-----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, S8liSlwWwviLB2tC3seA8GkX2+UnMmnbXwc/45FtXSmHE40u62WmTxF3bXIEv0bb vr7+3E5KQ+StwHV34eX5EQ== 0000950130-00-001787.txt : 20000331 0000950130-00-001787.hdr.sgml : 20000331 ACCESSION NUMBER: 0000950130-00-001787 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HENRY JOHN W & CO/MILLBURN L P CENTRAL INDEX KEY: 0000853456 STANDARD INDUSTRIAL CLASSIFICATION: [6221] IRS NUMBER: 061287586 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 000-18215 FILM NUMBER: 587183 BUSINESS ADDRESS: STREET 1: WORLD FINANCIAL CTR SOUTH TWR-6TH FLR STREET 2: C/O ML FUTURE INVESTMENT PARTNERS INCAGE CITY: MERRILL LYNCH WORLD STATE: NY ZIP: 10080 BUSINESS PHONE: 2122364161 MAIL ADDRESS: STREET 1: MERRILL LYNCH & CO STREET 2: WORLD FINANCIAL CTR, SOUTH TOWER, 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (x) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1999 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 0-18215 JOHN W. HENRY & CO./MILLBURN L.P. --------------------------------- (Exact name of registrant as specified in its charter) Delaware 06-1287586 -------------------------------------- ------------------------------ (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) c/o Merrill Lynch Investment Partners Inc. Princeton Corporate Campus 800 Scudders Mill Road - Section 2G Plainsboro, New Jersey 08536 ----------------------------- (Address of principal executive offices) Registrant's telephone number, including area code: (609) 282-6996 Securities registered pursuant to Section 12(b) of the Act: None Securities registered pursuant to Section 12(g) of the Act: Limited Partnership Units Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No _______ ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting and non-voting common equity held by non- affiliates of the registrant: the registrant is a limited partnership; as of February 1, 2000, limited partnership units with an aggregate value of $40,807,414 were outstanding and held by non-affiliates. Documents Incorporated by Reference The registrant's "1999 Annual Report and Independent Auditors' Report," the annual report to security holders for the fiscal year ended December 31, 1999, is incorporated by reference into Part II, Item 8 and Part IV hereof and filed as an Exhibit herewith. JOHN W. HENRY & CO./MILLBURN L.P. ANNUAL REPORT FOR 1999 ON FORM 10-K Table of Contents -----------------
PART I PAGE ------ ---- Item 1. Business..................................................................................... 1 Item 2. Properties................................................................................... 5 Item 3. Legal Proceedings............................................................................ 5 Item 4. Submission of Matters to a Vote of Security Holders.......................................... 5 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................... 5 Item 6. Selected Financial Data..................................................................... 7 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................. 15 Item 8. Financial Statements and Supplementary Data................................................. 21 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure........ 21 PART III -------- Item 10. Directors and Executive Officers of the Registrant.......................................... 22 Item 11. Executive Compensation...................................................................... 24 Item 12. Security Ownership of Certain Beneficial Owners and Management.............................. 24 Item 13. Certain Relationships and Related Transactions.............................................. 24 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 26
PART I Item 1: Business -------- (a) General Development of Business: ------------------------------- John W. Henry & Co./Millburn L.P. (the "Partnership" or the "Fund") was organized under the Delaware Revised Uniform Limited Partnership Act on August 29, 1989. The original public offering of the Partnership"s units of limited partnership interest (the "Series A Units") commenced on September 29, 1989, and the Partnership commenced trading with respect to the Series A Units on January 5, 1990. A second public offering of Series B Units of limited partnership interest (the "Series B Units") commenced on December 14, 1990. The Partnership began trading with respect to the Series B Units on January 28, 1991. A third public offering of Series C Units of limited partnership interest (the "Series C Units") commenced on September 13, 1991. The Partnership began trading with respect to the Series C Units on January 2, 1992. The Fund's objective is achieving, through speculative trading, substantial capital appreciation over time. The proceeds of each of the three series of Units were each initially allocated equally among the Partnership's two trading advisors -- John W. Henry & Company, Inc. ("JWH") and Millburn Ridgefield Corporation ("Millburn") (collectively, the "Advisors"). Merrill Lynch Investment Partners Inc. ("MLIP") acts as the general partner of the Partnership. Merrill Lynch Futures Inc. ("MLF") is the Partnership's commodity broker. The General Partner is a wholly-owned subsidiary of Merrill Lynch Group Inc., which, in turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. The Commodity Broker is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. (Merrill Lynch & Co., Inc. and its affiliates are hereinafter sometimes referred to do "Merrill Lynch"). JWH and Millburn (each an "Advisor", together, "Advisors") have been the Partnership's only trading advisors since inception. Each Advisor was allocated 50% of the total assets of each Series as of the date such Series began trading. Subsequently, these allocations have varied over time, but have been periodically rebalanced to 50%/50%. All series have the same percentage allocation of assets between the Advisors. As of December 31, 1999, 46% of the capital of each series of units was allocated to JWH and 54% was allocated to Millburn. As of December 1, 1996, the Partnership placed all of its assets under the management of the Advisors through investing in two private limited liability companies ("Trading LLC's or "LLC's) sponsored by MLIP, each one of which was traded by one of the Advisors. Investing assets in the Trading LLCs rather than trading directly did not change the operation or fee structure of the Partnership. The administrative authority over the Partnership remains with MLIP. As of December 31, 1999, the aggregate capitalization of the Fund was $42,876,172, the total capitalization of the Series A, Series B and Series C Units was $10,363,793, $21,524,846 and $10,987,533, respectively, and the Net Asset Value per Series A, Series B and Series C Units, originally $100 as of January 5, 1990, January 28, 1991 and January 2, 1992, respectively, had risen to $260.14 (excluding a $20 per Series A Unit distribution paid as of November 30, 1990), $211.47 and $164.80, respectively. The highest month-end Net Asset Value per Series A Unit through December 31, 1999 was $319.42 (June 30, 1999) and the lowest $100.31 (May 31, 1990); the highest month-end Net Asset Value per Series B Unit through December 31, 1999 was $259.56 (June 30, 1999) and the lowest $91.20 (May 31, 1992); the highest month-end Net Asset Value per Series C Unit through December 31, 1999 was $202.28 (June 30, 1999) and the lowest $75.87 (May 31, 1992). -1- (b) Financial Information about Segments: ------------------------------------ The Partnership's business constitutes only one segment for financial reporting purposes, i.e., a speculative "commodity pool." The Partnership does not engage in sales of goods or services. (c) Narrative Description of Business: --------------------------------- General The Fund trades (currently through its investment in Trading LLC's) in the international futures, options on futures and forward markets with the objective of achieving substantial capital appreciation. The Partnership has entered into advisory agreements with each Advisor (the "Advisory Agreement"). JWH trades the Partnership's assets allocated to it in four market sectors -- interest rates, stock indices, currencies and metals - -- pursuant to its Financial and Metals Program. Millburn trades the Partnership's assets allocated to it pursuant to its currency program, which concentrates exclusively on currency trading, primarily in the interbank monetary market. One of the objectives of the Fund is to provide diversification to a limited portion of the risk segment of the Limited Partners' portfolios. Commodity pool performance has historically often demonstrated a low degree of performance correlation with traditional stock and bond holdings. Since it began trading, the Fund's returns have, in fact, frequently been significantly non- correlated with the United States stock and bond markets. The Fund accesses the Advisors not by opening individual managed accounts with them, but rather through investing in private funds (Trading LLC's) sponsored by MLIP through which the trading accounts of different MLIP- sponsored funds managed by the same Advisor and pursuant to the same strategy are consolidated. Use of Proceeds and Interest Income Market Sectors. Under the direction of the two Advisors, the -------------- Partnership trades a portfolio which is concentrated in the financial, currency and metals markets. The limited focus of the Fund's trading increases volatility and market risk. Market Types. The Fund trades on a variety of United States and ------------ foreign futures exchanges. Substantially all of the Fund's off-exchange trading takes place in the highly liquid, institutionally-based currency forward markets. Many of the Partnership's currency trades are executed in the spot and forward foreign exchange markets (the "FX Markets") where there are no direct execution costs. Instead, the participants, banks and dealers, in the FX Markets take a "spread" between the prices at which they are prepared to buy and sell a particular currency and such spreads are built into the pricing of the spot or forward contracts with the Partnership. In its exchange of futures for physical ("EFP") trading, the Partnership acquires cash currency positions through banks and dealers, including Merrill Lynch. The Partnership pays a spread when it exchanges these positions for futures. This spread reflects, in part, the different settlement dates of the cash and the futures contracts, as well as prevailing interest rates, but also includes a pricing spread in favor of the banks and dealers, which may include a Merrill Lynch entity. As in the case of its market sector allocations, the Fund's commitments to different types of markets -- U.S. and non-U.S., regulated and unregulated -- differ substantially from time to time as well as over time. The Fund has no policy restricting its relative commitment to any of these different types of markets. -2- The Fund's financial statements contain information relating to the types of markets traded by the Fund. There can, however, be no assurance as to which markets the Fund may trade or as to how the Fund's trading may be concentrated at any one time or over time. Custody of Assets. All of the Fund's assets are currently held in ----------------- customer accounts at Merrill Lynch. Interest paid by Merrill Lynch on the Fund's U.S. Dollar and Non U.S. --------------------------------------------------------------------- Dollar Assets. The Fund's U.S. dollar assets are maintained at MLF. On assets - -------------- held in U.S. dollars, Merrill Lynch credits the Fund with interest at the prevailing 91-day U.S. Treasury bill rate. The Fund is credited with interest on any of its net gains actually held by Merrill Lynch in non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill Lynch may derive certain economic benefit, in excess of the interest which Merrill Lynch pays to the Fund, from possession of such assets. Merrill Lynch charges the Fund Merrill Lynch's cost of financing realized and unrealized losses on the Fund's non-U.S. dollar-denominated positions. Charges Each of the series of Units is subject to the same charges. However, these charges are calculated separately with respect to each Series, each of which maintains its own Net Asset Value. During 1999 and 1998, all of the Fund's assets were invested in the two Trading LLCs mentioned above. Therefore, no direct charges were incurred by the Fund during these two years. ____________________________ The Fund's average month-end Net Assets during 1999, 1998 and 1997 equaled $51,751,051, $56,223,504, and $62,234,507, respectively. During 1999 and 1998, all of the Fund's assets were invested in the two Trading LLCs mentioned above. Therefore, no direct interest was earned by the Fund during these two years. The Partnership pays brokerage commissions to MLF at a flat monthly rate of .792 of 1% (a 9.50% annual rate) of the Partnership's month-end assets. Prior to February 1, 1997, the rate was .979 of 1% (an 11.75% annual rate) The Partnership also pays MLIP a monthly administative fee of .21 of 1% (.25% annual rate) of the Partnership's month-end assets. -3- Recipient Nature of Payment Amount of Payment MLF Brokerage Commissions A flat-rate monthly commission of 0.7917 of 1% of the Fund's month-end assets (a 9.50% annual rate). MLIP estimates that the round-turn equivalent rates charged to ML Millburn Global L.L.C. (Millburn LLC) during the years ended 1999, 1998 and 1997 were approximately $461, $151, and 162, respectively. MLIP estimates that the round-turn equivalent rates charged to ML JWH Financial and Metals Portfolio L.L.C. ("JWH LLC") during the years ended 1999, 1998 and 1997 were approximately $316, $133 and $198, respectively. MLF Use of Fund assets Merrill Lynch may derive an economic benefit from the deposit of certain of the Fund's U.S. dollar assets in offset accounts. MLIP Administrative Fees The Fund pays MLIP a monthly Administrative Fee equal to 0.020833 of 1% of the Fund's month-end assets (0.25% annually). MLIP pays all of the Fund's routine administrative costs. MLIB; Other Bid-ask spreads Bid-ask spreads on forward and related trades. Counterparties Advisors Profit Shares Prior to January 1, 1997, quarterly profit shares of 15% and 20% of any New Trading Profit achieved by each Advisor's Fund account, individually, were paid to JWH and Millburn, respectively. Beginning January 1, 1997, Millburn's Profit Share began to be calculated on an annual basis. Profit Shares are also paid upon redemption of Units. New Trading Profit is calculated separately in respect of each Advisor, irrespective of the overall performance of the Fund. Advisors Consulting Fees MLF pays the Advisors annual consulting fees up to 4% of the average month-end assets allocated to them for management. MLF; Extraordinary expenses Actual costs incurred; none paid to date. Others
Regulation MLIP, the Advisors and MLF are each subject to regulation by the Commodity Futures Trading Commission (the "CFTC") and the National Futures Association. Other than in respect of its periodic reporting requirements under the Securities Exchange Act of 1934, the Partnership itself is generally not subject -4- to regulation by the Securities and Exchange Commission. However, MLIP itself is registered as an "investment adviser" under the Investment Advisers Act of 1940. (i) through (xii) - not applicable. (xiii) The Partnership has no employees. (d) Financial Information about Geographic Areas -------------------------------------------- The Partnership trades on a number of foreign commodity exchanges. The Partnership does not engage in the sales of goods or services. Item 2: Properties ---------- The Partnership does not use any physical properties in the conduct of its business. The Partnership's only place of business is the place of business of MLIP (Princeton Corporate Campus, 800 Scudders Mill Road -Section 2G, Plainsboro, New Jersey 08536). MLIP performs all administrative services for the Partnership from MLIP's offices. Item 3: Legal Proceedings ----------------- ML&Co. - the sole stockholder of Merrill Lynch Group, Inc. (which is the sole stockholder of MLIP and MLF and the 100% indirect owner of all Merrill Lynch entities involved in the operation of the Fund) - as well as certain of its subsidiaries and affiliates have been named as defendants in civil actions, arbitration proceedings and claims arising out of their respective business activities. Although the ultimate outcome of these actions cannot be predicted at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management that the result of these matters will not be materially adverse to the business operations or financial condition of MLIP or the Fund. MLIP itself has never been the subject of any material litigation. Item 4: Submission of Matters to a Vote of Security Holders --------------------------------------------------- The Partnership has never submitted any matter to a vote of its Limited Partners. PART II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters --------------------------------------------------------------------- Item 5(a) (a) Market Information: ------------------ There is no established public trading market for the Units, nor will one develop. Rather, Limited Partners may redeem Units as of the end of each month at Net Asset Value. (b) Holders: ------- As of December 31, 1999, there were 354, 1,049 and 514 holders of the Series A, B and C Units, respectively, including the General Partner. -5- (c) Dividends: --------- The Partnership has made only one distribution ($20 per Series A Unit payable as of November 30, 1990) since trading commenced. The General Partner does not presently intend to make any further distributions. Item 5(b) Not applicable. -6- Item 6: Selected Financial Data ----------------------- The following selected financial data has been derived from the audited financial statements of the Partnership.
