JOHN W. HENRY &
CO./MILLBURN L.P.
(A DELAWARE LIMITED PARTNERSHIP)
Financial Statements for the years ended
December 31, 1997, 1996 and 1995
and Independent Auditors' Report
To: The Limited Partners of
JOHN W. HENRY & CO./MILLBURN L.P.-
SERIES A
John W. Henry & Co./Millburn L.P. - Series A (the "Fund" or "Partnership") ended
its eighth fiscal year of trading on December 31, 1997 with a Net Asset Value
("NAV") per Unit of $284.11, representing an increase of 12.50% from the
December 31, 1996 NAV per Unit of $252.54. During 1997, all sectors traded by
the Fund were profitable.
Trend reversals and extreme market volatility, affected by such factors as the
Asian flu and El Nino, were characteristic of most of 1997. However, the year
proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
In currency markets, the U.S. dollar rallied and started 1997 on a strong note,
rising to a four-year high versus the Japanese yen and two-and-a-half year highs
versus the Deutsche mark and the Swiss franc. However, the dollar underwent two
significant corrections during the year. The first correction occurred in the
Spring against the Japanese yen, due to the G7 finance ministers' determination
that a further dollar advance would be counter-productive to their current
goals. From August through mid-November, the dollar corrected against the
Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By
mid-December the dollar had bounced back to new highs against the yen and was
rallying against the mark.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. By the middle of the year,
economic data in key countries was positive indicating lower inflation and
igniting a worldwide rally in the bond markets. Specifically, investor
sentiment was particularly strong in the U.S., where prices on the 30-year
Treasury bond and 10-year Treasury note rose to their highest levels in over two
years. This followed a largely positive economic report delivered by Federal
Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting. From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility. Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period. We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President
MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
To: The Limited Partners of
JOHN W. HENRY & CO./MILLBURN L.P.-
SERIES B
John W. Henry & Co./Millburn L.P. - Series B (the "Fund" or "Partnership") ended
its seventh fiscal year of trading on December 31, 1997 with a Net Asset Value
("NAV") per Unit of $230.87, representing an increase of 12.47% from the
December 31, 1996 NAV per Unit of $205.27. During 1997, all sectors traded by
the Fund were profitable.
Trend reversals and extreme market volatility, affected by such factors as the
Asian flu and El Nio, were characteristic of most of 1997. However, the year
proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
In currency markets, the U.S. dollar rallied and started 1997 on a strong note,
rising to a four-year high versus the Japanese yen and two-and-a-half year highs
versus the Deutsche mark and the Swiss franc. However, the dollar underwent two
significant corrections during the year. The first correction occurred in the
Spring against the Japanese yen, due to the G7 finance ministers' determination
that a further dollar advance would be counter-productive to their current
goals. From August through mid-November, the dollar corrected against the
Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By
mid-December the dollar had bounced back to new highs against the yen and was
rallying against the mark.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. By the middle of the year,
economic data in key countries was positive indicating lower inflation and
igniting a worldwide rally in the bond markets. Specifically, investor
sentiment was particularly strong in the U.S., where prices on the 30-year
Treasury bond and 10-year Treasury note rose to their highest levels in over two
years. This followed a largely positive economic report delivered by Federal
Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting. From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility. Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period. We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President
MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
To: The Limited Partners of
JOHN W. HENRY & CO./MILLBURN L.P.-
SERIES C
John W. Henry & Co./Millburn L.P. - Series C (the "Fund" or "Partnership") ended
its sixth fiscal year of trading on December 31, 1997 with a Net Asset Value
("NAV") per Unit of $179.92, representing an increase of 12.47% from the
December 31, 1996 NAV per Unit of $159.97. During 1997, all sectors traded by
the Fund were profitable.
