EXHIBIT 13.01(a)
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
Financial Statements for the years ended
December 31, 1999 and 1998 and Independent
Auditors' Report
[LOGO] Merrill Lynch
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998.
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 JWH Financial and Metals Portfolio L.L.C.:
We have audited the accompanying statements of financial condition of ML JWH
Financial and Metals Portfolio L.L.C. (the "Company") as of December 31, 1999
and 1998, and the related statements of operations and of changes in members'
capital for the years ended December 31, 1999 and 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ML JWH Financial and Metals Portfolio L.L.C.
as of December 31, 1999 and 1998, and the results of its operations and changes
in members' capital for the years ended December 31, 1999 and 1998 in comformity
with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 2000
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
------------------ ------------------
ASSETS
Equity in commodity futures trading accounts:
Cash and option premiums $ 20,105,266 $ 26,100,432
Net unrealized profit on open contracts 297,749 3,074,669
Accrued interest (Note 2) 92,694 102,296
------------------ ------------------
TOTAL $ 20,495,709 $ 29,277,397
================== ==================
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 2) $ 162,099 $ 231,621
Administrative fees payable (Note 2) 4,266 6,095
Withdrawals payable 485,801 153,482
------------------ ------------------
Total liabilities 652,166 391,198
------------------ ------------------
MEMBERS' CAPITAL:
Voting Members 19,843,543 28,886,199
------------------ ------------------
Total Members' capital 19,843,543 28,886,199
------------------ ------------------
TOTAL $ 20,495,709 $ 29,277,397
================== ==================
See notes to financial statements.
-2-
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------
1999 1998
------------------ ------------------
REVENUES:
Trading (loss) profit:
Realized $ (1,431,693) $ (913,823)
Change in unrealized (2,776,920) 345,682
------------------ ------------------
Total trading results (4,208,613) (568,141)
Interest income (Note 2) 1,201,484 1,959,142
------------------ ------------------
Total revenues (3,007,129) 1,391,001
------------------ ------------------
EXPENSES:
Brokerage commissions (Note 2) 2,455,447 3,638,923
Profit Shares (Note 3) - 332,560
Administrative fees (Note 2) 64,617 97,879
------------------ ------------------
Total expenses 2,520,064 4,069,362
------------------ ------------------
NET LOSS $ (5,527,193) $ (2,678,361)
================== ==================
See notes to financial statements.
-3-
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- -------------------------------------------------------------------------------------------------------------
Non-Voting
Voting Members Members Total
-------------------- ------------------ ------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1997 $ 59,766,977 $ 1,591,929 $ 61,358,906
Withdrawals (28,414,824) (1,379,522) (29,794,346)
Net Loss (2,465,954) (212,407) (2,678,361)
-------------------- ------------------ ------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1998 28,886,199 - 28,886,199
Withdrawals (3,515,463) - (3,515,463)
Net Loss (5,527,193) - (5,527,193)
-------------------- ------------------ ------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1999 $ 19,843,543 $ - $ 19,843,543
==================== ================== ==================
See notes to financial statements.
-4-
ML JWH FINANCIAL AND METALS PORTFOLIO L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML JWH Financial and Metals Portfolio L.L.C. (the "Company") was organized
under the Delaware Limited Liability Company Act on September 19, 1996 and
commenced trading activities on October 1, 1996. The Company engages in
the speculative trading of futures, options on futures and forward
contracts on a wide range of commodities. John W. Henry & Company, Inc.
("JWH(R)") is the trading advisor to the Company. 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 MLIP, is
the Company's commodity broker. The Company has authorized two classes of
Membership Interests: Non-Voting Interests and Voting Interests
(collectively, "Interests"). These two classes of Interests have common
economic interests in the Company, but the Non-Voting Interests, which can
be held by non-United States investment funds sponsored by MLIP, do not
participate in the management of the Company, or engage, directly or
indirectly, in, participate in or control any portion of the business
activities or affairs of the Company. Management of the Company is vested
solely in the Voting Interests, which are held by United States limited
partnerships. The Voting Members control all business activities and
affairs of the Company by agreement of the majority in interest of such
Members, subject to the trading authority vested in and delegated to JWH
and the administrative authority vested in and delegated to MLIP. Each
Voting Member is a "commodity pool" sponsored and managed by MLIP, share
in the trading profit (loss) and interest income of the Company in
proportion to their respective capital accounts, although the Members are
subject to somewhat different fees.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
-------------------
Commodity futures, options on futures and forward contract transactions
are recorded on the trade date and open contracts are reflected in net
unrealized profit on open contracts in the Statements of Financial
Condition at the difference between the original contract value and the
market value (for those commodity interests for which market quotations
are readily available) or at fair value. The change in unrealized profit
on open contracts from one period to the next is reflected under Trading
(loss) profit: Change in unrealized in the Statements of Operations.
