-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Ve4zaZSBdg2BMZflAX6qjhjwimwscoOcFK7sOa+YUF0ohx5amacz07cHI319Lqz6 OJ7FQgPVFmHPSDuD0rj04g== 0001047469-03-011211.txt : 20030331 0001047469-03-011211.hdr.sgml : 20030331 20030331145626 ACCESSION NUMBER: 0001047469-03-011211 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML PRINCIPAL PROTECTION LP CENTRAL INDEX KEY: 0000917259 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [6798] IRS NUMBER: 133750642 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-25000 FILM NUMBER: 03629568 BUSINESS ADDRESS: STREET 1: 6TH FL, SOUTH TOWER, M L WORLD HDQR STREET 2: C/O ML FUTURES INVESTMENT PARTNERS INC CITY: NEW YORK STATE: NY ZIP: 10080-6106 BUSINESS PHONE: 2122364161 MAIL ADDRESS: STREET 1: C/O MERRILL LYNCH INVESTMENT PARTNERS IN STREET 2: WORLD FINANCIAL CENTER S TOWER 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 FORMER COMPANY: FORMER CONFORMED NAME: SECTOR STRATEGY FUND VII LP DATE OF NAME CHANGE: 19940107 FORMER COMPANY: FORMER CONFORMED NAME: ML PRINCIPAL PROTECTION PLUS LP DATE OF NAME CHANGE: 19940616 10-K 1 a2105279z10-k.txt 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K /X/ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the fiscal year ended: December 31, 2002 or / / Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission file number: 0-25000 ML PRINCIPAL PROTECTION L.P. (Exact name of registrant as specified in its charter) DELAWARE 13-3750642 (REGISTRANT) ------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) C/O MERRILL LYNCH INVESTMENT MANAGERS LLC 222 BROADWAY 27TH FLOOR NEW YORK, NY 10038-2510 ------------------------------------------ (Address of principal executive offices) Registrant's telephone number, including area code: (609) 282-6996 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Limited Partnership Units Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. /X/ Aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant: the registrants are limited partnerships; as of February 1, 2003, limited partnership units with an aggregate value of $17,834,963 were outstanding and held by non-affiliates. DOCUMENTS INCORPORATED BY REFERENCE The registrant's "2002 Annual Report and Independent Auditors' Report," the annual report to security holders for the fiscal year ended December 31, 2002, is incorporated by reference into Part II, Item 8 and Part IV hereof and filed as an Exhibit herewith. ML PRINCIPAL PROTECTION L.P. ANNUAL REPORT FOR 2002 ON FORM 10-K TABLE OF CONTENTS
PART I PAGE ------ ---- Item 1. Business...................................................................................... 1 Item 2. Properties.................................................................................... 7 Item 3. Legal Proceedings............................................................................. 7 .. Item 4. Submission of Matters to a Vote of Security Holders........................................... 7 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters......................... 8 Item 6. Selected Financial Data....................................................................... 9 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations......... 12 Item 7A. Quantitative and Qualitative Disclosures About Market Risk.................................... 18 Item 8. Financial Statements and Supplementary Data................................................... 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.......... 19 PART III Item 10. Directors and Executive Officers of the Registrant............................................ 19 Item 11. Executive Compensation........................................................................ 20 Item 12. Security Ownership of Certain Beneficial Owners and Management................................ 21 Item 13. Certain Relationships and Related Transactions................................................ 21 Item 14. Controls and Procedures....................................................................... 22 PART IV Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K............................... 23
i PART I ITEM 1: BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS: ML Principal Protection L.P. (the "Partnership") was organized under the Delaware Revised Uniform Limited Partnership Act on January 3, 1994 and commenced trading activities on October 12, 1994. The Partnership is a multi-strategy, multi-market managed futures investment vehicle employing a range of proprietary strategies diversified across major markets of the global economy -- financials, currencies, energy, metals and agriculture. MLIM Alternative Strategies LLC ("MLIM AS LLC"), a wholly-owned subsidiary of Merrill Lynch Investment Managers, LP ("MLIM"), which, in turn, is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), was the general partner of the Partnership. As of February 28, 2003, the general partner interest and the management authority of the Partnership was assigned from MLIM AS LLC to Merrill Lynch Investment Managers LLC ("MLIM LLC"), a wholly-owned subsidiary of MLIM, as part of an internal Merrill Lynch reorganization. This change did not affect the personnel involved in the management of the Partnership. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is the Partnership's commodity broker. Many of the multi-advisor funds (the "Multi-Advisor Funds") sponsored by MLIM AS LLC allocate their assets to a number of the same independent advisors (the "Advisors"). MLIM AS LLC 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, 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 MLIM AS LLC. MM LLC has been managed by MLIM AS LLC, and is now being managed by MLIM LLC, 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 MLIM LLC. MLIM LLC, on an ongoing basis, may change the number of Multi-Advisor Funds investing in MM LLC. The Partnership offers its units of limited partnership interest ("Units"), and receives and processes subscriptions, on a continuous basis throughout each calendar quarter. Investors whose subscriptions are accepted at any time during a calendar quarter are admitted to the Partnership as limited partners as of the beginning of the immediately following quarter, acquiring Units at $100 per Unit. Investors' customer securities accounts are debited in the amount of their subscriptions on settlement dates throughout each quarter shortly after their subscriptions are accepted by MLIM LLC. Subscription proceeds received during a quarter are held in escrow pending investment in Units as of the beginning of the following quarter. All interest earned on subscriptions while held in escrow is paid to the investors on or about the date that Units are issued to them or their subscription is rejected. The Units sold, generally, at the beginning of each calendar quarter, are sold in separate Series, each of which has its own Net Asset Value. All Series trade pursuant to the same Advisor combination, but because they begin trading at different times they have different Net Asset Values and may have different percentages of their capital invested in MM LLC or prior to September 1, 2000, the ML Principal Protection Trading L.P. (the "Trading Partnership"). Only the assets attributable to each Series of Units allocated to trading are allocated to the Advisors for management through MM LLC. As of December 31, 2002, the Partnership's capitalization was $17,440,562 and the Net Asset Value per Series A Unit (the initial Series of Units), originally $100 as of October 12, 1994, had risen to $151.52 (adding back $29.50 in Distributions). 1 Through December 31, 2002, the highest month-end Net Asset Value of a Series A Unit was $151.52 (adding back $29.50 in Distributions) (December 31, 2002) and the lowest was $101.04 (December 31, 1994). The outstanding Series of Units, which have not reached the Principal Assurance Date, as defined below, are entitled to fixed-rate annual distributions and may also receive certain discretionary distributions. No distributions are made on any Series of Units sold after May 1, 1997. The Partnership is a "principal protected" commodity pool. Merrill Lynch provides the guarantee described below under 1(c), "Narrative Description of Business -- Merrill Lynch's 'Principal Protection' Undertaking to the Partnership" that all Units of any given Series will have a Net Asset Value - -- after payment of all fixed-rate annual as well as discretionary distributions on such Units, in the case of Units sold on or prior to May 1, 1997 -- of at least their initial $100 subscription price as of a specified date after their issuance (the "Principal Assurance Date" for such Series, seven years after issuance for all outstanding Series sold before May 1, 1997 and five years after issuance for all Series sold thereafter). This guarantee does not prevent substantial losses, but rather serves only as a form of "stop loss," limiting the maximum loss which investors who retain their Units until such Units' Principal Assurance Date can incur. In order to protect Merrill Lynch from any liability under its guarantee, MLIM LLC imposes substantial opportunity costs on the Partnership by deleveraging its trading, retaining a substantial portion of the Partnership's assets in the Partnership rather than investing such assets in the Trading Partnership for allocation to trading. If the Net Asset Value per Unit of a Series declines to 110% or less of the present value of $100, plus any fixed-rate annual distributions due on such Series, discounted back from the Principal Assurance Date, MLIM LLC would terminate trading with respect to such Series altogether in order to ensure that Merrill Lynch incurred no financial obligation to the Partnership under Merrill Lynch's guarantee of the minimum Net Asset Value per Unit of such Series. The Principal Assurance Dates for Series A through F and K through N came to term on or before December 31, 2002 and were not renewed. The above Series Units remain outstanding, with 100% of their assets allocated to trading, without any "principal protection" feature and no longer pay annual distributions. In the case of Units sold after May 1, 1997, the potential opportunity costs of the Partnership's "principal protection" are significantly increased due to the fact that in the event that MLIM LLC deleverages any Series of such Units, it must deleverage all Series to the same degree. A Series could be deleveraged as a result of losses which accrued subsequent to such Series having recognized profits more than sufficient to offset such losses, but which were earned before a more recent Series was issued and, consequently, were not available to offset the same losses incurred by such Series. Conversely, losses incurred before a particular Series is issued could indirectly cause a further deleveraging of such Series' trading due to the effect of such losses on the leverage which MLIM LLC believes is appropriate to use for an earlier-issued Series. (b) FINANCIAL INFORMATION ABOUT SEGMENTS: The Partnership's business constitutes only one segment for financial reporting purposes, i.e., a speculative "commodity pool." The Partnership does not engage in sales of goods or services. (c) NARRATIVE DESCRIPTION OF BUSINESS: GENERAL The Partnership trades, through MM LLC, in the international futures, options on futures, forwards and options on forward markets, with the objectives of achieving long-term capital appreciation while controlling performance volatility while assuring investors of at least a predetermined minimum Net Asset Value per Unit as of the Principal Assurance Date, with respect to those Series whose Principal Assurance Date has not passed. The Partnership's investment in MM LLC is allocated and reallocated by MLIM LLC to the trading management of the Advisors applying proprietary strategies in numerous markets. MLIM LLC may, from time to time, direct certain individual Advisors to manage their Partnership accounts as if they were managing up to 50% more equity than the actual capital allocated to them. One of the objectives of the Partnership is to provide diversification for a limited portion of the risk segment of the Limited Partners' portfolios. Commodity pool performance has historically often demonstrated a low degree of performance correlation with traditional stock and bond holdings. Since it began trading, the Partnership's returns have, in fact, frequently been non-correlated with the United States stock and bond markets. 2 MERRILL LYNCH'S "PRINCIPAL PROTECTION" UNDERTAKING TO THE PARTNERSHIP Merrill Lynch agreed to contribute sufficient capital to the Partnership so that it will have adequate funds, after adjusting for all liabilities to third parties, that the Net Asset Value per Unit of each Series will be no less than $100 as of the Principal Assurance Date for such Series (after the payment of all distributions, if any, on Units of such Series). This guarantee, which is effective with respect to any given Series as of the Principal Assurance Date for such Series, is a guarantee only of a return of an investor's initial investment (plus distributions, if any). It is not a guarantee against the loss of the time value of such investment or a guarantee of profit. The Principal Assurance Dates for Series A through F and K through N came to term on or before December 31, 2002, respectively and were not renewed. The above Series Units remain outstanding, with 10% of its assets allocated to trading, without any "principal protection" feature and no longer pay annual distributions. OPERATION OF A SERIES AFTER ITS PRINCIPAL ASSURANCE DATE MLIM LLC may determine to dissolve a Series as of its Principal Assurance Date, to extend the Merrill Lynch guarantee for a certain period of time (resetting the minimum Net Asset Value per Unit of such Series guaranteed by Merrill Lynch) or to continue to operate such Series without a "principal protection" feature. Series A through F and K through N continue to operate without the "principal protection" feature. CONSOLIDATION OF SERIES MLIM LLC after making the previously announced distributions for Series F and prior to the opening of business on January 2, 2003, consolidated those series that had come to term on or before December 31, 2002 (Series A through F and K through N) into a new series, Series A 2003, with a $1.00 per Unit Net Asset Value. The aggregate Net Asset Value of each investor's new Units was equal to the aggregate Net Asset Value of their original Units as of December 31, 2002. The consolidation had no economic effect on the investors. MLIM LLC contributed $5,499 to the Partnership, the amount necessary due to the effects of rounding, to insure all investors received Units equal in value to their original holdings at December 31, 2002. The following is a listing of the number of new Series A 2003 Units each investor received for each Unit of their original series holding.
