<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, 1998
or
(_) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
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 (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, NEW YORK, NY 10080
--------------------------------
(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
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Limited Partnership
Units
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting and non-voting common equity held by non-
affiliates of the registrant: the registrant is a limited partnership; as of
February 1, 1999, limited partnership interests with an aggregate value of
$12,068,344 outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's "1998 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1998,
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 1998 ON FORM 10-K
Table of Contents
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<TABLE>
<CAPTION>
PAGE
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<S> <C>
PART I
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Item 1. Business................................................................................ 1
Item 2. Properties.............................................................................. 4
Item 3. Legal Proceedings....................................................................... 4
Item 4. Submission of Matters to a Vote of Security Holders..................................... 4
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................... 4
Item 6. Selected Financial Data................................................................. 5
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations... 8
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.............................. 12
Item 8. Consolidated Financial Statements and Supplementary Data................................ 12
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.... 12
PART III
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Item 10. Directors and Executive Officers of the Registrant...................................... 12
Item 11. Executive Compensation.................................................................. 14
Item 12. Security Ownership of Certain Beneficial Owners and Management.......................... 15
Item 13. Certain Relationships and Related Transactions.......................................... 15
PART IV
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Item 14. Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K............ 16
</TABLE>
-i-
<PAGE>
PART I
ITEM 1: BUSINESS
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(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 August 5, 1987.
The Partnership holds stock index futures and options positions
as directed by the "Dynamic Asset Allocation System" developed by Leland O'Brien
Rubinstein Associates Inc. ("LOR" or the "Trading Advisor"), the objective of
which is to replicate the performance of the S&P 500 Stock Index (without
dividends) to the maximum practicable extent given the limited amount of trading
assets available.
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.
("ML&Co.") The Commodity Broker is an indirect wholly-owned subsidiary of ML&Co.
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"). As of December 31, 1998, the capitalization of the Fund was
$11,933,393. The Net Asset Value per Series A Unit, originally $100 as of August
5, 1987, had risen to $316.72 as of December 31, 1998.
Through December 31, 1998, the highest month-end Net Asset Value
per Series A Unit was $316.72 (December 31, 1998) and the lowest $87.31 (October
31, 1987).
(b) Financial Information about Segments:
------------------------------------
The Partnership's business constitutes only one segment for
financial reporting purposes, i.e., a speculative "commodity pool." The
Partnership does not engage in sales of goods or services.
(c) Narrative Description of Business:
---------------------------------
GENERAL
The Partnership applies asset allocation techniques in an attempt
to maximize the Partnership's participation in upward movements in stock index
levels while assuring that losses will not exceed the Downside Protection. The
trading strategy is reactive, i.e., it responds to market movements without
attempting to forecast trends or future prices (as would, for example, a trend-
following system).
Series A Units ended 1998 with a Protected Minimum Net Asset
Value ("NAV") of $279.90, as of the end of the current Time Horizon (December
31, 1999). 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 or near 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.
-1-
<PAGE>
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 Unit of $311.00 on July 6, 1998.
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.
Market Sectors. The Partnership trades in one market sector, the
--------------
S&P 500 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 Stock
Index 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 or near the end of the Time Horizon in a principal amount
sufficient to assure the Protected Minimum Net Asset Value per Series A Unit.
Interest Paid by Merrill Lynch on the Fund's U.S. Dollar and Non-
-----------------------------------------------------------------
U.S. Dollar Assets. The portion of the Partnership's assets (approximately 10%
- ------------------
to 20%) 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 and deposited with Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), an affiliate of Merrill Lynch. The Trading
Partnership's U.S. dollar assets are maintained at MLF. On such assets, Merrill
Lynch credits the Partnership with interest at the prevailing 91-day U.S.
Treasury bill rate. Merrill Lynch may derive certain economic benefit, in excess
of the interest which Merrill Lynch pays to the Partnership, from possession of
such assets. During the years ended December 31, 1998, 1997 and 1996, MLF paid
the Partnership approximately $90,622, $101,660 and $73,663 in interest,
respectively.
-2-
<PAGE>
CHARGES
The following table summarizes the charges incurred by the
Fund during 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
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% of Average % of Average % of Average
Dollar Month-End Dollar Month-End Dollar Month-End
Charges Amount Net Assets Amount Net Assets Amount Net Assets
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brokerage $ 6,994 0.06% $ 4,894 0.05% $ 2,938 0.03%
Commissions
Administrative Fees 199,731 1.77% 180,711 1.77% 158,330 1.77%
---------------------------------------------------------------------------------------------------
Total $ 206,725 1.83% $ 185,605 1.82% $ 161,268 1.80%
===================================================================================================
</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 assets (other than
the STRIPS which provides the Fund's "Principal Protection" feature) maintained
at MLF.
