10-Q 1 a2164827z10-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, 2005 ------------------ 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. ---------------------------- (Exact Name of Registrant as specified in its charter) Delaware 13-3750642 (Registrant) ------------------------------------ --------------------------------- (State or other jurisdiction of (IRS Employer Identification No.) incorporation or organization) c/o Merrill Lynch Investment Managers LLC 222 Broadway 27th Floor New York, NY 10038-2510 ----------------------- (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 / / Indicate by check mark whether registrant is an accelerated filer (as defined by Rule 12b-2 of the Act). Yes / / No /X/ Indicate by check mark whether registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes / / No /X/ PART I - FINANCIAL INFORMATION Item 1. Financial Statements ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF FINANCIAL CONDITION
SEPTEMBER 30, 2005 DECEMBER 31, (UNAUDITED) 2004 --------------- --------------- ASSETS: Equity in commodity futures trading accounts: Cash $ 520,400 $ 509,498 Investment in Global Horizons 10,739,128 - Receivable from MM LLC - 13,053,547 Accrued interest receivable 1,515 964 --------------- --------------- TOTAL ASSETS $ 11,261,043 $ 13,564,009 =============== =============== LIABILITIES AND PARTNERS' CAPITAL: LIABILITIES: Payable to Global Horizons $ 383,399 $ - Payable to MM LLC - 430,901 Redemptions payable 138,516 79,561 --------------- --------------- Total liabilities 521,915 510,462 --------------- --------------- PARTNERS' CAPITAL: General Partner (160,738 and 146,547 Units) 154,127 160,719 Limited Partners (11,038,997 and 11,758,530 Units) 10,585,001 12,892,828 --------------- --------------- Total partners' capital 10,739,128 13,053,547 --------------- --------------- TOTAL LIABILITIES AND PARTNERS' CAPITAL $ 11,261,043 $ 13,564,009 =============== ===============
NET ASSET VALUE PER UNIT (SEE NOTE 3) See notes to financial statements. 2 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) 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, 2005 2004 2005 2004 --------------- --------------- --------------- --------------- TRADING PROFITS (LOSSES): Realized $ 58,537 $ (465,277) $ (76,270) $ 479,236 Change in unrealized (10,163) 574,570 (19,897) (337,320) --------------- --------------- --------------- --------------- Total trading profits (losses) 48,374 109,293 (96,167) 141,916 --------------- --------------- --------------- --------------- Interest income 99,790 44,507 248,714 116,099 --------------- --------------- --------------- --------------- EXPENSES: Brokerage commissions 194,385 237,038 605,698 747,953 Administrative fees 6,703 8,172 20,886 25,772 Profit shares 1,024 42,685 54,681 90,935 --------------- --------------- --------------- --------------- Total expenses 202,112 287,895 681,265 864,660 --------------- --------------- --------------- --------------- NET INVESTMENT LOSS $ (102,322) $ (243,388) $ (432,551) $ (748,561) =============== =============== =============== =============== NET LOSS $ (53,948) $ (134,095) $ (528,718) $ (606,645) =============== =============== =============== =============== NET LOSS PER UNIT: Weighted average number of General Partner and Limited Partner units outstanding 11,398,625 12,556,112 11,973,787 13,090,147 =============== =============== =============== =============== Net loss per weighted average General Partner and Limited Partner Unit $ (0.0047) $ (0.0107) $ (0.0442) $ (0.0463) =============== =============== =============== ===============
Substantially all items of income and expense are derived from the investment in Global Horizons or MM LLC for the three and nine months ended September 30. (Note 2) See notes to financial statements. 3 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) STATEMENTS OF CHANGES IN PARTNERS' CAPITAL FOR THE NINE MONTH PERIOD ENDED SEPTEMBER 30, 2005 AND 2004 (unaudited)
GENERAL LIMITED UNITS PARTNER PARTNERS TOTAL --------------- --------------- --------------- --------------- PARTNERS' CAPITAL, December 31, 2003 11,909,517 $ 159,703 $ 15,281,993 $ 15,441,696 Conversion of Units (Note 3) 2,266,687 - 314 314 Net loss - (7,568) (599,077) (606,645) Redemptions (1,931,967) - (2,123,572) (2,123,572) --------------- --------------- --------------- --------------- PARTNERS' CAPITAL, September 30, 2004 12,244,237 $ 152,135 $ 12,559,658 $ 12,711,793 =============== =============== =============== =============== PARTNERS' CAPITAL, December 31, 2004 11,905,077 $ 160,719 $ 12,892,828 $ 13,053,547 Conversion of Units (Note 3) 1,149,203 19 714 733 Net loss - (6,611) (522,107) (528,718) Redemptions (1,854,545) - (1,786,434) (1,786,434) --------------- --------------- --------------- --------------- PARTNERS' CAPITAL, September 30, 2005 11,199,735 $ 154,127 $ 10,585,001 $ 10,739,128 =============== =============== =============== ===============
