10-Q 1 a2061003z10-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, 2001 ------------------ 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 MLIM Alternative Strategies LLC (formerly 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, 2001 2000 (UNAUDITED) -------------- -------------- ASSETS Equity in commodity futures trading accounts: Cash $ 6,431,664 $ 2,947,014 Investment in MM LLC 18,051,087 19,921,935 Commercial Paper (Cost: $0 and $4,310,371) -- 4,310,371 Receivable from investment in MM LLC -- 780,962 Accrued interest receivable 15,526 52,986 -------------- -------------- TOTAL $ 24,498,277 $ 28,013,268 ============== ============== LIABILITIES AND PARTNERS' CAPITAL LIABILITIES: Redemptions payable $ 274,114 $ 438,622 Payable to MM LLC 1,869,831 -- -------------- -------------- Total liabilities 2,143,945 438,622 -------------- -------------- Minority Interest -- 875,795 -------------- -------------- PARTNERS' CAPITAL: General Partner (2,762 and 2,712 Units) 311,521 298,960 Limited Partners (195,038 and 239,624 Units) 22,042,811 26,399,891 -------------- -------------- Total partners' capital 22,354,332 26,698,851 -------------- -------------- TOTAL $ 24,498,277 $ 28,013,268 ============== ============== NET ASSET VALUE PER UNIT
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, 2001 2000 2001 2000 -------------- -------------- -------------- -------------- REVENUES: Trading loss: Realized $ -- $ (65,030) $ -- $ (610,248) Change in unrealized -- (114,967) -- (202,811) -------------- -------------- -------------- -------------- Total trading results -- (179,997) -- (813,059) -------------- -------------- -------------- -------------- Loss from Investments -- (680,218) -- (680,218) Interest income 53,172 368,223 193,294 1,443,978 -------------- -------------- -------------- -------------- Total revenues 53,172 (491,992) 193,294 (49,299) -------------- -------------- -------------- -------------- EXPENSES: Profit Shares -- 110 -- 19,156 Brokerage commissions -- 274,152 -- 1,398,269 Administrative fees -- 7,787 -- 53,971 -------------- -------------- -------------- -------------- Total expenses -- 282,049 -- 1,471,396 -------------- -------------- -------------- -------------- INCOME FROM INVESTMENT IN MM LLC 283,158 -- 631,062 -- -------------- -------------- -------------- -------------- INCOME (LOSS) BEFORE MINORITY INTEREST 336,330 (774,041) 824,356 (1,520,695) -------------- -------------- -------------- -------------- Minority interest -- 28,954 -- 55,469 -------------- -------------- -------------- -------------- NET INCOME (LOSS) $ 336,330 $ (745,087) $ 824,356 $ (1,465,226) ============== ============== ============== ============== NET INCOME (LOSS) PER UNIT: Weighted average number of General Partner and Limited Partners Units outstanding 205,199 291,576 220,921 330,495 ============== ============== ============== ============== Net income (loss) per weighted average General Partner and Limited Partner unit $ 1.64 $ (2.56) $ 3.73 $ (4.43) ============== ============== ============== ==============
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, 2001 AND 2000 (unaudited)
GENERAL LIMITED UNITS PARTNER PARTNERS TOTAL -------------- -------------- -------------- -------------- 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 ============== ============== ============== ============== PARTNERS' CAPITAL, December 31, 2000 242,336 $ 298,960 $ 26,399,891 $ 26,698,851 Additions 50 5,464 -- 5,464 Net income -- 9,878 814,478 824,356 Redemptions (44,586) -- (4,943,437) (4,943,437) Distributions -- (2,781) (228,121) (230,902) -------------- -------------- -------------- -------------- PARTNERS' CAPITAL, September 30, 2001 197,800 $ 311,521 $ 22,042,811 $ 22,354,332 ============== ============== ============== ==============
See notes to consolidated financial statements. 4 ML PRINCIPAL PROTECTION 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, 2001, and the results of its operations for the three and nine months ended September 30, 2001 and 2000. 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 conformity with accounting principles generally accepted in the United States 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, 2000 (the "Annual Report"). On January 1, 2001, the Trading Partnership was dissolved. The General Partner, MLIM Alternative Strategies, LLC ("MLIM AS LLC") (formerly, Merrill Lynch Investment Partners, Inc.), redeemed its entire investment from the trading partnership and the Partnership immediately invested its redemption proceeds directly into ML Multi-Manager Portfolio LLC ("MM LLC"), giving the Partnership a direct investment in MM LLC rather than through the Trading Partnership. This action did not effect the operation of the Partnership or MM LLC and was done at no cost to the investors. Any costs have been absorbed by MLIM AS LLC. MLIM AS LLC continues to maintain a 1% General Partner interest in the Partnership. 