The Fund's average month-end Net Assets during 1998, 1997 and 1996
equaled $11,294,943, $10,187,651, and $8,948,805, respectively.
During 1998, 1997 and 1996, the Fund earned $606,070, $588,693 and
$453,093 in interest income, or approximately 5.37%, 5.78% and 5.06% of the
Fund's average month-end Net Assets.
____________________________
<TABLE>
<CAPTION>
DESCRIPTION OF CURRENT CHARGES
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 assets in accounts maintained at MLF.
MLIP Administrative Fee The Partnership pays a monthly administrative fee to MLIP equal to
0.146 of 1% of the Partnership's month-end Net Assets (a 1.75%
annual rate).
Advisor Consulting Fees MLIP 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.
MLF; Others Extraordinary expenses Actual costs incurred; none paid to date, and expected to be
negligible.
</TABLE>
-3-
<PAGE>
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. The Partnership does not engage in sales of
goods or services.
ITEM 2: PROPERTIES
----------
The Partnership does not use any physical properties in the conduct of
its business.
The Partnership's only place of business is the place of business of
the General Partner (Merrill Lynch World Headquarters, World Financial Center,
South Tower, New York, New York, 10080). The General Partner performs all
administrative services for the Partnership from the General Partner's offices.
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.
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
---------------------------------------------------------------------
Item 5 (a)
(a) Market Information:
------------------
There is no established 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.
-4-
<PAGE>
(b) Holders:
-------
As of December 31, 1998, there were 465 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.
Item 5 (b)
Not applicable
ITEM 6: SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from the
audited consolidated financial statements of the Partnership.
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
STATEMENT OF OPERATIONS 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized Gain (Loss) $ 673,508 $ 1,801,922 $ 1,226,117 $ 2,374,649 $ (324,228)
Change in Unrealized
Gain (Loss) 809,339 40,042 (64,696) (367,336) (73,403)
----------------------------------------------------------------------------------------
Total Trading Results 1,482,847 1,841,964 1,161,421 2,007,313 (397,631)
----------------------------------------------------------------------------------------
Interest Income 606,070 588,693 453,093 407,304 355,496
----------------------------------------------------------------------------------------
Total Revenues 2,088,917 2,430,657 1,614,514 2,414,617 (42,135)
----------------------------------------------------------------------------------------
Expenses:
Brokerage Commissions 6,994 4,894 2,938 4,225 8,247
Administrative Fees 199,731 180,711 158,330 144,696 142,881
----------------------------------------------------------------------------------------
Total Expenses 206,725 185,605 161,268 148,921 151,128
----------------------------------------------------------------------------------------
Income before Minority
Interest 1,882,192 2,245,052 1,453,246 2,265,696 (193,263)
Minority Interest Income (77,594) (90,502) (28,850) (12,942) -
----------------------------------------------------------------------------------------
Net Income (Loss) $ 1,804,598 $ 2,154,550 $ 1,424,396 $ 2,252,754 $ (193,263)
========================================================================================
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
BALANCE SHEET DATA 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fund Net Asset Value $11,933,393 $ 10,762,615 $ 9,421,523 $ 8,623,082 $ 7,566,511
Net Asset Value per Unit $ 316.72 $ 270.32 $ 218.46 $ 186.57 $ 141.33
----------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
-5-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER UNIT
- ------------------------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 $273.20 $287.07 $298.62 $300.27 $294.72 $304.29 $302.20 $278.40 $286.69 $294.65 $302.82 $316.72
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to CFTC policy, monthly performance is presented from January 1,
1994, even through the Units were outstanding prior to such date.
