Item 1: Business
(a) General Development of Business:
ML Appleton FuturesAccess LLC (the “Fund”) was organized under the Delaware Limited Liability Company Act on May 17, 2004 and commenced trading activities on April 1, 2005. The Fund issues new units of limited liability company interest (“Units”) at Net Asset Value per unit (see Item 6 for discussion of net asset value and net asset value per unit for subscriptions and redemptions purposes hereinafter referred to as Net Asset Value and Net Asset Value per unit for all other purposes) as of the beginning of each calendar month. The Fund engages in the speculative trading of currency forward contracts. ACMP Limited trading as Appleton Capital Management LLC (“Appleton”) is the trading advisor of the Fund.
Merrill Lynch Alternative Investments LLC (“MLAI”), is the sponsor and manager of the Fund. MLAI 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 Fund’s commodity broker.
In February 2008, the Fund was put on administrative hold by MLAI. MLAI expects to liquidate the Fund as of June 30, 2008. In accordance with the offering memorandum, the Members redeemed their capital upon the liquidation of the Fund. MLAI has agreed to waive payment for any remaining unreimbursed costs related to the initial offering of the units.
As of December 31, 2007, the Net Asset Value of the Fund for all other purposes was $76,970,706 and the Net Asset Value per Unit for all other purposes, was $0.9774 for Class A, $0.9500 for Class C, $1.0268 for Class D and $0.9896 for Class I. The Net Asset Value per Unit for financial reporting purposes in conformity with accounting principals generally accepted in the United States of America (“U.S. GAAP”) was $0.9772 for Class A, $0.9499 for Class C, $1.0268 for Class D and $0.9894 for Class I, and the Net Asset Value of the Fund was $76,958,851.
The highest month-end Net Asset Value per Unit for all other purposes for Class A as of December 31, 2007 was $1.212 (June 30, 2007) and the lowest was $0.8506 (May 31, 2006). The highest month-end Net Asset Value per Unit for all other purposes for Class C as of December 31, 2007 was $1.1844 (June 30, 2007) and the lowest was $0.8389 (July 31, 2006). The highest month-end Net Asset Value per Unit for all other purposes for Class D as of December 31, 2007 was $1.2637 (June 30, 2007) and the lowest was $0.8724 (May 31, 2006). The highest month-end Net Asset Value per Unit for all other purposes for Class I as of December 31, 2007 was $1.2246 (June 30, 2007) and the lowest was $0.8554 (May 31, 2006).
(b) Financial Information about Segments:
The Fund’s business constitutes only one segment for financial reporting purposes, i.e., a speculative “commodity pool.” The Fund does not engage in sales of goods or services.
(c) Narrative Description of Business:
Trading Advisor’s Trading Model
The Fund has entered into an advisory agreement with Appleton whereby Appleton trades through a managed account the Fund’s assets using the Appleton 25% Risk Program (the “Trading Model”), which is summarized below.
In the Trading Model, which Appleton has traded since January 1, 1995, Appleton applies a combination of different strategies. Methods employed include a model-based approach to spread trading, asset allocation models, and technical analysis.
The objective of the Trading Model is to realize profits through the speculative trading of over-the-counter (“OTC”) currency forward contracts and exchange-traded futures contracts on currencies which Appleton deems to be sufficiently liquid to implement the Trading Model, although the percentage of the Fund’s assets allocated to either of these classes of contracts may change at any time. Appleton’s trading methodology utilizes proprietary mathematical techniques that are researched and developed on an ongoing basis in an attempt to forecast market direction, manage the risk associated with that direction and adapt to changing market conditions. Appleton’s investment
The Trading Model is trend-following in nature and makes forecasts over a timeframe that is generally described as medium-term, over a period of a few weeks. The theoretical basis of the Trading Model is that the major currency markets tend to display sustained periods of direction against one another. In order to capture this phenomenon, the Trading Model makes a forecast of the value of a currency in the next time period as being a function of the value of that currency in the current time period. Or, the Trading Model uses historical prices, in an attempt to forecast future exchange rate movements. There can be no assurance that markets which have displayed direction in the past will continue to do so, therefore Appleton may alter the constituent currencies in the portfolio from time to time.
As well as the expected price change as a result of the underlying direction, the Trading Model also takes into account the interest rate differential that is present between two currencies, as this is also a potential source of return. Generally no attempt is made to forecast the interest rate differential but rather it is taken as a passive input to the forecast. Simultaneously, the Trading Model will make a forecast of the expected volatility of the exchange rate in question. This is done in order to more accurately deliver on the risk level targeted by the particular program or individual managed account. As market volatility increases, the Trading Model will reduce the size of the positions that is exposed to that volatility. In this way, the Trading Model attempts to maintain a constant level of volatility for each account.
The final part of the process is the optimization of positions. The Trading Model will take the inputs of expected risk and forecast return and attempt to find an optimal combination of possible positions from a risk-adjusted basis.
Although Appleton’s trading decisions are determined by the Trading Model. Appleton reserves the right to override the Trading Model.
Employees
The Fund has no employees.
Use of Proceeds and Cash Management Income
Subscription Proceeds
The Fund’s cash is used as security for and to pay the Fund’s trading losses as well as its expenses and redemptions. The primary use of the proceeds of the sale of the Units is to permit Appleton to trade on a speculative basis in currency forwards markets on behalf of the Fund. While being used for this purpose, the Fund’s assets are also generally available for cash management, as more fully described below under “Cash Assets”.
Market Sectors
Appleton’s trading is limited to the speculative trading of over-the-counter forward currency contracts and exchange traded currency future contracts on currencies which Appleton deems to be sufficiently liquid, although the percentage of the Fund’s assets allocated to either class of contracts will vary from time to time.
Market Types
Substantially all of the Fund’s off-exchange trading takes place in the highly liquid, institutionally based currency forward markets.
Many of the Fund’s currency trades are executed in the spot and forward foreign exchange markets (the “FX Markets”) where there are no direct execution costs. Instead, the participants, banks and dealers in the FX
Markets take a “spread” between the prices at which they are prepared to buy and sell a particular currency and such spreads are built into the pricing of the spot or forward contracts with the Fund.
Custody of Assets
Substantially all of the Fund’s assets are currently held in Commodity Futures Trading Commission (“CFTC”) regulated customer accounts at MLPF&S.
Cash Assets
The Fund will generally earn interest, as described below, on its “Cash Assets”, which can be generally described as the cash actually held by the Fund. Cash Assets are held primarily in U.S. dollars, and to a lesser extent in foreign currencies, and are comprised of the Fund’s cash balances which may be held in the offset accounts (as described below). Cash Assets do not include and the Fund does not earn interest income on the Fund’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.
The Fund’s Cash Assets may be greater than, less than or equal to the Fund’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.
