-----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, KQOa+BuaFKL6AaAEAhr8pqAk1tOvkm3zS9/8XA+F5OLwyK7TK/s/D11MEJvRhm+t kAQWUjnYyziozvsNaG+JYg== 0000950130-99-006418.txt : 19991115 0000950130-99-006418.hdr.sgml : 19991115 ACCESSION NUMBER: 0000950130-99-006418 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991112 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ML PRINCIPAL PROTECTION LP CENTRAL INDEX KEY: 0000917259 STANDARD INDUSTRIAL CLASSIFICATION: REAL ESTATE INVESTMENT TRUSTS [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: 99750657 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 FORM 10Q 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, 1999 ------------------ OR ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to _____________ Commission File Number 0-25000 ML PRINCIPAL PROTECTION L.P. ---------------------------- ML PRINCIPAL PROTECTION TRADING L.P. ------------------------------------ (Rule 140 Co-Registrant) (Exact Name of Registrant as specified in its charter) Delaware 13-3750642 (Registrant) - ------------------------------- 13-3775509 (Co-Registrant) (State or other jurisdiction of --------------------------------- incorporation or organization) (IRS Employer Identification No.) c/o Merrill Lynch Investment Partners Inc. Princeton Corporate Campus 800 Scudders Mill Road - Section 2G Plainsboro, New Jersey 08536 ---------------------------- (Address of principal executive offices) (Zip Code) 609-282-6996 ---------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No ___ --- 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, 1999 1998 ------------- ------------- ASSETS - ------ Equity in commodity futures trading accounts: Cash and options premiums $ 6,056,821 $ 20,564,400 Net unrealized profit on open contracts 820,217 601,178 Government Securities (Cost: $49,574,060 and $60,044,483, respectively) 49,314,477 60,536,271 Cash 1,821 43,497 Accrued interest 378,926 685,821 ------------- ------------- TOTAL $ 56,572,262 $ 82,431,167 ============= ============= LIABILITIES AND PARTNERS' CAPITAL - --------------------------------- LIABILITIES: Redemptions payable $ 3,845,724 $ 1,467,829 Profit Shares payable 90,724 594,328 Brokerage commissions payable 300,510 402,923 Administrative fees payable 11,786 16,960 ------------- ------------- Total liabilities 4,248,744 2,482,040 ------------- ------------- Minority Interest 832,753 842,289 ------------- ------------- PARTNERS' CAPITAL: General Partners (9,497.04 and 6,654.61 Units) 1,021,855 735,280 Limited Partners (468,278.0918 and 717,784.1628 Units) 50,468,910 78,371,558 ------------- ------------- Total partners' capital 51,490,765 79,106,838 ------------- ------------- TOTAL $ 56,572,262 $ 82,431,167 ============= ============= 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 -------------------------------------
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, 1999 1998 1999 1998 ------------- -------------- ------------ -------------- REVENUES: Trading profit (loss): Realized $ (442,255) $ 3,313,972 $ 1,181,632 $ 4,910,716 Change in unrealized 273,546 4,914,987 (511,145) 1,976,361 ------------- -------------- ------------ -------------- Total trading results (168,709) 8,228,959 670,487 6,887,077 ------------- -------------- ------------ -------------- Interest income 887,271 1,329,442 2,604,988 4,299,498 ------------- -------------- ------------ -------------- Total revenues 718,562 9,558,401 3,275,475 11,186,575 ------------- -------------- ------------ -------------- EXPENSES: Profit Shares 16,438 729,850 260,326 1,434,119 Brokerage commissions 963,803 1,630,551 3,211,524 4,885,403 Administrative Fees 37,685 46,587 128,785 139,583 ------------- -------------- ------------ -------------- Total expenses 1,017,926 2,406,988 3,600,635 6,459,105 ------------- -------------- ------------ -------------- INCOME BEFORE MINORITY INTEREST (299,364) 7,151,413 (325,160) 4,727,470 ------------- -------------- ------------ -------------- Minority interest 8,999 (75,249) 9,537 (37,044) ------------- -------------- ------------ -------------- NET INCOME (LOSS) $ (290,365) $ 7,076,164 $ (315,623) $ 4,690,426 ============= ============== ============ ============== NET INCOME (LOSS) PER UNIT: Weighted average number of units outstanding 544,572 910,322 621,576 979,067 ============= ============== ============ ============== Weighted average net income (loss) per Limited Partner and General Partner Unit $ (0.53) $ 7.77 $ (0.51) $ 4.79 ============= ============== ============ ===============
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, 1999 and 1998 -----------------------------------------------------
