ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
Consolidated Financial Statements for the
years ended December 31, 2000, 1999 and 1998
and Independent Auditors' Report
[MERRILL LYNCH LOGO]
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
TABLE OF CONTENTS
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PAGE
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998:
Consolidated Statements of Financial Condition 2
Consolidated Statements of Operations 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-14
INDEPENDENT AUDITORS' REPORT
To the Partners of
ML Principal Protection L.P.:
We have audited the accompanying consolidated statements of financial condition
of ML Principal Protection L.P. (the "Partnership") as of December 31, 2000 and
1999, and the related consolidated statements of operations and of changes in
partners' capital for each of the three years in the period ended December 31,
2000. These consolidated financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures
in the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of ML Principal Protection L.P. as of
December 31, 2000 and 1999, and the results of their operations and changes in
their partners' capital for each of the three years in the period ended December
31, 2000 in conformity with accounting principles generally accepted in the
United States of America.
DELOITTE & TOUCHE LLP
New York, New York
February 5, 2001
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
2000 1999
--------------- ----------------
ASSETS
Equity in commodity futures trading accounts:
Cash and options premiums $ 2,947,014 $ 3,226,441
Net unrealized profit on open contracts - 677,742
Investment in MM LLC (Note 8) 19,921,935 -
Government Securities (Note 1) (Cost: $40,831,617) - 40,439,706
Commercial Paper (Note 1) (Cost: $4,310,371) 4,310,371 -
Receivable from Investment in MM LLC 780,962 -
Accrued interest receivable (Note 2) 52,986 574,774
Cash - 4,079
--------------- ----------------
TOTAL $ 28,013,268 $ 44,922,742
=============== ================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 438,622 $ 2,118,255
Profit Shares payable (Note 4) - 51,547
Brokerage commissions payable (Note 2) - 231,473
Administrative fees payable (Note 2) - 11,076
--------------- ----------------
Total liabilities 438,622 2,412,351
--------------- ----------------
Minority Interest (Note 1) 875,795 827,623
--------------- ----------------
PARTNERS' CAPITAL:
General Partners (2,712 and 9,628 Units) 298,960 1,023,562
Limited Partners (239,624 and 381,113 Units) 26,399,891 40,659,206
--------------- ----------------
Total partners' capital 26,698,851 41,682,768
--------------- ----------------
TOTAL $ 28,013,268 $ 44,922,742
=============== ================
NET ASSET VALUE PER UNIT (Note 5)
See notes to consolidated financial statements.
2
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
2000 1999 1998
--------------- --------------- ---------------
REVENUES:
Trading profit (loss):
Realized $ (610,248) $ 1,318,041 $ 8,746,563
Change in unrealized (202,811) (809,172) (2,053,193)
--------------- --------------- ---------------
Total trading results (813,059) 508,869 6,693,370
Interest income (Note 2) 1,549,458 3,263,074 5,434,851
--------------- --------------- ---------------
Total revenues 736,399 3,771,943 12,128,221
--------------- --------------- ---------------
EXPENSES:
Brokerage commissions (Note 2) 1,398,269 3,969,972 6,159,359
Profit Shares (Note 4) 19,158 265,734 1,658,306
Administrative fees (Note 2) 53,971 159,099 193,861
--------------- --------------- ---------------
Total expenses 1,471,398 4,394,805 8,011,526
--------------- --------------- ---------------
INCOME FROM INVESTMENT IN MM LLC (Note 8) 1,876,745
--------------- --------------- ---------------
INCOME (LOSS) BEFORE MINORITY INTEREST 1,141,746 (622,862) 4,116,695
Minority interest in (income) loss (48,173) 14,666 (27,056)
--------------- --------------- ---------------
NET INCOME (LOSS) $ 1,093,573 $ (608,196) $ 4,089,639
=============== =============== ===============
NET INCOME (LOSS) PER UNIT:
Weighted average number of General Partner
and Limited Partner Units outstanding (Note 6) 312,054 578,758 929,254
=============== =============== ===============
Net income (loss) per weighted average General Partner $ 3.50 $ (1.05) $ 4.40
and Limited Partner Unit =============== =============== ===============
See notes to consolidated financial statements.
