Exhibit 13.01
JOHN W. HENRY & CO./ MILLBURN L.P.
(A Delaware Limited Partnership)
Financial Statements for the years ended
December 31, 1999, 1998 and 1997
and Independent Auditors' Report
[LOGO] Merrill Lynch
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999, 1998 AND 1997:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-14
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
John W. Henry & Co./Millburn L.P.:
We have audited the accompanying statements of financial condition of John W.
Henry & Co./Millburn L.P. (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 John W. Henry & Co./Millburn 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
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
------------------------- --------------------------
ASSETS
Investments (Note 6) $ 42,876,172 $ 56,163,313
Receivable from investments (Note 6) 1,007,250 259,704
------------------------- --------------------------
TOTAL $ 43,883,422 $ 56,423,017
========================= ==========================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 1,007,250 $ 259,704
------------------------- --------------------------
Total liabilities 1,007,250 259,704
------------------------- --------------------------
PARTNERS' CAPITAL:
General Partner:
(504 and 504 Series A Units outstanding) 131,110 149,246
(1,338 and 1,338 Series B Units outstanding) 282,923 321,921
(926 and 926 Series C Units outstanding) 152,600 173,635
Limited Partners:
(39,335 and 44,678 Series A Units outstanding) 10,232,683 13,230,285
(100,451 and 115,421 Series B Units outstanding) 21,241,923 27,771,959
(65,744 and 77,411 Series C Units outstanding) 10,834,933 14,516,267
------------------------- --------------------------
Total partners' capital 42,876,172 56,163,313
------------------------- --------------------------
TOTAL $ 43,883,422 $ 56,423,017
========================= ==========================
NET ASSET VALUE PER UNIT
Series A $ 260.14 $ 296.13
========================= ==========================
Series B $ 211.47 $ 240.61
========================= ==========================
Series C $ 164.80 $ 187.52
========================= ==========================
See notes to financial statements.
2
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
1999 1998 1997
-------------------- ------------------- -------------------
INCOME (LOSS) FROM INVESTMENTS (Note 6) $ 6,145,111) $ 1,867,451 $ 7,357,688
-------------------- ------------------- -------------------
NET INCOME (LOSS) (6,145,111) 1,867,451 7,357,688
==================== =================== ===================
NET INCOME (LOSS) PER UNIT:
Weighted average number of General Partner
and Limited Partner Units outstanding (Note 5) 226,394 264,787 294,640
==================== =================== ===================
Net income (loss) per weighted average
General Partner and Limited
Partner Unit $ (27.14) $ 7.05 $ 24.97
==================== =================== ===================
See notes to financial statements.
3
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
Series Series Series General Partner
----------------------------------------------------
A B C Series Series Series
Units Units Units A B C
------------- -------------- --------------- ---------------- ---------------- ---------------
PARTNERS' CAPITAL,
DECEMBER 31, 1996 56,376 148,528 100,695 $ 196,983 $ 405,594 $ 230,192
Redemptions (4,604) (11,308) (8,236) - - -
Net income - - - 24,622 50,580 28,707
------------- -------------- --------------- ---------------- ---------------- ---------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 51,772 137,220 92,459 221,605 456,174 258,899
Redemptions (6,590) (20,461) (14,122) (70,937) (133,279) (82,775)
Net income (loss) - - - (1,422) (974) (2,489)
------------- -------------- --------------- ---------------- ---------------- ---------------
PARTNERS' CAPITAL,
DECEMBER 31, 1998 45,182 116,759 78,337 149,246 321,921 173,635
Redemptions (5,343) (14,970) (11,667) - - -
Net income (loss) - - - (18,136) (38,998) (21,035)
------------- -------------- --------------- ---------------- ---------------- ---------------
PARTNERS' CAPITAL,
DECEMBER 31, 1999 39,839 101,789 66,670 $ 131,110 $ 282,923 $ 152,600
============= ============== =============== ================ ================ ===============
Limited Partners
----------------------------------------------------------
Series Series Series
A B C Total
------------------ -------------------- ---------------- ----------------
PARTNERS' CAPITAL,
DECEMBER 31, 1996 $ 14,040,479 $ 30,082,484 $ 15,878,356 $60,834,088
Redemptions (1,255,814) (2,498,029) (1,413,769) (5,167,612)
Net income 1,702,808 3,638,849 1,912,122 7,357,688
------------------- -------------------- ------------------ ---------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 14,487,473 31,223,304 16,376,709 63,024,164
Redemptions (1,665,001) (4,413,933) (2,362,377) (8,728,302)
Net income (loss) 407,813 962,588 501,935 1,867,451
------------------- -------------------- ------------------- --------------
PARTNERS' CAPITAL,
DECEMBER 31, 1998 13,230,285 27,771,959 14,516,267 56,163,313
Redemptions (1,552,673) (3,480,805) (2,108,552) (7,142,030)
Net income (loss) (1,444,929) (3,049,231) (1,572,782) (6,145,111)
------------------- -------------------- ------------------- --------------
PARTNERS' CAPITAL,
DECEMBER 31, 1999 $ 10,232,683 $ 21,241,923 $ 10,834,933 $42,876,172
====================== ==================== ================ ==============
See notes to financial statements.