Limited General Subscriptions Units Partners Partner Receivable Total ------------- ------------- ------------- ------------- ------------- PARTNERS' CAPITAL, December 31, 1997 942,619.12 $ 105,628,837 $ 2,564,153 (6,966,305) $ 101,226,685 Subscriptions 130,030.49 13,003,049 - - 13,003,049 Subscriptions receivable 69,663.26 - - 6,966,305 6,966,305 Distributions - (986,857) (26,118) - (1,012,975) Net Income - 4,674,077 16,349 - 4,690,426 Redemptions (298,166.32) (29,689,298) (1,807,512) - (31,496,810) ------------- ------------- ------------- ------------- ------------- PARTNERS' CAPITAL, September 30, 1998 844,146.55 $ 92,629,808 $ 746,872 $ - $ 93,376,680 ============= ============= ============= ============= ============= PARTNERS' CAPITAL, December 31, 1998 724,438.77 $ 78,371,558 $ 735,280 $ - $ 79,106,838 Subscriptions 15,736.00 1,273,562 300,038 - 1,573,600 Distributions - (578,878) (10,433) - (589,311) Net Income (Loss) - (312,593) (3,030) - (315,623) Redemptions (262,399.64) (28,284,739) - - (28,284,739) ------------- ------------- ------------- ------------- ------------- PARTNERS' CAPITAL, September 30, 1999 477,775.13 $ 50,468,910 $ 1,021,855 $ - $ 51,490,765 ============= ============= ============= ============= =============
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 ------------------------------------------ 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES These financial statements have been prepared without audit. In the opinion of management, the financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the consolidated financial position of ML Principal Protection L.P. (the "Partnership" or the "Fund") as of September 30, 1999 and December 31, 1998, and the results of its operations for the three and nine month periods ended September 30, 1999 and 1998. However, the operating results for the interim periods may not be indicative of the results expected for the full year. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with generally accepted accounting principles have been omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto included in the Partnership's Annual Report on Form 10-K filed with the Securities and Exchange Commission for the year ended December 31, 1998 (the "Annual Report"). 5 2. NET ASSET VALUE PER UNIT At September 30, 1999 and December 31, 1998, the Net Asset Values of the different series of Units for financial reporting purposes and for all other purposes were:
September 30, 1999 Net Asset Number Net Asset Value Value of Units per Unit ----------- ------------ --------------- Series A Units $ 8,792,511 76,186.0000 $ 115.41 Series B Units 1,027,948 9,269.0000 110.90 Series C Units 1,354,978 12,745.0000 106.31 Series D Units 4,908,951 45,832.0000 107.11 Series E Units 4,006,577 36,072.7800 111.07 Series F Units 2,368,927 22,327.0400 106.10 Series G Units 2,243,620 21,414.6000 104.77 Series H Units 1,400,054 13,500.4750 103.70 Series K Units 5,613,679 51,729.0000 108.52 Series L Units 4,398,211 41,591.0000 105.75 Series M Units 6,797,090 63,365.8800 107.27 Series N Units 1,963,809 18,991.4250 103.41 Series O Units 3,822,863 36,856.2419 103.72 Series P Units 578,332 5,464.0000 105.84 Series Q Units 754,186 7,705.6908 97.87 Series R Units 1,191,425 12,044.0000 98.92 Series S Units 267,605 2,681.0000 99.82 ----------- ------------ Totals 51,490,765 477,775.1327 =========== ============
6
December 31, 1998 Number Net Asset Net Asset Value of Units Value per Unit --------------- ------------ -------------- Series A Units $ 12,718,104 109,886.0000 $ 115.74 Series B Units 1,498,896 13,150.0000 113.98 Series C Units 2,145,087 19,694.0000 108.92 Series D Units 6,658,019 59,742.0000 111.45 Series E Units 6,063,352 54,556.5800 111.14 Series F Units 3,285,111 30,152.6400 108.95 Series G Units 2,854,082 26,507.1000 107.67 Series H Units 2,185,925 20,275.7250 107.81 Series K Units 7,063,107 64,436.0000 109.61 Series L Units 9,686,313 90,690.0000 106.81 Series M Units 10,476,381 96,696.0600 108.34 Series N Units 5,800,784 55,546.4250 104.43 Series O Units 7,205,406 68,774.2420 104.77 Series P Units 655,841 6,134.0000 106.92 Series Q Units 810,430 8,198.0008 98.86 --------------- ------------ Totals $ 79,106,838 724,438.7728 =============== ============
7 3. ANNUAL DISTRIBUTIONS The Partnership makes annual fixed-rate distributions, payable irrespective of profitability, of between $2 and $5 per Unit on Units issued prior to July 16, 1996. The Partnership may also pay discretionary distributions on such Series of Units of up to 50% of any Distributable New Appreciation, as defined on such Units. No distributions are payable on Units issued after July 16, 1996. As of September 30, 1999, the Partnership has made the following distributions:
Distribution Fixed-Rate Discretionary Series Date Distribution Distribution ------ ------------ ------------ ------------- 1999 ---- Series B 1/1/99 $ 3.50 $ - Series C 4/1/99 3.50 - Series D 7/1/99 3.50 1.00 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
