SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
(Mark One)
[x] Annual report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934 for the fiscal year ended December 31, 2004
[_] Transition report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934
For the transition period from __________________ to ___________________
Commission file number 0-49767
MLM INDEX(TM) FUND
(Exact name of registrant as specified in its charter)
Delaware Unleveraged Series: 22-2897229
Leveraged Series: 22-372268322
(State of Incorporation) (I.R.S. Employer Identification No.)
47 Hulfish Street
Suite 510
Princeton, New Jersey 08542
(Adress of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (609) 924-8868
Securities registered pursuant to Section 12 (b) of the Act:
Title of Each Class Name of Exchange on Which Registered
None None
Securities registered pursuant to Section 12 (g) of the Act:
Business Trust Interests - Unleveraged Series
Business Trust Interests - Leveraged Series
Indicate by check mark whether the registrant (1) has filed all reports
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required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
filing requirements for the past 90 days. Yes [x] No[ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [x]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes [ ] No [x].
As of February 25, 2005 the aggregate market value of the business trust
units of the Unleveraged Series of the registrant held by non-affiliates of the
registrant was approximately $175,250,000 and the aggregate market value of the
business trust units of the Leveraged Series of the registrant held by
non-affiliates of the registrant was approximately $188,563,000.
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TABLE OF CONTENTS
Page
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PART I. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 3. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . 21
PART II . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . 22
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
Item 7A Quantitative and Qualitative Disclosures About Market Risk. . . . . . . . . 29
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . 31
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure. . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
Item 9A. Controls and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . . 31
PART III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
Item 10. Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . . . 32
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . 34
Item 12. Security Ownership of Certain Beneficial Owners and Management. . . . . . . 34
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . . . . . . 34
Item 14. Principal Accountant Fees and Services. . . . . . . . . . . . . . . . . . . 34
PART IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K. . . . . . 36
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PART I
Item 1. Business.
General
The MLM Index(TM) Fund (the "Trust") is a business trust organized under
the laws of Delaware. The Trust engages primarily in the speculative trading of
a diversified portfolio of futures contracts using the MLM Index(TM) Trading
Program (the "Trading Program"). Futures contracts are standardized contracts
made on or through a commodity exchange and provide for future delivery of
commodities, precious metals, foreign currencies or financial instruments and,
in the case of certain contracts such as stock index futures contracts and
Eurodollar futures contracts, provide for cash settlement. The Trust's objective
is the appreciation of its assets through speculative trading. The Trust began
trading on January 4, 1999.
Mount Lucas Management Corporation (the "Manager"), a Delaware corporation,
acts as the manager and trading advisor of the Trust. The Manager was formed in
1986 to act as an investment manager. As part of a planned merger in October
1999, the Manager combined operations with Mount Lucas Index Management
Corporation (the former manager of the Trust), CA Partners, Inc. and Little
Brook Corporation of New Jersey. The purpose of the merger was to streamline and
consolidate the operations of the affiliated entities. As of December 31, 2004,
the Manager had approximately $1.553 billion of assets under advisement. The
Manager is a registered investment adviser under the Investment Advisers Act of
1940 and is a registered commodity trading advisor and commodity pool operator
with the Commodity Futures Trading Commission (the "CFTC") and a member of the
National Futures Association (the "NFA"). The Manager may from time to time
operate other investment vehicles.
The Trust and the Manager maintain their principal business office at 47
Hulfish Street, Suite 510, Princeton, New Jersey 08542 and their telephone
number is (609) 924-8868.
Wilmington Trust Company, a Delaware banking corporation, acts as trustee
for the Trust. The Trustee's office is located at Rodney Square North, 1100
North Market Street, Wilmington, Delaware 19890. The Trustee is unaffiliated
with the Manager. The Trustees duties and liabilities are limited to its express
obligations under the Amended and Restated Declaration of Trust and Trust
Agreement, dated as of August 31, 1998, among the Trustee, the Manager and the
Interest Holders from time to time thereunder, as amended (the "Trust
Agreement").
Refco, LLC currently acts as clearing broker for the Trust. A clearing
broker accepts orders to trade futures on behalf of another party and accepts
money to support such orders. The clearing broker is a futures commission
merchant registered with the CFTC and is a member of the NFA.
Trading Program
The Trust trades speculatively in a wide range of futures contracts traded
on U.S. and foreign exchanges using the Trading Program, which is based upon the
MLM Index(TM). The
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MLM Index(TM) and the Trading Program are both proprietary products of the
Manager. The Trading Program attempts to replicate the MLM Index(TM), before
fees and expenses. Currently the Trust has two series of interests; the
Unleveraged Series and the Leveraged Series. The Unleveraged Series attempts to
replicate the MLM Index(TM) without any leverage, while the Leveraged Series
trades the Trading Program at three times leverage. The Leveraged Series was
previously named the Enhanced Series. Leverage is the ability to control large
dollar amounts of a commodity with a comparatively small amount of capital. The
Leveraged Series purchases or sells $3 market value of contracts for every $1
invested in the Series.
In attempting to replicate the MLM Index(TM), the Manager will invest in
the same markets as the MLM Index(TM); use the same algorithm to determine long
versus short positions; make the same allocations to each market; and generally
execute positions at almost the same time. The Manager may also use swaps in
attempting to replicate the MLM Index(TM). These swaps would be agreements with
dealers to provide the returns which are the same as holding a specific number
of futures contracts in a specific market, without holding the actual contracts.
The economic effect on the Trust would be substantially identical to holding
futures contracts. However, since the holder of swaps assumes additional
counterparty risk, swaps are only held infrequently. As of this time, the Trust
holds no swap positions.
The MLM Index(TM)
In 1988, the Manager created the MLM Index(TM) as a benchmark of the
returns to speculation in futures markets. Broadly speaking, the futures markets
have two classes of participants, hedgers and speculators. Hedgers are the
commercial businesses that use the futures markets to transfer unwanted or
excessive price risk to those more willing to absorb that risk. Speculators are
position holders who absorb this price risk. In essence, they provide
"insurance" to the commercial interest so that the commercial interests can
focus on their basic business while being protected from unforeseen changes in
commodity prices, interest rates or foreign exchange rates. Basic finance theory
argues that the reduction in risk experienced by the hedgers exacts a cost, or
risk premium, that is earned by those holding the risk. The intent of the MLM
Index(TM) is to measure this risk premium. In this general sense it is analogous
to an index of stocks that measures the premium to holding equity risk.
Price risk in futures markets exists when markets rise and when they fall.
For example, an operator of a wheat storage facility is damaged by a fall in the
price of wheat in that the value of the inventory in their facility falls. On
the other hand, a consumer of wheat, like a baker, incurs financial risk if the
price of wheat rises, as the cost of future operations increases. In both cases,
steady prices are favorable. Thus, an index designed to capture the risk premium
earned must capture returns as markets move up and move down, yet suffer when
markets are stable. The MLM Index(TM) is designed to measure this effect by
taking long and short positions in the constituent markets. The existence of the
long and short positions in the construction of the MLM Index(TM) is a
significant innovation and important difference from other risk premium
measurements.
The MLM Index(TM) currently invests in futures contracts on the following:
Chicago corn, Chicago soybeans, New York sugar, Chicago wheat, Canadian
Government Bonds, Euro Bunds,
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Japanese Government Bonds, Long Gilts, 10-year Treasury Notes, crude oil,
heating oil, natural gas, unleaded gasoline, live cattle, New York gold, New
York copper, Australian Dollar, British Pound, Canadian Dollar, Swiss Franc,
Japanese Yen, and Euro Currency. The selection of the markets in the MLM
Index(TM) is made by the Manager. The selection is based on a variety of
factors, including liquidity of the underlying futures contract, the
relationship with the other markets in the MLM Index(TM), and the reasonableness
of including the market in the MLM Index(TM). The choice of markets for a
calendar year is made in the December preceding the start of the year, and,
except in unusual circumstances, markets are not normally added to or deleted
from the MLM Index(TM) during a year. An extraordinary event that may lead to
the removal of a contract during the year might be the permanent suspension of
normal trading or an abrupt permanent change in the liquidity of the contract.
For example, the Chicago Mercantile Exchange suspended floor trading of the
Deutsche Mark contract in August of 2000, ahead of the announced schedule. If a
commodity is traded on more than one futures exchange, only the one with the
largest open interest is included in the MLM Index(TM). The open interest is the
number of all long or short futures contracts in one delivery month for one
market that have been entered into and not yet liquidated by an offsetting
transaction or fulfilled by delivery. For example, Chicago Board of Trade wheat
has larger open interest than Kansas City Board of Trade wheat; consequently,
Chicago Board of Trade wheat is included in the MLM Index(TM) but Kansas City
Board of Trade wheat is not.
In addition to the markets in the MLM Index(TM), the Manager determines
which delivery months will be traded for each market in the MLM Index(TM).
Generally, for each market, four deliveries are chosen that are both liquid and
spaced throughout the calendar year. For example, for the Wheat market, the
deliveries traded are March, May, July and December. The choice of deliveries is
set for each calendar year, but can change due to similar extraordinary
circumstances as with the market selection.
The calculation of the MLM Index(TM) is explained below.
Calculation of the MLM Index(TM)
1. Determination of long or short futures position for each market.
The rate of return of an individual market depends on whether the market
position is long or short. Since a futures contract eventually expires, the MLM
Index(TM) is based on the unit asset value of a market, rather than on the
actual futures price. This month's unit asset value of a futures market is
determined by multiplying last month's value by 1 plus the percentage change in
this month's nearby futures price. The market position is long during the
current month if the market's closing value on the next-to-last trading day of
the prior month is greater than or equal to the market's 252 business day moving
average of closing values; otherwise, the market position is short.
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2. Calculation of the monthly rate of return for each market.
If the market position is long, then the market monthly rate of return
equals the percentage change in the market price during the month, i.e., the
market monthly rate of return (%) equals the closing price of the current month
divided by the closing price of the prior month, minus 1, times 100. If the
market position is short, then the market monthly rate of return (%) equals -1
(minus one) times the percentage change in the market price during the month,
i.e., the market monthly rate of return equals the closing price of the current
month divided by the closing price of the prior month, minus 1, times -100
(minus 100).
3. Calculation of the monthly rate of return for the MLM Index(TM).
The monthly rate of return of the MLM Index(TM) equals the weighted average
of the individual market monthly rates of return plus the Treasury Bill rate of
return.
4. Determination of the MLM Index(TM) value.
The value of the MLM Index(TM) is computed by compounding the MLM Index(TM)
monthly rates of return. The beginning value of the MLM Index(TM) is defined to
be 1000 in January 1961. Each month thereafter, the MLM Index(TM) is changed by
the monthly rate of return. That is, each month's MLM Index(TM) value is
determined by multiplying the prior month's value by 1 plus the current
percentage monthly rate of return.
The annual performance of the MLM Index(TM) for each of the past ten years is
set forth below.
Year Annual Return
1995 11.16
1996 10.93
1997 7.50
1998 16.74
1999 0.39
2000 16.20
2001 3.67
2002 -1.63
2003 3.92
2004 3.52
The MLM Index(TM) is published daily on the Bloomberg system and is
available from the Manager. Since the development of the MLM Index(TM), other
firms have computed similar indices, including the CMI of AssetSight Corporation
and an index computed by SAIS in Switzerland. Both indices are variations on the
construction of the MLM Index(TM), either in the derivation of the long and
short positions or the relative weights of the markets. In addition, there are
many "commodity" indexes, such as the GSCI from Goldman Sachs and AIG Commodity
Index. These indexes are long only, and do not include currencies or financial
instruments.
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Fees and Expenses
Set forth below is a summary of the basic fees that the each of the Series and
Classes is subject to.
Brokerage Fee
Each Series of the Trust pays the Manager a brokerage fee at the annual rates
set forth below.
Classes A and B Unleveraged Series 0.85% of net asset value
Classes C and D Unleveraged Series 0.40% of net asset value
Classes A and B Leveraged Series 1.75% of net asset value
Classes C and D Leveraged Series 0.90% of net asset value
The brokerage fee is based on net asset value as of the first day of each
month. The net asset value of the Trust equals the sum of all cash, the market
value (or cost of liquidation) of all futures positions and the fair value of
all other assets of the Trust, less all liabilities of the Trust (including
accrued liabilities), in each case determined per Series by the Manager in
accordance with U.S. generally accepted accounting principles. For purposes of
determining the brokerage fee, there is no reduction for:
(1) the accrued brokerage or management fees,
(2) any allocation or reallocation of assets effective as of the day the
brokerage fee is being calculated, or
(3) any distributions or redemptions as of the day the brokerage fee is
being calculated.
No assurance can be given that the brokerage fee will be competitive with
the charges of other brokerage firms.
The Manager is responsible for paying all of the Trust's costs of executing
and clearing futures trades, including floor brokerage expenses and give-up
charges, as well as the NFA, exchange and clearing fees incurred in connection
with the Trust's futures trading activities. The Manager may also pay from the
brokerage fees, custody fees or amounts necessary for certain administrative and
marketing assistance provided by broker/dealers who are also authorized selling
agents. NFA fees equal $0.04 per round-turn trade of a futures contract.
Management Fee
Each Series is divided into Class A Interests, Class B Interests, Class C
Interests and Class D interests. Class A and C Interests are generally sold
through registered broker-dealers and Class B and D Interests are generally
offered through fee-only advisors. The Trust pays the Manager a monthly
management fee at the annual rates set forth below.
