<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, 1999
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.
Princeton Corporate Campus
800 Scudders Mill Road - Section 2G
Plainsboro, New Jersey 08536
-----------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (609) 282-6996
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, 2000, limited partnership units with an aggregate value of
$13,453,930 were outstanding and held by non-affiliates.
Documents Incorporated by Reference
The registrant's "1999 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1999,
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 1999 ON FORM 10-K
Table of Contents
-----------------
<TABLE>
<CAPTION>
PART I PAGE
------ ----
<S> <C> <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 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 13
Item 8. Financial Statements and Supplementary Data.......................................... 13
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. 13
PART III
--------
Item 10. Directors and Executive Officers of the Registrant................................... 13
Item 11. Executive Compensation............................................................... 15
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 16
Item 13. Certain Relationships and Related Transactions....................................... 16
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 18
</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. ("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 ("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. ("MLF") is the Partnership's commodity broker. A portion of the
Fund's assets is held by a commodity broker, other than MLF, to facilitate the
trading of a certain independent advisor. MLIP 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."). MLF 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
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 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 Fund. 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, MLIP 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, MLIP allocated approximately 30% of the
Partnership's assets to cash and approximately 70% to trading. As of June 1,
1998, 100% was invested in MM LLC.
As of December 31, 1999, the Partnership's capitalization was
$13,952,487, and the Net Asset Value of a Unit sold as of July 16, 1990 for $100
was $186.98.
ML&Co. guarantees that the Net Asset Value per Unit will equal at
least $148.65 as of September 30, 2001 (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 fourth
1
<PAGE>
Time Horizon, also two years in length, was begun as of October 1, 1999. 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. MLIP will manage the
percentage of assets allocated to trading so as to minimize the likelihood that
payments will be required to be made by ML&Co. pursuant to the guarantee. As a
result, the assets allocated to trading may be reduced or eliminated if the
present value of the guaranteed payments ($100 principal and all remaining
annual fixed-rate dividends) approaches the current value of the assets in the
Fund. If the spread between such present and current values widens, the assets
allocated to trading will increase. The determination of the percentage of
assets allocated to trading is affected by the performance of the Fund, the
level of interest rates used in determining the present value and the time
remaining to the Principal Assurance Date.
Through December 31, 1999 the net gain in the net asset value per unit
was 86.98%. The highest month-end Net Asset Value per Unit was $199.62 (February
28, 1997) and the lowest was $102.26 (July 30, 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 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 Value per Unit as of the
Principal Assurance Date.
MLIP 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 Fund trades in a diversified range
of international markets. Certain of the 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 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 MLIP and MLF, 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 $148.65 as of the fourth Principal Assurance Date (September 30, 2001).
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 Fourth 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, 1999, MLIP again "restarted"
the Fund's trading program and the ML&Co. guarantee for an additional two-year
period ending September 30, 2001. MLIP may determine to dissolve the
Partnership as of the current Principal Assurance Date (September 30, 2001), 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, 2001 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 Fund 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.
Market Types. The Fund trades 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 in the FX Markets
take a "spread" between the prices at which they are prepared to buy and sell
particular currencies and such spreads are built into the pricing of the spot or
forward contracts with the Partnership.
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.
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
1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
---------------------------------------------------------------------------------------------------------------
Charges Dollar % of Average Dollar % of Average Dollar % of Average
Amount Month-End Amount Month-End Amount Month-End
Net Assets Net Assets Net Assets
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brokerage $ - 0.00% $662,247 3.05% $1,936,603 6.75%
Commissions
Administrative - 0.00% 18,921 0.09% 55,331 0.19%
Fees
Profit Shares - 0.00% 147,262 0.68% 158,988 0.56%
---------------------------------------------------------------------------------------------------------------
Total $ - 0.00% $828,430 3.82% $2,150,922 7.50%
===============================================================================================================
</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." During 1999, the Fund had
100% of its assets invested in MM LLC.
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 1999, 1998 and 1997
equaled $16,233,778, $21,720,057, and $28,696,419, respectively.
Subsequent to October 1, 1996, interest income is not representative
of the actual amounts received by the Fund since the bulk of the interest was
received by the Fund as an investor in the Trading LLCs or MM LLC. During 1999,
the Fund had invested 100% of its assets in MM LLC.
During 1998 and 1997, the Fund earned $396,925 and $1,118,910 in
interest income, or, approximately, 1.83% and 3.90% of the Fund's average month-
end Net Assets.
The variations in charges are primarily due to placing assets in the
Trading LLCs and MM LLC (See Item 7).
4
<PAGE>
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 in MM LLC.
During 1999, the Fund paid round-
turn commissions through its
investment in MM LLC.
During 1998 and 1997, the round-
turn (each purchase and sale or
sale and purchase of a single
futures contract) equivalent rate
of the Fund's flat-rate Brokerage
Commissions was approximately $69,
and $114, respectively.
MLF Use of Fund assets Merrill Lynch may derive an
economic 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.
Advisors Profit Shares All Advisors can receive quarterly
or annual Profit Shares ranging
from 15% to 25% (depending on the
Advisor) of any New Trading Profit
achieved by their Fund account.
