UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 1998 -------------------- OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File Number 0-18215 JOHN W. HENRY & CO./MILLBURN L.P. --------------------------------- (Exact Name of Registrant as specified in its charter) Delaware 06-1287586 - ------------------------------- ---------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) c/o Merrill Lynch Investment Partners Inc. Merrill Lynch World Headquarters - South Tower, 6th Fl. World Financial Center New York, New York 10080-6106 ----------------------------------------------------- (Address of principal executive offices) (Zip Code) 212-236-5662 -------------------------------------------- (Registrant's telephone number, including area ode) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No_____ --- PART I - FINANCIAL INFORMATION Item 1. Financial Statements JOHN W. HENRY & CO./MILLBURN L.P. (a Delaware limited partnership) ------------------------------ STATEMENTS OF FINANCIAL CONDITION --------------------------------- September 30, December 31, 1998 1997 ----------------- ----------------- ASSETS - ------ Investments $ 60,686,438 $ 63,024,164 Receivable from investments 1,208,193 514,158 ----------------- ----------------- TOTAL $ 61,894,631 $ 63,538,322 ================= ================= LIABILITIES AND PARTNERS' CAPITAL - --------------------------------- LIABILITIES: Redemptions payable $ 1,208,193 $ 514,158 ----------------- ----------------- Total liabilities 1,208,193 514,158 ----------------- ----------------- PARTNERS' CAPITAL: General Partner: (504 and 780 Series A Units) 154,184 221,605 (1338 and 1976 Series B Units) 332,561 456,174 (896 and 1439 Series C Units) 173,562 258,899 Limited Partners: (45485 and 50992 Series A Units) 13,914,921 14,487,473 (120794 and 135244 Series B Units) 30,025,451 31,223,304 (83036 and 91020 Series C Units) 16,085,759 16,376,709 ----------------- ----------------- Total partners' capital 60,686,438 63,024,164 ----------------- ----------------- TOTAL $ 61,894,631 $ 63,538,322 ================= ================= NET ASSET VALUE PER UNIT Series A (Based on 45989 and 51772 Units outstanding) $ 305.92 $ 284.11 ================= ================= Series B (Based on 122132 and 137220 Units outstanding) $ 248.57 $ 230.87 ================= ================= Series C (Based on 83932 and 92459 Units outstanding) $ 193.72 $ 179.92 ================= ================= See notes to financial statements. 2 JOHN W. HENRY & CO./MILLBURN L.P. --------------------------------- (a Delaware limited partnership) -------------------------------- STATEMENTS OF INCOME -------------------- For the three For the three For the nine For the nine months ended months ended months ended months ended September 30, September 30, September 30, September 30, 1998 1997 1998 1997 ------------------- ------------------- ------------------- ------------------- REVENUES: Income from investments $11,356,796 $4,026,458 $3,872,096 $5,219,594 -------------------- ------------------ -------------------- ------------------ NET INCOME $11,356,796 $4,026,458 $3,872,096 $5,219,594 ==================== ================== ==================== ================== NET INCOME PER UNIT: Weighted average number of units outstanding 260,011 292,180 270,675 297,946 ==================== ================== ==================== ================== Weighted average net income per Limited Partner and General Partner Unit $ 43.68 $ 13.78 $ 14.31 $ 17.52 ==================== ================== ==================== ================== 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 nine months ended September 30, 1998 and 1997 ----------------------------------------------------- Units Limited Partners ----- ---------------- Series A Series B Series C Series A Series B Series C -------------- ------------ -------------- ------------- ---------------- ----------------- PARTNERS' CAPITAL, December 31, 1996 56,376 148,528 100,695 $14,040,479 $30,082,484 $15,878,356 Redemptions (4,024) (8,830) (6,626) (1,091,900) (1,936,437) (1,129,570) Net Income -- -- -- 1,209,209 2,580,597 1,357,393 -------------- ------------ -------------- ------------- ---------------- ----------------- PARTNERS' CAPITAL, September 30, 1997 52,352 139,698 94,069 $14,157,788 $30,726,644 $16,106,179 ============== ============ ============== ============= ================ ================= PARTNERS' CAPITAL, December 31, 1997 51,772 137,220 92,459 $14,487,473 $31,223,304 $16,376,709 Redemptions (5,783) (15,088) (8,527) (1,430,084) (3,152,220) (1,334,901) Net Income -- -- -- 857,532 1,954,367 1,043,951 -------------- ------------ -------------- ------------- ---------------- ----------------- PARTNERS' CAPITAL, September 30, 1998 45,989 122,132 83,932 $13,914,921 $30,025,451 $16,085,759 ============== ============ ============== ============= ================ ================= General Partner --------------- Series A Series B Series C Total ------------- ------------ ------------ ------------ PARTNERS' CAPITAL, December 31, 1996 $196,983 $ 405,594 $230,192 $60,834,088 Redemptions -- -- -- $(4,157,907) Net Income 17,144 35,246 20,005 $ 5,219,594 ------------- ------------ ------------ ------------ PARTNERS' CAPITAL, September 30, 1997 $214,127 $ 440,840 $250,197 $61,895,775 ============= ============ ============ ============ PARTNERS' CAPITAL, December 31, 1997 $221,605 $ 456,174 $258,899 $63,024,164 Redemptions (70,937) (133,279) (88,401) $(6,209,822) Net Income 3,516 9,666 3,064 $ 3,872,096 ------------- ------------ ------------ ------------ PARTNERS' CAPITAL, September 30, 1998 $154,184 $ 332,561 $173,562 $60,686,438 ============= ============ ============ ============ 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 These financial statements have been prepared without audit. In the opinion of management, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of John W. Henry & Co./Millburn L.P. (the "Partnership" or the "Fund") as of September 30, 1998 and the results of its operations for the nine months ended September 30, 1998 and 1997. However, the operating results for the interim periods may not be indicative of the results expected for the full year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with general accepted accounting principles have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1997 (the "Annual Report"). 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. 2. INVESTMENTS As of September 30, 1998 and December 31, 1997, 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: 1998 1997 ---- ---- JWH LLC $ 31,442,622 $ 31,979,914 Millburn LLC 29,243,816 31,044,250 ------------ ------------ Total $ 60,686,438 $ 63,024,164 ============ ============ 5 Total revenues and fees with respect to such investments is set forth as follows: For the three months Total Brokerage Administrative Profit Income from Investments ended September 30, 1998 Revenue Commissions Fees Shares ----------------------------------------------------------------------------------------- SERIES A UNITS JWH LLC $ 2,126,981 $ 156,335 $ 4,113 $ 76,656 $ 1,889,877 Millburn LLC 955,648 150,918 3,972 83,363 717,395 ----------------------------------------------------------------------------------------- Total $ 3,082,629 $ 307,253 $ 8,085 $160,019 $ 2,607,272 ========================================================================================= SERIES B UNITS JWH LLC $ 4,661,405 $ 341,683 $ 8,994 $167,835 $ 4,142,893 Millburn LLC 2,120,792 332,509 8,750 184,031 1,595,502 ----------------------------------------------------------------------------------------- Total $ 6,782,197 $ 674,192 $17,744 $351,866 $ 5,738,395 ========================================================================================= SERIES C UNITS JWH LLC $ 2,444,577 $ 179,048 $ 4,711 $ 88,069 $ 2,172,749 Millburn LLC 1,113,759 174,230 4,585 96,564 838,380 ----------------------------------------------------------------------------------------- Total $ 3,558,336 $ 353,278 $ 9,296 $184,633 $ 3,011,129 ========================================================================================= TOTAL ALL UNITS --------------- JWH LLC $ 9,232,963 $ 677,066 $17,818 $332,560 $ 8,205,519 Millburn LLC 4,190,199 657,657 17,307 363,958 3,151,277 ----------------------------------------------------------------------------------------- Total $13,423,162 $1,334,723 $35,125 $696,518 $11,356,796 ========================================================================================= 6 For the three months Total Brokerage Administrative Profit Income from ended September 30, 1997 Revenue Commissions Fees Shares Investments -------------------------------------------------------------------------------- SERIES A UNITS JWH LLC $ 1,071,218 $ 174,245 $ 4,586 $ 31,350 $ 861,037 Millburn LLC 292,516 186,294 4,902 21,974 79,346 -------------------------------------------------------------------------------- Total $ 1,363,734 $ 360,539 $ 9,488 $ 53,324 $ 940,383 ================================================================================ SERIES B UNITS JWH LLC $ 2,298,494 $ 374,547 $ 9,857 $ 66,946 $ 1,847,144 Millburn LLC 629,907 403,749 10,626 46,810 168,722 -------------------------------------------------------------------------------- Total $ 2,928,401 $ 778,296 $20,483 $113,756 $ 2,015,866 ================================================================================ SERIES C UNITS JWH LLC $1,216,513 $ 197,276 $ 5,192 $ 35,664 $ 978,381 Millburn LLC 335,489 212,667 5,596 25,398 91,828 -------------------------------------------------------------------------------- Total $1,552,002 $ 409,943 $ 10,788 $ 61,062 $ 1,070,209 ================================================================================ TOTAL ALL UNITS --------------- JWH LLC $4,586,225 $ 746,068 $ 19,635 $133,960 $ 3,686,562 Millburn LLC 1,257,912 802,710 21,124 94,182 339,896 -------------------------------------------------------------------------------- Total $5,844,137 $1,548,778 $ 40,759 $228,142 $ 4,026,458 ================================================================================ 7 For the nine months Total Brokerage Administrative Profit Income from ended September 30, 1998 Revenue Commissions Fees Shares Investments ------------------------------------------------------------------------------ SERIES A UNITS JWH LLC $1,119,717 $ 468,459 $ 12,329 $ 76,656 $ 562,273 Millburn LLC 871,014 476,219 12,532 83,488 298,775 ------------------------------------------------------------------------------ Total $1,990,731 $ 944,678 $ 24,861 $160,144 $ 861,048 ============================================================================== SERIES B UNITS JWH LLC $2,490,689 $1,012,466 $ 26,644 $167,835 $1,283,744 