<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1997
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-28928
ML JWH STRATEGIC ALLOCATION FUND L.P.
-------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3887922
- ----------------- -------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
SOUTH TOWER, 6TH FLOOR, NEW YORK, NY 10080-6106
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 236-5662
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Limited Partnership Units
-------------------------
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) 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
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Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Aggregate market value of the voting and non-voting stock held by non-affiliates
of the registrant; as of February 1, 1998, limited partnership units with an
aggregate net asset value of $219,995,212 were held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's "1997 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1997,
is incorporated by reference into Part II, Item 8, and Part IV hereof and filed
as an Exhibit herewith.
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ML JWH STRATEGIC ALLOCATION FUND L.P.
ANNUAL REPORT FOR 1997 ON FORM 10-K
Table of Contents
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PART I PAGE
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Item 1 Business............................................................................... 1
Item 2 Properties............................................................................. 18
Item 3 Legal Proceedings...................................................................... 18
.
Item 4 Submission of Matters to a Vote of Security Holders.................................... 20
PART II
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Item 5 Market for Registrant's Common Equity and Related Stockholder Matters................. 20
Item 6 Selected Financial Data............................................................... 21
Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations. 23
Item 7A Quantitative and Qualitative Disclosures About Market Risk............................ 24
Item 8 Financial Statements and Supplementary Data........................................... 24
Item 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 24
PART III
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Item 10 Directors and Executive Officers of the Registrant.................................... 25
Item 11 Executive Compensation................................................................ 27
Item 12 Security Ownership of Certain Beneficial Owners and Management........................ 27
Item 13 Certain Relationships and Related Transactions........................................ 28
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K......................... 28
</TABLE>
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PART I
ITEM 1: BUSINESS
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(a) General Development of Business:
-------------------------------
ML JWH Strategic Allocation Fund L.P. (the "Partnership" or the
"Fund") was organized under the Delaware Revised Uniform Limited Partnership Act
on December 11, 1995 and began trading operations on July 15, 1996. The Fund
trades in the international futures and forward markets applying multiple
proprietary trading strategies under the direction of John W. Henry & Company,
Inc. ("JWH(R)").
Merrill Lynch Investment Partners Inc. (the "General Partner" or
"MLIP") is the general partner of the Partnership. Merrill Lynch Futures Inc.
(the "Commodity Broker" or "MLF") is the Partnership's commodity broker.
Merrill Lynch Asset Management, L.P. ("MLAM") provides cash management services
to the Partnership. The General Partner is a wholly-owned subsidiary of Merrill
Lynch Group Inc., which in turn is a wholly-owned subsidiary of Merrill Lynch &
Co., Inc. The Commodity Broker is an indirect wholly-owned subsidiary of
Merrill Lynch & Co., Inc. (Merrill Lynch & Co., Inc. and its affiliates are
herein sometimes referred to as "Merrill Lynch").
John W. Henry & Company, Inc. has been the sole trading advisor for
the Fund since inception. JWH manages capital in commodities, interest rate and
foreign exchange markets for international banks, brokerage firms, pension
funds, institutions and high net worth individuals. JWH trades a wide range of
futures and forward contracts on a 24-hour basis in the United States, Europe
and Asia, and is one of the largest advisors in the managed futures industry in
terms of assets under management, trading approximately $2.3 billion in client
capital as of February 1, 1998.
Merrill Lynch Asset Management, L.P. ("MLAM") provides cash management
services to the Fund within parameters established by MLIP (for which MLAM
assumes no responsibility).
The Fund offers its units of limited partnership interest ("Units") on
a continuous basis for sale as of the beginning of each month. Investors whose
subscriptions are accepted during a month are admitted to the Fund as Limited
Partners as of the beginning of the following month, acquiring Units at the Net
Asset Value per Unit as of the date of admission. Investors' customer
securities accounts are debited in the amount of their subscriptions on a single
monthly settlement date within approximately five business days of the issuance
of their Units.
The Fund began trading on July 15, 1996 with an initial capitalization
of $102,000,000. A total of an additional $97,895,866 was invested in the Units
at month-end closings through December 31, 1997, and Units with an aggregate Net
Asset Value of $23,889,637 were redeemed. As of December 31, 1997, the
aggregate Net Asset Value of the Fund was $223,752,247, and the Net Asset Value
per Unit, originally $100 as of July 15, 1996, had risen to $135.40. As of
December 31, 1997, the Fund had 6,409 Limited Partners.
Through December 31, 1997, the net gain in the Net Asset Value per
Unit was 35.40%. The highest month-end Net Asset Value per Unit was $135.40
(December 31, 1997) and the lowest $98.89 (August 31, 1996).
(b) Financial Information about Industry Segments:
---------------------------------------------
The Partnership's business constitutes only one segment for financial
reporting purposes, i.e., a speculative "commodity pool."
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(c) Narrative Description of Business:
---------------------------------
GENERAL
The Fund trades in the international futures, options on futures and
forward markets applying the multiple property target strategies ("Programs") of
JWH. In managing the Fund's trading, JWH uses its "JWH Strategy Allocation
Program" in which JWH selected, and allocates and reallocates Fund assets in any
different combinations of its JWH Programs. The Fund's primary objective is
substantial capital appreciation. At the same time, the use of multiple JWH
Programs has the potential to reduce the expected volatility and risk of loss
which would typically be associated with the use of any single Program.
The Partnership applies a multi-strategy approach. MLIP has allocated
to JWH full discretionary authority over the selection of which JWH Trading
Programs to use for the Partnership and the leverage to be applied in doing so.
One of the objectives of the Fund is to provide diversification to a
limited portion of the risk segment of the Limited Partners' portfolios into an
investment field that has historically often demonstrated a low degree of
performance correlation with traditional stock and bond holdings. Since it
began trading, the Fund's returns have, in fact, frequently been significantly
non-correlated (not, however, negatively correlated) with the United States
stock and bond markets.
JWH Trading Programs. JWH's 11 active Programs are all available to
--------------------
the JWH Strategic Allocation Program. As of December 31, 1997, eight Programs
were being used for the Fund.
A number of factors -- including recent trading performance, market
sector opportunities, overall economic conditions, range of markets traded,
volatility, inter-Program correlation and inter-Program market overlap -- affect
JWH's Program selection. Some of these are Program-specific; others relate to
general market conditions.
The Fund's Programs as of December 31, 1997 provide exposure to a wide
range of markets, using different quantitative filters.
% of
Fund Assets
-----------
Dollar Program 7.5%
Financial and Metals Portfolio 12.5%
G-7 Currency Portfolio 12.5%
Global Diversified Portfolio 10.0%
Global Financial Portfolio 15.0%
Original Investment Program 20.0%
Worldwide Bond Program 5.0%
JWH GlobalAnalytics(TM) Family 17.5%
------
100%
======
AVERAGE COMPOUNDED ANNUALIZED RATES OF RETURN
<TABLE>
<CAPTION>
January 1, 1993-
Name of Program December 31, 1997
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Financial and Metals Portfolio 23.5%
Original Investment Program 21.4
Global Diversified Portfolio 22.5
Global Financial Portfolio 14.2
(6/1/94-12/31/97)
International Foreign Exchange Program 13.2
G-7 Currency Portfolio 10.3
JWH GlobalAnalytics(TM) Family
of Programs 17.6*
(6/1/94-12/31/97)
International Currency and Bond Portfolio 16.5
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The World Financial Perspective 14.7
Dollar Program 11.8 (7/1/96-12/31/97)
Worldwide Bond Program 18.6 (7/1/96-12/31/97)
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*THIS NUMBER IS THE COMPOUND ANNUAL RATE OF RETURN FOR THIS PROGRAM
AS CALCULATED BY COMPOUNDING THE MONTHLY RATES OF RETURN OVER THE NUMBER OF
PERIODS IN A GIVEN YEAR. FOR EXAMPLE, EACH MONTH'S MONTHLY RATE OF RETURN
IN HUNDREDTHS IS ADDED TO ONE (1) AND THE RESULT IS MULTIPLIED BY THE
PREVIOUS MONTH'S COMPOUNDED MONTHLY RATE OF RETURN SIMILARLY EXPRESSED.
ONE (1) IS THEN SUBTRACTED FROM THE PRODUCT. FOR PERIODS OF LESS THAN ONE
YEAR, THE RESULTS ARE YEAR TO DATE. AVERAGE COMPOUNDED ANNUALIZED RATE OF
RETURN IS SIMILARLY CALCULATED EXCEPT THAT BEFORE SUBTRACTING ONE (1) FROM
THE PRODUCT, THE PRODUCT IS EXPONENTIALLY CHANGED BY THE FACTOR OF ONE (1)
DIVIDED BY THE NUMBER OF YEARS OF THE PROGRAM'S PERFORMANCE RECORD AND THEN
ONE (1) IS SUBTRACTED.
The following are brief summaries of the active JWH Programs.
APPROXIMATE
ASSETS MANAGED
FINANCIAL AND METALS PORTFOLIO FEBRUARY 1, 1998
------------------------------ ----------------
Program Composition: $1.3 BILLION
Global Interest Rates
Global Stock Indices
Foreign Exchange
Precious Metals
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (9.8)% (7/94)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (30.5)% (6/94-6/95)
1997 COMPOUND RATE OF RETURN: 15.2%
1996 COMPOUND RATE OF RETURN: 29.7%
1995 COMPOUND RATE OF RETURN: 38.5%
1994 COMPOUND RATE OF RETURN: (5.3)%
1993 COMPOUND RATE OF RETURN: 46.8%
ANNUAL COMPOUND RATE OF RETURN: 23.5%
JWH's largest Program, the Financial and Metals Portfolio, attempts to
deliver attractive risk-adjusted returns in global financial and precious metals
markets. Currency positions are held both as outrights -- trading positions
taken in foreign currencies versus the dollar -- and cross-rates -- trading
foreign currencies against each other -- in the interbank market and
occasionally futures exchanges. This Program is designed to identify and
capitalize on intermediate and long-term price movements in these markets using
a systematic approach to ensure disciplined investment decisions. If a trend is
identified, the Program attempts to take a position; in nontrending market
environments, the Program may remain neutral or liquidate open positions. This
Program began trading client capital in October 1984.
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APPROXIMATE
ASSETS MANAGED
ORIGINAL INVESTMENT PROGRAM FEBRUARY 1, 1998
--------------------------- ----------------
Program Composition: $377.2 MILLION
Global Interest Rates
Global Stock Indices
Foreign Exchange
Fiber
Energy
Softs
Grains
Precious and Base Metals
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (16.3)% (10/94)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (31.0)% (7/94-10/94)
1997 COMPOUND RATE OF RETURN: 5.7%
1996 COMPOUND RATE OF RETURN: 22.6%
1995 COMPOUND RATE OF RETURN: 53.2%
1994 COMPOUND RATE OF RETURN: (5.7)%
1993 COMPOUND RATE OF RETURN: 40.6%
ANNUAL COMPOUND RATE OF RETURN: 21.4%
The Original Investment Program, the first Program offered by JWH,
offers access to a spectrum of worldwide financial and non-financial futures
markets using a disciplined trend identification investment approach. The
Original Investment Program utilizes a long-term quantitative approach which
always maintains a position -- long or short -- in every market traded by the
Program. This Program began trading client capital in October 1982.
APPROXIMATE
ASSETS MANAGED
GLOBAL DIVERSIFIED PORTFOLIO FEBRUARY 1, 1998
---------------------------- ----------------
Program Composition: $181.7 MILLION
Global Interest Rates
Global Stock Indices
Foreign Exchange
Fiber
Energy
Softs
Grains
Precious and Base Metals
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (11.2)% (2/96)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (24.1)% (6/95-10/95)
1997 COMPOUND RATE OF RETURN: (3.3)%
1996 COMPOUND RATE OF RETURN: 26.9%
1995 COMPOUND RATE OF RETURN: 19.6%
1994 COMPOUND RATE OF RETURN: 10.1%
1993 COMPOUND RATE OF RETURN: 59.8%
ANNUAL COMPOUND RATE OF RETURN: 22.5%
Trading futures and forwards in up to 60 markets, the Global
Diversified Portfolio is one of JWH's most diversified Programs. The Global
Diversified Portfolio is designed to identify and capitalize on long-term price
movements in a spectrum of financial and nonfinancial markets using a systematic
approach. The Program does not
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maintain continuous positions and, in fact, may take a neutral stance (i.e., no
position) if a long-term trend fails to develop or during periods of non-
trending markets. This Program began trading client capital in June 1988.
APPROXIMATE
ASSETS MANAGED
GLOBAL FINANCIAL PORTFOLIO FEBRUARY 1, 1998
-------------------------- ----------------
Program Composition: $156.1 MILLION
Global Interest Rates
Global Stock Indices
Foreign Exchange
Energy
Precious Metals
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (19.5)% (11/94)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (48.9)% (1/94-1/95)
1997 COMPOUND RATE OF RETURN: 4.9%
1996 COMPOUND RATE OF RETURN: 32.4%
1995 COMPOUND RATE OF RETURN: 86.2%
1994 COMPOUND RATE OF RETURN: (37.7)% (7 MOS.)
ANNUAL COMPOUND RATE OF RETURN: 14.2%
The Global Financial Portfolio offers access to a small group of
energy and financial markets, including global currencies, interest rates and
stock indices. This Program is designed to identify and capitalize on long-term
price movements using a disciplined trend identification approach. This Program
always maintains a futures position -- long or short -- in every market traded
by the Program. In 1997, the sector allocation for this Program was altered to
include precious metals. This Program began trading client capital in June
1994.
APPROXIMATE
INTERNATIONAL FOREIGN ASSETS MANAGED
EXCHANGE PROGRAM FEBRUARY 1, 1998
---------------- ----------------
Program Composition: $89.2 MILLION
Foreign Exchange
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (8.3)% (5/97)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (35.9)% (9/92-1/95)
1997 COMPOUND RATE OF RETURN: 71.1%
1996 COMPOUND RATE OF RETURN: 3.7%
1995 COMPOUND RATE OF RETURN: 16.9%
1994 COMPOUND RATE OF RETURN: (6.3)%
1993 COMPOUND RATE OF RETURN: (4.5)%
ANNUAL COMPOUND RATE OF RETURN: 13.2%
The International Foreign Exchange Program ("Forex") is designed to
identify and capitalize on intermediate and long-term price movements in a broad
range of major and minor currencies on the interbank market. Positions are taken
as outrights against the dollar, or cross-rates, which reduce dependence on the
dollar. Forex attempts to take a position if a trend is identified, and attempts
to eliminate the position quickly -- i.e., a neutral stance is taken -- if long-
term trends fail to continue or during periods of nontrending markets. This
Program began trading client capital in August 1986.
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APPROXIMATE
ASSETS MANAGED
G-7 CURRENCY PORTFOLIO FEBRUARY 1, 1998
---------------------- ----------------
Program Composition: $80.9 MILLION
Foreign Exchange
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (12.3)% (11/94)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (31.4)% (10/92-1/95)
1997 COMPOUND RATE OF RETURN: 21.0%
1996 COMPOUND RATE OF RETURN: 14.5%
1995 COMPOUND RATE OF RETURN: 32.2%
1994 COMPOUND RATE OF RETURN: (4.9)%
1993 COMPOUND RATE OF RETURN: (6.3)%
ANNUAL COMPOUND RATE OF RETURN: 10.3%
The G-7 Currency Portfolio invests in the highly liquid currencies of
the Group of Seven industrialized nations and Switzerland. Not all of these
currencies are traded at all times. Forward positions are primarily taken in
the interbank market as outrights against the dollar, or as cross-rates, which
reduce dependence on the dollar. Because the G-7 Currency Portfolio excludes
minor currencies, which may be less liquid, and maintains a lower degree of
leverage, the performance characteristics are different from those of Forex.
The Program is designed to identify and capitalize on intermediate and
long-term price movements using a disciplined trend identification methodology.
The G-7 Currency Portfolio attempts to take a position if a trend is identified,
and attempts to eliminate the position quickly -- i.e., a neutral stance is
taken -- if long-term trends fail to develop or during periods of nontrending
markets. This Program began trading client capital in February 1991.
APPROXIMATE
JWH GLOBALANALYTICS(TM) ASSETS MANAGED
FAMILY OF PROGRAMS FEBRUARY 1, 1998
------------------ ----------------
Program Composition: $46.1 MILLION
Global Interest Rates
Global Stock Indices
Foreign Exchange
Energy
Agriculture
Precious Metals
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (4.5)% (8/97)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (4.5)% (8/97)
1997 COMPOUND RATE OF RETURN: 17.6% (7 MOS.)
ANNUAL COMPOUND RATE OF RETURN: 17.6%
JWH GlobalAnalytics(TM) Family of Programs is an integrated investment
system consisting of a family of Programs, collectively known as JWH
GlobalAnalytics. The family of Programs combines different trend identification
methodologies into a single, broadly diversified investment portfolio. JWH
GlobalAnalytics trades a wide range of financial and commodity markets. Certain
energy and agricultural contracts not previously available through other JWH
investment Programs are also included.
Unlike other JWH Programs, which generally take an intermediate to
long-term perspective on markets, JWH GlobalAnalytics identifies, offsets and
invests in a broad spectrum of price trends -- from very short to exceptionally
long-term. The family of Programs tracks key asset classes, remaining neutral
if no substantive trends are apparent, building or reducing positions over time
as appropriate.
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JWH GlobalAnalytics is the result of an extensive period of research
and testing. This family of Programs manages positions which can be modified
quickly, allowing timely substitution of one market for another. JWH's research
indicates that the potential benefits of this approach include increased trend
sensitivity and lower overall volatility. This Program began trading client
capital in June 1997, when this Program was first used to manage assets for the
Fund.
APPROXIMATE
INTERNATIONAL CURRENCY ASSETS MANAGED
AND BOND PORTFOLIO FEBRUARY 1, 1998
----------------------- ----------------
Program Composition: $31.7 MILLION
Foreign Exchange
Global Interest Rates
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (7.8)% (7/94)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (23.6)% (7/94-1/95)
1997 COMPOUND RATE OF RETURN: 17.0%
1996 COMPOUND RATE OF RETURN: 19.9%
1995 COMPOUND RATE OF RETURN: 36.5%
1994 COMPOUND RATE OF RETURN: (2.3)%
1993 COMPOUND RATE OF RETURN: 14.8%
ANNUAL COMPOUND RATE OF RETURN: 16.5%
Using a more conservative approach to leverage compared to that used
in other JWH Programs, the International Currency and Bond Portfolio ("ICB")
targets the long end of interest rate and currency futures of major
industrialized nations. Foreign exchange positions are held both as outrights -
- - positions taken in foreign currencies versus the dollar -- and cross-rates --
trading foreign currencies against each other. ICB is designed to identify and
capitalize on intermediate and long-term price movements in the world's bond and
foreign exchange markets using a systematic approach to ensure disciplined
investment decisions. If a trend is identified, the Program will take a
position; in nontrending market environments, the Program may liquidate
positions and remain neutral. This Program began trading client capital in
January 1993.
APPROXIMATE
THE WORLD FINANCIAL ASSETS MANAGED
PERSPECTIVE FEBRUARY 1, 1998
-------------------------- ----------------
Program Composition: $31.2 MILLION
Global Interest Rates
Global Stock Indices
Foreign Exchange
Energy
Precious Metals
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (11.6)% (3/93)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (25.9)% (7/94-1/95)
1997 COMPOUND RATE OF RETURN: 10.4%
1996 COMPOUND RATE OF RETURN: 40.9%
1995 COMPOUND RATE OF RETURN: 32.2%
1994 COMPOUND RATE OF RETURN: (15.2)%
1993 COMPOUND RATE OF RETURN: 13.7%
ANNUAL COMPOUND RATE OF RETURN: 14.7%
The World Financial Perspective seeks to capitalize on market
opportunities by holding positions from multiple currency perspectives,
including the British pound, German mark, Japanese yen, Swiss franc and dollar.
This Program is designed to systematically identify long-term price movements in
financial, metals and energy markets. The World Financial Perspective always
maintains a futures position -- long or short -- in every market traded by the
Program. This Program began trading client capital in April 1987.
