<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1996
------------------
OR
( ) 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 0-22448
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
ML PRINCIPAL PROTECTION TRADING L.P.
------------------------------------
(formerly ML Principal Protection Plus Trading L.P.)
(Rule 140 Co-Registrant)
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3750642 (Registrant)
- ------------------------------- 13-3775509 (Co-Registrant)
(State or other jurisdiction of ---------------------------------
incorporation or organization) (IRS Employer Identification No.)
c/o Merrill Lynch Investment Partners Inc.
(formerly ML Futures Investment Partners Inc.)
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-4161
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
This document contains 13 pages.
There are no exhibits and no exhibit index filed with this document.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
---- ----
<S> <C> <C>
ASSETS
- ------
Cash $ 2,995 $ 19,332
Accrued interest receivable 618,777 17,852
U.S. Government securities 76,528,743 74,280,477
Equity in commodity futures trading accounts:
Cash and option premiums 5,568,353 1,586,839
Net unrealized gain on open contracts 1,896,238 2,073,538
------------------ ------------------
TOTAL $84,615,106 $77,978,038
================== ==================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Settlement payment due to broker $ - $ 1,496,925
Redemptions payable 2,110,456 539,877
Organization and offering costs payable 88,556 148,331
Brokerage commissions payable (Note 2) 395,448 356,607
Profit shares payable 75,861 78,840
Administrative expense payable (Note 2) 10,687 -
------------------ ------------------
Total liabilities 2,681,008 2,620,580
------------------ ------------------
Minority interest 698,453 510,914
------------------ ------------------
PARTNERS' CAPITAL:
General Partner (20,873.06 and 16,603.42 Units) 2,225,385 1,766,403
Limited Partners (758,127.76 and 697,715.56 Units) 79,010,260 73,080,141
------------------ ------------------
Total partners' capital 81,235,645 74,846,544
------------------ ------------------
TOTAL $84,615,106 $77,978,038
================== ==================
</TABLE>
NET ASSET VALUE PER UNIT (Note 3)
2
<PAGE>
See notes to consolidated financial statements.
3
<PAGE>
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1996 1995 1996 1995
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $(1,254,082) $ (87,488) $2,701,951 $4,142,209
Change in unrealized 1,576,809 (211,473) (177,300) (773,318)
---------------- ---------------- ---------------- ---------------
Total trading results 322,727 (298,961) 2,524,651 3,368,891
---------------- ---------------- ---------------- ---------------
Interest income 1,175,775 975,921 3,465,370 2,327,644
---------------- ---------------- ---------------- ---------------
Total revenues 1,498,502 676,960 5,990,021 5,696,535
---------------- ---------------- ---------------- ---------------
EXPENSES:
Profit shares 75,861 99,320 319,464 573,525
Brokerage commissions (Note 2) 1,197,147 961,844 3,588,269 2,243,222
Administrative expense (Note 2) 32,355 - 96,980 -
---------------- ---------------- ---------------- ---------------
Total expenses 1,305,363 1,061,164 4,004,713 2,816,747
---------------- ---------------- ---------------- ---------------
INCOME (LOSS) BEFORE MINORITY
INTEREST 193,139 (384,204) 1,985,308 2,879,788
Minority interest on income (loss) 2,672 7,712 (11,134) (17,611)
---------------- ---------------- ---------------- ---------------
NET INCOME (LOSS) $195,811 $ (376,492) $1,974,174 $2,862,177
================ ================ ================ ===============
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 837,769 641,743 828,420 491,225
======== ======== ======== ========
Weighted average net income (loss)
per Limited Partner unit and
General Partner unit $0.23 $(0.59) $2.38 $5.83
====== ======= ====== ======
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------------------
For the nine months ended September 30, 1996 and 1995
-----------------------------------------------------
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
----- -------- ------- -----
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1994 317,562 $31,017,854 $1,074,985 $32,092,839
Additions 334,660 32,973,700 492,300 33,466,000
Net income - 2,765,556 96,621 2,862,177
Redemptions (14,519) (1,563,739) - (1,563,739)
--------------- ----------------- --------------- -----------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1995 637,703 $65,193,371 $1,663,906 $66,857,277
=============== ================= =============== =================
PARTNERS' CAPITAL,
DECEMBER 31, 1995 714,318.98 $73,080,141 $1,766,403 $74,846,544
Subscriptions 254,468.36 25,102,217 344,619 25,446,836
Distributions - (1,279,994) (21,484) (1,301,478)
Net income - 1,838,327 135,847 1,974,174
Redemptions (189,786.52) (19,730,431) - (19,730,431)
--------------- ----------------- --------------- -----------------
PARTNERS' CAPITAL,
SEPTEMBER 30, 1996 779,000.82 $79,010,260 $2,225,385 $81,235,645
=============== ================= =============== =================
</TABLE>
See notes to consolidated financial statements.