Trend reversals and extreme market volatility, affected by such factors as the
Asian flu and El Nio, were characteristic of most of 1997. However, the year
proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
In currency markets, the U.S. dollar rallied and started 1997 on a strong note,
rising to a four-year high versus the Japanese yen and two-and-a-half year highs
versus the Deutsche mark and the Swiss franc. However, the dollar underwent two
significant corrections during the year. The first correction occurred in the
Spring against the Japanese yen, due to the G7 finance ministers' determination
that a further dollar advance would be counter-productive to their current
goals. From August through mid-November, the dollar corrected against the
Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By
mid-December the dollar had bounced back to new highs against the yen and was
rallying against the mark.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. By the middle of the year,
economic data in key countries was positive indicating lower inflation and
igniting a worldwide rally in the bond markets. Specifically, investor
sentiment was particularly strong in the U.S., where prices on the 30-year
Treasury bond and 10-year Treasury note rose to their highest levels in over two
years. This followed a largely positive economic report delivered by Federal
Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting. From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility. Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period. We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President
MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST
PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
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, 1997, 1996 AND 1995:
Statements of Financial Condition 2
Statements of Income 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. (a Delaware limited partnership; the "Partnership") as
of December 31, 1997 and 1996, and the related statements of income and changes
in partners' capital for each of the three years in the period ended December
31, 1997. 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, 1997 and 1996, and the results of its operations for the three
years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
February 6, 1998
New York, New York
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
1997 1996
------------------- --------------------
ASSETS
Investments (Note 6) $ 63,024,164 $ 60,834,087
Receivable from investments (Note 6) 514,158 779,075
---------------- -----------------
TOTAL $ 63,538,322 $ 61,613,162
================ =================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 514,158 $ 778,385
Profit Shares (Note 3) - 689
---------------- -----------------
Total liabilities 514,158 779,074
---------------- -----------------
PARTNERS' CAPITAL:
General Partner:
(780 and 780 Series A Units outstanding) 221,605 196,983
(1,976 and 1,976 Series B Units outstanding) 456,174 405,594
(1,439 and 1,439 Series C Units outstanding) 258,899 230,192
Limited Partners:
(50,992 and 55,596 Series A Units outstanding) 14,487,473 14,040,479
(135,244 and 146,552 Series B Units outstanding) 31,223,304 30,082,484
(91,020 and 99,256 Series C Units outstanding) 16,376,709 15,878,356
---------------- -----------------
Total partners' capital 63,024,164 60,834,088
---------------- -----------------
TOTAL $ 63,538,322 $ 61,613,162
================ =================
NET ASSET VALUE PER UNIT
Series A $ 284.11 $ 252.54
================ =================
Series B $ 230.87 $ 205.27
================ =================
Series C $ 179.92 $ 159.97
================ =================
See notes to financial statements.
-2-
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1997 1996 1995
------------- -------------- -------------
REVENUES:
Trading profit (loss):
Realized $ - $ 8,749,410 $ 23,852,578
Change in unrealized - (1,760,218) (651,118)
------------- -------------- -------------
Total trading results - 6,989,192 23,201,460
Interest income (Note 2) - 1,842,887 2,863,384
------------- -------------- -------------
Total revenues - 8,832,079 26,064,844
------------- -------------- -------------
EXPENSES:
Profit Shares (Note 3) - 97,468 729,138
Brokerage commissions (Note 2) - 5,406,851 7,412,789
Administrative fees (Note 2) - 115,039 -
------------- -------------- -------------
Total expenses - 5,619,358 8,141,927
------------- -------------- -------------
INCOME FROM INVESTMENTS (Note 6) 7,357,688 7,171,609 -
------------- -------------- -------------
NET INCOME $ 7,357,688 $ 10,384,330 $ 17,922,917
============= ============== =============
NET INCOME PER UNIT:
Weighted average number of Units
outstanding (Note 5) 294,640 327,875 387,956
============= ============== =============
Net income per weighted average
General Partner and Limited
Partner Unit $ 24.97 $ 31.67 $ 46.20
============= ============== =============
See notes to financial statements.