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Unleveraged Series
Class A 1.50% of net asset value
Class B 0.50% of net asset value
Class C 1.00% of net asset value
Class D 0.50% of net asset value
Leveraged Series
Class A 2.80% of net asset value
Class B 1.30% of net asset value
Class C 2.05% of net asset value
Class D 1.30% of net asset value
The management fee is determined and paid as of the first day of each
calendar month. For purposes of determining the management fee, there is no
reduction for:
(1) accrued management fees,
(2) any allocation or reallocation of assets effective as of the day the
management fee is being calculated, or
(3) any distributions or redemptions as of the day the management fee is
being calculated.
The Manager pays from the management fee an annual fee for interests sold
by authorized selling agents appointed by the Manager for the Class A Series, in
the amount of 100 basis points for the Unleveraged Series and 150 basis points
for the Leveraged Series of the Trust's net asset value for each respective
series; and for the Class C Series, in the amount of 50 basis points for the
Unleveraged Series and 75 basis points for the Leveraged Series of the Trust's
net asset value for each respective series.
Organizational Fee
Investors in Classes A and B of both Series will pay an organizational fee
of 0.50% of their initial and any subsequent investment(s) (excluding exchanges)
to the Manager to cover expenses associated with the organization of the Trust
and the offering of interests. This fee will be deducted from each investment in
determining the number of interests purchased. An organizational fee will be
charged until an investor's interest is greater than or equal to $1,000,000. If
the organizational expenses exceed the organizational fees collected by the
Manager, the Manager will pay any costs above the collected fees. If the
organizational fees paid to the Manager exceed actual organizational expenses,
any excess will be retained by the Manager and may be shared with consultants
that the Manager may engage from time to time. Specifically, consultants who
assist the Trust in distributing the interests may be paid a share of the
organizational fees. Excess fees are not returned to the Trust, but the Manager
absorbs costs in excess of the fees.
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Operating and Administrative Expenses
The Trust pays the Manager an annual fee of 0.35% of the net asset value as
reimbursement for its legal, accounting and other routine administrative
expenses and fees, including fees to the Trustee. The Trustee is paid an annual
fee and reimbursed for out-of-pocket expenses. Each Series pays its own cash
manager fees, banking fees, and the New Jersey partnership tax. The relevant
series generally pays any extraordinary expenses, including legal claims and
liabilities and litigation costs and any indemnification related thereto. To the
extent the extraordinary expenses arise as a result of the gross negligence or
willful misconduct of the Manager, the Manager may be deemed responsible to pay
the extraordinary expenses to that extent.
Selling Commission
Investors who subscribe for Class A Interests and Class C Interests will be
charged a sales commission of 0% to 4% of the subscription amount, payable to
the selling agent from the investor's investment. The amount of the sales
commission is determined by the selling agent. Investors who subscribe for Class
B Interests and Class D Interests will generally not be charged a sales
commission.
Futures Trading
Futures Contracts
Futures contracts are contracts made on or through a commodity exchange and
provide for future delivery of agricultural and industrial commodities, precious
metals, foreign currencies or financial instruments and, in the case of certain
contracts such as stock index futures contracts and Eurodollar futures
contracts, provide for cash settlement. Futures contracts are uniform for each
commodity on each exchange and vary only with respect to price and delivery
time. A contract to buy or sell may be satisfied either by taking or making
delivery of the commodity and payment or acceptance of the entire purchase price
thereof, or by offsetting the obligation with a contract containing a matching
contractual obligation on the same (or a linked) exchange prior to delivery.
United States commodity exchanges individually or, in certain limited
situations, in conjunction with certain foreign exchanges, provide a clearing
mechanism to facilitate the matching of offsetting trades. Once trades made
between members of an exchange have been confirmed, the clearinghouse becomes
substituted for the clearing member acting on behalf of each buyer and each
seller of contracts traded on the exchange and in effect becomes the other party
to the trade. Thereafter, each clearing member firm party to the trade looks
only to the clearinghouse for performance. Clearinghouses do not deal with
customers, but only with member firms, and the guarantee of performance under
open positions provided by the clearinghouse does not run to customers. If a
customer's commodity broker becomes bankrupt or insolvent, or otherwise defaults
on such broker's obligations to such customer, the customer in question may not
receive all amounts owed to such customer in respect of his trading, despite the
clearinghouse fully discharging all of its obligations.
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Hedgers and Speculators
Two broad classifications of persons who trade in commodity futures are (1)
hedgers and (2) speculators. Commercial interests, including banks and other
financial institutions, and farmers, who market or process commodities, use the
futures markets for hedging. Hedging is a protective procedure designed to
minimize losses which may occur because of price fluctuations. The commodity
markets enable the hedger to shift the risk of price fluctuations to the
speculator. The usual objective of the hedger is to protect the expected profit
from financial or other commercial operations, rather than to profit strictly
from futures trading.
The speculator, such as the Trust, risks its capital with the expectation
of making profits from the price fluctuations in futures contracts. The hedger
seeks to offset any potential loss (measured as the difference between the price
at which he had expected to buy or sell and the price at which he is eventually
able to buy or sell) in the purchase or sale of the commodity hedged. Likewise,
losses in futures trading might be offset by unexpected gains on transactions in
the actual commodity. The speculator assumes the risks which the hedger seeks to
avoid.
Speculators rarely expect to take or make delivery of the cash or actual
physical commodity in the futures market. Rather, they generally close out their
futures positions by entering into offsetting purchases or sales of futures
contracts. Because the speculator may take either a long or short position in
the futures markets, it is possible for the speculator to earn profits or incur
losses regardless of the direction of price trends.
Trading Approaches
Commodity traders generally may be classified as either systematic or
discretionary. A systematic trader will rely primarily on trading programs or
models to generate trading signals. A systematic trader will also rely, to some
degree, on judgmental decisions concerning, for example, what markets to follow
and commodities to trade, when to liquidate a position in a contract month which
is about to expire and how large a position to take in a particular commodity.
The systems utilized to generate trading signals are changed from time to time,
but the trading instructions generated by the then-current systems are generally
followed without significant additional analysis or interpretation.
In contrast, discretionary traders, while sometimes utilizing a variety of
price charts and computer programs to assist them in making trading decisions,
make these decisions on the basis of their own judgment. It is possible to
describe a discretionary trader's experience, the type of information which he
consults, the number of commodities he follows or trades and the degree to which
he leverages his accounts. However, in assessing the potential for future
profitability in the case of a discretionary trader, the talents and abilities
of the individual, rather than the profitability of any particular system or
identifiable method, must be evaluated.
Margins
Margins are good faith deposits which must be made with a commodity broker
in order to initiate or maintain an open position in a futures contract. When
futures contracts are traded in
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the United States and on most exchanges abroad, both buyer and seller are
required to post margins with the broker handling their trades as security for
the performance of their buying and selling undertakings, and to offset losses
on their trades due to daily fluctuations in the markets. Minimum margins
usually are set by the exchanges.
A customer's margin deposit is treated as equity in his account. A change
in the market price of the futures contract will increase or decrease the
equity. If this equity decreases below the maintenance margin amount (generally
75% of the initial margin requirement), the broker will issue a margin call
requiring the customer to increase the account's equity to the initial margin.
Failure to honor such a margin call generally will result in the closing out of
the open position. If, at the time such open position is closed, the account
equity is negative, then the equity in the customer's remaining open positions,
if any, in excess of the required margins, as well as the customer's cash
reserves will be used to offset such debit balance, and if such equities and
reserves are not sufficient the customer will be liable for the remaining unpaid
balance.
United States Regulations
Commodity Exchange Act ("CE Act"). The United States Congress enacted the
CE Act to regulate trading in commodities, the exchanges on which they are
traded, the individual brokers who are members of the exchanges, and commodity
professionals and commodity brokerage houses that trade in these commodities in
the United States.
Commodity Futures Trading Commission. The CFTC is an independent
governmental agency which administers the CE Act and is authorized to promulgate
rules thereunder. A function of the CFTC is to implement the objectives of the
CE Act in preventing price manipulation and excessive speculation and promoting
orderly and efficient commodity futures markets. The CFTC has adopted
regulations covering, among other things:
- the designation of contract markets;
- the monitoring of United States commodity exchange rules;
- the establishment of speculative position limits;
- the registration of commodity brokers and brokerage houses, floor
brokers, introducing brokers, leverage transaction merchants,
commodity trading advisors, commodity pool operators and their
principal employees engaged in non-clerical commodities activities
(associated persons); and
- the segregation of customers funds and record keeping by, and minimum
financial requirements and periodic audits of, such registered
commodity brokerage houses and professionals.
Under the CE Act, the CFTC is empowered, among other things, to:
- hear and adjudicate complaints of any person (e.g., an Interest
Holder) against all individuals and firms registered or subject
to registration under the CE Act (reparations),
- seek injunctions and restraining orders,
- issue orders to cease and desist,
- initiate disciplinary proceedings,
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- revoke, suspend or not renew registrations and
- levy substantial fines.
The CE Act also provides for certain other private rights of action and the
possibility of imprisonment for certain violations.
The CFTC has adopted extensive regulations affecting commodity pool
operators and commodity trading advisors such as the Manager and their
associated persons. These regulations, among other things, require the giving of
disclosure documents to new customers and the retention of current trading and
other records, prohibit pool operators from commingling pool assets with those
of the operators or their other customers and require pool operators to provide
their customers with periodic account statements and an annual report. Upon
request by the CFTC, the Manager will also furnish the CFTC with the names and
addresses of the interest holders, along with copies of all transactions with,
and reports and other communications to, the interest holders.
United States Commodity Exchanges. United States commodity exchanges are
given certain latitude in promulgating rules and regulations to control and
regulate their members and clearing houses, as well as the trading conducted on
their floors. Examples of current regulations by an exchange include
establishment of initial and maintenance margin levels, size of trading units,
daily price fluctuation limits and other contract specifications. Except for
those rules relating to margins, all exchange rules and regulations relating to
terms and conditions of contracts of sale or to other trading requirements
currently must be reviewed and approved by the CFTC.
National Futures Association. Substantially all commodity pool operators,
commodity trading advisors, futures commission merchants, introducing brokers
and their associated persons are members or associated members of the NFA. The
NFA's principal regulatory operations include:
- auditing the financial condition of futures commission merchants,
introducing brokers, commodity pool operators and commodity
trading advisors;
- arbitrating commodity futures disputes between customers and NFA
members;
- conducting disciplinary proceedings; and
- registering futures commission merchants, commodity pool operators,
commodity trading advisors, introducing brokers and their
respective associated persons, and floor brokers.
The regulation of commodities transactions in the United States is a
rapidly changing area of law and the various regulatory procedures described
herein are subject to modification by United States congressional action,
changes in CFTC rules and amendments to exchange regulations and NFA
regulations.
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Risk Factors
Historical Results of the MLM Index(TM) may not be indicative of future results
The MLM Index(TM) historical results may not be indicative of future
results. The MLM Index(TM) results are based on the analysis of a particular
period of time. The future performance of the MLM Index(TM) is entirely
unpredictable.
Performance of the Trust May be Different than the MLM Index(TM)
The Trust attempts to replicate the MLM Index(TM). In doing so, the Trust
will establish positions in the futures markets. The prices at which the Trust
executes these positions may be significantly different than the prices used to
calculate the MLM Index(TM). In addition, the Trust charges various fees and
commissions which will lower the return of the Trust vs. the MLM Index(TM). All
these factors mean that the Trust performance will be different and in all
likelihood lower than the results of the MLM Index(TM).
Four Losing Years in Six Years of Operation.
The Trust has been in operation since January, 1999, and has experienced
losses in four of the six calendar years of operation.
Futures Trading Involves Substantial Leverage
Futures contracts are typically traded on margin. This means that a small
amount of capital can be used to invest in contracts of much greater total
value. The resulting leverage means that a relatively small change in the market
price of a futures contract can produce a substantial profit or loss. Leverage
enhances the Trust's sensitivity to market movements that can result in greater
profits when the Trading Program anticipates the direction of the move
correctly, or greater losses when the Trading Program is incorrect. The
Unleveraged Series attempts to replicate the MLM Index(TM) without leverage and
the Leveraged Series trades the MLM Index(TM) at three times leverage.
Futures Trading Is Speculative, Highly Volatile and Can Result in Large Losses
A principal risk in futures trading is the rapid fluctuation in the market
prices of futures contracts. The Trust's profitability depends greatly on the
Trading Program correctly anticipating trends in market prices. If the Trading
Program incorrectly predicts the movement of futures prices, large losses could
result. Price movements of futures contracts are influenced by such factors as:
changing supply and demand relationships; government trade, fiscal, monetary and
exchange control programs and policies; national and international political and
economic events; and speculative frenzy and the emotions of the market place.
The Manager has no control over these factors.
14
Illiquid Markets Could Make It Impossible for the Trust to Realize Profits or
Limit Losses
Although the Trust trades in ordinarily highly liquid markets, there may be
circumstances in which it is not possible to execute a buy or sell order at the
desired price, or to close out an open position, due to market conditions. Daily
price fluctuation limits are established by the exchanges and approved by the
CFTC. When the market price of a futures contract reaches its daily price
fluctuation limit, no trades can be executed at prices outside such limit. The
holder of a commodity futures contract (including the Trust) may be locked into
an adverse price movement for several days or more and lose considerably more
than the initial margin put up to establish the position. Another possibility is
the unforeseen closure of an exchange due to accident or government
intervention.
