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 March 31, 1999
--------------
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 33-22864
ML FUTURES INVESTMENTS L.P.
-----------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 36-3590615
- -------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
Princeton Corporate Campus
800 Scudders Mill Road - Section 2G
Plainsboro, New Jersey 08536
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(Address of principal executive offices)
(Zip Code)
609-282-6996
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(Registrant's telephone number, including area code)
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
ML FUTURES INVESTMENTS L.P.
(a Delaware limited partnership)
STATEMENTS OF FINANCIAL CONDITION
March 31, December 31,
1999 1998
----------- -----------
ASSETS
Investments $20,039,172 $21,027,263
Receivable from investments 341,164 116,083
----------- -----------
TOTAL $20,380,336 $21,143,346
=========== ===========
LIABILITY AND PARTNERS' CAPITAL
Liability - Redemptions payable $ 341,164 $ 116,083
PARTNERS' CAPITAL:
General Partner (1,027 and 1,027 Units) 246,039 247,344
Limited Partners (82,614 and 86,275 Units) 19,793,133 20,779,919
----------- -----------
Total partners' capital 20,039,172 21,027,263
----------- -----------
TOTAL $20,380,336 $21,143,346
=========== ===========
NET ASSET VALUE PER UNIT
(Based on 83,641 and 87,302 Units outstanding) $ 239.59 $ 240.86
=========== ===========
See notes to financial statements.
2
ML FUTURES INVESTMENTS L.P.
(a Delaware limited partnership)
STATEMENTS OF OPERATIONS
For the three For the three
months ended months ended
March 31, March 31,
1999 1998
--------- ---------
REVENUES:
Trading profits (loss):
Realized $ -- $ 530,175
Change in unrealized -- (370,850)
--------- ---------
Total trading results -- 159,325
--------- ---------
Interest income -- 128,173
(Loss) Income from investments (111,985) 697,815
--------- ---------
Total revenues (111,985) 985,313
--------- ---------
EXPENSES:
Brokerage commissions -- 223,271
Administrative fees -- 6,379
--------- ---------
Total expenses -- 229,650
--------- ---------
NET (LOSS) INCOME $(111,985) $ 755,663
========= =========
NET (LOSS) INCOME PER UNIT:
Weighted average number of units
outstanding 86,155 106,612
========= =========
Weighted average net (loss) income
per Limited Partner
and General Partner Unit $ (1.30) $ 7.09
========= =========
See notes to financial statements.
3
ML FUTURES INVESTMENTS L.P.
(a Delaware limited partnership)
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
For the three months ended March 31, 1999 and 1998
Units Limited Partners General Partner Total
------------ ---------------- --------------- ------------
PARTNERS' CAPITAL,
December 31, 1997 108,296 $ 23,983,033 $ 402,372 $ 24,385,405
Net income -- 743,097 12,566 755,663
Redemptions (4,292) (990,771) -- (990,771)
------------ ------------ ------------ ------------
PARTNERS' CAPITAL,
March 31, 1998 104,004 $ 23,735,359 $ 414,938 $ 24,150,297
============ ============ ============ ============
PARTNERS' CAPITAL,
December 31, 1998 87,302 $ 20,779,919 $ 247,344 $ 21,027,263
Net loss -- (110,680) (1,305) (111,985)
Redemptions (3,661) (876,106) -- (876,106)
------------ ------------ ------------ ------------
PARTNERS' CAPITAL,
March 31, 1999 83,641 $ 19,793,133 $ 246,039 $ 20,039,172
============ ============ ============ ============
See notes to financial statements.
4
ML FUTURES INVESTMENTS 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 ML Futures Investments L.P. (the "Partnership" or the "Fund") as of March 31,
1999 and December 31, 1998, and the results of its operations for the three
months ended March 31, 1999 and 1998. 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 generally 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, 1998 (the "Annual Report").
2. INVESTMENTS
As of March 31, 1999 and December 31, 1998, the Partnership had an investment in
MM LLC of $20,039,172 and $21,027,263, respectively.
Total revenues and fees with respect to the Fund's investment are set forth as
follows:
For the three months Total Brokerage Administrative Profit Loss from
ended March 31, 1999 Revenue Commissions Fees Shares Investments
--------- ----------- -------------- --------- -----------
MM LLC $391,836 $455,369 $13,011 $35,441 $(111,985)
--------- --------- --------- --------- ---------
Total $ 391,836 $ 455,369 $ 13,011 $ 35,441 $(111,985)
========= ========= ========= ========= =========
For the three months Total Brokerage Administrative Profit Loss from
ended March 31, 1998 Revenue Commissions Fees Shares Investments
--------- ----------- -------------- --------- -----------
Chesapeake LLC $ 824,380 $ 162,505 $ 4,643 $ 131,693 $ 525,539
SJO LLC 358,502 159,662 4,562 22,002 172,276
---------- ---------- ---------- ---------- ----------
Total $1,182,882 $ 322,167 $ 9,205 $ 153,695 $ 697,815
========== ========== ========== ========== ==========
During the second quarter of 1998, the Partnership withdrew its investment in
Chesapeake LLC and SJO LLC.
