<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1999
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-16746
ML FUTURES INVESTMENTS II L.P.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3481305
-------------------------------------- --------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Merrill Lynch Investment Partners Inc.
Princeton Corporate Campus
800 Scudders Mill Road - Section 2G
Plainsboro, New Jersey 08536
----------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (609) 282-6996
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Limited
Partnership Units
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No __
-----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant: the registrant is a limited partnership: as of
February 1, 2000, limited partnership units with an aggregate value of
$9,607,310 were outstanding and held by non-affiliates.
Documents Incorporated by Reference
The registrant's "1999 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1999,
is incorporated by reference into Part II, Item 8 and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
ML FUTURES INVESTMENTS II L.P.
ANNUAL REPORT FOR 1999 ON FORM 10-K
Table of Contents
PART I
------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 5
Item 3. Legal Proceedings............................................................................. 6
Item 4. Submission of Matters to a Vote of Security Holders........................................... 6
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 6
Item 6. Selected Financial Data....................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 13
Item 8. Financial Statements and Supplementary Data................................................... 14
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 14
PART III
--------
Item 10. Directors and Executive Officers of the Registrant............................................ 14
Item 11. Executive Compensation........................................................................ 16
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 16
Item 13. Certain Relationships and Related Transactions................................................ 16
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 18
</TABLE>
-i-
<PAGE>
PART I
Item 1: Business
(a) General Development of Business:
-------------------------------
ML Futures Investments II L.P. (the "Partnership") was
organized under the Delaware Revised Uniform Limited Partnership Act on January
20, 1987 and began trading operations on May 2, 1988. The Partnership made a
single offering of its units of limited partnership interest ("Units"). Units
may be redeemed as of the end of each calendar month. The Partnership engages
(currently, through an investment in a limited liability company, see below) in
the speculative trading of a portfolio of futures, options on futures, forwards
and options on forward contracts and related options in the currencies, interest
rates, stock index, metals, agricultural and energy sectors of the world futures
markets. The Partnership's objective is achieving, through speculative trading,
substantial capital appreciation over time.
Merrill Lynch Investment Partners Inc. ("MLIP") is the general
partner of the Partnership and selects and allocates the Partnership's assets
(through the Partnership's investment in ML Multi-Manager Portfolio LLC ("MM
LLC"), among professional advisors ("Advisors"), each unaffiliated with MLIP and
each of which trades independently of the others. The Partnership and MM LLC are
referred to throughout this document, either individually and/or collectively,
as the "Fund". Merrill Lynch Futures Inc. ("MLF") is the Fund's commodity
broker. A portion of the Fund's assets is held by a commodity broker,
other than MLF, to facilitate the trading of a certain independent advisor. MLIP
is a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in turn, is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). MLF is an
indirect wholly-owned subsidiary of ML&Co. (ML&Co. and its affiliates are herein
sometimes referred to as "Merrill Lynch.")
Prior to October 1, 1996, the Partnership placed assets with
the Advisors by opening individual managed accounts with them. For the period
from October 1, 1996 to May 31, 1998, the Partnership placed assets with certain
of the Advisors through investing in private funds ("Trading LLCs") sponsored by
MLIP, through which the trading accounts of different MLIP-sponsored funds
managed by the same Advisor pursuant to the same strategy were consolidated. The
only members of the Trading LLCs were commodity pools sponsored by MLIP. Placing
assets with an Advisor through investing in a Trading LLC rather than a managed
account had no economic effect on the Partnership, except to the extent that the
Partnership benefited 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). As of June 1, 1998, MLIP consolidated the trading
accounts of nine of its multi-advisor funds (the "Multi-Advisor Funds"),
including the Fund. The consolidation was achieved by having these Multi-
Advisor Funds invest in a single Delaware limited liability company, MM LLC,
which opened a single account with each Advisor selected. MM LLC is managed by
MLIP, has no investors other than the Multi-Advisor Funds and serves solely as
the vehicle through which the assets of such Multi-Advisor Funds are combined in
order to be managed through single rather than multiple accounts. The placement
of assets into MM LLC did not change the operations or fee structure of the
Partnership. The administrative authority over the Partnership, as well as MM
LLC, remains with MLIP. The following disclosures relate to the operation of the
Partnership through its investment in MM LLC.
As of December 31, 1999, the capitalization of the Fund was
$9,849,935, and the Net Asset Value per Unit, originally $100 as of May 2, 1988,
had risen to $185.80.
Through December 31, 1999 the net gain in the Net Asset Value
per Unit was 85.80%. The highest month-end Net Asset Value per Unit was $189.05
(April 30, 1999) and the lowest $105.26 (May 31, 1988).
(b) Financial Information about Segments:
------------------------------------
The Partnership's business constitutes only one segment for
financial reporting purposes, i.e., a speculative "commodity pool." The
Partnership does not engage in sales of goods or services.
-1-
<PAGE>
(c) Narrative Description of Business:
---------------------------------
General
The Fund trades in the international futures, options on
futures, forwards and options on forward markets with the objective of achieving
substantial capital appreciation over time.
MLIP is MM LLC's trading manager with responsibility for
selecting Advisors to manage MM LLC's assets, allocating and reallocating MM
LLC's assets among different Advisors.
Although considered as a whole, the Fund trades in a
diversified range of international markets. Certain of the Advisors, considered
individually, concentrate primarily on trading in a limited portfolio of
markets. The composition of the "sectors" included in the Partnership's
portfolios varies substantially over time.
MLIP may, from time to time, direct certain individual
Advisors to manage their Fund accounts as if they were managing more equity than
the actual capital allocated to them.
One of the objectives of the Fund is to provide
diversification for a limited portion of the risk segment of the Limited
Partners' portfolios. Commodity pool performance has historically demonstrated a
low degree of performance correlation with traditional stock and bond holdings.
Since it began trading, the Fund's returns have, in fact, frequently been
significantly non-correlated with the United States stock and bond markets.
Use of Proceeds and Interest Income
Market Sectors. The Fund trades in a diversified group of
--------------
markets under the direction of multiple 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.
Market Types. The Fund trades on a variety of United States
------------
and foreign futures exchanges. Substantially all of the Fund's off-exchange
trading takes place in the highly liquid, institutionally-based currency forward
markets.
Many of the Partnership's currency trades are executed in the
spot and forward foreign exchange markets (the "FX Markets") where there are no
direct execution costs. Instead, the participants, banks and dealers, in the FX
Markets take a "spread" between the prices at which they are prepared to buy and
sell a particular currency and such spreads are built into the pricing of the
spot or forward contracts with the Partnership.
In its exchange of futures for physical ("EFP") trading, the
Partnership acquires cash currency positions through banks and dealers,
including Merrill Lynch. The Partnership pays a spread when it exchanges these
positions for futures. This spread reflects, in part, the different settlement
dates of the cash and the futures contracts, as well as prevailing interest
rates, but also includes a pricing spread in favor of the banks and dealers,
which may include a Merrill Lynch entity.
As in the case of its market sector allocations, the Fund's
commitments to different types of markets -- U.S. and non-U.S., regulated and
unregulated -- differ substantially from time to time as well as over time.
-2-
<PAGE>
The Fund's financial statements contain information relating
to the types of markets traded by the Fund. There can, however, be no assurance
as to which markets the Fund may trade or as to how the Fund's trading may be
concentrated at any one time or over time.
Custody of Assets. The majority of the Fund's assets are
-----------------
currently held in customer accounts at Merrill Lynch.
Interest paid by Merrill Lynch on the Fund's U.S. Dollar and
------------------------------------------------------------
Non U.S. Dollar Assets. A majority of the Fund's U.S. dollar assets are
- -----------------------
maintained at MLF. On assets held in U.S. dollars, Merrill Lynch credits the
Fund with interest at the prevailing 91-day U.S. Treasury bill rate. The Fund is
credited with interest on any of its net gains actually held by Merrill Lynch in
non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch.
Merrill Lynch may derive certain economic benefit, in excess of the interest
which Merrill Lynch pays to the Fund, from possession of such assets.
Merrill Lynch charges the Fund Merrill Lynch's cost of
financing realized and unrealized losses on the Fund's non-U.S.
dollar-denominated positions.
Charges
The following table summarizes the charges incurred by the
Fund during 1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------------------------------------------------------------
%of Average %of Average %of Average
Dollar Month-End Dollar Month-End Dollar Month-End
Charges Amount Net Assets Amount Net Assets Amount Net Assets
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brokerage
Commissions $ -- 0.00% $198,734 1.70% $595,634 4.37%
Administrative
Fees -- 0.00% 5,678 0.05% 16,844 0.12%
Profit Shares -- 0.00% -- 0.00% 10,277 0.08%
--------------------------------------------------------------------------------------
Total $ -- 0.00% $204,412 1.75% $622,755 4.57%
======================================================================================
</TABLE>
Subsequent to October 1, 1996, Brokerage Commissions,
Administrative Fees and Profit Shares are not representative of the actual
amounts paid by the Fund, because the Fund paid the bulk of these fees as an
investor in the Trading LLCs or MM LLC. See "Description of Current Charges."
