-----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, AgDWqzHW7RAAoHC5NVUp0pB7qZ3KQSHkJz9gHAmDQNZsfhi0PvWMYo04FfYpYIKs U/f+yNgfYnlyJj+N8HYnlg== 0000950130-98-001495.txt : 19980330 0000950130-98-001495.hdr.sgml : 19980330 ACCESSION NUMBER: 0000950130-98-001495 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980327 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 SEC ACT: SEC FILE NUMBER: 000-18215 FILM NUMBER: 98575504 BUSINESS ADDRESS: STREET 1: WORLD FINANCIAL CTR SOUTH TWR-6TH FLR STREET 2: C/O ML FUTURE INVESTMENT PARTNERS INCAGE CITY: MERRILL LYNCH WORLD STATE: NY ZIP: 10080 BUSINESS PHONE: 2122364161 MAIL ADDRESS: STREET 1: MERRILL LYNCH & CO STREET 2: WORLD FINANCIAL CTR, SOUTH TOWER, 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 10-K405 1 FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (x) Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 1997 or ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 0-18215 JOHN W. HENRY & CO./MILLBURN L.P. --------------------------------- (Exact name of registrant as specified in its charter) DELAWARE 06-1287586 - ------------------------------- ------------------- (State 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) 236-5662 -------------- 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) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ----- ----- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant: the registrant is a limited partnership; as of February 1, 1998, limited partnership units with an aggregate value of $61,731,534 were outstanding and held by non-affiliates. DOCUMENTS INCORPORATED BY REFERENCE The registrant's "1997 Annual Report and Independent Auditors' Report," the annual report to security holders for the fiscal year ended December 31, 1997, is incorporated by reference into Part II, Item 8, and Part IV hereof and filed as an Exhibit herewith. JOHN W. HENRY & CO./MILLBURN L.P. ANNUAL REPORT FOR 1997 ON FORM 10-K Table of Contents ----------------- PART I PAGE ------ ---- Item 1. Business........................................... 1 Item 2. Properties......................................... 8 Item 3. Legal Proceedings.................................. 8 Item 4. Submission of Matters to a Vote of Security Holders 8 PART II ------- Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.............................. 9 Item 6. Selected Financial Data.......................... 10 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.............. 15 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................... 18 Item 8. Financial Statements and Supplementary Data...... 18 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.............. 18 PART III -------- Item 10. Directors and Executive Officers of the Registrant....................................... 19 Item 11. Executive Compensation........................... 21 Item 12. Security Ownership of Certain Beneficial Owners and Management................................... 21 Item 13. Certain Relationships and Related Transactions... 22 PART IV ------- Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................................... 23 -ii- 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 second 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 Fund's objective is achieving, through speculative trading, substantial capital appreciation over time. The proceeds of each of the three series of Units were each initially allocated equally among the Partnership's two trading advisors -- Millburn Ridgefield Corporation ("Millburn") and John W. Henry & Company, Inc. ("JWH") (collectively, the "Trading Advisors" or the "Advisors"). As of December 31, 1997; 49% and 51% of the Series A Units capital was allocated to Millburn and JWH, respectively; 49% and 51% of the Series B Units capital; and 49% and 51% 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 as "Merrill Lynch"). The initial capitalization of the Fund was $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, 1997, Units with an aggregate Net Asset Value of $102,136,315 (not including a dividend distribution of $2,345,180 for Series A Unitholders on November 30, 1990) had been redeemed including December 31, 1997 redemptions which were not actually paid out until January 1998). As of December 31, 1997, the aggregate capitalization of the Fund was $63,024,164, the total capitalization of the Series A, Series B and Series C Units was $14,709,078, $31,679,478 and $16,635,608, 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 $284.11 (excluding a $20 per Series A Unit distribution paid as of November 30, 1990), $230.87 and $179.92, respectively. As of December 31, 1997, the Fund had 455 Series A, 1,407 Series B and 720 Series C Limited Partners. The highest month-end Net Asset Value per Series A Unit through December 31, 1997 was $284.11 (December, 1997) and the lowest $100.31(May, 1990); the highest month-end Net Asset Value per Series B Unit through December 31, 1997 was $230.87 (December, 1997) and the lowest $91.20 (May, 1992); the highest month-end Net Asset Value per Series C Unit through December 31, 1997 was $179.92 (December, 1997) 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 substantial capital appreciation. 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 trades the Partnership's assets allocated to it in four market sectors -- interest rates, stock indices, currencies and metals -- pursuant to its Financial and Metals Program. Millburn trades the Partnership's assets allocated to it pursuant to its currency program, which concentrates exclusively on currency trading, primarily in the interbank market. MLIP may from time to time direct certain individual Advisors to manage their Fund accounts as if they were managing up to 50% more equity than the actual capital allocated to them. This additional leverage is subject to the condition that the Fund as a whole will not trade as if it had in excess of 20% more equity than actual capital. One of the objectives of the Fund is to provide diversification to a limited portion of the risk segment of the Limited Partners' portfolios. Commodity pool performance has historically often demonstrated a low degree of performance correlation with traditional stock and bond holdings. Since it began trading, the Fund's returns have, in fact, frequently been significantly non-correlated (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 markets. 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 -2- ultimate counterparties, which include Merrill Lynch International 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. 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. 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; and (b) 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 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 -3- 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. 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. The Fund does not earn interest on foreign margin deposits provided by MLF. The Fund does, however, earn interest on its non-U.S. dollar Available Assets. Specifically, the Fund is credited by Merrill Lynch with interest at 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. ------------------------------- The General Partner has determined that there may have been a miscalculation in the interest credited to the Fund for a period prior to November 1996. Accordingly, Merrill Lynch has credited certain amounts to the Fund's investors (directly, not by credit to the Fund itself). For current Merrill Lynch clients, this credit, which includes compounded interest, appeared on their December 1997 account statements. The total amount of the adjustment is approximately $779,000 for Series A Units, $1,739,000 for Series B Units and $773,000 for Series C Units. 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 1995, 1996 and 1997, the Series A Units' -------------- average month-end Net Assets equaled: 1995 $13,360,144, and the Series recognized gross trading gains of $5,089,863 or 38.10% of such average month-end Net Assets; 1996 $12,941,058, and the Series recognized gross trading gains of $1,647,329 or 12.73% of such average month-end Net Assets; and 1997 $14,483,904, and the Series recognized a gain from investments of $1,727,430 or 11.93% of average month-end Net Assets; which resulted in a 12.50% increase in the Net Asset Value per Unit. Series B Units. During 1995, 1996 and 1997, the Series B Units' -------------- average month-end Net Assets equalled: -4- 1995 $24,425,858, and the Series recognized gross trading gains of $11,540,056 or 47.25% of such average month-end Net Assets; 1996 $27,873,607, and the Series recognized gross trading gains of $3,471,941 or 12.46% of such average month-end Net Assets; and 1997 $31,251,336, and the Series recognized a gain from investments of $3,689,429 or 11.81% of average month-end Net Assets; which resulted in a 12.47% increase in the Net Asset Value per Unit. Series C Units. During 1995, 1996 and 1997, the Series C Units' -------------- average month-end Net Asset equaled: 1995 $16,554,503, and the Series recognized gross trading gains of $6,571,541; 1996 $15,096,182, and the Series recognized gross trading gains of $1,869,922 or 12.39% of such average month-end Net Assets; and 1997 $16,499,268, and the Series recognized a gain from Investments of $1,940,829 or 11.76% of average month-end Net Assets. CHARGES The following table summarizes the charges incurred by the Fund during 1995, 1996 and 1997.
