<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: 0-21112
THE SECTOR STRATEGY FUND (SM) V L.P.
------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 13-3674792
------------------------------- -----------------------
(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
$7,450,739 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 SECTOR STRATEGY FUND (SM) V L.P.
ANNUAL REPORT FOR 1999 ON FORM 10-K
Table of Contents
-----------------
<TABLE>
<CAPTION>
PART I PAGE
------ ----
<S> <C>
Item 1. Business...................................................................................... 1
Item 2. Properties.................................................................................... 6
Item 3. Legal Proceedings............................................................................. 7
Item 4. Submission of Matters to a Vote of Security Holders........................................... 7
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 7
Item 6. Selected Financial Data....................................................................... 8
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 10
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 15
Item 8. Financial Statements and Supplementary Data................................................... 15
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 15
PART III
--------
Item 10. Directors and Executive Officers of the Registrant............................................ 16
Item 11. Executive Compensation........................................................................ 18
Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 18
Item 13. Certain Relationships and Related Transactions................................................ 19
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 20
</TABLE>
-i-
<PAGE>
PART I
Item 1: Business
--------
(a) General Development of Business:
-------------------------------
The SECTOR Strategy Fund (SM) V L.P. (the "Partnership") was
organized under the Delaware Revised Uniform Limited Partnership Act on July 16,
1992 and began trading operations on January 4, 1993. 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
commodity 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 Partnership's assets
to allocate to trading and what percentage to hold in reserve. Merrill Lynch
Futures Inc. ("MLF") is the Fund's commodity broker. A portion of the Funds'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 investments in MMLLC, the Partnership
maintains a cash account. From time to time, MLIP allocates and reallocates
Partnership assets among its investment in MM LLC and 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
December 31, 1999, 100% was invested in MM LLC.
-1-
<PAGE>
As of December 31, 1999, the Partnership's capitalization was
$7,807,992, and the Net Asset Value of a Unit sold as of January 4, 1993 for
$100 was $132.57.
ML&Co. guarantees that the Net Asset Value per Unit will equal
at least $106.06 as of December 31, 2001 (the "Principal Assurance Date"). The
initial Principal Assurance Date was set at approximately five years after
trading commenced. Effective January 1, 2000 the Fund restarted its trading
program for a new Time Horizon of two years' duration. 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 32.57%. Through December 31, 1999, the highest month-end Net Asset
Value per Unit was $134.88 (April 30, 1999) and the lowest $98.60 (January
31, 1993).
(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 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 often
demonstrated a low degree of performance correlation with traditional stock and
bond holdings. Since it began trading, the Fund's returns have, in fact,
frequently been significantly non-correlated (not, however, negatively
correlated) with the United States stock and bond markets.
-2-
<PAGE>
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 $106.06 as of the Principal Assurance Date (December 31, 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 time value of such investment or a guarantee
of profit. This guarantee is a general, unsecured obligation of ML&Co.
Operation of the Partnership after the Third Principal
Assurance Date
When the Fund reached its first Principal Assurance Date, MLIP
"restarted" the Fund's trading program and the ML&Co. guarantee for a two-year
period ending December 31, 1999. MLIP has restarted the Fund's trading program
for a third principal assurance date for a two-year period ending December 31,
2001 with a minimum assured NAV of $106.06. MLIP may determine to dissolve the
Partnership as of the Principal Assurance Date, to extend the ML&Co. guarantee
for a certain period of time (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 45 days
prior to the Principal Assurance Date as to what the operation of the Fund (if
any) will be after the 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 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 a particular currency 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.
-3-
<PAGE>
As in the case of its market sector allocations, the Fund's
commitments to different types of markets -- U.S. and non-U.S., regulated and
unregulated -- differ substantially from time to time as well as over time.
The Fund's financial statements contain information relating
to the types of markets traded by the Fund. There can, however, be no assurance
as to which markets the Fund may trade or as to how the Fund's trading may be
concentrated at any one time or over time.
Custody of Assets. The majority of the Fund's assets are
-----------------
currently held in customer accounts at Merrill Lynch.
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
-------------------------------------------------------------------
% of Average % of Average % of Average
Dollar Month End Dollar Month End Dollar Month End
Cost Amount Net Assets Amount Net Assets Amount Net Assets
---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Brokerage
Commissions - 0.00% $115,706 1.10% $348,042 2.69%
Administrative
Fees - 0.00% 3,306 0.03% 9,839 0.08%
Profit Shares - 0.00% 74 0.00% 9,118 0.07%
--------------------- ---------------------- ----------------------
Total - 0.00% $119,086 1.13% $366,999 2.84%
===================== ====================== ======================
</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 benefits which may be derived by
Merrill Lynch from the deposit of certain of the Fund's U.S. dollar assets in
offset accounts.