4
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
John W. Henry & Co./Millburn L.P. (the "Partnership") was organized under the
Delaware Revised Uniform Limited Partnership Act on August 29, 1989. The
Partnership raised $18,182,000 in its initial offering of Units of limited
partnership interest ("Series A Units") and commenced trading activities on
January 5, 1990. The Partnership raised an additional $50,636,000 in a second
offering of Units of limited partnership interest ("Series B Units") and
commenced trading activities with respect to the Series B Units on January
28, 1991. The Partnership raised an additional $40,000,000 in a third
offering of Units of limited partnership interest ("Series C Units") and
commenced trading activities with respect to the Series C Units on January 2,
1992. (Series A, B and C units are, hereinafter, collectively referred to as
"Units.") The Partnership engages (currently, through investments in limited
liability companies (see below)) in the speculative trading of futures,
options on futures and forward contracts on a wide range of commodities.
Merrill Lynch Investment Partners Inc. ("MLIP"), a wholly-owned subsidiary of
Merrill Lynch Group, Inc., which, in turn, is a wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the general partner of the
Partnership. Merrill Lynch Futures Inc. ("MLF"), an affiliate of Merrill
Lynch, is the Partnership's commodity broker. MLIP has agreed to maintain a
general partner's interest of at least 1% of total capital of each Series of
Units. MLIP and each Limited Partner share in the profits and losses of such
Series in proportion to their respective interests in it.
John W. Henry & Company, Inc. and Millburn Ridgefield Corporation (each an
"Advisor", together, "Advisors") have been the Partnership's only trading
advisors since inception. Each Advisor was allocated 50% of the total assets
of each Series as of the date such Series began trading. Subsequently, these
allocations have varied over time. MLIP may, in its discretion, reallocate
assets as of any month-end. The Partnership has placed all of its assets
under the management of the Advisors through investing in private limited
liability companies ("Trading LLCs"), as described in Note 6. Certain of the
following notes to financial statements are directly related to Partnership
assets managed by the Advisors in the Trading LLC's.
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements as
well as the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recongnition
--------------------
See Note 6 for discussion of revenue recognition for the Partnership's
investment in Trading LLC's.
Operating Expenses
------------------
MLIP pays all routine operating expenses, including legal, accounting,
printing, postage and similar administrative expenses. MLIP receives an
administrative fee as well as a portion
5
of the brokerage commissions paid to MLF by the Partnership (see Note 2).
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each Partner is individually responsible for such Partner's
respective share of the income and expenses of the series in which such
partner is invested as reported for income tax purposes.
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, 2016 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
The Partnership's U.S. dollar assets invested in Trading LLC's are maintained
at MLF. On assets held in U.S. dollars, Merrill Lynch credits the Trading
LLC's with interest at the prevailing 91-day U.S. Treasury bill rate. The
Trading LLC's are 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 Trading
LLC's, from possession of such assets.
Merrill Lynch charges the Trading LLC's Merrill Lynch's cost of financing
realized and unrealized losses on the Trading LLC's non-U.S. dollar-
denominated positions.
The Partnership pays brokerage commissions to MLF through the Trading LLC's
at a flat monthly rate of .792 of 1% (a 9.50% annual rate) of the
Partnership's month-end assets. Prior to February 1, 1997, the rate was .979
of 1% (an 11.75% annual rate). The Partnership also pays MLIP a monthly
administrative fee through the Trading LLC's of .21 of 1% (an .25% annual
rate) of the Partnership's month-end assets. Month-end assets are not
reduced, for purposes of calculating brokerage commissions and administrative
fees, by any accrued brokerage commissions, administrative fees, Profit
Shares or other fees or charges.
MLF pays the Advisors annual consulting fees up to 4% of the average month-
end assets allocated to them for management.
3. AGREEMENTS
The Trading LLCs entered the Advisory Agreements with the Advisors (see Note
6).
