<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1997
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-18215
JOHN W. HENRY & CO./MILLBURN L.P.
---------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 06-1287586
- ------------------------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
SOUTH TOWER, 6TH FLOOR, NEW YORK, NY 10080-6106
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 236-5662
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Limited Partnership Units
-------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant: the registrant is a limited partnership; as of February 1,
1998, limited partnership units with an aggregate value of $61,731,534 were
outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's "1997 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1997,
is incorporated by reference into Part II, Item 8, and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
JOHN W. HENRY & CO./MILLBURN L.P.
ANNUAL REPORT FOR 1997 ON FORM 10-K
Table of Contents
-----------------
PART I PAGE
------ ----
Item 1. Business........................................... 1
Item 2. Properties......................................... 8
Item 3. Legal Proceedings.................................. 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II
-------
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters.............................. 9
Item 6. Selected Financial Data.......................... 10
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............. 15
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk...................................... 18
Item 8. Financial Statements and Supplementary Data...... 18
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............. 18
PART III
--------
Item 10. Directors and Executive Officers of the
Registrant....................................... 19
Item 11. Executive Compensation........................... 21
Item 12. Security Ownership of Certain Beneficial Owners
and Management................................... 21
Item 13. Certain Relationships and Related Transactions... 22
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K...................................... 23
-ii-
<PAGE>
PART I
ITEM 1: BUSINESS
--------
(a) General Development of Business:
-------------------------------
John W. Henry & Co./Millburn L.P. (the "Partnership" or the "Fund")
was organized under the Delaware Revised Uniform Limited Partnership Act on
August 29, 1989. The original public offering of units of limited partnership
interest (the "Series A Units") commenced on September 29, 1989, and the
Partnership commenced trading with respect to the Series A Units on January 5,
1990. A reopening of the Partnership through the public offering of Series B
Limited Partnership Units (the "Series B Units") commenced on December 14, 1990.
The Partnership began trading with respect to the Series B Units on January 28,
1991. A second reopening of the Partnership through the public offering of
Series C Limited Partnership Units (the "Series C Units") commenced on September
13, 1991. The Partnership began trading with respect to the Series C Units on
January 2, 1992. The Fund's objective is achieving, through speculative
trading, substantial capital appreciation over time.
The proceeds of each of the three series of Units were each initially
allocated equally among the Partnership's two trading advisors -- Millburn
Ridgefield Corporation ("Millburn") and John W. Henry & Company, Inc. ("JWH")
(collectively, the "Trading Advisors" or the "Advisors"). As of December 31,
1997; 49% and 51% of the Series A Units capital was allocated to Millburn and
JWH, respectively; 49% and 51% of the Series B Units capital; and 49% and 51% of
the Series C Units capital.
Merrill Lynch Investment Partners Inc. (the "General Partner" or
"MLIP") acts as the general partner of the Partnership. Merrill Lynch Futures
Inc. (the "Commodity Broker" or "MLF") is the Partnership's commodity broker.
The General Partner is a wholly-owned subsidiary of Merrill Lynch Group Inc.,
which in turn is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. The
Commodity Broker is an indirect wholly-owned subsidiary of Merrill Lynch & Co.,
Inc. (Merrill Lynch & Co., Inc. and its affiliates are hereinafter sometimes
referred to as "Merrill Lynch").
The initial capitalization of the Fund was $18,182,000. A total of an
additional $50,636,000 was invested in the Fund on January 28, 1991 (when the
Series B Units were sold) and an additional $40,000,000 on January 2, 1992 (when
the Series C Units were sold). Through December 31, 1997, Units with an
aggregate Net Asset Value of $102,136,315 (not including a dividend distribution
of $2,345,180 for Series A Unitholders on November 30, 1990) had been redeemed
including December 31, 1997 redemptions which were not actually paid out until
January 1998). As of December 31, 1997, the aggregate capitalization of the Fund
was $63,024,164, the total capitalization of the Series A, Series B and Series C
Units was $14,709,078, $31,679,478 and $16,635,608, respectively, and the Net
Asset Value per Series A, Series B and Series C Units, originally $100 as of
January 5, 1990, January 28, 1991 and January 2, 1992, respectively, had risen
to $284.11 (excluding a $20 per Series A Unit distribution paid as of November
30, 1990), $230.87 and $179.92, respectively. As of December 31, 1997, the Fund
had 455 Series A, 1,407 Series B and 720 Series C Limited Partners.
The highest month-end Net Asset Value per Series A Unit through
December 31, 1997 was $284.11 (December, 1997) and the lowest $100.31(May,
1990); the highest month-end Net Asset Value per Series B Unit through December
31, 1997 was $230.87 (December, 1997) and the lowest $91.20 (May, 1992); the
highest month-end Net Asset Value per Series C Unit through December 31, 1997
was $179.92 (December, 1997) and the lowest $75.87 (May, 1992).
(b) Financial Information about Industry Segments:
---------------------------------------------
The Partnership's business constitutes only one segment for financial
reporting purposes, i.e., a speculative "commodity pool."
-1-
<PAGE>
(c) Narrative Description of Business:
---------------------------------
GENERAL
The Fund trades in the international futures, options on futures and
forward markets with the objective of achieving substantial capital
appreciation.
The Partnership has entered into advisory agreements with each Trading
Advisor (the "Advisory Agreement") with respect to each of the Series A Units,
Series B Units and Series C Units and allocated 50% of the initial capital of
each Series to each Trading Advisor. JWH trades the Partnership's assets
allocated to it in four market sectors -- interest rates, stock indices,
currencies and metals -- pursuant to its Financial and Metals Program. Millburn
trades the Partnership's assets allocated to it pursuant to its currency
program, which concentrates exclusively on currency trading, primarily in the
interbank market.
MLIP may from time to time direct certain individual Advisors to
manage their Fund accounts as if they were managing up to 50% more equity than
the actual capital allocated to them. This additional leverage is subject to
the condition that the Fund as a whole will not trade as if it had in excess of
20% more equity than actual capital.
One of the objectives of the Fund is to provide diversification to a
limited portion of the risk segment of the Limited Partners' portfolios.
Commodity pool performance has historically often demonstrated a low degree of
performance correlation with traditional stock and bond holdings. Since it
began trading, the Fund's returns have, in fact, frequently been significantly
non-correlated (not, however, negatively correlated) with the United States
stock and bond markets.
The Fund accesses the Trading Advisors not by opening individual
managed accounts with them, but rather through investing in private funds
sponsored by MLIP through which the trading accounts of different MLIP-sponsored
funds managed by the same Advisor and pursuant to the same strategy are
consolidated.
USE OF PROCEEDS AND INTEREST INCOME
General. The Fund's assets are not used to purchase or acquire any
-------
physical commodity but rather held as security for and to pay the Partnership's
speculative trading losses as well as any expenses and redemptions. The primary
use of the Fund's capital is to permit the Advisors to trade on a speculative
basis in a wide range of different futures, forwards and options markets. While
being used for this purpose, the Partnership's assets are also generally
available to earn interest, as more fully described below under "-- Available
Assets."
Market Sectors. The Partnership trades in a diversified group of
--------------
markets under the direction of its two independent Advisors. These Advisors
can, and do, from time to time materially alter the allocation of their overall
trading commitments among different market sectors. Except in the case of
certain trading programs which are purposefully limited in the markets which
they trade, there is essentially no restriction on the commodity interests which
may be traded by any Advisor or the rapidity with which an Advisor may alter its
market sector allocations.
The Fund's financial statements contain information relating to the
market sectors traded by the Fund. There can, however, be no assurance as to
which markets may be included in the Fund's portfolio or as to in which market
sectors the Fund's trading may be concentrated at any one time or over time.
Market Types. The Fund trades on a variety of United States and
------------
foreign futures exchanges. Applicable exchange rules differ significantly among
different countries and exchanges. Substantially all of the Fund's off-exchange
trading takes place in the highly liquid, institutionally based currency forward
markets. The forward markets are generally unregulated, and in its forward
trading the Fund does not deposit margin with respect to its positions. The
Partnership's forward currency trading is executed exclusively through the
Foreign Exchange Service Desk (the "F/X Desk") operated by MLIP and certain of
its affiliates, with MLF as the back-to-back intermediary to the
-2-
<PAGE>
ultimate counterparties, which include Merrill Lynch International Bank ("MLIB")
with which the Advisors trade on behalf of the Fund.
As in the case of its market sector allocations, the Fund's
commitments to different types of markets -- U.S. and non-U.S., regulated and
unregulated -- differ substantially from time to time as well as over time. The
Fund has no policy restricting its relative commitment to any of these different
types of markets.
The Fund's financial statements contain information relating to the
types of markets traded by the Fund. There can, however, be no assurance as to
in which markets the Fund may trade or the Fund's trading may be concentrated at
any one time or over time.
Custody of Assets. All of the Fund's assets are currently held in
-----------------
customer accounts at Merrill Lynch.
Available Assets. The Fund earns interest, as described below, on its
----------------
"Available Assets," which can be generally described as the cash actually held
by the Fund. Available Assets are held primarily in U.S. dollars, and to a
lesser extent in foreign currencies, and are comprised of the following: (a)
the Fund's cash balance in the offset accounts (as described below) -- which
includes "open trade equity" (unrealized gains and losses on open positions) on
United States futures contracts, which is paid into or out of the Fund's account
on a daily basis; and (b) the Fund's cash balance in foreign currencies derived
from its trading in non-U.S. dollar denominated futures and options contracts,
which includes open trade equity on those exchanges which settle gains and
losses on open positions in such contracts prior to the closing out of such
positions. Available Assets do not include, and the Fund does not earn interest
on, the Fund's gains or losses on its open forward, commodity option and certain
foreign futures positions since such gains or losses are not collected or paid
until such positions are closed out.
The Partnership's Available Assets may be greater than, less than or
equal to the Fund's Net Asset Value (on which the redemption value of the Units
is based) primarily because Net Asset Value reflects all gains and losses on
open positions as well as accrued but unpaid expenses.
The interest income arrangements for the Partnership's U.S. dollar
Available Assets differ from those applicable to its non-U.S. dollar Available
Assets. Interest income, once accrued by the Fund, is subject to the risk of
trading losses.
Interest Earned on the Fund's U.S. Dollar Available Assets. The
----------------------------------------------------------
Fund's U.S. dollar Available Assets are held in cash in offset accounts and in
short-term Treasury bills purchased from dealers unaffiliated with Merrill
Lynch. Offset accounts are non-interest bearing demand deposit accounts
maintained with banks unaffiliated with Merrill Lynch. An integral feature of
the offset arrangements is that the participating banks specifically acknowledge
that the offset accounts are MLF customer accounts, not subject to any Merrill
Lynch liability.
MLF credits the Partnership, as of the end of each month, with
interest at the effective daily 91-day Treasury bill rate on the average daily
U.S. dollar Available Assets held in the offset accounts during such month.
The use of the offset account arrangements for the Partnership's U.S.
dollar Available Assets may be discontinued by Merrill Lynch whether or not
Merrill Lynch otherwise continues to maintain its offset arrangements. The
offset arrangements are dependent on the banks' continued willingness to make
overnight credits available to Merrill Lynch, which, in turn, is dependent on
the credit standing of ML&Co. If Merrill Lynch were to determine that the
offset arrangements had ceased to be practicable (either because ML&Co. credit
lines at participating banks were exhausted or for any other reason), Merrill
Lynch would thereafter attempt to invest all of the Fund's U.S. dollar Available
Assets to the maximum practicable extent in short-term Treasury bills. All
interest earned on the U.S. dollar Available Assets so invested would be paid to
the Fund, but MLIP would expect the amount of such interest to be less than that
available to the Fund under the offset account arrangements. The remaining U.S.
dollar Available Assets of the Fund would be kept in cash to meet variation
margin payments and pay expenses, but would not earn interest for the Fund. The
banks at which the offset accounts are maintained make available to Merrill
Lynch interest-free overnight credits, loans or overdrafts in the amount of the
Fund's U.S. dollar Available Assets held in the offset accounts, charging
Merrill Lynch
-3-
<PAGE>
a small fee for this service. The economic benefits derived by Merrill Lynch --
net of the interest credits paid to the Fund and the fee paid to the offset
banks -- from the offset accounts have not exceeded 3/4 of 1% per annum of the
Fund's average daily U.S. dollar Available Assets held in the offset accounts.