1995 1996 1997 -------------------- ------------------- ----------------- % OF % OF % OF AVERAGE AVERAGE AVERAGE DOLLAR MONTH-END DOLLAR MONTH-END DOLLAR MONTH-END COST AMOUNT NET ASSETS AMOUNT NET ASSETS AMOUNT NET ASSETS ---- ------ ---------- ------ ---------- ------ ---------- Brokerage $7,412,789 13.64% $5,406,851 9.67% - - Commissions Administrative - - 115,039 0.21 - - Fees Profit Shares 729,138 1.34 97,468 0.17 - - ------- ---- ------ ---- ------ ----------- Total $8,141,927 14.98% $5,619,358 10.05% - - ========== ===== ========== ===== ====== ===========
____________________________ The foregoing table does not reflect the bid-ask spreads paid by the Fund on its forward trading, or the benefits which may be derived by Merrill Lynch from the deposit of certain of the Fund's U.S. dollar available assets in offset accounts. See Item 1(c), "Narrative Description of Business -- Use of Proceeds and Interest Income." -5- The Fund's average month-end Net Assets during 1995, 1996 and 1997 equaled $54,340,505, $55,910,847 , and $62,234,507, respectively. During 1995, 1996 and 1997, the Fund earned $2,863,384, $1,842,887 and $0 in interest income, or approximately 5.27%, 3.30%, and 0% of the Fund's average month-end Net Assets. As of January 1, 1996, the 11.75% per annum Brokerage Commissions paid by the Fund to MLF were recharacterized as 9.75% per annum Brokerage Commissions and a .25% per annum Administrative Fee paid by the Fund to MLIP. This recharacterization had no economic effect on the Fund. The significant variations in charges is primarily due to placing assets in Trading LLCs (See Item 7). ______________________________ DESCRIPTION OF CURRENT CHARGES RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT - --------- ----------------- ----------------- MLF Brokerage Commissions A flat-rate monthly commission of 0.7917 of 1% of the Fund's month-end assets (a 9.50% annual rate). During 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 $207 and $143, respectively. The round- turn rates for 1995 and 1996 reflect Brokerage Commissions at the rate of 11.75% per annum. As of February 1, 1997, this rate was reduced to 9.50%. 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 The Fund pays MLIP a monthly Administrative Fee equal to 0.020833 of 1% of the Fund's month-end assets (0.25% annually). MLIP pays all of the Fund's routine administrative costs. MLIB 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 Counterparts with which the F/X Desk deals also each receive bid-ask spreads on the forward trades executed with the Fund. -6- 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 achieved by each Advisor's Fund account, 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. MLF; Extraordinary expenses Actual costs incurred; none paid to Others date, and expected to be negligible. --------------------------------- REGULATION The General Partner, the Trading Advisors and the Commodity Broker are each subject to regulation by the Commodity Futures Trading Commission (the "CFTC") and the National Futures Association. Other than in respect of its periodic reporting requirements under the Securities Exchange Act of 1934, the Partnership itself is generally not subject 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. -7- (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 ----------------- 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 1996, 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 essentially the same allegations as the New York and California complaints. Additional complaints containing the same allegations as the earlier California complaints were filed in California in March 1997. The California complaints were consolidated under the caption "In re Dean Witter Managed Futures Litigation" in May 1997. The New York complaints were consolidated under the caption "In re Dean Witter Managed Futures Limited Partnerships Litigation" in July 1997. 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. On June 24, 1997, the CFTC accepted an Offer of Settlement from MLF and others, in a matter captioned "In the Matter of Mitsubishi Corporation and Merrill Lynch Futures Inc., et al.," CFTC Docket No. 97-10, pursuant to which MLF, without admitting or denying the allegations against it, consented to a finding by the Commission that MLF had violated Section 4c(a)(A) of the Commodity Exchange Act, relating to wash sales (the CFTC alleged that the customer entered nearly simultaneous orders without the intent to engage in a bona fide trading transaction), and CFTC Regulation 1.37(a), relating to recordkeeping requirements. MLF agreed to cease and desist from violating Section 4c(a)(A) of the Act and Regulation 1.37(a), and to pay a civil monetary penalty of $175,000. 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. -8- 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, 1997, there were 456, 1408 and 734 holders of the Series A, B and C Units, respectively, including the General Partner. (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. -9- ITEM 6: SELECTED FINANCIAL DATA ----------------------- The following selected financial data has been derived from the audited financial statements of the Partnership.
INCOME STATEMENT DATA 1997 1996 1995 1994 1993 - ---------------------- ---- ---- ---- ---- ---- Revenues: Trading Profits (Loss): Realized Gain $ $ 8,749,410 $23,852,578 $ 3,650,307 $17,886,014 Change in Unrealized Gain - (1,760,218) (651,118) (2,731,447) 4,187,590 ---------- ----------- ----------- ------------ ----------- Total Trading results - 6,989,192 23,201,460 918,860 22,073,604 Interest Income - 1,842,887 2,863,384 1,998,830 1,847,581 ---------- ----------- ----------- ------------ ----------- Total Revenues - 8,832,079 26,064,844 2,917,690 23,921,185 ---------- ----------- ----------- ------------ ----------- Expenses: Brokerage Commissions - 5,406,851 7,412,789 7,717,269 9,559,369 Administrative Fees - 115,039 - - - Profit Shares - 97,468 729,138 508,502 551,684 ---------- ----------- ----------- ------------ ----------- Total Expenses - 5,619,358 8,141,927 $ 8,225,771 10,111,053 ---------- ----------- ----------- ------------ ----------- Income from Investments $7,357,688 $ 7,171,609 $ - $ - $ - ---------- ----------- ----------- ------------ ----------- Net Income (Loss) $7,357,688 $10,384,330 $17,922,917 ($5,308,081) $13,810,132 ========== =========== =========== ============ ===========
BALANCE SHEET DATA 1997 1996 1995 1994 1993 - ------------------------------ ----------- ----------- ----------- ----------- ----------- Fund Net Asset Value $63,024,164 $60,834,088 $57,921,834 $53,987,444 $71,749,780 Net Asset Value per Series A $ 284.11 $ 252.54 $ 210.29 $ 155.90 $ 170.64 nit Net Asset Value per Series B $ 230.87 $ 205.27 $ 171.02 $ 127.16 $ 138.87 Unit Net Asset Value per Series C $ 179.92 $ 159.97 $ 133.82 $ 99.07 $ 107.55 Unit
Significant variations in income statement line items is primarily due to placing assets in Trading LLCs (See Item 7). -10-
- ------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES A UNIT - ------------------------------------------------------------------------------------------------------------------ JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------ 1997 $273.52 $270.58 $267.94 $261.04 $251.03 $257.22 $283.93 $270.03 $274.52 $273.84 $277.30 $284.11 - ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES B UNIT - ------------------------------------------------------------------------------------------------------------------ JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------ 1997 $222.32 $219.93 $217.78 $212.17 $204.08 $209.10 $230.77 $219.46 $223.11 $222.53 $225.33 $230.87 - ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------ MONTH-END NET ASSET VALUE PER SERIES C UNIT - ------------------------------------------------------------------------------------------------------------------ JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC. - ------------------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------------------ 1997 $173.26 $171.40 $169.73 $165.35 $159.04 $162.96 $179.85 $171.03 $173.88 $173.43 $175.61 $179.92 - ------------------------------------------------------------------------------------------------------------------
