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 September 30, 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

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)

Substantially all revenues and expenses are derived from the investment in MM
LLC.

See notes to financial statements.

3

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

STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE NINE ENDED SEPTEMBER 30, 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 necessary to present fairly the financial position of ML
Principal Protection L.P. (the "Partnership") as of September 30, 2004, and
the results of its operations for the three and nine months ended September
30, 2004 and 2003. 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, 2003.

2. INVESTMENTS

As of September 30, 2004 and December 31, 2003, the Partnership had an
investment in ML Multi-Manager Portfolio LLC ("MM LLC") of $12,711,793 and
$15,441,696, respectively. As of September 30, 2004, and December 31, 2003,
the Partnership's percentage ownership share of MM LLC was 12.96% and
11.02%, respectively.

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

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 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 adverse
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.

6

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).

At September 30, 2004 and December 31, 2003, the Net Asset Values of the
different series of Units were:

September 30, 2004
(unaudited)

December 31, 2003

7

4. ANNUAL DISTRIBUTIONS

The Partnership makes annual fixed-rate distributions, payable irrespective
of profitability, of $3.50 per Unit on Units issued prior to May 1, 1997.
The Partnership may also pay discretionary distributions on such Series of
Units of up to 50% of any Distributable New Appreciation, as defined on
such Units. No distributions are payable on Units issued after May 1, 1997.
The Principal Assurance Dates for Series A through R came to term on or
before December 31, 2003 and were not renewed. The Series that remain
outstanding at September 30, 2004 have 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 nine
month period ended September 30, 2004:

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 some of those risks resulting from its investment in MM LLC.

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 (loss) 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 LLC ("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
Values 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

8

of the end of a month) in an attempt to avoid over-concentrations. However,
such interventions are unusual and unless 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 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 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 under Equity in commodity
futures trading accounts in Net Unrealized profit on open contracts on 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 SEPTEMBER 30, 2004

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.

9

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.

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.

10

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.

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

11

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 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

12

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.

JANUARY 1, 2003 TO SEPTEMBER 30, 2003

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.

April 1, 2003 to June 30, 2003

MM LLC was profitable in the financial futures, currencies, interest rates and
stock index sectors, and incurred losses in the physical commodity sectors,
energy, agriculture and metals.

13

The currency sector was the strongest performer for MM LLC. The U.S. dollar
depreciated against most major currencies throughout most of the second quarter.
The currency markets judged the developments in the Middle East as negative for
the U.S. economy and trade, and the U.S. dollar sold off against most major
currencies. The U.S. dollar continued to weaken significantly during the month
of May when U.S. Treasury Secretary Snow indicated he was comfortable with
current declines and that a cheaper U.S. dollar would increase exports. The U.S.
dollar strengthened against most major currencies late June, reversing some
earlier profits.

The interest rate sector generated strong gains during the second quarter
producing significant profits in May. After a mixed start in April, the bond
market rally continued through May despite the stock market recovery. The U.S.,
European and Japanese bond markets reached new highs in June, as investors were
convinced the Federal Reserve would cut short-term rates by 50 basis points. A
stronger Consumer Price Index and a rate cut of only 25 basis points
disappointed the markets causing bond prices to reverse sharply by the end of
the month.

The stock index sector posted gains for the quarter. Gains were generated in
short-term trading in the U.S. and Europe, primarily the S&P 500 and selected
European indices. Overall exposure to the sector remained relatively light.

The energy markets posted losses for the quarter. The markets in April and May
were dominated by the developments in the Middle East, especially OPEC's
reaction to the developments in Iraq. Production was not being resumed as
initially estimated even though the destruction of the oilfields was smaller
than expected. The SARS epidemic was expected to reduce the demand for jet fuel,
which the markets extrapolated to affect crude oil prices. Natural gas was very
volatile during June.

Trading in agricultural commodities had losses for the quarter. Gains in April,
mainly from soybeans, which rallied due to revisions crop estimates and weather
overseas, were overshadowed by losses in May and June due to changes in crop
estimates and a volatile livestock market. Losses were posted in livestock, oil
seed and grains.

The metals sector generated the greatest losses for MM LLC this quarter. Short
positions in base metals and precious metals contributed to losses in the
sector. Gold generated losses in June reacting to the U.S. dollar sell off.

July 1, 2003 to September 30, 2003

For the third quarter, gains were generated in the metals, agricultural
commodities, interest rates and the stock indices sectors, while the currencies
and energy sectors posted losses.