These revenues to Merrill Lynch are in addition to the Brokerage Commissions and
Administrative Fees paid by the Fund to MLF and MLIP, respectively.
Interest Paid by Merrill Lynch on the Fund's Non-U.S. Dollar Available
----------------------------------------------------------------------
Assets. Under the single currency margining system implemented for the
- ------
Partnership, the Partnership itself does not deposit foreign currencies to
margin trading in non-U.S. dollar denominated futures contracts and options. MLF
provides the necessary margin, permitting the Fund to retain the monies which
would otherwise be required for such margin as part of the Fund's U.S. dollar
Available Assets. The Fund does not earn interest on foreign margin deposits
provided by MLF. The Fund does, however, earn interest on its non-U.S. dollar
Available Assets. Specifically, the Fund is credited by Merrill Lynch with
interest at the local short-term rate on realized and unrealized gains on non-
U.S. dollar denominated positions for such gains actually held in cash by the
Fund. Merrill Lynch charges the Fund Merrill Lynch's cost of financing realized
and unrealized losses on such positions.
In order to avoid the expense of daily currency conversions, the Fund
holds foreign currency gains and finances foreign currency losses on an interim
basis until converted into U.S. dollars and either paid into or out of the
Fund's U.S. dollar Available Assets. Foreign currency gains or losses on open
positions are not converted into U.S. dollars until the positions are closed.
Assets of the Fund while held in foreign currencies are subject to exchange rate
risk.
-------------------------------
The General Partner has determined that there may have been a
miscalculation in the interest credited to the Fund for a period prior to
November 1996. Accordingly, Merrill Lynch has credited certain amounts to the
Fund's investors (directly, not by credit to the Fund itself). For current
Merrill Lynch clients, this credit, which includes compounded interest, appeared
on their December 1997 account statements. The total amount of the adjustment
is approximately $779,000 for Series A Units, $1,739,000 for Series B Units and
$773,000 for Series C Units.
CHARGES
Each of the Series of Units is subject to the same charges. However,
these charges are calculated separately with respect to each Series, each of
which maintains its own Net Asset Value.
PERFORMANCE SUMMARY
Series A Units . During 1995, 1996 and 1997, the Series A Units'
--------------
average month-end Net Assets equaled:
1995 $13,360,144, and the Series recognized gross trading gains of
$5,089,863 or 38.10% of such average month-end Net Assets;
1996 $12,941,058, and the Series recognized gross trading gains of
$1,647,329 or 12.73% of such average month-end Net Assets; and
1997 $14,483,904, and the Series recognized a gain from investments
of $1,727,430 or 11.93% of average month-end Net Assets; which
resulted in a 12.50% increase in the Net Asset Value per Unit.
Series B Units. During 1995, 1996 and 1997, the Series B Units'
--------------
average month-end Net Assets equalled:
-4-
<PAGE>
1995 $24,425,858, and the Series recognized gross trading gains of
$11,540,056 or 47.25% of such average month-end Net Assets;
1996 $27,873,607, and the Series recognized gross trading gains of
$3,471,941 or 12.46% of such average month-end Net Assets; and
1997 $31,251,336, and the Series recognized a gain from investments
of $3,689,429 or 11.81% of average month-end Net Assets; which
resulted in a 12.47% increase in the Net Asset Value per Unit.
Series C Units. During 1995, 1996 and 1997, the Series C Units'
--------------
average month-end Net Asset equaled:
1995 $16,554,503, and the Series recognized gross trading gains of
$6,571,541;
1996 $15,096,182, and the Series recognized gross trading gains of
$1,869,922 or 12.39% of such average month-end Net Assets; and
1997 $16,499,268, and the Series recognized a gain from Investments
of $1,940,829 or 11.76% of average month-end Net Assets.
CHARGES
The following table summarizes the charges incurred by the Fund during
1995, 1996 and 1997.
<TABLE>
<CAPTION>
1995 1996 1997
-------------------- ------------------- -----------------
% OF % OF % OF
AVERAGE AVERAGE AVERAGE
DOLLAR MONTH-END DOLLAR MONTH-END DOLLAR MONTH-END
COST AMOUNT NET ASSETS AMOUNT NET ASSETS AMOUNT NET ASSETS
---- ------ ---------- ------ ---------- ------ ----------
<S> <C> <C> <C> <C> <C> <C>
Brokerage $7,412,789 13.64% $5,406,851 9.67% - -
Commissions
Administrative - - 115,039 0.21 - -
Fees
Profit Shares 729,138 1.34 97,468 0.17 - -
------- ---- ------ ---- ------ -----------
Total $8,141,927 14.98% $5,619,358 10.05% - -
========== ===== ========== ===== ====== ===========
</TABLE>
____________________________
The foregoing table does not reflect the bid-ask spreads paid by the
Fund on its forward trading, or the benefits which may be derived by Merrill
Lynch from the deposit of certain of the Fund's U.S. dollar available assets in
offset accounts. See Item 1(c), "Narrative Description of Business -- Use of
Proceeds and Interest Income."
-5-
<PAGE>
The Fund's average month-end Net Assets during 1995, 1996 and 1997
equaled $54,340,505, $55,910,847 , and $62,234,507, respectively.
During 1995, 1996 and 1997, the Fund earned $2,863,384, $1,842,887 and
$0 in interest income, or approximately 5.27%, 3.30%, and 0% of the Fund's
average month-end Net Assets.
As of January 1, 1996, the 11.75% per annum Brokerage Commissions paid
by the Fund to MLF were recharacterized as 9.75% per annum Brokerage Commissions
and a .25% per annum Administrative Fee paid by the Fund to MLIP. This
recharacterization had no economic effect on the Fund.
The significant variations in charges is primarily due to placing assets
in Trading LLCs (See Item 7).
______________________________
DESCRIPTION OF CURRENT CHARGES
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
MLF Brokerage Commissions A flat-rate monthly commission of
0.7917 of 1% of the Fund's month-end
assets (a 9.50% annual rate).
During 1995 and 1996, the round-turn
(each purchase and sale or sale and
purchase of a single futures
contract) equivalent rate of the
Fund's flat-rate Brokerage
Commissions was approximately $207
and $143, respectively. The round-
turn rates for 1995 and 1996 reflect
Brokerage Commissions at the rate of
11.75% per annum. As of February 1,
1997, this rate was reduced to
9.50%.
MLF Use of Fund assets Merrill Lynch may derive an economic
benefit from the deposit of certain
of the Fund's U.S. dollar Available
Assets in offset accounts; such
benefit to date has not exceeded 3/4
of 1% of such average daily U.S.
dollar Available Assets.
MLIP Administrative Fees The Fund pays MLIP a monthly
Administrative Fee equal to 0.020833
of 1% of the Fund's month-end assets
(0.25% annually). MLIP pays all of
the Fund's routine administrative
costs.
MLIB Bid-ask spreads Under MLIP's F/X Desk arrangements,
MLIB receives bid-ask spreads on the
forward trades it executes with the
Fund.
Other Bid-ask spreads The counterparties other than MLIB
Counterparts with which the F/X Desk deals also
each receive bid-ask spreads on the
forward trades executed with the
Fund.
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<PAGE>
MLIP F/X Desk service fees Under the F/X Desk arrangements,
MLIP or another Merrill Lynch entity
receives a service fee equal, at
current exchange rates, to
approximately $5.00 to $12.50 on
each purchase or sale of each
futures contract-equivalent forward
contract executed with
counterparties other than MLIB.
MLIB EFP differentials MLIB or an affiliate receives a
differential spread for exchanging
the Fund's spot currency positions
(which are acquired through the F/X
Desk, as described above) for
equivalent futures positions.
Trading Advisors Profit Shares Prior to January 1, 1997, quarterly
profit shares of 15% and 20% of any
New Trading Profit achieved by each
Advisor's Fund account,
individually, were paid to JWH and
Millburn, respectively. Beginning
January 1, 1997, a quarterly Profit
Share of 15% continues to be payable
to JWH and an annual Profit Share of
20% is payable to Millburn, in each
case as of the end of each calendar
quarter or year (as the case may be)
and upon redemption of Units. New
Trading Profit is calculated
separately in respect of each
Advisor, irrespective of the overall
performance of the Fund. Units may
generate New Trading Profit and be
subject to paying Profit Shares even
though the Net Asset Value per Unit
has declined below the purchase
price of such Units.
MLF; Extraordinary expenses Actual costs incurred; none paid to
Others date, and expected to be negligible.
---------------------------------
REGULATION
The General Partner, the Trading Advisors 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.
-7-
<PAGE>
(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, however, trade, from the
United States, on a number of foreign commodity exchanges.
ITEM 2: PROPERTIES
----------
The Partnership does not use any physical properties in the conduct of its
business.
The Partnership's only place of business is the place of business of the
General Partner (see Item 10 herein). The General Partner performs all
administrative services for the Partnership from the General Partner's offices.
ITEM 3: LEGAL PROCEEDINGS
-----------------
In September 1996, JWH was named as a co-defendant in class action lawsuits
brought in the California Superior Court, Los Angeles County and in the New York
Supreme Court, New York County. In November 1996, JWH was named as a co-
defendant in a class action complaint filed in Superior Court of the State of
Delaware for Newcastle County that contained essentially the same allegations as
the New York and California complaints. Additional complaints containing the
same allegations as the earlier California complaints were filed in California
in March 1997. The California complaints were consolidated under the caption
"In re Dean Witter Managed Futures Litigation" in May 1997. The New York
complaints were consolidated under the caption "In re Dean Witter Managed
Futures Limited Partnerships Litigation" in July 1997. The actions, which seek
unspecified damages, purport to be brought on behalf of investors in certain
Dean Witter, Discover & Co. ("Dean Witter") commodity pools, some of which are
advised by JWH, and are primarily directed at Dean Witter's alleged fraudulent
selling practices in connection with the marketing of those pools. JWH is
essentially alleged to have aided and abetted or directly participated with Dean
Witter in those practices. JWH believes the allegations against it are without
merit; it intends to contest these allegations vigorously, and is convinced that
it will be shown to have acted properly and in the best interest of the
investors.
On June 24, 1997, the CFTC accepted an Offer of Settlement from MLF
and others, in a matter captioned "In the Matter of Mitsubishi Corporation and
Merrill Lynch Futures Inc., et al.," CFTC Docket No. 97-10, pursuant to which
MLF, without admitting or denying the allegations against it, consented to a
finding by the Commission that MLF had violated Section 4c(a)(A) of the
Commodity Exchange Act, relating to wash sales (the CFTC alleged that the
customer entered nearly simultaneous orders without the intent to engage in a
bona fide trading transaction), and CFTC Regulation 1.37(a), relating to
recordkeeping requirements. MLF agreed to cease and desist from violating
Section 4c(a)(A) of the Act and Regulation 1.37(a), and to pay a civil monetary
penalty of $175,000.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Partnership has never submitted any matters to a vote of its Limited
Partners.
-8-
<PAGE>
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
(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.
(b) Holders:
-------
As of December 31, 1997, there were 456, 1408 and 734 holders of the
Series A, B and C Units, respectively, including the General Partner.
