<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-23240
ML GLOBAL HORIZONS L.P.
-----------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3716393
- ----------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
-----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-5662
--------------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ML GLOBAL HORIZONS L.P.
-----------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
September 30, December 31,
1998 1997
-------------- --------------
ASSETS
- ------
Accrued interest $ 456,138 $ 572,654
Equity in commodity futures trading accounts:
Cash and option premiums 110,922,831 127,759,932
Net unrealized profit on open contracts 5,371,245 8,665,240
-------------- --------------
TOTAL $ 116,750,214 $ 136,997,826
============== ==============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Profit Shares payable $ 1,749,611 $ 1,196,823
Brokerage commissions payable 705,322 825,958
Incentive override payable 3,771 289,162
Redemptions payable 3,022,499 612,978
Administrative fees payable 24,322 28,540
-------------- --------------
Total liabilities 5,505,525 2,953,461
-------------- --------------
PARTNERS' CAPITAL:
General Partners (8758 and 10194 Units) 1,378,773 1,568,439
Limited Partners (697874 and 873830 Units) 109,865,916 134,446,411
Subscriptions Receivable (0 and 12807 Units) - (1,970,485)
-------------- --------------
Total partners' capital 111,244,689 134,044,365
-------------- --------------
TOTAL $ 116,750,214 $ 136,997,826
============== ==============
NET ASSET VALUE PER UNIT
(Based on 706632 and 871217
Units outstanding) $ 157.43 $ 153.86
============== ==============
See notes to financial statements.
2
<PAGE>
ML GLOBAL HORIZONS L.P.
-----------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF INCOME
--------------------
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ 3,448,134 $ 1,356,009 $ 10,239,067 $ 5,222,825
Change in unrealized 5,727,779 1,714,994 (3,293,995) 1,687,136
--------------- ---------------- ------------- -------------
Total trading results 9,175,913 3,071,003 6,945,072 6,909,961
--------------- ---------------- ------------- -------------
Interest income 1,446,873 1,422,413 4,827,507 3,668,604
--------------- ---------------- ------------- -------------
Total revenues 10,622,786 4,493,416 11,772,579 10,578,565
--------------- ---------------- ------------- -------------
EXPENSES:
Profit Shares 1,645,930 64,708 2,812,848 836,327
Incentive override - 34,382 3,771 42,678
Brokerage commissions 2,085,156 2,100,622 6,922,375 5,363,489
Administrative fees 71,902 72,435 238,703 184,948
--------------- ---------------- ------------- -------------
Total expenses 3,802,988 2,272,147 9,977,697 6,427,442
--------------- ---------------- ------------- -------------
NET INCOME $ 6,819,798 $ 2,221,269 $ 1,794,882 $ 4,151,123
=============== ================ ============= =============
NET INCOME PER UNIT:
Weighted average number of
units outstanding 748,898 754,358 834,762 656,881
=============== ================ ============= =============
Weighted average net
income per Limited Partner
and General Partner Unit $ 9.11 $ 2.94 $ 2.15 $ 6.32
=============== ================ ============= =============
</TABLE>
3
<PAGE>
ML GLOBAL HORIZONS L.P.
(a Delaware limited partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the nine months ended September 30, 1998 and 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
Limited General Subscriptions
Units Partners Partner Receivable Total
------------ -------------- ------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1996 588,825 $ 82,889,121 $ 1,284,420 $ - $ 84,173,541
Net income - 4,085,513 65,610 - 4,151,123
Subscriptions 291,529 43,353,820 177,070 - 43,530,890
Subscriptions Receivable (35,587) - - (5,330,933) (5,330,933)
Redemptions (37,443) (5,584,471) - - (5,584,471)
------------ -------------- ------------- --------------- ---------------
PARTNERS' CAPITAL,
September 30, 1997 807,324 $124,743,983 $ 1,527,100 $ (5,330,933) $ 120,940,150
============ ============== ============= =============== ===============
PARTNERS' CAPITAL,
December 31, 1997 871,217 $134,446,411 $ 1,568,439 $ (1,970,485) $ 134,044,365
Subscriptions 56,473 6,798,138 8,766 1,970,485 8,777,389
Net income - 1,770,977 23,905 - 1,794,882
Redemptions (221,058) (33,149,610) (222,337) - (33,371,947)
------------ -------------- ------------- --------------- ---------------
PARTNERS' CAPITAL,
September 30, 1998 706,632 $109,865,916 $ 1,378,773 $ - $ 111,244,689
============ ============== ============= =============== ===============
</TABLE>
See notes to financial statements.