See notes to financial statements. 4 ML PRINCIPAL PROTECTION L.P. (A DELAWARE LIMITED PARTNERSHIP) NOTES TO FINANCIAL STATEMENTS (unaudited) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES In the opinion of management, the financial statements contain all adjustments necessary to present fairly the financial position of ML Principal Protection L.P. (the "Partnership") as of September 30, 2005, and the results of its operations for the three and nine month periods ended September 30, 2005 and 2004. However, the operating results for the interim periods may not be indicative of the results 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, 2004. 2. INVESTMENTS Effective December 31, 2004, the Partnership redeemed its entire investment in ML Multi-Manager LLC ("MM LLC"), which commenced its liquidation process as of December 31, 2004, and the proceeds were invested prior to the opening of business on January 2, 2005 in Global Horizons I L.P. ("Global Horizons"), formerly known as ML Global Horizons L.P. As of September 30, 2005 the Partnership had an investment in Global Horizons of $10,739,128 and the Partnership's percentage ownership share of Global Horizons is 3.82%. Condensed statement of financial condition of Global Horizons and statements of operations for Global Horizons LP and MM LLC are set forth as follows:
SEPTEMBER 30, 2005 (UNAUDITED) --------------- Assets $ 290,280,439 =============== Liabilities $ 8,832,573 Partners' Capital 281,447,866 --------------- Total $ 290,280,439 ===============
5
GLOBAL HORIZONS MM LLC GLOBAL HORIZONS MM LLC ------------------------ ------------------------ ------------------------ ------------------------ FOR THE THREE MONTHS FOR THE THREE MONTHS FOR THE NINE MONTHS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2005 ENDED SEPTEMBER 30, 2004 ENDED SEPTEMBER 30, 2005 ENDED SEPTEMBER 30, 2004 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ------------------------ ------------------------ ------------------------ ------------------------ Trading Profits (Losses) and Interest Income $ 3,831,311 $ 972,365 $ 5,413,227 $ 1,289,591 Expenses 4,903,366 1,665,822 14,799,223 5,052,221 ------------------------ ------------------------ ------------------------ ------------------------ Net loss $ (1,072,055) $ (693,457) $ (9,385,996) $ (3,762,630) ======================== ======================== ======================== ========================
3. NET ASSET VALUE PER UNIT Prior to the opening of business on January 2, 2005, Series A 2003, Series 2004 and Series S were consolidated into a new series, Series 2005, with a $1.00 Net Asset Value Per Unit. The aggregate Net Asset Value of each investor's new Units is equal to the aggregate Net Asset Value of their original Units at December 31, 2004. The consolidation had no adverse economic effect on the investors. Merrill Lynch Investment Managers LLC ("MLIM LLC"), the General Partner, contributed $733 to the Partnership, the amount necessary due to the effects of rounding, to ensure that all investors received Units equal in value to their original holdings at December 31, 2004. The following is a listing of the number of new Units each investor received of Series 2005 for each Unit of their original series holding:
NUMBER SERIES OF UNITS ------ ---------- A 2003 1.108721 G 2004 1.005565 S 125.174168
Prior to the opening of business on January 2, 2004, Series G, H, and O through R, those series that had come to term on or before December 31, 2003, but after December 31, 2002, were consolidated into a new series, Series 2004, with a $1.00 per Unit Net Asset Value. The aggregate Net Asset Value of each investor's new Units is equal to the aggregate Net Asset Value of their original Units at December 31, 2003. The consolidation had no adverse economic effect on the investors. The General Partner contributed $314 to the Partnership, the amount necessary due to the effects of rounding to ensure all investors received Units equal in value to their original holdings at December 31, 2003. The following is a list of the number of new Units each investor received of Series 2004 for each Unit of their original series holding.
