<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 June 30, 1999
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.
Princeton Corporate Campus
800 Scudders Mill Road - Section 2G
Plainsboro, New Jersey 08536
----------------------------
(Address of principal executive offices)
(Zip Code)
609-282-6996
---------------------------------------------
(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>
June 30, December 31,
1999 1998
----------------- -----------------
<S> <C> <C>
ASSETS
Equity in commodity futures trading accounts:
Cash and options premiums $ 14,210,931 $ 20,564,400
Net unrealized profit on open contracts 549,425 601,178
Government Securities
(Cost: $50,252,435 and $60,044,483, respectively) 49,972,082 60,536,271
Cash 2,483 43,497
Accrued interest 679,728 685,821
----------------- -----------------
TOTAL $ 65,414,649 $ 82,431,167
================= =================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 1,164,309 $ 1,467,829
Profit Shares payable 222,229 594,328
Brokerage commissions payable 349,996 402,923
Administrative fees payable 13,629 16,960
----------------- -----------------
Total liabilities 1,750,163 2,482,040
----------------- -----------------
Minority Interest 841,751 842,289
----------------- -----------------
PARTNERS' CAPITAL:
General Partners (9,168.61 and 6,654.61 Units) 1,000,302 735,280
Limited Partners (567,098.8627 and 717,784.1628 Units) 61,822,433 78,371,558
----------------- -----------------
Total partners' capital 62,822,735 79,106,838
----------------- -----------------
TOTAL $ 65,414,649 $ 82,431,167
================= =================
</TABLE>
NET ASSET VALUE PER UNIT (Note 2)
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 six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
--------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 1,387,708 $ 347,507 $ 1,623,887 $ 1,596,744
Change in unrealized (223,764) (1,794,976) (784,691) (2,938,626)
--------------- --------------- -------------- -------------
Total trading results 1,163,944 (1,447,469) 839,196 (1,341,882)
--------------- --------------- -------------- -------------
Interest income 857,436 1,483,007 1,817,717 2,970,056
--------------- --------------- -------------- -------------
Total revenues 2,021,380 35,538 2,656,913 1,628,174
--------------- --------------- -------------- -------------
EXPENSES:
Profit Shares 192,253 286,419 243,888 704,269
Brokerage commissions 1,060,157 1,693,272 2,247,721 3,254,852
Administrative fees 42,863 48,379 91,098 92,996
--------------- --------------- -------------- -------------
Total expenses 1,295,273 2,028,070 2,582,707 4,052,117
--------------- --------------- -------------- -------------
INCOME (LOSS) BEFORE
MINORITY INTEREST 726,107 (1,992,532) 74,206 (2,423,943)
--------------- --------------- -------------- -------------
Minority interest (8,800) 27,002 538 38,205
--------------- --------------- -------------- -------------
NET INCOME (LOSS) $ 717,307 $ (1,965,530) $ 74,744 $ (2,385,738)
=============== =============== ============== =============
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 618,439 1,029,734 660,078 1,013,441
=============== =============== ============== ==============
Weighted average net income (loss)
per Limited Partner
and General Partner Unit $ 1.16 $ (1.91) $ 0.11 $ (2.35)
=============== =============== ============== ==============
</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 six months ended June 30, 1999 and 1998
------------------------------------------------
<TABLE>
<CAPTION>
Limited General Subscriptions
Units Partners Partner Receivable Total
-------------- --------------- ------------- ---------------- ---------------
<S> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1997 942,619.1200 $ 105,628,837 $ 2,564,153 $ (6,966,305) $ 101,226,685
Subscriptions 130,030.4900 13,003,049 - - 13,003,049
Subscriptions receivable 69,663.2600 - - 6,966,305 6,966,305
Distributions - (661,354) (22,156) - (683,510)
Net Loss - (2,351,043) (34,695) - (2,385,738)
Redemptions (183,846.0100) (17,711,435) (1,807,847) - (19,519,282)
-------------- --------------- ------------- ---------------- ---------------
PARTNERS' CAPITAL,
June 30, 1998 958,466.8600 $ 97,908,054 $ 699,455 $ - $ 98,607,509
============== =============== ============= ================ ===============
PARTNERS' CAPITAL,
December 31, 1998 724,438.7728 $ 78,371,558 $ 735,280 - $ 79,106,838
Subscriptions 15,735.7999 1,307,406 266,194 - 1,573,600
Distributions - (288,968) (5,339) - (294,307)
Net Income - 70,577 4,167 - 74,744
Redemptions (163,907.1000) (17,638,140) - - (17,638,140)
-------------- --------------- ------------- ---------------- ---------------
PARTNERS' CAPITAL,
June 30, 1999 576,267.4727 $ 61,822,433 $ 1,000,302 $ - $ 62,822,735
============== =============== ============= ================ ===============
</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 June 30, 1999 and December 31, 1998, and
the results of its operations for the three and six-month periods ended June
30, 1999 and 1998. 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 generally 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, 1998 (the "Annual Report").