Pursuant to CFTC policy, monthly performance is presented from January 1, 1993 even though the Series A and B Units were outstanding prior to such date. -11- JOHN W. HENRY & CO./MILLBURN L.P. (SERIES A UNITS) DECEMBER 31, 1997 Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/ Inception of Trading: January 5, 1990 Aggregate Subscriptions: $18,182,000 Current Capitalization: $14,709,078 Worst Monthly Drawdown/(2)/:(9.58)% (2/96) Worst Peak-to-Valley Drawdown/(3)/:(19.33)% (7/94-1/95) Net Asset Value per Series A Unit, December 31, 1997: $284.11 - ------------------------------------------------------------------------------- MONTHLY RATES OF RETURN/(4)/ - ------------------------------------------------------------------------------- MONTH 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- January 8.31% 10.17 % (5.81)% (7.76)% 0.07% - ------------------------------------------------------------------------------- February (1.07) (9.58) 14.09 0.08 8.97 - ------------------------------------------------------------------------------- March (0.98) (1.97) 22.24 8.78 (1.82) - ------------------------------------------------------------------------------- April (2.58) 3.93 4.72 (0.36) 8.16 - ------------------------------------------------------------------------------- May (3.83) (4.31) 0.81 (0.11) 1.62 - ------------------------------------------------------------------------------- June 2.47 1.46 (1.63) 6.73 (2.54) - ------------------------------------------------------------------------------- July 10.38 ( 0.17) (2.66) (6.94) 7.79 - ------------------------------------------------------------------------------- August (4.90) (2.38) 2.45 (5.72) (6.90) - ------------------------------------------------------------------------------- September 1.66 3.19 (1.99) 2.58 1.56 - ------------------------------------------------------------------------------- October (0.25) 14.17 0.45 1.31 (0.64) - ------------------------------------------------------------------------------- November 1.26 7.39 0.34 (3.75) 0.26 - ------------------------------------------------------------------------------- December 2.46 (1.16) 0.38 (2.41) 3.61 - ------------------------------------------------------------------------------- Compound Annual 12.49% 20.09% 34.89% (8.64)% 20.64% 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, 1993 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, 1993 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- JOHN W. HENRY & CO./MILLBURN L.P. (SERIES B UNITS) DECEMBER 31, 1997 Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/ Inception of Trading: January 28, 1991 Aggregate Subscriptions: $50,636,000 Current Capitalization: $31,679,478 Worst Monthly Drawdown/(2)/: (9.41)% (2/96) Worst Peak-to-Valley Drawdown/(3)/:(19.32)% (7/94-1/95) ----------------------- Net Asset Value per Series B Unit, December 31, 1997: $230.87 - ------------------------------------------------------------------------------- MONTHLY RATES OF RETURN/(4)/ - ------------------------------------------------------------------------------- MONTH 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- January 8.31% 10.47% (5.93)% (7.91)% 0.04% - ------------------------------------------------------------------------------- February (1.08) (9.41) 14.22 0.09 8.73 - ------------------------------------------------------------------------------- March (0.98) (2.14) 22.06 9.08 (1.68) - ------------------------------------------------------------------------------- April (2.58) 3.86 4.57 (0.41) 8.18 - ------------------------------------------------------------------------------- May (3.81) (4.38) 0.66 (0.22) 1.54 - ------------------------------------------------------------------------------- June 2.46 1.40 (1.52) 6.85 (2.58) - ------------------------------------------------------------------------------- July 10.36 (0.14) (2.75) (6.90) 7.51 - ------------------------------------------------------------------------------- August (4.90) (2.49) 2.71 (5.77) (7.17) - ------------------------------------------------------------------------------- September 1.66 3.22 (2.04) 2.59 1.49 - ------------------------------------------------------------------------------- October (0.26) 14.17 0.48 1.53 (0.75) - ------------------------------------------------------------------------------- November 1.26 7.30 0.31 (3.81) 0.40 - ------------------------------------------------------------------------------- December 2.46 (1.14) 0.31 (2.42) 3.65 - ------------------------------------------------------------------------------- Compound Annual 12.46% 20.03% 34.49% (8.43)% 19.74% 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, 1993 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, 1993 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. -13- JOHN W. HENRY & CO./MILLBURN L.P. (SERIES C UNITS) DECEMBER 31, 1997 Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/ Inception of Trading: January 2, 1992 Aggregate Subscriptions: $40,000,000 Current Capitalization: $16,635,608 Worst Monthly Drawdown/(2)/: (9.54)% (2/96) Worst Peak-to-Valley Drawdown/(3)/: (19.20)% (7/94-1/95) _____________ Net Asset Value per Series C Unit, December 31, 1997: $179.92 - ------------------------------------------------------------------------------- MONTHLY RATES OF RETURN/(4)/ - ------------------------------------------------------------------------------- MONTH 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------- January 8.31% 10.52% (6.00)% (7.97)% 0.33% - ------------------------------------------------------------------------------- February (1.07) (9.54) 14.12 0.13 7.47 - ------------------------------------------------------------------------------- March (0.97) (2.18) 22.31 9.19 (1.99) - ------------------------------------------------------------------------------- April (2.58) 3.86 4.53 (0.36) 7.11 - ------------------------------------------------------------------------------- May (3.82) (4.43) 0.70 (0.36) 0.85 - ------------------------------------------------------------------------------- June 2.46 1.45 (1.44) 7.28 (2.68) - ------------------------------------------------------------------------------- July 10.36 (0.08) (2.74) (7.05) 6.57 - ------------------------------------------------------------------------------- August (4.90) (2.71) 2.90 (5.90) (7.17) - ------------------------------------------------------------------------------- September 1.67 3.21 (1.91) 2.83 1.66 - ------------------------------------------------------------------------------- October (0.26) 14.17 0.59 1.58 (0.97) - ------------------------------------------------------------------------------- November 1.26 7.14 0.32 (3.69) 0.24 - ------------------------------------------------------------------------------- December 2.45 (1.09) 0.17 (2.31) 3.46 - ------------------------------------------------------------------------------- Compound Annual 12.47% 19.54% 35.08% (7.88)% 14.78% 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, 1993 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, 1993 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. -14- 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. The significant variations in both the statement of financial condition and the income statement line items is primarily due to the Partnership placing assets under the management of certain of the Advisors not through opening managed accounts with them but rather through investing in a private limited liability company ("Trading LLC") sponsored by MLIP. As of December 1, 1996, the Partnership placed all of its assets under the management of Trading LLCs. The only members of the Trading LLC are commodity pools sponsored by MLIP. The Trading LLC trades under the management of a single Advisor 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 results of the Partnership's Trading LLC investments are reflected in the Partnership's financial statements as "Income from Investments." The investments are reflected in the financial statements at fair value based upon the Partnership's interest in the Trading LLCs. 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. -15- PERFORMANCE SUMMARY 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 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. 1997 Trend reversals and extreme market volatility, affected by such factors as the Asian flu and El Nino, were characteristic of most of 1997. However, the year proved to be a profitable one overall for the Fund as trends in several key markets enabled the Trading Advisors to profit despite the significant obstacles. Although trading results in several sectors may have been lackluster, the global currency and bond markets offered noteworthy trading opportunities, which resulted in significant profits in these markets during the year. Additionally, the currency and interest rate sectors of the Fund's portfolio represented its largest percentage of market commitments. In currency markets, the U.S. dollar rallied and started 1997 on a strong note, rising to a four-year high versus the Japanese yen and two-and-a-half year highs versus the Deutsche mark and the Swiss franc. However, the dollar underwent two significant corrections during the year. The first correction occurred in the Spring against the Japanese yen, due to the G7 finance ministers' determination that a further dollar advance would be counter- productive to their current goals. From August through mid-November, the dollar corrected against the -16- Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By mid-December the dollar had bounced back to new highs against the yen and was rallying against the mark. Global interest rate markets began the year on a volatile note, as investors evaluated economic data for signs of inflation. By the middle of the year, economic data in key countries was positive indicating lower inflation and igniting a worldwide rally in the bond markets. Specifically, investor sentiment was particularly strong in the U.S., where prices on the 30-year Treasury bond and 10-year Treasury note rose to their highest levels in over two years. This followed a largely positive economic report delivered by Federal Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge in the Hong Kong stock market in late October spread rapidly throughout the world's financial markets, including global bond markets. After continued volatility in subsequent months made trading difficult, 1997 interest rate trading ended on a positive note when U.S. and Japanese bond markets rallied as a flight to safety from plunging stock markets around the world occurred in December. 