<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-------------------
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
----- -----
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE GROWTH AND GUARANTEE FUND L.P.
----------------------------------
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
- ------
Accrued interest $ 3,026 $ 9,255
U.S. Government obligations 10,055,498 8,775,472
Equity in commodity futures trading accounts:
Cash and options premium 1,110,434 2,309,206
Net unrealized (loss) on open contracts (188,175) (100,288)
------------ ------------
TOTAL $ 10,980,783 $ 10,993,645
============ ============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 25,802 $ 65,958
Administrative fees and brokerage
commissions payable 16,715 16,777
------------ ------------
Total liabilities 42,517 82,735
------------ ------------
Minority Interest 15,081 148,295
------------ ------------
PARTNERS' CAPITAL:
General Partner (390 and 680 Units) 111,810 183,819
Limited Partners (37711 and 39134 Units) 10,811,375 10,578,796
------------ ------------
Total partners' capital 10,923,185 10,762,615
------------ ------------
TOTAL $ 10,980,783 $ 10,993,645
============ ============
NET ASSET VALUE PER UNIT
(Based on 38101 and 39814 Units outstanding) $ 286.69 $ 270.32
============ ============
</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 nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
------------- -------------- ------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profit:
Realized:
Options and Futures $ (621,325) $ 480,500 $ 376,850 $ 1,526,850
U.S. Government obligations (8,642) 40 17,687 4,897
Change in unrealized:
Options and Futures (300,675) (25,875) (88,050) 232,275
U.S. Government obligations 141,228 26,918 110,079 6,591
------------- -------------- ------------- --------------
Total trading results (789,414) 481,583 416,566 1,770,613
------------- -------------- ------------- --------------
Interest income:
Options and Futures 318,198 26,991 380,618 74,489
U.S. Government obligations (165,574) 128,277 80,020 358,537
------------- -------------- ------------- --------------
Total revenues (636,790) 636,851 877,204 2,203,639
------------- -------------- ------------- --------------
EXPENSES:
Brokerage commissions 2,550 712 5,694 3,425
Administrative fees 48,440 47,480 148,996 133,591
------------- -------------- ------------- --------------
Total expenses 50,990 48,192 154,690 137,016
------------- -------------- ------------- --------------
(LOSS) INCOME BEFORE
MINORITY INTEREST (687,780) 588,659 722,514 2,066,623
Minority interest on income 14,053 (30,238) (58,786) (83,531)
------------- -------------- ------------- --------------
NET (LOSS) INCOME $ (673,727) $ 558,421 $ 663,728 $ 1,983,092
============= ============== ============= ==============
NET (LOSS) INCOME PER UNIT:
Weighted average number of units
outstanding 38,241 41,063 38,863 41,539
============= ============== ============= ==============
Weighted average net (loss) income
per Limited Partner
and General Partner Unit $ (17.62) $ 13.60 $ 17.08 $ 47.74
============= ============== ============= ==============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
----------------------------------
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
-------------------------------------------------------
For the nine months ended September 30, 1998 and 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partners General Partner Total
------------------- --------------------- -------------------- ---------------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1996 43,127 $ 9,272,971 $ 148,552 $ 9,421,523
Net income - 1,950,768 32,324 1,983,092
Redemptions (2,281) (539,829) - (539,829)
------------------- --------------------- -------------------- ---------------------
PARTNERS' CAPITAL,
September 30, 1997 40,846 $ 10,683,910 $ 180,876 $ 10,864,786
=================== ===================== ==================== =====================
PARTNERS' CAPITAL,
December 31, 1997 39,814 $ 10,578,796 $ 183,819 $ 10,762,615
Net income - 650,268 13,460 663,728
Redemptions (1,713) (417,689) (85,469) (503,158)
------------------- --------------------- -------------------- ---------------------
PARTNERS' CAPITAL,
September 30, 1998 38,101 $ 10,811,375 $ 111,810 $ 10,923,185
=================== ===================== ==================== =====================
</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 consolidated financial statements have been prepared without audit. In the
opinion of management, the consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of The Growth and Guarantee Fund L.P. (the
"Partnership" or the "Fund") as of September 30, 1998 and the results of its
operations for the nine months ended September 30, 1998 and 1997. 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 generally 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, 1997
(the "Annual Report").
2. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's total trading results by reporting category for the respective
periods were as follows:
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
-------------- -------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest rate $ 138,630 $ 27,671 $ 133,810 $ 15,088
Stock Indices (928,044) 453,912 282,756 1,755,525
------------- -------------- ------------- -------------
$ (789,414) $ 481,583 $ 416,566 $ 1,770,613
============= ============== ============= =============
</TABLE>
The contract/notional values of the Partnership's open derivative instrument
positions as of September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------- ---------------------------------------------------
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 $ 2,212,650 $ - $ 10,573,450 $ -
===================== ===================== ====================== ======================
</TABLE>
5
<PAGE>
The contract/notional values of exchange traded open contracts as of September
30, 1998 and December 31, 1997 were as follows (the Partnership does not trade
non-exchange-traded derivative instruments):
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------- --------------------------------------------------
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 $ 2,212,650 $ - $ 10,573,450 $ -
===================== ===================== ===================== =====================
</TABLE>
The average fair values, based on contract notional values, of the derivative
instruments held or issued as of the end of each calendar month during the nine
months ended September 30, 1998 and the year ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------- ---------------------------------------------------
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 $ 8,909,549 $ - $ 9,593,706 $ -
===================== ===================== ====================== ======================
</TABLE>
The gross unrealized profit and the net unrealized (loss) on open contracts as
of September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- ----------------------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Loss Profit Loss
------------------ ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Exchange
traded $ 2,275 $ (188,175) $ - $ (100,288)
================== ================== ================== ===================
</TABLE>
Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Results of Operations
- ---------------------
During the 3 months of trading ending September 30, 1997, the S&P 500
Stock Index (dividends not reinvested) increased a total of 7.04%, whereas the
Net Asset Value per Series A unit increased 5.37%.
During the 3 months of trading ending September 30, 1998 the S&P 500
Stock Index (dividends not reinvested) decreased a total of 10.30%, whereas the
Net Asset Value per Series A unit decreased 5.78%.
On July 6, 1998, the NAV of the Fund increased to $311.00, a level
triggering a "New Profits Lock-in." Based upon the $311.00 per Unit NAV as of
the beginning of the current Time Horizon, which ends at the close of business
on December 31, 1999, the New Protected Minimum NAV is $279.90 per Unit. The
Fund will experience a "New Profits Lock-In" if the NAV reaches $342.10 per
Series A Unit.
6
<PAGE>
Performance Summary
- -------------------
During the first nine months of 1997, the Fund's average month-end Net
Assets equaled $10,023,394 and the Fund recognized gross trading gains of
$1,770,613 or 17.66% of such average month-end Net Assets. Brokerage commissions
of $3,425 or 0.03% and Administrative fees of $133,591 or 1.33% of average
month-end Net Assets were paid. Interest income of $433,026 or 4.32% of average
month-end Net Assets resulted in net income of $1,983,092 (after deduction of
Merrill Lynch Investment Partners Inc. ("MLIP's) "Minority Interest" of $83,531
in the Trading Partnership) or 19.78% of average month-end Net Assets which
resulted in a 21.76% increase in the Net Asset Value per Series A Unit since
December 31, 1996.
