<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1998
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-18702
THE S.E.C.T.O.R. STRATEGY FUND (SM) L.P.
(Safety of Equity Capital; Targeting Overall Return)
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3568563
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
SOUTH TOWER, NEW YORK, NY 10080
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 236-5662
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Limited Partnership
Units
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No ___
---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant: the registrant is a limited partnership: as of
February 1, 1999, limited partnership units with an aggregate value of
$17,954,767 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's "1998 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1998,
is incorporated by reference into Part II, Item 8 and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND (SM) L.P.
ANNUAL REPORT FOR 1998 ON FORM 10-K
Table of Contents
-----------------
<TABLE>
<CAPTION>
PART I PAGE
------ ----
<S> <C>
Item 1. Business..................................................................................................... 1
Item 2. Properties................................................................................................... 6
Item 3. Legal Proceedings............................................................................................ 6
Item 4. Submission of Matters to a Vote of Security Holders.......................................................... 6
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................................ 6
Item 6. Selected Financial Data...................................................................................... 7
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations........................ 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk................................................... 17
Item 8. Financial Statements and Supplementary Data.................................................................. 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure......................... 17
PART III
--------
Item 10. Directors and Executive Officers of the Registrant........................................................... 17
Item 11. Executive Compensation....................................................................................... 19
Item 12. Security Ownership of Certain Beneficial Owners and Management............................................... 19
Item 13. Certain Relationships and Related Transactions............................................................... 20
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.............................................. 21
</TABLE>
<PAGE>
PART I
ITEM 1: BUSINESS
--------
(a) General Development of Business:
-------------------------------
The S.E.C.T.O.R. Strategy Fund (SM) L.P. (Safety of Equity Capital;
Targeting Overall Return) (the "Partnership") was organized under the Delaware
Revised Uniform Limited Partnership Act on April 30, 1990 and began trading
operations on July 16, 1990. The Partnership made a single offering of its units
of limited partnership interest ("Units"). Units may be redeemed as of the end
of each calendar month. The Partnership engages (currently, through an
investment in a limited liability company, see below) in the speculative trading
of a portfolio of futures, options on futures, forwards and options on forward
contracts and related options in the currencies, interest rates, stock index,
metals, agricultural and energy sectors of the world futures markets. The
Partnership's objective is achieving, through speculative trading, substantial
capital appreciation, over time, while also assuring investors of at least a
predetermined minimum Net Asset Value per Unit as of the Principal Assurance
Date.
Merrill Lynch Investment Partners Inc. (the "General Partner" or
"MLIP") is the general partner of the Partnership and selects and allocates the
Partnership's assets (through the Partnership's investment in ML Multi-Manager
Portfolio LLC ("MM LLC"), among professional advisors ("Trading
Advisors" or "Advisors"), each unaffiliated with MLIP and each of which trades
independently of the others. The Partnership and MM LLC are referred to
throughout this document, either individually and/or collectively, as the
"Fund". MLIP also determines what percentage of the Fund's assets to allocate to
trading and what percentage to hold in reserve. Merrill Lynch Futures Inc. (the
"Commodity Broker" or "MLF") is the Partnership's commodity broker. A portion of
the Partnership's assets is held by a commodity broker, other than MLF, to
facilitate the trading of a certain independent advisor. The General Partner is
a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in turn, is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("ML&Co."). The Commodity
Broker is an indirect wholly-owned subsidiary of ML&Co. (ML&Co. and its
affiliates are herein sometimes referred to as "Merrill Lynch.")
Prior to October 1, 1996, the Partnership placed assets with the
Trading Advisors by opening individual managed accounts with them. For the
period from October 1, 1996 to May 31, 1998, the Partnership placed assets with
certain of the Trading Advisors through investing in private funds ("Trading
LLCs") sponsored by MLIP, through which the trading accounts of different
MLIP-sponsored funds managed by the same Advisor pursuant to the same strategy
were consolidated. The only members of the Trading LLCs were commodity pools
sponsored by MLIP. Placing assets with an Advisor through investing in a Trading
LLC rather than a managed account had no economic effect on the Partnership,
except to the extent that the Partnership benefited 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). As of June 1, 1998, MLIP
consolidated the trading accounts of nine of its multi-advisor funds (the
"Multi-Advisor Funds"), including the Partnership. The consolidation was
achieved by having these Multi-Advisor Funds invest in a single Delaware limited
liability company, MM LLC, which opened a single account with each Advisor
selected. MM LLC is managed by MLIP, has no investors other than the
Multi-Advisor Funds and serves solely as the vehicle through which the assets of
such Multi-Advisor Funds are combined in order to be managed through single
rather than multiple accounts. The placement of assets into MM LLC did not
change the operations or fee structure of the Partnership. The administrative
authority over the Partnership, as well as MM LLC, remains with MLIP. The
following disclosures relate to the operation of the Partnership through its
investment in MM LLC.
In addition to its investment in MM LLC, the Partnership maintains a
cash account. From time to time, the General Partner allocates and reallocates
Partnership assets among its investment in MM LLC and its cash accounts in an
attempt to increase profit potential while limiting the downside risks
associated with futures and forward trading (in order to prevent ML&Co. from
incurring any obligations under its guarantee of a minimum Net Asset Value per
Unit, as described below). Initially, the General Partner allocated
approximately 30% of the Partnership's assets to cash and approximately 70% to
trading. As of December 31, 1998, 100% was invested in MM LLC.
As of December 31, 1998, the Partnership's capitalization was
$18,934,681, and the Net Asset Value of a Unit sold as of July 16, 1990 for $100
was $189.19.
1
<PAGE>
ML&Co. guarantees that the Net Asset Value per Unit will equal at
least $150.06 as of September 30, 1999 (the "Principal Assurance Date").
The initial Principal Assurance Date was set at five years after
trading commenced. Effective October 1, 1995, the Fund restarted its trading
program for a new Time Horizon of two years' duration. A third Time Horizon,
also two years in length, was begun as of October 1, 1997. This guarantee does
not prevent substantial investor losses, but rather serves only as a form of
"stop loss," limiting the maximum loss which investors who retain their Units
until the Principal Assurance Date can incur. In order to protect ML&Co. from
any liability under its guarantee, at such time, if any, as the Net Asset Value
per Unit were to decline to 110% or less of the present value of the guaranteed
minimum Net Asset Value per Unit discounted back from the current Principal
Assurance Date, MLIP would terminate trading altogether in order to ensure that
ML&Co. incurred no financial obligation to the Fund under ML&Co.'s guarantee of
the minimum Net Asset Value per Unit.
Through December 31, 1998, the highest month-end Net Asset Value per
Unit was $199.62 (February 27, 1997) and the lowest was $102.26 (July 31, 1990).
(b) Financial Information about Segments:
------------------------------------
The Partnership's business constitutes only one segment for financial
reporting purposes, i.e., a speculative "commodity pool." The Partnership does
not engage in sales of goods or services.
(c) Narrative Description of Business:
---------------------------------
GENERAL
The Fund trades (currently, through its investment in MM LLC) in
futures, options on futures, forwards and options on forward contracts in major
sectors of the world economy, with the objective of achieving substantial
capital appreciation over time, while assuring investors of at least a
predetermined minimum Net Asset per Unit as of the Principal Assurance Date.
The General Partner is the Partnership's trading manager, with
responsibility for selecting Advisors to manage MM LLC's assets, allocating and
reallocating MM LLC assets among different Advisors and determining the
percentage of the Partnership's assets to be invested in MM LLC from time to
time.
Although considered as a whole, the Partnership (currently, through an
investment in MM LLC) trades in a diversified range of international markets.
Certain of the Trading Advisors, considered individually, concentrate primarily
on trading in a limited portfolio of markets. The composition of the "sectors"
included in the Partnership's portfolio varies substantially over time.
MLIP may, from time to time, direct certain individual Advisors to
manage their Fund accounts as if they were managing more equity than the actual
capital allocated to them.
One of the objectives of the Fund is to provide diversification for a
limited portion of the risk segment of the Limited Partners' portfolios.
Commodity pool performance has historically 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.
ML&CO.'S "PRINCIPAL PROTECTION" UNDERTAKING TO THE FUND
ML&Co., the parent company of the Merrill Lynch organization, which
includes the General Partner and the Commodity Broker, has agreed to contribute
sufficient capital to the Partnership so that it will have adequate funds, after
adjustment for all liabilities to third parties, that the Net Asset Value per
Unit will be no less than $150.06 as of the third Principal Assurance Date
(September 30, 1999). This guarantee, which is effective only as of the
Principal Assurance Date, is a guarantee only of the minimum assured Net Asset
Value, (plus distributions, if any), not against the loss of the use of time
value of such investment or a guarantee of profit. This guarantee is a general,
unsecured obligation of ML&Co.
2
<PAGE>
OPERATION OF THE PARTNERSHIP AFTER THE THIRD PRINCIPAL ASSURANCE DATE
When the Fund reached its first Principal Assurance Date, MLIP
"restarted" the Fund's trading program and the ML&Co. guarantee for a two-year
period ending September 30, 1997. As of October 1, 1997, MLIP again "restarted"
the Fund's trading program and the ML&Co. guarantee for an additional two-year
period ending September 30, 1999. MLIP may determine to dissolve the Partnership
as of the current Principal Assurance Date (September 30, 1999), to extend the
ML&Co. guarantee for a certain period of time (again resetting the minimum Net
Asset Value per Unit guaranteed by ML&Co.) or to continue to operate the Fund
without a "principal protection" feature. All investors will be given notice by
no later than August 15, 1999 as to what the operation of the Fund (if any) will
be after the current Principal Assurance Date.
USE OF PROCEEDS AND INTEREST INCOME
Market Sectors. The Partnership (currently, through an investment in
--------------
MM LLC) trades in a diversified group of markets under the direction of multiple
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 in which market sectors
the Fund's trading may be concentrated at any one time or over time.
Market Types. The Fund trades (currently, through its investment in
------------
MM LLC) on a variety of United States and foreign futures exchanges.
Substantially all of the Fund's off-exchange trading takes place in the highly
liquid, institutionally-based currency forward markets.
Many of the Partnership's currency trades are executed in the spot and
forward foreign exchange markets (the "FX Markets") where there are no direct
execution costs. Instead, the participants, banks and dealers, including Merrill
Lynch International Bank ("MLIB"), in the FX Markets take a "spread" between the
prices at which they are prepared to buy and sell a particular currency and such
spreads are built into the pricing of the spot or forward contracts with the
Partnership. The General Partner anticipates that some of the Partnership's
foreign currency trades will be executed through MLIB, an affiliate of the
General Partner. MLIB has discontinued the operation of the foreign exchange
service desk, which included seeking multiple quotes from counterparties
unrelated to MLIB for a service fee and trade execution.
In its exchange of futures for physical ("EFP") trading, the
Partnership acquires cash currency positions through banks and dealers,
including Merrill Lynch. The Partnership pays a spread when it exchanges these
positions for futures. This spread reflects, in part, the different settlement
dates of the cash and the futures contracts, as well as prevailing interest
rates, but also includes a pricing spread in favor of the banks and dealers,
which may include a Merrill Lynch entity.
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's financial statements contain information relating to the
types of markets traded by the Fund. There can, however, be no assurance as to
which markets the Fund may trade or as to how the Fund's trading may be
concentrated at any one time or over time.
Custody of Assets. The majority of the Fund's assets are currently
-----------------
held in customer accounts at Merrill Lynch.
3
<PAGE>
Interest paid by Merrill Lynch on the Fund's U.S. Dollar and Non
----------------------------------------------------------------
U.S. Dollar Assets A majority of the Fund's U.S. dollar assets are maintained
- ------------------
at MLF. On assets held in U.S. dollars, Merrill Lynch credits the Fund with
interest at the prevailing 91-day U.S. Treasury bill rate. The Fund is credited
with interest on any of its net gains actually held by Merrill Lynch in non-U.S.
dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill
Lynch may derive certain economic benefit, in excess of the interest which
Merrill Lynch pays to the Fund, from possession of such assets.
Merrill Lynch charges the Fund Merrill Lynch's cost of financing
realized and unrealized losses on the Fund's non-U.S. dollar-denominated
positions.
________________________
CHARGES
The following table summarizes the charges incurred by the Fund
during 1998, 1997 and 1996.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------------------------
% of Average % of Average % of Average
Dollar Month-End Dollar Month-End Dollar Month-End
Changes Amount Net Assets Amount Net Assets Amount Net Assets
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brokerage
Commissions $662,247 3.05% $1,936,603 6.75% $2,636,241 8.21%
Administrative
Fees 18,921 0.09% 55,331 0.19% 75,321 0.23%
Profit Shares 147,262 0.68% 158,988 0.56% 457,989 1.43%
----------------------------------------------------------------------------------
Total $828,430 3.82% $2,150,922 7.50% $3,169,551 9.87%
==================================================================================
</TABLE>
________________________
Subsequent to October 1, 1996, Brokerage Commissions,
Administrative Fees and Profit Shares are not representative of the actual
amounts paid by the Fund, because the Fund paid the bulk of these fees as an
investor in the Trading LLCs or MM LLC. See "Description of Current Charges."
The foregoing table does not reflect the bid-ask spreads paid by
the Fund on its forward trading, or the annual benefits which may be derived by
Merrill Lynch from the deposit of certain of the Fund's U.S. dollar assets in
offset accounts.
The Fund's average month-end Net Assets during 1998, 1997 and
1996 equaled $21,720,057, $28,696,419 and $32,095,064, respectively.
During 1998, 1997 and 1996, the Fund earned $396,925, $1,118,910
and $1,364,326 in interest income, or approximately 1.83%, 3.90% and 4.25% of
the Fund's average month-end Net Assets.
4
<PAGE>
Effective January 1, 1996, the 9.0% per annum Brokerage
Commissions paid by the Fund to MLF were recharacterized as 8.75% per annum
Brokerage Commissions and a 0.25% per annum Administrative Fee paid by the Fund
to MLIP. This recharacterization had no economic effect on the Fund.
DESCRIPTION OF CURRENT CHARGES
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
MLF Brokerage Commissions A flat-rate monthly commission
of 0.729 of 1% (a 8.75% annual
rate) of the Fund's month-end
assets allocated to trading.
As of December 31, 1998, 100%
of the Fund's assets were
allocated to trading.
During 1998, 1997 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 Com
missions was approximately
$69, $114 and $118,
respectively.
MLF Use of Fund assets Merrill Lynch may derive an
annual benefit from the
deposit of certain of the
Fund's U.S. dollar assets in
offset accounts.
MLIP Administrative Fees The Fund pays MLIP a monthly
Administrative Fee equal to
0.020833 of 1% of the Fund's
month-end assets committed to
trading (0.25% annually). MLIP
pays all of the Fund's routine
administrative costs.
MLIB; Other Bid-ask spreads Bid-ask spreads on forward and
Counterparties related trades.
Trading Advisors Profit Shares Prior to January 1, 1997, all
Advisors received quarterly
Profit Shares ranging from 15%
to 25% (depending on the
Trading Advisor) of any New
Trading Profit achieved by
their Fund account. As of
January 1, 1998, a number of
Advisors agreed to receive
only annual Profit Shares.
Profit Shares are also paid
upon redemption of Units and
upon the net reallocation of
assets away from an Advisor.
New Trading Profit is
calculated separately in
respect of each Advisor,
irrespective of the overall
performance of the Fund. The
Fund and MM LLC may pay
substantial Profit Shares
during periods when it is
incurring significant overall
losses.
Trading Advisors Consulting Fees MLF pays the Trading Advisors
annual Consulting Fees ranging
up to 4% of the Partnership's
average month-end assets
allocated to them for
management, after reduction
for a portion of the brokerage
commissions .
MLF; Extraordinary expenses Actual costs incurred; none
Others paid to date.
5
<PAGE>
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.
(d) Financial Information about Foreign and Domestic Operations and
---------------------------------------------------------------
Export Sales:
- ------------
The Partnership trades, through its investment in MM LLC, on a
number of foreign commodity exchanges. The Partnership does not engage in the
sales of goods or services.
ITEM 2: PROPERTIES
----------
The Partnership does not use any physical properties in the
conduct of its business.
The Partnership's only place of business is the place of business
of the General Partner, Merrill Lynch World Headquarters, World Financial
Center, South Tower, New York, New York, 10080. The General Partner performs all
administrative services for the Partnership from the General Partner's offices.
ITEM 3: LEGAL PROCEEDINGS
-----------------
ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc.
(which is the sole stockholder of MLIP) -- as well as certain of its
subsidiaries and affiliates have been named as defendants in civil actions,
arbitration proceedings and claims arising out of their respective business
activities. Although the ultimate outcome of these actions cannot be predicted
at this time and the results of legal proceedings cannot be predicted with
certainty, it is the opinion of management that the result of these matters will
not be materially adverse to the business operations of financial condition of
MLIP or the Fund.
MLIP itself has never been the subject of any material
litigation.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Partnership has never submitted any matter to a vote of its
Limited Partners.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
Item 5(a)
(a) Market Information:
------------------
There is no trading market for the Units, nor will one develop.
Rather, Limited Partners may redeem Units as of the end of each month at Net
Asset Value. Units redeemed prior to the applicable Principal Assurance Date are
not entitled to any benefits under the ML&Co. guarantee.
(b) Holders:
-------
As of December 31, 1998, there were 1,273 holders of Units,
including the General Partner.
6
<PAGE>
(c) Dividends:
---------
The Partnership has made no distributions, nor does the General
Partner presently intend to make any distributions in the future.
Item 5(b)
Not applicable.
ITEM 6: SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from the audited
financial statements of the Partnership:
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR
ENDED ENDED ENDED ENDED ENDED
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
STATEMENT OF OPERATIONS 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Trading (Loss) Profit:
Realized (Loss) Gain $ (520,547) $ (100,337) $3,756,114 $10,514,336 $(1,230,908)
Change in Unrealized (703,331) 105,173 (284,224) (1,160,384) (504,496)
(Loss) Gain
--------------------------------------------------------------------------------------------
Total Trading Results (1,223,878) 4,836 3,471,890 9,353,952 (1,735,404)
--------------------------------------------------------------------------------------------
Interest Income 396,925 1,118,910 1,364,326 1,954,622 1,793,843
--------------------------------------------------------------------------------------------
Total Revenues (826,953) 1,123,746 4,836,216 11,308,574 58,439
--------------------------------------------------------------------------------------------
Expenses:
Brokerage Commissions 662,247 1,936,603 2,636,241 3,480,701 4,498,435
Administrative Fees 18,921 55,331 75,321 - -
Profit Shares 147,262 158,988 457,989 1,084,170 529,654
--------------------------------------------------------------------------------------------
Total Expenses 828,430 2,150,922 3,169,551 4,564,871 5,028,089
--------------------------------------------------------------------------------------------
Income from Investments 675,414 968,354 2,032,587 - -
--------------------------------------------------------------------------------------------
Net (Loss) Income $ (979,969) $ (58,822) $3,699,252 $ 6,743,703 $(4,969,650)
============================================================================================
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
BALANCE SHEET DATA 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fund Net Asset Value $18,934,681 $26,576,283 $31,949,032 $34,684,047 $41,096,545
Net Asset Value per Unit $ 189.19 $ 194.53 $ 194.47 $ 173.02 $ 145.09
-----------------------------------------------------------------------------
</TABLE>
The variations in income statement line items are primarily due
to investing in Trading LLCs and in MM LLC.
7
<PAGE>
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER UNIT
- -------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May June July Aug. Sept. Oct. Nov. Dec.
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
1994 $152.94 $147.23 $150.83 $147.70 $152.86 $156.40 $155.52 $150.29 $152.71 $150.36 $149.40 $145.09
- -------------------------------------------------------------------------------------------------------------------
1995 $143.16 $151.75 $158.05 $161.56 $161.66 $158.32 $157.85 $163.55 $167.25 $167.26 $170.88 $173.02
- -------------------------------------------------------------------------------------------------------------------
1996 $181.96 $170.88 $173.16 $175.80 $173.86 $176.00 $171.33 $175.62 $177.79 $185.94 $195.14 $194.47
- -------------------------------------------------------------------------------------------------------------------
1997 $198.92 $199.62 $198.24 $192.04 $184.00 $184.90 $196.21 $184.18 $187.57 $186.07 $188.49 $194.53
- -------------------------------------------------------------------------------------------------------------------
1998 $190.87 $188.05 $184.76 $174.28 $174.87 $175.08 $175.33 $184.91 $188.86 $188.27 $188.44 $189.19
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to CFTC policy, monthly performance is presented only
from January 1, 1994 even though Units were outstanding prior to such date.
8
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND (SM) L.P.
