then in any of such events, the Escrow Agent is authorized, in its -10- sole discretion, to rely upon and comply with any such order, writ, judgment or decree, which the Escrow Agent is advised by legal counsel of its own choosing is binding upon the Escrow Agent, and if the Escrow Agent complies with any such order, writ, judgment or decree, the Escrow Agent shall not be liable to any of the parties hereto or to any other person, firm or corporation by reason of such compliance, even though such order, writ, judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated. The Escrow Agent may resign by giving fifteen (15) business days' written notice to the undersigned as aforesaid; and thereafter, subject to the possible applicability of the provisions of the preceding paragraph hereof in the event that any property in the Escrow Account has been attached, garnished or levied upon, shall deliver all remaining property in the Escrow Account upon the joint written and signed order of the undersigned. If no such order is received by the Escrow Agent within thirty days after mailing such notice, the Escrow Agent is unconditionally and irrevocably authorized and empowered to send any and all property in the Escrow Account by registered mail to the respective depositors thereof (irrespective of whether the -11- Escrow Agent shall have received any certificate regarding, or funds in respect of, additional interest from the General Partner). The General Partner may remove the Escrow Agent at any time (with or without cause) by giving at least 25 days' written notice thereof. Within 10 days after receiving such notice, the General Partner and the Selling Agent shall jointly agree on and appoint a successor escrow agent at which time the Escrow Agent shall either distribute the funds held in the Escrow Account, less its fees, costs and expenses or other obligations owed to it as directed by the joint instructions of the General Partner and the Selling Agent or hold such funds, pending distribution, until all such fees, costs and expenses or other obligations are paid. If a successor escrow agent has not been appointed or has not accepted such appointment by the end of the 10 day period, the Escrow Agent may appeal to a court of competent jurisdiction for the appointment of a successor escrow agent, or for other appropriate relief and the costs, expenses and reasonable attorneys fees which the Escrow Agent incurs in connection with such a proceeding shall be paid by the General Partner. -12- The General Partner shall pay the Escrow Agent pursuant to the Escrow Agent's customary fee schedule. The Escrow Agent agrees that it shall have no right against ML PRINCIPAL PROTECTION L.P. or its subsidiary, ML PRINCIPAL PROTECTION TRADING L.P. with respect thereto. This paragraph shall survive termination of the Agreement. This agreement shall be construed, enforced, and administered in accordance with the laws of the State of New York. In the event of any dispute between or conflicting claims by or among the General Partner or the Selling Agent and/or any other person or entity with respect to any funds held in the Escrow Account, the Escrow Agent shall be entitled, at its sole discretion, to refuse to comply with any and all claims, demands or instructions with respect to such funds so long as such dispute or conflict shall continue, and the Escrow Agent shall not be or become liable in any way to the General Partner or the Selling Agent for its failure or refusal to comply with such conflicting claims, demands or instructions, except to the extent under the circumstances such failure would constitute negligence, bad faith or willful misconduct on the Escrow Agent's -13- part. The Escrow Agent shall be entitled to refuse to act until, at its sole discretion, either such conflicting or adverse claims or demands shall have been finally determined in a court of competent jurisdiction or settled by agreement between the conflicting parties as evidenced in a writing, satisfactory to the Escrow Agent or the Escrow Agent shall have received security or an indemnity satisfactory to the Escrow Agent sufficient to save it harmless from and against any and all loss, liability or expense which it may incur by reason of its acting. The Escrow Agent may in addition elect at its sole discretion to commence an interpleader action or seek other judicial relief or orders as the Escrow Agent may deem necessary. The invalidity, illegality or unenforceability of any provision of this Agreement shall in no way affect the validity, legality or enforceability of any other provision; and if any provision is held to be unenforceable as a matter of law, the other provisions shall not be affected thereby and shall remain in full force and effect. -14- This Agreement shall constitute the entire agreement of the parties with respect to the subject matter and supersedes all prior oral or written agreements in regard thereto. The rights and remedies conferred upon the parties hereto shall be cumulative, and the exercise or waiver of any such right or remedy shall not preclude or inhibit the exercise of any additional rights or remedies. The waiver of any right or remedy shall not preclude or inhibit the subsequent exercise of such right or remedy. This Agreement may be executed by each of the parties hereto in any number of counterparts, each of which counterparts, when so executed and delivered, shall be deemed to be an original and all such counterparts shall together constitute one and the same agreement. -15- Dated at New York, New York as of ________, 1996 Parties to the Escrow --------------------- ML PRINCIPAL PROTECTION L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner Merrill Lynch World Headquarters Sixth Floor South Tower World Financial Center New York, New York 10080-6106 By: _______________________________ James M. Bernard Vice President MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED, Selling Agent Merrill Lynch World Headquarters North Tower World Financial Center New York, New York 10080-6106 By: _______________________________ John R. Frawley, Jr. Accepted this ____ day of _____________, 1996 THE BANK OF NEW YORK 101 Barclay Street New York, New York 10286 By: ________________________ Name: Title: -16- EX-10.07 13 FOR. EXCHANGE DESK SERVICE AGREEMENT EXHIBIT 10.07 AMENDMENT TO FOREIGN EXCHANGE DESK SERVICE AGREEMENT This Amendment (the "Amendment") to the Foreign Exchange Desk Service Agreement