ITEM 1: BUSINESS
(a) GENERAL DEVELOPMENT OF BUSINESS:
John W. Henry & Co./Millburn L.P. (the "Partnership") was organized under the Delaware Revised Uniform Limited Partnership Act on August 29, 1989. The original public offering of the Partnership's units of limited partnership interest (the "Series A Units") commenced on September 29, 1989, and the Partnership commenced trading with respect to the Series A Units on January 5, 1990. A second public offering of Series B Units of limited partnership (the "Series B Units") commenced on December 14, 1990. The Partnership began trading with respect to the Series B Units on January 28, 1991. A third public offering of Series C Units of limited partnership (the "Series C Units") commenced on September 13, 1991. The Partnership began trading with respect to the Series C Units on January 2, 1992. The Partnership's objective is achieving, through speculative trading, substantial capital appreciation over time.
The proceeds of each of the three series of Units were each initially allocated equally between the Partnership's two trading advisors -- John W. Henry & Company, Inc. ("JWH") and Millburn Ridgefield Corporation ("Millburn") (collectively, the "Advisors").
Merrill Lynch Alternative Investments LLC ("MLAI"), formerly MLIM Alternative Strategies LLC ("MLIM AS LLC") is a wholly-owned subsidiary of Merrill Lynch Investment Managers, LP ("MLIM"), which, in turn, is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the general partner of the Partnership. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a wholly-owned subsidiary of Merrill Lynch, is the Partnership's commodity broker. As used herein, the capitalized term "MLAI" also refers to the general partner at times when its name was MLIM Alternative Strategies LLC, as applicable.
The 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, but have been periodically rebalanced to 50%/50%. All series have the same percentage allocation of assets between the Advisors. As of December 31, 2004, 50% of the capital of each series of units was allocated to JWH and 50% was allocated to Millburn. As of December 1, 1996, the Partnership placed all of its assets under the management of the Advisors through investing in two private limited liability companies ("Trading LLCs") sponsored by MLAI, each one of which was traded by one of the Advisors. Investing assets in the Trading LLCs rather than trading directly did not change the operation or fee structure of the Partnership. The administrative authority over the Partnership remains with MLAI. Throughout this document, references to the Partnership refer to the Partnership's investment in the Trading LLC's.
As of December 31, 2004, the aggregate capitalization of the Partnership was $27,635,033, the total capitalization of the Series A, Series B and Series C Units was $7,246,705, $13,218,894 and $7,169,434, respectively, and the Net Asset Value per Series A, Series B and Series C Units, originally $100 as of January 5, 1990, January 28, 1991 and January 2, 1992, respectively, had risen to $386.22 (excluding a $20 per Series A Unit distribution paid as of November 30, 1990), $313.44 and $244.32, respectively.
The highest month-end Net Asset Value per Series A Unit through December 31, 2004 was $422.69 (excluding the distributions paid in 1990) (February 29, 2004) and the lowest $100.31 (May 31, 1990); the highest month-end Net Asset Value per Series B Unit through December 31, 2004 was $343.47 (February 29, 2004) and the lowest $91.20 (May 31, 1992); the highest month-end Net Asset Value per Series C Unit through December 31, 2004 was $267.65 (February 29, 2004) and the lowest $75.87 (May 31, 1992).
(b) FINANCIAL INFORMATION ABOUT SEGMENTS:
The Partnership's business constitutes only one segment for financial reporting purposes, i.e., a speculative "commodity pool." The Partnership does not engage in sales of goods or services.
(c) NARRATIVE DESCRIPTION OF BUSINESS:
GENERAL
The Partnership trades (through its investment in the Trading LLCs) in the international futures, options on futures and forward markets with the objective of achieving substantial capital appreciation.
The Partnership has entered into advisory agreements with each Advisor (the "Advisory Agreement"). JWH trades the Partnership's assets allocated to it in four market sectors -- interest rates, stock indices, currencies and metals -- pursuant to its Financial and Metals Program. Millburn trades the Partnership's assets allocated to it pursuant to its currency program, which concentrates exclusively on currency trading, primarily in the interbank market.
One of the objectives of the Partnership is to provide diversification to a limited portion of the risk segment of the Limited Partners' portfolios. Commodity pool performance has historically often demonstrated a low degree of performance correlation with traditional stock and bond holdings. Since it began trading, the Partnership's returns have, in fact, frequently been significantly non-correlated with the United States stock and bond markets.
The Partnership accesses the Advisors not by opening individual managed accounts with them, but rather through investing in private funds sponsored by MLAI through which the trading accounts of different MLAI sponsored funds managed by the same Advisor and pursuant to the same strategy are consolidated.
USE OF PROCEEDS AND INTEREST INCOME
MARKET SECTORS.
Under the direction of the two Advisors, the Partnership trades a portfolio, which is concentrated in the financial, currency and metals markets. The limited focus of the Partnership's trading increases volatility and market risk.
MARKET TYPES.
The Partnership trades on a variety of United States and foreign futures exchanges. Substantially all of the Partnership's off-exchange trading takes place in the highly liquid, institutionally based currency forward markets.
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, 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. In its exchange of futures for physical ("EFP") trading, the Partnership acquires cash currency positions through banks and dealers. 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.
As in the case of its market sector allocations, the Partnership's commitments to different types of markets -- U.S. and non-U.S., regulated and non-regulated -- differ substantially from time to time, as well as over time. The Partnership has no policy restricting its relative commitment to any of these different types of markets.
CUSTODY OF ASSETS.
All of the Partnership's assets are currently held in customer accounts at Merrill Lynch.
INTEREST PAID BY MERRILL LYNCH ON THE PARTNERSHIP'S U.S. DOLLAR AND NON U.S. DOLLAR ASSETS.
The Partnership's (through the Trading LLC's) U.S. dollar assets are maintained at MLPF&S. 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 (through the Trading LLC's) Merrill Lynch's cost of financing realized and unrealized losses on the Partnership's non-U.S. dollar-denominated positions.
CHARGES
Each of the series of Units is subject to the same charges. However, these charges are calculated separately with respect to each Series, each of which maintains its own Net Asset Value.
During 2004 and 2003, all of the Partnership's assets were invested in the two Trading LLCs mentioned above. Therefore, no direct charges were incurred by the Partnership during these two years.
The Partnership's average month-end Net Assets during 2004, 2003 and 2002 equaled $27,020,334, $32,317,001, and $27,713,533 respectively.
