<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, 1997
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-23240
THE GROWTH AND GUARANTEE FUND L.P.
----------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3407269
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
SOUTH TOWER, 6TH FLOOR, NEW YORK, NY 10080-6106
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 236-5662
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
<TABLE>
<S> <C>
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Limited Partnership Units
-------------------------
(Title of Class)
</TABLE>
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant: the registrant is a limited partnership; as of February 1,
1998, limited partnership interests with an aggregate value of $10,570,323 were
outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's "1997 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1997,
is incorporated by reference into Part II, Item 8, and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
ANNUAL REPORT FOR 1997 ON FORM 10-K
Table of Contents
-----------------
<TABLE>
<CAPTION>
PART I
------
PAGE
----
<S> <C> <C>
Item 1. Business.............................................................................. 1
Item 2. Properties............................................................................ 4
Item 3. Legal Proceedings..................................................................... 5
Item 4. Submission of Matters to a Vote of Security Holders................................... 5
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 5
Item 6. Selected Financial Data.............................................................. 6
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 10
Item 8. Financial Statements and Supplementary Data.......................................... 10
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 11
</TABLE>
<TABLE>
PART III
--------
<S> <C> <C>
Item 10. Directors and Executive Officers of the Registrant................................... 11
Item 11. Executive Compensation............................................................... 13
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 13
Item 13. Certain Relationships and Related Transactions....................................... 14
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K........................ 15
</TABLE>
ii
<PAGE>
PART I
ITEM 1: BUSINESS
--------
(a) General Development of Business:
-------------------------------
The Growth and Guarantee Fund L.P. (the "Partnership" or the "Fund")
was organized under the Delaware Revised Uniform Limited Partnership Act on
January 21, 1987. The Partnership began trading on June 12, 1987.
The Partnership holds stock index futures and options positions as
directed by asset allocation strategies developed by Leland O'Brien Rubinstein
Associates Inc. ("LOR" or the "Trading Advisor"), the objective of which is to
limit losses in down S&P Stock Index markets while optimizing the extent to
which the Net Asset Value per Unit may participate, over time and on an
unleveraged basis, in significant upward movements in stock index levels.
The Partnership does not trade directly but rather through a
subsidiary limited partnership (the "Trading Partnership"). This structure is
used so as to isolate the assets used to provide the Fund's "Principal
Protection" feature from the risk of trading losses.
Merrill Lynch Investment Partners Inc. (the "General Partner" or
"MLIP") acts as the general partner of the Partnership. Merrill Lynch Futures
Inc. (the "Commodity Broker" or "MLF") is the Partnership's commodity broker.
The General Partner is a wholly-owned subsidiary of Merrill Lynch Group Inc.,
which in turn is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. The
Commodity Broker is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. (ML&Co. and its affiliates are herein sometimes referred to as "Merrill
Lynch.")
The Fund issued two series of units of limited partnership interest
("Units"). The Series A had an initial capitalization of $148,349,950, and the
Series B $84,283,207, respectively. No Units of either Series were sold after
the initial closing. The Series B Units ceased trading December 31, 1991.
Through December 31, 1997, Series A Units with an aggregate Net Asset Value of
$139,863,134 had been redeemed (including December 31, 1997 redemptions which
were not actually paid out until January 1998), and the capitalization of the
Fund was $10,762,615. The Net Asset Value per Series A Unit, originally $100 as
of August 5, 1987, had risen to $270.32. As of December 31, 1997, the Fund had
451 Limited Partners.
The highest month-end Net Asset Value per Series A Unit through
December 31, 1997 was $270.32 (December, 1997) and the lowest $87.31 (October,
1987).
(b) Financial Information about Industry Segments:
---------------------------------------------
The Partnership's business constitutes only one segment for financial
reporting purposes, i.e., a speculative "commodity pool."
(c) Narrative Description of Business:
---------------------------------
GENERAL
The Partnership's trading strategy is to apply the asset allocation
techniques in an attempt to maximize the Partnership's upside participation in
upward movements in stock index levels while preserving its ability to liquidate
positions prior to incurring losses in excess of the Downside Protection
parameters. The trading strategy is primarily reactive, i.e., it responds to
market movements without attempting to forecast trends or future prices (as
would, for example, a trend-following system). This strategy is applied
directly to the futures markets, attempting to assure the Downside Protection
through liquidating long stock index futures positions.
-1-
<PAGE>
Series A Units ended 1997 with a Protected Minimum Net Asset Value of
$229.90, as of the end of the current Time Horizon (November 30, 1998). At such
time, the program will either be restarted or the Fund will dissolve. In order
to assure this minimum value, the Fund purchases Treasury STRIPS maturing at the
end of the current Time Horizon in a face amount equal to the Protected Minimum
NAV. These STRIPS are not subject to the risk of market losses.
The Fund is structured to provide a "New Profits Lock-In" in the event
that the NAV per series A Unit increases by 10% or more. The latest "New
Profits Lock-In" was established at an NAV per Series A Unit of $255.45 on June
13, 1997.
USE OF PROCEEDS AND INTEREST INCOME
General. The Fund's assets are used as a means of providing the
-------
Fund's "principal protection" feature and as security for and to pay the
Partnership's trading losses as well as any expenses and redemptions. The
Partnership's assets are generally available to earn interest, as more fully
described below under "-- Available Assets."
Market Sectors. The Partnership trades in one market sector, the S&P
--------------
stock index futures markets. As the Fund's objective is to replicate the
positive return on the S&P 500 Index while also providing Downside Protection,
it is a non-diversified investment focused exclusively on the S&P 500 futures
contract.
Market Types. The Fund trades exclusively on the Chicago Mercantile
------------
Exchange, on which the S&P 500 futures contract is traded.
Custody of Assets. All of the Fund's assets are currently held in
-----------------
customer accounts at Merrill Lynch or in bank accounts opened in the name of the
Fund
STRIPS. In order to provide its "principal protection" feature of
------
assuring investors will not lose more than 10% of the value of their respective
investments over the course of any 18 month Time Horizon, the Fund invests
approximately 80% of its assets in Treasury STRIPS (effectively zero coupon
bonds) maturing at the end of the Time Horizon in a principal amount sufficient
to assure the Protected Minimum Net Asset Value per Series A Unit.
Available Assets. In addition to the STRIPS held by it to provide its
----------------
"principal protection" feature, the Fund earns interest, as described below, on
its "Available Assets," which can be generally described as the cash actually
held by the Fund or invested in short-term Treasury bills. Available Assets are
held in U.S. dollars and are comprised of the following: (a) the Fund's cash
balance in the offset accounts (as described below) -- which includes "open
trade equity" (unrealized gains and losses on open positions) on the Fund's S&P
500 Stock Index futures contracts, which is paid into or out of the Fund's
account on a daily basis; and (b) short-term Treasury bills purchased by the
Fund.
