f<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, 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>
June 30, December 31,
2000 1999
(unaudited)
----------------- ------------------
<S> <C> <C>
ASSETS
------
Equity in commodity futures trading accounts:
Cash and options premiums $ 6,158,201 $ 3,226,441
Net unrealized profit on open contracts 195,053 677,742
Government Securities (Cost: $40,831,617) - 40,439,706
Commercial Paper (Cost: $27,442,661) 27,502,076 -
Cash 7,341 4,079
Accrued interest 117,896 574,774
----------------- ------------------
TOTAL $ 33,980,567 $ 44,922,742
================= ==================
LIABILITIES AND PARTNERS' CAPITAL
---------------------------------
LIABILITIES:
Redemptions payable $ 1,517,329 $ 2,118,255
Profit Shares payable 296 51,547
Brokerage commissions payable 146,513 231,473
Administrative fees payable 6,235 11,076
----------------- ------------------
Total liabilities 1,670,373 2,412,351
----------------- ------------------
Minority Interest 801,109 827,623
----------------- ------------------
PARTNERS' CAPITAL:
General Partners (4,033 and 9,628 Units) 419,177 1,023,562
Limited Partners (298,903 and 381,113 Units) 31,089,908 40,659,206
----------------- ------------------
Total partners' capital 31,509,085 41,682,768
----------------- ------------------
TOTAL $ 33,980,567 $ 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 six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
----------------- ----------------- ---------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ (1,171,588) $ 1,387,708 $ (545,218) $ 1,623,887
Change in unrealized 323,325 (223,764) (87,844) (784,691)
----------------- ----------------- ---------------- -----------------
Total trading results (848,263) 1,163,944 (633,062) 839,196
----------------- ----------------- ---------------- -----------------
Interest income 633,070 857,436 1,075,755 1,817,717
----------------- ----------------- ---------------- -----------------
Total revenues (215,193) 2,021,380 442,693 2,656,913
----------------- ----------------- ---------------- -----------------
EXPENSES:
Profit Shares (8,228) 192,253 19,046 243,888
Brokerage commissions 494,238 1,060,157 1,124,117 2,247,721
Administrative fees 20,644 42,863 46,184 91,098
----------------- ----------------- ---------------- -----------------
Total expenses 506,654 1,295,273 1,189,347 2,582,707
----------------- ----------------- ---------------- -----------------
INCOME (LOSS) BEFORE
MINORITY INTEREST (721,847) 726,107 (746,654) 74,206
----------------- ----------------- ---------------- -----------------
Minority interest 22,531 (8,800) 26,515 538
----------------- ----------------- ---------------- -----------------
NET INCOME (LOSS) $ (699,316) $ 717,307 $ (720,139) $ 74,744
================= ================= ================ =================
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 328,546 618,439 349,954 660,078
================= ================= ================ =================
Weighted average net income (loss)
per General Partner
and Limited Partner Unit $ (2.13) $ 1.16 $ (2.06) $ 0.11
================= ================= ================ =================
</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, 2000 AND JUNE 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 15,735 266,194 1,307,406 1,573,600
Net income - 4,167 70,577 74,744
Redemptions (163,907) - (17,638,140) (17,638,140)
Distributions - (5,339) (288,968) (294,307)
----------------- --------------- ----------------- -------------------
PARTNERS' CAPITAL,
June 30, 1999 576,267 $ 1,000,302 $ 61,822,433 $ 62,822,735
================= =============== ================= ===================
PARTNERS' CAPITAL,
December 31, 1999 390,741 $ 1,023,562 $ 40,659,206 $ 41,682,768
Net loss - (5,023) (715,116) (720,139)
Redemptions (87,805) (595,903) (8,668,945) (9,264,848)
Distributions - (3,459) (185,237) (188,696)
----------------- --------------- ----------------- -------------------
PARTNERS' CAPITAL,
June 30, 2000 302,936 $ 419,177 $ 31,089,908 $ 31,509,085
================= =============== ================= ===================
</TABLE>
See notes to 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 June 30, 2000, and the results of its operations for
the six month period ended June 30, 2000 and June 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. NET ASSET VALUE PER UNIT
At June 30, 2000 and December 31, 1999, the Net Asset Values of the
different series of Units were:
<TABLE>
<CAPTION>
June 30, 2000
Net Asset Number Net Asset Value
Value of Units per Unit
----------------- ------------------- --------------------
<S> <C> <C> <C>
Series A Units $ 6,945,683 63,333.0000 $109.67
Series B Units 645,466 6,080.0000 106.16
Series C Units 1,063,167 10,367.0000 102.55
Series D Units 3,216,609 30,468.0000 105.57
Series E Units 3,058,658 28,954.1800 105.64
Series F Units 1,449,954 14,240.9200 101.82
Series G Units 1,189,839 11,848.5800 100.42
Series H Units 984,801 9,624.4150 102.32
Series K Units 3,185,948 30,517.0000 104.40
Series L Units 2,009,976 19,757.0300 101.73