NUMBER SERIES OF UNITS ------ ---------- G 110.859969 H 102.336331 O 129.904347 P 132.546751 Q 122.531124 R 123.779041
6 After the series consolidations, the brokerage commission rates for Series 2005 and Series 2004 was reduced to a monthly rate of 0.604 of 1% (a 7.25% annual rate). At September 30, 2005 and December 31, 2004, the Net Asset Values of the different series of Units were: September 30, 2005 (unaudited)
NET ASSET VALUE NET ASSET VALUE NUMBER OF UNITS PER UNIT --------------- --------------- --------------- Series 2005 Units $ 10,739,128 11,199,735 $ 0.9589 =============== ===============
December 31, 2004
NET ASSET VALUE NUMBER OF UNITS NET ASSET VALUE --------------- --------------- --------------- Series A 2003 Units $ 11,000,919 9,922,463 $ 1.1087 Series 2004 Units 1,993,167 1,982,139 $ 1.0056 Series S Units 59,461 475 $ 125.18 --------------- --------------- $ 13,053,547 11,905,077 =============== ===============
4. FAIR VALUE AND OFF-BALANCE SHEET RISK The Partnership invests indirectly in derivative instruments as a result of its investment in Global Horizons, but does not itself hold any derivative instrument positions. The nature of this Partnership has certain risks, which cannot be presented on the financial statements. The following summarizes, resulting from its investment in Global Horizons, some of those risks. 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 allocation of net unrealized profit on open contracts on such derivative instruments as reflected in the Statements of Financial Condition of Global Horizons. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by Global Horizons as well as the volatility and liquidity of the markets in which such derivative instruments are traded. MLIM 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 by MLIM LLC, the General Partner of Global Horizons, calculating the net asset value of their respective Partnership's accounts and Global Horizons 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 LLC does not itself intervene in the markets to hedge or diversify the Partnership's market exposure, MLIM LLC may urge advisors to reallocate positions, or itself reallocate Partnership assets through Global 7 Horizons among advisors (although typically only as of the end of a month) in an attempt to avoid over-concentrations. 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, MLIM 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 Global Horizons, has credit risk with respect to non-performance 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 Global Horizons, in its normal course of business, enters into various contracts, with Merrill Lynch Pierce Fenner & Smith ("MLPF&S") acting as its commodity broker. Pursuant to the brokerage agreement with MLPF&S (which includes a netting arrangement), to the extent that such trading results in receivables from and payables to MLPF&S, these receivables and payables are offset and reported as a net receivable or payable in the financial statements of Global Horizons in the net realized profit on open contracts in the Statements of Financial Condition. 8 Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS MONTH-END NET ASSET VALUE PER SERIES A 2003 UNIT
JAN. FEB. MAR. APR. MAY JUN. JUL. AUG. SEP. ------------------------------------------------------------------------------------------------------------------------------ 2004 $ 1.1075 $ 1.1504 $ 1.1486 $ 1.1082 $ 1.0940 $ 1.0602 $ 1.0573 $ 1.0502 $ 1.0495
MONTH-END NET ASSET VALUE PER SERIES 2005 UNIT
JAN. FEB. MAR. APR. MAY JUN. JUL. AUG. SEP. ------------------------------------------------------------------------------------------------------------------------------ 2005 $ 0.9659 $ 0.9763 $ 0.9788 $ 0.9514 $ 0.9519 $ 0.9634 $ 0.9474 $ 0.9607 $ 0.9589
Performance Summary All of the Partnership's trading assets are invested in Global Horizons as of January 2, 2005. The Partnership recognizes trading profits or losses as an investor in Global Horizons. The following 2005 commentary describes the trading results of Global Horizons. JANUARY 1, 2005 TO SEPTEMBER 30, 2005 January 1, 2005 to March 31, 2005 The Partnership posted a loss for the first quarter. Losses in the currency and global equity sectors outweighed gains experienced in the agricultural sector. The interest rate sector was the best performing sector for the Partnership. The Partnership benefited from long U.S. dollar positions versus the Euro and long Euro and Japanese fixed incomes. Systematic, long-term trend followers also posted gains in the interest rate sector. The energy sector was the second highest performing sector for the Partnership. Gains were experienced in the energy sector as the Partnership benefited from long positions in crude oil and gas as these industries profited. Gains were also posted in long crude oil and heating oil positions. The agricultural sector also performed well for the quarter. Gains were experienced from long positions in cattle and hog markets. Short grain positions and long soybean positions detracted from performance mid-quarter. However, the quarter ended with gains posted due to coffee, which experienced a lack of supply