-6-
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
DECEMBER 31, 1998
Type of Pool: Single-Advisor/Publicly-Offered/"Principal Protected"/(1)/
Inception of Trading: August 5, 1987
Aggregate Subscriptions: $148,349,450
Current Capitalization: $11,933,393
Worst Monthly Drawdown/(2)/: (7.88)% (8/98)
Worst Peak-to-Valley Drawdown/(3)/: (8.51)% (7/98-8/98)
_____________
Net Asset Value per Series A Unit, December 31, 1998: $316.72
-------------------------------------------------------------------------
MONTHLY RATES OF RETURN(4)
-------------------------------------------------------------------------
MONTH 1998 1997 1996 1995 1994
-------------------------------------------------------------------------
January 1.07% 5.47% 3.23% 2.56% 2.77%
-------------------------------------------------------------------------
February 5.08 0.36 (0.29) 3.40 (2.61)
-------------------------------------------------------------------------
March 4.03 (4.09) 0.93 2.08 (2.89)
-------------------------------------------------------------------------
April 0.55 4.54 0.45 2.78 0.03
-------------------------------------------------------------------------
May (1.85) 5.28 1.91 3.69 0.91
-------------------------------------------------------------------------
June 3.25 3.43 0.67 1.95 (2.51)
-------------------------------------------------------------------------
July (0.69) 6.63 (4.21) 3.22 2.61
-------------------------------------------------------------------------
August (7.88) (4.70) 1.35 0.30 2.88
-------------------------------------------------------------------------
September 2.98 3.69 5.07 3.44 (2.22)
-------------------------------------------------------------------------
October 2.78 (2.06) 3.22 (0.20) 1.61
-------------------------------------------------------------------------
November 2.77 2.51 6.38 3.89 (3.43)
-------------------------------------------------------------------------
December 5.76 1.23 (2.36) 1.09 0.80
-------------------------------------------------------------------------
Compound Annual
Rate of Return 18.48% 23.76% 17.09% 32.01% (2.34)%
-------------------------------------------------------------------------
(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, 1994 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, 1994 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.
-7-
<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, 1998,
the S&P 500 Stock Index (dividends not reinvested) increased a total of 69.78%,
whereas the Net Asset Value per Series A Unit increased 44.98%.
PERFORMANCE SUMMARY
The Fund's performance is dependent upon upwards movements in the
S&P 500 Stock Index, which the Fund attempts to capture through taking long
positions in the S&P 500 Stock Index Futures Contract.
1998
During 1998, the Fund's average month-end Net Assets equaled
$11,294,943, and the Fund recognized gross trading gains of $1,482,847 or 13.13%
of such average month-end Net Assets. Brokerage commissions of $6,994 or .06%
and Administrative Fees of $199,731 or 1.77% of average month-end Net Assets
were paid. Interest income of $606,070 or 5.37% of average month-end Net
Assets resulted in net income of $1,804,598 (after deduction of MLIP's Minority
Interest in the Trading Partnership) or 15.98% of average month-end Net Assets,
which resulted in a 17.16% 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 Fees 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.
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 Fees 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.
-8-
<PAGE>
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 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 Stock Index 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 Stock Index levels. On the other hand, in the
case of a strongly upward trending S&P 500 Stock Index, the Fund would be likely
to capture substantially all of the cumulative gain in the Index over a Time
Horizon.
LIQUIDITY; CAPITAL RESOURCES
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
NAVS 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 except to the extent that rising interest rates
affect S&P 500 Stock Index levels. The Fund cannot be profitable during a Time
Horizon unless the S&P 500 Stock Index market rises.
YEAR 2000 COMPLIANCE INITIATIVE
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 it is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. The resource-
intensive renovation phase (as further discussed) of Merrill Lynch's Year 2000
efforts was approximately 95% completed as of January 31, 1999. Merrill Lynch
will focus primarily on completing its renovation and testing and on integration
of the Year 2000 programs of recent acquisitions during the remainder of 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.
-9-
<PAGE>
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, and 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 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 system, and establishing a
conversion schedule. During the renovation phase, source code is 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 validates that a system can run successfully in a Year 2000
environment. The integration testing phase, which will occur throughout 1999,
validates that a system can successfully interface with both internal and
external systems. Finally, as Merrill Lynch continues to implement new systems,
they are also being tested for Year 2000 readiness.
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.
As of January 31, 1999, production testing was approximately 93% completed. 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 various other domestic and
international industry tests during 1998.
Merrill Lynch continues to survey and communicate with third
parties whose Year 2000 readiness is important to the company. Information
technology and non-information technology vendors and service providers are
contacted in order to obtain their Year 2000 compliance plans. Based on the
nature of the response and the importance of the product or service involved,
Merrill Lynch determines if additional testing is needed. The results of these
efforts are maintained in a database that is accessible throughout the firm.
Third parties that have been contacted include transactional counterparties,
exchanges, and clearinghouses; a process to access and rate their responses has
been developed. This information as well as other Year 2000 readiness
information on particular countries and their political subdivisions will be
used by Merrill Lynch to manage risk resulting from the Y2K problem. Management
is unable at this point to ascertain whether all significant third parties will
successfully address the Y2K problem. Merrill Lynch will continue to monitor
third parties' Year 2000 readiness to determine if additional or alternative
measures are necessary. In connection with information technology and non-
information technology products and services, contingency plans, which are
developed at the business unit level, may include selection of alternative
vendors or service providers and changing business practices so that a
particular system is not needed. In the case of securities exchanges and
clearinghouses, risk mitigation could include the re-routing of business. In
light of the interdependency of the parties in or serving the financial markets,
however, there can be no
-10-
<PAGE>
assurance that all Y2K problems will be identified and remediated on a timely
basis or that all remediation will be successful. The failure of exchanges,
clearing organizations, vendors, service providers, counterparties, regulators,
or others to resolve their own processing issues in a timely manner could have a
material adverse effect on Merrill Lynch's business, results of operations, and
financial condition.