Profit Shares of either 15% or 20%, of any New Trading Profit, as defined,
either as of the end of each calendar quarter or year, were paid to each
Advisor based on the performance of the Partnership account managed by such
Advisor, irrespective of the overall performance of the Partnership. Profit
Shares are also paid out in respect of Units redeemed as of the end of
interim months, to the extent the applicable percentage of any New Trading
Profits attributable to such Units.
6
4. STATEMENT OF INCOME BY SERIES
The profit and loss of the Series A, Series B and Series C Units for the
years ended December 31, 1999, 1998 and 1997 is as follows:
Series A Series B
------------------------------------------------ ---------------------------------------------
1999 1998 1997 1999 1998 1997
---------------- ----------- --------------- ---------------- ---------- ---------------
Income (loss) from
investments (Note 6) (1,463,065) 406,391 1,727,430 (3,088,229) 961,614 3,689,429
---------------- ----------- --------------- ---------------- ---------- ---------------
NET INCOME (LOSS) $ (1,463,065) $ 406,391 $ 1,727,430 $ (3,088,229) $ 961,614 $ 3,689,429
================ =========== =============== ================ ========== ===============
NET INCOME (LOSS) PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number
of units outstanding (Note 5) 42,998 48,581 54,036 108,954 129,195 143,414
---------------- ----------- --------------- ---------------- ---------- ---------------
Net income (loss) per weighted
Average General Partner and
Limited Partner Unit $ (34.03) $ 8.37 $ 31.97 $ (28.34) $ 7.44 $ 25.73
================ =========== =============== ================ ========== ===============
Series C
----------------------------------------------
1999 1998 1997
--------------- ----------- ----------------
Income (loss) from
investments (Note 6) (1,593,817) 499,446 1,940,829
--------------- ----------- ----------------
NET INCOME (LOSS) $ (1,593,817) $ 499,446 $1,940,829
=============== =========== ================
NET INCOME (LOSS) PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number
of units outstanding (Note 5) 74,442 87,011 97,190
--------------- ----------- ----------------
Net income (loss) per weighted
average General Partner and
Limited Partner Unit $ (21.41) $ 5.74 $ 19.97
=============== =========== ================
7
5. WEIGHTED AVERAGE UNITS
The weighted average number of Units of each series outstanding was computed
for purposes of disclosing net income per weighted average Unit. The weighted
average number of Units of each series outstanding for the years ended
December 31, 1999, 1998 and 1997 equals the Units of such series outstanding
as of such date, adjusted proportionately for Units redeemed based on the
respective length of time each was outstanding during the year.
6. INVESTMENTS
The investments in the Trading LLC's are reflected in the financial
statements at fair value based upon the interest of each series of Units in
each Trading LLC. Fair value is equal to the market value of the net assets
of the Trading LLC's. The resulting difference between cost and fair value is
reflected on the Statements of Operations as Income (loss) from investments.
At December 31, 1999 and 1998, the Partnership had investments in the ML JWH
Financial and Metals Portfolio LLC ("JWH LLC") and ML Millburn Global LLC
("Millburn LLC") as follows:
1999 1998
--------------- ---------------
JWH LLC $ 19,843,543 $28,886,199
Millburn LLC 23,032,629 27,277,114
--------------- ---------------
Total $ 42,876,172 $56,163,313
=============== ===============
8
Total revenues and fees with respect to such investments are set forth as
follows:
For the year ended Total Brokerage Administrative
December 31, 1999 Revenues Commissions Fees
---------------------------- ----------------------------------------------------------
Series A Units
- ------------------------------------
JWH LLC $ (710,851) $ 593,051 $ 15,604
Millburn LLC 484,166 605,625 15,937
---------------------------- ------------------------- -----------------------
Total $ (226,685) $ 1,198,676 $ 31,541
============================ ========================= =======================
Series B Units
- ------------------------------------
JWH LLC $ (1,520,888) $ 1,214,897 $ 31,972
Millburn LLC 973,195 1,251,363 32,930
---------------------------- ------------------------- -----------------------
Total $ (547,693) $ 2,466,260 $ 64,902
============================ ========================= =======================
Series C Units
- ------------------------------------
JWH LLC $ (775,390) $ 647,501 $ 17,040
Millburn LLC 537,575 666,722 17,545
---------------------------- ------------------------- -----------------------
Total $ (237,815) $ 1,314,223 $ 34,585
============================ ========================= =======================
Total - All Series
- ------------------------------------
JWH LLC $ (3,007,129) $ 2,455,449 $ 64,616
Millburn LLC 1,994,936 2,523,710 66,412
---------------------------- ------------------------- -----------------------
Total $ (1,012,193) $ 4,979,159 $ 131,028
============================ ========================= =======================
For the year ended Profit Income from
December 31, 1999 Shares Investments
------------------------------- ---------------------------
