<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 33-22864
ML FUTURES INVESTMENTS L.P.
---------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 36-3590615
- ----------------------------------- ----------------------------------------
(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
ML FUTURES INVESTMENTS L.P.
---------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------------- ------------------
<S> <C> <C>
ASSETS
- ------
Accrued interest $ - $ 45,161
Equity in commodity futures trading accounts:
Cash and option premiums - 9,749,760
Net unrealized profit on open contracts - 550,739
Investments 21,490,536 14,266,512
Receivable from investments 1,347,666 299,255
Other receivable - 51,715
-------------------- ------------------
TOTAL $22,838,202 $24,963,142
==================== ==================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 1,347,666 $ 498,752
Brokerage commissions payable - 76,811
Profit Shares payable - -
Administrative fees payable - 2,174
-------------------- ------------------
Total liabilities 1,347,666 577,737
-------------------- ------------------
PARTNERS' CAPITAL:
General Partner (1027 and 1787 Units) 246,916 402,372
Limited Partners (88353 and 106509 Units) 21,243,620 23,983,033
-------------------- ------------------
Total partners' capital 21,490,536 24,385,405
-------------------- ------------------
TOTAL $22,838,202 $24,963,142
==================== ==================
NET ASSET VALUE PER UNIT
(Based on 89380 and 108296 Units outstanding) $ 240.44 $ 225.17
==================== ==================
</TABLE>
See notes to financial statements.
2
<PAGE>
ML FUTURES INVESTMENTS L.P.
---------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF INCOME
--------------------
<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) profits:
Realized $ (28,397) $ 933,226 $ (254,925) $1,407,988
Change in unrealized 28,396 (140,446) (550,739) 50,209
-------------------- -------------------- -------------------- ----------------
Total trading results (1) 792,780 (805,664) 1,458,197
-------------------- -------------------- -------------------- ----------------
Interest income (314) 135,862 204,729 407,370
Income from investments 1,689,358 495,657 2,434,695 1,036,043
-------------------- -------------------- -------------------- ----------------
Total revenues 1,689,043 1,424,299 1,833,760 2,901,610
-------------------- -------------------- -------------------- ----------------
EXPENSES:
Profit shares - (60,371) - 106,758
Brokerage commissions - 245,034 351,494 696,950
Administrative fees - 7,001 10,042 19,754
-------------------- -------------------- -------------------- ----------------
Total expenses - 191,664 361,536 823,462
-------------------- -------------------- -------------------- ----------------
NET INCOME $1,689,043 $1,232,635 $1,472,224 $2,078,148
==================== ==================== ==================== ================
NET INCOME PER UNIT:
Weighted average number of units
outstanding 96,628 114,971 101,735 118,512
==================== ==================== ==================== ================
Weighted average net income
per Limited Partner
and General Partner Unit $ 17.48 $ 10.72 $ 14.47 $ 17.54
==================== ==================== ==================== ================
</TABLE>
See notes to financial statements.
3
<PAGE>
ML FUTURES INVESTMENTS L.P.
---------------------------
(a Delaware limited partnership)
------------------------------
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 122,597 $24,906,584 $ 368,402 $25,274,986
Net income -- 2,046,938 31,210 2,078,148
Redemptions (9,817) (2,132,352) - (2,132,352)
---------------- ----------------- ------------------ ----------------
PARTNERS' CAPITAL,
September 30, 1997 112,780 $24,821,170 $ 399,612 $25,220,782
================ ================= ================== ================
PARTNERS' CAPITAL,
December 31, 1997 108,296 $23,983,033 $ 402,372 $24,385,405
Net Income -- 1,458,429 13,795 1,472,224
Redemptions (18,916) (4,197,842) (169,251) (4,367,093)
---------------- ----------------- ------------------ ----------------
PARTNERS' CAPITAL,
September 30, 1998 89,380 $21,243,620 $ 246,916 $21,490,536
================ ================= ================== ================
</TABLE>
See notes to financial statements.
4
<PAGE>
ML FUTURES INVESTMENTS L.P.
