RYE SELECT BROAD MARKET PORTFOLIO LIMITED (Incorporated under the laws of the Cayman Islands) Financial Statements.

Transcription

1 Financial Statements (With Independent Auditors Report Thereon)

2 Financial Statements Table of Contents Page Independent Auditors Report 1 Financial Statements: Statement of Assets and Liabilities 2 Condensed Schedule of Investments 3 Statement of Operations 4 Statement of Changes in Net Assets 5 Statement of Cash Flows 6 Notes to Financial Statements 7

3 KPMG P.O. Box 493 Century Yard, Cricket Square Grand Cayman KY CAYMAN ISLANDS Telephone Fax Internet Independent Auditors Report The Board of Directors and Shareholders Rye Select Broad Market Portfolio Limited: We have audited the accompanying statement of assets and liabilities of Rye Select Broad Market Portfolio Limited (the Company ), including the condensed schedule of investments, as of, and the related statements of operations, changes in net assets and cash flows for the year then ended. These financial statements are the responsibility of the Company s management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes 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 Company s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 Rye Select Broad Market Portfolio Limited as of, and the results of its operations, changes in its net assets and its cash flows for the year then ended in conformity with U.S. generally accepted accounting principles. May 9, 2008 KPMG, a Cayman Islands partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International, a Swiss cooperative.

4 Statement of Assets and Liabilities Assets Cash and cash equivalents $ 97,198,794 Investments in U.S. Treasury bills, at fair value (cost $994,077,529) (Note 3) 994,077,529 Investments in investment funds, at fair value (cost $45,040,401) (Note 4(c)) 47,143,620 Dividends and interest receivable, net of withholding taxes of $15, ,992 Prepaid expenses and other assets 12,000 Total assets $ 1,138,900,935 Liabilities and Net Assets Redemptions payable $ 38,070,941 Subscriptions received in advance 12,000,000 Management fees payable (Note 4(a)) 1,424,690 Administration fees payable (Note 4(b)) 185,824 Accrued expenses (Note 5) 66,944 Total liabilities 51,748,399 Net assets $ 1,087,152,536 Net asset value per share (Notes 4(a), 7 and 9) Class A (based on 52, shares outstanding) $ 1, Class B (based on 84, shares outstanding) 1, Class B1 (based on 5, shares outstanding) 1, Class D (based on 781, shares outstanding) 1, See accompanying notes to financial statements. Approved on behalf of the Board of Directors: Peter D. Anderson Director Darren Johnston Director 2

5 Condensed Schedule of Investments Principal Percentage of amount Description net assets Fair value Investments in U.S. Treasury Bills United States: $ 83,525, % due 02/21/ % $ 83,170,019 83,525, % due 02/28/ ,115,727 83,525, % due 03/06/ ,065,612 83,525, % due 03/13/ ,008,815 83,525, % due 03/20/ ,943,666 83,525, % due 03/27/ ,885,199 25, % due 04/03/ * 24,787 83,525, % due 04/10/ ,777,451 83,525, % due 04/17/ ,738,195 83,525, % due 04/24/ ,678,892 83,525, % due 05/01/ ,607,896 83,525, % due 05/08/ ,558,616 83,525, % due 05/15/ ,502,654 * Due to rounding Total investments in U.S. Treasury Bills (cost $994,077,529) 91.44% $ 994,077,529 Investments in investment funds British Virgin Islands: Other (cost $20,540,401) 2.09% $ 22,763,680 Cayman Islands: Other (cost $24,500,000) 2.24% 24,379,940 Total investments in investment funds 4.33% $ 47,143,620 See accompanying notes to financial statements. 3

6 Statement of Operations Year ended Investment Income: Interest $ 27,232,117 Dividends, net of withholding taxes of $2,052,235 5,018,838 Total investment income 32,250,955 Expenses: Management fees (Note 4 (a)) 14,543,205 Administration fees (Note 4 (b)) 1,894,003 Professional fees (Note 5) 336,992 Other 28,035 Director fees 8,120 Total expenses 16,810,355 Net investment income 15,440,600 Net realized gain and net change in unrealized appreciation on investments in investment funds: Net realized gain from common stocks, options, and investment funds 59,803,630 Net change in unrealized appreciation on investments in investment funds (Note 4(c)) (636,513) Net realized gain and change in unrealized appreciation on investments 59,167,117 Net increase in net assets resulting from operations $ 74,607,717 See accompanying notes to financial statements. 4