Millburn LLC 1,929,195 1,037,422 27,300 184,184 680,289 ------------------------------------------------------------------------------ Total $4,419,884 $2,049,888 $ 53,944 $352,019 $1,964,033 ============================================================================== SERIES C UNITS JWH LLC $1,313,497 $ 529,060 $ 13,923 $ 88,069 $ 682,445 Millburn LLC 1,017,684 542,023 14,263 96,828 364,570 ------------------------------------------------------------------------------ Total $2,331,181 $1,071,083 $ 28,186 $184,897 $1,047,015 ============================================================================== TOTAL ALL UNITS --------------- JWH LLC $4,923,903 $2,009,985 $ 52,896 $332,560 $2,528,462 Millburn LLC 3,817,893 2,055,664 54,095 364,500 1,343,634 ------------------------------------------------------------------------------ Total $8,741,796 $4,065,649 $106,991 $697,060 $3,872,096 ============================================================================== 8 For the nine months Total Brokerage Administrative Profit Income from ended September 30, 1997 Revenue Commissions Fees Shares Investments ------------------------------------------------------------------------------ SERIES A UNITS JWH LLC $ 1,009,462 $ 512,799 $ 13,144 $ 31,914 $ 451,605 Millburn LLC 1,571,585 575,589 14,752 206,496 774,748 ------------------------------------------------------------------------------ Total $ 2,581,047 $1,088,388 $ 27,896 $ 238,410 $1,226,353 ============================================================================== SERIES B UNITS JWH LLC $ 2,160,892 $1,103,112 $ 28,279 $ 67,741 $ 961,760 Millburn LLC 3,371,038 1,243,925 31,890 441,140 1,654,083 ------------------------------------------------------------------------------ Total $ 5,531,930 $2,347,037 $ 60,169 $ 508,881 $2,615,843 ============================================================================== SERIES C UNITS JWH LLC $ 1,136,736 $ 583,702 $ 14,964 $ 36,009 $ 502,061 Millburn LLC 1,784,120 658,445 16,880 233,458 875,337 ------------------------------------------------------------------------------ Total $ 2,920,856 $1,242,147 $ 31,844 $ 269,467 $1,377,398 ============================================================================== TOTAL ALL UNITS --------------- JWH LLC $ 4,307,090 $2,199,613 $ 56,387 $ 135,664 $1,915,426 Millburn LLC 6,726,743 2,477,959 63,522 881,094 3,304,168 ------------------------------------------------------------------------------ Total $11,033,833 $4,677,572 $119,909 $1,016,758 $5,219,594 ============================================================================== 9 Condensed statements of financial condition and statements of operations for JWH LLC and Millburn LLC are set forth as follows: 1998 1997 ---------------------------------------------------- --------------------------------------------------- JWH Millburn JWH Millburn LLC LLC LLC LLC -------------------------- ------------------------- ------------------------- ----------------------- Assets $35,686,338 $30,440,134 $62,481,438 $35,584,936 ========================== ========================= ========================= ======================= Liabilities $ 1,243,716 $ 1,196,318 $ 1,122,533 $ 1,454,659 Members' Capital 31,442,622 29,243,816 61,358,905 34,130,277 -------------------------- ------------------------ ------------------------- ----------------------- Total $32,686,338 $30,440,134 $62,481,438 $35,584,936 ========================== ======================== ========================= ======================= JWH LLC ------- For the three months For the three months For the nine months For the nine months ended September 30, ended September 30, ended September 30, ended September 30, 1998 1997 1998 1997 -------------------------- ------------------------ ------------------------- ----------------------- Revenues $ 9,232,962 $ 9,280,296 $ 1,970,640 $ 8,905,568 Expenses 1,027,442 1,875,359 3,361,340 4,605,310 -------------------------- ------------------------ ------------------------- ----------------------- Net Income (Loss) $ 8,205,520 $ 7,404,937 $(1,390,700) $ 4,300,258 ========================== ======================== ========================= ======================= Millburn LLC ------------ For the three months For the three months For the nine months For the nine months ended September 30, ended September 30, ended September 30, ended September 30, 1998 1997 1998 1997 -------------------------- ------------------------ ------------------------- ----------------------- Revenues $ 4,190,198 $ 1,384,595 $ 3,786,031 $ 7,422,906 Expenses 1,038,922 1,003,596 2,583,807 3,746,086 -------------------------- ------------------------ ------------------------- ----------------------- Net Income $ 3,151,276 $ 380,999 $ 1,202,224 $ 3,676,820 ========================== ======================== ========================= ======================= 10 3. INCOME PER SERIES The profit of the Series A, Series B and Series C Units for the three and nine months ended September 30, 1998 and 1997 is as follows: For the three months ended September 30, 1998 1998 1997 ------------------------------------------- ---------------------------------------- Series A Series B Series C Series A Series B Series C ------------ ----------- ---------- --------- ----------- ------------ REVENUES: Income from investments $ 2,607,272 $ 5,738,395 $ 3,011,129 940,383 2,015,866 1,070,209 ------------ ----------- ----------- --------- ----------- ----------- NET INCOME $ 2,607,272 $ 5,738,395 $ 3,011,129 $ 940,383 $ 2,015,866 $ 1,070,209 ============ =========== =========== ========= =========== =========== NET INCOME PER UNIT: Weighted average number of units outstanding 47.154 127,286 85,571 53,601 142,368 96,211 ============ =========== =========== ========= =========== =========== Weighted average net income per Limited Partner and General Partner Unit $ 55.29 $ 45.08 $ 35.19 $ 17.54 $ 14.16 $ 11.12 ============ =========== =========== ========= =========== =========== For the nine months ended September 30, 1998 1998 1997 ------------------------------------------- ---------------------------------------- Series A Series B Series C Series A Series B Series C ------------ ----------- ---------- ---------- ----------- ------------ REVENUES: Income from investments $ 861,048 $ 1,964,033 $ 1,047,015 $1,226,353 $ 2,615,843 $ 1,377,398 ------------ ----------- ----------- ---------- ----------- ----------- NET INCOME $ 861,048 $ 1,964,033 $ 1,047,015 1,226,353 2,615,843 1,377,398 ============ =========== =========== ========== =========== =========== NET INCOME PER UNIT: Weighted average number of units outstanding 49,580 132,363 85,571 54,618 144,913 98,415 ============ =========== =========== ========== =========== =========== Weighted average net income per Limited Partner and General Partner Unit $ 17.37 $ 14.84 $ 12.24 $ 22.45 $ 18.05 $ 14.00 ============ =========== =========== ========== =========== =========== 11 Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations MONTH-END NET ASSET VALUE PER SERIES A UNIT ---------------------------------------------------------------------------------------------------------- Jan. Feb. Mar. Apr. May Jun. Jul Aug Sep ---------------------------------------------------------------------------------------------------------- 1997 $273.52 $270.58 $267.94 $261.04 $251.03 $257.22 $283.93 $270.03 $274.52 ---------------------------------------------------------------------------------------------------------- 1998 $281.00 $268.85 $270.14 $248.62 $257.02 $249.67 $238.22 $270.01 $305.92 ---------------------------------------------------------------------------------------------------------- MONTH-END NET ASSET VALUE PER SERIES B UNIT --------------------------------------------------------------------------------------------------------- Jan. Feb. Mar. Apr. May Jun. Jul Aug Sep --------------------------------------------------------------------------------------------------------- 1997 $222.32 $219.93 $217.78 $212.17 $214.08 $209.10 $230.77 $219.46 $223.11 --------------------------------------------------------------------------------------------------------- 1998 $228.36 $218.48 $219.55 $202.07 $208.90 $202.93 $193.60 $219.40 $248.57 --------------------------------------------------------------------------------------------------------- MONTH-END NET ASSET VALUE PER SERIES C UNIT ---------------------------------------------------------------------------------------------------------- Jan. Feb. Mar. Apr. May Jun. Jul Aug Sep ---------------------------------------------------------------------------------------------------------- 1997 $173.26 $171.40 $169.73 $165.35 $159.04 $162.96 $179.85 $171.03 $173.88 ---------------------------------------------------------------------------------------------------------- 1998 $177.97 $170.27 $171.11 $157.48 $162.80 $158.15 $150.88 $170.99 $193.72 ---------------------------------------------------------------------------------------------------------- Performance Summary JANUARY 1, 1997 TO SEPTEMBER 30, 1997 BY QUARTER January 1, 1997 to March 31 1997 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. The dollar, however, underwent a significant correction in the Spring against the Japanese yen, due to the G7 finance ministers' determination that a further dollar advance would be counter-productive to their current goals. Global interest rate markets began the year on a volatile note, as investors evaluated economic data for signs of inflation. April 1, 1997 to June 30, 1997 In the currency markets, the dollar underwent a significant correction in the Spring against the Japanese yen due to the G7 finance ministers' determination that a further dollar advance would be counter-productive to their current goals. Currency trading was unprofitable for the quarter. Global interest rate trading proved unprofitable for the quarter. Losses incurred in April were due to U.S. bond prices having moved in a directionless pattern, as investors remained concerned over inflation and its impact on further increases in interest rates by the U.S. Federal Reserve. July 1,1997 to September 30, 1997 In the currency markets, the U.S. dollar rose dramatically in July, reflecting the dollar's role as a haven for currency traders skeptical over the "Euro", the new single European currency that is supposed to start replacing several European national denominations 1n 1999. Beginning in August, the dollar corrected against the Eurocurrencies in advance of well-advertised tightening by the Bundesbank. Currency trading was unprofitable in August and September. Global interest rate trading was profitable in July and September. During the third quarter, economic data in key countries was positive indicating lower inflation and igniting a worldwide rally in the bond markets. Specifically, investor sentiment was particularly strong in the U.S., where prices on the 30- year Treasury bond and 10-year Treasury note rose to their highest levels in over two years. This followed a largely positive economic report delivered by Federal Reserve Chairman Greenspan in testimony before Congress. 