December 31, 1998
TYPE OF POOL: SELECTED-ADVISOR/PUBLICLY-OFFERED/"PRINCIPAL PROTECTED"(1)
INCEPTION OF TRADING: July 16, 1990
AGGREGATE SUBSCRIPTIONS: $125,853,001
CURRENT CAPITALIZATION: $18,934,681
WORST MONTHLY DRAWDOWN/(2)/: (6.13)% (8/97)
WORST PEAK-TO-VALLEY DRAWDOWN/(3)/: (12.70)% (3/97-4/98)
-------------
Net Asset Value per Unit, December 31, 1998: $189.19
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------
MONTHLY RATES OF RETURN/(4)/
- ---------------------------------------------------------------------------------------------
MONTH 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January (1.88)% 2.29% 5.17% (1.33)% (4.39)%
- ---------------------------------------------------------------------------------------------
February (1.48) 0.35 (6.09) 6.00 (3.73)
- ---------------------------------------------------------------------------------------------
March (1.75) (0.69) 1.33 4.15 2.44
- ---------------------------------------------------------------------------------------------
April (5.67) (3.13) 1.53 2.22 (2.08)
- ---------------------------------------------------------------------------------------------
May 0.34 (4.19) (1.11) 0.06 3.50
- ---------------------------------------------------------------------------------------------
June 0.12 0.49 1.23 (2.07) 2.32
- ---------------------------------------------------------------------------------------------
July 0.14 6.12 (2.65) (0.30) (0.57)
- ---------------------------------------------------------------------------------------------
August 5.46 (6.13) 2.50 3.61 (3.36)
- ---------------------------------------------------------------------------------------------
September 2.14 1.84 1.24 2.26 1.61
- ---------------------------------------------------------------------------------------------
October (0.31) (0.80) 4.58 0.01 (1.54)
- ---------------------------------------------------------------------------------------------
November 0.09 1.30 4.95 2.16 (0.64)
- ---------------------------------------------------------------------------------------------
December 0.40 3.20 (0.35) 1.25 (2.89)
- ---------------------------------------------------------------------------------------------
Compound Annual
Rate of Return (2.74)% 0.03% 12.40% 19.25% (9.29)%
- ---------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor"
fund is defined as one that allocates no more than 25% of its trading assets
(i.e., assets committed to trading) to any single manager. As the Fund may
allocate more than 25% of its trading assets to one or more Advisors, it is
referred to as a "Selected-Advisor" fund. Applicable CFTC regulations define a
"Principal Protected" fund as one which is designed to limit the loss of
participants' initial investment. MLIP's trading leverage policies and the
ML&Co. guarantee limit Limited Partners' losses on their Units to the time value
of their investments over the Time Horizon from the beginning of trading to the
Principal Assurance Date.
(2) Worst Monthly Drawdown represents the largest negative
Monthly Rate of Return experienced since January 1, 1994 by the Fund; a drawdown
on is measured on the basis of month-end Net Asset Value only, and does not
reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest
percentage decline since January 1, 1994 from a month-end cumulative Monthly
Rate of Return without such cumulative Monthly Rate of Return being equaled or
exceeded as of a subsequent month-end. For example, if the Monthly Rate of
Return was (1)% in each of January and February, 1% in March and (2)% in April,
the Peak-to-Valley Drawdown would still be continuing at the end of April in the
amount of approximately (3)%, whereas if the Monthly Rate of Return had been
approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of
the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund
during the month of determination (including interest income and after all
expenses have been accrued or paid) divided by the total equity of the Fund as
of the beginning of such month.
9
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
Advisor Selections
- ------------------
The Fund's results of operations depend on MLIP's ability to
select Advisors and the Advisors' ability to trade profitably. MLIP's selection
procedures and trading leveraging analysis, as well as 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. Because of the speculative nature of its trading, the Fund's past
performance is not necessarily indicative of its future results.
MLIP has made and expects to continue making frequent changes to
both trading asset allocations among Advisors and Advisor combinations as well
as from time to time adjusting the percentage of the Fund's assets committed to
trading.
MLIP's decision to terminate or reallocate assets among Advisors
is based on a combination of numerous factors. Advisors are, in general,
terminated primarily for unsatisfactory performance, but other factors -- for
example, a change in MLIP's or an Advisor's market outlook, apparent deviation
from announced risk control policies, excessive turnover of positions, changes
in principals, commitment of resources to other business activities, etc. -- may
also have a role in the termination or reallocation decision. The market
judgment and experience of MLIP's principals is an important factor in its asset
allocation decisions.
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. There can be no assurance as to the frequency or number of
Advisor changes that may take place in the future, or as to how long any of the
current Advisors will continue to manage assets for the Fund.
General
- -------
A number of the Advisors are trend-following traders, whose
programs do not attempt to predict price movements. No fundamental economic
supply or demand analyses are used by these Advisors, and no macroeconomic
assessments of the relative strengths of different national economies or
economic sectors. Instead, the programs apply proprietary computer models to
analyzing past market data, and from this data alone attempt to determine
whether market prices are trending. These technical traders base their
strategies on the theory that market prices reflect the collective judgment of
numerous different traders and are, accordingly, the best and most efficient
indication of market movements. However, there are frequent periods during which
fundamental factors external to the market dominate prices.
If a trend-following Advisor's models identify a trend, they
signal positions which follow it. When these models identify the trend as having
ended or reversed, these positions are either closed out or reversed. Due to
their trend-following character, these Advisors' programs do not predict either
the commencement or the end of a price movement. Rather, their objective is to
identify a trend early enough to profit from it and detect its end or reversal
in time to close out the Fund's positions while retaining most of the profits
made from following the trend.
In analyzing the performance of trend-following programs,
economic conditions, political events, weather factors, etc., are not directly
relevant because only market data has any input into trading results.
Furthermore, there is no direct connection between particular market conditions
and price trends. There are so many influences on the markets that the same
general type of economic event may lead to a price trend in some cases but not
in others. The analysis is further complicated by the fact that the programs are
designed to recognize only certain types of trends and to apply only certain
criteria of when a trend has begun. Consequently, even though significant price
trends may occur, if these trends are not comprised of the type of intra-period
price movements which the programs are designed to identify, a trend-following
Advisor may miss the trend altogether.
In the case of the Advisors which implement strategies which rely
more on discretion and market judgment, it is not possible to predict, from
their performance during past market cycles, how they will respond to future
market events.
-10-
<PAGE>
Performance Summary
- -------------------
This performance summary is an outline description of how the
Fund performed in the past, not necessarily any indication of how it will
perform in the future. In addition, the general causes to which certain price
movements are attributed may or may not in fact have caused such movements, but
simply occurred at or about the same time.
The Advisors, as a group, are unlikely to be profitable in
markets in which such trends do not occur. Static or erratic prices are likely
to result in losses. Similarly, unexpected events (for example, a political
upheaval, natural disaster or governmental intervention) can lead to major
short-term losses as well as gains.
While there can be no assurance that any Advisor will be
profitable, under any given market condition, markets in which substantial and
sustained price movements occur typically offer the best profit potential for
the Fund.
The performance of the Fund is also materially affected by the
percentage of its assets allocated to trading. The greater the percentage of the
Fund's assets allocated to trading, the greater its profit potential, risk and
performance volatility
1998
Total Trading
Results
Interest Rates and Stock Indices $ 46,962
Commodities 262,150
Currencies 65,904
Energy (1,390,575)
Metals (208,319)
-----------------
$(1,223,878)
=================
Global interest rate markets provided the Fund with its most
profitable positions for the first quarter, particularly in European bonds where
an extended bond market rally continued despite an environment of robust growth
in the United States, Canada and the United Kingdom, as well as a strong pick-up
in growth in continental Europe. In the second quarter, swings in the U.S.
dollar and developments in Japan affected bond markets, causing the Fund's
interest rate trading to result in losses. This was turned around in the third
quarter, as markets worldwide were turned upside down and the Fund's non-
correlation with general equity and debt markets was strongly exhibited, and
trading was particularly profitable in positions in Eurodollars, German and
Japanese bonds, and U.S. Treasury notes and bonds. Global investors staged a
major flight to quality, resulting in a significant widening of credit spreads
on a global basis. In October, investors pushed the yields on U.S. Treasury
bonds to a 31-year low. The long bond yield fell about 75 basis points in 1998
as the world economy slowed more than expected, inflation continued to fall, the
anticipated small U.S. budget deficit turned into substantial surplus, and the
Fed lowered interest rates.
In currency markets, results early in the year were unprofitable.
During the second quarter, strong gains were realized in positions in the
Japanese yen, which weakened during June to an eight-year low versus the U.S.
dollar. Significant gains from Japanese yen trading continued into the third
quarter, and Japan's problems spread to other sectors of the global economy,
causing commodities prices to decline as demand from the Asian economies
weakened. Japan's deepening recession and credit crunch continued through the
fourth quarter, and the Fund achieved gains from long yen positions.
Trading results in stock index markets were also mixed in early
1998, despite a strong first-quarter performance by the U.S. equity market as
several consecutive weekly gains were recorded with most market averages setting
new highs. Second quarter results were profitable as the Asia-Pacific region's
equity markets weakened across the board. In particular, Hong Kong's Hang Seng
index trended downward during most of the second quarter and traded at a three-
year low. As U.S. equity markets declined in July and August, the Fund profited
from short positions in the
-11-
<PAGE>
S&P 500, most notably during August, when the index dropped 14.5%. Volatility in
September made for a difficult trading environment in the stock index sector,
and the Fund incurred modest losses, although results remained profitable for
the quarter and the year overall in these markets
In agricultural commodity markets, 1998 began with strong gains as live
cattle and hog prices trended downward throughout the first quarter. In the
second quarter, although the U.S. soybean crop got off to a good start which
contributed to higher yield expectations and a more burdensome supply outlook,
soybean prices traded in a volatile pattern. Sugar futures maintained mostly a
downtrend, as no major buyers emerged to support the market. Similarly, coffee
prices trended downward, as good weather conditions in Central America and
Mexico increased the prospects of more output from these countries. The third
quarter resulted in losses as the U.S. soybean crop increased relative to the
USDA's production estimate as a result of timely rains, which contributed to
lower prices. These losses continued into the fourth quarter as the Fund was
caught on the short side of the soybean complex, as the soybean supply surplus
became more manageable following the November 10th USDA reports, causing prices
to gain upward momentum.
Gold prices began the year drifting sideways, and continued to weaken
following news in the second quarter of a European Central Bank consensus that
ten to fifteen percent of reserves should be made up of gold bullion, which was
at the low end of expectations. Gold was unable to extend third quarter rallies
or to build any significant upside momentum, resulting in a trendless
environment. This was also the case in the fourth quarter, as gold's cost of
production declined. Also, silver markets remained range-bound, while also
experiencing a significant selloff in November, and aluminum traded at its
lowest levels since 1994, with many aluminum smelters operating at a loss.
In energy markets, demand for crude oil in the Middle East was affected
by low oil prices early in the year, and trading resulted in losses. Initially
buoyed on concerns about a U.S.-led military strike against Iraq, crude oil fell
to a nine-year low, as the globally warm winter, the return of Iraq as a
producer and the Asian economic crisis added to OPEC's supply glut problems.
Despite production cuts initiated by OPEC at the end of March, world oil
supplies remained excessive and oil prices stood at relatively low levels
throughout the first half of 1998. Short heating oil positions in the third
quarter proved profitable for the Fund as the market for heating oil prices
dropped to its lowest level in more than a decade. In early December, oil and
natural gas prices dropped sharply, causing continued problems for many emerging
market countries that depend on commodity exports for economic growth and
government financing. These price pressures were mainly due to excessive supply
availability and near-term weather indications that inventories would remain at
more than adequate levels even in the event of a cold Northern Hemisphere
winter. Also, the December U.S. air attack on Iraq failed to cause any damage to
oil pumping and shipping operations, and oil prices fell over 10%.
1997
Total Trading
Results
Interest Rates and Stock Indices $ (30,260)
Commodities (265,231)
Currencies 1,301,214
Energy (950,072)
Metals (50,815)
-------------
$ 4,836
=============
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
-12-
<PAGE>
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.
In energy markets, a slump in crude oil prices was characteristic
of its lackluster performance from the beginning of the year. Early in 1997,
volatility returned in the energy markets, reflecting the impact of a winter
significantly warmer than normal. By mid-year, the decline in prices reversed
sharply as Saudi Arabia and Iran, together representing about 45% of OPEC's oil
production, joined forces to pressure oil-producing nations to stay within OPEC
production quotas. In December, financial and economic problems in Asia reduced
demand for oil, and, in combination with ample supplies, resulted in crude oil
prices declining once again.
<TABLE>
<CAPTION>
1996
Total Trading
Results
<S> <C>
Interest Rates and Stock Indices $ 42,816
Commodities 693,244
Currencies 1,306,971
Energy 1,265,776
Metals 163,083
-----------
$ 3,471,890
===========
</TABLE>
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 its worst monthly 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.
-13-
<PAGE>
Variables Affecting Performance
- -------------------------------
The principal variables which determine the net performance of
the Fund are gross profitability and interest income. Gross profitability is, in
turn, affected by the percentage of the Fund's assets allocated to trading.
During all periods set forth under "Selected Financial Data,"
the interest rates in many countries were at unusually low levels. The low
interest rates in the United States (although higher than in many other
countries) negatively impacted revenues because interest income is typically a
major component of the Fund's 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 Fund may be reduced as compared to high
yielding and much lower risk fixed-income investments.
The Fund's Brokerage Commissions and Administrative Fees are a
constant percentage of the Fund's assets allocated to trading. The only Fund
costs (other than the insignificant currency trading costs) which are not based
on a percentage of the Fund's assets (allocated to trading or total) are the
Profit Shares payable to the Advisors on an Advisor-by-Advisor basis. Gross
profitability is in turn, affected by the percentages of the Fund's assets
allocated to trading. During periods when Profit Shares are a high percentage of
net trading gains, it is likely that there has been substantial performance
non-correlation among the Advisors (so that the total Profit Shares paid to
those Advisors which have traded profitably are a high percentage, or perhaps
even in excess, of the total profits recognized, as other Advisors have incurred
offsetting losses, reducing overall trading gains but not the Profit Shares paid
to the successful Advisors) -- suggesting the likelihood of generally trendless,
non-consensus markets.
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.
Except in unusual circumstances, factors -- 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.
LIQUIDITY; CAPITAL RESOURCES
The Fund borrows only to a limited extent and only on a
strictly short-term basis in order to finance losses on non-U.S. dollar
denominated trading positions pending the conversion of the Fund's dollar
deposits. These borrowings are at a prevailing short-term rate in the relevant
currency. They have been immaterial to the Fund's operation to date and are
expected to continue to be so.
Substantially all of the Fund's assets are held in cash. The
Net Asset Value of the Fund's cash is not affected by inflation. However,
changes in interest rates could cause periods of strong up or down price trends,
during which the Fund's profit potential generally increases. Inflation in
commodity prices could also generate price movements which the strategies might
successfully follow.
Substantially all of the Fund's assets are held in cash.
Accordingly, except in very unusual circumstances, the Fund should be able to
close out any or all of its open trading positions and liquidate any or all of
its securities holdings quickly and at market prices. This permits an Advisor to
limit losses as well as reduce market exposure on short notice should its
strategies indicate doing so. In addition, because there is a readily available
market value for the Fund's positions and assets, the Fund's monthly Net Asset
Value calculations are precise, and investors need only wait 10 business days to
receive the full redemption proceeds of their Units.
-14-
<PAGE>
YEAR 2000 COMPLIANCE INITIATIVE
As the millennium approaches, Merrill Lynch has undertaken
initiatives to address the Year 2000 problem (the "Y2K problem"). The Y2K
problem is the result of a widespread programming technique that causes computer
systems to identify a date based on the last two numbers of a year, with the
assumption that the first two numbers of the year are "19". As a result, the
year 2000 would be stored as "00," causing computers to incorrectly interpret
the year as 1900. Left uncorrected, the Y2K problem may cause information
technology systems (e.g., computer databases) and non-information technology
systems (e.g., elevators) to produce incorrect data or cease operating
completely.
Merrill Lynch believes that it has identified and evaluated its
internal Y2K problem and that it is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. The resource-
intensive renovation phase (as further discussed) of Merrill Lynch's Year 2000
efforts was approximately 95% completed as of January 31, 1999. Merrill Lynch
will focus primarily on completing its renovation and testing and on integration
of the Year 2000 programs of recent acquisitions during the remainder of 1999.
In order to focus attention on the Y2K problem, management has deferred certain
other technology projects: however, this deferral is not expected to have a
material adverse effect on the company's business, results of operations, or
financial condition.
The failure of Merrill Lynch's technology systems relating to a
Y2K problem would likely have a material adverse effect on the company's
business, results of operations, and financial condition. This effect could
include disruption of normal business transactions, such as the settlement,
execution, processing, and recording of trades in securities, commodities,
currencies, and other assets. The Y2K problem could also increase Merrill
Lynch's exposure to risk and its need for liquidity.
In 1995, Merrill Lynch established the Year 2000 Compliance
Initiative, which is an enterprisewide effort to address the risks associated
with the Y2K problem, both internal and external. The Year 2000 Compliance
Initiative's efforts to address the risks associated with the Y2K problem have
been organized into six phases: planning, pre-renovation, renovation, production
testing, certification, and integration testing.
The planning phase involved defining the scope of the Year 2000
Compliance Initiative, including its annual budget and strategy, and determining
the level of expert knowledge available within Merrill Lynch regarding
particular systems or applications. The pre-renovation phase involved developing
a detailed enterprisewide inventory of applications and systems, identifying the
scope of necessary renovations to each application system, and establishing a
conversion schedule. During the renovation phase, source code is actually
converted, date fields are expanded or windowed (windowing is used on an
exception basis only), test data is prepared, and each system or application is
tested using a variety of Year 2000 scenarios. The production testing phase
validates that a renovated system is functionally the same as the existing
production version, that renovation has not introduced defects, and that
expanded or windowed date fields continue to handle current dates properly. The
certification phase validates that a system can run successfully in a Year 2000
environment. The integration testing phase, which will occur throughout 1999,
validates that a system can successfully interface with both internal and
external systems. Finally, as Merrill Lynch continues to implement new systems,
they are also being tested for Year 2000 readiness.
In 1996 and 1997, as part of the planning and pre-renovation
phases, both plans and funding of plans for inventory, preparation, renovation,
and testing of computer systems for the Y2K problem were approved. All plans for
both mission-critical and non-mission-critical systems are tracked and
monitored. The work associated with the Year 2000 Compliance Initiative has been
accomplished by Merrill Lynch employees, with the assistance of consultants
where necessary.
As part of the production testing and certification phases,
Merrill Lynch has performed, and will continue to perform, both internal and
external Year 2000 testing intended to address the risks from the Y2K problem.
As of January 31, 1999, production testing was approximately 93% completed. In
July 1998, Merrill Lynch participated in an industrywide Year 2000 systems test
sponsored by the Securities Industry Association ("SIA"), in which selected
firms tested their computer systems in mock stock trades that simulated dates in
December 1999 and January 2000. Merrill Lynch will participate in further
industrywide testing sponsored by the SIA, currently scheduled for March and
April 1999, which will involve an expanded number of firms, transactions, and
conditions. Merrill Lynch also
-15-
<PAGE>
participated in various other domestic and international industry tests during
1998.
Merrill Lynch continues to survey and communicate with third
parties whose Year 2000 readiness is important to the company. Information
technology and non-information technology vendors and service providers are
contacted in order to obtain their Year 2000 compliance plans. Based on the
nature of the response and the importance of the product or service involved,
Merrill Lynch determines if additional testing is needed. The results of these
efforts are maintained in a database that is accessible throughout the firm.
Third parties that have been contacted include transactional counterparties,
exchanges, and clearinghouses; a process to access and rate their responses has
been developed. This information as well as other Year 2000 readiness
information on particular countries and their political subdivisions will be
used by Merrill Lynch to manage risk resulting from the Y2K problem. Management
is unable at this point to ascertain whether all significant third parties will
successfully address the Y2K problem. Merrill Lynch will continue to monitor
third parties' Year 2000 readiness to determine if additional or alternative
measures are necessary. In connection with information technology and non-
information technology products and services, contingency plans, which are
developed at the business unit level, may include selection of alternative
vendors or service providers and changing business practices so that a
particular system is not needed. In the case of securities exchanges and
clearinghouses, risk mitigation could include the re-routing of business. In
light of the interdependency of the parties in or serving the financial markets,
however, there can be no assurance that all Y2K problems will be identified and
remediated on a timely basis or that all remediation will be successful. The
failure of exchanges, clearing organizations, vendors, service providers,
counterparties, regulators, or others to resolve their own processing issues in
a timely manner could have a material adverse effect on Merrill Lynch's
business, results of operations, and financial condition.
At year-end 1998, the total estimated expenditures for the entire
Year 2000 Compliance Initiative were approximately $425 million, of which
approximately $125 million was remaining. The majority of these remaining
expenditures are expected to cover testing, risk management, and contingency
planning. There can be no assurance that the costs associated with such
remediation efforts will not exceed those currently anticipated by Merrill
Lynch, or that the costs associated with the remediation efforts or the possible
failure of such remediation efforts would not have a material adverse effect on
Merrill Lynch's business, results of operations, or financial condition.
