JOHN W. HENRY & CO./ MILLBURN L.P.
(A Delaware Limited Partnership)
Financial Statements for the years ended
December 31, 1998, 1997 and 1996 and
Independent Auditors' Report
[LOGO] Merrill Lynch
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 the "Partnership")
ended its ninth fiscal year of trading on December 31, 1998 with a Net Asset
Value ("NAV") per Unit of $296.13, representing an increase of 4.23% from the
December 31, 1997 NAV per Unit of $284.11. During 1998, trading profits were
generated in the interest rate markets, while losses were incurred in the
metals, currency and stock index markets.
Global interest rate markets provided the Fund with its most profitable
positions for the first quarter, particularly in European bonds where an
extended bond market rally continued despite an environment of robust growth in
the United States, Canada and the United Kingdom, as well as a strong pick-up in
growth in continental Europe. In the second quarter, swings in the U.S. dollar
and developments in Japan affected bond markets, causing the Fund's interest
rate trading to result in losses. This was turned around in the third quarter,
as markets worldwide were turned upside down and the Fund's non-correlation with
general equity and debt markets was strongly exhibited. Global investors staged
a major flight to quality, resulting in a significant widening of credit spreads
on a global basis. In October, investors pushed the yields on U.S. Treasury
bonds to a 31-year low. The long bond yield fell about 75 basis points in 1998
as the world economy slowed more than expected, inflation continued to fall, the
anticipated small U.S. budget deficit turned into substantial surplus, and the
Federal Reserve lowered interest rates.
Gold prices began the year drifting sideways, and continued to weaken following
news in the second quarter 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. Gold was unable to extend third quarter rallies or to
build any significant upside momentum, resulting in a trendless environment.
This was also the case in the fourth quarter, as gold's cost of production
declined. Also, silver markets remained range-bound, while also experiencing a
significant selloff in November, and aluminum traded at its lowest levels since
1994, with many aluminum smelters operating at a loss.
In currency markets, results early in the year were mixed, although marginally
unprofitable. During the second quarter, the Japanese yen weakened during June
to an eight-year low versus the U.S. dollar. In the third quarter, Japan's
problems spread to other sectors of the global economy, causing commodities
prices to decline as demand from the Asian economies weakened, and Japan's
deepening recession and credit crunch continued through the fourth quarter.
Trading results in stock index markets were also mixed in early 1998, 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. Second quarter results 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 second quarter and traded at a three-
year low. As U.S. equity markets declined in July and August, the Fund profited
from short positions in the S&P 500, most notably during August, when the index
dropped 14.5%. Volatility in September made for a difficult trading environment
in the stock index sector, and the Fund incurred modest losses, although results
remained profitable for the quarter and the year overall in these markets.
Despite a year of unprecedented volatility in key global markets, we were
pleased with the Fund's ability to generate a profit by trading both the long
and short side of a variety of markets, demonstrating its value as an element of
diversification in an investor's portfolio. We look forward to 1999 and the
opportunities it may present.
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 the "Partnership")
ended its eighth fiscal year of trading on December 31, 1998 with a Net Asset
Value ("NAV") per Unit of $240.61, representing an increase of 4.22% from the
December 31, 1997 NAV per Unit of $230.87. During 1998, trading profits were
generated in the interest rate markets, while losses were incurred in the
metals, currency and stock index markets.
Global interest rate markets provided the Fund with its most profitable
positions for the first quarter, particularly in European bonds where an
extended bond market rally continued despite an environment of robust growth in
the United States, Canada and the United Kingdom, as well as a strong pick-up in
growth in continental Europe. In the second quarter, swings in the U.S. dollar
and developments in Japan affected bond markets, causing the Fund's interest
rate trading to result in losses. This was turned around in the third quarter,
as markets worldwide were turned upside down and the Fund's non-correlation with
general equity and debt markets was strongly exhibited. Global investors staged
a major flight to quality, resulting in a significant widening of credit spreads
on a global basis. In October, investors pushed the yields on U.S. Treasury
bonds to a 31-year low. The long bond yield fell about 75 basis points in 1998
as the world economy slowed more than expected, inflation continued to fall, the
anticipated small U.S. budget deficit turned into substantial surplus, and the
Federal Reserve lowered interest rates.