-3-
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
Series Series Series Limited Partners
----------------------------------------------------
A B C Series Series Series
Units Units Units A B C
------------- ------- ------- ------------ ------------- -------------
PARTNERS' CAPITAL,
DECEMBER 31, 1994 74,610 213,110 153,995 $ 11,495,848 $ 26,740,233 $ 15,045,473
Redemptions (11,037) (44,773) (36,198) (2,147,231) (7,077,021) (4,508,984)
Net income - - - 3,856,407 8,787,685 5,034,912
------------- ------- ------- ------------ ------------- -------------
PARTNERS' CAPITAL,
DECEMBER 31, 1995 63,573 168,337 117,797 13,205,024 28,450,897 15,571,401
Redemptions (7,197) (19,809) (17,102) (1,650,602) (3,458,479) (2,362,995)
Net income - - - 2,486,057 5,090,066 2,669,950
------------- ------- ------- ------------ ------------- -------------
PARTNERS' CAPITAL,
DECEMBER 31, 1996 56,376 148,528 100,695 14,040,479 30,082,484 15,878,356
Redemptions (4,604) (11,308) (8,236) (1,255,814) (2,498,029) (1,413,769)
Net income - - - 1,702,808 3,638,849 1,912,122
------------- ------- ------- ------------ ------------- -------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 51,772 137,220 92,459 $ 14,487,473 $ 31,223,304 $ 16,376,709
============= ======= ======= ============ ============= =============
General Partner
-------------------------------------
Series Series Series
A B C Total
--------- --------- --------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1994 $135,628 $ 359,351 $210,911 $ 53,987,444
Redemptions (18,791) (144,587) (91,913) (13,988,527)
Net income 47,191 123,156 73,566 17,922,917
--------- --------- --------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1995 164,028 337,920 192,564 57,921,834
Redemptions - - - (7,472,076)
Net income 32,955 67,674 37,628 10,384,330
--------- --------- --------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1996 196,983 405,594 230,192 60,834,088
Redemptions - - - (5,167,612)
Net income 24,622 50,580 28,707 7,357,688
--------- --------- --------- ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 $221,605 $ 456,174 $258,899 $ 63,024,164
========= ========= ========= ============
See notes to financial statements.
-4-
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
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 of 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 of the Series C Units on January 2, 1992. (Series A, B and C units
are hereinafter collectively referred to as "Units.") The Partnership 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" or the "General
Partner"), 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, and Merrill Lynch Futures
Inc. ("MLF"), also an affiliate of Merrill Lynch, is its 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 each 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. As of December 1, 1996, the Partnership placed
all of its assets under the management of the Advisors not through managed
accounts but rather through investing in private limited liability companies
("Trading LLCs" or "LLCs"), as defined in Note 6. Certain of the following
notes to financial statements are directly related to assets managed by
Advisors. The placement of assets into LLCs did not change the operation nor
fee structure of the Partnership, therefore, the following notes relate to
the operation of the Partnership through its investment in the LLCs. Also,
the administrative authority over the Partnership remains with MLIP.
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.
-5-
Revenue Recognition
-------------------
Commodity futures, options, and forward contract transactions are recorded on
the trade date, and open contracts are reflected in net unrealized profit on
open contracts in the Statements of Financial Condition at the difference
between the original contract value and the fair value. The change in net
unrealized profit on open contracts from one period to the next is reflected
in change in unrealized in the Statements of Income. Fair value is based on
quoted market prices on the exchange or market on which the contract is
traded. (There were no open contracts as of December 31, 1997 and 1996).
Operating Expenses
------------------
The General Partner pays all routine operating expenses, including legal,
accounting, printing, postage and similar administrative expenses.
The General Partner receives an administrative fee as well as a portion of
the brokerage commissions paid to MLF by the Partnership as reimbursement for
the foregoing expenses.
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 each Series' income and expenses as reported for income
tax purposes.
Redemptions
-----------
A Limited Partner may require the Partnership to 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 were held at MLF in cash. On the cash
held at MLF, the Partnership received interest from Merrill Lynch at the
prevailing 91-day U.S. Treasury bill rate. Merrill Lynch may derive certain
economic benefits, in excess of the interest which Merrill Lynch pays to the
Partnership, from possession of such cash.