8 4. FAIR VALUE AND OFF-BALANCE SHEET RISK In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities" (the "Statement"), effective for fiscal years beginning after June 15, 2000, however, the Fund has adopted the Statement effective January 1, 1999. This Statement supercedes SFAS No. 119 ("Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments") and SFAS No. 105 ("Disclosure of information about Financial Instruments with Off-Balance Sheet Risk and Financial Instruments with Concentrations of Credit Risk") whereby disclosure of average aggregate fair values and contract/notional values, respectively, of derivative financial instruments is no longer required for an entity such as the Partnership which carries its assets at fair value. Such Statement sets forth a much broader definition of a derivative instrument. The General Partner does not believe that the application of the provisions of such statement has a significant effect on the financial statements. SFAS No. 133 defines a derivative as a financial instrument or other contract that has all three of the following characteristics (1) one or more underlyings, notional amounts or payment provisions (2) requires no initial net investment or a smaller initial net investment than would be required relative to changes in market factors (3) terms require or permit net settlement. Generally, derivatives include a future, forward, swap or option contract, or other financial instrument with similar characteristics such as caps, floors and collars. Market Risk ----------- Derivative instruments involve varying degrees of off-balance sheet market risk, and changes in the level or volatility of interest rates, foreign currency exchange rates or the market values of the financial instruments or commodities underlying such derivative instruments frequently result in changes in the Partnership's net unrealized profit (loss) on such derivative instruments as reflected in the Consolidated Statements of Financial Condition. The Trading Partnership's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Trading Partnership, as well as the volatility and liquidity of the markets in which such derivative instruments are traded. The General Partner has procedures in place intended to control market risk exposure, although there can be no assurance that they will, in fact, succeed in doing so. These procedures focus primarily on monitoring the trading of the Advisors selected from time to time for the Partnership, adjusting the percentage of the Partnership's invested in the Trading Partnership with respect to each Series or Units, calculating the Net Asset Value of the Advisors' respective Partnership accounts as of the close of business on each day and reviewing outstanding positions for over- concentrations both on an Advisor-by-Advisor and on an overall Partnership basis. While the General Partner does not itself intervene in the markets to hedge or diversify the Partnership's market exposure (although the General Partner does adjust the percentage of the Partnership's total assets allocated to trading), the General Partner may urge Advisors to reallocate positions, or itself reallocate Partnership assets among Advisors (although typically only as of the end of a month) in an attempt to avoid over-concentration. However, such interventions are unusual. Except in cases in which it appears that an Advisor has begun to deviate from past practice or trading policies or to be trading erratically, the General Partner's basic risk control procedures consist simply of the ongoing process of Advisor monitoring and selection, with the market risk controls being applied by the Advisors themselves. One important aspect of the General Partner's risk controls is its adjustments to the leverage at which the Units trades. If MLIP makes a leverage adjustment to any Series issued after May 1, 1997, a corresponding adjustment is made to the leverage used by all such Series. For series issued prior to May 1, 1997, adjustments to leverage may be made individually by Series. By controlling the percentage of assets invested in the Trading Partnership, the General Partner can directly affect the market exposure of the Partnership. Leverage control is the principal means by which the General Partner hopes to be able to ensure that Merrill Lynch is never required to make any payments. Under its guarantee that the Net Asset Value per Unit of each Series will equal no less than $100 as of the Principal Assurance Date for such Series. Credit Risk ----------- The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter (non-exchange- traded) transactions, because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange. In over-the- counter transactions, on the other hand, traders must rely solely on the credit of their respective individual counterparties. Margins, which may be subject to loss in the event of a default, are generally required in exchange trading, and counterparties may require margin in the over-the- counter markets. 9 The credit risk associated with these instruments from counterparty nonperformance is the net unrealized profit included on the Consolidated Statements of Financial Condition. The Partnership has credit risk in respect of its counterparties and brokers, but attempts to control this risk by dealing almost exclusively with Merrill Lynch entities as counterparties and brokers. 5. SUBSEQUENT EVENTS On October 1, 1999 distributions were announced with respect to Series A Units and Series E Units. Series A Units and Series E Units received an annual fixed rate distribution equal to $3.50 per Unit. No discretionary distribution was paid. 10 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. - ---------------------------------------------------------------------------------------------------------------------------------- 1998 $113.84(a) $113.25(a) $113.37(a) $111.46(a) $112.48(a) $111.69(a) $111.09(a) $116.00(a) $119.77(a) - ---------------------------------------------------------------------------------------------------------------------------------- 1999 $115.39(b) $115.86(b) $114.86(b) $116.14(b) $114.75(b) $116.00(b) $116.26(b) $116.28(b) $115.41(b) - ----------------------------------------------------------------------------------------------------------------------------------