-4-
<PAGE>
The Fund's average month-end Net Assets during 1999, 1998 and
1997 equaled $8,845,138, $10,524,883 and $12,922,688; respectively.
Subsequent to October 1, 1996, interest income does not
represent 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 $69,400 and $292,197 in
interest income, or approximately 0.66% and 2.26% of the Fund's average month-
end Net Assets.
The variations in charges are primarily due to placing assets
in Trading LLCs and MM LLC (See Item 7).
Description of Current Charges
Recipient Nature of Payment Amount of Payment
- --------- ----------------- -----------------
MLF Brokerage Commissions A flat-rate monthly commission of 0.7291
of 1% (an 8.75% annual rate) of the
Fund's month-end assets committed to
trading. As of December 31, 1999
approximately 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
$126 and $136, 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 0.02083 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 related
Counterparties trades.
-5-
<PAGE>
Advisors Profit Shares All Advisors can receive quarterly or
annually 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 may
pay substantial Profit Shares during
periods when they are incurring
significant overall losses.
Advisors Consulting Fees MLF pays the Advisors annual Consulting
Fees ranging 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 Actual costs incurred; none paid to
Others expenses date, and expected to be negligible.
Regulation
MLIP, the Advisors and MLF are each subject to regulation by
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.
-6-
<PAGE>
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 or 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 public trading market for the Units, nor will one
develop. Rather, Limited Partners may redeem Units as of the end of each month
at Net Asset Value, subject to certain early redemption charges. Units redeemed
prior to the Principal Assurance Date are not entitled to any benefits of the
ML&Co. guarantee.
(b) Holders:
-------
As of December 31, 1999, there were 427 holders of Units,
including MLIP.
(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.
-7-
<PAGE>
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
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
Trading (Loss) Profit
Realized (Loss) Gain $ - $ (70,297) $ 368,946 $ 1,264,013 $ 5,460,869
Change in Unrealized Loss - (17,058) (39,093) (1,945,383) (152,635)
------------------------------------------------------------------------
Total Trading Results - (87,355) 329,853 (681,370) 5,308,234
------------------------------------------------------------------------
Interest Income - 69,400 292,197 782,522 1,600,013
-------------------------------------------------------------------------
Total Revenues - (17,955) 622,050 101,152 6,908,247
-------------------------------------------------------------------------
Expenses:
Brokerage Commissions - 115,706 348,042 1,198,690 2,378,476
Administrative Fees - 3,306 9,839 30,735 -
Profit Shares - 74 9,118 50,339 524,877
-------------------------------------------------------------------------
Total Expenses - 119,086 366,999 1,279,764 2,903,353
-------------------------------------------------------------------------
Income from Investments (109,067) 193,066 1,114,196 708,715 -
-------------------------------------------------------------------------
Net Income (Loss) $ (109,067) $ 56,025 $ 1,369,247 $ (469,897) $ 4,004,894
=========================================================================
</TABLE>
<TABLE>
<CAPTION>
December 31, December 31, December 31, December 31, December 31,
Balance Sheet Data 1999 1998 1997 1996 1995
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Fund Net Asset Value $7,807,992 $9,750,926 $12,210,714 $14,034,296 $26,056,054
Net Asset Value per Unit $ 132.57 $ 134.13 $ 132.21 $ 119.09 $ 115.50
---------------------------------------------------------------------------
</TABLE>
The variations in income statement line items are primarily due to
investing in Trading LLCs and in MM LLC (See Item 7).
<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 $ 99.58 $103.91 $107.84 $109.57 $113.00 $110.57 $106.99 $105.71 $104.67 $104.05 $107.30 $115.50
- ----------------------------------------------------------------------------------------------------------------------------
1996 $115.53 $106.85 $105.04 $107.19 $104.38 $103.82 $104.12 $105.68 $109.65 $115.91 $122.45 $119.09
- ----------------------------------------------------------------------------------------------------------------------------
1997 $122.53 $124.41 $124.03 $120.91 $119.51 $120.99 $132.18 $126.72 $129.82 $128.17 $129.08 $132.21
- ----------------------------------------------------------------------------------------------------------------------------
1998 $130.73 $129.48 $128.35 $121.27 $124.04 $124.13 $124.30 $131.09 $133.89 $133.48 $133.60 $134.13
- ----------------------------------------------------------------------------------------------------------------------------
1999 $132.43 $134.02 $133.42 $134.88 $133.82 $134.32 $134.59 $133.68 $131.74 $128.13 $131.57 $132.57
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
Pursuant to CFTC policy, monthly performance is presented from January
1, 1995 even though Units were outstanding prior to such date.