Interest Earned on the Fund's Available Assets. The Fund's Available
----------------------------------------------
Assets (which for purposes of this description do not include the STRIPS held by
the Fund so as to assure the Protected Minimum Net Asset Value per Series A Unit
as of the end of each Time Horizon) are held in cash in offset accounts and in
short-term Treasury bills purchased from dealers unaffiliated with Merrill
Lynch. Offset accounts are non-interest bearing demand deposit accounts
maintained with banks unaffiliated with Merrill Lynch. An integral feature of
the offset arrangements is that the participating banks specifically acknowledge
that the offset accounts are MLF customer accounts, not subject to any Merrill
Lynch liability.
MLF credits the Partnership, as of the end of each month, with
interest at the effective daily 91-day Treasury bill rate on the average daily
Available Assets held in the offset accounts during such month. The Fund
receives all the interest paid on the short-term Treasury bills in which it
invests.
The use of the offset account arrangements for the Partnership's
Available Assets may be discontinued by Merrill Lynch whether or not Merrill
Lynch otherwise continues to maintain its offset arrangements. The offset
-2-
<PAGE>
arrangements are dependent on the banks' continued willingness to make overnight
credits available to Merrill Lynch, which, in turn, is dependent on the credit
standing of ML&Co. If Merrill Lynch were to determine that the offset
arrangements had ceased to be practicable (either because ML&Co. credit lines at
participating banks were exhausted or for any other reason), Merrill Lynch would
thereafter attempt to invest all of the Fund's Available Assets to the maximum
practicable extent in short-term Treasury bills. All interest earned on the
Available Assets so invested would be paid to the Fund, but MLIP would expect
the amount of such interest to be less than that available to the Fund under the
offset account arrangements. The remaining Available Assets of the Fund would
be kept in cash to meet variation margin payments and pay expenses, but would
not earn interest for the Fund.
The banks at which the offset accounts are maintained make available
to Merrill Lynch interest-free overnight credits, loans or overdrafts in the
amount of the Fund's Available Assets held in the offset accounts, charging
Merrill Lynch a small fee for this service. The economic benefits derived by
Merrill Lynch -- net of the interest credits paid to the Fund and the fee paid
to the offset banks -- from the offset accounts have not exceeded 3/4 of 1% per
annum of the Fund's average daily Available Assets held in the offset accounts.
These revenues to Merrill Lynch are in addition to the Brokerage Commissions
paid by the Fund to MLF.
____________________________
The General Partner has determined that there may have been a
miscalculation in the interest credited to the Fund for a period prior to
November 1996. Accordingly, Merrill Lynch has credited the Fund's investors
(directly, not by crediting the Fund itself). For current Merrill Lynch
clients, this credit, which includes compounded interest, appears on the
December 1997 account statements. The total amount of the adjustment is
approximately $5,000.
CHARGES
The following table summarizes the charges incurred by the Fund during
1995, 1996 and 1997.
<TABLE>
<CAPTION>
1995 1996 1997
-----------------------------------------------------------------------
% OF AVERAGE % OF AVERAGE % OF AVERAGE
DOLLAR MONTH-END DOLLAR MONTH-END DOLLAR MONTH-END
COST AMOUNT NET ASSETS AMOUNT NET ASSETS AMOUNT NET ASSETS
- ---- -------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Brokerage Commissions $ 4,225 0.05% $ 2,938 0.03% $ 4,894 0.05%
Administrative Fees 144,696 1.78 158,330 1.77 180,711 1.77
-------- ---- -------- ---- -------- ----
Total $148,921 1.83% $161,268 1.80% $185,605 1.82%
======== ==== ======== ==== ======== ====
</TABLE>
____________________________
The foregoing table does not reflect the benefits which may be derived
by Merrill Lynch from the deposit of certain of the Fund's Available Assets
(other than the STRIPS which provides the Fund's "Principal Protection" feature)
in offset accounts. See Item 1(c), "Narrative Description of Business -- Use of
Proceeds and Interest Income."
The Fund's average month-end Net Assets during 1995, 1996 and 1997
equaled $8,107,763, $8,948,805 and $10,187,651 , respectively.
During 1995, 1996 and 1997, the Fund earned $407,304, $453,093 and
$588,693 in interest income, or approximately 5.02%, 5.06% and 5.78% of the
Fund's average month-end Net Assets.
-3-
<PAGE>
------------------------------
DESCRIPTION OF CURRENT CHARGES
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
MLF Brokerage Commissions A round turn rate of $25, which includes exchange,
clearing and NFA fees
MLF Use of Fund assets Merrill Lynch may derive an economic benefit from
the deposit of certain of the Fund's Available Assets in
offset accounts; such benefit to date has not exceeded
3/4 of 1% of such average daily Available Assets.
Third Parties Administrative Expenses As incurred.
MLF; Others Extraordinary expenses Actual costs incurred; none paid to date, and expected
to be negligible.
</TABLE>
------------------------------
REGULATION
The General Partner, LOR and the Commodity Broker are each subject to
regulation by the Commodity Futures Trading Commission (the "CFTC") and the
National Futures Association. Other than in respect of its periodic reporting
requirements under the Securities Exchange Act of 1934, the Partnership itself
is generally not subject to regulation by the Securities and Exchange
Commission. However, MLIP itself is registered as an "investment adviser" under
the Investment Advisers Act of 1940.
(i) through (xii) -- not applicable.
(xiii) The Partnership has no employees.
(d) Financial Information about Foreign and Domestic Operations and Export
----------------------------------------------------------------------
Sales:
- -----
The Partnership does not engage in material operations in foreign
countries, nor is a material portion of the Partnership's revenues derived from
customers in foreign countries.
ITEM 2: PROPERTIES
----------
The Partnership does not use any physical properties in the conduct of its
business.
The Partnership's only place of business is the place of business of the
General Partner (see Item 10 herein). The General Partner performs all
administrative services for the Partnership from the General Partner's offices.
-4-
<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 ascertained 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.