3
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
- --------------------------------------------------------------------------------
General Limited Subscriptions
Units Partner Partners Receivable Total
-------------------- --------------- ------------------ ------------------ -----------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 942,619 $ 2,564,153 $ 105,628,837 $ (6,966,305) $ 101,226,685
Redemptions (426,072) (1,807,512) (43,562,357) - (45,369,869)
Subscriptions 138,229 - 13,822,849 - 13,822,849
Subscriptions Receivable 69,663 - - 6,966,305 6,966,305
Distributions - (33,509) (1,595,262) - (1,628,771)
Net income - 12,148 4,077,491 - 4,089,639
-------------------- --------------- ------------------ ------------------ -----------------
PARTNERS' CAPITAL,
DECEMBER 31, 1998 724,439 735,280 78,371,558 - 79,106,838
Redemptions (349,434) - (37,407,257) - (37,407,257)
Subscriptions 15,736 312,428 1,261,172 - 1,573,600
Distributions - (17,824) (964,393) - (982,217)
Net loss - (6,322) (601,874) - (608,196)
-------------------- --------------- ------------------ ------------------ -----------------
PARTNERS' CAPITAL,
DECEMBER 31, 1999 390,741 1,023,562 40,659,206 - 41,682,768
Redemptions (148,405) (733,977) (14,715,316) - (15,449,293)
Distributions - (9,355) (618,842) - (628,197)
Net income - 18,730 1,074,843 - 1,093,573
-------------------- --------------- ------------------ ------------------ -----------------
PARTNERS' CAPITAL,
DECEMBER 31, 2000 242,336 $ 298,960 $ 26,399,891 $ - $ 26,698,851
==================== =============== ================== ================== =================
See notes to consolidated financial statements
4
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ML Principal Protection L.P (the "Partnership") was organized as an
open-end fund under the Delaware Revised Uniform Limited Partnership Act on
January 3, 1994 and commenced trading activities on October 12, 1994. The
Partnership engages (currently, through a limited liability company (see
below)) in the speculative trading of futures, options on futures, forwards
and options on forward contracts on a wide range of commodities through ML
Principal Protection Trading L.P. (the "Trading Partnership"), of which the
Partnership is the sole limited partner. Merrill Lynch Investment Partners
Inc. (the "General Partner" or "MLIP"), a wholly-owned subsidiary of
Merrill Lynch Group, Inc., which, in turn, is a wholly-owned subsidiary of
Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the general partner of both
the Partnership and the Trading Partnership. Merrill Lynch Futures Inc.
("MLF"), an affiliate of Merrill Lynch, was the Trading Partnership's
commodity broker. MLIP also provides cash management services to the
Partnership by investing in Commercial Paper. Substantially all of the
Partnership's assets are held in accounts maintained at MLF or Merrill
Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a Merrill Lynch
affiliate. The General Partner intends to maintain a general partner's
interest of at least 1% of the total capital in each series of units. The
General Partner and the Limited Partners share in the profits and losses of
the Partnership and the Trading Partnership in proportion to the respective
interests in the Partnership and the Trading Partnership. References to the
Partnership include references to the Trading Partnership unless the
context otherwise requires.
MLIP, an indirect subsidiary of Merrill Lynch, became a member of Merrill
Lynch Investment Managers ("MLIM") - Alternative Investments Group during
October 2000. MLIM's Alternative Investments Group creates and manages a
variety of alternative investment products, including managed futures
funds, hedge funds, funds of funds, exchange funds and private equity
funds. MLIP, organized in 1986, is the hedge fund, fund of funds and
managed futures sponsor within MLIM's Alternative Investments Group.
Many of the multi-advisor funds (the "Multi-Advisor Funds") sponsored by
MLIP allocate their assets to a number of the same independent advisors
(the "Advisors"). MLIP consolidated the trading accounts of nine of its
Multi-Advisor Funds as of June 1, 1998. The consolidation was achieved by
having these Multi-Advisor Funds close their existing trading accounts and
invest in a limited liability company, ML Multi-Manager Portfolio L.L.C.
("MM LLC"), a Delaware limited liability company, which opened a single
account with each Advisor selected. On September 1, 2000, the Partnership
joined MM LLC in a similar manner along with another Multi-Advisor Fund
sponsored by MLIP. MM LLC is managed by MLIP, has no investors other than
the Multi-Advisor Funds and serves solely as the vehicle through which the
assets of such Multi-Advisor Funds are combined in order to be managed
through single rather than multiple accounts. The placement of assets into
MM LLC did not change the operations or fee structure of the Partnership;
therefore, the following notes also relate to the operation of the
Partnership through its investment in MM LLC. The administrative authority
over the Partnership remains with MLIP. MLIP, on an ongoing basis, may
change the number of Multi-Advisor Funds investing in MM LLC.
5
MLIP selects the Advisors to manage MM LLC's assets, and allocates and
reallocates such trading assets among existing, replacement and additional
Advisors. MLF is MM LLC's commodity broker.
The consolidated financial statements include the accounts of the Trading
Partnership in which the Partnership is the sole limited partner. All
related transactions and intercompany balances between the Partnership and
the Trading Partnership are eliminated in consolidation.
The ownership by the General Partner in the Trading Partnership represents
a minority interest when the financial results of the Trading Partnership
are consolidated into those of the Partnership. The General Partner's share
of the Trading Partnership's profits and losses is deducted from the
Consolidated Statements of Operations, and the General Partner's interest
in the Trading Partnership reduces partners' capital on the Consolidated
Statements of Financial Condition and the Consolidated Statements of
Changes in Partners' Capital.
The Partnership may issue different series of units of limited partnership
interest ("Units") generally as of the beginning of each calendar quarter.
Each series has its own Net Asset Value per Unit. For series issued prior
to May 1, 1997, each series may allocate different percentages of their
total capital to trading. For series issued after May 1, 1997, all such
series must allocate the same percentage of their total capital to trading.
All series, regardless of when issued, trade through MM LLC, under the
direction of the same combination of independent advisors (the "Advisors"),
chosen from time to time by MLIP to manage the Trading Partnership's
trading.
MLIP determines what percentage of the Partnership's total capital
attributable to each series of units to allocate to trading by investing in
the Trading Partnership, through MM LLC, attempting to balance the
desirability of reducing the opportunity costs of the Partnership's
"principal protection" structure against the necessity of preventing
Merrill Lynch from being required to make any payments to the Partnership
under the Merrill Lynch guarantee (see Note 7), and subject to the
requirement that all series issued after May 1, 1997 must allocate the same
percentage of their capital to trading, through MM LLC.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
REVENUE RECOGNITION
Commodity futures, options on futures, forwards and options on forward
contracts are recorded on the trade date, and open contracts are reflected
in Net unrealized profit (loss) on open contracts in the Consolidated
Statements of Financial Condition at the difference between the original
contract value and the market value (for those commodity interests for
which market quotations are readily available) or at fair value. The change
in unrealized profit (loss) on open contracts and Government Securities, as
defined below, from one period to the next is reflected under Trading
profit (loss): Change in unrealized in the Consolidated Statements of
Operations.