-8-
<PAGE>
THE SECTOR STRATEGY FUND (SM) V L.P.
December 31, 1999
Type of Pool: Selected-Advisor/Publicly-Offered/"Principal Protected"/(1)/
Inception of Trading: January 4, 1993
Aggregate Subscriptions: $137,500,000
Current Capitalization: $7,807,992
Worst Monthly Drawdown/(2)/: (7.51)% (2/96)
Worst Peak-to-Valley Drawdown/(3)/: (10.14)% (2/96-6/96)
-------------
Net Asset Value per Unit, December 31, 1999: $132.57
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
Monthy Rates of Return/(4)/
----------------------------------------------------------------------------------------------
Month 1999 1998 1997 1996 1995
----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January (1.26)% (1.12)% 2.89% 0.03% (1.52)%
----------------------------------------------------------------------------------------------
February 1.20 (0.96) 1.53 (7.51) 4.35
----------------------------------------------------------------------------------------------
March (0.45) (0.88) (0.31) (1.70) 3.79
----------------------------------------------------------------------------------------------
April 1.09 (5.52) (2.52) 2.05 1.61
----------------------------------------------------------------------------------------------
May (0.79) 2.28 (1.16) (2.62) 3.12
----------------------------------------------------------------------------------------------
June 0.37 0.07 1.24 (0.54) (2.14)
----------------------------------------------------------------------------------------------
July 0.20 0.14 9.25 0.28 (3.24)
----------------------------------------------------------------------------------------------
August (0.68) 5.46 (4.13) 1.50 (1.20)
----------------------------------------------------------------------------------------------
September (1.46) 2.14 2.45 3.76 (0.99)
----------------------------------------------------------------------------------------------
October (2.73) (0.31) (1.27) 5.71 (0.59)
----------------------------------------------------------------------------------------------
November 2.69 0.09 0.71 5.64 3.12
----------------------------------------------------------------------------------------------
December 0.75 0.40 2.42 (2.74) 7.64
----------------------------------------------------------------------------------------------
Compound Annual
Rate of Return (1.17) 1.43% 11.00% 3.11% 14.22%
----------------------------------------------------------------------------------------------
</TABLE>
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund
is defined as one that allocates no more than 25% of its trading assets (i.e.,
assets committed to trading) to any single manager. As the Fund may allocate
more than 25% of its trading assets to one or more Advisors, it is referred to
as a "Selected-Advisor" fund. Applicable CFTC regulations define a "Principal
Protected" fund as one which is designed to limit the loss of participants'
initial investment. MLIP's trading leverage policies and the ML&Co. guarantee
limit Limited Partners' losses on their Units to the time value of their
investments over the Time Horizon from the beginning of trading to the Principal
Assurance Date.
(2) Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced since January 1, 1995 by the Fund; a drawdown is
measured on the basis of month-end Net Asset Value only, and does not reflect
intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage
decline since January 1, 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.
-9-
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Results of Operations
Advisor Selections
------------------
The Fund's results of operations depend on MLIP's ability to
select Advisors and the Advisors' ability to trade profitably. MLIP's selection
procedures and trading leveraging analysis, as well as the Advisors' trading
methods, are confidential, so that substantially the only available information
relevant to the Fund's results of operations is its actual performance record to
date. Because of the speculative nature of its trading, the Fund's past
performance is not necessarily indicative of its future results.
MLIP has made and expects to continue making frequent changes to
both trading asset allocations among Advisors and Advisor combinations as well
as from time to time adjusting the percentage of the Fund's assets committed to
trading.
MLIP's decision to terminate or reallocate assets among Advisors
is based on a combination of 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.
-10-
<PAGE>
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.
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 totalling 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-induced target
price.
Stock index trading was profitable for the first half of 1999.
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
<TABLE>
<CAPTION>
Total Trading
Results
<S> <C>
Interest Rates and Stock Indices $ 162,415
Commodities (73,623)
Currencies (75,241)
Energy (48,558)
Metals (52,348)
------------
$ (87,355)
============
</TABLE>
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.