SERIES NUMBER OF UNITS - ------ --------------- A 112.021960 B 117.269077 C 115.242141 D 112.085339 E 111.088709 F 104.084994 K 123.799970 L 120.674078 M 122.310644 N 117.973383
TWO-TIER STRUCTURE OF THE PARTNERSHIP Prior to September 1, 2000, the Partnership did not trade in the futures and forwards markets directly, but rather through the Trading Partnership. The Partnership's liability for any trading losses was limited to the Partnership's investment in the Trading Partnership. Effective September 1, 2000, the Partnership consolidated its trading accounts with those of certain other multi-advisor managed futures funds sponsored by MLIM AS LLC. The Trading Partnership is no longer trading directly through managed accounts with each of its advisors, but invested in MM LLC. As of January 1, 2001, the Trading Partnership was liquidated and the Partnership invested directly into MM LLC. 3 USE OF PROCEEDS AND CASH MANAGEMENT INCOME SUBSCRIPTION PROCEEDS. MLIM LLC pays from its own funds the selling commissions relating to the sale of the Units. Accordingly, 100% of the proceeds of Unit sales are received in cash by the Partnership and are available for use in its speculative trading. In such trading, the Partnership's assets are used as security for and to pay the Partnership's trading losses as well as any expenses and redemptions. The primary use of the proceeds of the sale of the Units is to permit the Advisors to trade on a speculative basis in a wide range of different futures, options on futures, forwards and options on forward markets on behalf of the Partnership. While being used for this purpose, the Partnership's assets are also generally available for cash management and to earn interest, as more fully described below under "Available Assets." MARKET SECTORS. The Partnership trades, through MM LLC, in a diversified group of markets under the direction of multiple independent Advisors. These Advisors can, and do, from time to time, materially alter the allocation of their overall trading commitments among different market sectors. Except in the case of certain trading programs which are purposefully limited in the markets which they trade, there is essentially no restriction on the commodity interests which may be traded by any Advisor or the rapidity with which an Advisor may alter its market sector allocations. MARKET TYPES. The Partnership trades, through MM LLC, on a variety of United States and foreign futures exchanges. Substantially all of the Partnership's off-exchange trading takes places in the highly liquid, institutionally-based currency forward markets. Many of the Partnership's currency trades, through MM LLC, are executed in the spot and forward foreign exchange markets (the "FX Markets") where there are no direct execution costs. Instead, the participants, banks and dealers, in the FX Markets take a "spread" between the prices at which they are prepared to buy and sell a particular currency and such spreads are built into the pricing of the spot or forward contracts with the Partnership. In its exchange of futures for physical ("EFP") trading, the Partnership acquires cash currency positions through banks and dealers. The Partnership pays a spread when it exchanges these positions for futures. This spread reflects, in part, the different settlement dates of the cash and the futures contracts, as well as prevailing interest rates, but also includes a pricing spread in favor of the banks and dealers, which may include a Merrill Lynch entity. As in the case of its market sector allocations, the Partnership's commitments to different types of markets -- U.S. and non-U.S., regulated and non-regulated -- differ substantially from time to time as well as over time. The Partnership has no policy restricting its relative commitments to any of these different types of markets. CUSTODY OF ASSETS. All of the Partnership's assets are currently held in customer accounts at Merrill Lynch. AVAILABLE ASSETS. Prior to May 26, 2000, the Partnership earned income, as described below, on its "Available Assets," which could be generally described as the cash actually held by the Partnership or invested in Treasury bills. Available Assets were held primarily in U.S. dollars, and to a lesser extent, in foreign currencies, and were comprised of the following: the Partnership's cash balances held in the offset accounts (as described below) which include "open trade equity" (unrealized gain and loss on open positions) on United States futures contracts, which is paid into or out of the Partnership's account on a daily basis; and the Partnership's cash balance in foreign currencies derived from its trading in non-U.S. dollar denominated futures and options contracts, which includes open trade equity on those exchanges which settle gains and losses on open positions in such contracts prior to closing out such positions. Available Assets do not include, and the Partnership does not earn interest on, the Partnership's gains or losses on its open forward, commodity option and certain foreign futures positions since such gains and losses are not collected or paid until such positions are closed out. 4 The Partnership's Available Assets may be greater than, less than or equal to the Partnership's Net Asset Value (on which the redemption value of the Units is based) primarily because Net Asset Value reflects all gains and losses on open positions, as well as accrued but unpaid expenses. THE PARTNERSHIP'S U.S. DOLLAR AVAILABLE ASSETS MANAGED BY MLIM. Prior to May 26, 2000, a portion of the Partnership's U.S. dollar Available Assets were managed directly by MLIM, pursuant to guidelines established by MLIM AS LLC, for which MLIM assumed no responsibility, in the Government Securities markets. MLIM AS LLC's objective in retaining MLIM was to provide cash management services to the Partnership and to enhance the return earned on the Partnership's U.S. dollar Available Assets managed by MLIM to slightly above the 91-day Treasury bill rate. On May 26, 2000, the Government Securities were liquidated and the management agreement with MLIM was terminated. INTEREST PAID BY MERRILL LYNCH ON THE PARTNERSHIP'S U.S. DOLLAR AND NON U.S. DOLLAR ASSETS The Partnership's U.S. dollar assets are maintained at MLPF&S. On assets held in U.S. dollars, Merrill Lynch credits the Partnership with interest at the prevailing 91-day U.S. Treasury bill rate. The Partnership is credited with interest on any of its 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 derive certain economic benefit, in excess of the interest which Merrill Lynch pays to the Partnership, from possession of such assets. Merrill Lynch charges the Partnership 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. CHARGES The following table summarizes the charges incurred by the Partnership during 2002, 2001, and 2000 directly or through MM LLC.
2002 2001 2000 ------------------------------------------------------------------------------------ % OF AVERAGE % OF AVERAGE % OF AVERAGE DOLLAR MONTH-END DOLLAR MONTH-END DOLLAR MONTH-END CHARGES AMOUNT NET ASSETS AMOUNT NET ASSETS AMOUNT NET ASSETS ----------------------------------------------------------------------------------------------------------- Brokerage Commissions $ 1,142,131 6.03% $ 1,351,049 5.68% $1,923,409 6.00% Administrative Fee 38,071 0.20% 45,035 0.19% 71,476 0.22% Profit Shares 273,852 1.45% 250,522 1.05% 270,203 0.84% ------------------------------------------------------------------------------------ Total $ 1,454,054 7.68% $ 1,646,606 6.92% $2,265,088 7.06% ====================================================================================
Subsequent to September 1, 2000, Brokerage Commissions, Administrative Fees and Profit Shares were paid by the Partnership through its investment in MM LLC. During 2002 and 2001, the Partnership had 100% of its assets invested in MM LLC. The charges incurred by MM LLC are passed through to the Partnership (see "Description of Current Charges"). The foregoing table does not reflect the bid-ask spreads paid by the Partnership on its forward trading, or the benefits which may be derived by Merrill Lynch from the deposit of certain of the Partnership's U.S. dollar available assets in offset accounts. The Partnership's average month-end Net Assets during 2002, 2001, and 2000 equaled $18,933,468, $23,799,347 and $32,066,319, respectively. 5 During 2002, 2001 and 2000, the Partnership earned directly or through its investment in MM LLC $364,235, $847,680, and $1,936,380 in interest income, or approximately 1.92%, 3.56%, and 6.04% of the Partnership's average month-end Net Assets. DESCRIPTION OF CURRENT CHARGES
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT - --------- ----------------- ----------------- MLPF&S Brokerage Commissions A flat-rate monthly commission of 0.625 of 1% (a 7.5% annual rate) of the Partnership's month-end assets committed to trading. The Partnership initially commited 85% of the capital attributable to each Series of Units issued after May 1, 1998. During 2000 (prior to its investment in MM LLC), the round-turn equivalent rate of the Partnership's flat-rate Brokerage Commissions was approximately $101. The estimated aggregate round turn commission rate for MM LLC for the year ended December 31, 2002, 2001 and 2000 was $59, $64 and $82, respectively. MLPF&S Use of Partnership assets Merrill Lynch may derive certain economic benefit from the deposit of certain of the Partnership's U.S. dollar Available Assets. MLIM LLC Administrative Fees The Partnership pays MLIM LLC a monthly Administrative Fee equal to 0.021 of 1% (a 0.25 of 1% annual rate) of the Partnership's month-end total assets. MLIM LLC pays the Partnership's routine administrative costs. Other Bid-ask spreads Bid-ask spreads on forward and Counterparties related trades. Advisors Profit Shares Advisors receive quarterly or annual Profit Shares ranging from 20% to 25% (depending on the Advisor) of any New Trading Profit. Profit Shares are also paid upon the net reallocation of assets away from an Advisor and the redemption of Units. New Trading Profit is calculated separately in respect of each Advisor, irrespective of the overall performance of the Partnership. The Partnership may pay substantial Profit Shares during periods when it is incurring significant overall losses. Subsequent to September 1, 2000, the Partnership pays Profit Shares through MM LLC. Advisors Consulting Fees MLPF&S pays the Advisors annual Consulting Fees ranging up to 2.5% 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. MLPF&S; Extraordinary expenses Actual costs incurred; none paid Others to date.
6 -------------- REGULATION MLIM LLC, the Advisors and MLPF&S are each subject to regulation by the Commodity Futures Trading Commission (the "CFTC") and the National Futures Association ("NFA"). Other than in respect of its periodic reporting requirements under the Securities Exchange Act of 1934, and the registration of the Units for continuous public distribution under the Securities Act of 1933, the Partnership itself is generally not subject to regulation by the Securities and Exchange Commission (the "SEC"). However, MLIM LLC itself is registered as an "investment adviser" under the Investment Advisers Act of 1940. MLPF&S is also regulated by the SEC and the National Association of Securities Dealers. (i) through (xii)-- not applicable. (xiii) The Partnership has no employees. (d) FINANCIAL INFORMATION ABOUT GEOGRAPHIC AREAS: The Partnership does not engage in material operations in foreign countries, nor is a material portion of the Partnership's revenue derived from customers in foreign countries. However, the Partnership trades, through MM LLC, on a number of foreign commodity exchanges. The Partnership does not engage in the sales of goods or services. ITEM 2: PROPERTIES The Partnership does not use any physical properties in the conduct of its business. The Partnership's administrative offices are the administrative offices of MLIM LLC (Merrill Lynch Investment Managers LLC, 222 Broadway, 27th Floor, New York, NY 10038-2510). MLIM LLC performs all administrative services for the Partnership from MLIM LLC's offices. ITEM 3: LEGAL PROCEEDINGS Merrill Lynch -- a partner of MLIM, which is the sole member of MLIM LLC -- as well as certain of its subsidiaries and affiliates have been named as defendants in civil actions, arbitration proceedings and claims arising out of their respective business activities. Although the ultimate outcome of these actions cannot be predicted at this time and the results of legal proceedings cannot be predicted with certainty, it is the opinion of management that the result of these matters will not be materially adverse to the business operations or financial condition of MLIM LLC or the Partnership. Neither MLIM LLC itself nor the Partnership has never been the subject of any material litigation. ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Partnership has never submitted any matters to a vote of its Limited Partners. 7 PART II ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS ITEM 5(a) (a) MARKET INFORMATION: There is no established public trading market for the Units, nor will one develop. Limited Partners may redeem Units as of the end of each month at Net Asset Value, subject to certain early redemption charges. Units redeemed prior to the Principal Assurance Date are not entitled to any benefits under the Merrill Lynch, Inc. guarantee. (b) HOLDERS: As of December 31, 2002, there were 1,084 holders of Units, including MLIM AS LLC. (c) DIVIDENDS: For Series issued on or prior to May 1, 1997, the Partnership makes annual fixed-rate distributions, payable irrespective of profitability, of $3.50 per Unit. MLIM LLC may also make discretionary distributions of up to 50% of any Distributable New Appreciation, as defined, recognized as of each twelve-month anniversary of the issuance of each Series of Units, subject to an annual limit of 4% of the Net Asset Value per Unit of each Series as of the beginning of the preceding twelve-month period. Distributions, whether fixed-rate or discretionary, do not reduce the $100 minimum Net Asset Value per Unit assured to investors as of the Principal Assurance Date for their Series of Units. For those Series whose principal protection feature has not been renewed, currently Series A through F and K through N, the annual fixed rate distribution has been terminated. As of December 31, 2002, 2001 and 2000, the Partnership had made the following distributions: 8
DISTRIBUTION FIXED-RATE DISCRETIONARY SERIES DATE DISTRIBUTION DISTRIBUTION -------- ------------- ------------ -------------- 2002 - ---- Series B 01/1/2002 $ 3.50 $ - Series C 04/1/2002 3.50 - Series D 07/1/2002 3.50 - Series E 10/1/2002 3.50 - Series F 01/1/2002 3.50 - Series G 04/1/2002 3.50 - Series H 07/1/2002 3.50 - 2001 ------------ Series A 10/1/2001 $ 3.50 - Series B 01/1/2001 3.50 - Series C 04/1/2001 3.50 - Series D 07/1/2001 3.50 - Series E 10/1/2001 3.50 - Series F 01/1/2001 3.50 - Series G 04/1/2001 3.50 - Series H 07/1/2001 3.50 - 2000 ------------ Series A 10/1/2000 $ 3.50 - Series B 01/1/2000 3.50 - Series C 04/1/2000 3.50 - Series D 07/1/2000 3.50 - Series E 10/1/2000 3.50 - Series F 01/1/2000 3.50 - Series G 04/1/2000 3.50 - Series H 07/1/2000 3.50 -
The Partnership does not make any distributions on any Series of Unit issued subsequent to May 1, 1997. (d) SECURITIES AUTHORIZED FOR ISSUANCE UNDER EQUITY COMPENSATION PLANS: Not applicable. (e) RECENT SALES OF UNREGISTERED SECURITIES; Not applicable. (f) USE OF PROCEEDS FROM REGISTERED SECURITIES The Partnership has units registered with an aggregate price of $462,114,000. The Partnership has sold units with an aggregate price of $164,506,495. ITEM 5(b) Not applicable. ITEM 6: SELECTED FINANCIAL DATA The following selected financial data has been derived from the audited financial statements of the Partnership: 9
FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR FOR THE YEAR ENDED ENDED ENDED ENDED ENDED DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, INCOME STATEMENT DATA 2002 2001 2000 1999 1998 - -------------------------------------------------------------------------------------------------------------------- Revenues: Trading Profit (Loss) Realized $ 1,544,945 $ 2,827,944 $ 388,404 $ 1,318,041 $ 8,746,563 Change in Unrealized 404,007 (1,336,518) 1,082,050 (809,172) (2,053,193) Settlement Proceeds 308,142 - - - - --------------------------------------------------------------------------- Total Trading Results 2,257,094 1,491,426 1,470,454 508,869 6,693,370 --------------------------------------------------------------------------- Interest Income 364,235 847,680 1,936,380 3,263,074 5,434,851 --------------------------------------------------------------------------- Total Revenues 2,621,329 2,339,106 3,406,834 3,771,943 12,128,221 --------------------------------------------------------------------------- Expenses: Brokerage Commissions 1,142,131 1,351,049 1,923,409 3,969,972 6,159,359 Administrative Fees (1) 38,071 45,035 71,476 159,099 193,861 Profit Shares 273,852 250,522 270,203 265,734 1,658,306 --------------------------------------------------------------------------- Total Expenses 1,454,054 1,646,606 2,265,088 4,394,805 8,011,526 --------------------------------------------------------------------------- Net Income (Loss) Before Minority Interest 2,621,329 2,339,106 1,141,746 (622,862) 4,116,695 Minority Interest in (Income) Loss (1) - - (48,173) 14,666 (27,056) --------------------------------------------------------------------------- Net Income (Loss) $ 2,621,329 $ 692,500 $ 1,093,573 $ (608,196) $ 4,089,639 ===========================================================================
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, BALANCE SHEET DATA 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------ Aggregate Net Asset Value (Series A-S) $ 17,440,562 $ 21,305,280 $ 26,698,851 $ 41,682,768 $ 79,106,838 -------------- -------------- -------------- -------------- -------------- Net Asset Value per Unit Series A $122.02(2) $112.51(3) $113.23(4) $111.64(5) $115.74(6) Series B $117.26(2) $111.80(3) $111.96(4) $110.83(5) $113.98(6) Series C $115.22(2) $107.78(3) $107.87(4) $106.45(5) $108.92(6) Series D $112.09(2) $106.95(3) $107.16(4) $106.98(5) $111.45(6) Series E $111.09(2) $108.39(3) $108.67(4) $107.36(5) $111.14(6) Series F $107.58(2) $107.16(3) $107.43(4) $106.12(5) $108.95(6) Series G $106.25(2) $105.91(3) $106.12(4) $104.76(5) $107.67(6) Series H $101.65(2) $104.16(3) $104.40(4) $103.60(5) $107.81(6) Series K $123.67 $117.09 $114.12 $107.85 $109.61 Series L $120.53 $114.12 $111.23 $105.10 $106.81 Series M $122.23 $115.73 $112.79 $106.61 $108.34 Series N $117.85 $111.59 $108.74 $102.77 $104.43 Series O $118.17 $111.91 $109.07 $103.09 $104.77 Series P $120.55 $114.15 $111.28 $105.19 $106.92 Series Q $111.44 $105.53 $102.89 $ 97.27 $ 98.86 Series R $112.54 $106.57 $103.39 $ 98.33 N/A Series S $113.44 $107.41 $104.76 $ 99.20 N/A
10 (1) MLIM AS LLC was general partner of the Trading Partnership before it was dissolved. Because the Partnership owned substantially all of the Trading Partnership prior to January 1, 2001, Trading Partnership activities are referred to as Partnership activities in this Report. The minority interest represents MLIM AS LLC's share, as general partner of the Trading Partnership, of the Trading Partnership's profit or loss. (2) Net of aggregate distribution of $29.50 per unit on Series A Units, $31.50 on Series B Units, $28.50 on Series C Units, $26.50 on Series D Units, $26.50 on Series E Units, $24.75 on Series F Units, $24.50 on Series G Units and $24.50 on Series H Units (3) Net of aggregate distribution of $29.50 per unit on Series A Units, $28.00 on Series B Units, $25.00 on Series C Units, $23.00 on Series D Units, $23.00 on Series E Units, $21.25 on Series F Units, $21.00 on Series G Units and $21.00 on Series H Units (4) Net of aggregate distribution of $26.00 per unit on Series A Units, $24.50 on Series B Units, $21.50 on Series C Units, $19.50 on Series D Units, $19.50 on Series E Units, $17.75 on Series F Units, $17.50 on Series G Units and $17.50 on Series H Units. (5) Net of aggregate distribution of $22.50 per unit on Series A Units, $21.00 on the Series B Units, $18.00 on the Series C Units, $16.00 on the Series D Units, $16.00 on the Series E Units, $14.25 on the Series F Units, $14.00 on the Series G Units and $14.00 on the Series H Units. (6) Net of aggregate distribution of $19.00 per unit on Series A Units, $17.50 on the Series B Units, $14.50 on Series C Units, $11.50 on Series D Units, $12.50 on Series E Units, $10.75 on Series F Units, $10.50 on Series G Units and $9.50 on Series H Units. ML PRINCIPAL PROTECTION L.P. DECEMBER 31, 2002 TYPE OF POOL: Multi-Advisor; Selected Advisor/Publicly-Offered/"Principal Protected"(1) INCEPTION OF TRADING: October 12, 1994 AGGREGATE SUBSCRIPTIONS: $164,976,175 CURRENT CAPITALIZATION: $17,440,562 WORST MONTHLY DRAWDOWN:(2) (4.00)% (11/01) WORST PEAK-TO-VALLEY DRAWDOWN:(3) (7.88)% (11/01-2/02)
- ------------------------------------------------------------------------------- MONTHLY RATES OF RETURN(4) - ------------------------------------------------------------------------------- MONTH 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------- January (2.17)% (0.32)% 1.11% (1.09)% 0.07% - ------------------------------------------------------------------------------- February (1.90) 0.92 (0.38) 0.84 (0.56) - ------------------------------------------------------------------------------- March 1.21 3.76 (0.87) (0.52) 0.10 - ------------------------------------------------------------------------------- April (0.97) (2.08) (1.50) 1.17 (1.96) - ------------------------------------------------------------------------------- May 1.00 (0.55) 0.72 (1.30) 0.95 - ------------------------------------------------------------------------------- June 2.85 0.22 (1.21) 1.19 (0.86) - ------------------------------------------------------------------------------- July 1.56 0.04 (1.11) 0.20 (0.67) - ------------------------------------------------------------------------------- August 3.41 0.61 0.76 (0.02) 4.83 - ------------------------------------------------------------------------------- September 1.29 0.84 (2.21) (0.91) 3.55 - ------------------------------------------------------------------------------- October (1.83) 3.52 0.39 (2.90) 0.06 - ------------------------------------------------------------------------------- November (0.27) (4.00) 4.75 1.60 (1.00) - ------------------------------------------------------------------------------- December 2.41 (0.01) 4.74 1.00 0.20 - ------------------------------------------------------------------------------- Compound Annual Rate of Return 6.59% 2.75% 5.02% (0.83)% 4.60% - -------------------------------------------------------------------------------
Rates of Return are presented on a composite, not a Series-by-Series, basis. ------------------------- 11 All Units issued on or prior to May 1, 1997 commenced trading with 60%, and Units issued after May 1, 1997 with 75%, of their assets allocated to trading. Beginning May 1, 1998, all Units issued after May 1, 1997 have initially allocated 85% of their assets to trading. ------------------------- (1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" Partnership is defined as one that allocates no more than 25% of its Trading Assets to any single manager. The Partnership does not currently allocate more than 25% of its Trading Assets to any single Advisor but may do so in the future; consequently, it is referred to as a "Multi-Advisor; Selected Advisor" Partnership. Certain funds, including funds sponsored by MLIM AS LLC, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such funds as "Principal Protected." The Merrill Lynch Guarantee and MLIM AS LLC- related deleveraging of the Partnership's trading provides the "Principal Protection" feature of the Partnership. The "Principal Protection" feature no longer applies to Series A through F and K through N as of December 31, 2002. (2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced by the Partnership since January 1, 1998; a Drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures. (3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline from a month-end cumulative Monthly Rate of Return since January 1, 1998 without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was (1)% in each of January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately (3)%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the (2)% level. (4) Monthly Rate of Return is the net performance of the Partnership during the month of determination (including interest income and after all expenses accrued or paid) divided by the total equity of the Partnership as of the beginning of such month.
- -------------------------------------------------------------------------------- MONTH-END NET ASSET VALUE PER SERIES A UNIT - -------------------------------------------------------------------------------- JAN. FEB. MAR. APR. MAY JUNE - -------------------------------------------------------------------------------- 1998 $113.84(a) $113.25(a) $113.37(a) $111.46(a) $112.48(a) $111.69(a) - -------------------------------------------------------------------------------- 1999 $114.49(b) $115.86(b) $114.86(b) $116.14(b) $114.75(b) $116.00(b) - -------------------------------------------------------------------------------- 2000 $112.80(c) $112.46(c) $111.61(c) $110.11(c) $110.85(c) $109.67(c) - -------------------------------------------------------------------------------- 2001 $112.97(d) $113.94(d) $117.81(d) $115.64(d) $115.09(d) $115.36(d) - -------------------------------------------------------------------------------- 2002 $109.41(e) $106.60(e) $108.32(e) $106.88(e) $108.25(e) $112.26(e) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- MONTH-END NET ASSET VALUE PER SERIES A UNIT - -------------------------------------------------------------------------------- JULY AUG. SEPT. OCT. NOV. DEC. - -------------------------------------------------------------------------------- 1998 $111.09(a) $116.00(a) $119.77(a) $116.40(b) $115.45(b) $115.74(b) - -------------------------------------------------------------------------------- 1999 $116.26(b) $116.28(b) $115.41(c) $109.03(c) $110.61(c) $111.64(c) - -------------------------------------------------------------------------------- 2000 $108.61(c) $109.41(c) $107.25(c) $104.16(d) $108.59(d) $113.23(d) - -------------------------------------------------------------------------------- 2001 $115.43(d) $116.10(d) $117.02(d) $118.36(e) $112.55(e) $112.51(e) - -------------------------------------------------------------------------------- 2002 $114.29(e) $119.93(e) $121.70(e) $119.18(e) $118.81(e) $122.02(e) - --------------------------------------------------------------------------------
(a) After reduction for the first and second annual distributions of $6.00 each and the $3.50 per Series A Unit distribution made as of October 1, 1997. (b) After reduction for the first, second and third annual distribution and the $3.50 per Series A Unit distribution made on October 1, 1998. (c) After reduction for the first, second, third and fourth annual distribution and the $3.50 per Series A Unit distribution made on October 1, 1999. (d) After reduction for the first, second, third, fourth and fifth annual distribution and the $3.50 per Series A Unit distribution made on October 1, 2000. (e) After reduction for the first, second, third, fourth, fifth and sixth annual distribution and the $3.50 per Series A Unit distribution made on October 1, 2001. ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS THE TWO-TIER STRUCTURE OF THE PARTNERSHIP Effective September 1, 2000, the Partnership consolidated its trading accounts with those of certain other multi-advisor managed future funds sponsored by MLIM AS LLC. The Trading Partnership is no longer trading directly through managed accounts with each of its Advisors, but investing in MM LLC. Prior to September 1, 2000, the 12 Partnership did not trade in the futures and forwards markets directly, but rather through the Trading Partnership. The Partnership's liability for any trading losses is still limited to the Partnership's investment in the Trading Partnership. Different Series of Units allocate different percentages of their overall capital to trading, through MM LLC. All trading profits and losses are shared pro rata among the different series based on their respective investments in MM LLC. On January 1, 2001, the Trading Partnership was dissolved. MLIM AS LLC 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 MLIM AS LLC. MLIM LLC (as successor general partner to MLIM AS LLC) continues to maintain a 1% General Partner interest in the Partnership. RESULTS OF OPERATIONS ADVISOR SELECTIONS The Partnership's results of operations depend on MLIM LLC's ability to select Advisors and the Advisors' ability to trade profitably. MLIM LLC's selection procedures and trading leveraging analysis, as well as the Advisors' trading methods, are confidential, so that substantially the only available information relevant to the Partnership's results of operations is its actual performance record to date. Because of the speculative nature of its trading, the Partnership's past performance is not necessarily indicative of its future results. MLIM AS LLC has made and MLIM LLC expects to continue making frequent changes to both trading asset allocations among Advisors and Advisor combinations as well as from time to time adjusting the percentage of the Partnership's assets committed to trading. All Series of Units trade under the direction of the same Advisor allocation and combination, and may be changed from time to time by MLIM LLC. MLIM LLC's decision to terminate or reallocate assets among Advisors is based on a combination of numerous factors. Advisors are, in general, terminated primarily for unsatisfactory performance, but other factors - -- for example, a change in MLIM LLC's or an Advisor's market outlook, apparent deviation from announced risk control policies, excessive turnover of positions, changes in principals, commitment of resources to other business activities, etc. -- may also have a role in the termination or reallocation decision. The market judgment and experience of MLIM LLC's principals is an important factor in its asset allocation decisions. MLIM LLC has no timetable or schedule for making Advisor changes or reallocations, and generally makes a medium- to long-term commitment to all Advisors selected. There can be no assurance as to the frequency or number of Advisor changes that may take place in the future, or as to how long any of the current Advisors will continue to manage assets for the Partnership. General A number of the Advisors are trend-following traders, whose programs do not attempt to predict price movements. No fundamental economic supply or demand analyses are used by these Advisors, and no macroeconomic assessments of the relative strengths of different national economies or economic sectors are evaluated. Instead, the programs apply proprietary computer models to analyzing past market data, and from this data alone attempt to determine whether market prices are trending. These technical traders base their strategies on the theory that market prices reflect the collective judgment of numerous different traders and are, accordingly, the best and most efficient indication of market movements. However, there are frequent periods during which fundamental factors external to the market dominate prices. If a trend-following Advisor's models identify a trend, they signal positions which follow it. When these models identify the trend as having ended or reversed, these positions are either closed out or reversed. Due to their trend-following character, these Advisors' programs do not predict either the commencement or the end of a price movement. Rather, their objective is to identify a trend early enough to profit from it and detect its end or reversal in time to close out the Partnership's positions while retaining most of the profits made from following the trend. 