-----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, RGE2cM0su8PGgYqFGmjXvKbQW6bEtIX9hZCVkT6+P/y7Z6VU+JCCqAnBClE8uJYg RLHAyus26mRYejspFu/hkg== 0000950130-97-004600.txt : 19971027 0000950130-97-004600.hdr.sgml : 19971027 ACCESSION NUMBER: 0000950130-97-004600 CONFORMED SUBMISSION TYPE: 10-K405/A PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19971024 SROS: NONE 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/A SEC ACT: SEC FILE NUMBER: 000-18215 FILM NUMBER: 97699946 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/A 1 FORM 10K/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K/A (x) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1996 ( ) 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 of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) C/O MERRILL LYNCH INVESTMENT PARTNERS INC. MERRILL LYNCH WORLD HEADQUARTERS WORLD FINANCIAL CENTER SOUTH TOWER, 6TH FLOOR, NEW YORK, NY 10080-6106 ------------------------------------------------ (Address of principal executive offices) Registrant's telephone number, including area code: (212) 236-4161 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Limited Partnership ------------------- Units - ----- (Title of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) 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 stock held by non-affiliates: the registrant is a limited partnership and, accordingly, has no voting stock held by non-affiliates or otherwise. DOCUMENTS INCORPORATED BY REFERENCE The registrant's "1996 Annual Report and Independent Auditors' Report," the annual report to security holders for the fiscal year ended December 31, 1996, is incorporated by reference into Part II, Item 8, and Part IV hereof and filed as an Exhibit herewith. ANNUAL REPORT FOR 1996 ON FORM 10-K Table of Contents ----------------- PART IPAGE ---------- Item 1. Business........................................... 1 Item 2. Properties......................................... 7 Item 3. Legal Proceedings.................................. 7 Item 4. Submission of Matters to a Vote of Security Holders 7 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................................ 8 Item 6. Selected Financial Data............................ 8 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................ 13 Item 8. Financial Statements and Supplementary Data........ 15 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................ 15 PART III -------- Item 10. Directors and Executive Officers of the Registrant.. 16 Item 11. Executive Compensation.............................. 17 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................... 18 Item 13. Certain Relationships and Related Transactions...... 18 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.......................................... 19 i 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 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 reopening of the Partnership through the public offering of Series B Limited Partnership Units (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 reopening of the Partnership through the public offering of Series C Limited Partnership Units (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 proceeds of each of the three series of Units were each initially allocated equally among the Partnership's two trading advisors -- Millburn Ridgefield Corporation ("Millburn") and John W. Henry & Company, Inc. ("JWH") (collectively, the "Trading Advisors" or the "Advisors"). As of December 31, 1996; 50% and 50% of the Series A Units capital was allocated to Millburn and JWH, respectively; 50% and 50% of the Series B Units capital; and 50% and 50% of the Series C Units capital. Merrill Lynch Investment Partners Inc. (the "General Partner" or "MLIP") acts as the general partner of the Partnership. Merrill Lynch Futures Inc. (the "Commodity Broker" or "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"). When the Fund began trading on January 5, 1990, it had an initial capitalization of $18,182,000. A total of an additional $50,636,000 was invested in the Fund on January 28, 1991 (when the Series B Units were sold) and an additional $40,000,000 on January 2, 1992 (when the Series C Units were sold). Through December 31, 1996, Units with an aggregate Net Asset Value of $96,968,699 (not including a dividend distribution of $2,345,180 for Series A Unitholders on November 30, 1990) had been redeemed (including December 31, 1996 redemptions which were not actually paid out until January 1997). As of December 31, 1996, the aggregate capitalization of the Fund was $60,834,088, the total capitalization of the Series A, Series B and Series C Units was $14,237,462, $30,488,078 and $16,108,548, 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 $252.54 (excluding a $20 per Series A Unit distribution paid as of November 30, 1990), $205.27 and $159.97, respectively. As of December 31, 1996, the Fund had 489 Series A, 1,539 Series B and 791 Series C Limited Partners. The highest month-end Net Asset Value per Series A Unit through December 31, 1996 was $255.50 (November, 1996) and the lowest $100.31 (May, 1990); the highest month-end Net Asset Value per Series B Unit through December 31, 1996 was $207.63 (November, 1996) and the lowest $91.20 (May, 1992); the highest month-end Net Asset Value per Series C Unit through December 31, 1996 was $161.74 (November, 1996) and the lowest $75.87 (May, 1992). (b) Financial Information about Industry Segments: --------------------------------------------- The Partnership's business constitutes only one segment for financial reporting purposes, i.e., a speculative "commodity pool." -1- (c) Narrative Description of Business: --------------------------------- GENERAL The Fund trades in the international futures, options on futures and forward markets with the objective of achieving significant profits over time. The Partnership has entered into advisory agreements with each Trading Advisor (the "Advisory Agreement") with respect to each of the Series A Units, Series B Units and Series C units and allocated 50% of the initial capital of each Series to each Trading Advisor. JWH is retained to trade 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 is retained to trade the Partnership's assets allocated to it pursuant to its currency program, which concentrates exclusively on currency trading, primarily in the interbank 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 into an investment field that 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 (not, however, negatively correlated) with the United States stock and bond markets. The Fund accesses the Trading Advisors not by opening individual managed accounts with them, but rather through investing in private funds 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 General. The Fund's assets are not used to purchase or acquire any ------- physical commodity but rather held as security for and to pay the Partnership's speculative trading losses as well as any expenses and redemptions. The primary use of the Fund's capital is to permit the Advisors to trade on a speculative basis in a wide range of different futures, forwards and options on futures markets on behalf of the Partnership. While being used for this purpose, the Partnership's assets are also generally available to earn interest, as more fully described below under "-- Available Assets." Market Sectors. The Partnership trades in a diversified group of -------------- markets under the direction of its two independent Advisors. These Advisors can, and do, from time to time materially alter the allocation of their overall trading commitments among different market sectors. Except in the case of certain trading programs which are purposefully limited in the markets which they trade, there is essentially no restriction on the commodity interests which may be traded by any Advisor or the rapidity with which an Advisor may alter its market sector allocations. The Fund's financial statements contain information relating to the market sectors traded by the Fund. There can, however, be no assurance as to which markets may be included in the Fund's portfolio or as to in which market sectors the Fund's trading may be concentrated at any one time or over time. Market Types. The Fund trades on a variety of United States and ------------ foreign futures exchanges. Applicable exchange rules differ significantly among different countries and exchanges. Substantially all of the Fund's off-exchange trading takes place in the highly liquid, institutionally based currency forward markets. The forward markets are generally unregulated, and in its forward trading the Fund does not deposit margin with respect to its positions. The Partnership's forward currency trading is executed exclusively through the Foreign Exchange Service Desk (the "F/X Desk") operated by MLIP and certain of its affiliates, with MLF as the back-to-back intermediary to the ultimate counterparties, which include Merrill Lynch Investment Bank ("MLIB") with which the Advisors trade on behalf of the Fund. As in the case of its market sector allocations, the Fund's commitments to different types of markets -- U.S. and non-U.S., regulated and unregulated -- differ substantially from time to time as well as over time. The Fund has no policy restricting its relative commitment to any of these different types of markets. -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 in which markets the Fund may trade or the Fund's trading may be concentrated at any one time or over time. Custody of Assets. All of the Fund's assets are currently held in ----------------- customer accounts at Merrill Lynch. Available Assets. The Fund earns interest, as described below, on its ---------------- "Available Assets," which can be generally described as the cash actually held by the Fund or invested in short-term Treasury bills. Available Assets are held primarily in U.S. dollars, and to a lesser extent in foreign currencies, and are comprised of the following: (a) the Fund's cash balance in the offset accounts (as described below) -- which includes "open trade equity" (unrealized gains and losses on open positions) on United States futures contracts, which is paid into or out of the Fund's account on a daily basis; (b) short-term Treasury bills purchased by the Fund; and (c) the Fund's cash balance in foreign currencies derived from its trading in non-U.S. dollar denominated futures and options contracts, which includes open trade equity on those exchanges which settle gains and losses on open positions in such contracts prior to the closing out of such positions. Available Assets do not include, and the Fund does not earn interest on, the Fund's gains or losses on its open forward, commodity option and certain foreign futures positions since such gains or losses are not collected or paid until such positions are closed out. The Partnership's Available Assets may be greater than, less than or equal to the Fund's Net Asset Value (on which the redemption value of the Units is based) primarily because Net Asset Value reflects all gains and losses on open positions as well as accrued but unpaid expenses. The interest income arrangements for the Partnership's U.S. dollar Available Assets differ from those applicable to its non-U.S. dollar Available Assets. Interest income, once accrued by the Fund, is subject to the risk of trading losses. Interest Earned on the Fund's U.S. Dollar Available Assets. The ---------------------------------------------------------- Fund's U.S. dollar Available Assets are held in cash in offset accounts and in short-term Treasury bills purchased from dealers unaffiliated with Merrill Lynch. Offset accounts are non-interest bearing demand deposit accounts maintained with banks unaffiliated with Merrill Lynch. An integral feature of the offset arrangements is that the participating banks specifically acknowledge that the offset accounts are MLF customer accounts, not subject to any Merrill Lynch liability. MLF credits the Partnership, as of the end of each month, with interest at the effective daily 91-day Treasury bill rate on the average daily U.S. dollar Available Assets held in the offset accounts during such month. The Fund receives all the interest paid on the short-term Treasury bills in which it invests. The use of the offset account arrangements for the Partnership's U.S. dollar Available Assets may be discontinued by Merrill Lynch whether or not Merrill Lynch otherwise continues to maintain its offset arrangements. The offset arrangements are dependent on the banks' continued willingness to make overnight credits available to Merrill Lynch, which, in turn, is dependent on the credit standing of ML&Co. If Merrill Lynch were to determine that the offset arrangements had ceased to be practicable (either because ML&Co. credit lines at participating banks were exhausted or for any other reason), Merrill Lynch would thereafter attempt to invest all of the Fund's U.S. dollar Available Assets to the maximum practicable extent in short-term Treasury bills. All interest earned on the U.S. dollar Available Assets so invested would be paid to the Fund, but MLIP would expect the amount of such interest to be less than that available to the Fund under the offset account arrangements. The remaining U.S. dollar Available Assets of the Fund would be kept in cash to meet variation margin payments and pay expenses, but would not earn interest for the Fund. The banks at which the offset accounts are maintained make available to Merrill Lynch interest-free overnight credits, loans or overdrafts in the amount of the Fund's U.S. dollar Available Assets held in the offset accounts, charging Merrill Lynch a small fee for this service. The economic benefits derived by Merrill Lynch -- net of the interest credits paid to the Fund and the fee paid to the offset banks -- from the offset accounts have not exceeded 3/4 of 1% per annum of the Fund's average daily U.S. dollar Available Assets held in the offset accounts. These revenues to Merrill Lynch are in addition to the Brokerage Commissions and Administrative Fees paid by the Fund to MLF and MLIP, respectively. -3- Interest Paid by Merrill Lynch on the Fund's Non-U.S. Dollar Available ---------------------------------------------------------------------- Assets. Under the single currency margining system implemented for the - ------ Partnership, the Partnership itself does not deposit foreign currencies to margin trading in non-U.S. dollar denominated futures contracts and options. MLF provides the necessary margin, permitting the Fund to retain the monies which would otherwise be required for such margin as part of the Fund's U.S. dollar Available Assets. Consequently, the Fund does not earn interest on foreign margin deposits. The Fund does, however, earn interest on its non-U.S. dollar Available Assets. Specifically, the Fund is credited by Merrill Lynch with interest at the local short-term rate on realized and unrealized gains on non- U.S. dollar denominated positions for such gains actually held in cash by the Fund. Merrill Lynch charges the Fund Merrill Lynch's cost of financing realized and unrealized losses on such positions. In order to avoid the expense of daily currency conversions, the Fund holds foreign currency gains and finances foreign currency losses on an interim basis until converted into U.S. dollars and either paid into or out of the Fund's U.S. dollar Available Assets. Foreign currency gains or losses on open positions are not converted into U.S. dollars until the positions are closed. Assets of the Fund while held in foreign currencies are subject to exchange rate risk. Forward Transactions. Spot and forward currency contracts are the -------------------- only non-exchange traded instruments held by the Fund. To date, approximately 20% to 30% of the Fund's trades by volume have been in forward currency contracts, but from time to time the percentage of the Fund's trading represented by forward currency trades may fall substantially outside this range. In using the F/X Desk, the Fund trades through MLF. Because the Fund need not deposit any margin with MLF in respect of the Fund's forward trading, the Fund's additional risk in trading in such unregulated markets should be limited to a possible loss of unrealized profits on open forward positions which a counterparty accessed through MLF would not, in the event of its bankruptcy, be able to pay to MLF for the account of the Fund. (MLF would not itself be required to pay such unrealized profits to the Fund if MLF did not receive such profits from such counterparties.) Having the Fund (and the other MLF clients using the F/X Desk) trade through the F/X Desk on the basis of MLF's credit lines permits the F/X Desk to access a wide range of counterparties without the need of such counterparties evaluating the individual credit of the Fund (or any other MLF client). 