dated July 1, 1993 (the "Agreement") among MERRILL LYNCH INTERNATIONAL BANK ("MLIB"), MERRILL LYNCH FUTURES INC. ("MLF"), MERRILL LYNCH INVESTMENT PARTNERS INC., formerly, ML Futures Investment Partners Inc. ("MLIP"), and each of the funds listed on Schedule A thereto, as amended from time to time, is made as of this __th day of ____, 1996 among the undersigned and ML PRINCIPAL PROTECTION TRADING L.P., formerly, ML Principal Protection Plus Trading L.P. (the "Customer"). W I T N E S S E T H: ------------------- WHEREAS, MLIB, MLF and MLIP have determined to amend the Agreement as set forth in this Amendment; and WHEREAS, the Customer has determined to be bound by the terms and provisions of the Agreement including the amendments to the Agreement pursuant to this Amendment. NOW, THEREFORE, in consideration of the premises and the mutual covenants contained herein and other good and valuable consideration, the receipt and sufficiency of all of which are hereby acknowledged, the parties hereto agree as follows: 1. The Customer hereby agrees to be bound by the terms and provisions of the Agreement including the amendments to the Agreement contained herein. 2. Section 6 of the Agreement shall be amended to add the following paragraphs after the second paragraph under such section: "ML Principal Protection L.P. (the "Parent"), the sole limited partner of Customer, hereby authorizes and directs MLF to debit directly from Parent's bank or custodial account(s) all amounts due to MLF from Parent as provided under Section 16(e) of the Parent's Third Amended and Restated Limited Partnership Agreement dated as of ________, 1996 -- being amounts equal to the difference between the assets which Customer commits to trading and the actual equity invested in Customer. Such debits may be made without need of prior notice to either Customer or the Parent. MLF acknowledges and agrees that Customer is a subsidiary limited partnership of the Parent, which is the sole limited partner of Customer and whose general partner is also the general partner of Customer. MLF agrees that except pursuant to the Parent's undertaking pursuant to Section 16(e) of the Parent's Limited Partnership Agreement, MLF will look only to the assets of Customer, and not to any assets of the Parent itself, to satisfy any debts or liabilities due to MLF hereunder. MLF also agrees that (i) it will in no event seek to assert, other than pursuant to and to the extent of the Parent's undertaking set forth in Section 16(e) of the Parent's Third Amended and Restated Amended Limited Partnership Agreement, that the Parent or any of its assets is in any respects subject to any debts of or claims against Customer, either through "piercing the corporate veil," "substantive consolidation" or other theories, and (ii) MLF will take no action and institute no action or proceeding seeking to adjudicate the Customer a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for it or for any substantial part of its property. In no event shall MLF collect any amounts from Customer if doing so would result in the assets attributable to one series of units of limited partnership interest sold by Parent being used to pay any losses incurred in respect of any other such series." 3. Except as otherwise set forth in this Amendment, the Agreement shall remain in full force and effect and is hereby ratified and confirmed. All references to the Agreement in the -2- Agreement or elsewhere shall be deemed to refer to the Agreement as amended hereby. 4. This Amendment may be executed in any number of counterparts each of which shall be deemed to be an original but all such separate counterparts shall constitute but one and the same instrument. IN WITNESS WHEREOF, this Amendment has been executed by a duly authorized representative for and on behalf of the undersigned as of the day and year first above written. -3- MERRILL LYNCH INVESTMENT PARTNERS MERRILL LYNCH FUTURES INC. INC. By:___________________________ By:___________________________ James M. Bernard Name: Vice President Title: MERRILL LYNCH INTERNATIONAL ML PRINCIPAL PROTECTION BANK TRADING L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC., By:___________________________ General Partner Name: Title: By:___________________________ James M. Bernard Vice President Accepted and agreed to with respect to Section 2 of the Amendment: ML PRINCIPAL PROTECTION L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC., General Partner By:___________________________ James M. Bernard Vice President -4- EX-10.08 14 INVESTMENT ADVISORY CONTRACT EXHIBIT 10.08 MERRILL LYNCH ASSET MANAGEMENT, L.P. ---------------------------------------------------------------------- INVESTMENT ADVISORY CONTRACT We, MERRILL LYNCH ASSET MANAGEMENT, L.P. agree to act as investment manager for ML PRINCIPAL PROTECTION L.P. and ML PRINCIPAL PROTECTION TRADING L.P. as follows: APPOINTMENT 1. We have been appointed investment manager of the investment portfolio (the "Portfolio") of ML Principal Protection Trading L.P. and ML Principal Protection L.P. (the "Client"; formerly, ML Principal Protection Plus Trading L.P. and ML Principal Protection Plus L.P., respectively), and effective from the time we accept this agreement we agree to continue in such capacity on the terms set forth herein. INVESTMENTS 2. Except as limited below, we shall have full discretion, as Client's agent and attorney-in-fact, to make purchases and sales of investments on Client's behalf and otherwise to act at our discretion. 3. We will use reasonable efforts to manage the Portfolio in general compliance with the Investment Guidelines affixed hereto or as may be modified by the written agreement of the Client and us (the "Investment Guidelines"). We will submit to the Client monthly reports appraising the portfolio at current market value. PORTFOLIO TRANSACTIONS 4. Merrill Lynch Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.), acting in its respective capacities as general partner of each of the Client, directs us to effect such transactions with or through any investment firm that we select on the Client's behalf, excluding any affiliate of ours ("Merrill Lynch"). Merrill Lynch Investment Partners Inc., acting in its respective capacities as general partner of each of the Client, also authorizes us to establish accounts on the Client's behalf as the Client's attorney-in-fact in accordance with these directions, and empowers such investment firms to follow our instructions. No trades for the Portfolio may be executed with or through Merrill Lynch. ADMINISTRATION 5. We are a registered investment adviser under the Investment Advisers Act of 1940. Merrill Lynch Asset Management, L.P. is a limited partnership. Merrill Lynch Investment Management, Inc. and Merrill Lynch & Co., Inc. are its limited partners. Princeton Services, Inc. a wholly owned, indirect subsidiary of Merrill Lynch & Co., Inc., is the general partner. We will undertake to notify you of any change in the membership of our partnership within a reasonable time of such change. 