5
<PAGE>
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
(a Delaware limited partnership)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present
fairly the financial position of ML Principal Protection Plus L.P. (the
"Partnership" or the "Fund") as of September 30, 1996 and the results of
its operations for the nine months ended September 30, 1996 and 1995.
However, the operating results for the interim periods may not be
indicative of the results expected for the full year.
Certain information and footnote disclosures normally included in
annual financial statements prepared in accordance with general accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Partnership's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1995 (the "Annual Report").
2. RELATED PARTY TRANSACTIONS
The Partnership pays brokerage commissions to MLF, at a flat monthly rate
equal to 0.7917 of 1% (a 9.5% annual rate) of the Partnership's month-end
assets allocated to trading. Effective January 1, 1996, the brokerage
commission the Partnership pays to the Commodity Broker was reduced to
.7708% (a 9.25% annual rate), and the Partnership began to pay an
administrative fee to the General Partner of .020833% (a .25% annual
rate). Assets committed to trading are not reduced for purposes of
calculating brokerage commissions by any accrued but unpaid brokerage
commissions, profit shares or other fees or charges. The General Partner
estimates that the round-turn equivalent commission rate charged to the
Partnership during the nine months ended September 30, 1996 and 1995 was
approximately $116 and $53, respectively (not including, in calculating
round-turn equivalents, forward contracts on a futures-equivalent basis).
MLF pays MLAM annual management fees of 0.20 of 1% on the first $25
million of Partnership capital managed by MLAM, 0.15 of 1% on the next $25
million of capital, 0.125 of 1% on the next $50 million, and 0.10 of 1% on
capital in excess of $100 million. Such fees are paid quarterly in arrears
and are calculated on the basis of the average daily assets managed by
MLAM.
MLF pays the Trading Advisors annual Consulting Fees, generally ranging
from 1% to 4% of the Partnership's average month-end assets allocated to
them for management, after reduction for a portion of the brokerage
commissions accrued in respect of such assets.
