-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TOOAlch4mYqxEf7W5uKqiq3K9GFiK5e4HtNZxPVqHm6Dad/atzPx57wIb7t7brZo SWamRXBSTNIvz8rugft3yA== /in/edgar/work/0000912057-00-049547/0000912057-00-049547.txt : 20001115 0000912057-00-049547.hdr.sgml : 20001115 ACCESSION NUMBER: 0000912057-00-049547 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000930 FILED AS OF DATE: 20001114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML PRINCIPAL PROTECTION LP CENTRAL INDEX KEY: 0000917259 STANDARD INDUSTRIAL CLASSIFICATION: [6798 ] IRS NUMBER: 133750642 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-25000 FILM NUMBER: 763811 BUSINESS ADDRESS: STREET 1: 6TH FL, SOUTH TOWER, M L WORLD HDQR STREET 2: C/O ML FUTURES INVESTMENT PARTNERS INC CITY: NEW YORK STATE: NY ZIP: 10080-6106 BUSINESS PHONE: 2122364161 MAIL ADDRESS: STREET 1: C/O MERRILL LYNCH INVESTMENT PARTNERS IN STREET 2: WORLD FINANCIAL CENTER S TOWER 6TH FL CITY: NEW YORK STATE: NY ZIP: 10080-6106 FORMER COMPANY: FORMER CONFORMED NAME: ML PRINCIPAL PROTECTION PLUS LP DATE OF NAME CHANGE: 19940616 FORMER COMPANY: FORMER CONFORMED NAME: SECTOR STRATEGY FUND VII LP DATE OF NAME CHANGE: 19940107 10-Q 1 a2028255z10-q.txt 10-Q 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 --- --- PART I - FINANCIAL INFORMATION Item 1. Financial Statements ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
September 30, December 31, 2000 1999 (unaudited) ----------------- ------------------ 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 ================= ==================
NET ASSET VALUE PER UNIT (NOTE 2) See notes to consolidated financial statements 2 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
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 ----------------- ----------------- ---------------- ----------------- 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) ================= ================= ================ =================
See notes to consolidated financial statements 3 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)
General Limited Units Partner Partners Total ----------------- --------------- ----------------- ------------------- 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 ================= =============== ================= ===================
See notes to consolidated financial statements. 4 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
For the three months Total Brokerage Administrative Profit Loss from ended September 30, 2000 Revenue Commissions Fees Shares Investments -------------- --------------- ----------------- ------------- ------------------- MM LLC (529,220) 143,029 4,768 3,201 (680,218) -------------- --------------- ----------------- ------------- ------------------- For the nine months Total Brokerage Administrative Profit Loss from Investments ended September 30, 2000 Revenue Commissions Fees Shares -------------- --------------- ----------------- ------------- ------------------- MM LLC (529,220) 143,029 4,768 3,201 (680,218) -------------- --------------- ----------------- ------------- -------------------
A condensed statements of financial condition and statements of operations for MM LLC are set forth as follows:
MM LLC ------------------------- September 30, 2000 (unaudited) ------------------------- Assets $ 242,877,843 ========================= Liabilities $ 1,459,756 Members' Capital 241,418,087 ------------------------- Total $ 242,877,843 ========================= For the three months For the nine months ended September 30, 2000 ended September 30, 2000 (unaudited) (unaudited) ------------------------- ------------------------ Revenues $ (4,176,959) $ (1,725,034) Expenses 2,411,044 6,397,178 ------------------------- ------------------------ Net Loss $ (6,588,003) $ (8,122,212) ========================= ========================
6 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:
September 30, 2000 Net Asset Number Net Asset Value Value of Units per Unit ----------------- ------------------- -------------------- 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 Number Net Asset Value Net Asset Value of Units Per Unit ----------------- ------------------- -------------------- 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 ================= ===================
7 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:
Distribution Fixed-Rate Discretionary Series Date Distribution Distribution ---------- ------------------ --------------- ------------------ 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
8 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 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
- -------------------------------------------------------------------------------------------------------------------- Jan. Feb. Mar. Apr. May Jun. Jul. Aug. Sep. - -------------------------------------------------------------------------------------------------------------------- 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) - --------------------------------------------------------------------------------------------------------------------
(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 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 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 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 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:
Par Value Description Maturity Date Fair Value --------- ----------- ------------- ---------- Short-Term ---------- 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 ==================
14 As of December 31, 1999, the Partnership's MLIM 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 ==================
15 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 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 EX-27 2 a2028255zex-27.txt EXHIBIT 27
BD 0000917259 ML PRINCIPAL PROTECTION LP 9-MOS 9-MOS DEC-31-2000 DEC-31-1999 JAN-01-2000 JAN-01-1999 SEP-30-2000 SEP-30-1999 0 1,821 2,443,655 7,255,964 0 0 0 0 26,070,306 49,314,477 0 0 28,513,961 56,572,262 0 0 1,550,241 5,081,497 0 0 0 0 0 0 0 0 0 0 0 0 0 0 26,963,720 51,490,765 28,513,961 56,572,262 (813,059) 670,487 763,760 2,604,988 (1,415,927) 3,591,098 0 0 0 0 0 0 0 0 (1,465,226) (315,623) (1,465,226) (315,623) 0 0 0 0 (1,465,226) (315,623) (4.43) (0.51) (4.43) (0.51)
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