Gold prices began the year drifting sideways, and continued to weaken following
news in the second quarter 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. Gold was unable to extend third quarter rallies or to
build any significant upside momentum, resulting in a trendless environment.
This was also the case in the fourth quarter, as gold's cost of production
declined. Also, silver markets remained range-bound, while also experiencing a
significant selloff in November, and aluminum traded at its lowest levels since
1994, with many aluminum smelters operating at a loss.
In currency markets, results early in the year were mixed, although marginally
unprofitable. During the second quarter, the Japanese yen weakened during June
to an eight-year low versus the U.S. dollar. In the third quarter, Japan's
problems spread to other sectors of the global economy, causing commodities
prices to decline as demand from the Asian economies weakened, and Japan's
deepening recession and credit crunch continued through the fourth quarter.
Trading results in stock index markets were also mixed in early 1998, 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. Second quarter results 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 second quarter and traded at a three-
year low. As U.S. equity markets declined in July and August, the Fund profited
from short positions in the S&P 500, most notably during August, when the index
dropped 14.5%. Volatility in September made for a difficult trading environment
in the stock index sector, and the Fund incurred modest losses, although results
remained
profitable for the quarter and the year overall in these markets.
Despite a year of unprecedented volatility in key global markets, we were
pleased with the Fund's ability to generate a profit by trading both the long
and short side of a variety of markets, demonstrating its value as an element of
diversification in an investor's portfolio. We look forward to 1999 and the
opportunities it may present.
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 the "Partnership")
ended its seventh fiscal year of trading on December 31, 1998 with a Net Asset
Value ("NAV") per Unit of $187.52, representing an increase of 4.22% from the
December 31, 1997 NAV per Unit of $179.92. During 1998, trading profits were
generated in the interest rate markets, while losses were incurred in the
metals, currency and stock index markets.
Global interest rate markets provided the Fund with its most profitable
positions for the first quarter, particularly in European bonds where an
extended bond market rally continued despite an environment of robust growth in
the United States, Canada and the United Kingdom, as well as a strong pick-up in
growth in continental Europe. In the second quarter, swings in the U.S. dollar
and developments in Japan affected bond markets, causing the Fund's interest
rate trading to result in losses. This was turned around in the third quarter,
as markets worldwide were turned upside down and the Fund's non-correlation with
general equity and debt markets was strongly exhibited. Global investors staged
a major flight to quality, resulting in a significant widening of credit spreads
on a global basis. In October, investors pushed the yields on U.S. Treasury
bonds to a 31-year low. The long bond yield fell about 75 basis points in 1998
as the world economy slowed more than expected, inflation continued to fall, the
anticipated small U.S. budget deficit turned into substantial surplus, and the
Federal Reserve lowered interest rates.
Gold prices began the year drifting sideways, and continued to weaken following
news in the second quarter 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. Gold was unable to extend third quarter rallies or to
build any significant upside momentum, resulting in a trendless environment.
This was also the case in the fourth quarter, as gold's cost of production
declined. Also, silver markets remained range-bound, while also experiencing a
significant selloff in November, and aluminum traded at its lowest levels since
1994, with many aluminum smelters operating at a loss.
In currency markets, results early in the year were mixed, although marginally
unprofitable. During the second quarter the Japanese yen weakened during June
to an eight-year low versus the U.S. dollar. In the third quarter, Japan's
problems spread to other sectors of the global economy, causing commodities
prices to decline as demand from the Asian economies weakened, and Japan's
deepening recession and credit crunch continued through the fourth quarter.
Trading results in stock index markets were also mixed in early 1998, 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. Second quarter results 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 second quarter and traded at a three-
year low. As U.S. equity markets declined in July and August, the Fund profited
from short positions in the S&P 500, most notably during August, when the index
dropped 14.5%. Volatility in September made for a difficult trading environment
in the stock index sector, and the Fund incurred modest losses, although results
remained
profitable for the quarter and the year overall in these markets.