5
Condensed statements of financial condition and statements of operations for
Chesapeake LLC and SJO LLC are set forth as follows:
MM LLC MM LLC
-------------------- --------------------
December 31, December 31, Chesapeake SJO
1999 1998 LLC LLC
-------------------- -------------------- ------------------------ -----------------
Assets $ 117,405,277 $ 125,332,558
==================== ====================
Liabilities 3,559,790 $ 4,949,082
Members' Capital 113,845,487 120,383,476
--------------------
--------------------
Total $ 117,405,277 $ 125,332,558
==================== ====================
For the three months For the three months For the three months
ended March 31, 1999 ended March 31, 1998 ended March 31, 1998
-------------------- -------------------- --------------------
Revenues $ 2,230,887 $ 1,890,020 $ 972,284
Expenses 2,805,784 685,055 503,557
-------------- ---------------- -------------
Net Income $ (574,897) $ 1,204,965 $ 468,727
============== ================ =============
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"), effective for fiscal
years beginning after June 15, 1999. This Statement supercedes SFAS No. 119
("Disclosure about Derivative Financial Instruments and Fair Value of Financial
Instruments") and SFAS No. 105 ("Disclosure of information about Financial
Instruments with Off-Balance Sheet Risk and Financial Instruments with
Concentrations of Credit Risk") whereby disclosure of average aggregate fair
values and contract/notional values, respectively, of derivative financial
instruments is no longer required for an entity such as the Partnership which
carries its assets at fair value. Such Statement sets forth a much broader
definition of a derivative instrument. The General Partner does not believe that
the application of the provisions of such statement has a significant effect on
the financial statements.
SFAS No. 133 defines a derivative as a financial instrument or other contract
that has all three of the following characteristics (1) one or more underlyings,
notional amounts or payment provisions (2) requires no initial net investment or
a smaller initial net investment than would be required relative to changes in
market factors (3) terms require or permit net settlement. Generally,
derivatives include a future, forward, swap or option contract, or other
financial instrument with similar characteristics such as caps, floors and
collars.
6
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 resulted in changes in the
Partnership's net unrealized profit (loss) on such derivative instruments as
reflected in the Statements of Financial Condition or, with respect to
Partnership assets invested in Trading LLCs and in MM LLC, the net unrealized
profit (loss) as reflected in the respective Statements of Financial Condition
of the Trading LLCs and MM LLC. 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, the Trading LLCs and currently
MM LLC, 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
Advisors selected from time to time by the Partnership or MM LLC, calculating
the Net Asset Value of their respective Partnership accounts and Trading LLC
accounts or currently MM LLC accounts as of the close of business on each day
and reviewing outstanding positions for over-concentrations both on an
Advisor-by-Advisor and on an overall Partnership basis. While the General
Partner does not itself intervene in the markets to hedge or diversify the
Partnership's market exposure, the General Partner may urge Advisors to
reallocate positions, or itself reallocate Partnership assets among Advisors
(although typically only as of the end of a month) in an attempt to avoid
over-concentrations. However, such interventions are unusual. Except in cases in
which it appears that an Advisor has begun to deviate from past practice or
trading policies or to be trading erratically, the General Partner's basic risk
control procedures consist simply of the ongoing process of Advisor monitoring
and selection 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, are generally required in exchange trading, and
counterparties may require margin in the over-the-counter markets.
The credit risk associated with these instruments from counterparty
nonperformance is the Partnership's net unrealized profit included on the
Statements of Financial Condition or, with respect to the Partnership assets
invested in Trading LLCs and in MM LLC, the net unrealized profit included in
the respective Statements of Financial Condition of the Trading LLCs and MM LLC.
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.
7
Item 2: Management's Discussion and Analysis of Financial Condition and Results
of Operations
MONTH-END NET ASSET VALUE PER UNIT
----------------------------------------
Jan. Feb. Mar.
----------------------------------------
1998 $229.37 $231.94 $232.21
----------------------------------------
1999 $237.81 $240.67 $239.59
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Performance Summary
January 1, 1998 to March 31, 1998
The Fund's positions in the global interest rate markets were profitable
during the quarter. 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. Initially buoyed
on concerns about a U.S.-led military strike against Iraq, crude oil fell to a
nine year low, as the globally warm winter, the return of Iraq as a producer and
the Asian economic crisis added to OPEC's supply glut problems.
Trading results in stock index markets were mixed, but profitable, 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.
Agricultural commodity markets provided profitable trading results overall.
Live cattle and hog prices trended downward throughout the quarter. Cotton
prices moved mostly upward during the quarter, but prices dropped off sharply at
the end of March.
January 1, 1999 to March 31, 1999
The Fund profited from trading in crude oil, heating oil, and unleaded gas.