Interest Earned on the Fund’s U.S. Dollar Cash Assets
The Fund’s U.S. dollar Cash Assets are held in cash at MLPF&S, which utilizes offset accounts.
Offset accounts are non-interest bearing demand deposit accounts maintained with banks unaffiliated with Merrill Lynch. An integral feature of the offset arrangements is that the participating banks specifically acknowledge that the offset accounts are MLPF&S customer accounts, not subject to any Merrill Lynch liability.
MLPF&S credits the Fund with interest at the most favorable rate payable by MLPF&S to accounts of Merrill Lynch affiliates but not less than 75% of such prevailing rate. The Fund is credited with interest on any of its assets and net gains actually held by MLPF&S non-U.S. dollar currencies at a prevailing local rate received by Merrill Lynch. Merrill Lynch may drive certain economic benefit, in excess of the interest, which Merrill Lynch pays to the Fund, from possession of such assets.
The banks at which the offset accounts are maintained make available to Merrill Lynch interest-free overnight credits, loans or overdrafts in the amount of the Fund’s U.S. dollar Available Assets held in the offset accounts, charging Merrill Lynch a small fee for this service. The economic benefits derived by Merrill Lynch - net of the interest credits paid to the Fund and the fee paid to the offset banks - from the offset accounts have not exceeded 0.75% per annum of the Fund’s average daily U.S. dollar Available Assets held in the offset accounts. These revenues to Merrill Lynch are in addition to the Brokerage Commissions and Management Fees paid by the Fund to MLPF&S and MLAI, respectively.
Interest Paid by Merrill Lynch on the Fund’s Non-U.S. Dollar Cash Assets
Under the single currency margining system implemented for the Fund, the Fund does not deposit foreign currencies to margin trading in non-U.S. dollar denominated futures contracts and options, if any. MLPF&S provides the necessary margin, permitting the Fund to retain the monies which would otherwise be required for such margin as part of the Fund’s U.S. dollar Cash Assets. The Fund does not earn interest on foreign margin deposits provided by MLPF&S. The Fund does, however, earn interest on its non-U.S. dollar Cash Assets. Specifically, the Fund is credited by Merrill Lynch with interest at prevailing short-term local rates on assets and net gains on non-U.S. dollar denominated positions for such gains actually held in cash by the Fund. Merrill Lynch charges the Fund Merrill Lynch’s cost of financing realized and unrealized losses on such positions.
The Fund may hold foreign currency gains and finances foreign currency losses on an interim basis until converted into U.S. dollars and either paid into or out of the Fund’s U.S. dollar Cash Assets which generally occurs weekly. Foreign currency gains or losses on open positions are not converted into U.S. dollars until the positions are closed. Assets of the Fund while held in foreign currencies are subject to exchange rate risk.
Charges
The following table summarizes the charges incurred by the Fund for the years ended December 31, 2007 and 2006 and for the period April 1, 2005 (commencement of operations) to December 31, 2005.
(1) Net of reimbursement of $10,137 in 2005
The foregoing table does not reflect the bid-ask spreads paid by the Fund on its forward trading, or the benefits which may be derived by Merrill Lynch from the deposit of certain of the Fund’s U.S. dollar assets maintained at MLPF&S.
The Fund’s average month-end Net Asset Value for all other purposes during 2007, 2006 and 2005 equaled $86,609,627, $52,675,046 and $11,436,993, respectively.
During 2007, the Fund earned $4,393,090 in interest income, or approximately 5.07% of the Fund’s average month-end Net Assets for all other purposes. During 2006, the Fund earned $2,623,944 in interest income, or approximately 4.98% of the Fund’s average month-end Net Assets for all other purposes. During 2005, the Fund earned $299,686 in interest income, or approximately 2.62% of the Fund’s average month-end Net Assets for all other purposes.
Description of Current Charges
Regulation
MLAI, Appleton and MLPF&S are each subject to regulation by the CFTC and the National Futures Association (“NFA”). Other than in respect of the registration requirements pertaining to the Fund’s securities under Section 12(g) of the Securities Exchange Act of 1934, the Fund is generally not subject to regulation by the Securities and Exchange Commission (the “SEC”). However, MLAI is registered as an “investment advisor” under the Investment Advisors Act of 1940. MLPF&S is also regulated by the SEC and the Financial Industry Regulatory Authority ( the “FINRA”).
(d) Financial Information about Geographic Areas
The Fund does not engage in material operations in foreign countries, nor is a material portion of the Fund’s revenue derived from customers in foreign countries.
The Fund trades on a number of foreign currency forward markets. The Fund does not engage in the sales of goods or services.
Item 1A:
Item 1A: Risk factors
Past Performance Not Necessarily Indicative of Future Results
Past performance is not necessarily indicative of future results. The trading advisor’s past performance may not be representative of how it may trade in the future for the Fund.
Volatile Markets; Highly Leveraged Trading
Futures and forward trading is highly leveraged, and market price levels are volatile and materially affected by unpredictable factors such as weather and governmental intervention. The combination of leverage and volatility creates a high degree of risk.
Importance of General Market Conditions
Overall market or economic conditions - which neither MLAI nor the trading advisor can predict or control - have a material effect on the performance of any managed futures strategy.
Forward Trading
The Fund will trade currencies in the forward markets in addition to in the futures markets. The forward markets are over-the-counter, non-exchange markets, and in trading in these markets, the Fund will be dependent on the credit standing of the counterparties with which they trade, without the financial support of any clearinghouse system. In addition, the prices offered for the same forward contract may vary significantly among different forward market participants. Forward markets counterparties are under no obligation to enter into forward transactions with the Fund, including transactions through which the Fund is attempting to liquidate open positions.
Increased Assets Under Management
There appears to be a tendency for the rates of return achieved by managed futures advisors to decline as assets under management increase. The trading advisor has not agreed to limit the amount of additional equity which it may manage.
Trading Advisor Risk
The Fund is subject to the risk of the bad judgment, negligence or misconduct of its trading advisor. There have been a number of instances in recent years in which private investment funds have incurred substantial losses due to manager misconduct.
Changes in Trading Strategy
The trading advisor may make material changes in its trading strategies without the knowledge of MLAI.
Illiquid Markets
Certain positions held by the Fund may become illiquid, preventing the Fund’s trading advisor from acquiring positions otherwise indicated by its strategy or making it impossible for the trading advisor to close out positions against which the market is moving.
Certain futures markets are subject to “daily price limits,” restricting the maximum amount by which the price of a particular contract can change during any given trading day. Once a contract’s price has moved “the limit,” it may be impossible or economically non-viable to execute trades in such contract. From time to time, prices have moved “the limit” for a number of consecutive days, making it impossible for traders against whose positions the market was moving to prevent large losses.
