<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 March 31, 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 PLUS L.P.
---------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3750642
- ------------------------------------ -------------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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 15 pages.
There are no exhibits and no exhibit index filed with this document.
1
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ML PRINCIPAL PROTECTION PLUS L.P.
---------------------------------
(a Delaware limited partnership)
------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1996 1995
----------- ------------
<S> <C> <C>
ASSETS
- ------
Cash $ 225,075 $ 19,332
Accrued interest receivable (Note 2) 737,187 17,852
U.S. Government securities 76,265,652 74,280,477
Equity in commodity futures trading
accounts:
Cash and option premiums 5,234,957 1,586,839
Net unrealized gain on open contracts 1,382,110 2,073,538
----------- -----------
TOTAL $83,844,981 $77,978,038
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Settlement payment due to broker $ - $ 1,496,925
Redemptions payable 657,345 539,877
Organization and offering costs
payable (Note 1) 128,406 148,331
Brokerage commissions payable (Note 2) 387,184 356,607
Profit shares payable 86,625 78,840
Administrative expense payable 10,464 -
----------- -----------
Total liabilities 1,270,024 2,620,580
----------- -----------
Minority interest 567,851 510,914
----------- -----------
PARTNERS' CAPITAL:
General Partner (18,724.64 and
16,603.42 Units) 1,963,395 1,766,403
Limited Partners (774,741.42 and
697,715.56 Units) 80,043,711 73,080,141
----------- -----------
Total partners' capital 82,007,106 74,846,544
----------- -----------
TOTAL $83,844,981 $77,978,038
=========== ===========
NET ASSET VALUE PER UNIT (Note 5)
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ML PRINCIPAL PROTECTION PLUS L.P.
---------------------------------
(a Delaware limited partnership)
------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
<TABLE>
<CAPTION>
For the three For the three
Months ended Months ended
March 31, March 31,
1996 1995
------------- -------------
<S> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 608,812 $1,648,075
Change in unrealized (691,428) 993,486
---------- ----------
Total trading results (82,616) 2,641,561
---------- ----------
Interest income (Note 2) 1,127,746 612,173
---------- ----------
Total revenues 1,045,130 3,253,734
---------- ----------
EXPENSES:
Profit shares 86,625 330,265
Brokerage commissions (Note 2) 1,152,232 578,550
Administrative expense 31,142 -
---------- ----------
Total expenses 1,269,999 908,815
---------- ----------
INCOME (LOSS) BEFORE MINORITY INTEREST (224,869) 2,344,919
---------- ----------
Minority interest in (loss) income 5,064 (19,566)
---------- ----------
NET INCOME $ (219,805) $2,325,353
========== ==========
NET (LOSS) INCOME PER UNIT
Weighted average number of Units
outstanding (Note 6) 807,370 384,162
======= =======
Weighted average net (loss)
income per Unit $(.27) $6.05
===== =====
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ML PRINCIPAL PROTECTION PLUS L.P.
---------------------------------
(a Delaware limited partnership)
------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------------------
<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
Subscriptions 67,660 6,595,900 170,100 6,766,000
Net income - 2,231,547 93,806 2,325,353
Redemptions (3,583) (373,994) - (373,994)
---------- ----------- ---------- -----------
PARTNERS' CAPITAL,
MARCH 31, 1995 381,639 $39,471,307 $1,338,891 $40,810,198
========== =========== ========== ===========
PARTNERS' CAPITAL,
DECEMBER 31, 1995 714,318.98 $73,080,141 $1,766,403 $74,846,544
Subscriptions 102,000.00 9,987,878 212,122 10,200,000
Distributions - (371,034) (10,206) (381,240)
Net (loss) - (214,881) (4,924) (219,805)
Redemptions (22,852.92) (2,438,393) - (2,438,393)
---------- ----------- ---------- -----------
PARTNERS' CAPITAL,
MARCH 31, 1996 793,466.06 $80,043,711 $1,963,395 $82,007,106
========== =========== ========== ===========
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ML PRINCIPAL PROTECTION PLUS L.P.
