<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, 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 0-22448
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
ML PRINCIPAL PROTECTION TRADING L.P.
------------------------------------
(formerly ML Principal Protection Plus Trading L.P.)
(Rule 140 Co-Registrant)
(Exact Name of Registrant as
specified in its charter)
13-3750642 (Registrant)
Delaware 13-3775509 (Co-Registrant)
- -------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
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)
212-236-4161
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ ------
This document contains 13 pages.
There are no exhibits and no exhibit index filed with this document.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
March 31, December 31,
1997 1996
------------ ------------
ASSETS
- ------
Cash $ 958 $ 328
Accrued interest receivable 566,179 23,501
U.S. Government securities 70,836,861 72,815,648
Equity in commodity futures trading
accounts:
Cash and option premiums 7,412,239 7,177,888
Net unrealized profit on open 479,655 1,677,317
contracts
----------- -----------
TOTAL $79,295,892 $81,694,682
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 1,456,038 $ 966,906
Profit shares payable 583,452 658,800
Brokerage commissions payable 355,127 378,291
Organization and offering costs 48,706 68,630
payable
Administrative fees payable 10,146 10,224
----------- -----------
Total liabilities 2,453,469 2,082,851
----------- -----------
Minority interest 809,171 768,546
----------- -----------
PARTNERS' CAPITAL:
General Partner (20,873.06 and 2,363,315 2,301,180
20,873.06 Units)
Limited Partners (659,437.55 and 73,669,937 76,542,105
702,786.91 Units)
-------------- -----------
Total partners' capital 76,033,252 78,843,285
-------------- -----------
TOTAL $79,295,892 $81,694,682
============== ===========
NET ASSET VALUE PER UNIT (Note 2)
See notes to consolidated financial statements.
2
<PAGE>
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENT OF OPERATIONS
------------------------------------
For the three For the three
months ended months ended
March 31, March 31,
1997 1996
------------- --------------
REVENUES:
Trading profits (loss):
Realized $ 4,591,648 $ 608,812
Change in unrealized (1,197,662) (691,428)
----------- ----------
Total trading results 3,393,986 (82,616)
----------- ----------
Interest income 1,113,890 1,127,746
----------- ----------
Total revenues 4,507,876 1,045,130
----------- ----------
EXPENSES:
Profit shares 583,452 86,625
Brokerage commissions 1,073,504 1,152,232
Administrative fees 30,672 31,142
----------- ----------
Total expenses 1,687,628 1,269,999
----------- ----------
INCOME (LOSS) BEFORE MINORITY
INTEREST 2,820,248 (224,869)
----------- ----------
Minority interest on income (loss) (40,626) 5,064
----------- ----------
NET INCOME (LOSS) 2,779,622 $ (219,805)
=========== ==========
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 706,361 807,370
======= =======
Weighted average net income (loss)
per General Partner and
Limited Partner Unit $3.94 $(.27)
===== =====
See notes to consolidated financial statements.
3
<PAGE>
ML PRINCIPAL PROTECTION L.P.
----------------------------
(formerly ML Principal Protection Plus L.P.)