Speculative Position Limits May Require the Manager to Modify Its Trading to the
Detriment of the Trust
The exchanges have established and the CFTC has approved speculative
position limits (referred to as position limits) on the maximum futures position
which any person, or group of persons acting in concert, may hold or control in
particular futures contracts. In addition, certain exchanges, in lieu of
speculative position limits, have adopted position accountability requirements
that could require a person whose positions in a contract exceed a specified
level to provide information to the exchange relating to the nature of such
person's trading strategy. The Manager may be required to reduce the size of the
future positions which would otherwise be taken to avoid exceeding such limits
or requirements. Such modification of the Trust's trades, if required, could
adversely affect the operations and profitability of the Trust.
Trading of Swaps could Subject the Trust to Substantial Losses
The Trust may enter into swap and similar transactions. Swap contracts are
not traded on exchanges and are not subject to the same type of government
regulation as exchange markets. As a result, many of the protections afforded to
participants on organized exchanges and in a regulated environment are not
available in connection with these transactions. The swap markets are
"principals' markets," in which performance with respect to a swap contract is
the responsibility only of the counterparty which the participant has entered
into a contract, and not of any exchange or clearinghouse. As a result, the
Trust is subject to the risk of the inability or refusal to perform with respect
to such contracts on the part of the counterparties with which the Trust trades.
Any such failure or refusal, whether due to insolvency, bankruptcy, default, or
other cause, could subject the Trust to substantial losses. There are no
limitations on daily price movements in swap transactions. Speculative position
limits do not apply to swap transactions, although the counterparties with which
the Trust deals may limit the size or duration of positions available to the
Trust as a consequence of credit considerations. Participants in the swap
markets are not required to make continuous markets in the swap contracts they
trade. Participants could refuse to quote prices for swap contracts or quote
prices with an unusually wide spread between the price at which they are
prepared to buy and the price at which they are prepared to sell.
Substantial Expenses Will Cause Losses for the Trust Unless Offset by Profits
and Interest Income
15
The Trust is subject to substantial fees and expenses, including brokerage
fees, management fees and operating and administrative expenses. In addition,
certain investors are subject to an organizational charge and/or a selling
commission. Set forth below are tables which set forth the basic fees that each
of the Series and Classes is subject to.
LEVERAGED SERIES
-------------------------------------------------------------------------------
BROKERAGE MANAGEMENT ORGANIZATIONAL OPERATING SELLING TOTAL FEES AND
FEE FEE FEE EXPENSE EXPENSE COMMISSIONS
-------------------------------------------------------------------------------
Class A-1 1.35% 1.65% N/A 0.35% N/A 3.35%
Class A 1.75% 2.80% 0.50% 0.35% 4.00% 9.40%
Class B-1 1.35% 0.65% N/A 0.35% N/A 2.35%
Class B 1.75% 1.30% 0.50% 0.35% N/A 3.90%
Class C 0.90% 2.05% N/A 0.35% 4.00% 7.30%
Class D 0.90% 1.30% N/A 0.35% N/A 2.55%
UNLEVERAGED SERIES
-------------------------------------------------------------------------------
BROKERAGE MANAGEMENT ORGANIZATIONAL OPERATING SELLING TOTAL FEES AND
FEE FEE FEE EXPENSE EXPENSE COMMISSIONS
-------------------------------------------------------------------------------
Class A-1 0.65% 1.25% N/A 0.35% N/A 2.25%
Class A 0.85% 1.50% 0.50% 0.35% 4.00% 7.20%
Class B-1 0.65% 0.25% N/A 0.35% N/A 1.25%
Class B 0.85% 0.50% 0.50% 0.35% N/A 2.20%
Class C 0.40% 1.00% N/A 0.35% 4.00% 5.75%
Class D 0.40% 0.50% N/A 0.35% N/A 1.25%
The Brokerage Fee, the Management Fee and the Organizational Fee shall be
paid to the Manager. It will be necessary for the Trust to achieve gains from
trading and interest income in excess of its charges for investors to realize
increases in the net asset value of their interests. The Trust may not be able
to achieve any appreciation of its assets.
The Manager Alone Makes the Trust's Trading Decisions
The Manager makes all commodity trading decisions for the Trust and,
accordingly, the success of the Trust largely depends upon the Manager's
judgment and abilities to make the necessary adjustments to the Trading Program.
There is no guarantee that the Trading Program's trading on behalf of the Trust
will prove successful under all or any market conditions. The performance record
of the Trading Program also reflects significant variations in profitability
from period to period.
You Have No Right to Remove the Manager.
Under the Trust Agreement, interest holders have no right to remove the
Manager as manager of the Trust for cause or for any other reason.
16
The Manager Advises Other Clients
The Manager may be managing and advising large amounts of other funds for
other clients at the same time as it is managing Trust assets and, as a result,
the Trust may experience increased competition for the same contracts.
Limited Ability To Liquidate Investment In Interests
You can only redeem your interests at month-end upon 10 business days
advance notice. The net asset value per interest may vary significantly from
month-to-month. You will not know at the time you submit a redemption request
what the redemption value of your interests will be. The restrictions imposed on
redemptions limit your ability to protect yourself against major losses by
redeeming part or all of your interests.
The Manager must consent before you can transfer or assign your interests
and the securities laws provide additional restrictions on the transferability
of interests. There will not be a secondary market for interests.
You Have No Rights Of Control
You will be unable to exercise any control over the business of the Trust.
In addition, the Manager can cause the Trust to redeem your interests upon 10
business days prior written notice for any reason in the Manager's sole
discretion. The Manager may elect to cause the Trust to redeem your interests
when your continued holding of interests would or might violate any law or
constitute a prohibited transaction under ERISA or the Internal Revenue Code and
a statutory, class or individual exemption from the prohibited transaction
provisions of ERISA for such transaction or transactions does not apply or
cannot be obtained from the Department of Labor (or the Manager determines not
to seek such an exemption).
You Have Limited Rights to Inspect Books and Records
You will have only limited rights to inspect the books and records of the
Trust and the Manager. You will generally only have the right to inspect the
books and records of the Trust and the Manager as are specifically granted under
the Delaware Business Trust Act. In particular, information regarding positions
held by a Series, to the extent deemed proprietary or confidential by the
Manager, will not be made available to you except as required by law.
Limited Arms-Length Negotiation
The initial offering price per interest was established arbitrarily. Except
for the agreements with the Trustee, the terms of this offering and the
structure of the Trust have not been established as the result of arms-length
negotiation.
The Trust Could Lose Assets and Have Its Trading Disrupted Due to the Bankruptcy
of its Clearing Broker or Others
17
The Trust is subject to the risk of clearing broker, exchange or
clearinghouse insolvency. Trust assets could be lost or impounded in such an
insolvency during lengthy bankruptcy proceedings. Were a substantial portion of
the Trust's capital tied up in a bankruptcy, the Manager might suspend or limit
trading, perhaps causing the Trust to miss significant profit opportunities.
The Trust Is Subject to Certain Conflicts of Interest
The Manager and the clearing broker are subject to certain actual and
potential conflicts of interests.
Although the Manager is not affiliated with a commodity broker, the Manager
may have a conflict of interest in selecting brokers because of long-standing
business dealings with certain brokers. In addition, the Manager, its principals
and affiliates may have commodity accounts at the same brokerage firms as the
Trust, and, because of the amount traded through such brokerage firms, may pay
lower commissions than the Trust.
The Manager, the clearing broker, their respective affiliates and each of
their principals, directors, officers, employees and families may be trading and
directing other futures accounts, including their own accounts. Each will not be
aware of what others are doing on behalf of the Trust, and they may take
positions similar or opposite to those of the Trust or in competition with the
Trust. Generally, the Trust will enter orders only once a month. The Manager
will allocate transactions among the Trust and other clients in a manner
believed by the Manager to be equitable to each.
In certain instances, the clearing broker may have orders for trades from
the Trust and orders from its own employees and it might be deemed to have a
conflict of interest between the sequence in which such orders are transmitted
to the trading floor.
The Manager and its principals are engaged in substantial activities,
including managing other accounts not involving the Trust, and will devote to
the Trust such amount of their time as they determine reasonable and necessary.
The compensation received by the Manager and its principals from such other
accounts and entities may differ from the compensation it receives from the
Trust.
Investment advisers and broker-dealers receiving continuing compensation
from the Manager on interests sold by them will have a financial incentive to
encourage investors to purchase and not to redeem their interests.
The Trust could be Taxed as a Corporation
In the opinion of the Trust's counsel, under current federal income tax
law, the Unleveraged Series and the Leveraged Series each will be classified as
a partnership and not as an association taxable as a corporation for federal
income tax purposes, and each such Series
18
should not be subject to federal income taxation as a corporation under the
provisions applicable to so-called publicly traded partnerships. However, you
should note that the Trust has not and will not request a ruling from the
Internal Revenue Service to this effect. If the Trust or a Series were taxed as
a corporation for federal income tax purposes, the net income of the Trust or a
Series would be taxed to the Trust or a Series at corporate income tax rates, no
losses of the Trust or a Series would be allowable as deductions to the interest
holders, and all or a portion of any distributions by the Trust or a Series to
the interest holders, other than liquidating distributions, would constitute
dividends to the extent of the Trust's or a Series' current or accumulated
earnings and profits and would be taxable as such.
You Are Taxed Every Year on Your Share of a Series' Profits Not Only When You
Redeem as Would Be the Case if You Held Stocks or Bonds
You will be taxed each year on your investment in a Series, irrespective of
whether you receive distributions or redeem any interests. In contrast, an
investor holding stocks or bonds generally pays no tax on their capital
appreciation until the securities are sold. Over time, the deferral of tax on
stock and bond appreciation has a compounding effect.
Deductibility of Expenses May be Limited
You could be required to treat the management fees, as well as certain
other expenses of a Series, as investment advisory fees, which are subject to
substantial restrictions on deductibility for individual taxpayers. The Manager
has not, to date, been classifying the management fee or such expenses as
investment advisory fees, a position to which the Internal Revenue Service might
object. Should the Internal Revenue Service re-characterize the management fee
or other expenses as investment advisory fees, you may be required to pay
additional taxes, interest and penalties.
The Series' Trading Gains May Be Taxed at Higher Rates
You will be taxed on your share of any trading profits of a Series at both
short- and long-term capital gain rates. These tax rates are determined
irrespective of how long you hold Interests. Consequently, the tax rate on a
Series' trading gains may be higher than those applicable to other investments
you hold for a comparable period.
Tax Could Be Due from You on Your Share of a Series' Interest Income Despite
Overall Losses
You may be required to pay tax on your allocable share of a Series'
interest income, even though the Series incurs overall losses. Trading losses
can only be used by individuals to offset trading gains and $3,000 of interest
income each year. Consequently, if you were allocated $5,000 of interest income
net of expenses and $10,000 of net trading losses, you would owe tax on $2,000
of interest income even though you would have a $5,000 loss for the year. The
$7,000 capital loss would carry forward, but subject to the same limitation on
its deductibility against interest income.
19
Possibility of Tax Audit
There can be no assurance that tax returns of a Series will not be audited
by the Internal Revenue Service or that such audits will not result in
adjustments to such returns. If an audit results in an adjustment, you may be
required to file amended returns and to pay additional taxes plus interest.
Employee Benefit Plan Considerations
Although the Manager will be a fiduciary to the ERISA investors with
respect to the assets of such investors invested in the Trust, neither the
Manager, nor the Trustee, nor any of their affiliates, agents, or employees will
act as a fiduciary to any ERISA investor with respect to the ERISA investor's
decision to invest assets in the Trust. Fiduciaries of prospective ERISA
investors, in consultation with their advisors, should carefully consider the
application of ERISA and the regulations issued there under on an investment in
the Trust.
Absence of Certain Statutory Registrations
The Trust is not registered as an investment company or mutual fund, which
would subject it to extensive regulation under the Investment Company Act of
1940, as amended. If the Trust were required to register as an investment
company, it would be subject to additional regulatory restrictions. Some of
these restrictions would be fundamentally inconsistent with the operation of the
Trust, including among other things, restrictions relating to the liquidity of
portfolio investments, to the use of leverage, to custody requirements, and to
the issuance of senior securities. As a result, it would be impractical for the
Trust to continue its current operations. Consequently, you will not benefit
from certain of the protections afforded by the Investment Company Act of 1940,
as amended. However, the Manager is registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940, as amended, and thus is an
investment manager for purposes of ERISA. In addition, the Manager is registered
as a commodity pool operator and a commodity trading advisor with the CFTC, is a
member of the NFA and is subject to extensive regulation under the Commodity
Exchange Act.
No Independent Counsel
No independent counsel has been selected to represent the interests of the
interest holders and there have been no negotiations between the Manager and any
interest holders in connection with the terms of the offering or the terms of
the Trust Agreement.
Item 2. Properties
The Trust does not own or lease any physical properties. The Trust's office
is located within the office of the Manager at 47 Hulfish Street, Suite 510,
Princeton, New Jersey 08542.
20
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Trust or the Manager is
a party or to which any of their assets are subject.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
21
PART II
Item 5. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters
There currently is no established public trading market for the interests.
As of December 31, 2004, approximately 3,476,000 interests were held by 2,851
owners.
The interests are "restricted securities" within the meaning of Rule 144
promulgated under the Securities Act of 1933, as amended (the "Securities Act"),
and may not be sold unless registered under the Securities Act or sold in
accordance with an exemption therefrom, such as Rule 144. The Trust has no plans
to register any of the interests for resale. In addition the Trust Agreement
provides that an interest holder may transfer its interests only upon the
approval of the Manager in the Manager's sole and absolute discretion.
