<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 June 30, 1997
--------------
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.
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-5662
------------------------------------------------
(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.
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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>
June 30, December 31,
1997 1996
-------------- --------------
<S> <C> <C>
ASSETS
- ------
Accrued interest $8,856 $8,352
Equity in commodity futures trading accounts:
U.S. Government obligations 8,757,846 7,628,080
Cash and options premium 1,655,837 2,042,087
Net unrealized profit (loss) on open contracts 121,725 (136,425)
-------------- --------------
TOTAL $10,544,264 $9,542,094
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $12,622 $48,061
Administrative fees and brokerage
commissions payable 15,926 14,718
-------------- --------------
Total liabilities 28,548 62,779
-------------- --------------
Minority Interest 111,087 57,792
-------------- --------------
PARTNERS' CAPITAL:
General Partners (680 and 680 Units) 171,660 148,552
Limited Partners (40536 and 42447 Units) 10,232,969 9,272,971
-------------- --------------
Total partners' capital 10,404,629 9,421,523
-------------- --------------
TOTAL $10,544,264 $9,542,094
============== ==============
NET ASSET VALUE PER UNIT
(Based on 41216 and 43127 Units outstanding) $252.44 $218.46
============== ==============
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
----------------------------------
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
-------------------------------------
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profit:
Realized:
Options and Futures $426,100 $217,000 $1,046,350 $382,075
U.S. Government obligations (3,577) (1,550) 4,857 56,344
Change in unrealized:
Options and Futures 780,500 (11,100) 258,150 154,200
U.S. Government obligations 25,256 2,782 (20,327) (115,360)
-------------- -------------- -------------- --------------
Total trading results 1,228,279 207,132 1,289,030 477,259
-------------- -------------- -------------- --------------
Interest income:
Options and Futures 22,961 16,522 47,498 33,698
U.S. Government obligations 118,089 88,988 230,260 181,733
-------------- -------------- -------------- --------------
Total revenues 1,369,329 312,642 1,566,788 692,690
-------------- -------------- -------------- --------------
EXPENSES:
Brokerage commissions 1,113 499 2,713 1,237
Administrative fees 44,012 39,232 86,111 78,140
-------------- -------------- -------------- --------------
Total expenses 45,125 39,731 88,824 79,377
-------------- -------------- -------------- --------------
NET INCOME BEFORE
MINORITY INTEREST 1,324,204 272,911 1,477,964 613,313
Minority interest on income (54,854) (4,884) (53,294) (10,823)
-------------- -------------- -------------- --------------
NET INCOME $1,269,350 $268,027 $1,424,670 $602,490
============== ============== ============== ==============
NET INCOME PER UNIT:
Weighted average number of units
outstanding 41,380 45,316 41,779 45,686
============== ============== ============== ==============
Weighted average net income
per Limited Partner
and General Partner Unit $30.68 $5.91 $34.10 $13.19
============== ============== ============== ==============
</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 six months ended June 30, 1997 and 1996
-----------------------------------------------
<TABLE>
<CAPTION>
Units Limited General Total
Partners Partners
------------- -------------- -------------- -------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1995 46,219 $8,496,236 $126,846 $8,623,082
Net income - 593,534 8,956 602,490
Redemptions (1,160) (225,430) - (225,430)
------------- -------------- -------------- -------------
PARTNERS' CAPITAL,
June 30, 1996 45,059 $8,864,340 $135,802 $9,000,142
============= ============== ============== =============
PARTNERS' CAPITAL,
December 31, 1996 43,127 $9,272,971 $148,552 $9,421,523
Net income - 1,401,562 23,108 1,424,670
Redemptions (1,911) (441,564) - (441,564)
------------- -------------- -------------- -------------
PARTNERS' CAPITAL,
June 30, 1997 41,216 $10,232,969 $171,660 $10,404,629
============= ============== ============== =============
</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 June 30, 1997 and the results of its operations for
the six months ended June 30, 1997 and 1996. 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
consolidated financial statements be read in conjunction with the
consolidated 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, 1996 (the "Annual
Report").
2. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's revenues by reporting category for the respecitive periods
were as follows:
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---------------- ----------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Interest rate $22,816 $1,732 $(12,583) $(57,978)
Stock indices 1,205,463 205,400 1,301,613 535,237
---------------- ----------------- ----------------- ----------------
$1,228,279 $207,132 $1,289,030 $477,259
================ ================= ================= ================
</TABLE>
The contract/notional values of the Partnership's open derivative instrument
positions as of June 30, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ -------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
--------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Stock Indices $9,412,625 - $8,976,550 -
=============== =============== ================ ===============
</TABLE>
The contract/notional value of exchange traded open contracts as of June 30,
1997 and December 31, 1996 were as follows (the Partnership does not trade non-
exchange-traded derivative instruments):
<TABLE>
<CAPTION>
1997 1996
----------------------------------- -----------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
----------------- -------------- ------------------ ---------------
<S> <C> <C> <C> <C>
Exchange
traded $9,412,625 - $8,976,550 -
=============== =============== ================ ===============
</TABLE>
5
<PAGE>
The average fair value of the derivative instruments held or issued as of the
end of each calendar month during the six months ended June 30, 1997 and the
year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
<S> <C> <C> <C> <C>
Stock Indices $8,981,783 - $7,367,783 -
=============== =============== ================ ===============
</TABLE>
At June 30, 1997 and December 31, 1996, $10,535,221 and $ 9,525,064 of these
assets, respectively, were held in segregated accounts.
The gross unrealized profit and the net unrealized profit (loss) on open
contracts as of June 30, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------- --------------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit (Loss) Profit Profit (Loss)
------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C>
Exchange
traded $137,800 $121,725 - $(136,425)
=============== =============== ================ ================
</TABLE>
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 3 months of trading ending June 30, 1997, the S&P 500
Stock Index (dividends not reinvested) increased a total of 15.43%, whereas the
Net Asset Value per Series A unit increased 15.55%.
Time Horizon
- ------------
On June 13, 1997, the NAV of the Fund increased to $255.45, a level
triggering a "New Profits Lock-in." Based upon the $255.45 per Unit NAV as of
the beginning of the current Time Horizon, which ends at the close of business
on November 15, 1998, the New Protected Minimum NAV is $229.90 per Unit. The
Fund will experience a "New Profits Lock-In" if the NAV reaches $280.99 per
Unit.
6
<PAGE>
Performance Summary
- -------------------
During the first six months of 1996, the Fund's average month-end Net
Assets equaled $8,879,996, and the Fund recognized gross trading gains of
$477,259 or 5.37% of average month-end Nest Assets. Brokerage commissions of
$1,237 or 0.01% and Administrative fees of $78,140 or 0.88% of average month-end
Net Assets were paid. Interest income of $215,431 or 2.43% of average month-end
Net Assets resulted in net gain of $602,490 (after deduction of MLIP's "Minority
Interest" of $10,823 in the Trading Partnership) or 6.78% of average month-end
Net Assets which resulted in a 7.06% increase in the Net Asset Value per Unit
since December 31, 1995.
During the first six months of 1997, the Fund's average month-end Net
Assets equaled $9,671,439 and the Fund recognized gross trading gains of
$1,289,030 or 13.33% of average month-end Net Assets. Brokerage commissions of
$2,713 or .03% and Administrative fees of $86,111 or .89% of average month-end
Net Assets were paid. Interest income of $277,758 or 2.87% of average month-end
Net Assets resulted in net gain of $1,424,670 (after deduction of MLIP's
"Minority Interest" of $53,294 in the Trading Partnership) or 14.73% of average
month-end Net Assets which resulted in a 15.55% increase in the Net Asset Value
per Unit since December 31, 1996.
During the first six months of 1997 and 1996, the Fund experienced
10 profitable months and 2 unprofitable months.