On June 24, 1997, the CFTC accepted an Offer of Settlement from MLF and
others, in a matter captioned "In the Matter of Mitsubishi Corporation and
Merrill Lynch Futures Inc., et al.," CFTC Docket No. 97-10, pursuant to which
MLF, without admitting or denying the allegations against it, consented to a
finding by the Commission that MLF had violated Section 4c(a)(A) of the
Commodity Exchange Act, relating to wash sales (the CFTC alleged that the
customer entered nearly simultaneous orders without the intent to engage in a
bona fide trading transaction), and CFTC Regulation 1.37(a), relating to
recordkeeping requirements. MLF agreed to cease and desist from violating
Section 4c(a)(A) of the Act and Regulation 1.37(a), and to pay a civil monetary
penalty of $175,000.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Partnership has never submitted any matters to a vote of its Limited
Partners.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
(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. Units redeemed prior to the end of the current Time Horizon are
not assured of any minimum Net Asset Value per Unit by the Partnership's
"principal protection" feature.
(b) Holders:
-------
As of December 31, 1997, there were 452 holders of Units, including
the General Partner .
(c) Dividends:
---------
The Partnership has made no distributions since trading commenced, nor
does the General Partner presently intend to make any distributions in the
future.
-5-
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from the
audited financial statements of the Partnership.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
INCOME STATEMENT DATA 1997 1996 1995 1994 1993
- --------------------- ------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized Gain (Loss) $ 1,801,922 $1,226,117 $2,374,649 $ (324,228) $ 382,507
Change in Unrealized (Loss) Gain 40,042 (64,696) (367,336) (73,403) (87,474)
----------- ---------- ---------- ---------- ----------
Total Trading Results 1,841,964 1,161,421 2,007,313 (397,631) 295,033
Interest Income 588,693 453,093 407,304 355,496 353,974
----------- ---------- ---------- ---------- ----------
Total Revenues 2,430,657 1,614,514 2,414,617 (42,135) 649,007
----------- ---------- ---------- ---------- ----------
Expenses:
Brokerage Commissions 4,894 2,938 4,225 8,247 9,891
Administrative Fees 180,711 158,330 144,696 142,881 164,052
----------- ---------- ---------- ---------- ----------
Total Expenses 185,605 161,268 148,921 151,128 173,943
----------- ---------- ---------- ---------- ----------
Income before Minority Interest 2,245,052 1,453,246 2,265,696 (193,263) 475,064
Minority Interest Income (90,502) (28,850) (12,942) - -
----------- ---------- ---------- ---------- ----------
Net Income (Loss) $ 2,154,550 $1,424,396 $2,252,754 ($193,263) $ 475,064
=========== ========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
1997 1996 1995 1994 1993
BALANCE SHEET DATA ----------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Fund Net Asset Value $10,762,615 $9,421,523 $8,623,082 $7,566,511 $8,748,614
Net Asset Value per Series A Unit $270.32 $218.46 $186.57 $141.33 $144.72
</TABLE>
-6-
<PAGE>
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES A 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>
1993 $138.74 $140.38 $141.95 $138.85 $141.07 $140.99 $140.50 $144.51 $142.22 $144.75 $143.30 $144.72
- ------------------------------------------------------------------------------------------------------------------
1994 $148.74 $144.86 $140.67 $140.72 $142.00 $138.44 $142.06 $146.14 $142.90 $145.19 $140.21 $141.33
- ------------------------------------------------------------------------------------------------------------------
1995 $144.95 $149.87 $152.99 $157.25 $163.05 $166.23 $171.58 $172.09 $178.01 $177.64 $184.56 $186.57
- ------------------------------------------------------------------------------------------------------------------
1996 $192.60 $192.04 $193.82 $194.68 $198.40 $199.74 $191.34 $193.92 $203.75 $210.32 $223.74 $218.46
- ------------------------------------------------------------------------------------------------------------------
1997 $230.41 $231.23 $221.77 $231.83 $244.06 $252.44 $269.18 $256.52 $265.99 $260.51 $267.04 $270.32
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to CFTC policy, monthly performance is presented from January
1, 1993, even though the Units were outstanding prior to such date.
-7-
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
DECEMBER 31, 1997
Type of Pool: Single-Advisor/Publicly-Offered/"Principal Protected"/(1)/
Inception of Trading: August 5, 1987
Aggregate Subscriptions: $148,349,450
Current Capitalization: $10,762,615
Worst Monthly Drawdown/(2)/: (4.70)% (8/97)
Worst Peak-to-Valley Drawdown/(3)/: (6.93)% (2/94-6/94)
_____________
Net Asset Value per Series A Unit, December 31, 1997: $270.32
<TABLE>
<CAPTION>
- ---------------------------------------------------------
MONTHLY RATES OF RETURN/(4)/
- ---------------------------------------------------------
MONTH 1997 1996 1995 1994 1993
- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 5.47% 3.23% 2.56% 2.77% 0.85%
- ---------------------------------------------------------
February 0.36 (0.29) 3.40 (2.61) 1.19
- ---------------------------------------------------------
March (4.09) 0.93 2.08 (2.89) 1.12
- ---------------------------------------------------------
April 4.54 0.45 2.78 0.03 (2.19)
- ---------------------------------------------------------
May 5.28 1.91 3.69 0.91 1.60
- ---------------------------------------------------------
June 3.43 0.67 1.95 (2.51) (0.06)
- ---------------------------------------------------------
July 6.63 (4.21) 3.22 2.61 (0.67)
- ---------------------------------------------------------
August (4.70) 1.35 0.30 2.88 3.19
- ---------------------------------------------------------
September 3.69 5.07 3.44 (2.22) (1.59)
- ---------------------------------------------------------
October (2.06) 3.22 (0.20) 1.61 1.78
- ---------------------------------------------------------
November 2.51 6.38 3.89 (3.43) (1.00)
- ---------------------------------------------------------
December 1.23 (2.36) 1.09 0.80 0.99
- ---------------------------------------------------------
Compound Annual 23.76% 17.09% 32.01% (2.34)% 5.20%
Rate of Return
- ---------------------------------------------------------
</TABLE>
(1) Certain funds, including other funds sponsored by MLIP, are
structured so as to guarantee to investors that their investment will be worth
no less than a specified amount as of a date certain in the future. The CFTC
refers to such funds as "principal protected." The Partnership provides its
"principal protection" feature through the purchase of STRIPS which matures as
of the end of each Time Horizon in an amount equal to 90% of the Partnership's
capitalization as of the beginning of such Time Horizon.
(2) Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced since January 1, 1993 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, 1993 from a month-end cumulative Monthly Rate of Return
without such cumulative Monthly Rate of Return being equaled or exceeded as of a
subsequent month-end. For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the Peak-to-Valley
Drawdown would still be continuing at the end of April in the amount of
approximately (3)%, whereas if the Monthly Rate of Return had been approximately
3% in March, the Peak-to-Valley Drawdown would have ended as of the end of
February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the 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
- ---------------------
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
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 36 months of trading ending December 31, 1997, the S&P
500 Stock Index (dividends not reinvested) increased a total of 110.84%, whereas
the Net Asset Value per Series A Unit increased 91.27%.