At year-end 1998, the total estimated expenditures for the entire Year 2000
Compliance Initiative were approximately $425 million, of which approximately
$125 million was remaining. The majority of these remaining expenditures are
expected to cover testing, risk management, 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.
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU") INITIATIVE
As of January 1, 1999, the "euro" was adopted as the common legal
currency of participating member states of the EMU. As a consequence of the
introduction of and conversion to the euro, Merrill Lynch was required to make
significant changes to nearly 200 global business systems in order to reflect
the substitution of the euro for the 11 member national currencies and the
European currency unit. The introduction of the euro brings about fundamental
changes in the structure and nature of European financial markets, including the
creation of a unified, more liquid capital market in Europe. As financial
markets in EMU member states converge and local barriers are removed,
competition is expected to increase.
The introduction of the euro affects all Merrill Lynch facilities
that transact, distribute, or provide custody or recordkeeping for securities or
cash denominated in the currency of a participating member state. Merrill
Lynch's systems or procedures that handle such securities or cash were modified
in order to implement the conversion to the euro. The implementation phase is
continuing into the first quarter of 1999 to resolve any post-conversion issues.
The success of Merrill Lynch's euro conversion efforts was dependent on the
euro-compliance of third parties, such as trading counterparties, financial
intermediaries (e.g., securities and commodities exchanges, depositories,
clearing organizations, and commercial banks), and vendors.
As of the end of the 1998 fiscal year, the total estimated
expenditures associated with the introduction of and conversion to the euro were
approximately $79 million, of which $1 million is remaining to be spent during
the first quarter of 1999 on compliance efforts and project administration.
Management believes that it has identified and evaluated all of the systems and
operational modifications necessary for the conversion to the euro. On January
4, 1999 and since then, Merrill Lynch has conducted normal business operations,
having successfully completed its conversion program. Management does not expect
the introduction of the euro to have a negative effect on its future business,
currency risk, or competitive positioning in the European markets.
-11-
<PAGE>
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
ITEM 8: CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
--------------------------------------------------------
The consolidated 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. The General Partner promoted the
Fund and is its controlling person.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no changes in or disagreements with independent auditors on
accounting or financial disclosure.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
10 (a&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 General Partner promoted
the Fund and is its controlling person.
The directors and executive officers of MLIP 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
JO ANN DI DARIO Vice President, Chief Financial Officer and Treasurer,
through April 30, 1999
MICHAEL L. PUNGELLO Vice President, Chief Financial Officer and Treasurer,
effective May 1, 1999
JOSEPH H. MOGLIA Director
ALLEN N. JONES Director
STEPHEN G. BODURTHA Director
STEVEN B. OLGIN Vice President, Secretary and
Director of Administration
-12-
<PAGE>
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman, Chief
Executive Officer, President and a Director of MLIP and Co-Chairman of MLF. He
joined Merrill Lynch Pierce Fenner & Smith Incorporated ("MLPF&S") in 1966 and
has served in various positions, including Retail and Institutional Sales,
Manager of New York Institutional Sales, Director of Institutional Marketing,
Senior Vice President of Merrill Lynch Capital Markets and Director of
International Institutional Sales. Mr. Frawley holds a Bachelor of Science
degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory
Coordination Advisory Committee from its formation in 1990 through its
dissolution in 1994. Mr. Frawley has served four consecutive one-year terms as
Chairman of the Managed Funds Association (formerly, the Managed Futures
Association), a national trade association that represents the managed futures,
hedge funds and fund of funds industry. Mr. Frawley currently serves as a member
of the CFTC's Global Markets Advisory Committee.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice
President, Director of Sales, Marketing and Research and a Director of MLIP. He
joined MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as
well as Managing Director of International Sales in the United States, and
Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts
degree from Trinity College, Hartford, Connecticut. Mr. Chandor is serving a
two-year term as a director of the Managed Funds Association.