DESCRIPTION OF CURRENT CHARGES
REGULATION
MLAI, the Advisors and MLPF&S are each subject to regulation by the Commodity Futures Trading Commission (the "CFTC") and the National Futures Association ("NFA"). Other than in respect of its periodic reporting requirements under the Securities Exchange Act of 1934, the Partnership itself is generally not subject to regulation by the Securities and Exchange Commission. However, MLAI itself is registered as an "investment adviser" under the Investment Advisers Act of 1940.
(i) through (xii)-- not applicable. (xiii) The Partnership has no employees.
(d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS
The Partnership trades on a number of foreign commodity exchanges. The Partnership does not engage in the sales of goods or services.
ITEM 2:
ITEM 2: PROPERTIES
The Partnership does not use any physical properties in the conduct of its business.
The Partnership's offices are the offices of MLAI (Merrill Lynch Alternative Investments LLC, Princeton Corporate Campus, 800 Scudders Mill Road - Section 2G, Plainsboro, New Jersey 08536). MLAI performs administrative services for the Partnership from MLAI's offices.
ITEM 3:
ITEM 3: LEGAL PROCEEDINGS
Neither the Partnership nor MLAI has ever been the subject of any material litigation. Merrill Lynch is the 100% indirect owner of MLAI, MLIM, MLPF&S and all other Merrill Lynch entities involved in the operation of the Partnership, Merrill Lynch as well as certain of its subsidiaries and affiliates have been named as defendants in civil actions, arbitration proceedings and claims arising out of their respective business activities. Although the ultimate outcome of these actions cannot be predicted at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management that the result of these matters will not be materially adverse to the business operations or financial condition of MLAI or the Partnership.
ITEM 4:
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5:
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Item 5(a)
(a) MARKET INFORMATION:
There is no established public trading market for the Units, nor is it anticipated that one will develop. Limited Partners may redeem Units as of the end of each month at Net Asset Value.
(b) HOLDERS:
As of December 31, 2004, there were 184, 529 and 2,639 holders of the Series A, B and C Units, respectively, including MLAI.
(c) DIVIDENDS:
The Partnership has made only one distribution ($20 per Series A Unit payable as of November 30, 1990) since trading commenced. MLAI does not presently intend to make any further distributions.
(d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS:
Not applicable. Item 5(b) Not applicable.
Item 5(c) Not applicable
ITEM 6:
ITEM 6: SELECTED FINANCIAL DATA
The following selected financial data has been derived from the audited financial statements of the Partnership.
All income is from investing in the Trading LLC's.
MONTH-END NET ASSET VALUE PER SERIES A UNIT
MONTH-END NET ASSET VALUE PER SERIES B UNIT
MONTH-END NET ASSET VALUE PER SERIES C UNIT
Pursuant to CFTC policy, monthly performance is presented from January 1, 2000 even though all Series were outstanding prior to such date.
JOHN W. HENRY & CO./MILLBURN L.P. (SERIES A UNITS) DECEMBER 31, 2004
TYPE OF POOL: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"(1) INCEPTION OF TRADING: January 5, 1990 AGGREGATE SUBSCRIPTIONS: $18,182,000 CURRENT CAPITALIZATION: $7,246,705 WORST MONTHLY DRAWDOWN(2):(14.20)% (11/01) WORST PEAK-TO-VALLEY DRAWDOWN(3):(29.29)% (3/04-7/04)
NET ASSET VALUE PER SERIES A UNIT, DECEMBER 31, 2004: $386.22
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund is defined as one that allocates no more than 25% of its trading assets to any single manager. As the Partnership allocates over 25% of its assets to each of JWH and Millburn, it is referred to as a "Selected-Advisor" fund. Certain funds, including funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as "principal protected." The Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since January 1, 2000 by the Series; a Drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since January 1, 2000 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Series during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Series as of the beginning of such month.
JOHN W. HENRY & CO./MILLBURN L.P. (SERIES B UNITS) DECEMBER 31, 2004
TYPE OF POOL: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"(1) INCEPTION OF TRADING: January 28, 1991 AGGREGATE SUBSCRIPTIONS: $50,636,060 CURRENT CAPITALIZATION: $13,218,894 WORST MONTHLY DRAWDOWN(2): (14.91)% (11/01) WORST PEAK-TO-VALLEY DRAWDOWN(3):(29.29)% (3/04-7/04)
NET ASSET VALUE PER SERIES B UNIT, DECEMBER 31, 2004: $313.44
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund is defined as one that allocates no more than 25% of its trading assets to any single manager. As the Partnership allocates over 25% of its assets to each of JWH and Millburn, it is referred to as a "Selected-Advisor" fund. Certain funds, including funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as "principal protected." The Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since January 1, 2000 by the Series; a Drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since January 1, 2000 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Series during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Series as of the beginning of such month.
JOHN W. HENRY & CO./MILLBURN L.P. (SERIES C UNITS) DECEMBER 31, 2004
TYPE OF POOL: Selected-Advisor/Publicly-Offered/Non-"Principal Protected"(1) INCEPTION OF TRADING: January 2, 1992 AGGREGATE SUBSCRIPTIONS: $40,000,000 CURRENT CAPITALIZATION: $7,169,434 WORST MONTHLY DRAWDOWN(2): (14.19)% (11/01) WORST PEAK-TO-VALLEY DRAWDOWN(3): (29.36)% (3/04-7/04)
NET ASSET VALUE PER SERIES C UNIT, DECEMBER 31, 2004: $244.32
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund is defined as one that allocates no more than 25% of its trading assets to any single manager. As the Partnership allocates approximately 50% of its assets to each of JWH and Millburn, it is referred to as a "Selected-Advisor" fund. Certain funds, including funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as "principal protected." The Partnership has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since January 1, 2000 by the Series; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since January 1, 2000 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Series during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Series as of the beginning of such month.
ITEM 7:
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
GENERAL
JWH and Millburn have been the Partnership's two Advisors since inception. Although from time to time one of the Advisors is allocated a greater percentage of the Partnership's assets than the other as a result of differential performance, MLAI periodically rebalances the Partnership's asset allocation to approximately 50%/50%.