During 1999, the Fund had 100% of its assets invested in MM LLC.
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 assets in
offset accounts.
-3-
<PAGE>
The Fund's average month-end Net Assets during 1999, 1998 and
1997 equaled $10,434,351, $11,668,311, and $13,632,115, respectively.
Subsequent to October 1, 1996, interest income does not
represent the actual amounts received by the Fund since the bulk of the interest
was received by the Fund as an investor in the Trading LLCs or MM LLC. During
1999, the Fund had invested 100% of its assets in MM LLC. During 1998 and 1997,
the Fund earned $118,183 and $345,022 in interest income, or approximately
1.01% and 2.53% of the Fund's average month-end Net Assets.
Effective February 1, 1997, the Brokerage Commissions paid by
the Fund were reduced from 9.75% to 8.75% per annum.
The variations in charges are primarily due to placing assets
in Trading LLCs and MM LLC (See Item 7).
------------------------------
Description of Current Charges
<TABLE>
<CAPTION>
Recipient Nature of Payment Amount of Payment
- --------- ----------------- -----------------
<S> <C> <C>
MLF Brokerage Commissions A flat-rate monthly commission of 0.7291 of 1% of the Fund's month-end assets
(an 8.75% annual rate).
During 1999, the Fund paid round-turn commissions through its investment in MM
LLC. During 1998 and 1997, 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 $121 and $130, respectively.
MLF Use of Fund assets Merrill Lynch may derive an economic benefit from the deposit of certain of the
Fund's U.S. dollar assets in offset account.
MLIP Administrative Fees The Fund pays MLIP a monthly Administrative Fee equal to 0.020833 of 1% of the
Fund's month-end assets (0.25% annually.) MLIP pays all of the Fund's routine
administrative costs.
MLIB; Other Bid-ask spreads Bid-ask spreads on forward and related trades.
Counterparties
</TABLE>
-4-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
Advisors Profit Shares All Advisors can receive quarterly or annual Profit Shares ranging
from 15% to 25% (depending on the Advisor) of any New Trading Profit
achieved by the Fund account. Profit Shares are also paid upon
redemption of Units and upon the net reallocation of assets away from
an Advisor. New Trading Profit is calculated separately in respect of
each Advisor, irrespective of the overall performance of the Fund.
The Fund and MM LLC may pay substantial Profit Shares during periods
when it is incurring significant overall losses.
Advisor Consulting Fees MLF currently pays the Advisors annual Consulting Fees ranging up to
1.75% of the Partnership's average month-end assets allocated to them
for management, after the reduction for a portion of brokerage
commissions.
MLF; Extraordinary expenses Actual costs incurred; none paid to date.
Others
</TABLE>
----------------------
Regulation
MLIP, the Advisors and MLF are each subject to regulation by
the Commodity Futures Trading Commission (the "CFTC") and the National Futures
Association. Other than in respect of its periodic reporting requirements under
the Securities Exchange Act of 1934, the Partnership itself is generally not
subject to regulation by the Securities and Exchange Commission. However, MLIP
itself is registered as an "investment adviser" under the Investment Advisers
Act of 1940.
(i) through (xii)-- not applicable.
(xiii) The Partnership has no employees.
(d) Financial Information about Geographic Areas:
--------------------------------------------
The Fund trades on a number of foreign commodity exchanges.
The Partnership does not engage in the sales of goods or services.
Item 2: Properties
----------
The Partnership does not use any physical properties in the
conduct of its business.
The Partnership's only place of business is the place of
business of MLIP (Princeton Corporate Campus, 800 Scudders Mill Road Section
2G, Plainsboro, New Jersey 08536). MLIP performs all administrative services for
the Partnership from MLIP's offices.
-5-
<PAGE>
Item 3: Legal Proceedings
-----------------
ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc.
(which is the sole stockholder of MLIP) -- as well as certain of its
subsidiaries and affiliates have been named as defendants in civil actions,
arbitration proceedings and claims arising out of their respective business
activities. Although the ultimate outcome of these actions cannot be predicted
at this time and the results of legal proceedings cannot be predicted with
certainty, it is the opinion of management that the result of these matters will
not be materially adverse to the business operations or the financial condition
of MLIP or the Fund.
MLIP itself has never been the subject of any material
litigation.
----------------------
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Partnership has never submitted any matter to a vote of
its Limited Partners.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
Item 5(a)
(a) Market Information:
------------------
There is no public trading market for the Units, nor will one
develop. Rather, Limited Partners may redeem Units as of the end of each month
at Net Asset Value.
(b) Holders:
-------
As of December 31, 1999, there were 303 holders of Units,
including MLIP.
(c) Dividends:
---------
The Partnership has made no distributions, nor does
MLIP presently intend to make any distributions in the future.
Item 5(b)
Not applicable.
-6-
<PAGE>
Item 6: Selected Financial Data
-----------------------
The following selected financial data has been derived from the
audited financial statements of the Partnership:
<TABLE>
<CAPTION>
For the Year For the Year For the Year For the Year For the Year
Ended Ended Ended Ended Ended
December 31, December 31, December 31, December 31, December 31,
Statement of Operations 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues
Trading Profit(Loss):
<S> <C> <C> <C> <C> <C>
Realized (Loss)Gain $ -- $ (451,217) $ 308,501 $ 3,382,048 $3,732,452
Change in Unrealized
(Loss)Gain -- (68,216) 64,324 (2,025,157) (120,416)
--------------------------------------------------------------------------------------
Total Trading Results -- (519,433) 372,825 1,356,891 3,612,036
--------------------------------------------------------------------------------------
Interest Income -- 118,183 345,022 668,742 806,886
--------------------------------------------------------------------------------------
Total Revenues -- (401,250) 717,847 2,025,633 4,418,922
--------------------------------------------------------------------------------------
Expenses:
Brokerage Commissions -- 198,734 595,634 1,418,126 1,622,255
Administrative Fees -- 5,678 16,844 36,362 --
Profit Shares -- -- 10,277 326,058 293,724
--------------------------------------------------------------------------------------
Total Expenses -- 204,412 622,755 1,780,546 1,915,979
--------------------------------------------------------------------------------------
Income from (Loss) Investments (124,747) 1,238,572 571,891 37,777 --
--------------------------------------------------------------------------------------
Net Income (Loss) $ (124,747) $ 632,910 $ 666,983 $ 282,864 $ 2,502.943
======================================================================================
December 31, December 31, December 31, December 31, December 31,
Balance Sheet Data 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------------------------------
Fund Net Asset Value $ 9,849,935 $ 11,209.662 $12,749,748 $ 14,296,652 $16,135,438
Net Asset Value per Unit $ 185.80 $ 187.99 $ 177.53 $ 169.46 $ 166.06
--------------------------------------------------------------------------------------
</TABLE>
The variations in statement of operations line items are primarily
due to investing in Trading LLCs and in MM LLC.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER UNIT
- -------------------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May. June July Aug. Sept. Oct. Nov. Dec.
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $137.22 $137.47 $145.26 $145.14 $154.53 $147.52 $145.50 $150.48 $151.82 $150.72 $155.36 $166.06
- -------------------------------------------------------------------------------------------------------------------------------
1996 $176.46 $165.47 $171.43 $177.03 $168.65 $163.61 $147.36 $153.84 $155.81 $165.00 $173.89 $169.46
- -------------------------------------------------------------------------------------------------------------------------------
1997 $173.97 $178.86 $177.05 $174.27 $175.72 $176.05 $182.93 $174.82 $178.29 $173.04 $173.19 $177.53
- -------------------------------------------------------------------------------------------------------------------------------
1998 $176.25 $176.78 $177.50 $170.80 $173.81 $173.98 $174.22 $183.74 $187.67 $187.09 $187.25 $187.99
- -------------------------------------------------------------------------------------------------------------------------------
1999 $185.62 $187.85 $187.00 $189.05 $187.56 $188.26 $188.64 $187.37 $184.64 $179.59 $184.41 $185.80
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to CFTC policy, monthly performance is presented from
January 1, 1995 even though the Units were outstanding prior to such date.
,
-7-
<PAGE>
ML FUTURES INVESTMENTS II L.P.