PERFORMANCE SUMMARY
The Fund's performance is dependent upon upwards movements in the S&P
Stock Index, which the Fund attempts to capture through taking long positions in
the S&P 500 Stock Index Futures Contract.
1995
During 1995, the Fund's average month-end Net Assets equaled
$8,107,763, and the Fund recognized gross trading gains of $2,007,313 or 24.76%
of such average month-end Net Assets. Brokerage commissions of $4,225 or 0.05%
and Administrative expenses of $144,696 or 1.78% of average month-end Net Assets
were paid. Interest income of $407,304 or 5.02% of average month-end Net Assets
resulted in net income of $2,252,754 (after deduction of MLIP's Minority
Interest in the Trading Partnership) or 27.79% of average month-end Net Assets
which resulted in a 32.01% increase in the overall Net Asset Value of the Fund.
1996
During 1996, the Fund's average month-end Net Assets equaled
$8,948,805, and the Fund recognized gross trading gains of $1,161,421 or 12.98%
of such average month-end Net Assets. Brokerage commissions of $2,938 or 0.03%
and Administrative expenses of $158,330 or 1.77% of average month-end Net Assets
were paid. Interest income of $453,093 or 5.06% of average month-end Net Assets
resulted in net income of $1,424,396 (after deduction of MLIP's Minority
Interest in the Trading Partnership) or 15.92% of average month-end Net Assets,
which resulted in a 17.09% increase in the Net Asset Value per Unit.
1997
During 1997, the Fund's average month-end Net Assets equaled
$10,187,651, and the Fund recognized gross trading gains of $1,841,964 or 18.08%
of such average month-end Net Assets. Brokerage commissions of $4,894 or 0.05%
and Administrative expenses of $180,711 or 1.77% of average month-end Net Assets
were paid. Interest income of $588,693 or 5.78% of average month-end Net Assets
resulted in net income of $2,154,550 (after deduction of MLIP's Minority
Interest in the Trading Partnership) or 21.15% of average month-end Net Assets,
which resulted in a 23.74% increase in the Net Asset Value per Unit.
IMPORTANCE OF MARKET FACTORS
The performance of the Fund is dependent on the performance of the S&P
500 Stock Index Futures Contract. The Fund's trading strategy involves taking
"long only" positions in this Contract, attempting to capture substantially all
of any upward movement in the S&P 500 Stock Index, while providing the "downside
protection" of assuring investors that they cannot lose more than 10% of the
capital during any 18-month Time Horizon. The Fund's ability to achieve this
objective is, however, "path dependent." Given different patterns of S&P 500
-9-
<PAGE>
Stock Index movements during a Time Horizon, the Fund could capture all, most,
or very little of the cumulative gain in the Index over a Time Horizon. Volatile
S&P 500 markets are likely to minimize or reduce the percentage of any
cumulative gain reflected in the performance of the Fund, as the Fund would be
continually acquiring and liquidating S&P positions in response to fluctuating
S&P 500 Index levels. On the other hand, in the case of a strongly upward
trending S&P Index, the Fund would be likely to capture substantantly all of the
cumulative gain in the Index over a Time Horizon. Comparisons between the Fund's
performance in any given fiscal year to that in the prior fiscal year are no
more, or less, meaningful than a comparison between S&P 500 Stock Index
movements which took into account both the overall increase or decrease in the
Index over the period and the pattern of price movements which resulted in such
increase or decrease.
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.
The S&P 500 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.
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 Fund trades
exclusively. The Fund cannot be profitable during a Time Horizon unless the S&P
500 Stock Index market rises.
THE YEAR 2000 COMPUTER ISSUE
Merrill Lynch's modifications for Year 2000 systems compliance are
proceeding according to plan and are expected to be completed in early 1999.
Based on information currently available, the remaining expenditures are
estimated at $200 million and will cover hardware and software upgrades, systems
consulting, and computer maintenance. These expenditures are not expected to
have a material adverse impact on Merrill Lynch's financial position, results of
operations, or cash flows in future periods. However, the failure of Merrill
Lynch's securities exchanges, clearing organizations, vendors, clients, or
regulators to resolve their own processing issues in a timely manner could
result in a material financial risk. Merrill Lynch is devoting necessary
resources to address all Year 2000 issues in a timely manner.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements required by this Item are included in Exhibit
13.01.
The supplementary financial information ("selected quarterly financial
data" and "information about oil and gas producing activities") specified by
Item 302 of Regulation S-K is not applicable.
-10-
<PAGE>
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no changes in or disagreements with accountants on accounting or
financial disclosure.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a,b) Identification of Directors and Executive Officers:
--------------------------------------------------
As a limited partnership, the Partnership itself has no officers or
directors and is managed by the General Partner. Trading decisions are made by
the Trading Advisors on behalf of the Partnership.
The directors and executive officers of MLIP as of February 1, 1998
and their business backgrounds are as follows.
John R. Frawley, Jr. Chairman, Chief Executive Officer,
President and Director
Jeffrey F. Chandor Senior Vice President, Director of
Sales, Marketing and Research and
Director
Joseph H. Moglia Director
Allen N. Jones Director
Stephen G. Bodurtha Director
Michael A. Karmelin Chief Financial Officer, Vice
President and Treasurer
Steven B. Olgin Vice President, Secretary and Director
of Administration
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman, Chief
Executive Officer, President and a Director of MLIP and Co-Chairman of MLF. He
joined Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in 1966 and
has served in various positions, including Retail and Institutional Sales,
Manager of New York Institutional Sales, Director of Institutional Marketing,
Senior Vice President of Merrill Lynch Capital Markets and Director of
International Institutional Sales. Mr. Frawley holds a Bachelor of Science
degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory
Coordination Advisory Committee from its formation in 1990 through its
dissolution in 1994. Mr. Frawley is currently serving his fourth consecutive
one-year term as Chairman of the Managed Funds Association (formerly, the
Managed Futures Association), a national trade association that represents the
managed futures, hedge funds and fund of funds industry. Mr. Frawley is also a
Director of that organization. Mr. Frawley currently serves on a panel created
by the Chicago Mercantile Exchange and The Board of Trade of the City of Chicago
to study cooperative efforts related to electronic trading, common clearing and
the issues regarding a potential merger.
-11-
<PAGE>
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice
President, the Director of Sales, Marketing and Research and a Director of MLIP.
He joined MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as
well as Managing Director of International Sales in the United States, and
Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts
degree from Trinity College, Hartford, Connecticut.