Trading on Non-U.S. Exchanges
The trading advisor may trade extensively on non-U.S. exchanges. These exchanges are not regulated by any United States governmental agency. The Fund could incur substantial losses trading on foreign exchanges to which it would not have been subject had its trading advisor limited its trading to U.S. markets.
The profits and losses derived from trading foreign forwards will generally be denominated in foreign currencies; consequently, the Fund will be subject to a certain degree of exchange-rate risk in trading such contracts.
The Fund Could Lose Assets and Have Its Trading Disrupted Due to the Bankruptcy One of the Parties
The Fund is subject to the risk of insolvency of a counterparty, an exchange, a clearinghouse or MLPF&S. Fund assets could be lost or impounded during lengthy bankruptcy proceedings. Were a substantial portion of the Fund’s capital tied up in a bankruptcy, MLAI might suspend or limit trading, perhaps causing the Fund to miss significant profit opportunities. There are increased risks in dealing with unregulated trading counterparties including the risk that assets may not benefit from the protection afforded to “customer funds” deposited with regulated dealers and brokers.
Item 1B:
Item 1B: Unresolved Staff Comments
Not applicable.
Item 2:
Item 2: Properties
The Fund does not use any physical properties in the conduct of its business.
The Fund’s management offices are the management offices of MLAI (Merrill Lynch Alternative Investments LLC, Hopewell Corporate Campus, 1200 Merrill Lynch Drive - First Floor, Pennington, New Jersey 08534). MLAI performs management services for the Fund from MLAI’s offices.
Item 3:
Item 3: Legal Proceedings
None.
Item 4:
Item 4: Submission of Matters to a Vote of Security Holders
None.
PART II
Item 5:
Item 5: Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Item 5(a)
(a) Market Information:
There is no established public trading market for the Units, and none is likely to develop. Members may redeem Units on ten days written notice to MLAI as of the last day of each month at their Net Asset Value, subject to certain early redemption charges.
(b) Holders:
As of December 31, 2007, there were 2,180 holders of Units, including MLAI.
(c) Dividends:
MLAI has not made and does not contemplate making any distributions on the Units.
(d) Securities Authorized for Issuance Under Equity Compensation Plans:
Not applicable.
(e) Recent Sales of Unregistered Securities: Uses of Proceeds From Registered Securities:
Issuance to accredited investors pursuant to Regulation D and Section 4(6) under the Securities Act. The selling agent of the following Class of Units was MLPF&S.
CLASS A
CLASS C
CLASS D
CLASS I
(1) Net Asset Value for all other purposes
Class A Units are subject to a sales commission paid to Merrill Lynch ranging from 1.0% to 2.5%. Class D and Class I Units are subject to sales commissions up to 0.5%. The rate assessed to a given subscription is based upon the subscription amount. Sales commissions are directly deducted from subscription amounts. Class C Units are not subject to any sales commissions.
Item 5(b)
Not applicable.
Item 5(c)
Not applicable
Item 6:
Item 6: Selected Financial Data
The following selected financial data has been derived from the financial statements of the Fund.
For financial reporting purposes in conformity with U.S. GAAP, the Fund deducted the total initial offering costs payable to MLAI at inception from Members’ Capital for purposes of determining Net Asset Value. For all other purposes, including computing Net Asset Value for purposes of member subscription and redemption activity, such payment is amortized over 60 months. Consequently, as of December 31, 2007, 2006 and 2005, the Net Asset Value and Net Asset Value per Unit of the different Classes for financial reporting purposes and for all other purposes are as follows:
December 31, 2007
December 31, 2006
MLAI believes that the Net Asset Value used to calculate subscription and redemption value and report performance to investors throughout the year is the most valuable information to the Members of the Fund. Therefore, the charts below referencing Net Asset Value and performance measurements are based on the Net Asset Value for all other purposes.
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS A
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS C
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS D
MONTH-END NET ASSET VALUE PER INITIAL UNIT CLASS I
Pursuant to CFTC policy, monthly performance is presented from April 1, 2005 (commencement of operations).
ML APPLETON FUTURESACCESS LLC
(CLASS A UNITS) (5)
December 31,
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 2005
Aggregate Subscriptions: $10,330,559
Current Capitalization: $7,660,030
Worst Monthly Drawdown(2): (12.16)% (July 2007)
Worst Peak-to-Valley Drawdown(3): (26.81)% (December 2005 - May 2006)
Net Asset Value per Unit, December 31, 2007: $0.9774
Monthly Rates of Return (4)
(1) Certain Funds, including Funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2005 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since April 1, 2005 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was -1% in each of January and February, 1% in March and -2% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately -3%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the -2% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit for all other purposes. The total return, since inception, based on U. S. GAAP is -2.28%.
ML APPLETON FUTURESACCESS LLC
(CLASS C UNITS) (5)
December 31,
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 2005
Aggregate Subscriptions: $71,923,070
Current Capitalization: $53,002,616
Worst Monthly Drawdown(2): (12.26)% (July 2007)
Worst Peak-to-Valley Drawdown(3): (27.28)% (December 2005 - July 2006)
Net Asset Value per Unit, December 31, 2007: $0.9500
Monthly Rates of Return (4)
(1) Certain Funds, including Funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2005 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since April 1, 2005 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was -1% in each of January and February, 1% in March and -2% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately -3%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the -2% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit for all other purposes. The total return, since inception, based on U.S. GAAP is -5.01%.
ML APPLETON FUTURESACCESS LLC
(CLASS D UNITS) (5)
December 31,
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 2005
Aggregate Subscriptions: $13,634,845
Current Capitalization: $10,675,926
Worst Monthly Drawdown(2): (12.04)% (July 2007)
Worst Peak-to-Valley Drawdown(3): (26.04)% (December 2005 - May 2006)
Net Asset Value per Unit, December 31, 2007: $1.0268
Monthly Rates of Return (4)
(1) Certain Funds, including Funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2005 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since April 1, 2005 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was -1% in each of January and February, 1% in March and -2% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately -3%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the -2% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit for all other purposes. The total return, since inception, based on U.S. GAAP is 2.68%.
ML APPLETON FUTURESACCESS LLC
(CLASS I UNITS) (5)
December 31,
Type of Pool: Single Advisor Non-“Principal Protected”(1)
Inception of Trading: April 2005
Aggregate Subscriptions: $ 7,765,806
Current Capitalization: $5,632,134
Worst Monthly Drawdown(2): (12.12)% (July 2007)
Worst Peak-to-Valley Drawdown(3): (26.54)% (December 2005 - May 2006)
Net Asset Value per Unit, December 31, 2007: $0.9896
Monthly Rates of Return (4)
(1) Certain Funds, including Funds sponsored by MLAI, are structured so as to guarantee to investors that their investment will be worth no less than a specified amount (typically, the initial purchase price) as of a date certain after the date of investment. The CFTC refers to such as “principal protected”. The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly Rate of Return experienced since April 1, 2005 by the Fund; a drawdown is measured on the basis of month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage decline since April 1, 2005 from a month-end cumulative Monthly Rate of Return without such cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent month-end. For example, if the Monthly Rate of Return was -1% in each of January and February, 1% in March and -2% in April, the Peak-to-Valley Drawdown would still be continuing at the end of April in the amount of approximately -3%, whereas if the Monthly Rate of Return had been approximately 3% in March, the Peak-to-Valley Drawdown would have ended as of the end of February at approximately the -2% level.