EUROPEAN ECONOMIC AND MONETARY UNION ("EMU") INITIATIVE
As of January 1, 1999, the "euro" was adopted as the common legal
currency of participating member states of the EMU. As a consequence of the
introduction of and conversion to the euro, Merrill Lynch was required to make
significant changes to nearly 200 global business systems in order to reflect
the substitution of the euro for the 11 member national currencies and the
European currency unit. The introduction of the euro brings about fundamental
changes in the structure and nature of European financial markets, including the
creation of a unified, more liquid capital market in Europe. As financial
markets in EMU member states converge and local barriers are removed,
competition is expected to increase.
The introduction of the euro affects all Merrill Lynch facilities
that transact, distribute, or provide custody or recordkeeping for securities or
cash denominated in the currency of a participating member state. Merrill
Lynch's systems or procedures that handle such securities or cash were modified
in order to implement the conversion to the euro. The implementation phase is
continuing into the first quarter of 1999 to resolve any post-conversion issues.
The success of Merrill Lynch's euro conversion efforts was dependent on the
euro-compliance of third parties, such as trading counterparties, financial
intermediaries (e.g., securities and commodities exchanges, depositories,
clearing organizations, and commercial banks), and vendors.
As of the end of the 1998 fiscal year, the total estimated
expenditures associated with the introduction of and conversion to the euro were
approximately $79 million, of which $1 million is remaining to be spent during
the first quarter of 1999 on compliance efforts and project administration.
Management believes that it has identified and evaluated all of the systems and
operational modifications necessary for the conversion to the euro. On January
4, 1999 and since then, Merrill Lynch has conducted normal business operations,
having successfully completed its conversion program. Management does not expect
the introduction of the euro to have a negative effect on its future business,
currency risk, or competitive positioning in the European markets.
-16-
<PAGE>
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements required by this Item are included in
Exhibit 13.01.
The supplementary financial information ("selected quarterly
financial data" and "information about oil and gas producing activities")
specified by Item 302 of Regulation S-K is not applicable.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no changes in or disagreements with independent
auditors on accounting or financial disclosure.
PART III
Item 10: Directors and Executive Officers of the Registrant
--------------------------------------------------
(a,b) Identification of Directors and Executive Officers:
--------------------------------------------------
As a limited partnership, the Partnership itself has no
officers or directors and is managed by the General Partner. Trading decisions
are made by the Trading Advisors on behalf of the Partnership. The General
Partner promotes the Fund and its controlling person.
The directors and executive officers of MLIP and their
respective business backgrounds are as follows:
JOHN R. FRAWLEY, JR. Chairman, Chief Executive Officer,
President and Director
JEFFREY F. CHANDOR Senior Vice President, Director of
Sales, Marketing and Research and Director
JO ANN DI DARIO Vice President, Chief Financial Officer and
Treasurer, through April 30, 1999
MICHAEL L. PUNGELLO Vice President, Chief Financial Officer and
Treasurer, effective May 1, 1999
JOSEPH H. MOGLIA Director
ALLEN N. JONES Director
STEPHEN G. BODURTHA Director
STEVEN B. OLGIN Vice President, Secretary and Director of
Administration
John R. Frawley, Jr. was born in 1943. Mr. Frawley is
Chairman, Chief Executive Officer, President and a Director of MLIP and Co-
Chairman of MLF. He joined Merrill Lynch, Pierce, Fenner & Smith Incorporated
("MLPF&S") in 1966 and has served in various positions, including Retail and
Institutional Sales, Manager of New York Institutional Sales, Director of
Institutional Marketing, Senior Vice President of Merrill Lynch Capital Markets
and Director of International Institutional Sales. Mr. Frawley holds a Bachelor
of Science degree from Canisius College. Mr. Frawley served on the CFTC's
Regulatory Coordination Advisory Committee from its formation in 1990 through
its dissolution in 1994. Mr. Frawley has served four consecutive one-year terms
as Chairman of the Managed Funds Association (formerly, the Managed Futures
Association), a national trade association that represents the managed futures,
hedge funds and fund of funds industry. Mr. Frawley currently serves as a member
of the CFTC's Global Markets Advisory Committee.
-17-
<PAGE>
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice
President, Director of Sales, Marketing and Research and a Director of MLIP. He
joined MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as
well as Managing Director of International Sales in the United States, and
Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts
degree from Trinity College, Hartford, Connecticut. Mr. Chandor is serving a two
year term as a director of the Managed Funds Association.
Jo Ann Di Dario was born in 1946. Ms. Di Dario is, through April 30,
1999, Vice President, Chief Financial Officer and Treasurer of MLIP. Before
joining MLIP in May 1998, she was self-employed for one year. From February 1996
to May 1997, she worked as a consultant for Global Asset Management, an
international mutual fund organizer and operator headquartered in London, where
she offered advice on restructuring their back-office operations. From May 1992
to January 1996, she served as a Vice President of Meridian Bank Corporation, a
regional bank holding company. She was responsible for managing the treasury
operations of Meridian Bank Corporation including its wholly-owned subsidiary,
Meridian Investment Company Inc. From September 1991 to May 1992, Ms. Di Dario
managed the Domestic Treasury Operations of First Fidelity Bank, a regional
bank. From January 1991 to September 1991, Ms. Di Dario was self-employed. For
the previous five years, Ms. Di Dario was Vice President, Secretary and
Controller of Caxton Corporation, a Commodity Pool Operator and Commodity
Trading Advisor. Her background includes seven years of public accounting
experience, and she graduated with high honors from Stockton State College with
a Bachelor of Science degree in Accounting.
Michael L. Pungello was born in 1957. Effective May 1, 1999, Mr.
Pungello will become Vice President, Chief Financial Officer and Treasurer of
MLIP. He was First Vice President and Senior Director of Finance for Merrill
Lynch's Operations, Services and Technology Group from January 1998 to March
1999. Prior to that, Mr. Pungello spent over 18 years with Deloitte & Touche
LLP, and was a partner in their Financial Services practice from June 1990 to
December 1997. He graduated from Fordham University in 1979 with a Bachelor of
Science degree in accounting and received his Master of Business Administration
degree in Finance from New York University in 1987.
Joseph H. Moglia was born in 1949. Mr. Moglia is a Director of MLIP.
In 1971, he graduated from Fordham University with a Bachelor of Arts degree in
Economics. He later received his Master of Science degree from the University of
Delaware. He taught at the high school and college level for sixteen years. Mr.
Moglia joined MLPF&S in 1984, and has served in a number of senior roles,
including Director of New York Fixed Income Institutional Sales, Director of
Global Fixed Income Institutional Sales, and Director of the Municipal Division.
He is currently Senior Vice President and Director of the Investment Strategy
and Product Group in Merrill Lynch Private Client, and Director of Middle
Markets.
Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP and,
from July 1995 until January 1998, Mr. Jones was also Chairman of the Board of
Directors of MLIP. Mr. Jones graduated from the University of Arkansas with a
Bachelor of Science, Business Administration degree in 1964. Since June 1992,
Mr. Jones has held the position of Senior Vice President of MLPF&S. From June
1992 through February 1994, Mr. Jones was the President and Chief Executive
Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board
of Directors of MLIG and its subsidiary companies. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of
MLIP. In 1980, Mr. Bodurtha graduated magna cum laude from Wesleyan University,
Middletown, Connecticut with a Bachelor of Arts degree in Government. From 1980
to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill
Lynch. In 1985, he was awarded his Master of Business Administration degree from
Harvard University, where he also served as Associates Fellow (1985 to 1986).
From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice
President with Kidder, Peabody & Co., Incorporated where he worked in their
Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has
held the position of First Vice President since 1995. He has been the Director
in charge of the Structured Investments Group of MLPF&S since 1995.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice President,
Secretary and the Director of Administration of MLIP. He joined MLIP in July
1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr.
Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin
graduated from The American University with a Bachelor of Science degree in
Business Administration and a Bachelor of Arts degree in Economics. In 1986, he
received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin is
a member of the Managed Funds Association's Government Relations Committee and
has served as an arbitrator for the NFA. Mr. Olgin is also a member of the
Committee on Futures Regulation of the Association of the Bar of the City of New
York.
As of December 31, 1998, the principals of MLIP had no investment in
the Fund, and MLIP's general partner interest in the Fund was valued at
$222,668.
-18-
<PAGE>
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 Growth
and Guarantee Fund L.P., ML Futures Investments II L.P., ML Futures Investments
L.P., John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R. Strategy Fund (SM) II
L.P., The S.E.C.T.O.R. Strategy Fund (SM) V L.P., The S.E.C.T.O.R. Strategy Fund
(SM) VI L.P., ML Global Horizons L.P., ML Principal Protection L.P. , ML JWH
Strategic Allocation Fund L.P. and the Fund. Because MLIP serves as the sole
general partner of each of these funds, the officers and directors of MLIP
effectively manage them as officers and directors of such funds.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
None.
(d) Family Relationships:
--------------------
None.
(e) Business Experience:
-------------------
See Item 10(a)(b) above.
(f) Involvement in Certain Legal Proceedings:
----------------------------------------
None.
(g) Promoters and Control Persons:
-----------------------------
Not applicable.
ITEM 11: EXECUTIVE COMPENSATION
----------------------
The directors and officers of the General Partner are remunerated
by the General Partner. 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 may also receive certain economic benefits
from holding the Fund's dollar available assets. The directors and officers
receive no "other compensation" from the Partnership, and the directors receive
no compensation for serving as directors of the General Partner. There are no
compensation plans or arrangements relating to a change in control of either the
Partnership or the General Partner.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1998, no person or "group" is known to be or have
been the beneficial owner of more than 5% of the Units.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1998, the General Partner owned 1,177 Units (unit-
equivalent general partnership interests), which was less than 1.2% of the total
Units outstanding.
(c) Changes in Control:
------------------
None.
-19-
<PAGE>
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions Between Merrill Lynch and the Fund
-----------------------------------------------
All of the service providers to the Fund, other than the
Advisors, are affiliates of Merrill Lynch. Merrill Lynch negotiated with the
Advisors over the level of its advisory fees and Profit Share. However, none of
the fees paid by the Fund to any Merrill Lynch party were negotiated, and they
are higher than would have been obtained in arm's-length bargaining.
The Fund pays Merrill Lynch substantial Brokerage Commissions and
Administrative Fees as well as bid-ask spreads on forward currency trades. The
Fund also pays MLF interest on short-term loans extended by MLF to cover losses
on foreign currency positions.
Within the Merrill Lynch organization, MLIP is the direct
beneficiary of the revenues received by different Merrill Lynch entities from
the Fund. MLIP controls the management of the Fund and serves as its promoter.
Although MLIP has not sold any assets, directly or indirectly, to the Fund, MLIP
makes substantial profits from the Fund due to the foregoing revenues.
No loans have been, are or will be outstanding between MLIP or
any of its principals and the Fund.
MLIP pays substantial selling commissions and trailing
commissions to MLPF&S for distributing the Units. MLIP is ultimately paid back
for these expenditures from the revenues it receives from the Fund.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as the principal
commodity broker for the Partnership.
In 1998 the Partnership expensed: (i) Brokerage Commissions of
$662,247 to the Commodity Broker, which included $114,382 in consulting fees
earned by the Trading Advisors, and (ii) Administrative Fees of $18,921 to MLIP.
Through its investments in Trading LLCs and MM LLC, the following fees were
expensed: (i) Brokerage Commissions of $1,284,931 to the Commodity Broker, which
included consulting fees earned by the Trading Advisors of $245,250; and (ii)
Administrative Fees of $36,713 to MLIP. In addition, MLIP and its affiliates may
have derived certain economic benefits from possession of the Fund's assets, as
well as from foreign exchange and EFP trading.
See Item 1(c), "Narrative Description of Business -- Charges" and
"Description of Current Charges" for a discussion of other business dealings
between MLIP affiliates and the Partnership.
(c) Indebtedness of Management:
--------------------------
The Partnership is prohibited from making any loans, to
management or otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
-20-
<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, 1998 and 1997 2
For the years ended December 31, 1998, 1997 and 1996
Statements of Income 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(i) Amended and Restated Certificate of Limited Partnership
of the Registrant, dated July 27, 1995.
Exhibit 3.01(i): Is incorporated herein by reference from Exhibit
- ---------------
3.01(d) contained in the Registrant's report on Form
10-Q for the Quarter Ended June 30, 1995.
3.01(ii) Limited Partnership Agreement of the Partnership.
Exhibit 3.01(ii): Is incorporated herein by reference from Exhibit
- ----------------
3.01(a) contained in Amendment No. 1 (as Exhibit A) to
the Registration Statement (File No. 33-34432) filed on
May 25, 1990 on Form S-1 under the Securities Act of
1933 (the "Registrant's Registration Statement").
10.01(o) Form of Advisory Agreement between the Partnership,
Merrill Lynch Investment Partners Inc., Merrill Lynch
Futures Inc. and each Trading Advisor.
Exhibit 10.01(o): Is incorporated herein 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 of the Partnership and Merrill Lynch Futures
Inc.
Exhibit 10.02(a): Is incorporated herein by reference from Exhibit
- ----------------
10.02(a) contained in the Registrant's Registration
Statement.
10.03(a) Form of Customer Agreement between the Partnership and
Merrill Lynch Futures Inc.
-21-
<PAGE>
Exhibit 10.03(a): Is incorporated herein by reference from Exhibit
- ----------------
10.03(a) contained in the Registrant's Registration
Statement.
10.05 Merrill Lynch & Co., Inc. Guarantee.
Exhibit 10.05: Is incorporated herein by reference from Exhibit 10.05
- -------------
contained in the Registrant's Registration Statement.
10.06 Foreign Exchange Desk Service Agreement among Merrill
Lynch Investment 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 Inc.
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 1998 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
- -------------
13.01(a) 1998 Annual Reports and Independent Auditors' Reports
for the following Trading Limited Liability Companies
sponsored by Merrill Lynch Investment Partners Inc.:
ML Millburn Global LLC
ML Sjo Prospect LLC
ML Chesapeake Diversified LLC
ML JWH Financial and Metals Portfolio LLC
ML Multi-Manager Portfolio LLC
Exhibit 13.01(a): Is filed herewith.
- ----------------
28.01 Prospectus of the Partnership dated June 1, 1990.
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 (File No. 33-34432)
filed on June 7, 1990.
(b) Report on Form 8-K:
------------------
No reports on Form 8-K were filed during the fourth quarter of
1998.
-22-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE S.E.C.T.O.R. STRATEGY FUND (SM) L.P.
(Safety of Equity Capital; Targeting Overall Return)
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
By: /s/ John R. Frawley, Jr.
-----------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer, President
and Director
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed on March 25, 1999 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director March 25, 1999
- -------------------------
John R. Frawley, Jr. (Principal Executive Officer)
/s/ Jo Ann Di Dario Vice President, Chief Financial Officer, and Treasurer March 25, 1999
- -------------------------
Jo Ann Di Dario (Principal Financial and Accounting Officer)
/s/ Jeffrey F. Chandor Senior Vice President, Director of Sales, March 25, 1999
- -------------------------
Jeffrey F. Chandor Marketing and Research, and Director
/s/ Allen N. Jones Director March 25, 1999
- -------------------------
Allen N. Jones
</TABLE>
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
MERRILL LYNCH INVESTMENT General Partner of Registrant March 25, 1999
PARTNERS INC.
By: /s/ John R. Frawley, Jr.
-------------------------
John R. Frawley, Jr.
-23-
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND (SM) L.P.
1998 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1998 Annual Report and Independent Auditors' Report
Exhibit 13.01(a) 1998 Annual Reports and Independent Auditors' Reports
for the following Trading Limited Liability Companies
sponsored by Merrill Lynch Investment Partners Inc.:
ML Millburn Global LLC
ML Sjo Prospect LLC
ML Chesapeake Diversified LLC
ML JWH Financial and Metals Portfolio LLC
ML Multi-Manager Portfolio LLC
-24-
<PAGE>
EXHIBIT 13.1
The S.E.C.T.O.R. STRATEGY FUND(SM) L.P.
(A Delaware Limited Partnership)
Financial Statements for the years ended
December 31, 1998, 1997 and 1996
and Independent Auditors' Report
[LOGO] Merrill Lynch
<PAGE>
To: The Limited Partners of The S.E.C.T.O.R. Strategy Fund(SM) L.P.
The S.E.C.T.O.R. Strategy Fund(SM) L.P. (the "Fund" or the "Partnership") ended
its ninth fiscal year of trading on December 31, 1998 with a Net Asset Value
("NAV") per Unit of $189.19, representing a decrease of 2.75% from the December
31, 1997 NAV per Unit of $194.53. During 1998, trading profits were generated in
the interest rate, currency, stock index and agricultural markets while losses
were incurred in energy and agriculture trading.
Global interest rate markets provided the Fund with its most profitable
positions for the first quarter, particularly in European bonds where an
extended bond market rally continued despite an environment of robust growth in
the United States, Canada and the United Kingdom, as well as a strong pick-up in
growth in continental Europe. In the second quarter, swings in the U.S. dollar
and developments in Japan affected bond markets, causing the Fund's interest
rate trading to result in losses. This was turned around in the third quarter,
as markets worldwide were turned upside down and the Fund's non-correlation with
general equity and debt markets was strongly exhibited, and trading was
particularly profitable in positions in Eurodollars, German and Japanese bonds,
and U.S. Treasury notes and bonds. Global investors staged a major flight to
quality, resulting in a significant widening of credit spreads on a global
basis. In October, investors pushed the yields on U.S. Treasury bonds to a 31-
year low. The long bond yield fell about 75 basis points in 1998 as the world
economy slowed more than expected, inflation continued to fall, the anticipated
small U.S. budget deficit turned into substantial surplus, and the Federal
Reserve lowered interest rates.
In currency markets, results early in the year were unprofitable. During the
second quarter, strong gains were realized in positions in the Japanese yen,
which weakened during June to an eight-year low versus the U.S. dollar.
Significant gains from Japanese yen trading continued into the third quarter,
and Japan's problems spread to other sectors of the global economy, causing
commodities prices to decline as demand from the Asian economies weakened.
Japan's deepening recession and credit crunch continued through the fourth
quarter, and the Fund achieved gains from long yen positions.
Trading results in stock index markets were also mixed in early 1998, despite a
strong first-quarter performance by the U.S. equity market as several
consecutive weekly gains were recorded with most market averages setting new
highs. Second quarter results were profitable as the Asia-Pacific region's
equity markets weakened across the board. In particular, Hong Kong's Hang Seng
index trended downward during most of the second quarter and traded at a three-
year low. As U.S. equity markets declined in July and August, the Fund profited
from short positions in the S&P 500, most notably during August, when the index
dropped 14.5%. Volatility in September made for a difficult trading environment
in the stock index sector, and the Fund incurred modest losses, although results
remained profitable for the quarter and the year overall in these markets
In agricultural commodity markets, 1998 began with strong gains as live cattle
and hog prices trended downward throughout the first quarter. In the second
quarter, although the U.S. soybean crop got off to a good start which
contributed to higher yield expectations and a more burdensome supply outlook,
soybean prices traded in a volatile pattern. Sugar futures maintained mostly a
downtrend, as no major buyers emerged to support the market. Similarly, coffee
prices trended downward, as good weather conditions in Central America and
Mexico increased the prospects of more output from these countries. The third
quarter resulted in losses as the U.S. soybean crop
<PAGE>
increased relative to the USDA's production estimate as a result of timely
rains, which contributed to lower prices. These losses continued into the fourth
quarter as the Fund was caught on the short side of the soybean complex, as the
soybean supply surplus became more manageable following the November 10th USDA
reports, causing prices to gain upward momentum.
Gold prices began the year drifting sideways, and continued to weaken following
news in the second quarter of a European Central Bank consensus that ten to
fifteen percent of reserves should be made up of gold bullion, which was at the
low end of expectations. Gold was unable to extend third quarter rallies or to
build any significant upside momentum, resulting in a trendless environment.
This was also the case in the fourth quarter, as gold's cost of production
declined. Also, silver markets remained range-bound, while also experiencing a
significant selloff in November, and aluminum traded at its lowest levels since
1994, with many aluminum smelters operating at a loss.
In energy markets, demand for crude oil in the Middle East was affected by low
oil prices early in the year, and trading resulted in losses. Initially buoyed
on concerns about a U.S.-led military strike against Iraq, crude oil fell to a
nine-year low, as the globally warm winter, the return of Iraq as a producer and
the Asian economic crisis added to OPEC's supply glut problems. Despite
production cuts initiated by OPEC at the end of March, world oil supplies
remained excessive and oil prices stood at relatively low levels throughout the
first half of 1998. Short heating oil positions in the third quarter proved
profitable for the Fund as the market for heating oil prices dropped to its
lowest level in more than a decade. In early December, oil and natural gas
prices dropped sharply, causing continued problems for many emerging market
countries that depend on commodity exports for economic growth and government
financing. These price pressures were mainly due to excessive supply
availability and near-term weather indications that inventories would remain at
more than adequate levels even in the event of a cold Northern Hemisphere
winter. Also, the December U.S. air attack on Iraq failed to cause any damage
to oil pumping and shipping operations, and oil prices fell over 10%.