Joseph H. Moglia was born in 1949. He is a director of MLIP. In
1971, he graduated from Fordham University with a Bachelor of Arts degree in
Economics. He later received his Master of Science degree from the University
of Delaware. He taught at the high school and college level for sixteen years.
Mr. Moglia joined MLPF&S in 1984, and has served in a number of senior roles,
including Director of New York Fixed Income Institutional Sales, Director of
Global Fixed Institutional Sales, and Director of the Municipal Division. He is
currently Senior Vice President and Director of the Investment Strategy and
Product Group in Merrill Lynch Private Client, and Director of Middle Markets.
Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP and,
from July 1995 until January 1998, Mr. Jones was Chairman of the Board of
Directors of MLIP. Mr. Jones graduated from the University of Arkansas with a
Bachelor of Science, Business Administration degree in 1964. Since June 1992,
Mr. Jones has held the position of Senior Vice President of MLPF&S. From June
1992 through February 1994, Mr. Jones was the President and Chief Executive
Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board
of Directors of MLIG and its subsidiary companies. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of
MLIP. In 1980, Mr. Bodurtha graduated from Wesleyan University, Middletown,
Connecticut with a Bachelor of Arts degree in Government, magna cum laude. From
1980 to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill
Lynch. In 1985, he was awarded his Master of Business Administration degree
from Harvard University, where he also served as Associates Fellow (1985-1986).
From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice
President with Kidder, Peabody & Co., Incorporated where he worked in their
Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has
held the position of First Vice President since 1995. He has been the Director
in charge of MLPF&S's Structured Investments Group since 1995.
Michael A. Karmelin was born in 1947. Mr. Karmelin is Chief Financial
Officer, Vice President and Treasurer of MLIP. Prior to joining MLIP in April
1997, Mr. Karmelin was Chief Financial Officer of Merrill Lynch, Hubbard Inc.
("ML Hubbard"), a sponsor of real estate limited partnerships. Mr. Karmelin
joined ML Hubbard in January 1994 and was a Vice President of ML Hubbard. From
May 1994 to April 1997, he was the Chief Financial Officer of ML Hubbard,
responsible for its accounting, treasury and tax functions. Prior to joining ML
Hubbard, Mr. Karmelin held several senior financial positions with ML&Co and
MLPF&S from December 1985 to December 1993, including Vice President/Senior
Financial Officer Corporate Real Estate and Purchasing, Manager Commitment
Control/Capital Budgeting, and Senior Project Manager/Project Analysis. Prior
to joining ML&Co., Mr. Karmelin was employed at Avco Corporation for 17 years,
where he held a variety of financial positions. Mr. Karmelin holds a B.B.A.
degree in Accounting from Baruch College, C.U.N.Y. and a Master of Business
Administration degree in Corporate Strategy and Finance from New York
University. Mr. Karmelin passed the Certified Public Accounting examination in
1974 and is a member of the Treasury Management Association, the Institute of
Management Accountants and The Strategic Leadership Forum.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice President,
Secretary and the Director of Administration of MLIP. He joined MLIP in July
1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr.
Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin
graduated from The American University with a Bachelor of Science degree in
Business Administration and a Bachelor of Arts degree in Economics. In 1986, he
received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin
is a member of the Managed Funds Association's Government Relations Committee
and has served as an arbitrator for the NFA. Mr. Olgin is also a member of the
Committee on Futures Regulation of the Association of the Bar of the City of New
York.
-12-
<PAGE>
Messrs. Moglia and Bodurtha became Directors in January 1998.
As of December 31, 1997, the principals of MLIP had no investment in
the Fund, and MLIP's general partner interest in the Fund was valued at
$183,819.
MLIP acts as general partner to twelve public futures funds whose
units of limited partnership interest are registered under the Securities
Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, ML
Futures Investments L.P., ML Futures Investments II 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.
(formerly, ML Principal Protection Plus L.P.), ML JWH Strategic Allocation Fund
L.P. and the Fund. Because MLIP serves as the sole general partner of each of
these funds, the officers and directors of MLIP effectively manage them as
officers and directors of such funds.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
None.
(d) Family Relationships:
--------------------
None.
(e) Business Experience:
-------------------
See Item 10(a)(b) above.
(f) Involvement in Certain Legal Proceedings:
----------------------------------------
None.
(g) Promoters and Control Persons:
-----------------------------
Not applicable.
ITEM 11: EXECUTIVE COMPENSATION
----------------------
The directors and officers of the General Partner are remunerated by the
General Partner in their respective positions. The Partnership does not itself
have any officers, directors or employees. The Partnership pays Brokerage
Commissions to an affiliate of the General Partner. The General Partner or its
affiliates may also receive certain economic benefits from holding certain of
the Fund's dollar Available Assets in offset accounts, as described in Item 1(c)
above. The directors and officers receive no "other compensation" from the
Partnership, and the directors receive no compensation for serving as directors
of the General Partner. There are no compensation plans or arrangements
relating to a change in control of either the Partnership or the General
Partner.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1997, no person or "group" is known to be or have
been the beneficial owner of more than five percent of the Units.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1997, the General Partner owned 680 Units (unit-
equivalent general partnership interests), which was less than 2% of the total
Units outstanding.
-13-
<PAGE>
(c) Changes in Control:
------------------
None.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with Management and Others:
---------------------------------------
The General Partner acts as administrative and trading manager of the
Fund. The General Partner provides all normal ongoing administrative functions
of the Partnership, such as accounting, legal and printing services. The
General Partner, which receives the Administrative Fees, pays all expenses
relating to such services.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as the principal
commodity broker for the Partnership.
In 1997 the Partnership paid: (i) Brokerage Commissions of $4,894 to
the Commodity Broker, and (ii) Administrative Fees of $180,711 to the General
Partner, which included $32,975 in consulting and advisory fees paid by the
Commodity Broker to the Trading Advisors. In addition, MLIP and its affiliates
may have derived certain economic benefits from maintaining a portion of the
Fund's assets in "offset accounts," as described under Item 1(c), "Narrative
Description of Business -- Use of Proceeds and Interest Income -- Interest
Earned on the Fund's U.S. Dollar Available Assets" and "Executive Compensation"
herein.
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.
-14-
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a)1. Financial Statements (found in Exhibit 13.01): Page
---------------------------------------------- ----
Independent Auditors' Report 1
Consolidated Statements of Financial Condition
as of December 31, 1997 and 1996 2
For the years ended December 31, 1997,
1996 and 1995:
Consolidated Statements of Income 3
Consolidated Statements of Changes in
Partners' Capital 4
Notes to Consolidated Financial Statements 5-10
(a)2. Financial Statement Schedules:
-----------------------------
Financial statement schedules not included in this Form 10-K have been
omitted for the reason that they are not required or are not applicable or that
equivalent information has been included in the financial statements or notes
thereto.