3. NET ASSET VALUE PER UNIT
For financial reporting purposes, the Partnership deducted the total
organization and initial offering costs payable to the General Partner at
inception for purposes of determining Net Asset Value. For all other
purposes (including computing Net Asset Value for redemptions), the
Partnership deducts the organization and initial offering cost
reimbursements only as actually paid. At September 30, 1996 and December
31, 1995, the Net Asset Values of the different series of Units for
financial reporting purposes and for all other purposes were:
6
<PAGE>
<TABLE>
<CAPTION>
Net Asset Value Net Asset Value per Unit
------------------------------------------ ---------------------------------------------------------
All Other Financial Number of All Other Financial
Purposes Reporting Units Purposes Reporting
-------- --------- ----- -------- ---------
September 30,
1996
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A Units $22,866,691 $22,843,914 208,256.00 * $109.80 * $109.69
Series B Units 3,926,908 3,923,247 36,656.00 ** 107.13 ** 107.03
Series C Units 5,037,250 5,032,361 49,149.00 *** 102.49 *** 102.39
Series D Units 13,192,043 13,173,591 130,035.00 **** 101.45 **** 101.31
Series E Units 11,250,493 11,240,474 106,835.96 105.31 105.21
Series F Units 9,799,926 9,791,287 96,000.00 102.08 101.99
Series G Units 6,613,348 6,607,504 65,670.50 100.71 100.62
Series H Units 8,630,899 8,623,267 86,398.36 99.90 99.81
------------------- ------------------- -------------------
Total $81,317,558 $81,235,645 779,000.82
=================== =================== ===================
<CAPTION>
December 31,
1995
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A Units $29,380,564 $29,321,472 274,693.00 $106.96 $106.74
Series B Units 7,011,988 6,999,016 63,540.00 $110.36 $110.15
Series C Units 6,800,466 6,788,236 65,800.00 $103.35 $103.16
Series D Units 20,522,519 20,485,530 200,540.00 $102.34 $102.15
Series E Units 11,272,696 11,252,290 109,745.98 $102.72 $102.53
------------------- ------------------- -------------------
Total $74,988,233 $74,846,544 $714,318.98
=================== =================== ===================
</TABLE>
* After reduction for the $6.00 Distribution to Series A as of 10/1/95
** After reduction for the $6.00 Distribution to Series B as of 1/1/96
*** After reduction for the $3.50 Distribution to Series C as of 4/1/96
**** After reduction for the $3.50 Distribution to Series D as of 7/1/96
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options and forward contracts on interest
rates, stock indices, commodities, currencies, energy and metals. The
Partnership's revenues by reporting category for the nine months ended
September 30, 1996 were as follows:
September 30, 1996
------------------
Interest rate $544,590
Stock indices (916,975)
Commodities (104,132)
Currencies 559,603
Energy 3,116,342
Metals (674,777)
---------------------
$2,524,651
=====================
7
<PAGE>
Market Risk
- -----------
Derivative instruments involve varying degrees of off-balance sheet market risk,
and changes in the level or volatility of interest rates, foreign currency
exchange rates or the market values of the financial instruments or commodities
underlying such derivative instruments frequently result in changes in the
Partnership's unrealized gain or loss on such derivative instruments as
reflected in the Consolidated Statements of Financial Condition as of the end of
the period. The Partnership's exposure to market risk is influenced by a number
of factors, including the relationships among the derivative instruments held by
the Trading Partnership as well as the volatility and liquidity of the markets
in which the derivative instruments are traded.
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing so.
These procedures focus primarily on monitoring the trading of the Advisors
selected from time to time for the Partnership, adjusting the percentage of the
Partnership's total assets allocated to trading with respect to each Series of
Units, calculating the Net Asset Value of the Advisors' respective Partnership
accounts as of the close of business on each day and reviewing outstanding
positions for over-concentrations both on an Advisor-by-Advisor and on an
overall Partnership basis. While the General Partner will not itself intervene
in the markets to hedge or diversify the Partnership's market exposure, the
General Partner may urge Advisors to reallocate positions, or itself reallocate
Partnership assets among Advisors (although typically only as of the end of a
month), in an attempt to avoid over-concentrations. However, such interventions
are unusual. Except in cases in which it appears that an Advisor has begun to
deviate from past practice or trading policies or to be trading erratically, the
General Partner's basic risk control procedures consist simply of the ongoing
process of Advisor monitoring and selection, with the market risk controls being
applied by the Advisors themselves.
