ML PRINCIPAL PROTECTION LP - 10-Q Quarterly Report

Back to GetFilings.com

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 March 31, 2004

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 / /

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF FINANCIAL CONDITION

See notes to financial statements.

2

ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF INCOME
(unaudited)

See notes to financial statements.

3

ML PRINCIPAL PROTECTION L.P.
(A DELAWARE LIMITED PARTNERSHIP)

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(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

In the opinion of management, the financial statements contain all
adjustments (consisting of only recurring adjustments) necessary to
present fairly the financial position of ML Principal Protection L.P.
(the "Partnership") as of December 31, 2003, and the results of its
operations for the three months ended March 31, 2004 and 2003. 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 quarterly
financial statements prepared in accordance with accounting principles
generally accepted in the United States of America 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, 2003.

2. INVESTMENT IN MM LLC

As of March 31, 2004 and December 31, 2003, the Partnership had an
investment in ML Multi-Manager Portfolio LLC ("MM LLC") of $14,786,726 and
$15,441,696, respectively. As of March 31, 2004, and December 31, 2003, the
Partnership's percentage ownership share of MM LLC was 12.20% and 11.02%,
respectively.

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

5

3. NET ASSET VALUE PER UNIT

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.

Prior to the Prior to the opening of business on January 2, 2003, Series A
through F and K through N, those series whose guarantee had come to term on
or before December 31, 2002, were consolidated into a new series, Series A
2003, 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, 2002. The consolidation had no
economic effect on the investors. The General Partner contributed $5,499 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, 2002. The following is a listing of the number of
new Units each investor received of Series A 2003 for each Unit of their
original series holding.

After the series consolidations, the brokerage commission rates for Series
2004 and Series A 2003 were reduced to a monthly rate of 0.604 of 1% (a
7.25% annual rate).

6

At March 31, 2004 and December 31, 2003, the Net Asset Values of the
different series of Units were:

March 31, 2004

December 31, 2003

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.
The Principal Assurance Dates for Series A through R came to term on or
before December 31, 2003 and were not renewed. The above Series Units
remain outstanding, with 100% of their assets allocated to trading, without
any "principal protection" feature and no longer pay quarterly
distributions. The Partnership has made the following distributions for the
fiscal year ended December 31, 2003, and for the three month period ended
March 31, 2004:

7

5. FAIR VALUE AND OFF-BALANCE SHEET RISK

The Partnership invests indirectly in derivative instruments as a result of
its investment in MM LLC, 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 MM LLC, 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 such
derivative instruments as reflected in the Statements of Financial
Condition of MM LLC. The Partnership's exposure to market risk is
influenced by a number of factors, including the relationships among the
derivative instruments held by MM LLC as well as the volatility and
liquidity of the markets in which such derivative instruments are traded.

The General Partner, Merrill Lynch Investment Managers ("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 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 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 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 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 with respect to its
counterparties and brokers, but attempts to mitigate this risk by dealing
almost exclusively with Merrill Lynch entities as clearing brokers.

The Partnership, through MM LLC, in its normal course of business, enters
into various contracts, with 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

8

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 2003 UNIT

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, 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 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.

9

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.

January 1, 2003 to March 31, 2003

MM LLC experienced gains in the currency, energy, interest rate and
stock index sectors and losses in the agricultural commodity and metals
sectors. Overall, for the quarter, MM LLC experienced gains.

The currency forward and futures trading had the most significant gains for
the quarter. The weakening U.S. dollar was continuing to decline as it has
for over a year and MM LLC was well positioned to capitalize on its U.S.
dollar positions against other currencies. The largest gains versus the
U.S. dollar during January and February were with the Australian dollar and
Canadian dollar. In March, the U.S. dollar strengthened, on hopes that the
war with Iraq would be short, and returned some of the profits earned early
in the year.

Energy was a profitable sector for the quarter. With the continuation of
the strike in Venezuela, the tensions with Iraq and the cold winter, long
positions in oil and natural gas were profitable in the beginning of the
year. In February, the best performing month, natural gas prices rose
nearly 40% in a single day citing expected severely cold weather and supply
shortages. MM LLC profited from this event but such volatility caused
many of the Advisors to reduce their long positions. This helped MM LLC
retain profits as prices declined in crude oil and natural gas in March.

Interest rate futures were also profitable for the quarter. February had
significant gains offsetting losses in both January and March. U.S. and
European bonds rallied amid concerns of a global economic slowdown
benefiting MM LLC's long exposures. Selective long/short rate exposure
globally was the main driver to gains generated in the sector. The global
fixed income markets continued their upward climb until mid-March when
expectations of a short conflict triggered the liquidation of many fixed
income investments, hurting long exposures.