-11-
<PAGE>
In currency markets, results early in the year were mixed, but
unprofitable. During the second quarter, strong gains were realized in positions
in the Japanese yen, which weakened during June to an eight-year low versus the
U.S. dollar. Significant gains from Japanese yen trading continued into the
third quarter, and Japan's problems spread to other sectors of the global
economy, causing commodities prices to decline as demand from the Asian
economies weakened. Japan's deepening recession and credit crunch continued
through the fourth quarter, and the Fund achieved gains from long yen positions.
Trading results in stock index markets were also mixed in early
1998, despite a strong first-quarter performance by the U.S. equity market as
several consecutive weekly gains were recorded with most market averages setting
new highs. Second quarter results were profitable as the Asia-Pacific region's
equity markets weakened across the board. In particular, Hong Kong's Hang Seng
index trended downward during most of the second quarter and traded at a three-
year low. As U.S. equity markets declined in July and August, the Fund profited
from short positions in the S&P 500, most notably during August, when the index
dropped 14.5%. Volatility in September made for a difficult trading environment
in the stock index sector, and the Fund incurred modest losses, although results
remained profitable for the quarter and the year overall in these markets.
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 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.
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%.
-12-
<PAGE>
1997
<TABLE>
<CAPTION>
Total Trading
Results
<S> <C>
Interest Rates and Stock Indices $ (92,197)
Commodities 164,054
Currencies 342,016
Energy (64,047)
Metals (19,973)
---------------
$ 329,853
===============
</TABLE>
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.
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.
-13-
<PAGE>
Variables Affecting Performance
- -------------------------------
The principal variables which determine the net performance of
the Fund are gross profitability and interest income. Gross profitability is, in
turn, affected by the percentage of the Fund's assets allocated to trading.
During all periods set forth under "Selected Financial Data," the
interest rates in many countries were at unusually low levels. The low interest
rates in the United States (although higher than in many other countries)
negatively impacted revenues because interest income is typically a major
component of the Fund's profitability. In addition, low interest rates are
frequently associated with reduced fixed income market volatility, and in static
markets the Fund's profit potential generally tends to be diminished. On the
other hand, during periods of higher interest rates, the relative attractiveness
of a high risk investment such as the Fund may be reduced as compared to high
yielding and much lower risk fixed-income investments.
The Fund's Brokerage Commissions and Administrative Fees are a
constant percentage of the Fund's assets allocated to trading. The only Fund
costs (other than the insignificant currency trading costs) which are not based
on a percentage of the Fund's assets (allocated to trading or total) are the
Profit Shares payable to the Advisors on an Advisor-by-Advisor basis. Gross
profitability is in turn, affected by the percentage of the Fund's assets
allocated to trading. During periods when Profit Shares are a high percentage of
net trading gains, it is likely that there has been substantial performance non-
correlation among the Advisors (so that the total Profit Shares paid to those
Advisors which have traded profitably are a high percentage, or perhaps even in
excess, of the total profits recognized, as other Advisors have incurred
offsetting losses, reducing overall trading gains but not the Profit Shares paid
to the successful Advisors) -- suggesting the likelihood of generally trendless,
non-consensus markets.
Unlike many investment fields, there is no meaningful distinction
in the operation of the Fund between realized and unrealized profits. Most of
the contracts traded by the Fund are highly liquid and can be closed out at any
time.
Except in unusual circumstances, factors -- regulatory approvals,
cost of goods sold, employee relations and the like -- which often materially
affect an operating business have virtually no impact on the Fund.
Liquidity; Capital Resources
The Fund borrows only to a limited extent and only on a strictly
short-term basis in order to finance losses on non-U.S. dollar denominated
trading positions pending the conversion of the Fund's dollar deposits. These
borrowings are at a prevailing short-term rate in the relevant currency. They
have been immaterial to the Fund's operation to date and are expected to
continue to be so.
Substantially all of the Fund's assets are held in cash. The Net
Asset Value of the Fund's cash is not affected by inflation. However, changes in
interest rates could cause periods of strong up or down price trends, during
which the Fund's profit potential generally increases. Inflation in commodity
prices could also generate price movements which the strategies might
successfully follow.
Except in very unusual circumstances, the Fund should be able to
close out any or all of its open trading positions and liquidate any or all of
its securities holdings quickly and at market prices. This permits an Advisor to
limit losses as well as reduce market exposure on short notice should its
strategies indicate doing so. In addition, because there is a readily available
market value for the Fund's positions and assets, the Fund's monthly Net Asset
Value calculations are precise, and investors need only wait ten 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
failures 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, relating
to continued testing, contingency planning, risk management, and the wind down
of the efforts, had not yet been spent.
-14-
<PAGE>
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Not Applicable.