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 they are incurring
significant overall losses.
Advisors Consulting Fees MLF currently pays the Advisors
annual Consulting Fees up to 1.75%
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 paid to
Others date.
5
<PAGE>
Regulation
MLIP, the Advisors and MLP 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 Geographic Areas:
--------------------------------------------
The Fund trades 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
MLIP (Merrill Lynch Investment Partners Inc., Princeton Corporate Campus, 800
Scudders Mill Road - Section 2G, Plainsboro, New Jersey 08536). MLIP performs
all administrative services for the Partnership from MLIP'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, 1999, there were 778 holders of Units, including
MLIP.
6
<PAGE>
(c) Dividends:
---------
The Partnership has made no distributions, nor does MLIP 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 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Revenues:
Trading (Loss) Profit:
<S> <C> <C> <C> <C> <C>
Realized (Loss) Gain $ - $ (520,547) $ (100,337) $ 3,756,114 $10,514,336
Change in Unrealized - (703,331) 105,173 (284,224) (1,160,384)
(Loss) Gain
----------------------------------------------------------------------------
Total Trading Results - (1,223,878) 4,836 3,471,890 9,353,952
----------------------------------------------------------------------------
Interest Income - 396,925 1,118,910 1,364,326 1,954,622
----------------------------------------------------------------------------
Total Revenues - (826,953) 1,123,746 4,836,216 11,308,574
----------------------------------------------------------------------------
Expenses:
Brokerage Commissions - 662,247 1,936,603 2,636,241 3,480,701
Administrative Fees - 18,921 55,331 75,321 -
Profit Shares - 147,262 158,988 457,989 1,084,170
----------------------------------------------------------------------------
Total Expenses - 828,430 2,150,922 3,169,551 4,564,871
----------------------------------------------------------------------------
Income from Investments (203,566) 675,414 968,354 2,032,587 -
----------------------------------------------------------------------------
Net (Loss) Income $ (203,566) $ (979,969) $ (58,822) $ 3,699,252 $ 6,743,703
============================================================================
December 31, December 31, December 31, December 31, December 31,
Balance Sheet Data 1999 1998 1997 1996 1995
- -----------------------------------------------------------------------------------------------------------
Fund Net Asset Value $13,952,487 $18,934,681 $26,576,283 $31,949,032 $34,684,047
Net Asset Value per Unit $ 186.98 $189.19 $194.53 $194.47 $173.02
----------------------------------------------------------------------------
</TABLE>
The variations in income statement line items are primarily due to
investing in Trading LLCs and in MM LLC.
<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>
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
- ------------------------------------------------------------------------------------------------------------------
1999 $186.80 $189.04 $188.19 $190.25 $188.76 $189.46 $189.84 $188.56 $185.81 $180.73 $185.58 $186.98
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
Pursuant to CFTC policy, monthly performance is presented only from
January 1, 1995 even though Units were outstanding prior to such date.
THE S.E.C.T.O.R. STRATEGY FUND (SM) L.P.
December 31, 1999
Type of Pool: Selected-Advisor/Publicly-Offered/"Principal Protected"(1)
Inception of Trading: July 16, 1990
Aggregate Subscriptions: $125,853,001
Current Capitalization: $13,952,487
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, 1999: $186.98
Monthly Rates of Return(4)
- ------------------------------------------------------------------------------
Month 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------
January (1.26)% (1.88)% 2.29% 5.17% (1.33)%
- ------------------------------------------------------------------------------
February 1.20 (1.48) 0.35 (6.09) 6.00
- ------------------------------------------------------------------------------
March (0.45) (1.75) (0.69) 1.33 4.15
- ------------------------------------------------------------------------------
April 1.09 (5.67) (3.13) 1.53 2.22
- ------------------------------------------------------------------------------
May (0.79) 0.34 (4.19) (1.11) 0.06
- ------------------------------------------------------------------------------
June 0.37 0.12 0.49 1.23 (2.07)
- ------------------------------------------------------------------------------
July 0.20 0.14 6.12 (2.65) (0.30)
- ------------------------------------------------------------------------------
August (0.68) 5.46 (6.13) 2.50 3.61
- ------------------------------------------------------------------------------
September (1.46) 2.14 1.84 1.24 2.26
- ------------------------------------------------------------------------------
October (2.73) (0.31) (0.80) 4.58 0.01
- ------------------------------------------------------------------------------
November 2.69 0.09 1.30 4.95 2.16
- ------------------------------------------------------------------------------
December 0.75 0.40 3.20 (0.35) 1.25
- ------------------------------------------------------------------------------
Compound Annual (1.17)% (2.74)% 0.03% 12.40% 19.25%
Rate of Return
- ------------------------------------------------------------------------------
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund
is defined as one that allocates no more than 25% of its trading assets (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, 1995 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, 1995 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.
8
<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.
-9-
<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
1999
During 1999, all of the Fund's assets were invested in MM LLC. The
Fund received trading profits as an investor in MM LLC. The following commentary
for 1999 describes the trading results for MM LLC during the year.
