EX-99.13.01 2 a2154526zex-99_1301.txt EX-99.13.01 Exhibit 99.13.01 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) Financial Statements for the years ended December 31, 2004, 2003 and 2002 and Report of Independent Registered Public Accounting Firm [MERRILL LYNCH LOGO] ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) TABLE OF CONTENTS
PAGE ---- REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 1 FINANCIAL STATEMENTS: Statements of Financial Condition as of December 31, 2004 and 2003 2 Statements of Income for the years ended December 31, 2004, 2003 and 2002 3 Statements of Changes in Partners' Capital for the years ended December 31, 2004, 2003 and 2002 4 Financial Data Highlights for the year ended December 31, 2004 5 Notes to Financial Statements 6-13
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Partners of ML Principal Protection L.P.: We have audited the accompanying statements of financial condition of ML Principal Protection L.P. (the "Partnership") as of December 31, 2004 and 2003, and the related statements of income and changes in partners' capital for each of the three years in the period ended December 31, 2004 and the financial data highlights for the year ended December 31, 2004. 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 the standards of the Public Company Accounting Oversight Board (United States). 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. The Partnership is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. An audit includes consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances but not for the purpose of expressing an opinion on the effectiveness of the Partnership's internal control over financial reporting. Accordingly, we express no such opinion. An audit also 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 and financial data highlights present fairly, in all material respects, the financial position of ML Principal Protection L.P. as of December 31, 2004 and 2003, and the results of its operations, changes in its 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. New York, New York March 28, 2005 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 2004 AND 2003
2004 2003 --------------- --------------- ASSETS: Equity in commodity futures trading accounts: Cash $ 509,498 $ 503,091 Investment in MM LLC - 15,441,696 Receivable from MM LLC 13,053,547 - Accrued interest receivable 964 389 --------------- --------------- TOTAL $ 13,564,009 $ 15,945,176 =============== =============== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Redemptions payable $ 79,561 $ 392,038 Payable to MM LLC 430,901 111,442 --------------- --------------- Total liabilities 510,462 503,480 --------------- --------------- PARTNERS' CAPITAL: General Partner (146,547 and 123,681 Units) 160,719 159,703 Limited Partners (11,758,530 and 11,785,836 Units) 12,892,828 15,281,993 --------------- --------------- Total partners' capital 13,053,547 15,441,696 --------------- --------------- TOTAL $ 13,564,009 $ 15,945,176 =============== ===============
NET ASSET VALUE PER UNIT (Note 6) See notes to financial statements. 2 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
2004 2003 2002 --------------- --------------- --------------- TRADING REVENUES: Trading profit (loss): Realized $ 1,783,605 $ 3,053,369 $ 1,544,945 Change in unrealized (626,506) (28,995) 404,007 Settlement proceeds (Note 9) - - 308,142 --------------- --------------- --------------- Total trading revenues 1,157,099 3,024,374 2,257,094 --------------- --------------- --------------- INVESTMENT INCOME: Interest 173,439 180,856 364,235 --------------- --------------- --------------- EXPENSES: Brokerage commissions 974,435 1,166,016 1,142,131 Administrative fees 33,581 40,027 38,071 Profit Shares 216,979 437,466 273,852 --------------- --------------- --------------- Total expenses 1,224,995 1,643,509 1,454,054 --------------- --------------- --------------- NET INVESTMENT LOSS (1,051,556) (1,462,653) (1,089,819) --------------- --------------- --------------- NET INCOME $ 105,543 $ 1,561,721 $ 1,167,275 =============== =============== =============== NET INCOME PER UNIT: Weighted average number of General Partner and Limited Partner Units outstanding 12,844,606 13,571,725 172,404 =============== =============== =============== Net income per weighted average General Partner and Limited Partner Unit $ 0.0082 $ 0.1151 $ 6.77 =============== =============== ===============
Substantially all items of income and expense are derived from the investment in MM LLC (Note 2). See notes to financial statements. 3 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE YEARS ENDED DECEMBER 31, 2004, 2003 AND 2002
GENERAL LIMITED UNITS PARTNER PARTNERS TOTAL --------------- --------------- --------------- --------------- 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 Consolidation of shares (Note 6) 14,633,051 59 5,440 5,499 Net income - 18,243 1,543,478 1,561,721 Distributions - (653) (61,634) (62,287) Redemptions (2,872,841) (42,967) (3,460,832) (3,503,799) --------------- --------------- --------------- --------------- PARTNERS' CAPITAL, DECEMBER 31, 2003 11,909,517 159,703 15,281,993 15,441,696 Consolidation of shares (Note 6) 2,266,687 - 314 314 Net income - 1,016 104,527 105,543 Redemptions (2,271,127) - (2,494,006) (2,494,006) --------------- --------------- --------------- --------------- PARTNERS' CAPITAL, DECEMBER 31, 2004 11,905,077 $ 160,719 $ 12,892,828 $ 13,053,547 =============== =============== =============== ===============