2. INVESTMENTS Effective September 1, 2000, the Partnership consolidated its trading accounts with those of certain other multi-advisor managed future funds sponsored by MLIM AS LLC. The Partnership is no longer trading directly through managed accounts with each of its Trading Advisors, but is investing in a limited liability company, MM LLC. As of September 1, 2000, MM 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 MLIM AS LLC, has no investors other than the multi-advisor funds sponsored by MLIM AS LLC, 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 MLIM AS LLC 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 were incurred by the Partnership or any investor as a result of the consolidation. MLIM AS LLC absorbed 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. MLIM AS LLC 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, 2001 and December 31, 2000, the Partnership had an investment in MM LLC of $18,051,087 and $19,921,935, respectively. 5 Total revenues and fees with respect to the Partnership's investment are set forth as follows:
FOR THE THREE MONTHS TOTAL BROKERAGE ADMINISTRATIVE PROFIT INCOME FROM ENDED SEPTEMBER 30, 2001 REVENUE COMMISSIONS FEES SHARES INVESTMENT --------------- ---------------- ----------------- ------------- -------------------- MM LLC (unaudited) $ 720,901 $ 319,879 $ 10,662 $ 107,202 $ 283,158 --------------- ---------------- ----------------- ------------- -------------------- FOR THE NINE MONTHS TOTAL BROKERAGE ADMINISTRATIVE PROFIT INCOME FROM ENDED SEPTEMBER 30, 2001 REVENUE COMMISSIONS FEES SHARES INVESTMENT --------------- ---------------- ----------------- ------------- -------------------- MM LLC (unaudited) $ 1,992,466 $ 1,008,042 $ 33,601 $ 319,761 $ 631,062 --------------- ---------------- ----------------- ------------- --------------------
Condensed statements of financial condition and statements of operations for MM LLC are set forth as follows:
MM LLC MM LLC --------------- --------------- SEPTEMBER 30, DECEMBER 31, 2001 2000 (UNAUDITED) --------------- --------------- Assets $ 222,849,008 $ 252,995,756 =============== =============== Liabilities $ 8,721,675 $ 5,383,789 Members' Capital 214,127,333 247,611,967 --------------- --------------- Total $ 222,849,008 $ 252,995,756 =============== ===============
FOR THE THREE MONTHS FOR THE THREE MONTHS FOR THE NINE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 ENDED SEPTEMBER 30, 2000 ENDED SEPTEMBER 30, 2001 ENDED SEPTEMBER 30, 2000 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ------------------------- ------------------------- ------------------------- ------------------------- Revenues $ 7,879,447 $ (4,176,959) $ 21,504,537 $ (1,725,034) Expenses 4,976,570 2,411,044 14,968,692 6,397,178 ------------------------- ------------------------- ------------------------- ------------------------- Net Income (Loss) $ 2,902,877 $ (6,588,003) $ 6,535,845 $ (8,122,212) ========================= ========================= ========================= =========================
6 3. NET ASSET VALUE PER UNIT At September 30, 2001 and December 31, 2000, the Net Asset Values of the different series of Units were:
SEPTEMBER 30, 2001 NET ASSET NUMBER NET ASSET VALUE VALUE OF UNITS PER UNIT ---------------- ---------------- ---------------- Series A Units $ 5,704,079 48,746.0000 $117.02 Series B Units 482,397 4,307.0000 $112.00 Series C Units 830,979 7,705.0000 $107.85 Series D Units 2,596,300 24,239.0000 $107.11 Series E Units 1,704,325 15,178.2800 $112.29 Series F Units 988,376 9,209.5400 $107.32 Series G Units 821,836 7,746.0300 $106.10 Series H Units 806,881 7,737.9150 $104.28 Series K Units 3,010,101 25,483.0000 $118.12 Series L Units 1,427,086 12,395.0300 $115.13 Series M Units 2,009,454 17,211.9607 $116.75 Series N Units 236,593 2,101.6778 $112.57 Series O Units 633,729 5,613.7419 $112.89 Series P Units 233,416 2,027.0000 $115.15 Series Q Units 259,922 2,441.6908 $106.45 Series R Units 518,383 4,822.0000 $107.50 Series S Units 90,475 835.0000 $108.35 ---------------- ---------------- Totals $ 22,354,332 197,799.8662 ================ ================