The Fund finished 1999 with gains in energy, stock index and
agricultural trading and losses in currency, interest rate and metal trading.
Commodities spent 1999 in a transition phase, shifting from bearishness to a
more neutral position. Lack of demand, particularly in Asia, was the dominant
factor in the overall decline in commodity prices.
Overall, the Fund profited from trading in crude oil, heating oil, and
unleaded gas in 1999. Positions in crude oil offset losses from short positions
in natural gas and gas oil trading. In March, OPEC ratified new production cuts
totaling 1.716 million barrels per day at its conference, which resulted in
higher prices for crude. In the natural gas markets, prices rallied sharply
resulting from a decline in U.S. natural gas production, along with high levels
of energy consumption and weather scares throughout the country. Near the end of
the year, there was a continued upward momentum in crude oil reflecting the
tightening between supply and demand and a new, higher OPEC-indicated target
price.
Stock index trading was profitable for the first half of 1999. Also of
note, the Dow Jones Industrial Average closed above the 10,000 mark for the
first time ever at the end of March, setting a record for the index, and equity
markets rallied worldwide in April and June. In the second half of the year, the
Fund suffered losses in stock index positions as trading was mixed due to
significant volatility globally. However, there was profitable trading in Hang
Seng, Nikkei 225 and Topix Indices which resulted in gains during November and
December. Such activity depicted evidence of Japan's stronger-than-expected
recovery coupled with a sudden decline in its unemployment rate.
In agricultural trading, gains in live hogs and live cattle offset
losses in corn positions. Initially, the corn market continued to struggle due
to supply/demand imbalances and ongoing favorable weather in South America.
These factors also led to an increase in prices as there was a sharp decline in
crop ratings during the second half of the year. There was also a sharp upturn
in soy prices, and losses in coffee trading became evident due to cold
temperature and lack of rainfall in Brazil.
Currency trading produced losses for the Fund throughout the year.
Long Japanese yen positions resulted in losses despite the yen trading higher
against the dollar. The Bank of Japan lowered rates to keep their economy
sufficiently liquid to allow fiscal spending to restore some growth to the
economy and to drive down the surging yen. The European Central Bank raised the
repo rate in November due to inflation pressures. On a trade-weighted basis, the
Swiss franc ended the first quarter to close at a seven-month low, mostly as a
result of the stronger U.S. dollar. The Canadian dollar also underwent similar
fluctuations throughout the year.
Interest rate trading was also volatile as the flight to quality in
the bond market reversed during the first half of 1999 and the Federal Reserve
raised interest rates three times during the year. Early in the year, interest
rate trading proved unprofitable for the fund, which was triggered by the
Japanese Trust Fund Bureau's decision to absorb a smaller share of futures
issues, leaving the burden of financing future budget deficits to the private
sector. Interest rate trading did gain strength at mid-year as the flight to
quality in the bond market reversed and concerns about higher interest rates in
the U.S. continued to rattle the financial markets. During the third quarter,
Eurodollar trading generated losses amidst speculation of the probability of a
tightening by the U.S. Federal Reserve, which became evident with the higher
interest rates in their November 16 meeting due to concerns of inflation. In
December, the yield on the 30-year Treasury bond recently surpassed its October
high propelled by inflation worries and fears the Federal Reserve might tighten
further in 2000.
Metals trading was mixed for the year as gold played a major part in
the volatility of the metals market. Gold had failed to maintain its status as a
safety vehicle and a monetary asset during the first half of 1999. In early
June, gold had reached its lowest level in over 20 years. A major statement from
the president of the European Central Bank stated that the member banks had
agreed not to expand their gold lending. This sent gold prices sharply higher in
late September. Unfortunately, the Fund held short positions in gold futures at
that time. Gold prices had stabilized in the fourth quarter following the price
surge. Early in the year, burdensome warehouse stocks and questionable demand
prospects weighed on base metals as aluminum fell to a five-year low and copper
fell to nearly an 11-year low. The economic scenario for Asia, Brazil, Europe
and emerging market nations helped to keep copper and other base metals on the
defensive as demand receded with virtually no supply side response in the second
quarter. A substantial increase in Chinese imports combined with the recovery in
the rest of Asia and Europe had significantly improved demand for aluminum
pushing prices higher during December.
1998
Total Trading
Results
Interest Rates and Stock Indexes $ 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.
-10-
<PAGE>
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 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 Indexes $ (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 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.
-11-
<PAGE>
In currency markets, the U.S. dollar rallied and started 1997 on a
strong note, rising to a four-year high versus the Japanese yen and two-and-a-
half year highs versus the Deutsche mark and the Swiss franc. However, the
dollar underwent two significant corrections during the year. The first
correction occurred in the Spring against the Japanese yen, due to the G7
finance ministers' determination that a further dollar advance would be counter-
productive to their current goals. From August through mid-November, the dollar
corrected against the Eurocurrencies in advance of a well-advertised tightening
by the Bundesbank. By mid-December the dollar had bounced back to new highs
against the yen and was rallying against the mark.
Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. By the middle of the
year, economic data in key countries was positive indicating lower inflation and
igniting a worldwide rally in the bond markets. Specifically, investor
sentiment was particularly strong in the U.S., where prices on the 30-year
Treasury bond and 10-year Treasury note rose to their highest levels in over two
years. This followed a largely positive economic report delivered by Federal
Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
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.
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.
-12-
<PAGE>
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.
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
contract 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.
Year 2000 Compliance Initiative
In 1999, Merrill Lynch completed its efforts to address the Year 2000
issue (the "Y2K issue"). The Y2K issue was the result of a widespread
programming technique that caused 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 issue may have caused serious failures in information technology systems
and other systems.
In 1995, Merrill Lynch established the Year 2000 Compliance Initiative
to address the internal and external risks associated with the Y2K issue. The
initiative consisted of six phases, completed by the millennium: planning, pre-
renovation, renovation, production testing, certification, and integration
testing. Contingency plans were established in the event of any failure or
disruptions.
Through the date of this filing, there have been no material failures
or disruptions of systems or services at Merrill Lynch attributable to the Y2K
issue. Similarly we have not been notified of any material failure or
disruption of systems or services affecting third parties in their capacity to
transact business with Merrill Lynch or in Merrill Lynch's capacity to transact
business with others. Merrill Lynch continues to monitor the performance of its
systems for any possible future failures or disruptions attributable to the Y2K
issue.
As of December 31, 1999, the total estimated expenditures of existing
and incremental resources for the entire Year 2000 Compliance Initiative was
approximately $510 million, including $102 million of occupancy, communications,
and other related overhead expenditures, as Merrill Lynch is applying a fully
costed pricing methodology for this project. At December 31, 1999, of the total
estimated expenditures, approximately $12 million, related to continued testing,
contingency planning, risk management, and the wind down of the efforts, had not
yet been spent.
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 MLIP. Trading decisions are made by the Advisors
on behalf of the Partnership. MLIP promotes the Fund and its controlling person.
The directors and executive officers of MLIP and their respective
business backgrounds are as follows:
-13-
<PAGE>
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
Michael L. Pungello Vice President, Chief Financial Officer and Treasurer
Allen N. Jones Director
Stephen G. Bodurtha Director
Michael J. Perini 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.
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.
Michael L. Pungello was born in 1957. Effective May 1, 1999, Mr.
Pungello became 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.
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.
-14-
<PAGE>
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.
Michael J. Perini was born in 1947. Effective May 11, 1999, Mr. Perini
became a Director of MLIP. Since February 1998, Mr. Perini has been First Vice
President and Senior Director of the Defined and Managed Funds Group, which
includes Defined Asset Funds, Special Investments and MLIP. This is part of the
Investment Strategy Product Group of Merrill Lynch Private Client. Previously
Michael Perini was Director of Defined Asset Funds and has held various
management positions since he joined Merrill Lynch in 1970. Mr. Perini attended
St. John's University and New York University as well as The Stanford University
Marketing Management Program. He was elected to the Board of Governors of the
Investment Company Institute in Washington, D.C. and is Chairman of the Unit
Investment Trust Committee of the Institute.
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, 1999, the principals of MLIP had no investment in
the Fund, and MLIP's general partner interest in the Fund was valued at
$201,377.
MLIP acts as general partner to eleven public futures funds whose
units of limited partnership interest are registered under the Securities
Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, ML
Futures Investments II L.P., ML Futures Investments L.P., John W. Henry &
Co./Millburn L.P., The SECTOR Strategy Fund (SM) II L.P., The SECTOR Strategy
Fund (SM) V L.P., The SECTOR Strategy Fund (SM) VI L.P., ML Global Horizons
L.P., ML Principal Protection L.P., ML JWH Strategic Allocation Fund L.P. and
the Fund. Because MLIP serves as the sole general partner of each of these
funds, the officers and directors of MLIP effectively manage them as officers
and directors of such funds.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
None.
(d) Family Relationships:
--------------------
None.
(e) Business Experience:
-------------------
See Item 10(a)(b) above.
(f) Involvement in Certain Legal Proceedings:
----------------------------------------
None.
(g) Promoters and Control Persons:
-----------------------------
Not applicable.
Item 11: Executive Compensation
----------------------
The directors and officers of MLIP are remunerated by MLIP. The
Partnership does not itself have any officers, directors or employees. The
Partnership pays Brokerage Commissions to an affiliate of MLIP and
Administrative Fees to MLIP. MLIP or its affiliates may also receive certain
economic benefits from holding the Fund's dollar assets. The directors and
officers receive no "other compensation" from the Partnership, and the directors
receive no compensation for serving as directors of MLIP. There are no
compensation plans or arrangements relating to a change in control of either
MLIP or the Partnership
-15-
<PAGE>
Item 12: Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1999, 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, 1999, MLIP owned 1,077 Units (unit-equivalent
general partnership interests), which was less than 1.4% of the total Units
outstanding.
(c) Changes in Control:
------------------
None.
Item 13: Certain Relationships and Related Transactions
----------------------------------------------
(a) Transactions Between Merrill Lynch and the Fund
-----------------------------------------------
All of the service providers to the Fund, other than the 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-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 MLIP, acts as the principal commodity broker for
the Fund.
