<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2000
------------------
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>
September 30, December 31,
2000 1999
(unaudited)
----------------- ------------------
<S> <C> <C>
ASSETS
------
Equity in commodity futures trading accounts:
Cash and options premiums $ 296,924 $ 3,226,441
Net unrealized profit on open contracts 69,558 677,742
Investments 20,261,311 -
Government Securities (Cost: $40,831,617) - 40,439,706
Commercial Paper (Cost: $5,761,536) 5,808,995 -
Receivable from Investments 2,076,886 -
Accrued interest 287 574,774
Cash - 4,079
----------------- ------------------
TOTAL $ 28,513,961 $ 44,922,742
================= ==================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES:
Redemptions payable $ 778,086 $ 2,118,255
Profit Shares payable - 51,547
Brokerage commissions payable - 231,473
Administrative fees payable - 11,076
----------------- ------------------
Total liabilities 778,086 2,412,351
----------------- ------------------
Minority Interest 772,155 827,623
----------------- ------------------
PARTNERS' CAPITAL:
General Partners (4,033 and 9,628 Units) 406,326 1,023,562
Limited Partners (262,698 and 381,113 Units) 26,557,394 40,659,206
----------------- ------------------
Total partners' capital 26,963,720 41,682,768
----------------- ------------------
TOTAL $ 28,513,961 $ 44,922,742
================= ==================
</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
(UNAUDITED)
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ (65,030) $ (442,255) $ (610,248) $ 1,181,632
Change in unrealized (114,967) 273,546 (202,811) (511,145)
----------------- ----------------- ---------------- -----------------
Total trading results (179,997) (168,709) (813,059) 670,487
----------------- ----------------- ---------------- -----------------
Loss from Investments (680,218) - (680,218) -
Interest income 368,223 887,271 1,443,978 2,604,988
----------------- ----------------- ---------------- -----------------
Total revenues (491,992) 718,562 (49,299) 3,275,475
----------------- ----------------- ---------------- -----------------
EXPENSES:
Profit Shares 110 16,438 19,156 260,326
Brokerage commissions 274,152 963,803 1,398,269 3,211,524
Administrative fees 7,787 37,685 53,971 128,785
----------------- ----------------- ---------------- -----------------
Total expenses 282,049 1,017,926 1,471,396 3,600,635
----------------- ----------------- ---------------- -----------------
LOSS BEFORE MINORITY
INTEREST (774,041) (299,364) (1,520,695) (325,160)
----------------- ----------------- ---------------- -----------------
Minority interest 28,954 8,999 55,469 9,537
----------------- ----------------- ---------------- -----------------
NET LOSS $ (745,087) $ (290,365) $ (1,465,226) $ (315,623)
================= ================= ================ =================
NET LOSS PER UNIT:
Weighted average number of units
outstanding 291,576 544,572 330,495 621,576
================= ================= ================ =================
Weighted average net loss
per General Partner
and Limited Partner Unit $ (2.56) $ (0.53) $ (4.43) $ (0.51)
================= ================= ================ =================
</TABLE>
See notes to consolidated financial statements
3
<PAGE>
ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND SEPTEMBER 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
General Limited
Units Partner Partners Total
----------------- --------------- ----------------- -------------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1998 724,439 $ 735,280 $ 78,371,558 $ 79,106,838
Subscriptions 15,736 300,038 1,273,562 1,573,600
Net loss - (3,030) (312,593) (315,623)
Redemptions (262,400) - (28,284,739) (28,284,739)
Distributions - (10,433) (578,878) (589,311)
----------------- --------------- ----------------- -------------------
PARTNERS' CAPITAL,
September 30, 1999 477,775 $ 1,021,855 $ 50,468,910 $ 51,490,765
================= =============== ================= ===================
PARTNERS' CAPITAL,
December 31, 1999 390,741 $ 1,023,562 $ 40,659,206 $ 41,682,768
Net loss - (15,855) (1,449,371) (1,465,226)
Redemptions (124,010) (595,902) (12,328,900) (12,924,802)
Distributions - (5,479) (323,541) (329,020)
----------------- --------------- ----------------- -------------------
PARTNERS' CAPITAL,
September 30, 2000 266,731 $ 406,326 $ 26,557,394 $ 26,963,720
================= =============== ================= ===================
</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
(UNAUDITED)
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") as of September 30, 2000, and the results of its operations
for the three and nine month period ended September 30, 2000 and
September 30, 1999. 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, 1999 (the "Annual Report").