DECEMBER 31, 2000 NET ASSET VALUE NUMBER NET ASSET VALUE ----------------- ----------------- ----------------- Series A Units $ 6,185,441 54,627.0000 $ 113.23 Series B Units 487,797 4,357.0000 111.96 Series C Units 863,478 8,005.0000 107.87 Series D Units 2,795,253 26,084.0000 107.16 Series E Units 2,369,509 21,803.9800 108.67 Series F Units 1,348,280 12,550.5400 107.43 Series G Units 931,995 8,782.2800 106.12 Series H Units 844,370 8,087.9150 104.40 Series K Units 3,205,898 28,092.0000 114.12 Series L Units 1,619,734 14,562.0300 111.23 Series M Units 2,045,146 18,131.9607 112.79 Series N Units 296,095 2,722.9278 108.74 Series O Units 2,253,875 20,663.7419 109.07 Series P Units 225,563 2,027.0000 111.28 Series Q Units 508,459 4,941.6908 102.89 Series R Units 573,917 5,522.0000 103.93 Series S Units 144,041 1,375.0000 104.76 ----------------- ----------------- Totals $ 26,698,851 242,336.0662 ================= =================
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, 2001, the Partnership has made the following distributions:
DISTRIBUTION FIXED-RATE DISCRETIONARY SERIES DATE DISTRIBUTION DISTRIBUTION ----------- ----------------- -------------- ----------------- 2001 --------- Series B 1/1/01 $ 3.50 $ - Series C 4/1/01 3.50 - Series D 7/1/01 3.50 - Series F 1/1/01 3.50 - Series G 4/1/01 3.50 - Series H 7/1/01 3.50 - 2000 --------- Series A 10/1/00 $ 3.50 $ - Series B 1/1/00 3.50 - Series C 4/1/00 3.50 - Series D 7/1/00 3.50 - Series E 10/1/00 3.50 - Series F 1/1/00 3.50 - Series G 4/1/00 3.50 - Series H 7/1/00 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 -
5. FAIR VALUE AND OFF-BALANCE SHEET RISK As of September 1, 2000, the Partnership invests all of its assets allocated to trading in MM LLC. Accordingly, the Partnership invested indirectly in derivative instruments, but does not itself hold any derivative instrument positions. The application of the provisions of Statement of Financial 8 Accounting Standards ("SFAS") No. 133, as amended by SFAS No. 137 and SFAS No. 138, did not have a significant effect on the consolidated financial statements of the Partnership. 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 market values of the financial instruments or commodities underlying such derivative instruments frequently result in changes in the Partnership's net unrealized profit on such derivative instruments as reflected in the Statements of Financial Condition or, with respect to Partnership assets invested in MM LLC, the unrealized profit (loss) as reflected in the respective Statements of Financial Condition of MM LLC. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by MM LLC, as well as the volatility and liquidity of the markets in which such derivative instruments are traded. The General Partner, MLIM AS LLC, has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of the Advisors selected from time to time for MM LLC, and include calculating the Net Asset Value of the Advisors' respective MM LLC accounts as of the close of business on each day and reviewing outstanding positions for over-concentrations both on an Advisor-by-Advisor and on an overall Partnership basis. While MLIM AS LLC does not itself intervene in the markets to hedge or diversify the Partnership's market exposure through MM LLC, MLIM AS LLC may urge Advisors to reallocate positions, or itself reallocate Partnership assets among Advisors through Advisors (although typically only as of the end of a month) in an attempt to avoid over-concentration. However, such interventions are unusual. Except in cases in which it appears that an Advisor has begun to deviate from past practice and trading policies or to be trading erratically, MLIM AS LLC's basic risk control procedures consist simply of the ongoing process of advisor monitoring and selection, with the market risk controls being applied by the Advisors themselves. CREDIT RISK The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange-traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the-counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading and counterparties may require margin in the over-the-counter markets. The Partnership, through MM LLC, has credit risk in respect of its counterparties and brokers, but attempts to mitigate this risk by dealing almost exclusively with Merrill Lynch entities as clearing brokers. The Partnership, through MM LLC, 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 from and payables to MLF, these receivables and payables are offset and reported as a net receivable or payable in the financial statements of MM LLC in the Equity in commodity futures trading accounts in the Statements of Financial Condition. 9 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. 2000 $112.80(a) $112.46(a) $111.61(a) $110.11(a) $110.85(a) $109.67(a) $108.61(a) $109.41(a) $107.25(a) 2001 $112.97(b) $113.94(b) $117.81(b) $115.64(b) $115.09(b) $115.36(b) $115.43(b) $116.10(b) $117.02(b)