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. 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. -17- 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. THE YEAR 2000 COMPUTER ISSUE Merrill Lynch's modifications for Year 2000 systems compliance are proceeding according to plan and are expected to be completed in early 1999. Based on information currently available, the remaining expenditures are estimated at $200 million and will cover hardware and software upgrades, systems consulting, and computer maintenance. These expenditures are not expected to have a material adverse impact on Merrill Lynch's financial position, results of operations, or cash flows in future periods. However, the failure of Merrill Lynch's securities exchanges, clearing organizations, vendors, clients, or regulators to resolve their own processing issues in a timely manner could result in a material financial risk. Merrill Lynch is devoting necessary resources to address all Year 2000 issues in a timely manner. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS. ----------------------------------------------------------- Not applicable. 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. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND --------------------------------------------------------------- FINANCIAL DISCLOSURE - -------------------- There were no changes in or disagreements with accountants on accounting or financial disclosure. -18- 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 directors and executive officers of MLIP and their business backgrounds are as follows. John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director Jeffrey F. Chandor Senior Vice President, Director of Sales, Marketing and Research and Director Joseph H. Moglia Director Allen N. Jones Director Stephen G. Bodurtha Director Michael A. Karmelin Chief Financial Officer, Vice President and Treasurer Steven B. Olgin Vice President, Secretary and Director of Administration John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman, Chief Executive Officer, President and a Director of MLIP and Co-Chairman of Merrill Lynch Futures Inc. ("MLF"). He joined Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in 1966 and has served in various positions, including Retail and Institutional Sales, Manager of New York Institutional Sales, Director of Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets and Director of International Institutional Sales. Mr. Frawley holds a Bachelor of Science degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory Coordination Advisory Committee from its formation in 1990 through its dissolution in 1994. Mr. Frawley is currently serving his fourth consecutive one-year term as Chairman of the Managed Funds Association (formerly, the Managed Futures Association), a national trade association that represents the managed futures, hedge funds and fund of funds industry. Mr. Frawley is also a Director of that organization. Mr. Frawley currently serves on a panel created by the Chicago Mercantile Exchange and The Board of Trade of the City of Chicago to study cooperative efforts related to electronic trading, common clearing and the issues regarding a potential merger. 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 International Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as well as Managing Director of International Sales in the United States, and Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts degree from Trinity College, Hartford, Connecticut. Joseph H. Moglia was born in 1949. He is a director of MLIP. In 1971, he graduated from Fordham University with a Bachelor of Arts degree in Economics. He later received his Master of Science degree from the -19- University of Delaware. He taught at the high school and college level for sixteen years. Mr. Moglia joined MLPF&S in 1984, and has served in a number of senior roles, including Director of New York Fixed Income Institutional Sales, Director of Global Fixed Institutional Sales, and Director of the Municipal Division. He is currently Senior Vice President and Director of the Investment Strategy and Product Group in Merrill Lynch Private Client, and Director of Middle Markets. Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP and, from July 1995 until January 1998, Mr. Jones was Chairman of the Board of Directors of MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has held the position of Senior Vice President of MLPF&S. From June 1992 through February 1994, Mr. Jones was the President and Chief Executive Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of Directors of MLIG and its subsidiary companies. From February 1994 to April 1997, Mr. Jones was the Director of Individual Financial Services of the Merrill Lynch Private Client Group. In April 1997, Mr. Jones became the Director of Private Client marketing. Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of MLIP. In 1980, Mr. Bodurtha graduated from Wesleyan University, Middletown, Connecticut with a Bachelor of Arts degree in Government, magna cum laude. From 1980 to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill Lynch. In 1985, he was awarded his Master of Business Administration degree from Harvard University, where he also served as Associates Fellow (1985-1986). From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice President with Kidder, Peabody & Co., Incorporated where he worked in their Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has held the position of First Vice President since 1995. He has been the Director in charge of MLPF&S's Structured Investments Group since 1995. Michael A. Karmelin was born in 1947. Mr. Karmelin is Chief Financial Officer, Vice President and Treasurer of MLIP. Prior to joining MLIP in April 1997, Mr. Karmelin was Chief Financial Officer of Merrill Lynch, Hubbard Inc. ("ML Hubbard"), a sponsor of real estate limited partnerships. Mr. Karmelin joined ML Hubbard in January 1994 and was a Vice President of ML Hubbard. From May 1994 to April 1997, he 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 ML&Co and MLPF&S 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 Accounting examination in 1974 and is a member of the Treasury Management Association, the Institute of Management Accountants and The Strategic Leadership Forum. Steven B. Olgin was born in 1960. Mr. Olgin is Vice President, Secretary and the Director of Administration of MLIP. He joined MLIP in July 1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduated from The American University with a Bachelor of Science degree in Business Administration and a Bachelor of Arts degree in Economics. In 1986, he received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is a member of the Managed Funds Association's Government Relations Committee and has served as an arbitrator for the NFA. Mr. Olgin is also a member of the Committee on Futures Regulation of the Association of the Bar of the City of New York. Messrs. Moglia and Bodurtha became Directors in January 1998. As of December 31, 1997, the principals of MLIP had no investment in the Fund, and MLIP's general partnership interest was valued at $936,678. MLIP acts as general partner to twelve 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 -20- 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/(SM)/ L.P., The SECTOR Strategy Fund/(SM)/ II L.P., The SECTOR Strategy Fund/(SM)/ V L.P., The SECTOR Strategy Fund/(SM)/ VI L.P., ML Global Horizons L.P., ML Principal Protection L.P. (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: ----------------------------- Not applicable ITEM 11: EXECUTIVE COMPENSATION ---------------------- The officers of the General Partner are remunerated by the General Partner 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, 1997, 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, 1997, each Trading Advisor owned 1,015 Series A Units, 1,000 Series B Units and 1,500 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 4%, 3% and 4% of the total Units outstanding, respectively. -21- (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 1997 the Partnership paid: (i) Brokerage Commissions of $0 to the Commodity Broker, which included $0 in consulting fees paid by the Commodity Broker to the Trading Advisors; and (ii) Administrative Fees of $0 to MLIP. Through its investments in Trading LLCs, the following fees were paid: (i) Brokerage Commissions of $6,195,037 to the Commodity Broker, which included $1,886,277 in consulting fees paid by the Commodity Broker to the Trading Advisors; and (ii) Administrative Fees of $159,843 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. (d) Transactions with Promoters: --------------------------- Not applicable. -22- 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, 1997 and 1996 2 For the years ended December 31, 1997, 1996 and 1995: Statements of Operations 3 Statements of Changes in Partners' Capital 4 Notes to Financial Statements 5-14 (a)2. Financial Statement Schedules: ----------------------------- Financial statement schedules not included in this Form 10-K have been omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto. (a)3. Exhibits: -------- The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K: Designation Description - ----------- ----------- 3.01(ii) Amended and Restated Limited Partnership Agreement of the Partnership. Exhibit 3.01(ii): Is incorporated herein by reference from Exhibit 3.01(ii) - ---------------- contained in Amendment No. 1 (as Exhibit A) to the Registration Statement (File No. 33-41373) filed on August 20, 1991, on Form S-1 under the Securities Act of 1933 (the "Registrant's Registration Statement"). 