See notes to financial statements. 4 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) FINANCIAL DATA HIGHLIGHTS FOR THE YEAR ENDED DECEMBER 31, 2004
SERIES A 2003 SERIES 2004* SERIES S --------------- --------------- --------------- PER UNIT OPERATING PERFORMANCE: Net asset value, beginning of period (Note 6) $ 1.1015 $ 1.0000 $ 124.76 Realized trading profit 0.1380 0.1252 15.60 Change in unrealized trading profit (loss) (0.0489) (0.0444) (5.54) Interest income 0.0139 0.0120 1.50 Expenses (0.0958) (0.0872) (11.15) ----------------------------------------------------- Net asset value, end of period $ 1.1087 $ 1.0056 $ 125.17 ===================================================== TOTAL RETURN: Total return before Profit Shares 2.14% 2.06% 1.84% Profit Shares -1.56% -1.58% -1.58% Total return 0.65% 0.56% 0.33% RATIOS TO AVERAGE NET ASSETS: Expenses (excluding Profit Shares) 7.29% 7.29% 7.49% Profit Shares 1.57% 1.59% 1.53% ----------------------------------------------------- Expenses 8.86% 8.88% 9.02% ===================================================== Net investment loss -7.59% -7.67% -7.81% =====================================================
*Series 2004 units were issued on January 2, 2004. See notes to financial statements. 5 NOTES TO 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. Through December 31, 2004, the Partnership engaged, through a limited liability company, ML Multi-Manager Portfolio LLC ("MM LLC"), in the speculative trading of futures, options on futures, forwards and options on forward contracts on a wide range of commodities. Effective December 31, 2004 after the close of business, MM LLC redeemed all of the Partnership's units and proceeds of $13,053,547 were invested in ML Global Horizons L.P. ("Global Horizons"), that has an investment strategy similar to MM LLC. Merrill Lynch Investment Managers, LLC ("MLIM LLC") is the general partner of the Partnership and is a wholly-owned subsidiary of Merrill Lynch Investment Managers, LP ("MLIM"), which in turn, is an indirect wholly-owned subsidiary of Merrill Lynch & Co. Inc. ("Merrill Lynch"). Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S"), a wholly-owned subsidiary of Merrill Lynch, is the Partnership's commodity broker. All of the Partnership's assets are held in accounts maintained at MLPF&S. MLIM LLC intends to maintain a general partner's interest of at least 1% of the total capital in each series of units. MLIM LLC and the Limited Partners share in the trading revenues and interest income of the Partnership in proportion to the respective interests in the Partnership. Other multi-advisor funds (the "Multi-Advisor Funds") sponsored by MLIM LLC, including the Partnership, allocate their assets to a number of the same independent advisors (the "Advisors"). These Multi-Advisor Funds invested in MM LLC, which operated a single account with each Advisor selected. MM LLC was managed by MLIM LLC, had no investors other than the Multi-Advisor Funds and served solely as the vehicle through which the assets of such Multi-Advisor Funds were combined in order to be managed through single rather than multiple accounts. The following notes relate to the operations of the Partnership through its investment in MM LLC. As of December 31, 2004 (prior to MM LLC liquidation), 2003 and 2002, the Partnership's percentage of ownership share of MM LLC was 13.44%, 11.02% and 9.39%, respectively. MLIM LLC selected the Advisors to manage MM LLC's assets, and allocated and reallocated such trading assets among existing, replacement and additional Advisors. The Partnership may issue different series of units of limited partnership interest ("Units") generally as of the beginning of each calendar quarter. The Partnership is currently not open to new investment. Each series has its own Net Asset Value per Unit. All series, regardless of when issued, traded through MM LLC and will trade through Global Horizons, under the direction of the same combination of independent advisors (the "Advisors"), chosen from time to time by MLIM LLC to manage the trading. 