---------------------------
(A Delaware limited partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the opinion of
management, the financial statements contain all adjustments (consisting of only
normal recurring adjustments) necessary to present fairly the financial position
of ML Futures Investments 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 financial statements be
read in conjunction with the financial statements and notes thereto included in
the Partnership's Annual Report on Form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1997 (the "Annual Report").
2. INVESTMENTS
Many of the multi-advisor funds (the "Multi-Advisor Funds") sponsored by Merrill
Lynch Investment Partners Inc. ("MLIP") allocate their assets to a number of the
same Trading Advisors. However, because different Multi-Advisor Funds have
historically allocated assets to slightly different Advisor groups, the Multi-
Advisor Funds have often been required to open and maintain individual trading
accounts with each Advisor. MLIP has decided to consolidate the trading
accounts of nine of its Multi-Advisor Funds (including the Partnership) as of
June 1, 1998. The consolidation is achieved by having these Multi-Advisor Funds
close their existing trading accounts and invest in a limited liability company,
ML Multi-Manager Portfolio L.L.C. ("MM LLC ") which opened a single account with
each Advisor selected. MM LLC is managed by MLIP, initially has no investors
other than the Multi-Advisor Funds and serves solely as the vehicle through
which the assets of such Multi-Advisor Funds are combined in order to be managed
through single rather than multiple accounts.
As of September 30, 1998 the Partnership had an investment in MM LLC and as of
December 31, 1997 the Partnership had investments in the ML Chesapeake
Diversified L.L.C. ("Chesapeake LLC") and the ML Sjo Prospect L.L.C. ("SJO
LLC") as follows:
1998 1997
------------- -------------
MM LLC $ 21,490,536 $ -
Chesapeake LLC - 7,176,214
SJO LLC - 7,090,298
------------- -------------
Total $ 21,490,536 $ 14,266,512
============= =============
During the second quarter of 1998, the Partnership withdrew its investments in
Chesapeake LLC and SJO LLC.
5
<PAGE>
Total revenues and fees with respect to such investments is set forth as
follows:
<TABLE>
<CAPTION>
For the three months Total Brokerage Administrative Profit Income from
ended September 30, 1998 Revenue Commissions Fees Shares Investments
---------------- ----------------- ------------------- -------------- ----------------------
<S> <C> <C> <C> <C> <C>
MM LLC $2,600,520 $500,530 $14,302 $396,330 $1,689,358
================ ================= =================== ============== ======================
<CAPTION>
For the three months Total Brokerage Administrative Profit Income from
ended September 30, 1997 Revenue Commissions Fees Shares Investments
---------------- ----------------- ------------------- -------------- ----------------------
<S> <C> <C> <C> <C> <C>
Chesapeake LLC $ 342,367 $162,932 $ 4,655 $ 35,174 $ 139,606
SJO LLC 581,611 166,834 4,766 53,960 356,051
---------------- ----------------- ------------------- -------------- ----------------------
Total $ 923,978 $329,766 $ 9,421 $ 89,134 $ 495,657
================ ================= =================== ============== ======================
<CAPTION>
For the nine months Total Brokerage Administrative Profit Income from
ended September 30, 1998 Revenue Commissions Fees Shares Investments
---------------- ----------------- ------------------- -------------- ----------------------
<S> <C> <C> <C> <C> <C>
Chesapeake LLC $ 870,260 $ 270,588 $ 7,731 $118,361 $ 473,580
MM LLC 2,834,551 661,733 18,908 444,269 1,709,641
SJO LLC 551,017 260,867 7,454 31,222 251,474
---------------- ----------------- ------------------- -------------- ----------------------
Total $4,255,828 $1,193,188 $34,093 $593,852 $2,434,695
================ ================= =================== ============== ======================
For the nine months Total Brokerage Administrative Profit Income from
ended September 30, 1997 Revenue Commissions Fees Shares Investments
---------------- ----------------- ------------------- -------------- ----------------------
Chesapeake LLC $ 891,986 $ 508,702 $14,350 $ 75,584 $ 293,350
SJO LLC 1,366,414 503,323 14,200 106,198 742,693
---------------- ----------------- ------------------- -------------- ----------------------
Total $2,258,400 $1,012,025 $28,550 $181,782 $1,036,043
================ ================= =================== ============== ======================
</TABLE>
6
<PAGE>
Condensed statements of financial condition for MM LLC, Chesapeake LLC and SJO
are set forth as follows:
<TABLE>
<CAPTION>
MM LLC Chesepeake LLC SJO LLC
------ -------------- -------
September 30, 1998 December 31, 1997 December 31, 1997
------------------------ ----------------------- ------------------