and a growing demand. The metals sector posted a gain for the quarter. The Partnership benefited from long positions in base and precious metals, such as gold, copper and zinc. The stock indices sector posted a loss for the quarter. Losses occurred in the beginning of the quarter due to a trend reversal from long global equities to short global equities. Profits were made through long positions on the FTSE index and Asian equities. Stock indices contributed negatively to performance as the equity markets declined at the end of the quarter. The currency sector posted the greatest loss for the Partnership. Losses at the beginning of the quarter were due to a trend reversal from short U.S. dollar positions to long U.S. dollar positions. Long Japanese yen and Swiss franc positions also experienced losses. With the U.S. Federal Reserve expressing 9 concern about inflation, investors predicted that interest rates and the U.S. dollar would rise. This caused losses as investors fled from emerging currencies. Long Australian dollar and Mexican peso positions also contributed to negative performance. April 1, 2005 to June 30, 2005 The Partnership experienced gains in the interest rates and currencies sectors and losses in the remaining sectors. Trading in interest rates posted gains for the Partnership, despite losses early in the quarter. The Partnership benefited from long positions in the 10-year German Bund. The long positions held by the Partnership in European and Japanese government bonds contributed to gains as well. The currencies sector posted a gain as well for the quarter. Long positions in the British pound and Aussie dollar contributed early on in the quarter. Short positions to the British pound, Swiss franc and Euro enabled the Partnership to capitalize on trend reversals in the market in the latter half of the quarter. Trading in stock indices attributed to overall trading losses for the Partnership despite gains posted in the second two months of the quarter. As equity markets declined, the stock indices market posted losses. Short positions of domestic equities slightly offset some of the gains attributed to global and European equities. Profits from long exposure in the European and U.S. equities were not enough to offset the losses incurred earlier in the quarter. Trading in agricultural commodities posted losses for the quarter. Gains in exposure to hogs and soybeans were not enough to offset trading losses in other commodities. Long exposure to soymeal attributed to the losses as well. Losses were posted throughout the quarter in the metals sector. Long positions in base metals detracted from performance. Complex base metals detracted from performance as well. The energy sector posted the largest losses for the quarter. Crude oil and heating oil declined as crude oil fell in price, which negatively impacted trend followers. July 1, 2005 to September 30, 2005 The Partnership posted positive trading results, although the Partnership as a whole suffered losses for the third quarter. The energy sector generated the most gains, followed by stock indices and metals sectors. Trading losses were posted in the agriculture, currencies and interest rates sectors. In August, large gains posted in the energy sector attributed to the majority of the Partnership's profits. Long energy positions in the entire energy complex, as well as a rally in the energy sector due to Hurricane Katrina attributed to those gains. Trading in stock indices posted gains for the quarter despite small losses posted in August. Long positions in global equities contributed to profits early in the quarter as global markets rallied. Long European equities and Japanese Nikkei positions contributed to the profits in the latter part of the quarter. Gains were also posted in the metals sector. Long metal positions, specifically copper, contributed as global growth increased speculation that demand, and therefore prices, would increase. 10 Trading in agricultural commodities posted a loss for the quarter. Short exposure to corn and long exposure to London coffee detracted from performance across the agricultural complex. Gains in London sugar and cotton were offset by losses in hogs and the soybean complex. Losses were also posted from trading in the currency sector despite gains posted in September. China's revaluation of the yuan caused volatility across the currency markets. The U.S. dollar weakened based on higher oil prices and the potential Federal Reserve slowdown in September. British pounds detracted from performance in the foreign sector. Gains from long Australian dollar and short Euro positions were not enough to offset the losses. Trading in the interest rate sector posted the largest losses for the quarter. A rally in bond prices attributed to losses. Long positions in Japanese and European government bonds as well as German bunds further detracted from performance. JANUARY 1, 2004 TO SEPTEMBER 30, 2004 All of the Partnership's trading assets in 2004 were invested in MM LLC. The Partnership recognizes trading profits or losses as an investor in MM LLC. The following 2004 commentary describes the trading results