2. INVESTMENTS
Effective September 1, 2000, the Partnership consolidated its trading
accounts with those of certain other multi-advisor managed future funds
sponsored by Merrill Lynch Investment Partners Inc. ("MLIP"). The
Partnership is no longer trading directly through managed accounts with
each of its Trading Advisors, but is investing in a limited liability
company, ML Multi-Manager Portfolio LLC ("MM LLC"). As of September 1,
2000, the Multi-Manager LLC had an aggregate capitalization of
approximately $264 million.
The consolidation was effected by having the Partnership close its
existing individual trading accounts and invest in MM LLC, which
maintains a single account with each Advisor selected. MM LLC is managed
by MLIP, has no investors other than multi-advisor funds sponsored by
MLIP, and serves solely as the vehicle through which the assets of such
funds are combined in order to be managed through single rather than
multiple accounts.
The consolidation of the Partnership's trading accounts through MM LLC
should result in improved order execution. By investing in MM LLC rather
than trading as separate entities, participating funds receive the same
price on their allocable portions of bulk orders rather than MLIP having
to allocate individual contracts acquired at different prices among
different fund accounts. In addition, by pooling their capital in MM
LLC, participating funds are able to maintain access to the full range
of Trading Advisors - irrespective of how small an individual fund's
capital base may become.
No additional fees or charges will be incurred by the Partnership or any
investor as a result of the consolidation. MLIP will absorb all costs
related to the consolidation. As a result of consolidating the
Partnership's trading accounts, Merrill Lynch Futures Inc. ("MLF"),
which receives flat-rate brokerage fees from the Partnership, should be
able to recognize future savings on its trade processing costs. MLIP and
MLF are responsible for the administration and monitoring of MM LLC as
well as each participating fund, and in doing so will have access to the
same "real time" trade and position information as was the case for the
Partnership's managed accounts.
As of September 30, 2000 the Partnership had an investment in MM LLC of
$20,261,311.
Total revenues and fees with respect to the Partnership's investment are
set forth as follows:
5
<PAGE>
<TABLE>
<CAPTION>
For the three months Total Brokerage Administrative Profit Loss from
ended September 30, 2000 Revenue Commissions Fees Shares Investments
-------------- --------------- ----------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
MM LLC (529,220) 143,029 4,768 3,201 (680,218)
-------------- --------------- ----------------- ------------- -------------------
<CAPTION>
For the nine months Total Brokerage Administrative Profit Loss from Investments
ended September 30, 2000 Revenue Commissions Fees Shares
-------------- --------------- ----------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
MM LLC (529,220) 143,029 4,768 3,201 (680,218)
-------------- --------------- ----------------- ------------- -------------------
</TABLE>