<S> <C> <C> <C>
Assets $ 133,727,795 $ 17,195,182 $ 21,240,207
======================== ======================= ==================
Liabilities $ 7,698,694 $ 704,681 $ 2,058,617
Members' Capital 126,029,101 16,490,501 19,181,590
------------------------ ----------------------- ------------------
Total $ 133,727,795 $ 17,195,182 $ 21,240,207
======================== ======================= ==================
<CAPTION>
MM LLC
------
For the three months For the nine months
ended September 30, 1998 ended September 30, 1998
------------------------ ------------------------
<S> <C> <C>
Revenues $ 14,430,272 $ 15,738,047
Expenses 5,049,934 6,237,337
------------------------ -----------------------
Net Income $ 9,380,338 $ 9,500,710
======================== =======================
<CAPTION>
Chesapeake LLC
--------------
For the three months For the nine months
ended September 30, 1998 ended September 30, 1998
------------------------ ------------------------
<S> <C> <C>
Revenues $ 805,972 $ 2,337,760
Expenses 473,967 1,525,605
------------------------ -----------------------
Net Income $ 332,005 $ 812,155
======================== =======================
<CAPTION>
SJO LLC
-------
For the three months For the nine months
ended September 30, 1998 ended September 30, 1998
------------------------ ------------------------
<S> <C> <C>
Revenues $ 1,704,641 $ 3,879,476
Expenses 659,205 1,760,401
------------------------ -----------------------
Net Income $ 1,045,436 $ 2,119,075
======================== =======================
</TABLE>
7
<PAGE>
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
As of June 1, 1998, the Partnership invested all of its assets in MM LLC. The
Partnership is thus, invested indirectly in the trading of derivative
instruments. The only derivative instruments held by the Partnership were
offsetting commitments to purchase and sell the same derivative instruments on
the same date in the future. These commitments were economically offsetting but
were not, as a technical matter, offset in the forward market until settlement
date.
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 &
Stock indices $ - $ 17,797 $ 151,114 $ (475,664)
Commodities (1) (93,018) (38,479) 72,740
Currencies - 802,203 (610,635) 1,296,399
Energy - (800) (12,000) (82,790)
Metals - 66,598 (295,664) 647,512
--------------- ---------------- ---------------- ---------------
$ (1) $ 792,780 $ (805,664) $1,458,197
=============== ================ ================ ===============
</TABLE>
The contract/notional values of the Partnership's open derivative instrument
positions as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------- -------------------
<S> <C> <C>
Exchange
traded $45,970,412 $24,361,153
Non-Exchange
traded 1,798,700 4,030,239
------------------- ----------------
$47,769,112 $28,391,392
=================== ================
</TABLE>
The contract/notional values of the Partnership's exchange-traded and non-
exchange-traded open derivative instrument positions as of December 31, 1997
were as follows:
<TABLE>
<CAPTION>
1997
----------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------- ----------------
<S> <C> <C>
Interest rate &
Stock Indices $44,385,611 $11,883,229
Commodities - 570,095
Currencies 2,030,107 14,234,764
Metals 1,353,394 1,703,304
------------------- ----------------
$47,769,112 $28,391,392
=================== ================
</TABLE>
8
<PAGE>
The average fair values, based on contract/notional values, of the Partnership's
derivative instrument positions which were open 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 (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Interest rate &
Stock Indices $31,221,962 $14,105,150 $23,451,890 $30,553,601
Commodities 387,145 698,773 1,662,055 398,620
Currencies 9,834,785 9,514,085 9,044,965 14,258,465
Energy - - 866,145 841,680
Metals 2,080,316 1,197,239 5,754,718 2,949,551
------------------ ------------------ ------------------ ------------------
$43,524,208 $25,515,247 $40,779,773 $49,001,917
================== ================== ================== ==================
</TABLE>
The gross unrealized profit and the net unrealized profit on the Partnership's
open derivative instrument positions as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1997
------------------------------------
Gross Net
Unrealized Unrealized
Profit Profit
--------------- ---------------
<S> <C> <C>
Exchange
traded $552,949 $481,945
Non-Exchange
traded 101,308 68,794
--------------- ---------------
$654,257 $550,739
=============== ===============
</TABLE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The significant variations in both the statement of financial condition and the
statement of operations line items is primarily due to the Partnership placing
assets under the management of Advisors not through opening managed accounts
with them but rather through investing in MM LLC.