Jo Ann Di Dario was born in 1946. Ms. Di Dario is, through April 30,
1999, Vice President, Chief Financial Officer and Treasurer of MLIP. Before
joining MLIP in May 1998, she was self-employed for one year. From February 1996
to May 1997, she worked as a consultant for Global Asset Management, an
international mutual fund organizer and operator headquartered in London, where
she offered advice on restructuring their back-office operations. From May 1992
to January 1996, she served as a Vice President of Meridian Bank Corporation, a
regional bank holding company. She was responsible for managing the treasury
operations of Meridian Bank Corporation including its wholly-owned subsidiary,
Meridian Investment Company Inc. From September 1991 to May 1992, Ms. Di Dario
managed the Domestic Treasury Operations of First Fidelity Bank, a regional
bank. From January 1991 to September 1991, Ms. Di Dario was self-employed. For
the previous five years, Ms. Di Dario was Vice President, Secretary and
Controller of Caxton Corporation, a Commodity Pool Operator and Commodity
Trading Advisor. Her background includes seven years of public accounting
experience, and she graduated with high honors from Stockton State College with
a Bachelor of Science degree in Accounting.
Michael L. Pungello was born in 1957. Effective May 1, 1999, Mr.
Pungello will become Vice President, Chief Financial Officer and Treasurer of
MLIP. He was First Vice President and Senior Director of Finance for Merrill
Lynch's Operations, Services and Technology Group from January 1998 to March
1999. Prior to that, Mr. Pungello spent over 18 years with Deloitte & Touche
LLP, and was a partner in their Financial Services practice from June 1990 to
December 1997. He graduated from Fordham University in 1979 with a Bachelor of
Science degree in accounting and received his Master of Business Administration
degree in Finance from New York University in 1987.
Joseph H. Moglia was born in 1949. Mr. Moglia 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 Income 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 also Chairman of the Board of
Directors of MLIP. Mr. Jones graduated from the University of Arkansas with a
Bachelor of Science, Business Administration degree in 1964. Since June 1992,
Mr. Jones has held the position of Senior Vice President of MLPF&S. From June
1992 through February 1994, Mr. Jones was the President and Chief Executive
Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board
of Directors of MLIG and its subsidiary companies. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of
MLIP. In 1980, Mr. Bodurtha graduated magna cum laude from Wesleyan University,
Middletown, Connecticut with a Bachelor of Arts degree in Government. From 1980
to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill
Lynch. In 1985, he was awarded his Master of Business Administration degree from
Harvard University, where he also served as Associates Fellow (1985 to 1986).
From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice
President with Kidder, Peabody & Co., Incorporated where he worked in their
Financial Futures & Options
-13-
<PAGE>
Group. Mr. Bodurtha joined MLPF&S in 1989 and has held the position of First
Vice President since 1995. He has been the Director in charge of the Structured
Investments Group of MLPF&S since 1995.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice President,
Secretary and the Director of Administration of MLIP. He joined MLIP in July
1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr.
Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin
graduated from The American University with a Bachelor of Science degree in
Business Administration and a Bachelor of Arts degree in Economics. In 1986, he
received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is
a member of the Managed Funds Association's Government Relations Committee and
has served as an arbitrator for the NFA. Mr. Olgin is also a member of the
Committee on Futures Regulation of the Association of the Bar of the City of New
York.
As of December 31, 1998, the principals of MLIP had no investment in
the Fund, and MLIP's general partner interest in the Fund was valued at
$123,521.
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., 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 possession of certain
of the Fund's dollar assets. 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.
-14-
<PAGE>
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
Amount of
Title Name of nature of Percent
of beneficial beneficial of
class owner ownership class
- ----- ---------- ---------- -------
Limited M.B. Seretean 2,000 5.31%
Partnership 12424 Creek Hollow Ln.
Units Soddy-Daisy, TN 37379
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1998, the General Partner owned 390 Units
(unit-equivalent general partnership interests), which was less than 1.04% of
the total Units outstanding.
(c) Changes in Control:
------------------
None.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions Between Merrill Lynch and the Fund
-----------------------------------------------
All of the service providers to the Fund, other than the Advisor, are
affiliates of Merrill Lynch. Merrill Lynch negotiated with the Advisor over the
level of its advisory fees and Profit Share. However, none of the fees paid by
the Fund to any Merrill Lynch party were negotiated, and they are higher than
would have been obtained in arm's-length bargaining.
The Fund pays Merrill Lynch Brokerage Commissions and
Administrative Fees as well as bid-ask spreads on forward currency trades. The
Fund also pays MLF interest on short-term loans extended by MLF to cover losses
on foreign currency positions.