(c) Dividends:
---------
The Partnership has made only one distribution ($20 per Series A Unit
payable as of November 30, 1990) since trading commenced. The General Partner
does not presently intend to make any distributions, but may do so if a series
of Units recognizes substantial profits.
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<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from the audited
financial statements of the Partnership.
<TABLE>
<CAPTION>
INCOME STATEMENT DATA 1997 1996 1995 1994 1993
- ---------------------- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss):
Realized Gain $ $ 8,749,410 $23,852,578 $ 3,650,307 $17,886,014
Change in Unrealized Gain - (1,760,218) (651,118) (2,731,447) 4,187,590
---------- ----------- ----------- ------------ -----------
Total Trading results - 6,989,192 23,201,460 918,860 22,073,604
Interest Income - 1,842,887 2,863,384 1,998,830 1,847,581
---------- ----------- ----------- ------------ -----------
Total Revenues - 8,832,079 26,064,844 2,917,690 23,921,185
---------- ----------- ----------- ------------ -----------
Expenses:
Brokerage Commissions - 5,406,851 7,412,789 7,717,269 9,559,369
Administrative Fees - 115,039 - - -
Profit Shares - 97,468 729,138 508,502 551,684
---------- ----------- ----------- ------------ -----------
Total Expenses - 5,619,358 8,141,927 $ 8,225,771 10,111,053
---------- ----------- ----------- ------------ -----------
Income from Investments $7,357,688 $ 7,171,609 $ - $ - $ -
---------- ----------- ----------- ------------ -----------
Net Income (Loss) $7,357,688 $10,384,330 $17,922,917 ($5,308,081) $13,810,132
========== =========== =========== ============ ===========
</TABLE>
<TABLE>
<CAPTION>
BALANCE SHEET DATA 1997 1996 1995 1994 1993
- ------------------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Fund Net Asset Value $63,024,164 $60,834,088 $57,921,834 $53,987,444 $71,749,780
Net Asset Value per Series A $ 284.11 $ 252.54 $ 210.29 $ 155.90 $ 170.64
nit
Net Asset Value per Series B $ 230.87 $ 205.27 $ 171.02 $ 127.16 $ 138.87
Unit
Net Asset Value per Series C $ 179.92 $ 159.97 $ 133.82 $ 99.07 $ 107.55
Unit
</TABLE>
Significant variations in income statement line items is primarily due
to placing assets in Trading LLCs (See Item 7).
-10-
<PAGE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER SERIES A UNIT
- ------------------------------------------------------------------------------------------------------------------
JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $141.54 $154.24 $151.42 $163.78 $166.43 $162.20 $174.85 $162.78 $165.32 $164.26 $164.70 $170.64
- ------------------------------------------------------------------------------------------------------------------
1994 $157.40 $157.52 $171.35 $170.73 $170.55 $182.02 $169.39 $159.71 $163.83 $165.97 $159.74 $155.90
- ------------------------------------------------------------------------------------------------------------------
1995 $146.85 $167.54 $204.80 $214.46 $216.21 $212.68 $207.03 $212.10 $207.87 $208.79 $209.51 $210.29
- ------------------------------------------------------------------------------------------------------------------
1996 $231.67 $209.48 $205.35 $213.42 $204.22 $207.21 $206.87 $201.95 $208.39 $237.92 $255.50 $252.54
- ------------------------------------------------------------------------------------------------------------------
1997 $273.52 $270.58 $267.94 $261.04 $251.03 $257.22 $283.93 $270.03 $274.52 $273.84 $277.30 $284.11
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER SERIES B UNIT
- ------------------------------------------------------------------------------------------------------------------
JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $116.02 $126.15 $124.04 $134.19 $136.26 $132.74 $142.71 $132.47 $134.45 $133.44 $133.97 $138.87
- ------------------------------------------------------------------------------------------------------------------
1994 $127.89 $128.01 $139.63 $139.06 $138.76 $148.27 $138.03 $130.06 $133.43 $135.47 $130.31 $127.16
- ------------------------------------------------------------------------------------------------------------------
1995 $119.62 $136.63 $166.77 $174.39 $175.54 $172.89 $168.13 $172.70 $169.17 $169.98 $170.50 $171.02
- ------------------------------------------------------------------------------------------------------------------
1996 $188.93 $171.14 $167.47 $173.94 $166.31 $168.64 $168.41 $164.21 $169.49 $193.51 $207.63 $205.27
- ------------------------------------------------------------------------------------------------------------------
1997 $222.32 $219.93 $217.78 $212.17 $204.08 $209.10 $230.77 $219.46 $223.11 $222.53 $225.33 $230.87
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER SERIES C UNIT
- ------------------------------------------------------------------------------------------------------------------
JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $ 94.01 $101.04 $ 99.03 $106.07 $106.98 $104.11 $110.95 $102.99 $104.71 $103.70 $103.95 $107.55
- ------------------------------------------------------------------------------------------------------------------
1994 $ 98.97 $ 99.10 $108.21 $107.82 $107.43 $115.26 $107.13 $100.81 $103.66 $105.30 $101.41 $ 99.07
- ------------------------------------------------------------------------------------------------------------------
1995 $ 93.13 $106.27 $129.98 $135.87 $136.83 $134.85 $131.16 $134.97 $132.39 $133.17 $133.60 $133.82
- ------------------------------------------------------------------------------------------------------------------
1996 $147.90 $133.80 $130.88 $135.93 $129.91 $131.79 $131.69 $128.12 $132.22 $150.96 $161.74 $159.97
- ------------------------------------------------------------------------------------------------------------------
1997 $173.26 $171.40 $169.73 $165.35 $159.04 $162.96 $179.85 $171.03 $173.88 $173.43 $175.61 $179.92
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to CFTC policy, monthly performance is presented from January 1, 1993
even though the Series A and B Units were outstanding prior to such date.
-11-
<PAGE>
JOHN W. HENRY & CO./MILLBURN L.P.
(SERIES A UNITS)
DECEMBER 31, 1997
Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/
Inception of Trading: January 5, 1990
Aggregate Subscriptions: $18,182,000
Current Capitalization: $14,709,078
Worst Monthly Drawdown/(2)/:(9.58)% (2/96)
Worst Peak-to-Valley Drawdown/(3)/:(19.33)% (7/94-1/95)
Net Asset Value per Series A Unit, December 31, 1997: $284.11
- -------------------------------------------------------------------------------
MONTHLY RATES OF RETURN/(4)/
- -------------------------------------------------------------------------------
MONTH 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
January 8.31% 10.17 % (5.81)% (7.76)% 0.07%
- -------------------------------------------------------------------------------
February (1.07) (9.58) 14.09 0.08 8.97
- -------------------------------------------------------------------------------
March (0.98) (1.97) 22.24 8.78 (1.82)
- -------------------------------------------------------------------------------
April (2.58) 3.93 4.72 (0.36) 8.16
- -------------------------------------------------------------------------------
May (3.83) (4.31) 0.81 (0.11) 1.62
- -------------------------------------------------------------------------------
June 2.47 1.46 (1.63) 6.73 (2.54)
- -------------------------------------------------------------------------------
July 10.38 ( 0.17) (2.66) (6.94) 7.79
- -------------------------------------------------------------------------------
August (4.90) (2.38) 2.45 (5.72) (6.90)
- -------------------------------------------------------------------------------
September 1.66 3.19 (1.99) 2.58 1.56
- -------------------------------------------------------------------------------
October (0.25) 14.17 0.45 1.31 (0.64)
- -------------------------------------------------------------------------------
November 1.26 7.39 0.34 (3.75) 0.26
- -------------------------------------------------------------------------------
December 2.46 (1.16) 0.38 (2.41) 3.61
- -------------------------------------------------------------------------------
Compound Annual 12.49% 20.09% 34.89% (8.64)% 20.64%
Rate of Return
- -------------------------------------------------------------------------------
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor"
fund is defined as one that allocates no more than 25% of its trading assets to
any single manager. As the Fund allocates over 25% of its assets to each of JWH
and Millburn, it is referred to as a "Selected-Advisor" fund. Certain funds,
including funds sponsored by MLIP, are structured so as to guarantee to
investors that their investment will be worth no less than a specified amount
(typically, the initial purchase price) as of a date certain after the date of
investment. The CFTC refers to such funds as "principal protected." The
Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced since January 1, 1993 by the Series; a drawdown is
measured on the basis of month-end Net Asset Value only, and does not reflect
intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage
decline since January 1, 1993 from a month-end cumulative Monthly Rate of Return
without such cumulative Monthly Rate of Return being equaled or exceeded as of a
subsequent month-end. For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the Peak-to-Valley
Drawdown would still be continuing at the end of April in the amount of
approximately (3)%, whereas if the Monthly Rate of Return had been approximately
3% in March, the Peak-to-Valley Drawdown would have ended as of the end of
February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Series
during the month of determination (including interest income and after all
expenses have been accrued or paid) divided by the total equity of the Series as
of the beginning of such month.
-12-
<PAGE>
JOHN W. HENRY & CO./MILLBURN L.P.
(SERIES B UNITS)
DECEMBER 31, 1997
Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/
Inception of Trading: January 28, 1991
Aggregate Subscriptions: $50,636,000
Current Capitalization: $31,679,478
Worst Monthly Drawdown/(2)/: (9.41)% (2/96)
Worst Peak-to-Valley Drawdown/(3)/:(19.32)% (7/94-1/95)
-----------------------
Net Asset Value per Series B Unit, December 31, 1997: $230.87
- -------------------------------------------------------------------------------
MONTHLY RATES OF RETURN/(4)/
- -------------------------------------------------------------------------------
MONTH 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
January 8.31% 10.47% (5.93)% (7.91)% 0.04%
- -------------------------------------------------------------------------------
February (1.08) (9.41) 14.22 0.09 8.73
- -------------------------------------------------------------------------------
March (0.98) (2.14) 22.06 9.08 (1.68)
- -------------------------------------------------------------------------------
April (2.58) 3.86 4.57 (0.41) 8.18
- -------------------------------------------------------------------------------
May (3.81) (4.38) 0.66 (0.22) 1.54
- -------------------------------------------------------------------------------
June 2.46 1.40 (1.52) 6.85 (2.58)
- -------------------------------------------------------------------------------
July 10.36 (0.14) (2.75) (6.90) 7.51
- -------------------------------------------------------------------------------
August (4.90) (2.49) 2.71 (5.77) (7.17)
- -------------------------------------------------------------------------------
September 1.66 3.22 (2.04) 2.59 1.49
- -------------------------------------------------------------------------------
October (0.26) 14.17 0.48 1.53 (0.75)
- -------------------------------------------------------------------------------
November 1.26 7.30 0.31 (3.81) 0.40
- -------------------------------------------------------------------------------
December 2.46 (1.14) 0.31 (2.42) 3.65
- -------------------------------------------------------------------------------
Compound Annual 12.46% 20.03% 34.49% (8.43)% 19.74%
Rate of Return
- -------------------------------------------------------------------------------
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund
is defined as one that allocates no more than 25% of its trading assets to any
single manager. As the Fund allocates over 25% of its assets to each of JWH and
Millburn, it is referred to as a "Selected-Advisor" fund. Certain funds,
including funds sponsored by MLIP, are structured so as to guarantee to
investors that their investment will be worth no less than a specified amount
(typically, the initial purchase price) as of a date certain after the date of
investment. The CFTC refers to such funds as "principal protected." The
Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced since January 1, 1993 by the Series; a drawdown is
measured on the basis of month-end Net Asset Value only, and does not reflect
intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage
decline since January 1, 1993 from a month-end cumulative Monthly Rate of Return
without such cumulative Monthly Rate of Return being equaled or exceeded as of a
subsequent month-end. For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the Peak-to-Valley
Drawdown would still be continuing at the end of April in the amount of
approximately (3)%, whereas if the Monthly Rate of Return had been approximately
3% in March, the Peak-to-Valley Drawdown would have ended as of the end of
February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Series
during the month of determination (including interest income and after all
expenses have been accrued or paid) divided by the total equity of the Series as
of the beginning of such month.