5
<PAGE>
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 deducted the organizational and
initial offering cost reimbursements only as actually paid. The
organizational and initial offering cost reimbursement was completed in
October 1997. At June 30, 1999 and December 31, 1998, the Net Asset Values
of the different series of Units for financial reporting purposes and for
all other purposes were:
June 30, 1999
Net Asset Number Net Asset Value
Value of Units per Unit
----------------- ------------------ ---------------
Series A Units $ 10,587,247 91,271.0000 $116.00
Series B Units 1,074,981 9,669.0000 111.18
Series C Units 1,460,736 13,745.0000 106.27
Series D Units 5,497,940 49,106.0000 111.96
Series E Units 4,391,231 39,361.1800 111.56
Series F Units 2,655,343 24,996.0400 106.23
Series G Units 2,418,559 23,049.6000 104.93
Series H Units 1,785,149 16,450.4750 108.52
.
Series K Units 6,317,579 57,593.0000 109.69
Series L Units 7,830,262 73,254.0000 106.89
Series M Units 8,544,507 78,804.5100 108.43
Series N Units 2,669,645 25,541.4250 104.52
Series O Units 4,619,331 44,059.2419 104.84
Series P Units 609,187 5,694.0000 106.99
Series Q Units 811,039 8,198.0008 98.93
Series R Units 1,279,508 12,794.0000 100.01
Series S Units 270,491 2,681.0000 100.89
----------------- ------------------
Totals $ 62,822,735 576,267.4727
================= ==================
6
<PAGE>
December 31, 1998
Net Asset Value Number Net Asset
of Units Value per Unit
------------------- ------------------- ---------------
Series A Units $ 12,718,104 109,886.0000 $115.74
Series B Units 1,498,896 13,150.0000 113.98
Series C Units 2,145,087 19,694.0000 108.92
Series D Units 6,658,019 59,742.0000 111.45
Series E Units 6,063,352 54,556.5800 111.14
Series F Units 3,285,111 30,152.6400 108.95
Series G Units 2,854,082 26,507.1000 107.67
Series H Units 2,185,925 20,275.7250 107.81
Series K Units 7,063,107 64,436.0000 109.61
Series L Units 9,686,313 90,690.0000 106.81
Series M Units 10,476,381 96,696.0600 108.34
Series N Units 5,800,784 55,546.4250 104.43
Series O Units 7,205,406 68,774.2420 104.77
Series P Units 655,841 6,134.0000 106.92
Series Q Units 810,430 8,198.0008 98.86
------------------- -------------------
Totals $ 79,106,838 724,438.7728
=================== ===================
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 June 30, 1999, the Partnership has made the following
distributions:
Series Distribution Fixed-Rate Discretionary
Date Distribution Distribution
---------- ------------ ------------ -------------
1999
- ----------
Series B 1/1/99 $ 3.50 -
Series C 4/1/99 3.50 -
Series F 1/1/99 3.50 -
Series G 4/1/99 3.50 -
1998
- ----------
Series A 10/1/98 $ 3.50 -
Series B 1/1/98 3.50 $ 1.50
Series C 4/1/98 3.50 -
Series D 7/1/98 3.50 -
Series E 10/1/98 3.50 -
Series F 1/1/98 3.50 1.25
Series G 4/1/98 3.50 -
Series H 7/1/98 3.50 -
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
8
<PAGE>
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"), effective for
fiscal years beginning after June 15, 2000, however, the Fund has adopted
the Statement effective January 1, 1999. This Statement supercedes SFAS No.