For the Year For the Year For the Year For the Year For the Year Ended Ended Ended Ended Ended December 31, December 31, December 31, December 31, December 31, Income Statement Data 1999 1998 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------- Revenues: Trading Profits Realized Gain $ - $ - $ - $ 8,749,410 $ 23,852,578 Change in Unrealized Loss - - - (1,760,218) (651,118) -------------------------------------------------------------------------------- Total Trading Results - - - 6,989,192 23,201,460 -------------------------------------------------------------------------------- Interest Income - - - 1,842,887 2,863,384 -------------------------------------------------------------------------------- Total Revenues - - - 8,832,079 26,064,844 -------------------------------------------------------------------------------- Expenses: Brokerage Commissions - - - 5,406,851 7,412,789 Administrative Fees - - - 115,039 - Profit Shares - - - 97,468 729,138 -------------------------------------------------------------------------------- Total Expenses - - - 5,619,358 8,141,927 -------------------------------------------------------------------------------- Income (loss) from Investments (6,145,111) 1,867,451 7,357,688 7,171,609 - -------------------------------------------------------------------------------- Net Income (Loss) $ (6,145,111) $ 1,867,451 $ 7,357,688 $ 10,384,330 $ 17,922,917 ================================================================================
December 31, December 31, December 31, December 31, December 31, Balance Sheet Data 1999 1998 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Fund Net Asset Value $42,876,172 $56,163,313 $63,024,164 $60,834,088 $57,921,834 Net Asset Value per Series A Unit $ 260.14 $ 296.13 $ 284.11 $ 252.54 $ 210.29 Net Asset Value per Series B Unit $ 211.47 $ 240.61 $ 230.87 $ 205.27 $ 171.02 Net Asset Value per Series C Unit $ 164.80 $ 187.52 $ 179.92 $ 159.97 $ 133.82
1999, 1998 and 1997 variations in income statement line items are due to investing assets in Trading LLCs.
- ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES A UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1995 $146.85 $167.54 $204.80 $214.46 $216.21 $212.68 $207.03 $212.10 $207.87 $208.79 $209.51 $210.29 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 $231.67 $209.48 $205.35 $213.42 $204.22 $207.21 $206.87 $201.95 $208.39 $237.92 $255.50 $252.54 - ------------------------------------------------------------------------------------------------------------------------------------ 1997 $273.52 $270.58 $267.94 $261.04 $251.03 $257.22 $283.93 $270.03 $274.52 $273.84 $277.30 $284.11 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 $281.00 $268.85 $270.14 $248.62 $257.02 $249.67 $238.22 $270.01 $305.92 $298.60 $280.52 $296.13 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 $287.86 $291.22 $288.12 $297.02 $303.11 $319.42 $310.07 $302.24 $289.40 $263.84 $261.74 $260.14 - ------------------------------------------------------------------------------------------------------------------------------------
-7-
- ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES B UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1995 $119.62 $136.63 $166.77 $174.39 $175.54 $172.89 $168.13 $172.70 $169.17 $169.98 $170.50 $171.02 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 $188.93 $171.14 $167.47 $173.94 $166.31 $168.64 $168.41 $164.21 $169.49 $193.51 $207.63 $205.27 - ------------------------------------------------------------------------------------------------------------------------------------ 1997 $222.32 $219.93 $217.78 $212.17 $204.08 $209.10 $230.77 $219.46 $223.11 $222.53 $225.33 $230.87 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 $228.36 $218.48 $219.55 $202.07 $208.90 $202.93 $193.60 $219.40 $248.57 $242.64 $227.97 $240.61 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 $233.92 $236.65 $234.15 $241.40 $246.31 $259.56 $251.96 $245.60 $235.20 $214.43 $212.74 $211.47 - ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES C UNIT - ------------------------------------------------------------------------------------------------------------------------------------ Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec. - ------------------------------------------------------------------------------------------------------------------------------------ 1995 $ 93.13 $106.27 $129.98 $135.87 $136.83 $134.85 $131.16 $134.97 $132.39 $133.17 $133.60 $133.82 - ------------------------------------------------------------------------------------------------------------------------------------ 1996 $147.90 $133.80 $130.88 $135.93 $129.91 $131.79 $131.69 $128.12 $132.22 $150.96 $161.74 $159.97 - ------------------------------------------------------------------------------------------------------------------------------------ 1997 $173.26 $171.40 $169.73 $165.35 $159.04 $162.96 $179.85 $171.03 $173.88 $173.43 $175.61 $179.92 - ------------------------------------------------------------------------------------------------------------------------------------ 1998 $177.97 $170.27 $171.11 $157.48 $162.80 $158.15 $150.88 $170.99 $193.72 $189.10 $177.67 $187.52 - ------------------------------------------------------------------------------------------------------------------------------------ 1999 $182.30 $184.43 $182.48 $188.13 $191.96 $202.28 $196.36 $191.41 $183.30 $167.12 $165.80 $164.80 - ------------------------------------------------------------------------------------------------------------------------------------
Pursuant to CFTC policy, monthly performance is presented from January 1, 1995 even though all Series were outstanding prior to such date. -8- JOHN W. HENRY & CO./MILLBURN L.P. (SERIES A UNITS) December 31, 1999 Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/ Inception of Trading: January 5, 1990 Aggregate Subscriptions: $18,182,000 Current Capitalization: $10,363,793 Worst Monthly Drawdown/(2)/: (9.58)% (2/96) Worst Peak-to-Valley Drawdown/(3)/: (19.33)% (7/94-1/95) Net Asset Value per Series A Unit, December 31, 1999: $260.14
----------------------------------------------------------------------------------------- Monthly Rates of Return(4) ----------------------------------------------------------------------------------------- Month 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------- January (2.79)% (1.09)% 8.31% 10.17% (5.81)% ----------------------------------------------------------------------------------------- February 1.17 (4.32) (1.07) (9.58) 14.09 ----------------------------------------------------------------------------------------- March (1.06) 0.48 (0.98) (1.97) 22.24 ----------------------------------------------------------------------------------------- April 3.09 (7.97) (2.58) 3.93 4.72 ----------------------------------------------------------------------------------------- May 2.05 3.38 (3.83) (4.31) 0.81 ----------------------------------------------------------------------------------------- June 5.38 (2.86) 2.47 1.46 (1.63) ----------------------------------------------------------------------------------------- July (2.93) (4.58) 10.38 (0.17) (2.66) ----------------------------------------------------------------------------------------- August (2.53) 13.34 (4.90) (2.38) 2.45 ----------------------------------------------------------------------------------------- September (4.25) 13.30 1.66 3.19 (1.99) ----------------------------------------------------------------------------------------- October (8.83) (2.39) (0.25) 14.17 0.45 ----------------------------------------------------------------------------------------- November (0.80) (6.05) 1.26 7.39 0.34 ----------------------------------------------------------------------------------------- December (0.61) 5.56 2.46 (1.16) 0.38 ----------------------------------------------------------------------------------------- Compound Annual Rate of Return (12.15)% 4.24% 12.49% 20.09% 34.89% -----------------------------------------------------------------------------------------
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund is defined as one that allocates no more than 25% of its trading assets to any single manager. As the Fund allocates over 25% of its assets to each of JWH and Millburn, it is referred to as a "Selected-Advisor" fund. Certain funds, including funds sponsored by MLIP, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as "principal protected." The Partnership has no such feature. (2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since January 1, 1995 by the Series; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures. (3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since January 1, 1995 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level. (4) Monthly Rate of Return is the net performance of the Series during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Series as of the beginning of such month. -9- JOHN W. HENRY & CO./MILLBURN L.P. (SERIES B UNITS) December 31, 1999 Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/ Inception of Trading: January 28, 1991 Aggregate Subscriptions: $50,636,000 Current Capitalization: $21,524,846 Worst Monthly Drawdown/(2)/: (9.41)% (2/96) Worst Peak-to-Valley Drawdown/(3)/: (19.32)% (7/94-1/95) _____________ Net Asset Value per Series B Unit, December 31, 1999: $211.47
----------------------------------------------------------------------------------------- Monthly Rates of Return(4) ----------------------------------------------------------------------------------------- Month 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------- January (2.78)% (1.09)% 8.31% 10.47% (5.93)% ----------------------------------------------------------------------------------------- February 1.17 (4.33) (1.08) (9.41) 14.22 ----------------------------------------------------------------------------------------- March (1.06) 0.49 (0.98) (2.14) 22.06 ----------------------------------------------------------------------------------------- April 3.10 (7.96) (2.58) 3.86 4.57 ----------------------------------------------------------------------------------------- May 2.04 3.38 (3.81) (4.38) 0.66 ----------------------------------------------------------------------------------------- June 5.38 (2.86) 2.46 1.40 (1.52) ----------------------------------------------------------------------------------------- July (2.93) (4.60) 10.36 (0.14) (2.75) ----------------------------------------------------------------------------------------- August (2.52) 13.33 (4.90) (2.49) 2.71 ----------------------------------------------------------------------------------------- September (4.24) 13.30 1.66 3.22 (2.04) ----------------------------------------------------------------------------------------- October (8.83) (2.39) (0.26) 14.17 0.48 ----------------------------------------------------------------------------------------- November (0.79) (6.05) 1.26 7.30 0.31 ----------------------------------------------------------------------------------------- December (0.60) 5.54 2.46 (1.14) 0.31 ----------------------------------------------------------------------------------------- Compound Annual Rate of Return (12.11)% 4.20% 12.46% 20.03% 34.49% -----------------------------------------------------------------------------------------
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund is defined as one that allocates no more than 25% of its trading assets to any single manager. As the Fund allocates over 25% of its assets to each of JWH and Millburn, it is referred to as a "Selected-Advisor" fund. Certain funds, including funds sponsored by MLIP, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as "principal protected." The Partnership has no such feature. (2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since January 1, 1995 by the Series; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures. (3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since January 1, 1995 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level. (4) Monthly Rate of Return is the net performance of the Series during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Series as of the beginning of such month. -10- JOHN W. HENRY & CO./MILLBURN L.P. (SERIES C UNITS) December 31, 1999 Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/ Inception of Trading: January 2, 1992 Aggregate Subscriptions: $40,000,000 Current Capitalization: $10,987,533 Worst Monthly Drawdown/(2)/: (9.54)% (2/96) Worst Peak-to-Valley Drawdown/(3)/: (19.20)% (7/94-1/95) _____________ Net Asset Value per Series C Unit, December 31, 1999: $164.80
----------------------------------------------------------------------------------------- Monthly Rates of Return(4) ----------------------------------------------------------------------------------------- Month 1999 1998 1997 1996 1995 ----------------------------------------------------------------------------------------- January (2.78)% (1.08)% 8.31% 10.52% (6.00)% ----------------------------------------------------------------------------------------- February 1.17 (4.33) (1.07) (9.54) 14.12 ----------------------------------------------------------------------------------------- March (1.06) 0.49 (0.97) (2.18) 22.31 ----------------------------------------------------------------------------------------- April 3.10 (7.97) (2.58) 3.86 4.53 ----------------------------------------------------------------------------------------- May 2.04 3.38 (3.82) (4.43) 0.70 ----------------------------------------------------------------------------------------- June 5.38 (2.86) 2.46 1.45 (1.44) ----------------------------------------------------------------------------------------- July (2.93) (4.60) 10.36 (0.08) (2.74) ----------------------------------------------------------------------------------------- August (2.52) 13.33 (4.90) (2.71) 2.90 ----------------------------------------------------------------------------------------- September (4.24) 13.29 1.67 3.21 (1.91) ----------------------------------------------------------------------------------------- October (8.83) (2.38) (0.26) 14.17 0.59 ----------------------------------------------------------------------------------------- November (0.79) (6.05) 1.26 7.14 0.32 ----------------------------------------------------------------------------------------- December (0.60) 5.54 2.45 (1.09) 0.17 ----------------------------------------------------------------------------------------- Compound Annual Rate of Return (12.11)% 4.20% 12.47% 19.54% 35.08% -----------------------------------------------------------------------------------------
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund is defined as one that allocates no more than 25% of its trading assets to any single manager. As the Fund allocates over 25% of its assets to each of JWH and Millburn, it is referred to as a "Selected-Advisor" fund. Certain funds, including funds sponsored by MLIP, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as "principal protected." The Partnership has no such feature. (2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since January 1, 1995 by the Series; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures. (3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since January 1, 1995 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level. (4) Monthly Rate of Return is the net performance of the Series during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Series as of the beginning of such month. -11- Item 7: Management's Discussion and Analysis of Financial Condition and Results ----------------------------------------------------------------------- of Operations - ------------- Results of Operations - --------------------- General - ------- JWH and Millburn have been the Fund's two Advisors since inception. Although from time to time one of the Advisors is allocated a greater percentage of the Fund's assets than the other as a result of differential performance, MLIP periodically rebalances the Fund's asset allocation to approximately 50%/50%. The Advisors are both trend-following traders, whose programs do not attempt to predict price movements. No fundamental economic supply or demand analyses are used by either JWH or Millburn, and no macroeconomic assessments of the relative strengths of different national economies or economic sectors. Instead, their programs apply proprietary computer models to analyzing past market data, and from this data alone attempt to determine whether market prices are trending. As technical traders, JWH and Millburn base their strategies on the theory that market prices reflect the collective judgment of JWH and Millburn and are, accordingly, the best and most efficient indication of market movements. However, there are frequent periods during which fundamental factors external to the market dominate prices. If an Advisor's models identify a trend, they signal positions which follow it. When these models identify the trend as having ended or reversed, these positions are either closed out or reversed. Due to their trend-following character, the Advisors' programs do not predict either the commencement or the end of a price movement. Rather, their objective is to identify a trend early enough to profit from it and detect its end or reversal in time to close out the Fund's positions while retaining most of the profits made from following the trend. In analyzing the performance of trend-following programs such as those implemented by JWH and Millburn, economic conditions, political events, weather factors, etc., are not directly relevant because only market data has any input into trading results. Furthermore, there is no direct connection between particular market conditions and price trends. There are so many influences on the markets that the same general type of economic event may lead to a price trend in some cases but not in others. The analysis is further complicated by the fact that the programs are designed to recognize only certain types of trends and to apply only certain criteria of when a trend has begun. Consequently, even though significant price trends may occur, if these trends are not comprised of the type of intra-period price movements which their programs are designed to identify, either or both Advisors may miss the trend altogether. Performance Summary This performance summary is an outline description of how the Fund performed in the past, not necessarily any indication of how it will perform in the future. In addition, the general causes to which certain price movements are attributed may or may not in fact have caused such