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APPROXIMATE
ASSETS MANAGED
DOLLAR PROGRAM FEBRUARY 1, 1998
-------------- ----------------
Program Composition: $24.8 MILLION
Foreign Exchange
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (8.4)% (5/97)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (11.6)% (5/97-9/97)
1997 COMPOUND RATE OF RETURN: 6.8%
1996 COMPOUND RATE OF RETURN: 10.6% (6 MOS.)
ANNUAL COMPOUND RATE OF RETURN: 11.8%
The Dollar Program specializes in the foreign exchange sector using
outright trading, an approach that has significantly contributed to the success
of other JWH Programs. The Dollar Program trades four of the world's major
currencies -- Japanese yen, German mark, Swiss franc and British pound -- versus
the dollar. This Program is designed to identify and capitalize on intermediate
and long-term price movements using a disciplined trend identification
methodology which attempts to employ a neutral stance during periods of
nontrending markets.
Unlike some JWH Programs, the Dollar Program does not participate in
cross-rates. Because this Program invests in a limited number of contracts, it
may experience greater volatility than other JWH foreign exchange programs.
This Program began trading client capital in July 1996.
APPROXIMATE
ASSETS MANAGED
WORLDWIDE BOND PROGRAM FEBRUARY 1, 1998
---------------------- ----------------
Program Composition: $19.7 MILLION
Interest Rates
WORST MONTHLY DECLINE ON
AN INDIVIDUAL ACCOUNT BASIS: (3.8)% (4/97)
WORST PEAK-TO-VALLEY DECLINE
ON AN INDIVIDUAL ACCOUNT BASIS: (6.2)% (12/96-5/97)
1997 COMPOUND RATE OF RETURN: 7.7% (11 MOS.)
1996 COMPOUND RATE OF RETURN: 17.8% (6 MOS.)
ANNUAL COMPOUND RATE OF RETURN: 18.6%
The Worldwide Bond Program ("WWB") invests through financial futures
in the long-term portion of global interest rate markets, including the U.S. 30-
year bond, U.S. 10-year note, British long gilt, the French, German and Italian
bond and the Australian 10-year bond. WWB is not limited to investments that
have the potential to profit in a stable or declining interest rate environment;
rather, the Program attempts to capitalize on dominant trends, whether rising or
falling, in bond markets around the world. Although WWB concentrates in one
sector, diversification is achieved by trading futures contracts on the interest
rate instruments of numerous countries.
WWB utilizes intermediate and long-term quantitative trend
identification models, some of which attempt to employ neutral stances during
periods of nontrending markets. In an effort to control risks, WWB's investment
methodology uses lower levels of leverage compared to JWH Programs that
participate in multiple market sectors. This Program began trading client
capital in July 1996.
___________
JWH PROGRAM SELECTION
JWH may change the Fund's Program combination at any time.
The JWH Trading Programs are highly systematic and technical in
nature. The allocations among such Programs made by the JWH Strategic
Allocation Program are, in marked contrast, based entirely on JWH's discretion
and market experience. In implementing the JWH Strategic Allocation Program,
JWH is able to draw upon its
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considerable experience trading the different Programs under a wide variety of
different market conditions, as well as on its extensive and proprietary
knowledge of the functionality and limitations of these Programs. However, JWH's
selection of Programs for the Fund and allocation of the Fund's trading level
among the Programs so selected is not made on the basis of any statistical model
or quantitative analysis, but solely in JWH's best judgment.
JWH will review the Fund's Program combinations in light of a number
of factors, including (without limitation) the recent trading performance of the
Fund as a whole and of the Programs themselves, perceived market sector
opportunities and overall market conditions, range of markets traded,
volatility, inter-Program correlation and inter-Program market overlap. Other
factors which will be weighed in reviewing the Fund's portfolio are not specific
to any one Program, but instead will relate to the market position of the Fund
as a whole -- for example, monitoring appropriate levels of leverage, liquidity,
market sector concentration, degree of exposure to any single market, overall
open position exposure and ability to react to possible market volatility.
There is no maximum allocation that may be made to any particular
Trading Program, but JWH does not expect any allocation to exceed 25% of the
Fund's total trading level (which may range from 50% to 150% of the Fund's Net
Assets).
See "-- Leverage Considerations," below.
The maximum peak-to-valley decline JWH has experienced in any single
Program was over sixty percent (60)%. Certain Programs have lost over ten
percent (10%) in a single day.
MARKETS TRADED
The JWH Programs trade in the futures, forward and spot markets,
emphasizing currencies and financial instruments, and the Fund trades in major
sectors of the global economy, including but not limited to:
CURRENCIES
Australian Dollar *Italian Lira
*Belgian Franc Japanese Yen
British Pound *Malaysian Ringgit
*Canadian Dollar *New Zealand Dollar
*Danish Krone Norwegian Krone
Deutsche Mark *Singapore Dollar
*French Franc *South African Rand
Hong Kong Dollar *Spanish Peseta
*Swedish Krone
Swiss Franc
FINANCIAL INSTRUMENTS
Australian (90-day) German Bonds
Bank Bills Italian Bonds
Australian (3-year and Japanese Bonds
10-year) Treasury Bonds *Spanish Bonds
*Canadian Bonds Spanish MIBOR
Eurodollar U.K. Long "Gilts"
Eurolira U.K. Short Sterling
Euromark U.S. 10-year Treasury
Euroswiss Notes
Euroyen U.S. Treasury Bonds
French Notionnel Bonds
French PIBOR
STOCK INDICES
*Australian All Ordinaries FTSE 100 (UK)
Index *New York
*CAC 40 Stock Index Composite
(France) Nikkei 225 Index
*DAX (German) (Japan)
*S&P 500 Stock Index
-9-
<PAGE>
METALS
*Aluminum *Palladium
Copper *Platinum
Gold Silver
*Lead *Tin
*Nickel *Zinc
____________
* These markets are integrated into the JWH Trading Programs as
contract liquidity, legal constraints, market conditions and data
reliability standards meet JWH's specifications.
AGRICULTURAL PRODUCTS
*Cattle *Orange Juice
Cocoa Soybeans
Coffee Soymeal
Corn Soy Oil
Cotton Sugar
*Hogs *Wheat
*Lumber
ENERGY
Crude Oil No. 2 Heating Oil
Natural Gas Unleaded Gasoline
____________
* These markets are integrated into the JWH Trading Programs as
contract liquidity, legal constraints, market conditions and data
reliability standards meet JWH's specifications.
LEVERAGE CONSIDERATIONS
Due to the leverage available in the futures and forward markets, JWH
can adjust the Fund's market commitment to levels JWH believes are consistent
with its intended risk/reward profile. The larger the market commitment
(generally equivalent to the face amount of the positions held) in relation to a
fixed amount of assets managed in one account, the higher the leverage at which
it is said to be trading. Larger market commitments, unless they are only one
part of a hedged or spread position, generally result in correspondingly greater
profit potential as well as risk of loss. For example, in volatile markets, JWH
might decide -- in order to reduce market exposure and, accordingly, the risk of
loss, but with a possible decrease in profit potential -- that the positions
ordinarily appropriate for a $50 million account are all a $75 million account
should hold. On the other hand, market factors might cause JWH to decide -- in
order to increase market exposure and, accordingly, the profit potential, but
with a possible increase in the risk of loss -- that the positions ordinarily
indicated for a $100 million account are appropriate for an account of only $50
million.
At certain times -- often after substantial gains in several of the
Programs -- JWH may conclude that the Fund's portfolio offers more risk than
reward. If so, JWH may reduce the Fund's market commitment, both taking profits
and controlling risk. Conversely, JWH may commit more than the total assets of
the Fund to the markets if the profit potential seems to justify the added risk.
JOHN W. HENRY & COMPANY, INC.
BACKGROUND
John W. Henry & Company began managing assets in 1981 as a sole
proprietorship and was later incorporated in the State of California as John W.
Henry & Co., Inc. to conduct business as a commodity trading advisor. JWH
reincorporated in Florida in 1997. JWH's offices are at One Glendinning Place,
Westport, Connecticut 06880, (203) 221-0431 and 301 Yamato Road, Suite 2200,
Boca Raton, Florida 3343-4931, (561) 241-0018. JWH's registration as a
Commodity Trading Advisor became effective in November 1980, and its
registration as a Commodity Pool Operator in July 1989. JWH is a member of the
National Futures Association ("NFA") in these capacities.
-10-
<PAGE>
GENERAL
JWH specializes in managing institutional and individual capital in
the global futures, interest rate and foreign exchange markets. Since 1981, JWH
has developed and implemented proprietary trend-following trading techniques
that focus on long-term rather than short-term, day-to-day trends. JWH
currently operates eleven trading programs.
A DISCIPLINED INVESTMENT PROCESS
Regardless of recent performance in any one market, or widely held
opinions on futures market direction, JWH maintains a disciplined investment
process. The consistent application of JWH's investment techniques facilitates
the ability to participate in rising or falling markets without bias.
The first step in the JWH investment process is the identification of
sustained price movements -- or trends -- in a given market. While there are
many ways to identify trends, JWH uses mathematical models that attempt to
distinguish real trends from interim volatility. It also presumes that trends
often exceed in duration the expectation of the general marketplace.
JWH's historical performance demonstrates that, because trends often
last longer than most market participants expect, significant returns can be
generated from positions held over a long period of time. The first step in the
JWH investment process is the identification of a price trend. JWH focuses on
attempting to implement a trading methodology which identifies a majority of the
significant, as opposed to the more numerous small, price trends in a given
market.
JWH attempts to pare losing positions relatively quickly while
allowing profitable positions to mature. Most losing positions are closed within
a few days or weeks, while others -- those where a profitable trend continues --
are retained. Positions held for two to four months are not unusual, and
positions have been held for more than one year. Historically, only 30% to 40%
of all trades made pursuant to the investment methods have been profitable.
Large profits on a few trades in positions that typically exist for several
months have produced favorable results overall.
The maximum equity retracement JWH has experienced in any single
program was nearly sixty percent. Clients should understand that similar or
greater drawdowns are possible in the future.
To reduce exposure to volatility in any particular market, most JWH
programs participate in several markets at one time. In total, JWH participates
in up to 60 markets, encompassing interest rates, foreign exchange, and
commodities such as agricultural products, energy and precious metals. Most
investment programs maintain a consistent portfolio composition to allow
opportunities in as many major market trends as possible.
Throughout the investment process, risk controls are maintained to
reduce the possibility of an extraordinary loss in any one market. Proprietary
research is conducted on an ongoing basis to refine the JWH investment
strategies and attempt to reduce volatility while maintaining the potential for
excellent performance.
JWH at its sole discretion may override computer-generated signals,
and may at times use discretion in the application of its quantitative models
which may affect performance positively or negatively. This could occur, for
example, when JWH determines that markets are illiquid or erratic, such as may
occur during holiday seasons. Subjective aspects of JWH's quantitative models
also include the determination of program leverage, commencement of trading in
an account, markets traded, contracts traded, contract month selection, margin
utilization and effective trade execution.
PROGRAM MODIFICATIONS
In an effort to maintain and improve performance, JWH has engaged, and
continues to engage, in extensive research. While the basic philosophy
underlying the firm's investment methodology has remained intact throughout its
history, the potential benefits of employing more than one investment
methodology, alternatively, or in varying combinations, is a subject of
continual testing, review and evaluation. Extensive research and analysis may
suggest substitution of alternative investment methodologies with respect to
particular contracts in light of relative differences in historical performance
achieved through testing different methodologies. In addition, risk management
-11-
<PAGE>
research and analysis may suggest modifications regarding the relative weighting
among various contracts, the addition or deletion of particular contracts for a
program or a change in the degree of leverage employed.
As capital in each JWH trading program increases, additional emphasis
and weighting may be placed on certain markets which have historically
demonstrated the greatest liquidity and profitability. Furthermore, the
weighting of capital committed to various markets in the trading programs is
dynamic, and JWH may vary the weighting at its discretion as market conditions,
liquidity, position limit considerations and other factors warrant. MLIP will
generally not be informed of any such changes.
LEVERAGE
Leverage adjustments have been and continue to be an integral part of
JWH's investment strategy. At its discretion, JWH may adjust leverage in certain
markets or entire programs. JWH reserves the right, at its sole discretion, to
adjust its leverage policy without notification to MLIP. Leverage adjustments
may be made at certain times for some accounts but not for others. Factors
which may affect the decision to adjust leverage include: ongoing research;
program volatility; current market volatility; risk exposure; and subjective
judgment and evaluation of these and other general market conditions. Such
decisions to change leverage may positively or negatively affect performance,
and will alter risk exposure for an account. Leverage adjustments may lead to
greater profits or losses, more frequent and larger margin calls and greater
brokerage expense. No assurance is given that such leverage adjust ments will
be to the financial advantage of investors in the Fund.
ADDITION, REDEMPTION AND REALLOCATION OF CAPITAL FOR COMMODITY POOL OR
FUND ACCOUNTS
JWH has developed the following procedures which it applies in
adjusting to additions and redemptions of Units. Investors purchase or redeem
Units at Net Asset Value on the close of business on the last business day of
the month. In order to provide market exposure commensurate with the Fund's
equity on the date of these transactions, JWH's general practice is to adjust
positions as near as possible to the close of business on the last trading date
of the month. The intention is to provide for additions and redemptions at an
NAV that will be the same for each of these transactions, and to eliminate
possible variations in NAVs that could occur as a result of inter-day price
changes if, for example, additions were calculated on the first day of the
subsequent month. Therefore, JWH may, at its sole discretion, adjust its
investment of the assets associated with the addition or redemption as near as
possible to the close of business on the last business day of the month to
reflect the amount then available for trading. Based on JWH's determination of
liquidity or other market conditions, JWH may decide to commence trading earlier
in the day on, or before, the last business day of the month, or at its sole
discretion, delay adjustments to trading for an account to a date or time after
the close of business on the last day of the month. No assurance is given that
JWH will be able to achieve the objectives described above in connection with
Fund equity level changes. The use of discretion by JWH in the application of
this procedure may affect performance positively or negatively.
PHYSICAL AND CASH COMMODITIES
JWH may from time to time trade in physical or cash commodities for
immediate or deferred delivery, including specifically gold bullion, as well as
futures and forward contracts when JWH believes that cash markets offer
comparable or superior market liquidity or the ability to execute transactions
at a single price. The Commodity Futures Trading Commission ("CFTC") does not
regulate cash transactions, which are subject to the risk of these entities'
failure, inability or refusal to perform with respect to such contracts.
THE LIMITED LIABILITY COMPANY AGREEMENT
The advisory arrangement between the Fund and JWH was initially
structured as a joint venture but was reorganized as a limited liability company
structure (effectively, a general partnership but with limited liability for
both the Fund and JWH) in March 1998. The Organization Agreement for the
limited liability company terminates September 30, 1998, subject to one one-year
renewal, on the same terms, at the option of the Fund. The term of the Joint
Venture Agreement and the Organization Agreement are materially the same.
The Fund has agreed to indemnify JWH and related persons for any
claims or proceedings involving the business or activities of the Fund, provided
that the conduct of such persons does not constitute negligence, misconduct or
breach of the Organization Agreement or of any fiduciary obligation to the Fund
and was done in good faith and in a manner reasonably believed to be in, or not
opposed to, the best interests of the Fund.
JWH and related persons will not be liable to the limited liability
company, the Fund or any of the Partners in connection with JWH's management of
the Fund's assets except (i) by reason of acts or omissions in breach
-12-
<PAGE>
of the Organization Agreement, (ii) due to their misconduct or negligence, or
(iii) by reason of not having acted in good faith and in the reasonable belief
that such actions or omissions were in, or not opposed to, the best interests of
the Fund. Mr. John W. Henry will not be liable except for his fraud or willful
misconduct.
JWH has invested $100,000 in the limited liability company.
The Partnership and the Joint Venture/Limited Liability Company are
herein collectively referred to as the "Partnership" or the "Fund" unless the
context otherwise requires.
USE OF PROCEEDS AND CASH MANAGEMENT INCOME
Subscription Proceeds. The Partnership's assets are used as security
---------------------
for and to pay the Partnership's trading losses as well as its expenses and
redemptions. The primary use of the proceeds of the sale of the Units is to
permit JWH to trade on a speculative basis in a wide range of different futures,
forwards and options on futures markets on behalf of the Partnership. While
being used for this purpose, the Partnership's assets are also generally
available for cash management, as more fully described below under "-- Available
Assets."
Market Sectors. The Partnership trades in a diversified group of
--------------
markets under the direction of JWH. JWH can, and does, from time to time
materially alter the allocation of its overall trading commitments among
different market sectors. Except in the case of certain trading programs which
are purposefully limited in the markets which they trade, there is essentially
no restriction on the commodity interests which may be traded by JWH or the
rapidity with which JWH may alter its market sector allocations.
The Fund's financial statements contain information relating to the
market sectors traded by the Fund. There can, however, be no assurance as to
which markets may be included in the Fund's portfolio or as to in which market
sectors the Fund's trading may be concentrated at any one time or over time.
Market Types. The Partnership trades on a variety of United States
------------
and foreign futures exchanges. Applicable exchange rules differ significantly
among different countries and exchanges. Substantially all of the Fund's off-
exchange trading takes place in the highly liquid, institutionally based
currency forward markets. The forward markets are generally unregulated, and in
its forward trading the Fund does not deposit margin with respect to its
positions. The Partnership's forward currency trading is executed exclusively
through the Foreign Exchange Service Desk (the "F/X Desk") operated by MLIP and
certain of its affiliates, with MLF as the "back-to-back" intermediary to the
ultimate counterparties, which include Merrill Lynch International Bank
("MLIB").
As in the case of its market sector allocations, the Fund's
commitments to different types of markets -- U.S. and non-U.S., regulated and
unregulated -- differ substantially from time to time as well as over time. The
Fund has no policy restricting its relative commitments to any of these
different types of markets, although generally the bulk of the Fund's trading
takes place on regulated exchanges.
The Fund's financial statements contain information relating to the
types of markets traded by the Fund. There can, however, be no assurance as to
in which markets the Fund may trade or the Fund's trading may be concentrated at
any one time or over time.
Custody of Assets. All of the Fund's assets -- other than the assets
-----------------
managed by MLAM and held in a custodial account as described below under "--The
Fund's U.S. Dollar Available Assets Managed by MLAM" -- are currently held in
customer accounts at Merrill Lynch.
Available Assets. The Fund earns income, as described below, on its
----------------
"Available Assets," which can be generally described as the cash actually held
by the Fund or invested in short-term Treasury bills. Available Assets are held
primarily in U.S. dollars or in U.S. dollar denominated securities issued by the
United States Government or certain of its agencies ("Government Securities"),
and to a lesser extent in foreign currencies, and are comprised of the
following: (a) the Fund's cash balances managed by MLAM or held in the offset
accounts (as described below) -- which include "open trade equity" (unrealized
gain and loss on open positions) on United States futures contracts, which is
paid into or out of the Fund's account on a daily basis; (b) short-term Treasury
bills purchased by the Fund; and (c) the Fund's cash balance in foreign
currencies derived from its trading in non-U.S. dollar denominated futures and
options contracts, which includes open trade equity on those exchanges which
settle gains and losses on open positions in such contracts prior to closing out
such positions. Available Assets do not include, and the Fund does not earn
-13-
<PAGE>
interest on, the Fund's gains or losses on its open forward, commodity option
and certain foreign futures positions since such gains and losses are not
collected or paid until such positions are closed out.
The Partnership's Available Assets may be greater than, less than or
equal to the Fund's Net Asset Value (on which the redemption value of the Units
is based) primarily because Net Asset Value reflects all gains and losses on
open positions as well as accrued but unpaid expenses.
The interest income arrangements for the Partnership's U.S. dollar
Available Assets differ from those applicable to its non-U.S. dollar Available
Assets. Interest income, once accrued by the Fund, is subject to the risk of
trading losses.
The Fund's U.S. Dollar Available Assets Managed by MLAM.
-------------------------------------------------------
Approximately 80% of the Fund's U.S. dollar Available Assets are managed
directly by MLAM, pursuant to guidelines established by MLIP for which MLAM
assumes no responsibility, in the Government Securities markets. MLIP's
objective in retaining MLAM to provide cash management services to the Fund is
to enhance the return earned on the Fund's U.S. dollar Available Assets managed
by MLAM to slightly above the 91-day Treasury bill rate, while maintaining
minimal (but by no means eliminating) market risk in the Fund's cash management
operations.