1998 was a year of unprecedented volatility in key global markets. We look
forward to 1999 and the opportunities it may present.
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>
THE S.E.C.T.O.R. STRATEGY FUND(SM) L.P.
(A Delaware Limited Partnership)
------------------------------
TABLE OF CONTENTS
- ----------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998, 1997 AND 1996:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
The S.E.C.T.O.R. Strategy Fund(SM) L.P.:
We have audited the accompanying statements of financial condition of The
S.E.C.T.O.R. Strategy Fund(SM) L.P. (the "Partnership") as of December 31, 1998
and 1997, and the related statements of operations and of changes in partners'
capital for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The S.E.C.T.O.R. Strategy Fund(SM) L.P. as
of December 31, 1998 and 1997, and the results of its operations for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 1999
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND(SM) L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Equity in commodity futures trading accounts:
Cash and option premiums (Note 1) $ -- $ 19,393,407
Net unrealized profit on open contracts (Note 1) -- 703,331
Accrued interest (Note 2) -- 88,083
Investments (Note 6) 18,934,681 6,996,472
Receivable from investments (Note 6) 528,786 162,042
------------ ------------
TOTAL $ 19,463,467 $ 27,343,335
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 2) $ -- $ 147,339
Profit Shares payable (Note 3) -- 83,463
Administrative fees payable (Note 2) -- 4,210
Redemptions payable 528,786 532,040
------------ ------------
Total liabilities 528,786 767,052
------------ ------------
PARTNERS' CAPITAL:
General Partner (1,177 Units and 2,518 Units) 222,668 489,837
Limited Partners (98,908 Units and 134,097 Units) 18,712,013 26,086,446
------------ ------------
Total partners' capital 18,934,681 26,576,283
------------ ------------
TOTAL $ 19,463,467 $ 27,343,335
============ ============
NET ASSET VALUE PER UNIT
(Based on 100,085 and 136,615 Units outstanding) $189.19 $194.53
============ ============
</TABLE>
See notes to financial statements
-2-
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND(SM) L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
1998 1997 1996
------------ ----------- -----------
<S> <C> <C> <C>
REVENUES:
Trading (loss) profit:
Realized (Note 1) $ (520,547) $ (100,337) $3,756,114
Change in unrealized (Note 1) (703,331) 105,173 (284,224)
------------ ----------- -----------
Total trading results (1,223,878) 4,836 3,471,890
Interest income (Note 2) 396,925 1,118,910 1,364,326
------------ ----------- -----------
Total revenues (826,953) 1,123,746 4,836,216
------------ ----------- -----------
EXPENSES:
Brokerage commissions (Note 2) 662,247 1,936,603 2,636,241
Profit Shares (Note 3) 147,262 158,988 457,989
Administrative fees (Note 2) 18,921 55,331 75,321
------------ ----------- -----------
Total expenses 828,430 2,150,922 3,169,551
------------ ----------- -----------
INCOME FROM INVESTMENTS (Note 6) 675,414 968,354 2,032,587
------------ ----------- -----------
NET (LOSS) INCOME $ (979,969) $ (58,822) $3,699,252
============ =========== ===========
NET (LOSS) INCOME PER UNIT:
Weighted average number of General Partner and
Limited Partner Units outstanding (Note 4) 119,711 151,089 181,635
============ =========== ===========
Net (loss) income per weighted average
General Partner and Limited Partner Unit $ (8.19) $ (0.39) $ 20.37
============ =========== ===========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND(SM) L.P.
(A Delaware Limited Partnerhsip)
- --------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Units of
Partnership Limited General
Interest Partners Partner Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL
DECEMBER 31, 1995 200,460 34,248,684 435,363 34,684,047
Redemptions (36,171) (6,434,267) - (6,434,267)
Net income - 3,644,943 54,309 3,699,252
------------- ------------- ------------- -------------
PARTNERS' CAPITAL
DECEMBER 31, 1996 164,289 31,459,360 489,672 31,949,032
Redemptions (27,674) (5,313,927) - (5,313,927)
Net (loss) income - (58,987) 165 (58,822)
------------- ------------- ------------- -------------
PARTNERS' CAPITAL
DECEMBER 31, 1997 136,615 26,086,446 489,837 26,576,283
Redemptions (36,530) (6,427,111) (234,522) (6,661,633)
Net loss - (947,322) (32,647) (979,969)
------------- ------------- ------------- -------------
PARTNERS' CAPITAL
DECEMBER 31, 1998 100,085 18,712,013 222,668 18,934,681
============= ============= ============= =============
</TABLE>
See notes to financial statements
-4-
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND(SM) L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
The S.E.C.T.O.R. Strategy Fund(SM) L.P. (the "Partnership") was organized
under the Delaware Revised Uniform Limited Partnership Act on April 30, 1990
and commenced trading activities on July 16, 1990. The Partnership engages
(currently, through an investment in a limited liability company (see below))
in the speculative trading of futures, options on futures, forwards and
options on forward contracts on a wide range of commodities. Merrill Lynch
Investment Partners Inc. ("MLIP" or the "General Partner"), a wholly-owned
subsidiary of Merrill Lynch Group, Inc., which, in turn, is a wholly-owned
subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the general
partner of the Partnership. Merrill Lynch Futures Inc. ("MLF"), a Merrill
Lynch affiliate, is the Partnership's commodity broker. A portion of the
Partnership's assets is held by a commodity broker, other than MLF, to
facilitate the trading of a certain independent advisor, subject to an
arrangement recognized by the General Partner. The General Partner has
agreed to maintain a general partner's interest of at least 1% of the total
capital of the Partnership. The General Partner and each Limited Partner
share in the profits and losses of the Partnership in proportion to their
respective interests in it.
Many of the multi-advisor funds (the "Multi-Advisor Funds") sponsored by MLIP
allocate their assets to a number of the same independent advisors (the
"Advisors" or the "Trading Advisors"). However, because different Multi-
Advisor Funds had historically allocated assets to slightly different Advisor
groups, the Multi-Advisor Funds often were required to open and maintain
individual trading accounts with each Advisor. MLIP consolidated the trading
accounts of nine of its Multi-Advisor Funds (including the Partnership) as of
June 1, 1998. The consolidation was achieved by having these Multi-Advisor
Funds close their existing trading accounts and invest in a limited liability
company, ML Multi-Manager Portfolio L.L.C. ("MM LLC"), a Delaware limited
liability company, which opened a single account with each Advisor selected.
MM LLC is managed by MLIP, has no investors other than the Multi-Advisor
Funds and serves solely as the vehicle through which the assets of such
Multi-Advisor Funds are combined in order to be managed through single rather
than multiple accounts. The placement of assets into MM LLC did not change
the operations or fee structure of the Partnership; therefore, the following
notes relate to the operation of the Partnership through its investment in MM
LLC. The administrative authority over the Partnership remains with MLIP.
MLIP, on an ongoing basis, may change the number of Multi-Advisor Funds
investing in MM LLC.
MLIP selects the Advisors to manage MM LLC's assets, and allocates and
reallocates such trading assets among existing, replacement and additional
Advisors.
MLIP determines what percentage of the Partnership's total capital to invest
in MM LLC from time to time, attempting to balance the desirability of
reducing the opportunity costs of the Partnership's "principal protection"
structure by investing 100% of the Partnership's assets in MM LLC against the
necessity of preventing Merrill Lynch from ever being required to make any
payments to the Partnership under the Merrill Lynch guarantee (See Note 5).
-5-
<PAGE>
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
-------------------
Commodity futures, options on futures, forwards and options on forward
contracts 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
market value (for those commodity interests for which market quotations are
readily available) or at fair value. The change in unrealized (loss) profit
on open contracts from one period to the next is reflected in change in
unrealized in the Statements of Operations. (As a result of the investment
in MM LLC, there were no open contracts as of December 31, 1998.)
Foreign Currency Transactions
-----------------------------
The Partnership's functional currency is the U.S. dollar; however, it
transacts business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are
translated into U.S. dollars at the rates in effect at the dates of the
Statements of Financial Condition. Income and expense items denominated in
currencies other than the U.S. dollar are translated into U.S. dollars at the
rates in effect during the period. Gains and losses resulting from the
translation to U.S. dollars are reported in total trading results currently.
Operating Expenses
------------------
MLIP pays for all routine operating costs (including legal, accounting,
printing, postage and similar administrative expenses) of the Partnership.
MLIP receives an administrative fee as well as a portion of the brokerage
commissions paid to MLF by the Partnership.
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each Partner is individually responsible for reporting income
or loss based on such Partner's respective share of the Partnership's income
and expenses as reported for income tax purposes.
Distributions
-------------
The Unitholders are entitled to receive, equally per Unit, any distribution
which may be made by the Partnership. No such distributions had been made as
of December 31, 1998.
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.
-6-
<PAGE>
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2010 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Limited Partnership Agreement.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (the "Statement"). Such Statement is effective for
fiscal years commencing after June 15, 1999. The General Partner does not
believe that the Statement will have a significant effect on the financial
statements of the Partnership.
2. RELATED PARTY TRANSACTIONS
The majority of the Partnership's U.S. dollar assets are maintained at MLF.
On assets held in U.S. dollars, Merrill Lynch credits the Partnership with
interest at the prevailing 91-day U.S. Treasury bill rate. The Partnership is
credited with interest on any of its net gains actually held by Merrill Lynch
in non-U.S. dollar currencies at a prevailing local rate received by Merrill
Lynch. Merrill Lynch may derive certain economic benefit, in excess of the
interest which Merrill Lynch pays to the Partnership, from possession of such
assets.
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 determined that there may have been a miscalculation in
the interest credited to the Partnership for a period prior to November 1996
(such period may extend prior to that covered by these financial statements).
Accordingly, the General Partner credited current and former investors who
maintained a Merrill Lynch customer account in December 1997 with interest
which was compounded. Former investors who do not maintain a Merrill Lynch
customer account have been credited as their response forms are processed.
The total amount of the adjustment was approximately $2,891,000. Since this
amount was paid directly to investors by the General Partner, it is not
reflected in these financial statements. The General Partner determined that
interest was calculated appropriately since November 1996.
Prior to January 1, 1996, the Partnership paid brokerage commissions to MLF
at a flat monthly rate equal to .75 of 1% (a 9% annual rate) of the
Partnership's month-end assets allocated to trading. Effective January 1,
1996, the percentage was reduced to .729 of 1% (an 8.75% annual rate), 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 allocated to
trading (this recharacterization had no economic effect on the Partnership).
Assets allocated to trading 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.
The General Partner estimates that the round-turn equivalent commission rate
charged to the Partnership during the years ended December 31, 1998, 1997 and
1996 was approximately $69, $114 and $118, respectively (not including, in
calculating round-turn equivalents, forward contracts on a futures-equivalent
basis).
-7-
<PAGE>
MLF pays the Trading Advisors annual Consulting Fees ranging up to 4% of the
Partnership's average month-end assets allocated to them for management,
after reduction for a portion of the brokerage commissions.
Many of the Partnership's currency trades are executed in the spot and
forward foreign exchange markets (the "FX Markets") where there are no direct
execution costs. Instead, the participants, banks and dealers, including
Merrill Lynch International Bank ("MLIB"), in the FX Markets take a "spread"
between the prices at which they are prepared to buy and sell a particular
currency and such spreads are built into the pricing of the spot or forward
contracts with the Partnership. The General Partner anticipates that some of
the Partnership's foreign currency trades will be executed through MLIB, an
affiliate of the General Partner. MLIB has discontinued the operation of the
foreign exchange service desk, which included seeking multiple quotes from
counterparties unrelated to MLIB for a service fee and trade execution.
In its exchange of futures for physical ("EFP") trading, the Partnership
acquires cash currency positions through banks and dealers, including Merrill
Lynch. The Partnership pays a spread when it exchanges these positions for
futures. This spread reflects, in part, the different settlement dates of the
cash and the futures contracts, as well as prevailing interest rates, but
also includes a pricing spread in favor of the banks and dealers, which may
include a Merrill Lynch entity.
3. AGREEMENTS
Pursuant to the Advisory Agreements among the Advisors, the Partnership and
MLIP, the Advisors determined the commodity futures, options on futures,
forwards and options on forward contracts traded on behalf of the
Partnership, subject to certain rights reserved by the General Partner. The
Advisory Agreements generally terminate one year after they are entered into,
subject to certain renewal rights exercisable by the Partnership.
In the case of the Trading LLCs, as defined in Note 6, the Trading LLCs
entered into the Advisory Agreements with the Advisors.
In the case of MM LLC, as defined in Note 1, MM LLC has entered into the
current Advisory Agreements with the Advisors.
Profit Shares, generally ranging from 15% to 25% of any New Trading Profit,
as defined, recognized by each Advisor considered individually irrespective
of the overall performance of the Partnership, either as of the end of each
calendar quarter or year and upon the reallocation of assets away from an
Advisor were paid by the Partnership or the Trading LLCs and are currently
paid by MM LLC to each Advisor. Profit Shares are also paid out in respect of
Units redeemed as of the end of interim months, to the extent of the
applicable percentage of any New Trading Profit attributable to such Units.
4. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes of
disclosing net income or loss per weighted average Unit. The weighted average
number of Units outstanding at December 31, 1998, 1997 and 1996 equals the
Units outstanding, as of such date, adjusted proportionately for Units
redeemed based on the respective length of time each was outstanding during
the year.
-8-
<PAGE>
5. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch has guaranteed to the Partnership that it will have sufficient
Net Assets as of the Principal Assurance Date that the Net Asset Value per
Unit as of such Principal Assurance Date will equal, after adjustment for all
liabilities to third parties, not less than the minimum assured Net Asset
Value per Unit. Effective October 1, 1997, the Partnership restarted its
trading program for an additional Time Horizon of two years' duration and a
new Principal Assurance Date of September 30, 1999, with a minimum assured
Net Asset Value per Unit of $150.06.
6. INVESTMENTS
Prior to investing in MM LLC, the Partnership placed assets under the
management of certain of the Advisors by investing in private limited
liability companies ("Trading LLCs") formed by the General Partner. The only
members of the Trading LLCs were commodity pools sponsored by the General
Partner. Each Trading LLC traded 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 a Trading LLC rather than a managed account
had no economic effect on the Partnership, except to the extent that the
Partnership benefited 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 investments in Trading LLCs and MM LLC are reflected in the financial
statements at fair value based upon the Partnership's interest in each
Trading LLC and MM LLC. Fair value is equal to the market value of the net
assets of the Trading LLCs and of MM LLC allocable to the Partnership as an
investor. The resulting difference between cost and fair value is reflected
on the Statements of Operations as income from investments.
As of December 31, 1998, the Partnership had an investment in MM LLC in the
amount of $18,934,681 and as of December 31, 1997, the Partnership had an
investment in the ML JWH Financial and Metals Portfolio L.L.C. ("JWH LLC") of
$6,996,472.
During the second quarter of 1998, the Partnership withdrew its investment in
JWH LLC.
-9-
<PAGE>
Total revenues and fees with respect to such investments were as follows:
<TABLE>
<CAPTION>
(Loss)
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1998 Revenues Commissions Fees Shares Investments
- ------------------ ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
JWH LLC $ (700,366) $ 224,055 $ 6,402 $ -- $ (930,823)
MM LLC 3,184,157 1,060,876 30,311 486,733 1,606,237
----------- ----------- ----------- ----------- -----------
Total $2,483,791 $1,284,931 $ 36,713 $ 486,733 $ 675,414
=========== =========== =========== =========== ===========
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1997 Revenues Commissions Fees Shares Investments
- ------------------ ----------- ----------- ----------- ----------- -----------
JWH LLC $1,710,140 $ 614,361 $ 17,552 $ 109,873 $ 968,354
=========== =========== =========== =========== ===========
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1996 Revenues Commissions Fees Shares Investments
- ------------------ ----------- ----------- ----------- ----------- -----------
JWH LLC $2,622,561 $ 244,376 $ 6,982 $ 338,616 $2,032,587
=========== =========== =========== =========== ===========
</TABLE>
Condensed statements of financial condition and statements of income for MM
LLC and JWH LLC are set forth as follows:
MM LLC JWH LLC JWH LLC
December 31, 1998 December 31, 1997
-------------------- -------------------
Assets $ 125,332,558 $ 65,048,564
==================== ===================
Liabilities $ 4,949,082 $ 3,689,658
Members' Capital 120,383,476 61,358,906
==================== ===================
Total $ 125,332,558 $ 65,048,564
==================== ===================
<TABLE>
<CAPTION>
For the period from For the period from
June 1, 1998 to For the year ended October 1, 1996 to
December 31, 1998 December 31, 1997 December 31, 1996
-------------------- -------------------- --------------------
<S> <C> <C> <C>
Revenues $ 19,255,343 $ 15,279,401 $ 19,365,949
Expenses 9,491,842 6,714,041 4,426,261
-------------------- -------------------- --------------------
Net Income $ 9,763,501 $ 8,565,360 $ 14,939,688
==================== ==================== ====================
</TABLE>
-10-
<PAGE>
7. FAIR VALUE AND OFF-BALANCE SHEET RISK
As of June 1, 1998, the Partnership invested all of its assets in MM LLC.
Accordingly, the Partnership invested indirectly in derivative instruments,
but does not itself hold any derivative instrument positions. Consequently,
no such positions subsequent to May 31, 1998 are reflected in these financial
statements or in this Note 7.
The Partnership traded futures, options on futures, forwards and options on
forward contracts in interest rates, stock indices, commodities, currencies,
energy and metals. The Partnership's total trading results by reporting
category for the period from January 1, 1998 to May 31, 1998 and for the
years ended December 31, 1997 and 1996 (during 1998, 1997 and 1996, a portion
of the Partnership's trading was done through Trading LLCs and is not,
accordingly, reflected below) were as follows:
Total Trading Results
----------------------------------------
1998 1997 1996
------------- ------------ ------------
Interest Rates and
Stock Indices $ 46,962 $ (30,260) $ 42,816
Commodities 262,150 (265,231) 693,244
Currencies 65,904 1,301,214 1,306,971
Energy (1,390,575) (950,072) 1,265,776
Metals (208,319) (50,815) 163,083
------------- ------------ ------------
$(1,223,878) $ 4,836 $3,471,890
============= ============ ============
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 the market values of the financial instruments or
commodities underlying such derivative instruments frequently result in
changes in the Partnership's net unrealized profit on such derivative
instruments as reflected in the Statements of Financial Condition or, with
respect to Partnership assets invested in Trading LLCs and in MM LLC, the net
unrealized profit as reflected in the respective Statements of Financial
Condition of the Trading LLCs and MM LLC. The Partnership's exposure to
market risk is influenced by a number of factors, including the relationships
among the derivative instruments held by the Partnership, the Trading LLCs
and currently MM LLC, 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
exposure, although there can be no assurance that they will, in fact, succeed
in doing so. These procedures focus primarily on monitoring the trading of
the Advisors selected from time to time for the Partnership or MM LLC,
adjusting the percentage of the Partnership's, the Trading LLC's or MM LLC's
total assets allocated to trading, calculating the Net Asset Value of the
Advisors' respective Partnership accounts and Trading LLC accounts or
currently MM LLC accounts as of the close of business on each day and
reviewing outstanding positions for over-concentrations both on an
Advisor-by-Advisor and on an overall Partnership basis. While the General
Partner does not itself intervene in the markets to hedge or diversify the
Partnership's market exposure (although the General Partner does adjust the
percentage of the Partnership's total assets allocated to trading), the
General Partner may urge Advisors to reallocate positions, or itself
reallocate Partnership assets among Advisors (although typically only as of
the end of a month) in an attempt to avoid over-concentration. However, such
interventions are unusual. Except in cases in which it appears that an
Advisor has begun to
-11-
<PAGE>
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 and selection, with the market risk
controls being applied by the Advisors themselves.
One important aspect of the General Partner's risk controls is its
adjustments to the leverage at which the Partnership trades. By controlling
the percentage of the Partnership's assets allocated to trading, the General
Partner can directly affect the market exposure of the Partnership. Leverage
control is the principal means by which the General Partner hopes to be able
to ensure that Merrill Lynch is never required to make any payments under
its guarantee that the Net Asset Value per Unit will equal no less than a
specified minimum as of the Principal Assurance Date.
Fair Value
----------
The derivative instruments traded by the Partnership were marked to market
daily with the resulting net unrealized profit recorded in the Statements of
Financial Condition and the related (loss) profit reflected in trading
results in the Statements of Operations.
The contract/notional values of open contracts as of December 31, 1997 were
as follows (there were no open contracts as of December 31, 1998):
1997
-------------------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
---------------------- -----------------------
Interest Rates
& Stock Indices $ 82,771,267 $ 65,284,299
Commodities 745,270 8,158,197
Currencies 17,541,232 36,204,865
Energy 772,649 4,558,618
Metals 1,466,026 8,489,672
---------------------- -----------------------
$ 103,296,444 $ 122,695,651
====================== =======================
All of the Partnership's derivative instruments outstanding as of December
31, 1997 expired within one year.