Item 8: Financial Statements and Supplementary Data
-------------------------------------------
The financial statements required by this Item are included in
Exhibit 13.01.
The supplementary financial information ("selected quarterly
financial data" and "information about oil and gas producing activities")
specified by Item 302 of Regulation S-K is not applicable. MLIP promoted the
Fund and is its controlling person.
Item 9: Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
There were no changes in or disagreements with independent
auditors on accounting or financial disclosure.
-15-
<PAGE>
PART III
Item 10: Directors and Executive Officers of the Registrant
--------------------------------------------------
(10a and 10b) Identification of Directors and Executive Officers:
--------------------------------------------------
As a limited partnership, the Partnership itself has no officers
or directors and is managed by the General Partner. Trading decisions are made
by the Trading Advisors on behalf of the Partnership.
The directors and executive officers of MLIP and their respective
business backgrounds are as follows.
John R. Frawley, Jr. Chairman, Chief Executive Officer,
President and Director
Jeffrey F. Chandor Senior Vice President, Director of
Sales, Marketing and Research and Director
Michael L. Pungello Vice President, Chief Financial Office 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.
-16-
<PAGE>
Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP
and, from July 1995 until January 1998, Mr. Jones was also Chairman of the Board
of Directors of MLIP. Mr. Jones graduated from the University of Arkansas with a
Bachelor of Science, Business Administration degree in 1964. Since June 1992,
Mr. Jones has held the position of Senior Vice President of MLPF&S. From June
1992 through February 1994, Mr. Jones was the President and Chief Executive
Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board
of Directors of MLIG and its subsidiary companies. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director
of MLIP. In 1980, Mr. Bodurtha graduated magna cum laude from Wesleyan
University, Middletown, Connecticut with a Bachelor of Arts degree in
Government. From 1980 to 1983, Mr. Bodurtha worked in the Investment Banking
Division of Merrill Lynch. In 1985, he was awarded his Master of Business
Administration degree from Harvard University, where he also served as
Associates Fellow (1985 to 1986). From 1986 to 1989, Mr. Bodurtha held the
positions of Associate and Vice President with Kidder, Peabody & Co.,
Incorporated where he worked in their Financial Futures & Options Group. Mr.
Bodurtha joined MLPF&S in 1989 and has held the position of First Vice President
since 1995. He has been the Director in charge of the Structured Investments
Group of MLPF&S since 1995.
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 $155,981.
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 S.E.C.T.O.R. Strategy Fund (SM) L.P., The SECTOR Strategy Fund (SM) II
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:
--------------------
-17-
<PAGE>
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 the
Partnership or MLIP.
Item 12: Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
<TABLE>
<CAPTION>
Amount of Nature of
Title of Class Name of Beneficial Owner Beneficial Ownership Percent of Class
- -------------- ------------------------ -------------------- ----------------
<S> <C> <C> <C>
Limited City of Milford 10,000 16.98%
Partnership Municipal Employee Pension Fund
Units 70 West River Road
Milford, CT 06460
</TABLE>
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1999, MLIP owned 1,176 Units (unit-equivalent
general partnership interests), which was less than 2.00% of the total Units
outstanding.
(c) Changes in Control:
------------------
None.
-18-
<PAGE>
Item 13: Certain Relationships and Related Transactions
----------------------------------------------
(a) Transactions Between Merrill Lynch and the Fund
-----------------------------------------------
All of the service providers to the Fund, other than the
Advisors, are affiliates of Merrill Lynch. Merrill Lynch negotiated with the
Advisors over the level of its advisory fees and Profit Share. However, none of
the fees paid by the Fund to any Merrill Lynch party were negotiated, and they
are higher than would have been obtained in arm's-length bargaining.
The Fund pays Merrill Lynch substantial Brokerage Commissions and
Administrative Fees as well as bid-ask spreads on forward currency trades. The
Fund also pays MLF interest on short-term loans extended by MLF to cover losses
on foreign currency positions.
Within the Merrill Lynch organization, MLIP is the direct
beneficiary of the revenues received by different Merrill Lynch entities from
the Fund. MLIP controls the management of the Fund and serves as its promoter.
Although MLIP has not sold any assets, directly or indirectly, to the Fund, MLIP
makes substantial profits from the Fund due to the foregoing revenues.
No loans have been, are or will be outstanding between MLIP or
any of its principals and the Fund.
MLIP pays substantial selling commissions and trailing
commissions to MLPF&S for distributing the Units. MLIP is ultimately paid back
for these expenditures from the revenues it receives from the Fund.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of MLIP, acts as the principal commodity broker
for the Partnership.