(a)3. Exhibits:
--------
The following exhibits are incorporated by reference or are filed
herewith to this Annual Report on Form 10-K:
Designation Description
- ----------- -----------
3.02 Amended and Restated Limited Partnership Agreement of the
Partnership.
Exhibit 3.02: Is incorporated herein by reference from Exhibit 3.01 contained
in Amendment No. 2 (as Exhibit A) to the Registration Statement
(File No. 33-13175) filed on June 10, 1987, on Form S-1 under the
Securities Act of 1933 (the "Registrant's Registration
Statement").
3.04 Amended and Restated Certificate of Limited Partnership of the
Partnership, dated July 27, 1995.
Exhibit 3.04: Is incorporated by reference from Exhibit 3.04 contained in the
Registrant's report on Form 10-Q for the Quarter Ended June 30,
1995.
3.05 Certificate of Limited Partnership of the Trading Partnership
dated June 24, 1994.
Exhibit 3.05: Is incorporated herein by reference from Exhibit 3.05 contained
in the Registrant's report on Form 10-K for the year ended
December 31, 1996.
10.01(c) Form of Advisory Agreement between the Partnership, Merrill Lynch
Investment Partners Inc., Merrill Lynch Futures Inc. and each
Trading Advisor.
Exhibit 10.01(c): Is incorporated by reference from Exhibit 10.01(c) contained
in the Registrant's report on Form 10-Q for the Quarter Ended
June 30, 1995.
-15-
<PAGE>
10.02 Form of Consulting Agreement between each the Partnership and
Merrill Lynch Futures Inc.
Exhibit 10.02: Is incorporated herein by reference from Exhibit 10.02
contained in the Registrant's Registration Statement.
10.04 Form of Customer Agreement between the Partnership and Merrill
Lynch Futures Inc.
Exhibit 10.04: Is incorporated herein by reference from Exhibit 10.04
contained in the Registrant's Registration Statement.
13.01 1997 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
28.01 Prospectus of the Partnership dated June 12, 1987.
Exhibit 28.01: Is incorporated by reference as filed with the Securities and
Exchange Commission pursuant to Rule 424 under the Securities Act
of 1933, on June 12, 1987.
(b) Report on Form 8-K:
------------------
No reports on Form 8-K were filed during the fourth quarter of 1997.
-16-
<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.
THE GROWTH AND GUARANTEE FUND L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
By: /s/ John R. Frawley, Jr.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer, President
and Director (Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed on March 25, 1998 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John R. Frawley, Jr. Chairman, Chief Executive Officer, President March 25, 1998
- -------------------------- and Director (Principal Executive Officer)
John R. Frawley, Jr.
/s/ Michael A. Karmelin Vice President, Chief Financial Officer, and March 25, 1998
- -------------------------- Treasurer (Principal Financial and Accounting Officer)
Michael A. Karmelin
/s/ Jeffrey F. Chandor Senior Vice President, Director of Sales, March 25, 1998
- -------------------------- Marketing and Research, and Director
Jeffrey F. Chandor
/s/ Allen N. Jones Director March 25, 1998
- --------------------------
Allen N. Jones
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
MERRILL LYNCH INVESTMENT General Partner of Registrant March 25, 1998
PARTNERS INC.
By: /s/ John R. Frawley, Jr.
----------------------------
John R. Frawley, Jr.
</TABLE>
-17-
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
1997 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1997 Annual Report and Independent Auditors' Report
-18-
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
(A DELAWARE LIMITED PARTNERSHIP)
Consolidated Financial Statements for the years
ended December 31, 1997, 1996 and 1995 and
Independent Auditors' Report
<PAGE>
To: The Limited Partners of The Growth and Guarantee Fund L.P. - Series A
The Growth and Guarantee Fund L.P. - Series A (the "Fund" or "Partnership")
ended its eleventh fiscal year of trading on December 31, 1997 with a Net Asset
Value ("NAV") per Unit of $270.32, representing an increase of 23.74% from the
December 31, 1996 NAV per Unit of $218.46. In 1997, the stock market, as
measured by the Standard & Poor's 5007 Stock Index (the "S&P 500"), increased
33.36%.
The design of the Fund allows investors the opportunity to participate in stock
market advances (as measured by the S&P 500) while protecting investors against
large losses through the "Downside Protection" feature of the Fund, providing a
Protected Minimum NAV per Unit as of the end of the current Time Horizon
determined for the Fund. The Fund purchases Treasury STRIPS maturing at the end
of each Time Horizon in a face amount equal to the Protected Minimum NAV and is
structured to provide a "New Profits Lock-In" in the event that the NAV per Unit
increases by 10% or more. The Time Horizons are 18 months in duration. 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 30, 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.
1997 proved to be an outstanding year for the Fund. As General Partner and
Trading Manager of the Fund, we continue to remain confident that the Fund is
well positioned to benefit from trading opportunities in 1998. We look forward
to the new fiscal year and the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President & Chief Executive Officer
Merrill Lynch Investment Partners Inc.
(General Partner)
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
(A Delaware Limited Partnership)
TABLE OF CONTENTS
- -----------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 and 1995:
Consolidated Statements of Financial Condition 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
The Growth and Guarantee Fund L.P.:
We have audited the accompanying consolidated statements of financial condition
of The Growth and Guarantee Fund L.P. (a Delaware limited partnership; the
"Partnership") as of December 31, 1997 and 1996, and the related consolidated
statements of income and changes in partners' capital for each of the three
years in the period ended December 31, 1997. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these financial statements present fairly, in all material
respects, the consolidated financial position of The Growth and Guarantee Fund
L.P. as of December 31, 1997 and 1996 and the consolidated results of its
operations for each of the three years in the period ended December 31, 1997 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 6, 1998
New York, New York
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
(A Delaware Limited Partnership)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1997 1996
----------------- ----------------
<S> <C> <C>
Accrued interest (Note 2) $ 9,255 $ 8,352
U.S. Government obligations 8,775,472 7,628,080
Equity in commodity futures trading accounts:
Cash and options premiums 2,309,206 2,042,087
Net unrealized loss on open contracts (100,288) (136,425)
----------------- ----------------
TOTAL $10,993,645 $ 9,542,094
================= ================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 65,958 $ 48,061
Administrative fees and brokerage
commissions payable 16,777 14,718
----------------- ----------------
Total liabilities 82,735 62,779
----------------- ----------------
Minority Interest 148,295 57,792
----------------- ----------------
PARTNERS' CAPITAL:
General Partner:
(680 and 680 units) 183,819 148,552
Limited Partners:
(39,134 and 42,447 units) 10,578,796 9,272,971
----------------- ----------------
Total partners' capital 10,762,615 9,421,523
----------------- ----------------
TOTAL $10,993,645 $ 9,542,094
================= ================
NET ASSET VALUE PER UNIT
(Based on 39,814 and 43,127 Units outstanding) $ 270.32 $ 218.46
================= ================
</TABLE>
See notes to consolidated financial statements.