A condensed statements of financial condition and statements of operations for
MM LLC are set forth as follows:
<TABLE>
<CAPTION>
MM LLC
-------------------------
September 30,
2000
(unaudited)
-------------------------
<S> <C>
Assets $ 242,877,843
=========================
Liabilities $ 1,459,756
Members' Capital 241,418,087
-------------------------
Total $ 242,877,843
=========================
<CAPTION>
For the three months For the nine months
ended September 30, 2000 ended September 30, 2000
(unaudited) (unaudited)
------------------------- ------------------------
<S> <C> <C>
Revenues $ (4,176,959) $ (1,725,034)
Expenses 2,411,044 6,397,178
------------------------- ------------------------
Net Loss $ (6,588,003) $ (8,122,212)
========================= ========================
</TABLE>
6
<PAGE>
3. NET ASSET VALUE PER UNIT
At September 30, 2000 and December 31, 1999, the Net Asset Values of the
different series of Units were:
<TABLE>
<CAPTION>
September 30, 2000
Net Asset Number Net Asset Value
Value of Units per Unit
----------------- ------------------- --------------------
<S> <C> <C> <C>
Series A Units $ 6,374,539 59,439.0000 $ 107.25
Series B Units 486,829 4,657.0000 104.54
Series C Units 850,431 8,367.0000 101.64
Series D Units 2,789,089 27,813.0000 100.28
Series E Units 2,694,329 26,040.3800 103.47
Series F Units 1,289,084 12,821.5400 100.54
Series G Units 946,424 9,548.5800 99.12
Series H Units 821,515 8,454.4150 97.17
Series K Units 2,953,232 29,349.0000 100.62
Series L Units 1,648,430 16,811.0300 98.06
Series M Units 1,894,798 19,049.9607 99.46
Series N Units 579,108 6,039.9278 95.88
Series O Units 2,029,608 21,102.7419 96.18
Series P Units 448,006 4,565.0000 98.14
Series Q Units 450,916 4,968.6908 90.75
Series R Units 578,872 6,314.0000 91.68
Series S Units 128,510 1,390.0000 92.45
----------------- -------------------
Totals $ 26,963,720 266,731.2662
================= ===================
December 31, 1999
<CAPTION>
Number Net Asset Value
Net Asset Value of Units Per Unit
----------------- ------------------- --------------------
<S> <C> <C> <C>
Series A Units $ 7,960,220 71,300.0000 $ 111.64
Series B Units 949,586 8,568.0000 110.83
Series C Units 1,267,695 11,909.0000 106.45
Series D Units 4,539,567 42,433.0000 106.98
Series E Units 3,617,782 33,697.1800 107.36
Series F Units 2,199,122 20,722.5800 106.12
Series G Units 1,536,527 14,666.3400 104.77
Series H Units 1,291,688 12,467.7250 103.60
Series K Units 4,980,521 46,179.0000 107.85
Series L Units 3,231,833 30,750.0000 105.10
Series M Units 2,672,599 25,068.8757 106.61
Series N Units 1,369,038 13,321.4278 102.77
Series O Units 3,657,494 35,480.2419 103.09
Series P Units 546,674 5,197.0000 105.19
Series Q Units 579,321 5,955.6908 97.27
Series R Units 1,017,139 10,344.0000 98.33
Series S Units 265,962 2,681.0000 99.20
----------------- -------------------
Totals $ 41,682,768 390,741.0612
================= ===================
</TABLE>
7
<PAGE>
4. ANNUAL DISTRIBUTIONS
The Partnership makes annual fixed-rate distributions, payable irrespective
of profitability, of $3.50 per Unit on Units issued prior to May 1, 1997.
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 May 1, 1997.