In 1999, the Fund expensed the following fees: (i) Brokerage
Commissions of $1,448,194 to MLF, which included $175,900 in consulting fees
earned by the Advisors; and (ii) Administrative Fees of $41,377 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.
-16-
<PAGE>
(c) Indebtedness of Management:
--------------------------
The Partnership is prohibited from making any loans, to management or
otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
-17-
<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,
1999 and 1998 2
For the years ended December 31, 1999, 1998 and 1997
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-11
(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 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.
Exhibit 10.03(a): Is incorporated herein by reference from Exhibit 10.03(a)
- ---------------- contained in the Registrant's
-18-
<PAGE>
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 1999 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
- -------------
13.01(a) 1999 Annual Report and Independent Auditors' Report for
the following Trading Limited Liability Company sponsored
by Merrill Lynch Investment Partners Inc.
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 1999.
-19-
<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 30, 2000 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, March 30, 2000
- -------------------------- President and Director
John R. Frawley, Jr. (Principal Executive Officer)
/s/ Michael L Pungello Vice President, Chief Financial March 30, 2000
- -------------------------- Officer, and Treasurer (Principal
Michael L. Pungello Financial and Accounting Officer)
/s/ Jeffrey F. Chandor Senior Vice President, Director March 30, 2000
- -------------------------- of Sales, Marketing and Research,
Jeffrey F. Chandor and Director
/s/ Michael J. Perini Director March 30, 2000
- --------------------------
Michael J. Perini
(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 30, 2000
PARTNERS INC.
By: /s/ John R. Frawley, Jr.
----------------------------
John R. Frawley, Jr.
</TABLE>
-20-
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND (SM) L.P.
1999 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1999 Annual Report and Independent Auditors' Report
Exhibit 13.01(a) 1999 Annual Report and Independent Auditors' Report
for ML Multi-Manager Portfolio LLC
-21-
<PAGE>
Exhibit 13.01
The S.E.C.T.O.R. STRATEGY FUND/SM/ L.P.
(A Delaware Limited Partnership)
Financial Statements for the years ended
December 31, 1999, 1998 and 1997
and Independent Auditors' Report
[LOGO] Merrill Lynch
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND/SM/ L.P.
(A Delaware Limited Partnership)
------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-11
</TABLE>
<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, 1999
and 1998, and the related statements of operations and of changes in partners'
capital for each of the three years in the period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations and changes in
partners' capital for each of the three years in the period ended December 31,
1999 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 2000
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND/SM/ L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1999 1998
--------------- ---------------
<S> <C> <C>
Investments (Note 6) $ 13,952,487 $ 18,934,681
Receivable from investments (Note 6) 246,627 528,786
--------------- ---------------
TOTAL $ 14,199,114 $ 19,463,467
=============== ===============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 246,627 $ 528,786
--------------- ---------------
Total liabilities 246,627 528,786
--------------- ---------------
PARTNERS' CAPITAL:
General Partner (1,077 Units and 1,177 Units) 201,377 222,668
Limited Partners (73,542 Units and 98,908 Units) 13,751,110 18,712,013
--------------- ---------------
Total partners' capital 13,952,487 18,934,681
--------------- ---------------
TOTAL $ 14,199,114 $ 19,463,467
=============== ===============
NET ASSET VALUE PER UNIT
(Based on 74,619 and 100,085 Units outstanding) $ 186.98 $ 189.19
=============== ===============
</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, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------------ --------------- ----------------
<S> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized (Note 1) $ - $ (520,547) $ (100,337)
Change in unrealized (Note 1) - (703,331) 105,173
------------------ --------------- ----------------
Total trading results - (1,223,878) 4,836
Interest income (Note 2) - 396,925 1,118,910
------------------ --------------- ----------------
Total revenues - (826,953) 1,123,746
------------------ --------------- ----------------
EXPENSES:
Brokerage commissions (Note 2) - 662,247 1,936,603
Profit Shares (Note 3) - 147,262 158,988
Administrative fees (Note 2) - 18,921 55,331
------------------ --------------- ----------------
Total expenses - 828,430 2,150,922
------------------ --------------- ----------------
INCOME (LOSS) FROM INVESTMENTS (Note 6) (203,566) 675,414 968,354
------------------ --------------- ----------------
NET LOSS $ (203,566) $ (979,969) $ (58,822)
================== =============== ================
NET INCOME (LOSS) PER UNIT:
Weighted average number of General Partner and
Limited Partner Units outstanding (Note 4) 87,544 119,711 151,089
================== =============== ================
Net loss per weighted average
General Partner and Limited Partner Unit $ (2.33) $ (8.19) $ (0.39)
================== =============== ================
</TABLE>
See notes to financial statements.