The Government Securities acquired by MLAM on behalf of the Fund are
maintained in a custodial account at a Merrill Lynch affiliate and are
specifically traceable to the Fund. All income earned on such Government
Securities inures to the benefit of the Fund.
MLF pays all fees due to MLAM in respect of its management of a
portion of the Fund's U.S. dollar Available Assets, at no additional cost to the
Fund.
MLAM does business as Merrill Lynch Asset Management. MLAM is a
limited partnership. ML&Co. is its limited partner, and Princeton Services,
Inc., a wholly-owned subsidiary of ML&Co., is the general partner. As of
December 31, 1997, MLAM and its affiliates, collectively, had a total of
approximately $234.1 billion in investment company and other portfolio assets
under management, including accounts of certain affiliates of MLAM.
Interest Earned on the Fund's U.S. Dollar Available Assets Not Managed
----------------------------------------------------------------------
by MLAM. The following description relates to the approximately 20% of the
- -------
Fund's U.S. dollar Available Assets not managed by MLAM.
The Fund's U.S. dollar Available Assets not managed by MLAM are held
in cash in offset accounts and in short-term Treasury bills purchased from
dealers unaffiliated with Merrill Lynch. Offset accounts are non-interest
bearing demand deposit accounts maintained with banks unaffiliated with Merrill
Lynch. An integral feature of the offset arrangements is that the participating
banks specifically acknowledge that the offset accounts are MLF customer
accounts, not subject to any Merrill Lynch liability.
MLF credits the Partnership, as of the end of each month, with
interest at the effective daily 91-day Treasury bill rate on the average daily
U.S. dollar Available Assets held in the offset accounts during such month. The
Fund receives all interest paid on the short-term Treasury bills in which it
invests.
The use of the offset account arrangements for the Partnership's U.S.
dollar Available Assets not managed by MLAM may be discontinued by Merrill Lynch
whether or not Merrill Lynch otherwise continues to maintain its offset
arrangements. The offset arrangements are dependent on the banks' continued
willingness to make overnight credits available to Merrill Lynch, which, in
turn, is dependent on the credit standing of ML&Co. If Merrill Lynch were to
determine that the offset arrangements had ceased to be practicable (either
because ML&Co. credit lines at participating banks were exhausted or for any
other reason), Merrill Lynch would thereafter attempt to invest all of the
Fund's U.S. dollar Available Assets not managed by MLAM to the maximum
practicable extent in short-term United States Treasury bills. All interest
earned on the U.S. dollar Available Assets so invested would be paid to the
Fund, but MLIP would expect the amount of such interest to be less than that
available to the Fund under the offset account arrangements. The remaining U.S.
dollar Available Assets of the Fund not managed by MLAM would be kept in cash to
meet variation margin payments and pay expenses, but would not earn interest for
the Fund.
The banks at which the offset accounts are maintained make available
to Merrill Lynch interest-free overnight credits, loans or overdrafts in the
amount of the Fund's U.S. dollar Available Assets held in the offset accounts,
charging Merrill Lynch a small fee for this service. The economic benefits
derived by Merrill Lynch -- net of the interest credits paid to the Fund and the
fee paid to the offset banks -- from the offset accounts have not exceeded
-14-
<PAGE>
3/4 of 1% per annum of the Fund's average daily U.S. dollar Available Assets not
managed by MLAM and held in the offset accounts. These revenues to Merrill Lynch
are in addition to the Brokerage Commissions and Administrative Fees paid by the
Fund to MLF and MLIP, respectively.
Interest Paid by Merrill Lynch on the Fund's Non-U.S. Dollar Available
----------------------------------------------------------------------
Assets. Under the single currency margining system implemented for the
- -------
Partnership, the Partnership itself does not deposit foreign currencies to
margin trading in non-U.S. dollar denominated futures contracts and options. MLF
provides the necessary margin, permitting the Fund to retain the monies which
would otherwise be required for such margin as part of the Partnership 's U.S.
dollar Available Assets. The Fund does not earn interest on foreign margin
deposits provided by MLF. The Partnership does, however, earn interest on its
non-U.S. dollar Available Assets. Specifically, the Fund is credited by Merrill
Lynch with interest at the local short-term rate on realized and unrealized
gains on non-U.S. dollar denominated positions for such gains actually held in
cash by the Fund (MLAM does not manage any of the Fund's non-U.S. dollar
Available Assets.). Merrill Lynch charges the Fund Merrill Lynch's cost of
financing realized and unrealized losses on such positions.
In order to avoid the expense of daily currency conversions, the
Partnership holds foreign currency gains and finances foreign currency losses on
an interim basis until converted into U.S. dollars and either paid into or out
of the Partnership's U.S. dollar Available Assets. Foreign currency gains or
losses on open positions are not converted into U.S. dollars until the positions
are closed. Assets of the Partnership while held in foreign currencies are
subject to exchange rate risk.
During 1997, the Fund earned $145,383 in cash management income.
CHARGES
The following table summarizes the charges incurred by the Fund during the
5 1/2 months in 1996 and for 1997.
<TABLE>
<CAPTION>
1996 1997
-----------------------
COST DOLLAR DOLLAR
---- AMOUNT AMOUNT
---------- -----------
<S> <C> <C>
BROKERAGE COMMISSIONS $4,873,368 $17,377,236
ADMINISTRATIVE FEES $ 157,205 $ 560,556
ORGANIZATIONAL AND INITIAL
OFFERING COSTS $ 149,621 $ 298,039
---------- -----------
TOTAL $5,180,194 $18,235,831
========== ===========
</TABLE>
IN ADDITION TO THE ABOVE CHARGES, THE PARTNERSHIP AND JWH SHARE IN THE
PROFITS OF THE JOINT VENTURE, 15% OF THE JOINT VENTURE'S QUARTERLY NEW TRADING
PROFITS ARE BEING ALLOCATED TO JWH. DURING 1997, JWH RECEIVED PROFIT SHARES OF
$2,640,194 (INCLUSIVE OF INTEREST).
DESCRIPTION OF CURRENT CHARGES
------------------------------
The fund and the Fund/JWH joint venture are subject to the following charges and
priority profit allocation (Profit Share):
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
MLIP Organizational and Reimbursement for these costs in the amount of
initial offering costs $16,421 per month will end June 30, 1998.
reimbursement
MLF Brokerage commissions A flat-rate monthly Brokerage Commission of 0.646
of 1% of the Fund/JWH joint venture's month-end
assets (a 7.75% annual rate).
</TABLE>
-15-
<PAGE>
DESCRIPTION OF CURRENT CHARGES (CON'T)
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
During the first 5 1/2 months of 1996 and during the
year 1997, the round-turn (each purchase and sale or
sale and purchase of a single futures contract)
equivalent rate of the Fund's flat-rate Brokerage
Commissions was approximately $208 and $212.
MLF Use of Fund assets MLF may derive an economic benefit from the deposit
of certain of the Fund's U.S. dollar Available Assets
not managed by MLAM in offset accounts; this
benefit to date has not exceeded 3/4 of 1% of such
average daily U.S. dollar Available Assets.
MLIP Administrative Fee An Administrative Fee of 0.25% per annum of the
Fund/JWH joint venture's month-end assets is paid to
MLIP, which pays all routine administrative expenses
of the joint venture, other than the Fund's ongoing
offering costs.
MLIB Bid-ask spreads Under MLIP's F/X Desk arrangements, MLIB
receives bid-ask spreads on the forward trades which
it executes with the Fund.
Other Counterparties Bid-ask spreads The counterparties' other than MLIB, with which the
F/X Desk trades each receive bid-ask spreads on the
forward trades executed with the joint venture.
MLIP F/X Desk service fees Under the F/X Desk arrangements, MLIP receives a
service fee equal, at current exchange rates, to
approximately $5.00 to $12.50 on each purchase or
sale of a futures contract-equivalent face amount of a
currency executed with counterparties other than
MLIB.
MLIB EFP differentials MLIB or an affiliate receives a differential spread for
exchanging the joint venture's spot currency positions
(which are acquired through the F/X Desk, as
described above) for equivalent futures positions.
Government Securities Bid-ask spreads The dealers with which MLAM executes Government
Dealers Securities trades include bid-ask spreads in the prices
they quote to the Fund.
Third Parties Ongoing offering costs The Fund does not pay its routine administrative
expenses (these are paid by MLIP, as described
above); however, the Fund pays the costs, as incurred,
of the ongoing offering of the Units, subject to MLIP
absorbing (without reimbursement) any such costs to
the extent that they exceed 0.25% of the Fund's
average month-end Net Assets in any fiscal year.
The ongoing offering costs payable by the Fund do not
include the selling commissions or ongoing
compensation payable to the Selling Agent in respect
of the Units. Such commissions and ongoing
compensation are paid by MLIP.
</TABLE>
-16-
<PAGE>
DESCRIPTION OF CURRENT CHARGES (CONT'D)
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
JWH Profit Share 15% of any New Trading Profits, i.e. any cumulative
calendar quarter-end Trading Profit in excess of the
highest level of such cumulative Trading Profit as of
any previous calendar quarter-end, are specially
allocated by the joint venture to JWH (as the Fund
owns substantially all of the Fund/JWH joint venture,
such special allocation effectively is made out of
Trading Profits which the Fund would otherwise have
received).
Trading Profit does not include interest income.
Trading Profit is calculated after reduction for annual
brokerage commissions calculated at a 5.00% rather
than a 7.75% annual rate. Trading Profit is not
reduced by the Administrative Fee, organizational and
initial offering cost reimbursements or ongoing
offering costs.
Trading Profit is calculated on the basis of the overall
performance of the joint venture, not the performance of
each JWH Trading Program considered individually.
Because the Profit Share is calculated on the basis of
any Trading Profits achieved by the joint venture in
excess of the highest level of cumulative Trading
Profits achieved by the joint venture as of any
previous calendar quarter-end, rather than on the
basis of increases in the Net Asset Value per Unit
over the highest Net Asset Value per Unit as of any
previous calendar quarter-end, the Profit Shares
allocated to JWH may not reflect the investment
experience of any particular Limited Partner. In fact,
JWH may be allocated substantial Profit Shares
(allocated equally among all outstanding Units) even
though many Units have declined significantly in
value from their initial purchase price.
As Profit Shares are calculated on the basis of
quarter-end highs in cumulative Trading Profit,
substantial Profit Shares may (irrespective of the fact
that Units are purchased at different times and prices,
and may have materially different investment
experiences during a year) be accrued during a
calendar year even though the joint venture has an
overall loss for such year.
MLF; Other Extraordinary expenses Actual payments to third parties; expected to be
Third Parties negligible.
</TABLE>
-17-
<PAGE>
REGULATION
The General Partner, JWH and the Commodity Broker are each subject to
regulation by the CFTC and the NFA. Other than in respect of its periodic
reporting requirements under the Securities Exchange Act of 1934, and the
registration of the Units for continuous public distribution under the
Securities Act of 1933, the Partnership itself is generally not subject to
regulation by the Securities and Exchange Commission. However, MLIP itself is
registered as an "investment adviser" under the Investment Advisers Act of 1940.
(i) through (xii) -- not applicable.
(xiii) The Partnership has no employees.
(d) Financial Information about Foreign and Domestic Operations
-----------------------------------------------------------
and Export Sales:
----------------
The Partnership and the Joint Venture (Limited Liability Company) do
not engage in material operations in foreign countries, nor is a material
portion of the Partnership's revenues derived from customers in foreign
countries. The Partnership does, however, trade, from the United States, on a
number of foreign commodity exchanges.
ITEM 2: PROPERTIES
----------
The Partnership does not use any physical properties in the conduct of
its business.
The Partnership's only place of business is the place of business of
the General Partner (see Item 10 herein). The General Partner performs all
administrative services for the Partnership from the General Partner's offices.
ITEM 3: LEGAL PROCEEDINGS
-----------------
JWH
There neither now exists nor has there previously ever been any
administrative, civil or criminal action against JWH or its principals which is
material, except that in September 1996, JWH was named as a co-defendant in
class action lawsuits brought in the California Superior Court, Los Angeles
County, and in the New York Supreme Court, New York County. In November 1996,
JWH was named as a co-defendant in a class action complaint filed in the
Superior Court of the State of Delaware for Newcastle County that contained the
same allegations as the New York and California complaints. Additional
complaints containing the same allegations as the earlier California complaints
were filed in California in March 1997. The actions, which seek unspecified
damages, purport to be brought on behalf of investors in certain Deal Witter,
Discover & Co. commodity pools, some of which are advised by JWH, and are
primarily directed at Dean Witter's alleged fraudulent selling practices in
connection with the marketing of those pools. JWH is essentially alleged to
have aided and abetted or directly participated with Dean Witter in those
practices. JWH believes the allegations against it are without merit; it
intends to contest these allegations vigorously and is convinced that it will be
shown to have acted properly and in the best interest of investors.
The names and filing dates of the various actions described above
are as follows:
Kozlowski et al. v. John W. Henry & Co. et al., BC156941 (Superior Court of the
State of California, Los Angeles County, September 6, 1996).
Gurevitz et al. v. John W. Henry & Co. et al., BC156922 (Superior Court of the
State of California, Los Angeles County, September 10, 1996).
Malichio et al. v. John W. Henry & Co. et al., #116698-96 (Superior Court of the
State of New York, New York County, September 18, 1996).
Hamel et al. v. John W. Henry & Co. et al. #604775/96 (Supreme Court of the
State of New York, New York County, September 20, 1996).
Shifflet et al. v. John W. Henry & Co. et al., BC157596 (Superior Court of the
State of California, Los Angeles County, September 20, 1996).
-18-
<PAGE>
Liptak et al. v. Dean Witter Reynolds Inc. et al., #966C-11-115VAB (Superior
Court of the State of Delaware, New Castle County, November 14, 1996).
Redd et al. v. John W. Henry & Co. et al., BC167463; Gibson et al. v. John W.
Henry & Co. et al., BC167469; and Kendall et al. v. John W. Henry & Co. et al.,
BC167470 (Superior Court of the State of California, Los Angeles County, March
13, 1997; Krieger et al. v. John W. Henry & Co. et al. BC167636 (Superior Court
of the State of California, Los Angeles County, March 17, 1997).
The California complaints were consolidated under the caption "In re
Dean Witter Managed Futures Litigation" in May 1997.
The New York complaints were consolidated under the caption "In re
Dean Witter Managed Futures Partnerships Litigation" in July 1997.
The foregoing claims do not vary significantly in the remedies they
seek. These remedies are generally the following:
(i) to recover damages sustained by all persons in the class in an amount to
be proven at trial;
(ii) to receive reasonable attorneys' fees, costs and expenses incurred;
(iii) to be awarded pre- and post-judgment interest;
(iv) to be awarded punitive damages (in certain cases); and
(v) to receive such other and further relief as the court may deem necessary
or appropriate.
None of the foregoing actions involve the Fund. Furthermore, the
Fund's operations, earnings and assets are largely unaffected by JWH's financial
condition. It would only be in the highly unlikely event that such financial
condition was impaired to the point that JWH could no longer effectively manage
the Fund's assets that the Fund would itself be affected by any of the
proceedings described above . Consequently, MLIP does not believe that any of
the foregoing actions will have an adverse effect on the Fund's operations,
earnings or assets.
The outcome of all litigation is uncertain, but JWH believes -- based
in part on discussions with its counsel -- that the foregoing suits will not
have a material adverse effect on JWH's operations, earnings or assets.
Merrill Lynch
ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc. (which is
the sole stockholder of MLIP and MLF and the 100% indirect owner of all Merrill
Lynch entities involved in the operation of the Fund) -- as well as certain of
its subsidiaries and affiliates have been named as defendants in civil actions,
arbitration proceedings and claims arising out of their respective business
activities. Although the ultimate outcome of these actions cannot be ascertained
at this time and the results of legal proceedings cannot be predicted with
certainty, it is the opinion of management that the result of these matters will
not be materially adverse to the business operations or financial condition of
MLIP or the Fund.
MLIP itself has never been the subject of any material litigation.
On June 24, 1997, the CFTC accepted an Offer of Settlement from MLF
and others, in a matter captioned "In the Matter of Mitsubishi Corporation and
Merrill Lynch Futures Inc., et al.," CFTC Docket No. 97-10, pursuant to which
MLF, without admitting or denying the allegations against it, consented to a
finding by the Commission that MLF had violated Section 4c(a)(A) of the
Commodity Exchange Act, relating to wash sales (the CFTC alleged that the
customer entered nearly simultaneous orders without the intent to engage in a
bona fide trading transaction), and CFTC Regulation 1.37(a), relating to
recordkeeping requirements. MLF agreed to cease and desist from violating
Section 4c(a)(A) of the Act and Regulation 1.37(a), and to pay a civil monetary
penalty of $175,000.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Partnership has never submitted any matters to a vote of its Limited
Partners.
-19-
<PAGE>
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
(a) Market Information:
------------------
There is no public trading market for the Units, nor will one develop.
Rather, Limited Partners may purchase or redeem Units as of the end of each
month at Net Asset Value, subject to certain early redemption charges.
(b) Holders:
-------
As of December 31, 1997, there were 6,410 holders of Units, including
the General Partner.
(c) Dividends:
---------
The General Partner has not made, and does not contemplate making, any
distributions on the Units.
(d) Recent Sales of Unregistered Securities;
---------------------------------------
Use of Proceeds form Registered Securities:
------------------------------------------
The Fund originally registered $200,000,000 of limited partnership
interest. The Fund has sold 1,971,418 units of limited partnership interest,
with an aggregate price of $198,061,545.
-20-
<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from the audited is
financial statements the Partnership:
<TABLE>
<CAPTION>
JANUARY 1, 1997 TO JULY 15, 1996 TO
INCOME STATEMENT DATA DECEMBER 31, 1997 DECEMBER 31, 1996
- --------------------- ------------------- ------------------
<S> <C> <C>
Revenues:
Realized Gain $ 18,820,033 $29, 800, 074
Change in Unrealized Gain 10,201,917 4,696,372
------------ -------------
Total Trading Results 29,021,950 34,496,446
------------
Interest Income 12,021,263 3,030,330
------------ -------------
Total Revenues 41,043,213 37,526,776
Expenses:
Brokerage Commissions 17,377,236 4,873,368
Administrative Fees 560,556 157,205
------------ -------------
Total Expenses 17,937,792 5,030,573
Net Income Before Minority Interest 23,105,421 32,496,203
Special Profit Share Allocation (2,640,194) (4,683,010)
Minority Interest in Income (12,447) (23,383)
------------ -------------
Net Income $ 20,452,780 $ 27,789,810
============ =============
</TABLE>
BALANCE SHEET DATA* DECEMBER 31, 1997 December 31, 1996
- ------------------- ------------------ -----------------
Aggregate Net Asset Value $223,752,247 $ 172,844,448
Net Asset Value per Unit $135.40 $123.16
* Balance sheet data is based on redemption values which differ immaterially
from Net Asset Values as determined under Generally Accepted Accounting
Principles ("GAAP") due to the treatment of organizational and initial offering
cost reimbursements.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER UNIT
- ------------------------------------------------------------------------------------------------------------------
JAN. FEB. MAR. APR. MAY. JUN. JULY AUG. SEPT. OCT. NOV. DEC.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 N/A N/A N/A N/A N/A N/A $ 98.98 $ 98.89 $104.32 $114.96 $122.58 $123.16
- ------------------------------------------------------------------------------------------------------------------
1997 $126.87 $126.83 $126.92 $126.34 $122.41 $122.74 $131.47 $127.12 $126.28 $129.54 $130.80 $135.40
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
The Net Asset Value per Unit varies from how it would be calculated
for purposes of GAAP due to the amortization of organizational and initial
offering costs.