6 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. The change in unrealized profit (loss) on open contracts from one period to the next is reflected in Change in unrealized under Trading profit (loss) in the Statements of Income of 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 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 "realized trading profit (loss)" on the Statements of Income. OPERATING EXPENSES AND SELLING COMMISSIONS MLIM LLC pays all routine operating costs (including legal, accounting, printing, postage and similar administrative expenses) of the Partnership. MLIM LLC receives an administrative fee as well as a portion of the brokerage commissions paid to MLPF&S by the Partnership through MM LLC (See Note 3). No selling commissions have been or are paid directly by Limited Partners. All selling commissions are paid by MLIM LLC. INCOME TAXES No provision for income taxes has been made in the accompanying financial statements as each Partner is individually responsible for reporting income or loss based on such Partner's respective share of the Partnership's 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. The Financial Accounting Standards Board ("FASB") has issued Statement No. 150, ACCOUNTING FOR CERTAIN FINANCIAL INSTRUMENTS WITH CHARACTERISTICS OF BOTH LIABILITIES AND EQUITY, ("FAS 150") and is effective for mandatorily redeemable financial instruments of entities that are public entities for the first interim period beginning after June 15, 2003. FAS 150 requires that a mandatorily redeemable financial instrument shall be classified as a liability if the financial interest is required to be redeemed at a specific date or upon an event certain to occur 7 The limited Partners' financial interests are not required to be redeemed at a specific date or upon an event certain to occur and thus are not considered mandatorily redeemable financial instruments. However, the limited partner may give 10 days notice for redemption of their units and redeem at that month's net asset value. The Partnership records the financial interests redeemed as a liability once the redemption is received from the limited partner. The adoption of FAS 150 will not have a material impact on the financial statements of the Partnership. 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. 2. INVESTMENT IN MM LLC The financial statements of MM LLC are bound together with this report and should be read in conjunction with the Partnership's financial statements. Effective December 31, 2004, MM LLC liquidated and the fair value of the Partnership's investment is reflected in "Receivable from MM LLC" on the Statement of Financial Condition. The investment in MM LLC as of December 31, 2003 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. All income and expense for the Partnership was derived from its investment in MM LLC, based on the Partnership's proportionate share of MM LLC's revenues and expenses. 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. Merrill Lynch credits 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, through its investment in MM LLC, Merrill Lynch's cost of financing realized and unrealized losses on the Partnership's non-U.S. dollar-denominated positions. Such amounts are netted against interest income due to the insignificance of such amounts. The Partnership pays brokerage commissions to MLPF&S in respect of each series of Units at a flat monthly rate of .604 of 1% (a 7.25% annual rate) of such series' month-end trading assets invested in MM LLC except for Series S. Series S pays a flat monthly rate of .625 of 1% (a 7.50% annual rate). The Partnership also pays MLIM LLC a monthly administrative fee of .021 of 1% (a 0.25% annual rate) of the Partnership's total month-end trading assets. Assets committed to trading 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 2.50% of the Partnership's average month-end trading assets allocated to them for management, after reduction for a portion of the brokerage commissions accrued with respect to such assets. 8 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, 2004, 2003 and 2002, the Partnership made the following distributions:
DISTRIBUTION FIXED-RATE DISCRETIONARY SERIES DATE DISTRIBUTION DISTRIBUTION ---------- --------------- --------------- --------------- 2004 none 2003 Series F 1/1/2003 $ 3.50 $ - Series G 4/1/2003 3.50 - Series H 7/1/2003 3.50 - 2002 Series B 1/1/2002 $ 3.50 $ - Series C 4/1/2002 3.50 - Series D 7/1/2002 3.50 - Series E 10/1/2002 3.50 - Series F 1/1/2002 3.50 - Series G 4/1/2002 3.50 - Series H 7/1/2002 3.50 -
5. ADVISORY AGREEMENTS MM LLC and the Advisors have each entered into Advisory Agreements. These Advisory Agreements generally renew annually after they are entered into, subject to certain rights exercisable by the Partnership. The Advisors determine the commodity futures, options on futures, forwards and option on forward contract trades to be made on behalf of their respective MM LLC accounts, subject to certain rights reserved by MLIM 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 to the appropriate Advisors to the extent of the applicable percentage of any New Trading Profit attributable to such Units. 6. NET ASSET VALUE PER UNIT Prior to the opening of business on January 2, 2004, Series G, H, and O through R, those series whose guarantee had come to term on or before December 31, 2003, but after December 31, 2002, were consolidated into a new series, Series G 2004, 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, 2003. The consolidation had no adverse economic effect on the investors. MLIM LLC contributed $314 to the 9 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, 2003. The following is a listing of the number of new Units each investor received of Series 2004 for each Unit of their original series holding.