7 Statement of Changes in Net Assets Year ended Net assets at January 1, 2007 $ 673,746,929 Changes in net assets resulting from operations: Net investment income 15,440,600 Net realized gains from common stocks, options, and investment funds 59,803,630 Net change in unrealized appreciation on investments in investment funds (636,513) Net increase in net assets resulting from operations 74,607,717 Changes in net assets resulting from capital transactions: Issuance of shares 596,346,908 Transfer in to Class A shares 1,265,729 Transfer in to Class B shares 3,147,566 Transfer out of Class B shares (1,265,729) Transfer out of Class C shares (3,147,566) Redemption of shares (257,549,018) Net increase in net assets resulting from capital transactions 338,797,890 Net increase in net assets 413,405,607 Net assets at $ 1,087,152,536 See accompanying notes to financial statements. 5

8 Statement of Cash Flows Year ended Cash flows from operating activities: Net increase in net assets resulting from operations $ 74,607,717 Adjustments to reconcile net increase in net assets resulting from operations to net cash used in operating activities: Purchases of investment securities (10,515,611,444) Proceeds from dispositions of investment securities 10,200,387,808 Purchases of investment funds (28,104,098) Proceeds from dispositions of investment funds 21,036,682 Net realized gains on dispositions of common stock and options (56,409,280) Realized gain on disposition of investment funds (3,394,350) Net change in unrealized appreciation on investments in investment funds 636,513 Changes in operating assets and liabilities: Dividends and interest receivable, net of withholding taxes 233,117 Prepaid expenses and other assets 2,000 Due to affiliate (20,000,000) Management fees payable (421,255) Administration fees payable (52,120) Accrued expenses (418) Net cash used in operating activities (327,089,128) Cash flows from financing activities: Proceeds from issuance of shares 594,846,908 Payments on redemptions of shares (239,968,561) Net cash provided by financing activities 354,878,347 Net increase in cash and cash equivalents 27,789,219 Cash and cash equivalents at beginning of year 69,409,575 Cash and cash equivalents at end of year $ 97,198,794 Supplemental disclosure of noncash operating activities: Change in contribution to investment fund in advance $ 9,000,000 Change in due from investment fund 1,036,682 Supplemental disclosure of noncash financing activities: Change in redemptions payable $ 17,580,457 Change in subscriptions received in advance (1,500,000) Transfer in to Class A shares 1,265,729 Transfer in to Class B shares 3,147,566 Transfer out of Class B shares (1,265,729) Transfer out of Class C shares (3,147,566) See accompanying notes to financial statements. 6

9 Notes to Financial Statements (1) Organization Rye Select Broad Market Portfolio, Limited (the Company ) is a Cayman Islands exempted company with limited liability incorporated on August 23, The Company registered under the Mutual Funds Law of the Cayman Islands on August 24, The Company is an open-ended investment company that seeks to (i) achieve long term capital appreciation and (ii) consistently generate positive returns irrespective of stock market volatility or direction, while focusing on preservation of capital. The Company attempts to accomplish this investment objective by investing the majority of the assets of the Company with a select manager who employs a nontraditional investment strategy described as split strike conversion. This strategy consists of (i) purchasing equity shares, (ii) buying related out-of-the-money or at-the-money index put options representing the same number of underlying shares and, (iii) selling related out-of-the-money index call options representing a number of underlying shares equal the number of shares purchased. A properly executed strategy along these lines will limit losses if the price of the equity shares decline, while still affording upside potential (albeit capped at the strike price of the short call) should the price of the equity shares rise. The remainder of the assets of the Company may be invested with a diverse group of non-u.s. investment funds or similar vehicles whose managers employ a variety of investment strategies. These sophisticated investment strategies often require the use of derivative trading vehicles and index options. (2) Significant Accounting Policies (a) Basis of Presentation The accompanying financial statements are presented in accordance with accounting principles generally accepted in the United States of America and are expressed in United States dollars. These financial statements should be read in conjunction with the Company s Amended and Restated Prospectus. (b) (c) (d) Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents consist of cash balances and highly liquid investments with a maturity date of less than three months, but does not include investments in U.S. Treasury Bills. Investment Valuation Investments in securities which are traded on a national securities exchange are valued at their last reported sales prices on the last day of the year on the national securities exchange on which such securities are principally traded. If there are no sales on that date on such exchange, then the securities are valued at the last reported bid quotation in the case of securities held long and at the 7 (Continued)