(a) After reduction for a $6.00 per Series A Unit distribution declared on October 1, 1995, a $6.00 per Series A Unit distribution declared on October 1, 1996, and a $3.50 per Series A Unit distribution declared on October 1, 1997. (b) After reduction for a $3.50 per Series A Unit distribution declared on October 1, 1998 and the distributions described in (a), resulting in a total distribution of $19.00 inception to date. As of July 1, 1996, the Fund changed its name to ML Principal Protection L.P. Such change was due to the General Partner restructuring the continuous offerings to be sold without a guaranteed annual fixed-rate distribution or a discretionary distribution as previously offered under ML Principal Protection Plus L.P. Performance Summary January 1, 1998 to September 30, 1998 - ------------------------------------- January 1, 1998 to March 31, 1998 The Fund's most profitable positions during the quarter were in the global interest rate markets, particularly in European bonds where an extended bond market rally continued despite an environment of robust growth in the United States, Canada and the United Kingdom, as well as a strong pick-up in growth in continental Europe. Specifically, strong gains were recorded in French and German bonds. Gold and crude oil trading resulted in losses. Gold prices drifted sideways and lower as Asian demand continued to slow and demand in the Middle East was affected by low oil prices. Initially buoyed on concerns about a U.S.-led military strike against Iraq, crude oil fell to a nine year low, as the globally warm winter, the return of Iraq as a producer and the Asian economic crisis added to OPEC's supply glut problems. Trading results in stock index markets were mixed, but marginally profitable, despite a strong first-quarter performance by the U.S. equity market as several consecutive weekly gains were recorded with most market averages setting new highs. Results in currency trading were also mixed, but marginally profitable. Strong gains were realized in positions on the Swiss franc, which weakened versus the U.S. dollar, while trading losses resulted from positions in the Deutsche mark and the Australian dollar. Agricultural commodity markets provided profits. Live cattle and hog prices trended downward throughout the quarter resulting in strong gains. Cotton prices moved mostly upward during the quarter, but dropped off sharply at the end of March, causing losses. April 1, 1998 to June 30, 1998 As swings in the U.S. dollar and developments in Japan affected bond markets, the Fund's interest rate trading during the quarter resulted in losses, particularly in Eurodollar deposits and U.S. Treasury bonds. Early in the quarter, Treasury trading was range-bound, as concern that the economy might be overheating was balanced by the potential impact of the Asian recession. Additionally, Australian bonds and bills saw a dramatic drop in prices in early June, as dollar-bloc currencies remained under pressure versus the U.S. dollar due to the Japanese/Asian crisis. Metals and energy trading also resulted in losses. The depressed gold market weakened further following news of a European Central Bank consensus that ten to fifteen percent of reserves should be made up of gold bullion which was at the low end of expectations. Despite production cuts initiated by OPEC at the end of March, world oil supplies remained excessive and oil prices stood at relatively low levels throughout the quarter. Results in currency trading were profitable. Strong gains were realized in positions on the Japanese yen, which weakened during June to an eight-year low versus the U.S. dollar. Trading results in stock index markets were also profitable as the Asia-Pacific region's equity markets weakened across the board. In 11 particular, Hong Kong's Hang Seng index trended downward during most of the quarter and traded at a three-year low. Agricultural commodity trading produced profits. Although the U.S. soybean crop got off to a good start which contributed to higher yield expectations and a more burdensome supply outlook, soybean prices traded in a volatile pattern for the second half of the quarter. Sugar futures maintained mostly a downtrend, as no major buyers emerged to support the market. Similarly, coffee prices trended downward, as good weather conditions in Central America and Mexico increased the prospects of more output from these countries. July 1, 1998 to September 30, 1998 Fund performance in July was essentially flat. In August and continuing into September, financial markets in general were characterized by a flight to quality that resulted from uncertainty over Russia's solvency, continued weakness in Asia, and concerns that recessionary conditions would