Series A Units
- ------------------------------------
JWH LLC $ - $ (1,319,506)
Millburn LLC 6,163 (143,559)
-------------------------- ---------------------------
Total $ 6,163 $ (1,463,065)
========================== ===========================
Series B Units
- ------------------------------------
JWH LLC $ - $ (2,767,757)
Millburn LLC 9,374 (320,472)
-------------------------- ---------------------------
Total $ 9,374 $ (3,088,229)
========================== ===========================
Series C Units
- ------------------------------------
JWH LLC $ - $ (1,439,931)
Millburn LLC 7,194 (153,886)
-------------------------- ---------------------------
Total $ 7,194 $ (1,593,817)
========================== ===========================
Total - All Series
- ------------------------------------
JWH LLC $ - $ (5,527,194)
Millburn LLC 22,731 (617,917)
-------------------------- ---------------------------
Total $ 22,731 $ (6,145,111)
========================== ===========================
9
For the year ended Total Brokerage Administrative
December 31, 1998 Revenues Commissions Fees
---------------------------- ------------------------------------------------------------
Series A Units
- ----------------------------------
JWH LLC $ 995,747 $ 630,513 $ 16,592
Millburn LLC 829,825 633,628 16,674
---------------------------- ------------------------- -----------------------
Total $ 1,825,572 $ 1,264,141 $ 33,266
============================ ========================= =======================
Series B Units
- ----------------------------------
JWH LLC $ 2,200,199 $ 1,356,787 $ 35,705
Millburn LLC 1,832,991 1,374,689 36,176
---------------------------- ------------------------- -----------------------
Total $ 4,033,190 $ 2,731,476 $ 71,881
============================ ========================= =======================
Series C Units
- ----------------------------------
JWH LLC $ 1,148,318 $ 712,552 $ 18,752
Millburn LLC 962,693 721,776 18,994
---------------------------- ------------------------- -----------------------
Total $ 2,111,011 $ 1,434,328 $ 37,746
============================ ========================= =======================
Total - All Series
- ----------------------------------
JWH LLC $ 4,344,264 $ 2,699,852 $ 71,049
Millburn LLC 3,625,509 2,730,093 71,844
---------------------------- ------------------------- -----------------------
Total $ 7,969,773 $ 5,429,945 $ 142,893
============================ ========================= =======================
For the year ended Profit Income from
December 31, 1998 Shares Investments
----------------------------- ---------------------------
Series A Units
- ----------------------------------
JWH LLC $ 76,657 $ 271,985
Millburn LLC 45,117 134,406
-------------------------- ---------------------------
Total $ 121,774 $ 406,391
========================== ===========================
Series B Units
- ----------------------------------
JWH LLC $ 167,835 $ 639,872
Millburn LLC 100,384 321,742
-------------------------- ---------------------------
Total $ 268,219 $ 961,614
========================== ===========================
Series C Units
- ----------------------------------
JWH LLC $ 88,069 $ 328,945
Millburn LLC 51,422 170,501
-------------------------- ---------------------------
Total $ 139,491 $ 499,446
========================== ===========================
Total - All Series
- ----------------------------------
JWH LLC $ 332,561 $1,240,802
Millburn LLC 196,923 626,649
-------------------------- ---------------------------
Total $ 529,484 $1,867,451
========================== ===========================
10
For the year ended Total Brokerage Administrative
December 31, 1997 Revenues Commissions Fees
---------------------------- ---------------------------------------------------------
Series A Units
- -------------------------------------
JWH LLC $ 1,759,089 $ 690,201 $ 17,813
Millburn LLC 1,758,987 751,834 19,390
---------------------------- ------------------------- -----------------------
Total $ 3,518,076 $ 1,442,035 $ 37,203
============================ ========================= =======================
Series B Units
- -------------------------------------
JWH LLC $ 3,771,359 $ 1,484,456 $ 38,315
Millburn LLC 3,773,695 1,625,922 41,942
---------------------------- ------------------------- -----------------------
Total $ 7,545,054 $ 3,110,378 $ 80,257
============================ ========================= =======================
Series C Units
- -------------------------------------
JWH LLC $ 1,981,710 $ 783,770 $ 20,229
Millburn LLC 1,995,533 858,854 22,154
---------------------------- ------------------------- -----------------------
Total $ 3,977,243 $ 1,642,624 $ 42,383
============================ ========================= =======================
Total - All Series
- -------------------------------------
JWH LLC $ 7,512,158 $ 2,958,427 $ 76,357
Millburn LLC 7,528,215 3,236,610 83,486
---------------------------- ------------------------- -----------------------
Total $ 15,040,373 $ 6,195,037 $ 159,843
============================ ========================= =======================
For the year ended Profit Income from
December 31, 1997 Shares Investments
-------------------------------- ---------------------------
Series A Units
- -------------------------------------
JWH LLC $ 103,624 $ 947,451