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENT OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------------------
For the three months ended March 31, 1997 and 1996
--------------------------------------------------
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
----------------- ------------- ----------- -------------
PARTNERS' CAPITAL,
<S> <C> <C> <C> <C>
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
============ =========== ========== ===========
PARTNERS' CAPITAL,
DECEMBER 31, 1996 723,659.97 $76,542,105 $2,301,180 $78,843,285
Subscriptions - - - -
Distributions - (736,978) (19,978) (756,956)
Net income - 2,697,509 82,113 2,779,622
Redemptions (43,349.36) (4,832,699) - (4,832,699)
------------ ----------- ---------- -----------
PARTNERS' CAPITAL,
March 31, 1997 680,310.61 $73,669,937 $2,363,315 $76,033,252
============ =========== ========== ===========
</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 Plus L.P. (the "Partnership"
or the "Fund") as of March 31, 1997 and the results of its operations for the
three months ended March 31, 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 March 31, 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>
Net Asset Value Net Asset Value per Unit
------------------------------------- -----------------------------------------------------
All Other Financial Number of All Other Financial
Purposes Reporting Units Purposes Reporting
--------- --------- ----- --------- ---------
1997
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A Units 20,435,824 20,423,802 178,188.00 114.69 **** 114.62
Series B Units 3,010,132 3,008,192 26,975.00 111.59 ****** 111.52
Series C Units 4,616,967 4,614,568 40,775.00 113.23 ** 113.17
Series D Units 12,432,479 12,420,532 110,969.00 112.04 *** 111.93
Series E Units 9,507,487 9,502,732 84,551.44 112.45 ***** 112.39
Series F Units 9,413,649 9,409,984 88,321.32 106.58 ******* 106.54
Series G Units 7,183,056 7,180,731 64,632.50 111.14 111.10
Series H Units 9,475,720 9,472,711 85,898.35 110.31 110.27
----------- ----------- -----------
Total 76,075,314 76,033,252 680,310.61
=========== =========== ===========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
1996
------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Series A Units $21,048,780 $21,031,369 190,136.00 $110.70 **** 110.61
Series B Units 3,447,686 3,444,936 30,179.00 114.24 * 114.15
Series C Units 4,996,014 4,992,389 45,696.00 109.33 ** 109.25
Series D Units 12,582,502 12,567,310 116,303.00 108.19 *** 108.06
Series E Units 10,484,159 10,476,812 96,561.50 108.58 ***** 108.50
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
----------- ----------- -----------
Total $78,905,274 $78,843,285 $723,659.97
=========== =========== ===========
</TABLE>
* After reduction for the $6.00 Distribution to
Series B as of 1/1/96
** After reduction for the $3.50 Distribution to
Series C as of 4/1/96
*** After reduction for the $3.50 Distribution to
Series D as of 7/1/96
**** After reduction for the $6.00 Distribution to
Series A as of 10/1/96 (For a total distribution of
$12.00 inception to date.)
***** After reduction for the $3.50 Distribution to
Series E as of 10/1/96
****** After reduction for the $6.50 Distribution to
Series B as of 1/1/97 (For a total distribution of
$12.50 inception to date.)
******* After reduction for the $6.00 Distribution to
Series F as of 1/1/97
6
<PAGE>
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's revenues by reporting category for the three months ended
March 31 1997 and March 31, 1997 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
Interest rate $ (504,828) $(346,304)
Stock indices 357,947 42,027
Commodities 1,525,154 (395,969)
Currencies 2,080,230 472,959
Energy (480,381) 631,983
Metals 415,864 (487,312)
---------- ---------
$3,393,986 $ (82,616)
========== =========
</TABLE>
Fair Value
----------
The contract/notional values of the Trading Partnership's open derivative
instrument positions as of March 31, 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>
Interest rate $24,300,478 $155,510,958 $103,258,306 $ 38,270,540
Stock indices 5,149,247 1,574,532 4,259,475 2,340,013
Commodities 15,519,334 6,010,506 8,541,433 12,761,047
Currencies 33,096,345 62,335,831 53,592,111 86,479,803
Energy 1,660,681 2,233,286 5,566,768 -
Metals 8,430,010 5,402,748 4,593,702 14,839,516
----------- ------------ ------------ ------------
$88,156,095 $233,067,861 $179,811,795 $154,690,919
=========== ============ ============ ============
</TABLE>
Substantially all of the Trading Partnership's open derivative instruments
outstanding as of March 31, 1997 expire within one year.
The contract/notional values of the Trading Partnership's exchange-traded and
non-exchange-traded open derivative instrument positions as of March 31, 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 $54,346,164 $176,435,016 $133,757,339 $ 85,639,298
Non-Exchange
traded 33,809,931 56,632,845 46,054,456 69,051,621
----------- ------------ ------------ ------------
$88,156,095 $233,067,861 $179,811,795 $154,690,919
=========== ============ ============ ============
</TABLE>
7
<PAGE>
The average fair value of the Trading Partnership's derivative instrument
positions which were open as of the end of each calendar month during the
three months ended March 31, 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 $136,011,133 $ 79,377,184 $224,985,973 $ 91,029,835
Stock indices 6,171,749 1,413,083 10,235,486 2,492,230
Commodities 15,835,027 7,628,483 13,316,970 7,175,841
Currencies 50,156,042 89,822,025 94,601,907 115,671,672
Energy 1,645,192 2,977,394 6,862,906 1,348,945
Metals 8,573,627 7,687,723 13,579,528 19,196,951
------------ ----------- ------------ ------------
$218,392,770 $188,905,892 $363,582,770 $236,915,474
============ ============ ============ ============
</TABLE>
As of March 31, 1997 and December 31, 1996, $2,510,055 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 March 31,
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 $1,873,413 $1,032,756 $2,090,698 $1,611,482
Non-Exchange
traded 699,599 (553,101) 1,172,965 65,835
---------- ---------- ---------- ----------
$2,573,012 $ 479,655 $3,263,663 $1,677,317
========== ========== ========== ==========
</TABLE>
4. SUBSEQUENT EVENTS
On April 1, 1997 distributions were announced with respect to Series C Units
and Series G Units. Series C Units received an annual fixed rate
distribution equal to $3.50 per Unit as well as a discretionary distribution
equal to $4.00 per Unit. Series G Units received an annual fixed rate
distribution equal to $3.50 per Unit as well as a discretionary distribution
equal to $3.50 per Unit.