December 31, 1999
Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"(1)
Inception of Trading: May 2, 1988
Aggregate Subscriptions: $269,810,800
Current Capitalization: $9,849,935
Worst Monthly Drawdown(2): (9.93)% (7/96)
Worst Peak-to-Valley Drawdown(3): (16.76)% (5/96-7/96)
-------------
Net Asset Value per Unit, December 31, 1999: $185.80
<TABLE>
<CAPTION>
Monthly Rates of Return(4)
- --------------------------------------------------------------------------------
Month 1999 1998 1997 1996 1995
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January (1.26)% (0.72)% 2.66% 6.26% (3.26)%
- --------------------------------------------------------------------------------
February 1.20 0.30 2.81 (6.23) 0.18
- --------------------------------------------------------------------------------
March (0.45) 0.41 (1.01) 3.61 5.66
- --------------------------------------------------------------------------------
April 1.09 (3.77) (1.57) 3.26 (0.08)
- --------------------------------------------------------------------------------
May (0.79) 1.76 0.83 (4.73) 6.47
- --------------------------------------------------------------------------------
June 0.37 0.10 0.19 (2.99) (4.54)
- --------------------------------------------------------------------------------
July 0.20 0.14 3.91 (9.93) (1.36)
- --------------------------------------------------------------------------------
August (0.67) 5.46 (4.43) 4.39 3.42
- --------------------------------------------------------------------------------
September (1.46) 2.14 1.98 1.28 0.89
- --------------------------------------------------------------------------------
October (2.73) (0.31) (2.94) 5.90 (0.72)
- --------------------------------------------------------------------------------
November 2.68 0.09 0.09 5.39 3.08
- --------------------------------------------------------------------------------
December 0.75 0.40 2.51 (2.55) 6.89
- --------------------------------------------------------------------------------
Compound Annual
Rate of Return (1.08)% 5.91% 4.78% 2.05% 17.07%
- --------------------------------------------------------------------------------
</TABLE>
(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 may allocate more than 25% of its trading assets
to one or more Advisors, it is referred to as a "Selected-Advisor" fund. Certain
funds, including funds sponsored by MLIP, are structured so as to guarantee to
investors that their investment will be worth no less than a specified amount
(typically, the initial purchase price) as of a date certain after the date of
investment. The CFTC refers to such funds as "principal protected." The
Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative
Monthly Rate of Return experienced since January 1, 1995 by the Fund; a drawdown
is measured on the basis of month-end Net Asset Value only, and does not reflect
intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest
percentage decline since January 1, 1995 from a month-end cumulative Monthly
Rate of Return without such cumulative Monthly Rate of Return being equaled or
exceeded as of a subsequent month-end. For example, if the Monthly Rate of
Return was (1)% in each of January and February, 1% in March and (2)% in April,
the Peak-to-Valley Drawdown would still be continuing at the end of April in the
amount of approximately (3)%, whereas if the Monthly Rate of Return had been
approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of
the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund
during the month of determination (including interest income and after all
expenses have been accrued or paid) divided by the total equity of the Fund as
of the beginning of such month.
-8-
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and
----------------------------------------------------------------
Results of Operations
---------------------
Advisor Selections
- ------------------
The Fund's results of operations depend on MLIP's ability to
select Advisors and the Advisors' ability to trade profitably. MLIP's selection
procedures and trading leveraging analysis, as well as the Advisors' trading
methods, are confidential, so that substantially the only available information
relevant to the Fund's results of operations is its actual performance record to
date. Because of the speculative nature of its trading, the Fund's past
performance is not necessarily indicative of its future results.
MLIP has made and expects to continue making frequent changes
to both trading asset allocations among Advisors and Advisor combinations as
well as from time to time adjusting the percentage of the Fund's assets
committed to trading.
MLIP's decision to terminate or reallocate assets among
Advisors is based on a combination of numerous factors. Advisors are, in
general, terminated primarily for unsatisfactory performance, but other factors
- -- for example, a change in MLIP's or an Advisor's market outlook, apparent
deviation from announced risk control policies, excessive turnover of positions,
changes in principals, commitment of resources to other business activities,
etc. -- may also have a role in the termination or reallocation decision. The
market judgment and experience of MLIP's principals is an important factor in
its asset allocation decisions.
MLIP has no timetable or schedule for making Advisor changes
or reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. There can be no assurance as to the frequency or number of
Advisor changes that may take place in the future, or as to how long any of the
current Advisors will continue to manage assets for the Fund.
General
- -------
A number of the Advisors are trend-following traders, whose
programs do not attempt to predict price movements. No fundamental economic
supply or demand analyses are used by these Advisors, and no macroeconomic
assessments of the relative strengths of different national economies or
economic sectors. Instead, the programs apply proprietary computer models to
analyzing past market data, and from this data alone attempt to determine
whether market prices are trending. These technical traders base their
strategies on the theory that market prices reflect the collective judgment of
numerous different traders and are, accordingly, the best and most efficient
indication of market movements. However, there are frequent periods during which
fundamental factors external to the market dominate prices.
If a trend-following Advisor's models identify a trend, they
signal positions which follow it. When these models identify the trend as having
ended or reversed, these positions are either closed out or reversed. Due to
their trend-following character, these Advisors' programs do not predict either
the commencement or the end of a price movement. Rather, their objective is to
identify a trend early enough to profit from it and detect its end or reversal
in time to close out the Fund's positions while retaining most of the profits
made from following the trend.
In analyzing the performance of trend-following programs,
economic conditions, political events, weather factors, etc., are not directly
relevant because only market data has any input into trading results.
Furthermore, there is no direct connection between particular market conditions
and price trends. There are so many influences on the markets that the same
general type of economic event may lead to a price trend in some cases but not
in others. The analysis is further complicated by the fact that the programs are
designed to recognize only certain types of trends and to apply only certain
criteria of when a trend has begun. Consequently, even though significant price
trends may occur, if these trends are not comprised of the type of intra-period
price movements which the programs are designed to identify, a trend-following
Advisor may miss the trend altogether.
In the case of the Advisors which implement strategies which
rely more on discretion and market judgment, it is not possible to predict, from
their performance during past market cycles, how they will respond to future
market events.
-9-
<PAGE>
Performance Summary
- -------------------
This performance summary is an outline description of how the Fund
performed in the past, not necessarily any indication of how it will perform in
the future. In addition, the general causes to which certain price movements
are attributed may or may not in fact have caused such movements, but simply
occurred at or about the same time.
The Advisors, as a group, are unlikely to be profitable in markets in which
such trends do not occur. Static or erratic prices are likely to result in
losses. Similarly, unexpected events (for example, a political upheaval,
natural disaster or governmental intervention) can lead to major short-term
losses as well as gains.
While there can be no assurance that any Advisor will be profitable, under
any given market condition, markets in which substantial and sustained price
movements occur typically offer the best profit potential for the Fund.
1999
During 1999, all of the Fund's assets were invested in MM LLC. The Fund
received trading profits as an investor in MM LLC. The following commentary for
1999 describes the trading results for MM LLC during the year.
The Fund finished 1999 with gains in energy, stock index and agricultural
trading and losses in currency, interest rate and metal trading. Commodities
spent 1999 in a transition phase, shifting from bearishness to a more neutral
position. Lack of demand, particularly in Asia, was the dominant factor in the
overall decline in commodity prices.
Overall, the Fund profited from trading in crude oil, heating oil, and
unleaded gas in 1999. Positions in crude oil offset losses from short positions
in natural gas and gas oil trading. In March, OPEC ratified new production cuts
totaling 1.716 barrels per day at its conference, which resulted in higher
prices for crude. In the natural gas markets, prices rallied sharply resulting
from a decline in U.S. natural gas production, along with high levels of energy
consumption and weather scares throughout the country. Near the end of the year,
there was a continued upward momentum in crude oil reflecting the tightening
between supply and demand and a new, higher OPEC-indicated target price.
Stock index trading was profitable for the first half of 1999. The Dow
Jones Industrial Average closed above the 10,000 mark for the first time ever at
the end of March, setting the record for the index, and equity markets rallied
worldwide in April and June. In the second half of the year, the Fund suffered
losses in stock index positions as trading was mixed due to significant
volatility globally. However, there was profitable trading in Hang Seng, Nikkei
225 and Topix Indices which resulted in gains during November and December. Such
activity depicted evidence of Japan's stronger-than-expected recovery coupled
with a sudden decline in its unemployment rate.
In agricultural trading, gains in live hogs and live cattle offset losses
in corn positions. Initially, the corn market continued to struggle due to
supply/demand imbalances and ongoing favorable weather in South America. These
factors also led to an increase in prices as there was a sharp decline in crop
ratings during the second half of the year. There was also a sharp upturn in soy
prices, and losses in coffee trading became evident due to cold temperature and
lack of rainfall in Brazil.
Currency trading produced losses for the Fund throughout the year. Long
Japanese yen positions resulted in losses despite the yen trading higher against
the dollar. The Bank of Japan lowered rates to keep their economy sufficiently
liquid to allow fiscal spending to restore some growth to the economy and to
drive down the surging yen. The European Central Bank raised the repo rate in
November due to inflation pressures. On a trade-weighted basis, the Swiss franc
ended the first quarter to close at a seven-month low, mostly as a result of the
stronger US dollar. The Canadian dollar also underwent similar fluctuations
throughout the year.
Interest rate trading was also volatile as the flight to quality in the
bond market reversed during the first half of 1999 and the Federal Reserve
raised interest rates three times during the year. Early in the year, interest
rate trading proved unprofitable for the fund, which was triggered by the
Japanese Trust Fund Bureau's decision to absorb a smaller share of futures
issues, leaving the burden of financing future budget deficits to the private
sector. Interest rate trading did gain strength at mid-year as the flight to
quality in the bond market reversed and concerns about higher interest rates in
the U.S. continued to rattle the financial markets. During the third quarter,
Eurodollar trading generated losses amidst speculation of the probability of a
tightening by the U.S. Federal Reserve, which became evident with the higher
interest rates in their November 16 meeting due to concerns of inflation. In
December, the yield on the 30-year Treasury bond recently surpassed its October
high propelled by inflation worries and fears the Federal Reserve might tighten
further in 2000.