-5-
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 dates of the
Statements of Financial Condition. Income and expense items denominated in
currencies other than the U.S. dollar are translated into U.S. dollars at
the rates in effect during the period. Gains and losses resulting from the
translation to U.S. dollars are reported in total trading results
currently.
Organizational Costs
--------------------
MLIP paid all organizational costs relating to the Company without direct
reimbursement from the Company or any Member.
Operating Expenses
------------------
MLIP pays for all operating costs (including all legal, accounting,
printing, postage and similar administrative expenses) of the Company.
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
-------------
No distributions had been made by the Company to any Member as of December
31, 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
-----------
The Company will terminate on September 30, 2046 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as
set forth in the Organization Agreement.
-6-
2. RELATED PARTY TRANSACTIONS
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 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 Company, from 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.
Following the allocation of the Company's trading (loss) profit and
interest income among the Members' respective capital accounts, MLIP
calculates the brokerage commissions, Profit Shares, administrative fees
and other expenses due from the Company to third parties, in respect of
the Company's trading on behalf of the respective Members (the Company
being subject to different commissions, fees and expenses in respect of
its trading as allocable to the various different Members). Such
commissions, fees, Profit Shares 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
appropriate Members' capital accounts and paid out by the Company. The
Company pays brokerage commissions to MLF at flat monthly rates reflecting
the fee arrangement between each Member and MLF. During the period from
January 1, 1998 to May 31, 1998, such rates ranged from .646 of 1% (a
7.75% annual rate) to .979 of 1% (an 11.75% annual rate) of each Member's
month-end assets invested in the Company. As of May 31, 1998, Members
subject to various brokerage commission rates withdrew from the Company,
and thereafter, the rate was .792 of 1% (a 9.5% annual rate).
The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25%
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 Advisor an annual consulting fee of 4% of the Company's
average month-end assets, after reduction for a portion of the brokerage
commissions.
3. ADVISORY AGREEMENT
The Advisory Agreement between the Company and JWH(R) has remained
essentially unchanged since the inception of the Company. This Agreement
is in effect for successive one-year terms, but, in fact, given the single
advisor structure of the Company, the Company would terminate were JWH(R)
to withdraw. JWH(R) determines the commodity futures, options on futures
and forward contract trades to be made on behalf of the Company, subject
to certain Company trading policies and to certain rights reserved by
MLIP.
The Company pays to JWH(R) a quarterly Profit Share equal to 15% of any
New Trading Profit, as defined, attributable to each Member's capital
account. Profit Shares are calculated separately in respect of each
Member's Capital Account. Profit Shares are determined as of the end of
each calendar quarter and are also paid to JWH(R) upon the withdrawal of
capital from the Company by a Member for whatever purpose, other than to
pay expenses.
-7-
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.
This Statement supercedes SFAS No. 119 ("Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments") and SFAS
No. 105 ("Disclosure of Information about Financial Instruments with
Off-Balance Sheet Risk and Financial Instruments with Concentrations of
Credit Risk") whereby disclosure of average aggregate fair values and
contract/notional values, respectively, of derivative financial
instruments is no longer required for an entity such as the Company which
carries its assets at fair value. Such Statement sets forth a much broader
definition of a derivative instrument. MLIP does not believe that the
adoption of the provisions of such Statement had 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.
The Company trades futures, options on futures and forward contracts on
interest rates, stock indices, currencies, and metals.
Market Risk
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the underlying 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 in the markets
in which such derivative instruments are traded.
MLIP, which monitors the trading of the Company in MLIP's capacity as the
Company's administrator, 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 JWH(R), calculating the Net Asset Value of the
Company and of the Members' respective capital accounts 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 consult with
JWH(R) concerning the possibility of JWH(R) reducing trading leverage or
market concentrations. However, such interventions are unusual. Except in
cases in which it appears that JWH(R) has begun to deviate from past
practice and trading policies or to be trading erratically (which has not
occurred to date), MLIP's basic risk control procedures consist simply of
the ongoing process of monitoring JWH(R) with the market risk controls
being applied by JWH(R).
-8-
Credit Risk
The risks associated with exchange-traded contracts are typically
perceived to be less than those associated with over-the-counter
(non-exchange-traded) transactions, because exchanges typically (but not
universally) provide clearinghouse arrangements in which the collective
credit (in some cases limited in amount, in some cases not) of the members
of the exchange is pledged to support the financial integrity of the
exchange. In over-the-counter transactions, on the other hand, traders
must rely solely on the credit of their respective individual
counterparties. Margins, which may be subject to loss in the event of a
default, are generally required in exchange trading, and counterparties
may require margin in the over-the-counter markets.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit, if any, included in the
Statements of Financial Condition. The Company attempts to mitigate credit
risk by dealing exclusively with Merrill Lynch entities as clearing
brokers.