movements, but simply occurred at or about the same time. Both Advisors are unlikely to be profitable in markets in which such trends do not occur. Static or erratic prices are likely to result in losses. Similarly, unexpected events (for example, a political upheaval, natural disaster or governmental intervention) can lead to major short-term losses as well as gains. While there can be no assurance that either Advisor will be profitable, under any given market condition, markets in which substantial and sustained price movements occur typically offer the best profit potential for the Fund. -12- 1999 John W.Henry & Co./Millburn, LP finished 1999 with gains in currencies and stock index trading and losses in metals and interest rate trading. Commodities spent 1999 in a transition phase, shifting from bear market trading to more neutral positions. Lack of demand, particularly in Asia, was the dominant factor in the overall decline in commodity prices. Currency trading produced gains throughout the year. The Bank of Japan lowered rates to keep their economy sufficiently liquid to allow fiscal spending to restore some growth to the economy and to drive down the surging yen. The yen continued to grow and reached a two-year high in the third quarter. The European Central Bank raised the repo rate in November due to inflation pressures. On a trade-weighted basis, the Swiss franc ended the first quarter to close at a seven-month low, mostly as a result of the stronger US dollar, yet regained strength in November. The Canadian dollar also underwent similar fluctuations throughout the year. Stock index trading was profitable for 1999. The Dow Jones Industrial Average closed above the 10,000 mark for the first time in March, setting a record for the index. Equity markets rallied worldwide in April and June. In the second half of the year, the Fund suffered losses in stock index positions as trading was mixed due to significant volatility globally. However, there was profitable trading in the Hang Seng and Nikkei 225 positions resulting in gains during November and December. This activity depicted evidence of Japan's stronger than expected recovery coupled with a sudden decline in the unemployment rate. Metals trading was mixed for the year as gold played a major part in the volatility of the metals market. Gold had failed to maintain its status as a safety vehicle and a monetary asset during the first half of 1999. In early June, gold had reached its lowest level in over 20 years. A major statement from the president of the European Central Bank stated that the member banks had agreed not to expand their gold lending. This sent gold prices sharply higher in late September. Unfortunately, the Fund held short positions in gold futures at that time. Gold prices had stabilized in the fourth quarter following the price surge. Early in the year, burdensome warehouse stocks and questionable demand prospects weighed on base metals as aluminum fell to a five-year low and copper fell to nearly an 11-year low. The economic scenario for Asia, Brazil, Europe and emerging market nations helped to keep copper and other base metals on the defensive as demand receded with virtually no supply side response in the second quarter. A substantial increase in Chinese imports combined with recovery in the rest of Asia and Europe had significantly improved demand for aluminum pushing prices higher during December. Interest rate trading was also volatile as the flight to quality in the bond market reversed during the first half of 1999 and the Federal Reserve raised interest rates three times during the year. Early in the year, interest rate trading proved unprofitable for the fund, which was triggered by the Japanese Trust Fund Bureau's decision to absorb a smaller share of futures issues, leaving the burden of financing future budget deficits to the private sector. Interest rate trading did gain strength at mid-year as the flight to quality in the bond market reversed and concerns about higher interest rates in the U.S. continued to rattle the financial markets. During the third quarter, Eurodollar trading generated losses amidst speculation of the probability of a tightening by the U.S. Federal Reserve, which became evident with the higher interest rates in their November 16 meeting due to concerns of inflation. In December, the yield on the 30-year Treasury bond recently surpassed its October high propelled by inflation worries and fears the Federal Reserve might tighten further in 2000. Trading results are not included for 1999 because the Fund traded exclusively through investing in LLC's. 1998 Global interest rate markets provided the Fund with its most profitable positions in the first quarter, particularly in European bonds where an extended bond market rally continued despite an environment of robust growth in the United States, Canada and the United Kingdom, as well as a strong pick up in growth in continental Europe. In the second quarter, swings in the U.S. dollar and developments in Japan affected bond markets, causing the Fund's interest rate trading to result in losses. This was turned around in the third quarter, as markets worldwide were turned upside down and the Fund's non- correlation with general equity and debt markets was strongly exhibited. Global investors staged a major flight to quality, resulting in a significant widening of credit spreads on a global basis. In October, investors pushed the yields on U.S. Treasury bonds to a 31-year low. The long bond yield fell about 75 basis points in 1998 as the world economy slowed more than expected, inflation continued to fall, the anticipated small U.S. budget deficit turned into substantial surplus, and the Federal Reserve lowered interest rates. Gold prices began the year drifting sideways, and continued to weaken following news in the second quarter of a European Central Bank consensus that ten to fifteen percent of reserves should be made up of gold bullion, which was at the low end of expectations. Gold was unable to extend third quarter rallies or to build any significant upside momentum, resulting in a trendless environment. This was also the case in the fourth quarter, as gold's cost of production declined. Also, silver markets remained range-bound, while also experiencing a significant selloff in November, and aluminum traded at its lowest levels since 1994, with many aluminum smelters operating at a loss. In currency markets, results early in the year were mixed, although marginally unprofitable. During the second quarter, the Japanese yen weakened during June to an eight-year low versus the U.S. dollar. In the third quarter, Japan's problems spread to other sectors of the global economy, causing commodities prices to decline as demand from the Asian economies weakened, and Japan's deepening recession and credit crunch continued through the fourth quarter. Trading results in stock index markets were also mixed in early 1998, despite a strong first-quarter performance by the U.S. equity market as several consecutive weekly gains were recorded with most market averages setting new highs. Second quarter results were profitable as the Asia-Pacific region's equity markets weakened across the board. In particular, Hong Kong's Hang Seng index trended downward during most of the second quarter and traded at a three- year low. As U.S. equity markets declined in July and August, the Fund profited from short positions in the S&P 500, most notably during August, when the index dropped 14.5%. Volatility in September made for a difficult trading environment in the stock index sector, and the Fund incurred modest losses, although results remained profitable for the quarter and the year overall in these markets. Trading results are not included for 1998 because the Fund traded exclusively through investing in LLC's. 1997 Trend reversals and extreme market volatility, affected by such factors as the Asian flu and El Nino, were characteristic of most of 1997. However, the year proved to be a profitable one overall for the Fund as trends in several key markets enabled the Trading Advisors to profit despite the significant obstacles. Although trading results in several sectors may have been lackluster, the global currency and bond markets offered noteworthy trading opportunities, which resulted in significant profits in these markets during the year. Additionally, the currency and interest rate sectors of the Fund's portfolio represented its largest percentage of market commitments. In currency markets, the U.S. dollar rallied and started 1997 on a strong note, rising to a four-year high versus the Japanese yen and two-and-a- half year highs versus the Deutsche mark and the Swiss franc. However, the dollar -13- underwent two significant corrections during the year. The first correction occurred in the Spring against the Japanese yen, due to the G7 finance ministers' determination that a further dollar advance would be counter- productive to their current goals. From August through mid-November, the dollar corrected against the Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By mid-December the dollar had bounced back to new highs against the yen and was rallying against the mark. Global interest rate markets began the year on a volatile note, as investors evaluated economic data for signs of inflation. By the middle of the year, economic data in key countries was positive indicating lower inflation and igniting a worldwide rally in the bond markets. Specifically, investor sentiment was particularly strong in the U.S., where prices on the 30-year Treasury bond and 10-year Treasury note rose to their highest levels in over two years. This followed a largely positive economic report delivered by Federal Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge in the Hong Kong stock market in late October spread rapidly throughout the world's financial markets, including global bond markets. After continued volatility in subsequent months made trading difficult, 1997 interest rate trading ended on a positive note when U.S. and Japanese bond markets rallied as a flight to safety from plunging stock markets around the world occurred in December. Trading results are not included for 1997 because the Fund traded exclusively through investing in LLC's. Variables Affecting Performance - ------------------------------- The principal variables which determine the net performance of the Fund are gross profitability and interest income. During all periods set forth under "Selected Financial Data," the interest rates in many countries were at unusually low levels. The low interest rates in the United States (although higher than in many other countries) negatively impacted revenues because interest income is typically a major component of the Fund's profitability. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the Fund's profit potential generally tends to be diminished. On the other hand, during periods of higher interest rates, the relative attractiveness of a high risk investment such as the Fund may be reduced as compared to high yielding and much lower risk fixed-income investments. The Fund's Brokerage Commissions and Administrative Fees are a constant percentage of the Fund's assets allocated to trading. The only Fund costs (other than the insignificant currency trading costs) which are not based on a percentage of the Fund's assets (allocated to trading or total) are the Profit Shares payable to each of JWH and Millburn separately on their individual performance, irrespective of the overall performance of the Fund. During periods when Profit Shares are a high percentage of net trading gains, it is likely that there has been substantial performance non-correlation between JWH and Millburn (so that the total Profit Shares paid to the Advisor which has traded profitably are a high percentage, or perhaps even in excess, of the total profits recognized, as the other Advisor incurred offsetting losses, reducing overall trading gains but not the Profit Shares paid to the successful Advisor) - - suggesting the likelihood of generally trendless, non-consensus markets. Unlike many investment fields, there is no meaningful distinction in the operation of the Fund between realized and unrealized profits. Most of the contracts traded by the Fund are highly liquid and can be closed out at any time. Except in unusual circumstances, factors - regulatory approvals, cost of goods sold, employee relations and the like - which often materially affect an operating business have virtually no impact on the Fund. -14- Liquidity; Capital Resources - ---------------------------- The Fund borrows only to a limited extent and only on a strictly short-term basis in order to finance losses on non-U.S. dollar denominated trading positions pending the conversion of the Fund's dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency. Substantially all of the Fund's assets are held in cash. The Net Asset Value of the Fund's cash is not affected by inflation. However, changes in interest rates could cause periods of strong up or down price trends, during which the Fund's profit potential generally increases. Inflation in commodity prices could also generate price movements which the strategies might successfully follow. Except in very unusual circumstances, the Fund should be able to close out any or all of its open trading positions and liquidate any or all of its securities holdings quickly and at market prices. This permits an Advisor to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so. In addition, because there is a readily available market value for the Fund's positions and assets, the Fund's monthly Net Asset Value calculations are precise, and investors need only wait ten business days to receive the full redemption proceeds of their Units. Year 2000 Compliance Initiative In 1999, Merrill Lynch completed its efforts to address the Year 2000 issue (the "Y2K issue"). The Y2K issue was the result of a widespread programming technique that caused computer systems to identify a date based on the last two numbers of a year, with the assumption that the first two numbers of the year are "19". As a result, the year 2000 would be stored as "00", causing computers to incorrectly interpret the year as 1900. Left uncorrected, the Y2K issue may have caused serious failures in information technology systems and other systems. In 1995, Merrill Lynch established the Year 2000 Compliance Initiative to address the internal and external risks associated with the Y2K issue. The initiative consisted of six phases, completed by the millennium; planning, pre- renovation, renovation, production testing, certification, and integration testing. Contingency plans were established in the event of any failures or disruptions. Through the date of this filing, there have been no material failures or disruptions of systems or services at Merrill Lynch attributable to the Y2K issue. Similarly we have not been notified of any material failure or disruption of systems or services affecting third parties in their capacity to transact business with Merrill Lynch or in Merrill Lynch's capacity to transact business with others. Merrill Lynch continues to monitor the performance of its systems for any possible future failures or disruptions attributable to the Y2K issue. As of December 31, 1999, the total estimated expenditures of existing and incremental resources for the entire Year 2000 Compliance Initiative was approximately $510 million, including $102 million of occupancy, communications, and other related overhead expenditures, as Merrill Lynch is applying a fully costed pricing methodology for this project. At December 31, 1999, of the total estimated expenditures, approximately $12 million, related to continued testing, contingency planning, risk management, and the wind down of the efforts, had not yet been spent. Item 7A: Quantitative and Qualitative Disclosures About Market Risks. ----------------------------------------------------------- Introduction Past Results Not Necessarily Indicative of Future Performance ------------------------------------------------------------- The Fund is a speculative commodity pool. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Fund's main line of business. Market movements result in frequent changes in the fair market value of the Fund's open positions and, consequently, in its earnings and cash flow. The Fund's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Fund's open positions and the liquidity of the markets in which it trades. The Fund, under the direction of the two Advisors which it has retained since inception, rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Fund's past performance is not necessarily indicative of its future results. Value at Risk is a measure of the maximum amount which the Fund could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Fund's speculative trading and the recurrence in the markets traded by the Fund of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Fund's experience to date (i.e., "risk of ruin"). In light of the foregoing as well as the risks and uncertainties intrinsic to all future projections, the quantifications included in this section should not be considered to constitute any assurance or representation that the Fund's losses in any market sector will be limited to Value at Risk or by the Fund's attempts to manage its market risk. -15- Quantifying the Fund's Trading Value at Risk Quantitative Forward-Looking Statements --------------------------------------- The following quantitative disclosures regarding the Fund's market risk exposures contain "forward-looking statements" within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact. The Fund's risk exposure in the various market sectors traded by the Advisors is quantified below in terms of Value at Risk. Due to the Fund's mark- to-market accounting, any loss in the fair value of the Fund's open positions is directly reflected in the Fund's earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin). Exchange maintenance margin requirements have been used by the Fund as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum loss in the fair value of any given contract incurred in 95%-99% of the one-day time periods included in the historical sample (generally approximately one year) researched for purposes of establishing margin levels. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation. In the case of market sensitive instruments which are not exchange- traded (almost exclusively currencies in the case of the Fund), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers' margins have been used. The fair value of the Fund's futures and forward positions does not have any optionality component. However, both JWH and Millburn trade options on futures to a limited extent. The Value at Risk associated with options is reflected in the following table as the margin requirement attributable to the instrument underlying each option. 100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have been aggregated to determine each trading category's aggregate Value at Risk. The diversification effects resulting from the fact that the Fund's positions are rarely, if ever, 100% positively correlated have not been reflected. The Fund's Trading Value at Risk in Different Market Sectors The following table indicates the average, highest and lowest trading Value at Risk associated with the Fund's open positions by market category for the fiscal year 1999. During the fiscal year 1999, the Fund's average capitalization was approximately $51,751,051. As of December 31, 1998, the Fund's total capitalization was approximately $56,163,313. The Fund does not trade agriculture or energy futures. -16-