---------------------------------
(a Delaware Limited Partnership)
------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
For the three months ended March 31, 1996 and 1995
--------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ML Principal Protection Plus L.P. (the "Partnership" or the "Fund") was
organized as an open-ended fund under the Delaware Revised Uniform Limited
Partnership Act on January 3, 1994 and commenced trading activities on
October 12, 1994. The Partnership engages both in speculative trading of
futures, options and forward contracts on a wide range of commodities through
ML Principal Protection Plus Trading L.P. (the "Trading Partnership"), of
which the Partnership is the sole limited partner - and in investing in U.S.
Government Securities, as defined. Merrill Lynch Investment Partners Inc.
(formerly, ML Futures Investment Partners Inc.) (the "General Partner" or
"MLIP"), a wholly-owned subsidiary of Merrill Lynch Group, Inc. ("Merrill
Lynch"), which in turn is a wholly-owned subsidiary of Merrill Lynch & Co.,
Inc., is the general partner of both the Partnership and the Trading
Partnership, and Merrill Lynch Futures Inc. ("MLF"), also a Merrill Lynch
affiliate, is its commodity broker. Merrill Lynch Asset Management, L.P.
("MLAM"), another affiliate of Merrill Lynch, provides cash management
services to the Partnership, and substantially all of the Partnership's
assets are held in accounts maintained at Merrill Lynch, Pierce, Fenner &
Smith Incorporated, a Merrill Lynch affiliate. The General Partner has
agreed to maintain a general partner's interest of at least 1% of the total
equity interest in each of the Partnership and the Trading Partnership. The
General Partner and the Limited Partners share in the profits and losses of
the Partnership, and the General Partner and the Partnership share in the
profits and losses of the Trading Partnership, in proportion to the
respective interests in the Partnership and the Trading Partnership owned by
each.
The financial information included herein has been prepared by management
without audit by independent certified public accountants who do not express
an opinion thereon. The statement of financial condition as of December 31,
1995 has been derived from but does not include all the disclosures contained
in the audited financial statements for the year ended December 31, 1995.
The information furnished includes all adjustments which are, in the opinion
of management, necessary for a fair statement of results for the interim
period. The results of operations as presented, however, should not be
considered indicative of the results to be expected for the entire year.
The consolidated financial statements include the accounts of the Trading
Partnership in which the Partnership is the sole limited partner. All
related transactions and intercompany balances between the Partnership and
the Trading Partnership are eliminated in consolidation.
The ownership by the General Partner in the Trading Partnership represents a
minority interest when the financial results of the Trading Partnership are
consolidated into those of the Partnership. The General Partner's share of
the Trading Partnership's profits and losses is deducted from the
Consolidated Statements of Income, and the General Partner's interest in the
Trading Partnership reduces partners' capital on the Consolidated Statements
of Financial Condition and the Consolidated Statements of Changes in
Partners' Capital.
The Partnership issues units of limited partnership interest ("Units") as of
the beginning of each calendar quarter. Each series has its own Net Asset
Value per Unit. Different series may allocate different percentages of their
total capital to trading, but all series trade under the direction of the
same combination of advisors (the "Trading Advisors" or the "Advisors"),
chosen from time to time by MLIP to manage the Trading Partnership's trading.
MLIP selects the Advisors to manage the Partnership's assets, and allocates
and reallocates the Partnership's trading assets among existing, replacement
and additional Advisors.
MLIP also determines what percentage of the Partnership's total capital to
allocate to trading from time to time, attempting to balance the desirability
of reducing the opportunity costs of the Partnership's "principal protection"
structure by allocating 100% (or more) of the Partnership's assets to trading
against the necessity of preventing Merrill Lynch & Co., Inc. from ever being
required to make any payments to the Partnership under the Merrill Lynch &
Co., Inc. guarantee (see Note 7).