Within the Merrill Lynch organization, MLIP is the direct beneficiary
of the revenues received by different Merrill Lynch entities from the Fund. MLIP
controls the management of the Fund and serves as its promoter. Although MLIP
has not sold any assets, directly or indirectly, to the Fund, MLIP makes
substantial profits from the Fund due to the foregoing revenues.
No loans have been, are or will be outstanding between MLIP or any of
its principals and the Fund.
MLIP pays substantial selling commissions and trailing commissions to
MLPF&S for distributing the Units. MLIP is ultimately paid back for these
expenditures from the revenues it receives from the Fund.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as the principal
commodity broker for the Partnership.
In 1998 the Partnership expensed: (i) Brokerage Commissions of
$6,994 to the Commodity Broker, and (ii) Administrative Fees of $199,731 to the
General Partner, which included approximately $36,000 in consulting and advisory
fees earned by the Trading Advisor. In addition, MLIP and its affiliates may
have derived certain economic benefits from possession of the Fund's assets, as
well as from foreign exchange and EFP trading.
See Item 1(c), "Narrative Description of Business -- Charges" and
"--Description of Current Charges" for a discussion of other business dealings
between MLIP affiliates and the Partnership.
-15-
<PAGE>
(c) Indebtedness of Management:
--------------------------
The Partnership is prohibited from making any loans, to management
or otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
PART IV
ITEM 14: EXHIBITS, CONSOLIDATED FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
-------------------------------------------------------------------
FORM 8-K
--------
(a)1. Consolidated Financial Statements (found in Exhibit 13.01): Page
--------------------------------------------------------- ----
Independent Auditors' Report 1
Consolidated Statements of Financial Condition
as of December 31, 1998 and 1997 2
For the years ended December 31, 1998,
1997 and 1996:
Consolidated Statements of Income 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-10
(a)2. Consolidated Financial Statement Schedules:
------------------------------------------
Consolidated 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 consolidated
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.
-16-
<PAGE>
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.
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 1998 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 1998.
-17-
<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, 1999 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director March 25, 1999
- -------------------------
John R. Frawley, Jr. (Principal Executive Officer)
/s/ Jo Ann Di Dario Vice President, Chief Financial Officer, and Treasurer March 25, 1999
- -------------------------
Jo Ann Di Dario (Principal Financial and Accounting Officer)
/s/ Jeffrey F. Chandor Senior Vice President, Director of Sales, March 25, 1999
- -------------------------
Jeffrey F. Chandor Marketing and Research, and Director
/s/ Allen N. Jones Director March 25, 1999
- -------------------------
Allen N. Jones
</TABLE>
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
MERRILL LYNCH INVESTMENT General Partner of Registrant March 25, 1999
PARTNERS INC.
By: /s/ John R. Frawley, Jr.
--------------------------
John R. Frawley, Jr.
-18-
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
1998 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1998 Annual Report and Independent Auditors' Report
-19-
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
(A Delaware Limited Partnership)
Consolidated Financial Statements for the years
ended December 31, 1998, 1997 and 1996
and Independent Auditors' Report
[LOGO] MERRILL LYNCH
<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 the "Partnership")
ended its twelfth fiscal year of trading on December 31, 1998 with a Net Asset
Value ("NAV") per Unit of $316.72, representing an increase of 17.16% from the
December 31, 1997 NAV per Unit of $270.32. In 1998, the stock market, as
measured by the Standard & Poor's 500(R) Stock Index (the "S&P 500"), increased
28.58%.
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
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 Unit.