During the first nine months of 1998, the Fund's average month-end Net
Assets equaled $11,279,616, and the Fund recognized gross trading gains of
$416,566 or 3.69% of such average month-end Net Assets. Brokerage commissions of
$5,694 or .05% and Administrative fees of $148,996 or 1.32% of average month-end
Net Assets were paid. Interest income of $460,638 or 4.08% of average month-end
Net Assets resulted in net income of $663,728 (after deduction of MLIP's
"Minority Interest" of $58,786 in the Trading Partnership) or 5.88% of average
month-end Net Assets which resulted in a 6.06% increase in the Net Asset Value
per Unit since December 31, 1997.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER UNIT
- -----------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr May Jun Jul Aug Sep
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $230.41 $231.23 $221.77 $231.83 $244.06 $252.44 $269.18 $256.52 $265.99
- -----------------------------------------------------------------------------------------------------------------
1998 $273.20 $287.07 $298.62 $300.27 $294.72 $304.29 $302.20 $278.40 $286.69
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
Year 2000 Compliance
- --------------------
As the millennium approaches, Merrill Lynch has undertaken
initiatives to address the Year 2000 problem (the "Y2K problem"). The Y2K
problem is the result of a widespread programming technique that causes computer
systems to identify a date based on the last two numbers of a year, with the
assumption that the first two numbers of the year are "19." As a result, the
year 2000 would be stored as "00," causing computers to incorrectly interpret
the year as 1900. Left uncorrected, the Y2K problem may cause information
technology systems (e.g., computer databases) and non-information technology
systems (e.g., elevators) to produce incorrect data or cease operating
completely.
Merrill Lynch believes that it has identified and evaluated its
internal Y2K problem and that the company is devoting sufficient resources to
renovating technology systems that are not already Year 2000 compliant. Merrill
Lynch expects the renovation phase (as discussed below) of its Year 2000 efforts
to be substantially completed by December 31, 1998, thereby allowing the company
to focus on additional testing efforts and integration of the Year 2000 programs
of recent acquisitions during 1999. In order to focus attention on the Y2K
problem, management has deferred certain other technology projects; however this
deferral is not expected to have a material adverse effect on the company's
business, results of operations, or financial condition.
The failure of Merrill Lynch's technology systems relating to a Y2K
problem would likely have a material adverse effect on the company's business,
results of operations, or financial condition. This effect could include
disruption of normal business transactions, such as the settlement, execution,
processing, and recording of trades in securities, commodities, currencies, and
other assets. The Y2K problem could also increase Merrill Lynch's exposure to
risk and its need for liquidity.
In 1995, Merrill Lynch established the Year 2000 Compliance
Initiative, which is an enterprisewide effort to address the risks associated
with the Y2K problem, both internal and external. The Year 2000 Compliance
Initiative's efforts to address the risks associated with the Y2K problem have
been organized into six segments or phases: planning, pre-renovation,
renovation, production testing, certification, and integration testing.
The planning phase involved defining the scope of the Year 2000
Compliance Initiative, including its annual budget and strategy, and determining
the level of expert knowledge available within Merrill Lynch regarding
particular systems or applications. The pre-renovation phase involved developing
a detailed enterprisewide inventory of applications and systems, identifying the
scope of necessary renovations to each application or system, and establishing a
conversion schedule. During the renovation phase, source codes are actually
converted, date fields are expanded or windowed (windowing is used on an
exception basis only), test data is prepared, and each system or application is
tested using a variety of Year 2000 scenarios. The production testing phase
validates that a renovated system is functionally the same as the existing
production version, that renovation has not introduced defects, and that
expanded or windowed date fields continue to handle current dates properly. The
certification phase
7
<PAGE>
validates that a system can run successfully in a Year 2000 environment.
Finally, the integration testing phase, which will occur throughout 1999,
validates that a system can successfully interface with both internal and
external systems.
In 1996 and 1997, as part of the planning and pre-renovation phases,
both plans and funding of plans for inventory, preparation, renovation, and
testing of computer systems for the Y2K problem were approved. All plans for
both mission-critical and non-mission-critical systems are tracked and
monitored. The work associated with the Year 2000 Compliance Initiative has been
accomplished by Merrill Lynch employees, with the assistance of consultants
where necessary.