Fiscal Year 1999 Average Value % of Average Highest Value at Lowest Value at Market Sector at Risk Capitalization Risk Risk - ------------- ------------- -------------- ---------------- --------------- Interest Rates $2,136,156 4.13% $3,515,796 $1,371,379 Currencies 2,188,695 4.23% 2,213,543 1,981,912 Stock Indices 670,728 1.30% 1,443,880 440,776 Metals 651,854 1.26% 932,200 464,883 -------------- -------------- ---------------- --------------- TOTAL $5,647,433 10.91% 8,105,419 4,258,950 ============== ============== ================ ===============
Average, highest and lowest Value at Risk amounts relate to the quarter-end amunts for each calendar quarter-end during the fiscal year. Average Capitalization is the average of the Fund's capitalization at the end of each quarter of fiscal year 1999. % of Total Market Sector Value at Risk Capitalization - ------------- ----------------- -------------------- Interest Rates $3,110,066 5.54% Currencies 1,822,438 3.25% Stock Indices 558,504 0.99% Metals 459,900 0.82% -------------- -------------------- TOTAL $5,950,908 10.60% ============== ==================== Material Limitations on Value at Risk as an Assessment of Market Risk The face value of the market sector instruments held by the Fund is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Fund. The magnitude of the Fund's open positions creates a "risk of ruin" not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions - unusual, but historically recurring from time to time - could cause the Fund to incur severe losses over a short period of time. The foregoing Value at Risk table - as well as the past performance of the Fund - - give no indication of this "risk of ruin." Non-Trading Risk Foreign Currency Balances; Cash on Deposit with MLF The Fund has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as the market risk they represent) are immaterial. The Fund also has non-trading market risk on the approximately 90%-95% of its assets which are held in cash at MLF. The value of this cash is not interest rate sensitive, but there is cash flow risk in that if interest rates decline so will the cash flow generated on these monies. This cash flow risk is immaterial. Qualitative Disclosures Regarding Primary Trading Risk Exposures The following qualitative disclosures regarding the Fund's market risk exposures - except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Fund manages its primary market risk exposures -- constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Fund's primary market risk exposures as well as the strategies used and to be used by MLIP and the Fund's two Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Fund's risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Fund. There can be no assurance that the Fund's current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of the time value of their investment in the Fund. -17- The following were the primary trading risk exposures of the Fund as of December 31, 1999, by market sector. Interest Rates. Interest rate risk is the principal market exposure -------------- of the Fund. Interest rate movements directly affect the price of derivative sovereign bond positions held by the Fund and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Fund's profitability. The Fund's primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries. However, the Fund also takes positions in the government debt of smaller nations -- e.g., New Zealand and Australia. The General Partner anticipates that G-7 interest rates will remain the primary market exposure of the Fund for the foreseeable future. Currencies. The Fund trades in a large number of currencies, ---------- including cross-rates -- i.e., positions between two currencies other than the U.S. dollar. However, the Fund's major exposures have typically been in the dollar/yen, and dollar/Euro positions. MLIP does not anticipate that the risk profile of the Fund's currency sector will change significantly in the future. The currency trading Value at Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk inherent to the dollar-based Fund in expressing Value at Risk in a functional currency other than dollars. Stock Indices. The Fund's primary equity exposure is to equity index ------------- price movements. The stock index futures traded by the Fund are by law limited to futures on broadly based indices. As of December 31, 1999, the Fund's primary exposures were in the S&P 500, Financial Times (England), Nikkei (Japan), Hang Seng (Hong Kong) and DAX (Germany) stock indices. MLIP anticipates little, if any, trading in non-G-7 stock indices. The Fund is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Asian indices. Metals. The Fund's primary metals market exposure is to fluctuations ------ in the price of gold and silver. Although certain of the Advisors will from time to time trade base metals such as aluminum, copper and tin, the principal market exposures of the Fund have consistently been in the precious metals, gold and silver (and, to a much lesser extent, platinum). However, silver prices have remained volatile over this period, and the Advisors have from time to time taken substantial positions as they have perceived market opportunities to develop. MLIP anticipates that gold and silver will remain the primary metals market exposure for the Fund. Qualitative Disclosures Regarding Non-Trading Risk Exposure The following were the only non-trading risk exposures of the Fund as of December 31, 1999. Foreign Currency Balances. The Fund's primary foreign currency ------------------------- balances are in Japanese yen, British Pounds and Euros. The Fund has de minimis exchange rate exposure on these balances. -18- U.S. Dollar Cash Balance. The Fund holds U.S. dollars only in cash at ------------------------ MLF. The Fund has immaterial cash flow interest rate risk on its cash on deposit with MLF in that declining interest rates would cause the income from such cash to decline. Qualitative Disclosures Regarding Means of Managing Risk Exposure Trading Risk MLIP has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of JWH and Millburn, calculating the Net Asset Value of the Fund accounts managed by the two Advisors as of the close of business on each day and reviewing outstanding positions for over-concentrations. While MLIP does not itself intervene in the markets to hedge or diversify the Fund's market exposure, MLIP may urge either or both of JWH and Millburn to reallocate positions managed by the two Advisors, in an attempt to avoid over-concentrations. However, such interventions are unusual. Each of JWH and Millburn applies its own risk management policies to its trading. JWH Risk Management JWH attempts to control risk in all aspects of the investment process - -- from confirmation of a trend to determining the optimal exposure in a given market, and to money management issues such as the startup or upgrade of investor accounts. JWH double checks the accuracy of market data, and will not trade a market without multiple price sources for analytical input. In constructing a portfolio, JWH seeks to control overall risk as well as the risk of any one position, and JWH trades only markets that have been identified as having positive performance characteristics. Trading discipline requires plans for the exit of a market as well as for entry. JWH factors the point of exit into the decision to enter (stop loss). The size of JWH's positions in a particular market is not a matter of how large a return can be generated but of how much risk it is willing to take relative to that expected return. To attempt to reduce the risk of volatility while maintaining the potential for excellent performance, proprietary research is conducted on an ongoing basis to refine the JWH investment strategies. Research may suggest substitution of alternative investment methodologies with respect to particular contracts; this may occur, for example, when the testing of a new methodology has indicated that its use might have resulted in different historical performance. In addition, risk management research and analysis may suggest modifications regarding the relative weighting among various contracts, the addition or deletion of particular contracts from a program, or a change in position size in relation to account equity. The weighting of capital committed to various markets in the investment programs is dynamic, and JWH may vary the weighting at its discretion as market conditions, liquidity, position limit considerations and other factors warrant. JWH may determine that risks arise when markets are illiquid or erratic, such as may occur cyclically during holiday seasons, or on the basis of irregularly occurring market events. In such cases, 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. Adjustments in position size in relation to account equity have been and continue to be an integral part of JWH's investment strategy. At its discretion, JWH may adjust the size of a position in relation to equity in certain markets or entire programs. Such adjustments may be made at certain times for some programs but not for others. Factors which may affect the decision to adjust the size of a position in relation to account equity include ongoing research, program volatility, assessments of current market volatility and risk exposure, subjective judgment, and evaluation of these and other general market conditions. -19- Millburn Ridgefield Risk Management Millburn Ridgefield attempts to control risk through the systematic application of its trading method, which includes a multi-system approach to price trend recognition, an analysis of market volatility, the application of certain money management principles, which may be revised from time to time, and adjusting leverage or portfolio size. In addition, Millburn Ridgefield limits its trading to markets which it believes are sufficiently liquid in respect of the amount of trading it contemplates conducting. Millburn Ridgefield develops trading systems using various classes of quantitative models and data such as price, volume and interest rates, and tests those systems in numerous markets against historical data to simulate trading results. Millburn Ridgefield then analyses the profitability of the systems looking at such features as the percentage of profitable trades, the worst losses experienced, the average giveback of maximum profits on profitable trades and risk adjusted returns. The performance of all systems in the market are then ranked, and three or four systems are selected which make decisions in different ways at different times. This multi-system approach ensures that the total risk intended to be taken in a market is spread over several different strategies. Millburn Ridgefield also attempts to assess market volatility as a means of monitoring and evaluating risk. In doing so, Millburn Ridgefield uses a volatility overlay system which measures the risk in a portfolio's position in a market and signals a decrease in position size when risk increases and an increase in position size when risk decreases. Millburn's volatility overlay maintains overall portfolio risk and distribution of risk across markets within designated ranges. Millburn Ridgefield's risk management also focuses on money management principles applicable to a portfolio as a whole rather than to individual markets. The first principle is reducing overall portfolio volatility through diversification among markets. Millburn Ridgefield seeks a portfolio in which returns from trading in different markets are not highly correlated, that is, in which returns are not all positive or negative at the same time. Additional money management principles include limiting the assets committed as margin or collateral, generally within a range of 15% to 30% of an account's net assets; avoiding the use of unrealized profits in a particular market as margin for additional positions in the same market; and changing the equity used for trading an account solely on a controlled periodic basis, not automatically due to an increase in equity from trading profits. Another important risk management function is the careful control of leverage or portfolio size. Leverage levels are determined by simulating the entire portfolio over the past five or ten years to determine the worst case experienced by the portfolio in the simulation period. The worst case or peak- to-trough drawdown, is measured from a daily high in portfolio assets to the subsequent daily low whether that occurs days, weeks or months after the daily high. If Millburn Ridgefield considers the drawdown too severe, it reduces the leverage or portfolio size. Millburn Ridgefield determines asset allocation among markets and position size on the basis of the money management principals and trading data research discussed above and the market experience of Millburn Ridgefield's principals. From time to time Millburn Ridgefield may adjust the size of a position, long or short, in any given market. Decisions to make such adjustments require the exercise of judgment and may include consideration of the volatility of the particular market; the pattern of price movements, both inter-day and intra-day; open interest; volume of trading; changes in spread relationships between various forward contracts; and overall portfolio balance and risk exposure. Non-Trading Risk The Fund controls the non-trading exchange rate risk by regularly converting foreign balances back into dollars (usually weekly but no less frequently than twice a month, and more frequently if a particular foreign currency balance becomes unusually high). The Fund has cash flow interest rate risk on its cash on deposit with MLF in that declining interest rates -20- would cause the income from such cash to decline. However, a certain amount of cash or cash equivalents must be held by the Fund in order to facilitate margin payments and pay expenses and redemptions. MLIP does not take any steps to limit the cash flow risk on its cash held on deposit at MLF. Item 8: Financial Statements and Supplementary Data ------------------------------------------- The financial statements required by this Item are included in Exhibit 13.01. The supplementary financial information ("selected quarterly financial data" and "information about oil and gas producing activities") specified by Item 302 of Regulation S-K is not applicable. MLIP promoted the Fund and is its controlling person. Item 9: Changes in and Disagreements with Accountants on Accounting and --------------------------------------------------------------- Financial Disclosure - -------------------- There were no changes in or disagreements with independent auditors on accounting or financial disclosure. -21- PART III Item 10: Directors and Executive Officers of the Registrant - ------------------------------------------------------------ 10(a) & 10(b) Identification of Directors and Executive Officers: --------------------------------------------------= As a limited partnership, the Partnership itself has no officers or directors and is managed by the General Partner. Trading decisions are made by the Trading Advisors on behalf of the Partnership. The directors and executive officers of MLIP and their business backgrounds are as follows. John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director Jeffrey F. Chandor Senior Vice President, Director of Sales, Marketing and Research and Director Michael L. Pungello Vice President, Chief Financial Officer and Treasurer Allen N. Jones Director Stephen G. Bodurtha Director Michael J. Perini Director Steven B. Olgin Vice President, Secretary and Director of Administration John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman, Chief Executive Officer, President and a Director of MLIP and Co-Chairman of MLF. He joined Merrill Lynch Pierce Fenner & Smith Incorporated ("MLPF&S") in 1966 and has served in various positions, including Retail and Institutional Sales, Manager of New York Institutional Sales, Director of Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets and Director of International Institutional Sales. Mr. Frawley holds a Bachelor of Science degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory Coordination Advisory Committee from its formation in 1990 through its dissolution in 1994. Mr. Frawley has served four consecutive one-year terms as Chairman of the Managed Funds Association (formerly, the Managed Futures Association), a national trade association that represents the managed futures, hedge funds and fund of funds industry. Mr. Frawley currently serves as a member of the CFTC's Global Markets Advisory Committee. Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice President, Director of Sales, Marketing and Research and a Director of MLIP. He joined MLPF&S in 1971 and has served as the Product Manager of International Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as well as Managing Director of International Sales in the United States, and Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts degree from Trinity College, Hartford, Connecticut. Mr. Chandor is serving a two-year term as a director of the Managed Funds Association. Michael L. Pungello was born in 1957. Effective May 1, 1999, Mr. Pungello became Vice President, Chief Financial Officer and Treasurer of MLIP. He was First Vice President and Senior Director of Finance for Merrill Lynch's Operations, Services and Technology Group from January 1998 to March 1999. Prior to that, Mr. Pungello spent over 18 years with Deloitte & Touche LLP, and was a partner in their Financial Services practice from June 1990 to December 1997. He graduated from Fordham University in 1979 with a Bachelor of Science degree in accounting and received his Master of Business Administration degree in Finance from New York University in 1987. -22- Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP and, from July 1995 until January 1998, Mr. Jones was also Chairman of the Board of Directors of MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has held the position of Senior Vice President of MLPF&S. From June 1992 through February 1994, Mr. Jones was the President and Chief Executive Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of Directors of MLIG and its subsidiary companies. From February 1994 to April 1997, Mr. Jones was the Director of Individual Financial Services of the Merrill Lynch Private Client Group. In April 1997, Mr. Jones became the Director of Private Client marketing. Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of MLIP. In 1980, Mr. Bodurtha graduated magna cum laude from Wesleyan University, Middletown, Connecticut with a Bachelor of Arts degree in Government. From 1980 to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill Lynch. In 1985, he was awarded his Master of Business Administration degree from Harvard University, where he also served as Associates Fellow (1985 to 1986). From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice President with Kidder, Peabody & Co., Incorporated where he worked in their Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has held the position of First Vice President since 1995. He has been the Director in charge of the Structured Investments Group of MLPF&S since 1995. Michael J. Perini was born in 1947. Effective May 11, 1999, Mr. Perini became a Director of MLIP. Since February 1998, Mr. Perini has been First Vice President and Senior Director of the Defined and Managed Funds Group, which includes Defined Asset Funds, Special Investments and MLIP. This is part of the Investment Strategy Product Group of Merrill Lynch Private Client. Previously Michael Perini was Director of Defined Asset Funds and has held various management positions since he joined Merrill Lynch in 1970. Mr. Perini attended St. John's University and New York University as well as The Stanford University Marketing Management Program. He was elected to the Board of Governors of the Investment Company Institute in Washington, D.C., and is Chairman of the Unit Investment Trust Committee of the Institute. Steven B. Olgin was born in 1960. Mr. Olgin is Vice President, Secretary and the Director of Administration of MLIP. He joined MLIP in July 1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduated from The American University with a Bachelor of Science degree in Business Administration and a Bachelor of Arts degree in Economics. In 1986, he received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is a member of the Managed Funds Association's Government Relations Committee and has served as an arbitrator for the NFA. Mr. Olgin is also a member of the Committee on Futures Regulation of the Association of the Bar of the City of New York. As of December 31, 1999, the principals of MLIP had no investment in the Fund, and MLIP's general partnership interest was valued at $566,633. MLIP acts as general partner to eleven public futures funds whose units of limited partnership interest are registered under the Securities Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, ML Futures Investments L.P., ML Futures Investments II 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) V L.P., The SECTOR Strategy Fund (SM) VI L.P., ML Global Horizons L.P., ML Principal Protection 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. (c) Identification of Certain Significant Employees: ----------------------------------------------- None. (d) Family Relationships: -------------------- -23- None. (e) Business Experience: ------------------- See Item 10(a)(b) above. (f) Involvement in Certain Legal Proceedings: ---------------------------------------- None. (g) Promoters and Control Persons: ----------------------------- Not applicable. Item 11: Executive Compensation ---------------------- The officers of MLIP are remunerated by MLIP in their respective positions. The Partnership does not itself have any officers, directors or employees. The Partnership pays Brokerage Commissions to an affiliate of MLIP and Administrative Fees to MLIP. MLIP or its affiliates also may receive certain economic benefits from holding the Fund's dollar assets in offset accounts, as described in Item 1(c) above. The directors and officers receive no "other compensation" from the Partnership, and the directors receive no compensation for serving as directors of MLIP. There are no compensation plans or arrangements relating to a change in control of either the Partnership or MLIP. Item 12: Security Ownership of Certain Beneficial Owners and Management -------------------------------------------------------------- (a) Security Ownership of Certain Beneficial Owners: ----------------------------------------------- As of December 31, 1999, no person or "group" is known to be or have been the beneficial owner of more than 5% of the Units. All of the Partnership's units of general partnership interest are owned by MLIP. (b) Security Ownership of Management: -------------------------------- As of December 31, 1999, the Advisors owned 515 Series A Units, 500 Series B Units and 1,000 Series C Units and the General Partner owned 504 Series A Units, 1,338 Series B Units and 926 Series C Units (unit-equivalent general partnership interests) which was, in each case, less than 2% of each series of the total Units outstanding, respectively. (c) Changes in Control: ------------------ None. Item 13: Certain Relationships and Related Transactions ---------------------------------------------- (a) Transactions Between Merrill Lynch and the Fund ----------------------------------------------- All of the service providers to the Fund, other than the Advisors, are affiliates of Merrill Lynch. Merrill Lynch negotiated with the Advisors over the level of its advisory fees and Profit Shares. However, none of the fees paid -24- by the Fund to any Merrill Lynch party were negotiated, and they are higher than would have been obtained in arm's-length bargaining. The Fund pays Merrill Lynch substantial Brokerage Commissions and Administrative Fees as well as bid-ask spreads on forward currency trades. The Fund also pays MLF interest on short-term loans extended by MLF to cover losses on foreign currency positions. Within the Merrill Lynch organization, MLIP is the direct beneficiary of the revenues received by different Merrill Lynch entities from the Fund. MLIP controls the management of the Fund and serves as its promoter. Although MLIP has not sold any assets, directly or indirectly, to the Fund, MLIP makes substantial profits from the Fund due to the foregoing revenues. No loans have been, are or will be outstanding between MLIP or any of its principals and the Fund. MLIP pays substantial selling commissions and trailing commissions to MLPF&S for distributing the Units. MLIP is ultimately paid back for these expenditures from the revenues it receives from the Fund. (b) Certain Business Relationships: ------------------------------ MLF, an affiliate of MLIP, acts as the principal commodity broker for the Partnership. In 1999, the Partnership expensed through its investment in the Trading LLC's: (i) Brokerage Commissions of $4,979,159 to MLF which included $1,556,794 in consulting fees earned by the Advisors; and (ii) Administrative Fees of $131,028 to MLIP. In addition, MLIP and its affiliates may have derived certain economic benefits from possession of the Fund's assets, as well as from foreign exchange and EFP trading. (c) Indebtedness of Management: -------------------------- The Partnership is prohibited from making any loans, to management or otherwise. (d) Transactions with Promoters: --------------------------- Not applicable. -25- PART IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K ---------------------------------------------------------------
(a)1. Financial Statements: Page --------------------- ---- Independent Auditors' Report 1 Statements of Financial Condition as of December 31, 1999 and 1998 2 For the years ended December 31, 1999, 1998 and 1997: Statements of Operations 3 Statements of Changes in Partners' Capital 4 Notes to Financial Statements 5-14
(a)2. Financial Statement Schedules: ----------------------------- Financial statement schedules not included in this Form 10-K have been 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. (a)3. Exhibits: -------- The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K: Designation Description - ----------- ----------- 3.01(ii) Amended and Restated Limited Partnership Agreement of the Partnership. Exhibit 3.01(ii): Is incorporated herein by reference from Exhibit 3.01(ii) - ---------------- contained in Amendment No. 1 (as Exhibit A) to the Registration Statement (File No. 33-41373) filed on August 20, 1991, on Form S-1 under the Securities Act of 1933 (the "Registrant's Registration Statement"). 3.02(c) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1995. Exhibit 3.02(c): Is incorporated by reference from Exhibit 3.02(c) contained - --------------- in the Registrant's report on Form 10-Q for the Quarter Ended June 30, 1995. 10.01(o) Form of Advisory Agreement between the Partnership, Merrill Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and each of John W. Henry & Company, Inc. and Millburn Ridgefield Corporation. Exhibit 10.01(o): Is incorporated by reference from Exhibit 10.01(o) - ---------------- contained in the Registrant's report on Form 10-Q for the Quarter Ended June 30, 1995. 10.02(a) Form of Consulting Agreement between each Advisor, the Partnership and Merrill Lynch Futures Inc. -26- Exhibit 10.02(a): Is incorporated herein by reference from Exhibit 10.02(a) - ---------------- contained in Amendment No. 1 to the Registration Statement (File No. 33-30096) dated as of September 21, 1989, on Form S-1 under the Securities Act of 1933. 10.03 Form of Customer Agreement between the Partnership and Merrill Lynch Futures Inc. Exhibit 10.03: Is incorporated herein by reference from Exhibit 10.03 - ------------- contained in the Registrant's Registration Statement. 10.06 Foreign Exchange Desk Service Agreement, dated July 1, 1993 among Merrill Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and the Fund. Exhibit 10.06: Is incorporated herein by reference from Exhibit 10.06 - -------------- contained in the Registrant's report on Form 10-K for the year ended December 31, 1996. 10.07(a) Form of Advisory and Consulting Agreement Amendment among Merrill Lynch Investment Partners Inc., each Advisor, the Fund and Merrill Lynch Futures. Exhibit 10.07(a): Is incorporated herein by reference from Exhibit 10.07(a) - ---------------- contained in the Registrant's report on Form 10-K for the year ended December 31, 1996. 10.07(b) Form of Amendment to the Customer Agreement among the Partnership and Merrill Lynch Futures. Exhibit 10.07(b) Is incorporated herein by reference from Exhibit 10.07(b) - ---------------- contained in the Registrant's report on Form 10-K for the year ended December 31, 1996. 13.01 1999 Annual Report and Independent Auditors' Report. Exhibit 13.01: Is filed herewith. - -------------- 13.01(a) 1999 Annual Reports and Independent Auditors' Reports for the following Trading Limited Liability Companies sponsored by Merrill Lynch Investment Partners' Inc.: ML Millburn Global L.L.C. ML JWH Financial and Metals Portfolio L.L.C. Exhibit 13.01(a): Is incorporated herewith - ----------------- 28.01 Prospectus of the Partnership dated September 29, 1989. Exhibit 28.01: Is incorporated by reference as filed with the Securities - ------------- and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended, on October 10, 1989. 28.02 Prospectus of the Partnership dated December 14, 1990. Exhibit 28.02: Is incorporated by reference as filed with the Securities - ------------- and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, as amended, on December 20, 1990. -27- 28.03 Prospectus of the Partnership dated September 13, 1991. Exhibit 28.03: Is incorporated by reference as filed with the Securities - -------------- and Exchange Commission pursuant to Rule 424 under the Securities Act of 1933, Registration Statement on September 23, 1991. (b) Report on Form 8-K: No reports on Form 8-K were filed during the fourth quarter of 1999. -28- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JOHN W. HENRY & CO./MILLBURN L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner By: /s/John R. Frawley, Jr. ---------------------- John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director (Principal Executive Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed on March 30, 2000 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature Title Date /s/ John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director March 30, 2000 - -------------------------- John R. Frawley, Jr. (Principal Executive Officer) /s/ Michael L. Pungello Vice President, Chief Financial Officer, and Treasurer March 30, 2000 - -------------------------- Michael L. Pungello (Principal Financial and Accounting Officer) /s/ Jeffrey F. Chandor Senior Vice President, Director of Sales, March 30, 2000 - -------------------------- Jeffrey F. Chandor Marketing and Research, and Director /s/ Michael J. Perini Director March 30, 2000 - -------------------------- Michael J. Perini
(Being the principal executive officer, the principal financial and accounting officer and a majority of the directors of Merrill Lynch Investment Partners Inc.) MERRILL LYNCH INVESTMENT General Partner of Registrant March 30, 2000 PARTNERS INC. By: /s/John R. Frawley, Jr. - --------------------------- John R. Frawley, Jr. -29- JOHN W. HENRY & CO./MILLBURN L.P. 1999 FORM 10-K INDEX TO EXHIBITS ----------------- Exhibit ------- Exhibit 13.01 1999 Annual Report and Independent Auditors' Report Exhibit 13.01(a) 1999 Annual Report and Independent Auditors' Report for: ML Millburn Global, LLC ML JWH Financials and Metals Portfolio, LLC 30 EX-13.01 2 1999 ANNUAL REPORT AND INDEPENDENT AUDITORS REPORT Exhibit 13.01 JOHN W. HENRY & CO./ MILLBURN L.P. (A Delaware Limited Partnership) Financial Statements for the years ended December 31, 1999, 1998 and 1997 and Independent Auditors' Report [LOGO] Merrill Lynch JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ TABLE OF CONTENTS - -------------------------------------------------------- Page ---- INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997: Statements of Financial Condition 2 Statements of Operations 3 Statements of Changes in Partners' Capital 4 Notes to Financial Statements 5-14 INDEPENDENT AUDITORS' REPORT - ---------------------------- To the Partners of John W. Henry & Co./Millburn L.P.: We have audited the accompanying statements of financial condition of John W. Henry & Co./Millburn L.P. (the "Partnership") as of December 31, 1999 and 1998, and the related statements of operations and of changes in partners' capital for each of the three years in the period ended December 31, 1999. These financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of John W. Henry & Co./Millburn L.P. as of December 31, 1999 and 1998, and the results of its operations and changes in partners' capital for each of the three years in the period ended December 31, 1999 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York February 4, 2000 JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1999 AND 1998 - --------------------------------------------------------------------------------
1999 1998 ------------------------- -------------------------- ASSETS Investments (Note 6) $ 42,876,172 $ 56,163,313 Receivable from investments (Note 6) 1,007,250 259,704 ------------------------- -------------------------- TOTAL $ 43,883,422 $ 56,423,017 ========================= ========================== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Redemptions payable $ 1,007,250 $ 259,704 ------------------------- -------------------------- Total liabilities 1,007,250 259,704 ------------------------- -------------------------- PARTNERS' CAPITAL: General Partner: (504 and 504 Series A Units outstanding) 131,110 149,246 (1,338 and 1,338 Series B Units outstanding) 282,923 321,921 (926 and 926 Series C Units outstanding) 152,600 173,635 Limited Partners: (39,335 and 44,678 Series A Units outstanding) 10,232,683 13,230,285 (100,451 and 115,421 Series B Units outstanding) 21,241,923 27,771,959 (65,744 and 77,411 Series C Units outstanding) 10,834,933 14,516,267 ------------------------- -------------------------- Total partners' capital 42,876,172 56,163,313 ------------------------- -------------------------- TOTAL $ 43,883,422 $ 56,423,017 ========================= ========================== NET ASSET VALUE PER UNIT Series A $ 260.14 $ 296.13 ========================= ========================== Series B $ 211.47 $ 240.61 ========================= ========================== Series C $ 164.80 $ 187.52 ========================= ==========================
See notes to financial statements. 2 JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
1999 1998 1997 -------------------- ------------------- ------------------- INCOME (LOSS) FROM INVESTMENTS (Note 6) $ 6,145,111) $ 1,867,451 $ 7,357,688 -------------------- ------------------- ------------------- NET INCOME (LOSS) (6,145,111) 1,867,451 7,357,688 ==================== =================== =================== NET INCOME (LOSS) PER UNIT: Weighted average number of General Partner and Limited Partner Units outstanding (Note 5) 226,394 264,787 294,640 ==================== =================== =================== Net income (loss) per weighted average General Partner and Limited Partner Unit $ (27.14) $ 7.05 $ 24.97 ==================== =================== ===================
See notes to financial statements. 3 JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997 - --------------------------------------------------------------------------------