13 In analyzing the performance of trend-following programs, economic conditions, political events, weather factors, etc., are not directly relevant because only market data has any input into trading results. Furthermore, there is no direct connection between particular market conditions and price trends. There are so many influences on the markets that the same general type of economic event may lead to a price trend in some cases but not in others. The analysis is further complicated by the fact that the programs are designed to recognize only certain types of trends and to apply only certain criteria of when a trend has begun. Consequently, even though significant price trends may occur, if these trends are not comprised of the type of intra-period price movements which the programs are designed to identify, a trend-following Advisor may miss the trend altogether. In the case of the Advisors who implement strategies which rely more on discretion and market judgment, it is not possible to predict, from their performance during past market cycles, how they will respond to future market events. PERFORMANCE SUMMARY This performance summary is an outline description of how the Partnership performed in the past, not necessarily any indication of how it will perform in the future. In addition, the general causes to which certain price movements are attributed may or may not in fact have caused such movements, but simply occurred at or about the same time. The Advisors, as a group, are unlikely to be profitable in markets in which such trends do not occur. Static or erratic prices are likely to result in losses. Similarly, unexpected events (for example, a political upheaval, natural disaster or governmental intervention) can lead to major short-term losses, as well as gains. While there can be no assurance that any Advisor will be profitable, under any given market condition, markets in which substantial and sustained price movements occur typically offer the best profit potential for the Partnership. 2002 During 2002, all of the Partnership's assets were invested in MM LLC. The Partnership received trading profits as an investor in MM LLC. The following commentary of 2002 describes the trading results for MM LLC during the year. The Partnership's overall trading performance was successful with gains in interest rates and currency sectors contributing the most profits. Results from the interest rate sector provided solid positive performance for the Partnership. Most profits were returned in the third quarter and the month of December. The yield curve on major debt instruments declined throughout the third quarter. This market environment was supported by the increased risk aversion, the continued U.S. stock market decline and the conflicting reports regarding the pace of the U.S. economic recovery. The economic news from Europe also pointed to a weak recovery overseas. During December, trading strategies capitalized on the lowered interest rates by the European Central Bank, causing the Euribor rates to trend higher. Profits resulting from trading in the currency sector provided the Partnership with gains in the second quarter and December, which outweighed losses sustained during other periods in the year. The decline in the U.S. dollar during the first half of the year continued through June unabated, fueled by the decline in the U.S. equity markets. The trading strategies were able to capitalize on the declining U.S. dollar in December and weather the volatility of the currency market during the last two weeks of the year. Agricultural commodities brought in slight trading gains for the year. A second and third quarter run up was able to offset the losses sustained in the first quarter and in December. The beginning of the year brought uncertainty in the global market place creating a difficult trading environment. The continued weakness in the U.S. dollar and low stockpiles in grains and soybeans aided in sustaining a price rally in the summer months. Grains and soybeans rallied to due weather and supply concerns. The summer drought produced expectations of a reduced harvest this season. The sector returned some gains later in September, as harvests were not as bad as was feared. The fourth quarter showed some significant profits in the short sugar positions as prices dropped hard in October. In December, soybeans had a large sell-off, which had a large impact on the soybean oil spread trade being held by the 14 Partnership. The energy sector brought in losses for the year. Recoveries being made in August and September were completely reversed and worsened in October and November. Crude oil led the gains in August and September as continued talk of military action against Iraq built a risk premium into prices. In October, crude oil reversed sharply as fears over a war with Iraq subsided and reversed its long trend going from $31 a barrel to $27 during the month. In November, news of the Iraqi acceptance of the UN resolution for arms inspections was expected to further drive prices down but unexpectedly failed to do so, resulting in continued losses in the portfolio of short crude positions. The metals sector incurred losses for the Partnership despite a settlement payment in August relating to certain copper trades made by a number of investors, including the Partnership, during a period in the mid-1990s. Members of the class were those who purchased or sold Comex copper futures or options contracts between June 24, 1993 and June 15, 1996. The effect of the settlement payment was included in the Partnership's performance in August. The trading in stock indices found profits from its short positions during the second and third quarters of the year but were unable to offset losses in the first and last quarter. The strength of U.S. economic data continued to surprise on the upside, pointing toward a stronger recovery than expected, but the equity markets remained weak. The downward trending market created a good environment for the trend following traders, as investors in the equity markets were still liquidating equity exposure during the third quarter. 2001 During 2001, all of the Partnership's assets were invested in MM LLC. The Partnership received trading profits as an investor in MM LLC. The following commentary of 2001 describes the trading results for MM LLC during the year. Trading in the interest rate sector was the most successful strategy for 2001. The impact of the weakening U.S. economy and the Federal Reserve's move to cut interest rates was felt throughout the futures market, as Euro futures contracts rose dramatically since December 2000. Eurodollar positions continued to post gains later in the year. Swiss franc short term interest rate contract trading and short Sterling 500 positions were also profitable. In October, the U.S. Treasury's announcement to stop issuing 30 year debt, coupled with worldwide governments easing of monetary policy, benefited long positions across the global yield curve. Despite year long volatility, stock index trading was profitable. Short positions resulted in gains as global equity markets remained caught between negative news about corporate earnings, the potential effects of further monetary easing and the global economic slump would worsen as an aftermath of the September 11 attacks. The global equity markets improved by year end, driven by the rebounding technology sector. Agricultural commodities trading was successful despite losses sustained early in the year. Excellent growing weather in the U.S., Argentina and Brazil, concerns about the U.S. export potential and inventories at historically high levels, kept the markets on the defensive. The cotton market sank to a 15 year low on short supply and increased demand. Short corn and cotton positions were profitable at mid year. By October, the soybean complex posted gains as the crushing capacity tightened up, driving spreads up to between $0.80-$1.00 in nearby delivery months, crushing spreads had been near the $0.60 range. Trading in the metals markets was successful. Silver prices reversed its earlier trend in February, as short positions were profitable. Silver trading continued to be volatile as China exports were high due to poor domestic demand, adversely affecting prices. Short positions in base metals posted gains in October as a weak economic outlook kept prices depressed. By year end, base metals reversed their downward trend on expectations of a quick economic recovery, generating losses on short positions. Currency trading suffered losses for the Partnership. Long Euro positions realized losses as the Euro fell back to the $0.90 level, despite strong fundamentals. The further weakening of the Euro and Japanese yen displayed how the global economy is not immune to the U.S. economic slowdown. Long British pound positions were profitable in September as it appreciated versus the U.S. dollar on concerns of the negative economic implications from the September 11 15 attacks. Energy trading was the most unprofitable strategy in 2001. Early on, crude oil prices were driven lower by both a seasonal downturn in global energy usage and heavier than normal refinery maintenance work, reducing demand. The sector continued to fade from downside pressure from a slowing global economy, inventory surplus and OPEC's decision to leave production levels unchanged. Oil prices sank in the last quarter as traders feared the attacks would cripple the airline industry, a major consumer of oil. 2000
TOTAL TRADING RESULTS Interest Rates $ 197,180 Stock Indices (607,651) Agriculture (153,523) Currencies 810,502 Energy 1,715,535 Metals (491,589) --------------- $ 1,470,454 ===============
Energy trading was successful for the year. Long crude oil and unleaded gas positions realized gains early in the year despite the possibility of OPEC increasing oil production. A hike would still leave oil inventories at levels much below normal during the balance of the year. Prices continued to rise throughout the year as the International Energy Agency reported the need for additional oil to prevent a shortage in inventory. During the fourth quarter, fears of supply shortages pushed prices higher as average winter temperatures dropped from the previous year. Currency trading alternated from unprofitable to profitable throughout the year. The Euro declined against the U.S. dollar early in the year after officials from the Group of Seven met and failed to express concern about the low levels of the European currency producing profits. Other factors to the decline include the slow pace of microeconomic reform in Europe, plans for a European withholding tax and the scale of direct investment flows outside of Europe. During the second quarter, gains from short Euro currency and long Swiss franc positions outweighed losses sustained in other currencies. Despite the dramatic interest rate hikes by the Swiss National Bank ("SNB") and the weakness of the Euro, the SNB said it would not keep the Swiss franc from rising. The British pound was particularly weak in the wake of the Bank of England's references to "sterling overvaluation." Gains realized on short Japanese yen positions were outweighed by losses sustained in the Euro positions as it fell to a record low despite stronger than expected European financial data and the success of the German tax reform package. Currency trading finished off the year strong as gains in the Canadian dollar out weighed losses sustained from Euro positions. Short positions in the Canadian dollar were profitable as the currency weakened during the month despite worsening U.S. dollar fundamentals, a large Canadian budget surplus and plans for tax cuts in Canada. Slight profits were earned during the year in the interest rate sector. Short Eurodollar trading was profitable as the currency continued to decline early in the year. The European Union ministers blamed the currency's slide in January on rapid U.S. growth and fears that the Federal Reserve will increase U.S. interest rates. These profits were far outweighed by losses in the U.S. ten year Treasury note positions and long U.S. Treasury positions as the yield curve fluctuated widely. U.S. bond yields fell during the year as investors shifted to Treasuries due to increased volatility in the NASDAQ and other equity markets. Uncertainty surrounding the U.S. Presidential election had investors favoring the bond markets resulting in gains for the Partnership's long positions. Strong gains in both Euro and three-month Euribor futures rallied the sector for the year eliminating previous losses. Agricultural commodity trading produced losses for the year. Losses were realized in short corn positions which were due to dry conditions in Argentina, which led to high corn prices. During the second quarter, long positions in soybean products were unprofitable as weather and soil conditions appear favorable for an abundance of supply. The USDA grain crop report projected a 12% rise in soybean inventories from previous season. Trading on sugar and live cattle positions was unprofitable during the third quarter, erasing previous gains in other commodities. Brazil, the world's largest sugar producer, reduced output and the Asian post crisis recovery period has improved demand, resulting in a supply/demand imbalance. During the fourth quarter gains in short coffee positions were not 16 enough to offset previous losses throughout the year. Prices of coffee faced a seven year low as a result of excess world supply. Metals trading was unprofitable for the year. Prices rose during the period in base metals as concerns over higher interest rates and the decline in stock prices globally created defensive tones in the market. High aluminum inventories caused prices to decline on the London Metals Exchange. Copper prices rose over rumors of increased demand from China, having an adverse effect on the short positions held. During the second quarter, copper trading continued to result in losses for the sector. A Freeport Indonesia mine announced output cuts would not be as large as the Indonesian government had forecast, resulting in losses for the Partnership's long positions. Losses continued through the quarter as trading in both base and precious metals was unprofitable as losses were sustained in gold and aluminum positions. The sector sustained losses during the year as nickel prices declined from slowing demand for stainless steel in Europe and Asia. The year closed with continued losses as gains in silver could not out weigh losses in aluminum and gold. Stock index trading was unprofitable despite gains realized in IBEX 35(Milan), DAX German Stock Index and CAC 40 Euro futures early in the year. Losses were sustained in Nikkei 225 and S&P 500 positions. Signs of rising inflation fueled fears that the Federal Reserve would continue to raise interest rates aggressively to slow the robust economy. VARIABLES AFFECTING PERFORMANCE The principal variables which determine the net performance of the Partnership are gross profitability and interest income. Gross profitability is, in turn, effected by the percentage of the Partnership's assets allocated to trading. During all periods set forth under "Selected Financial Data," the interest rates in many countries were at unusually low levels. The low interest rates in the United States (although higher than in many other countries) negatively impacted revenues because interest income is typically a major component of the Partnership's profitability. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the Partnership's profit potential generally tends to be diminished. On the other hand, during periods of higher interest rates, the relative attractiveness of a high risk investment such as the Partnership may be reduced as compared to high yielding and much lower risk fixed-income investments. The Partnership's Brokerage Commissions and Administrative Fees are a constant percentage of the Partnership's assets allocated to trading and total assets, respectively. The only Partnership costs (other than the insignificant currency trading costs) which are not based on a percentage of the Partnership's assets (allocated to trading or total) are the Profit Shares payable to the Advisors on an Advisor-by-Advisor basis. Gross profitability is in turn effected by the percentages of the Partnership's assets allocated to trading. During periods when Profit Shares are a high percentage of net trading gains, it is likely that there has been substantial performance non-correlation among the Advisors (so that the total Profit Shares paid to those Advisors which have traded profitably are a high percentage, or perhaps even in excess, of the total profits recognized, as other Advisors have incurred offsetting losses, reducing overall trading gains but not the Profit Shares paid to the successful Advisors) -- suggesting the likelihood of generally trendless, non-consensus markets. Unlike many investment fields, there is no meaningful distinction in the operation of the Partnership between realized and unrealized profits. Most of the contracts traded by the Partnership are highly liquid and can be closed out at any time. Except in unusual circumstances, factors (e.g. regulatory approvals, cost of goods sold, employee relations and the like) which often materially affect an operating business have virtually no impact on the Partnership. 17 THE DIFFERENT SERIES OF UNITS All Series of Units are invested in MM LLC and are subject to the same method of calculating their fees. Furthermore, any discretionary action taken by MLIM AS LLC -- e.g., adjusting trading leverage -- must be done in such a way that all Units have the same percentage of capital allocated to trading after the adjustment (this restructuring applies only to Units issued after May 1, 1997). Despite these fundamental similarities among the different Series, because the Series begin trading at different times they are likely, as a result of trading profits and losses, to pay different Profit Shares (although to the same group of Advisors) and have different Net Asset Values. The series offered since May 1, 1997 have begun trading at 75%-85% of total assets available. Series issued before May 1, 1997 began trading at 60% of total assets available. LIQUIDITY; CAPITAL RESOURCES The Partnership sells no securities other than the Units. The Partnership borrows only to a limited extent and only on a strictly short-term basis in order to finance losses on non-U.S. dollar denominated trading positions pending the conversion of the Partnership's U.S. dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency. The Partnership's assets are held primarily in short-term debt securities with maturities under one year, as well as in cash. The Net Asset Value of the Partnership's cash and financial instruments is not materially affected by inflation. Changes in interest rates, which are often associated with inflation, could cause the value of certain of the Partnership's debt securities to decline, but only to a limited extent. More importantly, changes in interest rates could cause periods of strong up or down price trends, during which the Partnership's profit potential generally increases. Inflation in commodity prices could also generate price movements which the strategies might successfully follow. The Partnership's assets are held in cash. Accordingly, except in very unusual circumstances, the Partnership should be able to close out any or all of its open trading positions and liquidate any or all of its securities holdings quickly and at market prices. This permits an Advisor to limit losses as well as reduce market exposure on short notice should its strategies indicate doing so. In addition, because there is a readily available market value for the Partnership's positions and assets, the Partnership's monthly Net Asset Value calculations are precise, and investors need only wait ten business days to receive the full redemption proceeds of their Units. ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. 18 ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Selected Quarterly Financial Data ML Principal Protection Plus LP Net Income by Quarter Eight Quarters through December 31, 2002
FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER 2002 2002 2002 2002 2001 2001 2001 2001 ---- ---- ---- ---- ---- ---- ---- ---- Total Income $ 316,551 $1,720,092 $ 895,304 $ (310,617) $ 153,346 $ 774,073 $ (377,961) $1,789,648 Total Expenses 276,883 526,018 355,182 295,972 285,203 437,743 256,065 667,596 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net Income $ 39,668 $1,194,074 $ 540,122 $ (606,589) $ (131,857) $ 336,330 $ (634,026) $1,122,052 ========== ========== ========== ========== ========== ========== ========== ========== Net Income per Unit $ 0.26 $ 7.03 $ 3.03 $ (3.26) $ (0.67) $ 1.64 $ (2.88) $ 4.73
The supplementary financial information ("information about oil and gas producing activities") specified by Item 302 of Regulation S-K is not applicable. MLIM AS LLC promoted the Partnership and MLIM LLC is now its controlling person. ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE There were no changes in or disagreements with independent auditors on accounting and financial disclosure. PART III ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT 10(a) and 10(b) IDENTIFICATION OF MANAGERS AND EXECUTIVE OFFICERS: As a limited partnership, the Partnership itself has no officers or directors and is managed by MLIM LLC. Trading decisions are made by the Advisors on behalf of the Partnership. The managers and executive officers of MLIM LLC and their respective business backgrounds are as follows. FABIO P. SAVOLDELLI Executive Vice President, Chief Investment Officer and Managing Director - Alternative Strategies Division JAMES KASE President PHILIP L. KIRSTEIN General Counsel PATRICK HAYWARD Chief Financial Officer VINAY MENDIRATTA Vice President and Chief Operations Officer - Alternative Strategies Division Fabio P. Savoldelli was born in 1961. Mr. Savoldelli is Executive Vice President, Chief Investment Officer and Managing Director - Alternative Strategies Division of MLIM LLC. He oversees the Partnership's investments. Mr. Savoldelli served as Managing Director for Merrill Lynch Corporate and Institutional Client Group from 1996 to 1999. Prior to joining Merrill Lynch he served as Chief Investment Officer for the Americas at the Chase Manhattan Private Bank, responsible for managers investing assets in international and domestic institutional, private client and ERISA funds. Previously, he was Deputy Chief Investment Officer and Head of Fixed Income and Foreign Exchange at Swiss Bank Corp. London Portfolio Management International. Mr. Savoldelli was educated at the 19 University of Windsor, Canada, and the London School of Economics. James Kase was born in 1960. Mr. Kase is President of MLIM LLC and Managing Director & Head of Distribution of Merrill Lynch Investment Managers L.P. His previous position at Merrill Lynch was selling quantitative-based equity products to institutional investors for 17 years. Prior to joining Merrill Lynch, he was Head of Equity Sales and Research for Lehman Brothers, Asia. He also managed equity derivative sales in the Americas for Lehman from 1995-1998. From 1986-1993, Mr. Kase was in Capital Market Sales at Bankers Trust. He received his Bachelor of Arts in Political Science from Brown University. Philip L. Kirstein was born in 1945. Mr. Kirstein has served as General Counsel of MLIM LLC since August 2001. He also serves as General Counsel of MLIM and Fund Asset Management, a position he has held since 1984. He received his Bachelor of Science from the University of North Carolina, He received his Juris Doctor from the Syracuse University School of Law and his LLB from the New York University School of Law. Patrick Hayward was born in 1967. He has served as Chief Financial Officer for MLIM Americas Institutional and MLIM LLC since June 2002. Mr. Hayward previously served as Vice President and Divisional Financial Officer for Societe Generale. He received his Bachelor of Arts from College of William & Mary. Vinay Mendiratta was born in 1967. Mr. Mendiratta is Managing Director & Chief Operating Officer for Alternative Strategies Division of MLIM LLC. He is responsible for the management of MLIM's Hedge Fund of Funds business. Most recently he was MLIM's Alternative Investments product specialist based in London responsible for the marketing of hedge fund products to clients in Europe and the Middle East. Prior to joining MLIM, Mr. Mendiratta was a product specialist for Bankers Trust's quantitaive investment team. He worked with the portfolio management team to structure and market a variety of quantitatively managed investment products to institutional and retail investors. Mr. Mendiratta obtained his Bachelor of Arts in Economics from Duke University and his MBA in Finance from Columbia University. MLIM LLC acts as general partner to three public futures funds whose units of limited partnership interest are registered under the Securities Exchange Act of 1934: ML Futures Investments L.P., ML Global Horizons L.P., and the Partnership. Because MLIM LLC serves as the sole general partner of each of these funds, the officers and managers of MLIM LLC effectively manage them as officers and directors of such funds. (c) IDENTIFICATION OF CERTAIN SIGNIFICANT EMPLOYEES: None. (d) FAMILY RELATIONSHIPS: None. (e) BUSINESS EXPERIENCE: See Item 10(a) and (b) above. (f) INVOLVEMENT IN CERTAIN LEGAL PROCEEDINGS: None. (g) PROMOTERS AND CONTROL PERSONS: Not applicable. ITEM 11: EXECUTIVE COMPENSATION The managers and officers of MLIM LLC are remunerated by MLIM LLC in their respective positions. The Partnership does not itself have any officers, directors or employees. The Partnership pays Brokerage Commissions to an affiliate of MLIM LLC and Administrative Fees to MLIM LLC. MLIM LLC or its affiliates may also receive certain economic benefits from holding certain of the Partnership's U.S. dollar Assets in offset accounts, as described in Item 1(c) above. The directors and officers receive no "other compensation" from the Partnership, and the managers 20 receive no compensation for serving as managers of MLIM LLC. There are no compensation plans or arrangements relating to a change in control of either the Partnership or MLIM LLC. ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS (a) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS: As of December 31, 2002, no person or "group" is known to be or have been the beneficial owner of more than 5% of the Units. (b) SECURITY OWNERSHIP OF MANAGEMENT: As of December 31, 2002, MLIM AS LLC owned 1,583.93625 Units (Unit-equivalent general partnership interests), which was approximately 1.1% of the total Units outstanding. (c) CHANGES IN CONTROL: None. ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) TRANSACTIONS BETWEEN MERRILL LYNCH AND THE PARTNERSHIP All of the service providers to the Partnership, other than the Advisors, are affiliates of Merrill Lynch. Merrill Lynch negotiated with the Advisors over the level of their advisory fees and Profit Shares. However, none of the fees paid by the Partnership to any Merrill Lynch party were negotiated, and they are higher than would have been obtained in arm's-length bargaining. The Partnership indirectly pays Merrill Lynch through MLPF&S and MLIM LLC, substantial Brokerage Commissions and Administrative Fees, respectively, as well as bid-ask spreads on forward currency trades. The Partnership also pays MLPF&S interest on short-term loans extended by MLPF&S to cover losses on foreign currency positions. Subsequent to September 1, 2000, the Partnership pays for the above-mentioned items through its investment in MM LLC. Within the Merrill Lynch organization, MLIM LLC is the direct beneficiary of the revenues received by different Merrill Lynch entities from the Partnership. MLIM LLC controls the management of the Partnership and serves as its promoter. Although MLIM LLC has not sold any assets, directly or indirectly, to the Partnership, MLIM LLC makes substantial profits from the Partnership due to the foregoing revenues. No loans have been, are or will be outstanding between MLIM LLC or any of its principals and the Partnership. MLIM AS LLC paid (and MLIM may pay) substantial selling commissions and trailing commissions to MLPF&S for distributing the Units. MLIM AS LLC and MLIM LLC are ultimately paid back for these expenditures from the revenues it receives from the Partnership. (b) CERTAIN BUSINESS RELATIONSHIPS: MLPF&S, an affiliate of MLIM AS LLC and MLIM LLC, acts as the principal commodity broker for the Partnership. In 2002, MM LLC expensed directly: (i) Brokerage Commissions of $7,738,731 to MLPF&S, which included $811,106 in consulting fees earned by the Advisors; and (ii) Administrative Fees of $279,753 to MLIM AS LLC. In addition, MLIM AS LLC and MLIM LLC and its affiliates may have derived certain economic benefit from possession of the Partnership's assets, as well as from foreign exchange and EFP trading. 21 See Item 1(c), "Narrative Description of Business -- Charges" and "-- Description of Current Charges" for a discussion of other business dealings between MLIM LLC affiliates and the Partnership. (c) INDEBTEDNESS OF MANAGEMENT: The Partnership is prohibited from making any loans, to management or otherwise. (d) TRANSACTIONS WITH PROMOTERS: Not applicable. ITEM 14: CONTROLS AND PROCEDURES Merrill Lynch Investment Managers LLC, the General Partner of ML Principal Protection L.P., with the participation of the General Partner's Chief Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership within 90 days of the filing date of this annual report, and, based on their evaluation, have concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 22 PART IV ITEM 15: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a)1. FINANCIAL STATEMENTS (FOUND IN EXHIBIT 13.01): PAGE ---- Independent Auditors' Report 1 Consolidated Statements of Financial Condition as of December 31, 2002 and 2001 2 For the years ended December 31, 2002, 2001 and 2000: Consolidated Statements of Operations 3 Consolidated Statements of Changes in Partners' Capital 4 Consolidated Financial Data Highlights for the year ended December 31, 2002 5 Notes to Consolidated Financial Statements 6-13
(a)2.8(d) FINANCIAL STATEMENT SCHEDULES: Financial statement schedules not included in this Form 10-K have been omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto. (a)3. EXHIBITS: The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K:
DESIGNATION DESCRIPTION - ----------- ----------- 1.01 Selling Agreement among the Partnership, MLIM AS LLC, MLPF&S, the Selling Agent and the Advisors. EXHIBIT 1.01: Is incorporated herein by reference from Exhibit 1.01 contained in Amendment No. 1 to the Registration - ------------- Statement (File No. 33-73914) filed on July 14, 1994, on Form S-1 under the Securities Act of 1933 (the "Registrant's Registration Statement"). 1.01(a) Form of Selling Agreement Amendment among the Partnership, MLIM AS LLC, MLPF&S, the Selling Agent and the Advisors. EXHIBIT 1.01(a): Is incorporated herein by reference from Exhibit 1.01(a) contained in the Registrant's report on Form 10-K - ---------------- for the year ended December 31, 2002. 3.01(i) Amended and Restated Limited Partnership Agreement of the Partnership. EXHIBIT 3.01(i): Is incorporated herein by reference from Exhibit 3.01(ii) contained in the Registrant's Registration - ---------------- Statement (as Exhibit A). 3.01(ii) Amended and Restated Limited Partnership Agreement of the Trading Partnership. EXHIBIT 3.01(ii): Is incorporated herein by reference from Exhibit 3.01(ii) contained in the Registrant's Registration - ----------------- Statement. 3.05(ii) Amended and Restated Certificate of Limited Partnership of the Partnership, dated July 27, 1995. EXHIBIT 3.05(ii): Is incorporated herein by reference from Exhibit 3.05(ii) contained in the Registrant's report on Form 10-Q - ----------------- for the Quarter Ended June 30, 1995. 10.01(h) Form of Advisory Agreement among the Partnership, MLIM AS LLC, MLPF&S and each Advisor. EXHIBIT 10.01(h): Is incorporated herein by reference from Exhibit 10.01(h) contained in the Registrant's report on Form 10-Q - ----------------- for the Quarter Ended June 30, 1995.