Metals trading was mixed for the year as gold played a major part in the
volatility of the metals market. Gold had failed to maintain its status as a
safety vehicle and a monetary asset during the first half of 1999. In early
June, gold had reached its lowest level in over 20 years. A major statement from
the president of the European Central Bank stated that the member banks had
agreed not to expand their gold lending. This sent gold prices sharply higher in
late September. Unfortunately, the Fund held short positions in gold futures at
that time. Gold prices had stabilized in the fourth quarter following the price
surge. Early in the year, burdensome warehouse stocks and questionable demand
prospects weighed on base metals as aluminum fell to a five-year low and copper
fell to nearly an 11-year low. The economic scenario for Asia, Brazil, Europe
and emerging market nations helped to keep copper and other base metals on the
defensive as demand receded with virtually no supply side response in the second
quarter. A substantial increase in Chinese imports combined with the recovery in
the rest of Asia and Europe had significantly improved demand for aluminum
pushing prices higher during December.
1998
Total Trading
Results
Interest Rates and Stock Indices $(132,201)
Commodities (23,769)
Currencies (367,635)
Energy 18,372
Metals (14,200)
-----------
$(519,433)
===========
Global interest rate markets provided the Fund with its most
profitable positions for the first quarter, particularly in European bonds where
an extended bond market rally continued despite an environment of robust growth
in the United States, Canada and the United Kingdom, as well as a strong pick-up
in growth in continental Europe. In the second quarter, swings in the U.S.
dollar and developments in Japan affected bond markets, causing the Fund's
interest rate trading to result in losses. This was turned around in the third
quarter, as markets worldwide were turned upside down and the Fund's non-
correlation with general equity and debt markets was strongly exhibited, and
trading was particularly profitable in positions in Eurodollars, German and
Japanese bonds, and U.S. Treasury notes and bonds. Global investors staged a
major flight to quality, resulting in a significant widening of credit spreads
on a global basis. In October, investors pushed the yields on U.S. Treasury
bonds to a 31-year low. The long bond yield fell about 75 basis points in 1998
as the world economy slowed more than expected, inflation continued to fall, the
anticipated small U.S. budget deficit turned into substantial surplus, and the
Fed lowered interest rates.
Trading results in stock index markets were mixed in early 1998,
despite a strong first-quarter performance by the U.S. equity market as several
consecutive weekly gains were recorded with most market averages setting new
highs. Second quarter results were profitable as the Asia-Pacific region's
equity markets weakened across the board. In particular, Hong Kong's Hang Seng
index trended downward during most of the second quarter and traded at a three-
year low. As U.S. equity markets declined in July and August, the Fund profited
from short positions in the S&P 500, most notably during August, when the index
dropped 14.5%. Volatility in September made for a difficult trading environment
in the stock index sector, and the Fund incurred modest losses, although results
remained profitable for the quarter and the year overall in these markets.
In energy markets, demand for crude oil in the Middle East was
affected by low oil prices early in the year, and trading resulted in losses.
Initially buoyed on concerns about a U.S.-led military strike against Iraq,
crude oil fell to a nine-year low, as the globally warm winter, the return of
Iraq as a producer and the Asian economic crisis added to OPEC's supply glut
problems. Despite production cuts initiated by OPEC at the end of March, world
oil supplies remained excessive and oil prices stood at relatively low levels
throughout the first half of 1998. Short heating oil positions in the third
quarter proved profitable for the Fund as the market for heating oil prices
dropped to its lowest level in more than a decade. In early December, oil and
natural gas prices dropped sharply, causing continued problems for many emerging
market countries that depend on commodity exports for economic growth and
government financing. These price pressures were mainly due to excessive supply
availability and near-term weather indications that inventories would remain at
more than adequate levels even in the event of a cold Northern Hemisphere
winter. Also, the December U.S. air attack on Iraq failed to cause any damage
to oil pumping and shipping operations, and oil prices fell over 10%.
-10-
<PAGE>
In currency markets, results early in the year were mixed, but
unprofitable. During the second quarter, strong gains were realized in
positions in the Japanese yen, which weakened during June to an eight-year low
versus the U.S. dollar. Significant gains from Japanese yen trading continued
into the third quarter, and Japan's problems spread to other sectors of the
global economy, causing commodities prices to decline as demand from the Asian
economies weakened. Japan's deepening recession and credit crunch continued
through the fourth quarter, and the Fund achieved gains from long yen positions.
In agricultural commodity markets, 1998 began with strong gains as
live cattle and hog prices trended downward throughout the first quarter. In
the second quarter, although the U.S. soybean crop got off to a good start which
contributed to higher yield expectations and a more burdensome supply outlook,
soybean prices traded in a volatile pattern. Sugar futures maintained mostly a
downtrend, as no major buyers emerged to support the market. Similarly, coffee
prices trended downward, as good weather conditions in Central America and
Mexico increased the prospects of more output from these countries. The third
quarter resulted in losses as the U.S. soybean crop increased relative to the
USDA's production estimate as a result of timely rains, which contributed to
lower prices. These losses continued into the fourth quarter as the Fund was
caught on the short side of the soybean complex, as the soybean supply surplus
became more manageable following the November 10th USDA reports, causing prices
to gain upward momentum.
Gold prices began the year drifting sideways, and continued to weaken
following news in the second quarter of a European Central Bank consensus that
ten to fifteen percent of reserves should be made up of gold bullion, which was
at the low end of expectations. Gold was unable to extend third quarter rallies
or to build any significant upside momentum, resulting in a trendless
environment. This was also the case in the fourth quarter, as gold's cost of
production declined. Also, silver markets remained range-bound, while also
experiencing a significant selloff in November, and aluminum traded at its
lowest levels since 1994, with many aluminum smelters operating at a loss.
1997
Total Trading
Results
Interest Rates and Stock Indices $ 58,472
Commodities (159,382)
Currencies 382,671
Energy 41,509
Metals 49,555
---------
$ 372,825
=========
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 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
-11-
<PAGE>
goals. From August through mid-November, the dollar corrected against the
Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By
mid-December the dollar had bounced back to new highs against the yen and was
rallying against the mark.
Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. By the middle of the
year, economic data in key countries was positive indicating lower inflation and
igniting a worldwide rally in the bond markets. Specifically, investor
sentiment was particularly strong in the U.S., where prices on the 30-year
Treasury bond and 10-year Treasury note rose to their highest levels in over two
years. This followed a largely positive economic report delivered by Federal
Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
In energy markets, a slump in crude oil prices was characteristic of its
lackluster performance from the beginning of the year. Early in 1997,
volatility returned in the energy markets, reflecting the impact of a winter
significantly warmer than normal. By mid-year, the decline in prices reversed
sharply as Saudi Arabia and Iran, together representing about 45% of OPEC's oil
production, joined forces to pressure oil-producing nations to stay within OPEC
production quotas. In December, financial and economic problems in Asia reduced
demand for oil, and, in combination with ample supplies, resulted in crude oil
prices declining once again.
-12-
<PAGE>
Variables Affecting Performance
- -------------------------------
The principal variables which determine the net performance of
the Fund are gross profitability and interest income. During all periods set
forth under "Selected Financial Data," the interest rates in many countries were
at unusually low levels. The low interest rates in the United States (although
higher than in many other countries) negatively impacted revenues because
interest income is typically a major component of the Fund's profitability. In
addition, low interest rates are frequently associated with reduced fixed income
market volatility, and in static markets the Fund's profit potential generally
tends to be diminished. On the other hand, during periods of higher interest
rates, the relative attractiveness of a high risk investment such as the Fund
may be reduced as compared to high yielding and much lower risk fixed-income
investments.
The Fund's Brokerage Commissions and Administrative Fees are a
constant percentage of the Fund's assets allocated to trading. The only Fund
costs (other than the insignificant currency trading costs) which are not based
on a percentage of the Fund's assets (allocated to trading or total) are the
Profit Shares payable to the Advisors on an Advisor-by-Advisor basis. During
periods when Profit Shares are a high percentage of net trading gains, it is
likely that there has been substantial performance non-correlation among the
Advisors (so that the total Profit Shares paid to those Advisors which have
traded profitably are a high percentage, or perhaps even in excess, of the total
profits recognized, as other Advisors have incurred offsetting losses, reducing
overall trading gains but not the Profit Shares paid to the successful Advisors)
- -- suggesting the likelihood of generally trendless, non-consensus markets.
Unlike many investment fields, there is no meaningful
distinction in the operation of the Fund between realized and unrealized
profits. Most of the contracts traded by the Fund are highly liquid and can be
closed out at any time.
Except in unusual circumstances, factors -- regulatory
approvals, cost of goods sold, employee relations and the like -- which often
materially affect an operating business have virtually no impact on the Fund.