-2-
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
(A Delaware Limited Partnership)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized:
Options and futures $ 1,796,625 $ 1,204,850 $ 2,323,415
U.S. Government obligations 5,297 21,267 51,234
Change in unrealized:
Options and futures 36,137 (30,625) (510,976)
U.S. Government obligations 3,905 (34,071) 143,640
---------------- ----------------- -----------------
Total trading results 1,841,964 1,161,421 2,007,313
Interest income (Note 2) 588,693 453,093 407,304
---------------- ----------------- -----------------
Total revenues 2,430,657 1,614,514 2,414,617
---------------- ----------------- -----------------
EXPENSES:
Brokerage commissions 4,894 2,938 4,225
Administrative fees 180,711 158,330 144,696
---------------- ----------------- -----------------
Total expenses 185,605 161,268 148,921
---------------- ----------------- -----------------
INCOME BEFORE MINORITY
INTEREST 2,245,052 1,453,246 2,265,696
MINORITY INTEREST IN INCOME (90,502) (28,850) (12,942)
---------------- ----------------- -----------------
NET INCOME $ 2,154,550 $ 1,424,396 $ 2,252,754
================ ================= =================
NET INCOME PER UNIT OF
PARTNERSHIP INTEREST:
Weighted average number of units
outstanding (Note 3) $ 41,267 $ 44,973 $ 49,591
================ ================= =================
Net income per weighted average
General Partner and Limited Partner Unit $ 52.21 $ 31.67 $ 45.43
================ ================= =================
</TABLE>
See notes to consolidated financial statements.
-3-
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
(A Delaware Limited Partnership)
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------------------------------------------------
Units Limited Partners General Partner Total
------------ ------------------ ------------------- ---------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 53,537 $ 7,470,426 $ 96,085 $ 7,566,511
Redemptions (7,318) (1,196,183) - (1,196,183)
Net income - 2,221,993 30,761 2,252,754
------------ ------------------ -------------- ------------------
PARTNERS' CAPITAL,
DECEMBER 31, 1995 46,219 8,496,236 126,846 8,623,082
Redemptions (3,092) (625,955) - (625,955)
Net income - 1,402,690 21,706 1,424,396
------------ ------------------ -------------- ------------------
PARTNERS' CAPITAL,
DECEMBER 31, 1996 43,127 9,272,971 148,552 9,421,523
Redemptions (3,313) (813,458) - (813,458)
Net income - 2,119,283 35,267 2,154,550
------------ ------------------ -------------- ------------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 39,814 $10,578,796 $ 183,819 $ 10,762,615
============ ================== ============== ==================
</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
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996, AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Growth and Guarantee Fund L.P. (the "Partnership") was organized on
January 21, 1987 under the Delaware Revised Uniform Limited Partnership Act and
commenced trading activities on August 5, 1987. The Growth and Guarantee Fund
Trading L.P. (the "Trading Partnership") was organized on and commenced trading
activities on June 1, 1995. The Partnership engages in the speculative trading
of stock index futures and options, attempting to replicate the performance of
the S&P 500 Stock Index while assuring that the Units do not decline in value by
more than 10% over the course of any one Time Horizon (a term defined in the
Limited Partnership Agreement, generally 18 months in duration). On June 1,
1995, the Partnership began trading through the Trading Partnership rather than
directly. The Trading Partnership assumes the isolation of the necessary
reserve assets from the assets subject to the risk of market loss. Leland
O'Brien Rubinstein Associates Incorporated (the "Advisor") is the trading
advisor of the Trading Partnership. Merrill Lynch Investment Partners Inc.
(formerly, ML Futures Investment Partners Inc.) ("MLIP" or the "General
Partner"), a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in
turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch"), is the general partner of the Partnership and the Trading Partnership,
and Merrill Lynch Futures Inc. ("MLF") , also an affiliate of Merrill Lynch, is
the commodity broker of the Trading Partnership. The General Partner has agreed
to maintain a general partner's interest of at least 1% of the total equity
interest of the Partnership and the Trading Partnership. The Partnership is the
sole Limited Partner of the Trading Partnership. The General Partner and each
Limited Partner share in the profits and losses of the Partnership, and the
General Partner and the Partnership share in the profits and losses of the
Trading Partnership, in proportion to the interest in the Partnership and the
Trading Partnership owned by each.
The consolidated statements include the accounts of the Trading
Partnership. All related transactions and intercompany balances between the
Partnership and the Trading Partnership are eliminated in consolidation.
The ownership by the General Partner in the Trading Partnership represents
a minority interest when the financial results of the Trading Partnership are
consolidated into those of the Partnership. The General Partner's share of the
Trading Partnership profits and losses is deducted from the Consolidated
Statements of Income, and the General Partner's interest in the Trading
Partnership reduces partners' capital on the Consolidated Statements of
Financial Condition and the Consolidated Statements of Changes in Partner's
Capital.
-5-
<PAGE>
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
Stock index futures and options, and securities transactions are recorded
on the trade date, and open contracts are reflected in net unrealized loss on
open contracts in the Consolidated Statements of Financial Condition at the
difference between the original contract value and the fair value. The change
in net unrealized profit (loss) on open contracts from one period to the next is
reflected in change in unrealized in the Consolidated Statements of Income.
Fair value is based on quoted market prices on the exchange or market on which
the contract is traded.
U.S. Government Obligations
The Partnership invests a portion of its assets in U.S. Government
securities. These investments are carried at fair value.
Fees
The Partnership pays a monthly administrative fee to the General Partner
equal to .146 of 1% of the Partnership's month end Net Assets (a 1.75% annual
rate). The General Partner pays quarterly consulting fees to the Advisor
totaling 0.07969 of 1% (a 0.31876% annual rate) of the first $100 million and
0.03625 of 1% (a 0.145% annual rate) on amounts in excess of $100 million.
Operating Expenses
The General Partner, at no additional expense to the Partnership, pays all
normal ongoing administrative costs of the Partnership, such as legal,
accounting, printing, postage and similar administrative expenses.