-21-
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
DECEMBER 31, 1997
Type of Pool: Single-Advisor/Publicly-Offered/Not "Principal Protected"/(1)/
Inception of Trading: July 15, 1996
Aggregate Subscriptions: $199,895,865
Current Capitalization: $223,752,247
Worst Monthly Drawdown:/(2)/ (3.31)% (8/97)
Worst Peak-to-Valley Drawdown:/(3)/ (3.95)% (8/97-9/97)
<TABLE>
<CAPTION>
MONTHLY RATES OF RETURN/(4)/
----------------------------------------
MONTH 1997 1996
----------------------------------------
<S> <C> <C>
January 3.01% N/A
----------------------------------------
February (0.03) N/A
----------------------------------------
March 0.07 N/A
----------------------------------------
April (0.46) N/A
----------------------------------------
May (3.11) N/A
----------------------------------------
June 0.27 N/A
----------------------------------------
July 7.11 (1.02)%
----------------------------------------
August (3.31) (0.09)
----------------------------------------
September (0.66) 5.49
----------------------------------------
October 2.58 10.20
----------------------------------------
November 0.97 6.62
----------------------------------------
December 3.52 0.47
----------------------------------------
Compound Annual 9.93% 23.15 %
Rate of Return (5-1/2 months)
----------------------------------------
</TABLE>
_________________________
(1) Certain funds, including funds sponsored by MLIP, are structured
so as to guarantee to investors that their investment will be worth no less than
a specified amount (typically, the amount initially invested) as of a date
certain after the date of investment. The CFTC refers to such funds as
"principal protected." The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced by the Fund; a drawdown is measured on the basis of
month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage
decline from a month-end cumulative Monthly Rate of Return without such
cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent
month-end. For example, if the Monthly Rate of Return was (1)% in each of
January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown
would still be continuing at the end of April in the amount of approximately
(3)%, whereas if the Monthly Rate of Return had been approximately 3% in March,
the Peak-to-Valley Drawdown would have ended as of the end of February at
approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during
the month of determination (including interest income and after all expenses
accrued or paid) divided by the total equity of the Fund as of the beginning of
such month.
-22-
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
-----------------------------------------------------------------------
OF OPERATIONS
-------------
RESULTS OF OPERATIONS
General
- -------
Because JWH's systems are designed with the objective of identifying
and profiting from long-term price trends, they are unlikely to be profitable in
markets in which such trends do not occur. Static or erratic prices are likely
to result in losses. Similarly, unexpected events (for example, a political
upheaval, natural disaster or governmental intervention) can lead to major
short-term losses as well as gains.
While there can be no assurance that the JWH Programs will be
profitable even in trending markets, markets in which substantial and sustained
price movements occur offer the best profit potential for the Fund.
Performance Summary
- -------------------
1997
The Fund's most profitable positions in 1997 were in the currency
markets. Strong gains were realized in positions on the German mark, which
weakened in world markets as hopes for European Monetary Union rose. Reflecting
sound economic fundamentals in the U.S., the dollar dominated world currencies,
setting new records against the mark, yen and Swiss franc.
Solid gains were generated for the year in global interest rate
markets, particularly in Japanese Government bonds where yields plummeted to
historic lows as the nation sank relentlessly into a recession and a string of
financial sector bankruptcies followed. Strong gains were also recorded in
Australian 10-year and three-year bonds and in German and Italian bonds. In the
U.S., yields on the benchmark 30-year Treasury bond dipped below 6% in the final
quarter of the year, reflecting the flight of foreign capital to quality amid
increasing turbulence in Asian markets; positions in U.S. government bonds were
profitable overall.
Positions in gold and the Nikkei also resulted in profits for the
year. Gold prices declined to the lowest level in over a decade reflecting its
declining value as an alternative monetary asset as central banks increased
their willingness to sell or lease the precious metal. The Nikkei suffered the
same fate as the Japanese yen. Losses were incurred in agricultural markets,
despite a strong performance by coffee futures earlier in the year. Energy
markets were also disappointing as ample world inventories and mild weather kept
supply and demand in balance.
1996 (5 1/2 months)
Gains in 1996 were considerable, as the Fund's investment programs
outperformed the major stock markets of the world. The Worldwide Bond Program
capitalized both on rising interest rates in the U.S. and falling rates
elsewhere.
Trading began on July 15 amid sharp declines in U.S. and global stock
markets. The U.S. dollar weakened against most major currencies as investors
fled U.S. assets in search of safe havens overseas. Investors remained cautious
through August, unwilling to take positions prior to key central bank policy
meetings and economic reports slated at month-end. Performance was mixed in
July and August, with some investment programs benefiting from the soaring
energy markets while others reflected the difficult trading environments for
global interest rates and currencies. Changing weather patterns buffeted
agricultural commodity markets.
By September, a combination of global economic and political
developments reduced the level of volatility in major interest rate and currency
markets. Chief among these was the decision by the U.S. Federal Reserve Board's
policy making committee to keep interest rates at current levels. Convinced
that European nations seeking membership in the European Monetary Union would
continue to keep rates low, investors turned again to higher yielding U.S.
dollar-denominated assets. Foreign central banks were heavy buyers of U.S.
bonds. The U.S. dollar strengthened. Performance was strong in all markets.
All of the Fund's investment programs recorded strong performance in
October. Sound economic fundamentals kept the U.S. dollar strong against most
major currencies. The one exception was the British pound,
-23-
<PAGE>
which soared against the dollar as a result of positive economic indicators.
Cash flooded the bond and equity markets in October and November. Positions in
global interest rates and currencies resulted in gains.
By year-end, however, most markets were experiencing seasonal
illiquidity and were becoming highly volatile. Early in December, JWH completed
a significant reduction in leverage in some investment programs to reduce
investors' exposure to that volatility and to help retain the substantial
profits made in the second half of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The level of the Fund's capitalization generally does not affect its
performance.
The Fund does not borrow (except on an interim basis in order to
facilitate multi-currency margining), and sells no securities other than the
Units.
Inflation by itself does not affect profitability, but it can cause
price movements that do so.
The Fund's assets and open positions are generally highly liquid.
_______________
The Fund changes its positions and market focus frequently. Consequently, the
fact that the Fund realized gains or incurred losses in certain markets (gold,
stock indices, currencies, etc.) in the past is not necessarily indicative of
whether the Fund will do so in the future.
THE YEAR 2000 COMPUTER ISSUE
Merrill Lynch's modifications for Year 2000 systems compliance are
proceeding according to plan and are expected to be completed in early 1999.
Based on information currently available, the remaining expenditures are
estimated at $200 million and will cover hardware and software upgrades, systems
consulting and computer maintenance. These expenditures are not expected to
have a material adverse impact on Merrill Lynch's financial position, results of
operations or cash flows in future periods. However, the failure of Merrill
Lynch's securities exchanges, clearing organizations, vendors, clients or
regulators to resolve their own processing issues in a timely manner could
result in a material financial risk. Merrill Lynch is devoting necessary
resources to address all Year 2000 issues in a timely manner.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements required by this Item are included in Exhibit
13.01.
The supplementary financial information ("selected quarterly financial
data" and "information about oil and gas producing activities") specified by
Item 302 of Regulation S-K is not applicable.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no changes in or disagreements with accountants on
accounting and financial disclosure.
-24-
<PAGE>
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
(a,b) Identification of Directors and Executive Officers:
--------------------------------------------------
As a limited partnership, the Partnership itself has no officers or
directors and is managed by the General Partner. Trading decisions are made by
JWH on behalf of the Partnership.
Merrill Lynch Investment Partners Inc., a subsidiary of ML&Co., has
as its primary objective providing quality alternative investments for its
clients. MLIP is one of the largest sponsors of managed futures funds in terms
both of assets invested in funds for which it serves as trading manager or
sponsor, and of financial and personnel resources. Offering hedge fund, managed
futures and currency investments for individuals, corporations and financial
institutions, MLIP has operated with one primary objective since its inception
in 1986 -- to provide investors with an opportunity for long-term capital
appreciation and diversification through quality investments in equity, debt,
currency, interest rate, metals, energy and agricultural markets, utilizing a
variety of instruments and trading strategies. While MLIP concentrated its
efforts primarily on managed futures investments during its early years of
operation, since 1996 MLIP has offered a number of multi-advisor and single-
advisor hedge funds. MLIP has dedicated significant resources to the growth of
its hedge fund business, and has the investment management, operational,
administrative, research and risk management experience to manage substantial
assets in both hedge funds and managed futures investments in the global
financial markets. As of February 1, 1998, MLIP was acting as trading manager
or sponsor to futures and hedge funds in which approximately $3.1 billion of
client capital was invested.
The principal officers and the directors of MLIP and their respective
business backgrounds are as follows:
JOHN R. FRAWLEY, JR. Chairman, Chief Executive Officer,
President and Director
JEFFREY F. CHANDOR Senior Vice President, Director of
Sales, Marketing and Research and
Director
JOSEPH H. MOGLIA Director
ALLEN N. JONES Director
STEPHEN G. BODURTHA Director
MICHAEL A. KARMELIN Chief Financial Officer, Vice
President and Treasurer
STEVEN B. OLGIN Vice President, Secretary and
Director of Administration
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman, Chief
Executive Officer, President and a Director of MLIP and Co-Chairman of MLF. He
joined Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in 1966 and
has served in various positions, including Retail and Institutional Sales,
Manager of New York Institutional Sales, Director of Institutional Marketing,
Senior Vice President of Merrill Lynch Capital Markets and Director of
International Institutional Sales. Mr. Frawley holds a Bachelor of Science
degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory
Coordination Advisory Committee from its formation in 1990 through its
dissolution in 1994. Mr. Frawley is currently serving his fourth consecutive
one-year term as Chairman of the U.S. Managed Funds Association (formerly, the
Managed Futures Association), a U.S. national trade association that represents
the managed futures, hedge funds and fund of funds industry. Mr. Frawley is
also a Director of that organization. Mr. Frawley currently serves on a panel
created by the Chicago Mercantile Exchange and The Board of Trade of the City of
Chicago to study cooperative efforts related to electronic trading, common
clearing and the issues regarding a potential merger.
-25-
<PAGE>
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice
President, Director of Sales, Marketing and Research and a Director of MLIP. He
joined MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as
well as Managing Director of International Sales in the United States, and
Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts
degree from Trinity College, Hartford, Connecticut.
Joseph H. Moglia was born in 1949. Mr. Moglia is a Director of MLIP.
In 1971, he graduated from Fordham University with a Bachelor of Arts degree in
Economics. He later received his Master of Science degree from the University
of Delaware. He taught at the high school and college level for sixteen years.
Mr. Moglia joined MLPF&S in 1984, and has served in a number of senior roles,
including Director of New York Fixed Income Institutional Sales, Director of
Global Fixed Institutional Sales, and Director of the Municipal Division. He is
currently Senior Vice President and Director of the Investment Strategy and
Product Group in Merrill Lynch Private Client, and Director of Middle Markets.
Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP and,
from July 1995 until January 1998, Mr. Jones was also Chairman of the Board of
Directors of MLIP. Mr. Jones graduated from the University of Arkansas with a
Bachelor of Science, Business Administration degree in 1964. Since June 1992,
Mr. Jones has held the position of Senior Vice President of MLPF&S. From June
1992 through February 1994, Mr. Jones was the President and Chief Executive
Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board
of Directors of MLIG and its subsidiary companies. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of
MLIP. In 1980, Mr. Bodurtha graduated from Wesleyan University, Middletown,
Connecticut with a Bachelor of Arts degree in Government, magna cum laude. From
1980 to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill
Lynch. In 1985, he was awarded his Master of Business Administration degree
from Harvard University, where he also served as Associates Fellow (1985-1986).
From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice
President with Kidder, Peabody & Co., Incorporated where he worked in their
Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has
held the position of First Vice President since 1995. He has been the Director
in charge of the Structured Investments Group of MLPF&S since 1995.
Michael A. Karmelin was born in 1947. Mr. Karmelin is Chief Financial
Officer, Vice President and Treasurer of MLIP. Prior to joining MLIP in April
1997, Mr. Karmelin was Chief Financial Officer of Merrill Lynch, Hubbard Inc.
("ML Hubbard"), a sponsor of real estate limited partnerships. Mr. Karmelin
joined ML Hubbard in January 1994 and was a Vice President of ML Hubbard. From
May 1994 to April 1997, he was the Chief Financial Officer of ML Hubbard,
responsible for its accounting, treasury and tax functions. Prior to joining ML
Hubbard, Mr. Karmelin held several senior financial positions with ML&Co. and
MLPF&S from December 1985 to December 1993, including Vice President/Senior
Financial Officer Corporate Real Estate and Purchasing, Manager Commitment
Control/Capital Budgeting, and Senior Project Manager/Project Analysis. Prior
to joining ML&Co., Mr. Karmelin was employed at Avco Corporation for 17 years,
where he held a variety of financial positions. Mr. Karmelin holds a B.B.A.
degree in Accounting from Baruch College, C.U.N.Y. and a Master of Business
Administration degree in Corporate Strategy and Finance from New York
University. Mr. Karmelin passed the Certified Public Accounting examination in
1974 and is a member of the Treasury Management Association, the Institute of
Management Accountants and The Strategic Leadership Forum.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice President,
Secretary and the Director of Administration of MLIP. He joined MLIP in July
1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr.
Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin
graduated from The American University with a Bachelor of Science degree in
Business Administration and a Bachelor of Arts degree in Economics. In 1986, he
received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin
is a member of the Managed Funds Association's Government Relations Committee
and has served as an arbitrator for the NFA. Mr. Olgin is also a member of the
Committee on Futures Regulation of the Association of the Bar of the City of New
York.
As of December 31, 1997, the principals of MLIP had no investments in
the Fund and MLIP's general partner interest in the Fund was valued at
approximately $2,455,940.
MLIP acts as general partner to twelve public futures funds whose
units of limited partnership interest are registered under the Securities
Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, The
Growth and Guarantee Fund L.P., ML Futures Investments II L.P., ML Futures
Investments L.P., John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R. Strategy
Fund(SM) L.P., The SECTOR Strategy Fund(SM) II L.P., The SECTOR Strategy
Fund(SM) V L.P.,
-26-
<PAGE>
The SECTOR Strategy Fund(SM) VI L.P., ML Global Horizons L.P., ML Principal
Protection L.P. (formerly, ML Principal Protection Plus L.P.) and the Fund.
Because MLIP serves as the sole general partner of each of these funds, the
officers and directors of MLIP effectively manage them as officers and directors
of such funds.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
John W. Henry & Company, Inc. is the Trading Advisor of the Fund.
Were JWH's services no longer to be available to the Fund, the Fund would, in
all likelihood, dissolve.
(d) Family Relationships:
--------------------
None.
(e) Business Experience:
-------------------
See Item 10(a)(b) above.
(f) Involvement in Certain Legal Proceedings:
---------------------------------------
None.
(g) Promoters and Control Persons:
-----------------------------
The General Partner is the sole promoter and controlling person of the
Partnership.
ITEM 11: EXECUTIVE COMPENSATION
----------------------
The officers of the General Partner are remunerated in their
respective positions. The Partnership does not itself have any officers,
directors or employees. The Partnership pays Brokerage Commissions to an
affiliate of the General Partner and Administrative Fees to the General Partner.
The General Partner or its affiliates may also receive certain economic benefits
from holding certain of the Fund's dollar Available Assets in offset accounts,
as described in Item 1(c) above. The directors and officers receive no "other
compensation" from the Partnership, and the directors receive no compensation
for serving as directors of the General Partner. There are no compensation
plans or arrangements relating to a change in control of either the Partnership
or the General Partner.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1997, no person or "group" is known to be or have
been the beneficial owner of more than five percent of the Units. All of the
Partnership's units of general partnership interest are owned by the General
Partner.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1997, the General Partner owned 18,177 (unit-
equivalent general partnership interests), which was less than 2% of the total
Units outstanding.
(c) Changes in Control:
------------------
None.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with Management and Others:
---------------------------------------
The General Partner acts as administrative and trading manager of the
Fund. The General Partner provides all normal ongoing administrative functions
of the Partnership, such as accounting, legal and printing services. The General
Partner, which receives the Administrative Fee, pays all expenses relating to
such services.
-27-
<PAGE>
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as the principal
commodity broker for the Partnership.
In 1997, the Partnership paid: (i) Brokerage Commissions of
$17,377,236 to the Commodity Broker, which included $8,940,868 in Management
Fees paid by the Commodity Broker to JWH; and (ii) Administrative Fees of
$560,556 to MLIP. In addition, MLIP and its affiliates derived certain economic
benefit from maintaining a portion of the Fund's assets in "offset accounts" as
described under Item 1(c), "Narrative Description of Business -- Use of Proceeds
and Cash Management Income -- Interest Earned or the Fund's U.S. Dollar
Available Assets Not Managed by MLAM," and Item 11, "Executive Compensation"
herein, as well from the Fund's F/X Desk and exchange of futures for physical
("EFP") trading.
See Item 1(c), "Narrative Description of Business -- Charges" and "--
Description of Current Charges" for a discussion of other business dealings
between MLIP affiliates and the Partnership.
(c) Indebtedness of Management:
--------------------------
The Partnership is prohibited from making any loans, to management or
otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
<TABLE>
<CAPTION>
(a)1. Financial Statements: Page
-------------------- ----
<S> <C>
Independent Auditors' Report 1
Consolidated Statements of Financial Condition as of December 31, 1997 2
For the year ended December 31, 1997 and the period from
July 15, 1996 (commencement of trading) to
December 31, 1996:
Consolidated Statements of Income 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-11
</TABLE>
(a)2. Financial Statement Schedules:
-----------------------------
Financial statement schedules not included in this Form 10-K have been
omitted for the reason that they are not required or are not applicable or that
equivalent information has been included in the financial statements or notes
thereto.
-28-
<PAGE>
(a)3. Exhibits:
--------
The following exhibits are incorporated by reference or are
filed herewith to this Annual Report on Form 10-K:
Designation Description
- ----------- -----------
1.01 Form of Selling Agreement among the Registrant, MLIP,
Merrill Lynch Futures Inc. ("Merrill Lynch Futures"),
Merrill Lynch, Pierce, Fenner & Smith Incorporated (the
"Selling Agent") and JWH.
Exhibit 1.01: Is incorporated herein by reference from Exhibit 1.01
- ------------ contained in Amendment No. 2 to the Registration
Statement (File No. 333-80509) filed on April 23, 1996,
on Form S-1 under the Securities Act of 1993 (the
"Registrant's Registration Statement.")
3.01(i) Certificate of Limited Partnership of the Registrant.
Exhibit 3.01(i): Is incorporated herein by reference from Exhibit 3.01
- --------------- contained in the Registrant's Registration Statement.
10.01 Form of Joint Venture Agreement among the Registrant,
MLIP, Merrill Lynch Futures Inc. and JWH.
Exhibit 10.01: Is incorporated herein by reference from Exhibit 10.01
- ------------- contained in the Registrant's Registration Statement.
10.02 Form of Customer Agreement between the Registrant's
joint venture with JWH and Merrill Lynch Futures Inc.
Exhibit 10.02: Is incorporated herein by reference from Exhibit 10.02
- ------------- contained in the Registrant's Registration Statement.
10.03 Foreign Exchange Desk Service Agreement among Merrill
Lynch Investment Bank, Merrill Lynch Investment Partners
Inc., Merrill Lynch Futures Inc. and the Fund.
Exhibit 10.03: Is incorporated herein by reference from Exhibit 10.03
- ------------- contained in the Registrant's Registration Statement.
10.05 Form of Subscription Agreement and Power of Attorney
(included as Exhibit C to the Prospectus.)
Exhibit 10.05 Is incorporated herein by reference from Exhibit 10.05
- ------------- contained in the Registrant's Registration Statement.
10.06 Form of Investment Advisory Contract among the
Registrant's joint venture with JWH, MLIP, Merrill Lynch
Futures Inc. and Merrill Lynch Asset Management, L.P.
Exhibit 10.06: Is incorporated herein by reference from Exhibit 10.06
- ------------- contained in the Registrant's Registration Statement.
10.07 Form of Custody Agreement among the Registrant's joint
venture with JWH and Merrill Lynch Futures Inc.
Exhibit 10.07: Is incorporated herein by reference from Exhibit 10.07
- ------------- contained in the Registrant's Registration Statement.
10.08 Form of Limited Liability Company Operating Agreement.
-29-
<PAGE>
Exhibit 10.08: Is filed herewith.
- -------------
10.09 Form of Amendatory Agreement.
Exhibit 10.09: Is filed herewith.