119 ("Disclosure about Derivative Financial Instruments and Fair Value of
Financial Instruments") and SFAS No. 105 ("Disclosure of information about
Financial Instruments with Off-Balance Sheet Risk and Financial Instruments
with Concentrations of Credit Risk") whereby disclosure of average aggregate
fair values and contract/notional values, respectively, of derivative
financial instruments is no longer required for an entity such as the
Partnership which carries its assets at fair value. Such Statement sets
forth a much broader definition of a derivative instrument. The General
Partner does not believe that the application of the provisions of such
statement has a significant effect on the financial statements.
SFAS No. 133 defines a derivative as a financial instrument or other
contract that has all three of the following characteristics (1) one or more
underlyings, notional amounts or payment provisions (2) requires no initial
net investment or a smaller initial net investment than would be required
relative to changes in market factors (3) terms require or permit net
settlement. Generally, derivatives include a future, forward, swap or option
contract, or other financial instrument with similar characteristics such as
caps, floors and collars.
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the financial instruments or
commodities underlying such derivative instruments frequently result in
changes in the Partnership's net unrealized profit (loss) on such derivative
instruments as reflected in the Consolidated Statements of Financial
Condition. The Trading Partnership's exposure to market risk is influenced
by a number of factors, including the relationships among the derivative
instruments held by the Trading Partnership, as well as the volatility and
liquidity of the markets in which such derivative instruments are traded.
The General Partner has procedures in place intended to control market risk
exposure, although there can be no assurance that they will, in fact,
succeed in doing so. These procedures focus primarily on monitoring the
trading of the Advisors selected from time to time for the Partnership
adjusting the percentage of the Partnership's invested in the Trading
Partnership with respect to each Series or Units, calculating the Net Asset
Value of the Advisors' respective Partnership accounts as of the close of
business on each day and reviewing outstanding positions for over-
concentrations both on an Advisor-by-Advisor and on an overall Partnership
basis. While the General Partner does not itself intervene in the markets to
hedge or diversify the Partnership's market exposure, the General Partner
may urge Advisors to reallocate positions, or itself reallocate Partnership
assets among Advisors (although typically only as of the end of a month) in
an attempt to avoid over-concentration. However, such interventions are
unusual. Except in cases in which it appears that an Advisor has begun to
deviate from past practice or trading policies or to be trading erratically,
the General Partner's basic risk control procedures consist simply of the
ongoing process of Advisor monitoring and selection, with the market risk
controls being applied by the Advisors themselves.
One important aspect of the General Partner's risk controls is its
adjustments to the leverage at which the Units trades. If MLIP makes a
leverage adjustment to any Series issued after May 1, 1997, a
corresponding adjustment is made to the leverage used by all such Series.
For series issued prior to May 1, 1997, adjustments to leverage may be made
individually by Series. By controlling the percentage of assets invested in
the Trading Partnership, the General Partner can directly affect the market
exposure of the Partnership. Leverage control is the principal means by
which the General Partner hopes to be able to ensure that Merrill Lynch is
never required to make any payments. Under its guarantee that the Net Asset
value per Unit of each Series will equal no less than $100 as of the
Principal Assurance Date for such Series.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically perceived
to be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases
limited in amount, in some cases not) of the members of the exchange is
pledged to support the financial integrity of the exchange. In over-the-
counter transactions, on the other hand, traders must rely solely on the
credit of their respective individual counterparties. Margins, which may be
subject to loss in the event of a default, are generally required in
exchange trading, and counterparties may require margin in the over-the-
counter markets.