The Advisors are both trend-following traders, whose programs do not attempt to predict price movements. Neither JWH nor Millburn has generally relied on using fundamental economic supply or demand analyses macroeconomic assessments of the relative strengths of different national economies or economic sectors. Instead, their programs apply proprietary computer models to analyzing past market data, and from this data attempt to determine whether market prices are trending. As technical traders, JWH and Millburn base their strategies on the theory that market prices reflect the collective judgment of numerous market participants and are, accordingly, an efficient indication of market movements. However, there are frequent periods during which fundamental factors external to the market dominate prices.
If an Advisor's models identify a trend, they signal positions, which follow it. When these models identify the trend as having ended or reversed, these positions are either closed out or reversed. Due to their trend-following character, the Advisors' programs do not predict either the commencement or the end of a price movement. Rather, their objective is to identify a trend early enough to profit from it and detect its end or reversal in time to close out the Partnership's positions while retaining most of the profits made from following the trend.
There are many influences on the markets that the same general type of economic event may lead to a price trend in some cases but not in others. The analysis is further complicated by the fact that the programs are designed to recognize only certain types of trends and to apply only certain criteria of when a trend has begun. Consequently, even though significant price trends may occur, if these trends are not comprised of the type of intra-period price movements, which their programs are, designed to identify, either or both Advisors may miss the trend altogether.
Performance Summary
This performance summary is an outline description of how the Partnership performed in the past, not necessarily any indication of how it will perform in the future. In addition, the general causes to which certain price movements are attributed may or may not in fact have caused such movements, but simply occurred at or about the same time.
Both Advisors are unlikely to be profitable in markets in which such trends do not occur. Static or erratic prices are likely to result in losses. Similarly, unexpected events (for example, a political upheaval, natural disaster or governmental intervention) can lead to major short-term losses, as well as gains.
While there can be no assurance that either Advisor will be profitable, under any given market condition, markets in which substantial and sustained price movements occur typically offer the best profit potential for the Partnership.
The Partnership's overall trading was unprofitable for the year. The Partnership experienced gains in two of the four sectors, with the largest gain in the interest rate sector.
The interest rate sector was the most profitable for the Partnership, despite choppy trading conditions early in the year. Long exposure early in the year to most of the major global yield curves proved to generate positive results though overall exposure was light compared to historical exposure. Bond markets were fairly range bound during the second quarter however, yields on the U.S. ten-year note reached their highest levels since July 2002. U.S. Treasury markets reacted to the employment data during the third quarter with a strong sell-off, which caused the sector to reduce the long exposure to change to a net short bias. The Federal Reserve raised key interest rates by 25 basis points on September 21st and softer economic data eventually pushed longer-term maturities higher by the end of the quarter. The U.S. fixed income markets, particularly the front end, reversed their sell-off, which started in November, but rallied during the first week of December, only to reverse that trend during the last two weeks of the year.
The metals sector had the second highest gains for the Partnership. Base metals continued their upward move early in the year as the sector experienced strong demand, shrinking supply and the U.S. dollar weakening helped to drive prices higher. Strong industrial demand for copper and continued speculative interest pushed the market to a seven year high. Both industrial and precious metals generated slight losses in the second quarter due to the fact most markets were range-bound and the U.S. dollar did not provide any momentum to these markets. Industrial metals, particularly copper added to performance in the third quarter. Copper rallied based on increasing demand from China and tight supply conditions. The year ended with the sector posting a small loss as gains in industrials were outweighed by losses in long precious metals exposure.
The currency sector posted a loss for the Partnership. The currency markets continued its long trend of a weakening U.S. dollar. However, trading was very choppy and gains generated in the beginning of the first quarter were lost. Early U.S. dollar strength turned around towards the end of the first quarter and a large drop at the close of the first quarter resulted in the U.S. dollar falling to a four year low against the Japanese yen. The U.S. dollar rebounded at the beginning of the second quarter only to be range bound throughout the quarter pending the Federal Reserve's decision on short term interest rates. The currency markets remained range bound versus the U.S. dollar throughout the third quarter. The year ended with a bearish U.S. dollar trend on the speculation that U.S. officials favor a weaker currency to shrink the record current account deficit. The U.S. dollar declined to a record low versus the Euro and fell to its lowest level versus the Japanese yen since 2000.
Stock indices were the least profitable for the Partnership. The Partnership was able to realize some gains in the beginning of the year. The main drivers to performance in this sector were the DAX and the NASDAQ indices. The markets were very choppy and exposures changed continuously. Losses were incurred during the second quarter in both the U.S. and global equity positioning due to the concerns of the imminent rate increases in U.S. interest rates. Losses in the U.S. outweighed moderate gains in some of the international markets late in the third quarter. However, stock indices posted stronger gains towards the end of the year, as markets continued an upward trend on positive economic data, a decline in energy prices and increased overall confidence. Gains were made across the U.S., Asia and Europe.
Specific trading results are not included for 2003 because the Partnership traded exclusively through investing in Trading LLC's.
The Partnership's overall trading was profitable for the year, bringing in approximately 11.67% compounded annual rate of return for 2003. The Partnership experienced gains in all the sectors, with the largest gain in the currency sector.
Gains in the currency sector early in the year were due to the weakening U.S. dollar, and the Partnership was well positioned to capitalize on its U.S. dollar positions against other currencies. In March, on hopes that the war with Iraq would be short, the U.S. dollar strengthened and returned some of the profits earned early in the year. The currency markets judged the developments in the Middle East as negative for the U.S. economy and trade, and the U.S. dollar sold off against most major currencies in April and May. U.S. Treasury Secretary John Snow
indicated he was comfortable with current decline in the U.S. dollar and that a cheaper U.S. dollar would increase exports. The U.S. dollar reversed its weakening trend in June which offset some of the previous gains. In the beginning of the third quarter, the U.S. dollar appreciated relative to other currencies with losses being experienced in most positions specifically, the Australian dollar, the Canadian dollar and the British pound. During the middle of the third quarter, the U.S. dollar appreciated relative to the European currencies. The third quarter ended with foreign currencies against the U.S. dollar appreciating. The year ended with the U.S. dollar falling under pressure on concerns that a strengthening U.S. economy may expand the trade deficit.
Trading in stock indices posted gains for the year as well. European stock markets started the year on an upward trend, which reversed as prices eroded throughout the first quarter. Global economies suffered throughout the quarter; however, in mid-March the equities market rebounded. Stock index futures capitalized on the global upswing in stock prices in June. During the first part of the third quarter, U.S. equities were fairly quiet while strong gains were generated in trading global stock indices. The Japanese Nikkei was a solid performer during the third quarter as it gained over 8% on strong economic numbers. Investors reacted to the hope that deflation and economic contractions were coming to an end in Japan. Gains in the Nikkei and the U.S. outweighed small losses in other markets. The fourth quarter posted gains overall with the main driver of performance being the DAX index.
