<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, 1997
------------------
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 0-25000
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.
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
(Address of principal executive offices)
(Zip Code)
212-236-5662
---------------------------------------------------
(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.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ML PRINCIPAL PROTECTION L.P.
----------------------------
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---------------- ----------------
<S> <C> <C>
ASSETS
- ------
Cash $1,294 $328
Accrued interest 963,423 23,501
U.S. Government obligations 84,091,473 72,815,648
Equity in commodity futures trading accounts:
Cash and options premium 4,905,206 7,177,888
Net unrealized profit on open contracts 1,343,179 1,677,317
---------------- ----------------
TOTAL $91,304,575 $81,694,682
================ ================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $1,235,629 $966,906
Profit shares payable 455,439 658,800
Brokerage commissions payable 426,186 378,291
Organization and offering costs payable 8,856 68,630
Administrative fees payable 12,177 10,224
---------------- ----------------
Total liabilities 2,138,287 2,082,851
---------------- ----------------
Minority Interest 789,855 768,546
---------------- ----------------
PARTNERS' CAPITAL:
General Partners (22525.74 and 20873.06 Units) 2,494,486 2,301,180
Limited Partners (807306.76 and 702786.91 Units) 85,881,947 76,542,105
---------------- ----------------
Total partners' capital 88,376,433 78,843,285
---------------- ----------------
TOTAL $91,304,575 $81,694,682
================ ================
NET ASSET VALUE PER UNIT (NOTE 2)
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ML PRINCIPAL PROTECTION L.P.
----------------------------
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS 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,
1997 1996 1997 1996
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profit:
Realized $(66,580) $(1,254,082) $3,655,767 $2,701,951
Change in unrealized 1,069,429 1,576,809 (334,138) (177,300)
---------------- ---------------- ---------------- ----------------
Total trading results 1,002,849 322,727 3,321,629 2,524,651
---------------- ---------------- ---------------- ----------------
Interest income 1,290,326 1,175,775 3,473,238 3,465,370
---------------- ---------------- ---------------- ----------------
Total revenues 2,293,175 1,498,502 6,794,867 5,990,021
---------------- ---------------- ---------------- ----------------
EXPENSES:
Profit shares 43,978 75,861 542,376 319,464
Brokerage commissions 1,276,885 1,197,147 3,418,130 3,588,269
Administrative fees 36,482 32,355 97,661 96,980
---------------- ---------------- ---------------- ----------------
Total expenses 1,357,345 1,305,363 4,058,167 4,004,713
---------------- ---------------- ---------------- ----------------
NET INCOME BEFORE
MINORITY INTEREST 935,830 193,139 2,736,700 1,985,308
---------------- ---------------- ---------------- ----------------
Minority interest (9,020) 2,672 (21,309) (11,134)
---------------- ---------------- ---------------- ----------------
NET INCOME $926,810 $195,811 $2,715,391 $1,974,174
================ ================ ================ ================
NET INCOME PER UNIT:
Weighted average number of units
outstanding 869,337 837,769 772,306 828,420
================ ================ ================ ================
Weighted average net income
per Limited Partner
and General Partner Unit $1.07 $0.23 $3.52 $2.38
================ ================ ================ ================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ML PRINCIPAL PROTECTION L.P.
----------------------------
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
-----------------------------------------------------------
For the nine months ended September 30, 1997 and 1996
---------------------------------------------------
<TABLE>
<CAPTION>
Limited General Total
Units Partners Partner
--------------- ---------------- ------------- -------------
<S> <C> <C> <C>
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
=============== ================ ================ ===============
PARTNERS' CAPITAL,
December 31, 1996 723,659.97 $76,542,105 $2,301,180 $78,843,285
Subscriptions 263,933.00 26,228,032 165,268 26,393,300
Distributions - (2,447,252) (50,719) (2,497,971)
Net Income - 2,636,634 78,757 2,715,391
Redemptions (157,760.47) (17,077,572) - (17,077,572)
--------------- ---------------- ---------------- ---------------
PARTNERS' CAPITAL,
September 30, 1997 829,832.50 $85,881,947 $2,494,486 $88,376,433
=============== ================ ================ ===============
</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)
--------------------------------
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 L.P. (the
"Partnership" or the "Fund") as of September 30, 1997 and December 31,
1996 and the results of its operations for the nine months ended September
30, 1997 and 1996. 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, 1996 (the "Annual Report").