-13-
<PAGE>
JOHN W. HENRY & CO./MILLBURN L.P.
(SERIES C UNITS)
DECEMBER 31, 1997
Type of Pool: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"/(1)/
Inception of Trading: January 2, 1992
Aggregate Subscriptions: $40,000,000
Current Capitalization: $16,635,608
Worst Monthly Drawdown/(2)/: (9.54)% (2/96)
Worst Peak-to-Valley Drawdown/(3)/: (19.20)% (7/94-1/95)
_____________
Net Asset Value per Series C Unit, December 31, 1997: $179.92
- -------------------------------------------------------------------------------
MONTHLY RATES OF RETURN/(4)/
- -------------------------------------------------------------------------------
MONTH 1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------
January 8.31% 10.52% (6.00)% (7.97)% 0.33%
- -------------------------------------------------------------------------------
February (1.07) (9.54) 14.12 0.13 7.47
- -------------------------------------------------------------------------------
March (0.97) (2.18) 22.31 9.19 (1.99)
- -------------------------------------------------------------------------------
April (2.58) 3.86 4.53 (0.36) 7.11
- -------------------------------------------------------------------------------
May (3.82) (4.43) 0.70 (0.36) 0.85
- -------------------------------------------------------------------------------
June 2.46 1.45 (1.44) 7.28 (2.68)
- -------------------------------------------------------------------------------
July 10.36 (0.08) (2.74) (7.05) 6.57
- -------------------------------------------------------------------------------
August (4.90) (2.71) 2.90 (5.90) (7.17)
- -------------------------------------------------------------------------------
September 1.67 3.21 (1.91) 2.83 1.66
- -------------------------------------------------------------------------------
October (0.26) 14.17 0.59 1.58 (0.97)
- -------------------------------------------------------------------------------
November 1.26 7.14 0.32 (3.69) 0.24
- -------------------------------------------------------------------------------
December 2.45 (1.09) 0.17 (2.31) 3.46
- -------------------------------------------------------------------------------
Compound Annual 12.47% 19.54% 35.08% (7.88)% 14.78%
Rate of Return
- -------------------------------------------------------------------------------
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund
is defined as one that allocates no more than 25% of its trading assets to any
single manager. As the Fund allocates approximately 50% of its assets to each
of JWH and Millburn, it is referred to as a "Selected-Advisor" fund. Certain
funds, including funds sponsored by MLIP, are structured so as to guarantee to
investors that their investment will be worth no less than a specified amount
(typically, the initial purchase price) as of a date certain after the date of
investment. The CFTC refers to such funds as "principal protected." The
Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced since January 1, 1993 by the Series; a drawdown is
measured on the basis of month-end Net Asset Value only, and does not reflect
intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage
decline since January 1, 1993 from a month-end cumulative Monthly Rate of Return
without such cumulative Monthly Rate of Return being equaled or exceeded as of a
subsequent month-end. For example, if the Monthly Rate of Return was (1)% in
each of January and February, 1% in March and (2)% in April, the Peak-to-Valley
Drawdown would still be continuing at the end of April in the amount of
approximately (3)%, whereas if the Monthly Rate of Return had been approximately
3% in March, the Peak-to-Valley Drawdown would have ended as of the end of
February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Series
during the month of determination (including interest income and after all
expenses have been accrued or paid) divided by the total equity of the Series as
of the beginning of such month.
-14-
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
OPERATIONAL OVERVIEW
The Fund's results of operations depend on the Advisors' ability to
trade profitably. The Advisors' trading methods, are confidential, so that
substantially the only available information relevant to the Fund's results of
operations is its actual performance record to date. However, because of the
speculative nature of its trading, the Fund's past performance is not
necessarily indicative of its future results.
RESULTS OF OPERATIONS
General. MLIP believes that managed futures funds should be
-------
regarded as medium- to long-term (i.e., three to five year) investments, but it
is difficult to identify trends in the Fund's operations and virtually
impossible to make any predictions regarding future results based on the results
to date. An investment in the Fund may be less successful over a longer than a
shorter period.
Markets with sustained price trends tend to be more favorable to
managed futures investments than whipsaw, choppy markets, but (i) this is not
always the case, (ii) it is impossible to predict when price trends will occur
and (iii) JWH and Millburn are affected differently by trending markets as well
as by particular types of trends.
MLIP attempts to control credit risk in the Fund's futures, forward
and options trading (the Fund does not trade derivatives other than futures and
forward contracts and options thereon) by trading only through MLF. MLF acts
solely as a broker or counterparty to the Fund's trades; it does not advise with
respect to, or direct, any such trading.
MLIP relies principally on JWH's and Millburn's respective risk
management policies and strategies to control the market risk inherent in the
Fund's trading. MLIP reviews the positions acquired by each of the Advisors on
a daily basis in an effort to determine whether such policies and strategies are
being followed and whether the overall positions of the Fund may have become
what MLIP analyzes as being excessively concentrated in a limited number of
markets -- in which case MLIP may discuss the possibility of rebalancing or
deleveraging the Fund's portfolio with JWH, Millburn or both. To date, however,
MLIP has only intervened once to request any rebalancing or deleveraging of
either Advisor's trading (JWH deleveraged its trading at the request of MLIP
from May 1992 through August 1992).
MLIP may consider making distributions to investors under certain
circumstances (for example, if substantial profits are recognized). MLIP caused
the Fund to make a $20 distribution on each Series A Unit as of November 30,
1990. This is the only distribution made to date.
The significant variations in both the statement of financial
condition and the income statement line items is primarily due to the
Partnership placing assets under the management of certain of the Advisors not
through opening managed accounts with them but rather through investing in a
private limited liability company ("Trading LLC") sponsored by MLIP. As of
December 1, 1996, the Partnership placed all of its assets under the management
of Trading LLCs. The only members of the Trading LLC are commodity pools
sponsored by MLIP. The Trading LLC trades under the management of a single
Advisor pursuant to a single strategy and at a uniform degree of leverage.
Placing assets with an Advisor through investing in a Trading LLC rather than a
managed account has no economic effect on the Partnership, except to the extent
that the Partnership benefits from the Advisor not having to allocate trades
among a number of different accounts (rather than acquiring a single position
for the Trading LLC as a whole).
The results of the Partnership's Trading LLC investments are reflected
in the Partnership's financial statements as "Income from Investments." The
investments are reflected in the financial statements at fair value based upon
the Partnership's interest in the Trading LLCs. Fair value is equal to the
market value of the net assets of the Trading LLCs. The resulting difference
between cost and fair value is reflected on the Statement of Operations as
income or loss from investments.
-15-
<PAGE>
PERFORMANCE SUMMARY
1995
In 1995, prevailing price trends in several key markets enabled the
Advisors to trade profitably for the Fund. Although trading in many of the
traditional commodity markets may have been lackluster, the currency and
financial markets offered exceptional trading conditions. After months
characterized by very difficult trading environments, solid price trends across
many markets (including U.S. Treasury and non-dollar bond markets) began to
emerge during the first quarter of 1995. In the second quarter, market
volatility once again began to affect trading, as many previously strong price
trends began to weaken and, in some cases, reverse. The U.S. dollar hit new
lows versus the Japanese yen and Deutschemark before rebounding sharply. In
addition, there were strong indications that the U.S. economy was slowing which,
when coupled with a failure of the German Central Bank to lower interest rates,
stalled a rally in the German bond market. During the third quarter, there was
a correction in U.S. bond prices after several months of a strong uptrend.
Despite exposure to the global interest-rate markets, the Fund's long positions
in Treasury bonds had a negative impact on the Fund. Throughout August and into
September, the U.S. dollar rallied sharply against the Japanese yen and the
Deutschemark as a result of the coordinated intervention by major central banks
and widespread recognition of the growing banking crisis in Japan. Despite
continued price volatility during the final quarter of 1995, the Trading
Advisors were able to identify several trends in key markets. U.S. Treasury
bond prices continued their strong move upward throughout November, due both to
weak economic data and optimism on federal budget talks. As the year ended, the
yield on the 30-year Treasury bond was pushed to its lowest level in more than
two years.
1996
1996 began with the East Coast blizzard, continuing difficulties in federal
budget talks and an economic slowdown having a negative impact on many markets.
The Fund was profitable in January due to strong profits in currency trading as
the U.S. dollar reached a 23-month high against the Japanese yen. In February,
however, the Fund incurred a significant loss due to the sudden reversals in
several strong price trends and considerable volatility in the currency and
financial markets. During March, large profits were taken in the crude oil and
gasoline markets as strong demand continued and talks between the United Nations
and Iraq were suspended. This trend continued into the second quarter, during
which strong gains were also recognized in the agricultural markets as a
combination of drought and excessive rain drove wheat and grain prices to
historic highs. In the late summer and early fall months, the Fund continued to
trade profitably as trending prices in a number of key markets favorably
impacted the Fund's performance. In September heating oil hit a five-year high
on soaring prices in Europe, and the Fund was also able to capitalize on
downward trends in the metals markets. Strong trends in the currency and global
bond markets produced significant gains in October and November, but the year
ended with declining performance as December witnessed the reversal of several
strong upward trends and increased volatility in key markets.
1997
Trend reversals and extreme market volatility, affected by such factors as
the Asian flu and El Nino, were characteristic of most of 1997. However, the
year proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
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. However, the dollar
underwent two significant corrections during the year. The first correction
occurred 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. From August through mid-November, the dollar
corrected against the
-16-
<PAGE>
Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By
mid-December the dollar had bounced back to new highs against the yen and was
rallying against the mark.
Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. By the middle of the
year, 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. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
PERFORMANCE OVERVIEW
The principal variables which determine the net performance of the
Partnership are profitability and interest income. During all periods set forth
under "Selected Financial Data," the interest rates in many countries were at
unusually low levels. This negatively impacted revenues because interest income
is typically a major component of commodity pool profitability. In addition,
low interest rates are frequently associated with reduced fixed-income market
volatility, and in static markets the Fund's profit potential generally tends to
be diminished. On the other hand, during periods of higher interest rates, the
relative attractiveness of a high risk investment such as the Partnership may be
reduced as compared to high yielding and much lower risk fixed-income
investments.
The Partnership's Brokerage Commissions and Administrative Fees are a
constant percentage of assets charge. The only Fund costs (other than the
insignificant F/X Desk service fees and EFP differentials as well as bid-ask
spreads on forward contracts) which are not based on a percentage of the Fund's
assets are the Profit Shares payable to each of JWH and Millburn based on their
individual performance. During periods when Profit Shares are a high percentage
of net trading gains, it is likely that there has been substantial performance
non-correlation between the Advisors (so that the total Profit Shares paid to
the Advisor which has traded profitably are a high percentage, or perhaps even
in excess, of the total profits recognized, as the other Advisor has incurred
offsetting losses, reducing overall trading gains but not the Profit Shares paid
to the successful Advisor).
The events that primarily determine the Fund's profitability are those that
produce sustained and major price movements. The Advisors are generally more
likely to be able to profit from sustained trends, irrespective of their
direction, than from static markets. During the course of the Partnership's
performance to date, such events have ranged from Federal Reserve Board
reductions in interest rates, the apparent refusal of Iraq to arrive at a
settlement which would permit it to sell oil internationally, the inability of
the U.S. government to agree upon a federal budget and a combination of drought
and excessive rain negatively impacting U.S. agricultural harvesting as well as
planting. While these events are representative of the type of circumstances
which materially affect the Fund, the specific events which will do so in the
future cannot be predicted or identified.