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. PERFORMANCE SUMMARY Series A Units. During 1994, the Series A Units' average month-end -------------- Net Asset equaled $12,383,435, and the Series recognized gross trading gains of $130,786 or 1.06% of such average month-end Net Assets. Brokerage Commissions of $1,572,088 or 12.70% and Profit Shares of $103,313 or 0.83% of average month- end Net Assets were paid. Interest income of $414,937 or 3.35% of average month- end Net Assets resulted in a net loss of $1,129,678 or 9.12% of average month- end Net Assets, which resulted in a 8.64% decrease in the Net Asset Value per Unit. During 1995, the Series A Units' average month-end Net Assets equalled $13,360,144, and the Series recognized gross trading gains of $5,089,863 or 38.10% of such average month-end Net Assets. Brokerage Commissions of $1,654,078 or 12.38% and Profit Shares of $168,968 or 1.26% of average month-end Net Assets were paid. Interest income of $636,781 or 4.77% of average month-end Net Assets resulted in net income of $3,903,598 or 29.22% of average month-end Net Assets which resulted in a 34.89% increase in the Net Asset Value per Unit. During 1996, the Series A Units' average month-end Net Assets equalled $12,941,058, and the Series recognized gross trading gains of $1,647,329 or 12.73% of such average month-end Net Assets. Brokerage Commissions of $1,239,114 or 9.58%, Administrative Fees of $26,364 or 0.20% and Profit Shares of $26,690 or 0.21% of average month-end Net Assets were paid. Interest income etc. resulted in net income of $2,519,013 or 19.47% of average month-end Net Assets, which resulted in a 20.09% increase in the Net Asset Value per Unit. -4- Series B Units. During 1994, the Series B Units' average month-end -------------- Net Assets equalled $24,388,421, and the Series recognized gross trading gains of $368,693 or 1.51% of such average month-end Net Assets. Brokerage Commissions of $3,760,979 or 15.42% and Profit Shares of $247,361 or 1.01% of average month-end Net Assets were paid. Interest income of $987,769 or 4.05% of average month-end Net Assets resulted in a net loss of $2,651,878 or 10.87% of average month-end Net Assets, which resulted in a 8.43% decrease in the Net Asset Value per Unit. During 1995, the Series B Units' average month-end Net Assets equalled $24,425,858, and the Series recognized gross trading gains of $11,540,056 or 47.25% of such average month-end Net Assets. Brokerage Commissions of $3,698,343 or 15.14% and Profit Shares of $362,058 or 1.48% of average month-end Net Assets were paid. Interest income of $1,431,186 or 5.86% of average month- end Net Assets resulted in net income of $8,910,841 or 36.48% of average month- end Net Assets, which resulted in a 34.49% increase in the Net Asset Value per Unit. During 1996, the Series B Units' average month-end Net Assets equalled $27,873,607, and the Series recognized gross trading gains of $3,471,941 or 12.46% of such average month-end Net Assets. Brokerage Commissions of $2,695,105 or 9.67%, Administrative Fees of $57,343 or 0.21% and Profit Shares of $44,910 or 0.16% of average month-end Net Assets are paid. Interest income of $920,755 or 3.30% of average month-end Net Assets resulted in net income of $5,157,739 or 18.50% of average month-end Net Assets, which resulted in a 20.03% increase in the Net Asset Value per Unit. Series C Units. During 1994, the Series C Units' average month-end -------------- Net Assets equalled $18,436,262, and the Series recognized gross trading gains of $419,381 or 2.27% of such average month-end Net Assets. Brokerage Commissions of $2,384,202 or 12.93% and Profit Shares of $157,828 or 0.86% of average month-end Net Assets were paid. Interest income of $596,124 or 3.23% of average month-end Net Assets resulted in a net loss of $1,526,525 or 8.28% of average month-end Net Assets, which resulted in a 7.88% decrease in the Net Asset Value per Unit. During 1995, the Series C Units' average month-end Net Asset equalled $16,554,503, and the Series recognized gross trading gains of $6,571,541 or 39.70% of such average month-end Net Assets. Brokerage Commissions of $2,060,368 or 12.45% and Profit Shares of $198,112 or 1.20% of average month-end Net Assets were paid. Interest income of $795,417 or 4.80% of average month-end Net Assets resulted in net income of $5,108,478 or 30.86% of average month-end Net Assets, which resulted in a 35.08% increase in the Net Asset Value per Unit. During 1996, the Series C Units' average month-end Net Assets equalled $15,096,182 and the Series recognized gross trading gains of $1,869,922 or 12.39% of such average month-end Net Assets. Brokerage Commissions of $1,472,632 or 9.75%, Administrative Fees of $31,332 or 0.21%, and Profit Shares of $25,868 or 0.17% of average month-end Net Assets were paid. Interest income of $504,393 or 3.34% of average month-end Net Assets resulted in net income of $2,707,578 or 17.94% of average month-end Net Assets, which resulted in a 19.54% increase in the Net Asset Value per Unit. ______________________________ DESCRIPTION OF CURRENT CHARGES
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT - ------------------ ---------------------- ------------------------------------------------------------ MLF Brokerage Commissions A flat-rate monthly commission of 0.9792 of 1% of the Fund's month-end assets (a 11.75% annual rate). During 1994, 1995 and 1996, the round-turn (each purchase and sale or sale and purchase of a single futures contract) equivalent rate of the Fund's flat-rate Brokerage Commissions was approximately $56, $207 and $143, respectively. The round-turn rates reflect Brokerage Commissions at the rate of 11.75% per annum. As of February 1, 1997, this rate was reduced to 9.50%.
-5- DESCRIPTION OF CURRENT CHARGES (CONT'D) ---------------------------------------
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT - ------------------ ---------------------- ------------------------------------------------------------ MLF Use of Fund assets Merrill Lynch may derive an economic benefit from the deposit of certain of the Fund's U.S. dollar Available Assets in offset accounts; such benefit to date has not exceeded 3/4 of 1% of such average daily U.S. dollar Available Assets. MLIP Administrative Fees As of January 1, 1996, the Brokerage Commissions payable by the Fund were reduced from 12% to 11.75% annually, and the Fund began to pay MLIP a monthly Administrative Fee equal to 0.020833 of 1% of the Fund's month-end assets (0.25% annually). This change had no economic effect on the Fund. MLIP pays all of the Fund's routine administrative costs. MLIB Bid-ask spreads Under MLIP's F/X Desk arrangements, MLIB receives bid-ask spreads on the forward trades it executes with the Fund. Other Bid-ask spreads The counterparties other than MLIB with which the F/X Counterparties Desk deals also each receive bid-ask spreads on the forward trades executed with the Fund. MLIP F/X Desk service fees Under the F/X Desk arrangements, MLIP or another Merrill Lynch entity receives a service fee equal, at current exchange rates, to approximately $5.00 to $12.50 on each purchase or sale of each futures contract- equivalent forward contract executed with counterparties other than MLIB. MLIB EFP differentials MLIB or an affiliate receives a differential spread for exchanging the Fund's spot currency positions (which are acquired through the F/X Desk, as described above) for equivalent futures positions. Trading Advisors Profit Shares Prior to January 1, 1997, quarterly profit shares of 15% and 20% of any New Trading Profit generated by each advisor, individually, were paid to JWH and Millburn, respectively, beginning January 1, 1997, a quarterly Profit Share of 15% continues to be payable to JWH and an annual Profit Share of 20% is payable to Millburn, in each case as of the end of each calendar quarter or year (as the case may be) and upon redemption of Units. New Trading Profit is calculated separately in respect of each Advisor, irrespective of the overall performance of the Fund. Units may generate New Trading Profit and be subject to paying Profit Shares even though the Net Asset Value per Unit has declined below the purchase price of such Units.
-6- DESCRIPTION OF CURRENT CHARGES (CONT'D) ---------------------------------------
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT - ------------------ ---------------------- ------------------------------------------------------------ MLF; Extraordinary expenses Actual costs incurred; none paid to date, and expected to Others be negligible. -------------------------------
REGULATION The General Partner, the Trading Advisors and the Commodity Broker are each subject to regulation by the Commodity Futures Trading Commission and the National Futures Association. Other than in respect of its periodic reporting requirements, the Partnership itself is generally not subject 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 Foreign and Domestic Operations and Export ---------------------------------------------------------------------- Sales: - ----- The Partnership does not engage in material operations in foreign countries, nor is a material portion of the Partnership's revenues derived from customers in foreign countries. The Partnership does, however, trade, from the United States, on a number of foreign commodity exchanges. 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 the General Partner (see Item 10 herein). The General Partner performs all administrative services for the Partnership from the General Partner's offices. ITEM 3: LEGAL PROCEEDINGS ----------------- There are no pending legal proceedings to which the Partnership or the General Partner is a party. In September 1996, JWH was named as a co-defendant in class action lawsuits brought in the California Superior Court, Los Angeles County and in the New York Supreme Court, New York County. In November, JWH was named as a co-defendant in a class action complaint filed in Superior Court of the State of Delaware for Newcastle County that contained the same allegations as the New York and California complaints. The actions, which seek unspecified damages, purport to be brought on behalf of investors in certain Dean Witter, Discover & Co. ("Dean Witter") commodity pools, some of which are advised by JWH, and are primarily directed at Dean Witter's alleged fraudulent selling practices in connection with the marketing of those pools. JWH is essentially alleged to have aided and abetted or directly participated with Dean Witter in those practices. JWH believes the allegations against it are without merit; it intends to contest these allegations vigorously, and is convinced that it will be shown to have acted properly and in the best interest of the investors. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS --------------------------------------------------- The Partnership has never submitted any matters to a vote of its Limited Partners. -7- PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS --------------------------------------------------------------------- (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, 1996, there were 490, 1,540 and 774 holders of the Series A, B and C Units, respectively, including the General Partner and the Trading Advisors. (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 distributions, but may do so if a series of Units recognizes substantial profits. ITEM 6: SELECTED FINANCIAL DATA ----------------------- The following selected financial data has been derived from the audited financial statements of the Partnership.
INCOME STATEMENT DATA 1996 1995 1994 1993 1992 - ----------------------------------- ------------ ------------ ------------ ----------- ------------- Revenues: Trading Profits (Loss): Realized Gain $ 8,749,410 $23,852,578 $ 3,650,307 $17,886,014 $ 18,957,117 Change in Unrealized Gain (1,760,218) (651,118) (2,731,447) 4,187,590 (23,653,935) ----------- ----------- ----------- ----------- ------------ Total Trading Results 6,989,192 23,201,460 918,860 22,073,604 (4,696,818) Interest Income 1,842,887 2,863,384 1,998,830 1,847,581 2,317,491 ----------- ----------- ----------- ----------- ------------ Total Revenues 8,832,079 26,064,844 2,917,690 23,921,185 (2,379,327) ----------- ----------- ----------- ----------- ------------ Expenses: Brokerage Commissions 5,406,851 7,412,789 7,717,269 9,559,369 10,532,323 Administrative Fees 115,039 0 0 0 0 Profit Shares 97,468 729,138 508,502 551,684 523,840 ----------- ----------- ----------- ----------- ------------ Total Expenses 5,619,358 8,141,927 8,225,771 10,111,053 (11,056,163) ----------- ----------- ----------- ----------- ------------ Income from Investments 7,171,609 0 0 0 0 ----------- ----------- ----------- ----------- ------------ Net Income (Loss) $10,384,330 $17,922,917 $(5,308,081) $13,810,132 $(13,435,490) =========== =========== =========== =========== ============ BALANCE SHEET DATA 1996 1995 1994 1993 1992 - ----------------------------------- ----------- ----------- ----------- ----------- ------------ Fund Net Asset Value $60,834,088 $57,921,834 $53,987,444 $71,749,780 $ 82,863,393 Net Asset Value per Series A Unit $ 252.54 $ 210.29 $ 155.90 $ 170.64 $ 141.44 Net Asset Value per Series B Unit $ 205.27 $ 171.02 $ 127.16 $ 138.87 $ 115.98 Net Asset Value per Series C Unit $ 159.97 $ 133.82 $ 99.07 $ 107.55 $ 92.87*
* The December 31, 1992 Net Asset Value per Series C Unit was $0.83 per Unit higher than the GAAP Net Asset Value due to the amortization of organization and offering cost reimbursements. -8-
MONTH-END NET ASSET VALUE PER SERIES A UNIT - ------------------------------------------------------------------------------------------------------------------ JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. - ------------------------------------------------------------------------------------------------------------------ 1992 $142.57 $128.54 $130.12 $117.75 $111.34 $125.75 $143.95 $158.02 $151.50 $143.69 $144.39 $141.44 - ------------------------------------------------------------------------------------------------------------------ 1993 $141.54 $154.24 $151.42 $163.78 $166.43 $162.20 $174.85 $162.78 $165.32 $164.26 $164.70 $170.64 - ------------------------------------------------------------------------------------------------------------------ 1994 $157.40 $157.52 $171.35 $170.73 $170.55 $182.02 $169.39 $159.71 $163.83 $165.97 $159.74 $155.90 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER SERIES B UNIT - ------------------------------------------------------------------------------------------------------------------ JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. - ------------------------------------------------------------------------------------------------------------------ 1992 $114.45 $104.79 $106.01 $ 96.15 $ 91.20 $103.23 $118.11 $129.56 $124.39 $117.89 $118.48 $115.98 - ------------------------------------------------------------------------------------------------------------------ 1993 $116.02 $126.15 $124.04 $134.19 $136.26 $132.74 $142.71 $132.47 $134.45 $133.44 $133.97 $138.87 - ------------------------------------------------------------------------------------------------------------------ 1994 $127.89 $128.01 $139.63 $139.06 $138.76 $148.27 $138.03 $130.06 $133.43 $135.47 $130.31 $127.16 - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER SERIES C UNIT - ------------------------------------------------------------------------------------------------------------------- JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. - ------------------------------------------------------------------------------------------------------------------- 1992 $ 92.41 $ 85.30 $ 86.02 $ 79.31 $ 75.87 $ 85.03 $ 95.51 $103.93 $100.18 $ 94.88 $ 95.63 $93.70** - ------------------------------------------------------------------------------------------------------------------- 1993 $ 94.01 $101.04 $ 99.03 $106.07 $106.98 $104.11 $110.95 $102.99 $104.71 $103.70 $103.95 $ 107.55 - ------------------------------------------------------------------------------------------------------------------- 1994 $ 98.97 $ 99.10 $108.21 $107.82 $107.43 $115.26 $107.13 $100.81 $103.66 $105.30 $101.41 $ 99.07 - ------------------------------------------------------------------------------------------------------------------- 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 - -------------------------------------------------------------------------------------------------------------------
** The December 31, 1992 Net Asset Value per Series C Unit was $0.83 per Unit higher than the GAAP Net Asset Value due to the amortization of organization and offering cost reimbursements. Pursuant to CFTC policy, monthly performance is presented from January 1, 1992 even though the Series A and B Units were outstanding prior to such date. -9- JOHN W. HENRY & CO./MILLBURN L.P. (SERIES A UNITS) DECEMBER 31, 1996 Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/ Inception of Trading: January 5, 1990 Aggregate Subscriptions: $18,182,000 Current Capitalization: $14,237,462 Worst Monthly Drawdown/(2)/: (15.99)% (1/92) Worst Peak-to-Valley Drawdown/(3)/: (34.40)% (1/92 - 5/92) _____________ Net Asset Value per Series A Unit, December 31, 1996: $252.54
MONTHLY RATES OF RETURN/(4)/ - ------------------------------------------------------------ MONTH 1996 1995 1994 1993 1992 - ------------------------------------------------------------ January 10.17% (5.81)% (7.76)% 0.07% (15.99)% - ------------------------------------------------------------ February (9.58) 14.09 0.08 8.97 (9.84) - ------------------------------------------------------------ March (1.97) 22.24 8.78 (1.82) 1.22 - ------------------------------------------------------------ April 3.93 4.72 (0.36) 8.16 (9.51) - ------------------------------------------------------------ May (4.31) 0.81 (0.11) 1.62 (5.44) - ------------------------------------------------------------ June 1.46 (1.63) 6.73 (2.54) 12.95 - ------------------------------------------------------------ July (0.17) (2.66) (6.94) 7.79 14.47 - ------------------------------------------------------------ August (2.38) 2.45 (5.72) (6.90) 9.78 - ------------------------------------------------------------ September 3.19 (1.99) 2.58 1.56 (4.13) - ------------------------------------------------------------ October 14.17 0.45 1.31 (0.64) (5.15) - ------------------------------------------------------------ November 7.39 0.34 (3.75) 0.26 0.49 - ------------------------------------------------------------ December (1.16) 0.38 (2.41) 3.61 (2.04) - ------------------------------------------------------------ Compound Annual 20.09% 34.89% (8.64)% 20.64% (16.65)% Rate of Return - ------------------------------------------------------------