Fair Value
- ----------
The derivative instruments traded by the Trading Partnership are marked to
market daily with the resulting unrealized gains or losses recorded in the
Consolidated Statements of Financial Condition and the related income or loss
reflected in trading revenues in the Consolidated Statements of Income. The
contract/notional values of the Trading Partnership's open derivative instrument
positions as of September 30, 1996 and December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------ ----------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate $305,321,578 $ 12,128,094 $230,060,441 $ 37,950,386
Stock indices 8,400,315 726,420 8,866,682 152,858
Commodities 13,379,905 5,798,981 17,582,456 3,850,643
Currencies 77,877,518 116,423,644 34,118,884 71,457,359
Energy 7,165,994 - 9,047,015 3,440,800
Metals 7,102,278 28,543,943 7,796,167 11,765,623
------------------- ------------------ -------------------- -------------------
$419,247,588 $163,621,082 $307,471,645 $128,617,669
=================== ================== ==================== ===================
</TABLE>
Substantially all of the Trading Partnership's open derivative instruments
outstanding as of September 30, 1996 expire within one year.
The contract/notional value of the Trading Partnership's exchange-traded and
non-exchange-traded derivative instrument positions as of September 30, 1996 and
December 31, 1995 was as follows:
<TABLE>
<CAPTION>
1996 1995
----------------------------------------- -----------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Exchange
traded $275,846,356 $ 70,573,962 $238,654,840 $ 76,980,099
Non-Exchange
traded 143,401,232 93,047,120 68,816,805 51,637,570
--------------------- --------------------- --------------------- ---------------------
$419,247,588 $163,621,082 $307,471,645 $128,617,669
===================== ===================== ===================== =====================
</TABLE>
8
<PAGE>
The average fair value of the Trading Partnership's derivative instrument
positions which were open as of the end of each calendar month during the nine
months ended September 30, 1996 and the year ended December 31, 1995 was as
follows:
<TABLE>
<CAPTION>
1996 1995
------------------------------------------ --------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate $218,540,411 $108,526,682 $170,252,009 $14,100,439
Stock indices 11,571,864 2,898,381 5,390,839 1,288,747
Commodities 15,947,944 5,350,029 9,360,681 2,915,357
Currencies 92,788,187 115,783,451 36,054,488 38,557,545
Energy 7,556,820 1,940,292 2,823,925 2,417,008
Metals 15,876,474 18,800,139 6,113,263 10,207,341
------------------- ------------------- ------------------- -------------------
$362,281,700 $253,298,974 $229,995,205 $69,486,437
=================== =================== =================== ===================
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects offsetting
commitments to purchase and to sell the same derivative instrument on the same
date in the future. These commitments are economically offsetting but are not,
as a technical matter, offset in the forward markets until the settlement date.
Credit Risk
- -----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases limited
in amount, in some cases not) of the members of the exchange is pledged to
support the financial integrity of the exchange. In over-the-counter
transactions, on the other hand, traders must rely solely on the credit of their
respective individual counterparties. Margins, which may be subject to loss in
the event of a default, are generally required in exchange trading, and
counterparties may require margin in the over-the-counter markets.
The fair value amounts in the above tables represent the extent of the Trading
Partnership's market exposure in the particular class of derivative instrument,
but not the credit risk associated with counterparty nonperformance. The credit
risk associated with these instruments, from counterparty nonperformance, is the
net unrealized gain, if any, included on the Consolidated Statements of
Financial Condition. The Trading Partnership also has credit risk because the
sole counterparty or broker with respect to most of the Trading Partnership's
assets is MLF.
As of September 30, 1996 and December 31, 1995, $6,868,118 and $10,444,577 of
the Trading Partnership's assets, respectively, were held in segregated accounts
in accordance with U.S. Commodity Futures Trading Commission regulations.
Substantially all of the Partnership's assets were held in unregulated accounts
maintained at MLF, Merrill Lynch Pierce, Fenner & Smith Incorporated or certain
of their affiliates.
The gross unrealized gain and the net unrealized gain on the Trading
Partnership's open derivative instrument positions as of September 30, 1996 and
December 31, 1995 were as follows:
<TABLE>
<CAPTION>
1996 1995
---- ----
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Gain Gain (Loss) Gain Gain (Loss)
---- ----------- ---- -----------
<S> <C> <C> <C> <C>
Exchange
traded $3,166,269 $2,297,661 $2,942,622 $2,223,484
Non-Exchange
traded 1,072,798 (401,423) 352,246 (149,946)
--------------------- --------------------- --------------------- ---------------------
$4,239,067 $1,896,238 $3,294,868 $2,073,538
===================== ===================== ===================== =====================
</TABLE>
The partnership controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
9
<PAGE>
The Partnership through its normal course of business enters into various
contracts with MLF acting as its commodity broker. Pursuant to the
brokerage arrangement with MLF, such trading which results in receivables
from and payables to MLF will be offset and reported as a net receivable
or payable.