Pursuant to the Trust Agreement, the Manager has the sole discretion to
determine whether distributions (other than on redemption of interests), if any,
will be made to interest holders. The Trust has never paid any distribution and
does not anticipate paying any distributions of interest holders in the
foreseeable future.
Recent Sales of Unregistered Securities
From October 1, 2004 to December 31, 2004, a total of 172,529.92 interests were
sold for the aggregate net subscription amount of $18,862,828.79. Total number
of purchasers was 306. There were no non-accredited investors during this
period. Details of the sale of these interests are as follows:
22
- --------------------------------------------------------------------------------
# of
Series Date Subscriptions Units Price Purchasers
- -------------------- ---------- -------------- --------- ------- ----------
- -------------------- ---------- -------------- --------- ------- ----------
Leveraged A2 Units 10/31/2004 $ 108,800.50 1,063.09 $102.34 6
- -------------------- ---------- -------------- --------- ------- ----------
Leveraged B2 Units 10/31/2004 $ 938,429.25 8,517.45 $110.18 34
- -------------------- ---------- -------------- --------- ------- ----------
Leveraged C2 Units 10/31/2004 $ 0.00 0.00 $ 0.00 0
- -------------------- ---------- -------------- --------- ------- ----------
Unleveraged A2 Units 10/31/2004 $ 410,875.00 3,731.09 $110.12 10
- -------------------- ---------- -------------- --------- ------- ----------
Unleveraged B2 Units 10/31/2004 $ 4,171,373.57 35,765.52 $116.63 40
- -------------------- ---------- -------------- --------- ------- ----------
Leveraged A2 Units 11/30/2004 $ 346,365.50 3,374.32 $102.65 10
- -------------------- ---------- -------------- --------- ------- ----------
Leveraged B2 Units 11/30/2004 $ 2,831,545.94 25,591.68 $110.64 53
- -------------------- ---------- -------------- --------- ------- ----------
Unleveraged B2 Units 11/30/2004 $ 3,979,727.12 34,074.34 $116.80 53
- -------------------- ---------- -------------- --------- ------- ----------
Leveraged A2 Units 12/31/2004 $ 774,669.26 8,139.84 $ 95.17 17
- -------------------- ---------- -------------- --------- ------- ----------
Leveraged B2 Units 12/31/2004 $ 2,103,788.17 20,482.35 $102.71 40
- -------------------- ---------- -------------- --------- ------- ----------
Leveraged C2 Units 12/31/2004 $ 1,000,000.00 11,974.91 $ 83.51 1
- -------------------- ---------- -------------- --------- ------- ----------
Unleveraged A2 Units 12/31/2004 $ 1,004,665.40 9,351.57 $107.43 12
- -------------------- ---------- -------------- --------- ------- ----------
Unleveraged B2 Units 12/31/2004 $ 1,192,589.08 10,463.76 $113.97 30
- --------------------------------------------------------------------------------
The price of the interests of each Class reflects the net asset value of
interests in the Class. The interests were sold pursuant to Rule 506 of
Regulation D and the sales were exempt from registration under the Securities
Act of 1933. Purchasers of the interests completed subscription documents in
which they represented that they were accredited investors as defined in
Regulation D and a Form D was filed with the Securities and Exchange Commission
in the time periods prescribed by Regulation D.
Item 6. Selected Financial Data
The Trust began trading on January 4, 1999. Set forth below is certain
selected historical data for the Trust as of and for the years ended December
31, 2004, 2003, 2002, 2001, 2000, and 1999. The selected historical financial
data were derived from the financial statements of the Trust, which were audited
by Ernst & Young LLP. The information set forth below should be read in
conjunction with the Financial Statements and notes thereto contained elsewhere
in this Registration Statement.
23
Year Ended December 31,
- -----------------------------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000 1999
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Operations Data:
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Realized Gains (Losses) $ 32,322,487 $ 5,302,391 $(27,250,523) $ (1,782,272) $10,979,358 $(3,703,768)
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Change in Unrealized Gains (Losses) (26,036,732) 6,101,017 10,793,154 754,588 4,249,238 2,068,296
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Interest Income 4,331,899 2,373,246 3,412,276 5,140,993 3,471,048 1,133,335
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Brokerage Commissions 4,586,994 3,221,120 2,842,588 2,032,721 905,304 292,743
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Management Fees 3,924,230 2,809,869 2,455,153 1,693,359 766,332 216,625
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Operating Expenses 2,287,004 1,554,929 944,454 839,741 321,746 117,905
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Income (Loss) (180,574) 6,190,736 (19,287,288) (452,512) 16,706,262 (1,129,410)
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Financial Condition Data
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Investors' Interest $358,864,845 $277,595,158 $203,994,413 $197,206,677 $82,233,913 $45,214,754
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Total Assets 365,368,734 280,812,656 212,016,757 201,133,787 82,937,503 50,271,694
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class A-1
Leveraged Series Interest NA 107.63 106.35 123.84 124.74 90.23
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class A
Leveraged Series Interest 95.17 94.98 93.97 110.72 112.76 85.72
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class B-1
Leveraged Series Interest NA 112.71 107.78 123.65 122.69 90.66
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class B
Leveraged Series Interest 102.71 100.98 98.37 114.22 114.59 85.82
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class C
Leveraged Series Interest 83.21 82.66 81.12 94.87 NA NA
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class D
Leveraged Series Interest 100.00 NA NA NA NA NA
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class A-1
Unleveraged Series Interest NA 110.60 109.99 114.19 112.40 99.31
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class
Unleveraged Series Interest 107.43 106.87 106.46 111.00 109.74 97.39
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class B-1
Unleveraged Series Interest NA 116.55 114.37 117.66 114.67 100.31
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class B
Unleveraged Series Interest 113.97 112.24 110.57 114.28 111.87 98.29
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class C
Unleveraged Series Interest 100.00 NA NA NA NA NA
- --------------------------------------- ------------- ------------ ------------- ------------- ----------- ------------
Net Asset Value Per Class D
Unleveraged Series Interest 100.00 NA NA NA NA NA
- -----------------------------------------------------------------------------------------------------------------------------
24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
The purpose of the Trust is to replicate the results of the MLM Index(TM),
an index designed to measure the risk premium available to futures traders.
Designed as such, the results of the Trust depend on two factors, the results of
the MLM Index(TM) itself, and the Manager's ability to replicate that Index. It
is important to note that the Manager also calculates the results of the MLM
Index(TM). Thus, their role is twofold - to calculate the results of the MLM
Index(TM), and to replicate the results of the MLM Index(TM) for the Trust. Any
changes made to the composition of the MLM Index(TM) by the MLM Index(TM)
Committee of the Manager will effect the trading of the Trust, since the object
of the Trust is to replicate the MLM Index(TM) as published.
Results of the MLM Index(TM)
The MLM Index(TM) is calculated from the prices of 22 liquid futures
markets. These markets are traded on domestic and foreign exchanges. For each
market, the MLM Index(TM) generally uses the price of 4 different delivery
months each year. For example, in the Japanese Yen futures market, the MLM
Index(TM) uses the March, June, September and December delivery months. On the
day before trading day, the MLM Index(TM) determines whether to hold a long or
short position in each constituent contract based on the calculation methodology
of the MLM Index(TM). Once established, that position is held for the subsequent
period, at which time it is re-evaluated. The monthly results of each
constituent market are then used to calculate the MLM Index(TM) return. The
objective of the Trust is to replicate this monthly return.
Clearly, the volatility of the constituent markets in the MLM Index(TM) can
affect the results of the Trust. The influences on this volatility are varied
and unpredictable. However, since the object of the Trust is to replicate the
MLM Index(TM), the Manager takes no unusual action to mitigate this volatility.
The role of the Manager is to buy or sell the appropriate number of futures
contracts in each constituent market such that the aggregate return of those
positions replicates as closely as possible the results of the MLM Index(TM).
In order to accomplish this objective, the Manager must calculate the
number of contracts based on both the assets in the Trust and the distribution
of the assets between the Unleveraged and Leveraged Series of the Trust. Since
the MLM Index(TM) rebalances positions each month, at that time the Manager must
ascertain the asset level and execute orders to achieve the desired allocations.
This is achieved by adding the performance results of the Trust for the month to
the assets at the beginning of the month, and adding additions of capital from
new subscriptions and subtracting redemptions in order to determine the asset
level at the end of the period.
25
Summary of Critical Accounting Policies
The preparation of financial statements in conformity with U.S. generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reports in the financial statements and
accompanying notes. Management believes that the estimates utilized in preparing
the financial statements are reasonable and prudent; however, actual results
could differ from those estimates. The Trust's significant accounting policies
are described in detail in Note 2 of the Notes to Financial Statements.
The Trust records all investments at market value in its financial
statements, with changes in market value reported as a component of realized and
unrealized gain (loss) on investments in the Statements of Operations.
Generally, market values are based on market prices; however, in certain
circumstances, significant judgments and estimates are involved in determining
market value in the absence of an active market closing price.
Financial Condition
To replicate the results of the MLM Index(TM), the Trust must effect trades
on domestic or foreign futures exchanges. Since the beginning of operations the
Trust has used Refco, LLC as its futures commission merchant. The Manager
deposits a percentage of the assets of the Trust in two separate accounts at
Refco, one for the Unleveraged Series and one for the Leveraged Series. The
amount deposited is determined by the margin requirement established by the
exchanges to hold the positions in the Trust. The margin requirement varies, but
is generally about 4.5% of assets for the Unleveraged Series and 13.5% of assets
for the Leveraged Series.
The balance of the assets of the Trust is held in two separate custodial
accounts at Investors Bank and Trust (the "Bank"). The Trust has contracted
with Credit Suisse Asset Management (CSAM) to manage the money in these accounts
so as to maximize the interest income which accrues to the Trust, while
maintaining strict credit controls as determined by the CE Act. When Refco
requires additional assets to maintain the positions for the Trust, the Bank
makes a wire transfer to Refco. If Refco has surplus assets in the accounts,
Refco makes a wire transfer to the accounts at the Bank.
The Trust owns no capital assets and does not borrow money. Since the
objective of the Trust is to replicate the results of the MLM Index(TM), its
entire asset base participates in the speculative trading of futures contracts.
As such, all the assets of the Trust are at risk. The level of assets will be
determined by the results of the Trust, and the effect of addition of capital
and the redemption of Trust interests. These variables are impossible to predict
with any certainty.
Liquidity
The majority of the Trust's assets are held in liquid short term interest
rate instruments. The Trust takes substantial exposure in futures markets, which
require relatively small deposits, called margin, to hold the positions. In
general, the Trust will have about 10% of its assets on
26
deposit with brokers as margin, with the balance held in accounts with a major
financial institution.
A holder of interests in the Trust may liquidate that holding at the end of
any month at the net asset value of the interests, upon 10 days written notice
to the Manager. While the Manager generally must honor all requests for
redemption if presented in proper form, the Manager may suspend temporarily any
redemption if the effect of such redemption, either alone or in conjunction with
other redemptions, would impair the relevant Series' ability to operate if the
impairment would be caused by a third party other than the Manager. Further, the
right to obtain redemption is contingent upon the relevant Series having
property sufficient to discharge its liabilities on the date of redemption.
Under certain circumstances, the Manager may find it advisable to establish a
reserve for contingent liabilities. In such event, the amount receivable by a
redeeming holder of interests will be reduced by his proportionate share of the
reserve. There is no secondary market for interests in the Trust, and none is
anticipated. There are restrictions for transfer of interests.
Although the Trust trades in futures contracts which are in general liquid,
the exchanges impose daily trading limits, which act to suspend trading when a
particular market or contract trades up or down to a pre-determined price level.
Should this happen, and the Trust was attempting to execute trades in that
situation, the Trust may not be able to accurately replicate the results of the
MLM Index(TM). These rules have not had a material impact on the operation of
the Trust to date.
Market and Credit Risks
The nature of the Trust is such that it undertakes substantial market risk
in following its mandate to replicate the MLM Index(TM). Although the Manager
monitors the intraday and daily valuation of the portfolio, no extraordinary
measures are taken to reduce market risk. Specifically, the Manager maintains
positions required to match, as closely as possible, the return of the MLM
Index. One could imagine certain circumstances where the Manager might be called
upon to make a change to this policy, such as the closing of an exchange or some
other emergency situation. In such case, management would use its best efforts
to respond to such circumstances with the interests of the investors in mind.
During calendar year 2004, the most profitable sector for the Trust was the
Energy sector (Crude Oil, Heating Oil, Unleaded Gas, and Natural Gas), while the
least profitable sector was the Tropicals (Cotton, Sugar and Coffee). The
ranking of the Tropicals is a repeat of calendar year 2003. The MLM Index(TM)
is designed to capture returns from sustained trends in the constituent futures
markets. When these trends exist in a market or sector, the MLM Index(TM) tends
to exhibit positive performance in that market or sector. Conversely, if a
market or sector is trendless and volatile, the performance for the market of
sector is likely to be negative. The results of the Energy and Tropical sectors
illustrate these design characteristics. During 2004, Crude Oil prices
substantially rose from around $30/barrel to around $53/barrel. The change
during that period was very orderly. The MLM Index(TM) remained long Crude Oil
during that period. The behavior of Crude Oil contrasts significantly with the
behavior of the Coffee market. The coffee market began 2004 around 80 cents per
pound and ended around 110 cents
27
per pound. During the year it ranged up to 95 cents and down to 75 cents. The
stability combined with volatility led to frequent changes in positions,
generally an indication of poor results.