4
<PAGE>
ML GLOBAL HORIZONS L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the
financial position of ML Global Horizons L.P. (the "Partnership" or the
"Fund") as of September 30, 1998 and the results of its operations for the
nine months ended September 30, 1998 and 1997. However, the operating
results for the interim periods may not be indicative of the results expected
for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements and
notes thereto included in the Partnership's Annual Report on Form 10-K filed
with the Securities and Exchange Commission for the year ended December 31,
1997 (the "Annual Report").
2. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's total trading results by reporting category for the
respective periods were as follows:
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
--------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
Interest rate $ 10,530,266 $ 5,711,097 $ 12,463,419 $ 2,932,294
Stock indices (2,055,170) 255,991 (1,913,057) 1,075,207
Commodities (505,964) (3,345,466) 140,696 1,149,063
Currencies 669,729 839,770 (1,697,388) 1,488,957
Energy 979,455 (62,175) 3,541,512 (2,033,980)
Metals (442,403) (328,214) (5,590,110) 2,298,420
--------------- --------------- --------------- ---------------
$ 9,175,913 $ 3,071,003 $ 6,945,072 $ 6,909,961
=============== =============== =============== ===============
</TABLE>
The contract/notional values of the Partnership's open derivative instrument
positions as of September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- --------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
---------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate $ 744,314,277 $ 244,761,676 $ 361,262,091 $ 216,261,891
Stock indices 24,831,989 19,774,813 3,671,625 9,837,452
Commodities 34,035,836 38,417,104 32,721,460 39,980,310
Currencies 232,414,482 135,829,575 71,377,618 290,360,085
Energy 12,777,014 4,064,740 - 12,218,655
Metals 18,383,497 19,861,817 28,496,076 51,889,407
---------------------- ------------------- -------------------- -------------------
$ 1,066,757,095 $ 462,709,725 $ 497,528,870 $ 620,547,800
====================== =================== ==================== ===================
</TABLE>
5
<PAGE>
The contract/notional values of the Partnership's exchange-traded and non-
exchange-traded open derivative instrument positions as of September 30, 1998
and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- ---------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
-------------------- -------------------- ------------------- ------------------
<S> <C> <C> <C> <C>
Exchange
traded $ 938,691,953 $ 350,156,066 $ 435,918,287 $ 484,549,200
Non-Exchange
traded 128,065,142 112,553,659 61,610,583 135,998,600
-------------------- -------------------- ------------------- ------------------
$ 1,066,757,095 $ 462,709,725 $ 497,528,870 $ 620,547,800
==================== ==================== =================== ==================
</TABLE>
The average fair values, based on contract/notional values, of the Partnership's
derivative instrument positions which were open as of the end of each calendar
month during the nine months ended September 30, 1998 and the year ended
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------- ---------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- --------------------
<S> <C> <C> <C> <C>
Interest rate $ 519,338,866 $ 196,961,770 $ 355,706,292 $ 163,790,120
Stock indices 18,108,197 10,016,069 16,261,720 10,889,808
Commodities 36,185,386 57,630,959 35,250,135 19,213,817
Currencies 179,980,931 202,438,067 93,524,652 185,718,360
Energy 4,746,577 11,745,686 5,554,722 5,244,100
Metals 36,824,259 37,344,341 30,160,151 39,147,176
------------------- ------------------- ------------------- --------------------
$ 795,184,216 $ 516,136,892 $ 536,457,672 $ 424,003,381
=================== =================== =================== ====================
</TABLE>
The gross unrealized profit and the net unrealized profit/(loss) on the
Partnership's open derivative instrument positions as of September 30, 1998 and
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------- -----------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit (Loss) Profit Profit
-------------- ----------------- -------------- -------------
<S> <C> <C> <C> <C>
Exchange
traded $ 9,931,482 $ 5,498,868 $ 10,018,862 $ 7,627,618
Non-Exchange
traded 3,279,485 (127,623) 2,824,800 1,037,622
-------------- ----------------- -------------- -------------
$ 13,210,967 $ 5,371,245 $ 12,843,662 $ 8,665,240
============== ================= ============== =============
</TABLE>
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
MONTH-END NET ASSET VALUE PER UNIT
<TABLE>
<CAPTION>
Jan. Feb. Mar. Apr. May. Jun. Jul Aug Sep
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $146.53 $151.84 $152.92 $149.41 $146.53 $146.46 $155.70 $148.90 $149.80
- ----------------------------------------------------------------------------------------------------------
1998 $154.11 $155.99 $156.90 $148.38 $148.82 $148.13 $146.66 $154.13 $157.43
- ----------------------------------------------------------------------------------------------------------
</TABLE>
Performance Summary
January 1, 1997 to September 30, 1997 by Quarter
- ------------------------------------------------
January 1, 1997 to March 31, 1997
In the currency markets, the U.S. dollar rallied and started 1997 on a
strong note, rising to a four-year high versus the Japanese yen and two-and-a-
half year highs versus the Deutsche mark and the Swiss franc. January and
February were profitable trading months for currencies.
Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. Interest rate trading
was profitable in January and March.
In the 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. Losses occurred in January and March for
energy trading; February trading was, however, profitable.
Agricultural commodity trading proved profitable in February and March.
Soybean prices reached their highest level in over eight years, on continued
demand and fears that inventories could fall to critically low levels before the
next harvest.
April 1, 1997 to June 30, 1997
In the currency markets, the dollar underwent a significant correction in
the Spring against the Japanese yen due to the G7 finance ministers'
determination that a further dollar advance would be counter-productive to their
current goals. Currency trading was unprofitable for the quarter.
Global interest rate trading proved unprofitable for the quarter. Losses
incurred in April were due to U.S. bond prices having moved in a directionless
pattern, as investors remained concerned over inflation and its impact on
further increases in interest rates by the U.S. Federal Reserve.
Energy trading saw losses throughout the quarter. In June crude oil
trended downward during the beginning of the month, before a sudden price
reversal occurred amid speculation that Iraq exports could be delayed until
August. Price movement of heating oil and unleaded gas proved to be trendless.
Agricultural commodity trading was profitable in April and May; overall the
second quarter was unprofitable. May's profits were due to coffee prices
surging beyond three dollars a pound for the first time in twenty years, on the
possibility of frost in Brazil and reports of poor crops in smaller countries.
July 1, 1997 to September 30, 1997
In the currency markets, the U.S. dollar rose dramatically in July,
reflecting the dollar's role as a haven for currency traders skeptical over the
"Euro", the new single European currency that is supposed to start replacing
several European national denominations 1n 1999. Beginning in August, the
dollar corrected against the Eurocurrencies in advance of well-advertised
tightening by the Bundesbank. Currency trading was unprofitable in August and
September.
Global interest rate trading was profitable in July and September. During
the third quarter, economic data in key countries was positive indicating lower
inflation and igniting a worldwide rally in the bond markets. Specifically,
investor sentiment was particularly strong in the U.S., where prices on the 30-
year Treasury bond and 10-year Treasury note rose to their highest levels in
over two years. This followed a largely positive economic report delivered by
Federal Reserve Chairman Greenspan in testimony before Congress.
Energy trading was unprofitable in July and September. By the middle of
the year, the decline in prices reversed sharply as Saudi Arabia and Iran,
together representing about 45% of OPEC's oil production joined forces to
pressure oil-producing nations to stay within OPEC production quotas.
7
<PAGE>
Agricultural commodity trading was unprofitable throughout the quarter.
Soybean and corn prices were on an upward trend in July as rain missed the
driest growing areas and more hot weather was forecast.
January 1, 1998 to September 30, 1998 by Quarter
- ------------------------------------------------
January 1, 1998 to March 31, 1998
The Fund's most profitable positions during the quarter were in the
global interest rate markets, 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. Specifically, strong gains were recorded in
French and German bonds.
For the quarter, positions in gold resulted in losses, while positions in
crude oil resulted in gains. Gold prices drifted sideways and lower as Asian
demand continued to slow and demand in the Middle East was affected by low oil
prices. Initially buoyed on concerns about a U.S.-led military strike against
Iraq, crude oil fell to a nine year low, as the globally warm winter, the return
of Iraq as a producer and the Asian economic crisis added to OPEC's supply glut
problems.