Millburn LLC 207,784 779,979
-------------------------- ---------------------------
Total $ 311,408 $1,727,430
========================== ===========================
Series B Units
- -------------------------------------
JWH LLC $ 221,754 $2,026,834
Millburn LLC 443,236 1,662,595
-------------------------- ---------------------------
Total $ 664,990 $3,689,429
========================== ===========================
Series C Units
- -------------------------------------
JWH LLC $ 116,818 $1,060,893
Millburn LLC 234,589 879,936
-------------------------- ---------------------------
Total $ 351,407 $1,940,829
========================== ===========================
Total - All Series
- -------------------------------------
JWH LLC $ 442,196 $4,035,178
Millburn LLC 885,609 3,322,510
-------------------------- ---------------------------
Total $ 1,327,805 $7,357,688
========================== ===========================
11
Condensed statements of financial condition and statements of operations for JWH
LLC and Millburn LLC are set forth as follows:
JWH Millburn JWH
LLC LLC LLC
December 31, 1999 December 31, 1999 December 31, 1998
------------------------------ ------------------------------ ------------------------------
Assets $ 20,495,709 $ 23,769,789 $ 29,277,397
============================== ============================== ==============================
Liabilities $ 652,166 $ 737,160 $ 391,198
Members' Capital 19,843,543 23,032,629 28,886,199
------------------------------ ------------------------------ ------------------------------
Total $ 20,495,709 $ 23,769,789 $ 29,277,397
============================== ============================== ==============================
For the year ended For the year ended For the year ended
December 31, 1999 December 31, 1999 December 31, 1998
------------------------------ ------------------------------ ------------------------------
Revenues $ (3,007,129) $ 1,994,936 $ 1,391,001
Expenses 2,520,065 2,612,853 4,069,362
------------------------------ ------------------------------ ------------------------------
Net Income (Loss) $ (5,527,194) $ (617,917) $ (2,678,361)
============================== ============================== ==============================
Millburn JWH Millburn
LLC LLC LLC
December 31, 1998
------------------------------
Assets $ 27,815,000
==============================
Liabilities $ 537,886
Members' Capital 27,277,114
------------------------------
Total $ 27,815,000
==============================
For the year ended For the year ended For the year ended
December 31, 1998 December 31, 1997 December 31, 1997
------------------------------ ------------------------------ ------------------------------
Revenues $ 3,593,650 $ 15,279,401 $ 8,303,430
Expenses 3,108,411 6,714,041 4,600,706
------------------------------ ------------------------------ ------------------------------
Net Income (Loss) $ 485,239 $ 8,565,360 $ 3,702,724
============================== ============================== ==============================
12
7. FAIR VALUE AND OFF-BALANCE SHEET RISK
For the year ended December 31, 1999, the Partnership invested all of its
assets in Trading LLC's. 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 Accouting Standards No. 133 had a significant
effect on the financial statements of the Partnership.
Market Risk
-----------
Derivative financial instruments involve varying degrees of off-balance sheet
market risk. Changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the underlying 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, the net
unrealized profit as reflected in the respective Statements of Financial
Condition of the Trading LLC's. 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, through the Trading LLC's, as
well as the volatility and liquidity of such 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, calculating the Net
Asset Value of the Advisors' respective Partnership accounts and Trading LLC
accounts, as of the close of business on each day and reviewing outstanding
positions for over-concentrations both on an Advisor-by-Advisor and on an
overall Partnership basis. While MLIP does not itself intervene in the
markets to hedge or diversify the Partnership's market exposure 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.
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, MLIP can directly affect the
market exposure of the Partnership. Leverage control is the principal means
by which MLIP hopes to be able to ensure that Merrill Lynch is never required
to make any payments under its guarantee that the Net Asset Value per Unit
will equal no less than a specified minimum as of the Principal Assurance
Date.
13
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 the Trading LLC's, in its normal course of business,
enters into various contracts, with MLF acting as its commodity broker.
Pursuant to the brokerage agreement with MLF (which includes a netting
arrangement), to the extent that such trading results in receivables from and
payables to MLF, these receivables and payables are offset and reported as a
net receivable or payable and included in the Statements of Financial
Condition under Equity in commodity futures accounts.
* * * * * * * * * *
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
John W. Henry & Co./Millburn L.P.
14