<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, 1998
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.
----------------------------
ML PRINCIPAL PROTECTION 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)
212-236-9757
--------------------------------------------------
(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
--- ---
<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>
March 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
Cash $72,334 $1,423
Accrued interest 24,386 38,562
U.S. Government obligations 99,498,707 94,651,930
Broker receivable 2,712,867 -
Equity in commodity futures trading accounts:
Cash and options premiums 3,427,945 6,127,948
Net unrealized profit on open contracts 1,814,434 2,958,084
----------------- -----------------
TOTAL $107,550,673 $103,777,947
================= =================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Broker Payables $2,504,102 $ -
Redemptions payable 2,254,308 636,155
Profit Shares payable 410,361 591,195
Brokerage commissions payable 508,884 494,349
Administrative fees payable 14,539 14,330
----------------- -----------------
Total liabilities 5,692,194 1,736,029
----------------- -----------------
Minority Interest 804,031 815,233
----------------- -----------------
PARTNERS' CAPITAL:
General Partners (23141.61 and 23141.61 Units) 2,540,230 2,564,153
Limited Partners (930214.73 and 989140.56 Units) 98,514,218 105,628,837
Subscriptions receivable (0 and 69,663.05 Units) - (6,966,305)
----------------- -----------------
Total partners' capital 101,054,448 101,226,685
----------------- -----------------
TOTAL $107,550,673 $103,777,947
================= =================
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
-------------------------------------
For the three For the three
months ended months ended
March 31, March 31,
1998 1997
------------------ -----------------
REVENUES:
Trading profit (loss):
Realized $1,249,237 $4,591,648
Change in unrealized (1,143,650) (1,197,662)
------------------ -----------------
Total trading results 105,587 3,393,986
------------------ -----------------
Interest income 1,487,049 1,113,890
------------------ -----------------
Total revenues 1,592,636 4,507,876
------------------ -----------------
EXPENSES:
Profit Shares 417,850 583,452
Brokerage commissions 1,561,580 1,073,504
Administrative fees 44,617 30,672
------------------ -----------------
Total expenses 2,024,047 1,687,628
------------------ -----------------
NET (LOSS) INCOME BEFORE
MINORITY INTEREST (431,411) 2,820,248
------------------ -----------------
Minority interest 11,203 (40,626)
------------------ -----------------
NET (LOSS) INCOME $(420,208) $2,779,622
================== =================
NET (LOSS) INCOME PER UNIT:
Weighted average number of units
outstanding 997,147 706,361
================== =================
Weighted average net (loss) income
per Limited Partner
and General Partner Unit $(0.42) $3.94
================== =================
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 three months ended March 31, 1998 and 1997
--------------------------------------------------
<TABLE>
<CAPTION>
Limited General Subscriptions
Units Partners Partner Receivable Total
----------------- ------------------- ----------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
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
================= =================== ================= =================== ================
PARTNERS' CAPITAL,
December 31, 1997 942,619.12 $105,628,837 $2,564,153 $ (6,966,305) $101,226,685
Subscriptions - - - - -
Subscriptions receivable 69,663.26 - - 6,966,305 6,966,305
Distributions - (377,241) (15,568) - (392,809)
Net Income - (411,853) (8,355) - (420,208)
Redemptions (58,926.04) (6,325,525) - - (6,325,525)
----------------- ------------------- ----------------- ------------------- ----------------
PARTNERS' CAPITAL,
March 31, 1998 953,356.34 $98,514,218 $2,540,230 $ - $101,054,448
================= =================== ================= =================== ================
</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 consolidated financial position of ML Principal Protection
L.P. (the "Partnership" or the "Fund") as of March 31, 1998 and the
results of its operations for the three months ended March 31, 1998 and
1997. 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, 1997 (the "Annual Report").