The interest rate sector managed to post a gain despite continuous losses, during the last half of the year. Interest rates continued to push lower in the beginning of the year as economic data for the fourth quarter of 2002 announced an annual growth rate for the economy of approximately 1% for 2002. Consumer spending and confidence remained low and even the housing market stumbled in March. The global fixed income markets continued their upward climb until mid-March when expectations of a short conflict in Iraq triggered the liquidation of many fixed income investments hurting long exposure. May gains outpaced losses from June. Some factors that kept the interest rates falling were rumors of deflation, hedging by long term lenders against the falling interest rates, and foreign banks buying U.S. Treasuries as part of their monetary policy to control the value of their currency. The market reversed in June due to disappointing news about a smaller rate cut by the Federal Reserve then expected. In the beginning of the third quarter, the U.S. bond market suffered heavy losses after the U.S government announced its intentions to borrow a record amount to finance the huge deficit. There were massive sell-offs in bonds during July, which seemed to have found a base during the month of August. With interest rates on hold at the short end of the curve in the U.S., trading was characterized by small ranges, which generated minor losses. Trading conditions in this sector remain choppy and overall exposure continues to remain low, since no clear trends have emerged.
The metals sector had gains for the year as well despite losses in the first half of the year. Gold drove profits in January as it continued its run up. The general perception of risks in the financial markets and the geopolitical situation unfolding was a main driver for the gold market in January. Gold reversed its rising trend in February with the announcement that the German Bundesbank had sold a portion of its gold reserves. Positions in gold shifted from profitable to unprofitable throughout the second quarter. In the beginning of the third quarter profits in the industrial complex were outweighed by losses in the precious metal sector. Copper and other industrial metals rallied on technical buying and stronger demand as economies showed stronger growth prospects. During the mid part of the third quarter, the metals sector posted a gain while profits in precious metals outweighed losses in the industrial complex. At the end of the third quarter, the metals sector posted a profit with long positions in the metals particularly gold and nickel, making significant price movements to the upside. The fourth quarter posted gains partially due to weaker U.S. dollar allowing base metals to advance sharply, as well as a strong demand from Asia. Gold prices reached a six-year high and were one of the main drivers of performance.
Specific trading results are not included for 2003 because the Partnership traded exclusively through investing in Trading LLC's.
The Partnership's overall trading was very profitable for the year, bringing in an over 33% compounded annual rate of return for 2002. The major contributors were the financial futures and forward sectors. The metals sector produced moderate losses for the year.
The interest rate sector was profitable for the Partnership despite its slow start. The year began with a loss as interest rates were particularly sensitive to economic data that was released, and more so to its varied interpretations. By June, the Partnership profited from a strong bond market, which benefited from the weakness in the stock market and unchanged interest rates. Economic numbers in the United States suggested that the economy was stabilizing, however, consumer confidence continued to deteriorate fueling the bond rallies in the third quarter. Economists continued to revise their world growth estimates for 2003 downward under 4%.
The currency sector also brought in significant profits for the year. Strong trends developed from a weakening U.S. dollar during the second quarter, where most of the profits were incurred. Most of the major currencies made new highs versus the U.S. dollar in June. Currencies produced losses for the remainder of the year until December, citing currencies being repatriated to their home country and high global cash balances creating a difficult market for the Partnership in major currencies. In December, the U.S. dollar's weakness globally due to the threat of a possible war with Iraq and tensions with North Korea created a trend that the Partnership was able to use profitably.
The stock index sector produced profits for the year as equity markets were under heavy pressure from poor corporate earnings, accounting irregularities and a general global economic slowdown. Volatility in the equity markets was at a high level, keeping bargain hunters from re-entering the markets, keeping up a trend the Partnership was able to capitalize on through the third quarter. The sector returned some of its profits in the fourth quarter as frequent worldwide economic news releases alternated from positive to negative.
Metals trading brought in losses for the year. A choppy market for industrial metals prevented profits. Precious metals experienced similar choppy conditions. Gold appears to be the most popular investment metal, but producers are hesitant to hedge at current levels and limit their upside potential. Gold ended the year on the upside due the uncertain global economic climate.
Specific trading results are not included for 2002 because the Partnership traded exclusively through investing in Trading LLC's.
VARIABLES AFFECTING PERFORMANCE
The principal variables, which determine the net performance of the Partnership, are gross profitability and interest income.
During all periods set forth under "Selected Financial Data," the interest rates in many countries were at unusually low levels. The low interest rates in the United States (although higher than in many other countries) negatively impacted revenues because interest income is typically a major component of the Partnership's profitability. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the Partnership's profit potential generally tends to be diminished. On the other hand, during periods of higher interest rates, the relative attractiveness of a high risk investment such as the Partnership may be reduced as compared to high yielding and much lower risk fixed-income investments.
The Partnership's Brokerage Commissions and Administrative Fees are a constant percentage of the Partnership's assets allocated to trading. The only Partnership costs (other than the insignificant currency trading costs) which are not based on a percentage of the Partnership's assets (allocated to trading or total) are the Profit Shares payable to JWH and Millburn separately on their individual performance, irrespective of the overall performance of the Partnership. During periods when Profit Shares are a high percentage of net trading gains, it is likely that there has been substantial performance non-correlation between JWH and Millburn (so that the total Profit Shares paid to the Advisor which has traded profitably are a high percentage, or perhaps even in excess, of the total profits recognized, as the other Advisor incurred offsetting losses, reducing overall trading gains but not the Profit Shares paid to the successful Advisor) -- suggesting the likelihood of generally trendless, non-consensus markets.
Unlike many investment fields, there is no meaningful distinction in the operation of the Partnership
between realized and unrealized profits. Most of the contracts traded by the Partnership are highly liquid and can be closed out at any time.
Except in unusual circumstances, factors -- regulatory approvals, cost of goods sold, employee relations and the like -- which often materially affect an operating business, have virtually no impact on the Partnership.
LIQUIDITY; CAPITAL RESOURCES
The Partnership borrows only to a limited extent and only on a strictly short-term basis in order to finance losses on non-U.S. dollar denominated trading positions pending the conversion of the Partnership's U.S. dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency.