As of September 30, 2000, the Partnership has made the following
distributions:
<TABLE>
<CAPTION>
Distribution Fixed-Rate Discretionary
Series Date Distribution Distribution
---------- ------------------ --------------- ------------------
<S> <C> <C> <C> <C>
2000
----------
Series B 1/1/2000 $ 3.50 $ -
Series C 4/1/2000 3.50 -
Series D 7/1/2000 3.50
Series F 1/1/2000 3.50 -
Series G 4/1/2000 3.50 -
Series H 7/1/2000 3.50
1999
----------
Series A 10/1/1999 $ 3.50 $ -
Series B 1/1/1999 3.50 -
Series C 4/1/1999 3.50 -
Series D 7/1/1999 3.50 1.00
Series E 10/1/1999 3.50 -
Series F 1/1/1999 3.50 -
Series G 4/1/1999 3.50 -
Series H 7/1/1999 3.50 1.00
1998
----------
Series A 10/1/1998 $ 3.50 $ -
Series B 1/1/1998 3.50 1.50
Series C 4/1/1998 3.50 -
Series D 7/1/1998 3.50 -
Series E 10/1/1998 3.50 -
Series F 1/1/1998 3.50 1.25
Series G 4/1/1998 3.50 -
Series H 7/1/1998 3.50 -
1997
----------
Series A 10/1/1997 $ 3.50 $ -
Series B 1/1/1997 3.50 3.00
Series C 4/1/1997 3.50 4.00
Series D 7/1/1997 3.50 1.00
Series E 10/1/1997 3.50 2.00
Series F 1/1/1997 3.50 2.50
Series G 4/1/1997 3.50 3.50
Series H 7/1/1997 3.50 2.50
1996
----------
Series A 10/1/1996 $ 3.50 $ 2.50
Series B 1/1/1996 3.50 2.50
Series C 4/1/1996 3.50 -
Series D 7/1/1996 3.50 -
Series E 10/1/1996 3.50 -
1995
----------
Series A 10/1/1995 $ 3.50 $ 2.50
</TABLE>
8
<PAGE>
5. 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, as amended by SFAS No. 137. SFAS
NO. 133 is further amended by SFAS no. 138, which clarifies issues
surrounding interest risk, foreign currency denominated items, normal
purchases and sales and net hedging. 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. MLIP
does not believe that the application of the provisions of SFAS NO. 133, as
amended by SFAS NO. 137, had a significant effect on the financial
statements, nor will the application of the provisions of SFAS NO. 138
have 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 and notional amounts or payment provisions; (2) requires
no initial net investment or a smaller initial net investment than would be
required for other types of contracts that would be expected to have a
similar response to changes in market factors; and, (3) terms that require
or permit net settlement. Generally, derivatives include futures, forwards,
swaps, options or other financial instruments with similar characteristics
such as caps, floors and collars.
MARKET RISK
Derivative instruments involve varying degrees of off-balance sheet market
risk. 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 Partnership's exposure to market risk is
influenced by a number of factors, including the relationships among the
derivative instruments held by the Partnership as well as the volatility
and liquidity of the markets in which the derivative instruments are
traded.
The General Partner has procedures in place intended to control market risk
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, calculating the Net Asset Value of the Partnership
as of the close of business on each day and reviewing outstanding positions
for over-concentrations. 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 the Advisors to reallocate positions
in an attempt to avoid over-concentrations. However, such interventions are
unusual. Except in cases in which it appears that the Advisors have 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, with the market risk
controls being applied by the Advisors themselves.
9
<PAGE>
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 also require
margin in the over-the-counter markets.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit, if any, included in the
Consolidated Statements of Financial Condition.
The Partnership attempts to mitigate credit risk by dealing exclusively
with Merrill Lynch entities as clearing brokers.
The Partnership, in its normal course of business, enters into various
contracts with MLF acting as its commodity broker. Pursuant to the
brokerage agreement with MLF (which includes a netting arrangement), to the
extent that such trading results in receivables and payables are offset and
reported as a net receivable or payable and are included in the
Consolidated Statements of Financial Condition under Equity in commodity
futures trading accounts.
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. Jul. Aug. Sep.
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1999 $114.49 (a) $115.36(a) $114.86 (a) $116.14 (a) $114.75 (a) $116.00(a) $116.26 (a) $116.28 (a) $115.41 (a)
--------------------------------------------------------------------------------------------------------------------
2000 $112.80 (b) $112.46(b) $111.61 (b) $110.11 (b) $110.85 (b) $109.67(b) $108.61 (b) $109.41 (b) $107.25 (b)
--------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) After reduction for distributions declared of $6.00, $6.00, $3.50 and $3.50
per Series A Unit as of October 1, 1995, 1996, 1997, and 1998 respectively.