The MLM Index(TM) is not designed to predict which market will exhibit
positive performance in any given year. The manager does not select the
constituent markets based on expectations of future performance. The MLM
Index(TM) is designed to represent participation in a diverse basket of future
contracts using a trend-following algorithm. The MLM Index(TM) is a diversified
Index producing different levels of return in the various sectors from year to
year.
The Trust incurs various kinds of credit risk in its operations. In order
to facilitate the trading of the Trust, assets must be placed with both Futures
Commission Merchants and Broker/Dealers. Management of the Trust deals only with
established registered firms in both capacities, and monitors their financial
condition on an ongoing basis. In addition, if the Trust were to enter into over
the counter transactions, additional counterparty risk would be incurred. There
were no OTC transactions during 2004.
Results of Operations
For the Fiscal Year ending 12/31/2004 the Trust had assets of $365,368,734,
compared with assets of $280,812,656, on 12/31/2003 and assets of $212,016,757,
on 12/31/2002. Liabilities of the Trust totaled $6,503,889 in the 2004 fiscal
year, compared with $3,217,498 in the 2003 fiscal year, $8,022,344 in the 2002
fiscal year, and $3,927,110 for the 2001 fiscal year. Net income (loss) from
operations was $(180,574), compared with $6,190,736 in 2003, and $(19,287,288)
in 2002.
The Trust's net income is directly related to the performance of the MLM
Index(TM), which the Trust is designed to replicate. For the 12 months ending
12/31/04, MLM Index(TM) performance was +3.52%, lower than the +3.92% recorded
in 2003, but higher than the -1.63% recorded in 2002. Trust performance may be
negative in years when the MLM Index(TM) is positive due to the timing of
subscriptions and redemptions, the fees charged, and the allocation of assets
between the Unleveraged and Leveraged Series of the Trust. Since inception of
the Trust, the correlation of monthly results between the Unleveraged Series of
the Trust and the MLM Index(TM) adjusted for fees is 0.99. The correlation
between the Leveraged Series of the Trust and the MLM Index(TM) adjusted for
leverage and fees is 0.99.
The components of the return of the MLM Index(TM) are the capital gains
earned from the changes in futures market prices, and the interest income earned
on cash balances. The mechanics and rules of futures markets allow the Trust to
earn interest on approximately 100% of the assets in the Trust. The interest
income takes two forms, directly from the Trust's futures broker paid on the
margin deposits held by them, and excess cash. During 2001, management altered
the method of earning interest on the excess cash. Previously, excess cash was
placed in a money market mutual fund. Larger asset size permitted the Trust to
retain the services of a professional money manager, CSAM, to invest the Trust's
cash assets without the expenses associated with money market mutual funds.
28
Omission of Review of Certain Quarterly Reports by Independent Registered Public
Accounting Firm
Prior to the third quarter of 2003, the Trust's quarterly reports had not
been reviewed by its independent registered public accounting firm. Those
previously unreviewed reports have since been reviewed by the Trust's
independent registered public accounting firm, and no material differences have
been identified as a result of such subsequent reviews.
Item 7A Quantitative and Qualitative Disclosures About Market Risk
The following is a discussion of the quantification of market risk for the
Trust. Such calculations are often referred to as Value-at-Risk, or VAR. The
method used here may or may not differ from other methods used for VAR
calculations by other firms. There is no one fixed method of VAR calculation,
and this method may not be comparable to other methods.
The market risk, or VAR of the Trust is directly related to the composition
of the MLM Index(TM). Each month, the position of the MLM Index(TM) can be
either long or short based on a 252 business day moving average rule. Since
positions can be offset inside of sectors (one contract long in a particular
commodity and one contract short in a related commodity), specific sector risk
is less relevant than the historical risk of the MLM Index(TM) as a whole. Since
the object of the Trust is to replicate the MLM Index(TM), it is reasonable to
use the historic values of that Index to estimate market risk.
THE VAR OF THE FUND IS CALCULATED AS FOLLOWS:
1. The manager calculates the standard deviation of the historical
returns of the MLM Index(TM) over two time periods, using daily
returns over the preceding 1 year ending at the date of this report,
and using monthly returns over the preceding 10 years. Those results
for the period ended 12/31/2004 are 0.58% and 1.86%, respectively. It
is important to note that this calculation is made on the historical
data of the MLM Index(TM). It is not based on the actual trading of
the Trust and does not include any operational risk. The standard
deviation is used to measure the dispersion of the returns of the MLM
Index(TM).
2. For the purposes of VAR, one attempts to estimate the size of a loss
that may occur with some small probability. It does not estimate
the possibility of some total loss, only the probability of a loss of
some magnitude. The calculation is complicated by the fact that the
standard deviation of the distribution assumes a normal distribution,
which may or may not be a good estimate of the actual distribution.
For the purposes of this estimate, the Manager has chosen to calculate
the size of a daily and monthly loss that might occur with a
probability of 1% (1 chance in 100). To do this, the standard
deviation is multiplied by 2.35 to the standard 99% confidence
interval, and by 1.5 to adjust for the possibility of a non-normal
distribution. For daily returns, this estimate is a loss of 1.974%.
For monthly returns the estimate is loss of 6.52125%
3. To ascertain a dollar loss amount for the Trust, the assets of the
Trust as of 12/31/2004 are multiplied by the estimate of the risk
calculated in step 2 above. The risk estimate
29
is based on the Unleveraged MLM Index(TM), so Trust assets must
be adjusted for the distribution of assets among the Unleveraged and
Leveraged Series of the Trust, with the leveraged assets having three
times the risk of the Unleveraged assets. Based on the asset levels as
of 12/31/2004, the manager estimates that the Trust could expect to
lose $14,971,286 in any given day and $48,011,366 in any given month.
The estimate above, though reasonable, should not be taken as an assurance
that losses in the Trust could not be greater than these amounts. This is
simply a quantitative estimate based on the historical performance of the MLM
Index(TM). The loss that occurs with small probability may be substantially
greater than the loss indicted above. Also, market conditions could change
dramatically from the conditions that prevailed over the period used to
calculate the estimate, affecting the realized volatility of the market.
Furthermore, other factors could effect trading, such as the inability to
execute orders in a particular market, due to operational or regulatory
restrictions that may alter the pattern of the Trust's returns. Specifically,
the Manager advises other funds in addition to the Trust. In certain markets
there is a limit to the size a position that one entity can control (speculative
limits). Since positions cannot exceed speculative limits, the Manager may have
to allocate positions across accounts and funds, resulting in a less than
complete replication of the MLM Index(TM). It is best to remember the fact
that, as outlined in the offering for the Trust, that all the assets invested
are at risk of loss.
Since the calculation of the VAR does not look at the specific instrument
risks, but rather the results of the MLM Index(TM) as a whole, risks related to
actual execution are not included in the calculation. For example, counter-party
risks from OTC transactions are not factored into the calculation.
Additional market risk may be attributed to the actual execution of the
orders for the Trust. The Trust executes the majority of its orders on the last
day of each month. As assets of the Trust grow, large orders may be placed in
periods of reduced liquidity. Such orders may move the markets in which they are
executed, adversely affecting the performance of the Trust. The Manager makes
every effort to execute all orders efficiently, but general levels of liquidity
are beyond the control of management. In certain circumstances, markets may move
to the daily trading limits imposed by the exchanges, and the Trust may be
unable to execute the necessary orders to replicate the MLM Index(TM), causing
extensive slippage.
Non-Market Risk
Risk from Brokers - The Trust's futures commission merchant, Refco, LLC.,
holds some portion of the assets of the Trust as margin deposits for futures
trading. A failure of Refco could cause the portion of the Trust's assets held
there to be at risk or unavailable for an undetermined period of time.
Speculative Limits - Certain futures exchanges require that positions
deemed speculative in nature (as opposed to commercial hedge positions) cannot
exceed certain pre-defined levels. All positions in the control of the Manager
must be aggregated to determine compliance with these rules. Should the assets
of the Manager reach a level such that positions may be capped, accurate
replication of the MLM Index(TM) for the Trust may be difficult or impossible.
The
30
Manager may also use certain "Over The Counter" derivatives to achieve the same
exposure without exceeding speculative limits. These OTC products would involve
taking additional counter-party risk for the Trust in order to achieve accurate
replication of the MLM Index(TM). For example, if it was determined that the
Trust must hold 10 contracts of Soybeans for a specific delivery, the Trust
could execute the appropriate futures contracts on the appropriate futures
exchange. Also, the Manager of the Trust may choose to enter into a swap
agreement, which would have substantially the same economic effect of the
futures position, but would be executed in the over-the-counter market. The swap
contract would change the nature of the counter-party from an organized exchange
to a single dealer, and would materially increase the non-market risk of holding
the position. The Trust has not yet utilized OTC swap contracts.
Item 8. Financial Statements and Supplementary Data
The Partnership's financial statements, together with the independent
registered public accounting firm's report thereon, appear on pages F-1 through
F-20 hereof.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable
Item 9A. Controls and Procedures.
The President and the Chief Operating Officer of the Manager evaluated the
effectiveness of the design and operation of the Trust's disclosure controls and
procedures, which are designed to ensure that the Trust's records, processes,
summarizes and reports in a timely and effective manner the information required
to be disclosed in the reports filed with or submitted to the Securities and
Exchange Commission. Based upon this evaluation, they concluded that, as of
December 31, 2004, the Trust's disclosure controls are effective. There have
been no significant changes in the Trust's internal control over financial
reporting in the year ended December 31, 2004 that has materially affected or is
reasonably likely to materially affect the Trust's control over financial
reporting.
31
PART III
Item 10. Directors and Executive Officers
The Trust has no directors or officers. The Manager manages and conducts
the business of the Trust.
The principals of the Manager are Roger E. Alcaly, Paul R. DeRosa, Raymond
E. Ix, Jr., James A. Mehling, John R. Oberkofler, Timothy J. Rudderow and Frank
L. Vannerson.
Roger E. Alcaly, age 63, became a principal and Director of the Manager
when it merged with CA Partners, Inc., a company he formed with Messrs. Rudderow
and Vannerson in 1990 which engaged primarily in convertible arbitrage trading.
Prior to helping form CA Partners, Mr. Alcaly was active in leveraged
acquisitions, merger arbitrage and value-oriented equity investing, first as a
partner of Kellner DiLeo & Co. and KD Equities, each of which engaged in
risk-arbitrage trading, and then at Riverside Capital, a company he formed after
leaving those firms in May 1987 which engaged in risk-arbitrage trading. Before
joining Kellner DiLeo, Mr. Alcaly served as Assistant Director of the Council on
Wage and Price Stability and as a Senior Economist at the Federal Reserve Bank
of New York, and taught Economics at Columbia University. Mr. Alcaly holds a
B.A. from Amherst College and a Ph.D. in Economics from Princeton University.
Paul R. DeRosa, age 63, became a principal and Director of the Manager when
it merged with CA Partners, Inc., which he joined in January 1999. Mr. DeRosa
began his career in the securities industry as the money market economist in
Citibank's bond trading division. He later became the bank's chief proprietary
bond trader and subsequently head of Citibank's financial derivative and capital
markets businesses in North America. In 1986 Mr. DeRosa joined E.F. Hutton Co.
as co-head of bond trading with particular responsibility for mortgage trading
and finance. In 1989 he helped to establish Eastbridge Holdings Inc., a bond and
currency trading company in New York, and served as President and CEO from June
1995 to June 1998. Mr. DeRosa holds a Ph.D. in Economics from Columbia
University.
Raymond E. Ix, Jr., age 41, is a Senior Vice President and a Director of
the Manager. Mr. Ix joined Mount Lucas in 1992 and is responsible for
institutional marketing and client service. From 1989 to 1992, Mr. Ix was
employed by Little Brook Corporation of New Jersey, a commodity trading advisor,
where he was involved in implementing the firm's technical trading systems.
Before joining Little Brook, Mr. Ix was the Fixed Income Administrative Manager
at Delaware Management Company, a company which advised institutional and
individual investors. Mr. Ix received a B.S. in accounting from Saint Joseph's
University in 1986.
James A. Mehling, age 55, is a Vice President and Chief Operating Officer
of the Manager. Before joining Mount Lucas in June 1999, Mr. Mehling had served
as President and Chief Investment Officer of Monitor Capital Advisors, a company
which managed institutional
32
stock and bond portfolios and mutual funds, beginning in 1991. Mr. Mehling
started his career in financial services with Merrill Lynch in 1976 and
eventually managed a trading desk for Merrill Lynch Government Securities. He is
a CFA charter holder and has served as a volunteer on the CFA examination
grading committee. Mr. Mehling received a B.S. in Aviation Engineering from
Western Michigan University in 1970.
John R. Oberkofler, age 45, is a Vice President and Director of Trading for
the Manager since 1999. From 1986 to 1999, he was employed as Senior Trader by
Little Brook Corporation of New Jersey. Mr. Oberkofler received a B.S. in
Finance from Seton Hall University in 1982.
Timothy J. Rudderow, age 49, is President and a Director of the Manager,
which he helped to establish in 1986. Prior to the mergers that took place in
October 1999, Mr. Rudderow was also a principal of Little Brook Corporation of
New Jersey, which he joined in 1983 as Director of Research and Development, and
of CA Partners, Inc., a company he helped form in 1990. Prior to joining Little
Brook, Mr. Rudderow was employed by Commodities Corporation, a company which was
a commodity trading advisor, with responsibilities for the design and management
of technical trading systems. Before joining Commodities Corporation, Mr.