Substantially all of the Partnership's assets at the Trading LLC's are held in cash. The Net Asset Value of the Partnership's cash is not affected by inflation. However, changes in interest rates could cause periods of strong up or down price trends, during which the Partnership's profit potential generally increases. Inflation in commodity prices could also generate price movements, which the strategies might successfully follow.
Except in very unusual circumstances, the Trading LLC's should be able to close out any or all of its open trading positions and liquidate any or all of its securities holdings quickly and at market prices. This permits an Advisor to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so. In addition, because there is a readily available market value for the Partnership's positions and assets, the Partnership's monthly Net Asset Value calculations are precise, and investors need only wait ten business days to receive the full redemption proceeds of their Units.
(The Partnership has no off-balance sheet arrangements or contractual obligations of the type described in Items 303(a)(4) and 303(a)(5) of Regulation S-K.)
ITEM 7A:
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.
INTRODUCTION
PAST RESULTS NOT NECESSARILY INDICATIVE OF FUTURE PERFORMANCE
The Partnership is a speculative commodity pool. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of the Trading LLC's open positions and, consequently, in its earnings and cash flow. The Partnership's market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Partnership's open positions and the liquidity of the markets in which it trades.
The Partnership, under the direction of the two Advisors, which it has retained since inception, rapidly acquires and liquidates both long and short positions in a wide range of different markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Partnership's past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Partnership's speculative trading and the recurrence in the markets traded by the Partnership of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Partnership's experience to date (i.e., "risk of ruin"). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the quantifications included in this section should not be considered to constitute any assurance or representation that the Partnership's losses in any market sector will be limited to Value at Risk or by the Partnership's attempts to manage its market risk.
QUANTIFYING THE PARTNERSHIP'S TRADING VALUE AT RISK
QUANTITATIVE FORWARD-LOOKING STATEMENTS
The following quantitative disclosures regarding the Partnership's market risk exposures contain "forward-looking statements" within the meaning of the safe harbor from civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.
The Partnership's risk exposure in the various market sectors traded by the Advisors is quantified below in terms of Value at Risk. Due to the Partnership's mark-to-market accounting, any loss in the fair value of the Partnership's open positions is directly reflected in the Partnership's earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).
Exchange maintenance margin requirements have been used by the Partnership as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum loss in the fair value of any given contract incurred in 95%-99% of the one-day time periods included in the historical sample (generally approximately one year) researched for purposes of establishing margin levels. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.
In the case of market sensitive instruments which are not exchange-traded (almost exclusively currencies in the case of the Partnership), the margin requirements for the equivalent futures positions have been used as Value at Risk. In those rare cases in which a futures-equivalent margin is not available, dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does not have any optionality component. However, both JWH and Millburn trade options on futures to a limited extent. The Value at Risk associated with options is reflected in the following table as the margin requirement attributable to the instrument underlying each option.
100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have been aggregated to determine each trading category's aggregate Value at Risk. The diversification effects resulting from the fact that the Partnership's positions are rarely, if ever, 100% positively correlated have not been reflected.
THE PARTNERSHIP'S TRADING VALUE AT RISK IN DIFFERENT MARKET SECTORS
The following table indicates the average, highest and lowest trading Value at Risk associated with the Partnership's open positions by market category for the fiscal year 2004. During the fiscal year 2004, the Partnership's average capitalization was approximately $ 27,020,334. As of December 31, 2003, the average capitalization was approximately $32,317,001.
The Partnership does not trade commodities or energy futures.
FISCAL YEAR 2004
FISCAL YEAR 2003
Average, highest and lowest value at Risk amounts relate to month end amounts for each month during the year. Average Capitalization is the average or the Partnership's capitalization at the end of each month of 2004 and 2003.
MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK
The face value of the market sector instruments held by the Partnership is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Partnership. The magnitude of the Partnership's open positions creates a "risk of ruin" not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions -- unusual, but historically recurring from time to time -- could cause the Partnership to incur severe losses over a short period of time. The foregoing Value at Risk table -- as well as the past performance of the Partnership -- give no indication of this "risk of ruin."
NON-TRADING RISK
FOREIGN CURRENCY BALANCES; CASH ON DEPOSIT WITH MLPF&S
The Partnership has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as the market risk they represent) are immaterial.
The Partnership also has non-trading market risk on the approximately 90%-95% of its assets which are held in cash at MLPF&S. The value of this cash is not interest rate sensitive, but there is cash flow risk in that if interest rates decline so will the cash flow generated on these monies. This cash flow risk is immaterial.
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
The following qualitative disclosures regarding the Partnership's market risk exposures -- except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the Partnership manages its primary market risk exposures -- constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Partnership's primary market risk exposures as well as the strategies used and to be used by MLAI and the Partnership's two Advisors for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Partnership's risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Partnership. There can be no assurance that the Partnership's current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short- or long-term. Investors must be prepared to lose all or substantially all of the time value of their investment in the Partnership.
The following were the primary trading risk exposures of the Partnership as of December 31, 2004, by market sector.
INTEREST RATES.
Interest rate risk is the principal market exposure of the Partnership. Interest rate movements directly affect the price of derivative sovereign bond positions held by the Partnership and indirectly the value of its stock index and currency positions. Interest rate movements in one country as well as relative interest rate movements between countries materially impact the Partnership's profitability. The Partnership's primary interest rate exposure is to interest rate fluctuations in the United States and the other G-7 countries. However, the Partnership also takes positions in the government debt of smaller nations -- e.g., New Zealand and Australia. MLAI anticipates that G-7 interest rates will remain the primary market exposure of the Partnership for the foreseeable future.
CURRENCIES.
The Partnership trades in a large number of currencies, including cross-rates -- i.e., positions between two currencies other than the U.S. dollar. However, the Partnership's major exposures have typically been in the U.S. dollar/Japanese yen and U.S. dollar /Euro positions. MLAI does not anticipate that the risk profile of the Partnership's currency sector will change significantly in the future. The currency trading Value at Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk inherent to the U.S. dollar-based Partnership in expressing Value at Risk in a functional currency other than U.S. dollars.
STOCK INDICES.
The Partnership's primary equity exposure is to equity index price movements. The stock index futures traded by the Partnership are by law limited to futures on broadly based indices. As of December 31, 2004, the Partnership's primary exposures were in the S&P 500, Financial Times (England), Nikkei (Japan) and DAX (Germany) stock indices. MLAI anticipates little, if any, trading in non-G-7 stock indices. The Partnership is primarily exposed to the risk of adverse price trends or static markets in the major U.S., European and Japanese indices.