Despite a year of unprecedented volatility in key global markets, we were
pleased with the Fund's ability to generate a profit by trading both the long
and short side of a variety of markets, demonstrating its value as an element of
diversification in an investor's portfolio. We look forward to 1999 and the
opportunities it may present.
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, 1998, 1997 AND 1996:
Statements of Financial Condition 2
Statements of Income 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-15
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
John W. Henry & Co./Millburn L.P.:
We have audited the accompanying statements of financial condition of John W.
Henry & Co./Millburn L.P. (the "Partnership") as of December 31, 1998 and 1997,
and the related statements of income and of changes in partners' capital for
each of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the results of its operations for each of the
three years in the period ended December 31, 1998 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 1999
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
1998 1997
------------ -----------
ASSETS
Investments (Note 6) $ 56,163,313 $ 63,024,164
Receivable from investments (Note 6) 259,704 514,158
------------ -----------
TOTAL $ 56,423,017 $ 63,538,322
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 259,704 $ 514,158
------------ ------------
Total liabilities 259,704 514,158
------------ -----------
PARTNERS' CAPITAL:
General Partner:
(504 and 780 Series A Units outstanding) 149,246 221,605
(1,338 and 1,976 Series B Units outstanding) 321,921 456,174
(926 and 1,439 Series C Units outstanding) 173,635 258,899
Limited Partners:
(44,678 and 50,992 Series A Units outstanding) 13,230,285 14,487,473
(115,421 and 135,244 Series B Units outstanding) 27,771,959 31,223,304
(77,411 and 91,020 Series C Units outstanding) 14,516,267 16,376,709
------------ -----------
Total partners' capital 56,163,313 63,024,164
------------ -----------
TOTAL $ 56,423,017 $ 63,538,322
============ ===========
NET ASSET VALUE PER UNIT
Series A $ 296.13 $ 284.11
============ ============
Series B $ 240.61 $ 230.87
============ ============
Series C $ 187.52 $ 179.92
============ ============
See notes to financial statements.
2
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
REVENUES:
Trading profit (loss):
Realized $ - $ - $ 8,749,410
Change in unrealized - - (1,760,218)
------------------ ------------------ ------------------
Total trading results - - 6,989,192
Interest income (Note 2) - - 1,842,887
------------------ ------------------ ------------------
Total revenues - - 8,832,079
------------------ ------------------ ------------------
EXPENSES:
Brokerage commissions (Note 2) - - 5,406,851
Profit Shares (Note 3) - - 97,468
Administrative fees (Note 2) - - 115,039
------------------ ------------------ ------------------
Total expenses - - 5,619,358
------------------ ------------------ ------------------
INCOME FROM INVESTMENTS (Note 6) 1,867,451 7,357,688 7,171,609
------------------ ------------------ ------------------
NET INCOME $ 1,867,451 $ 7,357,688 $ 10,384,330
================== ================== ==================
NET INCOME PER UNIT:
Weighted average number of General Partner
and Limited Partner Units outstanding (Note 5) 264,787 294,640 327,875
================== ================== ==================
Net income per weighted average
General Partner and Limited
Partner Unit $ 7.05 $ 24.97 $ 31.67
================== ================== ==================
See notes to financial statements.
3
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- --------------------------------------------------------------------------------
Series Series Series Limited Partners
------ ------- ------- ------------------------------------------
A B C Series Series Series
Units Units Units A B C
------ ------- ------- ------------ ------------ ------------
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
Redemptions (6,590) (20,461) (14,122) (1,665,001) (4,413,933) (2,362,377)
Net income (loss) - - - 407,813 962,588 501,935
------ ------- ------- ------------ ------------ ------------
PARTNERS' CAPITAL,
DECEMBER 31, 1998 45,182 116,759 78,337 $ 13,230,285 $ 27,771,959 $14,516,267
====== ======= ======= ============= ============ ===========
General Partner
-------------------------------------------------
Series Series Series
A B C Total
---------- ---------- ---------- -------------
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
Redemptions (70,937) (133,279) (82,775) (8,728,302)
Net income (loss) (1,422) (974) (2,489) 1,867,451
-------- --------- -------- -----------
PARTNERS' CAPITAL,
DECEMBER 31, 1998 $149,246 $ 321,921 $173,635 $56,163,313
======== ========= ======== ===========
See notes to financial statements.