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
Operational Overview: Advisor Selections
- ----------------------------------------
Due to the nature of the Fund's business, its results of operations
depend on Merrill Lynch Investment Partners ("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.
8
<PAGE>
As of April 1, 1997, 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 19.00
John W. Henry & Co., Inc. 15.00
Non-"Core" Advisors 66.00
------
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, only 60% of each series'
assets, and in certain cases possibly less, is allocated to trading) and the
related "principal protection" feature of the Fund.
Performance Summary
- -------------------
During the first quarter of 1996, the Fund's average month-end Neat
Assets equalled $82,082,037, and the Fund recognized trading losses of $82,616
or .10% of such average month-end Net Assets. Brokerage commissions of
$1,152,232 or 1.40%, Administrative fees 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 0.27%
decrease in the Net Asset Value per Series A Units, .25% 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, 0.32%
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 1997, the Fund's average month-end Net
Assets equalled $77,454,700 and the Fund recognized trading gains of $3,393,986
or 4.38% of such average month-end Net Assets. Brokerage commissions of
$1,073,504 or 1.39%, Administrative fees of $30,672 or .04% and Profit Shares of
$583,452 or .75% of average month-end Net Assets were paid. Interest income of
$1,113,890 or 1.44% of average month-end Net Assets resulted in a net gain of
$2,779,622 (before organizational and initial offering cost reimbursement
payments of $19,926 and after deduction of MLIP's "minority interest" in the
Trading Partnership), or 3.59% of average month-end Net Assets which resulted in
a 3.60% increase in the NAV per Series A Units, 3.37% increase (before
distribution) in the NAV per Series B Units, 3.57% increase in the NAV per
Series C Units, 3.56% increase in the NAV per Series D Units, 3.56% increase in
the NAV per Series E Units, 3.36% increase (before distribution) in the NAV per
Series F Units, 3.56% increase in the NAV per Series G Units and a 3.61%
increase in the NAV per Series H Units since December 31, 1996. 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.
9
<PAGE>
During the first three months of 1997 and 1996, the Fund experienced 5
profitable months and 1 unprofitable months.
MONTH-END NET ASSET VALUE PER SERIES A UNIT
Jan. Feb. Mar.
- -----------------------------------------------------------------------------
1996 * $109.65 *$105.56 *$106.69
- -----------------------------------------------------------------------------
1997 **$113.00 **$114.63 **$114.69
- -----------------------------------------------------------------------------
* After reduction for $6.00 per Series A Unit distribution declared on
October 1, 1995.
** After reduction for $6.00 to per Series A Unit distribution declared on
October 1, 1996, resulting in a total distribution of $12.00 inceptions
to date.
MONTH-END NET ASSET VALUE PER SERIES B UNIT
Jan. Feb. Mar.
- -----------------------------------------------------------------------------
1996 ***$106.98 ***$102.99 ***$104.09
- -----------------------------------------------------------------------------
1997 ****$109.96 ****$111.53 ****$111.59
- -----------------------------------------------------------------------------
*** After reduction for $6.00 per Series B Unit distribution declared on
January 1, 1996.
**** 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.
MONTH-END NET ASSET VALUE PER SERIES C UNIT
Jan. Feb. Mar.
- ----------------------------------------------------------------------------
1996 $105.97 $102.00 $103.10
- ----------------------------------------------------------------------------
1997 *****$111.57 *****$113.17 *****$113.23
- ----------------------------------------------------------------------------
***** After reduction for $3.50 per Series C Unit distribution declared on
April 1, 1996.
MONTH-END NET ASSET VALUE PER SERIES D UNIT
Jan. Feb. Mar.