-12-
<PAGE>
The contract/notional values of the Partnership's open exchange-traded and
non-exchange-traded open derivative instrument positions as of December 31,
1997 were as follows (there were no open derivative instrument positions as
of December 31, 1998):
1997
------------------------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------------ ----------------------
Exchange-
Traded $ 89,274,821 $100,878,257
Non-Exchange-
Traded 14,021,623 21,817,394
------------------------ ----------------------
$103,296,444 $122,695,651
======================== ======================
The average fair values, based on contract/notional values, of the
Partnership's derivative instrument positions which were open as of the end
of each calendar month during the period from January 1, 1998 to May 31, 1998
and for the year ended December 31, 1997 (during 1998 and 1997, a portion of
the Partnership's trading was done through Trading LLCs and is not,
accordingly, reflected below) were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest Rates
and Stock Indices $ 110,022,612 $ 25,213,416 $ 77,150,089 $ 37,849,496
Commodities 2,241,355 5,645,904 3,925,015 3,897,478
Currencies 15,416,143 19,133,760 18,669,147 28,646,929
Energy 1,806,250 2,157,156 3,139,779 2,312,458
Metals 2,730,894 4,141,921 5,072,385 7,398,721
------------------- ------------------- ------------------- -------------------
$ 132,217,254 $ 56,292,157 $ 107,956,415 $ 80,105,082
=================== =================== =================== ===================
</TABLE>
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 markets
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
-13-
<PAGE>
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
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 included on the
Statements of Financial Condition.
The gross unrealized profit and net unrealized profit (loss) on the
Partnership's open derivative instrument positions as of December 31, 1997
(as of December 31, 1997, a portion of the Partnership trading was done
through Trading LLCs and is not, accordingly, reflected below) were as
follows (there were no open derivative instrument positions as of December
31, 1998):
1997
--------------------------------------
Gross Unrealized Net Unrealized
Profit Profit (Loss)
------------------ ----------------
Exchange-Traded $ 1,076,647 $ 709,701
Non-Exchange-Traded 362,223 (6,370)
------------------ ----------------
$ 1,438,870 $ 703,331
================== ================
The Partnership has credit risk in respect of its counterparties and brokers,
but attempts to control this risk by dealing almost exclusively with Merrill
Lynch entities as counterparties and brokers.
The Partnership, in its normal course of business, entered into various
contracts, with MLF acting as its commodity broker. Pursuant to the
brokerage arrangement with MLF (which included a netting arrangement), to the
extent that such trading resulted in receivables from and payables to MLF,
these receivables and payables were 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/ Jo Ann Di Dario
Jo Ann Di Dario
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
The S.E.C.T.O.R. Strategy Fund(SM) L.P.
-14-
<PAGE>
EXHIBIT 13.01(A)
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
Financial Statements for the years ended
December 31, 1998 and 1997 and for the period from
December 2, 1996 (Commencement of Operations)
To December 31, 1996 and Independent Auditors' Report
[LOGO] Merrill Lynch
<PAGE>
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 AND FOR THE PERIOD FROM
DECEMBER 2, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996:
Statements of Financial Condition 2
Statements of Income 3
Statements of Changes in Members' Capital 4
Notes to Financial Statements 5-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Members of
ML Millburn Global L.L.C.:
We have audited the accompanying statements of financial condition of ML
Millburn Global L.L.C. (the "Company") as of December 31, 1998 and 1997, and the
related statements of income and of changes in members' capital for the years
ended December 31, 1998 and 1997 and for the period from December 2, 1996
(commencement of operations) to December 31, 1996. These financial statements
are the responsibility of Merrill Lynch Investment Partners Inc., the Company's
Administrator. 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 ML Millburn Global L.L.C. as of December 31,
1998 and 1997, and the results of its operations for the years ended December
31, 1998 and 1997 and for the period from December 2, 1996 (commencement of
operations) to December 31, 1996 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 1999
<PAGE>
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------------ ------------------
<S> <C> <C>
Equity in commodity futures trading accounts:
Cash and option premiums $ 26,414,436 $ 34,556,738
Net unrealized profit on open contracts 1,304,531 873,497
Accrued interest (Note 2) 96,033 154,701
------------------ ------------------
TOTAL $ 27,815,000 $ 35,584,936
================== ==================
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 2) $ 220,182 $ 279,690
Profit Shares payable (Note 3) 183,086 902,022
Administrative fees payable (Note 2) 5,794 7,413
Withdrawals payable 128,824 265,533
------------------ ------------------
Total liabilities 537,886 1,454,658
------------------ ------------------
MEMBERS' CAPITAL:
Voting Members 27,277,114 34,130,278
------------------ ------------------
Total Voting Members' capital 27,277,114 34,130,278
------------------ ------------------
TOTAL $ 27,815,000 $ 35,584,936
================== ==================
</TABLE>
See notes to financial statements.
-2-
<PAGE>
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE PERIOD FROM DECEMBER 2, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
----------------- ----------------- ---------------
<S> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 1,728,662 $ 6,777,967 $ (548,574)
Change in unrealized 431,034 (43,022) 916,519
----------------- ----------------- ---------------
Total trading results 2,159,696 6,734,945 367,945
Interest income (Note 2) 1,433,954 1,568,485 82,674
----------------- ----------------- ---------------
Total revenues 3,593,650 8,303,430 450,619
----------------- ----------------- ---------------
EXPENSES:
Brokerage commissions (Note 2) 2,836,503 3,530,493 270,878
Profit Shares (Note 3) 197,023 978,330 14,552
Administrative fees (Note 2) 74,885 91,883 5,940
----------------- ----------------- ---------------
Total expenses 3,108,411 4,600,706 291,370
----------------- ----------------- ---------------
NET INCOME $ 485,239 $ 3,702,724 $ 159,249
================= ================= ===============
</TABLE>
See notes to financial statements
-3-
<PAGE>
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBER'S CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE PERIOD FROM DECEMBER 2, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<S> <C>
Initial Contributions $ 27,949,167
Contributions 5,867,360
Receivable from Member (5,867,360)
Withdrawals (383,590)
Net income 159,249
------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1996 27,724,826
Collection of receivable 5,867,360
Withdrawals (3,164,632)
Net income 3,702,724
------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1997 $ 34,130,278
Withdrawals (7,338,403)
Net income 485,239
------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1998 $ 27,277,114
==================
</TABLE>
See notes to financial statements.
-4-
<PAGE>
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML Millburn Global L.L.C. (the "Company") was organized under the Delaware
Limited Liability Company Act on November 22, 1996 and commenced trading
activities on December 2, 1996. The Company engages in the speculative
trading of futures, options on futures and forward contracts on a wide range
of commodities. Millburn Ridgefield Corporation (the "Advisor" or
"Millburn") is the Advisor to the Company. Merrill Lynch Investment Partners
("MLIP"), a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in
turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch"), has been delegated administrative authority over the Company.
Merrill Lynch Futures Inc. ("MLF"), an affiliate of Merrill Lynch, is the
Company's commodity broker. The Company has authorized two classes of
Membership Interests: Non-Voting Interests and Voting Interests
(collectively, "Interests"). These two classes of Interests have common
economic interests in the Company, but the Non-Voting Interests, which could
be held by non-United States investment funds sponsored by MLIP, would not
participate in any respect in the management of the Company, or engage,
directly or indirectly, in, participate in or control all or any portion of
the business activities or affairs of the Company. Management of the Company
is vested solely in the Voting Interests, which are held by United States
limited partnerships sponsored by MLIP. The Voting Members control all
business activities and affairs of the Company by agreement of the majority
in interest of such Voting Members, subject to the trading authority vested
in and delegated to Millburn and the administrative authority vested in and
delegated to MLIP. The Members of the Company, each of which is a "commodity
pool" sponsored and managed by MLIP, share in the profits and losses of the
Company in proportion to their respective capital accounts, although the
Members are subject to somewhat different fees. Currently, there is only one
Member of the Company.
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.
Revenue Recognition
-------------------
Commodity futures, options on futures 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 market value (for
those commodity interests for which market quotations are readily available)
or at fair value. The change in unrealized profit (loss) on open contracts
from one period to the next is reflected in change in unrealized in the
Statements of Income.
-5-
<PAGE>
Foreign Currency Transactions
-----------------------------
The Company's functional currency is the U.S. dollar; however, it transacts
business in currencies other than the U.S. dollar. Assets and liabilities
denominated in currencies other than the U.S. dollar are translated into U.S.
dollars at the rates in effect at the dates of the Statements of Financial
Condition. Income and expense items denominated in currencies other than the
U.S. dollar are translated into U.S. dollars at the rates in effect during
the period. Gains and losses resulting from the translation to U.S. dollars
are reported in total trading results currently.
Organizational Costs
--------------------
MLIP paid all organizational costs relating to the Company without direct
reimbursement from the Company or any Member.
Operating Expenses
------------------
MLIP pays for all operating costs (including all legal, accounting, printing,
postage and similar administrative expenses) of the Company.
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each Member is individually responsible for reporting income or
loss based on such Member's respective share of the Company's income and
expenses as reported for income tax purposes.
Distributions
-------------
No distributions had been made by the Company to any Member as of December
31, 1998.
Withdrawals
-----------
Each Member may withdraw some or all of such Members' capital at Net Asset
Value as of the close of business on any business day. There are no
withdrawal fees or charges.
Dissolution
-----------
The Company will terminate on December 31, 2046 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Organization Agreement.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (the "Statement"). Such Statement is effective for
fiscal years commencing after June 15, 1999. MLIP does not believe that the
Statement will have a significant effect on the financial statements of the
Company.
-6-
<PAGE>
2. RELATED PARTY TRANSACTIONS
The Company's U.S. dollar assets are maintained at MLF. On assets held in
U.S. dollars, Merrill Lynch credits the Company with interest at the
prevailing 91-day U.S. Treasury bill rate. The Company is credited with
interest on any of its net gains actually held by Merrill Lynch in non-U.S.
dollar currencies at a prevailing local rate received by Merrill Lynch.
Merrill Lynch may derive certain economic benefit, in excess of the interest
which Merrill Lynch pays to the Company, from possession of such assets.
Merrill Lynch charges the Company Merrill Lynch's cost of financing realized
and unrealized losses on the Company's non-U.S. dollar-denominated positions.
Following the allocation of the Company's trading profit (loss) and interest
income among the Members' respective capital accounts, MLIP calculates the
brokerage commissions, administrative fees, Profit Shares and other expenses
due from the Company to third parties, in respect of the Company's trading on
behalf of the respective Members (the Company being subject to different
commissions, fees, Profit Shares and expenses in respect of its trading as
allocable to the various different Members). Such commissions, fees and
expenses are specifically allocated as of the end of each accounting period
(not pro rata based on the Members' respective capital accounts) to, and
deducted from, the appropriate Members' capital accounts and paid out by the
Company. The Company pays brokerage commissions to MLF at flat monthly rates
reflecting the fee arrangement between each Member and MLF. During the year
ended December 31, 1997, and the period from December 2, 1996 to December 31,
1996, such rates ranged from .729 of 1% (an 8.75% annual rate) to .979 of 1%
(an 11.75% annual rate) of each Member's month-end assets invested in the
Company. During the period from January 1, 1998 to May 31, 1998, the rates
ranged from .729 of 1% (an 8.75% annual rate) to .792 of 1% (a 9.50% annual
rate). As of May 31, 1998, the Members subject to a .729 of 1% brokerage
commission rate withdrew from the Company, and thereafter, the rate was .792
of 1% (a 9.50% annual rate).
The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25%
annual rate) of each Member'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.
In 1996, MLF paid the Advisor an annual consulting fee of 4% of the Company's
average month-end assets, after reduction for a portion of brokerage
commissions. Beginning January 1, 1997 the consulting fee paid by MLF to the
Advisor was reduced to 2% per annum.
Many of the Company's currency trades are executed in the spot and forward
foreign exchange markets (the "FX Markets") where there are no direct
execution costs. Instead, the participants, banks and dealers, including
Merrill Lynch International Bank ("MLIB"), in the FX Markets take a "spread"
between the prices at which they are prepared to buy and sell a particular
currency and such spreads are built into the pricing of the spot or forward
contracts with the Company. MLIP anticipates that some of the Company's
foreign currency trades will be executed through MLIB, an affiliate of MLIP.
MLIB has discontinued the operation of the foreign exchange service desk,
which included seeking multiple quotes from counterparties unrelated to MLIB
for a service fee and trade execution.
In its exchange of futures for physical ("EFP") trading, the Company acquires
cash currency positions through banks and dealers, including Merrill Lynch.
The Company pays a spread when it exchanges these positions for futures.
This spread reflects, in part, the different settlement dates of the cash and
the
-7-
<PAGE>
futures contracts, as well as prevailing interest rates, but also
includes a pricing spread in favor of the banks and dealers, which may
include a Merrill Lynch entity.
3. ADVISORY AGREEMENT
The Advisory Agreement between the Company and Millburn has remained
essentially unchanged since the inception of the Company. This Agreement is
in effect for successive one-year terms, but, in fact, given the single
advisor structure of the Company, the Company would terminate were the
Advisor no longer to manage its trading. The Advisor determines the
commodity futures, options on futures and forward contract trades to be made
on behalf of the Company, subject to certain rights reserved by MLIP.
The Company pays to Millburn an annual Profit Share equal to 20% of any New
Trading Profit, as defined, attributable to each Members' Capital Account in
the Company. Profit Shares are calculated separately in respect of each
Members' Capital Account. Prior to January 1, 1997, Profit Shares were
determined as of the end of each calendar quarter. Profit Shares are also
paid to Millburn upon the withdrawal of capital from the Company by a Member
for whatever purpose, other than to pay expenses.
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Company trades futures, options on futures and forward contracts on
interest rates, stock indices, currencies and metals. The Company's trading
results for the years ended December 31, 1998 and 1997 and for the period
from December 2, 1996 (Commencement of Operations) to December 31, 1996 were
as follows:
<TABLE>
<CAPTION>
Trading Results
-------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ---------------
<S> <C> <C> <C>
Interest rates $ 4,995,651 $ 591,963 $ (968,118)
Stock indices (555,528) 1,181,885 265,546
Currencies (1,713,442) 5,610,941 1,028,590
Metals (566,985) (649,844) 41,927
------------------ ------------------ ---------------
$ 2,159,696 $ 6,734,945 $ 367,945
================== ================== ===============
</TABLE>
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 the market values of the underlying financial
instruments or commodities underlying such derivative instruments frequently
result in changes in the Company's net unrealized profit on such derivative
instruments as reflected in the Statements of Financial Condition. The
Company's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the
Company as well as the volatility and liquidity in the markets in which such
derivative instruments are traded.
MLIP, which monitors the trading of the Company in MLIP's capacity as the
Company's Administrator, has procedures in place intended to control market
risk exposure, although there can be no assurance that they will, in fact,
succeed in doing so. These procedures focus primarily on monitoring the
trading of the Advisor, calculating the Net Asset Value of the Company and of
the Members' respective capital accounts as of the close of business on each
day and reviewing outstanding positions for over-
-8-
<PAGE>
concentrations. While MLIP does not itself intervene in the markets to hedge
or diversify the Company's market exposure, MLIP may consult with the Advisor
concerning the possibility of the Advisor reducing trading leverage or market
concentrations. However, such interventions are unusual. Except in cases in
which it appears that the Advisor has begun to deviate from past practice and
trading policies or to be trading erratically (which has not occurred to
date), MLIP's basic risk control procedures consist simply of the ongoing
process of monitoring Millburn with the market risk controls being applied by
Millburn.
Fair Value
The derivative instruments traded by the Company are marked to market daily
with the resulting net unrealized profit recorded in the Statements of
Financial Condition and the related profit reflected in trading results in
the Statements of Income.
The contract/notional values of open contracts as of December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------- ---------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------------ ------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C>
Interest rates $ 81,923,291 $ 244,863,913 $ 113,325,505 $ 45,345,280
Stock indices 2,024,758 4,584,393 729,875 7,900,952
Currencies 106,295,680 83,749,694 61,598,754 91,949,255
Metals 7,509,850 14,603,585 2,768,365 11,251,745
------------------------ ------------------------ ------------------------ -----------------------
$ 197,753,579 $ 347,801,585 $ 178,422,499 $ 156,447,232
======================== ======================== ======================== =======================
</TABLE>
Substantially all of the Company's derivative instruments outstanding as of
December 31, 1998 expire within one year.
The contract/notional values of the Company's exchange-traded and non-
exchange traded open derivative instrument positions as of December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------------------- ---------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------------ ------------------------ ------------------------ -----------------------
<S> <C> <C> <C> <C>
Exchange-
Traded $ 85,548,429 $ 253,061,446 $ 117,094,640 $ 55,066,167
Non-Exchange-
Traded 112,205,150 94,740,139 61,327,859 101,381,065
------------------------ ------------------------ ------------------------ -----------------------
$ 197,753,579 $ 347,801,585 $ 178,422,499 $ 156,447,232
======================== ======================== ======================== =======================
</TABLE>
-9-
<PAGE>
The average fair values, based on contract/notional values, of the Company's
derivative instrument positions which were open as of the end of each
calendar month during the years ended December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------- --------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Interest rates $ 124,601,864 $ 73,655,157 $ 109,239,425 $ 64,911,569
Stock indices 2,853,695 5,345,009 4,174,099 4,443,654
Currencies 189,443,664 191,133,976 181,132,627 197,159,660
Metals 10,024,800 14,065,584 10,647,435 11,798,908
-------------------- --------------------- -------------------- ---------------------
$ 326,924,023 $ 284,199,726 $ 305,193,586 $ 278,313,791
==================== ===================== ==================== =====================
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and 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 markets 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 require margin in the over-the-counter
markets.
The fair value amounts in the above tables represent the extent of the
Company'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 included on the Statements of
Financial Condition.
-10-
<PAGE>
EXHIBIT 13.01(A)
-----------------------------------------------------------------
ML Sjo Prospect L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
Financial Statements for the Period from January 1, 1998 to May
31, 1998 and the Period from January 2, 1997 (Commencement of
Operations) to December 31, 1997 and Independent Auditors' Report
<PAGE>
ML SJO PROSPECT L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998
AND FOR THE PERIOD FROM JANUARY 2, 1997 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1997:
Statements of Financial Condition 2
Statements of Income 3
Statements of Changes in Members' Capital 4
Notes to Financial Statements 5-10
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Members of
ML Sjo Prospect L.L.C. (In Liquidation):
We have audited the accompanying statements of financial condition of ML Sjo
Prospect L.L.C. (a Delaware limited liability company; the "Company"), in
liquidation, as of May 31, 1998 and December 31, 1997, and the related
statements of income and of changes in members' capital for the period from
January 1, 1998 to May 31, 1998 and for the period from January 2, 1997
(commencement of operations) to December 31, 1997. These financial statements
are the responsibility of the Company'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 ML Sjo Prospect L.L.C. (In Liquidation) as
of May 31, 1998 and December 31, 1997, and the results of its operations for the
period from January 1, 1998 to May 31, 1998 and for the period from January 2,
1997 (commencement of operations) to December 31, 1997 in conformity with
generally accepted accounting principles.
As discussed in Notes 1 and 2 to the financial statements, all trading
operations were suspended as of May 31, 1998. Liquidation was completed on July
30, 1998. Formal dissolution was effective on October 14, 1998.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1998
<PAGE>
ML SJO PROSPECT L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
STATEMENTS OF FINANCIAL CONDITION
MAY 31, 1998 AND DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
------------------ ------------------
<S> <C> <C>
Accrued interest (Note 3) $ 80,078 $ 93,192
Equity in commodity futures trading accounts:
Cash and option premiums 18,489,797 20,891,450
Net unrealized profit on open contracts - 255,565
------------------ ------------------
TOTAL $ 18,569,875 $ 21,240,207
================== ==================
LIABILITIES AND VOTING MEMBERS' CAPITAL
LIABILITIES:
Withdrawals payable $ 18,352,268 $ 1,716,855
Brokerage commissions payable (Note 3) 135,264 154,735
Profit Shares payable (Note 4) 78,478 182,607
Administrative fees payable (Note 3) 3,865 4,420
------------------ ------------------
Total liabilities 18,569,875 2,058,617
------------------ ------------------
VOTING MEMBERS' CAPITAL
Total Voting Members' capital - 19,181,590
------------------ ------------------
TOTAL $ 18,569,875 $ 21,240,207
================== ==================
</TABLE>
See notes to financial statements.