Rudderow taught Economics at Drexel University. Mr. Rudderow received a B.A. in
Mathematics from Rutgers University in 1977 and an M.B.A. in Management Analysis
from Drexel University in 1979.
Frank L. Vannerson, age 66, is Chairman, a Director and a founder of the
Manager. He also helped form two other companies that merged with the Manager in
October 1999, Little Brook Corporation of New Jersey in 1980 and CA Partners,
Inc. in 1990. In 1969, Mr. Vannerson co-founded Commodities Corporation and
served that company as Senior Vice President and a member of the Management
Policy Committee from 1975 to 1980. From 1984 to 1989, he was a member of
Commodities Corporation's Board of Directors and a consultant to the Management
Policy Committee. Before joining Commodities Corporation, Mr. Vannerson was a
commodity economist with Nabisco Inc. and an economic consultant with
Mathematica Inc. He holds a B.S. in Economics from Wichita State University and
a Ph.D. in Economics from Princeton University where he was a member of the
faculty in the Department of Economics from 1965 to 1966. He currently serves on
the Advisory Council to the Princeton University Department of Economics.
Code of Ethics
The Trust does not have any officers; therefore, it has not adopted a code
of ethics applicable to the Trust's principal executive officer principal
financial officer, principal accounting officer and persons performing similar
functions. The Manager is primarily responsible for the day to day
administrative and operational aspects of the Trust's business. The Manager has
adopted a code of ethics that applies to its principal executive officer,
principal financial officer, principal accounting officer and persons performing
similar functions and a copy of such code is included in Exhibit 14.1.
33
Item 11. Executive Compensation
The Trust has no directors or executive officers. The Manager receives
management and other fees from the Trust as described in Item 1 - Fees and
Expenses.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The Trust has no directors or officers. The Manager manages and conducts
the business of the Trust. As of December 31, 2004, the Manager had an
investment of $1,140.82 in the Unleveraged Series and $1,130.95 in the Leveraged
Series.
Item 13. Certain Relationships and Related Transactions
The Manager manages and conducts the business of the Trust. The Manager
receives management and other fees from the Trust as described in Item 1 - Fees
and Expenses.
For the years ended December 31, 2004, 2003, and 2002, the Manager received
from the Trust:
(1) management fees in the amount of $3,924,230, $2,809,869, and
$2,455,153, respectively;
(2) brokerage fees in the amount of $402,138 for December 2004. No
brokerage fees were paid to the Manager for the period January 1, 2004
to November 30, 2004 or for the years ended 2003 and 2002.;
(3) organizational fees in the amounts of $509,402, $349,492, and $317,678
respectively.
Item 14. Principal Accountant Fees and Services.
Audit Fees. The aggregate fees billed to the Trust by the independent
registered public accounting firm, Ernst & Young LLP ("E&Y"), for professional
services rendered in connection with the audit of the Trust's financial
statements included in this Annual Report on Form 10-K, and for review of the
statements included in the Trust's Quarterly Reports on Form 10-Q, totaled
approximately $68,000, $66,900, and $30,000 for the fiscal years 2004, 2003, and
2002 respectively.
Audit-Related Fees. There were no fees billed to the Trust by E&Y for
assurance and related services that are reasonably related to the performance of
the audit and review of the Trust's financial statements that are not already
reported in the paragraph immediately above for the years 2004, 2003, and 2002
respectively.
Tax Fees. The aggregate fees billed to the Trust by E&Y for professional
services rendered by E&Y for tax compliance totaled approximately $26,000,
$19,000 and $16,000 for
34
the years 2004, 2003 and 2002, respectively. These services included review of
the Trust's domestic tax compliance information.
All Other Fees. There were no fees billed to the Trust by E&Y for products
and services provided by E&Y other than as set forth above for the years 2004,
2003 and 2002.
Engagement of the Independent Registered Public Accounting Firm. The
Manager is responsible for approving every engagement of E&Y to perform audit or
non-audit services for the Trust before E&Y is engaged to provide those
services. The Manager considers whether the provision of any non-audit
provisions is compatible with maintaining E&Y's independence.
35
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) Exhibits
3.7 Amendment No. 5 to the Amended and Restated Declaration
of Trust and Trust Agreement of MLM Index(TM) Fund
14.1 Code of Ethics
31.1 Certification of President of the Manager Pursuant to
Rule 13A-14(a) and Rule 15D-14(a), of the Securities Exchange
Act, as amended.
31.2 Certification of Vice President and Chief Operating Officer
of the Manager Pursuant to Rule 13A-14(a) and Rule 15D-14(a), of
the Securities Exchange Act, as amended.
32.1 Certification of President of the Manager Pursuant to
18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
32.2 Certification of Vice President and Chief Operating Officer
of the Manager Pursuant to 18 U.S.C. Section 1350, as adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K
The Trust did not file any reports on Form 8-K during 2004.
36
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, MLM Index(TM) Fund has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
MLM INDEX(TM) FUND
By: Mount Lucas Management Corporation
Its: Manager
By: /s/ Timothy J. Rudderow
------------------------------------
Timothy J. Rudderow, President
Date: March 15, 2005
37
2004 10K Marked.Doc
Financial Statements
MLM Index Fund
Years ended December 31, 2004 and 2003
with Report of Independent Registered Public Accounting Firm
F-1
Mount Lucas Management Corp.
47 Hulfish Street, Suite 510
Princeton, NJ 08542
Telephone (609) 924-8868
Affirmation of the Commodity Pool Operator
I affirm that, to the best of my knowledge and belief, the information contained
in the attached financial statements of MLM Index Fund for the years ended
December 31, 2004 and 2003 is accurate and complete.
Timothy J. Rudderow
President
Mount Lucas Management Corporation
General Partner
MLM Index Fund
F-2
MLM Index(TM) Fund
Financial Statements
Years ended December 31, 2004 and 2003
CONTENTS
Affirmation of Commodity Pool Operator . . . . . . . . . . . . . . . . . . . F-2
Report of Independent Registered Public Accounting Firm. . . . . . . . . . . F-4
Statements of Financial Condition. . . . . . . . . . . . . . . . . . . . . . F-5
Condensed Schedules of Investments . . . . . . . . . . . . . . . . . . . . . F-6
Statements of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . F-8
Statements of Changes in Investors' Interest . . . . . . . . . . . . . . . . F-9
Statements of Cash Flows . . . . . . . . . . . . . . . . . . . . . . . . . .F-13
Notes to Financial Statements. . . . . . . . . . . . . . . . . . . . . . . .F-14
F-3
Report of Independent Registered Public Accounting Firm
To the Investors of
MLM Index(TM) Fund
We have audited the accompanying statements of financial condition, including
the condensed schedules of investments, of MLM Index(TM) Fund (the "Fund") as of
December 31, 2004 and 2003, and the related statements of operations, changes in
investors' interest and cash flows for the years ended December 31, 2004, 2003
and 2002. These financial statements are the responsibility of the Fund's
management. Our responsibility is to express an opinion on these financial
statements 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 are free of material misstatement. 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 Fund's internal control over
financial reporting. Accordingly, we express no such opinion. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of MLM Index(TM) Fund at December
31, 2004 and 2003, and the results of its operations, changes in its investors'
interest, and its cash flows for the years then ended, in conformity with U.S.
generally accepted accounting principles.
January 31, 2005
F-4
MLM Index(TM) Fund
Statements of Financial Condition
DECEMBER 31
2004 2003
--------------------------
ASSETS
Cash and cash equivalents $347,850,015 $254,185,997
Due from broker 17,275,811 26,593,584
Prepaid expenses 219,720 -
Interest receivable 21,711 33,075
Other assets 1,477 -
--------------------------
Total assets $365,368,734 $280,812,656
==========================
LIABILITIES AND INVESTORS' INTEREST
Redemptions payable $ 4,706,201 $ 2,478,744
Brokerage commissions payable 402,138 303,795
Management fee payable 473,458 318,664
Accrued expenses 643,592 116,295
Subscriptions received in advance 278,500 -
--------------------------
Total liabilities 6,503,889 3,217,498
Investors' interest 358,864,845 277,595,158
--------------------------
Total liabilities and investors' interest $365,368,734 $280,812,656
==========================
The accompanying notes are an integral part of the financial statements and
should be read in conjunction therewith.
F-5
MLM Index(TM) Fund
Condensed Schedules of Investments
December 31, 2004
UNREALIZED PERCENTAGE OF
APPRECIATION INVESTORS'
(DEPRECIATION) INTEREST
DESCRIPTION
- ---------------------------------------------------------------------------------
FUTURES
Long futures contracts(1)
Financial $ 609,934 0.17%
Commodity (4,038,780) (1.13)%
-------------------------------
(3,428,846) (0.96)%
Short futures contracts(1)
Commodity 1,287,475 0.36%
-------------------------------
Net unrealized depreciation on futures contracts $ (2,141,371) (0.60)%
===============================
(1) All such amounts are included, net, in due from brokers on the statements of
financial condition.
F-6
MLM Index(TM) Fund
Condensed Schedules of Investments (continued)
December 31, 2003
UNREALIZED PERCENTAGE OF
APPRECIATION INVESTORS'
(DEPRECIATION) INTEREST
DESCRIPTION
- ---------------------------------------------------------------------------------
FUTURES
Long futures contracts(1)
Financial $ 4,805,917 1.73%
Commodity 17,659,479 6.36%
-------------------------------
22,465,396 8.09%
Short futures contracts(1)
Commodity 1,429,965 0.52%
-------------------------------
Net unrealized appreciation on futures contracts $ 23,895,361 8.61%
===============================
(1) All such amounts are included, net, in due from brokers on the statements of
financial condition.
The accompanying notes are an integral part of the financial statements and
should be read in conjunction therewith.
F-7
MLM Index(TM) Fund
Statements of Operations
YEARS ENDED DECEMBER 31
2004 2003 2002
------------------------------------------
INVESTMENT INCOME
Interest $ 4,331,899 $ 2,373,246 $ 3,412,276
EXPENSES
Brokerage commissions 4,586,994 3,221,120 2,842,588
Management fee 3,924,230 2,809,869 2,455,153
Operating expenses 2,287,004 1,554,929 944,454
------------------------------------------
Total expenses 10,798,228 7,585,918 6,242,195
------------------------------------------
Net investment loss (6,466,329) (5,212,672) (2,829,919)
REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS
Net realized gain (loss) on investments 32,322,487 5,302,391 (27,250,523)
Net change in unrealized appreciation
(depreciation) on investments (26,036,732) 6,101,017 10,793,154
------------------------------------------
Net realized and unrealized gain (loss)
on investments 6,285,755 11,403,408 (16,457,369)
------------------------------------------
Net income (loss) $ (180,574) $ 6,190,736 $(19,287,288)
==========================================
The accompanying notes are an integral part of the financial statements and
should be read in conjunction therewith.
F-8
MLM Index(TM) Fund
Statements of Changes in Investors' Interest
Year ended December 31, 2004
LEVERAGED SERIES
--------------------------------------------------------------------------------------------------
TOTAL
CLASS A-1 CLASS A CLASS B-1 CLASS B CLASS C CLASS D LEVERAGED
SHARES SHARES SHARES SHARES SHARES(1) SHARES(1) SERIES
--------------------------------------------------------------------------------------------------
Investors' interest at
December 31, 2003 $ 112,117 $31,010,253 $ 1,678,368 $ 110,464,301 $ 8,933,897 $ - $ 152,198,936
Subscriptions - 11,430,001 199 44,536,537 1,000,000 1,500,000 58,466,737
Redemptions (81,397) (6,811,011) (503,723) (18,543,797) (1,000,000) - (26,939,928)
Transfers (32,233) 929,768 (1,207,817) (15,172,404) 32,233 19,389,960 3,939,507
Other (Selling commissions) - (19,970) - - - - (19,970)
Net income (loss) 1,513 (485,507) 32,973 (567,664) 76,619 - (942,066)
--------------------------------------------------------------------------------------------------
Investors' interest at
December 31, 2004 $ - $36,053,534 $ - $ 120,716,973 $ 9,042,749 $20,889,960 $ 186,703,216
==================================================================================================
Shares at December 31, 2003 1,041.75 326,477.19 14,890.59 1,093,941.49 108,085.69 - 1,544,436.71
Subscriptions - 112,558.00 1.72 407,050.98 11,974.91 15,000.00 546,585.61
Redemptions (746.25) (69,879.98) (4,473.96) (176,243.38) (12,160.51) - (263,504.08)
Transfers (295.50) 9,677.32 (10,418.35) (149,456.26) 771.95 193,899.60 44,178.76
--------------------------------------------------------------------------------------------------
Shares at December 31, 2004 - 378,832.53 - 1,175,292.83 108,672.04 208,899.60 1,871,697.00
==================================================================================================
Net asset value per share:
December 31, 2004 $ - $ 95.17 $ - $ 102.71 $ 83.21 $ 100.00
==================================================================================
(1) On December 31, 2004, Class A-1 and Class B-1 were closed by the General
Partner. Certain investors chose to reinvest in Class C and Class D shares.