5
<PAGE>
Estimates
---------
The preparation of consolidated financial statements in conformity with
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 consolidated financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
Revenue Recognition
-------------------
Commodity futures, options and forward contract transactions are recorded on
the trade date and open contracts are reflected in the consolidated financial
statements at their fair value on the last business day of the reporting
period. The difference between the original contract amount and fair value
is reflected in income as an unrealized gain or loss. Fair value is based on
quoted market prices. All commodity futures, options and forward contracts
are reflected at fair value in the consolidated financial statements.
U.S. Government Securities
--------------------------
The Partnership invests a portion of its assets in obligations of the U.S.
Treasury and other U.S. Government agencies. These investments are carried
at fair value.
Organization and Initial Offering Costs, Operating Expenses and Selling
-----------------------------------------------------------------------
Commissions
-----------
The General Partner advanced all organization and initial offering costs
relating to the Partnership and the Trading Partnership. The Partnership is
reimbursing the General Partner for such costs in 36 equal monthly
installments. For financial reporting purposes, the Partnership deducted the
organization and initial offering reimbursement costs of $239,100 from
partners capital at inception. For all other purposes (including determining
the Net Asset Values of the Units), the Partnership deducts organization and
initial offering cost reimbursements only as actually paid.
The General Partner pays for all routine operating costs (including legal,
accounting, printing and similar administrative expenses) of the Partnership
and the Trading Partnership, including the cost of the ongoing offering of
the Units.
No selling commissions were or are paid by Limited Partners.
Income Taxes
------------
No provision for income taxes has been made in the accompanying consolidated
financial statements as each partner is individually responsible for
reporting income or loss based on such partner's respective share of the
Partnership's consolidated income and expenses as reported for income tax
purposes.
Redemptions
-----------
A limited partner may require the Partnership to redeem some or all of such
partner's Units at their Net Asset Value as of the close of business on the
last business day of any calendar month upon ten calendar days' notice. Units
redeemed on or prior to the end of the twelfth full month after purchase are
assessed an early redemption charge of 3% of their Net Asset Value as of the
date of redemption.
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2024 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as set
forth in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
A portion of the Partnership's assets are held by MLF as margin deposits in
respect of the Partnership's futures trading. As a means of approximating
the interest rate which would be earned by the Partnership were 100% of its
Net Assets on deposit with MLF been invested in 91-day Treasury bills, MLF
pays the Partnership interest on its account equity on deposit with MLF at a
rate of 0.5 of 1% per annum below the prevailing 91-day U.S. Treasury bill
rates. In the case of its trading in certain foreign futures contracts, the
Partnership deposits margin in foreign currency denominated instruments or
cash and earns interest generally at the prevailing short-term government
interest rate in the country in question less 0.5 of 1% per annum. Any
additional benefit derived from possession of the Partnership's assets
accrues to MLF and its affiliates.
6
<PAGE>
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 quarters ended March
31, 1996 and 1995 was approximately $109 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.
The Partnership trades forward contracts through a Foreign Exchange Desk (the
"F/X Desk") established by MLIP that contacts at least two counterparties
along with Merrill Lynch International Bank ("MLIB") for all of the
Partnership's currency transactions. All counterparties other than MLIB are
unaffiliated with any Merrill Lynch entity. The F/X Desk charges a service
fee (at current exchange rates) equal to approximately $5.00 to $12.50 on
each purchase or sale of a futures-contract equivalent face amount of a
foreign currency. No service fee is charged on trades awarded to MLIB (on
which MLIB receives a "bid-ask" spread). MLIB is awarded trades only if its
price (without the service fee) is equal to or better than the best price
(including the service fee) offered by any of the other counterparties
contacted.
The F/X Desk trades using credit lines provided by a Merrill Lynch entity.
The Partnership is not required to margin or otherwise guarantee its F/X Desk
trading.