10 Notes to Financial Statements last reported ask quotation in the case of securities sold short on that date on the national securities exchange on which the securities are traded. United States Treasury Bills are classified as investments and are stated at fair value based on readily available market quotations. All such Treasury Bills are on deposit with various exchanges and mature within one year from the balance sheet date. Investments in investment funds are valued at the net asset value supplied by the investee fund. The net asset value of the investee funds represents the amount the Company would receive if it were to liquidate its investments in the investee funds on that date. Purchases and sales of investment funds are recorded on a trade-date basis. Realized gains and losses are recognized on the first-in, first-out basis ( FIFO ). (e) Revenue Recognition Purchases and sales of investment securities are recorded on a trade-date basis. Realized gains and losses are recognized on a FIFO basis and are included in the Statement of Operations. Dividend income is recorded on the ex-dividend date, net of any withholding taxes. Interest income is recorded on an accrual basis as earned. (f) (g) Net Income Allocation All net investment income, realized and unrealized gains and losses of the Company are allocated to the share classes in proportion to the respective ownership interests of such share classes in the net assets of the Company on a monthly basis. Financial Instruments The fair value of the Company s assets and liabilities which qualify as financial instruments under the Statement of Financial Accounting Standards No. 107, Disclosures About Fair Value of Financial Instruments, ( FAS 107 ), approximates the carrying amount presented in the Statement of Assets and Liabilities. In September 2006, the FASB issued Statement No. 157, Fair Value Measurements ( FAS 157 ). This accounting standard establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands disclosures about fair value measurements. FAS 157 applies to fair value measurements already required or permitted by existing standards. FAS 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and the interim period within those fiscal years. As of, the Company has not adopted FAS 157, but believes that there will not be a material effect on its financial statement amounts once adopted. However, additional disclosures will be required about the inputs used to develop the fair value measurements and the effect of certain fair value measurements on changes in shareholder s net assets. 8 (Continued)

11 Notes to Financial Statements (h) (i) Mandatorily Redeemable Financial Instruments In accordance with Statement of Financial Accounting Standards No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity ( FAS 150 ), financial instruments mandatorily redeemable at the option of the holder are classified as liabilities when a redemption request has been received and the redemption amount has been determined. Investor Servicing Fee The Company may enter into agreements with third-party advisors to provide distribution services to the Company. These agreements provide that an investor servicing fee of up to 1.0% per annum (0.083% per month) may be charged to each applicable shareholder s account as of the last business day of each month, however no such fee was charged to a shareholder of the Company. (3) Investment Securities Held at Broker The clearing and depository operations for the Company s security transactions are provided by one broker. At all of the investment securities owned, reflected in the Statement of Assets and Liabilities, other than the investments in investment funds, are positions with this clearing broker and consist of U.S. Treasury bills with yields to maturity approximating 3.17% and maturity dates ranging from February 21, 2008 to May 15, Management does not anticipate any issues as a result of this concentration. (4) Related Party Transactions (a) Management Fee On January 1, 2003, the Company entered into an amended agreement with Tremont (Bermuda) Limited (the Investment Manager ). Under the terms of the amended agreement, the Company pays the Investment Manager a management fee of 1.50% per annum (0.125% per month) for Class A Shares, 1.75% per annum (0.146% per month) for certain Class B Shares and 1.50% per annum (0.125% per month) for Class D shares. From March 1, 2004 to July 1, 2007, the Company paid the Investment Manager a management fee of 2.25% per annum (0.1875% per month) for Class C Shares. Subsequent to July 1, 2007, the Company pays the Investment Manager a management fee of 1.75% (0.146% per month) for the Class C shares. Such management fee is subject to a reduction, in whole or in part, at the discretion of the Investment Manager. Management fees for the year ended, were $14,543,205, of which $1,424,690 remains payable at. The Investment Manager is not paid a management fee with respect to Class B1 Shares. The Investment Manager is a shareholder of the Company and a less than 10% owner of the parent company of an investor in the Company. At, the Investment Manager owned Class A Shares. This represents a 0.01% interest in the Company. In addition, the Investment Manager holds 100 voting Management shares. The Management shares are nonredeemable, nonparticipating shares, which have the sole voting rights in the Company. 9 (Continued)