Merrill Lynch credited the Partnership with interest on the Partnership's
U.S. dollar-denominated assets based on local short-term rates. Merrill Lynch
charges the Partnership Merrill Lynch's cost of financing realized and
unrealized losses on the Partnership's non-U.S. dollar-denominated positions.
The General Partner has determined that there may have been a miscalculation
in the interest credited to the Partnership for a period prior to November
1996 (such period may extend prior to that covered by these financial
statements). Accordingly, the General Partner credited current and former
investors who maintained a Merrill Lynch customer account in December 1997
with interest which was compounded. Former investors who do not maintain a
Merrill Lynch customer account will be credited as their response forms are
processed. The total amount of the adjustment is approximately $779,000 for
Series A Units, $1,739,000 for Series B Units and $773,000 for Series C
Units. Since this amount was paid directly to investors by the General
Partner, it is not reflected in these financial statements. The General
Partner has determined that interest has been calculated appropriately since
November 1996.
-6-
The Partnership paid brokerage commissions to MLF at a flat monthly rate of
1% (a 12% annual rate) of the Partnership's month-end assets. Effective
January 1, 1996, the percentage was reduced to .979 of 1% (an 11.75% annual
rate) of the Partnership's month-end assets and the Partnership began to pay
MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of the
Partnership's month-end assets (this recharacterization had no economic
effect on the Partnership). Effective February 1, 1997, the Partnership's
brokerage commission percentage was reduced to .792 of 1% (a 9.50% 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.
MLIP estimates that the round-turn equivalent commission rate charged to the
Partnership during the years ended 1996 and 1995, was approximately $143 and
$207, respectively (not including, in calculating round-turn equivalents,
forward contracts on a future-equivalent basis).
MLF paid the Advisors annual consulting fees equal to 4% of the average
month-end assets.
The Partnership trades forward contracts through a foreign exchange service
desk (the "F/X Desk") established by MLIP. The F/X Desk gives the Partnership
access to counterparties in addition to (but also including) Merrill Lynch
International Bank ("MLIB"). MLIP or another Merrill Lynch entity charges a
service fee equal to, at current exchange rates, approximately $5.00 to
$12.50 on each purchase or sale (not round-turn) of a futures contract-
equivalent face amount of a given currency traded in the forward markets. No
service fees are charged on trades awarded to MLIB (which receives bid-ask
spreads on such trades).
In its exchange of futures for physical ("EFP") trading with Merrill Lynch,
the Partnership acquires spot or forward (collectively, "cash") currency
positions through the F/X Desk in the same manner and on the same terms as in
the case of the Partnership's other F/X Desk trading. When the Partnership
exchanges these positions for futures, there is a differential between the
prices of the two positions. This differential reflects, in part, the
different settlement dates of the cash and the futures contracts and
prevailing interest rates, but also includes a pricing spread in favor of
MLIB or another Merrill Lynch entity. The Advisors, to date, have made little
use of EFPs.
The Partnership's F/X Desk service fee and EFP differential costs have, to
date totaled no more than .25 of 1% per annum of the Partnership's average
month-end assets.
3. AGREEMENTS
The Partnership entered into Advisory Agreements. The Advisory Agreements
with each Trading Advisor for each series of Units are largely identical.
In the case of Trading LLCs, as defined in Note 6, the Trading LLCs entered
the Advisory Agreements with the Advisors.
Fifteen percent of any New Trading Profit, as defined, either as of the end
of each calendar quarter or year, was 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 of 15% of any New Trading Profits attributable to such Units.