As the year opened, the global oil balance continued to show signs of being
lopsided with estimated year-end 1998 inventories at their highest levels since
1984. During January, petroleum stocks rose by 21 million barrels compared with
a typical gain of 6 to 7 million barrels. Then, on March 23, OPEC ratified new
production cuts totaling 1.716 million barrels per day at its conference. These
new production cuts were scheduled to go into effect on April 1 and proved to be
harbingers of higher prices for crude.
Agricultural trading was also profitable overall, as gains in live hogs and
live cattle offset losses in corn positions. Hog prices plummeted due to a glut
of hogs in the market. At the beginning of the quarter, the corn market
continued to struggle despite a stretch of solid export business. The market's
negative sentiment was deepened by ongoing favorable weather in South America
which continued through February, even though there was a sharp reduction in
Argentina's planted area. Lack of enthusiasm for new crop and less than
spectacular demand continued to depress the corn market throughout the quarter.
Interest rate trading proved profitable for the Fund as well, as losses in
Japanese 10-year government bonds were offset by gains in 10-year U.S. Treasury
notes and German 10-year bonds. Early in January, the yield on the Japanese
government 10-year bond increased to 1.8%, sharply above the record low of
0.695% it reached on October 7, 1998. This was triggered by the Japanese Trust
Fund Bureau's decision to absorb a smaller share of future issues, leaving the
burden of financing future budget deficits to the private sector.
Losses in aluminum overshadowed slight gains in copper during the first
quarter. In January, burdensome warehouse stocks and questionable demand
prospects weighed on base metals as aluminum fell to a 5-year low and copper
fell to nearly an 11-year low. Major surpluses in both metals were expected,
keeping prices down, and there was no supply side response to weak demand and
lower prices. However, the end of March showed copper and aluminum leading a
surge in base metals as prices recovered from multi-year lows.
The Fund also suffered losses in currency trading during the quarter, as
losses in Japanese yen overpowered gains in Swiss francs. On a trade-weighted
basis, the Swiss franc ended the quarter at close to a seven-month low, mostly
as a result of the stronger U.S. dollar. In January, the yen had advanced by
nearly 35% against the dollar since early
8
in August, and the Bank of Japan lowered rates to keep the economy sufficiently
liquid so as to allow fiscal spending to restore some growth to the economy and
to drive down the surging yen.
Stock index trading was also unprofitable, as losses were sustained in Hang
Seng and CAC40 positions. Also of note, the Dow Jones Industrial Average closed
above the 10,000 mark for the first time ever at the end of March, setting a
record for the index.
THE YEAR 2000 COMPUTER ISSUE
As the Year 2000 approaches, Merrill Lynch has undertaken initiatives to address
the Year 2000 problem (the "Y2K problem"), as more fully described in the
Partnership's 1998 Form 10-K. 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, and 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 legal liability and its need for liquidity.
The renovation phase of Merrill Lynch's Year 2000 efforts, as described in the
Partnership's 1998 Form 10-K, was approximately 99.7% completed as of April 16,
1999, and production testing was approximately 99.1% completed as of that date.
In March and April 1999, Merrill Lynch continued its participation in U.S.
industrywide testing sponsored by the Securities Industry Association. These
tests involved an expanded number of firms, transactions, and conditions
compared with those previously conducted.
In light of the interdependency of the parties in or serving the financial
markets, there can be no assurance that all Y2K problems will be identified and
remedied on a timely basis or that all remediation will be successful.
Disruption or suspension of activity in the world's financial markets is also
possible. In some non-U.S. markets in which Merrill Lynch does business, the
level of awareness and remediation efforts relating to the Y2K problem are
thought to be less advanced than in the U.S. Management is unable at this point
to ascertain whether all significant third parties will successfully address the
Y2K problem. Merrill Lynch will continue to monitor third parties' Year 2000
readiness to determine if additional or alternative measures are necessary. The
failure of exchanges, clearing organizations, vendors, service providers,
clients and counterparties, regulators, or others to resolve their own
processing issues in a timely manner could have a material adverse effect on
Merrill Lynch's business, results of operations, and financial condition.
As of March 26, 1999, the total estimated expenditures for the Year 2000
compliance initiative are approximately $520 million. This estimate includes
$104 million of occupancy, communications, and other related overhead
expenditures as Merrill Lynch is applying a fully costed pricing methodology for
this project. Of the total estimated expenditures, approximately $157 million
remains to be spent, primarily on continued testing, contingency planning, and
risk management. There can be no assurance that the costs associated with
remediation efforts will not exceed those currently anticipated by Merrill
Lynch, or that the possible failure of such remediation 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
9
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending 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 with this report.
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed during the first three months of
fiscal 1999.
10
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.
ML FUTURES INVESTMENTS L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 11, 1999 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: May 11, 1999 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Vice President, Chief Financial Officer
and Treasurer