(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, 1992 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, 1992 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 B UNITS) DECEMBER 31, 1996 Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/ Inception of Trading: January 28, 1991 Aggregate Subscriptions: $50,636,000 Current Capitalization: $30,488,078 Worst Monthly Drawdown/(2)/: (15.01)% (1/92) Worst Peak-to-Valley Drawdown/(3)/: (32.28)% (1/92 - 5/92) _____________ Net Asset Value per Series B Unit, December 31, 1996: $205.27
MONTHLY RATES OF RETURN/(4)/ - ------------------------------------------------------------ MONTH 1996 1995 1994 1993 1992 - ------------------------------------------------------------ January 10.47% (5.93)% (7.91)% 0.04% (15.01)% - ------------------------------------------------------------ February (9.41) 14.22 0.09 8.73 (8.44) - ------------------------------------------------------------ March (2.14) 22.06 9.08 (1.68) 1.16 - ------------------------------------------------------------ April 3.86 4.57 (0.41) 8.18 (9.30) - ------------------------------------------------------------ May (4.38) 0.66 (0.22) 1.54 (5.15) - ------------------------------------------------------------ June 1.40 (1.52) 6.85 (2.58) 13.19 - ------------------------------------------------------------ July (0.14) (2.75) (6.90) 7.51 14.42 - ------------------------------------------------------------ August (2.49) 2.71 (5.77) (7.17) 9.69 - ------------------------------------------------------------ September 3.22 (2.04) 2.59 1.49 (3.99) - ------------------------------------------------------------ October 14.17 0.48 1.53 (0.75) (5.23) - ------------------------------------------------------------ November 7.30 0.31 (3.81) 0.40 0.50 - ------------------------------------------------------------ December (1.14) 0.31 (2.42) 3.65 (2.11) - ------------------------------------------------------------ Compound Annual 20.03% 34.49% (8.43)% 19.74% (13.88)% Rate of Return - ------------------------------------------------------------
(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, 1992 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, 1992 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- JOHN W. HENRY & CO./MILLBURN L.P. (SERIES C UNITS) DECEMBER 31, 1996 Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/ Inception of Trading: January 2, 1992 Aggregate Subscriptions: $40,000,000 Current Capitalization: $16,108,548 Worst Monthly Drawdown/(2)/: (9.54)% (2/96) Worst Peak-to-Valley Drawdown/(3)/: (24.13)% (1/92-5/92) _____________ Net Asset Value per Series C Unit, December 31, 1996: $159.97
MONTHLY RATES OF RETURN/(4)/ - ----------------------------------------------------------- MONTH 1996 1995 1994 1993 1992 - ----------------------------------------------------------- January 10.52% (6.00)% (7.97)% 0.33% (7.59)% - ----------------------------------------------------------- February (9.54) 14.12 0.13 7.47 (7.69) - ----------------------------------------------------------- March (2.18) 22.31 9.19 (1.99) 0.84 - ----------------------------------------------------------- April 3.86 4.53 (0.36) 7.11 (7.79) - ----------------------------------------------------------- May (4.43) 0.70 (0.36) 0.85 (4.35) - ----------------------------------------------------------- June 1.45 (1.44) 7.28 (2.68) 12.08 - ----------------------------------------------------------- July (0.08) (2.74) (7.05) 6.57 12.33 - ----------------------------------------------------------- August (2.71) 2.90 (5.90) (7.17) 8.82 - ----------------------------------------------------------- September 3.21 (1.91) 2.83 1.66 (3.61) - ----------------------------------------------------------- October 14.17 0.59 1.58 (0.97) (5.92) - ----------------------------------------------------------- November 7.14 0.32 (3.69) 0.24 0.79 - ----------------------------------------------------------- December (1.09) 0.17 (2.31) 3.46 (2.02) - ----------------------------------------------------------- Compound Annual 19.54% 35.08% (7.88)% 14.78% (6.30)% Rate of Return - -----------------------------------------------------------
(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 approximately 50% 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, 1992 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, 1992 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. -12- ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS ----------------------------------------------------------------------- OF OPERATIONS ------------- OPERATIONAL OVERVIEW The Fund's results of operations depend on the Advisors' ability to trade profitably. The Advisors' trading methods, are confidential, so that substantially the only available information relevant to the Fund's results of operations is its actual performance record to date. However, because of the speculative nature of its trading, the Fund's past performance is not necessarily indicative of its future results. RESULTS OF OPERATIONS General. MLIP believes that managed futures funds should be ------- regarded as medium- to long-term (i.e., three to five year) investments, but it is difficult to identify trends in the Fund's operations and virtually impossible to make any predictions regarding future results based on the results to date. An investment in the Fund may be less successful over a longer than a shorter period. Markets with sustained price trends tend to be more favorable to managed futures investments than whipsaw, choppy markets, but (i) this is not always the case, (ii) it is impossible to predict when price trends will occur and (iii) JWH and Millburn are affected differently by trending markets as well as by particular types of trends. MLIP attempts to control credit risk in the Fund's futures, forward and options trading (the Fund does not trade derivatives other than futures and forward contracts and options thereon) by trading only through MLF. MLF acts solely as a broker or counterparty to the Fund's trades; it does not advise with respect to, or direct, any such trading. MLIP relies principally on JWH's and Millburn's respective risk management policies and strategies to control the market risk inherent in the Fund's trading. MLIP reviews the positions acquired by each of the Advisors on a daily basis in an effort to determine whether such policies and strategies are being followed and whether the overall positions of the Fund may have become what MLIP analyzes as being excessively concentrated in a limited number of markets -- in which case MLIP may discuss the possibility of rebalancing or deleveraging the Fund's portfolio with JWH, Millburn or both. To date, however, MLIP has only intervened once to request any rebalancing or deleveraging of either Advisor's trading (JWH deleveraged its trading at the request of MLIP from May 1992 through August 1992). MLIP may consider making distributions to investors under certain circumstances (for example, if substantial profits are recognized). MLIP caused the Fund to make a $20 distribution on each Series A Unit as of November 30, 1990. This is the only distribution made to date. PERFORMANCE SUMMARY 1994 1994 was characterized by relatively quiet markets without many major price trends. United States interest rates generally declined during the period, and as they did, so did the U.S. dollar as compared to the Deutschemark and certain other major currencies. 1995 In 1995, prevailing price trends in several key markets enabled the Advisors to trade profitably for the Fund. Although trading in many of the traditional commodity markets may have been lackluster, the currency and financial markets offered exceptional trading conditions. After months characterized by very difficult trading environments, solid price trends across many markets (including U.S. Treasury and non-dollar bond markets) began to emerge during the first quarter of 1995. In the second quarter, market volatility once again began to affect trading, as many previously strong price trends began to weaken and, in some cases, reverse. The U.S. dollar hit new lows versus the Japanese yen and Deutschemark before rebounding sharply. In addition, there were strong indications that the U.S. economy was slowing which, when coupled with a failure of the German Central Bank to lower interest rates, stalled a rally in the German bond market. During -13- the third quarter, there was a correction in U.S. bond prices after several months of a strong uptrend. Despite exposure to the global interest-rate markets, the Fund's long positions in Treasury bonds had a negative impact on the Fund. Throughout August and into September, the U.S. dollar rallied sharply against the Japanese yen and the Deutschemark as a result of the coordinated intervention by major central banks and widespread recognition of the growing banking crisis in Japan. Despite continued price volatility during the final quarter of 1995, the Trading Advisors were able to identify several trends in key markets. U.S. Treasury bond prices continued their strong move upward throughout November, due both to weak economic data and optimism on federal budget talks. As the year ended, the yield on the 30-year Treasury bond was pushed to its lowest level in more than two years. 1996 1996 began with the East Coast blizzard, continuing difficulties in federal budget talks and an economic slowdown having a negative impact on many markets. The Fund was profitable in January due to strong profits in currency trading as the U.S. dollar reached a 23-month high against the Japanese yen. In February, however, the Fund incurred a significant loss due to the sudden reversals in several strong price trends and considerable volatility in the currency and financial markets. During March, large profits were taken in the crude oil and gasoline markets as strong demand continued and talks between the United Nations and Iraq were suspended. This trend continued into the second quarter, during which strong gains were also recognized in the agricultural markets as a combination of drought and excessive rain drove wheat and grain prices to historic highs. In the late summer and early fall months, the Fund continued to trade profitably as trending prices in a number of key markets favorably impacted the Fund's performance. In September heating oil hit a five-year high on soaring prices in Europe, and the Fund was also able to capitalize on downward trends in the metals markets. Strong trends in the currency and global bond markets produced significant gains in October and November, but the year ended with declining performance as December witnessed the reversal of several strong upward trends and increased volatility in key markets. PERFORMANCE OVERVIEW The principal variables which determine the net performance of the Partnership are profitability and interest income. During all periods set forth under "Selected Financial Data," the interest rates in many countries were at unusually low levels. This negatively impacted revenues because interest income is typically a major component of commodity pool profitability. In addition, low interest rates are frequently associated with reduced fixed-income market volatility, and in static markets the Fund's profit potential generally tends to be diminished. On the other hand, during periods of higher interest rates, the relative attractiveness of a high risk investment such as the Partnership may be reduced as compared to high yielding and much lower risk fixed-income investments. The Partnership's Brokerage Commissions and Administrative Fees are a constant percentage of assets charge. The only Fund costs (other than the insignificant F/X Desk service fees and EFP differentials as well as bid-ask spreads on forward contracts) which are not based on a percentage of the Fund's assets are the Profit Shares payable to each of JWH and Millburn based on their individual performance. 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 the Advisors (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 has incurred offsetting losses, reducing overall trading gains but not the Profit Shares paid to the successful Advisor). The events that primarily determine the Fund's profitability are those that produce sustained and major price movements. The Advisors are generally more likely to be able to profit from sustained trends, irrespective of their direction, than from static markets. During the course of the Partnership's performance to date, such events have ranged from Federal Reserve Board reductions in interest rates, the apparent refusal of Iraq to arrive at a settlement which would permit it to sell oil internationally, the inability of the U.S. government to agree upon a federal budget and a combination of drought and excessive rain negatively impacting U.S. agricultural harvesting as well as planting. While these events are representative of the type of circumstances which materially affect the Fund, the specific events which will do so in the future cannot be predicted or identified. -14- Unlike many investment fields, there is no meaningful distinction in the operation of the Fund between realized and unrealized profits. Most of the contracts traded by the Fund are highly liquid and can be closed out at any time. Furthermore, the profits on many open positions are effectively realized on a daily basis through the payment of variation margin. Except in unusual circumstances, factors such as 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. LIQUIDITY AND CAPITAL RESOURCES The Fund's costs are generally proportional to its asset base, and, within broad ranges of capitalization, the Advisors' trading positions (and the resulting gains and losses) should increase or decrease in approximate proportion to the size of the Fund account managed by each of them, respectively. Inflation per se is not a significant factor in the Fund's profitability, although inflationary cycles can give rise to the type of major price movements that can have a materially favorable or adverse impact on the Fund's performance. In its trading to date, the Fund has from time to time had substantial unrealized gains and losses on its open positions. These gains or losses are received or paid on a periodic basis as part of the routine clearing cycle on exchanges or in the over-the-counter markets (the only over-the-counter market in which the Fund trades is the inter-bank forward market in currencies). In highly unusual circumstances, market illiquidity could make it difficult for certain Advisors to close out open positions, and any such illiquidity could expose the Fund to significant losses, or cause it to be unable to recognize unrealized gains. However, in general, there is no meaningful difference between the Fund's realized and unrealized gains. In terms of cash flow, it makes little difference whether a market position remains open (so that the profit or loss on such positions remains unrealized), as cash settlement of unrealized gains and losses occurs periodically whether or not positions are closed out. The only meaningful difference between realized and unrealized gains or losses in the case of the Fund is that unrealized items reflect gains or losses on positions which the Advisors have determined not to close out (presumably, in the hope of future profits), whereas realized gains or losses reflect amounts received or paid in respect of positions no longer being maintained. The significant variations in the balance sheet line items is primarily due to the Partnership placing its assets under the management of the Advisors not through opening managed accounts with them but rather through investing in private limited liability companies ("Trading LLCs") sponsored by MLIP. On October 1, 1996 the assets managed by John W. Henry & Co., Inc. were invested in the ML JWH Financials & Metals Portfolio L.L.C. On December 2, 1996, the assets managed by the Millburn Ridgefield Corporation were invested in the ML Millburn Global Diversified L.L.C. As of December 31, 1996, all of the Partnership's assets formerly held in commodity futures trading accounts were invested in these two Trading LLCs. Placing assets with an Advisor through investing in a Trading LLC rather than a managed account has no economic effect on the Partnership, except to the extent that the Partnership benefits from the Advisor not having to allocate trades among a number of different accounts (rather than acquiring a single position for the Trading LLC as a whole). 