spread to the United States and Europe. These factors, combined with generally less liquid market conditions, led to a marked widening in bond credit spreads and a broad sell-off in world-wide equity markets. Managed futures funds exhibited strong non-correlation to world markets in August and again in September, generating significant profits on the long side of interest rates and the short side of the commodity markets. Interest rate trading was particularly profitable during the quarter in positions in Eurodollars, German and Japanese bonds, and U.S. Treasury notes and bonds. The growth rate of the world bond market declined to its lowest level since 1987 at 7.7%, down 4.0% from the last peak in 1993. Global investors poured funds into such instruments as U.S. Treasury issues and German Bunds, staging a major flight to quality. As a result, there was a significant widening of credit spreads on a global basis. Global fund managers also increased their already-overweight exposure to U.S. Treasuries to a record high. The impact of these events was that in September, the yield on the Japanese 5-year bond fell to .67%, an all-time low, German 10-year Bunds fell to 3.89%, representing almost a 100-year low, and the 30-year bond in the U.S. dropped to its lowest level on record. The Fund profited from its currency trading during the quarter with significant gains from short Japanese yen and Canadian dollar positions, as well as long Deutsche mark positions. In the currency markets, Japan's problems spread to other sectors of the global economy, causing commodities prices to decline as demand from the Asian economies weakened, in turn putting pressure on Canada's commodity-sensitive currency. In Germany, the federal election resulted in a shift to the left, as Chancellor Helmut Kohl, after sixteen years in office, lost to Gerhard Schroder. Surprisingly, this promoted a continued strengthening of the Deutsche mark versus the U.S. dollar. As U.S. equity markets declined in July and August, the Fund profited from short positions in the S&P 500(R), most notably during August, when the index dropped 14.5%. Volatility in September made for a difficult trading environment, and the Fund incurred modest losses in the stock index sector during September, but remained profitable for the quarter overall in these markets. Energy trading also resulted in gains for the quarter. Short heating oil positions proved profitable for the Fund as the market for heating oil prices dropped to its lowest level in more than a decade (the previous low was in 1986). Unleaded gas positions also generated strong profits for the Fund. In the metals markets, gold prices attempted to move higher against a backdrop of volatility in major equity markets, increasing concerns about emerging markets, economic chaos in Russia, weakness in the U.S. dollar, and increasing worries about global economic conditions. However, gold was unable to extend rallies and build any significant upside momentum resulting in a trendless environment and resulting losses in gold positions for the Fund. The agricultural sector generated losses overall for the quarter. Although as commodity markets collapsed in August, profits were generated on the short side, in September, the Fund was caught on the long side of the soybean complex resulting in losses as the U.S. soybean crop increased relative to the USDA's production estimate as a result of timely rains, which contributed to lower prices. January 1, 1999 to September 30, 1999 - ------------------------------------- January 1, 1999 to March 31, 1999 The Fund profited from trading in crude oil, heating oil, and unleaded gas. As the year opened, the global oil balance continued to show signs of being lopsided with estimated year-end 1998 inventories at their highest levels since 1984. During January, petroleum stocks rose by 21 million barrels compared with a typical gain of 6 to 7 million barrels. Then, on March 23, OPEC ratified new production cuts totaling 1.716 million barrels per day at its conference. These new production cuts were scheduled to go into effect on April 1 and proved to be harbingers of higher prices for crude. Agricultural trading was also profitable overall, as gains in live hogs and live cattle offset losses in corn positions. Hog prices plummeted due to a glut of hogs in the market. At the beginning of the quarter, the 12 corn market continued to struggle despite a stretch of solid export business. The market's negative sentiment was deepened by ongoing favorable weather in South America which continued through February, even though there was a sharp reduction in Argentina's planted area. Lack of enthusiasm for new crop and less than spectacular demand continued to depress the corn market throughout the quarter. The Fund suffered losses in currency trading during the quarter, as losses in Japanese yen overpowered gains in Swiss francs. On a trade-weighted basis, the Swiss franc ended the quarter at close to a seven-month low, mostly as a result of the stronger U.S. dollar. In January, the yen had advanced by nearly 35% against the dollar since early in August, and the Bank of Japan lowered rates to keep the