3.02(c) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1995. Exhibit 3.02(c): Is incorporated by reference from Exhibit 3.02(c) - --------------- contained in the Registrant's report on Form 10-Q for the Quarter Ended June 30, 1995. 10.01(o) Form of Advisory Agreement between the Partnership, Merrill Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and each of John W. Henry & Company, Inc. and Millburn Ridgefield Corporation. Exhibit 10.01(o): Is incorporated by reference from Exhibit 10.01(o) - ---------------- contained in the Registrant's report on Form 10-Q for the Quarter Ended June 30, 1995. 10.02(a) Form of Consulting Agreement between each trading advisor, the Partnership and Merrill Lynch Futures Inc. -23- 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 International Bank, Merrill Lynch Investment Partners Inc., Merrill Lynch Futures Inc. and the Fund. Exhibit 10.06: Is incorporated herein by reference from Exhibit 10.06 - -------------- contained in the Registrant's report on Form 10-K for the year ended December 31, 1996. 10.07(a) Form of Advisory and Consulting Agreement Amendment among Merrill Lynch Investment Partners Inc., each Advisor, the Fund and Merrill Lynch Futures. Exhibit 10.07(a): Is incorporated herein by reference from Exhibit 10.07(a) - ---------------- contained in the Registrant's report on Form 10-K for the year ended December 31, 1996. 10.07(b) Form of Amendment to the Customer Agreement among the Partnership and MLF. Exhibit 10.07(b) Is incorporated herein by reference from Exhibit 10.07(b) - ---------------- contained in the Registrant's report on Form 10-K for the year ended December 31, 1996. 13.01 1997 Annual Report and Independent Auditors' Report. Exhibit 13.01: Is filed herewith. - -------------- 13.01(a) 1997 Annual Reports and Independent Auditors' Report for the following Trading Limited Liability Companies sponsored by Merrill Lynch Investment Partners' Inc.: ML Millburn Global L.L.C. ML Sjo Prospect L.L.C. ML Chesapeake Diversified L.L.C. ML JWH Financial and Metals Portfolio L.L.C. Exhibits 13.01(a) Is incorporated herein by reference from Form 10-K (fiscal year ended December 31, 1997) Commission File number 0-18702 for The S.E.C.T.O.R. Fund (SM) L.P. (Registration Statement File No. 33-34432 filed on May 25, 1990 under the Securities Act, of 1933). 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 1997. -24- SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. JOHN W. HENRY & CO./MILLBURN L.P. BY: MERRILL LYNCH INVESTMENT PARTNERS INC. General Partner By: /s/John R. Frawley, Jr. John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director (Principal Executive Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed on March 25, 1998 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature Title Date /s/John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director March 25, 1998 - ------------------------- (Principal Executive Officer) John R. Frawley, Jr. /s/Michael A. Karmelin Vice President, Chief Financial Officer, and Treasurer March 25, 1998 - ------------------------- (Principal Financial and Accounting Officer) Michael A. Karmelin /s/Jeffrey F. Chandor Senior Vice President, Director of Sales, March 25, 1998 - ------------------------- Marketing and Research, and Director Jeffrey F. Chandor /s/Allen N. Jones Director March 25, 1998 - ------------------------- 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 March 25, 1998 PARTNERS INC.
By: /s/John R. Frawley, Jr. - --------------------------- John R. Frawley, Jr. -25- JOHN W. HENRY & CO./MILLBURN L.P. 1997 FORM 10-K INDEX TO EXHIBITS ----------------- Exhibit ------- Exhibit 13.01 1997 Annual Report and Independent Auditors' Report Exhibit 13.01(a) 1997 Annual Reports and Independent Auditors' Report for the following Trading Limited Liability Companies sponsored by Merrill Lynch Investment Partners' Inc.: ML Millburn Global L.L.C. ML Sjo Prospect L.L.C. ML Chesapeake Diversified L.L.C. ML JWH Financial and Metals Portfolio L.L.C. -26- EX-13.01 2 FINANCIAL STATEMENTS JOHN W. HENRY & CO./MILLBURN L.P. (A DELAWARE LIMITED PARTNERSHIP) Financial Statements for the years ended December 31, 1997, 1996 and 1995 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 "Partnership") ended its eighth fiscal year of trading on December 31, 1997 with a Net Asset Value ("NAV") per Unit of $284.11, representing an increase of 12.50% from the December 31, 1996 NAV per Unit of $252.54. During 1997, all sectors traded by the Fund were profitable. Trend reversals and extreme market volatility, affected by such factors as the Asian flu and El Nino, were characteristic of most of 1997. However, the year proved to be a profitable one overall for the Fund as trends in several key markets enabled the Trading Advisors to profit despite the significant obstacles. Although trading results in several sectors may have been lackluster, the global currency and bond markets offered noteworthy trading opportunities, which resulted in significant profits in these markets during the year. Additionally, the currency and interest rate sectors of the Fund's portfolio represented its largest percentage of market commitments. In currency markets, the U.S. dollar rallied and started 1997 on a strong note, rising to a four-year high versus the Japanese yen and two-and-a-half year highs versus the Deutsche mark and the Swiss franc. However, the dollar underwent two significant corrections during the year. The first correction occurred in the Spring against the Japanese yen, due to the G7 finance ministers' determination that a further dollar advance would be counter-productive to their current goals. From August through mid-November, the dollar corrected against the Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By mid-December the dollar had bounced back to new highs against the yen and was rallying against the mark. Global interest rate markets began the year on a volatile note, as investors evaluated economic data for signs of inflation. By the middle of the year, economic data in key countries was positive indicating lower inflation and igniting a worldwide rally in the bond markets. Specifically, investor sentiment was particularly strong in the U.S., where prices on the 30-year Treasury bond and 10-year Treasury note rose to their highest levels in over two years. This followed a largely positive economic report delivered by Federal Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge in the Hong Kong stock market in late October spread rapidly throughout the world's financial markets, including global bond markets. After continued volatility in subsequent months made trading difficult, 1997 interest rate trading ended on a positive note when U.S. and Japanese bond markets rallied as a flight to safety from plunging stock markets around the world occurred in December. Although the overall return for the Fund might have paled in comparison to some of the popular market indices during 1997, a significant observation is worth noting. From the time the Dow Jones industrial average hit its high of 8259.31 in August through the end of the year, it declined 4.25% with a continued increase in volatility. Conversely, the Fund, which has been designed with the objective of producing returns non-correlated to traditional debt and equity markets, steadily improved performance during the same time period. We appreciate your continued investment in the Fund and look forward to 1998 and the trading opportunities it may bring. Sincerely, John R. Frawley, Jr. President 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 "Partnership") ended its seventh fiscal year of trading on December 31, 1997 with a Net Asset Value ("NAV") per Unit of $230.87, representing an increase of 12.47% from the December 31, 1996 NAV per Unit of $205.27. During 1997, all sectors traded by the Fund were profitable. Trend reversals and extreme market volatility, affected by such factors as the Asian flu and El Nio, were characteristic of most of 1997. However, the year proved to be a profitable one overall for the Fund as trends in several key markets enabled the Trading Advisors to profit despite the significant obstacles. Although trading results in several sectors may have been lackluster, the global currency and bond markets offered noteworthy trading opportunities, which resulted in significant profits in these markets during the year. Additionally, the currency and interest rate sectors of the Fund's portfolio represented its largest percentage of market commitments. In currency markets, the U.S. dollar rallied and started 1997 on a strong note, rising to a four-year high versus the Japanese yen and two-and-a-half year highs versus the Deutsche mark and the Swiss franc. However, the dollar underwent two significant corrections during the year. The first correction occurred in the Spring against the Japanese yen, due to the G7 finance ministers' determination that a further dollar advance would be counter-productive to their current goals. From August through mid-November, the dollar corrected against the Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By mid-December the dollar had bounced back to new highs against the yen and was rallying against the mark. Global interest rate markets began the year on a volatile note, as investors evaluated economic data for signs of inflation. By the middle of the year, economic data in key countries was positive indicating lower inflation and igniting a worldwide rally in the bond markets. Specifically, investor sentiment was particularly strong in the U.S., where prices on the 30-year Treasury bond and 10-year Treasury note rose to their highest levels in over two years. This followed a largely positive economic report delivered by Federal Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge in the Hong Kong stock market in late October spread rapidly throughout the world's financial markets, including global bond markets. After continued volatility in subsequent months made trading difficult, 1997 interest rate trading ended on a positive note when U.S. and Japanese bond markets rallied as a flight to safety from plunging stock markets around the world occurred in December. Although the overall return for the Fund might have paled in comparison to some of the popular market indices during 1997, a significant observation is worth noting. From the time the Dow Jones industrial average hit its high of 8259.31 in August through the end of the year, it declined 4.25% with a continued increase in volatility. Conversely, the Fund, which has been designed with the objective of producing returns non-correlated to traditional debt and equity markets, steadily improved performance during the same time period. We appreciate your continued investment in the Fund and look forward to 1998 and the trading opportunities it may bring. Sincerely, John R. Frawley, Jr. President 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 "Partnership") ended its sixth fiscal year of trading on December 31, 1997 with a Net Asset Value ("NAV") per Unit of $179.92, representing an increase of 12.47% from the December 31, 1996 NAV per Unit of $159.97. During 1997, all sectors traded by the Fund were profitable. Trend reversals and extreme market volatility, affected by such factors as the Asian flu and El Nio, were characteristic of most of 1997. However, the year proved to be a profitable one overall for the Fund as trends in several key markets enabled the Trading Advisors to profit despite the significant obstacles. Although trading results in several sectors may have been lackluster, the global currency and bond markets offered noteworthy trading opportunities, which resulted in significant profits in these markets during the year. Additionally, the currency and interest rate sectors of the Fund's portfolio represented its largest percentage of market commitments. In currency markets, the U.S. dollar rallied and started 1997 on a strong note, rising to a four-year high versus the Japanese yen and two-and-a-half year highs versus the Deutsche mark and the Swiss franc. However, the dollar underwent two significant corrections during the year. The first correction occurred in the Spring against the Japanese yen, due to the G7 finance ministers' determination that a further dollar advance would be counter-productive to their current goals. From August through mid-November, the dollar corrected against the Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By mid-December the dollar had bounced back to new highs against the yen and was rallying against the mark. Global interest rate markets began the year on a volatile note, as investors evaluated economic data for signs of inflation. By the middle of the year, economic data in key countries was positive indicating lower inflation and igniting a worldwide rally in the bond markets. Specifically, investor sentiment was particularly strong in the U.S., where prices on the 30-year Treasury bond and 10-year Treasury note rose to their highest levels in over two years. This followed a largely positive economic report delivered by Federal Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge in the Hong Kong stock market in late October spread rapidly throughout the world's financial markets, including global bond markets. After continued volatility in subsequent months made trading difficult, 1997 interest rate trading ended on a positive note when U.S. and Japanese bond markets rallied as a flight to safety from plunging stock markets around the world occurred in December. Although the overall return for the Fund might have paled in comparison to some of the popular market indices during 1997, a significant observation is worth noting. From the time the Dow Jones industrial average hit its high of 8259.31 in August through the end of the year, it declined 4.25% with a continued increase in volatility. Conversely, the Fund, which has been designed with the objective of producing returns non-correlated to traditional debt and equity markets, steadily improved performance during the same time period. We appreciate your continued investment in the Fund and look forward to 1998 and the trading opportunities it may bring. Sincerely, John R. Frawley, Jr. President 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, 1997, 1996 AND 1995: Statements of Financial Condition 2 Statements of Income 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, 1997 and 1996, and the related statements of income and changes in partners' capital for each of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the results of its operations for the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. DELOITTE & TOUCHE LLP February 6, 1998 New York, New York JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1997 AND 1996 - --------------------------------------------------------------------------------
1997 1996 ------------------- -------------------- ASSETS Investments (Note 6) $ 63,024,164 $ 60,834,087 Receivable from investments (Note 6) 514,158 779,075 ---------------- ----------------- TOTAL $ 63,538,322 $ 61,613,162 ================ ================= LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Redemptions payable $ 514,158 $ 778,385 Profit Shares (Note 3) - 689 ---------------- ----------------- Total liabilities 514,158 779,074 ---------------- ----------------- PARTNERS' CAPITAL: General Partner: (780 and 780 Series A Units outstanding) 221,605 196,983 (1,976 and 1,976 Series B Units outstanding) 456,174 405,594 (1,439 and 1,439 Series C Units outstanding) 258,899 230,192 Limited Partners: (50,992 and 55,596 Series A Units outstanding) 14,487,473 14,040,479 (135,244 and 146,552 Series B Units outstanding) 31,223,304 30,082,484 (91,020 and 99,256 Series C Units outstanding) 16,376,709 15,878,356 ---------------- ----------------- Total partners' capital 63,024,164 60,834,088 ---------------- ----------------- TOTAL $ 63,538,322 $ 61,613,162 ================ ================= NET ASSET VALUE PER UNIT Series A $ 284.11 $ 252.54 ================ ================= Series B $ 230.87 $ 205.27 ================ ================= Series C $ 179.92 $ 159.97 ================ =================
See notes to financial statements. -2- JOHN W. HENRY & CO./MILLBURN L.P. (A Delaware Limited Partnership) ------------------------------ STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