12 Notes to Financial Statements The Investment Manager has retained its affiliate, Tremont Partner, Inc. to serve as sub-advisor to the Company (the Sub-Advisor ) at no additional cost to the Company and had delegated substantially all of its duties in respect of the Company to the Sub-Advisor. (b) (c) Administrative Fee The Company has appointed the Sub-Advisor, to serve as administrator to the Fund. The Sub-Advisor receives a monthly administration fee calculated at the annual rate of 0.20% (0.017% per month) paid out of the Company s assets (the Administration Fee ). The Administration Fee is calculated as of the last Business Day of each calendar month and paid in arrears. Administration fees for the year ended were $1,894,003, of which $185,824 remained payable at. Such administrative fee is subject to a reduction, in whole or in part, at the discretion of the Sub-Advisor. The Sub-Advisor is not paid an administration fee with respect to Class B1 Shares. Investments in Investment Funds The Company is invested in Rye Select Activist Segregated Portfolio ( RSASP ) and Rye Select Equities Segregated Portfolio ( RSESP ). RSASP and RSESP are segregated portfolios of the Rye Select Fund Series SPC Limited, of which the Sub-Advisor of the Company serves as Investment Manager. The Company may subscribe to RSASP or RSESP monthly, and redeem from RSASP or RSESP quarterly. The Company s investments in RSASP and RSESP are carried in the Statement of Assets and Liabilities at $9,375,011 and $15,004,929, respectively, at. For the year ended, the Company recorded a change in net unrealized appreciation from its investments in RSASP and RSESP in the amounts of $375,011 and ($495,071), respectively. (5) Sub-Administrator and Transfer Agent Effective July 1, 2007, The Bank of New York Mellon (the Sub-Administrator ) was appointed as the Company s Sub-Administrator and transfer agent. The Sub-Administration fee is calculated and is payable as of the last business day of each calendar month. The Sub-Administrator is also entitled to reimbursement of actual out of pocket expenses incurred on behalf of the Company. The fee was $198,472 for the year ended, which is included in Professional fees on the Statement of Operations. As of, $36,944 remained payable, which is included in Accrued expenses on the Statement of Assets and Liabilities. (6) Derivative Financial Instruments The Company s activities include the purchase and sale of index options. These are used for trading purposes and for managing risk associated with the portfolio of securities. When the Company purchases an index option, an amount equal to the premium paid by the Company is recorded as an asset in the Statement of Assets and Liabilities and subsequently adjusted to the current fair value of the index option. Changes in fair value of index options are reflected in the accompanying Statement of Operations as a gain or loss as they occur. Premiums paid on index options that expire unexercised are treated by the Company on expiration date as a realized loss. The difference between premiums paid and the amount received on 10 (Continued)

13 Notes to Financial Statements exercising the index option is accounted for as a realized gain, or if the amount received is less than the premium paid, as a realized loss. Substantially all of the gain from investment activity results from trading in equity and equity related instruments, which include index options. At, the Company did not hold any index options or other derivative financial instruments. In March 2008, the FASB issued Standards No. 161, Disclosures about Derivative Instruments and Hedging Activities ( FAS 161 ). FAS 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. The application of FAS 161 is required for fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. At this time, management has not yet adopted FAS 161 and is evaluating the implications of FAS 161 and its impact on the financial statements has not yet been determined. (7) Share Capital The Company s authorized share capital is US$50,000 divided into 1,000,000 Class A, B, C, and D Shares, 999,900 undesignated redeemable participating nonvoting Shares, and 100 nonvoting Management shares, each having a par value of $0.01. Each of the outstanding Class A, Class B, Class C, and Class D Shares participate ratably with all other outstanding shares in the Company s fees, expenses, assets and earnings with respect to such class of shares. Investors may subscribe to or redeem from the Company monthly. As of, no Class C Shares were outstanding. Through a letter agreement dated September 1, 2007, the Investment Manager and the Administrator agreed to waive their respective fees with respect to an investment made by an advisory client (the Client ) of the Administrator, as required by the Employee Retirement Income Act of 1974 ( ERISA ). In order to differentiate between those Class B shareholders that are subject to the Company s management and administration fees and this client, the Sub-Administrator has designated such investors as Class B1 shareholders, however, no such share class has been legally formed by the Company. 11 (Continued)