METALS.
The Partnership's primary metals market exposure is to fluctuations in the price of gold and silver. Although certain of the Advisors will from time to time trade base metals such as aluminum, copper and tin, the principal market exposures of the Partnership have consistently been in the precious metals, gold and silver (and, to a much lesser extent, platinum). However, gold prices have remained volatile over this period, and the Advisors have from time to time taken substantial positions as they have perceived market opportunities to develop. MLAI anticipates that gold and silver will remain the primary metals market exposure for the Partnership.
QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE
The following were the only non-trading risk exposures of the Partnership as of December 31, 2004.
FOREIGN CURRENCY BALANCES.
The Partnership's primary foreign currency balances are in Japanese yen, British pounds and Euros.
U.S. DOLLAR CASH BALANCE.
The Partnership holds U.S. dollars only in cash at MLPF&S. The Partnership has immaterial cash flow interest rate risk on its cash on deposit with MLPF&S in that declining interest rates would cause the income from such cash to decline.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
TRADING RISK
MLAI has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of JWH and Millburn, calculating the Net Asset Value of the Partnership accounts managed by the two Advisors as of the close of business on each day and reviewing outstanding positions for over-concentrations. While MLAI does not itself intervene in the markets to hedge or diversify the Partnership's market exposure, MLAI may urge either or both of JWH and Millburn to reallocate positions managed by the two Advisors, in an attempt to avoid over-concentrations. However, such interventions are unusual. Each of JWH and Millburn applies its own risk management policies to its trading.
JWH RISK MANAGEMENT
JWH attempts to control risk in all aspects of the investment process -- from confirmation of a trend to determining the optimal exposure in a given market, and to money management issues such as the startup or upgrade of investor accounts. JWH double checks the accuracy of market data, and will not trade a market without multiple price sources for analytical input. In constructing a portfolio, JWH seeks to control overall risk as well as the risk of any one position, and JWH trades only markets that have been identified as having positive performance characteristics. Trading discipline requires plans for the exit of a market as well as for entry. JWH factors the point of exit into the decision to enter (stop loss). The size of JWH's positions in a particular market is not a matter of how large a return can be generated but of how much risk it is willing to take relative to that expected return.
To attempt to reduce the risk of volatility while maintaining the potential for excellent performance, proprietary research is conducted on an ongoing basis to refine the JWH investment strategies. Research may suggest substitution of alternative investment methodologies with respect to particular contracts; this may occur, for example, when the testing of a new methodology has indicated that its use might have resulted in different historical performance. In addition, risk management research and analysis may suggest modifications regarding the relative weighting among various contracts, the addition or deletion of particular contracts from a program, or a change in position size in relation to account equity. The weighting of capital committed to various markets in the investment programs is dynamic, and JWH may vary the weighting at its discretion as market conditions, liquidity, position limit considerations and other factors warrant.
JWH may determine that risks arise when markets are illiquid or erratic, such as may occur cyclically during holiday seasons, or on the basis of irregularly occurring market events. In such cases, JWH at its sole discretion may override computer-generated signals and may at times use discretion in the application of its quantitative models, which may affect performance positively or negatively.
Adjustments in position size in relation to account equity have been and continue to be an integral part of JWH's investment strategy. At its discretion, JWH may adjust the size of a position in relation to equity in certain markets or entire programs. Such adjustments may be made at certain times for some programs but not for others. Factors, which may affect the decision to adjust the size of a position in relation to account equity, include ongoing research, program volatility, assessments of current market volatility and risk exposure, subjective judgment, and evaluation of these and other general market conditions.
MILLBURN RISK MANAGEMENT
Millburn attempts to control risk through the systematic application of its trading method, which includes a multi-system approach to price trend recognition, an analysis of market volatility, the application of certain money management principles, which may be revised from time to time, and adjusting leverage or portfolio size. In addition, Millburn limits its trading to markets which it believes are sufficiently liquid in respect of the amount of trading it contemplates conducting.
Millburn develops trading systems using various classes of quantitative models and data such as price, volume and interest rates, and tests those systems in numerous markets against historical data to simulate trading results. Millburn then analyzes the profitability of the systems looking at such features as the percentage of profitable trades, the worst losses experienced, the average giveback of maximum profits on profitable trades and risk-adjusted returns. The performance of all systems in the market are then ranked, and three or four systems are selected which make decisions in different ways at different times. This multi-system approach ensures that the total risk intended to be taken in a market is spread over several different strategies.
Millburn also attempts to assess market volatility as a means of monitoring and evaluating risk. In doing so, Millburn uses a volatility overlay system which measures the risk in a portfolio's position in a market and signals a decrease in position size when risk increases and an increase in position size when risk decreases. Millburn's volatility overlay maintains overall portfolio risk and distribution of risk across markets within designated ranges.
Millburn's risk management also focuses on money management principles applicable to a portfolio as a whole rather than to individual markets. The first principle is reducing overall portfolio volatility through diversification among markets. Millburn seeks a portfolio in which returns from trading in different markets are not highly correlated, that is, in which returns are not all positive or negative at the same time. Additional money management principles include limiting the assets committed as margin or collateral, generally within a range of 15% to 30% of an account's net assets; avoiding the use of unrealized profits in a particular market as margin for additional positions in the same market; and changing the equity used for trading an account solely on a controlled periodic basis, not automatically due to an increase in equity from trading profits.
Another important risk management function is the careful control of leverage or portfolio size.
Leverage levels are determined by simulating the entire portfolio over the past five or ten years to determine the worst case experienced by the portfolio in the simulation period. The worst case or peak-to-trough drawdown, is measured from a daily high in portfolio assets to the subsequent daily low whether that occurs days, weeks or months after the daily high. If Millburn considers the drawdown too severe, it reduces the leverage or portfolio size.
Millburn determines asset allocation among markets and position size on the basis of the money management principles and trading data research discussed above and the market experience of Millburn's principles. From time to time Millburn may adjust the size of a position, long or short, in any given market. Decisions to make such adjustments require the exercise of judgment and may include consideration of the volatility of the particular market; the pattern of price movements, both inter-day and intra-day; open interest; volume of trading; changes in spread relationships between various forward contracts; and overall portfolio balance and risk exposure.
NON-TRADING RISK
The Partnership controls the non-trading exchange rate risk by regularly converting foreign balances back into U.S. dollars on a weekly basis.