4
JOHN W. HENRY & CO./MILLBURN L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
John W. Henry & Co./Millburn L.P. (the "Partnership") was organized
under the Delaware Revised Uniform Limited Partnership Act on August 29,
1989. The Partnership raised $18,182,000 in its initial offering of Units of
limited partnership interest ("Series A Units") and commenced trading
activities on January 5, 1990. The Partnership raised an additional
$50,636,000 in a second offering of Units of limited partnership interest
("Series B Units") and commenced trading activities with respect to the
Series B Units on January 28, 1991. The Partnership raised an additional
$40,000,000 in a third offering of Units of limited partnership interest
("Series C Units") and commenced trading activities with respect to the
Series C Units on January 2, 1992. (Series A, B and C units are,
hereinafter, collectively referred to as "Units.") The Partnership engages
(currently, through investments in limited liability companies (see below))
in the speculative trading of futures, options on futures and forward
contracts on a wide range of commodities. Merrill Lynch Investment Partners
Inc. ("MLIP" 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. Merrill Lynch Futures Inc. ("MLF"), an affiliate of Merrill
Lynch, is the Partnership's commodity broker. MLIP has agreed to maintain a
general partner's interest of at least 1% of total capital of each Series of
Units. MLIP and each Limited Partner share in the profits and losses of such
Series in proportion to their respective interests in it.
John W. Henry & Company, Inc. and Millburn Ridgefield Corporation (each an
"Advisor", together, "Advisors") have been the Partnership's only trading
advisors since inception. Each Advisor was allocated 50% of the total assets
of each Series as of the date such Series began trading. Subsequently, these
allocations have varied over time. MLIP may, in its discretion, reallocate
assets as of any month-end. As of December 1, 1996, the Partnership placed
all of its assets under the management of the Advisors through investing in
private limited liability companies ("Trading LLCs" or "LLCs"), as described
in Note 6. Certain of the following notes to financial statements are
directly related to Partnership assets managed directly by the Advisors.
However, from December 1, 1996 on, references are to the Partnership's
investment in the Trading LLCs. The placement of assets into the LLCs did
not change the operation or fee structure of the Partnership. 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 on futures 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 market value
(for those commodity interests for which market quotations are readily
available) or at fair value. The change in 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, 1998, 1997 and 1996.) As of December 31, 1998,
1997 and 1996, revenue is recognized only from investments (See Note 6).
Foreign Currency Transactions
-----------------------------
The Partnership's functional currency is the U.S. dollar; however, it
transacts business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are
translated into U.S. dollars at the rates in effect at the dates of the
Statements of Financial Condition. Income and expense items denominated in
currencies other than the U.S. dollar are translated into U.S. dollars at the
rates in effect during the period. Gains and losses resulting from the
translation to U.S. dollars are reported in total trading results currently.
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.
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each Partner is individually responsible for such Partner's
respective share of the income and expenses of the series in which such
partner is invested as reported for income tax purposes.
Redemptions
-----------
A Limited Partner may 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.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standard No. 133, "Accounting for Derivative Instrument
and Hedging Activities" (the "Statement"). Such Statement is effective for
fiscal years commencing after June 15, 1999. The General Partner does not
believe that the Statement will have a significant effect on the financial
statements of the Partnership.
6
2. RELATED PARTY TRANSACTIONS
The Partnership's U.S. dollar assets are maintained at MLF. On assets held in
U.S. dollars, Merrill Lynch credits the Partnership with interest at the
prevailing 91-day U.S. Treasury bill rate. The Partnership is credited with
interest on any of its net gains actually held by Merrill Lynch in non-U.S.
dollar currencies at a prevailing local rate received by Merrill Lynch.
Merrill Lynch may derive certain economic benefit, in excess of the interest
which Merrill Lynch pays to the Partnership, from possession of such assets.
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 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 have been credited as their response forms are processed.