14 Notes to Financial Statements The Class A, Class B, Class B1, Class C and Class D Shares are redeemable participating nonvoting Shares in the Company. The movement in share capital of Class A, Class B, Class B1, Class C and Class D shares is as follows: Class A Class B Number Number of shares Dollar value of shares Dollar value Balance at January 1, , $ 175,270,624 83, $ 114,298,632 Issued pursuant to subscriptions into the Company 45, ,515,104 42, ,724,398 Issued/(redeemed) pursuant to transfers ,265,729 1, ,881,837 Redeemed pursuant to redemptions (106, ) (170,084,640) (43, ) (62,464,378) Net increase in net assets 9,239,348 9,980,903 Balance at 52, $ 88,206,165 84, $ 124,421,392 Net asset value per share at $ 1, $ 1, Class B1 Class C Number Number of shares Dollar value of shares Dollar value Balance at January 1, 2007 $ 2, $ 3,031,976 Issued pursuant to subscriptions into the Company 5, ,000,000 Issued/(redeemed) pursuant to transfers (2, ) (3,147,566) Redeemed pursuant to redemptions Net increase in net assets 169, ,590 Balance at 5, $ 5,169,702 $ Net asset value per share at $ 1, $ 12 (Continued)

15 Notes to Financial Statements Class D Total Number Number of shares Dollar value of shares Dollar value Balance at January 1, , $ 381,145, , $ 673,746,929 Issued pursuant to subscription into the Company 434, ,107, , ,346,908 Issued/(redeemed) pursuant to transfers ( ) Redeemed pursuant to redemptions (23, ) (25,000,000) (173, ) (257,549,018) Net increase in net assets 55,102,174 74,607,717 Balance at 781, $ 869,355, , $ 1,087,152,536 Net asset value per share at $ 1, (8) Taxation There is presently no taxation imposed on income by the Government of the Cayman Islands. However, the Company has received an undertaking dated February 18, 1997 from the Governor-in-Cabinet of the Cayman Islands as to tax concessions pursuant to Section 6 of the Tax Concessions Law (Revised) which provides that, for a period of twenty (20) years from the date of issuance of the undertaking, no law thereafter enacted in the Cayman Islands imposing any taxes or duty to be levied on income or capital assets, gains or appreciation will apply to any income or property of the Company. However, dividends received from certain investments are subject to and reported net of withholding taxes. During the current year, the Company adopted FASB Interpretation No. 48 Accounting for Uncertainty in Income Taxes ( FIN 48 ). FIN 48 provides guidance for how uncertain tax positions should be recognized, measured, presented and disclosed in the financial statements. FIN 48 requires the evaluation of tax positions taken or expected to be taken in the course of preparing the Company s financial statements to determine whether the tax positions are more-likely-than-not of being sustained by the applicable tax authority. Tax positions with respect to tax at the Company level not deemed to meet the more-likely-than-not threshold would be recorded as a tax benefit or expense in the current year. The Investment Manager has concluded that the adoption of FIN 48 had no impact on the operations of the Company for the year ended and that no provision for income tax is required in the Company s financial statements. 13 (Continued)

16 Notes to Financial Statements (9) Selected Financial Highlights The following represents the financial highlights of the shareholders of the Company for the year ended : Class A Class B Class B1 Class D Per share operating performance: Net asset value, January 1, 2007 $ 1, , N/A 1, Net asset value, September 1, 2007 N/A N/A 1, N/A From investment operations Net investment income Net realized and unrealized gains on investments Total from investment operations Net asset value, $ 1, , , , Total return 8.22% 7.95% 3.39% 8.22% Ratios to average net assets: Total expenses 1.75% 2.00% 0.02% 1.75% Net investment income The ratio and return calculations assume a share was invested for the entire year. An individual investor s return may vary from these returns and ratios based on the timing of capital transactions. Class B1 commenced on September 1, 2007 and the total return and ratios to average net assets above have not been annualized. (10) Indemnifications and Warranties In the ordinary course of its business, the Company may enter into contracts or agreements that contain indemnifications or warranties. Future events could occur that lead to the execution of the provisions against the Company. Based on its history, experience, and assessment of existing contracts, management feels that the likelihood of such an event is remote. 14