- -------------
13.01 1997 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
- -------------
28.01 Prospectus of the Partnership dated April 25, 1996.
Exhibit 28.01: Is incorporated herein by reference as filed with the
- ------------- Securities and Exchange Commission pursuant to Rule 424
under the Securities Act of 1933, Registration Statement
(File No. 333-80509) on Form S-1, effective April 25,
1996.
(b) Report on Form 8-K:
------------------
No reports on Form 8-K were filed during the fourth quarter of
1997.
-30-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 JWH STRATEGIC ALLOCATION FUND L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
General Partner
By: /s/ John R. Frawley, Jr.
---------------------------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer, President and Director
(Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed on March 25, 1998 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/John R. Frawley, Jr. Chairman, Chief Executive Officer, President and Director March 25, 1998
- -------------------------
John R. Frawley, Jr. (Principal Executive Officer)
/s/Michael A. Karmelin Vice President, Chief Financial Officer and Treasurer March 25, 1998
- -------------------------
Michael A. Karmelin (Principal Financial and Accounting Officer)
/s/Jeffrey F. Chandor Senior Vice President, Director of Sales, March 25, 1998
- -------------------------
Jeffrey F. Chandor Marketing and Research and Director
/s/Allen N. Jones Director March 25, 1998
- -------------------------
Allen N. Jones
</TABLE>
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
<TABLE>
<S> <C> <C>
MERRILL LYNCH INVESTMENT General Partner of Registrant March 25, 1998
PARTNERS INC.
</TABLE>
By: /s/John R. Frawley, Jr.
-----------------------
John R. Frawley, Jr.
-31-
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
1997 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1997 Annual Report and Independent Auditors' Report
-32-
<PAGE>
EXHIBIT 10.08
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
OF
ML JWH STRATEGIC JOINT VENTURE LLC
DATED AS OF _____ __, 1998
<PAGE>
ML JWH STRATEGIC JOINT VENTURE LLC
LIMITED LIABILITY COMPANY OPERATING AGREEMENT
This Limited Liability Company Operating Agreement (this "Agreement") made
as of this ____ day of _____, 1998 by and among ML JWH Strategic Allocation Fund
Ltd., a Cayman Islands company (the "Fund"), ML JWH Strategic Allocation Fund
L.P., a Delaware limited partnership (the "Partnership"), and John W. Henry &
Company, Inc., a Florida corporation ("JWH"); and, not as members but for the
limited purposes set forth herein, Merrill Lynch Futures Inc., a Delaware
corporation ("MLF"), and Merrill Lynch Investment Partners Inc., a Delaware
corporation (the "General Partner" or the "Sponsor"). The Partnership, the Fund
and JWH are the members of the Delaware limited liability company (the
"Company") formed hereby, to be known as ML JWH Strategic Joint Venture LLC.
W I T N E S S E T H:
WHEREAS, the Partnership was organized in 1996 as a limited partnership,
and the Fund was organized, also in 1996, as a Cayman Islands company, in each
case to engage in commodity trading;
WHEREAS, each of the Partnership and the Fund is a party to a separate
Joint Venture Agreement each dated as of April 25, 1996 with JWH, and the joint
ventures (the "Offshore Joint Venture" and the "U.S. Joint Venture" and,
collectively, the "Joint Ventures") formed thereby were the entities through
which the Partnership and the Fund have traded commodity interests prior to the
establishment of the Company;
WHEREAS, all assets and liabilities of the Joint Ventures (including open
commodity interest positions) will be contributed to the Company as soon as
practicable after the date hereof, and the Partnership and the Fund will
thereafter trade commodity interests through the Company rather than through the
Joint Ventures, which will be dissolved;
WHEREAS, JWH has extensive experience trading in the commodity markets and
is willing to participate with the Partnership and the Fund in the Company;
WHEREAS, JWH implements the JWH Strategic Allocation Program pursuant to
which JWH allocates and reallocates assets among a number of JWH's various
trading programs ("Programs") and the Partnership and the Fund are (to date,
through the Joint Ventures and, in the future, through the Company) the only
client or proprietary accounts managed pursuant to the JWH Strategic Allocation
Program;
WHEREAS, the General Partner is the sole general partner of the Partnership
and is the sole Sponsor of the Fund and has negotiated this Agreement on behalf
of the Partnership and the Fund;
<PAGE>
WHEREAS, MLF is the commodity broker for the Company and has agreed to
undertake certain financial obligations in connection with inducing JWH to
become a member of the Company, as contemplated hereby;
WHEREAS, the Partnership plans to offer units of limited partnership
interest ("Units") for sale to the public as described in a Registration
Statement on Form S-1, Registration No. 333-_____, originally filed on March 6,
1998 with the Securities and Exchange Commission (the "SEC") pursuant to the
Securities Act of 1933, as amended (the "Securities Act") (such Registration
Statement in the form in which it became effective as of the date hereof, being
herein referred to as the "Registration Statement"; and the prospectus included
therein or, if so filed, as first filed pursuant to SEC Rule 424(b) as the
"Prospectus");
WHEREAS, the Fund plans to offer Shares to non-U.S. investors pursuant to
an Offering Memorandum (the "Offering Memorandum") dated February 25, 1998;
WHEREAS, the proceeds of the Units will be used to increase the
Partnership's capital contribution to the Company;
WHEREAS, the proceeds of the Shares will be used to fund the Fund's capital
contribution to the Company;
WHEREAS, the Partnership, the Fund and JWH wish to enter into this
Agreement, which, among other things, sets forth certain terms and conditions
upon which the Partnership, the Fund and JWH will form the Company and continue
to engage in commodity interest trading; and
WHEREAS, the General Partner and MLF wish to confirm certain of the
obligations which they have agreed to undertake to the Company.
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of all of which are hereby acknowledged, the parties hereto agree as
follows:
1. Formation of Company; Capital Contributions.
-------------------------------------------
The Company was formed upon the filing of a Certificate of Formation with
the Secretary of State of Delaware. The Partnership, the Fund and JWH hereby
enter into this Agreement for the purpose of providing for the governance of the
Company as it engages in commodity interest trading, implementing the JWH
Strategic Allocation Program. The assets and liabilities of each Joint Venture
(including open commodity interest positions) will be contributed to the Company
as soon as practicable after the date hereof, and the Partnership and the Fund
shall subsequently contribute substantially all the net proceeds raised from the
sale of the Units and the Shares, respectively, to the Company. The Partnership
and the Fund may each retain an administrative reserve, not to exceed $250,000
at any one time outstanding, of funds not contributed to the Company.
-2-
<PAGE>
The Partnership and the Fund may each withdraw funds from the Company (to
the extent of their respective investment therein) on three (3) business days'
notice; provided, that (i) the Partnership will utilize the proceeds of such
withdrawals to pay the redemption price of Units, make distributions to the
limited partners ("Limited Partners") of the Partnership or pay Partnership
expenses and (ii) the Fund will utilize the proceeds of such withdrawals to pay
the redemption price of Shares, make distributions to the shareholders
("Shareholders") of the Fund or pay Fund expenses. For greater certainty, it is
the intent of the Partnership, the Fund and JWH that the withdrawal rights of
the Partnership and the Fund in no respect abrogate or qualify the provisions
hereof regarding the intended term of, and the parties' respective options to
terminate, this Agreement.
JWH agrees not to withdraw any funds from the Company -- other than in
respect of credits made to JWH's capital account in respect of bookkeeping
entries to the New Profits Account as described in Section 8 hereof -- prior to
the dissolution of the Company.
2. Registered Office; Books and Records.
------------------------------------
The address of the registered office of the Company is Corporation Trust
Center, 1209 Orange Street, Wilmington, Delaware. The books and records of the
Company shall be kept at the office of the Partnership, World Financial Center,
Sixth Floor, South Tower, New York, New York 10080-6106.
3. Undertakings in Respect of the Continuous Public Offering of the
Units and the Offering of the Shares.
---------------------------------------------------
(a) JWH agrees to cooperate and use its best efforts in connection
with: (i) the Partnership's preparation of the Registration Statement, provided
that the Registration Statement is not inconsistent with this Agreement; (ii)
the Partnership's filing of any supplement or amendments to the Prospectus with
the SEC, CFTC and the NFA; (iii) the Partnership's preparation and filing with
appropriate governmental authorities of any amendments to, or supplementary
information relating to, applications for registration of the Units under the
securities or Blue Sky laws of such jurisdictions as the Partnership may deem
advisable and the taking of such other actions not inconsistent with this
Agreement as the Partnership may determine to be necessary or advisable in order
to make the proposed offer and sale of Units lawful in such jurisdictions as the
Partnership may deem advisable; and (iv) causing the Registration Statement, as
it may be amended, and such applications, as they may be amended, to become
effective under the Securities Act and the securities or Blue Sky laws of such
jurisdictions as the Partnership may deem appropriate. JWH agrees to make all
necessary or appropriate disclosures regarding itself and its principals, their
trading performance, method and systems, customer accounts and otherwise as may
be required or advisable, in the reasonable judgment of the Partnership, to be
made in the Registration Statement and such applications and any amendments
thereto. Notwithstanding the foregoing, JWH shall not be required to take any
steps which might reasonably be deemed to constitute JWH a "co-issuer" or
promoter of the Partnership or of any other issuer created in connection with
the transactions contemplated hereby which may be deemed to be issuing
securities to the public.
-3-
<PAGE>
The Company shall be a "co-issuer" with the Partnership of the Units
for purposes of the Securities Act.
The Partnership may, in its sole discretion, discontinue the offering
of the Units at any time.
(b) JWH agrees to cooperate and use its best efforts in connection
with: (a) the Fund's preparation of any amendments to the Offering Memorandum
not inconsistent with this Agreement; (b) the taking of such other actions not
inconsistent with this Agreement as the Fund may determine to be necessary or
advisable in order to make the proposed offer and sale of Shares lawful in such
jurisdictions as the Fund may deem appropriate. JWH agrees to make all
necessary or appropriate disclosures regarding itself and its principals, their
trading performance, method and systems, customer accounts and otherwise as may
be required or advisable, in the reasonable judgment of the Fund, to be made in
the Offering Memorandum. Notwithstanding the foregoing, JWH shall not be
required to take any steps which might reasonably be deemed to constitute JWH a
"co-issuer" or promoter of the Fund or of any other issuer created in connection
with the transactions contemplated hereby.
The Fund may, in its sole discretion, discontinue the offering of the
Shares at any time.
4. Undertaking of the Partnership and the Fund in Respect of the
Public Offering of the Units and the Exclusively Non-U.S. Offering
of the Shares.
------------------------------------------------------------------
(a) The Partnership agrees that it will use best efforts in offering
the Units as contemplated by the Registration Statement and Prospectus.
Notwithstanding the foregoing, the Partnership shall at all times have sole
discretion in the direction and management of the offering of the Units and in
doing so shall be empowered in its absolute discretion to, among other things:
withdraw the Registration Statement and any amendments thereto from both or
either of the SEC and the CFTC (and so notify the NFA), as the Partnership may
deem appropriate; withdraw the applications filed under the securities or Blue
Sky laws of the various jurisdictions from any or all of such jurisdictions, as
the Partnership may deem appropriate; amend, enlarge, reduce or modify the terms
of the offering of the Units; and terminate the offering or the registration of
the Units with the SEC or any of such jurisdictions at any time.
The Partnership, the General Partner and MLF each agrees to make all
necessary or appropriate disclosures regarding itself and each of its respective
principals as may be required or advisable, in the reasonable judgment of the
Partnership, to be made in the Registration Statement and in any applications
made in respect of the sale of the Units to state securities or Blue Sky
commissioners.
(b) The Fund agrees that it will use best efforts in offering the
Shares as contemplated by the Offering Memorandum. Notwithstanding the
foregoing, the Fund shall at all times have sole discretion in the direction and
management of the offering of the Shares and in doing
-4-
<PAGE>
so shall be empowered in its absolute discretion to, among other things, amend,
enlarge, reduce or modify the terms of the offering of the Shares; and terminate
the offering of the Shares at any time.
The Fund, the Sponsor and MLF each agrees to make all necessary or
appropriate disclosures regarding itself and each of its respective principals
as may be required or advisable, in the reasonable judgment of the Fund, to be
made in the Offering Memorandum.
5. Management of the Company.
-------------------------
It is the intent of the Partnership, the Fund and JWH that the
Partnership and JWH shall divide the managerial responsibility for the operation
of the Company, with the Partnership managing the operations of the Company
(effectively in the same capacity as a sole general partner of a limited
partnership) while JWH directs its commodity trading pursuant to the JWH
Strategic Allocation Program, as described in the Prospectus (effectively in the
same capacity as a special limited partner in a limited partnership). The Fund
itself shall act in the equivalent capacity of a limited partner, taking no part
in the control, management or trading of the Company. To that end, the
Partnership, the Fund and JWH have agreed upon the following allocations of
manage ment responsibilities for the Company.
(a) Partnership to Act as Manager. The Partnership shall act as the
-----------------------------
manager of the Company and shall have charge of its day-to-day operations. The
Partnership's authority as manager of the Company shall include, without
limitation, the authority (i) to act as the "tax matters partner" of the Company
pursuant to the Internal Revenue Code and to make, or refrain from making, any
election as contemplated by Section 754 of the Internal Revenue Code, (ii) to
pay from the Company's assets any expenses of the Company and determine the
profit-sharing allocations contemplated by Section 8 hereof, (iii) to select the
Company's commodity broker(s) and the banks or forward contract dealers with
which the Company will trade in the forward markets, (iv) to deposit assets of
the Company with such brokers, dealers or banks, as the Company may deem
advisable, (v) to keep such records of the Company's activities as the
Partnership may deem appropriate or as required by law, (vi) to cause to be
prepared all tax returns and to effect the payment of all taxes required of the
Company, (vii) to contest any taxes described in (vi) by appropriate legal
proceedings to the extent that the Partnership in good faith determines that
doing so is in the best interests of the Company, (viii) to determine how to
classify various items for federal and state income tax purposes on the Company
tax return and (ix) to direct all investment of the Company's assets, other than
in commodity interests.
Except as otherwise expressly set forth in Section 6(b) below, the
Partnership alone shall have full authority and responsibility to conduct all
operations of the business of the Company and to enforce (or waive) the
Company's rights under any instrument or agreement to which it may be or become
a party.
The Partnership shall elect on behalf of the Company for the Company
to be treated as a qualified fund under Section 988(c)(i)(E)(iii)(V) of the
Internal Revenue Code and regulations promulgated thereunder.
-5-
<PAGE>
The Partnership will review and approve or disapprove all executing
brokers proposed by JWH for the Company. The Partnership agrees that it will
only disapprove a proposed executing broker suggested by JWH for cause and that
if approved, the Partnership and the Company will not hold JWH liable for any
error or breach of contract by any such executing broker, barring negligence,
misconduct or bad faith on the part of JWH.
Irrespective of what broker executes the Company's trades, such trades
shall in all instances be cleared at MLF, and MLF shall bear all the costs
associated with the "give-ups" of trades executed by non-MLF brokers to MLF from
the brokerage commissions paid to MLF by the Company.
In the event that JWH becomes disabled (by reason of its bankruptcy or
insolvency or by reason of the incapacity or death of Mr. John W. Henry) from
discharging its managerial responsibilities under Section 6(b) hereof, the
Partnership, as manager, may assume such responsibilities.
(b) Trading Authority of JWH. JWH shall determine the investment and
------------------------
reinvest ment of the assets and funds of the Company in futures and forward
contracts in commodities and in commodity options (and any related transactions
in physical commodities to the extent contemplated by JWH's trading method and
systems) on the terms and conditions set forth in this Agreement. As set forth
in the Prospectus and the Offering Memorandum, JWH's trading management of the
Company will include allocating Partnership and Fund assets among the different
JWH Trading Programs selected from time to time by JWH for the Partnership and
the Fund.
Neither the Partnership nor the Fund will participate with JWH in
determining the investment and reinvestment of the assets and funds of the
Company, except that the Partnership, as manager of the Company, may override
the trading instructions of JWH to the extent that the Partnership determines
that doing so is necessary for the protection of the Company. The Partnership,
as manager of the Company, may withdraw capital at any time to pay any expenses
of the Company and the Partnership and the Fund may withdraw capital from the
Company as contemplated by Section 1. JWH shall have no liability as a result
of liquidating market positions as a result of any such withdrawals.
The Company will instruct all brokers with which the Company opens an
account to deliver copies of trading confirmations and statements for such
account directly to JWH.
JWH may, in its discretion, alter the trading method and systems it
uses in participating in the management of the Company's assets, provided that
JWH determines that such alteration is in the best interests of the Company.
JWH will give prompt notice in writing to the Partnership and the Fund of any
material change in such trading methods or systems, in the management of JWH or
in the personnel overseeing the Company trading, but, as set forth in the
Prospectus and the Offering Memorandum, shall not be required to notify the
Partnership or the Fund of changes in commodity futures traded or of
modifications, additions or deletions to JWH's computer programs or trading
systems. JWH will provide the Partnership and the Fund with such assistance in
preparing
-6-
<PAGE>
such monthly and annual reports for their investors reflecting the trading
results of the Company as the Partnership or the Fund may reasonably request.
JWH shall participate to the extent that the Partnership or the Fund
may reasonably request, in "road shows" and other promotional activities
relating to the marketing of the Units or the Shares, provided that such
--------
participation shall in no respect adversely affect JWH's trading activities on
behalf of other clients on its own account or cause JWH to register as a broker-
dealer or as doing business in any state where JWH would not otherwise be
required to do so. JWH shall pay the costs of its reasonably requested
participation in such road shows. JWH shall have the right to review and give
written approval in advance of all sales, promotional or informational material
using its name relating to the Partnership or the Fund.
In the event that the Partnership becomes disabled (by reason of its
bankruptcy or insolvency or by reason of the resignation of MLIP as its general
partner) from discharging its managerial responsibility under Section 6(a)
hereof, JWH, as a member of the Company, may assume such responsibilities.
(c) Standard of Liability of JWH. Notwithstanding the fiduciary
----------------------------
duty imposed by applicable law on JWH as a member of the Company, in recognition
of the nature of JWH's participation in the management of the Company and the
unusual risk of liability to which such participation might expose JWH, the
Partnership and the Fund herewith agree that in respect of JWH's participation
in the commodity trading decisions of the Company none of JWH, its affiliates,
any employees of JWH or any of its affiliates or any person who controls JWH or
any of its affiliates (within the meaning of Section 15 of the Securities Act)
shall be liable to the Company, the Fund or the Partnership except by reason of
acts or omissions due to misconduct or negligence or by reason of not having
acted in good faith in the reasonable belief that such actions or omissions were
in, or not opposed to, the best interests of the Company.
(d) Standard of Liability of John W. Henry. John W. Henry shall have
--------------------------------------
no liability to the Partnership, the Fund or the Company under this Agreement or
in connection with the transactions contemplated by this Agreement except for
the fraud or willful misconduct by John W. Henry.
6. Confidentiality.
---------------
The Partnership, the Fund, the General Partner and MLF each
acknowledges that the trading instructions, method and systems of JWH are the
property of JWH; the Partnership, the Fund, the General Partner and MLF each
further agrees that it will keep confidential and will not disseminate such
instructions, method or systems (or any such system) to any of its limited
partners or shareholders (as the case may be), any of the customers, employees,
agents, officers or directors of its commodity broker or to any others. Any
such information acquired by the Partnership, the Fund, the General Partner or
MLF shall be used solely to monitor JWH's trading on behalf of the Company. JWH
is a member of the Company, but JWH is in no respect contributing its
proprietary trading method or systems to the Company, except to the extent that
JWH uses such method and systems in participating in the management of the
Company. Nothing here shall require JWH to
-7-
<PAGE>
disclose any details concerning its trading method or systems that it deems to
be proprietary information.
7. Management Fee.
--------------
MLF shall pay JWH a monthly Management Fee equal to .33 of 1% of the
sum of the month-end Net Assets of the Company, increased or decreased by the
trading profits (losses) and interest income of the Company during the month.
For this purpose, Net Assets shall have the same meaning as provided in the
Registration Statement and the Offering Memorandum; provided, however, that the
accrued brokerage commissions due as of each month-end and taken into account in
calculating Net Assets of the Partnership and the Fund shall be reduced, for
purposes of calculating such Management Fees by the amount of the accrued
Management Fee then being calculated.