Series Series Series General Partner ---------------------------------------------------- A B C Series Series Series Units Units Units A B C ------------- -------------- --------------- ---------------- ---------------- --------------- PARTNERS' CAPITAL, DECEMBER 31, 1996 56,376 148,528 100,695 $ 196,983 $ 405,594 $ 230,192 Redemptions (4,604) (11,308) (8,236) - - - Net income - - - 24,622 50,580 28,707 ------------- -------------- --------------- ---------------- ---------------- --------------- PARTNERS' CAPITAL, DECEMBER 31, 1997 51,772 137,220 92,459 221,605 456,174 258,899 Redemptions (6,590) (20,461) (14,122) (70,937) (133,279) (82,775) Net income (loss) - - - (1,422) (974) (2,489) ------------- -------------- --------------- ---------------- ---------------- --------------- PARTNERS' CAPITAL, DECEMBER 31, 1998 45,182 116,759 78,337 149,246 321,921 173,635 Redemptions (5,343) (14,970) (11,667) - - - Net income (loss) - - - (18,136) (38,998) (21,035) ------------- -------------- --------------- ---------------- ---------------- --------------- PARTNERS' CAPITAL, DECEMBER 31, 1999 39,839 101,789 66,670 $ 131,110 $ 282,923 $ 152,600 ============= ============== =============== ================ ================ =============== Limited Partners ---------------------------------------------------------- Series Series Series A B C Total ------------------ -------------------- ---------------- ---------------- PARTNERS' CAPITAL, DECEMBER 31, 1996 $ 14,040,479 $ 30,082,484 $ 15,878,356 $60,834,088 Redemptions (1,255,814) (2,498,029) (1,413,769) (5,167,612) Net income 1,702,808 3,638,849 1,912,122 7,357,688 ------------------- -------------------- ------------------ --------------- PARTNERS' CAPITAL, DECEMBER 31, 1997 14,487,473 31,223,304 16,376,709 63,024,164 Redemptions (1,665,001) (4,413,933) (2,362,377) (8,728,302) Net income (loss) 407,813 962,588 501,935 1,867,451 ------------------- -------------------- ------------------- -------------- PARTNERS' CAPITAL, DECEMBER 31, 1998 13,230,285 27,771,959 14,516,267 56,163,313 Redemptions (1,552,673) (3,480,805) (2,108,552) (7,142,030) Net income (loss) (1,444,929) (3,049,231) (1,572,782) (6,145,111) ------------------- -------------------- ------------------- -------------- PARTNERS' CAPITAL, DECEMBER 31, 1999 $ 10,232,683 $ 21,241,923 $ 10,834,933 $42,876,172 ====================== ==================== ================ ==============
See notes to financial statements. 4 JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ NOTES TO FINANCIAL STATEMENTS 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization ------------ John W. Henry & Co./Millburn L.P. (the "Partnership") was organized under the Delaware Revised Uniform Limited Partnership Act on August 29, 1989. The Partnership raised $18,182,000 in its initial offering of Units of limited partnership interest ("Series A Units") and commenced trading activities on January 5, 1990. The Partnership raised an additional $50,636,000 in a second offering of Units of limited partnership interest ("Series B Units") and commenced trading activities with respect to the Series B Units on January 28, 1991. The Partnership raised an additional $40,000,000 in a third offering of Units of limited partnership interest ("Series C Units") and commenced trading activities with respect to the Series C Units on January 2, 1992. (Series A, B and C units are, hereinafter, collectively referred to as "Units.") The Partnership engages (currently, through investments in limited liability companies (see below)) in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. Merrill Lynch Investment Partners Inc. ("MLIP"), a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the general partner of the Partnership. Merrill Lynch Futures Inc. ("MLF"), an affiliate of Merrill Lynch, is the Partnership's commodity broker. MLIP has agreed to maintain a general partner's interest of at least 1% of total capital of each Series of Units. MLIP and each Limited Partner share in the profits and losses of such Series in proportion to their respective interests in it. John W. Henry & Company, Inc. and Millburn Ridgefield Corporation (each an "Advisor", together, "Advisors") have been the Partnership's only trading advisors since inception. Each Advisor was allocated 50% of the total assets of each Series as of the date such Series began trading. Subsequently, these allocations have varied over time. MLIP may, in its discretion, reallocate assets as of any month-end. The Partnership has placed all of its assets under the management of the Advisors through investing in private limited liability companies ("Trading LLCs"), as described in Note 6. Certain of the following notes to financial statements are directly related to Partnership assets managed by the Advisors in the Trading LLC's. 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 as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recongnition -------------------- See Note 6 for discussion of revenue recognition for the Partnership's investment in Trading LLC's. Operating Expenses ------------------ MLIP pays all routine operating expenses, including legal, accounting, printing, postage and similar administrative expenses. MLIP receives an administrative fee as well as a portion 5 of the brokerage commissions paid to MLF by the Partnership (see Note 2). Income Taxes ------------ No provision for income taxes has been made in the accompanying financial statements as each Partner is individually responsible for such Partner's respective share of the income and expenses of the series in which such partner is invested as reported for income tax purposes. Redemptions ----------- A Limited Partner may redeem some or all of such Partner's Units at Net Asset Value as of the close of business on the last business day of any month upon ten calendar days' notice. Dissolution of the Partnership ------------------------------ The Partnership will terminate on December 31, 2016 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 The Partnership's U.S. dollar assets invested in Trading LLC's are maintained at MLF. On assets held in U.S. dollars, Merrill Lynch credits the Trading LLC's with interest at the prevailing 91-day U.S. Treasury bill rate. The Trading LLC's are credited with interest on any of its net gains actually held by Merrill Lynch in non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill Lynch may derive certain economic benefit, in excess of the interest which Merrill Lynch pays to the Trading LLC's, from possession of such assets. Merrill Lynch charges the Trading LLC's Merrill Lynch's cost of financing realized and unrealized losses on the Trading LLC's non-U.S. dollar- denominated positions. The Partnership pays brokerage commissions to MLF through the Trading LLC's at a flat monthly rate of .792 of 1% (a 9.50% annual rate) of the Partnership's month-end assets. Prior to February 1, 1997, the rate was .979 of 1% (an 11.75% annual rate). The Partnership also pays MLIP a monthly administrative fee through the Trading LLC's of .21 of 1% (an .25% annual rate) of the Partnership's month-end assets. Month-end assets are not reduced, for purposes of calculating brokerage commissions and administrative fees, by any accrued brokerage commissions, administrative fees, Profit Shares or other fees or charges. MLF pays the Advisors annual consulting fees up to 4% of the average month- end assets allocated to them for management. 3. AGREEMENTS The Trading LLCs entered the Advisory Agreements with the Advisors (see Note 6). Profit Shares of either 15% or 20%, of any New Trading Profit, as defined, either as of the end of each calendar quarter or year, were paid to each Advisor based on the performance of the Partnership account managed by such Advisor, irrespective of the overall performance of the Partnership. Profit Shares are also paid out in respect of Units redeemed as of the end of interim months, to the extent the applicable percentage of any New Trading Profits attributable to such Units. 6 4. STATEMENT OF INCOME BY SERIES The profit and loss of the Series A, Series B and Series C Units for the years ended December 31, 1999, 1998 and 1997 is as follows:
Series A Series B ------------------------------------------------ --------------------------------------------- 1999 1998 1997 1999 1998 1997 ---------------- ----------- --------------- ---------------- ---------- --------------- Income (loss) from investments (Note 6) (1,463,065) 406,391 1,727,430 (3,088,229) 961,614 3,689,429 ---------------- ----------- --------------- ---------------- ---------- --------------- NET INCOME (LOSS) $ (1,463,065) $ 406,391 $ 1,727,430 $ (3,088,229) $ 961,614 $ 3,689,429 ================ =========== =============== ================ ========== =============== NET INCOME (LOSS) PER UNIT OF PARTNERSHIP INTEREST: Weighted average number of units outstanding (Note 5) 42,998 48,581 54,036 108,954 129,195 143,414 ---------------- ----------- --------------- ---------------- ---------- --------------- Net income (loss) per weighted Average General Partner and Limited Partner Unit $ (34.03) $ 8.37 $ 31.97 $ (28.34) $ 7.44 $ 25.73 ================ =========== =============== ================ ========== =============== Series C ---------------------------------------------- 1999 1998 1997 --------------- ----------- ---------------- Income (loss) from investments (Note 6) (1,593,817) 499,446 1,940,829 --------------- ----------- ---------------- NET INCOME (LOSS) $ (1,593,817) $ 499,446 $1,940,829 =============== =========== ================ NET INCOME (LOSS) PER UNIT OF PARTNERSHIP INTEREST: Weighted average number of units outstanding (Note 5) 74,442 87,011 97,190 --------------- ----------- ---------------- Net income (loss) per weighted average General Partner and Limited Partner Unit $ (21.41) $ 5.74 $ 19.97 =============== =========== ================
7 5. WEIGHTED AVERAGE UNITS The weighted average number of Units of each series outstanding was computed for purposes of disclosing net income per weighted average Unit. The weighted average number of Units of each series outstanding for the years ended December 31, 1999, 1998 and 1997 equals the Units of such series outstanding as of such date, adjusted proportionately for Units redeemed based on the respective length of time each was outstanding during the year. 6. INVESTMENTS The investments in the Trading LLC's are reflected in the financial statements at fair value based upon the interest of each series of Units in each Trading LLC. Fair value is equal to the market value of the net assets of the Trading LLC's. The resulting difference between cost and fair value is reflected on the Statements of Operations as Income (loss) from investments. At December 31, 1999 and 1998, the Partnership had investments in the ML JWH Financial and Metals Portfolio LLC ("JWH LLC") and ML Millburn Global LLC ("Millburn LLC") as follows: 1999 1998 --------------- --------------- JWH LLC $ 19,843,543 $28,886,199 Millburn LLC 23,032,629 27,277,114 --------------- --------------- Total $ 42,876,172 $56,163,313 =============== =============== 8 Total revenues and fees with respect to such investments are set forth as follows:
For the year ended Total Brokerage Administrative December 31, 1999 Revenues Commissions Fees ---------------------------- ---------------------------------------------------------- Series A Units - ------------------------------------ JWH LLC $ (710,851) $ 593,051 $ 15,604 Millburn LLC 484,166 605,625 15,937 ---------------------------- ------------------------- ----------------------- Total $ (226,685) $ 1,198,676 $ 31,541 ============================ ========================= ======================= Series B Units - ------------------------------------ JWH LLC $ (1,520,888) $ 1,214,897 $ 31,972 Millburn LLC 973,195 1,251,363 32,930 ---------------------------- ------------------------- ----------------------- Total $ (547,693) $ 2,466,260 $ 64,902 ============================ ========================= ======================= Series C Units - ------------------------------------ JWH LLC $ (775,390) $ 647,501 $ 17,040 Millburn LLC 537,575 666,722 17,545 ---------------------------- ------------------------- ----------------------- Total $ (237,815) $ 1,314,223 $ 34,585 ============================ ========================= ======================= Total - All Series - ------------------------------------ JWH LLC $ (3,007,129) $ 2,455,449 $ 64,616 Millburn LLC 1,994,936 2,523,710 66,412 ---------------------------- ------------------------- ----------------------- Total $ (1,012,193) $ 4,979,159 $ 131,028 ============================ ========================= ======================= For the year ended Profit Income from December 31, 1999 Shares Investments ------------------------------- --------------------------- Series A Units - ------------------------------------ JWH LLC $ - $ (1,319,506) Millburn LLC 6,163 (143,559) -------------------------- --------------------------- Total $ 6,163 $ (1,463,065) ========================== =========================== Series B Units - ------------------------------------ JWH LLC $ - $ (2,767,757) Millburn LLC 9,374 (320,472) -------------------------- --------------------------- Total $ 9,374 $ (3,088,229) ========================== =========================== Series C Units - ------------------------------------ JWH LLC $ - $ (1,439,931) Millburn LLC 7,194 (153,886) -------------------------- --------------------------- Total $ 7,194 $ (1,593,817) ========================== =========================== Total - All Series - ------------------------------------ JWH LLC $ - $ (5,527,194) Millburn LLC 22,731 (617,917) -------------------------- --------------------------- Total $ 22,731 $ (6,145,111) ========================== ===========================
9
For the year ended Total Brokerage Administrative December 31, 1998 Revenues Commissions Fees ---------------------------- ------------------------------------------------------------ Series A Units - ---------------------------------- JWH LLC $ 995,747 $ 630,513 $ 16,592 Millburn LLC 829,825 633,628 16,674 ---------------------------- ------------------------- ----------------------- Total $ 1,825,572 $ 1,264,141 $ 33,266 ============================ ========================= ======================= Series B Units - ---------------------------------- JWH LLC $ 2,200,199 $ 1,356,787 $ 35,705 Millburn LLC 1,832,991 1,374,689 36,176 ---------------------------- ------------------------- ----------------------- Total $ 4,033,190 $ 2,731,476 $ 71,881 ============================ ========================= ======================= Series C Units - ---------------------------------- JWH LLC $ 1,148,318 $ 712,552 $ 18,752 Millburn LLC 962,693 721,776 18,994 ---------------------------- ------------------------- ----------------------- Total $ 2,111,011 $ 1,434,328 $ 37,746 ============================ ========================= ======================= Total - All Series - ---------------------------------- JWH LLC $ 4,344,264 $ 2,699,852 $ 71,049 Millburn LLC 3,625,509 2,730,093 71,844 ---------------------------- ------------------------- ----------------------- Total $ 7,969,773 $ 5,429,945 $ 142,893 ============================ ========================= ======================= For the year ended Profit Income from December 31, 1998 Shares Investments ----------------------------- --------------------------- Series A Units - ---------------------------------- JWH LLC $ 76,657 $ 271,985 Millburn LLC 45,117 134,406 -------------------------- --------------------------- Total $ 121,774 $ 406,391 ========================== =========================== Series B Units - ---------------------------------- JWH LLC $ 167,835 $ 639,872 Millburn LLC 100,384 321,742 -------------------------- --------------------------- Total $ 268,219 $ 961,614 ========================== =========================== Series C Units - ---------------------------------- JWH LLC $ 88,069 $ 328,945 Millburn LLC 51,422 170,501 -------------------------- --------------------------- Total $ 139,491 $ 499,446 ========================== =========================== Total - All Series - ---------------------------------- JWH LLC $ 332,561 $1,240,802 Millburn LLC 196,923 626,649 -------------------------- --------------------------- Total $ 529,484 $1,867,451 ========================== ===========================
10
For the year ended Total Brokerage Administrative December 31, 1997 Revenues Commissions Fees ---------------------------- --------------------------------------------------------- Series A Units - ------------------------------------- JWH LLC $ 1,759,089 $ 690,201 $ 17,813 Millburn LLC 1,758,987 751,834 19,390 ---------------------------- ------------------------- ----------------------- Total $ 3,518,076 $ 1,442,035 $ 37,203 ============================ ========================= ======================= Series B Units - ------------------------------------- JWH LLC $ 3,771,359 $ 1,484,456 $ 38,315 Millburn LLC 3,773,695 1,625,922 41,942 ---------------------------- ------------------------- ----------------------- Total $ 7,545,054 $ 3,110,378 $ 80,257 ============================ ========================= ======================= Series C Units - ------------------------------------- JWH LLC $ 1,981,710 $ 783,770 $ 20,229 Millburn LLC 1,995,533 858,854 22,154 ---------------------------- ------------------------- ----------------------- Total $ 3,977,243 $ 1,642,624 $ 42,383 ============================ ========================= ======================= Total - All Series - ------------------------------------- JWH LLC $ 7,512,158 $ 2,958,427 $ 76,357 Millburn LLC 7,528,215 3,236,610 83,486 ---------------------------- ------------------------- ----------------------- Total $ 15,040,373 $ 6,195,037 $ 159,843 ============================ ========================= ======================= For the year ended Profit Income from December 31, 1997 Shares Investments -------------------------------- --------------------------- Series A Units - ------------------------------------- JWH LLC $ 103,624 $ 947,451 Millburn LLC 207,784 779,979 -------------------------- --------------------------- Total $ 311,408 $1,727,430 ========================== =========================== Series B Units - ------------------------------------- JWH LLC $ 221,754 $2,026,834 Millburn LLC 443,236 1,662,595 -------------------------- --------------------------- Total $ 664,990 $3,689,429 ========================== =========================== Series C Units - ------------------------------------- JWH LLC $ 116,818 $1,060,893 Millburn LLC 234,589 879,936 -------------------------- --------------------------- Total $ 351,407 $1,940,829 ========================== =========================== Total - All Series - ------------------------------------- JWH LLC $ 442,196 $4,035,178 Millburn LLC 885,609 3,322,510 -------------------------- --------------------------- Total $ 1,327,805 $7,357,688 ========================== ===========================