In 1999, the Fund expensed the following fees: (i) Brokerage
Commissions of $786,236 to MLF, which included $98,435 in consulting fees earned
by the Advisors; and (ii) Administrative Fees of $22,464 to MLIP. In addition,
MLIP and its affiliates may have derived certain economic benefits from
possession of the Fund's assets, as well as from foreign exchange and EFP
trading.
See Item 1(c), "Narrative Description of Business -- Charges" and
"-- Description of Current Charges" for a discussion of other business dealings
between MLIP affiliates and the Partnership.
(c) Indebtedness of Management:
--------------------------
The Partnership is prohibited from making any loans, to
management or otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
-19-
<PAGE>
PART IV
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K
---------------------------------------------------------------
<TABLE>
<CAPTION>
(a)1. Financial Statements (found in Exhibit 13.01): Page
--------------------------------------------- ----
<S> <C>
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
</TABLE>
(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
- ---------------
3.02(a) contained in the Registrant's report on
Form 10-Q for the Quarter ended June 30, 1995.
3.01(ii) Amended and Restated Limited Partnership Agreement of
the Partnership dated October 19, 1992.
Exhibit 3.01(ii): Is incorporated herein by reference from Exhibit 3.01
- ----------------
contained in Amendment No. 1 to the Registration
Statement (File No. 33-49852) filed on October 16,
1992, on Form S-1 under the Securities Act of 1933 (the
"Registrant's Registration Statement").
10.01 Form of Advisory Agreement between the Partnership,
Merrill Lynch Investment Partners Inc., Merrill Lynch
Futures Inc. and each Trading Advisor.
Exhibit 10.01: Is incorporated by reference from Exhibit 10.01(o)
- -------------
contained in the Registrant's report on Form 10-Q for
the Quarter Ended June 30, 1995.
10.02 Form of Consulting Agreement between each Trading
Advisor of the Partnership and Merrill Lynch Futures
Inc.
Exhibit 10.02: Is incorporated herein by reference from Exhibit
- -------------
10.02(a) contained in the Registrant's Registration
Statement.
10.03 Form of Customer Agreement between the Partnership and
Merrill Lynch Futures Inc.
-20-
<PAGE>
Exhibit 10.03: Is incorporated herein by reference from Exhibit 10.03
- -------------
contained in the Registrant's Registration Statement.
10.05 ML&Co., Inc. Guarantee.
Exhibit 10.05: Is incorporated herein by reference from Exhibit 10.05
- -------------
contained in the Registrant's Registration Statement.
10.07(i) Foreign Exchange Desk Service Agreement, Merrill Lynch
Investment Partners Inc., each advisor, Merrill Lynch
Futures Inc. and the Fund.
Exhibit 10.07(i): Is incorporated herein by reference from Exhibit
- ----------------
10.07(i) contained in the Registrant's report on Form
10-K for the year ended December 31, 1996.
10.07(ii) 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(ii): Is incorporated herein by reference from Exhibit
- -----------------
10.07(ii) contained in the Registrant's report on Form
10-K for the year ended December 31, 1996.
10.07(iii) Form of Amendment to the Customer Agreement among the
Partnership and MLF.
Exhibit 10.07(iii): Is incorporated herein by reference from Exhibit
- ------------------
10.07(iii) 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 incorporated herein by reference from Form 10-K
(fiscal year ended December 31, 1999) Commission File
number 0-18702 for The S.E.C.T.O.R. Fund (SM) L.P.
(Registration Statement File No. 33-34432 filed on May
25, 1990 under the Securities Act of 1933).
28.01 Prospectus of the Partnership dated October 19, 1992.
Exhibit 28.01: Is incorporated by reference as filed with the
- -------------
Securities and Exchange Commission pursuant to Rule 424
under the Securities Act of 1933 on October 19, 1992.
(b) Report on Form 8-K:
------------------
No reports on Form 8-K were filed during the fourth quarter of
1999.
-21-
<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 SECTOR STRATEGY FUND (SM) V L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS
INC.
General Partner
By: /s/ John R. Frawley, Jr.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director (Principal
Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed on March 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, President and Director March 30, 2000
- -------------------------------
John R. Frawley, Jr. (Principal Executive Officer)
/s/ Michael L. Pungello Vice President, Chief Financial Officer and Treasurer March 30, 2000
- -------------------------------
Michael L. Pungello (Principal Financial and Accounting Officer)
/s/ Jeffrey F. Chandor Senior Vice President, Director of Sales, March 30, 2000
- -------------------------------
Jeffrey F. Chandor Marketing and Research and Director
/s/ Michael J. Perini Director March 30, 2000
- -------------------------------
Michael J. Perini
</TABLE>
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
MERRILL LYNCH INVESTMENT General Partner of Registrant March 30, 2000
PARTNERS INC.