of MM LLC. January 1, 2004 to March 31, 2004 MM LLC experienced gains in the interest rate, metals, agricultural commodities, energy, and currency sectors and losses in stock indices. Overall, for the quarter, MM LLC experienced gains. The interest sector posted the largest gains for the quarter despite choppy trading conditions early in the quarter. In January, profits were generated from various positions at the short end of the curve in Canada and Europe, while losses were posted at longer points in the curve in both the U.S. and Europe. In February, fixed income markets resumed their slow upward trend. In March, long exposure to most of the major global yield curves proved to generate positive results. The metals sector posted gains for the quarter as well. In January, both precious and industrial metals generated positive returns from the long side. Base metals continued to move higher with the exception of nickel. Copper rose to its highest price in more than six years due to supply disruptions and heavy demand from new home construction. In February, base metals continued their upward move as the sector experienced strong demand, shrinking supply and U.S. dollar weakness, helping to drive prices higher. Strong industrial demand for copper and continued speculative interest pushed the market to a seven year high. In March, industrial metals generated minor losses for MM LLC, while precious metals contributed significantly, particularly, gold and silver. The agricultural commodities sector posted gains early in the quarter as the USDA cut its forecast of the crop supply for both soybeans and corn, which sent prices surging. In February, grain markets extended their long-term rally, with corn and soybeans being pushed to highs on strong demand and low stockpiles. Grain markets continued to extend their long-term rally in March, with corn, soybeans and soymeal being pushed higher on strong demand from Asia and lower estimates of supply from South America. The energy sector posted gains for the quarter. In crude oil and more broad energy markets, weather and OPEC were the dominant factors behind price moves during January. Weather was extremely cold in the Northeast and Midwest U.S., which caused a sharp rally in natural gas and heating oil. Crude oil had a sharp rally in early February and gradually sold-off as the markets became complacent about the OPEC 11 meeting. The market continued this trend, as weather-related demand and tight U.S. inventories continued. In March, the energy sectors posted a small loss under extremely volatile market conditions. The crude oil market had very choppy performance during the month, as did the heating oil market. The currency sector posted slight gains for the quarter. The currency sector began the quarter with gains as it continued its long trend of a weakening U.S. dollar. However, trading was very choppy and gains generated in the early part of January were lost. In February and March, the trend continued as currency trading was very difficult due to the heightened volatility in the markets. Stock indices posted losses despite gains early in the quarter. Stock indices posted a profit for January, as long exposure to global equities from momentum based and fundamental models performed well. In February, long exposure to global equities produced positive performance. In March, stock indices posted a loss that exceeded the gains from earlier in the quarter. Long Nikkei profits were overcome by losses in long exposure to European equities, which later flipped to short positions, by month-end. April 1, 2004 to June 30, 2004 MM LLC experienced an overall loss for the quarter. The energy sector was the only profitable sector for MM LLC. The energy sector posted gains for the quarter despite volatile market conditions. Crude oil and unleaded gas were the main drivers of performance. In May, crude oil prices continued to increase during the month, including refined products, as did market volatility. Political uncertainties in the Middle East added an additional risk premium to the markets. Losses were posted for the month of June. Crude oil and heating oil were the largest contributors to losses as markets sold-off early during the month when OPEC agreed to provide more supply, while U.S. inventory levels showed a gradual increase. MM LLC maintained a long bias in this sector throughout the quarter. The agricultural sector posted a loss for the quarter despite small gains in April and June. Early in the quarter, agricultural markets reversed their upward trend with the fear that demand from China would slow down. Long exposure to the soybean complex outweighed losses in other markets, particularly corn. Large losses were posted in May. Soybean prices collapsed, and sold off close to 20% from highs in April as ideal weather conditions persisted in the Midwest and exports failed to materialize. Demand from China and diminishing supplies had kept prices high for quite some time. Small gains were posted in June, with cotton prices dropping allowing short exposures to generate profits. Corn also posted a significant decline during the month, which caused the portfolio