5. SUBSEQUENT EVENTS
On October 1, 1996, distributions were announced with respect to Series A
Units and Series E Units. Series A units received an annual fixed rate
distribution equal to $3.50 per Series A Unit as well as a discretionary
distribution equal to $2.50 per Unit. Series E Units received an annual
fixed rate distribution equal to $3.50 per Series E Unit.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Operational Overview: Advisor Selections
- ----------------------------------------
Due to the nature of the Fund's business, its results of
operations depend on MLIP's ability to select Advisors and determine the
appropriate percentage of each series' assets to allocate to them for trading,
as well as the Advisors' ability to recognize and capitalize on trends and other
profit opportunities in different sectors of the world commodity markets. MLIP's
Advisor selection procedure and leveraging analysis, as well as the Advisors'
trading methods, are confidential, so that substantially the only information
that can be furnished regarding the Fund's results of operations is contained in
the performance record of its trading. Unlike operating businesses, general
economic or seasonal conditions do not directly affect the profit potential of
the Fund, and its past performance is not necessarily indicative of future
results. Because of the speculative nature of its trading, operational or
economic trends have little relevance to the Fund's results. MLIP believes,
however, that there are certain market conditions, for example, markets with
strong price trends, in which the Fund has a better likelihood of being
profitable than in others.
As of October 1, 1996, the trading assets attributable to each
series of Units were allocated approximately as follows (approximately 60% of
each series' total capital being allocated to trading):
Chesapeake Capital Corporation 20.00
John W. Henry & Co., Inc. 20.00
Non-"Core" Advisors 60.00
------
Total 100.00%
MLIP expects to continue to change both allocations and Advisor
selections from time to time without advance notice to existing investors.
Results of Operations - General
- -------------------------------
MLIP believes that multi-Advisor futures funds should be
regarded as medium- to long-term investments but, unlike an operating business,
it is difficult to identify "trends" in the Fund's operations and virtually
impossible to make any predictions regarding future results based on results to
date.
Markets in which sustained price trends occur with some
frequency tend to be more favorable to managed futures investments than
"whipsaw," "choppy" markets, but (i) this is not always the case, (ii) it is
impossible to predict when trending markets will occur and (iii) different
Advisors are affected differently by trends in general as well as by particular
types of trends.
The Fund controls credit risk in its trading in the derivatives
markets by trading only through Merrill Lynch entities which MLIP believes to be
creditworthy. The Fund attempts to control the market risk inherent in its
derivatives trading by utilizing a multi-advisor, multi- strategy structure.
This structure purposefully attempts to diversify the Fund's Advisor group among
different strategy types and market sectors in an effort to reduce risk
(although the Fund's portfolio currently emphasizes technical and
trend-following approaches). The market risk to the Fund is, in any event,
limited by the deleveraged character of its trading (initially, only 60% of each
series' assets, and in certain cases possibly less, is allocated to trading) and
the related "principal protection" feature of the Fund.