8. Capital Accounts; Allocations and Distributions.
-----------------------------------------------
(a) Capital Accounts. A capital account shall be maintained by the
----------------
Company for each of JWH, the Partnership and the Fund, and the initial capital
accounts of JWH, the Partnership and the Fund shall be the amount of their
respective contributions to the Company (initially, their respective capital
accounts in the Joint Ventures and, subsequently, the proceeds of additional
sales of Units and Shares). Such initial capital accounts shall be increased by
income ("Income"), gain ("Gain") and losses allocated to such capital accounts
and decreased by expenses and losses ("Losses") allocated to, and any
withdrawals from, such capital accounts. No interest shall be paid by the
Company on any capital account in the Company, although such capital accounts
will be entitled to their respective allocable shares of the interest income
earned on the assets of the Company.
(b) Trading Profits; New Profits Account. For purposes of
------------------------------------
determining the allocations and distributions described in this Section 8, the
Company shall calculate Trading Profit (Loss) and maintain a New Profits Account
in the following manner.
(i) For the first quarter of the Company's operation, Trading Profit
(Loss) will equal the net of realized gains and losses from closed
commodity futures (or forward) transactions, plus or minus the net
unrealized gains and losses from open commodity futures (or forward)
transactions, not including interest income, and less brokerage commissions
at an aggregate annual rate of 5% of the Company's month-end assets, but
not including Administrative Fees or ongoing offering costs (as set forth
in the Prospectus and the Offering Memorandum). For each calendar quarter
thereafter, Trading Profit (Loss) will equal the net of realized gains and
losses from closed commodity futures (or forward) transactions during such
calendar quarter, not including interest income, plus or minus the net
change in unrealized gains and losses from open commodity futures (or
forward) transactions minus 5% annual brokerage commissions (but not
including the Administrative Fee or ongoing offering costs) and any
cumulative losses since the most recent quarter-end as of which there
existed Trading Profit with respect to the Partnership or the Fund.
-8-
<PAGE>
Trading Profit shall be reduced by any "loss carryforwards"
(calculated in the same manner as cumulative losses since the most recent
quarter-end as of which there existed Trading Profit with respect to the
capital account of the Partnership or the Fund, as described in the
preceding paragraph) attributable to the capital accounts of the
Partnership and the Fund in their respective Joint Ventures, immediately
prior to the initial contribution of the assets and liabilities of the
Joint Ventures to the Company.
(ii) Fifteen percent (15%) of any Trading Profit as of the end of
each calendar quarter during the term of this Agreement shall be credited,
as a bookkeeping entry only, to the New Profits Account. The New Profits
Account is not a capital account of the Company or of any member, and
credits to such Account shall in no respect reduce any member's capital
account.
(iii) In the event that the Partnership or the Fund makes any
withdrawals from the Company as of a month-end (or other date) which is not
a quarter-end, credits shall be made to the New Profits Account in the
amount of 15% of any Trading Profit attributable to the amounts so
withdrawn. Trading Profit shall also be proportionately reduced as of such
withdrawal date for purposes of determining whether any Trading Profit
remains as of the end of the quarter in which such withdrawal occurs. In
the event that cumulative Trading Losses (including any Trading Losses
carried over in respect of "loss carryforwards" attributable to the
respective capital accounts of the Partnership and the Fund in their
respective Joint Ventures at the time of the Joint Ventures' contribution
of all of their assets and liabilities to the Company) exist at the time of
any such withdrawal (net of any new capital contributions made at the time
of such withdrawals from the proceeds of any new Units or Shares then sold
by the Partnership or the Fund, respectively), such losses shall also be
proportionately reduced for purposes of determining future credits to the
New Profits Account.
(iv) An example of the calculation of the Company's New Profits
Account allocations is set forth in Schedule I hereto and incorporated by
reference herein; Net Profits Account allocations shall be calculated
separately in respect of the capital accounts of the Partnership and the
Fund, respectively.
(c) Allocation of Income and Gains. Income and Gains of the Company
------------------------------
(allocating Gains and Losses from each of the Company's trades for such purposes
on a gross, not a net, basis during any period when a mixed straddle account
election is not in effect for the Company) shall be allocated as of the end of
each calendar year as follows:
(i) First, Gains shall be allocated to JWH until the aggregate amount
of Gains allocated to JWH pursuant to this Section 8(c)(i) for the current
and all prior periods equals the sum of the bookkeeping credits to the New
Profits Account during the current and all prior periods (including the
additional bookkeeping credits contemplated by Section 8(h) below); and
-9-
<PAGE>
(ii) Second, all Income and all remaining Gains shall be allocated to
the Partnership, the Fund and JWH in proportion to their beginning of the
month capital account balances for each month when such Income and
remaining Gain accrued.
(d) Allocation of Losses. Losses of the Company (allocating Gains
--------------------
and Losses from each of the Company's trades for such purposes on a gross, not a
net, basis during any period where a mixed straddle account election is not in
effect for the Company) shall be allocated, as of the end of each calendar year
to the Partnership, the Fund and JWH in proportion to their beginning of the
month capital account balances for each month when such Losses accrued.
(e) Pro Rata Allocations. All allocations of gains, income, losses
--------------------
and deductions for federal income tax purposes shall be made to the members in
proportion to the manner in which Income, Gain and Losses are allocated to them
pursuant to paragraphs (c) and (d) hereof. All allocations made hereunder shall
for federal income tax purposes be made pro rata from each class or kind of
income, including, for example, short-term capital gain or loss and long-term
capital gain or loss and operating income or loss (to the extent that the
federal income tax law distinguishes between long- and short-term gain).
(f) Distributions. Distributions shall be made to the Partnership,
-------------
the Fund and JWH as follows:
(i) Subject to Section 1 hereof, the Partnership and the Fund may
withdraw amounts only so long as such distributions do not exceed the
amount of cash that would be distributable to the Partnership or the Fund,
as applicable pursuant to Section 20 hereof, if the Company were dissolved,
all its assets liquidated, and gains and losses allocated pursuant to
Section 8(c) and (d) hereof, and such distributions may be made at the end
of any month;
(ii) JWH may withdraw amounts at the end of each year or period for
which allocations are made that do not exceed the balance of its
allocations made with respect to the Profit Sharing Account.
(g) Dissolution of the Company. Upon any dissolution of the Company,
--------------------------
the Partnership and the Fund each agree to change its name so that it no longer
includes the phrase "JWH Strategic Allocation."
(h) Additional New Profits Account Credit. Additional credits to the
-------------------------------------
New Profits Account shall accrue from time to time at prevailing rates for 91-
day Treasury bills to the extent credits have been made to the New Profits
Account but there have been no allocations of Gains with respect to such New
Profits Account credits. Alternatively, JWH may elect to have the New Profits
Account participate in the profits and losses of the Company as if such New
Profits Account were a capital account in the Company (with the parties agreeing
in writing that appropriate adjustments to the capital and tax allocations
provided herein shall be made in the event that JWH elects such alternative).
-10-
<PAGE>
9. Representations, Warranties and Covenants
of JWH, the Partnership and the Fund
-------------------------------------------
(a) JWH hereby restates all representations and warranties made by it
in the Selling Agreements (as amended) relating to the offering of the Units and
the Shares, with the same effect as if such representations and warranties were
set forth verbatim herein.
(b) The General Partner hereby restates all representations and
warranties made by it in the Selling Agreements (as amended) relating to the
offering of the Units and the Shares with the same effect as if such
representations and warranties were set forth verbatim herein.
(c) The Partnership hereby makes, on its own behalf, the
representations and warranties made by the General Partner in the Selling
Agreement (as amended) relating to the Partnership, as if such representations
and warranties were set forth verbatim herein as represen tations and
warranties of the Partnership.
(d) The Fund hereby makes on its own behalf, the representations and
warranties made by it in the Selling Agreement (as amended) relating to the
Fund, as if such representations and warranties were set forth verbatim herein
as representations and warranties of the Fund.
10. Amendment.
---------
This Agreement may not be amended except by the written consent of
each of the parties hereto. Each party hereto further agrees that the Company
is an arrangement based upon mutual consent and that such party will not
withdraw its consent to the Company provided that the Company is operated in
accordance with the terms hereof.
11. Indemnification and Standard of Liability of JWH.
------------------------------------------------
In view of the nature of the managerial responsibilities which JWH has
agreed to assume on behalf of the Company, the Partnership, the Fund and the
Company agree that JWH is exposed to potential liabilities to a degree greater
than the Partnership and the Fund in participating in the Company and that,
accordingly, the following indemnification of JWH is appropriate.
(a) In Actions by Third Parties. The Partnership or the Fund (as
---------------------------
applicable) shall each indemnify, defend and hold harmless JWH, its affiliates
and their respective officers, directors, employees, shareholders and
controlling persons (within the meaning of Section 15 of the Securities Act)
from and against any and all losses, claims, damages, liabilities (joint and
several), costs and expenses (including any investigatory, legal and other
expenses incurred in connection with, and any amounts paid in, any settlement;
provided, that the Partnership or the Fund (as applicable) shall have approved
- --------
such settlement) resulting from a demand, claim, lawsuit, action or proceeding
relating to any of such person's actions or capacities relating to the business
or activities of the Partnership, the Fund or the Company (other than a demand,
claim, lawsuit, action or proceeding described in the next paragraph); provided,
--------
that the conduct of such person which was the subject of the demand, claim,
lawsuit, action or proceeding did not constitute gross negligence, willful or
wanton
-11-
<PAGE>
misconduct, a breach of this Agreement or a breach of fiduciary obligations,
arising under applicable law or a violation of applicable law, to the Company
and was done in good faith and in a manner such person reasonably believed to be
in, or not opposed to, the best interests of the Company. The termination of any
demand, claim, lawsuit, action or proceeding by settlement shall not, of itself,
create a presumption that the conduct in question was not undertaken in good
faith and in a manner reasonably believed to be in, or not opposed to, the best
interests of the Company.
MLIP shall indemnify the Partnership and the Fund to the extent that
the foregoing indemnity exceeds in liability to the Partnership or the Fund the
indemnity that would have been due pursuant to Section 11(b) hereof.
(b) In Actions by the Partnership or the Fund or in Right of the
------------------------------------------------------------
Partnership or the Fund. In any demand, claim, lawsuit, action or proceeding
- -----------------------
brought by the Partnership or the Fund in and relating to its capacity as a
member or brought by a partner (including the General Partner) in the
Partnership in right of the Partnership or by a Shareholder of the Fund in right
of the Fund alleging damages arising from activities of JWH as such member, its
affiliates, and their respective officers, directors, employees, shareholders
and controlling persons (within the meaning of Section 15 of the Securities Act)
shall be indemnified to the extent and subject to the conditions described in
the preceding paragraph, but with the qualification that the term "negligence"
shall be substituted for the term "gross negligence" and the term "misconduct"
shall be substituted for the term "willful or wanton misconduct" in such
paragraph.
No indemnity under this Section 11 shall, however, be available for
JWH, its affiliates, their respective officers, directors, employees,
shareholders and controlling persons (within the meaning of Section 15 of the
Securities Act) for losses, claims, damages, liabilities (joint and several),
costs or expenses resulting from actions for which JWH has agreed to indem nify
various parties pursuant to the Selling Agreement relating to the offering of
the Units or the Shares. No indemnification under this Section 11 shall be made
in respect of any demand, claim, lawsuit, action or proceeding relating to
activities of the person to be indemnified which have been adjudged, by a court
having jurisdiction with respect to the matter upon entry of a final judgment,
not to have met the foregoing standards of indemnity, as the case may be,
unless, and except to the extent that, such court determines that, despite such
judgment, such person is fairly and reasonably entitled to indemnity.
To the extent that JWH or any other indemnified party described in the
first two paragraphs of this Section 11 is successful, on the merits or
otherwise, in the defense of any demand, claim, lawsuit, action or proceeding
referred to in such paragraphs, the Company shall indemnify such person against
the costs and expenses (including any investigatory, legal and other expenses)
actually and reasonably incurred by such indemnified party in connection
therewith.
Any indemnification required by the first two paragraphs of this
Section 11, unless ordered or expressly permitted by a court, shall be made by
the Company, the Partnership or the Fund (as applicable) only upon a
determination by independent legal counsel in a written opinion that the conduct
which is the subject of the claim, demand, lawsuit, action or proceeding with
respect
-12-
<PAGE>
to which indemnification is sought meets the applicable standard set forth in
either of the first two paragraphs of this Section 11, as the case may be.
The indemnification provisions of this Section 11 shall not increase
the liability of any partner in the Partnership or Shareholder in the Fund
beyond his or her capital and profits (exclusive of distributions or other
returns of capital, including redemptions, if any) in the Partnership or the
Fund, as applicable; furthermore, the General Partner shall make whole the
Partnership for any indemnification claim to which it is made subject under
Section 11(a) for which it would not have been liable had the indemnification
standard set forth in Section 11(b) been applicable to such claim.
(c) Standard of Liability. JWH, its affiliates and their respective
---------------------
officers, directors, employees, shareholders and controlling persons (within the
meaning of Section 15 of the Securities Act) shall not be liable to the Company,
the Fund or any of the Shareholders in the Fund, the Partnership, or any of the
Partners in the Partnership except (i) by reason of acts or omissions in breach
of this Agreement, (ii) due to misconduct or negligence, or (iii) by reason of
not having acted in good faith and in the reasonable belief that such actions or
omissions were in, or not opposed to, the best interests of the Partnership or
the Fund, as applicable.
12. Indemnification of the Partnership and the Fund.
-----------------------------------------------
JWH shall indemnify, defend and hold harmless the Partnership, the
General Partner, the Fund, their respective affiliates and their respective
directors, officers, shareholders, employees and controlling persons from and
against any and all losses, claims, damages, liabilities (joint and several),
costs and expenses (including any reasonable investigatory, legal and other
expenses incurred in connection with, and any amounts paid in, any settlement;
provided that JWH shall have approved such settlement) resulting from a demand,
claim, lawsuit, action or proceeding relating to any action or omission of JWH
or any of its respective officers, directors or employees relating to the
business or activities of such person under this Agreement or relating to the
management of the account of the Partnership or the Fund (as applicable); and
provided further that the action or omission of such person which was the
subject of the demand, claim, lawsuit, action or proceeding constituted
negligence or misconduct or a breach of this Agreement or was an action or
omission taken otherwise than in good faith and in a manner reasonably believed
to be in, or not opposed to, the best interests of the Partnership or the Fund
(as applicable). No indemnification shall be due hereunder, however, for any
matters for which the Partnership, the General Partner, the Fund, its affiliates
and their respective directors, officers, shareholders, employees or controlling
persons are indemnified under the Selling Agreement (although indemnity shall be
due under the Selling Agreement).
-13-
<PAGE>
13. Term.
----
Unless sooner terminated pursuant to Section 14 hereof, this Agreement
shall continue in effect until (i) September 30, 1998 in which the Company
commences trading or (ii) the earlier termination of the Partnership and the
Fund (and hence of the Company); provided, however, that the indemnity
-------- -------
provisions set forth in Sections 11 and 12 of this Agreement shall survive any
such termination and remain in effect for 3 years from the date of the
termination of this Agreement.
This Agreement may be renewed, as of September 30, 1998, on the same
terms for one additional one-year period at the option of the Partnership and
the Fund (JWH hereby consenting in advance to such renewal), such option to be
exercised in respect of each renewal by written notice delivered to JWH no more
than 60 and no less than 30 days prior to the date this Agreement would
otherwise terminate.
14. Termination.
-----------
The Partnership and the Fund may, as of the end of any calendar month
upon 30 calendar days' notice, terminate this Agreement and thereby dissolve the
Company.
This Agreement may be terminated at the discretion of JWH, as of the
following month-end, should any of the following occur: (1) the Company's Net
Asset Value decreases to less than $40,000,000 as of the close of business on
the last business day of a month; (2) JWH has determined to cease managing any
customer accounts pursuant to the Strategic Allocation Program (in which case,
however, JWH will negotiate in good faith with MLIP in an attempt to restructure
the trading program of the Company); (3) the Partnership elects, other than as
provided in Section 5, to override the trading signals of JWH against the advice
of JWH; (4) in the event that the trading policies applicable to the Company are
amended without the consent of JWH and as amended, would, in the reasonable
judgment of JWH, materially and adversely affect the trading approach used by
JWH for the Company, the Partnership or the Fund; or (5) the General Partner's
registration as a commodity pool operator is terminated.
Subsequent to September 30, 1999 (assuming that the Partnership and
the Fund renew this Agreement as of September 30, 1998 for an additional one-
year term, JWH may, as of the end of any calendar month upon 30 calendar days'
notice, terminate this Agreement, unless this Agreement, as then extended
contains other termination provisions.
This Agreement shall also terminate and the Company shall dissolve
upon (a) the mutual decision of JWH, the Fund and the Partnership, (b) the
bankruptcy of JWH or both the Partnership and the Fund, (c) the involuntary
dissolution of JWH, the Partnership or the Fund, (d) any event which makes it
unlawful to carry on the business of the Company or (e) December 31, 2028.
For purposes of the foregoing paragraph of this Agreement, the
"bankruptcy" of JWH, the Company, the Partnership or the Fund shall be deemed to
have occurred upon the happening of any of the following: (i) the filing of an
application by such member for, or a consent to, the appointment of a trustee of
its assets; (ii) the filing by such member of a voluntary petition in
-14-
<PAGE>
bankruptcy or the filing of a pleading in any court of record admitting in
writing its inability to pay its debts as they come due; (iii) the making by
such member of a general assignment for the benefit of creditors; (iv) the
filing by such member of an answer admitting the material allegations of, or its
consenting to, or defaulting in answering a bankruptcy petition filed against it
in, any bankruptcy proceeding; or (v) the entry of an order, judgment or decree
by any court or competent jurisdiction adjudicating such member as bankrupt or
appointing a trustee of its assets, and such order, judgment or decree
continuing unstayed and in effect for a period of sixty (60) consecutive days.
15. Expenses.
--------
Each party shall, in all events, bear its own expenses in connection
with the negotiation, execution and performance of this Agreement and the
preparation for and consum mation of the offering of the Units and the Shares.
16. Bank Accounts.
-------------
All of the Company's cash receipts shall be deposited in such banks or
other depositories as from time to time shall be chosen by the Partnership.
Withdrawals from said accounts shall be made by the signature, facsimile or
otherwise, of such person or persons, and in such manner, as shall be authorized
by the Partnership.
17. Accounting Decisions.
--------------------
All decisions for the Company as to accounting principles, for its
book, tax or other purposes (such decisions may be different for each such
purpose), shall be made by the Partnership in consultation with and with the
approval of the Fund and JWH.
18. Books and Records.
-----------------
Each of the parties hereto or its authorized representatives may
examine (and make copies at its own expense) of any of the books and records of
the Company at any time, and without notice, during regular business hours, at
the address set forth in Section 2 hereof.
19. Annual Reports.
--------------
As soon as practicable after the end of each fiscal year of the
Company, the Partnership shall cause the Company to furnish to the Partnership
the Schedule K-1 required by the Internal Revenue Service in respect of the
Company.
-15-
<PAGE>
20. Fiscal Year.
-----------
The fiscal year of the Company shall end on the 31st day of December
in each year, unless the Internal Revenue Service requires the Company to adopt
a different fiscal year or the Company terminates during a calendar year
(thereby terminating the Company's final fiscal year).
21. Dissolution.
-----------
Upon dissolution of the Company, the assets shall be liquidated and
the proceeds shall be applied to: (i) payment of Company debts, including the
expenses of the liquidation; and (ii) the deposit in a trust account of a
reasonable reserve for payment of contingent liabilities and expenses of the
Company, as determined by the Partnership. As soon as reasonably possible and
after payment of any contingencies arising during that time, the balance
remaining in the trust account shall be distributed to JWH, the Partnership and
the Fund in proportion to their respective general capital accounts as of the
date of dissolution.
22. Liquidator.
----------
The Partnership shall act as liquidator of the Company upon any
dissolution thereof, other than one due to the bankruptcy or involuntary
dissolution of the Partnership. During the liquidation and dissolution of the
Company, the Partnership may continue to act on behalf of the Company for the
sole purpose of winding up the Company.