2. 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, 1997 and December
31, 1996, the Net Asset Values of the different series of Units for
financial reporting purposes and for all other purposes were:
<TABLE>
<CAPTION>
September 30, 1997
----------------------------------- ------------------------------------------------
Net Asset Value Net Asset Value per Unit
----------------------------------- ----------------------------------------------------
All Other Financial Number All Other Financial
Purposes Reporting of Units Purposes Reporting
----------------- ----------------- -------------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
Series A Units $18,527,056 $18,526,794 161,764.00 $114.53 $114.52(d)
Series B Units 2,847,369 2,847,337 25,550.00 111.44 111.44(f)
Series C Units 4,047,073 4,047,024 38,331.00 105.58 105.58(b)
Series D Units 10,679,250 10,679,083 99,504.00 107.32 107.32(j)
Series E Units 8,086,401 8,086,269 72,013.46 112.29 112.28(e)
Series F Units 6,256,813 6,256,693 58,780.32 106.44 106.44(g)
Series G Units 5,767,433 5,767,353 55,461.50 103.99 103.98(h)
Series H Units 5,690,253 5,689,910 54,674.22 104.08 104.06(k)
Series K Units 11,860,662 11,860,551 116,453.00 101.85 101.84
Series L Units 14,616,337 14,615,419 147,301.00 99.23 99.22
----------------- ----------------- --------------------
Totals $88,378,647 $88,376,433 829,832.50
================= ================= ====================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------- ----------------------------------------------------
Net Asset Value Net Asset Value per Unit
------------------------------------- ----------------------------------------------------
All Other Financial Number All Other Financial
Purposes Reporting of Units Purposes Reporting
------------------ ------------------ ------------------- ------------ ------------------
<S> <C> <C> <C> <C> <C>
Series A Units $21,048,780 $21,031,369 190,136.00 110.70 110.61 (d)
Series B Units 3,447,686 3,444,936 30,179.00 124.24 114.15 (a)
Series C Units 4,996,014 4,992,389 45,696.00 109.33 109.25 (i)
Series D Units 12,582,502 12,567,310 116,303.00 108.19 108.06 (c)
Series E Units 10,484,159 10,476,812 96,561.50 108.58 108.50 (e)
Series F Units 10,179,910 10,173,793 93,465.62 108.92 108.85
Series G Units 6,967,116 6,962,973 64,920.50 107.32 107.25
Series H Units 9,199,107 9,193,703 86,398.35 106.47 106.41
------------------ ------------------ -------------------
Totals $78,905,274 $78,843,285 723,659.97
================== ================== ===================
</TABLE>
(a) After reduction for the $6.00 Distribution to Series B as of 1/1/96
(b) After reduction for the $7.50 Distribution to Series C as of 4/1/97
(For a total distibution of $11.00 inception to date.)
(c) After reduction for the $3.50 Distribution to Series D as of 7/1/96
(d) After reduction for the $6.00 Distribution to Series A as of 10/1/96
(For a total distibution of $12.00 inception to date.)
(e) After reduction for the $3.50 Distribution to Series E as of 10/1/96
(f) After reduction for the $6.50 Distribution to Series B as of 1/1/97
(For a total distibution of $12.50 inception to date.)
(g) After reduction for the $6.00 Distribution to Series F as of 1/1/97
(h) After reduction for the $7.00 Distribution to Series G as of 4/1/97
(i) Ater reduction for the $3.50 Distribution to Series C as of 4/1/96
(j) After reduction for the $4.50 Distribution to Series D as of 7/1/97
(For a total distibution of $8.00 inception to date.)