Liquidity; Capital Resources
- ----------------------------
The Fund sells no securities other than the Units. The Fund
borrows only to a limited extent and only on a strictly short-term basis in
order to finance losses on non-U.S. dollar denominated trading positions pending
the conversion of the Fund's dollar deposits. These borrowings are at a
prevailing short-term rate in the relevant currency. They have been immaterial
to the Fund's operation to date and are expected to continue to be so.
Substantially all of the Fund's assets are held in cash. The
Net Asset Value of the Fund's cash is not affected by inflation. However,
changes in interest rates could cause periods of strong up or down price trends,
during which the Fund's profit potential generally increases. Inflation in
commodity prices could also generate price movements which the strategies might
successfully follow.
Except in very unusual circumstances, the Fund should be able
to close out any or all of its open trading positions and liquidate any or all
of its securities holdings quickly and at market prices. This permits an Advisor
to limit losses as well as reduce market exposure on short notice should its
strategies indicate doing so. In addition, because there is a readily available
market value for the Fund's positions and assets, the Fund's monthly Net Asset
Value calculations are precise, and investors need only wait 10 business days to
receive the full redemption proceeds of their Units.
Year 2000 Compliance Initiative
In 1999, Merrill Lynch completed its efforts to address the Year
2000 issue (the "Y2K issue"). The Y2K issue was the result of a widespread
programming technique that caused computer systems to identify a date based on
the last two numbers of a year, with the assumption that the first two numbers
of the year are "19". As a result, the year 2000 would be stored as "00",
causing computers to incorrectly interpret the year as 1900. Left uncorrected,
the Y2K issue may have caused serious failures in information technology systems
and other systems.
In 1995, Merrill Lynch established the Year 2000 Compliance
Initiative to address the internal and external risks associated with the Y2K
issue. The initiative consisted of six phases, completed by the millennium:
planning, pre-renovation, renovation, production testing, certification, and
integration testing. Contingency plans were established in the event of any
failures or disruptions.
Through the date of this filing, there have been no material
failures or disruptions of systems or services at Merrill Lynch attributable to
the Y2K issue. Similarly we have not been notified of any material failure or
disruption of systems or services affecting third parties in their capacity to
transact business with Merrill Lynch or in Merrill Lynch's capacity to transact
business with others. Merrill Lynch continues to monitor the performance of its
systems for any possible future failures or disruptions attributable to the Y2K
issue.
As of December 31, 1999, the total estimated expenditures of
existing and incremental resources for the Year 2000 Compliance Initiative was
approximately $510 million, including $102 million of occupancy, communications,
and other related overhead expenditures, as Merrill Lynch is applying a fully
costed pricing methodology for this project. At December 31, 1999, of the total
estimated expenditures, approximately $12 million, related to continued testing,
contingency planning, risk management, and the wind down of the efforts, had not
yet been spent.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not Applicable.
-13-
<PAGE>
Item 8: Financial Statements and Supplementary Data
-------------------------------------------
The financial statements required by this Item are included in Exhibit
13.01.
The supplementary financial information ("selected quarterly financial
data" and "information about oil and gas producing activities") specified by
Item 302 of Regulation S-K is not applicable. MLIP promoted the Fund and is its
controlling person.
Item 9: Changes in and Disagreements with Accountants on Accounting and
----------------------------------------------------------------
Financial Disclosure
--------------------
There were no changes in or disagreements with independent auditors on
accounting or financial disclosure.
PART III
Item 10: Directors and Executive Officers of the Registrant
--------------------------------------------------
10(a) & 10(b) Identification of Directors and Executive Officers:
--------------------------------------------------
As a limited partnership, the Partnership itself has no officers
or directors and is managed by MLIP. Trading decisions are made by the Advisors
on behalf of the Partnership. MLIP promoted the Fund and its controlling person.
The directors and executive officers of MLIP and their respective
business backgrounds are as follows.
John R. Frawley, Jr. Chairman, Chief Executive Officer,
President and Director
Jeffrey F. Chandor Senior Vice President, Director of
Sales, Marketing and Research and Director
Michael L. Pungello Vice President, Chief Financial Officer and
Treasurer
Allen N. Jones Director
Stephen G. Bodurtha Director
Michael J. Perini Director
Steven B. Olgin Vice President, Secretary and
Director of Administration
John R. Frawley, Jr. was born in 1943. Mr. Frawley is
Chairman, Chief Executive Officer, President and a Director of MLIP and
Co-Chairman of MLF. He joined Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S") in 1966 and has served in various positions, including Retail and
Institutional Sales, Manager of New York Institutional Sales, Director of
Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets
and Director of International Institutional Sales. Mr. Frawley holds a Bachelor
of Science degree from Canisius College. Mr. Frawley served on the CFTC's
Regulatory Coordination Advisory Committee from its formation in 1990 through
its dissolution in 1994. Mr. Frawley has served four consecutive one-year terms
as Chairman of the Managed Funds Association (formerly, the Managed Futures
Association), a national trade association that represents the managed futures,
hedge funds and fund of funds industry. Mr. Frawley currently serves as a member
of the CFTC's Global Markets Advisory Committee.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior
Vice President, Director of Sales, Marketing and Research and a Director of
MLIP. He joined MLPF&S in 1971 and has served as the Product Manager of
International Institutional Equities, Equity Derivatives and Mortgage-Backed
Securities as well as Managing Director of International Sales in the United
States, and Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor
of Arts degree from
-14-
<PAGE>
Trinity College, Hartford, Connecticut. Mr. Chandor is serving a two-year term
as a director of the Managed Funds Association.
Michael L. Pungello was born in 1957. Effective May 1, 1999,
Mr. Pungello became Vice President, Chief Financial Officer and Treasurer of
MLIP. He was First Vice President and Senior Director of Finance for Merrill
Lynch's Operations, Services and Technology Group from January 1998 to March
1999. Prior to that, Mr. Pungello spent over 18 years with Deloitte & Touche
LLP, and was a partner in their Financial Services practice from June 1990 to
December 1997. He graduated from Fordham University in 1979 with a Bachelor of
Science degree in accounting and received his Master of Business Administration
degree in Finance from New York University in 1987.
Allen N. Jones was born in 1942. Mr. Jones is a Director of
MLIP and, from July 1995 until January 1998, Mr. Jones was also Chairman of the
Board of Directors of MLIP. Mr. Jones graduated from the University of Arkansas
with a Bachelor of Science, Business Administration degree in 1964. Since June
1992, Mr. Jones has held the position of Senior Vice President of MLPF&S. From
June 1992 through February 1994, Mr. Jones was the President and Chief Executive
Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board
of Directors of MLIG and its subsidiary companies. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a
Director of MLIP. In 1980, Mr. Bodurtha graduated magna cum laude from Wesleyan
University, Middletown, Connecticut with a Bachelor of Arts degree in
Government. From 1980 to 1983, Mr. Bodurtha worked in the Investment Banking
Division of Merrill Lynch. In 1985, he was awarded his Master of Business
Administration degree from Harvard University, where he also served as
Associates Fellow (1985 to 1986). From 1986 to 1989, Mr. Bodurtha held the
positions of Associate and Vice President with Kidder, Peabody & Co.,
Incorporated where he worked in their Financial Futures & Options Group. Mr.
Bodurtha joined MLPF&S in 1989 and has held the position of First Vice President
since 1995. He has been the Director in charge of the Structured Investments
Group of MLPF&S since 1995.
Michael J. Perini was born in 1947. Effective May 11, 1999, Mr.
Perini became a Director of MLIP. Since February 1998, Mr. Perini has been First
Vice President and Senior Director of the Defined and Managed Funds Group, which
includes Defined Asset Funds, Special Investments and MLIP. This is part of the
Investment Strategy Product Group of Merrill Lynch Private Client. Previously
Michael Perini was Director of Defined Asset Funds and has held various
management positions since he joined Merrill Lynch in 1970. Mr. Perini attended
St. John's University and New York University as well as The Stanford University
Marketing Management Program. He was elected to the Board of Governors of the
Investment Company Institute in Washington, D.C., and is Chairman of the Unit
Investment Trust Committee of the Institute.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice President,
Secretary and the Director of Administration of MLIP. He joined MLIP in July
1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr.
Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin
graduated from The American University with a Bachelor of Science degree in
Business Administration and a Bachelor of Arts degree in Economics. In 1986, he
received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is
a member of the Managed Funds Association's Government Relations Committee and
has served as an arbitrator for the NFA. Mr. Olgin is also a member of the
Committee on Futures Regulation of the Association of the Bar of the City of New
York.
As of December 31, 1999, the principals of MLIP had no
investment in the Fund, and MLIP's general partner interest in the Fund was
valued at $126,337.
MLIP acts as general partner to eleven public futures funds
whose units of limited partnership interest are registered under the Securities
Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, ML Futures
Investments L.P., John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R. Strategy
Fund (SM) L.P., The SECTOR Strategy Fund (SM) II L.P., The SECTOR Strategy Fund
(SM) V L.P., The SECTOR Strategy Fund (SM)VI L.P., ML Global Horizons L.P., ML
Principal Protection L.P., ML JWH Strategic Allocation Fund L.P. and the Fund.
Because MLIP serves as the sole general partner of each of these funds, the
officers and directors of MLIP effectively manage them as officers and directors
of such funds.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
None.