-7-
4. INCOME PER SERIES
The profit and loss of the Series A, Series B and Series C Units for the
years ended December 31, 1997, 1996 and 1995 is as follows:
Series A Series B
--------------------------------------------------------------------------------------------
1997 1996 1995 1997 1996 1995
------------ ------------ ------------ ----------- ------------ ------------
REVENUES:
Trading profit (loss):
Realized $ - $ 2,029,650 $5,237,341 $ - $4,349,607 $11,857,130
Change in unrealized - (382,321) (147,478) - (877,666) (317,074)
------------ ------------ ------------ ----------- ------------ ------------
Total trading results - 1,647,329 5,089,863 - 3,471,941 11,540,056
Interest income (Note 2) - 417,739 636,781 - 920,755 1,431,186
------------ ------------ ------------ ----------- ------------ ------------
Total revenues - 2,065,068 5,726,644 - 4,392,696 12,971,242
------------ ------------ ------------ ----------- ------------ ------------
EXPENSES:
Brokerage commissions (Note 2) - 1,239,114 1,654,078 - 2,695,105 3,698,343
Allocation of new profit
share to trading advisors (Note 3) - 26,690 168,968 - 44,910 362,058
Administrative fees (Note 2) - 26,364 - - 57,343 -
------------ ------------ ------------ ----------- ------------ ------------
Total expenses - 1,292,168 1,823,046 - 2,797,358 4,060,401
------------ ------------ ------------ ----------- ------------ ------------
Income from investments (Note 6) 1,727,430 1,746,113 - 3,689,429 3,562,401 -
------------ ------------ ------------ ----------- ------------ ------------
NET INCOME $ 1,727,430 $ 2,519,013 $ 3,903,598 $3,689,429 $5,157,739 $ 8,910,841
============= ============ ============ =========== ============ ============
NET INCOME PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number
of units outstanding (Note 5) 54,036 59,766 67,833 143,414 158,197 186,768
------------ ------------ ------------ ----------- ------------ ------------
Net income per weighted
Average General Partner and
Limited Partner Unit $ 31.97 $ 42.15 $ 57.55 $ 25.73 $32.60 $47.71
------------ ------------ ------------ ----------- ------------ ------------
Series C
----------------------------------------------
1997 1996 1995
------------- --------------- --------------
REVENUES:
Trading profit (loss):
Realized $ - $ 2,339,762 $ 6,758,107
Change in unrealized - (469,840) (186,566)
-------------- --------------- --------------
Total trading results - 1,869,922 6,571,541
Interest income (Note 2) - 504,393 795,417
-------------- --------------- --------------
Total revenues - 2,374,315 7,366,958
-------------- --------------- --------------
EXPENSES:
Brokerage commissions (Note 2) - 1,472,632 2,060,368
Allocation of new profit
share to trading advisors (Note 3) - 25,868 198,112
Administrative fees (Note 2) - 31,332 -
-------------- --------------- --------------
Total expenses - 1,529,832 2,258,480
-------------- --------------- --------------
Income from investments (Note 6) 1,940,829 1,863,095 -
-------------- --------------- --------------
NET INCOME $ 1,940,829 $ 2,707,578 $ 5,108,478
============== =============== ==============
NET INCOME PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number
of units outstanding (Note 5) 97,190 109,912 133,357
-------------- --------------- --------------
Net income per weighted
Average General Partner and
Limited Partner Unit $19.97 $24.63 $38.31
-------------- --------------- --------------
-8-
5. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes of
disclosing net income per weighted average Unit. The weighted average number
of Units outstanding at December 31, 1997, 1996 and 1995 equals the Units
outstanding as of such date, adjusted proportionately for Units redeemed
based on the respective length of time each was outstanding during the
preceding period.
6. INVESTMENTS
The investments are reflected in the financial statements at fair value based
upon the Partnership's interest in each Trading LLC. Fair value is equal to
the market value of the net assets of the Trading LLCs. The resulting
difference between cost and fair value is reflected on the Statement of
Income as income or loss from investments.