1997 1996 1995 ------------- -------------- ------------- REVENUES: Trading profit (loss): Realized $ - $ 8,749,410 $ 23,852,578 Change in unrealized - (1,760,218) (651,118) ------------- -------------- ------------- Total trading results - 6,989,192 23,201,460 Interest income (Note 2) - 1,842,887 2,863,384 ------------- -------------- ------------- Total revenues - 8,832,079 26,064,844 ------------- -------------- ------------- EXPENSES: Profit Shares (Note 3) - 97,468 729,138 Brokerage commissions (Note 2) - 5,406,851 7,412,789 Administrative fees (Note 2) - 115,039 - ------------- -------------- ------------- Total expenses - 5,619,358 8,141,927 ------------- -------------- ------------- INCOME FROM INVESTMENTS (Note 6) 7,357,688 7,171,609 - ------------- -------------- ------------- NET INCOME $ 7,357,688 $ 10,384,330 $ 17,922,917 ============= ============== ============= NET INCOME PER UNIT: Weighted average number of Units outstanding (Note 5) 294,640 327,875 387,956 ============= ============== ============= Net income per weighted average General Partner and Limited Partner Unit $ 24.97 $ 31.67 $ 46.20 ============= ============== =============
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, 1997, 1996 AND 1995 - --------------------------------------------------------------------------------
Series Series Series Limited Partners ---------------------------------------------------- A B C Series Series Series Units Units Units A B C ------------- ------- ------- ------------ ------------- ------------- 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 Redemptions (4,604) (11,308) (8,236) (1,255,814) (2,498,029) (1,413,769) Net income - - - 1,702,808 3,638,849 1,912,122 ------------- ------- ------- ------------ ------------- ------------- PARTNERS' CAPITAL, DECEMBER 31, 1997 51,772 137,220 92,459 $ 14,487,473 $ 31,223,304 $ 16,376,709 ============= ======= ======= ============ ============= ============= General Partner ------------------------------------- Series Series Series A B C Total --------- --------- --------- ------------ 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 Redemptions - - - (5,167,612) Net income 24,622 50,580 28,707 7,357,688 --------- --------- --------- ------------ PARTNERS' CAPITAL, DECEMBER 31, 1997 $221,605 $ 456,174 $258,899 $ 63,024,164 ========= ========= ========= ============
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, 1997, 1996 AND 1995 - ------------------------------------------------------------------------------- 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 (each an "Advisor", together, "Advisors") have been the Partnership's only trading advisors since inception. Each Advisor was allocated 50% of the total assets of each Series as of the date such Series began trading. Subsequently, these allocations have varied over time. MLIP may, in its discretion, reallocate assets as of any month-end. As of December 1, 1996, the Partnership placed all of its assets under the management of the Advisors not through managed accounts but rather through investing in private limited liability companies ("Trading LLCs" or "LLCs"), as defined in Note 6. Certain of the following notes to financial statements are directly related to assets managed by Advisors. The placement of assets into LLCs did not change the operation nor fee structure of the Partnership, therefore, the following notes relate to the operation of the Partnership through its investment in the LLCs. Also, the administrative authority over the Partnership remains with MLIP. Estimates --------- The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. -5- Revenue Recognition ------------------- Commodity futures, options, and forward contract transactions are recorded on the trade date, and open contracts are reflected in net unrealized profit on open contracts in the Statements of Financial Condition at the difference between the original contract value and the fair value. The change in net unrealized profit on open contracts from one period to the next is reflected in change in unrealized in the Statements of Income. Fair value is based on quoted market prices on the exchange or market on which the contract is traded. (There were no open contracts as of December 31, 1997 and 1996). Operating Expenses ------------------ 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 assets were held at MLF in cash. On the cash held at MLF, the Partnership received interest from Merrill Lynch at the prevailing 91-day U.S. Treasury bill rate. Merrill Lynch may derive certain economic benefits, in excess of the interest which Merrill Lynch pays to the Partnership, from possession of such cash. Merrill Lynch credited the Partnership with interest on the Partnership's U.S. dollar-denominated assets based on local short-term rates. Merrill Lynch charges the Partnership Merrill Lynch's cost of financing realized and unrealized losses on the Partnership's non-U.S. dollar-denominated positions. The General Partner has determined that there may have been a miscalculation in the interest credited to the Partnership for a period prior to November 1996 (such period may extend prior to that covered by these financial statements). Accordingly, the General Partner credited current and former investors who maintained a Merrill Lynch customer account in December 1997 with interest which was compounded. Former investors who do not maintain a Merrill Lynch customer account will be credited as their response forms are processed. The total amount of the adjustment is approximately $779,000 for Series A Units, $1,739,000 for Series B Units and $773,000 for Series C Units. Since this amount was paid directly to investors by the General Partner, it is not reflected in these financial statements. The General Partner has determined that interest has been calculated appropriately since November 1996. -6- 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). 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. 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. MLIP estimates that the round-turn equivalent commission rate charged to the Partnership during the years ended 1996 and 1995, was approximately $143 and $207, respectively (not including, in calculating round-turn equivalents, forward contracts on a future-equivalent basis). MLF paid the Advisors annual consulting fees equal to 4% of the average month-end assets. The Partnership trades forward contracts through a foreign exchange service desk (the "F/X Desk") established by MLIP. The F/X Desk gives the Partnership access to counterparties in addition to (but also including) Merrill Lynch International Bank ("MLIB"). MLIP or another Merrill Lynch entity charges a service fee equal to, at current exchange rates, approximately $5.00 to $12.50 on each purchase or sale (not round-turn) of a futures contract- equivalent face amount of a given currency traded in the forward markets. No service fees are charged on trades awarded to MLIB (which receives bid-ask spreads on such trades). In its exchange of futures for physical ("EFP") trading with Merrill Lynch, the Partnership acquires spot or forward (collectively, "cash") currency positions through the F/X Desk in the same manner and on the same terms as in the case of the Partnership's other F/X Desk trading. When the Partnership exchanges these positions for futures, there is a differential between the prices of the two positions. This differential reflects, in part, the different settlement dates of the cash and the futures contracts and prevailing interest rates, but also includes a pricing spread in favor of MLIB or another Merrill Lynch entity. The Advisors, to date, have made little use of EFPs. The Partnership's F/X Desk service fee and EFP differential costs have, to date totaled no more than .25 of 1% per annum of the Partnership's average month-end assets. 3. AGREEMENTS The Partnership entered into Advisory Agreements. The Advisory Agreements with each Trading Advisor for each series of Units are largely identical. 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, either as of the end of each calendar quarter or year, was paid to each Advisor based on the performance of the Partnership account managed by such Advisor, irrespective of the overall performance of the Partnership. Profit Shares are also paid out in respect of Units redeemed as of the end of interim months, to the extent of 15% of any New Trading Profits attributable to such Units. -7- 4. INCOME PER SERIES The profit and loss of the Series A, Series B and Series C Units for the years ended December 31, 1997, 1996 and 1995 is as follows:
Series A Series B -------------------------------------------------------------------------------------------- 1997 1996 1995 1997 1996 1995 ------------ ------------ ------------ ----------- ------------ ------------ REVENUES: Trading profit (loss): Realized $ - $ 2,029,650 $5,237,341 $ - $4,349,607 $11,857,130 Change in unrealized - (382,321) (147,478) - (877,666) (317,074) ------------ ------------ ------------ ----------- ------------ ------------ Total trading results - 1,647,329 5,089,863 - 3,471,941 11,540,056 Interest income (Note 2) - 417,739 636,781 - 920,755 1,431,186 ------------ ------------ ------------ ----------- ------------ ------------ Total revenues - 2,065,068 5,726,644 - 4,392,696 12,971,242 ------------ ------------ ------------ ----------- ------------ ------------ EXPENSES: Brokerage commissions (Note 2) - 1,239,114 1,654,078 - 2,695,105 3,698,343 Allocation of new profit share to trading advisors (Note 3) - 26,690 168,968 - 44,910 362,058 Administrative fees (Note 2) - 26,364 - - 57,343 - ------------ ------------ ------------ ----------- ------------ ------------ Total expenses - 1,292,168 1,823,046 - 2,797,358 4,060,401 ------------ ------------ ------------ ----------- ------------ ------------ Income from investments (Note 6) 1,727,430 1,746,113 - 3,689,429 3,562,401 - ------------ ------------ ------------ ----------- ------------ ------------ NET INCOME $ 1,727,430 $ 2,519,013 $ 3,903,598 $3,689,429 $5,157,739 $ 8,910,841 ============= ============ ============ =========== ============ ============ NET INCOME PER UNIT OF PARTNERSHIP INTEREST: Weighted average number of units outstanding (Note 5) 54,036 59,766 67,833 143,414 158,197 186,768 ------------ ------------ ------------ ----------- ------------ ------------ Net income per weighted Average General Partner and Limited Partner Unit $ 31.97 $ 42.15 $ 57.55 $ 25.73 $32.60 $47.71 ------------ ------------ ------------ ----------- ------------ ------------ Series C ---------------------------------------------- 1997 1996 1995 ------------- --------------- -------------- REVENUES: Trading profit (loss): Realized $ - $ 2,339,762 $ 6,758,107 Change in unrealized - (469,840) (186,566) -------------- --------------- -------------- Total trading results - 1,869,922 6,571,541 Interest income (Note 2) - 504,393 795,417 -------------- --------------- -------------- Total revenues - 2,374,315 7,366,958 -------------- --------------- -------------- EXPENSES: Brokerage commissions (Note 2) - 1,472,632 2,060,368 Allocation of new profit share to trading advisors (Note 3) - 25,868 198,112 Administrative fees (Note 2) - 31,332 - -------------- --------------- -------------- Total expenses - 1,529,832 2,258,480 -------------- --------------- -------------- Income from investments (Note 6) 1,940,829 1,863,095 - -------------- --------------- -------------- NET INCOME $ 1,940,829 $ 2,707,578 $ 5,108,478 ============== =============== ============== NET INCOME PER UNIT OF PARTNERSHIP INTEREST: Weighted average number of units outstanding (Note 5) 97,190 109,912 133,357 -------------- --------------- -------------- Net income per weighted Average General Partner and Limited Partner Unit $19.97 $24.63 $38.31 -------------- --------------- --------------
-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, 1997, 1996 and 1995 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 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 Income as income or loss from investments. At December 31, 1997 and 1996, the Partnership had investments in the ML JWH Financial and Metals Portfolio L.L.C. ("JWH LLC") and ML Millburn Global L.L.C. ("Millburn LLC") as follows: 1997 1996 ---------------- ---------------- JWH LLC $ 31,979,914 $ 30,417,044 Millburn LLC 31,044,250 30,417,043 ---------------- ---------------- Total $ 63,024,164 $ 60,834,087 ================ ================ -9- Total revenues and fees with respect to such investments are set forth as follows:
For the year ended Total Brokerage Administrative Profit Income from December 31, 1997 Revenues Commissions Fees Shares Investments Series A Units -------------- -------------- --------------- -------------- ---------------- - ---------------------- JWH LLC $ 1,759,089 $ 690,201 $ 17,813 $ 103,624 $ 947,451 Millburn LLC 1,758,987 751,834 19,390 207,784 779,979 -------------- -------------- ------------ -------------- ---------------- Total $ 3,518,076 $1,442,035 $ 37,203 $ 311,408 $1,727,430 ============== ============== ============ ============== ================ Series B Units - ---------------------- JWH LLC $ 3,771,359 $1,484,456 $ 38,315 $ 221,754 $2,026,834 Millburn LLC 3,773,695 1,625,922 41,942 443,236 1,662,595 -------------- -------------- ------------ -------------- ---------------- Total $ 7,545,054 $3,110,378 $ 80,257 $ 664,990 $3,689,429 ============== ============== ============ ============== ================ Series C Units - ---------------------- JWH LLC $ 1,981,710 $ 783,770 $ 20,229 $ 116,818 $1,060,893 Millburn LLC 1,995,533 858,854 22,154 234,589 879,936 -------------- -------------- ------------ -------------- ---------------- Total $ 3,977,243 $1,642,624 $ 42,383 $ 351,407 $1,940,829 ============== ============== ============ ============== ================ Total - All Series - ---------------------- JWH LLC $ 7,512,158 $2,958,427 $ 76,357 $ 442,196 $4,035,178 Millburn LLC $ 7,528,215 $3,236,610 $ 83,486 $ 885,609 3,322,510 -------------- -------------- ------------ -------------- ---------------- Total $15,040,373 $6,195,037 $159,843 $1,327,805 $7,357,688 ============== ============== ============ ============== ================
-10-
For the year ended Total Brokerage Administrative Profit Income from December 31, 1997 Revenues Commissions Fees Shares Investments 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 ============== ============== ============= ============== ===============
-11- Condensed statements of financial condition as of December 31, 1997 and 1996 and statements of income for the years ended December 31, 1997 and 1996 for JWH LLC and Millburn LLC are set forth as follows:
1997 1996 ------------------------------------- ---------------------------------------- JWH Millburn JWH Millburn LLC LLC LLC LLC ------------------ ---------------- ----------------- ------------------- Assets $ 62,481,438 $ 35,584,936 $ 80,825,364 $ 28,520,827 =================== ================ ================= =================== Liabilities $ 1,122,533 $ 1,454,659 $ 19,848,210 $ 796,001 Members' Capital 61,358,905 34,130,277 60,977,154 27,724,826 ------------------- ---------------- ----------------- ------------------- Total $ 62,481,438 $ 35,584,936 $ 80,825,364 $ 28,520,827 =================== ================ ================= =================== Revenues $ 15,279,401 $ 8,303,430 $ 19,365,949 $ 450,619 Expenses 6,714,041 4,600,706 4,426,261 291,370 ------------------- ---------------- ----------------- ------------------- Net Income $ 8,565,360 $ 3,702,724 $ 14,939,688 $ 159,249 =================== ================ ================= ===================
7. FAIR VALUE AND OFF-BALANCE SHEET RISK As of December 1, 1996, the Partnership invested all of its assets in Trading LLCs. The Partnership was, thus, invested indirectly in the trading of derivative instruments, but did not itself hold any derivative positions. Consequently. No such positions subsequent to November 30, 1996 are reflected in these financial statements. For the period from January 1, 1996 to November 30, 1996 and the year ended December 31, 1995, the Partnership traded futures, options on futures and forward contracts in interest rates, stock indices, currencies and metals. The Partnership's total trading results by reporting category 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 on such derivative instruments as would have been reflected in the Statements of Financial Condition had the Partnership not invested all of its assets in Trading LLCs. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships -12- among the derivative instruments held by the Partnership as well as the volatility and liquidity of the markets in which such 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 does 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. The average fair values, based on contract/notional values, 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 were as follows: Commitment to Commitment to Purchase (Futures, Sell (Futures, Options & Forwards) Options & Forwards) -------------------- -------------------- Interest Rates $ 237,102,957 $ 183,615,337 Stock Indices 13,728,737 6,759,498 Currencies 296,018,497 334,030,991 Metals 18,491,709 29,682,273 -------------------- -------------------- $ 565,341,900 $ 554,088,099 ==================== ==================== 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 -13- has credit risk because the sole counterparty or broker with respect to most of the Partnership's assets is MLF. The Partnership controls credit risk by dealing almost exclusively with Merrill Lynch entities as brokers and counterparties. The Partnership, in its normal course of business, enters into various contracts, with MLF acting as its commodity broker. Pursuant to the brokerage arrangement with MLF, 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. /S/ Michael A. Karmelin Michael A. Karmelin Chief Financial Officer Merrill Lynch Investment Partners Inc. General Partner of John W. Henry & Co./Millburn L.P. -14- EX-27 3 FINANCIAL DATA SCHEDULE
BD 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 0 0 514,158 779,075 0 0 0 0 63,024,164 60,834,087 0 0 63,538,322 61,613,162 0 0 514,158 779,074 0 0 0 0 0 0 0 0 0 0 0 0 0 0 63,024,164 60,834,088 63,538,322 61,613,162 0 6,989,192 0 1,842,887 0 5,406,851 0 0 0 0 0 0 0 0 7,357,688 10,384,330 7,357,688 10,384,330 0 0 0 0 7,357,688 10,384,330 24.97 31.67 24.97 31.67
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