<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
-------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
---------------- ----------------
Commission File Number 0-16110
THE GROWTH AND GUARANTEE FUND L.P.
----------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3407269
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
(formerly ML Futures Investment Partners Inc.)
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-4161
--------------------------------------------------
(Registrant's telephone number, including area code)
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
----- -----
This document contains 9 pages.
There are no exhibits and no exhibit index filed with this document.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE GROWTH AND GUARANTEE FUND L.P.
----------------------------------
(a Delaware limited partnership)
------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
- ------
Accrued Interest $ 6,091 $ 4,940
U.S. Government obligations 7,273,651 6,820,462
Equity in commodity futures trading accounts:
Cash and options premium 1,568,636 1,985,376
Net unrealized gain on open contracts 257,200 (105,800)
------------------ ------------------
TOTAL $9,105,578 $8,704,978
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 98,615 $ 39,739
Administrative fees and brokerage
commissions payable (Note 2) 14,178 13,215
------------------ ------------------
Total liabilities 112,793 52,954
------------------ ------------------
Minority interest 42,345 28,942
------------------ ------------------
PARTNERS' CAPITAL:
General Partner (680 and 680 Units) 138,529 126,846
Limited Partners (43,248 and 45,539 Units) 8,811,911 8,496,236
------------------ ------------------
Total partners' capital 8,950,440 8,623,082
------------------ ------------------
TOTAL $9,105,578 $8,704,978
================== ==================
NET ASSET VALUE PER UNIT
(Based on 43,928 and 46,219 Units outstanding) $203.75 $186.57
================== ==================
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
----------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profit:
Realized:
Options and Futures $(123,150) $427,925 258,925 $1,061,708
U.S. Government obligations (947) - 55,397 -
Change in unrealized:
Options and Futures 208,800 - 363,000 -
U.S. Government obligations 25,162 86,994 (90,198) 613,824
-------------- -------------- ------------- -------------
Total trading results 109,865 514,919 587,124 1,675,532
-------------- -------------- ------------- -------------
Interest income:
Options and Futures 16,358 - 50,056 -
U.S. Government obligations 90,121 92,507 271,854 298,801
-------------- -------------- ------------- -------------
Total revenues 216,344 607,426 909,034 1,974,333
-------------- -------------- ------------- -------------
EXPENSES:
Administrative fees 38,548 36,648 116,688 107,433
Brokerage commissions 1,025 774 2,262 3,375
-------------- -------------- ------------- -------------
Total expenses 39,573 37,422 118,950 110,808
-------------- -------------- ------------- -------------
NET INCOME BEFORE
MINORITY INTEREST 176,771 $570,004 790,084 $1,863,525
Minority interest on income (2,580) 6,873 (13,403) 8,310
-------------- -------------- ------------- -------------
NET INCOME $174,191 $563,131 $776,681 $1,855,215
============== ============== ============= =============
NET INCOME PER UNIT:
Weighted average number of units
outstanding 44,819 48,035 45,397 50,625
======= ======= ======= =======
Weighted average net income per
Limited Partner unit and General
Partner unit $3.89 $11.72 $17.11 $36.65
======= ======= ======= =======
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
----------------------------------
(a Delaware limited partnership)
------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
-------------------------------------------------------
For the nine months ended September 30, 1996 and 1995
-----------------------------------------------------
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
----- -------- ------- -----
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 53,537 $7,470,426 $96,085 $7,566,511
Net income - 1,830,276 24,939 1,855,215
Redemptions (6,913) (1,122,336) - (1,122,336)
------------- ----------------- -------------- -----------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1995 46,624 $8,178,366 $121,024 $8,299,390
============= ================= ============== =================
PARTNERS' CAPITAL,
DECEMBER 31, 1995 46,219 $8,496,236 $126,846 $8,623,082
Net income - 764,998 11,683 776,681
Redemptions (2,291) (449,323) - (449,323)
------------- ----------------- -------------- -----------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1996 43,928 $8,811,911 $138,529 $8,950,440
============= ================= ============== =================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
----------------------------------
(a Delaware limited partnership)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
These financial statements have been prepared without audit. In the opinion of
management, the financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
of The Growth and Guarantee Fund L.P. (the "Partnership" or the "Fund") as of
September 30, 1996 and the results of its operations for the nine months ended
September 30, 1996 and 1995. However, the operating results for the interim
periods may not be indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with general accepted accounting
principles have been omitted. It is suggested that these financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1995 (the "Annual Report").
2. RELATED PARTY TRANSACTIONS
The Partnership pays MLF brokerage commissions of $25.00 per each round-turn,
which includes exchange clearing and NFA fees, on U.S. futures transactions
executed by the Partnership.