Series M Units 2,039,547 19,763.8757 103.20
Series N Units 894,293 8,989.9278 99.48
Series O Units 2,902,494 29,087.7419 99.78
Series P Units 499,419 4,905.0000 101.82
Series Q Units 559,772 5,945.1908 94.16
Series R Units 653,317 6,864.0000 95.18
Series S Units 210,142 2,190.0000 95.96
----------------- -------------------
Totals $ 31,509,085 302,935.8612
================= ===================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
December 31, 1999
Net Asset Value Number Net Asset Value
--------------------------------------------------------------
<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>
6
<PAGE>
3. 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 June 30, 2000, the Partnership has made the following distributions:
<TABLE>
<CAPTION>
Series Distribution Fixed-Rate Discretionary
Date Distribution Distribution
---------- ------------------- ----------------- -----------------
2000
----------
<S> <C> <C> <C> <C>
Series B 1/1/00 $ 3.50 $ -
Series C 4/1/00 3.50 -
Series F 1/1/00 3.50 -
Series G 4/1/00 3.50 -
1999
----------
Series A 10/1/99 $ 3.50 $ -
Series B 1/1/99 3.50 -
Series C 4/1/99 3.50 -
Series D 7/1/99 3.50 1.00
Series E 10/1/99 3.50 -
Series F 1/1/99 3.50 -
Series G 4/1/99 3.50 -
Series H 7/1/99 3.50 1.00
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
</TABLE>
7
<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, as amended by SFAS No. 137. 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
adoption of the provisions of such Statement had 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.
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.
8
<PAGE>
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
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SERIES A UNIT
------------------------------------------------------------------------------
Jan. Feb. Mar. Apr. May Jun.
------------------------------------------------------------------------------
<S> <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)
------------------------------------------------------------------------------
2000 $112.80 (b) $112.46 (b) $111.61 (b) $110.11 (b) $110.85 (b) $109.67 (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 June 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 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 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
9
<PAGE>
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 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.
January 1, 2000 to June 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.
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.
10
<PAGE>
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 LME. 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%
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.
11
<PAGE>
MLAM'S Cash Management
Prior to May 26, 2000, MLAM invested approximately 80% of the Partnership's
assets in Government Securities. On May 26, 2000, the MLAM account was
liquidated and Government Securities were converted to Commercial Paper
holdings. As of June 30, 2000 the Partnership held approximately $27.5
million of Commercial Paper. As of December 31, 1999, the Partnership's MLAM
account totaled approximately $40 million.
As of June 30, 2000 the Fund held the following securities:
<TABLE>
<CAPTION>
Par Value Description Maturity Date Fair Value
--------- ----------- ------------- ----------
SHORT-TERM
<S> <C> <C>
1,037,000 IBM Commercial Paper July 10, 2000 $ 1,035,131
1,037,000 Prudential Funding Commercial Paper July 10, 2000 1,035,128
3,378,000 Ford Motor Commercial Paper July 21, 2000 3,365,152
3,378,000 IBM Commercial Paper July 21, 2000 3,365,172
1,108,000 General Electric Commercial Paper August 8, 2000 1,100,156
1,108,000 General Motors Commercial Paper August 8, 2000 1,100,144
3,609,000 Citicorp Commercial Paper August 21, 2000 3,575,063
3,609,000 John Deere Commercial Paper August 21, 2000 3,575,063
1,114,000 Ford Motor Commercial Paper September 8, 2000 1,099,812
1,114,000 Hertz Commercial Paper September 8, 2000 1,099,812
3,629,000 American General Commercial Paper September 19, 2000 3,575,844
3,629,000 General Motors Commercial Paper September 19, 2000 3,575,599
----------------
Total Debt $ 27,502,076
================
As of December 31, 1999, the Fund's MLAM account held the following securities:
Total
Par Value Description Rate Maturity Date Fair Value
--------- ----------- ---- ------------- ----------
LONG-TERM
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>
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending legal proceedings to which the Partnership
or the General Partner is a party.
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, 2000 the Fund 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
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 2000.
13
<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 15, 2000 By /s/ JOHN R. FRAWLEY, JR.
-------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: August 15, 2000 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Vice President, Chief Financial Officer
and Treasurer
14