12 JANUARY 1, 1998 TO SEPTEMBER 30, 1998 BY QUARTER January 1, 1998, to March 31, 1998 The Fund's most profitable positions during the quarter were in the global interest rate markets. In Europe, an extended bond market rally continued despite an environment of robust growth in the United States, Canada and the United Kingdom, as well as a strong pick-up in growth in continental Europe. Gold prices drifted sideways and lower as Asian demand continued to slow and demand in the Middle East was affected by low oil prices. Trading results in stock index markets were mixed, but unprofitable, despite a strong first-quarter performance by the U.S. equity market as several consecutive weekly gains were recorded with most market averages setting new highs. Results in currency trading were also mixed, but unprofitable. In particular, the Swiss franc weakened versus the U.S. dollar. April 1, 1998 to June 30, 1998 As swings in the U.S. dollar and developments in Japan affected bond markets, the Fund's interest rate trading during the quarter resulted in losses, particularly in Eurodollar deposits and U.S. Treasury bonds. Early in the second quarter, Treasury trading was range-bound, as concern that the economy might be overheating was balanced by the potential impact of the Asian recession. Additionally, Australian bonds and bills saw a dramatic drop in prices in early June, as dollar-bloc currencies remained under pressure versus the U.S. dollar due to the Japanese/Asian crisis. Metals and currency trading also resulted in losses. The depressed gold market weakened further following news of a European Central Bank consensus that ten to fifteen percent of reserves should be made up of gold bullion which was at the low end of expectations. The Japanese yen weakened during June to an eight-year low versus the U.S. dollar. Trading results in stock index markets were profitable, as the Asia-Pacific region's equity markets weakened across the board. In particular, Hong Kong's Hang Seng index trended downward during most of the quarter and traded at a three-year low. July 1, 1998 to September 30, 1998 Fund performance in July was essentially flat. In August and continuing into September, financial markets in general were characterized by a flight to quality that resulted from uncertainty over Russia's solvency, continued weakness in Asia, and concerns that recessionary conditions would spread to the United States and Europe. These factors, combined with generally less liquid market conditions, led to a marked widening in bond credit spreads and a broad sell-off in world-wide equity markets. Managed futures funds exhibited strong non-correlation to world markets in August and again in September, generating significant profits on the long side of interest rates and the short side of the commodity markets. Interest rate trading was particularly profitable during the quarter. The growth rate of the world bond market declined to its lowest level since 1987 at 7.7%, down 4.0% from the last peak in 1993. Global investors poured funds into such instruments as U.S. Treasury issues and German Bunds, staging a major flight to quality. As a result, there was a significant widening of credit spreads on a global basis. Global fund managers also increased their already- overweight exposure to U.S. Treasuries to a record high. The impact of these events was that in September, the yield on the Japanese 5-year bond fell to .67%, an all-time low, German 10-year Bunds fell to 3.89%, representing almost a 100-year low, and the 30-year bond in the U.S. dropped to its lowest level on record. As U.S. equity markets declined in July and August, the Fund profited from its short positions in the stock index market, most notably during August, when the S&P 500(R) dropped 14.5%. Volatility in September made for a difficult trading environment, and the Fund incurred modest losses in the stock index sector during September, but remained profitable for the quarter overall in these markets. In the metals markets, gold prices attempted to move higher against a backdrop of volatility in major equity markets, increasing concerns about emerging markets, economic chaos in Russia, weakness in the U.S. dollar, and increasing worries about global economic conditions. However, gold was unable to extend rallies and build any significant upside momentum resulting in a trendless environment. The Fund incurred losses from its currency trading during the quarter. In the currency markets, Japan's problems spread to other sectors of the global economy, causing commodities prices to decline as demand from the Asian economies weakened, in turn putting pressure on Canada's commodity-sensitive currency. In Germany, the federal election resulted in a shift to the left, as Chancellor Helmut Kohl, after sixteen years in office, lost to Gerhard Schroder. Surprisingly, this promoted a continued strengthening of the Deutsche mark versus the U.S. dollar. 