EXHIBIT 13.01(a)
ML JWH FINANCIAL AND
METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
Financial Statements for the Period from
October 1, 1996 (Commencement of Operations)
to December 31, 1996 and Independent Auditors' Report
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
TABLE OF CONTENTS
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Page
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INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE PERIOD FROM
OCTOBER 1, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996:
Statement of Financial Condition 2
Statement of Income 3
Statement of Changes in Members' Capital 4
Notes to Financial Statements 5-11
INDEPENDENT AUDITORS' REPORT
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To the Members of
ML JWH Financial and Metals Portfolio L.L.C.:
We have audited the accompanying statement of financial condition of ML JWH
Financial and Metals Portfolio L.L.C. (a Delaware limited liability company; the
"Company") as of December 31, 1996, and the related statements of income and of
changes in members' capital for the period from October 1, 1996 (commencement of
operations) to December 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ML JWH Financial and Metals Portfolio L.L.C.
as of December 31, 1996, and the results of its operations for the period from
October 1, 1996 (commencement of operations) to December 31, 1996 in conformity
with generally accepted accounting principles.
Deloitte & Touche LLP
New York, New York
February 3, 1997
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1996
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ASSETS
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Accrued interest (Note 2) $ 306,073
Equity in commodity futures trading accounts:
Cash and option premiums 79,820,720
Net unrealized gain on open contracts 698,571
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TOTAL $80,825,364
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LIABILITIES AND MEMBERS' CAPITAL
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LIABILITIES:
Withdrawals payable $16,819,986
Profit shares payable (Note 3) 2,313,537
Brokerage commissions payable (Note 2) 697,868
Administrative fees payable (Note 2) 16,819
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Total liabilities 19,848,210
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MEMBERS' CAPITAL:
Voting Members 53,977,573
Non-voting Members 6,999,581
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Total Members' capital 60,977,154
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TOTAL $80,825,364
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See notes to financial statements.
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ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
STATEMENT OF INCOME
FOR THE PERIOD FROM OCTOBER 1, 1996
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
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REVENUES:
Trading profit (loss):
Realized $17,860,411
Change in unrealized 698,571
-----------
Total trading results 18,558,982
Interest income (Note 2) 806,967
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Total revenues 19,365,949
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EXPENSES:
Profit shares (Note 3) 2,313,537
Brokerage commissions (Note 2) 2,063,021
Administrative fees (Note 2) 49,703
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Total expenses 4,426,261
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NET INCOME $14,939,688
============
See notes to financial statements.
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ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
STATEMENT OF CHANGES IN MEMBERS' CAPITAL
FOR THE PERIOD FROM OCTOBER 1, 1996
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
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Voting Non-Voting
Members Members Total
Initial Contributions $ 56,790,791 $ 7,080,836 $ 63,871,627
Contributions 1,212,016 2,017 1,214,033
Withdrawals (17,295,297) (1,752,897) (19,048,194)
Net Income 13,270,063 1,669,625 14,939,688
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MEMBERS' CAPITAL,
DECEMBER 31, 1996 $ 53,977,573 $ 6,999,581 $ 60,977,154
============ =========== ============
See notes to financial statements.
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ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
FOR THE PERIOD FROM OCTOBER 1, 1996
(COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
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ML JWH Financial and Metals Portfolio L.L.C. (the "Company") was organized
under the Delaware Limited Liability Company Act on September 19, 1996 and
commenced trading activities on October 1, 1996. The Company engages in the
speculative trading of futures, options on futures and forward contracts on a
wide range of commodities. Merrill Lynch Investment Partners Inc. (formerly,
ML Futures 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. (one or more of Merrill Lynch & Co., Inc. and its
affiliates being hereinafter referred to as "Merrill Lynch"), has been
delegated administrative authority over the Company, and Merrill Lynch
Futures Inc. ("MLF"), also an affiliate of Merrill Lynch, is its commodity
broker. The Company has authorized two classes of Membership Interests:
Non-Voting Membership Capital Accounts and Voting Membership Capital Accounts
("Members"). These two classes of Membership Capital Accounts have common
economic interests in the Company, but the Non-Voting Membership Capital
Accounts, which are held by non-United States companies, shall not
participate in any respect in the management of the Company, or engage,
directly or indirectly, in the participation in or control of all or any
portion of the business activities or affairs of the Company, such management
being vested solely in the Voting Membership Capital Accounts, which are held
by United States limited partnerships. The Voting Members, acting as Members
without any "manager," mutually dominate and control all business activities
and affairs of the Company by agreement of the majority in interest of such
Members, subject to the trading authority vested in and delegated to JWH and
the administrative authority vested in and delegated to MLIP. The Members of
the Company, each of which is a "commodity pool" sponsored by MLIP, share in
the trading profit (loss) and interest income of the Company in proportion to
their respective capital accounts in it.
John W. Henry & Company, Inc. (the "Advisor" or "JWH") has been delegated
trading authority over the assets of the Company.