As part of the production testing and certification phases, Merrill
Lynch has performed, and will continue to perform, both internal and external
Year 2000 testing intended to address the risks from the Y2K problem. In July
1998, Merrill Lynch participated in an industrywide Year 2000 systems test
sponsored by the Securities Industry Association ("SIA"), in which selected
firms tested their computer systems in mock stock trades that simulated dates in
December 1999 and January 2000. Merrill Lynch will participate in further
industrywide testing sponsored by the SIA, currently scheduled for March and
April 1999, which will involve an expanded number of firms, transactions, and
conditions. Merrill Lynch also participated in a test sponsored by the Bank of
England's Central Gilts Office.
Each business area within Merrill Lynch also continues to develop
specific contingency plans, with the particular choice of contingency action
dependent on the severity of the problem being addressed, the availability of
alternative products, and the level of importance of the business activity
supported by the problematic system. As part of the Year 2000 Compliance
Initiative, Merrill Lynch has undertaken a business readiness/risk management
effort in which each line of business will identify scenarios in order to
develop plans to reduce risks associated with a Y2K problem.
Merrill Lynch continues to survey and communicate with parties with
whom it has important relationships that may be associated with information
technology Y2K problems, as well as parties that may be associated with
non-information technology Y2K problems, such as landlords. Management is
unable, at this point, to ascertain whether all such third parties will
successfully address the Y2K problem, particularly parties outside the U.S.,
where it is believed that remediation efforts relating to the Y2K problem may be
less advanced than in the U.S. Merrill Lynch will continue to monitor third
parties' Year 2000 readiness to determine whether additional or alternative
measures are necessary. Such measures may include the selection of alternate
third parties or other efforts designed to mitigate some of the effects of a
third party's noncompliance. In light of the interdependency of the parties in
or serving the financial markets, however, there can be no assurance that all
Y2K problems will be identified and remediated on a timely basis or that all
remediation efforts will be successful. The failure of securities exchanges,
clearing organizations, vendors, clients, or regulators to resolve their own
processing issues in a timely manner could have a material adverse effect on
Merrill Lynch's business, results of operations, or financial condition.
Nearly 10% of the current year's technology budget has been allocated
to the Year 2000 Compliance Initiative. As of the end of the 1998 third quarter,
the total estimated expenditures associated with the entire Year 2000 Compliance
Initiative were expected to be approximately $400 million, of which $160 million
is remaining. The majority of these remaining expenditures are expected to cover
software remediation, testing, and contingency planning. There can be no
assurance that the costs associated with such remediation efforts will not
exceed those currently anticipated by Merrill Lynch, or that the costs
associated with the remediation efforts or the possible failure of such
remediation efforts would not have a material adverse effect on Merrill Lynch's
business, results of operations, or financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
8
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or
the General Partner is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits required to be filed as part of this
report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first
nine months of fiscal 1998.
9
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GROWTH AND GUARANTEE FUND L.P.
-------------------------------------
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 11,1998 By /s/ JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: November 11,1998 By /s/ JO ANN DI DARIO
-------------------
Jo Ann Di Dario
Vice President, Chief Financial Officer
and Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 0 0
<RECEIVABLES> 925,285 2,205,979
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 10,055,498 8,843,349
<PP&E> 0 0
<TOTAL-ASSETS> 10,980,783 11,049,328
<SHORT-TERM> 0 0
<PAYABLES> 57,598 184,542
<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> 10,923,185 10,864,786
<TOTAL-LIABILITY-AND-EQUITY> 10,980,783 11,049,328
<TRADING-REVENUE> 416,566 1,770,613
<INTEREST-DIVIDENDS> 460,638 433,026
<COMMISSIONS> 207,782 220,548
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 663,728 1,983,091
<INCOME-PRE-EXTRAORDINARY> 663,728 1,983,091
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 663,728 1,983,091
<EPS-PRIMARY> 17.08 47.74
<EPS-DILUTED> 17.08 47.74
</TABLE>