Certain of the Partnership's currency trades are executed in the form of
"Exchange of futures for physical" ("EFP") transactions involving MLIB and
MLF. In these transactions, a spot or forward (collectively referred to as
"cash") currency position is acquired and exchanged for an equivalent futures
position on the Chicago Mercantile Exchange's International Monetary Market.
In its EFP trading, the Partnership acquires cash currency positions through
the F/X Desk in the same manner and on the same terms as in the case of the
Partnership's other F/X Desk trading. When the Partnership exchanges these
positions for futures, there is a "differential" between the prices of these
two positions. This "differential" reflects, in part, the different
settlement dates of the cash and the futures contracts as well as prevailing
interest rates, but also includes a pricing spread in favor of MLIB or
another Merrill Lynch entity.
The Partnership's F/X Desk service fee and EFP differential costs have to
date totaled no more than 0.25 of 1% of the Partnership's average month-end
Net Assets on an annual basis.
3. ANNUAL DISTRIBUTIONS
The Partnership makes annual fixed-rate distributions, payable irrespective
of profitability, of between $2 and $5 per Unit. The Partnership may also
pay discretionary distributions of up to 50% of any Distributable New
Appreciation, as defined. The first such distribution was made, with respect
to the Series A Units, as of October 1, 1995, the first Issuance Anniversary,
as defined, of such series. At such time, Series A Unitholders received a
fixed-rate distribution equal to $3.50 per Series A Unit and a discretionary
distribution equal to $2.50 per Series A Unit (for a total distribution of
$6.00 per Series A Unit). The first such distribution with respect to Series
B Units was paid on January 1, 1996, the first Series B Issuance Anniversary,
and also consisted of an annual fixed-rate distribution equal to $3.50 per
Series B Unit as well as a discretionary distribution equal to $2.50 per
Series B Unit (for a total distribution equal to $6.00 per Series B Unit).
4. AGREEMENTS
The Partnership and the Trading Advisors have each entered into Advisory
Agreements. These Advisory Agreements generally terminate one year after
they are entered into, subject to certain renewal rights exercisable by the
Partnership. The Trading Advisors determine the commodity futures and
forward contract trades to be made on behalf of their respective Partnership
accounts, subject to certain trading policies and to certain rights reserved
for the General Partner.
7
<PAGE>
Profit Shares, generally ranging from 15% to 25% of any New Trading Profit,
as defined, recognized by each Advisor (individually, irrespective of the
overall performance of the Partnership) as of the end of each calendar
quarter are paid to the appropriate Trading Advisors. Such payments are also
made in respect of Units redeemed as of each of the interim months during a
quarter to the extent of the applicable percentage of any New Trading Profit
attributable to such Units.
5. 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 March 31, 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:
<TABLE>
<CAPTION>
Net Asset Value Net Asset Value per Unit
------------------------------ ----------------------------------------------------
All Other Financial Number of All Other Financial
Purposes Reporting Units Purposes Reporting
--------- --------- --------- --------- ---------
March 31, 1996
---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A Units $27,616,249 $27,574,075 258,855.00 $106.69 $106.52
Series B Units 6,138,681 6,129,105 58,974.00 $104.09 $103.93
Series C Units 6,675,409 6,665,652 64,750.00 $103.10 $102.94
Series D Units 20,397,451 20,367,991 199,940.00 $102.02 $101.87
Series E Units 11,170,519 11,154,344 109,088.06 $102.40 $102.25
Series F Units 10,130,561 10,115,939 101,859.00 $ 99.46 $ 99.31
----------- ----------- -----------
Total $82,128,870 $82,007,106 $793,466.06
=========== =========== ===========
<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>
6. WEIGHTED AVERAGE NUMBER OF UNITS
The weighted average number of Units outstanding was computed for purposes of
disclosing consolidated net income per weighted average Unit. The weighted
average number of Units for a period equals the number of Units outstanding
at the end of such period, adjusted proportionately for Units redeemed or
issued based on how long such Units were outstanding during such period.
7. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch & Co., Inc. has guaranteed to the Partnership that it will have
sufficient net assets, as of the Principal Assurance Date, as defined, for
each series of Units, that the Net Asset Value per Unit of such series as of
such Principal Assurance Date will equal, after adjustment for all
liabilities to third parties, not less than $100.
8. FAIR VALUE AND OFF-BALANCE SHEET RISK
8
<PAGE>
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 quarter ended March 31,
1996 was as follows:
March 31, 1996
--------------
Interest rate $(346,304)
Stock indices 42,027
Commodities (395,969)
Currencies 472,959
Energy 631,983
Metals (487,312)
---------
$ (82,616)
=========
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 March 31, 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 $ 40,375,739 $194,735,198 $230,060,441 $ 37,950,386
Stock indices 13,219,555 1,441,297 8,866,682 152,858
Commodities 16,256,040 6,577,067 17,582,456 3,850,643
Currencies 43,348,152 74,391,613 34,118,884 71,457,359
Energy 9,297,671 - 9,047,015 3,440,800
Metals 17,786,310 9,948,983 7,796,167 11,765,623
------------ ------------ ------------ ------------
$140,283,467 $287,094,158 $307,471,645 $128,617,669
============ ============ ============ ============
</TABLE>
9
<PAGE>
Substantially all of the Trading Partnership's open derivative instruments
outstanding as of March 31, 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 March 31, 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 $102,254,430 $235,668,817 $238,654,840 $ 76,980,099
Non-Exchanged
traded 38,029,037 51,425,341 68,816,805 51,637,570
------------ ------------ ------------ ------------
$140,283,467 $287,094,158 $307,471,645 $128,617,669
============ ============ ============ ============
</TABLE>
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
quarter ended March 31, 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 $110,538,920 $192,701,311 $170,252,009 $14,100,439
Stock indices 13,038,670 857,688 5,390,839 1,288,747
Commodities 14,030,072 6,724,687 9,360,681 2,915,357
Currencies 58,490,850 89,807,224 36,054,488 38,557,545
Energy 6,324,124 1,293,528 2,823,925 2,417,008
Metals 21,086,421 9,279,540 6,113,263 10,207,341
------------ ------------ ------------ ------------
$223,509,057 $300,663,978 $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 March 31, 1996 and December 31, 1995, $5,347,877 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 March 31, 1996 and
December 31, 1995 were as follows:
10
<PAGE>
<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 $2,473,580 $1,912,913 $2,942,622 $2,223,484
Non-Exchanged
traded 402,207 (530,803) 352,246 (149,946)
---------- ---------- ---------- ----------
$2,875,787 $1,382,110 $3,294,868 $2,073,538
========== ========== ========== ==========
</TABLE>
The partnership controls credit risk by dealing almost exclusively with Merrill
Lynch entities as brokers and counterparties.
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 April 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 25%
John W. Henry & Co., Inc. 25%
Non-"Core" Advisors 50%
---
Total 100%
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.