Estimates
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The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Revenue Recognition
--------------------
Commodity futures, options on futures, and forward contract transactions are
recorded on the trade date and open contracts are reflected in net unrealized
profit (loss) on open contracts in the Statement of Financial Condition at
the difference between the original contract amount and the fair value. The
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change in net unrealized profit (loss) on open contracts from one period to
the next is reflected in change in unrealized in the Statement of Income.
Fair value is based on quoted market prices on the exchange or market on
which the contract is traded.
Organization Costs
------------------
MLIP paid all organizational costs relating to the Company without direct
reimbursement from the Company or any Member. These organizational costs
should be indirectly reimbursed to Merrill Lynch as MLF's costs for executing
the Company's trades should, over time, be reduced by the Members
consolidating their respective JWH trading accounts in the Company.
Income Taxes
-------------
No provision for income taxes has been made in the accompanying financial
statements as each Member is individually responsible for reporting income or
loss based on such Member's respective share of the Company's income and
expenses as reported for income tax purposes.
Distributions
-------------
No distribution (except upon withdrawals) had been made by the Company to any
Member as of December 31, 1996.
Withdrawals
-----------
A Member may withdraw some or all of such Member's Capital at Net Asset Value
as of the close of business on any business day. There are no withdrawal
fees or charges.
Dissolution of the Company
--------------------------
The Company will terminate on September 30, 2046 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Organization Agreement. Were the Advisor to cease to manage the
Company's account, the Company would dissolve.
2. RELATED PARTY TRANSACTIONS
The Company's U.S. dollar-denominated assets are held at MLF in cash or
short-term Treasury bills. The Company receives all interest paid on such
Treasury bills. On the cash held at MLF, the Company receives interest from
Merrill Lynch at rates ranging from 0.50 of 1% per annum below the prevailing
91-day Treasury bill rate up to the full prevailing 91-day Treasury bill
rate. Merrill Lynch may derive certain economic benefits, in excess of the
interest which Merrill Lynch pays to the Company, from possession of such
cash.
Merrill Lynch credits the Company with interest on the Company's non-U.S.
dollar-denominated available assets based on local short-term rates. Merrill
Lynch charges the Company Merrill Lynch's cost of financing realized and
unrealized losses on the Company's non-U.S. dollar-denominated positions.
Following the allocation of the Company's trading profit (loss) and interest
income among the Members' respective Capital Accounts, MLIP calculates the
brokerage commissions, profit shares, administrative fees and other expenses
due from the Company to third parties, in respect of the
Company's trading on behalf of the respective Members (the Company being
subject to different
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commissions, fees and expenses in respect of its trading as allocable to the
various different Members). Such commissions, fees and expenses are
specifically allocated as of the end of each accounting period (not pro rata
based on the Members' respective Capital Accounts) to, and deducted from, the
appropriate Members' Capital Accounts and paid out by the Company. The
Company pays brokerage commissions to MLF, at flat monthly rates reflecting
the fee arrangement between each Member and MLF. Such rates currently range
from .729 of 1% (an 8.75% annual rate) to .979 of 1% (an 11.75% annual rate)
of the Member's month-end assets. Month-end assets are not reduced for
purposes of calculating brokerage commissions and administrative fees by any
accrued brokerage commissions, administrative fees, profit shares or other
fees of charges.
The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25%
annual rate) of each Member's month-end assets.
MLF pays the Advisor an annual consulting fee of 4% of the Company's average
month-end assets, after reduction for a portion of the brokerage commissions.
The Company trades forward contracts through a Foreign Exchange Service Desk
(the "F/X Desk") established by MLIP that contacts at least two
counterparties along with Merrill Lynch International Bank ("MLIB") for all
of the Company's currency transactions. All counterparties other than MLIB
are unaffiliated with any Merrill Lynch entity. The F/X Desk charges a
service fee equal (at current exchange rates) to approximately $5.00 to
$12.50 on each purchase or sale of a futures-contract equivalent face amount
of a foreign currency. No service fee is charged on trades awarded to MLIB
(which receives a "bid-ask" spread on such trades). MLIB is awarded trades
only if its price (which includes no service fee) is equal to or better than
the best price (including the service charge) offered by any of the other
counterparties contacted.
The F/X Desk trades on the basis of credit lines provided by a Merrill Lynch
entity. The Company is not required to margin or otherwise guarantee its F/X
Desk trading.
Certain of the Company's currency trades are executed in the form of
"exchange of futures for physical" ("EFP") transactions involving MLIB and
MLF. In these transactions, a spot or forward (collectively referred to as
"cash") currency position is acquired and exchanged for an equivalent futures
position on the Chicago Mercantile Exchange's International Monetary Market
("IMM"). In its EFP trading with Merrill Lynch, the Company acquires cash
currency positions through the F/X Desk in the same manner and on the same
terms as in the case of the Company's other F/X Desk trading. When the
Company exchanges these positions for futures, there is a "differential"
between the prices of these two positions. This "differential" 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 MLIB or another Merrill Lynch entity.
The Company's F/X Desk service fee and EFP differential costs have, to date
totaled no more than .25 of 1% per annum of the Company's average month-end
Net Assets.