23 10.02 Form of Consulting Agreement between MLPF&S and each Advisor. EXHIBIT 10.02: Is incorporated herein by reference from Exhibit 10.02 contained in the Registrant's Registration Statement. - -------------- 10.03 Form of Customer Agreement between the Trading Partnership and MLPF&S. EXHIBIT 10.03: Is incorporated herein by reference from Exhibit 10.03 contained in the Registrant's Registration Statement - ------------- (as Exhibit B). 10.05 Merrill Lynch & Co., Inc. Guarantee. EXHIBIT 10.05: Is incorporated herein by reference from Exhibit 10.05 contained in the Registrant's Registration Statement - -------------- (as Exhibit B). 10.06 Form of Subscription Agreement and Power of Attorney. EXHIBIT 10.06: Is incorporated herein by reference from Exhibit 10.06 contained in the Registrant's Registration Statement - -------------- (as Exhibit D). 10.07(a) Foreign Exchange Desk Service Agreement, dated July 1, 1993 among Merrill Lynch International Bank, MLIM AS LLC, MLPF&S and various MLIM AS LLC funds. EXHIBIT 10.07(a): Is incorporated herein by reference from Exhibit 10.07 contained in the Registrant's Registration Statement - ----------------- (as Exhibit D). 10.07(b) Amendment to Foreign Exchange Desk Service Agreement, dated July 14, 1994, among Merrill Lynch Investment Bank, MLIM AS LLC, MLPF&S and the Partnership. EXHIBIT 10.07(b): Is incorporated herein by reference from Exhibit 10.07 contained in the Registrant's Registration Statement. - ----------------- 10.08 Investment Advisory Contract between MLPF&S, the Partnership, the Trading Partnership and MLIM AS LLC. EXHIBIT 10.08: Is incorporated herein by reference from Exhibit 10.08 contained in the Registrant's Registration Statement. - -------------- 10.09(a) Form of Advisory and Consulting Agreement Amendment among MLIM AS LLC, each Advisor, the Partnership and MLPF&S. EXHIBIT 10.09(a): Is incorporated herein by reference from Exhibit 10.09(a) contained in the Registrant's report on Form 10-K - ----------------- for the year ended December 31, 1996. 10.09(b) Form of Amendment to the Customer Agreement among the Partnership and MLPF&S. EXHIBIT 10.09(b): Is incorporated herein by reference from Exhibit 10.09(b) contained in the Registrant's report on Form 10-K - ----------------- for the year ended December 31, 1996. 13.01 2002 Annual Report and Independent Auditors' Report. EXHIBIT 13.01: Is filed herewith. - -------------- 13.01 (a) 2002 Annual Report and Independent Auditors' Report for the following Trading Limited Liability Company sponsored by MLIM Alternative Strategies LLC: ML Multi-Manager Portfolio LLC EXHIBIT 13.01(a): Is filed herewith. - ----------------- 28.01 Prospectus of the Partnership dated January 25, 1996.
24 EXHIBIT 28.01: Is incorporated by reference as filed with the Securities and Exchange Commission pursuant to Rule 424 under - -------------- the Securities Act of 1933, Registration Statement (File No. 33-73914) on Form S-1 (effective January 25, 1996).
(b) REPORT ON FORM 8-K: ------------------- No reports on Form 8-K were filed during the fourth quarter of 2002. 25 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ML PRINCIPAL PROTECTION L.P. By: MERRILL LYNCH INVESTMENT MANAGERS LLC General Partner By: /s/ Fabio P. Savoldelli ----------------------- Fabio P. Savoldelli Executive Vice President, Chief Investment Officer and Managing Director - Alternative Strategies Division (Principal Executive Officer) Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed on March 31, 2003 by the following persons on behalf of the Registrant and in the capacities indicated.
SIGNATURE TITLE DATE - --------- ----- ---- /s/Fabio P. Savoldelli Executive Vice President, Chief Investment Officer and March 31, 2003 - ---------------------- Managing Director - Alternative Strategies Division Fabio P. Savoldelli (Principal Executive Officer) /s/James Kase President March 31, 2003 - ------------- James Kase /s/Philip L. Kirstein General Counsel March 31, 2003 - -------------------- Philip L. Kirstein /s/Patrick Hayward Chief Financial Officer March 31, 2003 - ------------------ (Principal Financial and Accounting Officer) Patrick Hayward /s/Vinay Mendiratta Vice President and Chief Operations Officer March 31, 2003 - ------------------- - Alternative Strategies Division Vinay Mendiratta (Being the principal executive officer, the principal financial and accounting officer and a majority of the directors of MLIM Alternative Strategies LLC) MERRILL LYNCH INVESTMENT General Partner of Registrant March 31, 2003 MANAGERS LLC
By /s/ Fabio P. Savoldelli ----------------------- Fabio P. Savoldelli 26 EXHIBIT 99 FORM OF CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 180 OF THE UNITED STATES CODE I, Fabio P. Savoldelli, certify that: 1. I have reviewed this annual report on Form 10-K of ML Principal Protection L.P.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 - ----------------------- By /s/ FABIO P. SAVOLDELLI ----------------------- Fabio P. Savoldelli Executive Vice President, Chief Investment Officer and Managing Director - Alternative Strategies Division (Principal Executive Officer) 27 EXHIBIT 99 (a) AS ADOPTED TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this annual report of ML Principal Protection L.P. on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof, I, Fabio P. Savoldelli certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant of the Sarbanes-Oxley Act of 2002, that: 1. This annual report fully complies with the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in this annual report fairly presents, in all material respects, the financial condition and results of operations of ML Principal Protection L.P. Date: March 31, 2003 - ----------------------- By /s/ FABIO P. SAVOLDELLI ----------------------- Fabio P. Savoldelli Executive Vice President, Chief Investment Officer and Managing Director - Alternative Strategies Division (Principal Executive Officer) 28 EXHIBIT 99 FORM OF CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63 OF TITLE 180 OF THE UNITED STATES CODE I, Patrick Hayward, certify that: 1. I have reviewed this annual report on Form 10-K of ML Principal Protection L.P.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies, in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 31, 2003 - ----------------------- By /s/ PATRICK HAYWARD -------------------- Patrick Hayward Chief Financial Officer (Principal Financial and Accounting Officer) 29 EXHIBIT 99 (a) AS ADOPTED TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with this annual report of ML Principal Protection L.P. on Form 10-K for the period ended December 31, 2002 as filed with the Securities and Exchange Commission on the date hereof, I, Patrick Hayward certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant of the Sarbanes-Oxley Act of 2002, that: 1. This annual report fully complies with the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934; and 2. The information contained in this annual report fairly presents, in all material respects, the financial condition and results of operations of ML Principal Protection L.P. Date: March 31, 2003 - ----------------------- By /s/ PATRICK HAYWARD -------------------- Patrick Hayward Chief Financial Officer (Principal Financial and Accounting Officer) 30 ML PRINCIPAL PROTECTION L.P. ANNUAL REPORT FOR 2002 ON FORM 10-K INDEX TO EXHIBITS EXHIBIT Exhibit 13.01 2002 Annual Report and Independent Auditors' Report Exhibit 13.01(a) 2002 Annual Report and Independent Auditors' Report for the following Trading Limited Liability Company sponsored by MLIM Alternative Strategies LLC: ML Multi-Manager Portfolio LLC 31 EX-99.13-01 3 a2105279zex-99_1301.txt EXHIBIT 99.13.01 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) Consolidated Financial Statements for the years ended December 31, 2002, 2001 and 2000 and Independent Auditors' Report [MERRILL LYNCH LOGO] ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) TABLE OF CONTENTS - --------------------------------------------------------------------------------
PAGE ---- INDEPENDENT AUDITORS' REPORT 1 CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Statements of Financial Condition as of December 31, 2002 and 2001 2 Consolidated Statements of Income for the years ended December 31, 2002, 2001 and 2000 3 Consolidated Statements of Changes in Partners' Capital for the years ended December 31, 2002, 2001 and 2000 4 Financial Data Highlights for the year ended December 31, 2002 5 Notes to Consolidated Financial Statements 6-13
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, 2002 and 2001, and the related consolidated statements of income and of changes in partners' capital for each of the three years in the period ended December 31, 2002 and the financial data highlights for the year ended December 31, 2002. These financial statements and financial data highlights are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these financial statements and financial data highlights 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 and financial data highlights 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 and financial data highlights present fairly, in all material respects, the financial position of ML Principal Protection L.P. as of December 31, 2002 and 2001, and the results of their operations and changes in their partners' capital and the financial data highlights for each of the periods presented in conformity with accounting principles generally accepted in the United States of America. DELOITTE & TOUCHE LLP New York, New York March 3, 2002 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2002 AND 2001 - --------------------------------------------------------------------------------
2002 2001 ------------ ------------ ASSETS Equity in commodity futures trading accounts: Cash and options premiums $ 1,960,792 $ 3,978,866 Investment in MM LLC (Note 2) 16,280,408 17,346,923 Receivable from Investment in MM LLC (Note 2) - 158,259 Accrued interest receivable (Note 3) 2,028 5,933 ------------ ------------ TOTAL $ 18,243,228 $ 21,489,981 ============ ============ LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Redemptions payable (Note 1) $ 497,074 $ 184,701 Payable to Investment in MM LLC (Note 2) 305,592 - ------------ ------------ Total liabilities 802,666 184,701 ------------ ------------ PARTNERS' CAPITAL: General Partners (1,584 and 2,105 Units) 185,021 233,900 Limited Partners (147,723 and 189,440 Units) 17,255,541 21,071,380 ------------ ------------ Total partners' capital 17,440,562 21,305,280 ------------ ------------ TOTAL $ 18,243,228 $ 21,489,981 ============ ============
NET ASSET VALUE PER UNIT (Note 6) See notes to consolidated financial statements. 2 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 - --------------------------------------------------------------------------------
2002 2001 2000 ------------ ------------ ------------ REVENUES Trading profit (loss): Realized $ 1,544,945 $ 2,827,944 $ 388,404 Change in unrealized 404,007 (1,336,518) 1,082,050 Settlement proceeds (Note 9) 308,142 - - ------------ ------------ ------------ Total trading results 2,257,094 1,491,426 1,470,454 Interest income (Note 3) 364,235 847,680 1,936,380 ------------ ------------ ------------ Total revenues 2,621,329 2,339,106 3,406,834 ------------ ------------ ------------ EXPENSES Brokerage commissions (Note 3) 1,142,131 1,351,049 1,923,409 Administrative fees (Note 3) 38,071 45,035 71,476 Profit Shares (Note 5) 273,852 250,522 270,203 ------------ ------------ ------------ Total expenses 1,454,054 1,646,606 2,265,088 ------------ ------------ ------------ INCOME BEFORE MINORITY INTEREST 1,167,275 692,500 1,141,746 Minority interest income - - (48,173) ------------ ------------ ------------ NET INCOME $ 1,167,275 $ 692,500 $ 1,093,573 ============ ============ ============ NET INCOME PER UNIT: Weighted average number of General Partner and Limited Partner Units outstanding (Note 7) 172,404 214,642 312,054 ============ ============ ============ Net income per weighted average General Partner and Limited Partner Unit $ 6.77 $ 3.23 $ 3.50 ============ ============ ============
All items of income and expenses prior to September 1, 2000 was derived from the invesment in MM LLC. 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, 2002, 2001 AND 2000 - --------------------------------------------------------------------------------
GENERAL LIMITED UNITS PARTNER PARTNERS TOTAL ------------ ------------ ------------ ------------ PARTNERS' CAPITAL, DECEMBER 31, 1999 390,741 $ 1,023,562 $ 40,659,206 $ 41,682,768 Net income - 18,730 1,074,843 1,093,573 Distributions - (9,355) (618,842) (628,197) Redemptions (148,405) (733,977) (14,715,316) (15,449,293) ------------ ------------ ------------ ------------ PARTNERS' CAPITAL, DECEMBER 31, 2000 242,336 298,960 26,399,891 26,698,851 Net income - 11,088 681,412 692,500 Distributions - (5,849) (448,788) (454,637) Redemptions (50,791) (70,299) (5,561,135) (5,631,434) ------------ ------------ ------------ ------------ PARTNERS' CAPITAL, DECEMBER 31, 2001 191,545 233,900 21,071,380 21,305,280 Net income - 14,013 1,153,262 1,167,275 Distributions - (2,890) (232,557) (235,447) Redemptions (42,238) (60,002) (4,736,544) (4,796,546) ------------ ------------ ------------ ------------ PARTNERS' CAPITAL, DECEMBER 31, 2002 149,307 $ 185,021 $ 17,255,541 $ 17,440,562 ============ ============ ============ ============
See notes to consolidated financial statements. 4 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) FINANCIAL DATA HIGHLIGHTS FOR THE YEAR ENDED DECEMBER 31, 2002 - -------------------------------------------------------------------------------- The following per Unit data ratios have been derived from information provided in the financial statements. Increase (Decrease) in Net Asset Value
SERIES A SERIES B SERIES C SERIES D SERIES E SERIES F SERIES G SERIES H -------- -------- -------- -------- -------- -------- -------- -------- PER UNIT OPERATING PERFORMANCE: Net asset value, beginning of period $ 112.51 $ 111.80 $ 107.78 $ 106.95 $ 108.39 $ 107.16 $ 105.91 $ 104.16 Realized trading profit 12.45 11.97 13.62 10.72 6.18 1.17 1.15 (1.72) Change in unrealized 3.49 3.36 3.05 1.26 2.43 (0.53) (0.56) (0.50) Settlement proceeds 1.86 1.79 1.76 1.71 1.78 1.68 1.67 1.64 Interest income 2.21 2.13 2.01 1.92 1.96 1.77 1.76 1.73 Expenses (10.50) (10.29) (9.50) (6.97) (6.15) (0.17) (0.18) (0.16) -------------------------------------------------------------------------------------------- Net Asset Value, before distributions 122.02 120.76 118.72 115.59 114.59 111.08 109.75 105.15 Cash distribution - (3.50) (3.50) (3.50) (3.50) (3.50) (3.50) (3.50) -------------------------------------------------------------------------------------------- Net asset value, end of the period $ 122.02 $ 117.26 $ 115.22 $ 112.09 $ 111.09 $ 107.58 $ 106.25 $ 101.65 ============================================================================================ Total investment return, compounded monthly 8.45% 8.27% 10.53% 8.35% 5.72% 3.79% 3.76% 0.98% ============================================================================================ RATIOS TO AVERAGE NET ASSETS: Expenses 9.24% 9.37% 8.62% 6.40% 5.66% 0.17% 0.20% 0.19% ============================================================================================ Net income 7.51% 6.74% 9.51% 7.81% 5.43% 3.66% 3.45% 0.81% ============================================================================================
