ML PRINCIPAL PROTECTION LP - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002
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OR

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For the transition period from to
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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 MLIM Alternative Strategies LLC
Princeton Corporate Campus
800 Scudders Mill Road - Section 2G
Plainsboro, New Jersey 08536
----------------------------
(Address of principal executive offices)
(Zip Code)

609-282-6996
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(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)
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STATEMENTS OF FINANCIAL CONDITION
---------------------------------

NET ASSET VALUE PER UNIT

See notes to financial statements.

2

ML PRINCIPAL PROTECTION L.P.
----------------------------
(a Delaware Limited Partnership)
--------------------------------

STATEMENTS OF OPERATIONS
------------------------
(unaudited)

See notes to financial statements.

3

ML PRINCIPAL PROTECTION L.P.
----------------------------
(a Delaware Limited Partnership)
--------------------------------

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the six months ended June 30, 2002 and 2001
-----------------------------------------------
(unaudited)

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

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 financial position of ML Principal Protection L.P.
(the "Partnership") as of June 30, 2002, and the results of its operations
for the three and six months ended June 30, 2002 and 2001. 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, 2001.

2. INVESTMENTS

As of June 30, 2002 and December 31, 2001, the Partnership had an
investment in ML Multi-Manager Portfolio LLC ("MM LLC") of $16,173,040 and
$17,346,923, respectively. As of June 30, 2002, and December 31, 2001, the
Partnership's percentage ownership share of MM LLC was 8.80% and 8.61%,
respectively.

Total revenues and fees with respect to the Partnership's investment in
MM LLC are set forth as follows:

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A condensed statements of financial condition and statements of operations
for MM LLC are set forth as follows:

3. NET ASSET VALUE PER UNIT

At June 30, 2002 and December 31, 2001, the Net Asset Values of the
different series of Units were:

June 30, 2002
(unaudited)

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December 31, 2001

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 June 30, 2002, the Partnership has made the following distributions:

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5. FAIR VALUE AND OFF-BALANCE SHEET RISK

The nature of this Partnership has certain risks, which can not be
presented on the financial statements. The following summarizes 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 net unrealized profit (loss) on such
derivative instruments as reflected in the Statements of Financial
Condition or, with respect to Partnership assets invested in MM LLC, the
net 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 the Partnership and MM LLC as well as the
volatility and liquidity of the markets in which such derivative
instruments are traded.

MLIM Alternative Strategies LLC ("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 by the Partnership or MM LLC, and include calculating the Net
Asset Value of their respective Partnership accounts and 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, MLIM AS
LLC may urge Advisors to reallocate positions, or itself reallocate
Partnership assets, through MM LLC, 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 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
exclusively with Merrill Lynch entities as clearing brokers.

The Partnership, through MM LLC, in its normal course of business, enters
into various contracts, with Merrill Lynch, Pierce, Fenner & Smith
("MLPF&S") acting as its commodity broker. Pursuant

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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 MM LLC in the Equity in commodity futures trading accounts in the
Statements of Financial Condition.

Item 2: Management's Discussion and Analysis of Financial Condition and
Results of Operations
---------------------------------------------------------------

MONTH-END NET ASSET VALUE PER SERIES A UNIT

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Jan. Feb. Mar. Apr. May Jun.
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2001 $112.97(a) $113.94(a) $117.81(a) $115.64(a) $115.09(a) $115.36(a)
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2002 $109.41(b) $106.60(b) $108.32(b) $106.88(b) $108.25(b) $112.26(b)
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(a) After reduction of $26.00 per Series A Unit distributions from inception to
date.

(b) After reduction of $29.50 per Series A Unit distributions from 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, 2002 to JUNE 30, 2002
- --------------------------------

January 1, 2002 to March 31, 2002

The energy sector was the only profitable trading strategy for the quarter.
Natural gas short positions were profitable as the positions benefited from the
mild weather in the United States. The sector experienced large declines in
February due to increased concerns of the health of world economies. This lead
to price instability. Gains were realized in March in the physical commodity
markets, as fears of increased conflicts in the Middle East could potentially
result in a shortage of oil supplies.

Trading in stock indices resulted in losses for the quarter. Long equity
exposures suffered losses in choppy market conditions as profit forecasts fell
short and concern over the Enron accounting situation deepened. Uncertainty in
the global market place prevailed, making for extremely difficult trading
conditions. Long positions appreciated in March, notably in Japan, Germany and
France, but not enough to offset earlier losses.

Conflicting economic reports was the cause for losses in the interest rate
sector. These reports prompted the Advisors to flip exposures from long
positions to short positions in most major international bond markets during the
quarter. European fixed income exposures posted losses under particularly
direction less markets. Global bond prices declined on growing optimism for a
stronger economic outlook for the remainder of 2002.