Unlike many investment fields, there is no meaningful distinction in the
operation of the Fund between realized and unrealized profits. Most of the
contracts traded by the Fund are highly liquid and can be closed out at any
time. Furthermore, the profits on many open positions are effectively realized
on a daily basis through the payment of variation margin.
Except in unusual circumstances, factors such as regulatory approvals, cost
of goods sold, employee relations and the like which often materially affect an
operating business have virtually no impact on the Fund.
-17-
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Fund's costs are generally proportional to its asset base, and, within
broad ranges of capitalization, the Advisors' trading positions (and the
resulting gains and losses) should increase or decrease in approximate
proportion to the size of the Fund account managed by each of them,
respectively.
Inflation per se is not a significant factor in the Fund's profitability,
although inflationary cycles can give rise to the type of major price movements
that can have a materially favorable or adverse impact on the Fund's
performance.
In its trading to date, the Fund has from time to time had substantial
unrealized gains and losses on its open positions. These gains or losses are
received or paid on a periodic basis as part of the routine clearing cycle on
exchanges or in the over-the-counter markets (the only over-the-counter market
in which the Fund trades is the inter-bank forward market in currencies). In
highly unusual circumstances, market illiquidity could make it difficult for
certain Advisors to close out open positions, and any such illiquidity could
expose the Fund to significant losses, or cause it to be unable to recognize
unrealized gains. However, in general, there is no meaningful difference
between the Fund's realized and unrealized gains.
THE YEAR 2000 COMPUTER ISSUE
Merrill Lynch's modifications for Year 2000 systems compliance are
proceeding according to plan and are expected to be completed in early 1999.
Based on information currently available, the remaining expenditures are
estimated at $200 million and will cover hardware and software upgrades, systems
consulting, and computer maintenance. These expenditures are not expected to
have a material adverse impact on Merrill Lynch's financial position, results of
operations, or cash flows in future periods. However, the failure of Merrill
Lynch's securities exchanges, clearing organizations, vendors, clients, or
regulators to resolve their own processing issues in a timely manner could
result in a material financial risk. Merrill Lynch is devoting necessary
resources to address all Year 2000 issues in a timely manner.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
-----------------------------------------------------------
Not applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements required by this Item are included in Exhibit
13.01.
The supplementary financial information ("selected quarterly financial
data" and "information about oil and gas producing activities") specified by
Item 302 of Regulation S-K is not applicable.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
There were no changes in or disagreements with accountants on accounting or
financial disclosure.
-18-
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
(a,b) Identification of Directors and Executive Officers:
--------------------------------------------------
As a limited partnership, the Partnership itself has no officers or
directors and is managed by the General Partner. Trading decisions are made by
the Trading Advisors on behalf of the Partnership.
The directors and executive officers of MLIP and their business
backgrounds are as follows.
John R. Frawley, Jr. Chairman, Chief Executive Officer,
President and Director
Jeffrey F. Chandor Senior Vice President, Director of
Sales, Marketing and Research and
Director
Joseph H. Moglia Director
Allen N. Jones Director
Stephen G. Bodurtha Director
Michael A. Karmelin Chief Financial Officer, Vice
President and Treasurer
Steven B. Olgin Vice President, Secretary and Director
of Administration
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman, Chief
Executive Officer, President and a Director of MLIP and Co-Chairman of Merrill
Lynch Futures Inc. ("MLF"). He joined Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("MLPF&S") in 1966 and has served in various positions, including
Retail and Institutional Sales, Manager of New York Institutional Sales,
Director of Institutional Marketing, Senior Vice President of Merrill Lynch
Capital Markets and Director of International Institutional Sales. Mr. Frawley
holds a Bachelor of Science degree from Canisius College. Mr. Frawley served on
the CFTC's Regulatory Coordination Advisory Committee from its formation in 1990
through its dissolution in 1994. Mr. Frawley is currently serving his fourth
consecutive one-year term as Chairman of the Managed Funds Association
(formerly, the Managed Futures Association), a national trade association that
represents the managed futures, hedge funds and fund of funds industry. Mr.
Frawley is also a Director of that organization. Mr. Frawley currently serves
on a panel created by the Chicago Mercantile Exchange and The Board of Trade of
the City of Chicago to study cooperative efforts related to electronic trading,
common clearing and the issues regarding a potential merger.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice President,
the Director of Sales, Marketing and Research and a Director of MLIP. He joined
MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as
well as Managing Director of International Sales in the United States, and
Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts
degree from Trinity College, Hartford, Connecticut.
Joseph H. Moglia was born in 1949. He is a director of MLIP. In 1971, he
graduated from Fordham University with a Bachelor of Arts degree in Economics.
He later received his Master of Science degree from the
-19-
<PAGE>
University of Delaware. He taught at the high school and college level for
sixteen years. Mr. Moglia joined MLPF&S in 1984, and has served in a number of
senior roles, including Director of New York Fixed Income Institutional Sales,
Director of Global Fixed Institutional Sales, and Director of the Municipal
Division. He is currently Senior Vice President and Director of the Investment
Strategy and Product Group in Merrill Lynch Private Client, and Director of
Middle Markets.
Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP and, from
July 1995 until January 1998, Mr. Jones was Chairman of the Board of Directors
of MLIP. Mr. Jones graduated from the University of Arkansas with a Bachelor of
Science, Business Administration degree in 1964. Since June 1992, Mr. Jones has
held the position of Senior Vice President of MLPF&S. From June 1992 through
February 1994, Mr. Jones was the President and Chief Executive Officer of
Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board of
Directors of MLIG and its subsidiary companies. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of MLIP.
In 1980, Mr. Bodurtha graduated from Wesleyan University, Middletown,
Connecticut with a Bachelor of Arts degree in Government, magna cum laude. From
1980 to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill
Lynch. In 1985, he was awarded his Master of Business Administration degree
from Harvard University, where he also served as Associates Fellow (1985-1986).
From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice
President with Kidder, Peabody & Co., Incorporated where he worked in their
Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has
held the position of First Vice President since 1995. He has been the Director
in charge of MLPF&S's Structured Investments Group since 1995.
Michael A. Karmelin was born in 1947. Mr. Karmelin is Chief Financial
Officer, Vice President and Treasurer of MLIP. Prior to joining MLIP in April
1997, Mr. Karmelin was Chief Financial Officer of Merrill Lynch, Hubbard Inc.
("ML Hubbard"), a sponsor of real estate limited partnerships. Mr. Karmelin
joined ML Hubbard in January 1994 and was a Vice President of ML Hubbard. From
May 1994 to April 1997, he was the Chief Financial Officer of ML Hubbard,
responsible for its accounting, treasury and tax functions. Prior to joining ML
Hubbard, Mr. Karmelin held several senior financial positions with ML&Co and
MLPF&S from December 1985 to December 1993, including Vice President/Senior
Financial Officer Corporate Real Estate and Purchasing, Manager Commitment
Control/Capital Budgeting, and Senior Project Manager/Project Analysis. Prior to
joining ML&Co., Mr. Karmelin was employed at Avco Corporation for 17 years,
where he held a variety of financial positions. Mr. Karmelin holds a B.B.A.
degree in Accounting from Baruch College, C.U.N.Y. and a Master of Business
Administration degree in Corporate Strategy and Finance from New York
University. Mr. Karmelin passed the Certified Public Accounting examination in
1974 and is a member of the Treasury Management Association, the Institute of
Management Accountants and The Strategic Leadership Forum.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice President, Secretary
and the Director of Administration of MLIP. He joined MLIP in July 1994 and
became a Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was
an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduated
from The American University with a Bachelor of Science degree in Business
Administration and a Bachelor of Arts degree in Economics. In 1986, he received
his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is a member
of the Managed Funds Association's Government Relations Committee and has served
as an arbitrator for the NFA. Mr. Olgin is also a member of the Committee on
Futures Regulation of the Association of the Bar of the City of New York.
Messrs. Moglia and Bodurtha became Directors in January 1998.
As of December 31, 1997, the principals of MLIP had no investment in the
Fund, and MLIP's general partnership interest was valued at $936,678.
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, The
-20-
<PAGE>
Growth and Guarantee Fund L.P., ML Futures Investments L.P., ML Futures
Investments II L.P. , The S.E.C.T.O.R. Strategy Fund/(SM)/ L.P., The SECTOR
Strategy Fund/(SM)/ II L.P., The SECTOR Strategy Fund/(SM)/ V L.P., The SECTOR
Strategy Fund/(SM)/ VI L.P., ML Global Horizons L.P., ML Principal Protection
L.P. (formerly, ML Principal Protection Plus L.P.), ML JWH Strategic Allocation
Fund L.P. and the Fund. Because MLIP serves as the sole general partner of each
of these funds, the officers and directors of MLIP effectively manage them as
officers and directors of such funds.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
None.
(d) Family Relationships:
--------------------
None.
(e) Business Experience:
-------------------
See Item 10(a)(b) above.
(f) Involvement in Certain Legal Proceedings:
----------------------------------------
None.
(g) Promoters and Control Persons:
-----------------------------
Not applicable
ITEM 11: EXECUTIVE COMPENSATION
----------------------
The 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 and Administrative Fees to the General
Partner. The General Partner or its affiliates also may receive certain
economic benefits from holding the Fund's dollar Available Assets in offset
accounts, as described in Item 1(c) above. The directors and officers receive
no "other compensation" from the Partnership, and the directors receive no
compensation for serving as directors of the General Partner. There are no
compensation plans or arrangements relating to a change in control of either the
Partnership or the General Partner.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1997, no person or "group" is known to be or have
been the beneficial owner of more than five percent of the Units. All of the
Partnership's units of general partnership interest are owned by the General
Partner.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1997, each Trading Advisor owned 1,015 Series A
Units, 1,000 Series B Units and 1,500 Series C Units and the General Partner
owned 780 Series A Units, 1,976 Series B Units and 1,439 Series C Units (unit-
equivalent general partnership interests) which was less than 4%, 3% and 4% of
the total Units outstanding, respectively.
-21-
<PAGE>
(c) Changes in Control:
------------------
None.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with Management and Others:
---------------------------------------
The General Partner acts as administrative and trading manager of the
Fund. The General Partner provides all normal ongoing administrative
functions of the Partnership, such as accounting, legal and printing
services. The General Partner, which receives the Administrative
Fees, pays all expenses relating to such services.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as the principal
commodity broker for the Partnership.
In 1997 the Partnership paid: (i) Brokerage Commissions of $0 to the
Commodity Broker, which included $0 in consulting fees paid by the Commodity
Broker to the Trading Advisors; and (ii) Administrative Fees of $0 to MLIP.
Through its investments in Trading LLCs, the following fees were paid: (i)
Brokerage Commissions of $6,195,037 to the Commodity Broker, which included
$1,886,277 in consulting fees paid by the Commodity Broker to the Trading
Advisors; and (ii) Administrative Fees of $159,843 to MLIP. In addition, MLIP
and its affiliates may have derived certain economic benefits from maintaining a
portion of the Fund's assets in "offset accounts," as described under Item 1(c),
"Narrative Description of Business -- Use of Proceeds and Interest Income --
Interest Earned on the Fund's U.S. Dollar Available Assets" and Item 11,
"Executive Compensation" herein.
See Item 1(c), "Narrative Description of Business -- Charges" and "--
Description of Current Changes" for a discussion of other business dealings
between MLIP affiliates and the Partnership.
(c) Indebtedness of Management:
--------------------------
The Partnership is prohibited from making any loans, to
management or otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
-22-
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a)1. Financial Statements: Page
-------------------- ----
Independent Auditors' Report 1
Statements of Financial Condition as of
December 31, 1997 and 1996 2
For the years ended December 31, 1997, 1996 and 1995:
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-14
(a)2. Financial Statement Schedules:
-----------------------------
Financial statement schedules not included in this Form 10-K have been
omitted for the reason that they are not required or are not applicable or that
equivalent information has been included in the financial statements or notes
thereto.