-2-
<PAGE>
ML SJO PROSPECT L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998 AND FOR THE PERIOD FROM
JANUARY 2, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REVENUES: 1998 1997
----------------- -----------------
<S> <C> <C>
Trading profit (loss):
Realized $ 1,317,593 $ 2,563,871
Change in unrealized (255,565) 255,565
----------------- -----------------
Total trading results 1,062,028 2,819,436
Interest income (Note 3) 410,214 1,083,832
----------------- -----------------
Total revenues 1,472,242 3,903,268
----------------- -----------------
EXPENSES:
Brokerage commissions (Note 3) 699,356 1,874,826
Profit Shares (Note 4) 83,540 216,149
Administrative fees (Note 3) 19,982 53,103
----------------- -----------------
Total expenses 802,878 2,144,078
----------------- -----------------
NET INCOME $ 669,364 $ 1,759,190
================= =================
</TABLE>
See notes to financial statements.
-3-
<PAGE>
ML SJO PROSPECT L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998 AND FOR THE PERIOD FROM
JANUARY 2, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-Voting
Voting Members Members Total
------------------- --------------------- ---------------
<S> <C> <C> <C>
Initial Contributions $ 19,005,590 $ 2,036,797 $ 21,042,387
Additions 4,053,526 - 4,053,526
Withdrawals (5,495,743) (2,177,770) (7,673,513)
Net Income 1,618,217 140,973 1,759,190
------------------- ------------------ ------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1997 19,181,590 - 19,181,590
Withdrawals (19,850,954) - (19,850,954)
Net Income 669,364 - 669,364
------------------- ------------------ ------------------
MEMBERS' CAPITAL,
MAY 31, 1998 $ - $ - $ -
=================== ================== ==================
</TABLE>
See notes to financial statements.
-4-
<PAGE>
ML SJO PROSPECT L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998 AND FOR THE PERIOD FROM
JANUARY 2, 1997 (COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1997
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML Sjo Prospect L.L.C. (the "Company") was organized under the Delaware
Limited Liability Company Act on December 19, 1996 and commenced trading
activities on January 2, 1997. Effective May 31, 1998, the Company suspended
trading operations (see Note 2). The Company engaged in the speculative
trading of futures, options on futures and forward contracts on a wide range
of commodities. Merrill Lynch Investment Partners Inc. ("MLIP"), a wholly-
owned subsidiary of Merrill Lynch Group, Inc., which in turn is a wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), was
delegated administrative authority over the Company, and Merrill Lynch
Futures Inc. ("MLF"), also an affiliate of MLIP, was its commodity broker.
The Company had authorized two classes of Membership Interests: Non-Voting
Membership Interests and Voting Membership Interests (collectively,
"Interests"). These two classes of Interests had common economic interests
in the Company, but the Non-Voting Interests, which were held by non-United
States investment funds sponsored by MLIP, did not participate in any respect
in the management of the Company, or engage, directly or indirectly, in,
participate in or control all or any portion of the business activities or
affairs of the Company. Management of the Company was vested solely in the
Voting Interests, which were held by United States limited partnerships
sponsored by MLIP. The Voting Members controlled all business activities and
affairs of the Company by agreement of the majority in interest of such
Members, subject to the trading authority vested in and delegated to Sjo,
Inc. (the "Advisor" or "Sjo") and the administrative authority vested in and
delegated to MLIP. The Members of the Company ("the Members"), each of which
is a "commodity pool" sponsored and controlled by MLIP, shared in the trading
profit and interest income of the Company in proportion to their respective
capital accounts.
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles required 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 may have differed from those estimates.
Revenue Recognition
-------------------
Commodity futures, options on futures, and forward contract transactions were
recorded on the trade date and open contracts were 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 was reflected in change in unrealized in the Statements of Income. Fair
value was based on quoted market prices on the exchange or market on which
the contract was traded.
-5-
<PAGE>
Organizational Costs
--------------------
MLIP paid all organizational costs relating to the Company without direct
reimbursement from the Company or any Member.
Income Taxes
------------
No provision for income taxes was made in the accompanying financial
statements as each Member was individually responsible for reporting income
or loss based on such Member's respective share of the Company's income and
expenses as reported for income tax purposes. Non-Voting Members were not
subject to U.S. tax.
Distributions
-------------
No distributions (except upon withdrawals) were made by the Company to any
Member as of May 31, 1998.
Withdrawals
------------
Each Member was permitted to withdraw some or all of such Members' Capital at
Net Asset Value as of the close of business on any business day. There were
no withdrawal fees or charges.
2. LIQUIDATION OF THE COMPANY
Effective May 31, 1998, the Company suspended all trading operations and
began formal liquidation of the Company. All commodity positions were
liquidated or offset and no other trading occurred. In accordance with the
liquidation, the Company's Advisory Agreement terminated and Members redeemed
their capital. Liquidation was completed on July 30, 1998. Formal
dissolution was effective on October 14, 1998.
3. RELATED PARTY TRANSACTIONS
The Company's U.S. dollar assets were maintained at MLF. On assets held in
U.S. dollars, Merrill Lynch credited the Company with interest at the
prevailing 91-day U.S. Treasury bill rate. The Company was credited with
interest on any of its net gains actually held by Merrill Lynch in non-U.S.
dollar currencies at a prevailing local rate received by Merrill Lynch.
Merrill Lynch may have derived certain economic benefit, in excess of the
interest which Merrill Lynch paid to the Company, from possession of such
assets.
Merrill Lynch charged the Company Merrill Lynch's cost of financing realized
and unrealized losses on the Company's non-U.S. dollar-denominated positions.
Following the allocation of the Company's trading profit and interest income
among the Members' respective capital accounts, MLIP calculated the brokerage
commissions, Profit Shares, administrative fees and other expenses due from
the Company to third parties, in respect of the Company's trading on behalf
of the respective Members (the Company being subject to different
commissions, fees and expenses in respect of its trading as allocable to the
various different Members). Such commissions, fees and expenses were
specifically allocated as of the end of each accounting period (not pro rata
based on the Members' respective capital accounts) to, and deducted from, the
appropriate Members' capital accounts and paid out by the Company. The
Company paid brokerage commissions to MLF, at flat monthly rates reflecting
the fee arrangement between each Member and MLF. During the period from
-6-
<PAGE>
January 2, 1997 to May 31, 1998, such rates ranged from .646 of 1% (a 7.75%
annual rate) to .831 of 1% (a 9.75% annual rate) of each Member's month-end
assets invested in the Company.
The Company paid MLIP a monthly administrative fee of .021 of 1% (a .25%
annual rate) of each Member's month-end assets invested in the Company.
Month-end assets were 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.
MLF paid the Advisor an annual consulting fee of 1% of the Company's average
month-end assets, after reduction for a portion of the brokerage commissions.
The Company traded forward contracts through a foreign exchange service desk
(the "F/X Desk") established by MLIP. The F/X Desk gave the Company access
to counterparties in addition to (but also including) Merrill Lynch
International Bank ("MLIB"). MLIP or another Merrill Lynch entity charged 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 were charged on trades awarded to MLIB (which received bid-ask
spreads on such trades).
In its exchange of futures for physical ("EFP") trading with Merrill Lynch,
the Company acquired 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 Company's other F/X Desk trading. When the Company exchanged
these positions for futures, there was a differential between the prices of
the two positions. This differential reflected, in part, the different
settlement dates of the cash and the futures contracts and prevailing
interest rates, but also included a pricing spread in favor of MLIB or
another Merrill Lynch entity. The Advisor made little use of EFPs.
The Company's F/X Desk service fee and EFP differential costs totaled no more
than .25 of 1% per annum of the Company's average month-end assets during the
Company's operation.
4. ADVISORY AGREEMENT
Pursuant to the Advisory Agreement between Sjo, the Company and MLIP, the
Advisor determined the commodity futures, options on futures and forward
contracts traded on behalf of the Company, subject to certain Company trading
policies and to certain rights reserved by MLIP.
The Company paid to Sjo an annual Profit Share equal to 15% of any New
Trading Profit, as defined, attributable to each Member's capital account in
the Company. Profit Shares, which were calculated separately in respect of
each Member's capital account, were determined as of the end of each calendar
year and were also paid to Sjo upon the withdrawal of capital from the
Company by a Member for whatever purpose, other than to pay expenses.
-7-
<PAGE>
5. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Company traded futures, options on futures and forward contracts on
interest rates, stock indices, commodities, currencies, energy and metals.
The Company's trading results by reporting category for the period from
January 1, 1998 to May 31, 1998 and the period from January 2, 1997
(commencement of operations) to December 31, 1997 were as follows:
Total Trading Results
---------------------------------------------
1998 1997
------------------- --------------------
Interest Rates $ 1,084,775 $ 1,608,016
Stock Indices - (111,089)
Commodities - 1,258,342
Currencies (22,747) 450,478
Energy - (516,170)
Metals - 129,859
------------------- --------------------
$ 1,062,028 $ 2,819,436
=================== ====================
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 the market values of the underlying financial
instruments or commodities underlying such derivative instruments frequently
result in changes in the Company's unrealized on such derivative instruments
as reflected in the Statements of Financial Condition. The Company's exposure
to market risk was influenced by a number of factors, including the
relationships among the derivative instruments held by the Company as well as
the volatility and liquidity in the markets in which such derivative
instruments were traded.
MLIP, which monitored the trading of the Company in MLIP's capacity as the
General Partner of the Voting Members and Sponsor of the Non-Voting Members,
had procedures in place intended to control market risk, although there was
no assurance that they would, in fact, succeed in doing so. The procedures
focused primarily on monitoring the trading of the Advisor, calculating the
Net Asset Value of the Company and of the Members' respective capital
accounts as of the close of business on each day and reviewing outstanding
positions for over-concentrations. While MLIP did not itself intervene in
the markets to hedge or diversify the Company's market exposure, MLIP did
consult with the Advisor concerning the possibility of the Advisor reducing
trading leverage or market concentrations. However, such consultations were
unusual. MLIP's basic risk control procedures consisted simply of the
ongoing process of monitoring Sjo with the market risk controls being applied
by Sjo.
Fair Value
----------
The derivative instruments traded by the Company were marked to market daily
with the resulting unrealized profit (loss) recorded in the Statements of
Financial Condition and the related profit reflected in trading revenues in
the Statements of Income.
-8-
<PAGE>
The contract/notional values of open contracts, all of which were exchange
traded, as of December 31, 1997 were as follows (there were no open contracts
as of May 31, 1998):
1997
--------------------------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------------- -------------------------
Interest Rates $ 259,399,745 $ 30,326,212
==================== =====================
The average fair values, based on contract/notional values, of the Company's
derivative instrument positions which were open as of the end of each
calendar month during the period from January 1, 1998 to May 31, 1998 and the
period from January 2, 1997 (commencement of operations) through December 31,
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------- --------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
---------------------- ----------------------- ----------------------- ----------------------
<S> <C> <C> <C> <C>
Interest Rates $ 218,889,921 $ 113,033,438 $ 194,525,907 $ 93,811,198
Stock Indices - - 10,338,576 16,608,547
Commodities - - 7,268,084 5,885,636
Currencies - - 16,122,843 19,305,449
Energy - - 1,618,935 2,010,335
Metals - - 5,914,036 5,393,765
---------------------- ----------------------- ----------------------- ----------------------
$ 218,889,921 $ 113,033,438 $ 235,788,381 $ 143,014,930
====================== ======================= ======================= ======================
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and sell the same derivative instrument on
the same date in the future. These commitments were economically offsetting
but were not, as a technical matter, offset in the forward markets 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 require margin in the over-the-counter
markets.
The fair value amounts in the above tables represent the extent of the
Company'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 was the net unrealized profit, if any, included on the
Statements of Financial Condition.
-9-
<PAGE>
The Company also had credit risk because the sole counterparty or broker with
respect to most of the Company's assets was MLF.
The gross unrealized profit and net unrealized profit on the Company's open
derivative instrument positions as of December 31, 1997 were as follows
(there were no open derivative instrument positions as of May 31, 1998):
1997
----------------------------------------
Gross Net
Unrealized Unrealized
Profit Profit
----------------- ------------------
Exchange-Traded $ 311,890 $ 255,565
=========== ============
The Company controlled credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.
The Company, in its normal course of business, entered into various
contracts, with MLF acting as its commodity broker. Pursuant to the
brokerage arrangement with MLF (which included a netting arrangement), to the
extent that such trading resulted in receivables from and payables to MLF,
these receivables and payables were offset and reported as a net receivable
or payable.
* * * * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Di Dario
Jo Ann Di Dario
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
Commodity Pool Operator of
ML Sjo Prospect L.L.C.
-10-
<PAGE>
EXHIBIT 13.01(A)
-----------------------------------------------------------------
ML Chesapeake Diversified L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
Financial Statements for the period from January 1, 1998 to May
31, 1998, for the year ended December 31, 1997 and for the period
from November 1, 1996 (Commencement of Operations) to December
31, 1996 and Independent Auditors' Report
<PAGE>
ML CHESAPEAKE DIVERSIFIED L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998, FOR
THE YEAR ENDED DECEMBER 31, 1997 AND FOR THE PERIOD FROM NOVEMBER 1, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996:
Statements of Financial Condition 2
Statements of Income 3
Statements of Changes in Members' Capital 4
Notes to Financial Statements 5-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Members of
ML Chesapeake Diversified L.L.C. (In Liquidation):
We have audited the accompanying statements of financial condition of ML
Chesapeake Diversified L.L.C. (a Delaware limited liability company; the
"Company"), in liquidation, as of May 31, 1998 and December 31, 1997 and the
related statements of income and changes in members' capital for the period from
January 1, 1998 to May 31, 1998, for the year ended December 31, 1997 and for
the period from November 1, 1996 (commencement of operations) to December 31,
1996. These financial statements are the responsibility of the Company'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 ML Chesapeake Diversified L.L.C. (In
Liquidation) as of May 31, 1998 and December 31, 1997, and the results of its
operations for the period from January 1, 1998 to May 31, 1998, for the year
ended December 31, 1997 and for the period from November 1, 1996 (commencement
of operations) to December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 2 to the financial statements, all trading
operations were suspended as of May 31, 1998. Liquidation was completed on July
30, 1998. Formal dissolution was effective on October 14, 1998.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1998
<PAGE>
ML CHESAPEAKE DIVERSIFIED L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
STATEMENTS OF FINANCIAL CONDITION
MAY 31, 1998 AND DECEMBER 31, 1997
------------------------------------------------------------------------------
ASSETS 1998 1997
----------- -----------
Accrued interest (Note 3) $ 72,745 $ 71,406
Equity in commodity futures trading accounts:
Cash and option premiums 16,384,123 15,538,921
Net unrealized profit on open contracts 106,572 1,584,855
----------- -----------
TOTAL $16,563,440 $17,195,182
=========== ===========
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES:
Withdrawals payable $16,181,857 $ 265,782
Brokerage commissions payable (Note 3) 122,074 126,690
Profit Shares payable (Note 4) 256,058 308,627
Administrative fees payable (Note 3) 3,451 3,582
----------- -----------
Total liabilities 16,563,440 704,681
----------- -----------
MEMBERS' CAPITAL:
Voting Members - 15,913,598
Non-Voting Members - 576,903
----------- -----------
Total Members' capital - 16,490,501
----------- -----------
TOTAL $16,563,440 $17,195,182
=========== ===========
See notes to financial statements.
-2-
<PAGE>
ML CHESAPEAKE DIVERSIFIED L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
STATEMENTS OF INCOME
FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998, FOR THE YEAR ENDED
DECEMBER 31, 1997 AND FOR THE PERIOD FROM NOVEMBER 1, 1996 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1996
------------------------------------------------------------------------------
REVENUES: 1998 1997 1996
------------ ------------ ----------
Trading profit (loss):
Realized $ 3,107,279 $ 1,335,899 $ 70,795
Change in unrealized (1,478,283) 1,217,210 367,645
------------ ------------ ----------
Total trading results 1,628,996 2,553,109 438,440
Interest income (Note 3) 357,839 927,382 170,154
Total revenues 1,986,835 3,480,491 608,594
------------ ------------ ----------
EXPENSES:
Brokerage commissions (Note 3) 615,028 1,646,907 359,828
Profit Shares (Note 4) 270,812 361,608 13,873
Administrative fees (Note 3) 17,572 46,611 9,248
------------ ------------ ----------
Total expenses 903,412 2,055,126 382,949
------------ ------------ ----------
NET INCOME $ 1,083,423 $ 1,425,365 $ 225,645
============ ============ ==========
See notes to financial statements.
-3-
<PAGE>
ML CHESAPEAKE DIVERSIFIED L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998, FOR THE YEAR ENDED
DECEMBER 31, 1997 AND FOR THE PERIOD FROM NOVEMBER 1, 1996 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1996
------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-Voting
Voting Members Members Total
--------------- ------------- -------------
<S> <C> <C> <C>
Initial Contributions $ 17,859,707 $ 3,403,696 $ 21,263,403
Withdrawals (743,910) (50,859) (794,769)
Net Income 191,985 33,660 225,645
--------------- ------------- -------------
MEMBERS' CAPITAL,
DECEMBER 31, 1996 17,307,782 3,386,497 20,694,279
Withdrawals (4,049,775) (3,153,590) (7,203,365)
Contributions 1,386,748 187,474 1,574,222
Net Income 1,268,843 156,522 1,425,365
--------------- ------------- -------------
MEMBERS' CAPITAL,
DECEMBER 31, 1997 15,913,598 576,903 16,490,501
Net Income 1,047,899 35,524 1,083,423
Withdrawals (16,961,497) (612,427) (17,573,924)
--------------- ------------- -------------
MEMBERS' CAPITAL,
MAY 31, 1998 $ - $ - $ -
=============== ============= =============
</TABLE>
See notes to financial statements.
-4-
<PAGE>
ML CHESAPEAKE DIVERSIFIED L.L.C.
(A Delaware Limited Liability Company)
(In Liquidation)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO MAY 31, 1998, FOR THE YEAR ENDED DECEMBER
31, 1997 AND FOR THE PERIOD FROM NOVEMBER 1, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML Chesapeake Diversified L.L.C. (the "Company") was organized under the
Delaware Limited Liability Company Act on October 23, 1996 and commenced
trading activities on November 1, 1996. Effective May 31, 1998, the Company
suspended trading operations (see Note 2). The Company had engaged in the
speculative trading of futures, options on futures and forward contracts on a
wide range of commodities. Merrill Lynch Investment Partners Inc. ("MLIP"),
a wholly-owned subsidiary of Merrill Lynch Group, Inc., which in turn is a
wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), was
delegated administrative authority over the Company, and Merrill Lynch
Futures Inc. ("MLF"), also an affiliate of MLIP, was its commodity broker.
The Company had authorized two classes of Membership Interests: Non-Voting
Interests and Voting Interests (collectively, "Interests"). These two
classes of Interests had common economic interests in the Company. The Non-
Voting Interests, which were held by non-United States investment funds
sponsored by MLIP, did not participate in any respect in the management of
the Company, or engage, directly or indirectly, in, participate in or control
all or any portion of the business activities or affairs of the Company.
Management of the Company was vested solely in the Voting Interests, which
were held by United States limited partnerships sponsored by MLIP. The
Voting Members controlled all business activities and affairs of the Company
by agreement of the majority in interest of such Members, subject to the
trading authority vested in and delegated to Chesapeake Capital Corporation
(the "Advisor" or "Chesapeake") and the administrative authority vested in
and delegated to MLIP. The Members of the Company (the "Members"), each of
which is a "commodity pool" sponsored by MLIP, shared in the trading profit
and interest income of the Company in proportion to their respective capital
accounts.
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 may have differed from those estimates.
Revenue Recognition
-------------------
Commodity futures, options on futures, and forward contract transactions were
recorded on the trade date and open contracts were 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 (loss) on open contracts from one period
to the next was reflected in change in unrealized in the Statements of
Income. Fair value was based on quoted market prices on the exchange or
market on which the contract was traded.
-5-
<PAGE>
Organizational Costs
--------------------
MLIP paid all organizational costs relating to the Company without direct
reimbursement from the Company or any Member.
Income Taxes
------------
No provision for income taxes was made in the accompanying financial
statements as each Member was individually responsible for reporting income
or loss based on such Member's respective share of the Company's income and
expenses as reported for income tax purposes. The Non-Voting Members were
not subject to U.S. tax.
Distributions
-------------
No distributions (except upon withdrawals) were made by the Company to any
Member as of May 31, 1998.
Withdrawals
------------
Each Member was permitted to withdraw some or all of such Member's Capital at
Net Asset Value as of the close of business on any business day. There were
no withdrawal fees or charges.
2. LIQUIDATION OF THE COMPANY
Effective May 31, 1998, the Company suspended all trading operations and
began formal liquidation of the Company. All commodity positions were
liquidated or offset and no other trading occurred. In accordance with the
liquidation, the Company's Advisory Agreement terminated and Members redeemed
their capital. Liquidation was completed on July 30, 1998. Formal
dissolution was effective on October 14, 1998.
3. RELATED PARTY TRANSACTIONS
The Company's U.S. dollar assets were maintained at MLF. On assets held in
U.S. dollars, Merrill Lynch credited the Company with interest at the
prevailing 91-day U.S. Treasury bill rate. The Company was credited with
interest on any of its net gains actually held by Merrill Lynch in non-U.S.
dollar currencies at a prevailing local rate received by Merrill Lynch.