The total amount of the adjustment was 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 determined that
interest was calculated appropriately since November 1996.
Prior to January 1, 1996, 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). 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 year ended 1996 was approximately $143 (not including,
in calculating round-turn equivalents, forward contracts on a future-
equivalent basis). MLIP estimates that the round-turn equivalent rates
charged to ML Millburn Global L.L.C. ("Millburn LLC") (See Note 6) during the
years ended 1998 and 1997 were approximately $151 and $162, respectively.
MLIP estimates that the round-turn equivalent rates charged to ML JWH
Financial and Metals Portfolio L.L.C. ("JWH LLC") (See Note 6) during the
years ended 1998 and 1997 were approximately $133 and $198, respectively.
MLF pays the Advisors annual consulting fees up to 4% of the average
month-end assets allocated to them for management.
Many of the Partnership's currency trades are executed in the spot
and forward foreign exchange markets (the "FX Markets") where there are no
direct execution costs. Instead, the participants, banks and dealers,
including Merrill Lynch International Bank ("MLIB"), in the FX Markets take a
"spread" between the prices at which they are prepared to buy and sell a
particular currency and such spreads are built into the pricing of the spot
or forward contracts with the Partnership. The General Partner anticipates
that some of the Partnership's foreign currency trades will be executed
through MLIB, an affiliate of the General Partner. MLIB has discontinued the
operation of the foreign exchange service desk, which included seeking
multiple quotes from counterparties unrelated to MLIB for a service fee and
trade execution.
7
In its exchange of futures for physical ("EFP") trading, the Partnership
acquires cash currency positions through banks and dealers, including Merrill
Lynch. The Partnership pays a spread when it exchanges these positions for
futures. This spread 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 the banks and dealers, which may
include a Merrill Lynch entity.
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.
Profit Shares of either 15% or 20%, of any New Trading Profit, as defined,
either as of the end of each calendar quarter or year, were paid to each
Advisor based on the performance of the Partnership account managed by such
Advisor, irrespective of the overall performance of the Partnership. Profit
Shares are also paid out in respect of Units redeemed as of the end of
interim months, to the extent the applicable percentage of any New Trading
Profits attributable to such Units.
8
4. STATEMENT OF INCOME BY SERIES
The profit and loss of the Series A, Series B and Series C Units for the
years ended December 31, 1998, 1997 and 1996 is as follows:
Series A
---------------------------------------------------------
1998 1997 1996
---------------- ---------------- ------------------
REVENUES:
Trading profit (loss):
Realized $ - $ - $ 2,029,650
Change in unrealized - - (382,321)
---------------- ---------------- ------------------
Total trading results - - 1,647,329
Interest income (Note 2) - - 417,739
---------------- ---------------- ------------------
Total revenues - - 2,065,068
---------------- ---------------- ------------------
EXPENSES:
Profit Shares (Note 3) - - 26,690
Brokerage commissions (Note 2) - - 1,239,114
Administrative fees (Note 2) - - 26,364
---------------- ---------------- ------------------
Total expenses - - 1,292,168
---------------- ---------------- ------------------
Income from investments (Note 6) 406,391 1,727,430 1,746,113
---------------- ---------------- ------------------
NET INCOME $ 406,391 $ 1,727,430 $ 2,519,013
================ ================ ==================
NET INCOME PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number
of units outstanding (Note 5) 45,584 54,036 59,766
---------------- ---------------- ------------------
Net income per weighted
Average General Partner and
Limited Partner Unit $ 8.92 $ 31.97 $ 42.15
================ ================ ==================
Series B
-----------------------------------------------------------
1998 1997 1996
----------------- ------------------ ------------------
REVENUES:
Trading profit (loss):
Realized $ - $ - $ 4,349,607
Change in unrealized - - (877,666)
----------------- ------------------ ------------------
Total trading results - - 3,471,941
Interest income (Note 2) - - 920,755
----------------- ------------------ ------------------
Total revenues - - 4,392,696
----------------- ------------------ ------------------
EXPENSES:
Profit Shares (Note 3) - - 44,910