MONTH-END NET ASSET VALUE PER UNIT
----------------------------------------------------------
Jan. Feb. Mar. Apr May Jun
----------------------------------------------------------
1996 $192.60 $192.04 $193.82 $194.68 $198.40 $199.74
----------------------------------------------------------
1997 $230.41 $231.23 $221.77 $231.83 $244.06 $252.44
----------------------------------------------------------
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, trading losses and
fees.
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
There are no pending proceedings to which the Partnership or the
General Partner is a party.
On June 24, 1997, the Commodity Futures Trading Commission("CFTC")
accepted an Offer of Settlement from Merrill Lynch Futures Inc. ("MLF") and
others, in a matter captioned "In the Matter of Mitsubishi Corporation and
Merrill Lynch Futures Inc., et al.", CFTC Docket No. 97-10, pursuant to which
MLF, without admitting or denying the allegations against it, consented to a
finding by the CFTC that MLF had violated Section 4c(a)(A) of the Commodity
Exchange Act (the "Act"), relating to wash sales, and CFTC Regulation 1.37(a),
relating to recordkeeping requirements. MLF agreed to cease and
7
<PAGE>
desist from violating Section 4c(a)(A) of the Act and Regulation 1.37(a), and to
pay a civil monetary penalty of $175,000.
Item 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
James M. Bernard, formerly a Senior Vice President of MLIP, is no
longer with the firm.
Michael A. Karmelin has been appointed Chief Financial Officer,
Vice President and Treasurer of MLIP. Mr. Karmelin assumed these positions on
April 14, 1997, when he completed his tenure as Chief Financial Officer of
Merrill Lynch, Hubbard Inc. ("ML Hubbard"), a sponsor of real estate limited
partnerships. Mr. Karmelin was born in 1947. Mr. Karmelin joined ML Hubbard in
January 1994 as a Vice President. From May 1994 until he joined MLIP, Mr.
Karmelin was the Chief Financial Officer of ML Hubbard, responsible for its
accounting, treasury and tax functions. Prior to joining ML Hubbard, Mr.
Karmelin held several senior financial positions with Merrill Lynch & Co., Inc.
("ML&Co.") and Merrill Lynch, Pierce, Fenner & Smith Incorporated from December
1985 to December 1993, including Vice President/Senior Financial Officer
Corporate Real Estate and Purchasing, Manager Commitment Control/Capital
Budgeting, and Senior Project Manager/Project Analysis. Prior to joining ML&Co.,
Mr. Karmelin was employed at Avco Corporation for 17 years, where he held a
variety of financial positions. Mr. Karmelin holds a B.B.A. degree in Accounting
from Baruch College, C.U.N.Y. and a Master of Business Administration degree in
Corporate Strategy and Finance from New York University. Mr. Karmelin passed the
Certified Public Accountant examination in 1974 and is a member of the Treasury
Management Association, the Institute of Management Accountants and The
Strategic Leadership Forum.
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 six
months of fiscal 1997.
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: August 12, 1997 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: August 12, 1997 By /s/MICHAEL A. KARMELIN
----------------------
Michael A. Karmelin
Chief Financial Officer, Vice President
and Treasurer
9
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 JUN-30-1996
<CASH> 0 0
<RECEIVABLES> 1786418 1787558
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 8757846 7266255
<PP&E> 0 0
<TOTAL-ASSETS> 10544264 9053813
<SHORT-TERM> 0 0
<PAYABLES> 139635 53671
<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> 10404629 9000142
<TOTAL-LIABILITY-AND-EQUITY> 10544264 9053813
<TRADING-REVENUE> 1289030 477259
<INTEREST-DIVIDENDS> 277758 215431
<COMMISSIONS> 142118 90200
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 1424670 602490
<INCOME-PRE-EXTRAORDINARY> 1424670 602490
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1424670 602490
<EPS-PRIMARY> 34.10 13.19
<EPS-DILUTED> 34.10 13.19
</TABLE>