11 Condensed statements of financial condition and statements of operations for JWH LLC and Millburn LLC are set forth as follows:
JWH Millburn JWH LLC LLC LLC December 31, 1999 December 31, 1999 December 31, 1998 ------------------------------ ------------------------------ ------------------------------ Assets $ 20,495,709 $ 23,769,789 $ 29,277,397 ============================== ============================== ============================== Liabilities $ 652,166 $ 737,160 $ 391,198 Members' Capital 19,843,543 23,032,629 28,886,199 ------------------------------ ------------------------------ ------------------------------ Total $ 20,495,709 $ 23,769,789 $ 29,277,397 ============================== ============================== ============================== For the year ended For the year ended For the year ended December 31, 1999 December 31, 1999 December 31, 1998 ------------------------------ ------------------------------ ------------------------------ Revenues $ (3,007,129) $ 1,994,936 $ 1,391,001 Expenses 2,520,065 2,612,853 4,069,362 ------------------------------ ------------------------------ ------------------------------ Net Income (Loss) $ (5,527,194) $ (617,917) $ (2,678,361) ============================== ============================== ============================== Millburn JWH Millburn LLC LLC LLC December 31, 1998 ------------------------------ Assets $ 27,815,000 ============================== Liabilities $ 537,886 Members' Capital 27,277,114 ------------------------------ Total $ 27,815,000 ============================== For the year ended For the year ended For the year ended December 31, 1998 December 31, 1997 December 31, 1997 ------------------------------ ------------------------------ ------------------------------ Revenues $ 3,593,650 $ 15,279,401 $ 8,303,430 Expenses 3,108,411 6,714,041 4,600,706 ------------------------------ ------------------------------ ------------------------------ Net Income (Loss) $ 485,239 $ 8,565,360 $ 3,702,724 ============================== ============================== ==============================
12 7. FAIR VALUE AND OFF-BALANCE SHEET RISK For the year ended December 31, 1999, the Partnership invested all of its assets in Trading LLC's. Accordingly, the Partnership is invested indirectly in derivative instruments, but does not itself hold any derivative instrument positions. As such, MLIP does not believe that the adoption of the provisions of Statement of Financial Accouting Standards No. 133 had a significant effect on the financial statements of the Partnership. Market Risk ----------- Derivative financial instruments involve varying degrees of off-balance sheet market risk. Changes in the level or volatility of interest rates, foreign currency exchange rates or the market values of the underlying financial instruments or commodities underlying such derivative instruments frequently resulted in changes in the Partnership's net unrealized profit on such derivative instruments as reflected in the Statements of Financial Condition or, with respect to Partnership assets invested in Trading LLC's, the net unrealized profit as reflected in the respective Statements of Financial Condition of the Trading LLC's. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Partnership, through the Trading LLC's, as well as the volatility and liquidity of such markets in which such derivative instruments are traded. MLIP has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of the Advisors selected from time to time for the Partnership, calculating the Net Asset Value of the Advisors' respective Partnership accounts and Trading LLC 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 MLIP does not itself intervene in the markets to hedge or diversify the Partnership's market exposure MLIP may urge Advisors to reallocate positions or itself reallocate Partnership assets among Advisors (although typically only as of the end of a month) in an attempt to avoid over-concentration. However, such interventions are unusual. Except in cases in which it appears that an Advisor has begun to deviate from past practice and trading policies or to be trading erratically, MLIP's basic risk control procedures consist simply of the ongoing process of advisor monitoring and selection, with the market risk controls being applied by the Advisors themselves. One important aspect of MLIP's risk controls is its adjustments to the leverage at which the Partnership trades. By controlling the percentage of the Partnership's assets allocated to trading, MLIP can directly affect the market exposure of the Partnership. Leverage control is the principal means by which MLIP hopes to be able to ensure that Merrill Lynch is never required to make any payments under its guarantee that the Net Asset Value per Unit will equal no less than a specified minimum as of the Principal Assurance Date. 13 Credit Risk ----------- The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the- counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may also require margin in the over-the-counter markets. The Partnership has credit risk in respect of its counterparties and brokers, but attempts to control this risk by dealing almost exclusively with Merrill Lynch entities as counterparties and clearing brokers. The Partnership, through the Trading LLC's, in its normal course of business, enters into various contracts, with MLF acting as its commodity broker. Pursuant to the brokerage agreement with MLF (which includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLF, these receivables and payables are offset and reported as a net receivable or payable and included in the Statements of Financial Condition under Equity in commodity futures accounts. * * * * * * * * * * To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. /s/ Michael L. Pungello Michael L. Pungello Chief Financial Officer Merrill Lynch Investment Partners Inc. General Partner of John W. Henry & Co./Millburn L.P. 14 EX-13.01(A) 3 ML JHW FINANCIAL & METALS PORTFOLIO EXHIBIT 13.01(a) ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company) Financial Statements for the years ended December 31, 1999 and 1998 and Independent Auditors' Report [LOGO] Merrill Lynch ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company) TABLE OF CONTENTS - -------------------------------------------------------------------------------- Page ---- INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998. Statements of Financial Condition 2 Statements of Operations 3 Statements of Changes in Members' Capital 4 Notes to Financial Statements 5-9 INDEPENDENT AUDITORS' REPORT - ---------------------------- To the Members of ML JWH Financial and Metals Portfolio L.L.C.: We have audited the accompanying statements of financial condition of ML JWH Financial and Metals Portfolio L.L.C. (the "Company") as of December 31, 1999 and 1998, and the related statements of operations and of changes in members' capital for the years ended December 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of ML JWH Financial and Metals Portfolio L.L.C. as of December 31, 1999 and 1998, and the results of its operations and changes in members' capital for the years ended December 31, 1999 and 1998 in comformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York February 4, 2000 ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company) STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1999 AND 1998 - --------------------------------------------------------------------------------
1999 1998 ------------------ ------------------ ASSETS Equity in commodity futures trading accounts: Cash and option premiums $ 20,105,266 $ 26,100,432 Net unrealized profit on open contracts 297,749 3,074,669 Accrued interest (Note 2) 92,694 102,296 ------------------ ------------------ TOTAL $ 20,495,709 $ 29,277,397 ================== ================== LIABILITIES AND MEMBERS' CAPITAL LIABILITIES: Brokerage commissions payable (Note 2) $ 162,099 $ 231,621 Administrative fees payable (Note 2) 4,266 6,095 Withdrawals payable 485,801 153,482 ------------------ ------------------ Total liabilities 652,166 391,198 ------------------ ------------------ MEMBERS' CAPITAL: Voting Members 19,843,543 28,886,199 ------------------ ------------------ Total Members' capital 19,843,543 28,886,199 ------------------ ------------------ TOTAL $ 20,495,709 $ 29,277,397 ================== ==================
See notes to financial statements. -2- ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company)
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 - ------------------------------------------------------------------------------- 1999 1998 ------------------ ------------------ REVENUES: Trading (loss) profit: Realized $ (1,431,693) $ (913,823) Change in unrealized (2,776,920) 345,682 ------------------ ------------------ Total trading results (4,208,613) (568,141) Interest income (Note 2) 1,201,484 1,959,142 ------------------ ------------------ Total revenues (3,007,129) 1,391,001 ------------------ ------------------ EXPENSES: Brokerage commissions (Note 2) 2,455,447 3,638,923 Profit Shares (Note 3) - 332,560 Administrative fees (Note 2) 64,617 97,879 ------------------ ------------------ Total expenses 2,520,064 4,069,362 ------------------ ------------------ NET LOSS $ (5,527,193) $ (2,678,361) ================== ==================
See notes to financial statements. -3- ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 - ------------------------------------------------------------------------------------------------------------- Non-Voting Voting Members Members Total -------------------- ------------------ ------------------ MEMBERS' CAPITAL, DECEMBER 31, 1997 $ 59,766,977 $ 1,591,929 $ 61,358,906 Withdrawals (28,414,824) (1,379,522) (29,794,346) Net Loss (2,465,954) (212,407) (2,678,361) -------------------- ------------------ ------------------ MEMBERS' CAPITAL, DECEMBER 31, 1998 28,886,199 - 28,886,199 Withdrawals (3,515,463) - (3,515,463) Net Loss (5,527,193) - (5,527,193) -------------------- ------------------ ------------------ MEMBERS' CAPITAL, DECEMBER 31, 1999 $ 19,843,543 $ - $ 19,843,543 ==================== ================== ==================
See notes to financial statements. -4- ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Organization ------------ ML JWH Financial and Metals Portfolio L.L.C. (the "Company") was organized under the Delaware Limited Liability Company Act on September 19, 1996 and commenced trading activities on October 1, 1996. The Company engages in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. John W. Henry & Company, Inc. ("JWH(R)") is the trading advisor to the Company. Merrill Lynch Investment Partners Inc. ("MLIP"), a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), has been delegated administrative authority over the Company. Merrill Lynch Futures Inc. ("MLF"), an affiliate of MLIP, is the Company's commodity broker. The Company has authorized two classes of Membership Interests: Non-Voting Interests and Voting Interests (collectively, "Interests"). These two classes of Interests have common economic interests in the Company, but the Non-Voting Interests, which can be held by non-United States investment funds sponsored by MLIP, do not participate in the management of the Company, or engage, directly or indirectly, in, participate in or control any portion of the business activities or affairs of the Company. Management of the Company is vested solely in the Voting Interests, which are held by United States limited partnerships. The Voting Members control all business activities and affairs of the Company by agreement of the majority in interest of such Members, subject to the trading authority vested in and delegated to JWH and the administrative authority vested in and delegated to MLIP. Each Voting Member is a "commodity pool" sponsored and managed by MLIP, share in the trading profit (loss) and interest income of the Company in proportion to their respective capital accounts, although the Members are subject to somewhat different fees. 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 as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition ------------------- Commodity futures, options on futures and forward contract transactions are recorded on the trade date and open contracts are reflected in net unrealized profit on open contracts in the Statements of Financial Condition at the difference between the original contract value and the market value (for those commodity interests for which market quotations are readily available) or at fair value. The change in unrealized profit on open contracts from one period to the next is reflected under Trading (loss) profit: Change in unrealized in the Statements of Operations. -5- Foreign Currency Transactions ----------------------------- The Company's functional currency is the U.S. dollar; however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect at the dates of the Statements of Financial Condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in total trading results currently. Organizational Costs -------------------- MLIP paid all organizational costs relating to the Company without direct reimbursement from the Company or any Member. Operating Expenses ------------------ MLIP pays for all operating costs (including all legal, accounting, printing, postage and similar administrative expenses) of the Company. Income Taxes ------------ No provision for income taxes has been made in the accompanying financial statements as each Member is individually responsible for reporting income or loss based on such Member's respective share of the Company's income and expenses as reported for income tax purposes. Distributions ------------- No distributions had been made by the Company to any Member as of December 31, 1999. Withdrawals ----------- Each Member may withdraw some or all of such Members' capital at the Net Asset Value as of the close of business on any business day. There are no withdrawal fees or charges. Dissolution ----------- The Company will terminate on September 30, 2046 or at an earlier date if certain conditions occur, as well as under certain other circumstances as set forth in the Organization Agreement. -6- 2. RELATED PARTY TRANSACTIONS The Company's U.S. dollar assets are maintained at MLF. On assets held in U.S. dollars, Merrill Lynch credits the Company with interest at the prevailing 91-day U.S. Treasury bill rate. The Company is credited with interest on any of its net gains actually held by Merrill Lynch in non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill Lynch may derive certain economic benefit, in excess of the interest which Merrill Lynch pays to the Company, from possession of such assets. Merrill Lynch charges the Company Merrill Lynch's cost of financing realized and unrealized losses on the Company's non-U.S. dollar-denominated positions. Following the allocation of the Company's trading (loss) profit and interest income among the Members' respective capital accounts, MLIP calculates the brokerage commissions, Profit Shares, administrative fees and other expenses due from the Company to third parties, in respect of the Company's trading on behalf of the respective Members (the Company being subject to different commissions, fees and expenses in respect of its trading as allocable to the various different Members). Such commissions, fees, Profit Shares and expenses are specifically allocated as of the end of each accounting period (not pro rata based on the Members' respective capital accounts) to, and deducted from, the appropriate Members' capital accounts and paid out by the Company. The Company pays brokerage commissions to MLF at flat monthly rates reflecting the fee arrangement between each Member and MLF. During the period from January 1, 1998 to May 31, 1998, such rates ranged from .646 of 1% (a 7.75% annual rate) to .979 of 1% (an 11.75% annual rate) of each Member's month-end assets invested in the Company. As of May 31, 1998, Members subject to various brokerage commission rates withdrew from the Company, and thereafter, the rate was .792 of 1% (a 9.5% annual rate). The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of each Member's month-end assets. Month-end assets are not reduced for purposes of calculating brokerage commissions and administrative fees by any accrued brokerage commissions, administrative fees, Profit Shares or other fees or charges. MLF pays the Advisor an annual consulting fee of 4% of the Company's average month-end assets, after reduction for a portion of the brokerage commissions. 3. ADVISORY AGREEMENT The Advisory Agreement between the Company and JWH(R) has remained essentially unchanged since the inception of the Company. This Agreement is in effect for successive one-year terms, but, in fact, given the single advisor structure of the Company, the Company would terminate were JWH(R) to withdraw. JWH(R) determines the commodity futures, options on futures and forward contract trades to be made on behalf of the Company, subject to certain Company trading policies and to certain rights reserved by MLIP. The Company pays to JWH(R) a quarterly Profit Share equal to 15% of any New Trading Profit, as defined, attributable to each Member's capital account. Profit Shares are calculated separately in respect of each Member's Capital Account. Profit Shares are determined as of the end of each calendar quarter and are also paid to JWH(R) upon the withdrawal of capital from the Company by a Member for whatever purpose, other than to pay expenses. -7- 4. FAIR VALUE AND OFF-BALANCE SHEET RISK In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" (the "Statement"), effective for fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. This Statement supercedes SFAS No. 119 ("Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments") and SFAS No. 105 ("Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk") whereby disclosure of average aggregate fair values and contract/notional values, respectively, of derivative financial instruments is no longer required for an entity such as the Company which carries its assets at fair value. Such Statement sets forth a much broader definition of a derivative instrument. MLIP does not believe that the adoption of the provisions of such Statement had a significant effect on the financial statements. SFAS No. 133 defines a derivative as a financial instrument or other contract that has all three of the following characteristics: (1) one or more underlyings and notional amounts or payment provisions; (2) requires no initial net investment or a smaller initial net investment than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and, (3) terms that require or permit net settlement. Generally, derivatives include futures, forwards, swaps, options, or other financial instruments with similar characteristics such as caps, floors and collars. The Company trades futures, options on futures and forward contracts on interest rates, stock indices, currencies, and metals. 