The Partnership has cash flow interest rate risk on its cash on deposit with MLPF&S in that declining interest rates would cause the income from such cash to decline. However, a certain amount of cash or cash equivalents must be held by the Partnership in order to facilitate margin payments and pay expenses and redemptions. MLAI does not take any steps to limit the cash flow risk on its cash held on deposit at MLPF&S.
ITEM 8:
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
SELECTED QUARTERLY FINANCIAL DATA JOHN W. HENRY & CO. / MILLBURN L.P.
Net Income by Quarter Eight Quarters through December 31, 2004
The financial statements required by this Item are included in Exhibit 13.01.
The supplementary financial information ("information about oil and gas producing activities") specified by Item 302 of Regulation S-K is not applicable. MLAI promoted the Partnership and is its controlling person.
ITEM 9:
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
There were no changes in or disagreements with independent auditors on accounting or financial disclosure.
ITEM 9A:
ITEM 9A: CONTROLS AND PROCEDURES
Merrill Lynch Alternative Investments LLC, the General Partner of John W. Henry & Co./Millburn L.P., with the participation of the General Partner's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership within 90 days of the filing date of this annual report, and, based on their evaluation, have concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
ITEM 9B:
ITEM 9B: OTHER INFORMATION
Not applicable.
PART III
ITEM 10:
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
10(a) & 10(b) IDENTIFICATION OF DIRECTORS AND EXECUTIVE OFFICERS:
As a limited partnership, the Partnership itself has no officers or directors and is managed by MLAI. Trading decisions are made by the Advisors on behalf of the Partnership.
The managers and executive officers of MLAI and their business backgrounds are as follows.
ROBERT M. ALDERMAN Chief Executive Officer, President and Manager
STEVEN B. OLGIN Vice President, Chief Operating Officer and Manager
MICHAEL L. PUNGELLO Vice President, Chief Financial Officer and Treasurer
JEFFREY F. CHANDOR Manager
Mr. Alderman was born in 1960. Mr. Robert M. Alderman is Chief Executive Officer, President and Manager of MLAI. Mr. Alderman is a Managing Director of Merrill Lynch Global Private Client and global head of Retail Sales and Business Management for Alternative Investments. Prior to re-joining Merrill Lynch and the International Private Client Group in 1999, he was a partner in the Nashville, Tennessee based firm of J.C. Bradford & Co. where he was the Director of Marketing, and a National Sales Manager for Prudential Investments. Mr. Alderman first joined Merrill Lynch in 1987 where he worked until 1997. During his tenure at Merrill Lynch, Mr. Alderman has held positions in Financial Planning, Asset Management and High Net Worth Services. He received his Master's of Business Administration from the Carroll School of Management Boston College and a Bachelor of Arts from Clark University.
Steven B. Olgin was born in 1960. Mr. Olgin is a Vice President, Chief Operating Officer and a Manager of MLAI. He joined MLAI in July 1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr. Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin graduated from The American University with a Bachelor of Science in Business Administration and a Bachelor of Arts in Economics. In 1986, he received his Juris Doctor from The John Marshall Law School. Mr. Olgin is a member of the Managed Funds Association's Government Relations Committee and has served as an arbitrator for the National Futures Association. Mr. Olgin is a member of the Illinois Bar.
Michael L. Pungello was born in 1957. Mr. Pungello is a Vice President, Chief Financial Officer and Treasurer of MLAI. He was First Vice President and Senior Director of Finance for Merrill Lynch's Operations, Services and Technology Group from January 1998 to March 1999. Prior to that, Mr. Pungello spent over 18 years with Deloitte & Touche LLP, and was a partner in their financial services practice from June 1990 to December 1997. He graduated from Fordham University in 1979 with a Bachelor of Science in Accounting and received his Master's of Business Administration in Finance from New York University in 1987.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is the Global Sales Director of the General Partner. Mr. Chandor became a Manager of the General Partner on April 1, 2003. He was a Senior Vice President, Director of Sales, Marketing and Research and a Director of Merrill Lynch Investment Partners, Inc., a predecessor to the General Partner. He joined Merrill Lynch, Pierce, Fenner & Smith Incorporated in 1971 and has served as the Product Manager of International Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as well as Managing Director of International Sales in the United States, and Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts degree from Trinity College, Hartford, Connecticut.
As of December 31, 2004, the principals of MLAI had no investment in the Partnership, and MLAI's general partnership interest was valued at $313,365.
As of February 29, 2004, MLAI acts as general partner to three public futures funds whose units of limited partnership interest are registered under the Securities Exchange Act of 1934: ML Select Futures LP, and ML JWH Strategic Allocation Fund L.P. and the Partnership. Because MLAI serves as the sole general partner of each of these funds, the officers and managers of MLAI effectively manage them as officers and directors of such funds. Prior to February 28, 2003, MLAI (while still known as MLIM AS LLC) acted as general partner of six futures funds whose units of limited partnership interest are registered under the Securities Exchange Act of 1934.
(c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES:
None.
(d) FAMILY RELATIONSHIPS:
None.
(e) BUSINESS EXPERIENCE:
See Item 10(a) and (b) above.
(f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS:
None.
(g) PROMOTERS AND CONTROL PERSONS:
Not applicable.
(h) AUDIT COMMITTEE FINANCIAL EXPERT:
Not applicable. (Neither the Partnership nor MLAI has an audit committee.)
CODE OF ETHICS:
The Partnership has adopted a code of ethics, as of the end of the period covered by this report, which applies to the Partnership's (MLAI's) principal executive officer and principal financial officer or persons performing similar functions on behalf of the Partnership. A copy of the code of ethics is available to any person, without charge, upon request by calling 1-800-637-3863.
ITEM 11:
ITEM 11: EXECUTIVE COMPENSATION
The officers of MLAI are remunerated by MLAI in their respective positions. The Partnership does not itself have any officers, directors or employees. The Partnership pays Brokerage Commissions to an affiliate of MLAI and Administrative Fees to MLAI. MLAI or its affiliates also may receive certain economic benefits from holding the Partnership's U.S. dollar assets in offset accounts, as described in Item 1(c) above. The managers and officers receive no "other compensation" from the Partnership, and the managers receive no compensation for serving as directors of MLAI. There are no compensation plans or arrangements relating to a change in control of either the Partnership or MLAI.