At December 31, 1997 and 1996, the Partnership had investments in the ML JWH
Financial and Metals Portfolio L.L.C. ("JWH LLC") and ML Millburn Global
L.L.C. ("Millburn LLC") as follows:
1997 1996
---------------- ----------------
JWH LLC $ 31,979,914 $ 30,417,044
Millburn LLC 31,044,250 30,417,043
---------------- ----------------
Total $ 63,024,164 $ 60,834,087
================ ================
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Total revenues and fees with respect to such investments are set forth as
follows:
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1997 Revenues Commissions Fees Shares Investments
Series A Units -------------- -------------- --------------- -------------- ----------------
- ----------------------
JWH LLC $ 1,759,089 $ 690,201 $ 17,813 $ 103,624 $ 947,451
Millburn LLC 1,758,987 751,834 19,390 207,784 779,979
-------------- -------------- ------------ -------------- ----------------
Total $ 3,518,076 $1,442,035 $ 37,203 $ 311,408 $1,727,430
============== ============== ============ ============== ================
Series B Units
- ----------------------
JWH LLC $ 3,771,359 $1,484,456 $ 38,315 $ 221,754 $2,026,834
Millburn LLC 3,773,695 1,625,922 41,942 443,236 1,662,595
-------------- -------------- ------------ -------------- ----------------
Total $ 7,545,054 $3,110,378 $ 80,257 $ 664,990 $3,689,429
============== ============== ============ ============== ================
Series C Units
- ----------------------
JWH LLC $ 1,981,710 $ 783,770 $ 20,229 $ 116,818 $1,060,893
Millburn LLC 1,995,533 858,854 22,154 234,589 879,936
-------------- -------------- ------------ -------------- ----------------
Total $ 3,977,243 $1,642,624 $ 42,383 $ 351,407 $1,940,829
============== ============== ============ ============== ================
Total - All Series
- ----------------------
JWH LLC $ 7,512,158 $2,958,427 $ 76,357 $ 442,196 $4,035,178
Millburn LLC $ 7,528,215 $3,236,610 $ 83,486 $ 885,609 3,322,510
-------------- -------------- ------------ -------------- ----------------
Total $15,040,373 $6,195,037 $159,843 $1,327,805 $7,357,688
============== ============== ============ ============== ================
-10-
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1997 Revenues Commissions Fees Shares Investments
Series A Units -------------- -------------- --------------- -------------- ----------------
- ----------------------
JWH LLC $2,234,606 $ 269,408 $ 5,732 $ 244,358 $1,715,108
Millburn LLC 91,169 56,443 1,201 2,520 31,005
-------------- -------------- ------------- -------------- ---------------
Total $2,325,775 $ 325,851 $ 6,933 $ 246,878 $1,746,113
============== ============== ============= ============== ===============
Series B Units
- ----------------------
JWH LLC $4,566,555 $ 550,526 $11,714 $ 509,549 $3,494,766
Millburn LLC 198,835 123,083 2,619 5,498 67,635
-------------- -------------- ------------- -------------- ---------------
Total $4,765,390 $ 673,609 $14,333 $ 515,047 $3,562,401
============== ============== ============= ============== ===============
Series C Units
- ----------------------
JWH LLC $2,388,921 $ 286,556 $ 6,097 $ 270,114 $1,826,154
Millburn LLC 108,581 67,206 1,430 3,004 36,941
-------------- -------------- ------------- -------------- ---------------
Total $2,497,502 $ 353,762 $ 7,527 $ 273,118 $1,863,095
============== ============== ============= ============== ===============
Total - All Series
- ----------------------
JWH LLC $9,190,082 $1,106,490 $23,543 $1,024,021 $7,036,028
Millburn LLC 398,585 246,732 5,250 11,022 135,581
-------------- -------------- ------------- -------------- ---------------
Total $9,588,667 $1,353,222 $28,793 $1,035,043 $7,171,609
============== ============== ============= ============== ===============
-11-
Condensed statements of financial condition as of December 31, 1997 and 1996
and statements of income for the years ended December 31, 1997 and 1996 for
JWH LLC and Millburn LLC are set forth as follows:
1997 1996
------------------------------------- ----------------------------------------
JWH Millburn JWH Millburn
LLC LLC LLC LLC
------------------ ---------------- ----------------- -------------------
Assets $ 62,481,438 $ 35,584,936 $ 80,825,364 $ 28,520,827
=================== ================ ================= ===================
Liabilities $ 1,122,533 $ 1,454,659 $ 19,848,210 $ 796,001
Members' Capital 61,358,905 34,130,277 60,977,154 27,724,826
------------------- ---------------- ----------------- -------------------
Total $ 62,481,438 $ 35,584,936 $ 80,825,364 $ 28,520,827
=================== ================ ================= ===================
Revenues $ 15,279,401 $ 8,303,430 $ 19,365,949 $ 450,619
Expenses 6,714,041 4,600,706 4,426,261 291,370
------------------- ---------------- ----------------- -------------------
Net Income $ 8,565,360 $ 3,702,724 $ 14,939,688 $ 159,249
=================== ================ ================= ===================
7. FAIR VALUE AND OFF-BALANCE SHEET RISK
As of December 1, 1996, the Partnership invested all of its assets in Trading
LLCs. The Partnership was, thus, invested indirectly in the trading of
derivative instruments, but did not itself hold any derivative positions.