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures and options on stock indices. The Partnership's
revenues by reporting category for the nine months ended September 30, 1996 were
as follows:
<TABLE>
<CAPTION>
1996
----
<S> <C>
Interest rate $(32,939)
Stock indices 620,063
--------------
$587,124
==============
</TABLE>
Market Risk
- -----------
Derivative instruments involve varying degrees of off-balance sheet market risk,
and changes in the level or volatility of interest rates or the S&P 500 Stock
Index will result in changes in the Partnership's unrealized gain or loss on
such derivative instruments as reflected in the Statements of Financial
Condition as of the end of the period. The Partnership's exposure to market risk
is influenced by a number of factors which affect stock index levels.
Fair Value
- ----------
The derivative instruments traded by the Trading Partnership are marked to
market daily with the resulting unrealized gains or losses recorded in the
Statements of Financial Condition and the related income or loss reflected in
trading revenues in the Statements of Operations. The contract/notional values
of open contracts as of September 30, 1996 and December 31, 1995 were as
follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- ---------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Stock
Indices $9,416,125 -- $6,052,025 --
================= ================== ================= ==================
</TABLE>
The majority of the Partnership's derivative financial instruments outstanding
at September 30, 1996, mature within one year.
5
<PAGE>
The contract/notional value of exchange traded and open contracts as of
September 30, 1996 and December 31, 1995 were as follows (the Partnership does
not trade non-exchange-traded derivative instruments):
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------- ----------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Exchange
traded $9,416,125 -- $6,052,025 --
==================== ==================== ===================== ====================
</TABLE>
The average fair value of the derivative instruments held or issued as of the
end of each calendar month during the nine months ended September 30, 1996 and
the year ended December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- ---------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Stock indices $6,857,936 -- $5,341,896 $156,385
=================== =================== =================== ===================
</TABLE>
Credit Risk
- -----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter transactions
(non-exchange-traded), 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, whereas 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 does not trade off-exchange instruments.
The contract amounts in the above tables represent the extent of the Trading
Partnership's market exposure in the relevant class of derivative instruments.
Because the Partnership trades only exchange-traded instruments, it has no
counterparty risk. The Partnership also has credit risk because the sole broker
with respect to the Partnership is MLF. At September 30, 1996 and December 31,
1995, $1,825,548 and $8,697,334 of these assets, respectively, were held in
segregated accounts.
The gross unrealized gain and the net unrealized gain (loss) on open contracts
as of September 30,1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Gain Gain (Loss) Gain Gain (Loss)
---------- ----------- ---------- -----------
<S> <C> <C> <C> <C>
Exchange
traded $275,425 $257,200 -- $(105,800)
==================== ==================== ===================== ====================
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.
The Partnership through its normal course of business enters into various
contracts with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF, such trading which results in receivables from and
payables to MLF will be offset and reported or payable.
6
<PAGE>
Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Operational Overview: Advisor Selections
- ----------------------------------------
Due to the nature of the Fund's business, its results of operations depend
on the Trading Advisor's ability to optimize the extent to which the Fund
participates in the significant upward movement in stock index levels. The
Trading Advisor's Dynamic Asset Allocation Risk Management Strategies are
confidential, so that substantially the only information that can be furnished
regarding the Fund's results of operations is contained in the performance
record of its trading. Unlike operating businesses, general economic or seasonal
conditions do not directly affect the profit potential of the Fund, and its past
performance is not necessarily indicative of future results. Because of the
speculative nature of its trading, operational or economic trends have little
relevance to the Fund's results. However, the Fund is dependent upon significant
upward movement in stock index levels for profitability.
Results of Operations - General
- -------------------------------
The Fund is materially different from most other futures funds in that it
does not attempt to achieve speculative profits from taking long or short
positions in a variety of markets. Rather, the Fund's objective is to capture a
substantial portion of significant upside movements in the S&P 500 Stock Index
(dividends not reinvested) while providing the protection of a maximum loss
which can be incurred during any 18 month Time Horizon. The Fund's ability to
capture upside S&P 500 Stock Index movements is based on a call options
strategy, and is path dependent - i.e., the extent to which the Fund is able to
capture upside movements in the S&P 500 depends on the patterns in which such
movements occur. For example, if the S&P 500 increased during a Time Horizon by
a total of 25%, but did so after incurring a 15% drop, it is likely that the
Fund would recognize little or none of the upward movement, because it would
have lost all that it had available to lose during the Time Horizon in question
during the course of the 15% drop.
During the past 9 months of trading ending September 30, 1996, the S&P 500
Stock Index (dividends not reinvested) increased a total of 13.49%, whereas the
Net Asset Value per Series A unit increased 9.21%.