2. NET ASSET VALUE PER UNIT
For financial reporting purposes, the Partnership deducted the total
organizational and initial offering costs payable to the General Partner
at inception for purposes of determining Net Asset Value. Such deduction
was allocated pro-rata among the outstanding Units of each series based
upon the aggregate Net Asset Value of each series, and then equally among
all Units of the same series. For all other purposes (including computing
Net Asset Value for redemptions) the Partnership deducts the
organizational and initial offering cost reimbursements only as actually
paid. The organizational and initial offering cost reimbursement was
completed in October 1997. At March 31, 1998 the Net Asset Values of the
different series of Units for financial reporting purposes and for all
other purposes were:
5
<PAGE>
<TABLE>
<CAPTION>
March 31, 1998
Net Asset Number Net Asset Value
Value of Units per Unit
------------------ ------------------- ------------------
<S> <C> <C> <C>
Series A Units $16,724,812 147,522.00 $113.37
Series B Units 2,687,149 24,696.00 108.81
Series C Units 3,778,930 35,051.00 107.81
Series D Units 9,480,302 86,504.00 109.59
Series E Units 7,495,753 68,737.26 109.05
Series F Units 5,009,714 48,187.24 103.96
Series G Units 5,097,748 48,007.00 106.19
Series H Units 3,373,282 31,740.23 106.28
Series K Units 11,826,254 113,352.00 104.33
Series L Units 14,469,356 142,399.00 101.61
Series M Units 14,182,770 137,497.56 103.15
Series N Units 6,928,378 69,663.05 99.46
------------------ -------------------
Totals $101,054,448 953,356.34
================== ===================
</TABLE>
6
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
Number Net Asset
Net Asset Value of Units Value per Unit
---------------------- ------------------- ------------------
<S> <C> <C> <C>
Series A Units $17,716,313 155,778.00 $113.73
Series B Units 2,865,130 25,100.00 114.15
Series C Units 4,061,256 37,551.00 108.15
Series D Units 10,499,613 95,504.00 109.94
Series E Units 7,685,677 70,255.86 109.40
Series F Units 6,136,370 56,275.48 109.04
Series G Units 5,470,415 51,354.50 106.52
Series H Units 5,610,794 52,626.22 106.62
Series K Units 12,127,411 115,752.00 104.77
Series L Units 14,732,144 144,314.00 102.08
Series M Units 14,321,562 138,108.06 103.70
-------------------- -------------------
Totals $101,226,685 942,619.12
==================== ===================
</TABLE>
7
<PAGE>
3. ANNUAL DISTRIBUTIONS
The Partnership makes annual fixed-rate distributions, payable
irrespective of profitability, of between $2 and $5 per Unit on Units issued
prior to July 16, 1996. The Partnership may also pay discretionary distributions
on such Series of Units of up to 50% of any Distributable New Appreciation, as
defined on such Units. No distributions are payable on Units issued after July
16, 1996. As of March 31, 1998, the Partnership has made the following
distributions:
<TABLE>
<CAPTION>
Series Distribution Fixed-Rate Discretionary
Date Distribution Distribution
--------- ------------------ ------------------ --------------------
<S> <C> <C> <C> <C>
1998
- -----------
Series B 1/1/98 $ 3.50 $ 1.50
Series F 1/1/98 3.50 1.25
1997
- -----------
Series A 10/1/97 $ 3.50 $ -
Series B 1/1/97 3.50 3.00
Series C 4/1/97 3.50 4.00
Series D 7/1/97 3.50 1.00
Series E 10/1/97 3.50 2.00
Series F 1/1/97 3.50 2.50
Series G 4/1/97 3.50 3.50
Series H 7/1/97 3.50 2.50
1996
- -----------
Series A 10/1/96 $ 3.50 $ 2.50
Series B 1/1/96 3.50 2.50
Series C 4/1/96 3.50 -
Series D 7/1/96 3.50 -
Series E 10/1/96 3.50 -
1995
- -----------
Series A 10/1/95 3.50 2.50
</TABLE>
8
<PAGE>
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's revenues by reporting category for the respective periods were
as follows:
For the three For the three
months ended months ended
March 31, 1998 March 31, 1997
--------------------- ---------------------
Interest rates $519,711 $(504,828)
Stock indices 212,737 357,947
Commodities 208,150 1,525,154
Currencies 422,105 2,080,230
Energy (1,163,062) (480,381)
Metals (94,054) 415,864
--------------------- ---------------------
$105,587 $3,393,986
===================== =====================
The contract/notional values of the Trading Partnership's open derivative
instrument positions as of March 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------- -------------------------------------------------
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 rates $218,538,984 $175,585,158 $121,435,283 $85,620,621
Stock indices 16,009,545 860,408 1,665,588 8,854,122
Commodities 13,405,783 21,228,185 11,663,786 21,791,599
Currencies 78,125,912 130,210,017 70,272,888 147,312,282
Energy 3,671,093 3,580,864 1,085,885 9,041,759
Metals 7,474,304 12,567,237 4,412,002 19,039,071
-------------------- ------------------- -------------------- ---------------------
$337,225,621 $344,031,869 $210,535,432 $291,659,454
==================== =================== ==================== ====================
</TABLE>
9
<PAGE>
The contract/notional values of the Trading Partnership's exchange-traded
and non-exchange-traded open derivative instrument positions as of March
31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------------------- ----------------------------------------------------
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 $277,532,994 $243,214,515 $142,565,779 $183,223,917
Non-Exchange
traded 59,692,627 100,817,354 67,969,653 108,435,537
------------------------- ------------------------- ------------------------- --------------------------
$337,225,621 $344,031,869 $210,535,432 $291,659,454
========================= ========================= ========================= ==========================
</TABLE>
The average fair value, based on contract/notional 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, 1998
and the year ended December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------------- -------------------------------------------------------
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 rates $301,751,496 $103,900,423 $177,189,103 $68,697,138
Stock indices 11,943,656 2,977,850 7,544,449 4,040,832
Commodities 13,032,721 20,732,492 13,113,725 11,481,639
Currencies 95,921,568 151,526,194 70,061,899 113,287,725
Energy 2,573,421 6,361,228 3,621,533 3,415,726
Metals 7,931,693 15,769,009 7,369,251 14,913,348
--------------------------- --------------------------- --------------------------- ---------------------------
$433,154,555 $301,267,196 $278,899,960 $215,836,408
=========================== =========================== =========================== ===========================
</TABLE>
The gross unrealized profit and the net unrealized profit on the
Trading Partnership's open derivative instrument positions as of March
31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------------- ----------------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit Profit Profit
------------------- -------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Exchange
traded $2,402,540 $1,118,995 $3,263,519 $2,416,539
Non-Exchange
traded 1,652,625 695,439 2,119,281 541,545
------------------- -------------------- ------------------- -------------------
$4,055,165 $1,814,434 $5,382,800 $2,958,084
=================== ==================== =================== ===================
</TABLE>
4. SUBSEQUENT EVENTS
On April 1, 1998 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. Series G Units received an annual
fixed rate distribution equal to $3.50 per Unit.