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Trading in the metals sector was down for the quarter. Short positions in base
metals were unsuccessful early on as base metals prices soared on the hope that
an economic recovery in the United States would boost demand. Precious metal
prices declined as the U. S. economy continued to show signs of stabilizing and
inflation concerns waned. Long gold positioning generated gains as prices rose
above $300 for the first time in two years.

Currency trading resulted in losses for the Partnership. In January, gains were
generated in short Japanese yen positions as the Japanese yen continued to
depreciate against the U. S. dollar due to continued deterioration of economic
fundamentals in Japan. In February, all of the futures traded currencies
appreciated against the U.S. dollar, except the Canadian dollar. March was a
relatively volatile month for G-7 currencies. The U.S. dollar fell from 133 to
127.50 Japanese yen during the first week, and then almost completely reversed
the move by month-end, causing losses.

Agricultural trading was the least successful strategy. During January and
February, coffee prices were in a downward trend. This trend sharply reversed
in March as reduced exports from Mexico and Central America trimmed
inventories of exchange-approved soybeans in U.S. warehouses. As prices rose,
the Partnership's short positions sustained losses.

April 1, 2002 to June 30, 2002

Profits resulting from trading in the currency sector provided the Partnership
with the majority of its gains in the second quarter. The decline in the U.S.
dollar continued through June unabated fueled by the decline in the U.S. equity
markets.

The interest rate sector was profitable for the Partnership despite its slow
start. Yields on major debt-instruments continued to decline. U.S. fixed income
markets have rallied sharply due to the flight-to-safety effect as well as the
conviction that the U.S. Federal Reserve will raise rates later rather than
sooner.

The agricultural commodities sector posted small gains for the quarter. Strong
gains were posted in livestock and grains in April as prices trended downward.
Soybean by-products positions also contributed to the profits in this sector.
The continued weakness in the U.S. dollar and low stockpiles in grains and
soybeans should aid in sustaining a price rally in the summer months.

The metals sector sustained slight losses for the quarter. In June, the uptrend
in gold and silver reversed and losses were sustained on long position
eliminating profits earned earlier in the quarter.

Energy futures experienced whipsaw markets and trading brought in losses for the
Partnership. The market was volatile during the quarter due to continued turmoil
in the Middle East.

Losses were experienced in the stock indices sector. The quarter began with the
stall of the appreciation in the U.S. and European equity markets in April due
to weak recovery expectations. The continued erosion of confidence in the
quarter about corporate earnings and the timing of recovery caused both the U.S.
and European markets to fall back.

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JANUARY 1, 2001 to JUNE 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
and on gold's failure to rally 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 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 German DAX trading. Trading in S&P contracts
was successful despite continued volatility.

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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, as China's silver exports have
been high due to poor domestic demand, adversely affecting prices.

Trading in the interest rate markets was accounted for most of the Partnership's
trading losses for the quarter. Positions in Euro-bund futures, three-month
Euribor futures and U.S. ten-year notes were unprofitable.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Not applicable

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PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending 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) 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

There are no exhibits required to be filed with this report.

(b) Reports on Form 8-K

There were no reports on Form 8-K filed during the first six months
of fiscal 2002.

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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: MLIM ALTERNATIVE STRATEGIES LLC
(General Partner)

Date: August 15, 2002 By /s/ FABIO P. SAVOLDELLI
------------------------
Fabio P. Savoldelli
Chairman, Chief Executive Officer and Manager
(Principal Executive Officer)

Date: August 15, 2002 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer

14

EXHIBIT 99

FORM OF CERTIFICATION PURSUANT TO SECTION 1350 OF CHAPTER 63
OF TITLE 18 OF THE UNITED STATES CODE

We, Fabio P. Savoldelli and Michael L. Pungello, the chief executive officer and
chief financial officer, respectively, of MLIM Alternative Strategies LLC,
general partner of ML Principal Protection L.P., certify that (i) the quarterly
report Form 10-Q fully complies with the requirements of Section 13(a) or 15(d)
of the Securities and Exchange Act of 1934 and (ii) the information contained in
the Form 10-Q fairly presents, in all material respects, the financial condition
and results of operations of ML Principal Protection L.P.

Date: August 15, 2002 By /s/ FABIO P. SAVOLDELLI
-----------------------
Fabio P. Savoldelli
Chairman, Chief Executive Officer and Manager
(Principal Executive Officer)

Date: August 15, 2002 By /s/ MICHAEL L. PUNGELLO
-----------------------
Michael L. Pungello
Vice President, Chief Financial Officer
and Treasurer
(Principal Financial and Accounting Officer)

15