(a)3. Exhibits:
--------
The following exhibits are incorporated by reference or are filed
herewith to this Annual Report on Form 10-K:
Designation Description
- ----------- -----------
3.01(ii) Amended and Restated Limited Partnership Agreement of the
Partnership.
Exhibit 3.01(ii): Is incorporated herein by reference from Exhibit 3.01(ii)
- ----------------
contained in Amendment No. 1 (as Exhibit A) to the
Registration Statement (File No. 33-41373) filed on
August 20, 1991, on Form S-1 under the Securities Act of
1933 (the "Registrant's Registration Statement").
3.02(c) Amended and Restated Certificate of Limited Partnership
of the Partnership, dated July 27, 1995.
Exhibit 3.02(c): Is incorporated by reference from Exhibit 3.02(c)
- ---------------
contained in the Registrant's report on Form 10-Q for the
Quarter Ended June 30, 1995.
10.01(o) Form of Advisory Agreement between the Partnership,
Merrill Lynch Investment Partners Inc., Merrill Lynch
Futures Inc. and each of John W. Henry & Company, Inc.
and Millburn Ridgefield Corporation.
Exhibit 10.01(o): Is incorporated by reference from Exhibit 10.01(o)
- ---------------- contained in the Registrant's report on Form 10-Q for the
Quarter Ended June 30, 1995.
10.02(a) Form of Consulting Agreement between each trading advisor,
the Partnership and Merrill Lynch Futures Inc.
-23-
<PAGE>
Exhibit 10.02(a): Is incorporated herein by reference from Exhibit 10.02(a)
- ---------------- contained in Amendment No. 1 to the Registration Statement
(File No. 33-30096) dated as of September 21, 1989, on Form
S-1 under the Securities Act of 1933.
10.03 Form of Customer Agreement between the Partnership and
Merrill Lynch Futures Inc.
Exhibit 10.03: Is incorporated herein by reference from Exhibit 10.03
- ------------- contained in the Registrant's Registration Statement.
10.06 Foreign Exchange Desk Service Agreement, dated July 1, 1993
among Merrill Lynch International Bank, Merrill Lynch
Investment Partners Inc., Merrill Lynch Futures Inc. and
the Fund.
Exhibit 10.06: Is incorporated herein by reference from Exhibit 10.06
- -------------- contained in the Registrant's report on Form 10-K for the
year ended December 31, 1996.
10.07(a) Form of Advisory and Consulting Agreement Amendment among
Merrill Lynch Investment Partners Inc., each Advisor, the
Fund and Merrill Lynch Futures.
Exhibit 10.07(a): Is incorporated herein by reference from Exhibit 10.07(a)
- ---------------- contained in the Registrant's report on Form 10-K for the
year ended December 31, 1996.
10.07(b) Form of Amendment to the Customer Agreement among the
Partnership and MLF.
Exhibit 10.07(b) Is incorporated herein by reference from Exhibit 10.07(b)
- ---------------- contained in the Registrant's report on Form 10-K for the
year ended December 31, 1996.
13.01 1997 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
- --------------
13.01(a) 1997 Annual Reports and Independent Auditors' Report
for the following Trading Limited Liability Companies
sponsored by Merrill Lynch Investment Partners' Inc.:
ML Millburn Global L.L.C.
ML Sjo Prospect L.L.C.
ML Chesapeake Diversified L.L.C.
ML JWH Financial and Metals Portfolio L.L.C.
Exhibits 13.01(a) Is incorporated herein by reference from Form 10-K
(fiscal year ended December 31, 1997) Commission File
number 0-18702 for The S.E.C.T.O.R. Fund (SM) L.P.
(Registration Statement File No. 33-34432 filed on
May 25, 1990 under the Securities Act, of 1933).
28.01 Prospectus of the Partnership dated September 29, 1989.
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, as amended, on October 10, 1989.
28.02 Prospectus of the Partnership dated December 14, 1990.
Exhibit 28.02: Is incorporated by reference as filed with the Securities
- ------------- and Exchange Commission pursuant to Rule 424 under the
Securities Act of 1933, as amended, on December 20, 1990.
28.03 Prospectus of the Partnership dated September 13, 1991.
Exhibit 28.03: Is incorporated by reference as filed with the Securities
- -------------- and Exchange Commission pursuant to Rule 424 under the
Securities Act of 1933, Registration Statement on
September 23, 1991.
(b) Report on Form 8-K:
No reports on Form 8-K were filed during the fourth quarter of 1997.
-24-
<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.
JOHN W. HENRY & CO./MILLBURN L.P.
BY: MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
By: /s/John R. Frawley, Jr.
John R. Frawley, Jr.
Chairman, Chief Executive Officer, President
and Director (Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed on March 25, 1998 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director March 25, 1998
- ------------------------- (Principal Executive Officer)
John R. Frawley, Jr.
/s/Michael A. Karmelin Vice President, Chief Financial Officer, and Treasurer March 25, 1998
- ------------------------- (Principal Financial and Accounting Officer)
Michael A. Karmelin
/s/Jeffrey F. Chandor Senior Vice President, Director of Sales, March 25, 1998
- ------------------------- Marketing and Research, and Director
Jeffrey F. Chandor
/s/Allen N. Jones Director March 25, 1998
- -------------------------
Allen N. Jones
</TABLE>
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
<TABLE>
<S> <C> <C>
MERRILL LYNCH INVESTMENT General Partner of Registrant March 25, 1998
PARTNERS INC.
</TABLE>
By: /s/John R. Frawley, Jr.
- ---------------------------
John R. Frawley, Jr.
-25-
<PAGE>
JOHN W. HENRY & CO./MILLBURN L.P.
1997 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1997 Annual Report and Independent Auditors' Report
Exhibit 13.01(a) 1997 Annual Reports and Independent Auditors' Report
for the following Trading Limited Liability Companies
sponsored by Merrill Lynch Investment Partners' Inc.:
ML Millburn Global L.L.C.
ML Sjo Prospect L.L.C.
ML Chesapeake Diversified L.L.C.
ML JWH Financial and Metals Portfolio L.L.C.
-26-
<PAGE>
JOHN W. HENRY &
CO./MILLBURN L.P.
(A DELAWARE LIMITED PARTNERSHIP)
Financial Statements for the years ended
December 31, 1997, 1996 and 1995
and Independent Auditors' Report
<PAGE>
To: The Limited Partners of
JOHN W. HENRY & CO./MILLBURN L.P.-
SERIES A
John W. Henry & Co./Millburn L.P. - Series A (the "Fund" or "Partnership") ended
its eighth fiscal year of trading on December 31, 1997 with a Net Asset Value
("NAV") per Unit of $284.11, representing an increase of 12.50% from the
December 31, 1996 NAV per Unit of $252.54. During 1997, all sectors traded by
the Fund were profitable.
Trend reversals and extreme market volatility, affected by such factors as the
Asian flu and El Nino, were characteristic of most of 1997. However, the year
proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
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. However, the dollar underwent two
significant corrections during the year. The first correction occurred 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. From August through mid-November, the dollar corrected against the
Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By
mid-December the dollar had bounced back to new highs against the yen and was
rallying against the mark.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. By the middle of the year,
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. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting. From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility. Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period. We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.
<PAGE>
Sincerely,
John R. Frawley, Jr.
President
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>
To: The Limited Partners of
JOHN W. HENRY & CO./MILLBURN L.P.-
SERIES B
John W. Henry & Co./Millburn L.P. - Series B (the "Fund" or "Partnership") ended
its seventh fiscal year of trading on December 31, 1997 with a Net Asset Value
("NAV") per Unit of $230.87, representing an increase of 12.47% from the
December 31, 1996 NAV per Unit of $205.27. During 1997, all sectors traded by
the Fund were profitable.
Trend reversals and extreme market volatility, affected by such factors as the
Asian flu and El Nio, were characteristic of most of 1997. However, the year
proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
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. However, the dollar underwent two
significant corrections during the year. The first correction occurred 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. From August through mid-November, the dollar corrected against the
Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By
mid-December the dollar had bounced back to new highs against the yen and was
rallying against the mark.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. By the middle of the year,
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. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting. From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility. Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period. We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.
<PAGE>
Sincerely,
John R. Frawley, Jr.
President
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>
To: The Limited Partners of
JOHN W. HENRY & CO./MILLBURN L.P.-
SERIES C
John W. Henry & Co./Millburn L.P. - Series C (the "Fund" or "Partnership") ended
its sixth fiscal year of trading on December 31, 1997 with a Net Asset Value
("NAV") per Unit of $179.92, representing an increase of 12.47% from the
December 31, 1996 NAV per Unit of $159.97. During 1997, all sectors traded by
the Fund were profitable.
Trend reversals and extreme market volatility, affected by such factors as the
Asian flu and El Nio, were characteristic of most of 1997. However, the year
proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
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. However, the dollar underwent two
significant corrections during the year. The first correction occurred 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. From August through mid-November, the dollar corrected against the
Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By
mid-December the dollar had bounced back to new highs against the yen and was
rallying against the mark.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. By the middle of the year,
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. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting. From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility. Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period. We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.
<PAGE>
Sincerely,
John R. Frawley, Jr.
President
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>
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1997, 1996 AND 1995:
Statements of Financial Condition 2
Statements of Income 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
John W. Henry & Co./Millburn L.P.:
We have audited the accompanying statements of financial condition of John W.
Henry & Co./Millburn L.P. (a Delaware limited partnership; the "Partnership") as
of December 31, 1997 and 1996, and the related statements of income and changes
in partners' capital for each of the three years in the period ended December
31, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of John W. Henry & Co./Millburn L.P. as of
December 31, 1997 and 1996, and the results of its operations for the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
February 6, 1998
New York, New York
<PAGE>
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------------- --------------------
ASSETS
<S> <C> <C>
Investments (Note 6) $ 63,024,164 $ 60,834,087
Receivable from investments (Note 6) 514,158 779,075
---------------- -----------------
TOTAL $ 63,538,322 $ 61,613,162
================ =================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 514,158 $ 778,385
Profit Shares (Note 3) - 689
---------------- -----------------
Total liabilities 514,158 779,074
---------------- -----------------
PARTNERS' CAPITAL:
General Partner:
(780 and 780 Series A Units outstanding) 221,605 196,983
(1,976 and 1,976 Series B Units outstanding) 456,174 405,594
(1,439 and 1,439 Series C Units outstanding) 258,899 230,192
Limited Partners:
(50,992 and 55,596 Series A Units outstanding) 14,487,473 14,040,479
(135,244 and 146,552 Series B Units outstanding) 31,223,304 30,082,484
(91,020 and 99,256 Series C Units outstanding) 16,376,709 15,878,356
---------------- -----------------
Total partners' capital 63,024,164 60,834,088
---------------- -----------------
TOTAL $ 63,538,322 $ 61,613,162
================ =================
NET ASSET VALUE PER UNIT
Series A $ 284.11 $ 252.54
================ =================
Series B $ 230.87 $ 205.27
================ =================
Series C $ 179.92 $ 159.97
================ =================
</TABLE>
See notes to financial statements.