(b) After reduction for a $3.50 per Series A Unit distribution declared on
October 1, 1999 and the distributions described in (a), resulting in a total
distribution of $22.50 inception to date.
As of July 1, 1996, the Partnership 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, 1999 to September 30, 1999
-------------------------------------
January 1, 1999 to March 31, 1999
The Partnership 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
10
<PAGE>
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 Partnership 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 Partnership 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 Partnership
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 Partnership 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 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 gas oil 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 Partnership.
Gains from live cattle positions were offset by losses from short corn and hog
positions. Agricultural commodities, in particular corn, were 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 Partnership. 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 most 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 reached with virtually no supply side response.
July 1, 1999 to September 30, 1999
During the third quarter of 1999, the Partnership's NAV decreased as profitable
trading in the energy and metals markets was outweighed by losses in the stock
index, interest rate, agricultural and currencies
11
<PAGE>
markets. The Partnership profited in the energy sector with long positions in
light crude oil resulting in strong gains. Crude oil prices received a jolt
owing to a report in August indicating Russia's plan to cut 70% its fuel oil and
gasoil exports for August and completely eliminate gasoil exports in order to
satisfy domestic needs. Short positions in natural gas trading were unprofitable
as high levels of energy consumption and weather scares throughout the country
early in the quarter added to the bullish tone for the market. However, these
losses were not substantial enough to affect the profitability of the sector
overall for the quarter.
Trading in the metals markets was also profitable as positions in nickel,
aluminum and copper all resulted in gains. Collectively, the base metals sector
was a strong performer this quarter. Despite a 5-year low in early March,
aluminum prices have gained nearly 25 percent this year, resulting in gains for
the Partnership's long positions. Steady Japanese consumer buying and the
strength in the yen versus the dollar have played a part in this. In copper
trading, long positions were also profitable as a rally initiated in April was
followed by a more robust advance in late June/early July and extended into
September.
The Partnership suffered losses in stock index positions as trading throughout
the quarter was volatile. Though the S&P finished the third quarter by breaking
the post-October 1998 highs, the Partnership suffered losses in stock index
trading due to significant volatility globally. For the quarter, losses were
sustained in the S&P, FTSE-Financial Times Stock Index, and the DAX German Stock
Index resulting in losses for the sector overall.
Interest rate trading was unprofitable for the third quarter as losses were
sustained in Eurodollar, Japanese government bond and Euroyen trading. Long
positions in Eurodollar trading were unprofitable given the speculations of
the probability of a tightening bias by the U.S. Federal Reserve. Eurodollar
contracts gave up much of the gains that they enjoyed following the Federal
Open Market Committee's adoption of a neutral bias.
The Partnership also was unprofitable in the agricultural markets as losses were
sustained in the hog, soymeal and coffee markets. Agricultural trading began the
quarter with an increase in prices as there was a sharp decline in crop ratings
due to wet conditions in the Eastern Belt during July. This in conjunction with
forecasters' outlooks for additional declines in the weeks ahead helped
jump-start the first major weather scare of the season. As a result, short
positions in soymeal proved unprofitable as there was a sharp upturn in soy
prices. Additionally, long coffee positions were unprofitable as the coffee
market plunged to 5-year lows during the quarter when cold temperatures in
Brazil skirted the major coffee belt and failed to harm trees.
Currency trading resulted in minimal losses for the quarter as profitable
positions in the Japanese yen were offset by losses in Swiss franc and Euro
currency trading. Long yen positions resulted in strong gains as the Bank of
Japan refused to ease monetary policy and investors added to their yen exposure,
which reached a two-year high during the quarter. The most positive sign in
Japan was that, for the second quarter in a row, domestic consumption exceeded
that of the year ago quarter. Losses were sustained in Euro currency trading as
it continued to trade in the same choppy pattern that has been evident for the
past few quarters.