9
<PAGE>
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit included on the Consolidated
Statements of Financial Condition.
The Partnership has credit risk in respect of its counterparties and
brokers, but attempts to control this risk by dealing almost exclusively
with Merrill Lynch entities as counterparties and brokers.
5. SUBSEQUENT EVENTS
On July 1, 1999 distributions were announced with respect to Series D Units
and Series H Units. Series D Units and Series H Units received an annual
fixed rate distribution equal to $3.50 per Unit as well as a discretionary
distribution equal to $1.00 per Unit.
10
<PAGE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
MONTH-END NET ASSET VALUE PER SERIES A UNIT
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun.
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998 $113.84 (a) $113.25 (a) $113.37 (a) $111.46 (a) $112.48 (a) $111.69 (a)
- ----------------------------------------------------------------------------------------------------
1999 $115.39 (b) $115.86 (b) $114.86 (b) $116.14 (b) $114.75 (b) $116.00 (b)
- ----------------------------------------------------------------------------------------------------
</TABLE>
(a) After reduction for a $6.00 per Series A Unit distribution declared on
October 1, 1995, a $6.00 per Series A Unit distribution declared on October 1,
1996, and a $3.50 per Series A Unit distribution declared on October 1, 1997.
(b) After reduction for a $3.50 per Series A Unit distribution declared on
October 1, 1998 and the distributions described in (a), resulting in a total
distribution of $19.00 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.
Performance Summary
January 1, 1998 to June 30, 1998
- --------------------------------
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.
April 1, 1998 to June 30, 1998
As swings in the U.S. dollar and developments in Japan affected bond markets,
the Fund's interest rate trading during the quarter resulted in losses,
particularly in Eurodollar deposits and U.S. Treasury bonds. Early in the
quarter, Treasury trading was range-bound, as concern that the economy might be
overheating was balanced by the potential impact of the Asian recession.
Additionally, Australian bonds and bills saw a dramatic drop in prices in early
June, as dollar-bloc currencies remained under pressure versus the U.S. dollar
due to the Japanese/Asian crisis.
Metals and energy trading also resulted in losses. The depressed gold market
weakened further following news of a European Central Bank consensus that ten to
fifteen percent of reserves should be made up of gold bullion which was at the
low end of expectations. Despite production cuts initiated by OPEC at the end
of March, world oil supplies remained excessive and oil prices stood at
relatively low levels throughout the quarter.
Results in currency trading were profitable. Strong gains were realized in
positions on the Japanese yen, which weakened during June to an eight-year low
versus the U.S. dollar. Trading results in stock index markets were also
profitable as the Asia-Pacific region's equity markets weakened across the
board. In
11
<PAGE>
particular, Hong Kong's Hang Seng index trended downward during most of the
quarter and traded at a three-year low.
Agricultural commodity trading produced profits. Although the U.S. soybean crop
got off to a good start which contributed to higher yield expectations and a
more burdensome supply outlook, soybean prices traded in a volatile pattern for
the second half of the quarter. Sugar futures maintained mostly a downtrend, as
no major buyers emerged to support the market. Similarly, coffee prices trended
downward, as good weather conditions in Central America and Mexico increased the
prospects of more output from these countries.
January 1, 1999 to June 30, 1999
- --------------------------------
January 1, 1999 to March 31, 1999
The Fund profited from trading in crude oil, heating oil, and unleaded gas. As
the year opened, the global oil balance continued to show signs of being
lopsided with estimated year-end 1998 inventories at their highest levels since
1984. During January, petroleum stocks rose by 21 million barrels compared with
a typical gain of 6 to 7 million barrels. Then, on March 23, OPEC ratified new
production cuts totaling 1.716 million barrels per day at its conference. These
new production cuts were scheduled to go into effect on April 1 and proved to be
harbingers of higher prices for crude.