1998 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 1999. 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, 1998, 1997 and 1996:
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. (the "Partnership") as of December 31,
1998 and 1997, and the related consolidated statements of income and of changes
in partners' capital for each of the three years in the period ended December
31, 1998. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the consolidated financial position of The Growth and Guarantee Fund
L.P. as of December 31, 1998 and 1997 and the consolidated results of its
operations for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 1999
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
(A Delaware Limited Partnership)
------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------ ------------
<S> <C> <C>
Equity in commodity futures trading accounts:
Cash and options premiums $ 1,339,093 $ 2,309,206
Net unrealized profit (loss) on open contracts 633,300 (100,288)
Government securities (Cost: $10,001,269 and $8,756,830) 10,095,662 8,775,472
Accrued interest (Note 2) 3,883 9,255
------------ ------------
TOTAL $ 12,071,938 $ 10,993,645
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Administrative fees and brokerage
commissions payable (Notes 1 and 2) $ 18,192 $ 16,777
Redemptions payable 86,465 65,958
------------ ------------
Total liabilities 104,657 82,735
------------ ------------
Minority Interest 33,888 148,295
------------ ------------
PARTNERS' CAPITAL:
General Partner:
(390 and 680 units) 123,521 183,819
Limited Partners:
(37,288 and 39,134 units) 11,809,872 10,578,796
------------ ------------
Total partners' capital 11,933,393 10,762,615
------------ ------------
TOTAL $ 12,071,938 $ 10,993,645
============ ============
NET ASSET VALUE PER UNIT
(Based on 37,678 and 39,814 Units outstanding) $ 316.72 $ 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 INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized:
Options and futures $ 654,900 $ 1,796,625 $ 1,204,850
Government securities 18,608 5,297 21,267
Change in unrealized:
Options and futures 733,588 36,137 (30,625)
Government securities 75,751 3,905 (34,071)
----------- ----------- -----------
Total trading results 1,482,847 1,841,964 1,161,421
Interest income (Note 2) 606,070 588,693 453,093
----------- ----------- -----------
Total revenues 2,088,917 2,430,657 1,614,514
----------- ----------- -----------
EXPENSES:
Brokerage commissions (Note 2) 6,994 4,894 2,938
Administrative fees (Note 1) 199,731 180,711 158,330
----------- ----------- -----------
Total expenses 206,725 185,605 161,268
----------- ----------- -----------
INCOME BEFORE MINORITY
INTEREST 1,882,192 2,245,052 1,453,246
MINORITY INTEREST IN INCOME (77,594) (90,502) (28,850)
----------- ----------- -----------
NET INCOME $ 1,804,598 $ 2,154,550 $ 1,424,396
=========== =========== ===========
NET INCOME PER UNIT:
Weighted average number of General Partner
and Limited Partner Units outstanding (Note 3) 38,650 41,267 44,973
=========== =========== ===========
Net income per weighted average
General Partner and Limited Partner Unit $ 46.69 $ 52.21 $ 31.67
=========== =========== ===========
</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 YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partners General Partner Total
-------- ---------------- --------------- ------------
<S> <C> <C> <C> <C>
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
Redemptions (2,136) (548,351) (85,469) (633,820)
Net income -- 1,779,427 25,171 1,804,598
-------- ---------------- --------------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1998 37,678 $ 11,809,872 $ 123,521 $ 11,933,393
======== ================ =============== ============
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE>
THE GROWTH AND GUARANTEE FUND L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
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
permits the reserve assets to be isolated 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. ("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 both the Partnership and the Trading Partnership. Merrill Lynch
Futures Inc. ("MLF"), 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 in
each 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. References to the Partnership include
references to the Trading Partnership unless the context otherwise requires.
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's profits and losses is deducted from the
Consolidated Statements of Income, and the General Partner's interest in the
Trading Partnership reduces partners' capital in the Consolidated Statements
of Financial Condition and the Consolidated Statements of Changes in
Partners' Capital.
The Advisor determines what long stock index futures and options positions to
acquire on behalf of the Trading Partnership by applying the Advisor's
"Dynamic Asset Allocation System." The objective is to replicate the
performance of the S&P 500 (without dividends) to the maximum practicable
extent given the limited amount of trading assets available.
-5-
<PAGE>
Certain of the prior year balances have been reclassified to conform with the
current year's presentation.
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 profit
(loss) on open contracts in the Consolidated Statements of Financial Condition
at the difference between the original contract value and the market value
(for those commodity interests for which market quotations are readily
available) or at fair value. The change in unrealized profit (loss) on open
contracts from one period to the next is reflected in change in unrealized in
the Consolidated Statements of Income.
Government Securities
---------------------
The Partnership invests a portion of its assets in U.S. Government securities
("Government securities"). These investments are carried at fair value. The
original issue discount on the Government securities is being amortized over
their life using the interest method and is included in interest income.
Government securities are recorded in the Statements of Financial Condition at
market value. Realized profit (loss) on the sale of Government securities is
determined on the amortized cost basis of the Government securities at the
time of sale.
Operating Expenses
------------------
The General Partner 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 $279.90 for the current Time Horizon
ending December 31, 1999 is guaranteed by the Government securities. The
Partnership utilizes the "downside protection" strategy implemented by the
Advisor's "Dynamic Asset Allocation System," which is designed to replicate
the S&P 500 (without dividends) despite the limited assets available to the
Trading Partnership while controlling the risk of major drawdowns. Avoiding
significant losses is of particular importance to the Partnership's prospects
for replicating the S&P 500 due to the limited amount of assets available for
trading.
-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 Net Asset Value as of the last business day of any month
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.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (the "Statement"). Such Statement is effective for
fiscal years commencing after June 15, 1999. The General Partner does not
believe that the Statement will have a significant effect on the financial
statements of the Partnership.