F-9
MLM Index(TM) Fund
Statements of Changes in Investors' Interest (continued)
Year ended December 31, 2004
UNLEVERAGED SERIES
---------------------------------------------------------------------------------------------
TOTAL
CLASS A-1 CLASS A CLASS B-1 CLASS B CLASS C CLASS D UNLEVERAGED
SHARES SHARES SHARES SHARES SHARES(1) SHARES(1) SERIES
---------------------------------------------------------------------------------------------
Investors' interest at
December 31, 2003 $ 652,400 $17,751,361 $1,256,307 $105,736,154 $ - $ - $ 125,396,222
Subscriptions - 11,910,118 - 58,392,549 - 4,000,000 74,302,667
Redemptions (190,541) (2,480,175) (916,155) (20,757,733) - - (24,344,604)
Transfers (468,278) (1,754,157) (365,478) (62,959,858) 468,278 61,139,985 (3,939,508)
Other (Selling commissions) - (14,640) - - - - (14,640)
Net income (loss) 6,419 42,321 25,326 687,426 - - 761,492
---------------------------------------------------------------------------------------------
Investors' interest at
December 31, 2004 $ - $25,454,828 $ - $ 81,098,538 $ 468,278 $65,139,985 $ 172,161,629
=============================================================================================
Shares at December 31, 2003 5,898.64 166,108.28 10,778.97 942,036.11 - - 1,124,822.00
Subscriptions - 110,016.59 - 507,739.65 - 40,000.00 657,756.24
Redemptions (1,705.98) (22,991.77) (7,705.17) (186,183.28) - - (218,586.20)
Transfers (4,192.66) (16,196.01) (3,073.80) (552,035.12) 4,682.78 611,399.85 40,585.04
---------------------------------------------------------------------------------------------
Shares at December 31, 2004 - 236,937.09 - 711,557.36 4,682.78 651,399.85 1,604,577.08
=============================================================================================
Net asset value per share:
December 31, 2004 $ - $ 107.43 $ - $ 113.97 $ 100.00 $ 100.00
=============================================================================
---------------------
TOTAL
INVESTORS' INTEREST
($100 PAR
VALUE/SHARE)
---------------------
Investors' interest at
December 31, 2003 $ 277,595,158
Subscriptions 132,769,404
Redemptions (51,284,533)
Transfers -
Other (Selling commissions) (34,610)
Net income (loss) (180,574)
---------------------
Investors' interest at
December 31, 2004 $ 358,864,845
=====================
Shares at December 31, 2003 2,669,258.71
Subscriptions 1,204,341.85
Redemptions (482,090.28)
Transfers 84,763.80
---------------------
Shares at December 31, 2004 3,476,274.08
=====================
Net asset value per share:
December 31, 2004
(1) On December 31, 2004, Class A-1 and Class B-1 were closed by the General
Partner. Certain investors chose to reinvest in Class C and Class D shares.
The accompanying notes are an integral part of the financial statements and
should be read in conjunction therewith.
F-10
MLM Index(TM) Fund
Statements of Changes in Investors' Interest (continued)
For the year ended December 31, 2003
LEVERAGED SERIES
-----------------------------------------------------------------------------------
TOTAL
CLASS A-1 CLASS A CLASS B-1 CLASS B CLASS C LEVERAGED
SHARES SHARES SHARES SHARES SHARES SERIES
-----------------------------------------------------------------------------------
Investors' interest at
December 31, 2002 $ 166,740 $27,666,865 $1,820,270 $ 90,368,012 $ 6,071,072 $ 126,092,959
Subscriptions - 8,212,819 - 30,159,498 2,581,500 40,953,817
Redemptions (58,785) (4,546,565) (214,204) (14,736,734) - (19,556,288)
Transfers - (478,939) - 1,673,188 - 1,194,249
Other (Selling commissions) - (70,426) - - - (70,426)
Net income 4,162 226,499 72,302 3,000,337 281,325 3,584,625
-----------------------------------------------------------------------------------
Investors' interest at
December 31, 2003 $ 112,117 $31,010,253 $1,678,368 $ 110,464,301 $ 8,933,897 $ 152,198,936
===================================================================================
Shares at December 31, 2002 1,567.81 294,432.67 16,888.48 918,690.21 74,838.99 1,306,418.16
Subscriptions - 89,806.31 - 314,287.47 33,246.70 437,340.48
Redemptions (526.06) (52,505.52) (1,997.89) (155,925.01) - (210,954.48)
Transfers - (5,256.27) - 16,888.82 - 11,632.55
-----------------------------------------------------------------------------------
Shares at December 31, 2003 1,041.75 326,477.19 14,890.59 1,093,941.49 108,085.69 1,544,436.71
===================================================================================
Net asset value per share:
December 31, 2003 $ 107.63 $ 94.98 $ 112.71 $ 100.98 $ 82.66
===================================================================
UNLEVERAGED SERIES
--------------------------------------------------------------------------------------------
TOTAL
TOTAL INVESTORS' INTEREST
CLASS A-1 CLASS A CLASS B-1 CLASS B UNLEVERAGED ($100 PAR
SHARES SHARES SHARES SHARES SERIES VALUE/SHARE)
--------------------------------------------------------------------------------------------
Investors' interest at
December 31, 2002 $ 800,249 $13,253,585 $1,233,316 $ 62,614,304 $ 77,901,454 $ 203,994,413
Subscriptions - 6,254,104 - 55,392,363 61,646,467 102,600,284
Redemptions (153,541) (1,831,621) (568) (13,516,037) (15,501,767) (35,058,055)
Transfers - 66,509 - (1,260,758) (1,194,249) -
Other (Selling commissions) - (61,794) - - (61,794) (132,220)
Net income 5,692 70,578 23,559 2,506,282 2,606,111 6,190,736
--------------------------------------------------------------------------------------------
Investors' interest at
December 31, 2003 $ 652,400 $17,751,361 $1,256,307 $105,736,154 $ 125,396,222 $ 277,595,158
============================================================================================
Shares at December 31, 2002 7,275.76 124,491.78 10,783.92 566,291.85 708,843.31 2,015,261.47
Subscriptions - 58,395.81 - 509,109.17 567,504.98 1,004,845.46
Redemptions (1,377.12) (17,476.15) (4.95) (122,027.14) (140,885.36) (351,839.84)
Transfers - 696.84 - (11,337.77) (10,640.93) 991.62
--------------------------------------------------------------------------------------------
Shares at December 31, 2003 5,898.64 166,108.28 10,778.97 942,036.11 1,124,822.00 2,669,258.71
============================================================================================
Net asset value per share:
December 31, 2003 $ 110.60 $ 106.87 $ 116.55 $ 112.24
=====================================================
The accompanying notes are an integral part of the financial statements and
should be read in conjunction therewith.
F-11
MLM Index(TM) Fund
Statements of Changes in Investors' Interest (continued)
For the year ended December 31, 2002
ENHANCED SERIES
-----------------------------------------------------------------------------------
TOTAL
CLASS A-1 CLASS A CLASS B-1 CLASS B CLASS C ENHANCED
SHARES SHARES SHARES SHARES SHARES SERIES
-----------------------------------------------------------------------------------
Investors' interest at
December 31, 2001 $ 153,689 $26,820,513 $ 4,193,995 $ 91,711,548 $4,024,210 $ 126,903,955
Subscriptions - 8,413,427 24,875 30,330,410 2,495,000 41,263,712
Redemptions (19,733) (2,915,007) (1,205,857) (15,209,311) - (19,349,908)
Transfers 54,045 (715,360) (704,143) (3,903,454) - (5,268,912)
Other (Selling commissions) - (74,963) - - (37,250) (112,213)
Net loss (21,261) (3,861,745) (488,600) (12,561,181) (410,888) (17,343,675)
-----------------------------------------------------------------------------------
Investors' interest at
December 31, 2002 $ 166,740 $27,666,865 $ 1,820,270 $ 90,368,012 $6,071,072 $ 126,092,959
===================================================================================
Shares at December 31, 2001 1,240.99 242,231.27 33,918.00 802,953.00 42,419.00 1,122,762.26
Subscriptions - 90,974.41 197.24 313,223.04 32,419.78 436,814.47
Redemptions (199.00) (30,517.08) (10,694.11) (157,164.08) - (198,574.27)
Transfers 525.82 (8,255.93) (6,532.65) (40,321.75) 0.21 (54,584.30)
Other - - - - - -
-----------------------------------------------------------------------------------
Shares at December 31, 2002 1,567.81 294,432.67 16,888.48 918,690.21 74,838.99 1,306,418.16
===================================================================================
Net asset value per share:
December 31, 2002 $ 106.35 $ 93.97 $ 107.78 $ 98.37 $ 81.12
===================================================================
UNLEVERAGED SERIES
------------------------------------------------------------------------------------
TOTAL
TOTAL INVESTORS'
CLASS A-1 CLASS A CLASS B-1 CLASS B UNLEVERAGED INTEREST
SHARES SHARES SHARES SHARES SERIES ($100 PAR
VALUE/SHARE)
------------------------------------------------------------------------------------
Investors' interest at
December 31, 2001 $ 910,801 $ 8,248,822 $1,985,391 $ 59,157,708 $ 70,302,722 $ 197,206,677
Subscriptions - 8,258,851 - 19,739,299 27,998,150 69,261,862
Redemptions (21,267) (2,666,621) (713,431) (20,253,781) (23,655,100) (43,005,008)
Transfers (54,044) (185,926) 1 5,508,881 5,268,912 -
Other (Selling commissions) - (69,617) - - (69,617) (181,830)
Net loss (35,241) (331,924) (38,645) (1,537,803) (1,943,613) (19,287,288)
------------------------------------------------------------------------------------
Investors' interest at
December 31, 2002 $ 800,249 $13,253,585 $1,233,316 $ 62,614,304 $ 77,901,454 $ 203,994,413
====================================================================================
Shares at December 31, 2001 7,975.90 74,313.00 16,874.00 517,660.26 616,823.16 1,739,585.42
Subscriptions - 77,152.56 - 181,449.52 258,602.08 695,416.55
Redemptions (199.00) (25,225.45) (6,089.43) (183,401.96) (214,915.84) (413,490.11)
Transfers (501.14) (1,748.33) 0.65 50,584.03 48,333.91 (6,250.39)
Other - - - - - -
------------------------------------------------------------------------------------
Shares at December 31, 2002 7,275.76 124,491.78 10,783.92 566,291.85 708,843.31 2,015,261.47
====================================================================================
Net asset value per share:
December 31, 2002 $ 109.99 $ 106.46 $ 114.37 $ 110.57
=====================================================
The accompanying notes are an integral part of the financial statements and
should be read in conjunction therewith.
F-12
MLM Index(TM) Fund
Statements of Cash Flows
YEARS ENDED DECEMBER 31
2004 2003 2002
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (180,574) $ 6,190,736 $(19,287,288)
Adjustments to reconcile net income (loss) to
net cash and cash equivalents provided by
(used in) operating activities:
Net change in operating assets and
liabilities:
Due from broker 3,032,020 (21,757,408) 26,360,160
Certificate of deposit - - 4,502,290
Prepaid expenses (219,720) - -
Interest receivable 11,364 82 465,589
Other assets (1,477) - -
Brokerage commissions payable 98,343 66,491 (19,818)
Management fee payable 154,794 55,112 8,086
Accrued expenses 527,297 (28,119) (106,769)
Unrealized appreciation (depreciation) on
investments (26,036,732) 6,101,017 10,793,154
Net realized gain on investments 32,322,487 5,302,391 (27,250,523)
-------------------------------------------
Net cash and cash equivalents provided by
(used in) operating activities 9,707,802 (4,069,698) (4,535,119)
-------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Subscriptions received, net of selling
commissions 132,734,794 102,468,065 69,080,032
Subscriptions received in advance 278,500 - -
Redemptions paid (49,057,076) (39,956,386) (38,791,272)
-------------------------------------------
Net cash and cash equivalents provided by
financing activities 83,956,216 62,511,679 30,288,760
-------------------------------------------
Net increase in cash and cash equivalents 93,664,018 58,441,981 25,753,641
Cash and cash equivalents at beginning of year 254,185,997 195,744,016 169,990,375
-------------------------------------------
Cash and cash equivalents at end of year $347,850,015 $254,185,997 $195,744,016
===========================================
The accompanying notes are an integral part of the financial statements and
should be read in conjunction therewith.
F-13
MLM Index Fund
Notes to Financial Statements
December 31, 2004 and 2003
1. ORGANIZATION
MLM Index(TM) Fund (the "Fund") was formed under the Business Trust Statute of
the State of Delaware as a business trust in December 1997 and commenced
operations on January 4, 1999. The Fund was organized for the primary purpose of
seeking capital appreciation through the speculative trading of a diversified
portfolio of futures contracts traded on U.S. exchanges using the MLM Index(TM)
Trading Program, which is based upon the MLM Index(TM) (the "Index"). The Index
is a benchmark of the hypothetical returns available to a futures investor. The
Index is comprised of a diverse portfolio of futures markets, including both
financial and tangible markets. Only highly liquid futures markets are currently
included in the Index.
Mount Lucas Management Corporation (the "Manager") is the investment manager of
the Fund and is responsible for the allocation of the Fund's interest among a
mix of trading approaches. The Manager is a registered investment advisor under
the Investment Adviser's Act of 1940, is registered as a commodity pool operator
and a commodity-trading advisor with the Commodity Futures Trading Commission
and is a member of the National Futures Association.
2. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with U.S.
generally accepted accounting principles. The following is a summary of the
significant accounting and reporting policies used in preparing the financial
statements.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist of highly liquid financial instruments with
maturities of three months or less. The Fund's cash and cash equivalents
consisted of approximately:
DECEMBER 31, 2004 DECEMBER 31, 2003
--------------------------------------
Overnight money markets $ 46,281,000 $ 82,034,000
Money market securities 299,006,000 169,598,000
F-14
MLM Index Fund
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
DUE FROM BROKERS
The Fund's trading activities utilize one broker located in the United States.
Due from broker represents cash balances held, unrealized profit or loss on
futures contracts, and amounts receivable or payable for transactions not
settled at December 31, 2004.