Agricultural trading was also profitable overall, as gains in live hogs and live
cattle offset losses in corn positions. Hog prices plummeted due to a glut of
hogs in the market. At the beginning of the quarter, the corn market continued
to struggle despite a stretch of solid export business. The market's negative
sentiment was deepened by ongoing favorable weather in South America which
continued through February, even though there was a sharp reduction in
Argentina's planted area. Lack of enthusiasm for new crop and less than
spectacular demand continued to depress the corn market throughout the quarter.
The Fund suffered losses in currency trading during the quarter, as losses in
Japanese yen overpowered gains in Swiss francs. On a trade-weighted basis, the
Swiss franc ended the quarter at close to a seven-month low, mostly as a result
of the stronger U.S. dollar. In January, the yen had advanced by nearly 35%
against the dollar since early in August, and the Bank of Japan lowered rates to
keep the economy sufficiently liquid so as to allow fiscal spending to restore
some growth to the economy and to drive down the surging yen.
Stock index trading was also unprofitable, as losses were sustained in Hang Seng
and CAC40 positions. Also of note, the Dow Jones Industrial Average closed
above the 10,000 mark for the first time ever at the end of March, setting a
record for the index.
Interest rate trading proved unprofitable for the Fund as well, as losses in
Japanese 10-year government bonds offset gains in 10-year U.S. Treasury notes
and German 10-year bonds. Early in January, the yield on the Japanese
government 10-year bond increased to 1.8%, sharply above the record low of
0.695% it reached on October 7, 1998. This was triggered by the Japanese Trust
Fund Bureau's decision to absorb a smaller share of future issues, leaving the
burden of financing future budget deficits to the private sector.
Losses in aluminum overshadowed slight gains in gold and copper during the first
quarter. In January, burdensome warehouse stocks and questionable demand
prospects weighed on base metals as aluminum fell to a 5-year low and copper
fell to nearly an 11-year low. Major surpluses in both metals were expected,
keeping prices down, and there was no supply side response to weak demand and
lower prices. However, the end of March showed copper and aluminum leading a
surge in base metals as prices recovered from multi-year lows. In precious
metals, gold failed to sustain a rally, and gold's role as a flight to safety
vehicle has clearly been greatly diminished as has its role as a monetary asset.
April 1, 1999 to June 30, 1999
The Fund profited in interest rate trading from short positions in Euro dollars,
U.S. 10-year Treasury notes and U.S. Treasury bonds as the flight to quality in
the bond market reversed during the first half of 1999 and concerns about higher
interest rates continued to rattle the financial markets.
Stock index trading also resulted in gains overall for the quarter, as positions
in the Hang Seng, Nikkei 225 and Topix Indices all generated profits when equity
markets rallied worldwide in April and June.
The energy sector was profitable as positions in crude oil and natural gas
offset losses in gasoil trading. The focus of attention in the natural gas
markets since the end of winter was the sharply lower than year-ago storage
injection activity. Crude oil prices rallied much higher and faster than
expected following last quarter's ratification of an OPEC/non-OPEC agreement to
cut production by over 2 million barrels per day. Natural gas prices also
rallied sharply over the quarter, reflecting, in part, growing concerns about a
decline in US natural gas production.
Trading in the agricultural markets resulted in losses for the Fund. Gains from
live cattle positions were offset by losses from short corn and hog positions.
Agricultural commodities, in particular corn, were
12
<PAGE>
weak almost across the board as they were saddled with negative supply/demand
balances. In the beginning of the quarter, continued wetness across the corn
belt led to early planting delays.