By: /s/ John R. Frawley, Jr.
------------------------
John R. Frawley, Jr.
-22-
<PAGE>
THE SECTOR STRATEGY FUND (SM) V L.P.
1999 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1999 Annual Report and Independent Auditors' Report
-23-
<PAGE>
Exhibit 13.01
The SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
Financial Statements for the years ended
December 31, 1999, 1998 and 1997
and Independent Auditors' Report
[LOGO]
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
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
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
The SECTOR Strategy Fund/SM/ V L.P.:
We have audited the accompanying statements of financial condition of The SECTOR
Strategy Fund/SM/ V 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 SECTOR Strategy Fund/SM/ V 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 SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
ASSETS 1999 1998
------------ ----------
Investments (Note 6) $7,807,992 $9,750,926
Receivable from investments (Note 6) 277,999 135,471
---------- ----------
TOTAL $8,085,991 $9,886,397
========== ==========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 277,999 $ 135,471
---------- ----------
Total liabilities 277,999 135,471
---------- ----------
PARTNERS' CAPITAL:
General Partner (1,176 Units and 876 Units) 155,891 117,488
Limited Partners (57,722 Units and 71,822 Units) 7,652,101 9,633,438
---------- ----------
Total partners' capital 7,807,992 9,750,926
---------- ----------
TOTAL $8,085,991 $9,886,397
========== ==========
NET ASSET VALUE PER UNIT
(Based on 58,898 and 72,698 Units outstanding) $ 132.57 $ 134.13
========== ==========
See notes to financial statements.
-2-
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- -----------
REVENUES:
<S> <C> <C> <C>
Trading profit (loss):
Realized (Note 1) $ -- $ (70,297) $ 368,946
Change in unrealized (Note 1) -- (17,058) (39,093)
--------- --------- -----------
Total trading results -- (87,355) 329,853
Interest income (Note 2) -- 69,400 292,197
--------- --------- -----------
Total revenues -- (17,955) 622,050
--------- --------- -----------
EXPENSES:
Brokerage commissions (Note 2) -- 115,706 348,042
Profit Shares (Note 3) -- 74 9,118
Administrative fees (Note 2) -- 3,306 9,839
--------- --------- -----------
Total expenses -- 119,086 366,999
--------- --------- -----------
INCOME (LOSS) FROM INVESTMENTS (Note 6) (109,067) 193,066 1,114,196
--------- --------- -----------
NET INCOME (LOSS) $(109,067) $ 56,025 $ 1,369,247
========= ========= ===========
NET INCOME (LOSS) PER UNIT:
Weighted average number of General Partner
and Limited Partner Units outstanding (Note 4) 67,051 82,499 104,332
========= ========= ===========
Net income (loss) per weighted average
General Partner and Limited Partner Unit $ (1.63) $ 0.68 $ 13.12
========= ========= ===========
See notes to financial statements.
</TABLE>
-3-
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
Units of
Partnership General Limited
Interest Partner Partners Total
---------- ---------- ------------- --------------
PARTNERS' CAPITAL 117,846 $ 356,079 $ 13,678,217 $ 14,034,296
December 31, 1996
Redemptions (25,489) -- (3,192,829) (3,192,829)
Net income -- 39,234 1,330,013 1,369,247
-------- --------- ------------ ------------
PARTNERS' CAPITAL 92,357 395,313 11,815,401 12,210,714
December 31, 1997
Redemptions (19,659) (261,967) (2,253,846) (2,515,813)
Net income (loss) -- (15,858) 71,883 56,025
-------- --------- ------------ ------------
PARTNERS' CAPITAL
DECEMBER 31, 1998 72,698 117,488 9,633,438 9,750,926
Subscriptions -- 38,440 -- 38,440
Redemptions (13,800) -- (1,872,307) (1,872,307)
Net loss -- (37) (109,030) (109,067)
-------- --------- ------------ ------------
PARTNERS' CAPITAL
DECEMBER 31, 1999 58,898 $ 155,891 $ 7,652,101 $ 7,807,992
======== ========= ============ ============
See notes to financial statements.