VALUATION OF TRADING POSITIONS
The Fund's trading positions are valued at market value. Cash equivalents are
carried at amortized cost which approximates fair value. All positions including
the net unrealized appreciation or depreciation are included in amounts due from
broker. Market value is principally based on listed market prices or broker or
dealer price quotations. The resulting change in unrealized profit or loss is
reflected in net change in unrealized appreciation (depreciation) on investments
on the statements of operations.
INVESTMENT TRANSACTIONS AND INVESTMENT INCOME
All security transactions are recorded on a trade date basis. Realized gain and
loss is recorded on the specific identification method. Interest income are
recorded using the accrual basis of accounting.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the Partnership's assets and liabilities, which qualify as
financial instruments under Statement of Financial Accounting Standards No. 107
"Disclosures about Fair Value of Financial Instruments," approximates the
carrying amounts presented in the financial statements.
USE OF ESTIMATES
The preparation of the accompanying financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.
F-15
MLM Index Fund
Notes to Financial Statements (continued)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
The Unleveraged Series and the Leveraged Series each are classified for federal
income tax purposes as separate partnerships. Investors in each Series will
reflect their proportionate share of realized profit or loss on their separate
tax returns. Accordingly, no provisions for income taxes are required for the
Fund.
3. INVESTORS' INTEREST
The Fund is comprised of two series: the Unleveraged Series, which attempts to
replicate the Index without leverage, and the Leveraged Series (collectively,
the "Series"), which attempts to replicate Index at three times leverage. Prior
to December 2004, each Series had five classes of shares: Class A, Class A-1,
Class B, Class B-1 and Class C. On December 1, 2004, Class D shares were offered
in each Series. On December 31, 2004, the General Partner elected to close Class
A-1 and Class B-1. Class A, Class B, Class C and Class D share are sold by
authorized selling agents appointed by the Manager to accredited investors at a
price equal to each Class' net asset value. Shares may be redeemed at net asset
value as of the last day of any month upon at least ten business days written
notice to the Manager.
The Manager allocates profits and losses among the investors of a Series based
on the balance in each investor's capital account.
The Manager paid all of the expenses associated with the organization of the
Fund and the offered shares. As a result, each shareholder of Class A and Class
B shares pays the Manager an organizational fee in the amount of 0.5% of their
aggregate investment, net of any selling commission. Class A and Class B
shareholders are not charged an organizational fee once their account totals a
$1,000,000 or more. Class C and Class D shareholders are not charged an
organizational fee.
The Class A and Class C shares of the Unleveraged and Leveraged Series are
subject to a sales commission of 0% to 4% of the subscription amount, payable to
the selling agent from the investor's investment for each series. The amount of
the sales commission will be determined by the selling agent.
F-16
MLM Index Fund
Notes to Financial Statements (continued)
4. MARGIN REQUIREMENTS
The Fund had margin requirements of approximately $19,570,308 and $29,980,779 at
December 31, 2004 and 2003, respectively, which were satisfied by net unrealized
profits or losses and cash at the broker.
5. MANAGEMENT FEE AND OTHER FEES AND EXPENSES
The Fund pays the Manager a management fee and the introducing broker a
brokerage fee as a percentage of net assets, as of the first day of each month
at the annualized rates as follows:
LEVERAGED SERIES
----------------------------------------------------------------------------
BROKERAGE MANAGEMENT ORGANIZATIONAL OPERATING SELLING TOTAL FEES
FEE FEE FEE EXPENSE EXPENSE AND
COMMISSIONS
----------------------------------------------------------------------------
Class A-1 1.35% 1.65% N/A 0.35% N/A 3.35%
Class A 1.75% 2.80% 0.50% 0.35% 4.00% 9.40%
Class B-1 1.35% 0.65% N/A 0.35% N/A 2.35%
Class B 1.75% 1.30% 0.50% 0.35% N/A 3.90%
Class C 0.90% 2.05% N/A 0.35% 4.00% 7.30%
Class D 0.90% 1.30% N/A 0.35% N/A 2.55%
UNLEVERAGED SERIES
----------------------------------------------------------------------------
BROKERAGE MANAGEMENT ORGANIZATIONAL OPERATING SELLING TOTAL FEES
FEE FEE FEE EXPENSE EXPENSE AND
COMMISSIONS
----------------------------------------------------------------------------
Class A-1 0.65% 1.25% N/A 0.35% N/A 2.25%
Class A 0.85% 1.50% 0.50% 0.35% 4.00% 7.20%
Class B-1 0.65% 0.25% N/A 0.35% N/A 1.25%
Class B 0.85% 0.50% 0.50% 0.35% N/A 2.20%
Class C 0.40% 1.00% N/A 0.35% 4.00% 5.75%
Class D 0.40% 0.50% N/A 0.35% N/A 1.25%
The Fund pays 0.35% of average net assets for the Fund's legal, accounting,
auditing and other operating expenses and fees. The Fund also pays the cash
manager, CSAM, banking fees and State of New Jersey K-1 filing fees directly.
F-17
MLM Index Fund
Notes to Financial Statements (continued)
6. INDEMNIFICATIONS
In the ordinary course of business, the Fund enters into contracts that contain
a variety of indemnifications. The Fund's maximum exposure under these
arrangements is unknown. However, the Fund has not had prior claims or losses
pursuant to these contracts and expects the risk of loss to be remote.
7. DERIVATIVE FINANCIAL INSTRUMENTS
Derivatives are subject to various risks similar to non-derivative financial
instruments including market, credit, liquidity and operational risk. The risks
of derivatives should not be viewed in isolation but rather should be considered
on an aggregate basis along with the Fund's other trading related activities.
The Fund purchases and sells futures in financial instruments and commodities.
The Fund records its derivative activities on a mark-to-market basis with
realized and unrealized gains (losses) recognized currently in the statements of
operations and in due from brokers on the statements of financial condition.
The following table reflects the fair value of the Fund's derivative financial
instruments.
FAIR VALUE AT DECEMBER 31
2004 2003
------------------------------------------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------------------------------------------------------
Commodity $ 609,934 $ 1,287,475 $22,408,591 $ (3,319,147)
Futures
Financial Futures (4,038,780) - 4,805,917 -
------------------------------------------------------
Total $(3,428,846) $ 1,287,475 $27,214,508 $ (3,319,147)
======================================================
F-18
MLM Index Fund
Notes to Financial Statements (continued)
8. FINANCIAL HIGHLIGHTS
The following represents the per share operating performance and ratios to
average investors' interest and other supplemental information for the year
ended December 31, 2004:
LEVERAGED SERIES
---------------------------------------------------------
CLASS A-1 CLASS A CLASS B-1 CLASS B CLASS C
SHARES SHARES SHARES SHARES SHARES
---------------------------------------------------------
Per share operating performance:
Net asset value per share, December 31,
2003 $ 107.63 $ 94.98 $ 112.71 $ 100.98 $ 82.66
Income from investment operations:
Net investment loss (1.71) (2.16) (0.01) (0.72) (1.22)
Net realized and unrealized gain on
investment transactions 3.16 2.35 3.23 2.45 1.77
---------------------------------------------------------
Total from investment operations 1.45 0.19 3.22 1.73 0.55
---------------------------------------------------------
Net asset value per share, December 31,
2004 prior to liquidation $ 109.08 $ 95.17 $ 115.93 $ 102.71 $ 83.21
=========================================================
Total Return 1.35% 0.19% 2.86% 1.71% 1.03%
=========================================================
Ratio to Average Investors' Interest:
Net investment loss (1.50%) (2.16%) (0.02%) (0.66%) (1.42%)
Expenses (2.81%) (3.46%) (1.31%) (1.95%) (2.70%)
UNLEVERAGED SERIES
----------------------------------------------
CLASS A-1 CLASS A CLASS B-1 CLASS B
SHARES SHARES SHARES SHARES
----------------------------------------------
Per share operating performance:
Net asset value per share, December 31,
2003 $ 110.60 $ 106.87 $ 116.55 $ 112.24
Income from investment operations:
Net investment loss (0.78) (1.00) 0.45 0.09
Net realized and unrealized gain on
investment transactions 1.86 1.56 1.90 1.64
----------------------------------------------
Total from investment operations 1.08 0.56 2.35 1.73
----------------------------------------------
Net asset value per share, December 31,
2004 prior to liquidation $ 111.68 $ 107.43 $ 118.90 $ 113.97
==============================================
Total Return 0.98% 0.53% 2.02% 1.54%
==============================================
Ratio to Average Investors' Interest:
Net investment loss (0.69%) (0.87%) 0.37% 0.12%
Expenses (1.97%) (2.21%) (0.97%) (1.21%)
Total return is calculated as the change in the net asset value per share for
the year. The per share operating performance and ratios are computed based upon
the weighted average shares outstanding and weighted average investors'
interest, respectively, for each class, for the year ended December 31, 2004. An
individual investor's return may vary from the above based upon the timing of
capital transactions.
F-19
MLM Index Fund
Notes to Financial Statements (continued)
8. FINANCIAL HIGHLIGHTS (CONTINUED)
The following represents the per share operating performance and ratios to
average investors' interest and other supplemental information for the year
ended December 31, 2003:
LEVERAGED SERIES
---------------------------------------------------------
CLASS A-1 CLASS A CLASS B-1 CLASS B CLASS C
SHARES SHARES SHARES SHARES SHARES
---------------------------------------------------------
Per share operating performance:
Net asset value per share, December 31,
2002 $ 106.35 $ 93.97 $ 107.78 $ 98.37 $ 81.12
Income from investment operations:
Net investment loss (3.14) (3.92) (1.66) (2.68) (2.82)
Net realized and unrealized gain on
investment transactions 4.42 4.93 6.59 5.29 4.36
---------------------------------------------------------
Total from investment operations 1.28 1.01 4.93 2.61 1.54
---------------------------------------------------------
Net asset value per share, December 31,
2003 $ 107.63 $ 94.98 $ 112.71 $ 100.98 $ 82.66
=========================================================
Total Return 1.20% 1.08% 4.58% 2.66% 1.89%
=========================================================
Ratio to Average Investors' Interest:
Net investment loss (2.95%) (4.25%) (1.53%) (2.76%) (3.53%)
Expenses (4.13%) (5.34%) (2.69%) (3.84%) (4.60%)
UNLEVERAGED SERIES
----------------------------------------------
CLASS A-1 CLASS A CLASS B-1 CLASS B
SHARES SHARES SHARES SHARES
----------------------------------------------
Per share operating performance:
Net asset value per share, December 31,
2002 $ 109.99 $ 106.46 $ 114.37 $ 110.57
Income from investment operations:
Net investment loss (1.75) (2.18) (0.68) (1.16)
Net realized and unrealized gain on
investment transactions 2.36 2.59 2.86 2.83
----------------------------------------------
Total from investment operations 0.61 0.41 2.18 1.67
----------------------------------------------
Net asset value per share, December 31,
2003 $ 110.60 $ 106.87 $ 116.55 $ 112.24
==============================================
Total Return 0.56% 0.38% 1.91% 1.51%
==============================================
Ratio to Average Investors' Interest:
Net investment loss (1.58%) (2.08%) (0.59%) (1.08%)
Expenses (2.62%) (3.10%) (1.63%) (2.09%)
Total return is calculated as the change in the net asset value per share for
the year. The per share operating performance and ratios are computed based upon
the weighted average shares outstanding and weighted average investors'
interest, respectively, for each class, for the year ended December 31, 2003. An
individual investor's return may vary from the above based upon the timing of
capital transactions.
F-20
INDEX TO EXHIBITS
Exhibit
Number Item Description
3.1 Restated Certificate of Trust for MLM Index(TM) Trust, filed 1/14/98 (Filed as
Exhibit 3.1 to the Registrant's Form 10 and incorporated by reference herein.)
3.2 Amended and Restated Declaration of Trust and Trust Agreement of MLM
Index(TM) Fund (Filed as Exhibit 3.1 to the Registrant's Form 10 and incorporated
by reference herein.)
3.3 Amendment No. 1 to the Amended and Restated Declaration of Trust and Trust
Agreement of MLM Index(TM) Fund (Filed as Exhibit 3.1 to the Registrant's Form
10 and incorporated by reference herein.)
3.4 Amendment No. 2 to the Amended and Restated Declaration of Trust and Trust
Agreement of MLM Index(TM) Fund (Filed as Exhibit 3.1 to the Registrant's Form
10 and incorporated by reference herein.)
3.5 Amendment No. 3 to the Amended and Restated Declaration of Trust and Trust
Agreement of MLM Index(TM) Fund (Filed as Exhibit 3.1 to the Registrant's
Form 10 and incorporated by reference herein.)
3.6 Amendment No. 4 to the Amended and Restated Declaration of Trust and Trust
Agreement of MLM Index(TM) Fund (Filed as Exhibit 3.1 to the Registrant's Form
10 and incorporated by reference herein.)
3.7 Amendment No. 5 to the Amended and Restated Declaration of Trust and Trust
Agreement of MLM Index(TM) Fund
14.1 Code of Ethics
31.1 Certification of President of the Manager Pursuant to Rule 13A-14(a) and Rule
15D-14(a), of the Securities Exchange Act, as amended.
31.2 Certification of Vice President and Chief Operating Officer of the Manager
Pursuant to Rule 13A-14(a) and Rule 15D-14(a), of the Securities Exchange Act, as
amended.
32.1 Certification of President of the Manager Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of Vice President and Chief Operating Officer of the Manager
Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
E-1