Protected Minimum Net Asset Value
The maximum permissible decrease in the Net Asset Value per Unit, as of the
end of successive Time Horizons (a term defined in the Limited Partnership
Agreement, generally 18 months in duration) is 10% of the Net Asset Value per
Unit as of the beginning of each such Time Horizon (the "Protected Minimum
NAV"). The Protected Minimum NAV of $229.90 for the current Time Horizon ending
November 30, 1998 is guaranteed by the U.S. Government obligations. The
Partnership utilizes a "downside protection" strategy which is designed to
maximize profits while controlling the risk of major drawdowns. Avoiding
significant losses is of particular importance to the Partnership's prospects
for profitability due to its "downside protection" feature.
-6-
<PAGE>
Income Taxes
No provision for income taxes has been made in the accompanying financial
statements as each Limited 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.
Redemptions
A Limited Partner may require the Partnership to redeem some or all such
Partner's Units at 100% of Net Asset Value as of the last business day of any
month, and at 100% of actual Net Asset Value plus any amounts due under the
Protected Minimum NAV as of the last business day of any month which is also the
last day of a Time Horizon, upon ten days' written notice to the General
Partner.
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 portion of the Partnership's assets (approximately 10% to 15%) which is
not held by the Partnership in U.S. Government securities is invested in the
Trading Partnership. The Partnership's assets are held in U.S. Government
securities deposited with Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S"), an affiliate of Merrill Lynch. The Trading Partnership's U.S.
dollar assets are held at MLF in cash. On the cash held at MLF, the Partnership
receives interest from Merrill Lynch at the prevailing 91-day U.S. Treasury bill
rate. Merrill Lynch may derive certain economic benefits, in excess of the
interest which Merrill Lynch pays to the Partnership, from possession of such
cash. During the years ended December 31, 1997, 1996 and 1995, MLF paid the
Partnership approximately $101,660 , $73,663 and $49,000 of interest,
respectively. Any additional economic benefit derived from possession of the
Partnership's assets accrues to MLF or its affiliates.
The General Partner has determined that there may have been a
miscalculation in the interest credited to the Partnership for a period prior to
November 1996 (such period may extend prior to that covered by these financial
statements). Accordingly, the General Partner credited current and former
investors who maintained a Merrill Lynch customer account in December 1997 with
interest which was compounded. Former investors who do not maintain a Merrill
Lynch customer account will be credited as their response forms are processed.
The total amount of the adjustment is approximately $5,000. Since this amount
was paid directly to investors by the General Partner, it is not reflected in
these financial statements. The General Partner has determined that interest has
been calculated appropriately since November 1996.
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.
-7-
<PAGE>
3. WEIGHTED AVERAGE UNITS
Weighted average number of Units outstanding was computed for purposes of
disclosing net income per weighted average Unit. The weighted average Units
outstanding at December 31, 1997, 1996 and 1995 equals the Units outstanding as
of such date, adjusted proportionately for Units redeemed based on the
respective length of time each was outstanding during the preceding period.
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures and options on stock indices. The
Partnership's total trading results by reporting category for the years ended
December 31, 1997, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
Total Trading Results
-----------------------------------------------------------
1997 1996 1995
---------------- ----------------- -----------------
<S> <C> <C> <C>
Interest Rates or Cash Instruments $ 13,426 $ (10,191) $ 199,460
Stock Indices 1,828,538 1,171,612 1,807,853
---------------- ----------------- -----------------
$ 1,841,964 $ 1,161,421 $ 2,007,313
================ ================= =================
</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 profit (loss) on
such derivative instruments as reflected in the Consolidated 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 profit (loss) recorded in the
Consolidated Statements of Financial Condition and the related profit or loss
reflected in trading revenues in the Statements of Income.
The contract/notional values of open contracts as of December 31, 1997 and 1996
were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------- --------------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase Sell Purchase Sell
(Futures & Options) (Futures & Options) (Futures & Options) (Futures & Options)
----------------------- ----------------------- ----------------------- -----------------------
<S> <C> <C> <C> <C>
Stock Indices $ 10,573,450 $ - $ 8,976,550 $ -
======================= ======================= ======================= =======================
</TABLE>
The majority of the Partnership's derivative financial instruments outstanding
at December 31, 1997, mature within one year.
-8-
<PAGE>
The contract/notional values of exchange-traded and open contracts as of
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------- ---------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase Sell Purchase Sell
(Futures & Options) (Futures & Options) (Futures & Options) (Futures & Options)
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Exchange -Traded $ 10,573,450 $ - $ 8,976,550 $ -
====================== ====================== ====================== ======================
</TABLE>
The average fair values, based on contract/notional values, of derivative
financial instruments held or issued as of the end of each calendar month during
the years ended December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
--------------------------------------------------- --------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase Sell Purchase Sell
(Futures & Options) (Futures & Options) (Futures & Options) (Futures & Options)
---------------------- ---------------------- ---------------------- ----------------------
<S> <C> <C> <C> <C>
Stock Indices $ 9,593,706 $ - $ 7,367,783 $ -
====================== ====================== ====================== ======================
</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 fair value 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.
-9-
<PAGE>
The gross unrealized profit and net unrealized loss on open contracts as of
December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -------------------------------------
Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized
Profit (Loss) Profit (Loss)
---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Exchange -
Traded $ - $ (100,288) $ - $ (136,425)
============== ================ ============== ===============
</TABLE>
The Partnership controls credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.
The Partnership, in its normal course of business, enters into various
contracts, with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF, to the extent that such trading results in receivables
from and payables to MLF, these receivables and payables are offset and reported
as a net receivable or payable.
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Michael A. Karmelin
Michael A. Karmelin
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
The Growth and Guarantee Fund L.P.
-10-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 0 0
<RECEIVABLES> 2,218,173 1,914,014
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 8,775,472 7,628,080
<PP&E> 0 0
<TOTAL-ASSETS> 10,993,645 9,542,094
<SHORT-TERM> 0 0
<PAYABLES> 82,735 62,779
<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> 10,910,910 9,479,315
<TOTAL-LIABILITY-AND-EQUITY> 10,993,645 9,542,094
<TRADING-REVENUE> 1,841,964 1,161,421
<INTEREST-DIVIDENDS> 588,693 453,093
<COMMISSIONS> 4,894 2,938
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 2,154,550 1,424,396
<INCOME-PRE-EXTRAORDINARY> 2,154,550 1,424,396
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,154,550 1,424,396
<EPS-PRIMARY> 52.21 31.67
<EPS-DILUTED> 52.21 31.67
</TABLE>