6. You acknowledge that you have received our disclosure statement. You represent that the person entering this agreement on your behalf has full power and authority to do so and that it is binding. You will not employ, nor permit any of your affiliates to employ, any publicity regarding Merrill Lynch Asset Management, L.P. without furnishing the text of such publicity to Merrill Lynch Asset Management, L.P. for review prior to its use and obtaining written consent prior to such use. The term "publicity" as used herein shall include (i) any written document available to the public or intended for dissemination to the public or to the Client's or Merrill Lynch Investment Partners Inc.'s or any of their affiliates' sales or marketing personnel or agents; and (ii) any oral communication with members of the media, the public or the Client's or ML Futures Investment Partners Inc.'s or any of their affiliates' sales or marketing personnel or agents. We hereby consent to the publicity regarding Merrill Lynch Asset Management, L.P. with respect to our role as investment manager of the Portfolio of the Client which has been furnished to us and approved prior to the date set forth below on which we accept this Agreement. 7. You agree to notify us prior to giving any instruction to an investment firm or custodian regarding the commitment, withdrawal or investment of the Portfolio. We are under no duty to enter into any transaction with respect to assets which are not readily available for delivery. 8. You direct that investment firms with or through which we effect transactions be instructed to transmit simultaneously to the custodian of the Portfolio on your behalf and to us all correspondence, including confirmations and periodic statements. The custodian will be directed to transmit to you all correspondence, including confirmations and periodic statements, that it receives from investment firms with respect to the Portfolio. 9. Employees of our affiliates may receive credits or compensation for introducing you to us and for transactions effected on your behalf. 10. You represent that the Portfolio is not subject to the Employee Retirement Income Security Act of 1974 ("ERISA") or the Invest ment Company Act of 1940. You will be exclusively responsible for compliance with the Commodity Exchange Act and other law, except insofar as we do not comply with the Investment Guidelines. 11. We will not be liable for the consequences of any investment decision or related activities made or omitted within the limitations specified earlier, except for loss incurred as a result of our gross negligence or willful or reckless misconduct. We will not be liable for loss incurred by any other person or as a result of any person other than us, whether or not our affiliate. These limitations of liability also apply to our officers, employees and agents. 12. We will in no event seek to assert, other than pursuant to and to the extent of ML Principal Protection L.P.'s undertaking set forth in -2- Section 16(e) of its Amended and Restated Limited Partnership Agreement, that ML Principal Protection L.P. or any of its assets is in any respects subject to any debts of or claims against ML Principal Protection Trading L.P., either through "piercing the corporate veil," "substantive consolidation" or any other theory, and (ii) we will take no action and institute no action or proceeding seeking to adjudicate ML Principal Protection Trading L.P. a bankrupt or insolvent, or seeking liquidation, winding up, reorganization, arrangement, adjustment, protection, relief, or composition of it or its debts under any law relating to bankruptcy, insolvency or reorganization or relief of debtors, or seeking the entry of an order for relief or the appointment of a receiver, trustee, custodian or other similar official for ML Principal Protection Trading L.P. or for any substantial part of its property. Merrill Lynch Investment Partners Inc., acting in its respective capacities as general partner of each of Merrill Lynch Principal Protection L.P. and Merrill Lynch Principal Protection Trading L.P., shall ensure that ML Principal Protection L.P. is at all times the sole limited partner of ML Principal Protection Trading L.P. and Merrill Lynch Investment Partners Inc. the sole general partner of both ML Principal Protection L.P. and ML Principal Protection Trading L.P. -- the intent of the parties being that ML Principal Protection Trading L.P. should function solely as a conduit for ML Principal Protection L.P.'s own trading activities and not as any form of investment by ML Principal Protection L.P. 13. THIS AGREEMENT SHALL BE CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF NEW YORK, EXCEPT AS MAY BE PREEMPTED BY UNITED STATES FEDERAL LAW. CUSTODY 14. You have instructed us that Merrill Lynch, Pierce, Fenner & Smith Incorporated and Merrill Lynch Futures Inc. will act as custodians, respectively, of the Portfolio. We will never receive or physically control the Portfolio. 