(4) Monthly Rate of Return is the net performance of the Fund during the month of determination (including interest income and after all expenses have been accrued or paid) divided by the total equity of the Fund as of the beginning of such month.
(5) The information presented is based on Net Asset Value and Net Asset Value per Unit for all other purposes. The total return, since inception, based on U.S. GAAP is -1.06%.
Item 7:
Item 7: Management’s Discussion and Analysis of Financial Condition and Results of Operations
Operational Overview
This performance summary is an outline description of how the Fund 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 Fund is 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 the Fund 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 Fund.
Results of Operations/Performance Summary
This performance summary is an outline description of how the Fund 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.
December 31, 2007
The Fund posted overall losses in 2007 trading in over the counter currency forward contracts.
The beginning of the year proved to be relatively uneventful from a performance point of view. The first quarter was extremely difficult for the Fund with volatility and longstanding trends coming to an abrupt halt, not just in currency markets but in global macro markets generally. There appears to be two opposite forces pulling on the U.S. dollar and the Japanese yen. However, the significant interest rate differential and the outlook for further rates hikes from the U.S. Federal Reserve would appear to support the U.S. dollar.
Strong moves in most of the major currencies allowed for technical approaches to capitalize during the second quarter. The Euro and the British pound both reached significant highs, and although the currency market volatility remained low, opportunities for profit were plentiful. The Fund has been cycling out of long positions in the Euro from April onwards as gains continued to be posted to the Fund due to the weakening of the Japanese yen. The Japanese yen continued to be generally the weakest of the major currencies and this price action, coupled with the considerable interest rate differential associated with this currency contributed to profits being posted to the Fund at the end of the second quarter.
At the beginning of the third quarter Appleton Risk Program “ARP” was down 25%. Although there were losses in several positions, the main contributor was the considerable appreciation of the Japanese yen against all major currencies, a reversal of a trend that has been in place almost uninterrupted since the middle of 2006. Losses continued through mid-quarter due to the currency markets displaying significant volatility. ARP established a sizeable short position in the U.S. dollar. The interest rate cut of 50 basis points coupled with volatility forced ARP to go long in the U.S. dollar position due to the fact the interest rate advantage relative to the Euro significant diminished while the Canadian interest rates were also roughly equal. Gains were posted to the Fund on this position as both the Euro and Canadian dollar advanced against the U.S. dollar. However, the U.S. dollar versus the Japanese yen positions stabilized above 114.00, as ARP ended the third quarter by lightening the long Euro versus the U.S. dollar position and instead taking exposure to the Euro versus the Japanese yen trade that had proven so successful in the first half of the year. Having peaked at 169.00, the subprime crisis and surrounding turmoil had brought the pair all
the way down to 151.00 with subsequent recovery back above 160.00 at quarters end.
The primary cause of losses being posted to the Fund at the end of the year were the Fund’s positions in Japanese yen, as well as many of the cross rates, such as the Euro versus the Canadian dollar. There have been many column inches in the financial media during 2007 regarding the decline and unwinding of the carry trade. Put simply, the carry trade refers to the practice of shorting a low yielding currency and buying a high yielding currency to the interest rate differential, in addition to any profits that accumulate due to a favorable movement in the spot price.
It would be disingenuous to lay the blame for the year’s performance squarely at the door of a few currency pairs. There were other markets that also displayed noteworthy behavior in terms of harsh reversals, spotty volatility or whipsawing markets. Thus the difficulties were presented across the full spectrum of available markets.
December 31,
The Fund posted gains for 2006 trading in over the counter currency forward contracts and exchange traded currency futures contracts.
The beginning of the year proved to be uneventful from a performance point of view. This was extremely difficult for the Fund with volatility and generally range-bound conditions prevailing as the Fund returned -9.25% in the first quarter. The main difficulties continue to stem from the lack of direction in the Japanese yen.
The traditional practice of holding a high yielding currency at the expense of a low-yield is common place in the foreign exchange markets. The rationale is that in the absence of any movement in the spot price, the currency manager will benefit from the interest rate differential therein. Reflecting on the movement the beginning of the first quarter and continuing through the second quarter, or lack thereof, in the major currency markets, Japanese yen, Euro, British pound and Canadian dollar showed that the price action in that time period experienced little or no direction accompanied by patchy levels of volatility.
The lack of pattern continued through the third quarter to the frustration of trend-followers and range-traders alike. There remains reluctance on the part of the major currencies to explore new territory above or below recent marks. In such an environment, an investment approach predicated on the presence of a certain level of volatility may suffer until such time as the trends return. The trade range exhibited by the U.S. dollar against two other major currencies, the Euro and Japanese yen show the level of movement was insufficient for the Fund to make inroads into the current year’s drawdown. However, mid-third quarter posted the largest gain in one month of 14.35% being recorded due to long positions in the Euro and the Japanese yen. The prospect of the Bank of Japan raising rates has been keeping the Japanese yen at levels that would seem to defy the obvious interest rate differential with other economic blocks.
Profits were realized in the U.S. dollar versus the Canadian dollar. Further positions were also added in U.S. dollar and Japanese yen as this trade was a trial for the year with a complete lack of direction. However, due to the interest rate differential in its favor, the trend was easy to stay with. Starting out at 115.75, the Japanese yen continued to decline and closed at a rate of 118.40 which meant further gains for the Fund, rounding out an interesting year.
December 31,
The Fund posted a gain for 2005 because of its successful trading in only currencies and currencies. The Fund started trading in only currencies and currencies beginning of the second quarter.
At the beginning of the second quarter, the trading revolved around the Canadian dollar versus the Japanese yen with the Fund going primarily long in the Canadian dollar. Trading in the U.S. dollar was varied with the U.S. dollar initially appreciating against the Japanese yen and the Euro then reversing that trend only to reverse a second time by the Fund benefiting from the Euro’s, decline at the end of the second quarter. The Japanese yen proved very volatile during this period but held steady against the U.S. dollar later in the second quarter.