Performance Summary
- -------------------
During the first nine months of 1995, the Fund's average month-end Net
Assets equalled $8,001,572 and the Fund recognized gross trading gains of
$1,675,532 or 20.94% of such average month-end Net Assets. Brokerage commissions
of $3,375 or .04% and Administrative expenses of $107,433 or 1.34% of average
month-end Net Assets were paid. Interest income of $298,801 or 3.73% of average
month-end Net Assets resulted in a net income of $1,855,215 (after deduction of
MLIP's "Minority Interest $8,310" in the Trading Partnership) or 23.19% of
average month-end Net Assets, which resulted in a 25.95% increase in the Net
Asset Value per Unit since December 31, 1994.
During the first nine months of 1996, the Fund's average month-end Net
Assets equalled $8,809,408 and the Fund recognized gross trading gains of
$587,124 or 6.66% of such average month-end Net Assets. Brokerage commissions of
$2,262 or .03% and Administrative expenses of $116,688 or 1.32% of average
month-end Net Assets were paid. Interest income of $321,910 or 3.65% of average
month-end Net Assets resulted in net income of $776,681 (after deduction of
MLIP's "Minority Interest" $13,403 in the Trading Partnership) or 8.82% of
average month-end Net Assets which resulted in a 9.21% increase in the Net Asset
Value per Units since December 31, 1995.
During the first nine months of 1996 and 1995, the Fund
experienced 16 profitable months and 2 unprofitable month.
MONTH-END NET ASSET VALUE PER UNIT
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $144.95 $149.87 $152.99 $157.25 $163.05 $166.23 $171.58 $172.09 $178.01
-----------------------------------------------------------------------------------------------------
1996 $192.60 $192.04 $193.82 $194.68 $198.40 $199.74 $191.34 $193.92 $203.75
-----------------------------------------------------------------------------------------------------
</TABLE>
Importance of Market Factors
- ----------------------------
Comparisons between the Fund's performance in one fiscal year to the prior
year are unlikely to be meaningful, given the uncertainty of price movements in
the markets traded by the Fund.
Liquidity
- ---------
A significant portion of the Partnership's assets were held in U.S.
Treasury STRIPS which, in turn, generate the protected minimum Net Asset Value.
The U.S. STRIPS are highly liquid but are acquired by the Fund on a buy-and-hold
basis for the course of a Time Horizon, except to the extent liquidated to fund
a portion of redemptions. A portion of the Partnership's assets are also held as
cash which, in turn, is used to margin its stock index futures positions and is
withdrawn, as necessary, to pay a portion of redemptions and fees.
7
<PAGE>
The stock index futures contracts in which the Partnership trades may
become illiquid under certain market conditions. Stock Index futures contracts
in the U.S. are subject to "circuit breakers" which require the suspension of
trading after certain market movements. However, these "circuit breakers" have
rarely been "triggered," and because the Fund buys rather than sells options, it
is generally not exposed to risk of not being able to close out positions
against which the market is moving as a result of illiquidity.
Capital Resources
- -----------------
The Partnership does not have, nor does it expect to have, any capital
assets and has no material commitments for capital expenditures. The Partnership
uses its assets to (i) assure the investors the protected minimum Net Asset
Values as of the end of the Time Horizons and (ii) supply the necessary margin
or premiums for, and to pay any losses incurred in connection with, its trading
activity and to pay redemptions and fees. Inflation is not a significant factor
in the Fund's profitability, although inflationary cycles can give rise to the
stock index futures markets in which the Funds trades exclusively. The Fund
cannot be profitable during a Time Horizon unless the S&P 500 Stock Index market
rises.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits required to be filed as part of this
document.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first nine
months of fiscal 1996.
8
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
THE GROWTH AND GUARANTEE FUND L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 11, 1996 By /s/JOHN R. FRAWLEY, JR.
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: November 11, 1996 By /s/JAMES M. BERNARD
James M. Bernard
Chief Financial Officer,
Treasurer and Senior Vice President
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
This schedule contains summary financial information extracted from consolidated
statements of financial condition, consolidated statements of operations,
consolidated statements of changes in partners' capital and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 0 0
<RECEIVABLES> 1,831,927 1,643,998
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 7,273,651 6,756,476
<PP&E> 0 0
<TOTAL-ASSETS> 9,105,578 8,400,474
<SHORT-TERM> 0 0
<PAYABLES> 155,138 101,084
<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> 8,950,440 8,299,390
<TOTAL-LIABILITY-AND-EQUITY> 9,105,578 8,400,474
<TRADING-REVENUE> 587,124 1,675,532
<INTEREST-DIVIDENDS> 321,910 298,801
<COMMISSIONS> 132,353 119,118
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 776,681 1,855,215
<INCOME-PRE-EXTRAORDINARY> 776,681 1,855,215
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 776,681 1,855,215
<EPS-PRIMARY> 17.11 36.65
<EPS-DILUTED> 17.11 36.65
</TABLE>