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 Statement of Financial Condition
under Equity in Commodity futures accounts.
* * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Michael L. Pungello
Michael L. Pungello
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
Commodity Pool Operator
ML JWH Financial and Metals
Portfolio L.L.C.
-9-
EXHIBIT 13.01(a)(2)
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
Financial Statments for the years ended
December 31, 1999 and 1998 and Independent
Auditor's Report
[LOGO] Merrill Lynch
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED
DECEMBER 31, 1999 AND 1998:
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 Millburn Global L.L.C.
We have audited the accompanying statements of financial condition of ML
Millburn Global L.L.C. (the "Company") as of December 31, 1999 and 1998, and the
related statements of operations and of changes in members' capital for the
years ended December 31, 1999 and 1998. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of ML Millburn Global L.L.C. as of December 31,
1999 and 1998, and the results of its operations and changes in members' capital
for the years ended December 31, 1999 and 1998 in comformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 2000
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1999 and 1998
- -----------------------------------------------------------------------------------------------------------
ASSETS 1999 1998
--------------- ---------------
Equity in commodity futures trading accounts:
Cash and option premiums $ 22,574,430 $ 26,414,436
Net unrealized profit on open contracts 1,088,672 1,304,531
Accrued interest (Note 2) 106,687 96,033
---------------- ----------------
TOTAL $ 23,769,789 $ 27,815,000
=============== ================
LIABILITIES AND MEMBERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 2) $ 188,158 $ 220,182
Profit Shares payable (Note 3) - 183,086
Administrative fees payable (Note 2) 4,952 5,794
Withdrawals payable 544,050 128,824
--------------- ---------------
Total liabilities 737,160 537,886
--------------- ---------------
MEMBERS' CAPITAL:
Voting Members 23,032,629 27,277,114
--------------- ---------------
Total Members' capital 23,032,629 27,277,114
--------------- ---------------
TOTAL $ 23,769,789 $ 27,815,000
=============== ===============
See notes to financial statements.
-2-
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
1999 1998
---------- ----------
REVENUES:
Trading profit:
Realized $ 936,083 $ 1,728,662
Change in unrealized (215,763) 431,034
------------ ------------
Total trading results 720,320 2,159,696
Interest income (Note 2) 1,274,615 1,433,954
------------ ------------
Total revenues 1,994,935 3,593,650
------------ ------------
EXPENSES:
Brokerage commissions (Note 2) 2,523,710 2,836,503
Profit Shares (Note 3) 22,730 197,023
Administrative fees (Note 2) 66,413 74,885
------------ ------------
Total expenses 2,612,853 3,108,411
------------ ------------
NET INCOME (LOSS) $ (617,918) $ 485,239
============ ============
See notes to financial statements.
-3-
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
STATEMENTS OF CHANGES IN MEMBERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1997 $ 34,130,278
Withdrawals (7,338,403)
Net income 485,239
------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1998 $ 27,277,114
Withdrawals (3,626,567)
Net loss (617,918)
------------------
MEMBERS' CAPITAL,
DECEMBER 31, 1999 $ 23,032,629
==================
See notes to financial statements.
-4-
ML MILLBURN GLOBAL L.L.C.
(A Delaware Limited Liability Company)
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUTING POLICIES
Organization
------------
ML Millburn Global L.L.C. (the "Company") was organized under the Delaware
Limited Liability Company Act on November 22, 1996 and commenced trading
activities on December 2, 1996. The Company engages in the speculative
trading of futures, options on futures and forward contracts on a wide range
of commodities. Millburn Ridgefield Corporation ("Millburn") is the trading
advisor to the Company. Merrill Lynch Investment Partners ("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. The Company has authorized two classes of Membership Interests: Non-
Voting Interests and Voting Interests (collectively, "Interests"). These two
classes of Interests have common economic interests in the Company. The
Non-Voting Interests, which can be held by non-United States investment funds
sponsored by MLIP, would not participate in the management of the Company, or
engage, directly or indirectly, in, participate in or control any portion of
the business activities or affairs of the Company. Currently, there are no
Non-Voting Members. Management of the Company is vested solely in the Voting
Interests, which can be held by United States limited partnerships sponsored
by MLIP. Currently, there is only one Voting Member. The Voting Member
controls all business activities and affairs of the Company, subject to the
trading authority vested in and delegated to Millburn and the administrative
authority vested in and delegated to MLIP. The Voting Member is a "commodity
pool" sponsored and managed by MLIP.