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. -15- ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE -------------------- There were no changes in or disagreements with accountants on accounting and financial disclosure. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - ------------------------------------------------------------ (a,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 principal officers of MLIP and their business backgrounds are as follows. John R. Frawley, Jr. Chief Executive Officer, President and Director James M. Bernard Chief Financial Officer, Senior Vice President and Treasurer (through April 14, 1997) Michael A. Karmelin Chief Financial Officer, Vice President and Treasurer (as of April 14, 1997) Jeffrey F. Chandor Senior Vice President, Director of Sales, Marketing and Research and Director Allen N. Jones Chairman and Director Steven B. Olgin Vice President, Secretary and Director of Administration John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chief Executive Officer, President and a Director of MLIP as well as Co-Chairman of MLF. He joined Merrill Lynch, Pierce, Fenner & Smith ("MLPF&S") in 1966 and has served in various positions, including Retail and Institutional Sales, Manager of New York Institutional Sales, Director of Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets, and Director of International Institutional Sales. Mr. Frawley holds a Bachelor of Science degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory Coordination Advisory Committee from its inception in 1990 through its dissolution in 1994. Mr. Frawley is currently a member of the CFTC's Financial Products Advisory Committee. In January 1996, he was re-elected to a one-year term as Chairman of the Managed Futures Association, the national trade association of the United States managed futures industry. Mr. Frawley is also a Director of that organization, and a Director of the Futures Industry Institute. Mr. Frawley also currently serves on a panel created by the Chicago Mercantile Exchange and The Board of Trade of the City of Chicago to study cooperative efforts related to electronic trading, common clearing and the issues regarding a potential merger. James M. Bernard was born in 1950. Mr. Bernard was Chief Financial Officer, Senior Vice President and Treasurer of MLIP. He joined MLF in 1983. Before that he was the Commodity Controller for Nabisco Brands Inc. from November 1976 to 1982 and a Supervisor at Ernst & Whinney from 1972 to November 1976. Mr. Bernard is a member of the American Institute of Certified Public Accountants and holds a Bachelor of Science degree from St. John's University and a Master of Business Administration degree from Fordham University. Mr. Bernard left the firm in 1997. Michael A. Karmelin has been appointed Chief Financial Officer, Vice President and Treasurer of MLIP. Mr. Karmelin assumed these positions on April 14, 1997, when he completed his tenure as Chief Financial Officer of Merrill Lynch, Hubbard Inc. ("ML Hubbard"), a sponsor of real estate limited partnerships. Mr. Karmelin was born in 1947. Mr. Karmelin joined ML Hubbard in January 1994 as a Vice President. From May 1994 until he joined MLIP, Mr. Karmelin was the Chief Financial Officer of ML Hubbard, responsible for its accounting, treasury and tax functions. Prior to joining ML Hubbard, Mr. Karmelin held several senior financial positions with Merrill Lynch & Co., Inc. ("ML&Co.") and Merrill Lynch, Pierce, Fenner & Smith Incorporated from December 1985 to December 1993, including Vice President/Senior Financial Officer Corporate Real Estate and Purchasing, Manager Commitment Control/Capital Budgeting, and Senior Project Manager/Project Analysis. Prior to joining ML&Co., Mr. Karmelin was employed at Avco Corporation for 17 years, where he held a variety of financial positions. Mr. Karmelin holds a B.B.A. degree in Accounting from Baruch College, C.U.N.Y. and a Master of Business Administration degree in Corporate Strategy and Finance from New York University. Mr. Karmelin passed the Certified Public Accountant examination in 1974 and is a member of the Treasury Management Association, the Institute of Management Accountants and The Strategic Leadership Forum. Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice President, the Director of Sales, Marketing and Research and a Director of MLIP. He joined MLPF&S in 1971 and has served as the Product Manager of Equity, Derivative Products and Mortgage-Backed Securities as well as Managing Director of International Sales in the United States, and Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts degree from Trinity College, Hartford, Connecticut. -16- Allen N. Jones was born in 1942. Mr. Jones is Chairman and a Director of MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has held the position of Senior Vice President of MLPF&S. From June 1992 through February 1994, Mr. Jones was the President and Chief Executive Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of Directors of MLIG and its subsidiary companies. In February 1994, Mr. Jones became the Director of Individual Financial Services of the Merrill Lynch Private Client Group. From January 1992 to June 1992, he held the position of First Vice President of MLPF&S. From January 1990 to June 1992, he held the position of District Director of MLPF&S. Before January 1990, he held the position of Senior Regional Vice President of MLPF&S. Steven B. Olgin was born in 1960. Mr. Olgin is Vice President, Secretary and the Director of Administration of MLIP. He joined MLIP in July 1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduated from The American University with a Bachelor of Science degree in Business Administration and a Bachelor of Arts degree in Economics. In 1986, he received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is a member of the Managed Futures Association's Government Relations Committee and has served as an arbitrator for the NFA. At its December 1996 Board of Directors meeting, MLIP formed a Finance Committee composed of representatives of several different operating and administrative units at Merrill Lynch to oversee the financial controls and accounting procedures implemented by MLIP. The Finance Committee will meet periodically to review MLIP's financial reporting, monitoring and record keeping, as well as all proposed changes -- other than the selection of Advisors - -- affecting the operations of the Fund. As of December 31, 1996, the principals of MLIP had no investment in the Fund, and MLIP's general partnership interest was valued at $832,769. MLIP acts as general partner to thirteen public futures funds whose units of limited partnership interest are registered under the Securities Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, The Growth and Guarantee Fund L.P., ML Futures Investments L.P., ML Futures Investments II L.P. , The S.E.C.T.O.R. Strategy Fund L.P., The SECTOR Strategy Fund II L.P., The SECTOR Strategy Fund IV L.P., The SECTOR Strategy Fund V L.P., The SECTOR Strategy Fund VI L.P., ML Global Horizons L.P., ML Principal Protection L.P. (formerly, ML Principal Protection Plus 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: -------------------- None. (e) Business Experience: ------------------- See Item 10(a)(b) above. (f) Involvement in Certain Legal Proceedings: ---------------------------------------- None. (g) Promoters and Control Persons: ----------------------------- The General Partner is the sole promoter and controlling person of the Partnership. -17- ITEM 11: EXECUTIVE COMPENSATION ---------------------- The officers of the General Partner are remunerated in their respective positions. The Partnership does not itself have any officers, directors or employees. The Partnership pays Brokerage Commissions to an affiliate of the General Partner and Administrative Fees to the General Partner. The General Partner or its affiliates also may receive certain economic benefits from holding the Fund's dollar Available 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 the General Partner. There are no compensation plans or arrangements relating to a change in control of either the Partnership or the General Partner. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT -------------------------------------------------------------- (a) Security Ownership of Certain Beneficial Owners: ----------------------------------------------- As of December 31, 1996, no person or "group" is known to be or have been the beneficial owner of more than five percent of the Units. All of the Partnership's units of general partnership interest are owned by the General Partner. (b) Security Ownership of Management: -------------------------------- As of December 31, 1996, each Trading Advisor owned 515 Series A Units, 500 Series B Units and 1,439 Series C Units and the General Partner owned 780 Series A Units, 1,976 Series B Units and 1,439 Series C Units (unit- equivalent general partnership interests) which was less than 3%, 2% and 3% of the total Units outstanding, respectively. (c) Changes in Control: ------------------ None. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS ---------------------------------------------- (a) Transactions with Management and Others: --------------------------------------- The General Partner acts as administrative and trading manager of the Fund. The General Partner provides all normal ongoing administrative functions of the Partnership, such as accounting, legal and printing services. The General Partner, which receives the Administrative Fees, pays all expenses relating to such services. (b) Certain Business Relationships: ------------------------------ MLF, an affiliate of the General Partner, acts as the principal commodity broker for the Partnership. In 1996 the Partnership paid: (i) Brokerage Commissions of $5,406,851 to the Commodity Broker, which included $1,828,360 in consulting fees paid by the Commodity Broker to the Trading Advisors; and (ii) Administrative Fees of $115,039 to MLIP. In addition, MLIP and its affiliates may have derived certain economic benefits from maintaining a portion of the Fund's assets in "offset accounts," as described under Item 1(c), "Narrative Description of Business -- Use of Proceeds and Interest Income -- Interest Earned on the Fund's U.S. Dollar Available Assets" and Item 11, "Executive Compensation" herein. See Item 1(c), "Narrative Description of Business -- Charges" and "-- Description of Current Changes" for a discussion of other business dealings between MLIP affiliates and the Partnership. (c) Indebtedness of Management: -------------------------- The Partnership is prohibited from making any loans, to management or otherwise. -18- (d) Transactions with Promoters: --------------------------- Not applicable. 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, 1996 and 1995 2 For the years ended December 31, 1996, 1995 and 1994: 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. -19- 10.02(a) Form of Consulting Agreement between each trading advisor, the Partnership and Merrill Lynch Futures Inc. 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 Bank, Merrill Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and the Fund. Exhibit 10.06: Is filed herewith. - ------------- 10.07(a) Form of Advisor y and Consulti ng Agreem ent Amend ment among Merrill Lynch Investm ent Partners Inc., each Advisor, the Fund and Merrill Lynch Futures. Exhibit 10.07(a): Is filed herewith. - ---------------- 10.07(b) Form of Amendment to the Customer Agreement among the Partnership and MLF. Exhibit 10.07(b) Is filed herewith. - ---------------- 13.01 1996 Annual Report and Independent Auditors' Report. Exhibit 13.01: Is filed 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. 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 1996. -20- 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. President, Chief Executive Officer 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 October 20,1997 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature Title Date - ------------------------- -------------------------------------------------- ---------------- /s/John R. Frawley, Jr. President and Chief Executive Officer and Director October 20, 1997 - ------------------------- John R. Frawley, Jr. /s/Michael A. Karmelin Chief Financial Officer, Vice President October 20, 1997 - ------------------------- Michael A. Karmelin and Treasurer /s/Jeffrey F. Chandor Senior Vice President and Director of Sales, October 20, 1997 - ------------------------- Jeffrey F. Chandor Marketing and Research, and Director /s/Allen N. Jones Director October 20, 1997 - ------------------------- Allen N. Jones
(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 October 20, 1997 PARTNERS INC. By: /s/John R. Frawley, Jr. ----------------------- John R. Frawley, Jr. -21- To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. James M. Bernard Chief Financial Officer Merrill Lynch Investment Partners Inc. General Partner of JOHN W. HENRY & CO./MILLBURN L.P. JOHN W. HENRY & CO./MILLBURN L.P. 1996 FORM 10-K/A INDEX TO EXHIBITS ----------------- Exhibit ------- Exhibit 10.06 Foreign Exchange Desk Service Agreement, dated July 1, 1993 among Merrill Lynch Investment Bank, Merrill Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and the Fund Exhibit 10.07(a) Form of Advisory and Consulting Agreement Amendment by and among Merrill Lynch Investment Partners Inc., each Advisor, the Fund and Merrill Lynch Futures Inc. Exhibit 10.07(b) Form of Amendment to the Customer Agreement among the Partnership and MLF Exhibit 13.01 1996 Annual Report and Independent Auditors' Report Exhibit 13.01(a) 1996 ML JWH Financial and Metals Portfolio L.L.C. Annual Report and Independent Auditors' Report Exhibit 13.01(b) 1996 ML Millburn Global L.L.C. Annual Report and Independent Auditors' Report EX-13.01 2 1996 ANNUAL REPORT AND INDEP. AUDITOR'S REPOR EXHIBIT 13.01 JOHN W. HENRY & CO./MILLBURN L.P. (A DELAWARE LIMITED PARTNERSHIP) Financial Statements for the years ended December 31, 1996, 1995 and 1994 and Independent Auditors' Report To: The Limited Partners of JOHN W. HENRY & CO./MILLBURN L.P. - SERIES A John W. Henry & Co./Millburn L.P. - Series A (the "Fund" or the "Partnership") ended its seventh fiscal year of trading on December 31, 1996 with a Net Asset Value ("NAV") per Unit of $252.54, representing an increase of 20.09% from the December 31, 1995 NAV per Unit of $210.29. During the fiscal year, profits generated in interest rate, currency and metals trading exceeded losses in stock index trading. In 1996, strong price trends prevailed in several key markets enabling the Fund's Trading Advisors to trade profitably for the Fund. Although trading in stock index markets may have been lackluster, the global bond and currency markets offered substantial trading opportunities. Interest rate and currency price trends resulted in profitable trading opportunities in these markets throughout the year. As the new year began, the U.S. dollar rallied throughout most of January, after being locked in a tight trading range for the two prior months. However, the dollar weakened against major currencies in February, and returned to a relatively narrow trading range. Difficult trading conditions in many markets prevailed and a lack of clear price trends in key markets negatively impacted the Fund's performance in May and June. For example, U.S. bond markets remained trendless as continued volatility, reflected investor confusion over conflicting reports on the direction of the economy. As the third quarter of 1996 began, it was the U.S. stock market that experienced increased volatility coupled with sharp declines in July. In the currency markets, the U.S. dollar posted its biggest one-day gain against the Deutsche mark in almost four months on August 14, after comments from the Bundesbank's chief economist encouraged expectations for lower German interest rates. Despite continued price volatility during the final quarter of 1996, the Fund's Trading Advisors were able to single out trends in key markets, such as the world's major bond markets which rallied into October and November. Additionally, price trends prevailed in several major foreign currency markets, for instance, the British pound extended its rally into November, as it soared to a 4-year high against the U.S. dollar and a 29-month high against the Deutsche mark on November 20. In December, however, the world's major bond market rallies came to an abrupt halt early in the month. Specifically, U.S. Treasury prices dropped on reports of strength in the economy, as well as a weaker dollar which further encouraged investor selling of treasury securities. 