13 Year 2000 Compliance - -------------------- As the millennium approaches, Merrill Lynch has undertaken initiatives to address the Year 2000 problem (the "Y2K problem"). The Y2K problem is the result of a widespread programming technique that causes computer systems to identify a date based on the last two numbers of a year, with the assumption that the first two numbers of the year are "19." As a result, the year 2000 would be stored as "00," causing computers to incorrectly interpret the year as 1900. Left uncorrected, the Y2K problem may cause information technology systems (e.g., computer databases) and non-information technology systems (e.g., elevators) to produce incorrect data or cease operating completely. Merrill Lynch believes that it has identified and evaluated its internal Y2K problem and that the company is devoting sufficient resources to renovating technology systems that are not already Year 2000 compliant. Merrill Lynch expects the renovation phase (as discussed below) of its Year 2000 efforts to be substantially completed by December 31, 1998, thereby allowing the company to focus on additional testing efforts and integration of the Year 2000 programs of recent acquisitions during 1999. In order to focus attention on the Y2K problem, management has deferred certain other technology projects; however this deferral is not expected to have a material adverse effect on the company's business, results of operations, or financial condition. The failure of Merrill Lynch's technology systems relating to a Y2K problem would likely have a material adverse effect on the company's business, results of operations, or financial condition. This effect could include disruption of normal business transactions, such as the settlement, execution, processing, and recording of trades in securities, commodities, currencies, and other assets. The Y2K problem could also increase Merrill Lynch's exposure to risk and its need for liquidity. In 1995, Merrill Lynch established the Year 2000 Compliance Initiative, which is an enterprisewide effort to address the risks associated with the Y2K problem, both internal and external. The Year 2000 Compliance Initiative's efforts to address the risks associated with the Y2K problem have been organized into six segments or phases: planning, pre-renovation, renovation, production testing, certification, and integration testing. The planning phase involved defining the scope of the Year 2000 Compliance Initiative, including its annual budget and strategy, and determining the level of expert knowledge available within Merrill Lynch regarding particular systems or applications. The pre-renovation phase involved developing a detailed enterprisewide inventory of applications and systems, identifying the scope of necessary renovations to each application or system, and establishing a conversion schedule. During the renovation phase, source codes are actually converted, date fields are expanded or windowed (windowing is used on an exception basis only), test data is prepared, and each system or application is tested using a variety of Year 2000 scenarios. The production testing phase validates that a renovated system is functionally the same as the existing production version, that renovation has not introduced defects, and that expanded or windowed date fields continue to handle current dates properly. The certification phase validates that a system can run successfully in a Year 2000 environment. Finally, the integration testing phase, which will occur throughout 1999, validates that a system can successfully interface with both internal and external systems. In 1996 and 1997, as part of the planning and pre-renovation phases, both plans and funding of plans for inventory, preparation, renovation, and testing of computer systems for the Y2K problem were approved. All plans for both mission-critical and non-mission-critical systems are tracked and monitored. The work associated with the Year 2000 Compliance Initiative has been accomplished by Merrill Lynch employees, with the assistance of consultants where necessary. As part of the production testing and certification phases, Merrill Lynch has performed, and will continue to perform, both internal and external Year 2000 testing intended to address the risks from the Y2K problem. In July 1998, Merrill Lynch participated in an industrywide Year 2000 systems test sponsored by the Securities Industry Association ("SIA"), in which selected firms tested their computer systems in mock stock trades that simulated dates in December 1999 and January 2000. Merrill Lynch will participate in further industrywide testing sponsored by the SIA, currently scheduled for March and April 1999, which will involve an expanded number of firms, transactions, and conditions. Merrill Lynch also participated in a test sponsored by the Bank of England's Central Gilts Office. Each business area within Merrill Lynch also continues to develop specific contingency plans, with the particular choice of contingency action dependent on the severity of the problem being addressed, the availability of alternative products, and the level of importance of the business activity supported by the problematic system. As part of the Year 2000 Compliance Initiative, Merrill Lynch has undertaken a business readiness/risk management effort in which each line of business will identify scenarios in order to develop plans to reduce