The big news in the beginning of the third quarter was the decision by the People’s Bank of China (PBOC) on July 21st to alter their longstanding currency policy. After much speculation about a possible one-off revaluation of as much as 10%, the final outcome was much less dramatic. The decision to move to a managed float within a basket was the best conclusion that currency market participants could have hoped for. The announcement caused the U.S. dollar/Japanese yen to drop early in the quarter. The Japanese yen reached a 14-month low against the U.S. dollar and was trading weak against the Canadian dollar. As a result, there were profits to be made in the major currency markets and their crosses in the latter part of the third quarter. The recent addition of the Australian dollar to the trading opportunity set reaped instant benefits. As the quarter came to an end, the Australian dollar was on the rise and prompted the Fund to take more exposure in the Australian currency.
In the beginning of the fourth quarter, the Fund continued to benefit from the weakness and volatility of the Japanese yen to the U.S. dollar. The Australian dollar trading opportunity set at the end of the third quarter and continued through the beginning of the fourth quarter. Through the quarter, the single dominant theme was the continuing weakness of the Japanese yen, with interest rate differentials between the Japanese currency and its major counterparts set to continue into the foreseeable future.
The year ended with difficult trading conditions for all currency market participants as the market reversed some long established trends and themes. Proprietary risk management systems served the Fund well at the end of the year which meant the losses were well within tolerance levels despite the most difficult trading conditions seen in several years.
Variables Affecting Performance
The principal variables that determine the net performance of the Fund are gross profitability from the Fund’s trading activities and interest income.
During all periods set forth above “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 Fund’s profitability. In addition, low interest rates are frequently associated with reduced fixed income market volatility, and in static markets the Fund’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 Fund may be reduced as compared to high yielding and much lower risk fixed-income investments.
The Fund’s management fees and sponsor fees are a constant percentage of the Fund assets. Brokerage Commissions which are not based on a percentage of the Fund’s assets, are based on actual round-turns. The performance fees payable to Appleton and MLAI are based on the new Trading Profits generated by the excluding interest and after reduction of the Brokerage Commissions.
Unlike many investment fields, there is no meaningful distinction in the operation of the Fund between realized and unrealized profits. Most of the contracts traded by the Fund are highly liquid and can be closed out at any time.
Except in unusual circumstances, factors-regulatory approvals, cost of goods sold, employee relations and the like-which often materially affect an operating business have virtually no impact on the Fund.
Liquidity; Capital Resources
The Fund 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 Fund’s U.S. dollar deposits. These borrowings are at a prevailing short-term rate in the relevant currency.
Substantially all of the Fund’s assets are held in cash. The Net Asset Value of the Fund’s cash is not affected by inflation. However, changes in interest rates could cause periods of strong up or down price trends, during which the Fund’s profit potential generally increases. Inflation in commodity prices could also generate price movements, which the strategies might successfully follow.
Because substantially all of the Fund’s assets are held in cash, the Fund 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, except in very unusual circumstances. This permits Appleton 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 Fund’s positions and assets, the Fund’s monthly Net Asset Value calculations are precise, and investors need only wait ten business days to receive the full redemption proceeds of their Units.
The Fund has no applicable off-balance sheet arrangements and tabular disclosure or contractual obligations of the type described in Items 3.03(a)(4) and 3.03(a)(5) of Regulation S-K.
7A: Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Fund is a speculative commodity pool. The market sensitive instruments held by it are acquired for speculative trading purposes and all or substantially all of the Fund’s assets are subject to the risk of trading loss. Unlike an operating company, the risk of market sensitive instruments is integral, not incidental, to the Fund’s main line of business.
Market movements result in frequent changes in the fair market value of the Fund’s open positions and, consequently, in its earnings and cash flow. The Fund’s market risk is influenced by a wide variety of factors, including the level and volatility of interest rates, exchange rates, equity price levels, the market value of financial instruments and contracts, the diversification effects among the Fund’s open positions and the liquidity of the markets in which it trades.
The Fund, under the direction of Appleton, rapidly acquires and liquidates both long and short positions in currency markets. Consequently, it is not possible to predict how a particular future market scenario will affect performance, and the Fund’s past performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Fund could reasonably be expected to lose in a given market sector. However, the inherent uncertainty of the Fund’s speculative trading and the recurrence in the markets traded by the Fund of market movements far exceeding expectations could result in actual trading or non-trading losses far beyond the indicated Value at Risk or the Fund’s experience to date (i.e., “risk of ruin”). In light of the foregoing, as well as the risks and uncertainties intrinsic to all future projections, the quantifications included in this section should not be considered to constitute any assurance or representation that the Fund’s losses in any market sector will be limited to Value at Risk or by the Fund’s attempts to manage its market risk.
Quantifying The Fund’s Trading Value At Risk
Quantitative Forward-Looking Statements
The following quantitative disclosures regarding the Fund’s market risk exposures contain “forward-looking statement” within the meaning of the safe harbor form civil liability provided for such statements by the Private Securities Litigation Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934). All quantitative disclosures in this section are deemed to be forward-looking statements for purposes of the safe harbor, except for statements of historical fact.
The Fund’s risk exposure in the various market sectors traded by Appleton is quantified below in terms of Value at Risk. Due to the Fund’s mark-to-market accounting, any loss in the fair value of the Fund’s open positions is directly reflected in the Fund’s earnings (realized or unrealized) and cash flow (at least in the case of exchange-traded contracts in which profits and losses on open positions are settled daily through variation margin).
Maintenance margin requirements have been used by the Fund as the measure of its Value at Risk. Maintenance margin requirements are set by exchanges to equal or exceed the maximum loss in the fair value of any given contract incurred in 95%-99% of the one-day time periods included in the historical sample (generally approximately one year) researched for purposes of establishing margin levels. The maintenance margin levels are established by dealers and exchanges using historical price studies as well as an assessment of current market volatility (including the implied volatility of the options on a given futures contract) and economic fundamentals to provide a probabilistic estimate of the maximum expected near-term one-day price fluctuation.
100% positive correlation in the different positions held in each market risk category has been assumed. Consequently, the margin requirements applicable to the open contracts have been aggregated to determine each trading category’s aggregate Value at Risk. The diversification effects resulting from the fact that the Fund’s positions are rarely, if ever, 100% positively correlated have not been reflected.
The Fund’s Trading Value at Risk in Different Market Sectors
The following table indicates the average, highest and lowest trading Value at Risk associated with the Fund’s open positions by market category for the following fiscal years. During the fiscal year 2007, the Fund’s average month-end Net Asset Value for all other purposes was approximately $86,609,627. During the fiscal year 2006, the Fund’s average month-end Net Asset Value for all other purposes was approximately $52,675,046.
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Fund is typically many times the applicable maintenance margin requirement (maintenance margin requirements generally ranging between approximately 1% and 10% of contract face value) as well as many times the capitalization of the Fund. The magnitude of the Fund’s open positions creates a “risk of ruin” not typically found in most other investment vehicles. Because of the size of its positions, certain market conditions - unusual, but historically recurring from time to time - could cause the Fund to incur severe losses over a short period of time. The foregoing Value at Risk table - as well as the past performance of the Fund - gives no indication of this “risk of ruin.”