(a) After reduction for distributions declared of $6.00, $6.00, $3.50, 3.50 and $3.50 per Series A Unit as of October 1, 1995, 1996, 1997, 1998 and 1999, respectively. (b) After reduction for a $3.50 per Series A Unit distribution declared on October 1, 2000 and the distributions described in (a), resulting in a total distribution of $26.00 inception to date. Performance Summary All of the Partnership's trading assets are invested in MM LLC. The Partnership recognizes trading profits or losses as an investor in MM LLC. The following commentary describes the trading results of MM LLC. January 1, 2001 to September 30, 2001 ------------------------------------- January 1, 2001 to March 31, 2001 Trading in the interest rate sector was highly profitable for the Partnership during the quarter. Long positions in the Euro resulted in gains in January. The impact of the weakening U.S. economy and the Federal Reserve's move to cut interest rates was felt throughout the interest rate futures market, as Euro futures contracts rose dramatically since December 2000. Euro-yen and Euro-bund cross futures trading produced gains for the sector. Agricultural trading was profitable despite losses sustained early in the quarter. During January, the agricultural sector faced weak grain and oilseed prices. Excellent growing weather in the U.S., Argentina and Brazil, concerns about U.S. export potential and inventories at historically high levels, kept the markets on the defensive. Contract lows in cotton produced gains for short positions. The cotton market sank to a 15 year low as a result of short supply and increased demand. Potential increased planting, paired with a drop in demand, forced prices lower. Currency trading resulted in gains for the Partnership. Losses were realized during January and February on long Euro and Swiss franc trading. After rallying from a low of 82--83 cents to 96 cents, the Euro fell back to the 90 cent level, despite strong fundamentals. This resulted in losses for the Partnership's long positions. The sector rebounded strongly in March on substantial gains from short Japanese yen positions. Trading in the metals markets was successful. Losses from short silver positions were sustained in January as silver had a minor technical run as it reached it's four month high. Short silver positions were profitable in February as silver prices reversed its earlier trend and declined as the market was generally weak. Gold's failure to rally also weighed on the market. March was a volatile trading month as another attempted gold rally failed, resulting in gains in short positions. Stock index trading was moderately successful despite uncertainty in equity markets. Short S&P 500 and NASDAQ positions resulted in gains as global equity markets remain caught between negative news about earnings and the potential positive effects of further monetary easing. Energy trading was the only unprofitable sector during the quarter. Natural gas prices pulled back in January after rallying during the last few months, resulting in losses. Crude oil prices were driven lower 10 by both a seasonal downturn in global oil usage and heavier than normal refinery maintenance work, reducing the demand. Short natural gas positions were unprofitable in March on concerns over supply availability. April 1, 2001 to June 30, 2001 Trading in agricultural commodities was profitable despite a sluggish start to the quarter. The market for grains has been weak throughout the beginning of 2001. Excellent crops in Argentina and Brazil and a good start to the U.S. growing season has resulted in weakness in the grain complex. Also, during the quarter, profits from short corn and cotton positions outweighed losses from soybeans. Stock index trading was profitable for the Partnership as long NASDAQ 100 positions outweighed losses from DAX German Stock Index trading. Trading in S&P contracts was successful despite continued volatility. Trading in the energy sector was down slightly. Despite profitable unleaded gas trading, losses were posted on long light crude oil and heating oil positions. Crude prices fell due to increased total inventories, stemming from the effects of crude oil stores rising more than 42 million barrels over the last few months. The