risks associated with a Y2K problem. Merrill Lynch continues to survey and communicate with parties with whom it has important relationships that may be associated with information technology Y2K problems, as well as parties that may be associated with non-information technology Y2K problems, such as landlords. Management is unable, at this point, to ascertain whether all such third parties will successfully address the Y2K problem, particularly parties outside the U.S., where it is believed that remediation efforts relating to the Y2K problem may be less advanced than in the U.S. Merrill Lynch will continue to monitor third parties' Year 2000 readiness to determine whether additional or alternative measures are necessary. Such 14 measures may include the selection of alternate third parties or other efforts designed to mitigate some of the effects of a third party's noncompliance. In light of the interdependency of the parties in or serving the financial markets, however, there can be no assurance that all Y2K problems will be identified and remediated on a timely basis or that all remediation efforts will be successful. The failure of securities exchanges, clearing organizations, vendors, clients, or regulators to resolve their own processing issues in a timely manner could have a material adverse effect on Merrill Lynch's business, results of operations, or financial condition. Nearly 10% of the current year's technology budget has been allocated to the Year 2000 Compliance Initiative. As of the end of the 1998 third quarter, the total estimated expenditures associated with the entire Year 2000 Compliance Initiative were expected to be approximately $400 million, of which $160 million is remaining. The majority of these remaining expenditures are expected to cover software remediation, testing, and contingency planning. There can be no assurance that the costs associated with such remediation efforts will not exceed those currently anticipated by Merrill Lynch, or that the costs associated with the remediation efforts or the possible failure of such remediation efforts would not have a material adverse effect on Merrill Lynch's business, results of operations, or financial condition. European Economic and Monetary Union ("EMU") - -------------------------------------------- As of January 1, 1999, the "euro" will be adopted as the common legal currency of participating member states of the EMU. The euro and participating member currencies will co-exist through July 1, 2002, with the euro gradually replacing member national currencies. The introduction of and conversion to the euro is expected to have significant implications for the business, as well as the computer systems and operational processes, of Merrill Lynch. The introduction of the euro will bring about fundamental changes in the structure and nature of the European financial markets, including the creation of a unified, more liquid capital market in Europe. As financial markets in EMU member states converge and local barriers are removed, competition is expected to increase. Merrill Lynch does not expect the introduction of the euro to have a negative effect on its business, currency risk, or competitive positioning in the European markets. The International Swaps and Derivatives Association, Inc. has established an EMU protocol agreement that parties to derivatives contracts may use to amend their agreements to ensure continuity of contract during the conversion period. Merrill Lynch is a party to this protocol agreement. Merrill Lynch's program to address the introduction of and conversion to the euro and the associated systems and operational implications and challenges has been divided into three phases: analysis, mobilization, and implementation. The analysis phase began in the third quarter of 1997 and focused upon analyzing the likely implications of the EMU and assessing the operational and systems impact on Merrill Lynch. During this phase, a database containing the primary compliance challenges of the EMU was developed, and working groups were established to drive the EMU preparation effort within the different product lines and principal operating locations. The mobilization phase began in the fourth quarter of 1997 and focused upon developing project plans and establishing an organizational and project structure to address various business requirements. The implementation phase, which began in December 1997, is concerned with implementing the operational and systems changes identified as necessary to ensure Merrill Lynch's compliance with EMU. The implementation phase is expected to continue into the first quarter of 1999 to resolve any post-conversion issues. With respect to operational and systems matters, the introduction of the euro will affect all Merrill Lynch facilities that transact, distribute, or provide custody or recordkeeping for securities or cash denominated in the currency of a participating member state. Merrill Lynch systems or procedures that handle such securities or cash may require modification. The procedural and systems modifications that Merrill Lynch has identified as necessary for conversion to the euro include, but are not limited to, such activities as: . modification of application systems to enable the systems to recognize and process the euro on an ongoing basis; . conversion of data, which will