15. We will not be responsible for making any tax credit or similar claim or any legal filing on your behalf. FEES 16. Our fees are calculated, and shall be paid, quarterly in arrears based on the attached fee schedule as determined in accordance with the valuation procedures described in paragraph three above. Merrill Lynch Futures Inc. will pay us our fees out of the amounts paid to Merrill Lynch Futures Inc. by ML Principal Protection Trading L.P. pursuant to the Customer Agreement between Merrill Lynch Futures Inc. and ML Principal Protection Trading L.P. Merrill Lynch Investment Partners Inc. will promptly pay us the shortfall, if any, between the amount of our fees and the amount paid to us by Merrill Lynch Futures Inc. -3- TERMINATION 17. This agreement shall remain in force until further notice. You will be entitled to terminate this agreement any time, effective from the time we receive written notification or such other time as may be mutually agreed upon, subject to the settlement of transactions in progress. There will be no penalty charge on termination. This agreement will also be terminated on the fifth day after we send you notice in writing of our intent to terminate this agreement or such other time as may be mutually agreed upon, also subject to the settlement of transactions in progress. We may not assign this agreement without your prior consent. Dated as of __________, 1996 ML PRINCIPAL PROTECTION L.P. By: Merrill Lynch Investment Partners Inc., General Partner ___________________________________________ James M. Bernard Vice President ML PRINCIPAL PROTECTION TRADING L.P. By: Merrill Lynch Investment Partners Inc., General Partner ___________________________________________ James M. Bernard Vice President MERRILL LYNCH INVESTMENT PARTNERS INC. ___________________________________________ James M. Bernard Vice President Signed and accepted, on July __, 1996, on behalf of MERRILL LYNCH MERRILL LYNCH FUTURES INC. ASSET MANAGEMENT, L.P., IN PLAINSBORO, NEW JERSEY, U.S.A. ___________________________________________ By: Princeton Services, Inc., General Partner Name: _____________________________________ Title: ______________________________ _________________________________ Name: ___________________________ Title: _________________________ -4- ================================================================================ SCHEDULE OF FEES Fees payable to the Investment Manager will be calculated in accordance with the following schedule, on the basis of the average daily investable balance of assets under management during the period with respect to which such fees are due. The average daily investable balance for each one month period during the quarter will be the market value of the securities plus other assets less liabilities at the beginning of each month plus or minus the weighted cash flows during such month divided by the number of days in the period. .20% of the first $25 million .15% on the next $25 million .125% on the next $50 million .10% on assets in excess of $100 million Minimum annual management fee of $50,000. Management fees to be paid quarterly in arrears. MERRILL LYNCH ================================================================================ INVESTMENT GUIDELINES The following guidelines are the written instructions of Merrill Lynch Investment Partners Inc. ("MLIP"), acting in its capacity as respective general partner of each of ML Principal Protection L.P. and ML Principal Protection Trading L.P., to Merrill Lynch Asset Management, L.P. pursuant to the Investment Advisory Contract among the parties named therein dated July __, 1996. MLIP shall provide all information necessary for MLAM to make the determinations with respect to Guideline 3 below (i.e., the amount of assets per calendar quarter- end series of Units and their respective Principal Assurance Dates). MLAM shall not be responsible for providing or confirming the accuracy or completeness of any such information and shall not be responsible for any mistakes as a result of relying on such information. 1. Only U.S. Treasury securities and securities issued by U.S. government agencies and instrumentalities ("Government Securities") are to be purchased. No mortgage backed securities, interest-only securities, principal-only securities or other derivatives may be purchased nor may repurchase or reverse repurchase agreements be entered into. 2. Overall Portfolio Duration: not to exceed 2 years. 3. The Portfolio shall at no time contain a principal amount of Government Securities maturing as of a particular date greater than the Net Asset Value of Units having a Principal Assurance Date on or after such date. 4. A minimum of 20% of the Portfolio must have maturities of 91 days or less (which may include T-bills held at Merrill Lynch Futures Inc.). Dated: __________, 1996 ML PRINCIPAL PROTECTION L.P. ML PRINCIPAL PROTECTION TRADING L.P. By: Merrill Lynch Investment Partners Inc. By: Merrill Lynch Investment Partners Inc. By:_________________________ James M. Bernard By:____________________________ Vice President James M. Bernard Vice President MERRILL LYNCH ASSET MANAGEMENT, L.P. By: Princeton Services, Inc., General Partner By:_____________________________ Name:__________________________ Title:_________________________ -6- EX-10.09(A) 15 NOTE FROM M.L. TO TRADING PARTNERSHIP EXHIBIT 10.09(a) NOTE ---- For value received, the undersigned, Merrill Lynch Futures Inc. ("Merrill Lynch Futures"), hereby promises to pay to ML Principal Protection Trading L.P. (the "Partnership"), a Delaware limited partnership, or to its registered assigns, the principal sum in the amount of the Net Assets (as defined in the Partnership's Amended and Restated Limited Partnership Agreement dated as of _________, 1996 of the Partnership at Merrill Lynch Futures upon the termination of the Customer Agreement dated as of _______, 1996 between Merrill Lynch Futures and the Partnership (the "Customer Agreement"), plus interest income at month-end for each month during the term of this Note at a rate equal to 0.50% per annum below the average yield on 91-day U.S. Treasury bills issued during such month on 100% of the Partnership's average daily "total assets" (cash on deposit adjusted to include open trade equity and funds in collection or settlement) maintained by the Partnership at Merrill Lynch Futures. Payment of all interest due hereunder shall be made by direct deposit by Merrill Lynch Futures to the account of the Partnership carried by Merrill Lynch Futures; payment of the principal hereunder shall be made by wire transfer to the account of the Partnership or its parent, ML Principal Protection L.P., as instructed by the Partnership. This Note shall be binding upon and inure to the benefit of Merrill Lynch Futures and its successors and assigns, and the Partnership and its successors and registered assignees. The Partnership, or any registered assignee of this Note, may transfer the right to receive payments hereunder only by surrendering this Note to Merrill Lynch Futures together with a duly executed, written instrument of assignment in form and substance acceptable to Merrill Lynch Futures. Merrill Lynch Futures shall maintain a register (the "Note Register") in which it shall initially record the name of the Partnership as the holder of such right. Upon surrender of this Note for