1996 proved to be a profitable year for the Fund. We continue to work diligently with the Trading Advisors to meet the Fund's objective of achieving, through speculative trading, substantial capital appreciation over time. We look forward to 1997 and the trading opportunities it may bring. Sincerely, John R. Frawley, Jr. President and Chief Executive Officer MERRILL LYNCH INVESTMENT PARTNERS INC. (General Partner) FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. To: The Limited Partners of JOHN W. HENRY & CO./MILLBURN L.P. - SERIES B John W. Henry & Co./Millburn L.P. - Series B (the "Fund" or the "Partnership") ended its sixth fiscal year of trading on December 31, 1996 with a Net Asset Value ("NAV") per Unit of $205.27, representing an increase of 20.03% from the December 31, 1995 NAV per Unit of $171.02. During the fiscal year, profits generated in interest rate, currency and metals trading exceeded losses in stock index trading. In 1996, strong price trends prevailed in several key markets enabling the Fund's Trading Advisors to trade profitably for the Fund. Although trading in stock index markets may have been lackluster, the global bond and currency markets offered substantial trading opportunities. Interest rate and currency price trends resulted in profitable trading opportunities in these markets throughout the year. As the new year began, the U.S. dollar rallied throughout most of January, after being locked in a tight trading range for the two prior months. However, the dollar weakened against major currencies in February, and returned to a relatively narrow trading range. Difficult trading conditions in many markets prevailed and a lack of clear price trends in key markets negatively impacted the Fund's performance in May and June. For example, U.S. bond markets remained trendless as continued volatility, reflected investor confusion over conflicting reports on the direction of the economy. As the third quarter of 1996 began, it was the U.S. stock market that experienced increased volatility coupled with sharp declines in July. In the currency markets, the U.S. dollar posted its biggest one-day gain against the Deutsche mark in almost four months on August 14, after comments from the Bundesbank's chief economist encouraged expectations for lower German interest rates. Despite continued price volatility during the final quarter of 1996, the Fund's Trading Advisors were able to single out trends in key markets, such as the world's major bond markets which rallied into October and November. Additionally, price trends prevailed in several major foreign currency markets, for instance, the British pound extended its rally into November, as it soared to a 4-year high against the U.S. dollar and a 29-month high against the Deutsche mark on November 20. In December, however, the world's major bond market rallies came to an abrupt halt early in the month. Specifically, U.S. Treasury prices dropped on reports of strength in the economy, as well as a weaker dollar which further encouraged investor selling of treasury securities. 1996 proved to be a profitable year for the Fund. We continue to work diligently with the Trading Advisors to meet the Fund's objective of achieving, through speculative trading, substantial capital appreciation over time. We look forward to 1997 and the trading opportunities it may bring. Sincerely, John R. Frawley, Jr. President and Chief Executive Officer MERRILL LYNCH INVESTMENT PARTNERS INC. (General Partner) FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. To: The Limited Partners of JOHN W. HENRY & CO./MILLBURN L.P. - SERIES C John W. Henry & Co./Millburn L.P. - Series C (the "Fund" or the "Partnership") ended its fifth fiscal year of trading on December 31, 1996 with a Net Asset Value ("NAV") per Unit of $159.97, representing an increase of 19.54% from the December 31, 1995 NAV per Unit of $133.82. During the fiscal year, profits generated in interest rate, currency and metals trading exceeded losses in stock index trading. In 1996, strong price trends prevailed in several key markets enabling the Fund's Trading Advisors to trade profitably for the Fund. Although trading in stock index markets may have been lackluster, the global bond and currency markets offered substantial trading opportunities. Interest rate and currency price trends resulted in profitable trading opportunities in these markets throughout the year. As the new year began, the U.S. dollar rallied throughout most of January, after being locked in a tight trading range for the two prior months. However, the dollar weakened against major currencies in February, and returned to a relatively narrow trading range. Difficult trading conditions in many markets prevailed and a lack of clear price trends in key markets negatively impacted the Fund's performance in May and June. For example, U.S. bond markets remained trendless as continued volatility, reflected investor confusion over conflicting reports on the direction of the economy. As the third quarter of 1996 began, it was the U.S. stock market that experienced increased volatility coupled with sharp declines in July. In the currency markets, the U.S. dollar posted its biggest one-day gain against the Deutsche mark in almost four months on August 14, after comments from the Bundesbank's chief economist encouraged expectations for lower German interest rates. Despite continued price volatility during the final quarter of 1996, the Fund's Trading Advisors were able to single out trends in key markets, such as the world's major bond markets which rallied into October and November. Additionally, price trends prevailed in several major foreign currency markets, for instance, the British pound extended its rally into November, as it soared to a 4-year high against the U.S. dollar and a 29-month high against the Deutsche mark on November 20. In December, however, the world's major bond market rallies came to an abrupt halt early in the month. Specifically, U.S. Treasury prices dropped on reports of strength in the economy, as well as a weaker dollar which further encouraged investor selling of treasury securities. 1996 proved to be a profitable year for the Fund. We continue to work diligently with the Trading Advisors to meet the Fund's objective of achieving, through speculative trading, substantial capital appreciation over time. We look forward to 1997 and the trading opportunities it may bring. Sincerely, John R. Frawley, Jr. President and Chief Executive Officer MERRILL LYNCH INVESTMENT PARTNERS INC. (General Partner) FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. 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, 1996, 1995 AND 1994: 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. (a Delaware limited partnership; the "Partnership") as of December 31, 1996 and 1995, and the related statements of operations and changes in partners' capital for each of the three years in the period ended December 31, 1996. 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, 1996 and 1995, and the results of its operations for the three years in the period ended December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York February 3, 1997 JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1996 AND 1995 - --------------------------------------------------------------------------------
1996 1995 -------------- -------------- ASSETS - ------ Investments (Note 6) $60,834,087 $ - Accrued interest (Note 2) - 236,588 Equity in commodity futures trading accounts: Cash and option premiums - 57,465,987 Net unrealized profit on open contracts - 1,760,218 Receivable from investments (Note 6) 779,075 - ---------------- ---------------- TOTAL $61,613,162 $59,462,793 ================ ================ LIABILITIES AND PARTNERS' CAPITAL - --------------------------------- LIABILITIES: Redemptions payable $ 778,385 $ 946,331 Brokerage commissions payable (Note 2) - 594,628 Profit shares 689 - ---------------- ---------------- Total liabilities 779,074 1,540,959 ---------------- ---------------- PARTNERS' CAPITAL: General Partner: (780 and 780 Series A Units outstanding) 196,983 164,028 (1,976 and 1,976 Series B Units outstanding) 405,594 337,920 (1,439 and 1,439 Series C Units outstanding) 230,192 192,564 Limited Partners: (55,596 and 62,793 Series A Units outstanding) 14,040,479 13,205,024 (146,552 and 166,361 Series B Units outstanding) 30,082,484 28,450,897 (99,256 and 116,358 Series C Units outstanding) 15,878,356 15,571,401 ---------------- ---------------- Total partners' capital 60,834,088 57,921,834 ---------------- ---------------- TOTAL $61,613,162 $59,462,793 ================ ================ NET ASSET VALUE PER UNIT Series A $ 252.54 $ 210.29 ================ ================ Series B $ 205.27 $ 171.02 ================ ================ Series C $ 159.97 $ 133.82 ================ ================
See notes to financial statements. - 2 - JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ STATEMENTS OF OPERATIONS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
1996 1995 1994 --------------- --------------- --------------- REVENUES: Trading profit (loss): Realized $ 8,749,410 $23,852,578 $ 3,650,307 Change in unrealized (1,760,218) (651,118) (2,731,447) ---------------- ---------------- ---------------- Total trading results 6,989,192 23,201,460 918,860 Interest income (Note 2) 1,842,887 2,863,384 1,998,830 ---------------- ---------------- ---------------- Total revenues 8,832,079 26,064,844 2,917,690 ---------------- ---------------- ---------------- EXPENSES: Profit shares (Note 3) 97,468 729,138 508,502 Brokerage commissions (Note 2) 5,406,851 7,412,789 7,717,269 Administrative fees (Note 2) 115,039 - - ---------------- ---------------- ---------------- Total expenses 5,619,358 8,141,927 8,225,771 ---------------- ---------------- ---------------- INCOME FROM INVESTMENTS (Note 6) 7,171,609 - - ---------------- ---------------- ---------------- NET INCOME (LOSS) $10,384,330 $17,922,917 $(5,308,081) ================ ================ ================ NET INCOME (LOSS) PER UNIT: Weighted average number of Units outstanding (Note 5) 327,875 387,956 496,530 ================ ================ ================ Net income (loss) per weighted average General Partner and Limited Partner Unit $31.67 $46.20 $(10.69) ================ ================ ================
See notes to financial statements. - 3 - JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ STATEMENTS OF CHANGES IN PARTNERS' CAPITAL YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 - --------------------------------------------------------------------------------
Limited Partners Series Series Series ---------------------------------------------- A B C Series Series Series Units Units Units A B C ------- ------- ------- ----------- ----------- ----------- PARTNERS' CAPITAL, DECEMBER 31, 1993 81,194 245,779 220,952 $13,706,790 $33,739,138 $23,429,671 Redemptions (6,584) (32,669) (66,957) (1,094,094) (4,380,116) (6,879,495) Net loss - - - (1,116,848) (2,618,789) (1,504,703) ------ ------- ------- ----------- ----------- ----------- PARTNERS' CAPITAL, DECEMBER 31, 1994 74,610 213,110 153,995 11,495,848 26,740,233 15,045,473 Redemptions (11,037) (44,773) (36,198) (2,147,231) (7,077,021) (4,508,984) Net income 3,856,407 8,787,685 5,034,912 ------ ------- ------- ----------- ----------- ----------- PARTNERS' CAPITAL, DECEMBER 31, 1995 63,573 168,337 117,797 13,205,024 28,450,897 15,571,401 Redemptions (7,197) (19,809) (17,102) (1,650,602) (3,458,479) (2,362,995) Net income - - - 2,486,057 5,090,066 2,669,950 ------ ------- ------- ----------- ----------- ----------- PARTNERS' CAPITAL, DECEMBER 31, 1996 56,376 148,528 100,695 $14,040,479 $30,082,484 $15,878,356 ====== ======= ======= =========== =========== ===========
General Partner -------------------------------------- Series Series Series A B C Total -------- --------- --------- ------------ PARTNERS' CAPITAL, DECEMBER 31, 1993 $148,458 $ 392,440 $ 333,283 $ 71,749,780 Redemptions - - (100,550) (12,454,255) Net loss (12,830) (33,089) (21,822) (5,308,081) -------- --------- --------- ------------ PARTNERS' CAPITAL, DECEMBER 31, 1994 135,628 359,351 210,911 53,987,444 Redemptions (18,791) (144,587) (91,913) (13,988,527) Net income 47,191 123,156 73,566 17,922,917 -------- --------- --------- ------------ PARTNERS' CAPITAL, DECEMBER 31, 1995 164,028 337,920 192,564 57,921,834 Redemptions - - - (7,472,076) Net income 32,955 67,674 37,628 10,384,330 -------- --------- --------- ------------ PARTNERS' CAPITAL, DECEMBER 31, 1996 $196,983 $ 405,594 $ 230,192 $ 60,834,088 ======== ========= ========= ============
See notes to financial statements. - 4 - JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ NOTES TO FINANCIAL STATEMENTS YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 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 of 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 of the Series C Units on January 2, 1992. (Series A, B and C units are hereinafter collectively referred to as "Units.") The Partnership engages in the speculative trading of futures, options on futures and forward contracts on a wide range of commodities. Merrill Lynch Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.) ("MLIP" or the "General Partner"), 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, and Merrill Lynch Futures Inc. ("MLF"), also an affiliate of Merrill Lynch, is its 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 each Series in proportion to their respective interests in it. John W. Henry & Company, Inc. and Millburn Ridgefield Corporation 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 among the Advisors as of any month- end. 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, and forward contract transactions are recorded on the trade date and open contracts are reflected in net unrealized profit (loss) on open contracts in the Statements of Financial Condition at the difference between the original contract amount and the fair value. The change in net unrealized profit (loss) on open contracts from one period to the next is reflected in change in unrealized in the Statements of Operations. Fair value is based on quoted market prices on the exchange or market on which the contract is traded. - 5 - Organization Costs and Operating Expenses ----------------------------------------- The General Partner paid all organization and offering costs in connection with the offering of the Partnership's Series A and Series B Units and the General Partner advanced the offering expenses in connection with the offering of the Series C Units for which it was reimbursed from the proceeds of Series C subscriptions in 24 equal monthly installments; provided, that the General Partner absorbed any such costs to the extent they exceeded 1.5% of the Series C capitalization. The General Partner pays all routine operating expenses, including legal, accounting, printing, postage and similar administrative expenses. The General Partner receives an administrative fee as well as a portion of the brokerage commissions paid to MLF by the Partnership as reimbursement for the foregoing expenses. 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 each Series' income and expenses as reported for income tax purposes. Redemptions ----------- A Limited Partner may require the Partnership to redeem some or all of such Partner's Units at Net Asset Value as of the close of business on the last business day of any month upon ten calendar days' notice. 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-denominated assets are held at MLF in cash or short-term Treasury bills. The Partnership receives all interest paid on such Treasury bills. On the cash held at MLF, the Partnership receives interest from Merrill Lynch at rates ranging from .50 of 1% per annum below the prevailing 91-day Treasury bill rate up to the full prevailing 91-day Treasury bill rate. Merrill Lynch may derive certain economic benefits, in excess of the interest which Merrill Lynch pays to the Partnership, from possession of such cash. Merrill Lynch credits the Partnership with interest on the Partnership's non- U.S. dollar-denominated available assets based on local short-term rates. Merrill Lynch charges the Partnership Merrill Lynch's cost of financing realized and unrealized losses on the Partnership's non-U.S. dollar- denominated positions. The Partnership paid brokerage commissions to MLF at a flat monthly rate of 1% (a 12% annual rate) of the Partnership's month-end assets. Effective January 1, 1996, the percentage was reduced to .979 of 1% (an 11.75% annual rate) of the Partnership's month-end assets and the Partnership began to pay MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of the Partnership's month-end assets (this recharacterization had no economic effect on the Partnership). 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. - 6 - MLIP estimates that the round-turn equivalent commission rate charged to the Partnership during the years ended December 31, 1996, 1995 and 1994, was approximately $143, $207 and $56, respectively (not including, in calculating round-turn equivalents, forward contracts on a future-equivalent basis). MLF pays the Advisors annual consulting fees equal to 4% of the average month-end net assets. The Partnership trades forward contracts through a Foreign Exchange Service Desk (the "F/X Desk") established by MLIP, that contacts at least two counterparties, along with Merrill Lynch International Bank ("MLIB"), for all of the Partnership's currency trades. All counterparties other than MLIB are unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service fee equal (at current exchange rates) to approximately $5.00 to $12.50 on each purchase or sale of a futures contract- equivalent face amount of a foreign currency on each transaction. No service fees are charged on trades awarded to MLIB (which receives a "bid-ask" spread on such trades). MLIB is awarded trades only if its price (which includes no service fee) is equal to or better than the best price (including the service fee) offered by any of the other counterparties contacted. The F/X Desk trades on the basis of credit lines provided by a Merrill Lynch entity. The Partnership is not required to margin or otherwise guarantee its F/X Desk trading. Certain of the Partnership's currency trades are executed in the form of "exchange of futures for physical" ("EFP") transactions involving MLIB and MLF. In these transactions, a spot or forward (collectively referred to as "cash") currency position is acquired and exchanged for an equivalent futures position on the Chicago Mercantile Exchange's International Monetary Market. In its EFP trading, the Partnership acquires cash currency positions through the F/X Desk in the same manner and on the same terms as in the case of the Partnership's other F/X Desk trading. When the Partnership exchanges these positions for futures, there is a "differential" between the prices of these two positions. This "differential" reflects, in part, the different settlement dates of the cash and the futures contracts as well as prevailing interest rates, but also includes a pricing spread in favor of MLIB or another Merrill Lynch entity. The Partnership's F/X Desk service fee and EFP differential costs have, to date, totaled no more than 0.25 of 1% of the Partnership's average month-end Net Assets. 3. AGREEMENTS The Partnership and the Advisors have each entered into Advisory Agreements. The Advisory Agreements with each Trading Advisor for each series of Units are largely identical. The Advisory Agreements for Series A Units, Series B Units and Series C Units have been renewed and will terminate on January 31, 1997 with the option to renew for up to an additional one-year period. In the case of Trading LLCs, as defined in Note 6, the Trading LLCs entered the Advisory Agreements with the Advisors. Fifteen percent of any New Trading Profit (as defined in the Limited Partnership Agreement) as of the end of each calendar quarter is 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 during a calendar quarter, to the extent of 15% of any New Trading Profits attributable to such Units. - 7 - 4. INCOME/(LOSS) PER SERIES The profit and loss of the Series A, Series B and Series C Units for the years ended December 31, 1996, 1995 and 1994 is as follows:
Series A Series B ------------------------------------- -------------------------------------- 1996 1995 1994 1996 1995 1994 REVENUES: Trading profit (loss): Realized $2,029,650 $5,237,341 $ 545,961 $4,349,607 $11,857,130 $ 1,596,784 Change in unrealized (382,321) (147,478) (415,175) (877,666) (317,074) (1,228,091) ---------- ---------- ----------- ---------- ----------- ----------- Total trading results 1,647,329 5,089,863 130,786 3,471,941 11,540,056 368,693 Interest income (Note 2) 417,739 636,781 414,937 920,755 1,431,186 987,769 ---------- ---------- ----------- ---------- ----------- ----------- Total revenues 2,065,068 5,726,644 545,723 4,392,696 12,971,242 1,356,462 ---------- ---------- ----------- ---------- ----------- ----------- EXPENSES: Brokerage commissions (Note 2) 1,239,114 1,654,078 1,572,088 2,695,105 3,698,343 3,760,979 Allocation of new profit share to trading advisors (Note 26,690 168,968 103,313 44,910 362,058 247,361 3) Administrative fees (Note 2) 26,364 - - 57,343 - - ---------- ---------- ----------- ---------- ----------- ----------- Total expenses 1,292,168 1,823,046 1,675,401 2,797,358 4,060,401 4,008,340 ---------- ---------- ----------- ---------- ----------- ----------- Income from investments (Note 6) 1,746,113 - - 3,562,401 - - ---------- ---------- ----------- ---------- ----------- ----------- NET INCOME (LOSS) $2,519,013 $3,903,598 $(1,129,678) $5,157,739 $ 8,910,841 $(2,651,878) ========== ========== =========== ========== =========== =========== NET INCOME (LOSS) PER UNIT OF PARTNERSHIP INTEREST: Weighted average number of units outstanding (Note 5) 59,766 67,833 78,366 158,197 186,768 230,166 ---------- ---------- ----------- ---------- ----------- ----------- Net income (loss) per weighted Average General Partner and Limited Partner Unit $41.15 $57.55 $(14.42) $32.60 $47.71 $(11.52) ========== ========== =========== ========== =========== ===========
Series C ------------------------------------------ 1996 1995 1994 ---------- --------- ----------- REVENUES: Trading profit (loss): Realized $2,339,762 6,758,107 $ 1,507,562 Change in unrealized (469,840) (186,566) (1,088,181) ---------- --------- ----------- Total trading results 1,869,922 6,571,541 419,381 Interest income (Note 2) 504,393 795,417 596,124 ---------- --------- ----------- Total revenues 2,374,315 7,366,958 1,015,505 ---------- --------- ----------- EXPENSES: Brokerage commissions (Note 2) 1,472,632 2,060,368 2,384,202 Allocation of new profit share to trading advisors (Note 25,868 198,112 157,828 3) Administrative fees (Note 2) 31,332 - - ---------- --------- ----------- Total expenses 1,529,832 2,258,480 2,542,030 ---------- --------- ----------- Income from investments (Note 6) 1,863,095 - - ---------- --------- ----------- NET INCOME (LOSS) $2,707,578 5,108,478 $(1,526,525) ========== ========= =========== NET INCOME (LOSS) PER UNIT OF PARTNERSHIP INTEREST: Weighted average number of units outstanding (Note 5) 109,912 133,357 187,998 ---------- --------- ----------- Net income (loss) per weighted Average General Partner and Limited Partner Unit $24.63 $38.31 $(8.12) ========== ========= ===========
- 8 - 5. WEIGHTED AVERAGE UNITS The weighted average number of Units outstanding was computed for purposes of disclosing net income per weighted average Unit. The weighted average number of Units outstanding at December 31, 1996, 1995 and 1994 equals the Units outstanding as of such date, adjusted proportionately for Units redeemed based on the respective length of time each was outstanding during the preceding period. 6. INVESTMENTS The Partnership places assets under the management of the Advisors not through opening managed accounts with them but rather through investing in private limited liability companies ("Trading LLCs") sponsored by MLIP. The only members of the Trading LLCs are commodity pools sponsored by MLIP. Each Trading LLC trades under the management of one of the Advisors pursuant to a single strategy and at a uniform degree of leverage. Placing assets with an Advisor through investing in a Trading LLC rather than a managed account has no economic effect on the Partnership, except to the extent that the Partnership benefits from the Advisor not having to allocate trades among a number of different accounts (rather than acquiring a single position for the Trading LLC as a whole). The investments are reflected in the financial statements at fair value based upon the Partnership's interest in each Trading LLC. Fair value is equal to the market value of the net assets of the Trading LLCs. The resulting difference between cost and fair value is reflected on the Statement of Operations as income or loss from investments. At December 31, 1996, the Partnership had an investment in the ML JWH Financial and Metals Portfolio L.L.C. ("JWH LLC") and ML Millburn Global L.L.C. ("Millburn LLC"). - 9 - Total revenues and fees with respect to such investments are set forth as follows:
Admin- Income Total Brokerage istrative Profit from Revenues Commissions Fees Shares Investment --------------- --------------- ----------- --------------- ------------- Series A Units ------------------------- JWH LLC $2,234,606 $ 269,408 $ 5,732 $ 244,358 $1,715,108 Millburn LLC 91,169 56,443 1,201 2,520 31,005 ---------- ---------- ------- ---------- ---------- Total $2,325,775 $ 325,851 $ 6,933 $ 246,878 $1,746,113 ========== ========== ======= ========== ========== Series B Units -------------- JWH LLC $4,566,555 $ 550,526 $11,714 $ 509,549 $3,494,766 Millburn LLC 198,835 123,083 2,619 5,498 67,635 ---------- ---------- ------- ---------- ---------- Total $4,765,390 $ 673,609 $14,333 $ 515,047 $3,562,401 ========== ========== ======= ========== ========== Series C Units -------------- JWH LLC $2,388,921 $ 286,556 $ 6,097 $ 270,114 $1,826,154 Millburn LLC 108,581 67,206 1,430 3,004 36,941 ---------- ---------- ------- ---------- ---------- Total $2,497,502 $ 353,762 $ 7,527 $ 273,118 $1,863,095 ========== ========== ======= ========== ========== Total - All Series ------------------ JWH LLC $9,190,082 $1,106,490 $23,543 $1,024,021 $7,036,028 Millburn LLC 398,585 246,732 5,250 11,022 135,581 ---------- ---------- ------- ---------- ---------- Total $9,588,667 $1,353,222 $28,793 $1,035,043 $7,171,609 ========== ========== ======= ========== ==========
- 10 - 7. FAIR VALUE AND OFF-BALANCE SHEET RISK The Partnership trades futures, options on futures and forward contracts in interest rates, stock indices, currencies and metals. The Partnership's trading results by reporting category for the period January 1, 1996 to November 30, 1996 and the year ended December 31, 1995 were as follows:
Total Trading Results --------------------------------------- 1996 1995 ----------------- ----------------- Interest Rates $5,080,346 $11,532,511 Stock Indices (992,453) 1,146,428 Currencies 2,659,762 12,696,529 Metals 241,537 (2,174,008) ------------------ ------------------ $6,989,192 $23,201,460 ================== ==================
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 market values of the financial instruments or commodities underlying such derivative instruments frequently result in changes in the Partnership's unrealized profit (loss) on such derivative instruments as reflected in the Statements of Financial Condition. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Partnership as well as the volatility and liquidity of the markets in which the derivative instruments are traded. The General Partner has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. The procedures focus primarily on monitoring the trading of the two Advisors, calculating the Net Asset Value of the Advisors' respective Partnership accounts as of the close of business on each day and reviewing outstanding positions for over-concentrations. While the General Partner will not itself intervene in the markets to hedge or diversify the Partnership's market exposure, the General Partner may urge either or both of the Advisors to reallocate positions, or itself reallocate Partnership assets among the Advisors (although typically only as of the end of a month) in an attempt to avoid over-concentrations. However, such interventions are unusual. Except in cases in which it appears that an Advisor has begun to deviate from past practice or trading policies or to be trading erratically, the General Partner's basic risk control procedures consist simply of the ongoing process of Advisor monitoring, with the market risk controls being applied by the Advisors themselves. - 11 - Fair Value ---------- The derivative instruments used in the Partnership's trading activities are marked to market daily with the resulting unrealized profit (loss) recorded in the Statements of Financial Condition and the related profit (loss) reflected in trading revenues in the Statements of Operations. The contract/notional values of open contracts as of December 31, 1995 were as follows (there were no open contracts as of December 31, 1996):
1995 ------------------------------------------------ Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------- ------------------- Interest Rates $301,417,757 $ 81,485,562 Stock Indices 14,903,382 - Currencies 115,918,767 196,448,531 Metals 4,396,075 19,975,248 ------------------ ------------------ $436,635,981 $297,909,341 ================== ==================
Substantially all of the Partnership's derivative instruments outstanding as of December 31, 1995, expired within one year. The contract/notional value of the Partnership's open exchange-traded and non- exchange-traded open derivative instrument positions as of December 31, 1995 were as follows (there were no open contracts as of December 31, 1996):
1995 ------------------------------------------------ Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------- ------------------ Exchange Traded $317,647,209 $ 94,328,735 Non-Exchange Traded 118,988,772 203,580,606 ------------------ ------------------ $436,635,981 $297,909,341 ================== ==================
- 12 - The average fair value of derivative instrument positions which were open as of the end of each calendar month during the period from January 1, 1996 to November 30, 1996 and the year ended December 31, 1995 were as follows:
1996 1995 --------------------------------------------- ---------------------------------------------- Commitment to Commitment to Commitment to Commitment to Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards) ------------------ ------------------- ------------------ ------------------ Interest Rates $237,102,957 $183,615,337 $283,747,133 $ 38,356,816 Stock Indices 13,728,737 6,759,498 11,550,483 6,398,948 Currencies 296,018,497 334,030,991 252,057,126 240,468,554 Metals 18,491,709 29,682,273 10,695,784 24,230,482 ------------------ ------------------ ------------------ ------------------ $565,341,900 $554,088,099 $558,050,526 $309,454,800 ================== ================== ================== ==================
A portion of the amounts indicated as off-balance sheet risk reflects offsetting commitments to purchase and to sell the same derivative instrument on the same date in the future. These commitments are economically offsetting but are not, as a technical matter, offset in the forward market until the settlement date. Credit Risk ----------- The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the- counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may also require margin in the over-the-counter markets. The fair value amounts in the above tables represent the extent of the Partnership's market exposure in the particular class of derivative instrument listed, but not the credit risk associated with counterparty nonperformance. The credit risk associated with these instruments from counterparty nonperformance is the net unrealized profit, if any, included on the Statements of Financial Condition. The Partnership also has credit risk because the sole counterparty or broker with respect to most of the Partnership's assets is MLF. As of December 31, 1995, $19,033,635 of the Partnership's assets, were held in segregated accounts at MLF in accordance with Commodity Futures Trading Commission regulations. - 13 - The gross unrealized profit and net unrealized profit (loss) on the Partnership's open derivative instrument positions as of December 31, 1995 were as follows (there were no open contracts as of December 31, 1996):
1995 ---------------------------------------- Gross Unrealized Net Unrealized Profit Profit (Loss) ---------------- ---------------- Exchange Traded $3,112,617 $ 2,803,973 Non-Exchange Traded 1,175,189 (1,043,755) ---------------- ---------------- $4,287,806 $ 1,760,218 ================ ================
The Partnership controls credit risk by dealing almost exclusively with Merrill Lynch entities as brokers and counterparties. The Partnership, through its normal course of business, enters into various contracts with MLF acting as its commodity broker. Pursuant to the brokerage arrangement with MLF, to the extent that such trading results in receivables from and payables to MLF, these receivables and payables are offset and reported as a net receivable or payable. 8. SUBSEQUENT EVENT Effective February 1, 1997, the Partnership's brokerage commission percentage was reduced to .792 of 1% (a 9.50% annual rate) of the Partnership's month- end assets. To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. James M. Bernard Chief Financial Officer Merrill Lynch Investment Partners Inc. General Partner of John W. Henry & Co./Millburn L.P. - 14 - EX-13.01(A) 3 1996 ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. EXHIBIT 13.01(a) ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company) Financial Statements for the Period from October 1, 1996 (Commencement of Operations) to December 31, 1996 and Independent Auditors' Report 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 PERIOD FROM OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996: Statement of Financial Condition 2 Statement of Income 3 Statement of Changes in Members' Capital 4 Notes to Financial Statements 5-11 INDEPENDENT AUDITORS' REPORT - ---------------------------- To the Members of ML JWH Financial and Metals Portfolio L.L.C.: We have audited the accompanying statement of financial condition of ML JWH Financial and Metals Portfolio L.L.C. (a Delaware limited liability company; the "Company") as of December 31, 1996, and the related statements of income and of changes in members' capital for the period from October 1, 1996 (commencement of operations) to December 31, 1996. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides 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, 1996, and the results of its operations for the period from October 1, 1996 (commencement of operations) to December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York February 3, 1997 ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company) STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 1996 - -------------------------------------------------------------------------------- ASSETS - ------ Accrued interest (Note 2) $ 306,073 Equity in commodity futures trading accounts: Cash and option premiums 79,820,720 Net unrealized gain on open contracts 698,571 ---------- TOTAL $80,825,364 =========== LIABILITIES AND MEMBERS' CAPITAL - -------------------------------- LIABILITIES: Withdrawals payable $16,819,986 Profit shares payable (Note 3) 2,313,537 Brokerage commissions payable (Note 2) 697,868 Administrative fees payable (Note 2) 16,819 ---------- Total liabilities 19,848,210 ---------- MEMBERS' CAPITAL: Voting Members 53,977,573 Non-voting Members 6,999,581 ---------- Total Members' capital 60,977,154 ---------- TOTAL $80,825,364 =========== See notes to financial statements. -2- ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company) STATEMENT OF INCOME FOR THE PERIOD FROM OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 - -------------------------------------------------------------------------------- REVENUES: Trading profit (loss): Realized $17,860,411 Change in unrealized 698,571 ----------- Total trading results 18,558,982 Interest income (Note 2) 806,967 ----------- Total revenues 19,365,949 ----------- EXPENSES: Profit shares (Note 3) 2,313,537 Brokerage commissions (Note 2) 2,063,021 Administrative fees (Note 2) 49,703 ---------- Total expenses 4,426,261 ---------- NET INCOME $14,939,688 ============ See notes to financial statements. -3- ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company) STATEMENT OF CHANGES IN MEMBERS' CAPITAL FOR THE PERIOD FROM OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 - -------------------------------------------------------------------------------- Voting Non-Voting Members Members Total Initial Contributions $ 56,790,791 $ 7,080,836 $ 63,871,627 Contributions 1,212,016 2,017 1,214,033 Withdrawals (17,295,297) (1,752,897) (19,048,194) Net Income 13,270,063 1,669,625 14,939,688 ------------ ----------- ------------ MEMBERS' CAPITAL, DECEMBER 31, 1996 $ 53,977,573 $ 6,999,581 $ 60,977,154 ============ =========== ============ See notes to financial statements. -4- ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C. (A Delaware Limited Liability Company) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 - -------------------------------------------------------------------------------- 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. Merrill Lynch Investment Partners Inc. (formerly, ML Futures 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. (one or more of Merrill Lynch & Co., Inc. and its affiliates being hereinafter referred to as "Merrill Lynch"), has been delegated administrative authority over the Company, and Merrill Lynch Futures Inc. ("MLF"), also an affiliate of Merrill Lynch, is its commodity broker. The Company has authorized two classes of Membership Interests: Non-Voting Membership Capital Accounts and Voting Membership Capital Accounts ("Members"). These two classes of Membership Capital Accounts have common economic interests in the Company, but the Non-Voting Membership Capital Accounts, which are held by non-United States companies, shall not participate in any respect in the management of the Company, or engage, directly or indirectly, in the participation in or control of all or any portion of the business activities or affairs of the Company, such management being vested solely in the Voting Membership Capital Accounts, which are held by United States limited partnerships. The Voting Members, acting as Members without any "manager," mutually dominate and 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. The Members of the Company, each of which is a "commodity pool" sponsored by MLIP, share in the trading profit (loss) and interest income of the Company in proportion to their respective capital accounts in it. John W. Henry & Company, Inc. (the "Advisor" or "JWH") has been delegated trading authority over the assets of the Company. Estimates --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition -------------------- Commodity futures, options on futures, and forward contract transactions are recorded on the trade date and open contracts are reflected in net unrealized profit (loss) on open contracts in the Statement of Financial Condition at the difference between the original contract amount and the fair value. The -5- change in net unrealized profit (loss) on open contracts from one period to the next is reflected in change in unrealized in the Statement of Income. Fair value is based on quoted market prices on the exchange or market on which the contract is traded. Organization Costs ------------------ MLIP paid all organizational costs relating to the Company without direct reimbursement from the Company or any Member. These organizational costs should be indirectly reimbursed to Merrill Lynch as MLF's costs for executing the Company's trades should, over time, be reduced by the Members consolidating their respective JWH trading accounts in 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 distribution (except upon withdrawals) had been made by the Company to any Member as of December 31, 1996. Withdrawals ----------- A Member may withdraw some or all of such Member's Capital at Net Asset Value as of the close of business on any business day. There are no withdrawal fees or charges. Dissolution of the Company -------------------------- 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. Were the Advisor to cease to manage the Company's account, the Company would dissolve. 2. RELATED PARTY TRANSACTIONS The Company's U.S. dollar-denominated assets are held at MLF in cash or short-term Treasury bills. The Company receives all interest paid on such Treasury bills. On the cash held at MLF, the Company receives interest from Merrill Lynch at rates ranging from 0.50 of 1% per annum below the prevailing 91-day Treasury bill rate up to the full prevailing 91-day Treasury bill rate. Merrill Lynch may derive certain economic benefits, in excess of the interest which Merrill Lynch pays to the Company, from possession of such cash. Merrill Lynch credits the Company with interest on the Company's non-U.S. dollar-denominated available assets based on local short-term rates. 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, 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 -6- commissions, fees and expenses in respect of its trading as allocable to the various different Members). Such commissions, fees 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. Such rates currently range from .729 of 1% (an 8.75% annual rate) to .979 of 1% (an 11.75% 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 of charges. The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of each Member's month-end assets. 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. The Company trades forward contracts through a Foreign Exchange Service Desk (the "F/X Desk") established by MLIP that contacts at least two counterparties along with Merrill Lynch International Bank ("MLIB") for all of the Company's currency transactions. All counterparties other than MLIB are unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service fee equal (at current exchange rates) to approximately $5.00 to $12.50 on each purchase or sale of a futures-contract equivalent face amount of a foreign currency. No service fee is charged on trades awarded to MLIB (which receives a "bid-ask" spread on such trades). MLIB is awarded trades only if its price (which includes no service fee) is equal to or better than the best price (including the service charge) offered by any of the other counterparties contacted. The F/X Desk trades on the basis of credit lines provided by a Merrill Lynch entity. The Company is not required to margin or otherwise guarantee its F/X Desk trading. Certain of the Company's currency trades are executed in the form of "exchange of futures for physical" ("EFP") transactions involving MLIB and MLF. In these transactions, a spot or forward (collectively referred to as "cash") currency position is acquired and exchanged for an equivalent futures position on the Chicago Mercantile Exchange's International Monetary Market ("IMM"). In its EFP trading with Merrill Lynch, the Company acquires cash currency positions through the F/X Desk in the same manner and on the same terms as in the case of the Company's other F/X Desk trading. When the Company exchanges these positions for futures, there is a "differential" between the prices of these two positions. This "differential" reflects, in part, the different settlement dates of the cash and the futures contracts as well as prevailing interest rates, but also includes a pricing spread in favor of MLIB or another Merrill Lynch entity. The Company's F/X Desk service fee and EFP differential costs have, to date totaled no more than .25 of 1% per annum of the Company's average month-end Net Assets. 3. ADVISORY AGREEMENT The Company and the Advisor have entered into an Advisory Agreement. This Advisory Agreement terminates one year after it is entered into, subject to certain renewal rights exercisable by the Company. The Advisor determines the commodity futures and forward contact trades to be made on behalf of the Company, subject to certain Company trading policies and to certain rights reserved by MLIP. -7- The Company pays to JWH a quarterly Profit Share equal to 15% of any New Trading Profit, as defined, attributable to each Member's Capital Account in the Company. Profit Shares, which are calculated separately in respect of each Member's Capital Account, are determined as of the end of each calendar quarter and shall also be paid to JWH 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 The Company trades futures, options on futures and forward contracts on interest rates, stock indices, commodities, currencies, and metals. The Company's trading results by reporting category were as follows: 1996 Total Trading Results ------------------ Interest Rates $10,439,465 Stock Indices (371,033) Currencies 5,889,115 Metals 2,601,435 ----------------- $18,558,982 ================= 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 market values of the underlying financial instruments or commodities underlying such derivative instruments frequently result in changes in the Company's unrealized profit (loss) on such derivative instruments as reflected in the Statement 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 the derivative instruments are traded. MLIP, which monitors the trading of the Company in MLIP's capacity as the General Partner of the Voting Members and Sponsor of the Non-Voting Members, has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. The procedures focus primarily on monitoring the trading of the Advisor, 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 will not itself intervene in the markets to hedge or diversify the Company's market exposure, MLIP may consult with the Advisor concerning the possibility of the Advisor reducing trading leverage or market concentrations. However, such interventions are unusual. Except in cases in which it appears that JWH 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 monitoring JWH with the market risk controls being applied by JWH. Fair Value The derivative instruments used in the Company's trading activities are marked to market daily with the resulting unrealized profit (loss) recorded in the Statement of Financial Condition and the related profit (loss) reflected in trading revenues in the Statement of Income. -8- The contract/notional values of open contracts as of December 31, 1996 were as follows: December 31, 1996 -------------------------------------- Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------ ------------------ Interest Rates $171,304,600 $ 13,669,055 Currencies 119,088,247 96,734,685 Metals - 33,126,830 ------------------- ------------------- $290,392,847 $143,530,570 =================== =================== Substantially all of the Company's derivative instruments outstanding as of December 31, 1996, expire within one year. The contract/notional value of the Company's exchange-traded and non-exchange traded open derivative instrument positions as of December 31, 1996 were as follows: Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------ ------------------ Exchange Traded $171,304,600 $ 46,795,885 Non- Exchange Traded 119,088,247 96,734,685 ------------------- ------------------- $290,392,847 $143,530,570 =================== =================== The average fair value of the Company's derivative instruments positions which were open as of the end of each calendar month during the period October 1, 1996 through December 31, 1996 were as follows: Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------ ------------------ Interest Rates $591,299,377 $127,295,586 Currencies 297,652,663 275,733,802 Metals 14,845,327 75,877,301 ----------------- ----------------- $903,797,367 $478,906,689 ================= ================= A portion of the amounts indicated as off-balance sheet risk reflects offsetting commitments to purchase and sell the same derivative instrument on the same date in the future. These commitments are economically offsetting but are not, as a technical matter, offset in the forward market until the settlement date. -9- Credit Risk The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the- counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may require margin in the over-the-counter markets. The fair value amounts in the above tables represent the extent of the Company's market exposure in the particular class of derivative instrument listed, but not the credit risk associated with counterparty nonperformance. The credit risk associated with these instruments from counterparty nonperformance is the net unrealized profit, if any, included on the Statement of Financial Condition. The Company also has credit risk because the sole counterparty or broker with respect to most of the Company's assets is MLF. As of December 31, 1996 $42,525,678 of the Company's assets were held in segregated accounts at MLF in accordance with Commodity Futures Trading Commission regulations. The gross unrealized profit and net unrealized profit on the Company's open derivative instrument positions as of December 31, 1996 were as follows: Gross Unrealized Net Unrealized Profit Profit ----------------- ------------------- Exchange Traded $ 873,657 $ 39,049 Non- Exchange Traded 1,962,810 659,522 ----------------- ------------------- $2,836,467 $698,571 ================= =================== The Company controls credit risk by dealing almost exclusively with Merrill Lynch entities as brokers and counterparties. The Company, through its normal course of business, enters into various contracts with MLF acting as its commodity broker. Pursuant to the brokerage arrangement with MLF, to the extent that such trading results in receivables from and payables to MLF, these receivables and payables are offset and reported as a net receivable or payable. -10- To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. James M. Bernard Chief Financial Officer Merrill Lynch Investment Partners Inc. Commodity Pool Operator of ML JWH Financial and Metals Portfolio L.L.C. EX-13.01(B) 4 1996 ML MILBURN GL. OBAL. ANNUAL REPORT EXHIBIT 13.01(b) ML MILLBURN GLOBAL L.L.C. (A DELAWARE LIMITED LIABILITY COMPANY) Financial Statements for the Period from December 2, 1996 (Commencement of Operations) to December 31, 1996 and Independent Auditors' Report ML MILLBURN GLOBAL L.L.C.. (A Delaware Limited Liability Company) TABLE OF CONTENTS - -------------------------------------------------------- Page ---- INDEPENDENT AUDITORS' REPORT 1 FINANCIAL STATEMENTS FOR THE PERIOD FROM DECEMBER 2, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996: Statement of Financial Condition 2 Statement of Income 3 Statement of Changes in Members' Capital 4 Notes to Financial Statements 5-11 INDEPENDENT AUDITORS' REPORT - ---------------------------- To the Members of ML Millburn Global L.L.C.: We have audited the accompanying statement of financial condition of ML Millburn Global L.L.C. (a Delaware limited liability company; the "Company") as of December 31, 1996, and the related statements of income and of changes in members' capital for the period from December 2, 1996 (commencement of operations) to December 31, 1996. 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 audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the 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 audit provides 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, 1996, and the results of its operations for the period from December 2, 1996 (commencement of operations) to December 31, 1996 in conformity with generally accepted accounting principles. Deloitte & Touche LLP New York, New York February 3, 1997 ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) STATEMENT OF FINANCIAL CONDITION DECEMBER 31, 1996 - --------------------------------------------------------------------------------
ASSETS - ------ Accrued interest (Note 2) $ 82,673 Equity in commodity futures trading accounts: Cash and option premiums 27,521,635 Net unrealized profit on open contracts 916,519 -------------------- TOTAL $28,520,827 ==================== LIABILITIES AND MEMBERS' CAPITAL - -------------------------------- LIABILITIES: Withdrawals payable $ 383,590 Brokerage commissions payable (Note 2) 270,878 Profit shares payable (Note 3) 135,593 Administrative fees payable (Note 2) 5,940 -------------------- Total liabilities 796,001 -------------------- MEMBERS' CAPITAL: Voting Members 33,592,186 Receivable from member (5,867,360) -------------------- Total Members' capital 27,724,826 -------------------- TOTAL $28,520,827 ==================== See notes to financial statements.