Performance Summary
- -------------------
During the first nine months of 1995, the Fund's average month-
end Net Assets equalled $49,838,574, and the Fund recognized gross trading gains
of $3,368,891 or 6.76% of such average month-end Net Assets. Brokerage
commissions of $2,243,222 or 4.50% and Profit Shares of $573,525 or 1.15% of
average month-end Net Assets were paid. Interest income of $2,327,644 or 4.67%
of average month-end Net Assets resulted in net income of $2,862,177 (before
organizational and initial offering cost reimbursement payments of $59,775, and
after deduction of MLIP's "minority interest" in the Trading Partnership of
$17,611) or 5.74% of average month-end Net Assets, which
10
<PAGE>
resulted in a 7.72% increase in the Net Asset Value per Series A Units since
December 31, 1994, a 6.91% increase in the Net Asset Value per Series B Units
since January 1995, a .13% increase in the Net Asset Value per Series C Units
since April 1995 and a .77% decrease in the Net Asset Value per Series D Units
since July 1995. The performance of the different Series of Units differs
somewhat over the same period due primarily to profit share calculation
differences resulting from the different times at which the various Series began
trading
During the first nine months of 1996, the Fund's average month-
end Net Assets equalled $83,687,751, and the Fund recognized gross trading gains
of $2,524,651 or 3.02% of such average month-end Net Assets. Brokerage
commissions of $3,588,269 or 4.29%, Administrative expenses of $96,980 or .12%
and Profit Shares of $319,464 or .38% of average month-end Net Assets were paid.
Interest income of $3,465,370 or 4.14% of average month-end Net Assets resulted
in net gain of $1,974,174 before organizational and initial offering cost
reimbursement payments of $59,775, and after deduction of MLIP's "minority
interest" in the Trading Partnership of $11,134, or 2.36% of average month-end
Net Assets which resulted in a 2.66% increase (before distribution) in the Net
Asset Value per Series A Units, 2.51% increase (before distribution) in the Net
Asset Value per Series B Units, 2.55% increase (before distribution) in the Net
Asset Value per Series C Units, 2.55% increase (before distribution) in the Net
Asset Value per Series D Units, 2.52% increase in the Net Asset Value per Series
E Units since December 31, 1995, a 2.08% increase in the Net Asset Value per
Series F Units (since January 17, 1996) and a .71% increase in the Net Asset
Value per Series G Units (since issuance on April 19, 1996) and a 10% decrease
in the Net Asset Value of the Series H Units (since issuance on July 16, 1996).
The performance of the different Series of Units differs somewhat over the same
period due primarily to profit share calculation differences resulting from the
different times at which the various Series began trading.
During the first nine months of 1996 and 1995, the Fund
experienced 14 profitable months and 7 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES A UNIT
Jan. Feb. Mar. April May June July Aug. Sept.
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $101.36 $103.63 $107.94 $109.09 $110.40 $110.18 $108.94 $109.98 $109.62
- ----------------------------------------------------------------------------------------------------------
1996 * $109.65 * $105.56 * $106.69 * $110.05 * $107.82 * $109.33 * $107.51 * $108.04 * $109.80
- ----------------------------------------------------------------------------------------------------------
</TABLE>
* After reduction for $6.00 per Series A Unit distribution declared on
October 1, 1995.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES B UNIT
- ------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 $ 98.82 $101.05 $105.24 $106.36 $107.67 $107.46 $106.25 $107.27 $106.91
- ------------------------------------------------------------------------------------------------------------------
1996 ** $106.98 ** $102.99 ** $104.09 ** $107.37 ** $105.20 ** $106.67 ** $104.90 ** $105.41 ** $107.13
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
** After reduction for $6.00 per Series B Unit distribution declared
on January 1, 1996.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES C UNIT
- --------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 N/A N/A N/A $ 99.66 $100.81 $100.60 $99.51 $100.44 $100.13
- --------------------------------------------------------------------------------------------------------------------
1996 $105.97 $102.00 $103.10 ***$102.73 ***$100.66 ***$102.05 ** $100.35 *** $100.85 ***$102.49
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*** After reduction for $3.50 per Series C Unit distribution declared
on April 1, 1996.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES D UNIT
- --------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 N/A N/A N/A N/A N/A N/A $98.63 $99.53 $99.23
- --------------------------------------------------------------------------------------------------------------------
1996 $104.83 $100.94 $102.02 $105.21 $103.11 $104.51 ** $99.33 ** $99.82 **** $101.45
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
**** After reduction for $3.50 per Series D Unit distribution declared
on July 1, 1996.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES E UNIT
- ------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
1996 $105.17 $101.32 $102.40 $105.55 $103.49 $104.86 $103.12 $103.62 $105.31
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES F UNIT
- ------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
1996 $102.16 $98.45 $99.46 $102.34 $100.44 $101.72 $100.01 $100.49 $102.08
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES G UNIT
- ------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
1996 N/A N/A N/A $100.87 $98.95 $100.35 $98.66 $99.14 $100.71
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES H UNIT
- ------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. April May June July Aug. Sept.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1995 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
1996 N/A N/A N/A N/A N/A N/A $97.82 $98.32 $99.90
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
Importance of Market Factors
- ----------------------------
Comparisons between the Fund's performance in a given period in
one fiscal year to the same period in a prior year are unlikely to be
meaningful, given the uncertainty of price movements in the markets traded by
the Fund. In general, MLIP expects that the Fund is most likely to trade
successfully in markets which exhibit strong and sustained price trends. The
current Advisor group emphasizes technical and trend-following methods.