assignment as provided above, Merrill Lynch Futures shall enter the name of the assignee upon the Note Register and immediately reissue this Note in the name of the registered assignee. Prior thereto, Merrill Lynch Futures shall treat the party last appearing on the Note Register as conclusively entitled to receive all payments under this Note. This Note shall be effective as of the date of the Customer Agreement and shall terminate on the date of the -2- termination of the Customer Agreement. If during any month the Customer Agreement shall terminate other than on the last day of the month, any interest due hereunder shall be prorated on the basis of the number of days during such month that the Customer Agreement was in effect compared to the total number of days in such month. This Note shall be deemed to be made under, governed by and construed in accordance with the laws of the State of New York. MERRILL LYNCH FUTURES INC. By: _______________________________ Name:________________________ Title:_______________________ Dated: _______ __, 1996 -3- EX-10.09(B) 16 NOTE FROM M.L. TO PARTNERSHIP EXHIBIT 10.09(b) NOTE ---- For value received, the undersigned, Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill Lynch"), hereby promises to pay to ML Principal Protection L.P. (the "Partnership"), a Delaware limited partnership, or to its registered assigns, the principal sum in the amount of the Net Assets (as defined in the Partnership's Third Amended and Restated Limited Partnership Agreement dated as of _________, 1996 of the Partnership at Merrill Lynch upon the termination of the Custody Agreement dated as of _______, 1996 between Merrill Lynch and the Partnership (the "Custody Agreement"), plus interest income at month-end for each month during the term of this Note at a rate equal to 0.50% per annum below the average yield on 91-day U.S. Treasury bills issued during such month on 100% of the Partnership's average daily "total assets" (cash on deposit adjusted to include open trade equity and funds in collection or in settlement) maintained at Merrill Lynch. Payment of all interest due hereunder shall be made by direct deposit by Merrill Lynch to the account of the Partnership carried by Merrill Lynch; payment of the principal hereunder shall be made by wire transfer to the account of the Partnership as instructed by the Partnership. This Note shall be binding upon and inure to the benefit of Merrill Lynch and its successors and assigns, and the Partnership and its successors and registered assignees. The Partnership, or any registered assignee of this Note, may transfer the right to receive payments hereunder only by surrendering this Note to Merrill Lynch together with a duly executed, written instrument of assignment in form and substance acceptable to Merrill Lynch. Merrill Lynch shall maintain a register (the "Note Register") in which it shall initially record the name of the Partnership as the holder of such right. Upon surrender of this Note for assignment as provided above, Merrill Lynch shall enter the name of the assignee upon the Note Register and immediately reissue this Note in the name of the registered assignee. Prior thereto, Merrill Lynch shall treat the party last appearing on the Note Register as conclusively entitled to receive all payments under this Note. This Note shall be effective as of the date of the Custody Agreement and shall terminate on the date of the -2- termination of the Custody Agreement. If during any month the Custody Agreement shall terminate other than on the last day of the month, any interest due hereunder shall be prorated on the basis of the number of days during such month that the Custody Agreement was in effect compared to the total number of days in such month. This Note shall be deemed to be made under, governed by and construed in accordance with the laws of the State of New York. MERRILL LYNCH, PIERCE, FENNER & SMITH INCORPORATED By: _______________________________ Name:________________________ Title:_______________________ Dated: _______ __, 1996 -3- EX-10.10 17 MIN. NET ASSET VALUE PER UNIT EXHIBIT 10.10 MINIMUM NET ASSET VALUE PER UNIT UNDERTAKING MINIMUM NET ASSET VALUE PER UNIT UNDERTAKING made as of the ___ day of ______, 1996 between MERRILL LYNCH INVESTMENT PARTNERS INC. ("MLIP"), a Delaware corporation, and ML PRINCIPAL PROTECTION L.P. (the "Partnership"), a Delaware limited partnership. 1. MLIP hereby undertakes to make, on September 30, 2001 and as of each calendar quarter-end thereafter (the "Principal Assurance Dates") (subject to adjustment by up to one month in the discretion of MLIP), sufficient payments to the Partnership so that the Net Asset Value per Unit of each series of Units as of the Principal Assurance Date for such series which is available for distribution to Limited Partners (after adjustment for all liabilities of the Partnership to third parties) will be at least $100, as of such date. 2. This Undertaking will remain in effect unless the Partnership is dissolved or MLIP is removed as the general partner of the Partnership, in each case with the approving vote of the Limited Partners -- upon either of which events this undertaking will terminate without any payment obligation on behalf of ML&Co. 3. MLIP acknowledges and agrees that its risk under this Undertaking is in no respect mitigated by the fact that the Partnership will not trade directly, but rather through a subsidiary limited partnership, ML Principal Protection Trading L.P. (the "Trading Partnership"), because the Partnership will commit to pay losses and expenses incurred by the Trading Partnership in amounts in excess of the capital invested in the Trading Partnership by the Partnership. 4. MLIP agrees that in the event it is required to make one or more payments under this Undertaking, any such payment will be made without recourse to the Partnership, the Trading Partnership, Merrill Lynch Futures Inc. or any Limited Partner. 5. MLIP shall be obligated to make payments under this Undertaking only on the Principal Assurance Date for each series and only in respect of Units of such series outstanding on such Date (including Units then being redeemed). 6. This Undertaking is an agreement between MLIP and the Partnership; investors in the Partnership are in no respects parties hereto. 7. This Undertaking will terminate as to each series of Units on the Principal Assurance Date for such series, upon payment by MLIP of any amounts due hereunder at such time. No series, except as of the Principal Assurance Date for such series, shall have any rights hereunder. 