Brokerage commissions (Note 2) - - 2,695,105
Administrative fees (Note 2) - - 57,343
----------------- ------------------ ------------------
Total expenses - - 2,797,358
----------------- ------------------ ------------------
Income from investments (Note 6) 961,614 3,689,429 3,562,401
----------------- ------------------ ------------------
NET INCOME $ 961,614 $ 3,689,429 $ 5,157,739
================= ================== ==================
NET INCOME PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number
of units outstanding (Note 5) 119,686 143,414 158,197
----------------- ------------------ ------------------
Net income per weighted
Average General Partner and
Limited Partner Unit $ 8.03 $ 25.73 $ 32.60
================= ================== ==================
Series C
---------------------------------------------------------
1998 1997 1996
---------------- ---------------- -----------------
REVENUES:
Trading profit (loss):
Realized $ - $ - $ 2,339,762
Change in unrealized - - (469,840)
---------------- ---------------- -----------------
Total trading results - - 1,869,922
Interest income (Note 2) - - 504,393
---------------- ---------------- -----------------
Total revenues - - 2,374,315
---------------- ---------------- -----------------
EXPENSES:
Profit Shares (Note 3) - - 25,868
Brokerage commissions (Note 2) - - 1,472,632
Administrative fees (Note 2) - - 31,332
---------------- ---------------- -----------------
Total expenses - - 1,529,832
---------------- ---------------- -----------------
Income from investments (Note 6) 499,446 1,940,829 1,863,095
---------------- ---------------- -----------------
NET INCOME $ 499,446 $ 1,940,829 $ 2,707,578
================ ================ =================
NET INCOME PER
UNIT OF PARTNERSHIP
INTEREST:
Weighted average number
of units outstanding (Note 5) 81,849 97,190 109,912
---------------- ---------------- -----------------
Net income per weighted
Average General Partner and
Limited Partner Unit $ 6.10 $ 19.97 $ 24.63
================ ================ =================
9
5. WEIGHTED AVERAGE UNITS
The weighted average number of Units of each series outstanding was computed
for purposes of disclosing net income per weighted average Unit. The weighted
average number of Units of each series outstanding at December 31, 1998, 1997
and 1996 equals the Units of such series outstanding as of such date,
adjusted proportionately for Units redeemed based on the respective length of
time each was outstanding during the year.
6. INVESTMENTS
The investments in the Trading LLCs are reflected in the financial statements
at fair value based upon the interest of each series of Units in each Trading
LLC. Fair value is equal to the market value of the net assets of the
Trading LLCs. The resulting difference between cost and fair value is
reflected on the Statements of Income as income from investments.
At December 31, 1998 and 1997, the Partnership had investments in the JWH LLC
and Millburn LLC as follows:
1998 1997
---------------- ----------------
JWH LLC $ 28,886,199 $ 31,979,914
Millburn LLC 27,277,114 31,044,250
---------------- ----------------
Total $ 56,163,313 $ 63,024,164
================ ================
10
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, 1998 Revenues Commissions Fees Shares Investments
----------------- ------------------------------------------------------------------------------
Series A Units
- ------------------------
JWH LLC $ 995,747 $ 630,513 $ 16,592 $ 76,657 $ 271,985
Millburn LLC 829,825 633,628 16,674 45,117 134,406
----------------- ---------------- --------------- ----------------- -----------------
Total $ 1,825,572 $ 1,264,141 $ 33,266 $ 121,774 $ 406,391
================= ================ =============== ================= =================
Series B Units
- ------------------------
JWH LLC $ 2,200,199 $ 1,356,787 $ 35,705 $ 167,835 $ 639,872
Millburn LLC 1,832,991 1,374,689 36,176 100,384 321,742
----------------- ---------------- --------------- ----------------- -----------------
Total $ 4,033,190 $ 2,731,476 $ 71,881 $ 268,219 $ 961,614
================= ================ =============== ================= =================
Series C Units
- ------------------------
JWH LLC $ 1,148,318 $ 712,552 $ 18,752 $ 88,069 $ 328,945
Millburn LLC 962,693 721,776 18,994 51,422 170,501
----------------- ---------------- --------------- ----------------- -----------------
Total $ 2,111,011 $ 1,434,328 $ 37,746 $ 139,491 $ 499,446
================= ================ =============== ================= =================
Total - All Series
- ------------------------
JWH LLC $ 4,344,264 $ 2,699,852 $ 71,049 $ 332,561 $ 1,240,802
Millburn LLC 3,625,509 2,730,093 71,844 196,923 626,649