Consequently, one would expect that in trendless, "choppy" markets the Fund
would likely be unprofitable, while in markets in which major price movements
occur, the Fund would have its best profit potential (although there could be no
assurance that the Fund would, in fact, trade profitably). However,
trend-followers not infrequently will miss major price movements, and market
corrections can result in rapid and material losses (sometimes as much as 5% in
a single day). Although MLIP monitors market conditions and Advisor performance
on an ongoing basis in overseeing the Fund's trading, MLIP does not attempt to
"market forecast" or to "match" trading styles with predicted market conditions.
Rather, MLIP concentrates on quantitative and qualitative analysis of
prospective Advisors, as well as on statistical studies of the historical
performance parameters of different Advisor combinations in selecting Advisors
and allocating and reallocating Fund assets among them.
Because managed futures advisors' strategies are proprietary and
confidential and market movements unpredictable, selecting advisors to implement
speculative trading strategies involves considerable uncertainty. Furthermore,
the concentration of the Fund's current Advisor portfolio, both in terms of the
number of managers retained and the common emphasis of their strategies on
technical and trend-following methods, increases the risk that unexpectedly bad
performance, turbulent market conditions or a combination of the two will result
in significant losses.
MLIP's Advisor Selections
- -------------------------
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally intends to make a medium- to long-term commitment
to all Advisors selected. However, there can be no assurance as to the frequency
or number of the Advisor changes which may take place in the future, or as to
how long any of the current Advisors will continue to manage assets for the
Fund.
Interest Income
- ---------------
The Fund's interest income varies from month to month due to a
portion of such income representing the yield enhancement return achieved by
MLAM rather than periodic interest accruals. Although there can be no assurance
that the Fund will not incur losses in its yield enhancement activities in the
future, to date MLAM has achieved a yield for the Fund (on the approximately 80%
to 90% of the Fund's assets managed by MLAM) of approximately 1.02% (annualized)
over the prevailing 91-day Treasury bill rate.
Liquidity
- ---------
The Fund's assets managed by MLAM, are available to margin the
Fund's futures positions and earn interest income and to be withdrawn, as
necessary, to pay redemptions and expenses. Other than potential limitations on
liquidity, due, for example, to daily price fluctuation limits, which are
inherent in the Fund's futures and forward trading, the Fund's assets are highly
liquid and are expected to remain so. To date, the Fund has experienced no
meaningful periods of illiquidity in any of the numerous markets traded by the
Advisors.
Although Units may be redeemed at any month-end, no one, who
cannot afford to commit funds to a comparatively illiquid investment should
subscribe to the Fund (redemption penalties apply through the end of the first
twelve months after the beginning of the calendar quarter as of which a Unit is
issued). MLIP believes that investors who are not prepared to regard the Fund
essentially as a medium- to long-term investment should not purchase Units.