10
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Performance Summary
January 1, 1997 to March 31, 1997
In currency markets, the U.S. dollar rallied and started 1997 on a
strong note, rising to a four-year high versus the Japanese yen and
two-and-a-half year highs versus the Deutsche mark and the Swiss franc.
Profitable results were seen throughout the quarter in currency trading.
Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. January and March were
profitable months for interest rate trading.
In energy markets, a slump in crude oil prices was characteristic
of its lackluster performance from the beginning of the year. Early in 1997,
volatility returned in the energy markets, reflecting the impact of a winter
significantly warmer than normal. January and March saw losses in energy
trading; February, however, was profitable.
Agricultural commodity trading proved profitable in February and
March. Soybean prices reached their highest level in over eight years, on
continued demand and fears that inventories could fall to critically low levels
before the next harvest.
January 1, 1998 to March 31, 1998
The Fund's most profitable positions during the quarter were in the
global interest rate markets, particularly in European bonds where an extended
bond market rally continued despite an environment of robust growth in the
United States, Canada and the United Kingdom, as well as a strong pick-up in
growth in continental Europe. Specifically, strong gains were recorded in French
and German bonds.
Gold and crude oil trading resulted in losses. Gold prices drifted
sideways and lower as Asian demand continued to slow and demand in the Middle
East was affected by low oil prices. Initially buoyed on concerns about a
U.S.-led military strike against Iraq, crude oil fell to a nine year low, as the
globally warm winter, the return of Iraq as a producer and the Asian economic
crisis added to OPEC's supply glut problems.
Trading results in stock index markets were mixed, but marginally
profitable, despite a strong first-quarter performance by the U.S. equity market
as several consecutive weekly gains were recorded with most market averages
setting new highs. Results in currency trading were also mixed, but marginally
profitable. Strong gains were realized in positions on the Swiss franc, which
weakened versus the U.S. dollar, while trading losses resulted from positions in
the Deutsche mark and the Australian dollar.
Agricultural commodity markets provided profits. Live cattle and
hog prices trended downward throughout the quarter resulting in strong gains.
Cotton prices moved mostly upward during the quarter, but dropped off sharply at
the end of March, causing losses.
MONTH-END NET ASSET VALUE PER SERIES A UNIT
Jan. Feb. Mar.
---------------------------------------------------
1997 $113.00 (a) $114.63 (a) $114.69 (a)
---------------------------------------------------
1998 $113.84 (b) $113.25 (b) $113.37(b)
---------------------------------------------------
(a) After reduction for $6.00 per Series A Unit distribution declared on
October 1, 1995 and $6.00 per Series A Unit distribution declared on
October 1, 1996.
(b) After reduction for a $3.50 per Series A distribution declared on October
1, 1997 and the distributions described in (a), resulting in a total
distribution of $15.50 inception to date.
As of July 1, 1996, the Fund changed its name to ML Principal
Protection L.P. Such change was 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
11
<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.
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 1,468,909.77 Units of
limited partnership interest, with an aggregate price of
$146,890,977.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Mr. Michael A. Karmelin, Chief Financial Officer, Vice President and
Treasurer of Merrill Lynch Investment Partners Inc. ("MLIP"), has announced that
he will resign from MLIP effective April 15, 1998 to pursue other business
opportunities. MLIP expects to announce his successor in the near future.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits required to be filed with this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first three months
of fiscal 1998.
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 11, 1998 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: May 11, 1998 By /s/ SERGIO M. PAVONE
--------------------
Sergio M. Pavone
Vice President and Controller
(Chief Accounting Officer)
13
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 72,334 958
<RECEIVABLES> 7,979,632 8,458,073
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 102,211,574 70,836,861
<PP&E> 0 0
<TOTAL-ASSETS> 110,263,540 79,295,892
<SHORT-TERM> 0 0
<PAYABLES> 9,209,092 3,262,640
<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> 101,054,448 76,033,252
<TOTAL-LIABILITY-AND-EQUITY> 110,263,540 79,295,892
<TRADING-REVENUE> 105,587 3,893,986
<INTEREST-DIVIDENDS> 1,487,049 1,113,890
<COMMISSIONS> 2,012,844 1,647,002
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (420,208) 2,779,622
<INCOME-PRE-EXTRAORDINARY> (420,208) 2,779,622
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (420,208) 2,779,622
<EPS-PRIMARY> (.42) 3.94
<EPS-DILUTED> (.42) 3.94
</TABLE>