Non-Trading Risk
Foreign Currency Balances; Cash on Deposit with MLPF&S
The Fund has non-trading market risk on its foreign cash balances not needed for margin. However, these balances (as well as the market risk they represent) are immaterial.
The Fund also has non-trading market risk on the approximately 90%-95% of its assets which are held in cash at MLPF&S. The value of this cash is not interest rate sensitive, but there is cash flow risk in that if interest rates decline so will the cash flow generated on these monies. This cash flow risk is immaterial.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Fund’s market risk exposures - except for (i) those disclosures that are statements of historical fact and (ii) the descriptions of how the manages its primary market risk exposures - constitute forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act. The Fund’s primary market risk exposures as well as the strategies used and to be used by MLAI and Appleton for managing such exposures are subject to numerous uncertainties, contingencies and risks, any one of which could cause the actual results of the Fund’s risk controls to differ materially from the objectives of such strategies. Government interventions, defaults and expropriations, illiquid markets, the emergence of dominant fundamental factors, political upheavals, changes in historical price relationships, an influx of new market participants, increased regulation and many other factors could result in material losses as well as in material changes to the risk exposures and the risk management strategies of the Fund . There can be no assurance that the Fund’s current market exposure and/or risk management strategies will not change materially or that any such strategies will be effective in either the short or long-term. Investors must be prepared to lose all or substantially all of the time value of their investment in the Fund.
The following were the primary trading risk exposures of the Fund as of December 31, 2007, by market sector.
Currencies.
The Fund trades in a number of currencies forwards. The currency trading Value at Risk figure includes foreign margin amounts converted into U.S. dollars with an incremental adjustment to reflect the exchange rate risk of maintaining Value at Risk in a functional currency other than U.S. dollars.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Fund as of December 31, 2007.
U.S. Dollar Cash Balance.
The Fund holds U.S. dollars only in cash at MLPF&S. The Fund has immaterial cash flow interest rate risk on its cash on deposit with MLPF&S in that declining interest rates would cause the income from such cash to decline.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
Trading Risk
MLAI has procedures in place intended to control market risk, although there can be no assurance that they will, in fact, succeed in doing so. While MLAI does not intervene in the markets to hedge or diversify the Fund’s market exposure, MLAI may urge Appleton to reallocate positions in an attempt to avoid over-concentrations. However, such interventions are unusual. Except in cases in which it appears that Appleton has begun to deviate from past practice and trading policies or to be trading erratically, MLAI’s basic control procedures consist of simply of the ongoing process of monitoring Appleton with the market risk controls being applied by Appleton.
Risk Management
Appleton attempts to control risk in all aspects of the investment process - from confirmation of a trend to determining the optimal exposure in a given market, and to money management issues such as the startup or upgrade of investor accounts. Appleton double checks the accuracy of market data, and will not trade a market without multiple price sources for analytical input. In constructing a portfolio, Appleton seeks to control overall risk as well as the risk of any one position, and Appleton trades only markets that have been identified as having positive performance characteristics. Trading discipline requires plans for the exit of a market as well as for entry. Appleton factors the point of exit into the decision to enter (stop loss). The size of Appleton’s positions in a particular market is not a matter of how large a return can be generated but of how much risk it is willing to take relative to that expected return.
To attempt to reduce the risk of volatility while maintaining the potential for excellent performance, proprietary research is conducted on an ongoing basis to refine the Appleton investment strategies. Research may suggest substitution of alternative investment methodologies with respect to particular contracts; this may occur, for example, when the testing of a new methodology has indicated that its use might have resulted in different historical performance. In addition, risk management research and analysis may suggest modifications regarding the relative weighting among various contracts, the addition or deletion of particular contracts for a program, or a change in position size in relation to account equity. The weighting of capital committed to various markets in the investment programs is dynamic, and Appleton may vary the weighting at its discretion as market conditions, liquidity, position limit considerations and other factors warrant.
Appleton may determine that risks arise when markets are illiquid or erratic, which may occur cyclically during holiday seasons, or on the basis of irregularly occurring market events. In such cases, Appleton at its sole discretion may override computer-generated signals and may at times use discretion in the application of its quantitative models, which may affect performance positively or negatively.
Adjustments in position size in relation to account equity have been and continue to be an integral part of Appleton’s investment strategy. At its discretion, Appleton may adjust the size of a position in relation to equity in certain markets or entire programs. Such adjustments may be made at certain times for some programs but not for others. Factors which may affect the decision to adjust the size of a position in relation to account equity include ongoing research, program volatility, assessments of current market volatility and risk exposure, subjective judgment, and evaluation of these and other general market conditions.
Non-Trading Risk
When the Fund has foreign currency balances, the Fund controls the non-trading exchange rate risk by regularly converting foreign balances back into U.S. dollars at least once per week, and more frequently if a particular foreign currency balance becomes unusually high.
The Fund has cash flow interest rate risk on its cash on deposit with MLPF&S in that declining interest rates would cause the income from such cash to decline. However, a certain amount of cash or cash equivalents must be held by the Fund in order to facilitate margin payments and pay expenses and redemptions. MLAI does not take any steps to limit the cash flow risk on its cash held on deposit at MLPF&S.
Item 8:
Item 8: Financial Statements and Supplementary Data
The financial statements required by this Item are included in Exhibit 13.01.
Net Income by Quarter
Eight Quarters through December 31, 2007
(a) the Net Income (Loss) per weighted average Unit is based on the weighted average of total Units for each quarters.
The supplementary financial information (“information about oil and gas producing activities”) specified by Item 302 of Regulation S-K is not applicable.
Item 9:
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There were no changes in or disagreements with the Fund’s independent registered public accounting firm on accounting and financial disclosure.
Item 9A(T):
Item 9A(T): Controls and Procedures
MLAI’s Chief Executive Officer and the Chief Financial Officer, on behalf of the Fund, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Fund as of and for the year which ended December 31, 2007, and, based on its evaluation, has concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Fund’s internal controls over financial reporting which materially affect such internal control.
Changes in Internal Control over Financial Reporting
No change in internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act ) occurred during the year ended December 31, 2007 that has materially affected, or is reasonable likely to materially affect, the Fund’s internal control, over financial reporting.
Management’s Report on Internal Control over Financial Reporting
The Fund’s management is responsible for establishing and maintaining adequate internal control over financial reporting. The Fund’s internal control over financial reporting is a process designed under the supervision of MLAI’s Chief Executive Officer and the Chief Financial Officer, on behalf of the Fund and is effected by management, other personnel and service providers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and included those policy and procedures that:
· Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Fund.
· Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Fund are being made only in accordance with authorizations of management and directors of the Fund; and
· Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisitions, use or disposition of the Fund’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting can only provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in condition, or that the degree of compliance with the policies or procedures may deteriorate.
The Fund’s management assessed the effectiveness of the Funds’ internal control over financial reporting as December 31, 2007. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in “Internal Control-Integrated Framework”.
Based on its assessment the Fund’s management concluded that at December 31, 2007, the Fund’s internal control over financial report was effective.
Item 9B:
Item 9B: Other Information
Not Applicable.
PART III
Item 10:
Item 10: Directors, Executive Officers and Corporate Governance
10(a) and 10(b) Identification of Directors and Executive Officers:
The Fund has no officers or directors and is managed by MLAI. Trading decisions are made by Appleton on behalf of the Fund.
The managers and executive officers of MLAI and their respective business backgrounds are as follows:
Paul Morton
Chief Executive Officer, President and Manager
Barbra E. Kocsis
Chief Financial Officer
Steven B. Olgin
Vice President and Manager
Thomas W. Lee
Vice President and Manager
Shawn T. Wells
Vice President
Paul Morton is the Chief Executive Officer, President and Manager of MLAI, and also serves as the COO for the Global Investment and Insurance Solutions (GIIS) group for Merrill Lynch. As COO of GIIS, Mr. Morton leads the market investments business within the group, which includes secondary equity, debt, listed options, futures and FX for Merrill Lynch’s Global Wealth Management division. Prior to serving as COO of GIIS, Mr. Morton worked in the equity and debt trading management of Merrill Lynch. Prior to joining Merrill Lynch in 1996, Mr. Morton worked in the equity derivatives at Paine Webber. From 1988-1993, Mr. Morton served as an officer in the US Army for five years. Mr. Morton holds a BS (Aerospace Engineering) from the United States Military Academy at West Point (1988) and a MBA (Finance) from the Wharton School at the University of Pennsylvania (1995).
Barbra E. Kocsis is the Chief Financial Officer of MLAI. She is also a Director within the Merrill Lynch Global Private Client Global Infrastructure Solutions group. Prior to that, she was the Fund Controller of MLAI. Before coming to MLAI, Ms Kocsis held various accounting and tax positions at Derivatives Portfolio Management LLC from May 1992 until May 1999, at which time she held the position of accounting director. Prior to that, she was an associate at Coopers & Lybrand in both the audit and tax practices. She graduated cum laude from Monmouth College in 1988 with a Bachelor of Science in Business Administration - Accounting and is a Certified Public Accountant.
Steven B. Olgin is a Vice President and a MLAI of the Manager, is registered with NFA as a principal of the MLAI and is a Managing Director of Merrill Lynch Global Private Client (“GPC”). Before joining the Manager in 1994, Mr. Olgin was an associate of the law firm of Sidley & Austin, from 1986 until 1994. Mr. Olgin graduated from The American University with a Bachelor of Science in Business Administration and a Bachelor of Arts in Economics, and received his Juries Doctor from The John Marshall Law School. Mr. Olgin was a member of the Managed Funds Association’s Government Relations Committee and has served as an arbitrator for NFA.
Thomas W. Lee is a Managing Director in Merrill Lynch’s Market Investments and Origination Group, responsible for Global Private Client’s equity and debt new issue businesses, and is a Vice President and Manager of MLAI, and his registration as a principal of MLAI is pending with NFA. Prior to joining Merrill Lynch in 1998, Mr. Lee was a corporate securities attorney at the law firm of Brown & Wood. Mr. Lee received his J.D. from Emory University School of Law and a B.S. from Cornell University.
Shawn Wells is a Vice President of the Manager, a position he has held since October 2005. Prior to that time, Mr. Wells served as Senior Associate General Counsel at Franklin Templeton Investments, serving as Chief Counsel of the firm’s International and Alternative Strategies divisions from October 1996 to December 1997 and again from September 1998 to October 2005. Mr. Wells is a Certified Public Accountant, and received a BBA in
Finance and Accounting from the University of Texas at Austin, and his JD from Southern Methodist University, where he was an editor of the SMU Law Review.
As of December 31, 2007, the principals of MLAI had no investment in the Fund, and MLAI had no sponsor interest in the Fund.
MLAI acts as the sponsor, general partner or manager to ten public futures funds whose units of limited partner or member interests are registered under the Securities Exchange Act of 1934: ML Trend-Following Fund L.P., ML Select Futures I L.P., ML APM Global Commodity FuturesAccess LLC, ML Chesapeake FuturesAccess LLC, ML Aspect FuturesAccess LLC, ML Cornerstone FuturesAccess LLC, ML Systematic Momentum FuturesAccess LLC, ML Transtrend DTP Enhanced FuturesAccess LLC, ML Winton FuturesAccess LLC and the Fund. Because MLAI serves as the sponsor, general partner or manager of each of these funds, the officers and managers of MLAI 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.
Section 16(a) Beneficial Ownership Reporting Compliance:
Not applicable.
Code of Ethics:
MLAI and Merrill Lynch have adopted a code of ethics, as of the end of the period covered by this report, which applies to the Fund’s (MLAI’s) principal executive officer and principal financial officer or persons performing similar functions on behalf of the Fund. A copy of the code of ethics is available to any person, without charge, upon request by calling 1-866-MER-ALTS.
Nominating Committee:
Not applicable. (Neither the Fund nor MLAI has a nominating committee).
Audit Committee; Audit Committee Financial Expert:
Not applicable. (Neither the Fund nor MLAI has an audit committee. There are no listed shares of the Fund or MLAI.)
Item 11:
Item 11: Executive Compensation
The managers and officers of MLAI are remunerated by Merrill Lynch in their respective positions. The Fund does not have any officers, managers or employees. The Fund pays Brokerage Commissions to an affiliate of MLAI and Sponsor Fees to MLAI. MLAI or its affiliates may also receive certain economic benefits from possession of the Fund’s U.S. dollar assets. The managers and officers receive no “other compensation” from the Fund, and the managers receive no compensation for serving as managers of MLAI. There are no compensation plans or arrangements relating to a change in control of either the Fund or MLAI.
Item 12:
Item 12: Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
(a) Security Ownership of Certain Beneficial Owners:
(b) Security Ownership of Management:
As of December 31, 2007, MLAI owned 20,324 Unit-equivalent member interests, which constituted 0.0255% of the total Units outstanding, the principals of MLAI did not own any Units, and Appleton did not own any Units.
(c) Changes in Control:
None.
(d) Securities Authorized for Issuance under Equity Compensation Plans:
Not applicable.