Increase (Decrease) in Net Asset Value
SERIES K SERIES L SERIES M SERIES N SERIES O SERIES P SERIES Q SERIES R SERIES S -------- -------- -------- -------- -------- -------- -------- -------- -------- PER UNIT OPERATING PERFORMANCE: Net asset value, beginning of period $117.09 $114.12 $115.73 $111.59 $111.91 $114.15 $105.53 $106.57 $107.41 Realized trading profit 9.59 9.35 9.48 9.14 9.17 9.35 8.64 8.73 8.80 Change in unrealized 3.57 3.48 3.53 3.41 3.42 3.48 3.22 3.25 3.28 Settlement proceeds 1.94 1.89 1.92 1.85 1.85 1.89 1.75 1.76 1.78 Interest income 2.29 2.23 2.26 2.18 2.19 2.23 2.06 2.08 2.10 Expenses (10.81) (10.54) (10.69) (10.32) (10.37) (10.55) (9.76) (9.85) (9.93) ----------------------------------------------------------------------------------------------- Net asset value, end of the period $123.67 $120.53 $122.23 $117.85 $118.17 $120.55 $111.44 $112.54 $113.44 =============================================================================================== Total investment return, compounded monthly 5.62% 5.62% 5.61% 5.61% 5.60% 5.60% 5.61% 5.61% 5.61% =============================================================================================== RATIOS TO AVERAGE NET ASSETS: Expenses 9.22% 9.25% 9.69% 9.19% 9.28% 9.26% 9.27% 9.19% 9.23% =============================================================================================== Net income 4.86% 5.38% 6.30% 4.52% 5.55% 5.44% 5.50% 5.03% 4.62% ===============================================================================================
See note to consolidated financial statements. 5 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. MLIM Alternative Strategies LLC ("MLIM AS LLC"), a wholly-owned subsidiary of Merrill Lynch Investment Managers, LP ("MLIM"), which, in turn, is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the general partner of the Partnership. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is the Partnership's commodity broker. All of the Partnership's assets are held in accounts maintained at MLPF&S. MLIM AS LLC intends to maintain a general partner's interest of at least 1% of the total capital in each series of units. MLIM AS LLC and the Limited Partners share in the profits and losses of the Partnership in proportion to the respective interests in the Partnership. Many of the multi-advisor funds (the "Multi-Advisor Funds") sponsored by MLIM AS LLC, including the Partnership, allocate their assets to a number of the same independent advisors (the "Advisors"). These Multi-Advisor Funds invest in a limited liability company, ML Multi-Manager Portfolio LLC ("MM LLC"), a Delaware limited liability company, which operates a single account with each Advisor selected. On September 1, 2000, the Partnership joined MM LLC along with another Multi-Advisor Fund sponsored by MLIM AS LLC. MM LLC is managed by MLIM AS LLC, 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 MLIM AS LLC. MLIM AS LLC, on an ongoing basis, may change the number of Multi-Advisor Funds investing in MM LLC. As of December 31, 2002, 2001 and 2000, the Partnership's percentage of ownership share of MM LLC was 9.39%, 8.61% and 8.05%, respectively. MLIM AS LLC selects the Advisors to manage MM LLC's assets, and allocates and reallocates such trading assets among existing, replacement and additional Advisors. Prior to January 1, 2001 the Partnership executed all its speculative trading through ML Principal Protection Trading L.P. (the "Trading Partnership"), of which the Partnership was the sole limited partner. On January 1, 2001, the Trading Partnership was dissolved. MLIM AS LLC 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. The consolidated financial statements include the accounts of the Trading Partnership. All related transactions and intercompany balances between the Partnership and the Trading Partnership were eliminated in consolidation. The ownership by MLIM AS LLC in the Trading Partnership represented a minority interest when the financial results of the Trading Partnership were consolidated into those of the Partnership. MLIM AS 6 LLC's share of the Trading Partnership's profits and losses was deducted from the Consolidated Statements of Operations, and MLIM AS LLC's interest in the Trading Partnership reduced 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 MLIM AS LLC to manage the trading. MLIM AS LLC determines what percentage of the Partnership's total capital attributable to each series of units to allocate to trading by investing in 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 8), 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 Statements of Financial Condition of MM LLC 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. Prior to September 1, 2000, the change in unrealized profit (loss) on open from one period to the next is reflected under Trading profit (loss): Change in unrealized in the Consolidated Statements of Operations. Subsequent to September 1, 2000, the change in unrealized profit (loss) on open contracts is reflected in the financial statements of MM LLC in the same manner. See Note 2 for discussion of revenue recognition for the Partnership's investment in MM LLC. 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. 7 OPERATING EXPENSES AND SELLING COMMISSIONS MLIM AS LLC 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. MLIM AS LLC receives an administrative fee as well as a portion of the brokerage commissions paid to MLPF&S by the Partnership (through MM LLC after September 1, 2000)(See Note 3). No selling commissions have been or are paid directly by Limited Partners. All selling commissions are paid by MLIM AS LLC. 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. 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. RECLASSIFICATION Certain 2001 and 2000 information has been reclassified to conform to the 2002 presentation. 2. INVESTMENT IN MM LLC Effective September 1, 2000, the Partnership consolidated its trading accounts with those of certain other multi-advisor managed future funds sponsored by MLIM AS LLC. The Partnership is no longer trading through the Trading Partnership through managed accounts with each of its Advisors, but is investing in MM LLC. 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. MLIM AS LLC absorbed all costs related to the consolidation. The financial statements of MM LLC are bound together with this report and should be read in conjunction with the Partnership's financial statements. 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 an investor. The resulting difference between cost and fair value is reflected on the Statements of Operations as Income from investment in MM LLC. 3. RELATED PARTY TRANSACTIONS. The Partnership's U.S. dollar assets are maintained at MLPF&S. On assets held in U.S. dollars, Merrill Lynch credits the Partnership with interest at the prevailing 91-day U.S. Treasury bill rate. The Partnership is credited with interest on any of its net gains actually held by Merrill Lynch in non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill Lynch may derive certain economic benefits, in excess of the interest, which Merrill Lynch pays to the Partnership, from possession of such assets. The Partnership's U.S. dollar assets invested in MM LLC are also maintained at MLPF&S. MLPF&S credits 8 MM LLC with interest in the same manner. The Partnership indirectly receives this interest through its investment in MM LLC. 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 pays brokerage commissions to MLPF&S 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 MM LLC, or the Trading Partnership prior to September 1, 2000. The Partnership also pays MLIM AS LLC 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. MLPF&S pays the Advisors annual Consulting Fees ranging up to 2.5% 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. 4. 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 until the Principal Assurance Date (see Note 8). 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. For the years ended December 31, 2002, 2001 and 2000, the Partnership made the following distributions: 9
DISTRIBUTION FIXED-RATE DISCRETIONARY SERIES DATE DISTRIBUTION DISTRIBUTION -------------- --------------------------------------------------- 2002 ----- Series B 01/1/2002 $ 3.50 $ - Series C 04/1/2002 3.50 - Series D 07/1/2002 3.50 - Series E 10/1/2002 3.50 - Series F 01/1/2002 3.50 - Series G 04/1/2002 3.50 - Series H 07/1/2002 3.50 - 2001 ---- Series A 10/1/2001 $ 3.50 $ - Series B 01/1/2001 3.50 - Series C 04/1/2001 3.50 - Series D 07/1/2001 3.50 - Series E 10/1/2001 3.50 - Series F 01/1/2001 3.50 - Series G 04/1/2001 3.50 - Series H 07/1/2001 3.50 - 2000 ----- Series A 10/1/2000 $ 3.50 $ - Series B 01/1/2000 3.50 - Series C 04/1/2000 3.50 - Series D 07/1/2000 3.50 - Series E 10/1/2000 3.50 - Series F 01/1/2000 3.50 - Series G 04/1/2000 3.50 - Series H 07/1/2000 3.50 -
5. ADVISORY AGREEMENTS MM LLC, the Trading Partnership prior to September 1, 2000, 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 MM LLC accounts, subject to certain rights reserved by MLIM AS LLC. Profit Shares, generally ranging from 20% 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 by MM LLC (and prior to September 1, 2000, directly by the Partnership) to the appropriate Advisors to the extent of the applicable percentage of any New Trading Profit attributable to such Units. 10 6. NET ASSET VALUE PER UNIT At December 31, 2002, the Net Asset Values of the different series of Units were as follows:
NUMBER NET ASSET VALUE NET ASSET VALUE OF UNITS PER UNIT ---------------------------------------------------- Series A Units $ 4,554,926 37,329.0000 $ 122.02 Series B Units 361,036 3,079.0000 117.26 Series C Units 754,685 6,550.0000 115.22 Series D Units 2,324,762 20,741.0000 112.09 Series E Units 1,327,640 11,951.4800 111.09 Series F Units 829,625 7,711.3400 107.58 Series G Units 585,224 5,508.0300 106.25 Series H Units 547,940 5,390.6650 101.65 Series K Units 2,302,631 18,619.0000 123.67 Series L Units 1,390,508 11,536.2800 120.53 Series M Units 726,816 5,946.4607 122.23 Series N Units 207,135 1,757.6778 117.85 Series O Units 624,977 5,288.7419 118.17 Series P Units 228,921 1,899.0000 120.55 Series Q Units 185,883 1,667.9408 111.44 Series R Units 433,969 3,856.0000 112.54 Series S Units 53,884 475.0000 113.44 ---------------- ---------------- $ 17,440,562 149,306.6162 ================ ================
At December 31, 2001, the Net Asset Values of the different series of Units were as follows:
NUMBER NET ASSET VALUE NET ASSET VALUE OF UNITS PER UNIT ---------------------------------------------------- Series A Units $ 5,306,952 47,168.0000 $ 112.51 Series B Units 463,202 4,143.0000 111.80 Series C Units 824,171 7,647.0000 107.78 Series D Units 2,511,793 23,486.0000 106.95 Series E Units 1,596,682 14,730.6800 108.39 Series F Units 931,116 8,689.3400 107.16 Series G Units 718,712 6,786.0300 105.91 Series H Units 779,108 7,479.9150 104.16 Series K Units 2,909,351 24,847.0000 117.09 Series L Units 1,392,555 12,202.0300 114.12 Series M Units 1,975,029 17,065.9607 115.73 Series N Units 230,060 2,061.6778 111.59 Series O Units 610,319 5,453.7419 111.91 Series P Units 231,271 2,026.0000 114.15 Series Q Units 244,155 2,313.6908 105.53 Series R Units 512,598 4,810.0000 106.57 Series S Units 68,206 635.0000 107.41 ---------------- ---------------- $ 21,305,280 191,545.0662 ================ ================
11 7. 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, 2002, 2001 and 2000 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. 8. 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 was September 30, 2001. The Principal Assurance Dates for subsequent Series generally occur at each succeeding quarter thereafter. The Principal Assurance Dates for Series A through F and K through N came to term on or before December 31, 2002 and were not renewed. The above Series Units remain outstanding, with 100% of their assets allocated to trading, without any "principal protection" feature and no longer pay annual distributions. 9. COPPER SETTLEMENT The Partnership, as a member of a class of plaintiffs, received a settlement payment in August 2002 relating to certain copper trades made by a number of investors, including the Partnership, during a period in the mid-1990s. Members of the class were those who purchased or sold Comex copper futures or options contracts between June 24, 1993 and June 15, 1996. The effect of the settlement payment was included in the Partnership's performance in August 2002. 10. FAIR VALUE AND OFF-BALANCE SHEET RISK The Partnership invests indirectly in derivative instruments as a result of its investment in MM LLC, but does not itself hold any derivative instrument positions. The nature of this Partnership has certain risks, which cannot be presented on the consolidated financial statements. 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 net unrealized 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 MM LLC, as well as the volatility and liquidity of the markets in which the derivative instruments are traded. 12. SUBSEQUENT EVENTS On January 2, 2003, distributions were announced for Series F. Series F Unitholders received a fixed-rate distribution of $3.50 per unit. Such distributions totaled $26,990. 12 Immediately following the distribution announcement and prior to the opening of business on January 2, 2003, Series A through F and K through N, those series that had come to term on or before December 31, 2002, were consolidated into a new series, Series A 2003, with a $1.00 per Unit Net Asset Value. The aggregate Net Asset Value of each investor's new Units is equal to the aggregate Net Asset Value of their original Units at December 31, 2002. The consolidation had no economic effect on the investors. MLIM AS LLC contribution $5,499 to the Partnership, the amount necessary due to the effects of rounding, to insure all investors received Units equal in value to their original holdings at December 31, 2002. The following is a listing of the number of new Units each investor received of Series A for each Unit of their original series holding.