January 1, 2000 to September 30, 2000
-------------------------------------
January 1, 2000 to March 31, 2000
Energy trading was profitable for the quarter due to long crude oil and unleaded
gas positions. Despite the possibility of OPEC increasing oil production by 5%,
crude oil prices continued to rise as such a hike would still leave oil
inventories at levels much below normal during the balance of the year. Prices
began to decline in mid-March as Iran backed down from its position on the point
of "no increase" and again later in the month as OPEC announced a production
increase of 1.716 million barrels/day offsetting some gains from the previous
two months.
12
<PAGE>
In currency trading, the Euro declined against the dollar as officials from the
Group of Seven met and failed to express concern about the low levels of the
European currency producing profits for the quarter. Some other contributing
factors to the decline of the Euro include the slow pace of microeconomic reform
in Europe, plans for a European withholding tax and the scale of direct
investment flows outside of Europe.
Stock index trading was profitable for the quarter. Positions in IBEX 35
(Milan), DAX German Stock Index and CAC 40 Euro futures resulted in profits for
the Partnership. Investor sentiment in Germany has been positive, as German
macroeconomic fundamentals continue to improve and in 2001, consumers
will benefit from a large cut in personal income taxes. The last month of the
quarter sustained profits in the Hong Kong Hang Seng and the S&P 500 as
investors focused more on value stocks.
Agricultural commodity trading produced losses for the quarter. Gains in pork
belly and coffee positions were outweighed by losses in short corn positions
which were due to dry conditions in Argentina, which led to high corn prices.
Metals trading alternated from profitable to unprofitable; however, the
sector ended the quarter with losses. Prices rose during the period in base
metals as concerns over higher interest rates and the decline in stock prices
globally created defensive tones in the market. High aluminum inventories
caused prices to decline on the London Metals Exchange. Late in the quarter,
copper prices rose over rumors of increased demand from China, having an
adverse effect on the short positions held.
Short Eurodollar trading was profitable as the currency continued to decline in
January. The European Union ministers blamed the currency's slide in January on
rapid U.S. growth and fears that the Federal Reserve will increase U.S. interest
rates. These profits were far outweighed by losses in the U.S. 10-year treasury
note positions and long U.S. treasury positions as the yield curve fluctuated
widely during the quarter.
April 1, 2000 to June 30, 2000
Long natural gas positions proved to be profitable throughout the quarter;
however, crude oil faced whipsaw market conditions. Prices on crude oil declined
early in the quarter in the wake of OPEC's March decision to increase
production; however, prices later rose as the International Energy Agency
reported the need for additional OPEC oil to prevent a shortage in inventory. In
June, long positions of light crude oil resulted in profits despite OPEC's
agreement to raise the production ceiling effective July 1. Prices sustained
their levels because the market was looking for a larger production hike.
Currency trading proved profitable for the Partnership. Gains from short Euro
currency and long Swiss franc positions outweighed losses sustained in other
currencies. Despite the dramatic interest rate hikes by the Swiss National Bank
("SNB") and the weakness of the Euro, the SNB said it will not keep the Swiss
franc from rising. Short positions in the British pound and Canadian dollar
resulted in gains for the sector during May. The pound was particularly weak in
the wake of the Bank of England's references to "sterling overvaluation." The
Euro rallied to U.S. $0.97 early in the month, but faced profit-taking after
news of some capital outflow from Euroland.
Agriculture trading was unprofitable for the quarter as losses in corn and
soybean positions resulted in losses for the sector. Long positions in both
commodities were unprofitable as weather and soil conditions appear favorable
for an abundance of supply. The mid-month USDA grain crop report projected a 12%
13
<PAGE>
rise in soybean inventories from last season and the corn crop to be the third
largest on record. This resulted in fears of an abundance of supply and
therefore, lower prices for both commodities.