Trading results in stock index markets were mixed, but marginally
profitable, despite a strong first-quarter performance by the U.S. equity market
as several consecutive weekly gains were recorded with most market averages
setting new highs. Results in currency trading were also mixed, but marginally
unprofitable. Gains were realized in positions on the Swiss franc, which
weakened versus the U.S. dollar, while trading losses resulted from positions in
the Japanese yen and the Australian dollar.
Agricultural commodity markets provided profitable trading results
overall. Live cattle and hog prices trended downward throughout the quarter
resulting in strong gains. Cotton prices moved mostly upward during the
quarter, but prices dropped off sharply at the end of March causing losses.
April 1, 1998 to June 30, 1998
As swings in the U.S. dollar and developments in Japan affected bond
markets, the Fund's interest rate trading during the quarter resulted in losses,
particularly in Eurodollar deposits and U.S. Treasury bonds. Early in the
quarter, Treasury trading was range-bound, as concern that the economy might be
overheating was balanced by the potential impact of the Asian recession.
Additionally, Australian bonds and bills saw a dramatic drop in prices in early
June, as dollar-bloc currencies remained under pressure versus the U.S. dollar
due to the Japanese/Asian crisis.
Metals trading also resulted in losses, while energy trading was
profitable. The depressed gold market weakened further following news of a
European Central Bank consensus that ten to fifteen percent of reserves should
be made up of gold bullion which was at the low end of expectations. Despite
production cuts initiated by OPEC at the end of March, world oil supplies
remained excessive and oil prices stood at relatively low levels throughout the
quarter.
Results in currency trading were unprofitable, despite strong gains
realized from Japanese yen positions, which weakened during June to an eight-
year low versus the U.S. dollar. Trading results in stock index markets 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 quarter and traded at a three-year low.
Agricultural commodity trading produced losses. 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
for the second half of the quarter. Sugar futures maintained mostly a
downtrend, as no major buyers emerged to support the market. Similarly, coffee
prices trended downward, as good weather conditions in Central America and
Mexico increased the prospects of more output from these countries.
July 1, 1998 to September 30, 1998
Fund performance in July was essentially flat. In August and continuing
into September, financial markets in general were characterized by a flight to
quality that resulted from uncertainty over Russia's solvency, continued
weakness in Asia, and concerns that recessionary conditions would spread to the
United States and Europe. These factors, combined with generally less liquid
market conditions, led to a marked widening in bond credit spreads and a broad
sell-off in world-wide equity markets. Managed futures funds exhibited strong
non-correlation to world markets in August and again in September, generating
significant profits on the long side of interest rates and the short side of the
commodity markets.
Interest rate trading was particularly profitable during the quarter in
positions in Eurodollars, German and Japanese bonds, and U.S. Treasury notes and
bonds. The growth rate of the world bond market declined to its lowest level
since 1987 at 7.7%, down 4.0% from the last peak in 1993. Global
8
<PAGE>
investors poured funds into such instruments as U.S. Treasury issues and German
Bunds, staging a major flight to quality. As a result, there was a significant
widening of credit spreads on a global basis. Global fund managers also
increased their already-overweight exposure to U.S. Treasuries to a record high.
The impact of these events was that in September, the yield on the Japanese 5-
year bond fell to .67%, an all-time low, German 10-year Bunds fell to 3.89%,
representing almost a 100-year low, and the 30-year bond in the U.S. dropped to
its lowest level on record.
The Fund profited from its currency trading during the quarter with
significant gains from short Japanese yen and Canadian dollar positions. In the
currency markets, Japan's problems spread to other sectors of the global
economy, causing commodities prices to decline as demand from the Asian
economies weakened, in turn putting pressure on Canada's commodity-sensitive
currency.
Energy trading also resulted in gains for the quarter. Short heating oil
positions proved profitable for the Fund as the market for heating oil prices
dropped to its lowest level in more than a decade (the previous low was in
1986). Crude oil and unleaded gas positions also generated strong profits for
the Fund.
As U.S. equity markets declined in July and August, the Fund profited from
short positions in the S&P 500(R), most notably during August, when the index
dropped 14.5%. Volatility in September made for a difficult trading
environment, and the Fund incurred losses in the stock index sector during
September, ultimately resulting in losses overall for the quarter in these
markets.
The agricultural sector generated losses overall for the quarter. Although
as commodity markets collapsed in August, profits were generated on the short
side, in September, the Fund was caught on the long side of the soybean complex
resulting in losses as the U.S. soybean crop increased relative to the USDA's
production estimate as a result of timely rains, which contributed to lower
prices.