8. This Undertaking shall inure to the benefit of the Partnership only in respect of each series of Units as of its Principal Assurance Date, not in respect of Units of other series. 9. This Undertaking shall be governed by and construed in accordance with the laws of the State of New York, without regard to principles of conflicts of law. 10. The parties hereto acknowledge that this Undertaking is supported by the Guarantee Agreement of Merrill Lynch & Co., Inc., the indirect parent of MLIP, in the form attached as Exhibit B to the Prospectus of the Partnership dated July __, 1996. -2- IN WITNESS WHEREOF, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, this Undertaking has been executed for and on behalf of the undersigned as of the day and year first above written. MERRILL LYNCH INVESTMENT PARTNERS INC. By:________________________________ James M. Bernard Vice President ML PRINCIPAL PROTECTION L.P. By: Merrill Lynch Investment Partners Inc. (General Partner) By:________________________________ James M. Bernard Vice President -3- EX-10.11 18 CUSTODY AGREEMENT EXHIBIT 10.11 CUSTODY AGREEMENT THIS AGREEMENT, made between Merrill Lynch, Pierce, Fenner & Smith incorporated, a Delaware corporation (the "Custodian"), and ML Principal Protection L.P. (the "Client"). 1. Subject to the administrative and operational requirements of the Custodian, the Client hereby retains the Custodian to establish and maintain a custodial account in the name of the Client (the "Custody Account"), and to hold in the Custody Account assets of the Client (securities and other property which, together with all additions, substitutions, and alterations thereto, are hereinafter referred to as "Portfolio"), upon the terms and conditions set forth herein, and only to the extent. that such Portfolio is actually delivered to the Custodian. 2. The Client agrees to provide the Custodian with written or oral instructions (which must be confirmed in writing) as to all matters connected with the Portfolio, which instructions shall be given by Merrill Lynch Asset Management, L.P. (the "Authorized Representative") pursuant to that certain Investment Advisory Contract among the parties named therein, dated ________, 1996, attached hereto as Exhibit A. Written instructions and written confirmation of oral instructions may be delivered or sent by mail or facsimile transmission. The Custodian shall be entitled to accept, follow, and rely upon such instructions from the Authorized Representative, whether given in writing or orally (and, if oral, whether or not written confirmation is received by the Custodian) until the Custodian receives written notice from the Client that the authority of such Authorized Representative has been terminated; provided that the Portfolio may include only U.S. Treasury securities and securities issued by agencies and instrumentalities of the U.S. government. The Custodian reserves the right to reject any transaction which in its sole judgment would expose it or its agents to regulatory or other legal liabilities. 3. The Custodian shall have the following duties and authority: (a) To collect all income, or other property payable in connection with any securities or other property in the Portfolio, as well as any principal due upon maturity, redemption or sale. (b) To hold the income or other funds collected in connection with the Portfolio as directed by the Authorized Representative. (c) To receive free or against payment, deliver free or against payment, or exchange securities and other property on instructions from the Client's Authorized Representative. Unless otherwise agreed by the Client and the Custodian, orders for purchases and sales shall be placed by the Client or its Authorized Representative for its account and risk with a broker, dealer, or agent selected by the Authorized Representative. The Custodian shall not be liable for any act or omission of such broker, dealer, or agent, regardless of whether the broker, dealer, or agent is an affiliate of the Custodian. (d) To charge against any funds in the Client's Custody Account the cost of all securities that the Custodian is instructed to receive against payment. The Custodian shall not be required to effect any settlement or to make any payment unless sufficient funds are deposited or have otherwise been made available in a manner that is satisfactory to the Custodian. In the event credit is inadvertently extended by the Custodian to the Client in connection with any settlement, the Client shall hold the Custodian harmless from and against all loss, liability, damage, cost and expense (including, but not limited to, fees and expenses of legal counsel) arising therefrom. (e) To allocate the called portion of any securities held by the Custodian or its agents for the Client in any manner deemed equitable. (f) To hold any securities of the Client in the name of the Custodian or any subcustodian or affiliate of the Custodian, or a depository or any affiliate or nominee of any of the foregoing. (g) To advise the Client, either in electronic or printed form, of each transaction made for the Portfolio and provide Client with a holding valuations report and a transaction journal report on a daily basis. Custodian shall also furnish duplicate copies of such information to: i) Mr. Bill Fodor OMR Systems 101 Business Park Drive, Suite 22O Skillman, New Jersey 08558; and ii) Mr. James M. Bernard ML Futures Investment Partners Inc South Tower, 6th Floor World Financial Center New York, New York 10080-6106 iii) Mr. Tim O'Connor Merrill Lynch Asset Management, L.P. P.O. Box 9011 Princeton, New Jersey 08543-9011 (h) To execute, as the Client's agent, any and all certificates, instruments, instructions, or other documents necessary or appropriate to the performance of the Custodian's duties under this agreement. 4. The Client shall be solely and exclusively responsible for compliance with any laws, rules, regulations or other obligations as they relate to the Client, the Portfolio and any actions of the Client or its agents or representatives taken with respect thereto. The Custodian shall not be liable for any losses or liability incurred by the Client in connection with this Agreement, except for such losses or liability as shall result from the gross negligence or willful misconduct of the Custodian. -2- 5. The Client shall indemnify and hold the Custodian harmless from and against any loss, liability, damage, cost, or expense (including but not limited to fees and expenses of legal counsel), as incurred, that the Custodian might incur in connection with this Agreement, except for such loss or liability that arises out of the gross negligence or willful misconduct of the Custodian. 