Item 13:
Item 13: Certain Relationships and Related Transactions
(a) Transactions between Merrill Lynch and the Fund
All of the service providers to the Fund, other than Appleton, are affiliates of Merrill Lynch or have been approved by Merrill Lynch. Merrill Lynch negotiated with Appleton over the level of its management and performance fees. However, none of the fees paid by the Fund to any Merrill Lynch party were negotiated, and they could be higher than would have been obtained in arms-length bargaining.
The Fund pays Merrill Lynch Brokerage Commissions and Sponsor Fees as well as bid-ask spreads on forward currency trades. The Fund also pays MLPF&S interest on short-term loans extended by MLPF&S to cover losses on foreign currency positions.
Within the Merrill Lynch organization, MLAI is the beneficiary of the revenues received by different Merrill Lynch entities from the Fund. MLAI controls the management of the Fund and serves as its promoter. Although MLAI has not sold any assets, directly or indirectly, to the Fund, MLAI makes substantial profits from the Fund due to the foregoing revenues.
No loans have been, are or will be outstanding between MLAI or any of its principals and the Fund.
MLAI pays substantial selling commissions and trailing commissions to MLPF&S for distributing the Units. MLAI is ultimately paid back for these expenditures from the revenues it receives from the Fund.
(b) Certain Business Relationships:
MLPF&S, an affiliate of MLAI, acts as the principal commodity broker for the Fund.
In 2007, the Fund expensed: (i) Brokerage Commissions of $0 to MLPF&S, $1,330,260 in management fees earned by Appleton and $443,420 earned by MLAI; and (ii) Sponsor Fees of $1,690,948 to MLAI. In addition, MLAI and its affiliates may have derived certain economic benefits from possession of a portion of the Fund’s assets, as well as from foreign exchange and EFP trading.
See Item 1(c), “Narrative Description of Business - Charges” and “- Description of Current Charges” for a discussion of other business dealings between MLAI affiliates and the Fund.
(c) Indebtedness of Management:
None.
(d) Transactions with Promoters:
Not applicable.
Item 14:
Item 14: Principal Accountant Fees and Services
(a) Audit Fees
Aggregate fees billed for professional services rendered by Deloitte & Touche LLP in connection with the audit of the Fund’s financial statements as of and for the years ended December 31, 2007 were $77,000. Aggregate fees billed for these services for the year ended December 31, 2006 were $121,579.
(b) Audit-Related Fees
There were no other audit-related fees billed for the years ended December 31, 2007 and 2006 related to the Fund.
(c) Tax Fees
Aggregate fees billed for professional services rendered by Deloitte Tax LLP in connection with the tax compliance, advice and preparation of the Fund’s tax returns for the year ended December 31, 2007 were $64,000. Aggregate fees billed for these services for the year ended were December 31, 2006 were $55,000.
(d) All Other Fees
No fees were paid to Deloitte & Touche LLP, Deloitte Tax LLP, or any member firms of Deloitte Touche Tohmatsu and their respective affiliates during the year ended December 31, 2007 for any other professional services in relation to the Fund.
Neither the Fund nor MLAI has an audit committee to pre-approve principal accountant fees and services. In lieu of an audit committee, the managers and the principal financial officer pre-approve all billings prior to the commencement of services.
PART IV
Item 15:
Item 15: Exhibits and Financial Statement Schedules
Page:
1.
Financial Statements (found in Exhibit 13.01):
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
FINANCIAL STATEMENTS:
Statements of Financial Condition as of December 31, 2007 and 2006
Statements of Operations for the years ended December 31, 2007 and 2006 and for the period April 1, 2005 (Commencement of Operations) to December 31,
Statements of Changes in Members’ Capital for the years ended December 31, 2007 and 2006 and for the period April 1, 2005 (Commencement of Operations) to December 31, 2005
4-5
Financial Data Highlights for the years ended December 31, 2007 and 2006 and for the period April 1, 2005 (Commencement of Operations) to December 31,
6-8
Notes to Financial Statements
9-16
2. Financial Statement Schedules:
Financial statement schedules not included in this Form 10-K have been omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or notes thereto.
3. Exhibits:
The following exhibits are incorporated by reference or are filed herewith to this Annual Report on Form 10-K:
Designation
Description
3.01
Certificate of Formation of ML Appleton FuturesAccess LLC.
Exhibit 3.01:
Is incorporated herein by reference from Exhibit 3.01 contained in the Registration Statement on Form 10 (File No. 000-51087) under the Securities Exchange Act of 1934, filed on December 20, 2004 (the “Registrant’s Initial Registration Statement”).
3.02
Limited Liability Company Operating Agreement of ML Appleton FuturesAccess LLC
Exhibit 3.02:
Is incorporated by reference from Exhibit 3.02 contained in the Registrant’s Initial Registration Statement.
10.01
Customer Agreement between ML Appleton Futures Access LLC and Merrill Lynch, Pierce, Fenner & Smith Incorporated.
Exhibit 10.01:
Is incorporated herein by reference from Exhibit 10.01 contained in Admendment No. 1 to the Registration Statement on Form 10 (File No. 000-51087) under the Securities Exchange Act of 1934, file on February 2, 2008.
10.02
Advisory Agreement by and among ML Appleton FuturesAccess LLC, ML Appleton Futures Access Ltd., Appleton Capital Management, Inc. and Merrill Lynch Alternative Investments LLC.
Exhibit 10.02:
Is incorporated by reference from Exhibit 10.02 contained in the Registrant’s Initial Registration Statement.
13.01
2007 Annual Report and Report of Independent Registered Public Accounting Firm.
Exhibit 13.01:
Is filed herewith.
31.01 and 31.02
Rule 13a-14(a)/15d-14(a) Certifications
Exhibit 31.01
and 31.02:
Are filed herewith.
32.01 and 32.02
Section 1350 Certifications
Exhibit 32.01
and 32.02:
Are filed herewith.
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.
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, 2008 by the following persons on behalf of the Registrant and in the capacities indicated.
Signature
Title
Date
/s/ Paul Morton
Chief Executive Officer, President and Manager
March 31,
Paul Morton
/s/ Barbra E. Kocsis
Chief Financial Officer
March 31,
Barbra E. Kocsis
/s/ Steven B. Olgin
Vice President and Manager
March 31,
Steven B. Olgin
/s/ Thomas W. Lee
Vice President and Manager
March 31,
Thomas W. Lee
/s/ Shawn T. Wells
Vice President
March 31,
Shawn T. Wells
(Being the principal executive officer, the principal financial and accounting officer and a majority of the managers of Merrill Lynch Alternative Investments LLC)
ML APPLETON FUTURESACCESS LLC
2007 FORM 10-K
INDEX TO EXHIBITS
Exhibit
Exhibit 13.01
2007 Annual Report and Report of Independent Registered Public Accounting Firm
31.01 and 31.02
Rule 13a-14(a)/15d-14(a) Certifications
32.01 and 32.02
Sections 1350 Certifications