----------------- ---------------- --------------- ----------------- -----------------
Total $ 7,969,773 $ 5,429,945 $ 142,893 $ 529,484 $ 1,867,451
================= ================ =============== ================= =================
11
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
================= ================ =============== ================= =================
12
For the year ended Total Brokerage Administrative Profit Income from
December 31, 1996 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
================= ================ =============== ================= ==================
Condensed statements of financial condition and statements of operations for
JWH LLC and Millburn LLC are set forth as follows:
JWH Millburn JWH Millburn
LLC LLC LLC LLC
December 31, 1998 December 31, 1998 December 31, 1997 December 31, 1997
------------------------- ------------------------- ------------------------- -----------------------
Assets $ 29,277,397 $ 27,815,000 $ 65,048,564 $ 35,584,936
========================= ========================= ========================= ========================
Liabilities $ 391,198 $ 537,886 $ 3,689,658 $ 1,454,658
Members' Capital 28,886,199 27,277,114 61,358,906 34,130,278
------------------------- ------------------------- ------------------------- ------------------------
Total $ 29,277,397 $ 27,815,000 $ 65,048,564 $ 35,584,936
========================= ========================= ========================= ========================
For the year ended For the year ended For the year ended For the year ended
December 31, 1998 December 31, 1998 December 31, 1997 December 31, 1997
------------------------- ------------------------- ------------------------- ------------------------
Revenues $ 1,391,001 $ 3,593,650 $ 15,279,401 $ 8,303,430
Expenses 4,069,362 3,108,411 6,714,041 4,600,706
------------------------- ------------------------- ------------------------- ------------------------
Net (Loss) Income $ (2,678,361) $ 485,239 $ 8,565,360 $ 3,702,724
========================= ========================= ========================= ========================
JWH Millburn
LLC LLC
For the period from For the period from
October 1, 1996 to December 2, 1996 to
December 31, 1996 December 31, 1996
------------------------- -------------------------
Revenues $ 19,365,949 $ 450,619
Expenses 4,426,261 291,370
------------------------- -------------------------
Net (Loss) Income $ 14,939,688 $ 159,249
========================= =========================
13
7. FAIR VALUE AND OFF-BALANCE SHEET RISK
As of December 1, 1996, the Partnership invested all of its assets in the
Trading LLCs. Accordingly, the Partnership is invested indirectly in
derivative instruments, but does not itself hold any derivative positions.
Consequently, no such positions subsequent to November 30, 1996 are
reflected in these financial statements or in this Note 7.
For the period from January 1, 1996 to November 30, 1996, 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
-----------------
Interest Rates $ 5,080,346
Stock Indices (992,453)
Currencies 2,659,762
Metals 241,537
-----------------
$ 6,989,192
=================
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 the 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 the Trading
LLCs. The Partnership's exposure to market risk is influenced by a number of
factors, including the relationships among the derivative instruments held
by the Partnership 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
exposure, although there can be no assurance that they will, in fact,
succeed in doing so. These procedures focus primarily on monitoring the
trading of the 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. 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 (which has not occurred to date), 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.
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,
14
are generally required in exchange trading, and counterparties may also
require margin in the over-the-counter markets.
The Partnership has credit risk in respect of its counterparties and
brokers, but attempts to control this risk by dealing almost exclusively
with Merrill Lynch entities as counterparties and brokers.
The Partnership, in its normal course of business, entered into various
contracts, with MLF acting as its commodity broker. Pursuant to the
brokerage arrangement with MLF (which included a netting arrangement), to the
extent that such trading resulted in receivables from and payables to MLF,
these receivables and payables were 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/ Jo Ann Di Dario
Jo Ann Di Dario
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
John W. Henry & Co./Millburn L.P.
15