-4-
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
- ------------
The SECTOR Strategy Fund/SM/ V L.P. (the "Partnership") was organized under the
Delaware Revised Uniform Limited Partnership Act on July 16, 1992 and commenced
trading activities on January 4, 1993. 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
L.L.C. ("MM LLC"), a Delaware limited liability company, which opened a single
account with each Advisor selected. MM LLC is managed by MLIP, has no investors
other than the Multi-Advisor Funds and serves solely as the vehicle through
which the assets of the 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 Fund'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).
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
-5-
<PAGE>
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 LLCs 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 all 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.
Dissolution of the Partnership
- ------------------------------
The Partnership will terminate on December 31, 2022 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Limited Partnership Agreement.
-6-
<PAGE>
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 of .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 $126 and $136,
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 net 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.
4. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes of
disclosing net income (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.
-7-
<PAGE>
5. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch has guaranteed to the Partnership that it will have sufficient Net
Assets as of the Principal Assurance Date that the Net Asset Value per Unit as
of such Principal Assurance Date will equal, after adjustment for all
liabilities to third parties, not less than the minimum assured Net Asset Value
per Unit. Effective January 1, 1998, the Partnership restarted its trading
program for an additional Time Horizon of two years' duration and a new
Principal Assurance Date of December 31, 1999, with a minimum assured Net Asset
Value per Unit of $105.77. Effective January 1, 2000, the Partnership restarted
its trading program for a third Time Horizon of two years' duration with a new
Principal Assurance Date of December 31, 2001, with a minimum assured Net Asset
Value per Unit of $106.06.
6. INVESTMENTS
Prior to investing in MM LLC, the Partnership placed assets under the management
of certain of the Advisors by investing in private limited liability companies
("Trading 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 $741,104 $786,236 $22,464 $41,471 $(109,067)
======== ======== ======= ======= =========
For the year ended Total Brokerage Administrative Profit Income (Loss) from
December 31, 1998 Revenues Commissions Fees Shares Investments
- ------------------ ---------- ------------- ------------------ ---------- ---------------------
JWH LLC $(545,697) $173,032 $ 4,944 $ -- $(723,673)
SJO LLC 264,161 126,221 3,606 14,901 119,433
MM LLC 1,581,241 527,567 15,073 241,295 797,306
--------- -------- ------- ------- ---------
Total $1,299,705 $826,820 $23,623 $256,196 $ 193,066
========== ======== ======= ======== =========
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1997 Revenues Commissions Fees Shares Investments
- ------------------ ---------- ------------- ------------------ ---------- ---------------------
JWH LLC $1,359,201 $383,830 $10,887 $112,723 $ 851,761
SJO LLC 591,634 289,219 8,192 31,788 262,435
--------- -------- ------- -------- ---------
Total $1,950,835 $673,049 $19,079 $144,511 $1,114,196
========== ======== ======= ======== ==========
</TABLE>
Condensed statements of financial condition and statements of operations for MM
LLC, JWH LLC and SJO LLC are set forth as follows:
MM LLC MM LLC
December 31, 1999 December 31, 1998
-------------------- -------------------
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
============ ============
For the period from
For the year ended June 1, 1998 to
December 31, 1999 December 31, 1998
-------------------- --------------------
Revenues $9,090,190 $19,255,343
Expenses 10,152,017 9,491,842
---------- ----------
Net Income (Loss) $(1,061,827) $ 9,763,501
=========== ===========
-9-
<PAGE>
<TABLE>
<CAPTION>
JWH LLC SJO LLC SJO LLC
For the period from For the period from JWH LLC For the period from
January 1, 1998 to January 1, 1998 to For the year ended January 2, 1997 to
May 31, 1998 May 31, 1998 December 31, 1997 December 31, 1997
---------------------- --------------------- ------------------- ---------------------
<S> <C> <C> <C> <C>
Revenues $ 1,391,001 $1,472,242 $15,279,401 $3,903,268
Expenses 4,069,362 802,878 6,714,041 2,144,078
----------- ---------- ----------- ----------
Net Income (Loss) $(2,678,361) $ 669,364 $ 8,565,360 $1,759,190
=========== ========== =========== ==========
</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 is 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 market values of the financial instruments or commodities underlying
such derivative instruments frequently resulted 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 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 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 and 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 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, the General Partner can
directly effect 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 also 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 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 SECTOR Strategy Fund/SM/ V L.P.
-11-
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<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> 277,999 135,471
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0 0
0 0
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<TOTAL-LIABILITY-AND-EQUITY> 8,085,991 9,886,397
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<COMMISSIONS> 0 115,706
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<CHANGES> 0 0
<NET-INCOME> (109,067) 56,025
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