require updates to master files to reflect redenomination; . alteration of transaction data that includes converting trading and cash positions from member currency to the euro; . procedural modifications to reflect the replacement of member currency bank accounts and settlement instructions with euro equivalents; and . development of the capability for certain business functions to translate member currencies into euro at a fixed exchange rate until July 2002. The introduction of the euro exposes Merrill Lynch to operational and systems risks in that the necessary systems modifications will affect clearance, settlement, and financial reporting of transactions. If not handled correctly, these modifications could result in failed trades and other improper accounting for transactions. The success of Merrill Lynch's euro conversion efforts also is dependent on the euro-compliance of third parties, such as trading counterparties, financial intermediaries (for example, securities and commodities exchanges, depositories, clearing organizations, and commercial banks), and vendors. Merrill Lynch will monitor risks associated with third parties on a regular basis, including, for example, performing assessments of counterparties' readiness. In anticipation of the introduction of the euro, the financial authorities and 15 securities exchanges of certain of the EMU member states are conducting market tests to assess euro-conversion readiness. Merrill Lynch is participating in such testing procedures as required, and to date the outcome of each of those tests has been satisfactory. In addition to participating in the testing procedures of the EMU member states' financial authorities and securities exchanges, Merrill Lynch also is implementing its own internal testing procedures, including four systemwide practice sessions, to prepare for the conversion. The purpose of these practice sessions is to better ensure that the conversion plans are comprehensive and that the schedule is acceptable. The results of such practice sessions will be evaluated and used to identify those areas in which further modification or remediation is necessary. While Merrill Lynch will engage in these testing procedures, certain elements of the conversion process can only be undertaken for the first time during the conversion. Accordingly, there can be no assurances that the tests will identify all system deficiencies and necessary modifications prior to the conversion. Due to the unprecedented scale of change, including the volume and magnitude of transactions affected and the number of third parties involved, market participants are anticipating a period of some disruption immediately following the conversion. Merrill Lynch has developed, and is continuing to develop, contingency plans in an effort to reduce the impact of such disruptions on its business. As of the end of the 1998 third quarter, the total estimated expenditures associated with the introduction of and conversion to the euro are expected to be approximately $79 million, of which approximately $20 million is remaining (of these amounts, $71 million and $19 million, respectively, pertain to 1998). These remaining expenditures are expected to be spent on EMU compliance efforts and project administration. Merrill Lynch expects to become fully EMU-compliant during the 1998 fourth quarter. Merrill Lynch believes that it has identified and evaluated those systems and operational modifications necessary for the conversion to the euro and is in the process of implementing the identified modifications. In light of the interdependency of the parties in or serving the financial markets, however, there can be no assurance that all necessary modifications will be identified and renovated on a timely basis, that all modification efforts will be successful, or that all third parties with whom Merrill Lynch's operations interface will be EMU-ready. In addition, there can be no assurance that the remaining euro conversion expenditures will not exceed those anticipated by Merrill Lynch at this time or that the expenditures associated with the conversion efforts and the possible failure of such conversion efforts will not have a material adverse effect on Merrill Lynch's business, results of operations, or financial condition. Item 3. Quantitative and Qualitative Disclosures About Market Risk Not Applicable 16 PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no pending legal proceedings to which the Partnership or the General Partner is a party. Item 2. Changes in Securities and Use of Proceeds (a) None. (b) None. (c) None. (d) None. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other information None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits -------- There are no exhibits required to be filed as part of this report. (b) Reports on Form 8-K ------------------- There were no reports on Form 8-K filed during the first nine months of fiscal 1998. 17 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. JOHN W. HENRY & CO./MILLBURN L.P. By: MERRILL LYNCH INVESTMENT PARTNERS INC. (General Partner) Date: November 11, 1998 By /s/ JOHN R. FRAWLEY J.R. ------------------------ John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director Date: November 11, 1998 By /s/ JO ANN DI DARIO ------------------- Jo Ann Di Dario Vice President, Chief Financial Officer and Treasurer