- ----------------------------------------------------------------------------
1996 $104.83 $100.94 $102.02
- ----------------------------------------------------------------------------
1997 ******$110.39 ******$111.98 ******$112.04
- ----------------------------------------------------------------------------
****** After reduction for $3.50 per Series D Unit distribution declared on
July 1, 1996.
MONTH-END NET ASSET VALUE PER SERIES E UNIT
Jan. Feb. Mar.
- ----------------------------------------------------------------------------
1996 $105.17 $101.32 $102.4
- ----------------------------------------------------------------------------
1997 ********$110.79 ********$112.39 ********$112.45
- ----------------------------------------------------------------------------
******** After reduction for $3.50 per Series E Unit distribution declared on
October 1, 1996.
MONTH-END NET ASSET VALUE PER SERIES F UNIT
Jan. Feb. Mar.
- ----------------------------------------------------------------------------
1996 $102.16 $98.45 $99.46
- ----------------------------------------------------------------------------
1997 ********$105.02 ********$106.53 ********$106.58
- ----------------------------------------------------------------------------
******** After reduction for $6.00 per Series F Unit distribution declared on
January 1, 1997.
MONTH-END NET ASSET VALUE PER SERIES G UNIT
Jan. Feb. Mar.
- ---------------------------------------------------------------------------
1996 N/A N/A N/A
- ---------------------------------------------------------------------------
1997 $109.50 $111.08 $111.14
- ---------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER SERIES H UNIT
Jan. Feb. Mar.
- ---------------------------------------------------------------------------
1996 N/A N/A N/A
- ---------------------------------------------------------------------------
1997 $108.69 $110.26 $110.31
- ---------------------------------------------------------------------------
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
10
<PAGE>
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 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. 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
A Units received both a fixed rate and discretionary distribution of $3.50 and
$2.50 (a total distribution of $6.00) on its second Issuance Anniversary. The
Series E Units received a fixed rate distribution of $3.50 Units respective
first 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 F Units received both a fixed rate
and discretionary distribution of $3.50 and $2.50 (a total distribution of
$6.00) on its first Issuance Anniversary.
In making discretionary distributions from the Fund, even though such
distributions are made only from cumulative profits, if any (as opposed to
fixed-rate annual distributions, which are made irrespective of profitability),
MLIP considers the importance of not depleting the assets of any particular
series to the point that subsequent losses could result in MLIP further
deleveraging the trading of such series.
As of July 1, 1996, the Fund has changed its name to ML Principal
Protection LP. Such change is due to the General Partner restructuring the
continuous offerings to be sold without a guaranteed annual fixed-rate
distribution or a discretionary distribution as previously offered under ML
Principal Protection Plus LP.
Capital Resources
- -----------------
Units are offered for sale as of the beginning of each calendar
quarter, and may be redeemed as of the end of each month.
The amount of capital raised for the Fund does not have a significant
impact on its operations, as, other than a de 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
11
<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
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% of the Fund's assets committed to
trading as of April 1, 1997. In September 1996, JWH was named in a co-defendant
in a class action lawsuits brought in the California Superior Court, Los Angeles
County and in the New York Supreme Court, New York County. In November, 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
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 three months
of fiscal 1997.
12
<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: May 13, 1997 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: May 13, 1997 By /s/MICHAEL A. KARMELIN
----------------------
Michael A. Karmelin
Chief Financial Officer,
and Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACED FROM
CONSOLIDATED STATEMENTS OF OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS OF
CHANGES IN PARTNERS' CAPITAL AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE
TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 958 225,075
<RECEIVABLES> 8,458,073 7,354,254
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 70,836,861 76,265,652
<PP&E> 0 0
<TOTAL-ASSETS> 79,295,892 83,844,981
<SHORT-TERM> 0 0
<PAYABLES> 3,262,640 1,837,875
<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> 76,033,252 82,007,106
<TOTAL-LIABILITY-AND-EQUITY> 79,295,892 83,844,981
<TRADING-REVENUE> 3,893,986 (82,616)
<INTEREST-DIVIDENDS> 1,113,890 1,127,746
<COMMISSIONS> 1,647,002 1,275,063
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 2,779,622 (219,805)
<INCOME-PRE-EXTRAORDINARY> 2,779,622 (219,805)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,779,622 (219,805)
<EPS-PRIMARY> 3.94 (.27)
<EPS-DILUTED> 3.94 (.27)
</TABLE>