Currency trading also resulted in losses for the Fund. Gains in Euro trading
were offset by losses sustained in the British pound and short positions in the
Canadian dollar. After suffering under the weight of lower commodity prices and
the Asian recession, the Canadian dollar underwent a significant rally in the
first half of 1999, moving up about 3 cents from the end of 1998. It has been
in a corrective mode since early May, but unlike past years has retained much of
its gain.
In the metals sector, gains from short gold positions were overshadowed by
losses in copper and nickel trading. Throughout the first half of 1999, gold
prices were in a state of gradual erosion and in early June, hit their lowest
levels in over 20 years. Gold continued to show a lack of response to political
and military events such as Kosovo and also lost much of its role as a monetary
asset and flight to safety vehicle. The economic scenario for Asia, Brazil,
emerging market nations and Europe helped keep copper and other base metals on
the defensive as demand receded with virtually no supply side response.
Year 2000 Compliance
As the Year 2000 approaches, Merrill Lynch has undertaken initiatives to address
the Year 2000 problem (the "Y2K problem"), as more fully described in the
Partnership's 1998 Form 10-K. The failure of Merrill Lynch's technology systems
relating to a Y2K problem would likely have a material adverse effect on the
company's business, results of operations, and financial condition. This effect
could include disruption of normal business transactions, such as the
settlement, execution, processing, and recording of trades in securities,
commodities, currencies, and other assets. The Y2K problem could also increase
Merrill Lynch's exposure to risk and legal liability and its need for liquidity.
The renovation phase of Merrill Lynch's Year 2000 system efforts, as described
in the Partnership's 1998 Form 10-K, was 100% completed as of June 30, 1999, and
production testing was 100% completed as of that date. In March and April 1999,
Merrill Lynch successfully participated in U.S. industrywide testing sponsored
by the Securities Industry Association. These tests involved an expanded number
of firms, transactions, and conditions compared with those previously conducted.
Merrill Lynch has participated in and continues to participate in numerous
industry tests throughout the world.
In light of the interdependency of the parties in or serving the financial
markets, there can be no assurance that all Y2K problems will be identified and
remedied on a timely basis or that all remediation will be successful. Public
uncertainty regarding successful remediation of the Y2K problem may cause a
reduction in activity in the financial markets. Disruption or suspension of
activity in the world's financial markets is also possible. In some non-U.S.
markets in which Merrill Lynch does business, the level of awareness and
remediation efforts relating to the Y2K problem are thought to be less advanced
than in the U.S. Management is unable at this point to ascertain whether all
significant third parties will successfully address the Y2K problem. Merrill
Lynch will continue to monitor third parties' Year 2000 readiness to determine
if additional or alternative measures are necessary. Contingency plans have been
established for all business units. However, the failure of exchanges, clearing
organizations, vendors, service providers, clients and counterparties,
regulators, or others to resolve their own processing issues in a timely manner
could have a material adverse effect on Merrill Lynch's business, results of
operations, and financial condition.
As of June 25, 1999, the total estimated expenditures of existing and
incremental resources for the Year 2000 compliance initiative are approximately
$520 million. This estimate includes $104 million of occupancy, communications,
and other related overhead expenditures, as Merrill Lynch is applying a fully
costed pricing methodology for this project. Of the total estimated
expenditures, approximately 80% remains to be spent, primarily on continued
testing, contingency planning, and risk management. There can be no assurance
that the costs associated with remediation efforts will not exceed those
currently anticipated by Merrill Lynch, or that the possible failure of such
remediation efforts will not have a material adverse effect on Merrill Lynch's
business, results of operations, or financial condition.
13
<PAGE>
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The following table indicates the trading Value at Risk associated with the
Fund's open positions by market category as of June 30, 1999 and December 31,
1998, and the average of the three and six month period ending June 30, 1999. As
of June 30, 1999 and December 31, 1998, the Fund's total capitalization was
approximately $62 million and $79 million, respectively, allocated to trading.