In the metals markets, gold prices attempted to move higher against a
backdrop of volatility in major equity markets, increasing concerns about
emerging markets, economic chaos in Russia, weakness in the U.S. dollar, and
increasing worries about global economic conditions. However, gold was unable
to extend rallies and build any significant upside momentum resulting in a
trendless environment and resulting losses in gold positions for the Fund.
Year 2000 Compliance
- --------------------
As the millennium approaches, Merrill Lynch has undertaken initiatives
to address the Year 2000 problem (the "Y2K problem"). The Y2K problem is the
result of a widespread programming technique that causes computer systems to
identify a date based on the last two numbers of a year, with the assumption
that the first two numbers of the year are "19." As a result, the year 2000
would be stored as "00," causing computers to incorrectly interpret the year as
1900. Left uncorrected, the Y2K problem may cause information technology systems
(e.g., computer databases) and non-information technology systems (e.g.,
elevators) to produce incorrect data or cease operating completely.
Merrill Lynch believes that it has identified and evaluated its internal
Y2K problem and that the company is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. Merrill Lynch
expects the renovation phase (as discussed below) of its Year 2000 efforts to be
substantially completed by December 31, 1998, thereby allowing the company to
focus on additional testing efforts and integration of the Year 2000 programs of
recent acquisitions during 1999. In order to focus attention on the Y2K problem,
management has deferred certain other technology projects; however this deferral
is not expected to have a material adverse effect on the company's business,
results of operations, or financial condition.
The failure of Merrill Lynch's technology systems relating to a Y2K
problem would likely have a material adverse effect on the company's business,
results of operations, or financial condition. This effect could include
disruption of normal business transactions, such as the settlement, execution,
processing, and recording of trades in securities, commodities, currencies, and
other assets. The Y2K problem could also increase Merrill Lynch's exposure to
risk and its need for liquidity.
In 1995, Merrill Lynch established the Year 2000 Compliance Initiative,
which is an enterprisewide effort to address the risks associated with the Y2K
problem, both internal and external. The Year 2000 Compliance Initiative's
efforts to address the risks associated with the Y2K problem have been organized
into six segments or phases: planning, pre-renovation, renovation, production
testing, certification, and integration testing.
The planning phase involved defining the scope of the Year 2000
Compliance Initiative, including its annual budget and strategy, and determining
the level of expert knowledge available within Merrill Lynch regarding
particular systems or applications. The pre-renovation phase involved developing
a detailed enterprisewide inventory of applications and systems, identifying the
scope of necessary renovations to each application or system, and establishing a
conversion schedule. During the renovation phase, source codes are actually
converted, date fields are expanded or windowed (windowing is used on an
exception basis only), test data is prepared, and each system or application is
tested using a variety of Year 2000 scenarios. The production testing phase
validates that a renovated system is functionally the same as the existing
production version, that renovation has not introduced defects, and that
expanded or windowed date fields continue to handle current dates properly. The
certification phase validates that a system can run successfully in a Year 2000
environment. Finally, the integration testing phase, which will occur throughout
1999, validates that a system can successfully interface with both internal and
external systems.
In 1996 and 1997, as part of the planning and pre-renovation phases,
both plans and funding of plans for inventory, preparation, renovation, and
testing of computer systems for the Y2K problem were approved. All plans for
both mission-critical and non-mission-critical systems are tracked and
monitored. The work associated with the Year 2000 Compliance Initiative has been
accomplished by Merrill Lynch employees, with the assistance of consultants
where necessary.
As part of the production testing and certification phases, Merrill
Lynch has performed, and will continue to perform, both internal and external
Year 2000 testing intended to address the risks from the Y2K problem. In July
1998, Merrill Lynch participated in an industrywide Year 2000 systems test
sponsored by the Securities Industry Association ("SIA"), in which selected
firms tested their computer systems in mock stock trades that simulated dates in
December 1999 and January 2000. Merrill Lynch will participate in further
industrywide testing sponsored by the SIA, currently scheduled for March and
April 1999, which will involve an expanded number of firms, transactions, and
conditions. Merrill Lynch also participated in a test sponsored by the Bank of
England's Central Gilts Office.