energy sector faded from downside pressure from a slowing global economy, inventory surplus and OPEC's decision to leave production levels unchanged. Currency trading suffered losses, particularly in Euro and Japanese yen positions. The further weakening of the Euro and Japanese yen displayed how the global economy is not immune to the slowdown of the U.S. economy. Gains were posted in the Canadian dollar at quarter end due to a healthy trade surplus and a favorable short-term interest rate differential. The metals sector performed poorly. Weakness in the Euro, a decline in the Australian dollar to all time lows and producer and central bank selling sent gold prices lower. Silver trading was volatile. China's silver exports have been high due to poor domestic demand, adversely affecting prices. Trading in the interest rate markets accounted for most of the Partnership's trading losses for the quarter. Positions in Euro-bund futures, three-month Euribor futures and U.S. 10-year notes were unprofitable. July 1, 2001 to September 30, 2001 Trading in the interest rate sector was very successful as significant gains were realized throughout the quarter on Euro dollar positions. These gains more than offset losses on U.S. Treasury and Japanese 10-year bonds. Swiss franc short term interest rate contract trading and short Sterling 500 positions offset losses on long Gilt positions in September. Metals trading was profitable throughout the quarter. Positions in aluminum, copper, silver and nickel produced profits. Long gold positions were profitable as investors flocked to gold for safety in the aftermath of the terrorist attacks. Stock index trading was also successful as the Partnership's various short positions were profitable. Major indices in the world markets fell as corporate earnings, in general, were poor and the global economic slump would worsen as a result of the terrorist attacks. Trading in the energy sector was moderately unsuccessful. The sector continued to face downside pressure as in the prior months. Natural gas prices fell as the heat wave in the Northeast dissipated. Oil prices sank, as traders feared the attacks would not only cripple the airline industry (a major consumer of oil), but would also trigger a global economic recession, cutting the demand for oil. Agricultural trading was unprofitable during the quarter. Early gains from coffee failed to outpace losses from corn and short wheat positions. Grain prices rose in July on concerns that hot and dry weather would cause lower 2001 production. Soybeans fell on fears of larger than expected crop outputs. Cotton fell to a 15-year low due to abundant crops. Cattle fell to a one year low on demand concerns. Trading in the currency markets was unprofitable. Losses were sustained from Canadian dollar and Swiss franc positions early on. Short Japanese yen positions were unprofitable in August. Long British pound positions were profitable in September as the currency appreciated versus the U.S. dollar on concerns over the negative economic implications from the September 11 terrorist attacks. 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 per day offsetting some gains from the previous two months. Stock index trading was profitable for the quarter. During the month of January, the Hang Seng Index found market conditions to be difficult. Stock index trading returned in February and March with gains in positions in CAC 40 Euro futures, DAX German Stock Index and long S&P 500 positions resulted in gains as investors focused more on value stocks near the end of the quarter. Metals trading alternated from profitable to unprofitable during the quarter. In January, gains in aluminum positions outweighed losses in zinc and copper. Losses in aluminum and gold positions outweighed gains in nickel positions during February. In March, metals trading was slightly profitable as gains in silver positions outweighed losses in zinc and copper. 11 Short Swiss franc and Euro positions launched the quarter with gains after officials from the Group of Seven met and failed to express concern about the low levels of the European currency, however the positions were unprofitable in February offsetting gains in Japanese yen positions. Short Euro positions then bounced back in March but were outweighed by losses in Japanese yen and British pound positions. Agriculture trading resulted in losses for the quarter. In January and February, gains in sugar positions were outweighed by losses in corn positions. In March, corn positions were profitable as prices rose, but were outweighed by unprofitable soyoil and sugar positions. Corn prices fluctuated as changes in weather forecasts occurred throughout the quarter. 