6. The Client understands and agrees that Custodian will have only those duties as are specifically set forth in this Agreement. The Custodian will have no obligation to review, analyze, or appraise assets of the Portfolio or to give advice or make recommendations regarding the purchase, retention, sale or exchange of any such assets. The Custodian will have no responsibility or liability for any loss or damage caused directly or indirectly by any war, natural disaster, government restriction, exchange or market ruling, suspension of trading, strikes, or breakdown of communication or transmission facilities, or other conditions beyond its control. 7. The Client hereby represents and warrants to the Custodian as follows: (a) Existence. The Client is a corporation or partnership duly organized, validly existing and in good standing under the laws of the jurisdiction in which it is incorporated or organized. (b) Requisite Authority. The Client has all requisite power and authority to execute and deliver this Agreement and to perform its obligations hereunder, and the execution and delivery of this Agreement by the Client has been duly authorized by all necessary action on its part. (c) Governmental Consents. No consent, authorization or approval of, or declaration or filing with, any governmental or regulatory agency, board or commission is required to be obtained or made by the Client in connection with the execution and delivery of this Agreement or the performance of its obligations hereunder. 8. The Client agrees to furnish the Custodian with such documents as it may require in order to enable it to evidence the accuracy of any of the representations or warranties, or the fulfillment of any of the agreements or conditions, herein contained, or as may be reasonably requested by Custodian. 9. The Custodian will be entitled to compensation for its services under this Agreement according to its fee schedule in effect at the time of the services and to be reimbursed for any incidental expenses incurred on the Client's behalf. The custodian shall have a lien on any securities or funds of the Client in the possession of the Custodian or its affiliates for payment of any amounts due the Custodian under this Agreement. 10. The Custodian or the Client may terminate this Agreement at any time upon written notice to the other. Delivery of assets of the Portfolio held in the Custody Account as the Client directs in writing will release the Custodian from all further liability and responsibility under this Agreement. 11. The Client is not a trust or plan covered by the Employee Retirement Income Security Act of 1974, as amended. -3- 12. Except as otherwise provided in this Agreement or as separately agreed by the Client, the Custodian shall hold all information received from the Client in confidence except where such information is required to be disclosed pursuant to a subpoena or court order issued by a court of competent jurisdiction or by a regulatory or self-regulatory agency with authority over the Custodian or the Client. 13. The Custodian shall not lend to itself or others any of the Client's securities held by the Custodian. 14. AGREEMENT TO ARBITRATE CONTROVERSIES. . ARBITRATION IS FINAL AND BINDING ON THE PARTIES. . THE PARTIES ARE WAIVING THEIR RIGHT TO SEEK REMEDIES IN COURT, INCLUDING THE RIGHT TO JURY TRIAL. . PRE-ARBITRATION DISCOVERY IS GENERALLY MORE LIMITED THAN AND DIFFERENT FROM COURT PROCEDURES. . THE ARBITRATORS' AWARD IS NOT REQUIRED TO INCLUDE FACTUAL FINDINGS OR LEGAL REASONING, AND ANY PARTY'S RIGHT TO APPEAL OR TO SEEK MODIFICATION OF RULINGS BY THE ARBITRATORS IS STRICTLY LIMITED. . THE PANEL OF ARBITRATORS WILL TYPICALLY INCLUDE A MINORITY OF ARBITRATORS WHO WERE OR ARE AFFILIATED WITH THE SECURITIES INDUSTRY. . NOTHING IN THESE TERMS AND CONDITIONS SHALL CONSTITUTE A WAIVER OF THE RIGHT TO SEEK A JUDICIAL FORUM WHERE SUCH A WAIVER WOULD BE VOID UNDER THE EMPLOYEE RETIREMENT INCOME SECURITY ACT OF 1974, AS AMENDED. THE CLIENT AGREES THAT ALL CONTROVERSIES WHICH MAY ARISE BETWEEN THE CLIENT AND THE CUSTODIAN, INCLUDING BUT NOT LIMITED TO THOSE INVOLVING ANY TRANSACTION OR THE CONSTRUCTION, PERFORMANCE, OR BREACH OF THIS OR ANY OTHER AGREEMENT BETWEEN THE CLIENT AND THE CUSTODIAN, WHETHER ENTERED INTO PRIOR, ON OR SUBSEQUENT TO THE DATE HEREOF, SHALL BE DETERMINED BY ARBITRATION. ANY ARBITRATION UNDER THIS AGREEMENT SHALL BE CONDUCTED ONLY BEFORE THE NEW YORK STOCK EXCHANGE, INC., THE AMERICAN STOCK EXCHANGE, INC. OR ARBITRATION FACILITY PROVIDED BY ANY OTHER EXCHANGE OF WHICH THE CUSTODIAN IS A MEMBER, OR THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC., AND IN ACCORDANCE WITH ITS RULES THEN IN FORCE. THE CLIENT MAY ELECT IN THE FIRST INSTANCE WHETHER ARBITRATION SHALL BE CONDUCTED BEFORE THE NEW YORK STOCK EXCHANGE, INC., THE AMERICAN STOCK EXCHANGE, INC., OTHER EXCHANGE OF WHICH THE CUSTODIAN IS A MEMBER, OR THE -4- NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. IF THE CLIENT FAILS TO MAKE SUCH ELECTION, BY REGISTERED LETTER OR TELEGRAM ADDRESSED TO THE CUSTODIAN BEFORE THE EXPIRATION OF FIVE DAYS AFTER RECEIPT OR A WRITTEN REQUEST FROM THE CUSTODIAN TO MAKE SUCH ELECTION, THEN THE CUSTODIAN MAY MAKE SUCH ELECTION. JUDGMENT UPON THE AWARD OF ARBITRATORS MAY BE ENTERED IN ANY COURT, STATE OR FEDERAL, HAVING JURISDICTION. NO PERSON SHALL BRING A PUTATIVE OR CERTIFIED CLASS ACTION TO ARBITRATION, NOR SEEK TO ENFORCE ANY PRE-DISPUTE ARBITRATION AGREEMENT AGAINST ANY PERSON WHO HAS INITIATED IN COURT, A PUTATIVE CLASS ACTION, OR WHO IS A MEMBER OF A PUTATIVE CLASS WHO HAS NOT OPTED OUT OF THE CLASS WITH RESPECT TO ANY CLAIMS ENCOMPASSED BY THE PUTATIVE CLASS ACTION UNTIL: (I) THE CLASS CERTIFICATION IS DENIED; (II) THE CLASS IS DECERTIFIED; OR (III) THE CLIENT IS EXCLUDED FROM THE CLASS BY THE COURT. SUCH FORBEARANCE TO ENFORCE AN AGREEMENT TO ARBITRATE SHALL NOT CONSTITUTE A WAIVER OF ANY RIGHTS UNDER THIS AGREEMENT EXCEPT TO THE EXTENT STATED HEREIN. 