-15-
<PAGE>
(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 directors and executive officers of MLIP are remunerated
by MLIP in their respective positions. The Partnership does not itself have any
officers, directors or employees. The Partnership pays Brokerage Commissions to
an affiliate of MLIP and Administrative Fees to MLIP. MLIP or its affiliates may
also receive certain economic benefits from holding the Fund's assets. The
directors and officers receive no "other compensation" from the Partnership, and
the directors receive no compensation for serving as directors of MLIP. There
are no compensation plans or arrangements relating to a change in control of
either the Partnership or MLIP.
Item 12: Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1999, no person or "group" is known to be
or have been the beneficial owner of more than 5% of the Units.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1999, MLIP owned 680 Units (unit-equivalent
general partnership interests), which was less than 1.3% of the total Units
outstanding.
(c) Changes in Control:
------------------
None.
Item 13: Certain Relationships and Related Transactions
----------------------------------------------
(a) Transactions Between Merrill Lynch and the Fund
-----------------------------------------------
All of the service providers to the Fund, other than the
Advisors, are affiliates of Merrill Lynch. Merrill Lynch negotiated with the
Advisors over the level of its advisory fees and Profit Share. However, none of
the fees paid by the Fund to any Merrill Lynch party were negotiated, and they
are higher than would have been obtained in arm's-length bargaining.
The Fund pays Merrill Lynch substantial Brokerage Commissions
and Administrative Fees as well as bid-ask spreads on forward currency trades.
The Fund also pays MLF interest on short-term loans extended by MLF to cover
losses on foreign currency positions.
-16-
<PAGE>
Within the Merrill Lynch organization, MLIP is the direct
beneficiary of the revenues received by different Merrill Lynch entities from
the Fund. MLIP controls the management of the Fund and serves as its promoter.
Although MLIP has not sold any assets, directly or indirectly, to the Fund, MLIP
makes substantial profits from the Fund due to the foregoing revenues.
No loans have been, are or will be outstanding between MLIP or
any of its principals and the Fund.
MLIP pays substantial selling commissions and trailing
commissions to MLPF&S for distributing the Units. MLIP is ultimately paid back
for these expenditures from the revenues it receives from the Fund.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of MLIP, acts as the principal commodity
broker for the Partnership.
In 1999 the Partnership expensed the following fees: (i)
Brokerage Commissions of $924,030 to MLF, which included $124,179 in consulting
fees earned by the Advisors; and (ii) Administrative Fees of $26,401 to MLIP. In
addition, MLIP and its affiliates may have derived certain economic benefits
from possession of the Fund's assets, as well as from foreign exchange and EFP
trading.
See Item 1(c), "Narrative Description of Business -- Charges"
and "-- Description of Current Charges" 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.
-17-
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
<TABLE>
<CAPTION>
(a)1. Financial Statements (found in Exhibit 13.01): Page
--------------------------------------------- ----
<S> <C>
Independent Auditors' Report 1
Statements of Financial Condition as of December 31, 1999, 1998 and 1997 2
For the years ended December 31, 1999, 1998 and 1997:
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-10
(a)2. Financial Statement Schedules:
-----------------------------
</TABLE>
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:
<TABLE>
<CAPTION>
Designation Description
- ----------- -----------
<S> <C>
3.01(a) Amended and Restated Limited Partnership Agreement of the Partnership.
Exhibit 3.01(a): Is incorporated herein by reference from
- --------------- Exhibit 3.01(a) contained in Amendment No. 1 (as
Exhibit A) to the Registration Statement (File No.
33-12645) filed on February 2, 1988, on Form S-1
under the Securities Act of 1933 (the "Registrant's
Registration Statement").
3.01(b) Amendment No. 2 to the Amended and Restated Limited Partnership Agreement, dated March 1, 1990.
Exhibit 3.01(b): Is incorporated by reference from Exhibit 3.01(b) contained in the Partnership's report on Form
- ---------------- 10-K for the fiscal year ended December 31, 1989.
3.01(c) Amendment No. 3 to the Amended and Restated Limited Partnership Agreement, dated June 10, 1992.
Exhibit 3.01(c): Is incorporated by reference from Exhibit 3.01(c) contained in the Partnership's report on Form
- --------------- 10-K for the fiscal year ended December 31, 1992.
3.01(d) Amendment No. 4 to the Amended and Restated Limited Partnership Agreement, dated June 18, 1992.
Exhibit 3.01(d): Is incorporated by reference from Exhibit 3.01(d) contained in the Partnership's report on Form
- --------------- 10-K for the fiscal year ended December 31, 1992.
3.01(e) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1995.
Exhibit 3.01(e): Is incorporated herein by reference from Exhibit 3.01(e) contained in the Registrant's report on
- --------------- Form 10-Q for the Quarter Ended June 30, 1995.
</TABLE>
-18-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
10.02(a) Form of Consulting Agreement between each trading advisor, the Partnership and Merrill Lynch Futures Inc.
Exhibit 10.02(a): Is incorporated herein by reference from Exhibit 10.02(a) contained in the Registrant's
- ---------------- Registration Statement.
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 Inc.
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.
10.14(j) Form of Advisory Agreement between the Partnership, Merrill Lynch Investment Partners Inc.,
Merrill Lynch Futures Inc. and each Trading Advisor.
Exhibit 10.14(j): Is incorporated herein by reference from Exhibit 10.14(j) contained in the Registrant's report on
- ---------------- Form 10-Q for the Quarter Ended June 30, 1995.
13.01 1999 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
- -------------
13.01(a) 1999 Annual Report and Independent Auditors' Report for the following Trading Limited Liability
Company sponsored by Merrill Lynch Investment Partners Inc.:
ML Multi-Manager Portfolio LLC
Exhibit 13.01(a): Is incorporated herein by reference from Form 10-K (fiscal year ended December 31, 1999) 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(i) Prospectus of the Partnership, dated February 2, 1988.
Exhibit 28.01(i): Is incorporated herein by reference as
filed with the Securities and Exchange Commission
pursuant to Rule 424 under the Securities Act of
1933, on February 5, 1988.
28.01(ii) Prospectus of the Partnership dated July 5, 1988.
</TABLE>
-19-
<PAGE>
Exhibit 28.01(iii): Is incorporated herein by reference as
- ------------------- filed with the Securities and Exchange Commission
pursuant to Rule 424 under the Securities Act of
1933, on July 8, 1988.
(b) Report on Form 8-K:
------------------
No reports on Form 8-K were filed during the fourth quarter of
1999.
-20-
<PAGE>
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.
ML FUTURES INVESTMENTS II L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.
General Partner
By: /s/John R. Frawley, Jr.
-----------------------
John R. Frawley, Jr.
Chairman, Chief Executive
Officer, President and Director
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, this report has been signed on March 30, 2000
by the following persons on behalf of the Registrant and in the capacities
indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director March 30, 2000
- ------------------------
John R. Frawley, Jr. (Principal Executive Officer)
/s/ Michael L. Pungello Vice President, Chief Financial Officer, and Treasurer March 30, 2000
- -----------------------
Michael L. Pungello (Principal Financial and Accounting Officer)
/s/ Jeffrey F. Chandor Senior Vice President, Director of Sales, March 30, 2000
- ----------------------
Jeffrey F. Chandor Marketing and Research, and Director
/s/ Michael J. Perini Director March 30, 2000
- ---------------------------
Michael J. Perini
</TABLE>
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
MERRILL LYNCH INVESTMENT General Partner of Registrant March 30, 2000
PARTNERS INC.
By: John R. Frawley, Jr.
--------------------
John R. Frawley, Jr.
-21-
<PAGE>
ML FUTURES INVESTMENTS II L.P.
1999 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1999 Annual Report and Independent Auditors' Report
-22-
<PAGE>
Exhibit 13.01
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
Financial Statements for the
years ended December 31, 1999,
1998 and 1997 and Independent
Auditors' Report
[LOGO] Merrill Lynch
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of ML Futures Investments II L.P.:
We have audited the accompanying statements of financial condition of ML Futures
Investments II L.P. (the "Partnership") as of December 31, 1999 and 1998, and
the related statements of operations and of changes in partners' capital for
each of the three years in the period ended December 31, 1999. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ML Futures Investments II L.P. as of
December 31, 1999 and 1998, and the results of its operations and changes in
partners' capital for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 2000
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
--------------------- ---------------------
ASSETS
<S> <C> <C> <C>
Investments (Note 5) $ 9,849,935 $ 11,209,662
Receivable from investments (Note 5) 126,529 79,507
--------------------- ---------------------
TOTAL $ 9,976,464 $ 11,289,169
===================== =====================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 126,529 $ 79,507
--------------------- ---------------------
Total liabilities 126,529 79,507
--------------------- ---------------------
PARTNERS' CAPITAL:
General Partner (680 Units and 681 Units) 126,337 128,020
Limited Partners (52,335 Units and 58,947 Units) 9,723,598 11,081,642
--------------------- ---------------------
Total partners' capital 9,849,935 11,209,662
--------------------- ---------------------
TOTAL $ 9,976,464 $ 11,289,169
===================== =====================
NET ASSET VALUE PER UNIT
(Based on 53,015 and 59,628 Units outstanding) $ 185.80 $ 187.99
===================== =====================
</TABLE>
See notes to financial statements.