<TABLE>
<CAPTION>
June 30, 1999 December 31, 1998
---------------------------------------- ------------------------------------------
% OF TOTAL % OF TOTAL
MARKET SECTOR VALUE AT RISK CAPITALIZATION VALUE AT RISK CAPITALIZATION
------------- -------------- ------------- -------------------
- ----------------
<S> <C> <C> <C> <C>
Interest Rates $ 1,400,596 2.24% $ 567,386 0.71%
Currencies 982,848 1.57 1,050,731 1.33
Stock Indices 1,831,362 2.93 283,117 0.36
Metals 400,363 0.64 315,100 0.40
Commodities 255,371 0.41 280,302 0.35
Energy 353,200 0.56 226,400 0.29
-------------- ----------- ----------------- ------------
$ 5,223,740 8.35% $ 2,723,036 3.44%
============== =========== ================= ============
<CAPTION>
Average month-end Average month-end
For the Period For the Period
April 1999 through June 1999 January 1999 through June 1999
------------------------------------------- --------------------------------------------
% OF TOTAL % OF TOTAL
MARKET SECTOR VALUE AT RISK CAPITALIZATION VALUE AT RISK CAPITALIZATION
------------- -------------- ------------- --------------
- ----------------
<S> <C> <C> <C> <C>
Interest Rates $ 1,970,005 3.07% $ 4,872,441 7.11%
Currencies 1,372,180 2.14 1,242,238 1.81
Stock Indices 1,049,353 1.64 856,711 1.25
Metals 454,954 0.71 498,965 0.73
Commodities 361,422 0.56 407,540 0.60
Energy 366,300 0.57 351,675 0.51
-------------- ----------- ----------------- ------------
$ 5,574,214 8.69% $8,229,570 12.01%
============== =========== ================= ============
</TABLE>
14
<PAGE>
MLAM'S Cash Management
MLAM invests approximately 80% of the Fund's assets in Government Securities.
As of June 30, 1999 and December 31, 1998, the Fund's MLAM account totalled
approximately $50 million and $61 million, respectively.
As of June 30, 1999, the Fund's MLAM account held the following securities:
<TABLE>
<CAPTION>
Par Value Description Rate Maturity Date Fair Value
- ----------------- ------------------------------------------ ------------- ----------------------- ------------------
Long-Term
- -----------------
<S> <C> <C> <C> <C>
5,000,000 Federal National Mortgage Association 5.720% January 9, 2001 $ 5,056,530
4,000,000 Federal National Mortgage Association 5.625% March 15, 2001 4,028,000
3,000,000 Federal National Mortgage Association 5.375% March 15, 2002 2,947,500
3,000,000 U.S. Treasury Note 4.500% September 30, 2000 2,967,656
2,000,000 U.S. Treasury Note 5.750% November 15, 2000 2,000,938
2,000,000 U.S. Treasury Note 5.625% November 30, 2000 2,005,312
9,000,000 U.S. Treasury Note 5.375% February 15, 2001 8,969,531
1,000,000 U.S. Treasury Note 5.750% April 30, 2003 1,001,562
1,000,000 U.S. Treasury Note 5.250% August 15, 2003 983,281
1,000,000 U.S. Treasury Note 6.000% August 15, 2000 991,562
1,500,000 U.S. Treasury Note 4.625% November 30, 2000 1,483,828
2,000,000 U.S. Treasury Note 4.500% January 31, 2001 1,971,250
------------------
Subtotal 34,406,950
------------------
Short-Term
- -----------------
2,530,000 Federal National Mortgage Association 0.000% July 20, 1999 2,517,059
9,580,000 Federal Home Loan Mortgage Corp. 0.000% July 9, 1999 9,536,351
1,000,000 U.S. Treasury Note 5.500% March 31, 2000 988,987
2,500,000 U.S. Treasury Note 6.375% May 15, 2000 2,522,735
------------------
Subtotal 15,565,132
------------------
Total Government Securities $ 49,972,082
==================
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
As of December 31, 1998, the Fund's MLAM account held the following securities:
Par Value Description Rate Maturity Date Fair Value
- ----------------- ------------------------------------------ ------------- ----------------------- ------------------
Long-Term
- -----------------
<S> <C> <C> <C> <C>
3,000,000 U.S. Treasury Note 5.500% February 29, 2000 $ 3,028,594
1,000,000 U.S. Treasury Note 6.375% May 15, 2000 1,022,344
1,000,000 U.S. Treasury Note 6.000% August 15, 2000 1,020,781
1,000,000 U.S. Treasury Note 5.750% November 15, 2000 1,019,531
1,000,000 U.S. Treasury Note 5.625% November 30, 2000 1,017,967
1,500,000 U.S. Treasury Note 5.625% December 31, 1999 1,514,648
5,000,000 U.S. Treasury Note 5.500% March 31, 2000 5,050,000
5,000,000 U.S. Treasury Note 6.375% May 15, 2000 5,111,719
2,000,000 U.S. Treasury Note 4.500% September 30, 1999 1,995,938
2,000,000 U.S. Treasury Note 5.750% November 15, 2000 2,039,063
2,000,000 U.S. Treasury Note 5.625% November 30, 2000 2,035,938
5,000,000 U.S. Treasury Note 5.375% February 15, 2001 5,078,125
1,000,000 U.S. Treasury Note 5.750% April 30, 2003 1,041,094
1,000,000 U.S. Treasury Note 5.250% August 15, 2003 1,025,625
1,000,000 Federal National Mortgage Association 4.820% December 18, 2000 998,672
2,000,000 Federal National Mortgage Association 5.720% January 9, 2001 2,027,960
4,000,000 Federal National Mortgage Association 4.820% December 18, 2000 3,994,688
3,000,000 Federal National Mortgage Association 5.720% January 9, 2001 3,041,939
3,000,000 Federal National Mortgage Association 5.420% January 23, 2001 3,025,200
--------------------
Subtotal 45,089,826
--------------------
Short-Term
- -----------------
3,000,000 U.S. Treasury Note 5.625% December 31, 1999 3,029,297
3,651,000 Federal National Mortgage Association 5.090% January 8, 1999 3,646,984
4,430,000 Federal National Mortgage Association 5.090% January 8, 1999 4,425,127
4,352,000 Federal National Mortgage Association 5.100% January 11, 1999 4,345,037
--------------------
Subtotal 15,446,445
--------------------
Total Government Securities $ 60,536,271
==================
</TABLE>
16
<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 units registered with an aggregate price of
$462,114,000. Through June 30, 1999, the Fund has sold units with
an aggregate price of $164,190,851.
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 report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first six months
of fiscal 1999.
17
<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: August 10, 1999 By /s/ JOHN R. FRAWLEY, JR.
-------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: August 10, 1999 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Vice President, Chief Financial Officer
and Treasurer
18
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> JUN-30-1999 JUN-30-1998
<CASH> 2,483 43,497
<RECEIVABLES> 15,440,084 21,851,399
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 49,972,082 60,536,271
<PP&E> 0 0
<TOTAL-ASSETS> 65,414,649 82,431,167
<SHORT-TERM> 0 0
<PAYABLES> 2,591,914 3,324,329
<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> 62,822,735 79,106,838
<TOTAL-LIABILITY-AND-EQUITY> 65,414,649 82,431,167
<TRADING-REVENUE> 839,196 (1,341,882)
<INTEREST-DIVIDENDS> 1,817,717 2,970,056
<COMMISSIONS> 2,582,169 4,013,912
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 74,744 (2,385,738)
<INCOME-PRE-EXTRAORDINARY> 74,744 (2,385,738)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 74,744 (2,385,738)
<EPS-BASIC> 0.11 (2.35)
<EPS-DILUTED> 0.11 (2.35)
</TABLE>