Consequently. No such positions subsequent to November 30, 1996 are
reflected in these financial statements.
For the period from January 1, 1996 to November 30, 1996 and the year ended
December 31, 1995, the Partnership traded futures, options on futures and
forward contracts in interest rates, stock indices, currencies and metals.
The Partnership's total trading results by reporting category were as
follows:
Total Trading Results
-----------------------------------
1996 1995
--------------- --------------
Interest
Rates $ 5,080,346 $ 11,532,511
Stock
Indices (992,453) 1,146,428
Currencies 2,659,762 12,696,529
Metals 241,537 (2,174,008)
--------------- --------------
$ 6,989,192 $ 23,201,460
=============== ==============
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 financial instruments or
commodities underlying such derivative instruments frequently result in
changes in the Partnership's unrealized profit on such derivative instruments
as would have been reflected in the Statements of Financial Condition had the
Partnership not invested all of its assets in Trading LLCs. The
Partnership's exposure to market risk is influenced by a number of factors,
including the relationships
-12-
among the derivative instruments held by the Partnership as well as the
volatility and liquidity of the markets in which such derivative instruments
are traded.
The General Partner 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 two
Advisors, calculating the Net Asset Value of the Advisors' respective
Partnership accounts as of the close of business on each day and reviewing
outstanding positions for over-concentrations. While the General Partner
does not itself intervene in the markets to hedge or diversify the
Partnership's market exposure, the General Partner may urge either or both of
the Advisors to reallocate positions, or itself reallocate Partnership assets
among the Advisors (although typically only as of the end of a month) in an
attempt to avoid over-concentrations. However, such interventions are
unusual. Except in cases in which it appears that an Advisor has begun to
deviate from past practice or trading policies or to be trading erratically,
the General Partner's basic risk control procedures consist simply of the
ongoing process of Advisor monitoring, with the market risk controls being
applied by the Advisors themselves.
The average fair values, based on contract/notional values, of derivative
instrument positions which were open as of the end of each calendar month
during the period from January 1, 1996 to November 30, 1996 were as follows:
Commitment to Commitment to
Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards)
-------------------- --------------------
Interest
Rates $ 237,102,957 $ 183,615,337
Stock
Indices 13,728,737 6,759,498
Currencies 296,018,497 334,030,991
Metals 18,491,709 29,682,273
-------------------- --------------------
$ 565,341,900 $ 554,088,099
==================== ====================
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and to 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.
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 fair value amounts in the above tables represent the extent of the
Partnership'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
Statements of Financial Condition. The Partnership also
-13-
has credit risk because the sole counterparty or broker with respect to most
of the Partnership's assets is MLF.
The Partnership controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
The Partnership, in 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.
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/S/ Michael A. Karmelin
Michael A. Karmelin
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
John W. Henry & Co./Millburn L.P.
-14-