6
FOREIGN CURRENCY TRANSACTIONS
The Partnership's functional currency is the U.S. dollar; however, it
transacts business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are
translated into U.S. dollars at the rates in effect at the dates of the
Consolidated Statements of Financial Condition. Income and expense items
denominated in currencies other than the U.S. dollar are translated into
U.S. dollars at the rates in effect during the period. Gains and losses
resulting from the translation to U.S. dollars are reported in total
trading results.
GOVERNMENT SECURITIES AND COMMERCIAL PAPER
Prior to May 26, 2000, the Partnership invested a portion of its assets in
obligations of the U.S. Treasury and certain other U.S. government
agencies ("Government Securities") under the direction of MLIM within the
parameters established by MLIP for which MLIM accepted no responsibility.
These investments were carried at fair value. On May 26, 2000 the
Government Securities were liquidated and Commercial Paper was purchased.
These holdings have maturities of 30, 60 or 90 days and are held to
maturity. The investments in Commercial Paper are directed by MLIP
through the Partnership's investment in MM LLC.
OPERATING EXPENSES AND SELLING COMMISSIONS
MLIP pays all routine operating costs (including legal, accounting,
printing, postage and similar administrative expenses) of the Partnership
and the Trading Partnership, including the cost of the ongoing offering of
the Units. MLIP receives an administrative fee as well as a portion of the
brokerage commissions paid to MLF by the Partnership (See Note 2).
No selling commissions have been or are paid directly by Limited Partners.
All selling commissions are paid by MLIP.
INCOME TAXES
No provision for income taxes has been made in the accompanying
consolidated financial statements as each Partner is individually
responsible for reporting income or loss based on such Partner's respective
share of the Partnership's consolidated income and expenses as reported for
income tax purposes.
REDEMPTIONS
A Limited Partner may redeem some or all of such Partner's Units at Net
Asset Value as of the close of business on the last business day of any
month upon ten calendar days' notice. Units redeemed on or prior to the end
of the twelfth full month after such Units were issued are assessed an
early redemption charge of 3% of their Net Asset Value as of the date of
redemption. Units redeemed after the twelfth month but on or before the end
of the eighteenth month after such Units were issued are subject to a
redemption charge of 1.5%. Units redeemed after the eighteenth month but on
or before the end of the twenty-fourth month after such Units were issued
are subject to a 1% redemption charge. Redemption charges are deducted from
redemption proceeds and paid to MLIP.
DISSOLUTION OF THE PARTNERSHIP
The Partnership will terminate on December 31, 2024 or at an earlier date
if certain conditions occur, as well as under certain other circumstances
as set forth in the Limited Partnership Agreement.
7
2. RELATED PARTY TRANSACTIONS
Prior to May 26, 2000, MLIM managed a substantial portion of the
Partnership's available U.S. dollar assets, pursuant to guidelines
established by MLIP for which MLIM assumed no responsibility, in the
Government Securities markets. MLF paid MLIM annual management fees of .20
of 1% on the first $25 million of certain assets of MLIP sponsored funds
("Capital"), including the Partnership's assets managed by MLIM, .15 of 1%
on the next $25 million of Capital, .125 of 1% on the next $50 million,
and .10 of 1% on Capital in excess of $100 million. Such fees were paid
quarterly in arrears and were calculated on the basis of the average daily
capital managed by MLIM. On May 26, 2000, the Government Securities were
liquidated and the management agreement with MLIM was terminated.
Commercial Paper was then purchased. MLPF&S acts as custodian for the cash
assets utilized in the Commercial Paper Program.
A portion of the Partnership's U.S. dollar assets is maintained at MLF. On
assets held in U.S. dollars, Merrill Lynch credits the Partnership with
interest at the prevailing 91-day U.S. Treasury bill rate. The Partnership
is credited with interest on any of its net gains actually held by Merrill
Lynch in non-U.S. dollar currencies at a prevailing local rate received by
Merrill Lynch. Merrill Lynch may derive certain economic benefits, in
excess of the interest, which Merrill Lynch pays to the Partnership, from
possession of such assets.
Merrill Lynch charges the Partnership directly, and after
September 1, 2000 through MM LLC, Merrill Lynch's cost of financing
realized and unrealized losses on the Partnership's non-U.S.
dollar-denominated positions.
The Partnership currently pays brokerage commissions to MLF in respect of
each series of Units at a flat monthly rate of .625 of 1% (a 7.50% annual
rate) of such series' month-end assets invested in the Trading
Partnership. Prior to October 1, 1998, the brokerage commission rate was
.729 of 1% (an 8.75% annual rate). The Partnership also pays MLIP a
monthly administrative fee of .021 of 1% (a 0.25% annual rate) of the
Partnership's total month-end assets. Assets committed to trading and
total assets are not reduced for purposes of calculating brokerage
commissions and administrative fees by any accrued brokerage commissions,
administrative fees, Profit Shares or other fees or charges.