(k) Ater reduction for the $6.00 Distribution to Series H as of 7/1/97
6
<PAGE>
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's revenues by reporting category for the respective periods
were as follows:
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, 1997 September 30, 1996 September 30, 1997 September 30, 1996
-------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate $2,447,990 $1,407,933 $1,395,869 $544,590
Stock indices 453,554 (1,064,205) 990,144 (916,975)
Commodities (1,179,624) (140,241) 571,345 (104,132)
Currencies 213,843 (1,185,501) 1,616,740 559,603
Energy (430,209) 1,499,750 (1,362,836) 3,116,342
Metals (502,705) (195,009) 110,367 (674,777)
-------------------- -------------------- ------------------- -------------------
$1,002,849 $322,727 $3,321,629 $2,524,651
==================== ==================== =================== ===================
</TABLE>
The contract/notional values of the Trading Partnership's open derivative
instrument positions as of September 30, 1997 and December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------ -----------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell ( Futures,
Options & Forwards) Options & Fowards) Options & Forwards) Options & Forwards)
------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rate $256,610,211 $19,321,710 $103,258,306 $38,270,540
Stock indices 9,207,761 3,465,833 4,259,475 2,340,013
Commodities 9,923,629 11,790,240 8,541,433 12,761,047
Currencies 63,531,402 111,766,127 53,592,111 86,479,803
Energy 8,695,496 598,538 5,566,768 -
Metals 9,615,842 16,516,895 4,593,702 14,839,516
------------------------ ----------------------- ----------------------- -----------------------
$357,584,341 $163,459,343 $179,811,795 $154,690,919
======================== ======================= ======================= =======================
</TABLE>
7
<PAGE>
The contract/notional values of the Trading Partnership's exchange-traded
and non-exchange-traded open derivative instrument positions as of September 30,
1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------- ---------------------------------------------
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 $298,911,938 $74,149,567 $133,757,339 $85,639,298
Non-Exchange
traded 58,672,403 89,309,776 46,054,456 69,051,621
---------------------- ---------------------- ---------------------- ----------------------
$357,584,341 $163,459,343 $179,811,795 $154,690,919
====================== ====================== ====================== ======================
</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 nine
months ended September 30, 1997 and the year ended December 31, 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------ -----------------------------------------------
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 $217,659,579 $68,540,689 $224,985,973 $91,029,835
Stock indices 8,848,452 1,906,939 10,235,486 2,492,230
Commodities 13,261,525 9,384,921 13,316,970 7,175,841
Currencies 61,251,497 102,972,370 94,601,907 115,671,672
Energy 3,476,576 2,635,892 6,862,906 1,348,945
Metals 8,416,985 13,421,169 13,579,528 19,196,951
----------------------- ----------------------- ----------------------- ----------------------
$312,914,614 $198,861,980 $363,582,770 $236,915,474
======================= ======================= ======================= ======================
</TABLE>
As of September 30, 1997 and December 31, 1996, $4,036,246 and $2,997,536
of the Trading Partnership's assets, respectively, were held in segregated
accounts in accordance with U.S. Commodity Futures Trading Commission
regulations.
The gross unrealized profit and the net unrealized profit (loss) on the
Trading Partnership's open derivative instrument positions as of September 30,
1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit (Loss) Profit Profit (Loss)
--------------- ------------------- ---------------- ------------------
<S> <C> <C> <C> <C>
Exchange
traded $2,753,866 $1,756,150 $2,090,698 $1,611,482
Non-Exchange
traded 1,054,031 (412,971) 1,172,965 65,835
--------------- ----------------- ---------------- -----------------
$3,807,897 $1,343,179 $3,263,663 $1,677,317
=============== ================= ================ =================
</TABLE>
8
<PAGE>
4. SUBSEQUENT EVENTS
On October 1, 1997 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 Unit. Series E Units received an annual
fixed rate distribution equal to $3.50 per Unit as well as a discretionary
distribution equal to $2.00 per Unit.
5. RELATED PARTY TRANSACTIONS
MLIP is currently reviewing certain aspects of the interest arrangements
between the Partnership and certain affiliates of MLIP. The purpose of the
review is to confirm that the Partnership received interest credits as described
in its Prospectus. The results of this review have not been determined.
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 Merrill Lynch Investment Partners Inc.'s ("MLIP") 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, 1997, the trading assets attributable to each
series of Units were allocated approximately as follows (either 60% or 75% of
each series' total capital being allocated to trading):
Chesapeake Capital Corporation 17.00
John W. Henry & Company, Inc. 15.00
Non-"Core" Advisors 68.00
-------
Total 100.00%
MLIP expects to continue to change both allocations and Advisor
selections from time to time without advance notice to existing investors.
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.