In metals trading, short aluminum positions were profitable early in the quarter
as a refinery indicated that it will return to operation this year, adding
supply to the market. During the middle of the quarter, copper trading resulted
in losses for the sector. A Freeport Indonesia mine announced output cuts would
not be as large as the Indonesian government had forecast, resulting in losses
for the Partnership's long positions. Losses continued through the quarter as
trading in both base and precious metals was unprofitable as losses were
sustained in gold and aluminum positions. As has been the ongoing pattern, gold
showed virtually no response to activities in the financial and equity markets,
including the surge in energy prices.
Stock index trading was unprofitable as losses were sustained in Nikkei 225 and
S&P 500 positions in the quarter. Signs of rising inflation fueled fears that
the Federal Reserve will continue to raise interest rates aggressively to slow
the robust economy.
Interest rate trading results were unprofitable for the quarter. Early on,
losses were incurred from U.S. Treasury bond. U.S. bond yields fell during the
month as investors shifted to Treasuries due to increased volatility in the
NASDAQ and other equity markets. Short positions resulted in losses as the Euro
dollar improved after the European Central Bank's 50 basis point repo rate hike.
July 1, 2000 to September 30, 2000
Metals trading was moderately profitable for the Partnership. Long copper
positions profited from reports that China increased production during the first
half of the year due to increased demand. The metals sector sustained losses in
mid quarter as nickel prices declined from slowing demand for stainless steel in
Europe and Asia. In September, higher copper prices resulting from strong demand
in Asia, particularly China, produced gains for long copper positions.
Trading in the energy sector was unprofitable during the quarter. Early on,
losses were sustained on long crude oil and natural gas positions. Higher retail
prices resulted in less demand for gasoline, pushing prices lower. In August,
long light crude oil positions profited as the oil balance faced a significant
inventory deficit, shrinking oil production capacity, limited prospects for
material non-OPEC supply growth and OPEC's key countries' desire for a higher
average oil price. Crude oil faced whipsaw market conditions in September. It
reached new highs mid month on comments from Venezuela's oil minister that OPEC
would not likely change its production target before their November meeting.
However, President Clinton's September 22 authorization of a 30 million barrel
release of oil from the Strategic Petroleum Reserve sent prices lower at month
end.
Currency trading was not profitable for the quarter. Gains were realized on
short Japanese yen positions in July as the yen finished the month weaker
against the dollar in anticipation that the U.S. Federal Reserve would continue
to increase interest rates. By mid quarter losses were sustained in the euro
positions as it fell to a record low despite stronger than expected European
financial data and the success of the German tax reform package. Profits
generated from long euro positions late in September were not large enough to
offset earlier losses. European economic conditions remained positive.
Moderation in U.S. activity suggests no surprises on the upside in the coming
quarters, indicating potential strength in the euro.
Interest rate trading incurred losses throughout the quarter. Trading in
Euro-Bund futures and Japanese 10 year bond positions was unprofitable.
Agricultural commodity trading resulted in losses for the quarter. Short wheat
trading was beneficial during July as drought warnings issued by the U.S.
National Weather Service in the early spring proved inaccurate. Sufficient rains
resulted in favorable growing conditions leading to dramatic price declines for
wheat. However, trading on sugar and live cattle positions was unprofitable in
September, erasing previous gains. Brazil, the world's largest sugar producer,
reduced output and the Asian post crisis recovery period has improved demand,
resulting in a supply/demand imbalance. Sugar prices rose late in August as a
result of a large quantity of Asian buying.
Stock index trading was not profitable during the quarter. CAC 40 Euro futures
and FTSE Financial Times Stock Index trading sustained losses early in the
quarter. This trend continued in August as losses were realized from Nikkei 225
and DAX German Stock Index trading. September was also unprofitable on S&P 500
positions as it finished the month lower as buyers retreated due to fears of an
economic slowdown in the U.S.