MLIP estimates that the round-turn equivalent commission rate charged to
the Trading Partnership during the years ended December 31, 2000 (prior to
its investment in MM LLC), 1999 and 1998, was approximately $101, $127, and
$80, respectively (not including, in calculating round-turn equivalents,
forward contracts on a futures-equivalent basis). The estimated aggregate
round-turn commission rate for MM LLC for the year ended December 31, 2000
was $82.
MLF pays the Advisors annual Consulting Fees ranging up to 2% of the
Partnership's average month-end assets allocated to them for management,
after reduction for a portion of the brokerage commissions accrued with
respect to such assets.
8
3. ANNUAL DISTRIBUTIONS
The Partnership makes annual fixed-rate distributions, payable irrespective
of profitability, of $3.50 per Unit on Units issued prior to May 1, 1997.
The Partnership may also pay discretionary distributions on such series of
Units of up to 50% of any Distributable New Appreciation, as defined on
such Units. No distributions are payable on Units issued after May 1, 1997.
As of December 31, 2000, 1999 and 1998, the Partnership had made the
following distributions:
DISTRIBUTION FIXED-RATE DISCRETIONARY
SERIES DATE DISTRIBUTION DISTRIBUTION
-------------- ---------------------------------------------------
2000
- -------
Series A 10/01/2000 $ 3.50 $ -
Series B 01/01/2000 3.50 -
Series C 04/01/2000 3.50 -
Series D 07/01/2000 3.50 -
Series E 10/01/2000 3.50 -
Series F 01/01/2000 3.50 -
Series G 04/01/2000 3.50 -
Series H 07/01/2000 3.50 -
1999
- -------
Series A 10/01/1999 $ 3.50 $ -
Series B 01/01/1999 3.50 -
Series C 04/01/1999 3.50 -
Series D 07/01/1999 3.50 1.00
Series E 10/01/1999 3.50 -
Series F 01/01/1999 3.50 -
Series G 04/01/1999 3.50 -
Series H 07/01/1999 3.50 1.00
1998
- -------
Series A 10/01/1998 $ 3.50 $ -
Series B 01/01/1998 3.50 1.50
Series C 04/01/1998 3.50 -
Series D 07/01/1998 3.50 -
Series E 10/01/1998 3.50 -
Series F 01/01/1998 3.50 1.25
Series G 04/01/1998 3.50 -
Series H 07/01/1998 3.50 -
4. ADVISORY AGREEMENTS
The Trading Partnership, and subsequent to September 1, 2000, MM LLC, and
the Advisors have each entered into Advisory Agreements. These Advisory
Agreements generally renew annually after they are entered into, subject
to certain rights exercisable by the Partnership. The Advisors determine
the commodity futures, options on futures, forwards and option on forward
contract trades to be made on behalf of their respective Trading
Partnership accounts, subject to certain rights reserved by MLIP.
9
Profit Shares, generally ranging from 15% to 25% of any New Trading Profit,
as defined, recognized by each Advisor individually, irrespective of the
overall performance of any series, either as of the end of each calendar
quarter or year and upon the net reallocation of assets away from an
Advisor, including unit redemptions, are paid to the appropriate Advisors
to the extent of the applicable percentage of any New Trading Profit
attributable to such Units.
5. NET ASSET VALUE PER UNIT
As of December 31, 2000, the Net Asset Value of the different series of
Units were as follows:
NET ASSET VALUE NUMBER NET ASSET VALUE
OF UNITS PER UNIT
----------------------------------------------------------
----------------------------------------------------------
Series A Units $ 6,185,441 54,627.0000 $ 113.23
Series B Units 487,797 4,357.0000 111.96
Series C Units 863,478 8,005.0000 107.87
Series D Units 2,795,253 26,084.0000 107.16
Series E Units 2,369,509 21,803.9800 108.67
Series F Units 1,348,280 12,550.5400 107.43
Series G Units 931,995 8,782.2800 106.12
Series H Units 844,370 8,087.9150 104.40
Series K Units 3,205,898 28,092.0000 114.12
Series L Units 1,619,734 14,562.0300 111.23
Series M Units 2,045,146 18,131.9607 112.79
Series N Units 296,095 2,722.9278 108.74
Series O Units 2,253,875 20,663.7419 109.07
Series P Units 225,563 2,027.0000 111.28
Series Q Units 508,459 4,941.6908 102.89
Series R Units 573,917 5,522.0000 103.93
Series S Units 144,041 1,375.0000 104.76
------------------ ----------------
$ 26,698,851 242,336.0662
================== ================
10
At December 31, 1999 the Net Asset Values of the different series of Units
were as follows:
NET ASSET VALUE NUMBER NET ASSET VALUE
OF UNITS PER UNIT
---------------------------------------------------------
---------------------------------------------------------
Series A Units $ 7,960,220 71,300.0000 $ 111.64
Series B Units 949,586 8,568.0000 110.83
Series C Units 1,267,695 11,909.0000 106.45
Series D Units 4,539,567 42,433.0000 106.98
Series E Units 3,617,782 33,697.1800 107.36
Series F Units 2,199,122 20,722.5800 106.12
Series G Units 1,536,527 14,666.3400 104.77
Series H Units 1,291,688 12,467.7250 103.60
Series K Units 4,980,521 46,179.0000 107.85
Series L Units 3,231,833 30,750.0000 105.10
Series M Units 2,672,599 25,068.8757 106.61
Series N Units 1,369,038 13,321.4278 102.77
Series O Units 3,657,494 35,480.2419 103.09
Series P Units 546,674 5,197.0000 105.19
Series Q Units 579,321 5,955.6908 97.27
Series R Units 1,017,139 10,344.0000 98.33
Series S Units 265,962 2,681.0000 99.20
----------------- ----------------
$ 41,682,768 390,741.0612
================= ================
6. WEIGHTED AVERAGE UNITS
Weighted average number of Units outstanding was computed for purposes of
disclosing consolidated net income per weighted average Unit. The weighted
average number of Units outstanding for the years ended December 31, 2000,
1999 and 1998 equals the Units outstanding as of such date, adjusted
proportionately for Units redeemed or issued based on the respective length
of time each was outstanding during the year.
7. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch has guaranteed to the Partnership that it will have
sufficient Net Assets, as of the Principal Assurance Date for each series
of Units, that the Net Asset Value per Unit will equal, after reduction for
all liabilities to third parties and all distributions paid in respect of
such Units, not less than $100. The Principal Assurance Date for Series A
Units is September 30, 2001. The Principal Assurance Dates for subsequent
Series generally occurs at each succeeding quarter thereafter.
8. INVESTMENTS
Effective September 1, 2000, the Partnership consolidated its trading
accounts with those of certain other multi-advisor managed future funds
sponsored by MLIP. The Trading Partnership is no longer trading directly
through managed accounts with each of its Advisors, but is investing in MM
LLC. As of September 1, 2000, the MM LLC had an aggregate capitalization of
approximately $264 million.
The consolidation was effected by having the Partnership close its existing
individual trading accounts and invest in MM LLC, which maintains a single
account with each Advisor selected.
No additional fees or charges were incurred by the Partnership or any
investor as a result of the consolidation. MLIP absorbed all costs related
to the consolidation. As a result of consolidating the Partnership's
trading accounts, MLF, which receives flat-rate brokerage fees from the
Partnership, should be
11
able to recognize future savings on its trade processing costs. MLIP and
MLF are responsible for the administration and monitoring of MM LLC as well
as each participating fund, and in doing so will have access to the same
"real time" trade and position information as was the case for the
Partnership's managed accounts.
The investment in MM LLC is reflected in the financial statements at fair
value based upon the Partnership's interest in MM LLC. Fair value of the
investment in MM LLC is equal to the market value of the net assets of MM
LLC allocable to the Partnership as investor. The resulting difference
between cost and fair value is reflected on the Statements of Operations as
income (loss) from investments.
Total revenues and fees with respect to the Partnership's investment are
set forth as follows:
For the year ended TOTAL BROKERAGE ADMINISTRATIVE PROFIT INCOME FROM
December 31, 2000 REVENUE COMMISSIONS FEES SHARES INVESTMENT
---------------- --------------- ----------------- ------------- -------------------
MM LLC $ 2,670,435 $ 525,140 $ 17,505 $ 251,045 $ 1,876,745
================ =============== ================= ============= ===================
Condensed statements of financial condition and of operations for MM LLC
are set forth as follows:
MM LLC
December 31, 2000
------------------------
Assets $ 252,995,756
========================
Liabilities $ 5,383,789
Members' Capital 247,611,967
------------------------
Total $ 252,995,756
========================
For the year ended
December 31, 2000
------------------------
Revenues $ 28,324,323
Expenses 13,557,899
------------------------
Net Income $ 14,766,424
========================
9. 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, 2000, as amended by SFAS No. 137. SFAS No.
133 is further amended by SFAS No. 138, which clarifies issues surrounding
interest risk, foreign currency denominated items, normal purchases and
sales and net hedging. 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
12
such as the Partnership which carries its assets at fair value. Such
Statement sets forth a much broader definition of a derivative instrument.
As of September 1, 2000, the Partnership invested all of its assets
allocated to trading in MM LLC. Accordingly, the Partnership invested
indirectly in derivative instruments, but does not itself hold any
derivative instrument positions. The application of the provisions of SFAS
No. 133, as amended by SFAS No. 137 and SFAS No. 138, did not have a
significant effect on the consolidated 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 and notional amounts or payment provisions; (2) requires
no initial net investment or a smaller initial net investment than would be
required for other types of contracts that would be expected to have a
similar response to changes in market factors; and, (3) terms that require
or permit net settlement. Generally, derivatives include futures, forwards,
swaps, options or other financial instruments with similar characteristics
such as caps, floors and collars.
MARKET RISK
Derivative instruments involve varying degrees of off-balance sheet market
risk. Changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the financial instruments
or commodities underlying such derivative instruments frequently result in
changes in the Partnership's net unrealized profit (loss) on such
derivative instruments as reflected in the Consolidated Statements of
Financial Condition or, with respect to Partnership assets invested in MM
LLC, the net realized profit (loss) as reflected in the Statements of
Financial Condition of 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, and currently MM LLC
as well as the volatility and liquidity of the markets in which the
derivative instruments are traded.
MLIP 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, calculating the Net Asset Value of the Partnership, or
currently MM LLC, as of the close of business on each day and reviewing1
outstanding positions for over-concentrations. While MLIP does not itself
intervene in the markets to hedge or diversify the Partnership's market
exposure, MLIP may urge the Advisors to reallocate positions in an attempt
to avoid over-concentrations. However, such interventions are unusual.