economy sufficiently liquid so as to allow fiscal spending to restore some growth to the economy and to drive down the surging yen. Stock index trading was also unprofitable, as losses were sustained in Hang Seng and CAC40 positions. Also of note, the Dow Jones Industrial Average closed above the 10,000 mark for the first time ever at the end of March, setting a record for the index. Interest rate trading proved unprofitable for the Fund as well, as losses in Japanese 10-year government bonds offset gains in 10-year U.S. Treasury notes and German 10-year bonds. Early in January, the yield on the Japanese government 10-year bond increased to 1.8%, sharply above the record low of 0.695% it reached on October 7, 1998. This was triggered by the Japanese Trust Fund Bureau's decision to absorb a smaller share of future issues, leaving the burden of financing future budget deficits to the private sector. Losses in aluminum overshadowed slight gains in gold and copper during the first quarter. In January, burdensome warehouse stocks and questionable demand prospects weighed on base metals as aluminum fell to a 5-year low and copper fell to nearly an 11-year low. Major surpluses in both metals were expected, keeping prices down, and there was no supply side response to weak demand and lower prices. However, the end of March showed copper and aluminum leading a surge in base metals as prices recovered from multi-year lows. In precious metals, gold failed to sustain a rally, and gold's role as a flight to safety vehicle has clearly been greatly diminished as has its role as a monetary asset. April 1, 1999 to June 30, 1999 The Fund profited in interest rate trading from short positions in Euro dollars, U.S. 10-year Treasury notes and U.S. Treasury bonds as the flight to quality in the bond market reversed during the first half of 1999 and concerns about higher interest rates continued to rattle the financial markets. Stock index trading also resulted in gains overall for the quarter, as positions in the Hang Seng, Nikkei 225 and Topix Indices all generated profits when equity markets rallied worldwide in April and June. The energy sector was profitable as positions in crude oil and natural gas offset losses in gasoil trading. The focus of attention in the natural gas markets since the end of winter was the sharply lower than year-ago storage injection activity. Crude oil prices rallied much higher and faster than expected following last quarter's ratification of an OPEC/non-OPEC agreement to cut production by over 2 million barrels per day. Natural gas prices also rallied sharply over the quarter, reflecting, in part, growing concerns about a decline in US natural gas production. Trading in the agricultural markets resulted in losses for the Fund. Gains from live cattle positions were offset by losses from short corn and hog positions. Agricultural commodities, in particular corn, were weak almost across the board as they were saddled with negative supply/demand balances. In the beginning of the quarter, continued wetness across the corn belt led to early planting delays. Currency trading also resulted in losses for the Fund. Gains in Euro trading were offset by losses sustained in the British pound and short positions in the Canadian dollar. After suffering under the weight of lower commodity prices and the Asian recession, the Canadian dollar underwent a significant rally in the first half of 1999, moving up about 3 cents from the end of 1998. It has been in a corrective mode since early May, but unlike past years has retained much of its gain. In the metals sector, gains from short gold positions were overshadowed by losses in copper and nickel trading. Throughout the first half of 1999, gold prices were in a state of gradual erosion and in early June, hit their lowest levels in over 20 years. Gold continued to show a lack of response to political and military events such as Kosovo and also lost much of its role as a monetary asset and flight to safety vehicle. The economic scenario for Asia, Brazil, emerging market nations and Europe helped keep copper and other base metals on the defensive as demand receded with virtually no supply side response. July 1, 1999 to September 30, 1999 During the third quarter of 1999, the Fund'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 markets. 13 The Fund 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 Fund'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 Fund 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 Fund 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 US 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 Fund 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. YEAR 2000 COMPLIANCE As the Year 2000 approaches, Merrill Lynch has undertaken initiatives to address the Year 2000 problem (the "Y2K problem"), as more fully described in the 1998 Annual Report. The failure of Merrill Lynch's technology systems relating to a Y2K problem would likely have a material adverse effect on the company's business, results of operations, and financial condition. This effect could include disruption of normal business transactions, such as the settlement, execution, processing, and