-2-
<PAGE>
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996 1995
------------- -------------- -------------
<S> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ - $ 8,749,410 $ 23,852,578
Change in unrealized - (1,760,218) (651,118)
------------- -------------- -------------
Total trading results - 6,989,192 23,201,460
Interest income (Note 2) - 1,842,887 2,863,384
------------- -------------- -------------
Total revenues - 8,832,079 26,064,844
------------- -------------- -------------
EXPENSES:
Profit Shares (Note 3) - 97,468 729,138
Brokerage commissions (Note 2) - 5,406,851 7,412,789
Administrative fees (Note 2) - 115,039 -
------------- -------------- -------------
Total expenses - 5,619,358 8,141,927
------------- -------------- -------------
INCOME FROM INVESTMENTS (Note 6) 7,357,688 7,171,609 -
------------- -------------- -------------
NET INCOME $ 7,357,688 $ 10,384,330 $ 17,922,917
============= ============== =============
NET INCOME PER UNIT:
Weighted average number of Units
outstanding (Note 5) 294,640 327,875 387,956
============= ============== =============
Net income per weighted average
General Partner and Limited
Partner Unit $ 24.97 $ 31.67 $ 46.20
============= ============== =============
</TABLE>
See notes to financial statements.
-3-
<PAGE>
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Series Series Series Limited Partners
----------------------------------------------------
A B C Series Series Series
Units Units Units A B C
------------- ------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 74,610 213,110 153,995 $ 11,495,848 $ 26,740,233 $ 15,045,473
Redemptions (11,037) (44,773) (36,198) (2,147,231) (7,077,021) (4,508,984)
Net income - - - 3,856,407 8,787,685 5,034,912
------------- ------- ------- ------------ ------------- -------------
PARTNERS' CAPITAL,
DECEMBER 31, 1995 63,573 168,337 117,797 13,205,024 28,450,897 15,571,401
Redemptions (7,197) (19,809) (17,102) (1,650,602) (3,458,479) (2,362,995)
Net income - - - 2,486,057 5,090,066 2,669,950
------------- ------- ------- ------------ ------------- -------------
PARTNERS' CAPITAL,
DECEMBER 31, 1996 56,376 148,528 100,695 14,040,479 30,082,484 15,878,356
Redemptions (4,604) (11,308) (8,236) (1,255,814) (2,498,029) (1,413,769)
Net income - - - 1,702,808 3,638,849 1,912,122
------------- ------- ------- ------------ ------------- -------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 51,772 137,220 92,459 $ 14,487,473 $ 31,223,304 $ 16,376,709
============= ======= ======= ============ ============= =============
<CAPTION>
General Partner
-------------------------------------
Series Series Series
A B C Total
--------- --------- --------- ------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 $135,628 $ 359,351 $210,911 $ 53,987,444
Redemptions (18,791) (144,587) (91,913) (13,988,527)
Net income 47,191 123,156 73,566 17,922,917
--------- --------- --------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1995 164,028 337,920 192,564 57,921,834
Redemptions - - - (7,472,076)
Net income 32,955 67,674 37,628 10,384,330
--------- --------- --------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1996 196,983 405,594 230,192 60,834,088
Redemptions - - - (5,167,612)
Net income 24,622 50,580 28,707 7,357,688
--------- --------- --------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 $221,605 $ 456,174 $258,899 $ 63,024,164
========= ========= ========= ============
</TABLE>
See notes to financial statements.
-4-
<PAGE>
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
John W. Henry & Co./Millburn L.P. (the "Partnership") was organized under the
Delaware Revised Uniform Limited Partnership Act on August 29, 1989. The
Partnership raised $18,182,000 in its initial offering of Units of limited
partnership interest ("Series A Units") and commenced trading activities on
January 5, 1990. The Partnership raised an additional $50,636,000 in a second
offering of Units of limited partnership interest ("Series B Units") and
commenced trading activities of the Series B Units on January 28, 1991. The
Partnership raised an additional $40,000,000 in a third offering of Units of
limited partnership interest ("Series C Units") and commenced trading
activities of the Series C Units on January 2, 1992. (Series A, B and C units
are hereinafter collectively referred to as "Units.") The Partnership engages
in the speculative trading of futures, options on futures and forward
contracts on a wide range of commodities. Merrill Lynch Investment Partners
Inc. (formerly, ML Futures Investment Partners Inc.) ("MLIP" or the "General
Partner"), a wholly-owned subsidiary of Merrill Lynch Group Inc., which, in
turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch"), is the general partner of the Partnership, and Merrill Lynch Futures
Inc. ("MLF"), also an affiliate of Merrill Lynch, is its commodity broker.
MLIP has agreed to maintain a general partner's interest of at least 1% of
total capital of each Series of Units. MLIP and each Limited Partner share in
the profits and losses of each Series in proportion to their respective
interests in it.
John W. Henry & Company, Inc. and Millburn Ridgefield Corporation (each an
"Advisor", together, "Advisors") have been the Partnership's only trading
advisors since inception. Each Advisor was allocated 50% of the total assets
of each Series as of the date such Series began trading. Subsequently, these
allocations have varied over time. MLIP may, in its discretion, reallocate
assets as of any month-end. As of December 1, 1996, the Partnership placed
all of its assets under the management of the Advisors not through managed
accounts but rather through investing in private limited liability companies
("Trading LLCs" or "LLCs"), as defined in Note 6. Certain of the following
notes to financial statements are directly related to assets managed by
Advisors. The placement of assets into LLCs did not change the operation nor
fee structure of the Partnership, therefore, the following notes relate to
the operation of the Partnership through its investment in the LLCs. Also,
the administrative authority over the Partnership remains with MLIP.
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 as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
-5-
<PAGE>
Revenue Recognition
-------------------
Commodity futures, options, and forward contract transactions are recorded on
the trade date, and open contracts are reflected in net unrealized profit on
open contracts in the Statements of Financial Condition at the difference
between the original contract value and the fair value. The change in net
unrealized profit on open contracts from one period to the next is reflected
in change in unrealized in the Statements of Income. Fair value is based on
quoted market prices on the exchange or market on which the contract is
traded. (There were no open contracts as of December 31, 1997 and 1996).
Operating Expenses
------------------
The General Partner pays all routine operating expenses, including legal,
accounting, printing, postage and similar administrative expenses.
The General Partner receives an administrative fee as well as a portion of
the brokerage commissions paid to MLF by the Partnership as reimbursement for
the foregoing expenses.
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each Partner is individually responsible for such Partner's
respective share of each Series' income and expenses as reported for income
tax purposes.
Redemptions
-----------
A Limited Partner may require the Partnership to redeem some or all of such
Partner's Units at Net Asset Value as of the close of business on the last
business day of any month upon ten calendar days' notice.
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2016 or at an earlier date if
certain conditions occur, as well as under certain other circumstances, as
set forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
The Partnership's U.S. dollar assets were held at MLF in cash. On the cash
held at MLF, the Partnership received interest from Merrill Lynch at the
prevailing 91-day U.S. Treasury bill rate. Merrill Lynch may derive certain
economic benefits, in excess of the interest which Merrill Lynch pays to the
Partnership, from possession of such cash.
Merrill Lynch credited the Partnership with interest on the Partnership's
U.S. dollar-denominated assets based on local short-term rates. Merrill Lynch
charges the Partnership Merrill Lynch's cost of financing realized and
unrealized losses on the Partnership's non-U.S. dollar-denominated positions.
The General Partner has determined that there may have been a miscalculation
in the interest credited to the Partnership for a period prior to November
1996 (such period may extend prior to that covered by these financial
statements). Accordingly, the General Partner credited current and former
investors who maintained a Merrill Lynch customer account in December 1997
with interest which was compounded. Former investors who do not maintain a
Merrill Lynch customer account will be credited as their response forms are
processed. The total amount of the adjustment is approximately $779,000 for
Series A Units, $1,739,000 for Series B Units and $773,000 for Series C
Units. Since this amount was paid directly to investors by the General
Partner, it is not reflected in these financial statements. The General
Partner has determined that interest has been calculated appropriately since
November 1996.
-6-
<PAGE>
The Partnership paid brokerage commissions to MLF at a flat monthly rate of
1% (a 12% annual rate) of the Partnership's month-end assets. Effective
January 1, 1996, the percentage was reduced to .979 of 1% (an 11.75% annual
rate) of the Partnership's month-end assets and the Partnership began to pay
MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of the
Partnership's month-end assets (this recharacterization had no economic
effect on the Partnership). Effective February 1, 1997, the Partnership's
brokerage commission percentage was reduced to .792 of 1% (a 9.50% annual
rate) of the Partnership's month-end assets. Month-end assets are not
reduced, for purposes of calculating brokerage commissions and administrative
fees, by any accrued brokerage commissions, administrative fees, Profit
Shares or other fees or charges.
MLIP estimates that the round-turn equivalent commission rate charged to the
Partnership during the years ended 1996 and 1995, was approximately $143 and
$207, respectively (not including, in calculating round-turn equivalents,
forward contracts on a future-equivalent basis).
MLF paid the Advisors annual consulting fees equal to 4% of the average
month-end assets.
The Partnership trades forward contracts through a foreign exchange service
desk (the "F/X Desk") established by MLIP. The F/X Desk gives the Partnership
access to counterparties in addition to (but also including) Merrill Lynch
International Bank ("MLIB"). MLIP or another Merrill Lynch entity charges a
service fee equal to, at current exchange rates, approximately $5.00 to
$12.50 on each purchase or sale (not round-turn) of a futures contract-
equivalent face amount of a given currency traded in the forward markets. No
service fees are charged on trades awarded to MLIB (which receives bid-ask
spreads on such trades).
In its exchange of futures for physical ("EFP") trading with Merrill Lynch,
the Partnership acquires spot or forward (collectively, "cash") currency
positions through the F/X Desk in the same manner and on the same terms as in
the case of the Partnership's other F/X Desk trading. When the Partnership
exchanges these positions for futures, there is a differential between the
prices of the two positions. This differential reflects, in part, the
different settlement dates of the cash and the futures contracts and
prevailing interest rates, but also includes a pricing spread in favor of
MLIB or another Merrill Lynch entity. The Advisors, to date, have made little
use of EFPs.
The Partnership's F/X Desk service fee and EFP differential costs have, to
date totaled no more than .25 of 1% per annum of the Partnership's average
month-end assets.
3. AGREEMENTS
The Partnership entered into Advisory Agreements. The Advisory Agreements
with each Trading Advisor for each series of Units are largely identical.
In the case of Trading LLCs, as defined in Note 6, the Trading LLCs entered
the Advisory Agreements with the Advisors.
Fifteen percent of any New Trading Profit, as defined, either as of the end
of each calendar quarter or year, was paid to each Advisor based on the
performance of the Partnership account managed by such Advisor, irrespective
of the overall performance of the Partnership. Profit Shares are also paid
out in respect of Units redeemed as of the end of interim months, to the
extent of 15% of any New Trading Profits attributable to such Units.