Except in cases in which it appears that the Advisors have begun to
deviate from past practice or trading policies or to be trading
erratically, MLIP's basic risk control procedures consist simply of the
ongoing process of advisor monitoring, with the market risk controls being
applied by the Advisors themselves.
One important aspect of the MLIP's risk controls is its adjustments to the
leverage at which each series of Units trades. By controlling the
percentage of each series' assets allocated to trading, MLIP can directly
affect the market exposure of the Partnership. Leverage control is the
principal means by which MLIP hopes to be able to ensure that Merrill Lynch
is never required to make any payments under its guarantee that the Net
Asset Value per Unit of each series will equal no less than $100 as of the
Principal Assurance Date for such series.
CREDIT RISK
The risks associated with exchange-traded contracts are typically perceived
to be less than those associated with over-the-counter
(non-exchange-traded) transactions, because exchanges typically (but not
universally) provide clearinghouse arrangements in which the collective
credit (in some cases limited in amount, in some cases not) of the members
of the exchange is pledged to support the financial integrity of the
exchange. In over-the-counter transactions, on the other hand, traders must
rely solely on the credit of their respective individual counterparties.
Margins, which may be subject to loss in the event of a default, are
generally required in exchange trading, and counterparties may also require
margin in the over-the-counter markets.
13
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit, if any, included in the
Consolidated Statements of Financial Condition. The Partnership attempts to
mitigate this risk by dealing exclusively with Merrill Lynch entities as
clearing brokers.
The Partnership, through MM LLC, in its normal course of business, enters
into various contracts with MLF acting as its commodity broker. Pursuant
to the brokerage agreement with MLF (which includes a netting
arrangement), to the extent that such trading results in receivables and
payables are offset and reported as a net receivable or payable and are
included in the financial statements of MM LLC, in the Statements of
Financial Condition under Equity in commodity futures trading accounts.
9. SUBSEQUENT EVENTS
On January 1, 2001, the Trading Partnership was dissolved. The General
Partner redeemed its entire investment and the Partnership immediately
invested its redemption proceeds directly into MM LLC, giving the
Partnership a direct investment in MM LLC rather than through the Trading
Partnership. This action did not effect the operation of the Partnership or
MM LLC and was done at no cost to the investors. Any costs have been
absorbed by MLIP. MLIP continues to maintain a 1% General Partner interest
in the Partnership.
On January 2, 2001, distributions were announced for Series B and Series F.
Both the Series B Unitholders and the Series F Unitholders received a
fixed-rate distribution of $3.50 per unit. Such distributions totaled
$59,176.
* * * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
Michael Pungello
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
ML Principal Protection L.P.
14
ML MULTI-MANAGER PORTFOLIO LLC
(A DELAWARE LIMITED LIABILITY COMPANY)
Financial Statements for the years ended
December 31, 2000 and 1999
and Independent Auditors' Report
[MERRILL LYNCH LOGO]
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 2000 AND 1999:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Changes in Members' Capital 4
Notes to Financial Statements 5-9
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Members of
ML Multi-Manager Portfolio LLC:
We have audited the accompanying statements of financial condition of ML
Multi-Manager Portfolio LLC (the "Company") as of December 31, 2000 and 1999,
and the related statements of operations and of changes in members' capital for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ML Multi-Manager Portfolio LLC as of
December 31, 2000 and 1999, and the results of its operations and changes in its
members' capital for the years then ended in conformity with accounting
principles generally accepted in the United States of America.
DELOITTE & TOUCHE LLP
New York, New York
February 5, 2001
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
ASSETS
2000 1999
------------------------ -----------------------
Equity in commodity futures trading accounts:
Cash and option premiums $ 139,346,615 $ 97,949,902
Net unrealized profit on open contracts 13,995,141 2,517,003
Cash 2,835,198 -
Commercial Paper (Cost $95,200,766) 95,200,766 -
Accrued interest (Note 2) 1,618,036 434,772
------------------------ -----------------------
TOTAL $ 252,995,756 $ 100,901,677
======================== =======================
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 2) $ 1,265,023 $ 708,081
Profit Shares payable (Note 3) 3,036,430 420,906
Administrative fees payable (Note 2) 41,341 24,744
Due to Invested Funds 1,040,995 1,752,661
------------------------ -----------------------
Total liabilities 5,383,789 2,906,392
------------------------ -----------------------
MEMBERS' CAPITAL:
Voting Members 247,611,967 97,995,285
------------------------ -----------------------
Total Members' capital 247,611,967 97,995,285
------------------------ -----------------------
TOTAL $ 252,995,756 $ 100,901,677
======================== =======================
See notes to financial statements.
-2-
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
REVENUES: 2000 1999
------------------ ------------------
Trading profit:
Realized $ 8,646,046 $ 3,344,876
Change in unrealized 11,538,356 546,402
------------------ ------------------
Total trading results 20,184,402 3,891,278
Interest income (Note 1 & Note 2) 8,139,921 5,198,912
------------------ ------------------
Total revenues 28,324,323 9,090,190
------------------ ------------------
EXPENSES:
Brokerage commissions (Note 2) 10,015,693 9,316,187
Profit Shares (Note 3) 3,201,454 515,566
Administrative fees (Note 2) 340,752 320,264
------------------ ------------------
Total expenses 13,557,899 10,152,017
------------------ ------------------
NET INCOME (LOSS) $ 14,766,424 $ (1,061,827)
================== ==================
See notes to financial statements.