MONTH-END NET ASSET VALUE PER UNIT
<TABLE>
<CAPTION>
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $211.33 $219.04 $220.00 $212.65 $214.10 $212.93 $231.40 $218.21 $223.63
- ----------------------------------------------------------------------------------------------------------
1998 $229.37 $231.94 $232.21 $219.61 $222.70 $222.90 $223.22 $235.41 $240.44
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary
JANUARY 1, 1997 TO SEPTEMBER 30, 1997 BY QUARTER
January 1, 1997 to March 31, 1997
In currency markets, the U.S. dollar rallied and started 1997 on a strong note,
rising to a four-year high versus the Japanese yen and two-and-a-half year highs
versus the Deutsche mark and the Swiss franc. January and February proved
profitable for currencies; however, losses were incurred in March.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. Profits resulted from interest
rate trading in February and March.
9
<PAGE>
In energy markets, a slump in crude oil prices was characteristic of its
lackluster performance from the beginning of the year. Early in 1997,
volatility returned in the energy markets, reflecting the impact of a winter
significantly warmer than normal. January and March saw losses in energy;
however, February proved profitable.
Agricultural commodity trading proved profitable throughout the quarter.
Soybean prices reached their highest level in over eight years, on continued
demand and fears that inventories could fall to critically low levels before the
next harvest.
April 1, 1997 to June 30, 1997
In the currency markets, the dollar underwent a significant correction in
the Spring against the Japanese yen due to the G7 finance ministers'
determination that a further dollar advance would be counter-productive to their
current goals. Currency trading was profitable in April and June.
Global interest rate trading provided varied results for the quarter.
Profits were incurred in May and June. April's losses were due to U.S. bond
prices moving in a directionless pattern, as investors remained concerned over
inflation and its impact on further increases in interest rates by the U.S.
Federal Reserve.
Energy trading was unprofitable throughout the quarter. In June crude oil
trended downward during the beginning of the month, before a sudden price
reversal occurred amid speculation that Iraq exports could delayed until August.
Price movement of heating oil and unleaded gas proved to be trendless.
Agricultural commodity trading was profitable in April and May. May's
profits were due to coffee prices surging beyond three dollars a pound for the
first time in twenty years, on the possibility of frost in Brazil and reports of
poor crops in smaller countries.
July 1, 1997 to September 30, 1997
In the currency markets, the U.S. dollar rose dramatically in July,
reflecting the dollar's role as a haven for currency traders skeptical over the
"Euro", the new single European currency that is supposed to start replacing
several European national denominations 1n 1999. Beginning in August, the
dollar corrected against the Eurocurrencies in advance of well-advertised
tightening by the Bundesbank. Currency trading was unprofitable in August and
September.
Global interest rate trading was profitable in July and September. During
the third quarter, economic data in key countries was positive indicating lower
inflation and igniting a worldwide rally in the bond markets. Specifically,
investor sentiment was particularly strong in the U.S., where prices on the 30-
year Treasury bond and 10-year Treasury note rose to their highest levels in
over two years. This followed a largely positive economic report delivered by
Federal Reserve Chairman Greenspan in testimony before Congress.