to adjust positions from long to short. Corn experienced a dramatic improvement in estimates of acreage and yields, due to high prices and positive weather conditions. The interest rate sector posted a loss for the quarter with small gains posted in May. In April, the fixed income markets experienced heightened volatility and then fell sharply, followed by a short bounce and then trended down for the rest of the month. The portfolio was long on many of the global yield curves at the start of the month and began reducing exposure and initiating shorts mid month. In May, Eurodollars and short sterling exposure proved profitable during the month, as strong employment figures in the U.S. confirmed a scenario whereby the Federal Reserve will raise rates by this summer and the Bank of England indicated it will raise rates to slow down the growth in the economy. In June, Eurodollars fell early in the month and finally gained 28 basis points from their lows. U.S. fixed income trading was flat, while gains in trading Japanese Government bonds were outweighed by losses in trading the European yield curve. 12 Stock indices posted losses throughout the quarter. In April, equities continued to rally in the early part of the month, but the fear of rate increase based on positive economic news sent equities falling with a steep sell-off towards the end of the month. Equities worldwide stayed weak, on concerns of the imminent rate increases in U.S. interest rates. The Japanese Nikkei experienced a sudden deterioration in sentiment, which sent the market plunging around 5% in one day. The metals sector posted losses for the quarter. In April, both industrial and precious metals generated significant losses for the portfolio. The U.S. dollar strengthening and the fear of higher interest rates, which would curb growth, caused base and precious metals to sell-off. Both industrial and precious metals generated slight losses for the portfolio in May. In June, industrial metals detracted from performance as zinc fell by approximately 11% and copper lost 3%. The currency sector posted the largest losses for the quarter. In April, the U.S. dollar strengthened considerably during the month, with the Euro falling below 120 and the British pound falling to 1.77. The Japanese yen fell sharply after a strong rebound in March. Gains in the British pound and the Euro overcame losses from the Japanese yen and Australian dollar positioning. In May, the U.S. dollar weakened against major currencies except for the Australian dollar after strengthening considerably during the prior month. Losses in the Japanese yen, Australian dollar and the Swiss franc were mitigated by gains in the British pound. In June, most major currencies displayed no clear direction, but exhibited high intra day volatility. Losses were incurred from positions in the Australian dollar, Swiss franc, British pound and other major markets. July 1, 2004 to September 30, 2004 MM LLC experienced gains in the interest rate, energy, agricultural commodities and metals sectors and losses in the stock indices and currency sectors. Overall, for the quarter, MM LLC experienced gains. The interest rate sector posted gains for MM LLC for the quarter. In July, U.S. bond prices rallied for a second month on weaker employment data. Bond prices in Europe advanced, while in Japan they declined. U.S. fixed income trading was positive; gains in trading German Bunds were offset by losses in other international yield curves. In August, U.S. bond prices rallied early in the month following the release of lackluster payroll data. Bond prices in Europe also advanced. Strong gains were generated in U.S. and European fixed income trading. The interest rate sector turned around in September but gains still offset those losses for the quarter. U.S. Treasury markets reacted to the employment data with a violent sell-off at the beginning of the month, which caused the Advisors to reduce the portfolio's long exposure or change to a net short bias. Softer economic data eventually pushed longer-term maturities higher by the end of the month. The energy sector posted profits throughout the quarter. Crude oil prices climbed as prices reached record levels. Energy markets had been driven higher on concerns about limited spare capacity from OPEC, growing demand globally, instability with Russian suppliers and terrorism. In August, crude oil reached a 21-year high mid-month before selling off. Short exposure to natural gas also contributed to performance. The energy sector continued to rally, as hurricanes in the southeastern U.S., higher demand from overseas and ongoing geopolitical tensions create supply concerns. The agricultural commodities sector also posted a gain for the quarter. In July, the sector posted a gain for the month as cotton prices dropped allowing short exposures to generate profits. Corn also posted a significant decline, which was profitable for short positions. New crop soybeans, corn, and wheat are all trading in what has developed to be the best growing season in years. Weather conditions had been quite 13 optimal, which lead many to believe that crops would have record