-3-
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
- --------------------------------------------------------------------------------
Voting Members
--------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1998 120,383,476
Withdrawals (21,326,364)
Net loss (1,061,827)
--------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1999 97,995,285
Additions 175,347,578
Withdrawals (40,497,320)
Net income 14,766,424
--------------------
MEMBERS' CAPITAL,
DECEMBER 31, 2000 247,611,967
====================
See notes to financial statements.
-4-
ML MULTI-MANAGER PORTFOLIO LLC
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
ML Multi-Manager Portfolio LLC (the "Company") was organized under the
Delaware Limited Liability Company Act on May 11, 1998 and commenced
trading activities on June 1, 1998. The Company engages in the speculative
trading of futures, options on futures, forwards and options on forward
contracts on a wide range of commodities. Merrill Lynch Investment Partners
Inc. ("MLIP"), a wholly-owned subsidiary of Merrill Lynch Group, Inc.,
which, in turn, is a wholly-owned subsidiary of Merrill Lynch & Co., Inc.
("Merrill Lynch"), has been delegated administrative authority over the
Company. Merrill Lynch Futures Inc. ("MLF"), an affiliate of Merrill Lynch,
is the Company's commodity broker. A portion of the Company's assets were
held by a commodity broker, other than MLF, to facilitate the trading of a
certain independent advisor, subject to an arrangement recognized by MLIP.
This advisor was terminated during 2000. The Company has one class of
Membership Interests, Voting Interests. Voting Interests are held by United
States limited partnerships ("Members"). The Members control all business
activities and affairs of the Company by agreement of the majority interest
of the Members, subject to the discretionary trading authority vested in
and delegated to the independent trading advisors (the "Advisors") and the
administrative authority vested in and delegated to MLIP. Each Member is a
"commodity pool" sponsored and controlled by MLIP and shares in the Trading
results and Interest income of the Company in proportion to their
respective capital accounts.
MLIP, an indirect subsidiary of Merrill Lynch, became a member of Merrill
Lynch Investment Managers ("MLIM") - Alternative Investments Group during
October 2000. MLIM's Alternative Investments Group creates and manages a
variety of alternative investment products, including managed futures
funds, hedge funds, funds of funds, exchange funds and private equity
funds. MLIP, organized in 1986, is the hedge fund, fund of funds and
managed futures sponsor within MLIM's Alternative Investments Group.
MLIP selects independent advisors to manage the Company's assets, and
allocates and reallocates the Company's assets among existing, replacement
and additional Advisors.
ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
CASH MANAGEMENT
As of June 2000, the Company began an Income Enhancement Program, whereas,
a portion of its assets is invested in Commercial Paper. This was done to
improve the yield on the cash assets not required for margin for trading
purposes. These holdings generally have maturities of 30, 60, or 90 days
and are held to maturity.
One Member invests assets that are not allocated to any Advisors directly
into the Income Enhancement Program. This Member receives a priority
allocation of interest income earned on these assets before the allocation
of interest income in proportion to those Members whose assets are
allocated for trading purposes.
-5-
REVENUE RECOGNITION
Commodity futures, options on futures, forwards and options on forward
contracts are recorded on the trade date and open contracts are reflected
in Net unrealized profit on open contracts in the Statements of Financial
Condition at the difference between the original contract value and the
market value (for those commodity interests for which market quotations are
readily available) or at fair value. The Change in unrealized profit on
open contracts from one period to the next is reflected in Change in
unrealized under Trading profit in the Statements of Operations.
FOREIGN CURRENCY TRANSACTIONS
The Company's functional currency is the U.S. dollar; however, it transacts
business in currencies other than the U.S. dollar. Assets and liabilities
denominated in currencies other than the U.S. dollar are translated into
U.S. dollars at the rates in effect at the date of the Statements of
Financial Condition. Income and expense items denominated in currencies
other than the U.S. dollar are translated into U.S. dollars at the rates in
effect during the period. Gains and losses resulting from the translation
to U.S. dollars are reported in total trading results.
ORGANIZATIONAL COSTS
MLIP paid all organizational costs relating to the Company without direct
reimbursement from the Company or any Member.
INCOME TAXES
No provision for income taxes has been made in the accompanying financial
statements as each Member is individually responsible for reporting income
or loss based on such Member's respective share of the Company's income and
expenses as reported for income tax purposes.
DISTRIBUTIONS
The Members are entitled to receive any distributions which may be made by
the Company in proportion to their respective capital accounts. No such
distributions have been declared for the years ended December 31, 2000 or
1999.
WITHDRAWALS
Each Member may withdraw some or all of such Members' capital at the Net
Asset Value as of the close of business on any business day. There are no
withdrawal fees or charges.
DISSOLUTION OF THE COMPANY
The Company will terminate on December 31, 2028 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as
set forth in the Organization Agreement.
2. RELATED PARTY TRANSACTIONS
A portion of the Company's U.S. dollar assets are maintained at MLF. On
assets held in U.S. dollars, Merrill Lynch credits the Company with
interest at the prevailing 91-day U.S. Treasury bill rate. The Company is
credited with interest on any of its assets and 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
-6-
derive certain economic benefit, in excess of the interest which Merrill
Lynch pays to the Company from the possession of such assets.
Merrill Lynch charges the Company Merrill Lynch's cost of financing
realized and unrealized losses on the Company's non-U.S. dollar-denominated
positions.