-7-
<PAGE>
4. INCOME PER SERIES
The profit and loss of the Series A, Series B and Series C Units for the
years ended December 31, 1997, 1996 and 1995 is as follows:
<TABLE>
<CAPTION>
Series A Series B
--------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------ ------------ ----------- ------------ ------------
<C> <C> <C> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ - $ 2,029,650 $5,237,341 $ - $4,349,607 $11,857,130
Change in unrealized - (382,321) (147,478) - (877,666) (317,074)
------------ ------------ ------------ ----------- ------------ ------------
Total trading results - 1,647,329 5,089,863 - 3,471,941 11,540,056
Interest income (Note 2) - 417,739 636,781 - 920,755 1,431,186
------------ ------------ ------------ ----------- ------------ ------------
Total revenues - 2,065,068 5,726,644 - 4,392,696 12,971,242
------------ ------------ ------------ ----------- ------------ ------------
EXPENSES:
Brokerage commissions (Note 2) - 1,239,114 1,654,078 - 2,695,105 3,698,343
Allocation of new profit
share to trading advisors (Note 3) - 26,690 168,968 - 44,910 362,058
Administrative fees (Note 2) - 26,364 - - 57,343 -
------------ ------------ ------------ ----------- ------------ ------------
Total expenses - 1,292,168 1,823,046 - 2,797,358 4,060,401
------------ ------------ ------------ ----------- ------------ ------------
Income from investments (Note 6) 1,727,430 1,746,113 - 3,689,429 3,562,401 -
------------ ------------ ------------ ----------- ------------ ------------
NET INCOME $ 1,727,430 $ 2,519,013 $ 3,903,598 $3,689,429 $5,157,739 $ 8,910,841
============= ============ ============ =========== ============ ============
NET INCOME PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number
of units outstanding (Note 5) 54,036 59,766 67,833 143,414 158,197 186,768
------------ ------------ ------------ ----------- ------------ ------------
Net income per weighted
Average General Partner and
Limited Partner Unit $ 31.97 $ 42.15 $ 57.55 $ 25.73 $32.60 $47.71
------------ ------------ ------------ ----------- ------------ ------------
<CAPTION>
Series C
----------------------------------------------
1997 1996 1995
------------- --------------- --------------
<S> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ - $ 2,339,762 $ 6,758,107
Change in unrealized - (469,840) (186,566)
-------------- --------------- --------------
Total trading results - 1,869,922 6,571,541
Interest income (Note 2) - 504,393 795,417
-------------- --------------- --------------
Total revenues - 2,374,315 7,366,958
-------------- --------------- --------------
EXPENSES:
Brokerage commissions (Note 2) - 1,472,632 2,060,368
Allocation of new profit
share to trading advisors (Note 3) - 25,868 198,112
Administrative fees (Note 2) - 31,332 -
-------------- --------------- --------------
Total expenses - 1,529,832 2,258,480
-------------- --------------- --------------
Income from investments (Note 6) 1,940,829 1,863,095 -
-------------- --------------- --------------
NET INCOME $ 1,940,829 $ 2,707,578 $ 5,108,478
============== =============== ==============
NET INCOME PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number
of units outstanding (Note 5) 97,190 109,912 133,357
-------------- --------------- --------------
Net income per weighted
Average General Partner and
Limited Partner Unit $19.97 $24.63 $38.31
-------------- --------------- --------------
</TABLE>
-8-
<PAGE>
5. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes of
disclosing net income per weighted average Unit. The weighted average number
of Units outstanding at December 31, 1997, 1996 and 1995 equals the Units
outstanding as of such date, adjusted proportionately for Units redeemed
based on the respective length of time each was outstanding during the
preceding period.
6. INVESTMENTS
The investments are reflected in the financial statements at fair value based
upon the Partnership's interest in each Trading LLC. Fair value is equal to
the market value of the net assets of the Trading LLCs. The resulting
difference between cost and fair value is reflected on the Statement of
Income as income or loss from investments.
At December 31, 1997 and 1996, the Partnership had investments in the ML JWH
Financial and Metals Portfolio L.L.C. ("JWH LLC") and ML Millburn Global
L.L.C. ("Millburn LLC") as follows:
1997 1996
---------------- ----------------
JWH LLC $ 31,979,914 $ 30,417,044
Millburn LLC 31,044,250 30,417,043
---------------- ----------------
Total $ 63,024,164 $ 60,834,087
================ ================
-9-
<PAGE>
Total revenues and fees with respect to such investments are set forth as
follows:
<TABLE>
<CAPTION>
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1997 Revenues Commissions Fees Shares Investments
Series A Units -------------- -------------- --------------- -------------- ----------------
- ----------------------
<S> <C> <C> <C> <C> <C> <C>
JWH LLC $ 1,759,089 $ 690,201 $ 17,813 $ 103,624 $ 947,451
Millburn LLC 1,758,987 751,834 19,390 207,784 779,979
-------------- -------------- ------------ -------------- ----------------
Total $ 3,518,076 $1,442,035 $ 37,203 $ 311,408 $1,727,430
============== ============== ============ ============== ================
Series B Units
- ----------------------
JWH LLC $ 3,771,359 $1,484,456 $ 38,315 $ 221,754 $2,026,834
Millburn LLC 3,773,695 1,625,922 41,942 443,236 1,662,595
-------------- -------------- ------------ -------------- ----------------
Total $ 7,545,054 $3,110,378 $ 80,257 $ 664,990 $3,689,429
============== ============== ============ ============== ================
Series C Units
- ----------------------
JWH LLC $ 1,981,710 $ 783,770 $ 20,229 $ 116,818 $1,060,893
Millburn LLC 1,995,533 858,854 22,154 234,589 879,936
-------------- -------------- ------------ -------------- ----------------
Total $ 3,977,243 $1,642,624 $ 42,383 $ 351,407 $1,940,829
============== ============== ============ ============== ================
Total - All Series
- ----------------------
JWH LLC $ 7,512,158 $2,958,427 $ 76,357 $ 442,196 $4,035,178
Millburn LLC $ 7,528,215 $3,236,610 $ 83,486 $ 885,609 3,322,510
-------------- -------------- ------------ -------------- ----------------
Total $15,040,373 $6,195,037 $159,843 $1,327,805 $7,357,688
============== ============== ============ ============== ================
</TABLE>
-10-
<PAGE>
<TABLE>
<CAPTION>
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1997 Revenues Commissions Fees Shares Investments
Series A Units -------------- -------------- --------------- -------------- ----------------
- ----------------------
<S> <C> <C> <C> <C> <C>
JWH LLC $2,234,606 $ 269,408 $ 5,732 $ 244,358 $1,715,108
Millburn LLC 91,169 56,443 1,201 2,520 31,005
-------------- -------------- ------------- -------------- ---------------
Total $2,325,775 $ 325,851 $ 6,933 $ 246,878 $1,746,113
============== ============== ============= ============== ===============
Series B Units
- ----------------------
JWH LLC $4,566,555 $ 550,526 $11,714 $ 509,549 $3,494,766
Millburn LLC 198,835 123,083 2,619 5,498 67,635
-------------- -------------- ------------- -------------- ---------------
Total $4,765,390 $ 673,609 $14,333 $ 515,047 $3,562,401
============== ============== ============= ============== ===============
Series C Units
- ----------------------
JWH LLC $2,388,921 $ 286,556 $ 6,097 $ 270,114 $1,826,154
Millburn LLC 108,581 67,206 1,430 3,004 36,941
-------------- -------------- ------------- -------------- ---------------
Total $2,497,502 $ 353,762 $ 7,527 $ 273,118 $1,863,095
============== ============== ============= ============== ===============
Total - All Series
- ----------------------
JWH LLC $9,190,082 $1,106,490 $23,543 $1,024,021 $7,036,028
Millburn LLC 398,585 246,732 5,250 11,022 135,581
-------------- -------------- ------------- -------------- ---------------
Total $9,588,667 $1,353,222 $28,793 $1,035,043 $7,171,609
============== ============== ============= ============== ===============
</TABLE>
-11-
<PAGE>
Condensed statements of financial condition as of December 31, 1997 and 1996
and statements of income for the years ended December 31, 1997 and 1996 for
JWH LLC and Millburn LLC are set forth as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- ----------------------------------------
JWH Millburn JWH Millburn
LLC LLC LLC LLC
------------------ ---------------- ----------------- -------------------
<S> <C> <C> <C> <C>
Assets $ 62,481,438 $ 35,584,936 $ 80,825,364 $ 28,520,827
=================== ================ ================= ===================
Liabilities $ 1,122,533 $ 1,454,659 $ 19,848,210 $ 796,001
Members' Capital 61,358,905 34,130,277 60,977,154 27,724,826
------------------- ---------------- ----------------- -------------------
Total $ 62,481,438 $ 35,584,936 $ 80,825,364 $ 28,520,827
=================== ================ ================= ===================
Revenues $ 15,279,401 $ 8,303,430 $ 19,365,949 $ 450,619
Expenses 6,714,041 4,600,706 4,426,261 291,370
------------------- ---------------- ----------------- -------------------
Net Income $ 8,565,360 $ 3,702,724 $ 14,939,688 $ 159,249
=================== ================ ================= ===================
</TABLE>
7. FAIR VALUE AND OFF-BALANCE SHEET RISK
As of December 1, 1996, the Partnership invested all of its assets in Trading
LLCs. The Partnership was, thus, invested indirectly in the trading of
derivative instruments, but did not itself hold any derivative positions.
Consequently. No such positions subsequent to November 30, 1996 are
reflected in these financial statements.
For the period from January 1, 1996 to November 30, 1996 and the year ended
December 31, 1995, the Partnership traded futures, options on futures and
forward contracts in interest rates, stock indices, currencies and metals.
The Partnership's total trading results by reporting category were as
follows:
Total Trading Results
-----------------------------------
1996 1995
--------------- --------------
Interest
Rates $ 5,080,346 $ 11,532,511
Stock
Indices (992,453) 1,146,428
Currencies 2,659,762 12,696,529
Metals 241,537 (2,174,008)
--------------- --------------
$ 6,989,192 $ 23,201,460
=============== ==============
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or market values of the financial instruments or
commodities underlying such derivative instruments frequently result in
changes in the Partnership's unrealized profit on such derivative instruments
as would have been reflected in the Statements of Financial Condition had the
Partnership not invested all of its assets in Trading LLCs. The
Partnership's exposure to market risk is influenced by a number of factors,
including the relationships
-12-
<PAGE>
among the derivative instruments held by the Partnership as well as the
volatility and liquidity of the markets in which such derivative instruments
are traded.
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing
so. The procedures focus primarily on monitoring the trading of the two
Advisors, calculating the Net Asset Value of the Advisors' respective
Partnership accounts as of the close of business on each day and reviewing
outstanding positions for over-concentrations. While the General Partner
does not itself intervene in the markets to hedge or diversify the
Partnership's market exposure, the General Partner may urge either or both of
the Advisors to reallocate positions, or itself reallocate Partnership assets
among the Advisors (although typically only as of the end of a month) in an
attempt to avoid over-concentrations. However, such interventions are
unusual. Except in cases in which it appears that an Advisor has begun to
deviate from past practice or trading policies or to be trading erratically,
the General Partner's basic risk control procedures consist simply of the
ongoing process of Advisor monitoring, with the market risk controls being
applied by the Advisors themselves.
The average fair values, based on contract/notional values, of derivative
instrument positions which were open as of the end of each calendar month
during the period from January 1, 1996 to November 30, 1996 were as follows:
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
-------------------- --------------------
Interest
Rates $ 237,102,957 $ 183,615,337
Stock
Indices 13,728,737 6,759,498
Currencies 296,018,497 334,030,991
Metals 18,491,709 29,682,273
-------------------- --------------------
$ 565,341,900 $ 554,088,099
==================== ====================
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and to sell the same derivative instrument
on the same date in the future. These commitments are economically offsetting
but are not, as a technical matter, offset in the forward market until the
settlement date.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, 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. 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 also require margin in the over-the-counter
markets.
The fair value amounts in the above tables represent the extent of the
Partnership's market exposure in the particular class of derivative instrument
listed, but not the credit risk associated with counterparty nonperformance.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit, if any, included on the
Statements of Financial Condition. The Partnership also
-13-
<PAGE>
has credit risk because the sole counterparty or broker with respect to most
of the Partnership's assets is MLF.
The Partnership controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
The Partnership, in its normal course of business, enters into various
contracts, with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF, to the extent that such trading results in receivables
from and payables to MLF, these receivables and payables are offset and
reported as a net receivable or payable.
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/S/ Michael A. Karmelin
Michael A. Karmelin
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
John W. Henry & Co./Millburn L.P.
-14-
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<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 0 0
<RECEIVABLES> 514,158 779,075
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 63,024,164 60,834,087
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<TOTAL-ASSETS> 63,538,322 61,613,162
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0 0
0 0
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<INCOME-PRETAX> 7,357,688 10,384,330
<INCOME-PRE-EXTRAORDINARY> 7,357,688 10,384,330
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