15. THIS AGREEMENT AND ITS ENFORCEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT GIVING EFFECT TO ITS CONFLICTS OF LAWS PRINCIPLES, and shall be binding upon and inure to the benefit of the parties hereto, their successors, agents, and assigns. No provision of this Agreement may be changed, waived, discharged or terminated orally. 16. The Client acknowledges that the Custodian is a subsidiary of Merrill Lynch & Co., Inc. and agrees that the Custodian is authorized to engage the services of Merrill Lynch & Co., Inc., or any of its direct or indirect subsidiaries and shall include the cost for their services (other than services for which the Client has contracted directly) as an expense of Portfolio administration. Without limiting the foregoing authorization, the Custodian shall be permitted to use the services of any affiliated corporation; to receive credit or other compensation from any affiliated corporation for any services it may perform; and otherwise to exchange services with any affiliated corporation and to compensate them for such services. 17. The Client understands that: (a) any other customers of the Custodian or its affiliated corporations may have a financial interest in the securities covered by the Custodian's services to the Client; (b) the Custodian, or its affiliated corporations, may be purchasing or selling those securities for the Custodian's or its affiliated corporations' customers; (c) the Custodian or its affiliated corporations may have business relationships with the companies that issue those securities; and (d) the Custodian's or its affiliated corporations' officers and directors may be officers or directors of those companies. -5- 18. In the event that one or more provisions of this Agreement are held invalid, illegal or unenforceable in any respect on the basis of any particular circumstances or any jurisdiction, the validity, legality and enforceability of any such provision and the remaining provisions, under other circumstances or in other jurisdictions will not in any way be affected or impaired. 19. Any and all notices or other communications required or permitted to be delivered to the Custodian hereunder shall be effective when actually received. For purposes of all notices, or other communications, the Custodian's address and the Client's address shall be as indicated on the signature page hereof. 20. This Agreement shall be binding upon all successors, assigns or transferees of both parties hereto, irrespective of any change with regard to the name of or the personnel of the Custodian or the client. Any assignment of this Agreement shall be subject to the requisite review and/or approval of any regulatory or self-regulatory agency or body whose review and/or approval must be obtained prior to the effectiveness and validity of such assignment. No assignment of this Agreement by the Client shall be valid unless the Custodian consents to such assignment in writing. Any assignment by the Custodian to any subsidiary that it may create or to a company affiliated with or controlled directly or indirectly by it will be deemed valid and enforceable in the absence of any consent from the Client. 21. This Agreement may be executed in counterparts, each of which shall be deemed an original, but together shall constitute one and the same instrument. 22. The Effective Date of this Agreement shall be the date of its acceptance by the Custodian. 23. The Client authorizes the Custodian to disclose the Client's identity, address, and securities positions to issuers of securities held in any of the Client's Portfolios. __X__Yes______No Note: A failure to respond will be regarded as the Client's consent to such disclosure. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized. BY SIGNING THIS AGREEMENT, THE CLIENT ACKNOWLEDGES (1) THAT, IN ACCORDANCE WITH PARAGRAPH 14, THE CLIENT IS AGREEING TO ARBITRATE ANY CONTROVERSIES WHICH MAY ARISE WITH THE CUSTODIAN, AND (2) RECEIPT OF A COPY OF THIS AGREEMENT. -6- MERRILL LYNCH, PIERCE, FENNER ML PRINCIPAL PROTECTION L.P. & SMITH INCORPORATED By: Merrill Lynch Investment Partners Inc. By:____________________________ By:__________________________________ TITLE: First Vice President TITLE: Vice President and Chief Financial Officer ADDRESS: 101 Hudson St. 10th Flr ADDRESS: South Tower, 6th Floor Jersey City, NJ 07302-3997 NY, NY 10080-6106 TELEPHONE: 201 557-1880 TELEPHONE: 212-236-4161 TELECOPY: 201 557-4220 TELECOPY: 212-236-4809 DATE: October 7. 1994 DATE: October 11, 1994 -7- EX-23.05 19 CONSENT OF SIDLEY & AUSTIN EXHIBIT 23.05 Sidley & Austin A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS
LOS ANGELES ONE FIRST NATIONAL PLAZA LONDON ______ CHICAGO, ILLINOIS 60603 ______ NEW YORK TELEPHONE 312: 853-7000 SINGAPORE ______ TELEX 25-4364 ______ WASHINGTON, D.C. FACSIMILE 312: 853-7036 TOKYO FOUNDED 1866 WRITER'S DIRECT NUMBER
CONSENT OF SIDLEY & AUSTIN --------------- Sidley & Austin hereby consents to all references made to it in the Registration Statement on Form S-1 of ML Principal Protection L.P., as filed with the Securities and Exchange Commission on July 3, 1996. Date: July 3, 1996 Very truly yours, SIDLEY & AUSTIN EX-23.06 20 CONSENT OF DELOITTE & TOUCHE Exhibit 23.06 INDEPENDENT AUDITORS' CONSENT We consent to the use in this Registration Statement of ML Principal Protection L.P. (formerly ML Principal Protection Plus L.P.) on Form S-1, which also relates to and constitutes Post-Effective Amendment No. 5 to the Registration Statement on Form S-1 declared effective July 14, 1994 (Registration No. 33-73914), of our reports dated January 26, 1996 relating to the consolidated financial statements of ML Principal Protection L.P. and to the balance sheet of Merrill Lynch Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.), appearing in the Prospectus, which is a part of such Registration Statement and to the reference to us under the heading "Experts" in such Prospectus. Deloitte & Touche L.L.P. July 1, 1996 New York, New York EX-27 21 FINANCIAL DATA SCHEDULE
5 This schedule contains summary financial information extracted from Consolidated Statements of Financial Condition, Consolidated Statements of Income, Consolidated Statements of Changes in Partners' Capital and is qualified in its entirety by reference to such financial statements. 0000925433 ML Principal Protection Plus L.P. 5-MOS DEC-31-1995 JAN-01-1996 MAY-31-1996 856 79,566,875 9,434,252 0 0 89,001,983 0 0 89,001,983 4,500,971 0 0 0 0 84,501,012 89,001,983 0 2,767,766 0 2,148,166 1,846 0 0 617,754 0 0 0 0 0 617,754 .75 .75
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