23. Freedom of Action.
-----------------
Nothing contained in this Agreement shall be construed to prevent or
prohibit the Partnership, the Fund or JWH from engaging separately from the
Company in any lawful fashion, whether individually or together with third
parties, in trading in the commodity markets or in any other activity, without
any obligation to account to either the other party or to the Company for such
activities. Nothing contained in this Agreement shall be construed to
constitute any of JWH, the Partnership or the Fund, the agent, attorney-in-fact
(except as may be otherwise explicitly set forth herein) or general partner of
any other member, nor in any manner to restrict them in the conduct of their
respective businesses or activities other than the activities included with the
scope of this Agreement. This Agreement shall not confer on any member any
proprietary interest in, or subject any member to any liability for, the
business, assets, profits, losses or obligations of this other, except as and to
the extent that the members have explicitly become members pursuant to the terms
of this Agreement. In no event shall this Agreement be deemed to create any
relationship whereby one member might be held liable for the omission or
commission of the other.
24. Transactions with Affiliates.
----------------------------
The validity of any transaction, agreement or payment involving the
Company and any affiliate of JWH, the Fund or the Partnership shall not be
affected by reason of the relation ship between such member and such affiliate.
-16-
<PAGE>
25. Notices.
-------
All notices required to be delivered under this Agreement shall be in
writing (including telegraphic communication) or telephone confirmed in writing,
all such writings to be delivered personally or sent by first class mail,
postage prepaid, as follows:
if to the Partnership to:
ML JWH STRATEGIC ALLOCATION FUND L.P.
c/o Merrill Lynch Investment Partners Inc.
General Partner
World Financial Center
South Tower, Sixth Floor
New York, New York 10080-6106
Attn: John R. Frawley, Jr.
if to the Fund to:
ML JWH STRATEGIC ALLOCATION FUND LTD.
c/o Merrill Lynch Bank & Trust Co.
(Cayman) Ltd.
P.O. Box 694
British American Centre, Phase III
Fifth Floor
Grand Cayman, Cayman Islands
British West Indies
if to JWH to:
JOHN W. HENRY & COMPANY, INC.
One Glendinning Place
Westport, Connecticut 06880
Attn: David M. Kozak
Notices shall be effective when actually received.
26. GOVERNING LAW.
-------------
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO PRINCIPLES OF CONFLICTS OF
LAWS.
-17-
<PAGE>
27. Entire Agreement.
----------------
This Agreement sets forth the entire agreement of the parties relating
to the subject matter hereof except as otherwise set forth herein. This
Agreement shall be deemed to constitute the written Power of Attorney
(notwithstanding the fact that JWH as the Fund's and Partnership's fellow member
should not require any such instrument) required by regulatory authorities to
authorize JWH to exercise discretionary control over the trading of the
Company's account. The Partnership and the Fund each agrees, however, to
execute and deliver, on behalf of the Company, a separate Power of Attorney in
respect of such trading in event that JWH should so request.
28. Representations and Warranties in the Registration
Statement and the Offering Memorandum
---------------------------------------------------
JWH and the General Partner/Sponsor each acknowledge, on behalf of
itself and its principals, that the Registration Statement and the Offering
Memorandum each states that JWH, the General Partner/Sponsor and their
respective principals have made various representations and warranties, and that
the accuracy of the Registration Statement and the Offering Memorandum is of
material importance to the success of the Company. JWH and the General
Partner/Sponsor will have the opportunity to approve any such references in the
Prospectus and each agrees, on behalf of itself and its principals, that all
such statements shall be incorporated by reference herein and made a part hereof
as set forth verbatim herein.
29. Exclusivity.
-----------
JWH agrees that it will not manage the assets of any fund pursuant to
the JWH Strategic Allocation Program other than funds sponsored by MLIP or an
affiliate until the end of the twelfth full month after the first sale of Units
by the Partnership pursuant to the Registration Statement.
30. Purpose of Company.
------------------
The members intend to create a limited liability company separate from
JWH, the Partnership and the Fund, and the purpose of the Company is to conduct
the commodities trading activities described in the Prospectus and the Offering
Memorandum. The members agree to report for accounting, tax and other purposes
the transactions contemplated by this Agreement consistently with the terms of
this Agreement and the intent expressed hereby.
31. Submission to Jurisdiction; Waivers. Each party hereby
-----------------------------------
irrevocably and unconditionally:
(a) submits for itself and its property in any legal action or
proceeding relating to this agreement or any other credit document, or for
recognition and enforcement of any judgement in respect thereof, to the
non-exclusive general jurisdiction of the courts of the State of New York,
the courts of the United States of America for the Southern District of New
York, and the appellate courts from any thereof;
-18-
<PAGE>
(b) consents that any such action or proceeding may be brought in such
courts, and waives trial by jury and any objection that it may now or
hereafter have to the venue of any such action or proceeding in any such
court or that such action or proceeding was brought in an inconvenient
court and agrees not to plead or claim the same;
(c) agrees that, if it shall not have a registered agent for service
of process in the State of New York, then service of process may be
effected by mailing a copy thereof by registered or certified mail (or any
substantially similar form of mail), as the case may be, at its address set
forth in Section 25 or at such other address of which the other parties
hereto shall have been notified; and
(d) agrees that nothing herein shall affect the right to effect
service of process in any other manner permitted by law or shall limit the
right to sue in any other jurisdiction.
32. Severability.
------------
If any provision of this Agreement, or the application of any
provision to any person or circumstance, shall be held to be inconsistent with
any present or future law, ruling, rule, or regulation of any court or
governmental or regulatory authority having jurisdiction over the subject matter
hereof, such provision shall be deemed to be rescinded or modified in accordance
with such law, ruling, rule, or regulation or modified in accordance with such
law, ruling, rule, or regulation, and the remainder of this Agreement, or the
application of such provision to persons or circumstances other than those as to
which it shall be held inconsistent, shall not be affected thereby; provided
that alteration of this Agreement in this manner shall not have a material
effect on the terms hereof.
33. Counterparts.
------------
This Agreement may be executed in counterparts, each of which shall be
deemed an original but all of which together shall constitute one and the same
instrument.
34. Arbitration.
-----------
Each party hereto consents and submits to the jurisdiction of any
applicable arbitral body located within the County of New York, City of New York
and State of New York. The parties hereto agree to execute and deliver a
consent to arbitration separate and distinct from this Agreement, as required by
applicable CFTC rules.
-19-
<PAGE>
IN WITNESS WHEREOF, this Limited Liability Company Agreement has been
executed by the parties hereto as of the day and year first above written.
ML JWH STRATEGIC ALLOCATION
FUND L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.
General Partner
By ______________________________
John R. Frawley, Jr.
President and Chief
Executive Officer
ML JWH STRATEGIC ALLOCATION
FUND LTD.
By ______________________________
Name:
Title:
JOHN W. HENRY & COMPANY, INC.
By ______________________________
Name:
Title:
-20-
<PAGE>
Confirmed:
not as a Member, but solely for the limited
purposes set forth herein
MERRILL LYNCH INVESTMENT
PARTNERS INC.
By ______________________________
John R. Frawley, Jr.
President and Chief
Executive Officer
Confirmed:
not as a Member, but solely for the limited
purposes set forth herein
MERRILL LYNCH FUTURES INC.
By ______________________________
-21-
<PAGE>
SCHEDULE
SAMPLE NEW PROFITS ACCOUNT CREDIT
---------------------------------
Assume that the Net Asset Value of the Partnership's Capital Account
in the Company on July 1, 1998 is $100,000,000 and that no loss carryforwards
exist. If at the end of July 1998, trading profit recognized on both open and
closed futures positions, less brokerage commissions and Administrative Fees
calculated together at a 5% of month-end assets annual rate, not including
interest income and not reduced by organizational and initial offering cost
reimbursement payments and ongoing offering costs, equaled $5,000,000, all of
such profit would constitute Trading Profit. Consequently, Limited Partners who
redeemed their Units at such time would receive a redemption price reflecting a
Partnership Net Asset Value of approximately $104,250,000. Assume that by the
end of August 1998 subsequent losses and brokerage commissions have reduced the
initial $5,000,000 gain to a loss of ($1,800,000). A cumulative trading loss of
$1,800,000 would exist (irrespective of the fact that $6.8 million had been lost
since the previous month-end -- as opposed to quarter-end -- high). If the
Partnership thereupon withdrew 50% of its interest in the Company to fund
redemptions, such trading loss would, for purposes of future New Profits Account
credits, be reduced to $900,000. If during September 1998, trading profit
recognized on both open and closed futures positions, not including interest
income, less brokerage and Administrative Fees calculated together at a 5% of
month-end assets annual rate, and not reduced by organizational and initial
offering cost reimbursement payments, equalled $2,000,000, Trading Profit of
$1,100,000 would be accrued as of such quarter. Thus the New Profits Account
would be increased by 15% of $1,100,000, or $165,000, and JWH would be entitled
to a priority profit allocation of $165,000 as profits accrued to the
Partnership's Capital Account in the Company.
-22-
<PAGE>
EXHIBIT
ACKNOWLEDGMENT OF RECEIPT OF DISCLOSURE DOCUMENT
The undersigned hereby acknowledges receipt of the Disclosure Document
dated ___________, 1998 of John W. Henry & Company, Inc. in connection with John
W. Henry & Company, Inc.'s implementation of the Strategic Allocation Program
for ML JWH Strategic Allocation Fund L.P.
ML JWH STRATEGIC ALLOCATION
FUND L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC.,
General Partner
By ______________________________
Name:
Title:
The undersigned hereby acknowledges receipt of the Disclosure Document
dated ___________, 1998 of John W. Henry & Company, Inc. in connection with John
W. Henry & Company, Inc.'s implementation of the Strategic Allocation Program
for ML JWH Strategic Allocation Fund Ltd.
ML JWH STRATEGIC ALLOCATION
FUND LTD.
By ______________________________
Name:
Title:
-23-
<PAGE>
ML JWH STRATEGIC JOINT VENTURE LLC
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
1. Formation of Company; Capital Contributions............... 2
2. Registered Office; Books and Records...................... 3
3. Undertakings in Respect of the Continuous Public Offering
of the Units and the Offering of the Shares............... 3
4. Undertaking of the Partnership and the Fund in Respect of
the Public Offering of the Units and the Exclusively
Non-U.S. Offering of the Shares........................... 4
5. Management of the Company................................. 5
6. Confidentiality........................................... 7
7. Management Fee............................................ 8
8. Capital Accounts; Allocations and Distributions........... 8
9. Representations, Warranties and Covenantsof JWH, the
Partnership and the Fund..................................11
10. Amendment.................................................11
11. Indemnification and Standard of Liability of JWH..........11
12. Indemnification of the Partnership and the Fund...........13
13. Term......................................................14
14. Termination...............................................14
15. Expenses..................................................15
16. Bank Accounts.............................................15
17. Accounting Decisions......................................15
18. Books and Records.........................................15
19. Annual Reports............................................16
</TABLE>
i
<PAGE>
TABLE OF CONTENTS (CONT'D)
<TABLE>
<CAPTION>
Section Page
- ------- ----
<S> <C>
20. Fiscal Year.................................................16
21. Dissolution.................................................16
22. Liquidator..................................................16
23. Freedom of Action...........................................16
24. Transactions with Affiliates................................17
25. Notices.....................................................17
26. GOVERNING LAW...............................................18
27. Entire Agreement............................................18
28. Representations and Warranties in the Registration
Statement and the Offering Memorandum.......................18
29. Exclusivity.................................................18
30. Purpose of Company..........................................18
31. Submission to Jurisdiction; Waivers.........................19
32. Severability................................................19
33. Counterparts................................................19
34. Arbitration.................................................20
Schedule: Sample New Profits Account Credit.................22
Exhibit: Acknowledgment of Receipt of Disclosure Document..23
</TABLE>
ii
<PAGE>
EXHIBIT 10.09
AMENDATORY AGREEMENT
THIS AMENDATORY AGREEMENT ("Agreement") is entered into by and among
the signatories hereto (the "Signatories") as of March ___, 1998.
W I T N E S S E T H
WHEREAS, the Signatories (or certain thereof) have previously entered
into a Selling Agreement, a Customer Agreement, a Foreign Exchange Desk Services
Agreement, an Investment Advisory Contract and a Custody Agreement
(collectively, the "Original Agreements") relating to the distribution of units
of limited partnership ("Units") in, and the operation, trading and safekeeping
the assets of, ML Strategic Allocation Fund L.P. (the "Partnership");
WHEREAS, all of the Original Agreements were filed as exhibits to the
Partnership's Registration Statement No. 33-80509, which became effective under
the Securities Act of 1933 (the "Securities Act") as of April 25, 1996 for the
initial offering of the Units (the "First Offering");
WHEREAS, the Partnership filed a new Registration Statement (Reg. No.
333-________) on March 6, 1998 pursuant to which the Partnership is registering
2,000,000 additional Units for public sale (the "Second Offering");
WHEREAS, the Partnership has previously traded commodity interests
through participating in a joint venture (the "Joint Venture") with John W.
Henry & Company, Inc. ("JWH(R)"), and in conjunction with the Second Offering
the Joint Venture has been converted into a limited liability company (ML JWH
Strategic Joint Venture LLC), formed under the Delaware Limited Liability
Company Act (the "Company"), and to which the offshore counterpart fund to the
Partnership, ML JWH Strategic Allocation Fund Ltd., a Cayman Islands company
(the "Fund"), has also been admitted as a member, together with the Partnership
and JWH;
WHEREAS, no other members shall be admitted to the Company;
WHEREAS, the Partnership is the manager of the Company, and Merrill
Lynch Investment Partners Inc. ("MLIP") is the general partner of the
Partnership and the sponsor of the Fund;
WHEREAS, all the Signatories other than JWH are affiliates of MLIP;
and
-1-
<PAGE>
WHEREAS, the Signatories wish to amend the Original Agreements to
reflect the formation of the Company and the Second Offering, but without
otherwise effecting any substantive change therein.
NOW THEREFORE, the Signatories agree as follows.
1. DEFINED TERMS. Capitalized terms not otherwise defined herein are
--------------
used with the meanings set forth in the Original Agreements.
2. THE SELLING AGREEMENT. The Selling Agreement is hereby amended to
---------------------
reflect the registration and public offering of an additional 2,000,000 Units
and the elimination of the use of an escrow account. As the Partnership is an
operating entity, there is no minimum number of new Units which must be sold as
of the beginning of any calendar month during the Second Offering for Units then
to be sold, and -- as provided in the Selling Agreement in the case of the
ongoing offering of the Units following the initial Closing Date during the
First Offering -- subscriptions are debited directly from investors' Merrill
Lynch Customer Securities Accounts as of each month-end settlement date directly
into the Partnership's account without being previously collected into an escrow
account.
The initial Closing of the Second Offering shall be subject to the
same closing conditions as was the initial Closing of the First Offering,
adjusted, as relevant, to reflect the existence of the Company as opposed to the
Joint Venture.
In respect of the amendment and extension of the Selling Agreement,
the Selling Agent agrees that it shall, for all liability and indemnification
provisions and for all other purposes under the Selling Agreement, look only to
the Partnership and its assets, and not to any other assets of the Company to
satisfy any obligation of the Partnership under the Selling Agreement,
irrespective of the fact that the Company is, for purposes of the Securities
Act, a "co-issuer" with the Partnership.
In all other respects, the terms of the Selling Agreement are restated
in their entirety; provided, that the Company as "co-issuer" with the
Partnership is herewith made a signatory of the Selling Agreement (the Company's
obligations thereunder to be limited to the Partnership's capital account in the
Company, as provided in the preceding paragraph).
3. THE CUSTOMER AGREEMENT. The Customer Agreement is hereby amended
----------------------
to reflect the fact that the Company, rather than the Joint Venture, is MLF's
client under the Customer Agreement. Otherwise, the terms of the original
Customer Agreement are restated in their entirety; provided, that the interest
credit arrangements shall be as set forth under "Interest Income Arrangements"
in the Prospectus and the Offering Memorandum.
-2-
<PAGE>
4. FOREIGN EXCHANGE DESK SERVICES AGREEMENT. The Foreign Exchange
----------------------------------------
Desk Services Agreement is hereby amended to reflect the fact that the Company,
not the Joint Venture, is the relevant party thereto.
In all other respects, the Foreign Exchange Desk Services Agreement is
restated in its entirety; provided, that the description of the process of
contacting counterparties in the Prospectus and Offering Memorandum shall
supersede the description in the Foreign Exchange Desk Services Agreement.
5. INVESTMENT ADVISORY CONTRACT, The Investment Advisory Contract is
----------------------------
hereby amended to reflect the fact that the Company, not the Joint Venture, is
the relevant party thereto. In addition, Merrill Lynch Asset Management, L.P.
acknowledges that the loss incurred/return earned on the monies managed by it
for the Company pursuant to the Investment Advisory Contract shall be allocated
exclusively to the capital account of the Partnership in the Company, not to the
capital account of the Fund.
In all other respects, the terms of the Investment Advisory Contract
are restated in their entirety.
6. CUSTODY AGREEMENT. The Custody Agreement is hereby amended to
-----------------
reflect the fact that the Company, not the Joint Venture, is the relevant party
thereto. In addition, the Selling Agent acknowledges that the assets held in
custody by it pursuant to the Custody Agreement shall be solely attributed to
the capital account of the Partnership in the Company, not to the capital
account of the Fund.
In all other respects, the terms of the Custody Agreement are restated
in their entirety.
7. REPRESENTATIONS AND WARRANTIES OF THE MLIP PARTIES. The MLIP
--------------------------------------------------
Parties, other than MLIP itself, hereby restate and reaffirm the representations
and warranties made by them in the Original Agreements in respect of such
Agreements as hereby amended (the "Amended Agreements").
8. REPRESENTATIONS AND WARRANTIES OF MLIP. MLIP represents and
--------------------------------------
warrants to the Signatories, as follows:
(a) The Partnership has provided to the MLIP Parties and filed with
the SEC a registration statement on Form S-1 (Registration No. 333-______),
as filed with the SEC on March 6, 1998 for the registration of 2,000,000
Units under the Securities Act, has filed two copies thereof with the CFTC
under the Commodity Act and one copy with the NFA in accordance with NFA
Compliance Rule 2-13. The term, "Registration Statement," shall, from and
after the declaration of the effectiveness of the Registration Statement,
refer to the
-3-
<PAGE>
Registration Statement as it becomes effective, and the term, "Prospectus"
shall refer to the prospectus then on file with the SEC as part of the
Registration State ment, or if a subsequent prospectus is filed by the
Partnership pursuant to Rule 424 of the SEC Regulations, the term,
"Prospectus," shall refer to the prospectus most recently filed pursuant to
such Rule from and after the date on which it shall have been first used.
Except as required by law, the Partnership will not file any amendment to
the Registration Statement or any amendment or supplement to the Prospectus
which shall be reasonably objected to in writing by any MLIP Party, upon
reasonable prior notice.
(b) The Certificate of Limited Partnership pursuant to which the
Partnership was formed and the Limited Partnership Agreement each provides
for the subscription for and sale of the Units; all action required to be
taken by MLIP and the Partnership as a condition to the sale of the Units
to qualified subscribers therefor has been, or prior to the initial Closing
Time of the Second Offering and Subsequent Closing Times during the Second
Offering will have been taken; and, upon payment of the consideration
therefor specified in all accepted Subscription Agreements and Powers of
Attorney, the Units will constitute valid limited partnership interests in
the Partnership.
(c) The Fund is a limited partnership duly organized pursuant to the
Certificate of Limited Partnership, the Limited Partnership Agreement and
the DRULPA and validly existing under the laws of the State of Delaware
with full power and authority to engage in the trading of futures, forward
and option contracts, as described in the Prospectus; the Fund has received
(or will receive prior to the Initial Closing Time, as defined in Section
4(c)) a certificate of authority to do business in the State of New York as
provided by Article 8-A of the New York Uniform Limited Partnership Act.
(d) The Certificate of Formation pursuant to which the Company was
formed and the Organization Agreement each provides for the Company to act
as "co-issuer" in the subscription for and sale of the Units; and all
action required to be taken by MLIP and the Company as a condition to the
Company as "co-issuer" participating in the sale of the Units to qualified
subscribers therefor has been, or prior to the initial Closing Time of the
Second Offering and subsequent Closing Times during the Second Offering
will have been taken.