12
<PAGE>
MLIP makes annual fixed-rate and, possibly, additional
discretionary distributions to investors from the assets attributable to their
respective series of Units. Such distributions are made as of each Issuance
Anniversary for the various series. The Series A Units and Series B Units each
received both fixed-rate and discretionary distributions of $3.50 and $2.50 (a
total distribution of $6.00) as of their respective first Issuance
Anniversaries. The Series C Units received a fixed rate distribution of $3.50 on
its respective first Issuance Anniversary. The Series D Units received a fixed
rate distribution of $3.50 on its respective first Issuance Anniversary.
In making discretionary distributions from the Fund, even though such
distributions are made only from cumulative profits, if any (as opposed to
fixed-rate annual distributions, which are made irrespective of profitability),
MLIP considers the importance of not depleting the assets of any particular
series to the point that subsequent losses could result in MLIP further
deleveraging the trading of such series.
As of July 1, 1996, the Fund has changed its name to ML
Principal Protection LP. Such change is due to the General Partner restructuring
the continuous offerings to be sold without a guaranteed annual fixed-rate
distribution or a discretionary distribution as previously offered under ML
Principal Protection Plus LP.
Capital Resources
- -----------------
Units are offered for sale as of the beginning of each calendar
quarter, and may be redeemed as of the end of each month.
The amount of capital raised for the Fund does not have a
significant impact on its operations, as, other than a de minimis organizational
and initial offering cost reimbursement obligation, the Fund has no capital
expenditure or working capital requirements other than for moneys to pay trading
losses, brokerage commissions, Administrative Fees and Profit Shares (all of
which should be generally proportional to the capital available to a particular
series of Units). Within broad ranges of capitalization, the Advisors' trading
positions should increase or decrease in approximate proportion to the size of
the Fund account managed by each of them, respectively.
The Fund raises additional capital only through the sale of
Units. The Fund is prohibited from borrowing under the terms of the Limited
Partnership Agreement.
Due to the nature of the Fund's business, substantially all of
its assets are and will be represented by cash, Government Securities and
short-term foreign sovereign debt obligations, while it maintains its primary
market exposure through futures and forward contract positions.
Inflation is not a significant factor in the Fund's
profitability, although inflationary cycles can give rise to the type of major
price movements which can have a materially favorable or adverse impact on the
Fund's performance.
Changes in the level of prevailing interest rates (a factor
generally associated with inflation) could have a material effect on the
percentage of the total capital attributable to various series of Units which is
committed to trading, as interest rates affect the calculation of the discounted
minimum Net Asset Value per Unit which ML&Co. has guaranteed to investors.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits required to be filed with this document.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first nine
months of fiscal 1996.
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 11, 1996 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: November 11, 1996 By /s/JAMES M. BERNARD
-------------------
James M. Bernard
Chief Financial Officer
Treasurer and Senior Vice President
15
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM CONSOLIDATED
STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF OPERATIONS,
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000917259
<NAME> ML PRINCIPAL PROTECTION L.P.
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> SEP-30-1996 SEP-30-1995
<CASH> 2,995 101,980
<RECEIVABLES> 8,083,368 4,952,403
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 76,528,743 62,987,347
<PP&E> 0 0
<TOTAL-ASSETS> 84,615,106 68,041,730
<SHORT-TERM> 0 0
<PAYABLES> 3,379,461 1,184,453
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 81,235,645 66,857,277
<TOTAL-LIABILITY-AND-EQUITY> 84,615,106 68,041,730
<TRADING-REVENUE> 2,524,651 3,368,891
<INTEREST-DIVIDENDS> 3,465,370 2,327,644
<COMMISSIONS> 4,015,847 2,834,358
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 1,974,174 2,862,177
<INCOME-PRE-EXTRAORDINARY> 1,974,174 2,862,177
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,974,174 2,862,177
<EPS-PRIMARY> 2.38 5.83
<EPS-DILUTED> 2.38 5.83
</TABLE>