Merrill Lynch may have derived certain economic benefit, in excess of the
interest which Merrill Lynch pays to the Company, from possession of such
assets.
Merrill Lynch charged the Company Merrill Lynch's cost of financing realized
and unrealized losses on the Company's non-U.S. dollar-denominated positions.
Following the allocation of the Company's trading profit (loss) and interest
income among the Members' respective capital accounts, MLIP calculated the
brokerage commissions, Profit Shares, administrative fees and other expenses
due from the Company to third parties, in respect of the Company's trading on
behalf of the respective Members (the Company being subject to different
commissions, fees and expenses in respect of its trading as allocable to the
various different Members). Such commissions, fees and expenses were
specifically allocated as of the end of each accounting period (not pro rata
based on the Members' respective capital accounts) to, and deducted from, the
appropriate Members' capital accounts and paid out by the Company. The
Company paid brokerage commissions to MLF, at flat monthly rates reflecting
the fee arrangement between each Member and MLF. During the year ended
December 31, 1997 and the period ended December 31, 1996, such rates
-6-
<PAGE>
ranged from .729 of 1% (an 8.75% annual rate) to .831 of 1% (a 9.75% annual
rate) of each Members' month-end assets invested in the Company. Beginning
January 1, 1998, the rate was .729 of 1% (an 8.75% annual rate) of each
Members' month-end assets invested in the Company.
The Company paid MLIP a monthly administrative fee of .021 of 1% (a .25%
annual rate) of each Member's month-end assets invested in the Company.
Month-end assets were 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.
MLF paid the Advisor an annual consulting fee of 2% of the Company's average
month-end assets, after reduction for a portion of the brokerage commissions.
Beginning January 1, 1997 the consulting fees paid by MLF to the Advisor were
reduced to 1% per annum.
The Company traded forward contracts through a foreign exchange service desk
(the "F/X Desk") established by MLIP. The F/X Desk gave the Company access
to counterparties in addition to (but also including) Merrill Lynch
International Bank ("MLIB"). MLIP or another Merrill Lynch entity charged 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 were charged on trades awarded to MLIB (which received bid-ask
spreads on such trades).
In its exchange of futures for physical ("EFP") trading with Merrill Lynch,
the Company acquired 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 Company's other F/X Desk trading. When the Company exchanged
these positions for futures, there was a differential between the prices of
the two positions. This differential reflected, in part, the different
settlement dates of the cash and the futures contracts and prevailing
interest rates, but also included a pricing spread in favor of MLIB or
another Merrill Lynch entity. The Advisor made little use of EFPs.
The Company's F/X Desk service fee and EFP differential costs totaled no more
than .25 of 1% per annum of the Company's average month-end assets during the
Company's operation.
4. ADVISORY AGREEMENT
Pursuant to the Advisory Agreement between Chesapeake, the Company and MLIP,
the Advisor determined the commodity futures, options on futures and forward
contracts traded on behalf of the Company, subject to certain Company trading
policies and to certain rights reserved by MLIP.
The Company paid to Chesapeake a Profit Share equal to 20% of any New Trading
Profit, as defined, attributable to each Members' capital account in the
Company. Profit Shares, which were calculated separately in respect of each
Members' capital account, were determined as of the end of each calendar
quarter prior to 1997 and annually thereafter and were also paid to
Chesapeake upon the withdrawal of capital from the Company by a Member for
whatever purpose, other than to pay expenses.
-7-
<PAGE>
5. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Company traded futures, options on futures and forward contracts on
interest rates, stock indices, commodities, currencies, energy and metals.
The Company's trading results by reporting category for the period from
January 1, 1998 to May 31, 1998, for the year ended December 31, 1997 and for
the period from November 1, 1996 (commencement of operations) to December 31,
1996 were as follows:
Total Trading Results
----------------------------------------
1998 1997 1996
------------ ------------ ----------
Interest Rates $ 941,486 $ 763,346 $ 503,034
Stock Indices 333,049 666,880 (91,628)
Commodities 536,206 542,777 (388,130)
Currencies (171,239) 671,508 422,927
Energy 317,352 (1,082,330) (49,487)
Metals (327,858) 990,928 41,724
------------ ------------ ----------
$ 1,628,996 $ 2,553,109 $ 438,440
============ ============ ==========
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 underlying financial
instruments or commodities underlying such derivative instruments frequently
result in changes in the Company's unrealized profit on such derivative
instruments as reflected in the Statements of Financial Condition. The
Company's exposure to market risk was influenced by a number of factors,
including the relationships among the derivative instruments held by the
Company as well as the volatility and liquidity of the markets in which such
derivative instruments were traded.
MLIP, which monitored the trading of the Company in its capacity as the
General Partner of the Voting Members and Sponsor of the Non-Voting Members,
had procedures in place intended to control market risk, although there was
no assurance that they would, in fact, have succeeded in doing so. The
procedures focused primarily on monitoring the trading of the Advisor,
calculating the Net Asset Value of the Company and of the Members' respective
capital accounts as of the close of business on each day and reviewing
outstanding positions for over-concentrations. While MLIP did not itself
intervene in the markets to hedge or diversify the Company's market exposure,
MLIP did consult from time to time with the Advisor concerning the
possibility of the Advisor reducing trading leverage or market
concentrations. However, such consultations were unusual. MLIP's basic risk
control procedures consisted simply of the ongoing process of monitoring
Chesapeake with the market risk controls being applied by Chesapeake.
Fair Value
----------
The derivative instruments traded by the Company were marked to market daily
with the resulting unrealized profit (loss) recorded in the Statements of
Financial Condition and the related profit reflected in trading revenues in
the Statements of Income.
-8-
<PAGE>
The contract/notional values of open contracts as of May 31, 1998 and December
31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- -----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest Rates $ - $ - $ 58,695,056 $ 18,009,766
Stock Indices - - 1,272,700 1,184,672
Commodities - - 4,584,639 7,520,083
Currencies 27,725,507 27,725,507 12,424,390 58,556,714
Energy - - - 1,978,682
Metals 11,696,691 11,696,691 4,971,476 10,357,200
---------------- -------------- ---------------- ---------------
$ 39,422,198 $ 39,422,198 $ 81,948,261 $ 97,607,117
================ ============== ================ ===============
</TABLE>
The contract/notional values of the Company's exchange-traded and
non-exchange-traded open derivative instrument positions as of May 31, 1998
and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- -----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Exchange Traded $ - $ - $ 73,789,832 $ 71,082,507
Non-Exchange-Traded 39,422,198 39,422,198 8,158,429 26,524,610
-------------- ------------- ----------------- -----------------
$ 39,422,198 $ 39,422,198 $ 81,948,261 $ 97,607,117
============== ============= ================= =================
</TABLE>
The average fair values, based on contract/notional values, of the
Company's derivative instrument positions which were open as of the end of
each calendar month during the period from January 1, 1998 to May 31, 1998
and the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C>
Interest Rates $ 67,066,558 $ 7,255,012 $ 66,490,915 $ 33,591,146
Stock Indices 5,149,711 688,223 6,987,284 1,450,982
Commodities 904,093 10,784,647 7,427,509 3,331,339
Currencies 25,826,290 40,695,373 13,883,403 42,553,986
Energy 100,880 1,843,474 1,655,737 1,203,131
Metals 8,612,561 11,593,682 6,500,099 7,542,869
--------------- ---------------- -------------- -------------
$ 107,660,093 $ 72,860,411 $ 102,944,947 $ 89,673,453
=============== ================ ============== =============
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and sell the same derivative instrument
on the same date in the future. These commitments were
-9-
<PAGE>
economically offsetting but were not, as a technical matter, offset in the
forward markets 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 require margin in the
over-the-counter markets.
The fair value amounts in the above tables represent the extent of the
Company'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 was the net unrealized profit, included on the Statements of
Financial Condition.
The Company also had credit risk because the sole counterparty or broker with
respect to most of the Company's assets was MLF.
The gross unrealized profit and net unrealized profit on the Company's open
derivative instrument positions as of May 31, 1998 and December 31, 1997 were
as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------- -------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit Profit Profit
------------ --------- ----------- -----------
<S> <C> <C> <C> <C>
Exchange Traded $ - $ - $ 1,275,702 $ 1,079,882
Non-Exchange-Traded 1,115,292 106,572 669,503 504,973
------------ --------- ----------- -----------
$ 1,115,292 $ 106,572 $ 1,945,205 $ 1,584,855
============ ========= =========== ===========
</TABLE>
The Company controlled credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.
The Company, in its normal course of business, entered into various contracts,
with MLF acting as its commodity broker. Pursuant to the brokerage arrangement
with MLF (which included a netting arrangement), to the extent that such
trading resulted in receivables from and payables to MLF, these receivables
and payables were offset and reported as a net receivable or payable.
-10-
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Members of
ML Chesapeake Diversified L.L.C. (In Liquidation):
We have audited the accompanying statements of financial condition of ML
Chesapeake Diversified L.L.C. (a Delaware limited liability company; the
"Company"), in liquidation, as of May 31, 1998 and December 31, 1997 and the
related statements of income and changes in members' capital for the period from
January 1, 1998 to May 31, 1998, for the year ended December 31, 1997 and for
the period from November 1, 1996 (commencement of operations) to December 31,
1996. These financial statements are the responsibility of the Company'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 ML Chesapeake Diversified L.L.C. (In
Liquidation) as of May 31, 1998 and December 31, 1997, and the results of its
operations for the period from January 1, 1998 to May 31, 1998, for the year
ended December 31, 1997 and for the period from November 1, 1996 (commencement
of operations) to December 31, 1996 in conformity with generally accepted
accounting principles.
As discussed in Notes 1 and 2 to the financial statements, all trading
operations were suspended as of May 31, 1998. Liquidation was completed on July
30, 1998. Formal dissolution was effective on October 14, 1998.
DELOITTE & TOUCHE LLP
New York, New York
October 16, 1998
<PAGE>
EXHIBIT 13.01(A)
ML JWH FINANCIAL AND
METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
Financial Statements for the
Years Ended December 31, 1998 and 1997
and for the period from October 1, 1996
(Commencement of Operations) to December
31, 1996, and Independent Auditors' Report
[LOGO] MERRILL LYNCH
<PAGE>
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1998 AND 1997 AND FOR THE PERIOD FROM
OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Changes in Members' Capital 4
Notes to Financial Statements 5-11
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Members of
ML JWH Financial and Metals Portfolio L.L.C.:
We have audited the accompanying statements of financial condition of ML JWH
Financial and Metals Portfolio L.L.C. (the "Company") as of December 31, 1998
and 1997, and the related statements of operations and of changes in members'
capital for the years ended December 31, 1998 and 1997 and for the period from
October 1, 1996 (commencement of operations) to December 31, 1996. These
financial statements are the responsibility of Merrill Lynch Investment Partners
Inc., the Company's Administrator. 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 ML JWH Financial and Metals Portfolio L.L.C.
as of December 31, 1998 and 1997, and the results of its operations for the
years ended December 31, 1998 and 1997 and for the period from October 1, 1996
(commencement of operations) to December 31, 1996 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 1999
<PAGE>
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
1998 1997
------------------ ------------------
<S> <C> <C>
Equity in commodity futures trading accounts:
Cash and option premiums $ 26,100,432 $ 62,041,417
Net unrealized profit on open contracts 3,074,669 2,728,987
Accrued interest (Note 2) 102,296 278,160
------------------ ------------------
TOTAL $ 29,277,397 $ 65,048,564
================== ==================
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 2) $ 231,621 $ 494,568
Profit Shares payable (Note 3) - 614,420
Administrative fees payable (Note 2) 6,095 13,545
Withdrawals payable 153,482 2,567,125
------------------ ------------------
Total liabilities 391,198 3,689,658
------------------ ------------------
MEMBERS' CAPITAL:
Voting Members 28,886,199 59,766,977
Non-Voting Members - 1,591,929
------------------ ------------------
Total Members' capital 28,886,199 61,358,906
------------------ ------------------
TOTAL $ 29,277,397 $ 65,048,564
================== ==================
</TABLE>
See notes to financial statements.
-2-
<PAGE>
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997 AND FOR
THE PERIOD FROM OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REVENUES: 1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Trading (loss) profit:
Realized $ (913,823) $ 10,175,257 $ 17,860,411
Change in unrealized 345,682 2,030,416 698,571
------------------ ------------------ ------------------
Total trading results (568,141) 12,205,673 18,558,982
Interest income (Note 2) 1,959,142 3,073,728 806,967
------------------ ------------------ ------------------
Total revenues 1,391,001 15,279,401 19,365,949
------------------ ------------------ ------------------
EXPENSES:
Brokerage commissions (Note 2) 3,638,923 5,539,579 2,063,021
Profit Shares (Note 3) 332,560 1,024,612 2,313,537
Administrative fees (Note 2) 97,879 149,850 49,703
------------------ ------------------ ------------------
Total expenses 4,069,362 6,714,041 4,426,261
------------------ ------------------ ------------------
NET (LOSS) INCOME $ (2,678,361) $ 8,565,360 $ 14,939,688
================== ================== ==================
</TABLE>
See notes to financial statements.
-3-
<PAGE>
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR THE PERIOD FROM OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-Voting
Voting Members Members Total
------------------- ----------------- ------------------
<S> <C> <C> <C>
Initial Contributions $ 56,790,791 $ 7,080,836 $ 63,871,627
Contributions 1,212,016 2,017 1,214,033
Withdrawals (17,295,297) (1,752,897) (19,048,194)
Net Income 13,270,063 1,669,625 14,939,688
------------------- ----------------- ------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1996 53,977,573 6,999,581 60,977,154
Contributions 6,356,012 714,303 7,070,315
Withdrawals (8,626,795) (6,627,128) (15,253,923)
Net Income 8,060,187 505,173 8,565,360
------------------- ----------------- ------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1997 59,766,977 1,591,929 61,358,906
Withdrawals (28,414,824) (1,379,522) (29,794,346)
Net Loss (2,465,954) (212,407) (2,678,361)
------------------- ----------------- ------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1998 $ 28,886,199 $ - $ 28,886,199
=================== ================= ==================
</TABLE>
See notes to financial statements.
-4-
<PAGE>
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML JWH Financial and Metals Portfolio L.L.C. (the "Company") was organized
under the Delaware Limited Liability Company Act on September 19, 1996 and
commenced trading activities on October 1, 1996. The Company engages in the
speculative trading of futures, options on futures and forward contracts on a
wide range of commodities. John W. Henry & Company, Inc. (the "Advisor" or
"JWH(R)") is the Advisor to the Company. Merrill Lynch Investment Partners
Inc. ("MLIP"or the "Administrator"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc., which, in turn, is a wholly-owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch"), has been delegated administrative
authority over the Company. Merrill Lynch Futures Inc. ("MLF"), an
affiliate of MLIP, is the Company's commodity broker. The Company has
authorized two classes of Membership Interests: Non-Voting Interests and
Voting Interests (collectively, "Interests"). These two classes of Interests
have common economic interests in the Company, but the Non-Voting Interests,
which were held by non-United States investment funds sponsored by MLIP, did
not participate in any respect in the management of the Company, or engage,
directly or indirectly, in, participate in or control all or any portion of
the business activities or affairs of the Company. Management of the Company
is vested solely in the Voting Interests, which are held by United States
limited partnerships. The Voting Members control all business activities and
affairs of the Company by agreement of the majority in interest of such
Members, subject to the trading authority vested in and delegated to JWH and
the administrative authority vested in and delegated to MLIP. The Members of
the Company (the "Members"), each of which is a "commodity pool" sponsored
and managed by MLIP, share in the trading profit (loss) and interest income
of the Company in proportion to their respective capital accounts, although
the Members are subject to somewhat different fees.
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.
Revenue Recognition
--------------------
Commodity futures, options on futures 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 market value (for
those commodity interests for which market quotations are readily available)
or at fair value. The change in unrealized profit on open contracts from one
period to the next is reflected in change in unrealized in the Statements of
Operations.
-5-
<PAGE>
Foreign Currency Transactions
-----------------------------
The Company's functional currency is the U.S. dollar; however, it transacts
business in currencies other than the U.S. dollar. Assets and liabilities
denominated in currencies other than the U.S. dollar are translated into U.S.
dollars at the rates in effect at the dates of the Statements of Financial
Condition. Income and expense items denominated in currencies other than the
U.S. dollar are translated into U.S. dollars at the rates in effect during
the period. Gains and losses resulting from the translation to U.S. dollars
are reported in total trading results currently.
Organizational Costs
--------------------
MLIP paid all organizational costs relating to the Company without direct
reimbursement from the Company or any Member.
Operating Expenses
------------------
MLIP pays for all operating costs (including all legal, accounting, printing,
postage and similar administrative expenses) of the Company.
Income Taxes
-------------
No provision for income taxes has been made in the accompanying financial
statements as each Member is individually responsible for reporting income or
loss based on such Member's respective share of the Company's income and
expenses as reported for income tax purposes.
Distributions
-------------
No distributions had been made by the Company to any Member as of December
31, 1998.
Withdrawals
-----------
Each Member may withdraw some or all of such Members' capital at the Net
Asset Value as of the close of business on any business day. There are no
withdrawal fees or charges.
Dissolution
------------
The Company will terminate on September 30, 2046 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Organization Agreement.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (the "Statement"). Such Statement is effective for
fiscal years commencing after June 15, 1999. The Administrator does not
believe that the Statement will have a significant effect on the financial
statements of the Company.
-6-
<PAGE>
2. RELATED PARTY TRANSACTIONS
The Company's U.S. dollar assets are maintained at MLF. On assets held in
U.S. dollars, Merrill Lynch credits the Company with interest at the
prevailing 91-day U.S. Treasury bill rate. The Company is credited with
interest on any of its net gains actually held by Merrill Lynch in non-U.S.
dollar currencies at a prevailing local rate received by Merrill Lynch.
Merrill Lynch may derive certain economic benefit, in excess of the interest
which Merrill Lynch pays to the Company, from possession of such assets.
Merrill Lynch charges the Company Merrill Lynch's cost of financing realized
and unrealized losses on the Company's non-U.S. dollar-denominated positions.
Following the allocation of the Company's trading profit (loss) and interest
income among the Members' respective capital accounts, MLIP calculates the
brokerage commissions, Profit Shares, administrative fees and other expenses
due from the Company to third parties, in respect of the Company's trading on
behalf of the respective Members (the Company being subject to different
commissions, fees and expenses in respect of its trading as allocable to the
various different Members). Such commissions, fees, Profit Shares and
expenses are specifically allocated as of the end of each accounting period
(not pro rata based on the Members' respective capital accounts) to, and
deducted from, the appropriate Members' capital accounts and paid out by the
Company. The Company pays brokerage commissions to MLF at flat monthly rates
reflecting the fee arrangement between each Member and MLF. During the
period from January 1, 1998 to May 31, 1998, the year ended December 31, 1997
and the period from October 1, 1996 to December 31, 1996, such rates ranged
from .646 of 1% (a 7.75% annual rate) to .979 of 1% (an 11.75% annual rate)
of each Member's month-end assets invested in the Company. As of May 31,
1998, Members subject to various brokerage commission rates withdrew from the
Company, and thereafter, the rate was .792 of 1% (a 9.5% annual rate).
The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25%
annual rate) of each Member'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.
MLF pays the Advisor an annual consulting fee of 4% of the Company's average
month-end assets, after reduction for a portion of the brokerage commissions.
Many of the Company's currency trades are executed in the spot and forward
foreign exchange markets (the "FX Markets") where there are no direct
execution costs. Instead, the participants, banks and dealers, including
Merrill Lynch International Bank ("MLIB"), in the FX Markets take a "spread"
between the prices at which they are prepared to buy and sell a particular
currency and such spreads are built into the pricing of the spot or forward
contracts with the Company. MLIP anticipates that some of the Company's
foreign currency trades will be executed through MLIB, an affiliate of MLIP.
MLIB has discontinued the operation of the foreign exchange service desk,
which included seeking multiple quotes from counterparties unrelated to MLIB
for a service fee and trade execution.
In its exchange of futures for physical ("EFP") trading, the Company acquires
cash currency positions through banks and dealers, including Merrill Lynch.
The Company pays a spread when it exchanges these positions for futures. This
spread reflects, in part, the different settlement dates of the cash and the
futures contracts, as well as prevailing interest rates, but also includes a
pricing spread in favor of the banks and dealers, which may include a Merrill
Lynch entity.
3. ADVISORY AGREEMENT
-7-
<PAGE>
The Advisory Agreement between the Company and JWH has remained essentially
unchanged since the inception of the Company. This Agreement is in effect
for successive one-year terms, but, in fact, given the single advisor
structure of the Company, the Company would terminate were the Advisor no
longer to manage its trading. The Advisor determines the commodity futures,
options on futures and forward contract trades to be made on behalf of the
Company, subject to certain Company trading policies and to certain rights
reserved by MLIP.
The Company pays to JWH a quarterly Profit Share equal to 15% of any New
Trading Profit, as defined, attributable to each Member's capital account.