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, either 60% or
75% 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 1996, the Fund's average month-end
Net Assets equaled $83,687,751, and the Fund recognized trading gains of
$2,524,651 or 3.02% of average month-end Net Assets. Brokerage commissions of
$3,588,269 or 4.29%, Administrative fees of $96,980 or 0.12% and Profit Shares
of $319,464 or 0.38% 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" of
$11,134 in the Trading Partnership), or 2.36% of average month-end Net Assets
which resulted in a 2.66% increase in the Net Asset Value per Series A Units
(before distribution), 2.51% increase in the Net Asset Value per Series B Units
(before distribution), 2.55% increase in the Net Asset Value per Series C Units
(before distribution), 2.55% increase in the Net Asset Value per Series D
9
<PAGE>
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 1996, a .71% increase in the Net Asset Value per Series G Units since
April 1996 and a 10% decrease in the Net Asset Value per Series H Units since
July 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 1997, the Fund's average month-end
Net Assets equaled $81,506,962 and the Fund recognized trading gains of
$3,321,629 or 4.08% of average month-end Net Assets. Brokerage commissions of
$3,418,130 or 4.19%, Administrative fees of $97,661 or .12% and Profit Shares of
$542,376 or .67% of average month-end Net Assets were paid. Interest income of
$3,473,238 or 4.26% of average month-end Net Assets resulted in a net gain of
$2,715,391 (before organizational and initial offering cost reimbursement
payments of $8,856 and after deduction of MLIP's "minority interest" of $21,309
in the Trading Partnership), or 3.33% of average month-end Net Assets which
resulted in a 3.46% increase in the NAV per Series A Units, 3.24% increase
(before distribution) in the NAV per Series B Units, 3.43% increase (before
distribution) in the NAV per Series C Units, 3.36% increase (before
distribution) in the NAV per Series D Units, 3.42% increase (before
distribution) in the NAV per Series E Units, 3.23% increase (before
distribution) in the NAV per Series F Units, 3.42% increase (before
distribution) in the NAV per Series G Units, 3.39% increase (before
distribution) in the NAV per Series H Units since December 31, 1996, a 1.85%
increase in the NAV per Series K Units since May 1997 and a .77% decrease in the
NAV per Series L Units since July 1997. The performance of different Series of
Units differs somewhat over the period due primarily to the profit share
calculation differences resulting from the different times at which the various
Series began trading.
During the first nine months of 1997 and 1996, the Fund experienced
12 profitable months and 6 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES A UNIT
- -------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $109.65(a) $105.56(a) $106.69(a) $110.05(a) $107.82(a) $109.33(a) $107.51(a) $108.04(a) $109.80(a)
- --------------------------------------------------------------------------------------------------------
1997 $113.00(b) $114.63(b) $114.69(b) $113.89(b) $112.28(b) $113.05(b) $116.48(b) $113.59(b) $114.53(b)
- --------------------------------------------------------------------------------------------------------
</TABLE>
(a) After reduction for $6.00 per Series A Unit distribution declared on October
1, 1995.
(b) After reduction for $6.00 per Series A Unit distribution declared on October
1, 1996, resulting in a total distribution of $12.00 inception to date.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES B UNIT
- ---------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $106.98(c) $102.99(c) $104.09(c) $107.37(c) $105.20(c) $106.67(c) $104.90(c) $105.41(c) $107.13(c)
- ---------------------------------------------------------------------------------------------------------
1997 $109.96(d) $111.53(d) $111.59(d) $110.81(d) $109.25(d) $110.01(d) $113.33(d) $110.53(d) $111.44(d)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(c) After reduction for $6.00 per Series B Unit distribution declared on January
1, 1996.
(d) After reduction for $6.50 per Series B Unit distribution declared on January
1, 1997, resulting in a total distribution of $12.50 inception to date.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES C UNIT
- -------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $105.97 $102.00 $103.10 $102.73(e) $100.66(e) $102.05(e) $100.35(e) $100.85(e) $102.49(e)
- -------------------------------------------------------------------------------------------------------
1997 $111.57(e) $113.17(e) $113.23(e) $104.99(f) $103.51(f) $104.22(f) $107.38(f) $104.72(f) $105.58(f)
- -------------------------------------------------------------------------------------------------------
</TABLE>
(e) After reduction for $3.50 per Series C Unit distribution declared on April
1, 1996.