2
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------------- ------------------- -------------------
REVENUES:
Trading (loss) profit:
<S> <C> <C> <C>
Realized (Note 1) $ - $(451,217) $ 308,501
Change in unrealized (Note 1) - (68,216) 64,324
------------------- ------------------- -------------------
Total trading results - (519,433) 372,825
Interest income (Note 2) - 118,183 345,022
------------------- ------------------- -------------------
Total revenues - (401,250) 717,847
------------------- ------------------- -------------------
EXPENSES:
Brokerage commissions (Note 2) - 198,734 595,634
Profit Shares (Note 3) - - 10,277
Administrative fees (Note 2) - 5,678 16,844
------------------- ------------------- -------------------
Total expenses - 204,412 622,755
------------------- ------------------- -------------------
INCOME (LOSS) FROM INVESTMENTS (Note 5) (124,747) 1,238,572 571,891
------------------- ------------------- -------------------
NET (LOSS) INCOME $(124,747) $ 632,910 $ 666,983
=================== =================== ===================
NET INCOME (LOSS) PER UNIT:
Weighted average number of General Partner
and Limited Partner Units outstanding (Note 4) 56,241 65,680 78,000
=================== =================== ===================
Net income (loss) per weighted average General
Partner and Limited Partner Unit $ (2.22) $ 9.64 $ 8.55
=================== =================== ===================
</TABLE>
See notes to financial statements.
3
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Units General Partner Limited Partners Total
--------------- ---------------------- ----------------------- ------------------
PARTNERS' CAPITAL,
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1996 84,366 $ 208,266 $ 14,088,386 $ 14,296,652
Redemptions (12,548) - (2,213,887) (2,213,887)
Net income - 9,916 657,067 666,983
-------------- --------------------- ---------------------- -------------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 71,818 218,182 12,531,566 12,749,748
Redemptions (12,190) (95,248) (2,077,748) (2,172,996)
Net income - 5,086 627,824 632,910
-------------- --------------------- ---------------------- -------------------
PARTNERS' CAPITAL,
DECEMBER 31, 1998 59,628 128,020 11,081,642 11,209,662
Redemptions (6,613) (180) (1,234,800) (1,234,980)
Net loss - (1,503) (123,244) (124,747)
-------------- --------------------- ---------------------- -------------------
PARTNERS' CAPITAL,
DECEMBER 31, 1999 53,015 $ 126,337 $ 9,723,598 $ 9,849,935
============== ===================== ====================== ===================
</TABLE>
See notes to financial statements.
4
<PAGE>
ML FUTURES INVESTMENTS II L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML Futures Investments II L.P. (the "Partnership") was organized under the
Delaware Revised Uniform Limited Partnership Act on January 20, 1987 and
completed its initial public offering of units of limited partnership
interest ("Units") on April 28, 1988. The Partnership commenced trading
activities on May 2, 1988. The Partnership engages (currently, through an
investment in a limited liability company (see below)), in the speculative
trading of futures, options on futures, forwards and options on forward
contracts on a wide range of commodities. Merrill Lynch Investment
Partners Inc. ("MLIP") a wholly-owned subsidiary of Merrill Lynch Group,
Inc., which, in turn, is a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. ("Merrill Lynch"), is the general partner of the Partnership. MLIP
has agreed to maintain a general partner's interest of at least 1% of the
total capital in the Partnership. MLIP and each Limited Partner share in
the profits and losses of the Partnership in proportion to their
respective interests in it.
Many of the multi-advisor funds (the "Multi-Advisor Funds") sponsored by
MLIP allocate their assets to a number of the same independent advisors
(the "Advisors"). However, because different Multi-Advisor Funds had
historically allocated assets to slightly different Advisor groups, the
Multi-Advisor Funds often were required to open and maintain individual
trading accounts with each Advisor. MLIP consolidated the trading accounts
of nine of its Multi-Advisor Funds (including the Partnership) as of June
1, 1998. The consolidation was achieved by having these Multi-Advisor
Funds close their existing trading accounts and invest in a limited
liability company, ML Multi-Manager Portfolio L.L.C. ("MM LLC"), a
Delaware limited liability company, which opened a single account with
each Advisor selected. MM LLC is managed by MLIP, has no investors other
than the Multi-Advisor Funds and serves solely as the vehicle through
which the assets of such Multi-Advisor Funds are combined in order to be
managed through single rather than multiple accounts. The placement of
assets into MM LLC did not change the operations or fee structure of the
Partnership; therefore, the following notes relate to the operation of the
Partnership through its investment in MM LLC. The administrative authority
over the Partnership remains with MLIP. MLIP, on an ongoing basis, may
change the number of Multi-Advisor Funds investing in MM LLC.
MLIP selects the Advisors to manage MM LLC's assets, and allocates and
reallocates such trading assets among existing, replacement and additional
Advisors. Merrill Lynch Futures Inc. ("MLF"), an affiliate of Merrill
Lynch, is MM LLC's commodity broker.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that effect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
5
<PAGE>
Revenue Recognition
-------------------
Commodity futures, options on futures, forwards and options on forward
contracts are recorded on the trade date, and open contracts are reflected
in the net unrealized profit on open contracts in the Statements of
Financial Condition at the difference between the original contract value
and the market value (for the commodity interests for which market
quotations are readily available) or at fair value. The change in
unrealized profit (loss) on open contracts from one period to the next is
reflected in Trading profit (loss) Change in unrealized in the Statements
of Operations. (As a result of the investment in MM LLC, there were no
open contracts as of December 31, 1999 and 1998). See Note 5 for
discussion of revenue recognition for the Partnership's investment in
Trading LLC's and MM LLC.
Foreign Currency Transactions
-----------------------------
The Partnership's functional currency is the U.S. dollar; however, it
transacts business in currencies other than the U.S. dollar through MM
LLC. Assets and liabilities denominated in currencies other than the U.S.
dollar are translated into U.S. dollars at the rates in effect at the
dates of the Statements of Financial Condition. Income and expense items
denominated in currencies other than the U.S. dollar are translated into
U.S. dollars at the rates in effect during the period. Gains and losses
resulting from the translation to U.S. dollars are reported in total
trading results.
Operating Expenses
------------------
MLIP pays all routine operating expenses (including legal, accounting,
printing, postage and similar administrative expenses) of the Partnership.
MLIP receives an administrative fee as well as a portion of the brokerage
commissions paid to MLF, by the Partnership, through MM LLC.
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each Partner is individually responsible for reporting
income or loss based on such Partner's respective share of the
Partnership's income and expenses as reported for income tax purposes.
Distributions
-------------
The Limited Partners are entitled to receive, equally per Unit, any
distributions which may be made by the Partnership. No such distributions
had been made as of December 31, 1999.
Redemptions
-----------
A Limited Partner may redeem some or all of such Partner's Units at Net
Asset Value as of the close of business on the last business day of any
month upon ten calendar days' notice.
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2007 or at an earlier date
if certain conditions occur, as well as under certain circumstances as set
forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
The majority of the Partnership's U.S. dollar assets are maintained at
MLF. On assets held in U.S. dollars, Merrill Lynch credits the Partnership
through MM LLC with interest at the prevailing 91-day U.S.
6
<PAGE>
Treasury bill rate. The Partnership through MM LLC is credited with
interest on any of its net gains actually held by Merrill Lynch in non-U.S.
dollar currencies at a prevailing local rate received by Merrill Lynch.
Merrill Lynch may derive certain economic benefit, in excess of the
interest which Merrill Lynch pays to the Partnership through MM LLC, from
possession of such assets.
Merrill Lynch charges the Partnership through MM LLC Merrill Lynch's cost
of financing realized and unrealized losses on MM LLC's non-U.S.
dollar-denominated positions.
Through its investment in MM LLC the Partnership pays brokerage commissions
to MLF at a flat monthly rate of .729 of 1% (an 8.75% annual rate) and pays
MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of the
Partnership's month-end assets. Month-end assets are not reduced, for
purposes of calculating brokerage commissions and administrative fees, by
any accrued brokerage commissions, administrative fees, Profit Shares or
other fees or charges.
Prior to the investment in MM LLC, MLIP estimates that the round-turn
equivalent commission rate charged to the Partnership during the years
ended December 31, 1998 and 1997, was approximately $121 and $130,
respectively (not including, in calculating round-turn equivalents, forward
contracts on a futures-equivalent basis).
MLF currently pays the Advisors annual Consulting Fees up to 1.75% of the
Partnership's average month-end assets allocated to them for management,
after the reduction for a portion of brokerage commissions.
3. AGREEMENTS
Pursuant to the Advisory Agreements among the Advisors, MM LLC and MLIP,
the Advisors determined the commodity futures, options on futures, forwards
and options on forward contracts traded on behalf of MM LLC, subject to
certain rights reserved by MLIP. The Advisory Agreements
generally terminate one year after they are entered into, subject to
certain renewal rights.