-3-
<PAGE>
THE S.E.C.T.O.R. STRATEGY FUND/SM/ L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Units of
Partnership General Limited
Interest Partner Partners Total
-------------- --------------- ------------------- -------------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL
DECEMBER 31, 1996 164,289 $ 489,672 $ 31,459,360 $ 31,949,032
Redemptions (27,674) - (5,313,927) (5,313,927)
Net income (loss) - 165 (58,987) (58,822)
-------------- --------------- ------------------- -------------------
PARTNERS' CAPITAL
DECEMBER 31, 1997 136,615 489,837 26,086,446 26,576,283
Redemptions (36,530) (234,522) (6,427,111) (6,661,633)
Net loss - (32,647) (947,322) (979,969)
-------------- --------------- ------------------- -------------------
PARTNERS' CAPITAL
DECEMBER 31, 1998 100,085 222,668 18,712,013 18,934,681
Redemptions (25,466) (18,073) (4,760,555) (4,778,628)
Net loss - (3,218) (200,348) (203,566)
-------------- --------------- ------------------- -------------------
PARTNERS' CAPITAL
DECEMBER 31, 1999 74,619 $ 201,377 $ 13,751,110 $ 13,952,487
============== =============== =================== ===================
</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"), 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. MLIP
has agreed to maintain a general partner's interest of at least 1% of the
total capital of the Partnership. MLIP 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"). 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
LLC ("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. Merrill Lynch Futures Inc. ("MLF"), a Merrill Lynch affiliate, is
MM LLC's commodity broker.
MLIP determines what percentage of the Partnership's total capital to invest
in MM LLC attempting to maximize the percentage of the Partnership's assets
invested in MM LLC, while managing the Partnership's exposure to prevent
Merrill Lynch from being required to make a payment to the Partnership
pursuant to its guarantee under the Partnership's principal protection
structure (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 effect 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 profit (loss) on open
contracts from one period to the next is reflected in Trading profit (loss):
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, 1999 or
1998. See Note 6 for discussion of revenue recognition for the Partnership's
investment in Trading LLC's and MM LLC.
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 through MM LLC.
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.
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, through MM LLC.
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 Limited Partners 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, 1999.
Redemptions
-----------
A Limited Partner may 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.
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 through
MM LLC with interest at the prevailing 91-day U.S. Treasury bill rate. The
Partnership through MM LLC 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 through MM LLC, from possession of such assets.
Merrill Lynch charges the Partnership through MM LLC, Merrill Lynch's cost of
financing realized and unrealized losses on MM LLC's non-U.S. dollar-
denominated positions.
Through its investment in MM LLC, the Partnership pays brokerage commissions
to MLF at a flat monthly rate equal to .729 of 1% (an 8.75% annual rate), and
pays MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of
the Partnership's month-end assets allocated to trading. 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.
Prior to the investment in MM LLC, MLIP estimates that the round-turn
equivalent commission rate charged to the Partnership during the years ended
December 31, 1998 and 1997 was approximately $69 and $114, respectively (not
including, in calculating round-turn equivalents, forward contracts on a
futures-equivalent basis).
MLF currently pays the Advisors annual Consulting Fees up to 1.75% of the
Partnership's average month-end assets allocated to them for management, after
reduction for a portion of the brokerage commissions.
3. AGREEMENTS
Pursuant to the Advisory Agreements among the Advisors, MM LLC and MLIP, the
Advisors determined the commodity futures, options on futures, forwards and
options on forward contracts traded on behalf of MM LLC, subject to certain
rights reserved by MLIP. The Advisory Agreements generally terminate one year
after they are entered into, subject to certain renewal rights.
Profit Shares are paid by MM LLC to each Advisor, currently ranging from 20%
to 23% 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. 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.
-7-
<PAGE>
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 for the years ended December 31, 1999, 1998 and
1997 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.
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, 1999, the Partnership restarted its
trading program for a third Time Horizon of two years' duration and a new
Principal Assurance Date of September 30, 2001, with a minimum assured Net
Asset Value per Unit of $148.65.
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 LLC's") formed by MLIP. The only members of the
Trading LLC's were commodity pools sponsored by MLIP. 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 LLC's 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 LLC's 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 (loss) from investments.
-8-
<PAGE>
Total revenues and fees with respect to such investments were as follows:
<TABLE>
<CAPTION>
For the year ended Total Brokerage Administrative Profit Income (Loss) from
December 31, 1999 Revenues Commissions Fees Shares Investments
- ------------------------ --------------- ----------------- ------------------ -------------- ----------------
<S> <C> <C> <C> <C> <C>
MM LLC $ 1,363,384 $ 1,448,194 $ 41,377 $ 77,379 $ (203,566)
=============== ================= ================== ============== ================
For the year ended Total Brokerage Administrative Profit Income (Loss) from
December 31, 1998 Revenues Commissions Fees Shares Investments
- ------------------------ --------------- ----------------- ------------------ -------------- ----------------
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
============= ================= ================== ============== ================
</TABLE>
Condensed statements of financial condition and statements of operations
for MM LLC and JWH LLC are set forth as follows:
<TABLE>
<CAPTION>
MM LLC MM LLC
December 31, 1999 December 31, 1998
---------------------------- ----------------------------
<S> <C> <C>
Assets $ 100,901,677 $ 125,332,558
============================ ============================
Liabilities $ 2,906,392 $ 4,949,082
Members' Capital 97,995,285 120,383,476
---------------------------- ----------------------------
Total $ 100,901,677 $ 125,332,558
============================ ============================
<CAPTION>
For the period from
For the year ended June 1, 1998 to
December 31, 1999 December 31, 1998
---------------------------- ----------------------------
<S> <C> <C>
Revenues $ 9,090,190 $ 19,255,343
Expenses 10,152,017 9,491,842
---------------------------- ----------------------------
Net Income (Loss) $ (1,061,827) $ 9,763,501
============================ ============================
</TABLE>
-9-
<PAGE>
<TABLE>
<CAPTION>
JWH LLC JWH LLC
For the period from
January 1, 1998 to For the year ended
May 31, 1998 December 31, 1997
---------------------------- ----------------------------
<S> <C> <C>
Revenues $ 1,391,001 $ 15,279,401
Expenses 4,069,362 6,714,041
---------------------------- ----------------------------
Net Income (Loss) $ (2,678,361) $ 8,565,360
============================ ============================
</TABLE>
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. As such, MLIP
does not believe that the adoption of the provisions of Statement of Financial
Accounting Standards No. 133 had a significant effect on the financial
statements of the Partnership. Consequently, no such positions subsequent to
May 31, 1998 are reflected in these financial statements.