(f) After reduction for $7.50 per Series C Unit distribution declared on April
1, 1997, resulting in a total distribution of $11.00 inception to date.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES D UNIT
- --------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $104.83 $100.94 $102.02 $105.21 $103.11 $104.51 $99.33(g) $99.82(g) $101.45(g)
- --------------------------------------------------------------------------------------------------------
1997 $110.39(g) $111.98(g) $112.04(g) $111.25(g) $109.68(g) $110.44(g) $109.15(h) $106.45(h) $107.32(h)
- --------------------------------------------------------------------------------------------------------
</TABLE>
(g) After reduction for $3.50 per Series D Unit distribution declared on July 1,
1996.
(h) After reduction for $4.50 per Series D Unit distribution declared on July 1,
1997, resulting in a total distribution of $8.00 inception to date.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES E UNIT
- ---------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $105.17 $101.32 $102.40 $105.55 $103.49 $104.86 $103.12 $103.62 $105.31
- ---------------------------------------------------------------------------------------------------------
1997 $110.79(i) $112.39(i) $112.45(i) $111.66(i) $110.07(i) $110.84(i) $114.21(i) $111.37(i) $112.29(i)
- ---------------------------------------------------------------------------------------------------------
</TABLE>
(i) After reduction for $3.50 per Series E Unit distribution declared on October
1, 1996.
10
<PAGE>
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES F UNIT
-------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
-------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $102.16 $98.45 $99.46 $102.34 $100.44 $101.72 $100.01 $100.49 $102.08
-------------------------------------------------------------------------------------------------------------------
1997 $105.02(j) $106.53(j) $106.58(j) $105.84(j) $104.33(j) $105.06(j) $108.26(j) $105.57(j) $106.44(j)
-------------------------------------------------------------------------------------------------------------------
</TABLE>
(j) After reduction for $6.00 per Series F Unit distribution declared on
January 1, 1997.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES G UNIT
- --------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 N/A N/A N/A $100.87 $98.95 $100.35 $98.66 $99.14 $100.71
- --------------------------------------------------------------------------------------------------------------------
1997 $109.50 $111.08 $111.14 $103.41(k) $101.94(k) $102.65(k) $105.76(k) $103.14(k) $103.99(k)
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
(k) After reduction for $7.00 per Series G Unit distribution declared on
April 1, 1997.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES H UNIT
- -------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 N/A N/A N/A N/A N/A N/A $97.82 $ 98.32 $ 99.90
- -------------------------------------------------------------------------------------------------------------------
1997 $108.69 $110.26 $110.31 $109.54 $107.98 $108.73 $105.86(l) $103.22(l) $104.08(l)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
(l) After reduction for $6.00 per Series H Unit distribution declared on
July 1, 1997.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES K UNIT
- ------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A N/A $99.97 $100.71 $104.26 $100.96 $101.85
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES L UNIT
- ------------------------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 N/A N/A N/A N/A N/A N/A N/A N/A N/A
- ------------------------------------------------------------------------------------------------------------------
1997 N/A N/A N/A N/A N/A N/A $101.68 $98.26 $99.23
- ------------------------------------------------------------------------------------------------------------------
</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.
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 approximately 80% to 90% of the
Fund's assets managed by MLAM) of approximately 1.13% (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
11
<PAGE>
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. 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. The Series E
Units received a fixed rate distribution of $3.50 on its first Issuance
Anniversary. The Series F Units received both a fixed rate and discretionary
distribution of $3.50 and $2.50 (a total distribution of $6.00), respectively,
on its first Issuance Anniversary. The Series G Units received both a fixed rate
and discretionary distribution of $3.50 and $3.50 (a total distribution of
$7.00), respectively, on its first Issuance Anniversary. The Series H Units
received both a fixed rate and discretionary distribution of $3.50 and $2.50 (a
total distribution of $6.00), respectively, on its first Issuance Anniversary.
The Series A Units received both a fixed rate and discretionary distribution of
$3.50 and $2.50, respectively, (a total distribution of $6.00), respectively, on
its second Issuance Anniversary. The Series B Units received both a fixed rate
and discretionary distribution of $3.50 and $3.00 (a total distribution of
$6.50) on its second Issuance Anniversary. The Series C Units received both a
fixed rate and discretionary distribution of $3.50 and $4.00, respectively, (a
total distribution of $7.50) on its second Issuance Anniversary. The Series D
Units received both a fixed rate and discretionary distribution of $3.50 and
$1.00, respectively, (a total distribution of $4.50) on its second 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 L.P. 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 L.P.