Profit Shares are calculated separately in respect of each Member's Capital
Account. Profit Shares are determined as of the end of each calendar quarter
and are also paid to JWH upon the withdrawal of capital from the Company by a
Member for whatever purpose, other than to pay expenses.
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Company trades futures, options on futures and forward contracts on
interest rates, stock indices, currencies, and metals. The Company's
trading results by reporting category for the years ended December 31, 1998
and 1997 and for the period from October 1, 1996 (commencement of operations)
to December 31, 1996 were as follows:
<TABLE>
<CAPTION>
Total Trading Results
----------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
<S> <C> <C> <C>
Interest Rates $ 6,730,758 $ 4,763,680 $ 10,439,465
Stock Indices (1,829,531) 2,201,853 (371,033)
Currencies (1,826,268) 1,794,830 5,889,115
Metals (3,643,100) 3,445,310 2,601,435
------------------ ------------------ ------------------
$ (568,141) $ 12,205,673 $ 18,558,982
================== ================== ==================
</TABLE>
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 the market values of the underlying financial
instruments or commodities underlying such derivative instruments frequently
result in changes in the Company's net unrealized profit on such derivative
instruments as reflected in the Statements of Financial Condition. The
Company's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the
Company as well as the volatility and liquidity in the markets in which such
derivative instruments are traded.
MLIP, which monitors the trading of the Company in MLIP's capacity as the
Company's Administrator, has procedures in place intended to control market
risk exposure, although there can be no assurance that they will, in fact,
succeed in doing so. These procedures focus primarily on monitoring the
trading of the Advisor, calculating the Net Asset Value of the Company and of
the Members' respective capital accounts as of the close of business on each
day and reviewing outstanding positions for over-concentrations. While MLIP
does not itself intervene in the markets to hedge or diversify the Company's
market exposure, MLIP may consult with the Advisor concerning the possibility
of the Advisor reducing trading leverage or market concentrations. However,
such interventions are unusual. Except in cases in which it appears that JWH
has begun to deviate from past practice and trading policies or to be trading
erratically (which has not occurred to date), MLIP's basic risk control
-8-
<PAGE>
procedures consist simply of the ongoing process of monitoring JWH with the
market risk controls being applied by JWH.
Fair Value
The derivative instruments traded by the Company are marked to market daily
with the resulting net unrealized profit recorded in the Statements of
Financial Condition and the related (loss) profit reflected in trading
results in the Statements of Operations.
The contract/notional values of open contracts as of December 31, 1998 and
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- -------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Interest Rates $ 162,548,185 $ 173,898,152 $ 200,852,720 $ 260,424,574
Stock Indices - - - 4,996,821
Currencies 10,438,700 - 69,236,628 134,487,777
Metals - 2,284,680 8,173,620 23,636,110
-------------------- -------------------- -------------------- --------------------
$ 172,986,885 $ 176,182,832 $ 278,262,968 $ 423,545,282
==================== ==================== ==================== ====================
</TABLE>
Substantially all of the Company's derivative instruments outstanding as of
December 31, 1998 expire within one year.
The contract/notional values of the Company's exchange-traded and non-
exchange traded open derivative instrument positions as of December 31, 1998
and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------ -------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Exchange-Traded $ 172,986,885 $ 176,182,832 $ 209,026,340 $ 305,091,785
Non-Exchange-Traded - - 69,236,628 118,453,497
------------------- ------------------- -------------------- --------------------
$ 172,986,885 $ 176,182,832 $ 278,262,968 $ 423,545,282
=================== =================== ==================== ====================
</TABLE>
-9-
<PAGE>
The average fair values, based on contract/notional values, of the Company's
derivative instruments positions which were open as of the end of each
calendar month during the years ended December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- -------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Interest Rates $ 300,311,628 $ 146,537,268 $ 364,504,683 $ 155,397,051
Stock Indices 4,594,819 5,430,676 13,580,756 11,229,979
Currencies 56,235,733 71,244,084 117,259,926 148,327,330
Metals 7,683,213 8,636,966 6,409,749 31,164,193
-------------------- -------------------- -------------------- --------------------
$ 368,825,393 $ 231,848,994 $ 501,755,114 $ 346,118,553
==================== ==================== ==================== ====================
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and 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 markets 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 require margin in the over-the-counter
markets.
The fair value amounts in the above tables represent the extent of the
Company'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 included on the Statements of
Financial Condition.
The gross unrealized profit and net unrealized profit (loss) on the Company's
open derivative instrument positions as of December 31, 1998 and 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------- ---------------------------------
Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized
Profit Profit Profit Profit (Loss)
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Exchange-Traded $ 3,511,028 $ 3,074,669 $ 4,309,342 $ 3,661,949
Non-Exchange Traded - - 1,587,289 (932,962)
--------------- -------------- -------------- --------------
$ 3,511,028 $ 3,074,669 $ 5,896,631 $ 2,728,987
=============== ============== ============== ==============
</TABLE>
-10-
<PAGE>
The Company has credit risk in respect of its counterparties and brokers, but
attempts to control this risk by dealing almost exclusively with Merrill
Lynch entities as counterparties and brokers.
The Company, through its normal course of business, enters into various
contracts, with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF (which includes a netting arrangement), to the extent
that such trading results in receivables from and payables to MLF, these
receivables and payables are offset and reported as a net receivable or
payable.
* * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Di Dario
Jo Ann Di Dario
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
Commodity Pool Operator
ML JWH Financial and Metals Portfolio L.L.C.
-11-
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
Financial Statements for the period from
June 1, 1998 (Commencement of Operations)
to December 31, 1998 and
Independent Auditors' Report
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
TABLE OF CONTENTS
- ---------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE PERIOD FROM
JUNE 1, 1998 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998:
Statement of Financial Condition 2
Statement of Income 3
Statement of Changes in Members' Capital 4
Notes to Financial Statements 5-11
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Members of
ML Multi-Manager Portfolio LLC:
We have audited the accompanying statement of financial condition of ML Multi-
Manager Portfolio LLC (the "Company") as of December 31, 1998, and the related
statements of income and of changes in members' capital for the period from June
1, 1998 (commencement of operations) to December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit 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 audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ML Multi-Manager Portfolio LLC as of
December 31, 1998, and the results of its operations for the period from June 1,
1998 (commencement of operations) to December 31, 1998 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 1999
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998
- --------------------------------------------------------------------------------
ASSETS
1998
-----------------
Equity in commodity futures trading accounts:
Cash and option premiums $ 122,916,463
Net unrealized profit on open contracts 1,970,219
Accrued interest (Note 2) 445,876
------------------
TOTAL $ 125,332,558
==================
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 2) $ 938,848
Profit Shares payable (Note 3) 1,944,169
Administrative fees payable (Note 2) 44,772
Due to invested funds 2,021,293
------------------
Total liabilities 4,949,082
------------------
MEMBERS' CAPITAL:
Voting Members 120,383,476
------------------
Total Members' capital 120,383,476
------------------
TOTAL $ 125,332,558
==================
See notes to financial statements.
- 2 -
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
STATEMENT OF INCOME
FOR THE PERIOD FROM JUNE 1, 1998 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
REVENUES: 1998
--------------
Trading profit:
Realized $ 13,866,078
Unrealized 1,970,219
--------------
Total trading results 15,836,297
Interest income (Note 2) 3,419,046
--------------
Total revenues 19,255,343
--------------
EXPENSES:
Brokerage commissions (Note 2) 6,348,662
Profit Shares (Note 3) 2,943,598
Administrative fees (Note 2) 199,582
--------------
Total expenses 9,491,842
--------------
NET INCOME $ 9,763,501
==============
See notes to financial statements.
- 3 -
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE PERIOD FROM JUNE 1, 1998 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Non-Voting
Voting Members Members Total
-------------------- -------------------- ------------------------
<S> <C> <C> <C>
Initial Contributions $ 116,715,631 $ 5,461,563 $ 122,177,194
Additions 11,012,473 56,478 11,068,951
Withdrawals (16,715,086) (5,911,084) (22,626,170)
Net Income 9,370,458 393,043 9,763,501
-------------------- -------------------- --------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1998 $ 120,383,476 $ - $ 120,383,476
==================== ==================== ====================
</TABLE>
See notes to financial statements.
- 4 -
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML Multi-Manager Portfolio LLC (the "Company") was organized under the
Delaware Limited Liability Company Act on May 11, 1998 and commenced trading
activities on June 1, 1998. The Company engages in the speculative trading
of futures, options on futures, forwards and options on forward contracts on
a wide range of commodities. Merrill Lynch Investment Partners Inc.
("MLIP"), a wholly-owned subsidiary of Merrill Lynch Group, Inc., which, in
turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill
Lynch"), has been delegated administrative authority over the Company.
Merrill Lynch Futures Inc. ("MLF"), an affiliate of MLIP, is the Company's
commodity broker. A portion of the Company's assets is held by a commodity
broker, other than MLF, to facilitate the trading of a certain independent
advisor, subject to an arrangement recognized by MLIP. The Company has
authorized two classes of Membership Interests: Non-Voting Interests and
Voting Interests (collectively, "Interests"). These two classes of Interests
have common economic interests in the Company, but the Non-Voting Interests,
which were held by non-United States investment funds sponsored by MLIP, do
not participate in any respect in the management of the Company, or engage,
directly or indirectly, in, participate in, or control all or any portion of
the business activities or affairs of the Company. Management of the Company
is vested solely in the Voting Interests, which are held by United States
limited partnerships. The Voting Members control all business activities and
affairs of the Company by agreement of the majority in interest of such
Members, subject to the discretionary trading authority vested in and
delegated to the trading advisors (the "Advisors" or "the "Trading Advisors")
and the administrative authority vested in and delegated to MLIP. The
Members of the Company (the "Members"), each of which is a "commodity pool"
sponsored and controlled by MLIP, share in the trading profit (loss) and
interest income of the Company in proportion to their respective capital
accounts.
MLIP selects independent advisors to manage the Company's assets, and
allocates and reallocates the Company's assets among existing, replacement
and additional Advisors.
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.
Revenue Recognition
--------------------
Commodity futures, options on futures, forwards and options on forward
contracts are recorded on the trade date and open contracts are reflected in
net unrealized profit on open contracts in the Statement of Financial
Condition at the difference between the original contract value and the
market value (for those commodity interests for which market quotations are
readily available) or at fair value. The unrealized profit on open contracts
is reflected in unrealized in the Statement of Income.
- 5 -
<PAGE>
Foreign Currency Transactions
-----------------------------
The Company's functional currency is the U.S. dollar; however, it transacts
business in currencies other than the U.S. dollar. Assets and liabilities
denominated in currencies other than the U.S. dollar are translated into U.S.
dollars at the rates in effect at the date of the Statement of Financial
Condition. Income and expense items denominated in currencies other than the
U.S. dollar are translated into U.S. dollars at the rates in effect during
the period. Gains and losses resulting from the translation to U.S. dollars
are reported in total trading results currently.
Organizational Costs
--------------------
MLIP paid all organizational costs relating to the Company without direct
reimbursement from the Company or any Member.
Income Taxes
-------------
No provision for income taxes has been made in the accompanying financial
statements as each Member is individually responsible for reporting income or
loss based on such Member's respective share of the Company's income and
expenses as reported for income tax purposes.
Distributions
-------------
No distribution (except upon withdrawals) had been made by the Company to any
Member as of December 31, 1998.
Withdrawals
-----------
Each Member may withdraw some or all of such Members' capital at the Net
Asset Value as of the close of business on any business day. There are no
withdrawal fees or charges.
Dissolution of the Company
--------------------------
The Company will terminate on December 31, 2028 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Organization Agreement.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (the "Statement"). Such Statement is effective for
fiscal years commencing after June 15, 1999. MLIP does not believe that the
Statement will have a significant effect on the financial statements of the
Company.
2. RELATED PARTY TRANSACTIONS
The bulk of the Company's U.S. dollar assets are maintained at MLF. On
assets held in U.S. dollars, Merrill Lynch credits the Company with interest
at the prevailing 91-day U.S. Treasury bill rate. The Company is credited
with interest on any of its net gains actually held by Merrill Lynch in non-
U.S. dollar currencies at a prevailing local rate received by Merrill Lynch.
Merrill Lynch may derive certain economic benefit, in excess of the interest
which Merrill Lynch pays to the Company, from possession of such assets.
- 6 -
<PAGE>
Merrill Lynch charges the Company Merrill Lynch's cost of financing realized
and unrealized losses on the Company's non-U.S. dollar-denominated positions.
Following the allocation of the Company's trading profit (loss) and interest
income among the Members' respective Capital Accounts, MLIP calculates the
brokerage commissions, Profit Shares, administrative fees and other expenses
due from the Company to third parties, in respect of the Company's trading on
behalf of the respective Members (the Company being subject to different
commissions, fees and expenses in respect of its trading as allocable to the
various different Members). Such brokerage commissions, fees and expenses
are specifically allocated as of the end of each accounting period (not pro
rata based on the Members' respective capital accounts) to, and deducted
from, the appropriate Members' capital accounts and paid out by the Company.
The Company pays brokerage commissions to MLF, at a flat monthly rate
reflecting the fee arrangement between each Member and MLF. During the
period from June 1, 1998 to December 31, 1998, such rates for Members were
.729 of 1% (an 8.75% annual rate) and for a certain Member, .292 of 1% (a
3.5% annual rate) of such Member's month-end assets invested in the Company.
The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25%
annual rate) and for a certain Member, .083 of 1% (a 1.0% annual rate) of
such Member'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.
MLF pays the Advisors annual Consulting Fees ranging up to 2% of the
Company's average month-end assets allocated to them for management after
reduction for a portion of the brokerage commissions.
Many of the Company's currency trades are executed in the spot and forward
foreign exchange markets (the "FX Markets") where there are no direct
execution costs. Instead, the participants, banks and dealers, including
Merrill Lynch International Bank ("MLIB"), in the FX Markets take a "spread"
between the prices at which they are prepared to buy and sell a particular
currency and such spreads are built into the pricing of the spot or forward
contracts with the Company. MLIP anticipates that some of the Company's
foreign currency trades will be executed through MLIB, an affiliate of MLIP.
MLIB has discontinued the operation of the foreign exchange service desk,
which included seeking multiple quotes from counterparties unrelated to MLIB
for a service fee and trade execution.
In its exchange of futures for physical ("EFP") trading, the Company acquires
cash currency positions through banks and dealers, including Merrill Lynch.
The Company pays a spread when it exchanges these positions for futures. This
spread reflects, in part, the different settlement dates of the cash and the
futures contracts, as well as prevailing interest rates, but also includes a
pricing spread in favor of the banks and dealers, which may include a Merrill
Lynch entity.
3. ADVISORY AGREEMENTS
Pursuant to the Advisory Agreements among the Advisors, the Company and MLIP,
the Advisors determined the commodity futures, options on futures, forwards
and options on forward contracts traded on behalf of the Company, subject to
certain rights reserved by MLIP. The Advisory Agreements generally terminate
one year after they are entered into, subject to certain renewal rights
exercisable by the Company.
The Company pays, from the Capital Account of each Member, to the Advisors
quarterly or annual Profit Shares generally ranging from 15% to 24% of any
New Trading Profit, as defined, recognized by each Advisor, attributable to
each Member's Capital Account, considered individually irrespective of the
overall performance of the such Member's Capital Account. Profit Shares,
which are calculated separately in respect of each Member's Capital Account,
are determined as of the end of each calendar
- 7 -
<PAGE>
quarter or year and are also paid to each Advisor upon the withdrawal of
capital from the Company by a Member for whatever purpose, other than to pay
expenses and upon the reallocation of assets away from an Advisor.
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Company trades futures, options on futures, forwards and options on
forward contracts on interest rates, stock indices, commodities, currencies,
energy and metals. The Company's trading results by reporting category for
the period from June 1, 1998 to December 31, 1998 were as follows:
1998
------------------
Interest Rates $ 11,105,955
Stock Indices 1,487,607
Commodities (1,086,883)
Currencies 5,054,310
Energy 534,828
Metals (1,259,520)
------------------
$ 15,836,297
==================
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 the market values of the underlying financial
instruments or commodities underlying such derivative instruments frequently
result in changes in the Company's unrealized profit on such derivative
instruments as reflected in the Statement of Financial Condition. The
Company's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the
Company as well as the volatility and liquidity in the markets in which such
derivative instruments are traded.
MLIP, which monitors the trading of the Company in MLIP's capacity as the
administrator, has procedures in place intended to control market risk
exposure, although there can be no assurance that they will, in fact, succeed
in doing so. These procedures focus primarily on monitoring the trading of
the Advisors, calculating the Net Asset Value of the Company and of the
Members' respective capital accounts as of the close of business on each day
and reviewing outstanding positions for over-concentrations. While MLIP does
not itself intervene in the markets to hedge or diversify the Company's
market exposure, MLIP may consult with the Advisors concerning the
possibility of the Advisors reducing trading leverage or market
concentrations. However, such interventions are unusual. Except in cases in
which it appears that the Advisors have begun to deviate from past practice
and trading policies or to be trading erratically, MLIP's basic risk control
procedures consist simply of the ongoing process of monitoring the Advisors
with the market risk controls being applied by the Advisors.
- 8 -
<PAGE>
Fair Value
The derivative instruments traded by the Company are marked to market daily
with the resulting unrealized profit recorded in the Statement of Financial
Condition and the related profit reflected in trading results in the
Statement of Income.
The contract/notional values of open contracts as of December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------------- -------------------------
<S> <C> <C>
Interest Rates $ 172,725,488 $ 150,086,136
Stock Indices 14,192,947 3,704,878
Commodities 2,049,190 9,818,796
Currencies 324,281,552 330,268,732
Energy - 2,957,365
Metals 3,062,623 9,507,885
------------------------- -------------------------
$ 516,311,800 $ 506,343,792
========================= =========================
</TABLE>
Substantially all of the Company's derivative instruments outstanding as of
December 31, 1998 expire within one year.
The contract/notional values of the Company's exchange-traded and non-
exchange traded open derivative instrument positions as of December 31, 1998
were as follows:
<TABLE>
<CAPTION>
1998
-------------------------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------------- -------------------------
<S> <C> <C>
Exchange Traded $ 220,954,431 $ 188,785,673
Non-Exchange-Traded 295,357,369 317,558,119
------------------------ --------------------------
$ 516,311,800 $ 506,343,792
======================== ==========================
</TABLE>
- 9 -
<PAGE>
The average fair values, based on contract/notional values, of the Company's
derivative instrument positions which were open as of the end of each
calendar month during the period from June 1, 1998 (commencement of
operations) to December 31, 1998 were as follows:
1998
------------------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
----------------------- --------------------
Interest Rates $ 338,431,556 $ 129,323,310
Stock Indices 12,109,631 7,830,657
Commodities 10,565,592 14,601,554
Currencies 316,276,954 306,680,060
Energy 3,089,967 5,895,385
Metals 14,005,485 19,172,515
------------------- --------------------
$ 694,479,185 $ 483,503,481
=================== ====================
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and 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 markets 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 require margin in the over-the-counter
markets.
The fair value amounts in the above tables represent the extent of the
Company'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 included on the Statement of
Financial Condition.
The gross unrealized profit and net unrealized profit on the Company's open
derivative instrument positions as of December 31, 1998 were as follows:
1998
---------------------------------
Gross Net
Unrealized Unrealized
Profit Profit
-------------- --------------
Exchange Traded $2,565,566 $1,803,512
Non-Exchange Traded 6,481,087 166,707
-------------- --------------
$9,046,653 $1,970,219
============== ==============
- 10 -
<PAGE>
The Company has credit risk in respect of its counterparties and brokers, but
attempts to control this risk by dealing almost exclusively with Merrill
Lynch entities as counterparties and brokers.
The Company, in its normal course of business, enters into various contracts,
with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF (which includes a netting arrangement), to the extent
that such trading results in receivables from and payables to MLF, these
receivables and payables are offset and reported as a net receivable or
payable.
* * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Di Dario
Jo Ann Di Dario
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
Commodity Pool Operator of
ML MULTI-MANAGER PORTFOLIO LLC
- 11 -
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 0 0
<RECEIVABLES> 528,786 20,346,863
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 18,934,681 6,996,472
<PP&E> 0 0
<TOTAL-ASSETS> 19,463,467 27,343,335
<SHORT-TERM> 0 0
<PAYABLES> 528,786 767,052
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 18,934,681 26,576,283
<TOTAL-LIABILITY-AND-EQUITY> 19,463,467 27,343,335
<TRADING-REVENUE> (1,223,878) 4,836
<INTEREST-DIVIDENDS> 396,925 1,118,910
<COMMISSIONS> 662,247 1,936,603
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (979,969) (58,822)
<INCOME-PRE-EXTRAORDINARY> (979,969) (58,822)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (979,969) (58,822)
<EPS-PRIMARY> (8.19) (0.39)
<EPS-DILUTED> (8.19) (0.39)
</TABLE>