The metals sector posted the highest gain for the third quarter. Long positions
in the metals particularly in gold and nickel made significant price movements
to the upside. At the closing of the third quarter both the industrial and metal
complex sectors benefited from increases in valuation.

The agricultural commodities sector posted a gain for the third quarter. At the
beginning of the third quarter, short exposure in corn generated strong profits
as the U.S. government forecasts reported a record crop for this year. Supply
and demand continued to drive the cattle market as prices rose sharply in the
beginning of the third quarter. The middle of the third quarter grain markets
exhibited a large price move as soybeans and corn rallied 16% and 14%,
respectively. Weather drove prices up due to very little rain in the Midwest,
where the majority of the U.S. crops grow. Trend-followers covered their short
exposure to these markets and, by the middle of the quarter, went long, managing
to recoup some of the losses. By the end of the third quarter, supply concerns
drove the corn and soybean markets due to the fact the USDA reported a better
than expected yield on corn and low yields on soybeans. Managers that were short
corn took advantage of the decrease in price due to the high yields. Due to the
USDA announcement regarding low soybean yields and low soybean harvest results,
the price of soybean rallied

14

by 13.8%. Most of the fundamental and systematic managers were able to profit
from these developments.

The interest rate sector posted a small gain for the third quarter. At the
beginning of the third quarter, the U.S. bond market suffered losses after the
U.S. government announced its intentions to borrow a record amount to finance
the huge deficit. European bonds were weaker, but outperformed the U.S. Profits
were generated in the U.S. segment of the portfolio, primarily in the ten-year
note, but negative performance from global bonds outweighed these gains. During
the middle of the third quarter, interest rates posted a gain due to the massive
sell-off in bonds during July which seemed to have found a base during the month
of August. Despite a record $60 billion refunding program in the U.S., bonds
managed a timid recovery after making new lows. Japanese Government Bonds lost
five figures during this period with interest rates on hold at the short end of
the curve in Europe and in the U.S. Trading was characterized by small ranges,
which generated losses and Japanese Government Bond exposure outweighed moderate
losses across other global fixed income markets. At the end of the third quarter
short positions in the ten year and 30 year sector of the U.S. bond market
generated losses, as yields dropped from 4.46% to 3.94% on the ten year.

The stock index sector posted the smallest gain for the third quarter. At the
beginning of the third quarter, the equities were fairly quiet with strong gains
being generated in trading global stock indices, primarily the Nikkei 225.
During the middle of the quarter the losses in the S&P 500 and Dow Jones futures
outweighed gains in other markets. However, the Japanese Nikkei was the star
performer as it gained over 8% on strong economic numbers.

The currency sector posted a loss for the third quarter. At the beginning of the
third quarter, the U.S. dollar appreciated relative to other currencies with
losses being experienced in most positions specifically, the Australian dollar,
the Canadian dollar and the British pound. Large reversals occurred in these
carry-trades, as markets focused attention on economic fundamentals rather than
yield differentials. During the middle of the third quarter the U.S. dollar
appreciated relative to the European currencies. The third quarter ended with
the G-7 summit directing the market to the idea that a weak U.S. dollar is
important to global trade balance causing losses on trades with the U.S. dollar.

The energy sector posted a loss for the third quarter. OPEC maintained their
output targets, demonstrating that they are comfortable with energy prices near
the high end of the range. During the middle of the quarter, crude oil and most
of the other energy markets were almost unchanged with high volatility
throughout this period. The volatility was mainly due to the uncertainty in
supply and estimates of demand that were projected to increase. This was partly
offset by expectations of the possible resumption of oil production by Iraq.
Strong gains were generated in trading unleaded gas and crude oil, only to be
reversed in September. Many of the systematic managers had difficulties trading
crude oil in the last part of the third quarter as the price dropped from a high
of $31.40 on September 3rd to a low of $26.65 on September 19th. This caused
many managers to flip positions from long to short positions and incur losses.

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 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

15

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.

16

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 nine months of
fiscal 2004.

17

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 15, 2004 By /s/ VINAY MENDIRATTA
--------------------
Vinay Mendiratta
Managing Director and Chief Operating Officer
- Alternative Strategies and Quantitative Advisers
Divisions
(Principal Executive Officer)

Date: November 15, 2004 By /s/ PATRICK HAYWARD
-------------------
Patrick Hayward
Chief Financial Officer
(Principal Financial and Accounting Officer)

18