recording of trades in securities, commodities, currencies, and other assets. The Y2K problem could also increase Merrill Lynch's exposure to risk and legal liability and its need for liquidity. The renovation phase of Merrill Lynch's Year 2000 system efforts, as described in the 1998 Annual Report, was 100% completed as of June 30, 1999, and production testing was 100% completed as of that date. In March and April 1999, Merrill Lynch successfully participated in U.S. industrywide testing sponsored by the Securities Industry Association. These tests involved an expanded number of firms, transactions, and conditions compared with those previously conducted. Merrill Lynch has participated in and continues to participate in numerous industry tests throughout the world. 14 Merrill Lynch's business units have developed and tested contingency plans. The plans identify critical processes, potential Y2K problems, and personnel, processes, and available resources needed to maintain operations. However, the failure of exchanges, clearing organizations, vendors, service providers, clients and counterparties, regulators, or others to resolve their own processing issues in a timely manner could have a material adverse effect on Merrill Lynch's business, results of operations, and financial condition. In light of the interdependency of the parties in or serving the financial markets, there can be no assurance that all Y2K problems will be identified and remedied on a timely basis or that all remediation and contingency planning will be successful. Public uncertainty regarding successful remediation of the Y2K problem may cause a reduction in activity in the financial markets. This could result in reduced liquidity as well as increased volatility. Disruption or suspension of activity in the world's financial markets is also possible. In some non-U.S. markets in which Merrill Lynch does business, the level of awareness and remediation efforts relating to the Y2K problem are thought to be less advanced than in the U.S. Management is unable at this point to ascertain whether all significant third parties will successfully address the Y2K problem. Merrill Lynch will continue to monitor third parties' Year 2000 readiness to determine if additional or alternative measures are necessary. Contingency plans have been established for all business units. Merrill Lynch's year-end balance sheet levels will depend on Y2K risks and many other factors, including business opportunities and customer demand. As of September 24, 1999, the total estimated expenditures of existing and incremental resources for the Year 2000 compliance initiative are approximately $520 million. This estimate includes $104 million of occupancy, communications, and other related overhead expenditures, as Merrill Lynch is applying a fully costed pricing methodology for this project. Of the total estimated expenditures, approximately $40 million, related to continued testing, contingency planning, and risk management. There can be no assurance that the costs associated with such efforts will not exceed those currently anticipated by Merrill Lynch, or that the possible failure of such efforts will not have a material adverse effect on Merrill Lynch's business, results of operations, or financial condition. Item 3. Quantitative and Qualitative Disclosures About Market Risk The following table indicates the trading Value at Risk associated with the Fund's open positions by market category as of September 30, 1999 and December 31, 1998, and the average of the three and nine month periods ending September 30, 1999. As of September 30, 1999 and December 31, 1998, the Fund's total capitalization was approximately $51 million and $79 million, respectively, allocated to trading. 15
September 30, 1999 December 31, 1998 ------------------------------ ------------------------------ % OF TOTAL % OF TOTAL MARKET SECTOR VALUE AT RISK CAPITALIZATION VALUE AT RISK CAPITALIZATION - ------------- ------------- -------------- ------------- -------------- Interest Rates $ 739,633 1.45% $ 567,386 0.71% Currencies 699,794 1.37% 1,050,731 1.33 Stock Indices 287,243 0.56% 283,117 0.36 Metals 349,705 0.68% 315,100 0.40 Commodities 126,564 0.25% 280,302 0.35 Energy 308,000 0.60% 226,400 0.29 ------------- ------------- ------------- ------------- $ 2,510,939 4.91% $ 2,723,036 3.44% ============= ============= ============= =============
Average month-end Average month-end For the Period For the Period July 1999 through September 1999 January 1999 through September 1999 ------------------------------ ------------------------------ % OF TOTAL % OF TOTAL MARKET SECTOR VALUE AT RISK CAPITALIZATION VALUE AT RISK CAPITALIZATION - ------------- ------------- -------------- ------------- -------------- Interest Rates $ 1,215,092 2.31% $ 3,653,325 5.78% Currencies 953,946 1.81% 1,146,141 1.81% Stock Indices 594,273 1.13% 769,232 1.22% Metals 477,402 0.91% 491,778 0.78% Commodities 149,367 0.28% 321,482 0.51% Energy 481,381 0.91% 394,910 0.62% ------------- ------------- ------------- ------------- $ 3,871,461 7.35% $ 6,776,868 10.72% ============= ============= ============= =============