Energy trading was profitable in August and September. By the middle of
the year, the decline in prices reversed sharply as Saudi Arabia and Iran,
together representing about 45% of OPEC's oil production joined forces to
pressure oil-producing nations to stay within OPEC production quotas.
Agricultural commodity trading was unprofitable throughout the quarter.
Soybean and corn prices were on an upward trend in July as rain missed the
driest growing areas and more hot weather was forecast.
JANUARY 1, 1998 TO SEPTEMBER 30, 1998 BY QUARTER
January 1, 1998 to March 31, 1998
The Fund's positions in the global interest rate markets were profitable
during the quarter. In Europe, an extended bond market rally continued despite
an environment of robust growth in the United States, Canada and the United
Kingdom, as well as a strong pick-up in growth in continental Europe.
Gold prices drifted sideways and lower as Asian demand continued to slow
and demand in the Middle East was affected by low oil prices. Initially buoyed
on concerns about a U.S.-led military strike against Iraq, crude oil fell to a
nine year low, as the globally warm winter, the return of Iraq as a producer and
the Asian economic crisis added to OPEC's supply glut problems.
Trading results in stock index markets were mixed, but profitable,
despite a strong first-quarter performance by the U.S. equity market as several
consecutive weekly gains were recorded with most market averages setting new
highs. Results in currency trading were also mixed, but unprofitable. In
particular, the Swiss franc weakened versus the U.S. dollar.
10
<PAGE>
Agricultural commodity markets provided profitable trading results
overall. Live cattle and hog prices trended downward throughout the quarter.
Cotton prices moved mostly upward during the quarter, but prices dropped off
sharply at the end of March.
April 1, 1998 to June 30, 1998
As swings in the U.S. dollar and developments in Japan affected bond
markets, the Fund's interest rate trading during the quarter resulted in losses,
particularly in Eurodollar deposits and U.S. Treasury bonds. Early in the
quarter, Treasury trading was range-bound, as concern that the economy might be
overheating was balanced by the potential impact of the Asian recession.
Additionally, Australian bonds and bills saw a dramatic drop in prices in early
June, as dollar-bloc currencies remained under pressure versus the U.S. dollar
due to the Japanese/Asian crisis.
Metals and energy trading also resulted in losses. The depressed gold
market weakened further following news of a European Central Bank consensus that
ten to fifteen percent of reserves should be made up of gold bullion which was
at the low end of expectations. Despite production cuts initiated by OPEC at
the end of March, world oil supplies remained excessive and oil prices stood at
relatively low levels throughout the quarter.
Results in currency trading were unprofitable, as the Japanese yen
weakened during June to an eight-year low versus the U.S. dollar. Trading
results in stock index markets were also unprofitable, as the Asia-Pacific
region's equity markets weakened across the board. In particular, Hong Kong's
Hang Seng index trended downward during most of the quarter and traded at a
three-year low.
Agricultural commodity trading produced losses. The U.S. soybean crop
got off to a good start which contributed to higher yield expectations and a
more burdensome supply outlook and soybean prices traded in a volatile pattern
for the second half of the quarter. Sugar futures maintained mostly a
downtrend, as no major buyers emerged to support the market. Similarly, coffee
prices trended downward, as good weather conditions in Central America and
Mexico increased the prospects of more output from these countries.
July 1, 1998 to September 30, 1998
Fund performance in July was essentially flat. In August and continuing
into September, financial markets in general were characterized by a flight to
quality that resulted from uncertainty over Russia's solvency, continued
weakness in Asia, and concerns that recessionary conditions would spread to the
United States and Europe. These factors, combined with generally less liquid
market conditions, led to a marked widening in bond credit spreads and a broad
sell-off in world-wide equity markets. Managed futures funds exhibited strong
non-correlation to world markets in August and again in September, generating
significant profits on the long side of interest rates and the short side of the
commodity markets.