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 underlying financial instruments or commodities underlying such derivative instruments frequently result in changes in the Company's net unrealized profit on such derivative instruments as reflected in the Statements of Financial Condition. The Company's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Company as well as the volatility and liquidity in the markets in which such derivative instruments are traded. MLIP, which monitors the trading of the Company in MLIP's capacity as the Company's administrator, has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of JWH(R), calculating the Net Asset Value of the Company and of the Members' respective capital accounts as of the close of business on each day and reviewing outstanding positions for over-concentrations. While MLIP does not itself intervene in the markets to hedge or diversify the Company's market exposure, MLIP may consult with JWH(R) concerning the possibility of JWH(R) reducing trading leverage or market concentrations. However, such interventions are unusual. Except in cases in which it appears that JWH(R) has begun to deviate from past practice and trading policies or to be trading erratically (which has not occurred to date), MLIP's basic risk control procedures consist simply of the ongoing process of monitoring JWH(R) with the market risk controls being applied by JWH(R). -8- Credit Risk The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the-counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may require margin in the over-the-counter markets. The credit risk associated with these instruments from counterparty nonperformance is the net unrealized profit, if any, included in the Statements of Financial Condition. The Company attempts to mitigate credit risk by dealing exclusively with Merrill Lynch entities as clearing brokers. The Company, in its normal course of business, enters into various contracts, with MLF acting as its commodity broker. Pursuant to the brokerage agreement with MLF (which includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLF, these receivables and payables are offset and reported as a net receivable or payable and included in the Statement of Financial Condition under Equity in Commodity futures accounts. * * * * * * * * * To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. /s/ Michael L. Pungello Michael L. Pungello Chief Financial Officer Merrill Lynch Investment Partners Inc. Commodity Pool Operator ML JWH Financial and Metals Portfolio L.L.C. -9- EXHIBIT 13.01(a)(2) ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) Financial Statments for the years ended December 31, 1999 and 1998 and Independent Auditor's Report [LOGO] Merrill Lynch ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) TABLE OF CONTENTS - -------------------------------------------------------------------------------- Page ---- INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998: Statements of Financial Condition 2 Statements of Operations 3 Statements of Changes in Members' Capital 4 Notes to Financial Statements 5-9 INDEPENDENT AUDITORS' REPORT - ---------------------------- To the Members of ML Millburn Global L.L.C. We have audited the accompanying statements of financial condition of ML Millburn Global L.L.C. (the "Company") as of December 31, 1999 and 1998, and the related statements of operations and of changes in members' capital for the years ended December 31, 1999 and 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these 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 financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, such financial statements present fairly, in all material respects, the financial position of ML Millburn Global L.L.C. as of December 31, 1999 and 1998, and the results of its operations and changes in members' capital for the years ended December 31, 1999 and 1998 in comformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP New York, New York February 4, 2000
ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 1999 and 1998 - ----------------------------------------------------------------------------------------------------------- ASSETS 1999 1998 --------------- --------------- Equity in commodity futures trading accounts: Cash and option premiums $ 22,574,430 $ 26,414,436 Net unrealized profit on open contracts 1,088,672 1,304,531 Accrued interest (Note 2) 106,687 96,033 ---------------- ---------------- TOTAL $ 23,769,789 $ 27,815,000 =============== ================ LIABILITIES AND MEMBERS' CAPITAL LIABILITIES: Brokerage commissions payable (Note 2) $ 188,158 $ 220,182 Profit Shares payable (Note 3) - 183,086 Administrative fees payable (Note 2) 4,952 5,794 Withdrawals payable 544,050 128,824 --------------- --------------- Total liabilities 737,160 537,886 --------------- --------------- MEMBERS' CAPITAL: Voting Members 23,032,629 27,277,114 --------------- --------------- Total Members' capital 23,032,629 27,277,114 --------------- --------------- TOTAL $ 23,769,789 $ 27,815,000 =============== ===============
See notes to financial statements. -2- ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) STATEMENTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- 1999 1998 ---------- ---------- REVENUES: Trading profit: Realized $ 936,083 $ 1,728,662 Change in unrealized (215,763) 431,034 ------------ ------------ Total trading results 720,320 2,159,696 Interest income (Note 2) 1,274,615 1,433,954 ------------ ------------ Total revenues 1,994,935 3,593,650 ------------ ------------ EXPENSES: Brokerage commissions (Note 2) 2,523,710 2,836,503 Profit Shares (Note 3) 22,730 197,023 Administrative fees (Note 2) 66,413 74,885 ------------ ------------ Total expenses 2,612,853 3,108,411 ------------ ------------ NET INCOME (LOSS) $ (617,918) $ 485,239 ============ ============ See notes to financial statements. -3- ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) STATEMENTS OF CHANGES IN MEMBERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998 - -------------------------------------------------------------------------------- MEMBERS' CAPITAL, DECEMBER 31, 1997 $ 34,130,278 Withdrawals (7,338,403) Net income 485,239 ------------------ MEMBERS' CAPITAL, DECEMBER 31, 1998 $ 27,277,114 Withdrawals (3,626,567) Net loss (617,918) ------------------ MEMBERS' CAPITAL, DECEMBER 31, 1999 $ 23,032,629 ================== See notes to financial statements. -4- ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) NOTES TO FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUTING POLICIES Organization ------------ ML Millburn Global L.L.C. (the "Company") was organized under the Delaware Limited Liability Company Act on November 22, 1996 and commenced trading activities on December 2, 1996. The Company engages in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. Millburn Ridgefield Corporation ("Millburn") is the trading advisor to the Company. Merrill Lynch Investment Partners ("MLIP"), a wholly- owned subsidiary of Merrill Lynch Group, Inc., which, in turn, is a wholly- owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), has been delegated administrative authority over the Company. Merrill Lynch Futures Inc. ("MLF"), an affiliate of Merrill Lynch, is the Company's commodity broker. The Company has authorized two classes of Membership Interests: Non- Voting Interests and Voting Interests (collectively, "Interests"). These two classes of Interests have common economic interests in the Company. The Non-Voting Interests, which can be held by non-United States investment funds sponsored by MLIP, would not participate in the management of the Company, or engage, directly or indirectly, in, participate in or control any portion of the business activities or affairs of the Company. Currently, there are no Non-Voting Members. Management of the Company is vested solely in the Voting Interests, which can be held by United States limited partnerships sponsored by MLIP. Currently, there is only one Voting Member. The Voting Member controls all business activities and affairs of the Company, subject to the trading authority vested in and delegated to Millburn and the administrative authority vested in and delegated to MLIP. The Voting Member is a "commodity pool" sponsored and managed by MLIP. 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 financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition ------------------ Commodity futures, options on futures and forward contract transactions are recorded on the trade date and open contracts are reflected in Net unrealized profit on open contracts in the Statements of Financial Condition at the difference between the original contract value and the market value (for those commodity interests for which market quotations are readily available) or at fair value. The change in unrealized profit (loss) on open contracts from one period to the next is reflected in Trading profit: Change in unrealized in the Statements of Operations. -5- Foreign Currency Transactions ----------------------------- The Company's functional currency is the U.S. dollar; however, it transacts business in currencies other than the U.S. dollar. Assets and liabilities denominated in currencies other than the U.S. dollars are translated into U.S. dollars at the rates in effect at the dates of the Statements of Financial Condition. Income and expense items denominated in currencies other than the U.S. dollar are translated into U.S. dollars at the rates in effect during the period. Gains and losses resulting from the translation to U.S. dollars are reported in total trading results currently. Organizational Costs -------------------- MLIP paid all organizational costs relating to the Company without direct reimbursement from the Company or any Member. Operating Expenses ------------------ MLIP pays for all operating costs (including all legal, accounting, printing, postage and similar administrative expenses) of the Company. Income Taxes ------------ No provision for income taxes has been made in the accompanying financial statements as the Member is individually responsible for reporting income or loss based on such Member's respective share of the Company's income and expenses as reported for income tax purposes. Distributions ------------- No distributions had been made by the Company to any Member as of December 31, 1999. Withdrawals ----------- The Member may withdraw some or all of such Members' capital at Net Asset Value as of the close of business on any business day. There are no withdrawal fees or charges. Dissolution ----------- The Company will terminate on December 31, 2046 or at an earlier date if certain conditions occur, as well as under certain other circumstances as set forth in the Organization Agreement. 2. RELATED PARTY TRANSACTIONS -------------------------- The Company's U.S. dollar assets are maintained at MLF. On Assets held in U.S. dollars, Merrill Lynch credits the Company with interest at the prevailing 91-day U.S. Treasury bill rate. The Company is credited with interest on any of its net gains actually held by Merrill Lynch in non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill Lynch may derive certain economic benefit, in excess of the interest which Merrill Lynch pays to the Company, from possession of such assets. -6- Merrill Lynch charges the Company Merrill Lynch's cost of financing realized and unrealized losses on the Company's non-U.S. dollar-denominated positions. Following the allocation of the Company's trading profit (loss) and interest income among the Members' respective capital accounts, MLIP calculates the brokerage commissions, administrative fees, Profit Shares and other expenses due from the Company to third parties. Such commissions, fees and expenses are specifically calculated for each member as of the end of each accounting period, and deducted from the appropriate Member's capital accounts and paid out by the Company. The Company pays brokerage commissions to MLF at flat monthly rates reflecting the fee arrangement between the Member and MLF. During the period from January 1, 1998 to May 31, 1998, the rates ranged from .729 of 1% (an 8.75% annual rate) to .792 of 1% (a 9.50% annual rate). As of May 31, 1998, the Members subject to a .729 of 1% (a 9.50% annual rate). The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of the Member's month-end assets. Month-end assets are not reduced for purposes of calculating brokerage commissions and administrative fees by any accrued brokerage commissions, administrative fees, Profit Shares or other fees or charges. MLF pays Millburn an annual consulting fee of 2% of the Company's average month-end assets, after reduction for a portion of brokerage commissions. 3. ADVISORY AGREEMENT The Advisory Agreement between the Company and Millburn has remained essentially unchanged since the inception of the Company. This Agreement is in effect for successive one-year terms, but, in fact, given the single advisor structure of the Company, the Company would terminate were Millburn to withdraw. Millburn determines the commodity futures, options on futures and forward contract trades to be made on behalf of the Company, subject to certain rights reserved by MLIP. The Company pays to Millburn an annual Profit Share equal to 20% of any New Trading Profit, as defined, attributable to the Member's Capital Account. Profit Shares are calculated separately in respect of each Members' Capital Account. Profit Shares are also paid to Millburn upon the withdrawal of capital from the Company by a Member for whatever purpose, other than to pay expenses. 4. FAIR VALUE AND OFF-BALANCE SHEET RISK In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" (the "Statement"), effective for fiscal years beginning after June 15, 2000, as amended by SFAS No. 137. This Statement supercedes SFAS No. 119 ("Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments") and SFAS No. 105 ("Disclosure of Information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk") whereby disclosure of average aggregate fair values and contract/notional values, respectively, of derivative financial instruments is no longer required for an entity such as the Company which carries its assets at fair value. Such Statement sets forth a much broader definition of a derivative instrument. MLIP does not believe that the adoption of the provisions of such Statement had a significant effect on the financial statements. SFAS No. 133 defines a derivative as a financial instrument or other contract that has all three of the following characteristics: (1) one or more underlyings and notional amounts or payment provisions; (2) -7- requires no initial net investment or a smaller initial net investment than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and, (3) terms that require or permit net settlement. Generally, derivatives include futures, forwards, swaps, options or other financial instruments with similar characteristics such as caps, floors and collars. 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 underlying financial instruments or commodities underlying such derivative instruments frequently result in changes in the Company's net unrealized profit on such derivative instruments as reflected in the Statements of Financial Condition. The Company's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Company as well as the volatility and liquidity in the markets in which such derivative instruments are traded. MLIP, which monitors the trading of the Company in MLIP's capacity as the Company's administrator, has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of Millburn, calculating the Net Asset Value of the Company and the Members' respective capital accounts as of the close of business on each day reviewing outstanding positions for over-concentrations. While MLIP does not itself intervene in the markets to hedge or diversify the Company's market exposure, MLIP may consult with Millburn concerning the possibility of Millburn reducing trading leverage or market concentrations. However, such interventions are unusual. Except in cases in which it appears that Millburn has begun to deviate from past practice and trading policies or to be trading erratically (which has not occurred to date), MLIP's basic risk control procedures consists simply of the ongoing process of advisor monitoring with the market risk controls being applied by Millburn. 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 arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the-counter transactions, on the other hand, 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 in exchange trading, and counterparties may require margin in the over-the-counter markets. The Company attempts to mitigate credit risk by dealing exclusively with Merrill Lynch entities as clearing brokers. The Company, in its normal course of business, enters into various contracts, with MLF acting as its commodity broker. Pursuant to the brokerage agreement with MLF (which includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLF, these receivables and payables are offset and reported as a net receivable or payable and included in the Statement of Financial Condition under Equity in Commodity futures accounts. -8- * * * * * * * * * * * * To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. /s/ Michael L. Pungello Michael L. Pungello Chief Financial Officer Merrill Lynch Investment Partners Inc. Commodity Pool Operator of ML Millburn Global L.L.C. -9- EX-27 4 FINANCIAL DATA SCHEDULE
BD YEAR YEAR DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 DEC-31-1999 DEC-31-1998 0 0 1,007,250 259,704 0 0 0 0 42,876,172 56,163,313 0 0 43,883,422 56,423,017 0 0 1,007,250 259,704 0 0 0 0 0 0 0 0 0 0 0 0 0 0 42,876,172 56,163,313 43,883,422 56,423,017 0 0 0 0 0 0 0 0 0 0 0 0 0 0 (6,145,111) 1,867,451 (6,145,111) 1,867,451 0 0 0 0 (6,145,111) 1,867,451 (27.14) 7.05 (27.14) 7.05
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