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk. 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 LLC's and in MM LLC, the net
unrealized profit (loss) as reflected in the respective Statements of
Financial Condition of the Trading LLC's 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 LLC's and currently MM LLC, as well as the volatility and liquidity of
the markets in which such derivative instruments are traded.
MLIP 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, and include
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 MLIP does not itself
intervene in the markets to hedge or diversify the Partnership's market
exposure (although MLIP may adjust the percentage of the Partnership's total
assets allocated to trading), MLIP 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 deviate from past practice or trading policies or
to be trading erratically, MLIP'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.
-10-
<PAGE>
One important aspect of the MLIP'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, MLIP can directly affect the market
exposure of the Partnership. Leverage control is the principal means by which
MLIP 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 (see Note
5).
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 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 clearing brokers.
The Partnership, through MM LLC, in its normal course of business, enters into
various contracts, with MLF acting as its commodity broker. Pursuant to the
brokerage agreement 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 in the financial statements of MM LLC in the Equity in commodity
future trading accounts in the Statements of Financial Condition.
* * * * * * * * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Michael L. Pungello
Michael L. Pungello
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
The S.E.C.T.O.R. Strategy Fund/SM/ L.P.
<PAGE>
EXHIBIT 13.01(A)
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
Financial Statements for the year ended
December 31, 1999 and for the period from
June 1, 1998 (Commencement of Operations)
to December 31, 1998 and
Independent Auditors' Report
[LOGO] Merrill Lynch
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1999 AND FOR THE PERIOD
FROM JUNE 1, 1998 (COMMENCEMENT OF
OPERATIONS) TO DECEMBER 31, 1998:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Changes in Members' Capital 4
Notes to Financial Statements 5-9
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Members of
ML Multi-Manager Portfolio LLC:
We have audited the accompanying statements of financial condition of ML Multi-
Manager Portfolio LLC (the "Company") as of December 31, 1999 and 1998, and the
related statements of operations and of changes in members' capital for the year
ended December 31, 1999 and 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 Multi-Manager Portfolio LLC as of
December 31, 1999 and 1998, and the results of its operations and changes in
members' capital for the year ended December 31, 1999 and 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, 2000
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 and 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS
1999 1998
------------------ ------------------
<S> <C> <C>
Equity in commodity futures trading accounts:
Cash and option premiums $ 97,949,902 $ 122,916,463
Net unrealized profit on open contracts 2,517,003 1,970,219
Accrued interest (Note 2) 434,772 445,876
------------------ ------------------
TOTAL $ 100,901,677 $ 125,332,558
================== ==================
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 2) $ 708,081 $ 938,848
Profit Shares payable (Note 3) 420,906 1,944,169
Administrative fees payable (Note 2) 24,744 44,772
Redemptions Payable 1,752,661 2,021,293
------------------ ------------------
Total liabilities 2,906,392 4,949,082
------------------ ------------------
MEMBERS' CAPITAL:
Voting Members 97,995,285 120,383,476
------------------ ------------------
Total Members' capital 97,995,285 120,383,476
------------------ ------------------
TOTAL $ 100,901,677 $ 125,332,558
================== ==================
</TABLE>
See notes to financial statements.
-2-
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1999 AND FOR THE PERIOD
FROM JUNE 1, 1998 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
REVENUES: 1999 1998
------------------ ---------------
<S> <C> <C>
Trading profit:
Realized $ 3,344,876 $ 13,866,078
Change in unrealized 546,402 1,970,219
------------------ ---------------
Total trading results 3,891,278 15,836,297
Interest income (Note 2) 5,198,912 3,419,046
------------------ ---------------
Total revenues 9,090,190 19,255,343
------------------ ---------------
EXPENSES:
Brokerage commissions (Note 2) 9,316,187 6,348,662
Profit Shares (Note 3) 515,566 2,943,598
Administrative fees (Note 2) 320,264 199,582
------------------ ---------------
Total expenses 10,152,017 9,491,842
------------------ ---------------
NET INCOME (LOSS) $ (1,061,827) $ 9,763,501
================== ===============
</TABLE>
See notes to financial statements.