Trading in stock indices posted slight gains for the quarter. The market
was choppy throughout the quarter making trading difficult. MM LLC was
able to realize some gains in January on short positions as most indices
recorded three-month lows. During the rest of the quarter, choppy markets
caused short positions to be covered to protect against the risk of
significant losses.

The metals sector had losses for the quarter. Gold drove profits in January
as it continued its run up. The general perception of risks in the
financial markets and the geopolitical situation unfolding was the main
driver for the gold market in January. MM LLC sustained losses in
February and March as the long bias in precious metals hurt the portfolio
when gold reversed its rising trend in February and continued to decline.
Gold's appeal as a safe investment diminished.

Trading in agricultural commodities posted losses for the quarter. MM
LLC held positions in sugar, livestock and the soybean complex. Livestock
markets were off in February as Russia imposed an import limit to help its
domestic production. Sugar was to blame for losses in March as prices
reversed and hit a two-month low.

10

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 Chief
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 within 90 days of the filing
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 this evaluation, including any
corrective actions with regard to significant deficiencies and material
weaknesses.

11

PART II - OTHER INFORMATION

Item 1. Legal Proceedings

There are no pending legal proceedings to which the Partnership, MM LLC, or
MLIM 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 three months of
fiscal 2004.

12

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: May 14, 2004 By /s/ VINAY MENDIRATTA
--------------------
Vinay Mendiratta
Managing Director and Chief Operating
Officer
- Alternative Strategies and Quantitative
Advisers Divisions
(Principal Executive Officer)

Date: May 14, 2004 By /s/ PATRICK HAYWARD
-------------------
Patrick Hayward
Chief Financial Officer
(Principal Financial and Accounting Officer)

13

EXHIBIT 31.01

RULE 13a-14(a)/15d-14(a) CERTIFICATIONS

I, Vinay Mendiratta, certify that:

1. I have reviewed this report on Form 10-Q of ML Principal Protection L.P.;

2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation;

c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.

Date: May 14, 2004
- ------------------

By /s/ VINAY MENDIRATTA
- -----------------------
Vinay Mendiratta
Managing Director and Chief Operating Officer
- - Alternative Strategies and Quantitative Advisers Divisions
(Principal Executive Officer)

14

EXHIBIT 31.02

RULE 13a-14(a)/15d-14(a) CERTIFICATIONS

I, Patrick Hayward, certify that:

1. I have reviewed this report on Form 10-Q of ML Principal Protection L.P.;

2. Based on my knowledge, this report does not contain any untrue statement of
a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were
made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the registrant as
of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being
prepared;

b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of
the period covered by this report based on such evaluation;

c) Disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter that has materially affected, or is reasonably likely to
materially affect, the registrant's internal control over financial
reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of registrant's board of directors
(or persons performing the equivalent functions):

a) All significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and

b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control
over financial reporting.

Date: May 14, 2004
- ------------------

By /s/ PATRICK HAYWARD
- ----------------------
Patrick Hayward
Chief Financial Officer
(Principal Financial and Accounting Officer)

15

EXHIBIT 32.01

SECTION 1350 CERTIFICATIONS

In connection with this quarterly report of ML Principal Protection L.P. on Form
10-Q for the period ended March 31, 2004 as filed with the Securities and
Exchange Commission on the date hereof, I, Vinay Mendiratta certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant of the Sarbanes-Oxley Act of 2002,
that:

1. This quarterly report containing the financial statements fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and

2. The information contained in this quarterly report fairly presents, in all
material respects, the financial condition and results of operations of ML
Principal Protection L.P.

Date: May 14, 2004
- -----------------------

By /s/ VINAY MENDIRATTA
- -----------------------
Vinay Mendiratta
Managing Director and Chief Operating Officer
- - Alternative Strategies and Quantitative Advisers Divisions
(Principal Executive Officer)

16

EXHIBIT 32.02

SECTION 1350 CERTIFICATIONS

In connection with this quarterly report of ML Principal Protection L.P. on Form
10-Q for the period ended March 31, 2004 as filed with the Securities and
Exchange Commission on the date hereof, I, Patrick Hayward certify, pursuant to
18 U.S.C. Section 1350, as adopted pursuant of the Sarbanes-Oxley Act of 2002,
that:

1. This quarterly report containing the financial statements fully complies with
the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of
1934; and

2. The information contained in this quarterly report fairly presents, in all
material respects, the financial condition and results of operations of ML
Principal Protection L.P.

Date: May 14, 2004
- ------------------

By /s/ PATRICK HAYWARD
- ----------------------
Patrick Hayward
Chief Financial Officer
(Principal Financial and Accounting Officer)

17