yields. The market priced in a near term surplus for many of these markets. In August, the USDA gave a low crop estimate as there were forecasts of an early freeze following a cool summer and slow crop development all surprising the market and posting losses as the short positions were covered. In September, many grain markets resumed their downward trend, particularly soybeans, corn and cotton after rallying in August. This sell-off was based on fundamental data reported. The metals sector also posted a small gain for the quarter despite losses in July and August. In July, industrial metals slightly detracted from performance, as gains in long copper exposure could not offset losses in nickel and aluminum positioning. Gold prices posted a modest gain during the month. In August, gains in short zinc exposure could not offset losses in long base metal positioning. Gold prices rose during the month, as weak economic data continued to drive down expectations of future rate hikes in the U.S. The sector posted a gain in September. Industrial metals, particularly copper added to performance, while exposure to precious metals contributed a small gain. Copper rallied based on increasing demand from China and tight supply conditions. Trading in stock indices posted a loss for the quarter despite small gains posted in August. Major global equity markets recorded sharp declines in July with a lack of volatility. A short bias to U.S. early in the month allowed for some positive performance, but a long bias to most international equities detracted from performance. Exposure to Japan and European equities contributed most of the losses. Global equity indices were largely unchanged mid quarter after an initial sell-off and rally at the end of August. A short bias to global equities late in the quarter allowed for some positive performance and short positions were later covered toward the end of the quarter, as the markets changed direction. Gains in the U.S. outweighed losses in exposure to Asian and European equities. Global equity indices experienced a small rally during September. European equities outperformed the U.S. and Asian markets. Losses in the U.S. outweighed moderate gains in some of the international markets late in the quarter. The currency sector posted the largest losses for the quarter for MM LLC. Currency markets remained choppy as the market continued to react to new releases of economic data. Weaker economic data was reported, particularly the employment report, and then went onto rally, based on a robust forecast for U.S. economic growth by Federal Reserve Chairman, Alan Greenspan. Gains made in trading Euro were offset by losses in the Swiss franc, British pound and Japanese yen. The market uncertainty about the future macroeconomic environment resulted in random price moves and a lack of any sustainable trends within the sector. August began with the U.S. dollar weakening, on soft economic data, most notably the payroll data and the trade deficit. In September, the positive non-farm payroll data initially caused an appreciation of the U.S. dollar, which later faded toward the end of the month, as the announcement of China joining the G-8 meeting re-ignited a U.S. dollar weakening. 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk Not applicable Item 4. Controls and Procedures Merrill Lynch Investment Managers LLC, the General Partner of ML Principal Protection L.P., with the participation of the General Partner's Principal Executive Officer and the Chief Financial Officer, has evaluated the effectiveness of the design and operation of its disclosure controls and procedures with respect to the Partnership as of the end of the period date of this quarterly report, and, based on this evaluation, has concluded that these disclosure controls and procedures are effective. Additionally, there were no significant changes in the Partnership's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. 15 PART II - OTHER INFORMATION Item 1. Legal Proceedings There are no pending legal proceedings to which the Partnership, Global Horizons or MLIM LLC is a party. Item 2. Unregistered Sales of Equity Securities and Use of Proceeds (a) None. (b) None. (c) None. (d) None. 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 The following exhibits are incorporated by reference or are filed herewith to this Quarterly Report on Form 10-Q: 31.01 and 31.02 Rule 13a-14(a)/15d-14(a) Certifications EXHIBIT 31.01 AND 31.02: Are filed herewith. 32.01 and 32.02 Section 1350 Certifications EXHIBIT 32.01 AND 32.02: Are filed herewith. (b) REPORTS ON FORM 8-K There were no reports on Form 8-K filed during the first nine months of fiscal 2005. 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. By: MERRILL LYNCH INVESTMENT MANAGERS LLC (General Partner) Date: November 14, 2005 By /s/ FABIO P. SAVOLDELLI ----------------------- Fabio P. Savoldelli Managing Director and Chief Investment Officer - Alternative Strategies Advisers Division (Principal Executive Officer) Date: November 14, 2005 By /s/ PATRICK HAYWARD ------------------- Patrick Hayward Chief Financial Officer (Principal Financial and Accounting Officer) 17