2. RELATED PARTY TRANSACTIONS
The portion of the Partnership's assets (approximately 10% to 15%) which is
not held by the Partnership in Government securities is invested in the
Trading Partnership. The Partnership's assets are held in Government
securities and deposited with Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S"), an affiliate of Merrill Lynch. The Trading
Partnership's U.S. dollar assets are maintained at MLF. On such assets,
Merrill Lynch credits the Partnership with interest at the prevailing 91-day
U.S. Treasury bill rate. Merrill Lynch may derive certain economic benefit,
in excess of the interest which Merrill Lynch pays to the Partnership, from
possession of such assets. During the years ended December 31, 1998, 1997 and
1996, MLF paid the Partnership approximately $90,622, $101,660 and $73,663 of
interest, respectively.
The General Partner 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 have been credited as their response forms are processed.
The total amount of the adjustment was 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 determined that
interest was calculated appropriately since November 1996.
The Partnership pays a monthly administrative fee to the General Partner
equal to .146 of 1% (a 1.75% annual rate) of the Partnership's month-end Net
Assets. The General Partner pays quarterly
-7-
<PAGE>
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.
The Partnership pays MLF brokerage commissions of $25.00 per each round-
turn, which includes exchange clearing and NFA fees, on U.S. futures
transactions executed by the Partnership.
3. 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, 1998, 1997 and 1996 equals the Units outstanding
as of such date, adjusted proportionately for Units redeemed based on the
respective length of time each was outstanding during the year.
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Trading Partnership trades futures and options on the S&P 500 Stock
Indices. The Trading Partnership's total trading results by reporting
category for the years ended December 31, 1998, 1997 and 1996 are as follows:
Futures and Options Total Trading Results
-----------------------------------------
1998 1997 1996
---------- ---------- ----------
Stock Indices $1,388,488 $1,832,762 $1,174,225
========== ========== ==========
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 net unrealized profit
on such derivative instruments as reflected in the Consolidated Statements of
Financial Condition. The Trading Partnership's exposure to market risk is
influenced by a number of factors which affect the S&P 500 Stock Index.
Fair Value
----------
The derivative instruments traded by the Trading Partnership are marked to
market daily with the resulting net unrealized profit recorded in the
Consolidated Statements of Financial Condition and the related profit
reflected in trading results in the Statements of Income.
The contract/notional values of open contracts, all of which were exchange-
traded, as of December 31, 1998 and 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 $ 4,807,250 $ - $ 10,573,450 $ -
=================== =================== =================== ===================
</TABLE>
-8-
<PAGE>
All of the Trading Partnership's derivative financial instruments outstanding
at December 31, 1998 mature within one year.
The average fair values, based on contract/notional values, of the
Partnership's derivative instruments held or issued as of the end of each
calendar month during the years ended December 31, 1998 and 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 $ 7,688,965 $ - $ 9,593,706 $ -
=================== =================== =================== ===================
</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 Trading Partnership does not trade over-the-counter
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 Trading Partnership trades only exchange-traded
instruments, it has no counterparty risk.
The gross unrealized profit and net unrealized profit (loss) on open
contracts as of December 31, 1998 and 1997 were as follows:
1998 1997
---------------------------- ---------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit Profit (Loss)
----------- ----------- ---------- ----------
Exchange -
Traded $ 633,375 $ 633,375 $ - $ (100,288)
=========== =========== ========== ==========
The Partnership controls credit risk by dealing exclusively with Merrill
Lynch entities as brokers and counterparties.
-9-
<PAGE>
The Trading 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 (which includes a netting arrangement), to the
extent that such trading results in receivables from and payables to MLF,
these receivables and payables are offset and reported as a net receivable or
payable.
* * * * * * * * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Di Dario
Jo Ann Di Dario
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-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 0 0
<RECEIVABLES> 1,976,276 2,218,173
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 10,095,662 8,775,472
<PP&E> 0 0
<TOTAL-ASSETS> 12,071,938 10,993,645
<SHORT-TERM> 0 0
<PAYABLES> 104,657 82,735
<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> 11,967,281 10,910,910
<TOTAL-LIABILITY-AND-EQUITY> 12,071,938 10,993,645
<TRADING-REVENUE> 1,482,847 1,841,964
<INTEREST-DIVIDENDS> 606,070 588,693
<COMMISSIONS> 6,994 4,894
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 1,804,598 2,154,550
<INCOME-PRE-EXTRAORDINARY> 1,804,598 2,154,550
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,804,598 2,154,550
<EPS-PRIMARY> 46.69 52.21
<EPS-DILUTED> 46.69 52.21
</TABLE>