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 minims 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.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending legal proceedings to which the Partnership
or the General Partner is a party.
John W. Henry & Company, Inc. ("JWH") is one of the
Advisors retained by the Fund, managing approximately 15.00% of the Fund's
assets committed to trading as of October 1, 1997. In September 1996, JWH was
named in a co-defendant in a class action lawsuit brought in the California
Superior Court, Los Angeles County and in the New York Supreme Court, New York
County. In November 1996, JWH was named as a co-defendant in a class action
complaint filed in Superior Court of the State of Delaware for Newcastle County
unspecified damages, purport to be brought on behalf of investors in certain
Dean Witter, Discover & Co. ("Dean Witter") commodity pools, some of which are
advised by JWH, and are primarily directed at Dean Witter alleged fraudulent
selling practices in connection with the marketing of those pools. JWH is
essentially alleged to have aided and abetted or directly participated with Dean
Witter in those practices. JWH believes the allegations against it are without
merit; it intends to contest these allegations vigorously, and is convinced that
it will be shown to have acted properly and in the best interest of the
investors.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) The Fund has 2,250,000 Units of limited partnership interest
registered, with an aggregate price of $225,000,000. The
Fund has sold 807,306.76 Units of limited partnership
interest, with an aggregate price of $85,881,947.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Ms. Eilene Nicoll is the vice president of trading administration and a
member of the Investment Policy Committee of John W. Henry & Company, Inc.
("JWH"). Prior to joining JWH in July 1997, Ms. Nicoll was a vice president
beginning in January 1997 at Commercial Materials, L.L.C., a newly organized
corporation which has not yet begun operations. She was a vice president and
director at West Course Capital, Inc., a CTA, from January 1994 until it
dissolved in December 1996. At West Course Capital, Inc., Ms. Nicoll was
responsible for operations and administration. Prior to joining West Course
Capital, Inc., she was a vice president at REFCO, Inc. from May 1991 to December
1993. While at REFCO, Inc., she was also a principal of Nikkhah & Nicoll Asset
Management, Inc., a CPO. Ms. Nicoll was at Shearson Lehman Brothers from January
1987 to December 1990 as vice president-futures, and subsequently, from January
1991 to May 1991, at Moore Capital Management, Inc. where she was involved in
all aspects of the commodity trading advisor business, including administration,
marketing, and allocation of proprietary capital. From 1984 through 1986, she
was an independent discretionary trader. Ms. Nicoll was employed at Commodities
Corporation (USA) N.V. from 1978 to 1984 where she was an assistant vice
president. Ms. Nicoll received her B.A. in psychology from Brooklyn College.
Ms. Glenda G. Twist and Mr. John A. Ford are no longer principals of JWH
effective August 1, 1997 and August 31, 1997, respectively.
On August 11, 1997, AIS Futures Management, Inc. relocated to Connecticut
and changed its form of organization from a corporation to a limited liability
company for various corporate and tax reasons. The principals and management of
the advisor remain the same in the newly-created limited liability company, AIS
Futures Management LLC.
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 1997.
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 14, 1997 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: November 14, 1997 By /s/MICHAEL A. KARMELIN
----------------------
Michael A. Karmelin
Chief Financial Officer, Vice President
and Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 1,294 2,995
<RECEIVABLES> 7,211,808 8,083,368
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 84,091,473 76,528,743
<PP&E> 0 0
<TOTAL-ASSETS> 91,304,575 84,615,106
<SHORT-TERM> 0 0
<PAYABLES> 2,928,142 3,379,461
<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> 88,376,433 81,235,645
<TOTAL-LIABILITY-AND-EQUITY> 91,304,575 84,615,106
<TRADING-REVENUE> 3,321,629 2,524,651
<INTEREST-DIVIDENDS> 3,473,238 3,465,370
<COMMISSIONS> 4,079,476 4,015,847
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 2,715,391 1,974,174
<INCOME-PRE-EXTRAORDINARY> 2,715,391 1,974,174
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,715,391 1,974,174
<EPS-PRIMARY> 3.52 2.38
<EPS-DILUTED> 3.52 2.38
</TABLE>