ITEM 12:
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
(a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS:
As of December 31, 2004, no person or "group" is known to be or have been the beneficial owner of more than 5% of the Units. All of the Partnership's units of general partnership interest are owned by MLAI.
(b) SECURITY OWNERSHIP OF MANAGEMENT:
As of December 31, 2004, the Advisors owned 515 Series A Units, 500 Series B Units and 1000 Series C Units and MLAI owned 209 Series A Units, 478 Series B Units and 339 Series C Units (unit-equivalent general partnership interests) which was, in each case, less than 3.50% of each series of the total Units outstanding, respectively.
(c) CHANGES IN CONTROL:
None.
ITEM 13:
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) TRANSACTIONS BETWEEN MERRILL LYNCH AND THE PARTNERSHIP
All of the service providers to the Partnership, other than the Advisors, are affiliates of Merrill Lynch. Merrill Lynch negotiated with the Advisors over the level of their advisory fees and Profit Shares. However, none of the fees paid by the Partnership to any Merrill Lynch party were negotiated, and they are higher than would have been obtained in arm's-length bargaining.
The Partnership indirectly pays Merrill Lynch through MLPF&S and MLAI substantial Brokerage Commissions and Administrative Fees, respectively, as well as bid-ask spreads on forward currency trades. The Partnership also pays MLPF&S interest on short-term loans extended by MLPF&S to cover losses on foreign currency positions.
Within the Merrill Lynch organization, MLAI is the direct beneficiary of the revenues received by different Merrill Lynch entities from the Partnership. MLAI controls the management of the Partnership and serves as its promoter. Although MLAI has not sold any assets, directly or indirectly, to the Partnership, MLAI makes substantial profits from the Partnership due to the foregoing revenues.
No loans have been, are or will be outstanding between MLAI or any of its principals and the Partnership.
MLAI pays substantial selling commissions and trailing commissions to MLPF&S for distributing the Units. MLAI is ultimately paid back for these expenditures from the revenues it receives from the Partnership.
(b) CERTAIN BUSINESS RELATIONSHIPS:
MLPF&S, an affiliate of MLAI, acts as the principal commodity broker for the Partnership.
In 2004, the Partnership expensed through its investment in the Trading LLCs: (i) Brokerage Commissions of $ 2,309,432 to MLPF&S, which included $540,339 in consulting fees earned by the Advisors; and (ii) Administrative Fees of $537,182 to MLAI. In addition, MLAI and its affiliates may have derived certain economic benefits from possession of the Partnership's assets, as well as from foreign exchange and EFP trading.
(c) INDEBTEDNESS OF MANAGEMENT:
The Partnership is prohibited from making any loans, to management or otherwise.
(d) TRANSACTIONS WITH PROMOTERS:
Not applicable.
ITEM 14:
ITEM 14: PRINCIPAL ACCOUNTANT FEE AND SERVICES
(a) AUDIT FEES
Aggregate fees billed for professional services rendered by Deloitte & Touche LLP in connection with the audit of the Partnership's financial statements as of and for the year ended December 31, 2004 were $52,350.
Aggregate fees billed for these services for the year ended December 31, 2003 were $35,000.
(b) AUDIT-RELATED FEES
There were no other audit-related fees billed for the years ended December 31, 2004 or 2003 related to the Partnership.
(c) TAX FEES
Aggregate fees billed for professional services rendered by Deloitte Tax LLP in connection with the tax compliance, advice and preparation of the Partnerships tax returns for the year ended December 31, 2004 were $80,000.
Aggregate fees billed for these services for the year ended December 31, 2003 were $82,500.
(d) ALL OTHER FEES
No fees were billed to Deloitte & Touche LLP nor Deloitte Tax LLP during the years ended December 31, 2004 or 2003 for any other professional services in relation to the Partnership.
Neither the Partnership nor MLAI has an audit committee to pre-approve principal accountant fees and services. In lieu of an audit committee, the managers and the principal financial officer pre-approve all billings prior to the commencement of the performance of such services.
PART IV
ITEM 15:
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
2. FINANCIAL STATEMENT SCHEDULES:
Financial statement schedules not included in this Form 10-K have been omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto.
3. EXHIBITS:
The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K:
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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: MERRIL LYNCH ALTERNATIVE INVESTMENTS LLC General Partner
By: /s/Robert M. Alderman --------------------- Robert M. Alderman Chief Executive Officer, President and Manager (Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed on March 31, 2005 by the following persons on behalf of the Registrant and in the capacities indicated.
(Being the principal executive officer, the principal financial and accounting officer and a majority of the managers of Merrill Lynch Alternative Investments LLC)
By: /s/Robert M. Alderman --------------------- Robert M. Alderman Chief Executive Officer, President and Manager (Principal Executive Officer)
EXHIBIT 31.01
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
I, Robert M. Alderman, certify that:
1. I have reviewed this report on Form 10-K of John W. Henry & Co./Millburn L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 31, 2005 - --------------------
By /s/ ROBERT M. ALDERMAN ---------------------- Robert M. Alderman Chief Executive Officer, President and Manager (Principal Executive Officer)
EXHIBIT 31.02
RULE 13a-14(a)/15d-14(a) CERTIFICATIONS
I, Michael L. Pungello, certify that:
1. I have reviewed this report on Form 10-K of John W. Henry & Co./Millburn L.P.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 31, 2005 - --------------------
By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
EXHIBIT 32.01
SECTION 1350 CERTIFICATION
In connection with this annual report of John W. Henry & Co./Millburn L.P.(the "Company") on Form 10-K for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (this "Report"), I, Robert M. Alderman, Chief Executive Officer, President and Manager of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant of the Sarbanes-Oxley Act of 2002, that:
1. This Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 31, 2005 - --------------------
By /s/ ROBERT M. ALDERMAN ---------------------- Robert M. Alderman Chief Executive Officer, President and Manager (Principal Executive Officer)
EXHIBIT 32.02
SECTION 1350 CERTIFICATION
In connection with this annual report of John W. Henry & Co./Millburn L.P.(the "Company") on Form 10-K for the fiscal year ended December 31, 2004 as filed with the Securities and Exchange Commission on the date hereof (this "Report"), I, Michael L. Pungello, Vice President, Chief Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant of the Sarbanes-Oxley Act of 2002, that:
1. This Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2. The information contained in this Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 31, 2005 - --------------------
By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer (Principal Financial and Accounting Officer)
JOHN W. HENRY & CO./MILLBURN L.P.
2004 FORM 10-K
INDEX TO EXHIBITS