As of June 2000, the Company began investing in Commercial Paper. Merrill
Lynch Pierce Fenner and Smith acts as custodian for these assets.
Following the allocation of the Company's trading profit and interest
income among the Members' Capital Accounts, MLIP calculates the brokerage
commissions, Profit Shares, administrative fees and other expenses due from
the Company to third parties, relating to the Company's trading on behalf
of the Members. Such brokerage commissions, fees and expenses are
specifically allocated as of the end of each accounting period (not pro
rata based on the Members' respective capital accounts) to, and deducted
from, the Members' capital accounts and paid out by the Company. The
Company pays brokerage commissions to MLF, at a flat monthly rate
reflecting the fee arrangement between each Member and MLF. For the years
ended December 31, 2000 and 1999, the monthly rates for Members ranged from
.291 of 1% (a 3.50% annual rate) to .729 of 1% (an 8.75% annual rate) of
each Member's month-end assets invested in the Company.
The Company pays MLIP a monthly administrative fee ranging from .021 of 1%
(a 0.25% annual rate) to .083 of 1% (a 1.00% annual rate) of each Member's
month-end assets. Month-end assets are not reduced for purposes of
calculating brokerage commissions and administrative fees by any accrued
brokerage commissions, administrative fees, Profit Shares or other fees or
charges.
MLF pays the Advisors annual Consulting Fees up to 2% of the Company's
average month-end assets allocated to them for management after reduction
for a portion of the brokerage commissions.
3. ADVISORY AGREEMENTS
Pursuant to the Advisory Agreements among the Advisors, the Company and
MLIP, the Advisors determine the commodity futures, options on futures,
forwards and options on forward contracts traded on behalf of the Company,
subject to certain rights reserved by MLIP. The Advisory Agreements
generally renew one year after they are entered into, subject to certain
renewal rights exercisable by the Company.
The Company pays, from the Capital Account of each Member, to the Advisors
quarterly or annual Profit Shares generally ranging from 15% to 23% of any
New Trading Profit, as defined, recognized by each Advisor, attributable to
each Member's Capital Account, considered individually irrespective of the
overall performance of the such Member's Capital Account. Profit Shares,
which are calculated separately in respect of each Member's Capital
Account, are determined as of the end of each calendar quarter or year and
are also paid to each Advisor upon the withdrawal of capital from the
Company by a Member for whatever purpose, other than to pay expenses and
upon the reallocation of assets away from an Advisor.
4. 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, 2000, as amended by SFAS No. 137. SFAS No.
133 is further amended by SFAS No. 138, which clarifies issues surrounding
interest risk, foreign currency denominated items, normal purchases and
sales and net hedging. 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
-7-
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 Company which carries its
assets at fair value. Such Statement sets forth a much broader definition
of a derivative instrument. The application of the provisions of SFAS No.
133, as amended by SFAS No. 137 and SFAS No. 138, did not have 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 and notional amounts or payment provisions; (2) requires
no initial net investment or a smaller initial net investment than would be
required for other types of contracts that would be expected to have a
similar response to changes in market factors; and, (3) terms that require
or permit net settlement. Generally, derivatives include futures, forwards,
swaps, options or other financial instruments with similar characteristics
such as caps, floors and collars.
MARKET RISK
Derivative instruments involve varying degrees of off-balance sheet market
risk. Changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the financial instruments
or commodities underlying such derivative instruments frequently result in
changes in the Company's net unrealized profit on such derivative
instruments as reflected in the Statements of Financial Condition. The
Company's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the
Company as well as the volatility and liquidity of the markets in which the
derivative instruments are traded.
MLIP 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, calculating the Net Asset Value of the Company as of the close of
business on each day and reviewing outstanding positions for
over-concentrations. While MLIP does not itself intervene in the markets to
hedge or diversify the Company's market exposure, MLIP may urge the
Advisors to reallocate positions in an attempt to avoid
over-concentrations. However, such interventions are unusual. Except in
cases in which it appears that the Advisors have begun to deviate from past
practice or trading policies or to be trading erratically, MLIP's basic
risk control procedures consist simply of the ongoing process of advisor
monitoring, with the market risk controls being applied by the Advisors
themselves.
CREDIT RISK
The risks associated with exchange-traded contracts are typically perceived
to be less than those associated with over-the-counter
(non-exchange-traded) transactions, because exchanges typically (but not
universally) provide clearinghouse arrangements in which the collective
credit (in some cases limited in amount, in some cases not) of the members
of the exchange is pledged to support the financial integrity of the
exchange. In over-the-counter transactions, on the other hand, traders must
rely solely on the credit of their respective individual counterparties.
Margins, which may be subject to loss in the event of a default, are
generally required in exchange trading, and counterparties may also require
margin in the over-the-counter markets.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit on open contracts, if any,
included in the Statements of Financial Condition. The Company attempts to
mitigate this risk by dealing almost exclusively with Merrill Lynch
entities as clearing brokers.
-8-
The Company, in its normal course of business, enters into various
contracts, with MLF acting as its commodity broker. Pursuant to the
brokerage agreement with MLF (which includes a netting arrangement), to the
extent that such trading results in receivables from and payables to MLF,
these receivables and payables are offset and reported as a net receivable
or payable and included in the Equity in commodity futures trading accounts
in the Statements of Financial Condition.
* * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
Michael L. Pungello
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
Commodity Pool Operator of
ML Multi-Manager Portfolio LLC
-9-