-3-
<PAGE>
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1999 AND 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
Withdrawals (21,326,364) - (21,326,364)
Net loss (1,061,827) - (1,061,827)
-------------------- -------------------- --------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1999 $ 97,995,285 - $ 97,995,285
==================== ==================== ====================
</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. The Non-Voting Interests,
held by non-United States investment funds sponsored by MLIP, do not
participate in the management of the Company, or engage, directly or
indirectly, in, participate in or control any portion of the business
activities or affairs of the Company. Voting Interests 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 the Voting Members, subject to the discretionary trading
authority vested in and delegated to the independent trading advisors (the
"Advisors") and the administrative authority vested in and delegated to MLIP.
Each Voting Member is a "commodity pool" sponsored and controlled by MLIP and
shares in the Trading profit 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 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 unrealized profit on open contracts
is reflected in Trading profit: 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 date 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.
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 has been made by the Company to any Member as of December 31,
1999.
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.
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.
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 and interest income
among the Members' Capital Accounts, MLIP calculates the brokerage
commissions, Profit Shares, administrative fees and other expenses due from
the Company to third parties, relating to the Company's trading on behalf of
the Members. Such brokerage commissions, fees and expenses are specifically
allocated as of the end of each
-6-
<PAGE>
accounting period (not pro rata based on the Members' respective capital
accounts) to, and deducted from, the 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. For
the year ended December 31, 1999 and the period from June 1, 1998 to December
31, 1998, the rate for Members was .729 of 1% (an 8.75% annual rate) except
for one Member which paid .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), except for one Member which pays .083 of 1% (a 1.0% 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 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.
3. ADVISORY AGREEMENTS
Pursuant to the Advisory Agreements among the Advisors, the Company and MLIP,
the Advisors determine 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 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
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"), effective for fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137. This
Statement supercedes SFAS No. 119 ("Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments") and SFAS No. 105
("Disclosure of Information about Financial Instruments with Off-Balance Sheet
Risk and Financial Instruments with Concentrations of Credit Risk") whereby
disclosure of average aggregate fair values and contract/notional values,
respectively, of derivative financial instruments is no longer required for an
entity such as the Company which carries its assets at fair value. Such
Statement sets forth a much broader definition of a derivative instrument.
MLIP does not believe that the adoption of the provisions of such Statement
had a significant effect on the financial statements.
SFAS No. 133 defines a derivative as a financial instrument or other contract
that has all three of the following characteristics: (1) one or more
underlyings and notional amounts or payment provisions; (2) requires no
initial net investment or a smaller initial net investment than would be
required for other types of contracts that would be expected to have a similar
response to changes in market factors; and, (3) terms
-7-
<PAGE>
that require or permit net settlement. Generally, derivatives include futures,
forwards, swaps, options, or other financial instruments with similar
characteristics such as caps, floors and collars.
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk. 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 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 of the markets in which the derivative
instruments are traded.
MLIP 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 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 urge the Advisors to
reallocate positions in an attempt to avoid over-concentrations. However,
such interventions are unusual. Except in cases in which it appears that the
Advisors have begun to deviate from past practice or trading policies or to be
trading erratically, MLIP's basic risk control procedures consist simply of
the ongoing process of advisor monitoring, with the market risk controls being
applied by the Advisors themselves.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases
limited in amount, in some cases not) of the members of the exchange is
pledged to support the financial integrity of the exchange. In over-the-
counter transactions, on the other hand, traders must rely solely on the
credit of their respective individual counterparties. Margins, which may be
subject to loss in the event of a default, are generally required in exchange
trading, and counterparties may also require margin in the over-the-counter
markets.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit on open contracts, if any,
included in the Statements of Financial Condition.
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 clearing brokers.
The Company, in its normal course of business, enters into various contracts,
with MLF acting as its commodity broker. Pursuant to the brokerage agreement
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 and included
in the Equity in commodity futures trading accounts in the Statements of
Financial Condition.
-8-
<PAGE>
* * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Michael L. Pungello
Michael L. Pungello
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
Commodity Pool Operator of
ML MULTI-MANAGER PORTFOLIO LLC
-9-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 0 0
<RECEIVABLES> 246,627 528,786
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 13,952,487 18,934,681
<PP&E> 0 0
<TOTAL-ASSETS> 14,199,114 19,463,467
<SHORT-TERM> 0 0
<PAYABLES> 246,627 528,786
<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> 13,982,487 18,934,681
<TOTAL-LIABILITY-AND-EQUITY> 14,199,114 19,463,467
<TRADING-REVENUE> 0 (1,223,878)
<INTEREST-DIVIDENDS> 0 396,925
<COMMISSIONS> 0 662,247
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (203,566) (979,969)
<INCOME-PRE-EXTRAORDINARY> (203,566) (979,969)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (203,566) (979,969)
<EPS-BASIC> (2.33) (8.19)
<EPS-DILUTED> (2.33) (8.19)
</TABLE>