Each business area within Merrill Lynch also continues to develop
specific contingency plans, with the particular choice of contingency action
dependent on the severity of the problem being addressed, the availability of
alternative products, and the level of importance of the business activity
supported by the problematic system. As part of the Year 2000 Compliance
Initiative, Merrill Lynch has undertaken a business readiness/risk management
effort in which each line of business will identify scenarios in order to
develop plans to reduce risks associated with a Y2K problem.
Merrill Lynch continues to survey and communicate with parties with whom
it has important relationships that may be associated with information
technology Y2K problems, as well as parties that may be associated with non-
information technology Y2K problems, such as landlords. Management is unable, at
this point, to ascertain whether all such third parties will successfully
address the Y2K problem, particularly parties outside the U.S., where it is
believed that remediation efforts relating to the Y2K problem may be less
advanced than in the U.S. Merrill Lynch will continue to monitor third parties'
Year 2000 readiness to determine whether additional or alternative measures are
necessary. Such measures may include the selection of alternate third parties or
other efforts designed to mitigate some of the effects of a third party's
noncompliance. In light of the interdependency of the parties in or serving the
financial markets, however, there can be no assurance that all Y2K problems will
be identified and remediated on a timely basis or that all remediation efforts
will be successful. The failure of securities exchanges, clearing organizations,
vendors, clients, or regulators to resolve their own processing issues in a
timely manner could have a material adverse effect on Merrill Lynch's business,
results of operations, or financial condition.
Nearly 10% of the current year's technology budget has been allocated to
the Year 2000 Compliance Initiative. As of the end of the 1998 third quarter,
the total estimated expenditures associated with the entire Year 2000 Compliance
Initiative were expected to be approximately $400 million, of which $160 million
is remaining. The majority of these remaining expenditures are expected to cover
software remediation, testing, and contingency planning. There can be no
assurance that the costs associated with such remediation efforts will not
exceed those currently anticipated by Merrill Lynch, or that the costs
associated with the remediation efforts or the possible failure of such
remediation efforts would not have a material adverse effect on Merrill Lynch's
business, results of operations, or financial condition.
European Economic and Monetary Union ("EMU")
- --------------------------------------------
As of January 1, 1999, the "euro" will be adopted as the common legal
currency of participating member states of the EMU. The euro and participating
member currencies will co-exist through July 1, 2002, with the euro gradually
replacing member national currencies. The introduction of and conversion to the
euro is expected to have significant implications for the business, as well as
the computer systems and operational processes, of Merrill Lynch.
The introduction of the euro will bring about fundamental changes in the
structure and nature of the European financial markets, including the creation
of a unified, more liquid capital market in Europe. As financial markets in EMU
member states converge and local barriers are removed, competition is expected
to increase. Merrill Lynch does not expect the introduction of the euro to have
a negative effect on its business, currency risk, or competitive positioning in
the European markets. The International Swaps and Derivatives Association, Inc.
has established an EMU protocol agreement that parties to derivatives contracts
may use to amend their agreements to ensure continuity of contract during the
conversion period. Merrill Lynch is a party to this protocol agreement.
Merrill Lynch's program to address the introduction of and conversion to
the euro and the associated systems and operational implications and challenges
has been divided into three phases: analysis, mobilization, and implementation.
The analysis phase began in the third quarter of 1997 and focused upon analyzing
the likely implications of the EMU and assessing the operational and systems
impact on Merrill Lynch. During this phase, a database containing the primary
compliance challenges of the EMU was developed, and working groups were
established to drive the EMU preparation effort within the different product
lines and principal operating locations. The mobilization phase began in the
fourth quarter of 1997 and focused upon developing project plans and
establishing an organizational and project structure to address various business
requirements. The implementation phase, which began in December 1997, is
concerned with implementing the operational and systems changes identified as
necessary to ensure Merrill Lynch's compliance with EMU. The implementation
phase is expected to continue into the first quarter of 1999 to resolve any
post-conversion issues.
With respect to operational and systems matters, the introduction of the
euro will affect all Merrill Lynch facilities that transact, distribute, or
provide custody or recordkeeping for securities or cash denominated in the
currency of a participating member state. Merrill Lynch systems or procedures
that handle such securities or cash may require modification. The procedural and
systems modifications that Merrill Lynch has identified as necessary for
conversion to the euro include, but are not limited to, such activities as:
. modification of application systems to enable the systems to recognize and
process the euro on an ongoing basis;
. conversion of data, which will require updates to master files to reflect
redenomination;
. alteration of transaction data that includes converting trading and cash
positions from member currency to the euro;
. procedural modifications to reflect the replacement of member currency bank
accounts and settlement instructions with euro equivalents; and
. development of the capability for certain business functions to translate
member currencies into euro at a fixed exchange rate until July 2002.