Interest rate trading was particularly profitable during the quarter in
positions in Eurodollars, German and Japanese bonds, and U.S. Treasury notes and
bonds. The growth rate of the world bond market declined to its lowest level
since 1987 at 7.7%, down 4.0% from the last peak in 1993. Global investors
poured funds into such instruments as U.S. Treasury issues and German Bunds,
staging a major flight to quality. As a result, there was a significant
widening of credit spreads on a global basis. Global fund managers also
increased their already-overweight exposure to U.S. Treasuries to a record high.
The impact of these events was that in September, the yield on the Japanese 5-
year bond fell to .67%, an all-time low, German 10-year Bunds fell to 3.89%,
representing almost a 100-year low, and the 30-year bond in the U.S. dropped to
its lowest level on record.
The Fund profited from its currency trading during the quarter with
significant gains from short Japanese yen and Canadian dollar positions, as well
as long Deutsche mark positions. In the currency markets, Japan's problems
spread to other sectors of the global economy, causing commodities prices to
decline as demand from the Asian economies weakened, in turn putting pressure on
Canada's commodity-sensitive currency. In Germany, the federal election
resulted in a shift to the left, as Chancellor Helmut Kohl, after sixteen years
in office, lost to Gerhard Schroder. Surprisingly, this promoted a continued
strengthening of the Deutsche mark versus the U.S. dollar.
As U.S. equity markets declined in July and August, the Fund profited
from short positions in the S&P 500(R), most notably during August, when the
index dropped 14.5%. Volatility in September made for a difficult trading
environment, and the Fund incurred modest losses in the stock index sector
during September, but remained profitable for the quarter overall in these
markets.
The agricultural sector generated profits overall for the quarter. As
commodity markets collapsed in August, profits were generated on the short side
of corn and sugar positions, which offset losses in the soybean complex. The
harvest of the second largest U.S. corn crop on record resulted in prices
dropping to the lowest levels in over 10 years. Prospects for a large
production surplus of sugar
11
<PAGE>
kept pressure on the sugar market and also resulted in low prices. However, in
September, the Fund was caught on the long side of the soybean complex resulting
in losses as the U.S. soybean crop increased relative to the USDA's production
estimate as a result of timely rains, which contributed to lower prices.
In the metals markets, gold prices attempted to move higher against a
backdrop of volatility in major equity markets, increasing concerns about
emerging markets, economic chaos in Russia, weakness in the U.S. dollar, and
increasing worries about global economic conditions. However, gold was unable
to extend rallies and build any significant upside momentum resulting in a
trendless environment and resulting losses in gold positions for the Fund.
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 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
12
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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.
European Economic and Monetary Union ("EMU")
- --------------------------------------------
As of January 1, 1999, the "euro" will be adopted as the common legal currency
of participating member states of the EMU. The euro and participating member
currencies will co-exist through July 1, 2002, with the euro gradually replacing
member national currencies. The introduction of and conversion to the euro is
expected to have significant implications for the business, as well as the
computer systems and operational processes, of Merrill Lynch.
The introduction of the euro will bring about fundamental changes in the
structure and nature of the 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. Merrill Lynch does not expect the introduction of the euro to have
a negative effect on its business, currency risk, or competitive positioning in
the European markets. The International Swaps and Derivatives Association, Inc.
has established an EMU protocol agreement that parties to derivatives contracts
may use to amend their agreements to ensure continuity of contract during the
conversion period. Merrill Lynch is a party to this protocol agreement.
Merrill Lynch's program to address the introduction of and conversion to the
euro and the associated systems and operational implications and challenges has
been divided into three phases: analysis, mobilization, and implementation. The
analysis phase began in the third quarter of 1997 and focused upon analyzing the
likely implications of the EMU and assessing the operational and systems impact
on Merrill Lynch. During this phase, a database containing the primary
compliance challenges of the EMU was developed, and working groups were
established to drive the EMU preparation effort within the different product
lines and principal operating locations. The mobilization phase began in the
fourth quarter of 1997 and focused upon developing project plans and
establishing an organizational and project structure to address various business
requirements. The implementation phase, which began in December 1997, is
concerned with implementing the operational and systems changes identified as
necessary to ensure Merrill Lynch's compliance with EMU. The implementation
phase is expected to continue into the first quarter of 1999 to resolve any
post-conversion issues.