16 MLAM'S Cash Management MLAM invests approximately 80% of the Fund's assets in Government Securities. As of September 30, 1999 and December 31, 1998, the Fund's MLAM account totalled approximately $49 million and $61 million, respectively. As of September 30, 1999, the Fund's MLAM account held the following securities:
September 30, 1999 Par Value Description Rate Maturity Date Fair Value - --------- ------------------------------------- ------ ---------------- ------------ Long-Term - --------- 5,000,000 Federal National Mortgage Association 5.720% January 9, 2001 $ 4,981,150 4,000,000 Federal National Mortgage Association 5.625% March 15, 2001 3,977,520 3,000,000 Federal National Mortgage Association 5.375% March 15, 2002 2,946,570 1,000,000 U.S. Treasury Note 6.000% August 15, 2000 990,078 2,500,000 U.S. Treasury Note 4.625% November 30, 2000 2,483,554 2,000,000 U.S. Treasury Note 4.500% January 31, 2001 1,973,281 2,500,000 U.S. Treasury Note 5.750% June 30, 2001 2,504,101 1,000,000 U.S. Treasury Note 5.500% March 31, 2000 1,010,507 2,000,000 U.S. Treasury Note 5.750% November 15, 2000 2,972,109 2,000,000 U.S. Treasury Note 5.625% November 30, 2000 2,005,469 9,000,000 U.S. Treasury Note 5.375% February 15, 2001 8,976,797 3,000,000 U.S. Treasury Note 4.500% September 30, 2000 1,005,158 1,000,000 U.S. Treasury Note 5.750% April 30, 2003 2,002,500 ------------ Subtotal 37,828,794 ------------ Short-Term - ---------- 9,202,000 Federal Home Loan Mortgage Corp. 0.000% October 15, 1999 9,182,676 985,000 Federal National Mortgage Association 0.000% October 15, 1999 982,932 1,321,000 Federal National Mortgage Association 0.000% October 5, 1999 1,320,075 Subtotal 11,485,683 ------------ Total Government Securities $ 49,314,477 ============
17 As of December 31, 1998, the Fund's MLAM account held the following securities:
December 31, 1998 Par Value Description Rate Maturity Date Fair Value - -------------- ------------------------------------- ----------- ------------------ ----------------- Long-Term - -------------- 3,000,000 U.S. Treasury Note 5.500% February 29, 2000 $ 3,028,594 1,000,000 U.S. Treasury Note 6.375% May 15, 2000 1,022,344 1,000,000 U.S. Treasury Note 6.000% August 15, 2000 1,020,781 1,000,000 U.S. Treasury Note 5.750% November 15, 2000 1,019,531 1,000,000 U.S. Treasury Note 5.625% November 30, 2000 1,017,967 1,500,000 U.S. Treasury Note 5.625% December 31, 1999 1,514,648 5,000,000 U.S. Treasury Note 5.500% March 31, 2000 5,050,000 5,000,000 U.S. Treasury Note 6.375% May 15, 2000 5,111,719 2,000,000 U.S. Treasury Note 4.500% September 30, 1999 1,995,938 2,000,000 U.S. Treasury Note 5.750% November 15, 2000 2,039,063 2,000,000 U.S. Treasury Note 5.625% November 30, 2000 2,035,938 5,000,000 U.S. Treasury Note 5.375% February 15, 2001 5,078,125 1,000,000 U.S. Treasury Note 5.750% April 30, 2003 1,041,094 1,000,000 U.S. Treasury Note 5.250% August 15, 2003 1,025,625 1,000,000 Federal National Mortgage Association 4.820% December 18, 2000 998,672 2,000,000 Federal National Mortgage Association 5.720% January 9, 2001 2,027,960 4,000,000 Federal National Mortgage Association 4.820% December 18, 2000 3,994,688 3,000,000 Federal National Mortgage Association 5.720% January 9, 2001 3,041,939 3,000,000 Federal National Mortgage Association 5.420% January 23, 2001 3,025,200 ------------- Subtotal 45,089,826 ============= Short-Term - -------------- 3,000,000 U.S. Treasury Note 5.625% December 31, 1999 3,029,297 3,651,000 Federal National Mortgage Association 5.090% January 8, 1999 3,646,984 4,430,000 Federal National Mortgage Association 5.090% January 8, 1999 4,425,127 4,352,000 Federal National Mortgage Association 5.100% January 11, 1999 4,345,037 ------------- Subtotal 15,446,445 ------------- Total Government Securities $ 60,536,271 =============
18 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 September 30, 1999, the Fund has sold units with an aggregate price of $164,190,851. Item 3. Defaults Upon Senior Securities None. Item 4. Submission of Matters to a Vote of Security Holders None. Item 5. Other Information None. Item 6. Exhibits and Reports on Form 8-K. (a) Exhibits There are no exhibits required to be filed with this report. (b) Reports on Form 8-K ------------------- There were no reports on Form 8-K filed during the first nine months of fiscal 1999. 19 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 12, 1999 By /s/ JOHN R. FRAWLEY, JR. ------------------------- John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director Date: November 12, 1999 By /s/ MICHAEL L. PUNGELLO ----------------------- Michael L. Pungello Vice President, Chief Financial Officer and Treasurer 20 EX-27 2 FINANCIAL DATA SCHEDULE
BD 9-MOS 9-MOS DEC-31-1999 DEC-31-1998 JAN-01-1999 JAN-01-1998 SEP-30-1999 SEP-30-1998 1,821 43,497 7,255,964 21,851,399 0 0 0 0 49,314,477 60,536,271 0 0 56,572,262 82,431,167 0 0 5,081,497 3,324,329 0 0 0 0 0 0 0 0 0 0 0 0 0 0 51,490,765 79,106,838 56,572,262 82,431,167 670,487 6,887,077 2,604,988 4,299,498 3,591,098 6,496,149 0 0 0 0 0 0 0 0 (315,623) 4,690,426 (315,623) 4,690,426 0 0 0 0 (315,623) 4,690,426 (0.50) 4.79 (0.50) 4.79
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