The introduction of the euro exposes Merrill Lynch to operational and
systems risks in that the necessary systems modifications will affect clearance,
settlement, and financial reporting of transactions. If not handled correctly,
these modifications could result in failed trades and other improper accounting
for transactions.
The success of Merrill Lynch's euro conversion efforts also is dependent
on the euro-compliance of third parties, such as trading counterparties,
financial intermediaries (for example, securities and commodities exchanges,
depositories, clearing organizations, and commercial banks), and vendors.
Merrill Lynch will monitor risks associated with third parties on a regular
basis, including, for example, performing assessments of counterparties'
readiness.
In anticipation of the introduction of the euro, the financial
authorities and securities exchanges of certain of the EMU member states are
conducting market tests to assess euro-conversion readiness. Merrill Lynch is
participating in such testing procedures as required, and to date the outcome of
each of those tests has been satisfactory. In addition to participating in the
testing procedures of the EMU member states' financial authorities and
securities exchanges, Merrill Lynch also is implementing its own internal
testing procedures, including four systemwide practice sessions, to prepare for
the conversion. The purpose of these practice sessions is to better ensure that
the conversion plans are comprehensive and that the schedule is acceptable. The
results of such practice sessions will be evaluated and used to identify those
areas in which further modification or remediation is necessary. While Merrill
Lynch will engage in these testing procedures, certain elements of the
conversion process can only be undertaken for the first time during the
conversion. Accordingly, there can be no assurances that the tests will identify
all system deficiencies and necessary modifications prior to the conversion.
Due to the unprecedented scale of change, including the volume and
magnitude of transactions affected and the number of third parties involved,
market participants are anticipating a period of some disruption immediately
following the conversion. Merrill Lynch has developed, and is continuing to
develop, contingency plans in an effort to reduce the impact of such disruptions
on its business.
As of the end of the 1998 third quarter, the total estimated
expenditures associated with the introduction of and conversion to the euro are
expected to be approximately $79 million, of which approximately $20 million is
remaining (of these amounts, $71 million and $19 million, respectively, pertain
to 1998). These remaining expenditures are expected to be spent on EMU
compliance efforts and project administration. Merrill Lynch expects to become
fully EMU-compliant during the 1998 fourth quarter.
Merrill Lynch believes that it has identified and evaluated those
systems and operational modifications necessary for the conversion to the euro
and is in the process of implementing the identified modifications. In light of
the interdependency of the parties in or serving the financial markets, however,
there can be no assurance that all necessary modifications will be identified
and renovated on a timely basis, that all modification efforts will be
successful, or that all third parties with whom Merrill Lynch's operations
interface will be EMU-ready. In addition, there can be no assurance that the
remaining euro conversion expenditures will not exceed those anticipated by
Merrill Lynch at this time or that the expenditures associated with the
conversion efforts and the possible failure of such conversion efforts will not
have a material adverse effect on Merrill Lynch's business, results of
operations, or financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the General
Partner is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
--------
There are no exhibits required to be filed as part of this report.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the first nine months of
fiscal 1998.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ML GLOBAL HORIZONS L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 11, 1998 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: November 11, 1998 By /s/ JO ANN DI DARIO
-------------------
Jo Ann Di Dario
Vice President, Chief Financial Officer
and Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> SEP-30-1998 SEP-30-1997
<CASH> 0 0
<RECEIVABLES> 116750214 123025181
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 116750214 123025181
<SHORT-TERM> 0 0
<PAYABLES> 5505525 2085031
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 111244689 120940150
<TOTAL-LIABILITY-AND-EQUITY> 116750214 123025181
<TRADING-REVENUE> 6945072 6909961
<INTEREST-DIVIDENDS> 4827507 3668604
<COMMISSIONS> 9977697 6427442
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 1794882 4151123
<INCOME-PRE-EXTRAORDINARY> 1794882 4151123
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1794882 4151123
<EPS-PRIMARY> 2.15 6.32
<EPS-DILUTED> 2.15 6.32
</TABLE>