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 Japanese 10-year bond, 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. Agriculture trading was profitable in the quarter as sugar and live hog positions outweighed losses from soybean trading. An exporter made the first sale of U.S. pork to China under a 1999 bilateral agricultural agreement, providing a new avenue of opportunity for U.S. pork producers. The mid-month USDA grain crop report projected a 12% rise in soybean inventories from last season. This resulted in fears of an abundance of supply and therefore, lower prices for the commodity. Forecasts of reduced Brazilian exports and crop damage in China and Pakistan combined with greater than expected demand from Russia, resulted in gains for the Partnership's long sugar positions. 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 British 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. Stock index trading was unprofitable due to losses sustained in Nikkei 225 and S&P 500 positions early 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. However, the Nikkei 225 trading showed gains at the end of the quarter as well as did the All Ordinaries Index as the Australian Index finished higher in June. 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, 12 gold showed virtually no response to activities in the financial and equity markets, including the surge in energy prices. Interest rate trading results were unprofitable for the quarter. Early on losses were incurred from U.S. Treasury bond and Euro 10-year bond trading. U.S. bond yields fell during the month as investors shifted to Treasuries due to increased volatility in the NASDAQ and other equity markets. The Euro traded higher during May on reports that the European Central Bank may buy the currency to boost its value, but finally trading was again unprofitable as losses were incurred in Euro dollar and Japanese government bond positions. 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. 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 U.S. 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. Cash Management Prior to June 2000, the Partnership invested a portion of its assets in Government Securities. Effective June 2000, the Partnership liquidated the Government Securities held and now invests a portion of its assets in Commercial Paper. These holdings generally have maturities of 30, 60 or 90 days and are held to maturity. The investments in Commercial Paper are directed by MLIM AS LLC. At September 30, 2001, the Partnership did not have an investment in Commercial Paper. 13 PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no pending legal proceedings to which the Partnership or MLIM AS LLC 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, 2001 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 Effective May 31, 2001, Merrill Lynch Investment Partners Inc. ("MLIP"), a Delaware corporation and General Partner of the Partnership, converted to a Delaware limited liability company. In connection with the conversion, MLIP's name was changed to MLIM Alternative Strategies LLC ("MLIM AS LLC"). This step was taken in connection with the ongoing reorganization of the various alternative investment groups under the Merrill Lynch Investment Managers umbrella. Effective August 14, 2001, Merrill Lynch Group, Inc. contributed all of the issued and outstanding shares of MLIM AS LLC to its affiliate Merrill Lynch Investment Managers in a tax free reorganization. The changes will have no impact on the Partnership's investors. All of the officers of MLIP continue in their former roles with MLIM AS LLC, except that also effective May 31, 2001, Ronald S. Rosenberg, formerly Chief Executive Officer of MLIP, became President of MLIM AS LLC and Fabio P. Savoldelli, formerly President of MLIP, became Chairman and Chief Executive Officer of MLIM AS LLC. In addition, each of the four directors of MLIP now serve on the board of managers of MLIM AS LLC. 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 2001. 14 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: MLIM ALTERNATIVE STRATEGIES LLC (formerly Merrill Lynch Investment Partners, Inc.) (General Partner) Date: November 15, 2001 By /s/ FABIO P. SAVOLDELLI ---------------------- Fabio P. Savoldelli Chairman, Chief Executive Officer and Manager Date: November 15, 2001 By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer 15