NUMBER SERIES OF UNITS ------ -------- G 110.859969 H 102.336331 O 129.904347 P 132.546751 Q 122.531124 R 123.779041
Prior to the opening of business on January 2, 2004, Series G, H, and O through R, those series that had come to term on or before December 31, 2003, but after December 31, 2002, were consolidated into a new series, Series 2004, with a $1.00 per Unit Net Asset Prior to the opening of business on January 2, 2003, Series A through F and K through N, those series whose guarantee 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 adverse economic effect on the investors. MLIM LLC contributed $5,499 to the Partnership, the amount necessary due to the effects of rounding, to insure that 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 2003 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
At December 31, 2004, the Net Asset Values of the different series of Units are as follows:
NUMBER NET ASSET VALUE NET ASSET VALUE OF UNITS PER UNIT --------------------------------------------------- Series A 2003 Units $ 11,000,919 9,922,463 $ 1.1087 Series 2004 Units 1,993,167 1,982,139 1.0056 Series S Units 59,461 475 125.17 --------------- --------------- $ 13,053,547 $ 11,905,077 =============== ===============
10 At December 31, 2003, the Net Asset Values of the different series of Units are as follows:
NUMBER NET ASSET VALUE NET ASSET VALUE OF UNITS PER UNIT --------------------------------------------------- Series A 2003 Units $ 13,096,718 11,889,700 $ 1.1015 Series G Units 415,800 3,752 110.82 Series H Units 495,479 4,842 102.33 Series O Units 599,734 4,616 129.90 Series P Units 251,706 1,899 132.55 Series Q Units 77,950 636 122.52 Series R Units 445,046 3,596 123.76 Series S Units 59,263 475 124.76 --------------- --------------- $ 15,441,696 $ 11,909,517 =============== ===============
7. WEIGHTED AVERAGE UNITS Weighted average number of Units outstanding is computed for purposes of computing net income per weighted average Unit. The weighted average number of Units outstanding for the years ended December 31, 2004, 2003 and 2002 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 guaranteed to the Partnership that the Partnership would have sufficient Net Assets, as of the Principal Assurance Date for Series A through S of Units, that the Net Asset Value per Unit would 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 Dates for Series A through Series R, and Series S came to term on or before December 31, 2003 and March 31, 2004, respectively and were not renewed. The Series S 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 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 on such derivative instruments as reflected in 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 such derivative instruments are traded. 11 11. SUBSEQUENT EVENT Prior to the opening of business on January 2, 2005, Series A 2003, Series 2004 and Series S were consolidated into a new Series, Series 2005, with a $1.00 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, 2004. The consolidation had no adverse economic effect on the investors. The General Partner contributed $733 to the Partnership, the amount necessary due to the effects of rounding, to insure that all investors received Units equal in value to their original holdings at December 31, 2004. The following is a listing of the number of new Units each investor received of Series 2005 for each Unit of their original series holding.
NUMBER SERIES OF UNITS ------ -------- A 2003 1.108721 2004 1.005565 S 125.174168
* * * * * * * * * * To the best of the knowledge and belief of the undersigned, the information contained in this report is accurate and complete. Patrick Hayward Chief Financial Officer Merrill Lynch Investment Managers, LLC General Partner of ML Principal Protection L.P. 12