-2- ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) STATEMENT OF INCOME FOR THE PERIOD FROM DECEMBER 2, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 - --------------------------------------------------------------------------------
REVENUES: Trading profit (loss): Realized $(548,574) Change in unrealized 916,519 ----------------- Total trading results 367,945 Interest income (Note 2) 82,674 ----------------- Total revenues 450,619 ----------------- EXPENSES: Brokerage commissions (Note 2) 270,878 Profit shares (Note 3) 14,552 Administrative fees (Note 2) 5,940 ----------------- Total expenses 291,370 ----------------- NET INCOME $ 159,249 =================
See notes to financial statements. -3- ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) STATEMENT OF CHANGES IN MEMBER'S CAPITAL FOR THE PERIOD FROM DECEMBER 2, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 - --------------------------------------------------------------------------------
Voting Members ----------------- Initial Contributions $27,949,167 Contributions 5,867,360 Receivable from Member (5,867,360) Withdrawals (383,590) Net Income 159,249 ----------------- MEMBERS' CAPITAL, DECEMBER 31, 1996 $27,724,826 =================
See notes to financial statements. -4- ML MILLBURN GLOBAL L.L.C. (A Delaware Limited Liability Company) NOTES TO FINANCIAL STATEMENTS FOR THE PERIOD FROM DECEMBER 2, 1996 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996 - -------------------------------------------------------------------------------- 1. SUMMARY OF SIGNIFICANT ACCOUNTING 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. 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. (one or more of Merrill Lynch & Co., Inc. and its affiliates being hereinafter referred to as "Merrill Lynch"), has been delegated administrative authority over the Company, and Merrill Lynch Futures Inc. ("MLF"), also an affiliate of Merrill Lynch, is its commodity broker. The Company has authorized two classes of Membership Interests: Non-Voting Membership Capital Accounts and Voting Membership Capital Accounts ("Members"). These two classes of Membership Capital Accounts have common economic interests in the Company, but the Non-Voting Membership Capital Accounts, which will be held by non-United States companies, shall not participate in any respect in the management of the Company, or engage, directly or indirectly, in the participation in or control of all or any portion of the business activities or affairs of the Company, such management being vested solely in the Voting Membership Capital Accounts, which are held by United States limited partnerships. The Voting Members, acting as Members without any "manager," mutually dominate and 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 Millburn and the administrative authority vested in and delegated to MLIP. The Members of the Company, each of which is a "commodity pool" sponsored by MLIP, share in the trading profit (loss) and interest income of the Company in proportion to their respective capital accounts trading in it. Millburn Ridgefield Corp. (the "Advisor" or "Millburn") has been delegated trading authority over the assets of the Company. Estimates --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Revenue Recognition ------------------- Commodity futures, options on futures, and forward contract transactions are recorded on the trade date and open contracts are reflected in net unrealized profit (loss) on open contracts in the Statement of Financial Condition at the difference between the original contract amount and the fair value. The -5- change in net unrealized profit (loss) on open contracts from one period to the next is reflected in change in unrealized in the Statement of Income. Fair value is based on quoted market prices on the exchange or market on which the contract is traded. Organization Costs ------------------ MLIP paid all organizational costs relating to the Company without direct reimbursement from the Company or any Member. These organizational costs should be indirectly reimbursed to Merrill Lynch as MLF's costs for executing the Company's trades should, over time, be reduced by the Members' consolidating their respective Millburn trading accounts in 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 Distribution (except upon withdrawals) had been made by the Company to any Member as of December 31, 1996. Withdrawals ----------- A Member may withdraw some or all of such Member's capital at Net Asset Value as of the close of business on any business day. There are no withdrawal fees or charges. Dissolution of the Company -------------------------- 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. Were the Advisor to cease to manage the Company's account, the Company would dissolve. 2. RELATED PARTY TRANSACTIONS The Company's U.S. dollar-denominated assets are held at MLF in cash or short-term Treasury bills. The Company receives all interest paid on such Treasury bills. On the cash held at MLF, the Company receives interest from Merrill Lynch at rates ranging from 0.50 of 1% per annum below the prevailing 91-day Treasury bill rate up to the full prevailing 91-day Treasury bill rate. Merrill Lynch may derive certain economic benefits, in excess of the interest which Merrill Lynch pays to the Company, from possession of such cash. Merrill Lynch credits the Company with interest on the Company's non-U.S. dollar-denominated available assets based on local short-term rates. 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, 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 -6- commissions, fees and expenses in respect of its trading as allocable to the various different Members). Such commissions, fees 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. Such rates currently range from .729 of 1% (an 8.75% annual rate) to .979 of 1% (an 11.75% 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 share or other fees or charges. The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of each Member's month-end assets. MLF pays the Advisor an annual consulting fee of 4% of the Company's average month-end assets, after reduction for a portion of brokerage commission. Beginning January 1, 1997 the consulting fee paid by MLF to the Advisor will be reduced to 2% per annum. The Company trades forward contracts through a Foreign Exchange Service Desk (the "F/X Desk") established by MLIP that contacts at least two counterparties along with Merrill Lynch International Bank ("MLIB") for all of the Company's currency transactions. All counterparties other than MLIB are unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service fee equal (at current exchange rates) to approximately $5.00 to $12.50 on each purchase or sale of a futures-contract equivalent face amount of a foreign currency. No service fee is charged on trades awarded to MLIB (which receives a "bid-ask" spread on such trades). MLIB is awarded trades only if its price (which includes no service fee) is equal to or better than the best price (including the service charge) offered by any of the other counterparties contacted. The F/X Desk trades on the basis of credit lines provided by a Merrill Lynch entity. The Company is not required to margin or otherwise guarantee its F/X Desk trading. Certain of the Company's currency trades are executed in the form of "exchange of futures for physical" ("EFP") transactions involving MLIB and MLF. In these transactions, a spot or forward (collectively referred to as "cash") currency position is acquired and exchanged for an equivalent futures position on the Chicago Mercantile Exchange's International Monetary Market ("IMM"). In its EFP trading with Merrill Lynch, the Company acquires cash currency positions through the F/X Desk in the same manner and on the same terms as in the case of the Company's other F/X Desk trading. When the Company exchanges these positions for futures, there is a "differential" between the prices of these two positions. This "differential" reflects, in part, the different settlement dates of the cash and the futures contracts as well as prevailing interest rates, but also includes a pricing spread in favor of MLIB or another Merrill Lynch entity. The Company's F/X Desk service fee and EFP differential costs have, to date totaled no more than .25 of 1% per annum of the Company's average month-end Net Assets. 3. ADVISORY AGREEMENT The Company and the Advisor have entered into an Advisory Agreement. This Advisory Agreement terminates one year after it is entered into, subject to certain renewal rights exercisable by the Company. The Advisor determines the commodity futures and forward contact trades to be made on behalf of the Company, subject to certain Company trading policies and to certain rights reserved by MLIP. -7- The Company pays to Millburn a quarterly Profit Share equal to 20% of any New Trading Profit, as defined, attributable to each Member's Capital Account in the Company. Profit Shares, which are calculated separately in respect of each Member's Capital Account, are determined as of the end of each calendar quarter and shall also be 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 The Company trades futures, options on futures and forward contracts on interest rates, stock indices, currencies and metals. The Company's trading results by reporting category were as follows: 1996 Total Trading Results ------------------------- Interest Rates $ (968,118) Stock Indices 265,546 Currencies 1,028,590 Metals 41,927 ------------------------- $ 367,945 ========================= 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 market values of the underlying financial instruments or commodities underlying such derivative instruments frequently result in changes in the Company's unrealized profit (loss) on such derivative instruments as reflected in the Statement 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 the derivative instruments are traded. MLIP, which monitors the trading of the Company in MLIP's capacity as the General Partner of the Voting Members, has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. The procedures focus primarily on monitoring the trading of the Advisor, 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 will not itself intervene in the markets to hedge or diversify the Company's market exposure, MLIP may consult with the Advisor concerning the possibility of the Advisor reducing trading leverage or market concentrations. However, such interventions are unusual. Except in cases in which it appears that the 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 monitoring the Millburn with the market risk controls being applied by the Millburn. -8- Fair Value The derivative instruments used in the Company's trading activities are marked to market daily with the resulting unrealized profit (loss) recorded in the Statement of Financial Condition and the related profit (loss) reflected in trading revenues in the Statement of Income. The contract/notional values of open contracts as of December 31, 1996 were as follows: December 31, 1996 ----------------------------------------------- Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------ ------------------ Interest Rates $104,423,803 $ 26,267,954 Stock Indices 2,233,500 - Currencies 140,452,466 244,633,536 Metals 6,379,654 12,694,954 ------------------- ------------------- $253,489,423 $283,596,444 =================== =================== A portion of the amounts indicated as off-balance sheet risk reflects offsetting commitments to purchase and sell the same derivative instrument on the same date in the future. These commitments are economically offsetting but are not, as a technical matter, offset in the forward market until the settlement date. Substantially all of the Company's derivative instruments outstanding as of December 31, 1996, expire within one year. The contract/notional value of the Company's exchange-traded and non-exchange traded open derivative instrument positions as of December 31, 1996 were as follows: Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------ ------------------ Exchange Traded $111,666,188 $ 32,583,254 Non-Exchange Traded 141,823,235 251,013,190 ------------------ -------------- $253,489,423 $283,596,444 =================== =============== -9- The average fair value of the Company's derivative instruments positions which were open as of the end of each calendar month during the period December 2, 1996 through December 31, 1996 were as follows: Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) ------------------ ------------------ Interest Rates $104,423,803 $ 26,267,954 Stock Indices 2,233,500 - Currencies 140,452,466 244,633,536 Metals 6,379,654 12,694,954 ------------------- ------------------- $253,489,423 $283,596,444 =================== =================== Credit Risk The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the- counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may require margin in the over-the-counter markets. The fair value amounts in the above tables represent the extent of the Company's market exposure in the particular class of derivative instrument listed, but not the credit risk associated with counterparty nonperformance. The credit risk associated with these instruments from counterparty nonperformance is the net unrealized profit, if any, included on the Statement of Financial Condition. The Company also has credit risk because the sole counterparty or broker with respect to most of the Company's assets is MLF. As of December 31, 1996 $20,268,336 of the Company's assets were held in segregated accounts at MLF in accordance with Commodity Futures Trading Commission regulations. The gross unrealized profit and net unrealized profit on the Company's open derivative instrument positions as of December 31, 1996 were as follows: Gross Unrealized Net Unrealized Profit Profit ------------------ -------------- Exchange Traded $ 507,869 $196,239 Non-Exchange Traded 2,584,134 720,280 ----------------- ----------------- $3,092,003 $916,519 ================= ================== The Company controls credit risk by dealing almost exclusively with Merrill Lynch entities as brokers and counterparties. -10- The Company, through its normal course of business, enters into various contracts with MLF acting as its commodity broker. Pursuant to the brokerage arrangement with MLF, to the extent that such trading results in receivables from and payables to MLF, these receivables and payables are offset and reported as a net receivable or payable. To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. James M. Bernard Chief Financial Officer Merrill Lynch Investment Partners Inc. Commodity Pool Operator of ML Millburn Global L.L.C. -----END PRIVACY-ENHANCED MESSAGE-----