Estimates
---------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of financial statements as well
as 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 and forward contract transactions are
recorded on the trade date and open contracts are reflected in Net unrealized
profit on open contracts in the Statements of Financial Condition at the
difference between the original contract value and the market value (for
those commodity interests for which market quotations are readily available)
or at fair value. The change in unrealized profit (loss) on open contracts
from one period to the next is reflected in Trading profit: Change in
unrealized in the Statements of Operations.
-5-
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. dollars are translated into
U.S. dollars at the rates in effect at the dates of the Statements of
Financial Condition. Income and expense items denominated in currencies
other than the U.S. dollar are translated into U.S. dollars at the rates in
effect during the period. Gains and losses resulting from the translation
to U.S. dollars are reported in total trading results currently.
Organizational Costs
--------------------
MLIP paid all organizational costs relating to the Company without direct
reimbursement from the Company or any Member.
Operating Expenses
------------------
MLIP pays for all operating costs (including all legal, accounting,
printing, postage and similar administrative expenses) of the Company.
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as the 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
-------------
No distributions had been made by the Company to any Member as of December
31, 1999.
Withdrawals
-----------
The Member may withdraw some or all of such Members' capital at Net Asset
Value as of the close of business on any business day. There are no
withdrawal fees or charges.
Dissolution
-----------
The Company will terminate on December 31, 2046 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
--------------------------
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 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 Company, from possession of such
assets.
-6-
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.
Following the allocation of the Company's trading profit (loss) and
interest income among the Members' respective capital accounts, MLIP
calculates the brokerage commissions, administrative fees, Profit Shares
and other expenses due from the Company to third parties. Such commissions,
fees and expenses are specifically calculated for each member as of the end
of each accounting period, and deducted from the appropriate Member's
capital accounts and paid out by the Company. The Company pays brokerage
commissions to MLF at flat monthly rates reflecting the fee arrangement
between the Member and MLF. During the period from January 1, 1998 to May
31, 1998, the rates ranged from .729 of 1% (an 8.75% annual rate) to .792
of 1% (a 9.50% annual rate). As of May 31, 1998, the Members subject to a
.729 of 1% (a 9.50% annual rate).
The Company pays MLIP a monthly administrative fee of .021 of 1% (a .25%
annual rate) of the 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 Millburn an annual consulting fee of 2% of the Company's average
month-end assets, after reduction for a portion of brokerage commissions.
3. ADVISORY AGREEMENT
The Advisory Agreement between the Company and Millburn has remained
essentially unchanged since the inception of the Company. This Agreement is
in effect for successive one-year terms, but, in fact, given the single
advisor structure of the Company, the Company would terminate were Millburn
to withdraw. Millburn determines the commodity futures, options on futures
and forward contract trades to be made on behalf of the Company, subject to
certain rights reserved by MLIP.
The Company pays to Millburn an annual Profit Share equal to 20% of any New
Trading Profit, as defined, attributable to the Member's Capital Account.
Profit Shares are calculated separately in respect of each Members' Capital
Account. Profit Shares are also paid to Millburn upon the withdrawal of
capital from the Company by a Member for whatever purpose, other than to
pay expenses.
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. This
Statement supercedes SFAS No. 119 ("Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments") and SFAS No. 105
("Disclosure of Information about Financial Instruments with Off-Balance
Sheet Risk and Financial Instruments with Concentrations of Credit Risk")
whereby disclosure of average aggregate fair values and contract/notional
values, respectively, of derivative financial instruments is no longer
required for an entity such as the Company which carries its assets at fair
value. Such Statement sets forth a much broader definition of a derivative
instrument. MLIP does not believe that the adoption of the provisions of
such Statement had 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)
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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,
and changes in the level or volatility of interest rates, foreign currency
exchange rates or the market values of the underlying 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 in the markets in which such derivative instruments are traded.
MLIP, which monitors the trading of the Company in MLIP's capacity as the
Company's administrator, 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
Millburn, calculating the Net Asset Value of the Company and the Members'
respective capital accounts as of the close of business on each day 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 consult with Millburn concerning the possibility of Millburn reducing
trading leverage or market concentrations. However, such interventions are
unusual. Except in cases in which it appears that Millburn has begun to deviate
from past practice and trading policies or to be trading erratically (which has
not occurred to date), MLIP's basic risk control procedures consists simply of
the ongoing process of advisor monitoring with the market risk controls being
applied by Millburn.
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
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, 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 in exchange trading, and counterparties may require margin in the
over-the-counter markets.
The Company attempts to mitigate credit risk by dealing exclusively with Merrill
Lynch entities as clearing brokers.
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
Statement of Financial Condition under Equity in Commodity futures accounts.
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* * * * * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Michael L. Pungello
Michael L. Pungello
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
Commodity Pool Operator of
ML Millburn Global L.L.C.
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