11
<PAGE>
Performance Summary
- -------------------
During the first quarter of 1995, the Fund's average month-end Net
Assets equalled $38,464,337, and the Fund recognized gross trading gains of
$2,641,561 or 6.87% of such average month-end Net Assets. Brokerage commissions
of $578,550 or 1.50% and Profit Shares of $330,265 or 0.86% of average month-end
Net Assets were paid. Interest income of $612,173 or 1.60% of average month-end
Net Assets resulted in net income of $2,325,353 (before organizational and
initial offering cost reimbursement payments of $19,926, and after deduction of
MLIP's "minority interest" in the Trading Partnership) or 6.05% of average
month-end Net Assets, which resulted in a 6.07% increase in the Net Asset Value
per Series A Units since December 31, 1994 and a 5.24% increase in the Net Asset
Value per Series B Units since January 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 quarter of 1996, the Fund's average month-end Net
Assets equalled $82,082,037, and the Fund recognized trading losses of $82,616
or .1% of such average month-end Net Assets. Brokerage commissions of
$1,152,232 or 1.40%, Administrative expenses of $31,142 or 0.04% and Profit
Shares of $86,625 or 0.11% of average month-end Net Assets were paid. Interest
income of $1,127,746 or 1.37% of average month-end Net Assets resulted in net
loss of $219,805 (before organizational and initial offering cost reimbursement
payments of $19,926, and after deduction of MLIP's "minority interest" in the
Trading Partnership), or 0.27% of average month-end Net Assets which resulted in
a 0.25% decrease in the Net Asset Value per Series A Units, 5.68% decrease in
the Net Asset Value per Series B Units, 0.25% decrease in the Net Asset Value
per Series C Units, 0.31% decrease in the Net Asset Value per Series D Units,
0.31% decrease in the Net Asset Value per Series E Units since December 31, 1995
and a 0.54% decrease in the Net Asset Value per Series F Units since January
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 quarter of 1996 and 1995, the Fund experienced 4
profitable months and 2 unprofitable months.
MONTH-END NET ASSET VALUE PER SERIES A UNIT
---------------------------------------------
Jan. Feb. Mar.
---------------------------------------------
1995 $101.36 $103.63 $107.94
1996 $109.65 $105.56 $106.69
MONTH-END NET ASSET VALUE PER SERIES B UNIT
---------------------------------------------
Jan. Feb. Mar.
---------------------------------------------
1995 $ 98.82 $101.05 $105.24
1996 $106.98 $102.99 $104.09
MONTH-END NET ASSET VALUE PER SERIES C UNIT
---------------------------------------------
Jan. Feb. Mar.
---------------------------------------------
1995 N/A N/A N/A
1996 105.97 102.00 103.10
MONTH-END NET ASSET VALUE PER SERIES D UNIT
---------------------------------------------
Jan. Feb. Mar.
---------------------------------------------
1995 N/A N/A N/A
1996 104.83 100.94 102.02
MONTH-END NET ASSET VALUE PER SERIES E UNIT
---------------------------------------------
Jan. Feb. Mar.
---------------------------------------------
1995 N/A N/A N/A
1996 105.17 101.32 102.40
MONTH-END NET ASSET VALUE PER SERIES F UNIT
---------------------------------------------
Jan. Feb. Mar.
---------------------------------------------
1995 N/A N/A N/A
1996 102.16 98.45 99.46
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,
12
<PAGE>
"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, including the 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.
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.
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.
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
13
<PAGE>
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.
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 quarter 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 PLUS L.P.
---------------------------------
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 13, 1996 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: May 13, 1996 By /s/JAMES M. BERNARD
-------------------
James M. Bernard
Chief Financial Officer
Treasurer and Senior Vice President
<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> MERRILL LYNCH PROTECTION PLUS L.P.
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1994
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> MAR-31-1996 MAR-31-1995
<CASH> 225,075 0
<RECEIVABLES> 7,354,254 5,879,469
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 76,265,652 37,083,047
<PP&E> 0 0
<TOTAL-ASSETS> 83,844,981 41,962,516
<SHORT-TERM> 0 0
<PAYABLES> 1,837,875 1,152,318
<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> 82,007,106 40,810,198
<TOTAL-LIABILITY-AND-EQUITY> 83,844,981 41,962,516
<TRADING-REVENUE> (82,616) 2,641,561
<INTEREST-DIVIDENDS> 1,127,746 612,173
<COMMISSIONS> 1,275,063 889,249
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (219,805) 2,325,353
<INCOME-PRE-EXTRAORDINARY> (219,805) 2,325,353
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (219,805) (2,325,353)
<EPS-PRIMARY> (.27) 6.05
<EPS-DILUTED> (.27) 6.05
</TABLE>