NUMBER SERIES OF UNITS -------- ---------- A 122.021960 B 117.269077 C 115.242141 D 112.085339 E 111.088709 F 104.084994 K 123.799970 L 120.674078 M 122.310644 N 117.973383
After the series consolidation, the brokerage commission rate for Series A 2003 was reduced to a monthly rate of 0.604 of 1% (a 7.25% annual rate). As of February 28, 2003, the general partner interest and the management authority of the of the Partnership was assigned from MLIM AS LLC to Merrill Lynch Investment Managers, LLC, a wholly-owned subsidiary of MLIM, as part of an internal Merrill Lynch reorganization. This change did not affect the personnel involved in the management of the Partnership. The change will have no impact on the Partnership's investors. * * * * * * * * * * 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 MLIM Alternative Strategies LLC General Partner of ML Principal Protection L.P. 13 ML MULTI-MANAGER PORTFOLIO LLC (A DELAWARE LIMITED LIABILITY COMPANY) Financial Statements for the years ended December 31, 2002 and 2001 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, 2002 AND 2001: Statements of Financial Condition 2 Statements of Income 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, 2002 and 2001, and the related statements of income 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, 2002 and 2001, 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 March 3, 2003 ML MULTI-MANAGER PORTFOLIO LLC (A Delaware Limited Liability Company) STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2002 AND 2001 - -------------------------------------------------------------------------------- ASSETS
2002 2001 --------------- --------------- Equity in commodity futures trading accounts: Cash and option premiums $ 172,773,081 $ 205,396,650 Net unrealized profit on open contracts (Note 2) 4,530,324 2,077,539 Accrued interest (Note 4) 182,180 314,001 --------------- --------------- TOTAL $ 177,485,585 $ 207,788,190 =============== =============== LIABILITIES AND MEMBERS' CAPITAL LIABILITIES: Brokerage commissions payable (Note 4) $ 618,102 $ 967,361 Profit Shares payable (Note 5) 1,400,129 685,683 Administrative fees payable (Note 4) 22,373 32,650 Due to Members 1,990,503 4,638,713 --------------- --------------- Total liabilities 4,031,107 6,324,407 --------------- --------------- MEMBERS' CAPITAL: Voting Members 173,454,478 201,463,783 --------------- --------------- Total Members' capital 173,454,478 201,463,783 --------------- --------------- TOTAL $ 177,485,585 $ 207,788,190 =============== ===============
See notes to financial statements. 2 ML MULTI-MANAGER PORTFOLIO LLC (A Delaware Limited Liability Company) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2002 AND 2001 - --------------------------------------------------------------------------------
REVENUES 2002 2001 ------------ ------------ Trading profit (loss): Realized (Note 6) $ 9,241,162 $ 26,679,581 Change in unrealized 2,453,406 (11,977,991) Proceeds from Copper Settlement 1,176,518 - ------------ ------------ Total trading results 12,871,086 14,701,590 Interest income (Note 4) 3,079,716 8,234,444 ------------ ------------ Total revenues 15,950,802 22,936,034 ------------ ------------ EXPENSES Brokerage commissions (Note 4) 7,738,731 14,316,819 Profit Shares (Note 5) 2,301,983 2,968,452 Administrative fees (Note 4) 279,753 471,194 ------------ ------------ Total expenses 10,320,467 17,756,465 ------------ ------------ NET INCOME $ 5,630,335 $ 5,179,569 ============ ============
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, 2002 AND 2001 - --------------------------------------------------------------------------------
VOTING MEMBERS -------------- MEMBERS' CAPITAL, DECEMBER 31, 2000 $ 247,611,967 Additions 1,788,034 Net income 5,179,569 Withdrawals (53,115,787) ------------- MEMBERS' CAPITAL, DECEMBER 31, 2001 $ 201,463,783 Additions 2,491,994 Net income 5,630,335 Withdrawals (36,131,634) ------------- MEMBERS' CAPITAL, DECEMBER 31, 2002 $ 173,454,478 =============
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. MLIM Alternative Strategies LLC ("MLIM AS LLC"), a wholly-owned subsidiary of Merrill Lynch Investment Managers, LP ("MLIM"), which, in turn, is an indirect wholly-owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), has been delegated administrative authority over the Company. Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") is the Company's commodity broker. The Company has one class of Membership Interests, Voting Interests. Voting Interests are held by multi-advisor funds managed by MLIM AS LLC ("The 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 MLIM AS LLC. Each Member is a "commodity pool" sponsored and controlled by MLIM AS LLC and shares in the trading results of the Company in proportion to its respective capital account. MLIM AS LLC 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. 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 (loss) in the Statements of Income. 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. 5 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, 2002 or 2001. WITHDRAWALS Each Member may withdraw some or all of such Member's 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. CONDENSED SCHEDULE OF INVESTMENTS The Company's investments, defined as Net unrealized profit on open contracts on the Statements of Financial Condition, as of December 31, 2002 and 2001, are as follows:
LONG POSITIONS SHORT POSITIONS 2002 -------------- ---------------- NET UNREALIZED COMMODITY INDUSTRY NUMBER UNREALIZED PERCENT OF NUMBER UNREALIZED PERCENT OF PROFIT (LOSS) ON PERCENT OF SECTOR OF CONTRACTS PROFIT (LOSS) NET ASSETS OF CONTRACTS PROFIT (LOSS) NET ASSETS OPEN POSITIONS NET ASSETS - ------------------ ------------ ------------- ---------- ------------ ------------ ---------- ---------------- ---------- Agriculture 1,263 $ 258,170 0.15% (1,361) $ 348,188 0.20% $ 606,358 0.35% Currencies 2,193,248 2,945,181 1.70% (3,207,564) (1,592,929) -0.92% 1,352,252 0.78% Energy 346 60,714 0.04% (4) (160) 0.00% 60,554 0.03% Interest rates 3,621 2,599,914 1.50% (370) (226,998) -0.13% 2,372,916 1.37% Metals 566 97,101 0.06% (260) 34,845 0.02% 131,946 0.08% Stock indices 57 (51,080) -0.03% (176) 57,378 0.03% 6,298 0.00% ----------- ------------ ---------------- Total 2002 $ 5,910,000 3.41% $ (1,379,676) -0.80% $ 4,530,324 2.61% =========== ============ ================
LONG POSITIONS SHORT POSITIONS 2001 -------------- --------------- NET UNREALIZED COMMODITY INDUSTRY UNREALIZED PERCENT OF UNREALIZED PERCENT OF PROFIT (LOSS) ON PERCENT OF SECTOR PROFIT (LOSS) NET ASSETS PROFIT (LOSS) NET ASSETS OPEN POSITIONS NET ASSETS - ------------------ ------------- ---------- ------------ ---------- ---------------- ---------- Agriculture $ (98,523) -0.05% $ 278,886 0.14% $ 180,363 0.09% Currencies (518,547) -0.26% 3,164,842 1.57% 2,646,295 1.31% Energy (8,555) 0.00% (109,665) -0.05% (118,220) -0.06% Interest rates (310,862) -0.15% 159,725 0.08% (151,137) -0.08% Metals (227,476) -0.11% (421,110) -0.21% (648,586) -0.32% Stock indices 151,168 0.08% 17,656 0.01% 168,824 0.08% ----------- ------------ ---------------- Total 2001 $(1,012,795) -0.50% $ 3,090,334 1.53% $ 2,077,539 1.03% =========== ============ ================
No individual contract comprises greater than 5% of the Company's net assets. 6 3. FINANCIAL DATA HIGHLIGHTS The following ratios have been derived from information provided in the financial statements for the year ended December 31, 2002. Total investment return, compounded monthly 3.30% ======= RATIO TO AVERAGE NET ASSETS: Expenses 5.51% ======= Net income 3.00% =======
4. RELATED PARTY TRANSACTIONS Currently, all of the Company's U.S. dollar assets are maintained at MLPF&S. 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 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. Following the allocation of the Company's trading profit and interest income among the Members' Capital Accounts, MLIM AS LLC 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 to each member 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 MLPF&S at a flat monthly rate reflecting the fee arrangement between each Member and MLPF&S. For the years ended December 31, 2002 and 2001, 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 MLIM AS LLC 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. MLPF&S pays the Advisors annual Consulting Fees up to 2.5% of the Company's average month-end assets allocated to them for management after reduction for a portion of the brokerage commissions. 5. ADVISORY AGREEMENTS Pursuant to the Advisory Agreements among the Advisors, the Company and MLIM AS LLC, 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 MLIM AS LLC. 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 20% to 25% of any New Trading Profit, as defined, recognized by each Advisor, attributable to each Member's Capital Account, considered individually irrespective of 7 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. 6. COPPER SETTLEMENT The Members, as parties of a class of plaintiffs, received a settlement payment in August 2002 relating to certain copper trades made by a number of investors, including the Members, during a period in the mid-1990's. Parties of the class were those who purchased or sold Comex copper futures or options contracts between June 24, 1993 and June 15, 1996. The amount of the settlement was paid to MM LLC on behalf of each member, based upon each Member's individual investment activity related to Comex copper futures or options. The effect of the settlement was included in the Company's performance in August 2002. 7. FAIR VALUE AND OFF-BALANCE SHEET RISK The nature of this Company has certain risks, which cannot be presented on the financial statements. The following summarizes some of those risks. 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. MLIM AS LLC 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 MLIM AS LLC does not itself intervene in the markets to hedge or diversify the Company's market exposure, MLIM AS LLC 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, MLIM AS LLC'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. 8 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. The Company, in its normal course of business, enters into various contracts, with MLPF&S acting as its commodity broker. Pursuant to the brokerage agreement with MLPF&S (which includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLPF&S, 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. 8. SUBSEQUENT EVENTS As of February 28, 2003, the administrative authority of the Company and the management authority of the Members was assigned from MLIM AS LLC to Merrill Lynch Investment Managers, LLC, a wholly-owned subsidiary of MLIM, as part of an internal Merrill Lynch reorganization. This change will not affect the personnel involved in the management of the Company. The change will not have an impact on the Company's investors. * * * * * * * * 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 MLIM Alternative Strategies LLC Commodity Pool Operator of ML Multi-Manager Portfolio LLC 9 -----END PRIVACY-ENHANCED MESSAGE-----