With respect to operational and systems matters, the introduction of the euro
will affect 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 systems or procedures that handle
such securities or cash may require modification. The procedural and systems
modifications that Merrill Lynch has identified as necessary for conversion to
the euro include, but are not limited to, such activities as:
. modification of application systems to enable the systems to recognize and
process the euro on an ongoing basis;
. conversion of data, which will require updates to master files to reflect
redenomination;
. alteration of transaction data that includes converting trading and cash
positions from member currency to the euro;
. procedural modifications to reflect the replacement of member currency bank
accounts and settlement instructions with euro equivalents; and
. development of the capability for certain business functions to translate
member currencies into euro at a fixed exchange rate until July 2002.
The introduction of the euro exposes Merrill Lynch to operational and systems
risks in that the necessary systems modifications will affect clearance,
13
<PAGE>
settlement, and financial reporting of transactions. If not handled correctly,
these modifications could result in failed trades and other improper accounting
for transactions.
The success of Merrill Lynch's euro conversion efforts also is dependent on
the euro-compliance of third parties, such as trading counterparties, financial
intermediaries (for example, securities and commodities exchanges, depositories,
clearing organizations, and commercial banks), and vendors. Merrill Lynch will
monitor risks associated with third parties on a regular basis, including, for
example, performing assessments of counterparties' readiness.
In anticipation of the introduction of the euro, the financial authorities and
securities exchanges of certain of the EMU member states are conducting market
tests to assess euro-conversion readiness. Merrill Lynch is participating in
such testing procedures as required, and to date the outcome of each of those
tests has been satisfactory. In addition to participating in the testing
procedures of the EMU member states' financial authorities and securities
exchanges, Merrill Lynch also is implementing its own internal testing
procedures, including four systemwide practice sessions, to prepare for the
conversion. The purpose of these practice sessions is to better ensure that the
conversion plans are comprehensive and that the schedule is acceptable. The
results of such practice sessions will be evaluated and used to identify those
areas in which further modification or remediation is necessary. While Merrill
Lynch will engage in these testing procedures, certain elements of the
conversion process can only be undertaken for the first time during the
conversion. Accordingly, there can be no assurances that the tests will
identify all system deficiencies and necessary modifications prior to the
conversion.
Due to the unprecedented scale of change, including the volume and magnitude
of transactions affected and the number of third parties involved, market
participants are anticipating a period of some disruption immediately following
the conversion. Merrill Lynch has developed, and is continuing to develop,
contingency plans in an effort to reduce the impact of such disruptions on its
business.
As of the end of the 1998 third quarter, the total estimated expenditures
associated with the introduction of and conversion to the euro are expected to
be approximately $79 million, of which approximately $20 million is remaining
(of these amounts, $71 million and $19 million, respectively, pertain to 1998).
These remaining expenditures are expected to be spent on EMU compliance efforts
and project administration. Merrill Lynch expects to become fully EMU-compliant
during the 1998 fourth quarter.
Merrill Lynch believes that it has identified and evaluated those systems and
operational modifications necessary for the conversion to the euro and is in the
process of implementing the identified modifications. In light of the
interdependency of the parties in or serving the financial markets, however,
there can be no assurance that all necessary modifications will be identified
and renovated on a timely basis, that all modification efforts will be
successful, or that all third parties with whom Merrill Lynch's operations
interface will be EMU-ready. In addition, there can be no assurance that the
remaining euro conversion expenditures will not exceed those anticipated by
Merrill Lynch at this time or that the expenditures associated with the
conversion efforts and the possible failure of such conversion efforts will 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
14
<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 with 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.
15
<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.
ML FUTURES INVESTMENTS 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
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