Profit Shares, currently ranging from 20% to 23% of any New Trading Profit,
as defined, recognized by each Advisor, considered individually
irrespective of the overall performance of the Partnership, either as of
the end of each calendar quarter or year and upon the net reallocation of
assets away from an Advisor, are paid by MM LLC (Trading LLC's prior to
June 1, 1998) to each Advisor. Profit Shares are also paid out in respect
of Units redeemed as of the end of interim months, to the extent of the
applicable percentage of any New Trading Profit attributable of such Units.
4. 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 for the years ended December 31, 1999, 1998 and
1997 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 year.
5. INVESTMENTS
Prior to investing in MM LLC, the Partnership placed assets under the
management of certain of the Advisors by investing in private Limited
Liability Companies ("Trading LLC's") formed by MLIP. The only members of
the Trading LLC's were Commodity Pools sponsored by MLIP. Each Trading LLC
traded 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 a Trading LLC rather than a managed account had no economic
effect on the Partnership, except to the extent that the Partnership
7
<PAGE>
benefits from one Advisor not having to allocate trades among a number of
different accounts (rather than acquiring a single position for the Trading
LLC as a whole).
The investments in MM LLC and previously in certain Trading LLC's are
reflected in the financial statements at fair value based upon the
Partnership's interest in MM LLC. Fair value is equal to the market value
of the net assets of MM LLC allocable to the Partnership as investor. The
resulting difference between cost and fair value is reflected on the
Statements of Operations as Income (loss) from investments.
Total revenues and fees with respect to such investments are set forth as
follows:
<TABLE>
<CAPTION>
For the year ended Total Brokerage Administrative Profit Income (loss) from
December 31, 1999 Revenues Commissions Fees Shares Investments
- ----------------------- ----------------- ------------------ ------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C>
MM LLC $ 875,011 $ 924,030 $ 26,401 $ 49,327 $ (124,747)
================= ================== =================== ==================== ====================
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1998 Revenues Commissions Fees Shares Investments
- ----------------------- ----------------- ------------------ ------------------- -------------------- --------------------
Chesapeake LLC $ 414,289 $ 127,990 $ 3,657 $ 56,453 $ 226,189
SJO LLC 264,809 125,718 3,592 14,937 120,562
MM LLC 1,773,374 593,802 16,966 270,785 891,821
----------------- ------------------ ------------------- -------------------- --------------------
Total $ 2,452,472 $ 847,510 $ 24,215 $ 342,175 $ 1,238,572
================= ================== =================== ==================== ====================
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1997 Revenues Commissions Fees Shares Investments
- ----------------------- ----------------- ------------------ ------------------- -------------------- --------------------
Chesapeake LLC $ 663,146 $ 317,350 $ 8,977 $ 68,234 $ 268,585
SJO LLC 670,202 320,343 9,063 37,490 303,306
----------------- ------------------ ------------------- -------------------- --------------------
Total $ 1,333,348 $ 637,693 $ 18,040 $ 105,724 $ 571,891
================= ================== =================== ==================== ====================
</TABLE>
8
<PAGE>
Condensed statements of financial condition and statements of operations
for MM LLC, Chesapeake LLC and SJO LLC are set forth as follows:
<TABLE>
<CAPTION>
MM MM
LLC LLC
December 31, 1999 December 31, 1998
--------------------------------- ---------------------------------
<S> <C> <C>
Assets $ 100,901,677 $ 125,332,558
================================= =================================
Liabilities $ 2,906,392 $ 4,949,082
Members' Capital 97,995,285 120,383,476
--------------------------------- ---------------------------------
Total $ 100,901,677 $ 125,332,558
================================= =================================
For the period from
For the year ended June 1, 1998 to
December 31, 1999 December 31, 1998
--------------------------------- ---------------------------------
Revenues $ 9,090,190 $ 19,255,343
Expenses 10,152,017 9,491,842
--------------------------------- ---------------------------------
Net Income (loss) $ (1,061,827) $ 9,763,501
================================= =================================
<CAPTION>
Chesapeake LLC SJO LLC SJO LLC
For the period from For the period from Chesapeake LLC For the period from
January 1, 1998 to January 1, 1998 to For the year ended January 2, 1997 to
May 31, 1998 May 31, 1998 December 31, 1997 December 31, 1997
------------------------------ ----------------------------- -------------------------- -----------------
<S> <C> <C> <C> <C>
Revenues $ 1,986,835 $ 1,472,242 $ 3,480,491 $ 3,903,268
Expenses 903,412 802,878 2,055,126 2,144,078
------------------------------ ----------------------------- -------------------------- -----------------
Net Income (loss) $ 1,083,423 $ 669,364 $ 1,425,365 $ 1,759,190
============================== ============================= ========================== =================
</TABLE>
6. FAIR VALUE AND OFF-BALANCE SHEET RISK
As of June 1, 1998, the Partnership invested all of its assets in MM LLC.
Accordingly, the Partnership is invested indirectly in derivative
instruments, but does not itself hold any derivative instrument positions.
As such, MLIP does not believe that the adoption of the provisions of
Statement of Financial Accounting Standards No. 133 had a significant
effect on the financial statements of the Partnership. Consequently, no
such positions subsequent to May 31, 1998 are reflected in these financial
statements.
Market Risk
-----------
Derivative financial instruments involve varying degrees of off-balance
sheet market risk. Changes in the level or volatility of interest rates,
foreign currency exchange rates or the market values of the financial
instruments or commodities underlying such derivative instruments
frequently resulted in changes in the Partnership's net unrealized profit
on such derivative instruments as reflected in the Statements of Financial
Condition or, with respect to Partnership assets invested in Trading LLC's
and in MM LLC, the net unrealized profit as reflected in the respective
Statements of Financial Condition of the Trading LLC's and MM LLC. The
Partnership's exposure to market risk is influenced by a number of
factors, including the
9
<PAGE>
relationships among derivative instruments held by the Partnership, the
Trading LLC's and currently MM LLC, as well as the volatility and
liquidity of the markets in which such derivative instruments are traded.
MLIP has procedures in place intended to control market risk exposure,
although there can be no assurance that they will, in fact, succeed in
doing so. These procedures focus primarily on monitoring the trading of
the Advisors selected from time to time for the Partnership or MM LLC, and
include calculating the Net Asset Value of the Advisors' respective
Partnership accounts and Trading LLC accounts, or currently MM LLC
accounts, as of the close of business on each day and reviewing
outstanding positions for over-concentrations both on an Advisor-by-
Advisor and on an overall Partnership basis. While MLIP does not itself
intervene in the markets to hedge or diversify the Partnership's market
exposure, MLIP may urge Advisors to reallocate positions, or itself
reallocate Partnership assets among Advisors (although typically only as
of the end of a month) in an attempt to avoid over-concentrations.
However, such interventions are unusual. Except in cases in which it
appears that an Advisor has begun to deviate from past practice and
trading policies or to be trading erratically, MLIP's basic risk control
procedures consist simply of the ongoing process of advisor monitoring and
selection, with the market risk controls being applied by the Advisors
themselves.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically
perceived to be less than those associated with over-the-counter
(non-exchange-traded) transactions, because exchanges typically (but not
universally) provide clearinghouse arrangements in which the collective
credit (in some cases limited in amount, in some cases not) of the members
of the exchange is pledged to support the financial integrity of the
exchange. In over-the-counter transactions, on the other hand, traders
must rely solely on the credit of their respective individual
counterparties. Margins, which may be subject to loss in the event of a
default, are generally required in exchange trading, and counterparties
may require margin in the over-the-counter markets.
The Partnership has credit risk in respect of its counterparties and
brokers, but attempts to control this risk by dealing almost exclusively
with Merrill Lynch entities as counterparties and clearing brokers.
The Partnership, through MM LLC, in its normal course of business, enters
into various contracts, with MLF acting as its commodity broker. Pursuant
to the brokerage agreement with MLF (which includes a netting
arrangement), to the extent that such trading results in receivables from
and payables to MLF, these receivables and payables are offset and
reported as a net receivable or payable in the financial statements of MM
LLC in the Equity in commodity future trading accounts in the Statements
of Financial Condition.
* * * * * * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Michael L. Pungello
Michael L. Pungello
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
ML Futures Investments II L.P.
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 0 0
<RECEIVABLES> 126,529 79,507
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 9,849,935 11,209,662
<PP&E> 0 0
<TOTAL-ASSETS> 9,976,464 11,289,169
<SHORT-TERM> 0 0
<PAYABLES> 126,529 79,507
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 9,849,935 11,209,662
<TOTAL-LIABILITY-AND-EQUITY> 9,976,464 11,289,169
<TRADING-REVENUE> 0 (519,433)
<INTEREST-DIVIDENDS> 0 118,183
<COMMISSIONS> 0 198,734
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (124,747) 632,910
<INCOME-PRE-EXTRAORDINARY> (124,747) 632,910
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (124,747) 632,910
<EPS-BASIC> (2.22) 9.64
<EPS-DILUTED> (2.22) 9.64
</TABLE>