MLIM'S Cash Management
Prior to May 26, 2000, MLIM invested approximately 80% of the Partnership's
assets in Government Securities. On May 26, 2000, the Government Securities
in the MLIM account were liquidated and Commercial Paper holdings were
purchased. On September 1, 2000 the Partnership invested most of its assets
in MM LLC, which in turn invests approximately 72% of its asset in commercial
paper. As of September 30, 2000 the Partnership held approximately $5.8
million of Commercial paper. As of December 31, 1999, the Partnership's MLIM
account totaled approximately $40 million.
As of September 30, 2000 the Partnership held the following securities:
<TABLE>
<CAPTION>
Par Value Description Maturity Date Fair Value
--------- ----------- ------------- ----------
Short-Term
----------
<S> <C> <C>
890,000 IBM Commercial Paper October 4, 2000 $ 889,200
948,000 Citicorp Commercial Paper October 10, 2000 946,128
948,000 Hertz Commercial Paper October 10, 2000 946,129
892,000 Prudential Funding Commercial Paper October 10, 2000 890,234
1,076,000 General Electric Commercial Paper November 6, 2000 1,068,652
1,076,000 General Motors Commercial Paper November 6, 2000 1,068,652
------------------
Total Debt $ 5,808,995
==================
</TABLE>
14
<PAGE>
As of December 31, 1999, the Partnership's MLIM account held the following
securities:
<TABLE>
<CAPTION>
Total
Par Value Description Rate Maturity Date Fair Value
--------- ----------- ---- ------------- ----------
Long-Term
---------
<S> <C> <C> <C>
5,000,000 Federal National Mortgage Association 5.720% January 9, 2001 $ 4,969,250
4,000,000 Federal National Mortgage Association 5.625% March 15, 2001 3,965,000
3,000,000 Federal National Mortgage Association 5.375% March 15, 2002 2,930,640
2,000,000 U.S. Treasury Note 4.500% January 31, 2001 1,967,031
1,000,000 U.S. Treasury Note 5.750% June 30, 2001 993,906
9,000,000 U.S. Treasury Note 5.375% February 15, 2001 8,925,469
1,000,000 U.S. Treasury Note 5.750% April 30, 2003 982,031
2,500,000 U.S. Treasury Note 5.875% November 15, 2004 2,451,367
------------------
Subtotal 27,184,694
------------------
Short-Term
----------
8,710,000 Federal Home Loan Discount Note 0.000% January 14, 2000 8,692,580
112,000 Federal Home Loan Mortgage Corporation 0.000% January 14, 2000 111,776
1,000,000 U.S. Treasury Note 6.000% August 15, 2000 1,000,469
1,500,000 U.S. Treasury Note 4.625% November 30, 2000 1,472,687
2,000,000 U.S. Treasury Note 4.500% September 30, 2000 1,977,500
------------------
Subtotal 13,255,012
------------------
Total Debt $ 40,439,706
==================
</TABLE>
15
<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 Partnership has units registered with an aggregate price of
$462,114,000. Through September 30, 2000 the Partnership has sold
units with an aggregate price of $164,506,495.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
As part of a restructuring of Merrill Lynch's investment management
operations, Merrill Lynch Investment Partners Inc. ("MLIP") and other
Merrill Lynch advisory entities are being consolidated under Merrill
Lynch Investment Managers ("MLIM"), the principal Merrill Lynch
investment management affiliate. MLIP is now part of MLIM's
Alternative Investments group, headed by Ron Rosenberg, Managing
Director and former head of Merrill Lynch's Global Hedge Fund Sales
and International Fixed Income Group. Fabio Savoldelli, Managing
Director and head of MLIM - Alternative Strategies, has assumed
management responsibilities for MLIP's business, reporting to
Mr. Rosenberg. In connection with this consolidation, John R Frawley,
Jr., the President of MLIP, and certain other MLIP staff members have
left Merrill Lynch, effective October 20, 2000.
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 nine
months of fiscal 2000.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ML PRINCIPAL PROTECTION L.P.
(formerly ML Principal Protection Plus L.P.)
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 14, 2000 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Duly Authorized Signatory
Vice President, Chief Financial Officer
and Treasurer
17