3. ADVISORY AGREEMENT
The Company and the Advisor have entered into an Advisory Agreement. This
Advisory Agreement terminates one year after it is entered into, subject to
certain renewal rights exercisable by the Company. The Advisor determines
the commodity futures and forward contact trades to be made on behalf of the
Company, subject to certain Company trading policies and to certain rights
reserved by MLIP.
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The Company pays to JWH a quarterly Profit Share equal to 15% of any New
Trading Profit, as defined, attributable to each Member's Capital Account in
the Company. Profit Shares, which are calculated separately in respect of
each Member's Capital Account, are determined as of the end of each calendar
quarter and shall also be paid to JWH upon the withdrawal of capital from the
Company by a Member for whatever purpose, other than to pay expenses.
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Company trades futures, options on futures and forward contracts on
interest rates, stock indices, commodities, currencies, and metals. The
Company's trading results by reporting category were as follows:
1996
Total Trading
Results
------------------
Interest Rates $10,439,465
Stock Indices (371,033)
Currencies 5,889,115
Metals 2,601,435
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$18,558,982
=================
Market Risk
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or market values of the underlying financial
instruments or commodities underlying such derivative instruments frequently
result in changes in the Company's unrealized profit (loss) on such
derivative instruments as reflected in the Statement of Financial Condition.
The Company's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the
Company as well as the volatility and liquidity in the markets in which the
derivative instruments are traded.
MLIP, which monitors the trading of the Company in MLIP's capacity as the
General Partner of the Voting Members and Sponsor of the Non-Voting Members,
has procedures in place intended to control market risk, although there can
be no assurance that they will, in fact, succeed in doing so. The procedures
focus primarily on monitoring the trading of the Advisor, calculating the Net
Asset Value of the Company and of the Members' respective Capital Accounts as
of the close of business on each day and reviewing outstanding positions for
over-concentrations. While MLIP will not itself intervene in the markets to
hedge or diversify the Company's market exposure, MLIP may consult with the
Advisor concerning the possibility of the Advisor reducing trading leverage
or market concentrations. However, such interventions are unusual. Except
in cases in which it appears that JWH has begun to deviate from past practice
and trading policies or to be trading erratically, MLIP's basic risk control
procedures consist simply of the ongoing process of monitoring JWH with the
market risk controls being applied by JWH.
Fair Value
The derivative instruments used in the Company's trading activities are
marked to market daily with the resulting unrealized profit (loss) recorded
in the Statement of Financial Condition and the related profit (loss)
reflected in trading revenues in the Statement of Income.
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The contract/notional values of open contracts as of December 31, 1996 were
as follows:
December 31, 1996
--------------------------------------
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------ ------------------
Interest Rates $171,304,600 $ 13,669,055
Currencies 119,088,247 96,734,685
Metals - 33,126,830
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$290,392,847 $143,530,570
=================== ===================
Substantially all of the Company's derivative instruments outstanding as of
December 31, 1996, expire within one year.
The contract/notional value of the Company's exchange-traded and non-exchange
traded open derivative instrument positions as of December 31, 1996 were as
follows:
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------ ------------------
Exchange Traded $171,304,600 $ 46,795,885
Non- Exchange Traded 119,088,247 96,734,685
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$290,392,847 $143,530,570
=================== ===================
The average fair value of the Company's derivative instruments positions
which were open as of the end of each calendar month during the period
October 1, 1996 through December 31, 1996 were as follows:
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
------------------ ------------------
Interest Rates $591,299,377 $127,295,586
Currencies 297,652,663 275,733,802
Metals 14,845,327 75,877,301
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$903,797,367 $478,906,689
================= =================
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and sell the same derivative instrument on
the same date in the future. These commitments are economically offsetting
but are not, as a technical matter, offset in the forward market until the
settlement date.
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Credit Risk
The risks associated with exchange-traded contracts are typically perceived
to be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases
limited in amount, in some cases not) of the members of the exchange is
pledged to support the financial integrity of the exchange. In over-the-
counter transactions, on the other hand, traders must rely solely on the
credit of their respective individual counterparties. Margins, which may be
subject to loss in the event of a default, are generally required in exchange
trading, and counterparties may require margin in the over-the-counter
markets.
The fair value amounts in the above tables represent the extent of the
Company's market exposure in the particular class of derivative instrument
listed, but not the credit risk associated with counterparty nonperformance.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit, if any, included on the
Statement of Financial Condition. The Company also has credit risk because
the sole counterparty or broker with respect to most of the Company's assets
is MLF.
As of December 31, 1996 $42,525,678 of the Company's assets were held in
segregated accounts at MLF in accordance with Commodity Futures Trading
Commission regulations.
The gross unrealized profit and net unrealized profit on the
Company's open derivative instrument positions as of December 31, 1996 were
as follows:
Gross Unrealized Net Unrealized
Profit Profit
----------------- -------------------
Exchange Traded $ 873,657 $ 39,049
Non- Exchange Traded 1,962,810 659,522
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$2,836,467 $698,571
================= ===================
The Company controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
The Company, through its normal course of business, enters into various
contracts with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF, 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.
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To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
James M. Bernard
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
Commodity Pool Operator of
ML JWH Financial and Metals Portfolio L.L.C.