(e) The Company is a limited liability company duly organized
pursuant to the Certificate of Formation, the Organization Agreement and
the Limited Liability Company Act of the State of Delaware and validly
existing under the laws of the State of Delaware with full power and
authority to engage in the trading of futures, forward and option
contracts, as described in the Prospectus.
-4-
<PAGE>
(f) MLIP is duly organized and validly existing and in good standing
as a corporation under the laws of the State of Delaware and in good
standing as a foreign corporation under the laws of the State of New York
and in each other jurisdiction in which the nature or conduct of its
business requires such qualifica tion and the failure to so qualify would
materially adversely affect the Partnership or MLIP's ability to perform
its obligations hereunder.
(g) The Company, the Partnership and MLIP have partnership or
corporate power and authority under applicable law to perform their
respective obligations under the Organization Agreement, Limited
Partnership Agreement, the Customer Agreement, the Foreign Exchange Desk
Service Agreement, the Advisory Agreement, the Custody Agreement and this
Agreement (as the case may be), as described in the Registration Statement
and Prospectus.
(h) The Registration Statement and Prospectus contain all statements
and information regarding the Company, the Partnership and MLIP required to
be included therein by the Commodity Act and the rules and regulations
thereunder. When the Registration Statement becomes effective under the
1933 Act and at all times subsequent thereto up to and including the
initial Closing Time of the Second Offering, the Registration Statement and
Prospectus will comply in all material respects with the requirements of
the 1933 Act, the Commodity Act and the rules and regulations under such
Acts. The Registration Statement as of its effective date will not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements therein
not misleading. The Prospectus as of its date of issue and at the initial
Closing Time of the Second Offering will not contain an untrue state ment
of a material fact or omit to state a material fact necessary to make the
state ments therein, in light of the circumstances under which such
statements were made, not misleading. This representation and warranty
shall not, however, apply to any statement or omission in the Registration
Statement or Prospectus made in reliance upon and in conformity with
information relating to JWH or furnished or approved in writing by JWH.
(i) Deloitte & Touche, the accountants who certified the financial
statements filed with the SEC as part of the Registration Statement, are,
with respect to the Company, the Partnership and MLIP, independent public
accountants as required by the 1933 Act and the SEC Regulations.
(j) The financial statements filed as part of the Registration
Statement and those included in the Prospectus present fairly the financial
position of the Partnership and of MLIP as of the dates indicated; and said
financial statements have been prepared in conformity with generally
accepted accounting principles
-5-
<PAGE>
(as described therein), applied on a basis which is consistent in all
material respects for each balance sheet date presented.
(k) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus, there has not been any
material adverse change in the condition, financial or otherwise, business
or prospects of the Company, the Partnership or MLIP, whether or not
arising in the ordinary course of business.
(l) The Advisory Agreement, the Organization Agreement, the Limited
Partnership Agreement and this Agreement have each been duly and validly
authorized, executed and delivered by MLIP on behalf of the Partnership or
by the Partnership on behalf of the Company and each constitutes a legal,
valid and binding agreement of the Company enforceable in accordance with
its terms. The Customer Agreement and the Foreign Exchange Desk Service
Agreement have each been duly and validly authorized, executed and
delivered by the Partnership on behalf of the Company.
(m) The execution and delivery of the Organization Agreement, the
Limited Partnership Agreement, the Customer Agreement, the Foreign Exchange
Desk Service Agreement, the Advisory Agreement, the Custody Agreement and
this Agreement, the incurrence of the obligations set forth in each of such
agreements and the consummation of the transactions contemplated therein
and in the Prospectus will not constitute a breach of, or default under,
any instrument by which the Company, the Partnership or MLIP, as the case
may be, is bound or any order, rule or regulation applicable to the
Company, the Partnership or MLIP of any court or any governmental body or
administrative agency having jurisdiction over the Company, the Partnership
or MLIP.
(n) There is not pending, or, to the best of MLIP's knowledge
threatened, any action, suit or proceeding before or by any court or other
governmental body to which the Company, the Partnership or MLIP is a party,
or to which any of the assets of the Company, the Partnership or MLIP is
subject, which is not referred to in the Prospectus and which might
reasonably be expected to result in any material adverse change in the
condition (financial or otherwise), business or prospects of the Company,
the Partnership or MLIP or is required to be disclosed in the Prospectus
pursuant to applicable CFTC regulations. MLIP has not received any notice
of an investigation or warning letter from the NFA or the CFTC regarding
non-compliance by MLIP with the Commodity Act or the regulations
thereunder.
(o) MLIP has all Federal and state governmental, regulatory and
commodity exchange approvals and licenses, and has effected all filings and
-6-
<PAGE>
registrations with Federal and state governmental agencies required to
conduct its business and to act as described in the Registration Statement
and Prospectus or required to perform its obligations as described under
the Limited Partnership Agreement and this Agreement (including, without
limitation, registration as a commodity pool operator under the Commodity
Act and membership in the NFA as a commodity pool operator), and the
performance of such obligations will not contravene or result in a breach
of any provision of its certificate of incorporation, by-laws or any
agreement, order, law or regulation binding upon it. The prin cipals of
MLIP identified in the Registration Statement are all of the principals of
MLIP, as "principals" is defined by the CFTC regulations. Such principals
are duly registered as such on MLIP's commodity pool operator Form 7-R
registration.
(p) Neither the Company nor the Partnership requires any Federal or
state governmental, regulatory or commodity exchange approvals or licenses,
or needs to effect any filings or registrations with any Federal or state
governmental agencies in order to conduct its businesses and to act as
contemplated by the Regi stration Statement and Prospectus and to issue
and sell the Units (other than fil ings relating solely to the offering of
the Units), and to trade in the commodity markets.
9. COVENANTS. The Signatories each restate and recommit to the
---------
respective covenants made by them in the Original Agreements, adopting such
covenants to reflect the formation of the Company.
10. FURTHER ASSURANCES AND DOCUMENTATION. The Signatories each agree
------------------------------------
that they will execute all such other documents and instruments as any Signatory
may reasonably request of any other Signatory to evidence the intent and purpose
of this Amendatory Agreement so as to achieve the purpose of substituting the
Company for the Partnership as the relevant party to all of the Original
Agreements other than the Selling Agreement, as well as the purpose of providing
under the Selling Agreement for the Second Offering.
11. PROTECTION OF THE FUND. The Signatories each acknowledges that
----------------------
the Fund is a member of the Company, together with the Partnership. Each
Signatory agrees that, to the fullest extent permitted by law, it will in no
event seek to collect any debt or liability properly attributable to the
Partnership as a member of the Company from any Company assets properly
attributable to the Fund's capital account in the Company.
12. EXPENSES. MLIP shall advance all costs incurred by any of the
--------
Signatories in the preparation, review, execution and delivery of this Agreement
as well as all related documentation and instruments required to reflect the
substitution of the Company for the Joint Venture in all of the Original
Agreements other than the Selling Agreement, and the Second Offering under the
Selling Agreement. Such costs shall constitute "ongoing offering costs"
-7-
<PAGE>
subject to reimbursement by the Partnership and the Fund, as described in the
Prospectus or the Offering Memorandum.
IN WITNESS WHEREOF, the undersigned have hereto set their hands as of
the day and year first above written.
ML JWH STRATEGIC JOINT VENTURE LLC
By: ML JWH Strategic Allocation Fund L.P.
Manager
By: Merrill Lynch Investment Partners Inc.
General Partner
By:
----------------------------------------
Name:
Title:
ML JWH STRATEGIC ALLOCATION FUND L.P.
By: Merrill Lynch Investment Partners Inc.
General Partner
By:
----------------------------------------
Name:
Title:
MERRILL LYNCH INVESTMENT PARTNERS INC.
By:
----------------------------------------
Name:
Title:
MERRILL LYNCH FUTURES INC.
By:
----------------------------------------
Name:
Title:
MERRILL LYNCH, PIERCE, FENNER & SMITH,
INCORPORATED
By:
----------------------------------------
-8-
<PAGE>
Name:
Title:
MERRILL LYNCH INTERNATIONAL BANK
By:
----------------------------------------
Name:
Title:
MERRILL LYNCH ASSET MANAGEMENT, L.P.
By: Princeton Services, Inc.
General Partner
By: Merrill Lynch Group, Inc.
General Partner
By:
----------------------------------------
Name:
Title:
JOHN W. HENRY & COMPANY, INC.
By:
----------------------------------------
Name:
Title:
ML JWH STRATEGIC JOINT VENTURE
By: ML JWH Strategic Allocation Fund L.P.
Manager
By: Merrill Lynch Investment Partners Inc.
General Partner
By:
----------------------------------------
Name:
Title:
As third-party beneficiaries:
-9-
<PAGE>
ML JWH OFFSHORE STRATEGIC JOINT VENTURE
By: ML JWH Strategic Allocation Fund Ltd.
Manager
By: _______________________________________________________________
Name:
Title:
ML JWH STRATEGIC ALLOCATION FUND LTD.
By: _______________________________________________________________
Name:
Title:
-10-
<PAGE>
EXHIBIT 13.01
ML JWH STRATEGIC ALLOCATION FUND L.P.
(A DELAWARE LIMITED PARTNERSHIP)
AND JOINT VENTURE
Consolidated Financial Statements for the year ended
December 31, 1997 and the period from July 15, 1996
(Commencement of Operations) to December 31, 1996
and Independent Auditors' Report
<PAGE>
To: The Limited Partners of ML JWH STRATEGIC ALLOCATION FUND L.P.
ML JWH Strategic Allocation Fund L.P. (the "Fund" or "Partnership") ended its
second fiscal year of trading on December 31, 1997 with a Net Asset Value
("NAV") per Unit of $135.40, representing an increase of 9.94% from the December
31, 1996 NAV per Unit of $123.16.
Set forth below is a report from John W. Henry & Company, Inc. addressing
performance for 1997. This report is included for the convenience of the Fund=s
investors and may not reflect the opinions or recommendations of the General
Partner.
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting. From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility. Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period. We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President
MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Report of the Trading Advisor
JOHN W. HENRY & COMPANY, INC.
The Fund's most profitable positions in 1997 were in the currency markets.
Strong gains were realized in positions on the German mark, which weakened in
world markets as hopes for European Monetary Union rose. Reflecting sound
economic fundamentals in the U.S., the dollar dominated world currencies,
setting new records against the mark, yen and Swiss franc.
Solid gains were generated for the year in global interest rate markets,
particularly in Japanese Government bonds where yields plummeted to historic
lows as the nation sank relentlessly into a recession and a string of financial
sector bankruptcies followed. Strong gains were also recorded in Australian 10
year and three-year bonds and in German and Italian bonds. In the U.S., yields
on the benchmark 30-year Treasury bond dipped below 6% in the final quarter of
the year, reflecting the flight of foreign capital to quality amid increasing
turbulence in Asian markets; positions in U.S. government bonds were profitable
overall.
<PAGE>
Positions in gold and the Nikkei also resulted in profits for the year. Gold
prices declined to the lowest level in over a decade reflecting its declining
value as an alternative monetary asset as central banks increased their
willingness to sell or lease the precious metal. The Nikkei suffered the same
fate as the Japanese yen, as investors lost confidence in the government's
ability or willingness to boost the ailing economy. Losses were incurred in
agricultural markets, despite a strong performance by coffee futures earlier in
the year. Energy markets were also disappointing as ample world inventories and
mild weather kept supply and demand in balance.
INDIVIDUAL INVESTMENT PROGRAMS
ORIGINAL INVESTMENT PROGRAM
Solid gains were recorded for the year as profitable positions in currencies,
metals and interest rates and smaller gains in stock indices offset losses in
energy and agricultural commodities. Positions in Japanese financial markets --
including the Nikkei, yen and government bond -- produced the largest gains.
Positions in all metals traded were profitable; reduced demand for copper from
Asia and increased selling of gold by central banks pushed the prices of both
metals lower. Positions in crude oil produced the largest losses, as prices
shifted back and forth on news from Iraq, OPEC and the Middle East in general.
GLOBAL FINANCIAL PORTFOLIO
The program recorded solid gains for the year as profitable positions in
currencies and interest rates offset losses in stock indices and energy.
Positions in most currencies traded resulted in profits. Positions in the
Japanese Government bond led gains in interest rates; small losses were incurred
in Canadian bills and the French bond. The declining Nikkei afforded
opportunity for profit, but positions in the Japanese equity index failed to
offset losses in the Australian All Ordinaries.
FINANCIAL AND METALS PORTFOLIO
Solid gains were recorded for the year, reflecting profitable positions in all
markets traded. Except for the French bond, positions in all long-term interest
rates traded resulted in gains. Profitable positions in gold offset losses in
silver; unlike gold, silver enjoyed an increase in worldwide demand, sending
silver prices higher as gold prices moved lower. In the currency markets, gains
in the Japanese yen, German mark and Australian dollar offset losses in the
British pound and the Swiss franc. The pound became more volatile, buffeted by
investors' concerns over the future direction of interest rates; the Swiss franc
was pressured upward by investors' flight to safe haven in the face of
uncertainties in Asia, reversing its downward trend.
G-7 CURRENCY PORTFOLIO
The G-7 Currency Portfolio capitalized on both developing and continuing trends
in key currency markets, realizing strong gains for the year. One of the
greatest impacts in world markets came from concerns over the future of the
European Monetary Union and relative currency valuations. The British pound,
however, marched to its own beat, largely reflecting the outlook for interest
rates in that nation.
<PAGE>
JWH GLOBALANALYTICS TM
Introduced in June, the program ended 1997 with strong gains, as profitable
positions in interest rates, stock indices, metals and currencies offset losses
in energy and agriculture. Significant gains were generated by positions in
Japanese financial markets including the yen, government bond and Nikkei.
Positions in the Italian bond resulted in solid gains as prospects for that
nation's entry into the European Monetary Union improved. Strong profits were
also recorded in gold, as prices on the precious metal declined throughout the
year.
GLOBAL DIVERSIFIED PORTFOLIO
The program recorded gains in 1997 as profitable positions in currencies,
interest rates, stock indices and metals offset losses in energy and
agricultural commodities. A trendless market in crude oil prices negatively
impacted JWH positions in the commodity. Profitable positions in coffee were
offset by losses in other agricultural sectors traded. Positions in metals were
profitable overall. With the exception of the French bond, positions in all
long-term interest rates traded produced gains, led by Australian 10-year bond
positions. Solid gains in the Japanese yen, Australian dollar and smaller
profits in the German mark offset losses in other currencies traded.
DOLLAR PROGRAM
Solid gains were realized for the year, reflecting the dominance of the U.S.
dollar in world markets throughout much of 1997. Backed by solid economic
fundamentals, the dollar strengthened against the German mark, Japanese yen and
Swiss franc, assuming safe haven status during turmoil in Asian markets. The
flight to quality which drove investors into the U.S. bond market also provided
support to the U.S. currency.
WORLDWIDE BOND PROGRAM
Solid gains were recorded in interest rate markets in 1997 reflecting, in part,
investors' flight to quality amid increasingly volatile worldwide equity markets
and each country's prospects for entry into the European Monetary Union, with
Italian and Spanish bonds the chief beneficiaries. With the exception of the
French bond, Australian three-year bond and British long gilt, positions in all
interest rates traded produced gains.
FOR THE EXCLUSIVE USE OF INVESTORS IN ML JWH STRATEGIC ALLOCATION FUND L.P.
THIS ANNUAL REPORT IS NOT AN OFFER TO SELL NOR A SOLICITATION OF AN OFFER TO BUY
ANY SECURITIES. AN OFFER CAN ONLY BE MADE BY THE CURRENT PROSPECTUS, TOGETHER
WITH SUMMARY FINANCIAL INFORMATION CURRENT WITHIN 60 DAYS. THESE DOCUMENTS
CONTAIN IMPORTANT INFORMATION CONCERNING RISK FACTORS, PERFORMANCE AND OTHER
MATERIAL ASPECTS OF THE FUND AND MUST BE READ CAREFULLY BEFORE INVESTING. THIS
ANNUAL REPORT MUST NOT BE REPRODUCED OR DISTRIBUTED IN ANY MANNER. FUTURES
TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. PAST PERFORMANCE IS
NOT NECESSARILY INDICATIVE OF FUTURE RESULTS. THE
<PAGE>
FUND'S SINGLE-ADVISOR MULTI-STRATEGY APPROACH IS NOT ANTICIPATED TO PROVIDE THE
SAME LEVEL OF RISK CONTROL AS IS COMMONLY EXPECTED IN A MULTI-ADVISOR PORTFOLIO.
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L. P.
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Page
----
<S> <C>
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE PERIOD FROM JULY 15, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996:
Consolidated Statements of Financial Condition 2
Consolidated Statements of Income 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-12
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
ML JWH Strategic Allocation Fund L.P.:
We have audited the accompanying consolidated statements of financial condition
of ML JWH Strategic Allocation Fund L.P. (a Delaware limited partnership; the
"Partnership") and its joint venture with John W. Henry & Company, Inc. (the
"Joint Venture") as of December 31, 1997 and 1996, and the related consolidated
statements of income and changes in partners' capital for the year ended
December 31, 1997 and the period from July 15, 1996 (commencement of operations)
to December 31, 1996. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of ML JWH Strategic Allocation Fund
L.P. and the Joint Venture as of December 31, 1997 and 1996 and the results of
their operations for the year ended December 31, 1997 and the period from July
15, 1996 (commencement of operations) to December 31, 1996 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
February 6, 1998
New York, New York
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------------- ---------------------
<S> <C> <C>
ASSETS
Cash on deposit at brokers $ - $ 726
Accrued interest (Note 3) 196,088 184,577
U. S. Government obligations 172,586,264 121,535,012
Equity in commodity futures trading accounts:
Cash and options premiums 41,484,775 54,132,103
Net unrealized profit on open contracts 14,898,289 4,696,372
------------------- ---------------------
TOTAL $229,165,416 $180,548,790
=================== =====================
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Profit Share payable (Note 2) $ 2,640,194 $ 4,683,010
Redemptions payable 1,116,238 1,661,675
Brokerage commissions payable (Note 3) 1,473,380 1,160,945
Administrative fees payable (Note 3) 47,527 37,450
Organizational and initial offering costs payable (Note 1) 114,951 808,712
------------------- ---------------------
Total liabilities 5,392,290 8,351,792
------------------- ---------------------
MINORITY INTEREST 135,830 123,383
------------------- ---------------------
PARTNERS' CAPITAL:
General Partner (18,177 Units and 16,643 Units) 2,455,940 2,038,044
Limited Partners (1,634,252 Units and 1,534,953 Units) 221,181,356 188,284,065
Subscriptions receivable (0 Units and 148,169 Units) - (18,248,494)
------------------- ---------------------
Total partners' capital 223,637,296 172,073,615
------------------- ---------------------
TOTAL $229,165,416 $180,548,790
=================== =====================
</TABLE>
NET ASSET VALUE PER UNIT (NOTE 4)
See notes to consolidated financial statements.
2
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE PERIOD FROM JULY 15, 1996
(COMMENCEMENT OF OPERATIONS) TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1997 1996
------------------ ------------------
<S> <C> <C>
REVENUES:
Trading profit:
Realized $18,820,033 $29,800,074
Change in unrealized 10,201,917 4,696,372
------------------ ------------------
Total trading results 29,021,950 34,496,446
------------------ ------------------
Interest income (Note 3) 12,021,263 3,030,330
Total revenues 41,043,213 37,526,776
------------------ ------------------
EXPENSES:
Brokerage commissions (Note 3) 17,377,236 4,873,368
Administrative fees (Note 3) 560,556 157,205
------------------ ------------------
Total expenses 17,937,792 5,030,573
------------------ ------------------
INCOME BEFORE PROFIT SHARE 23,105,421 32,496,203
ALLOCATION AND MINORITY INTEREST
Profit Share Allocation (Note 2) (2,640,194) (4,683,010)
Minority interest in income (12,447) (23,383)
------------------ ------------------
NET INCOME $20,452,780 $27,789,810
================== ==================
NET INCOME PER UNIT:
Weighted average number of Units
outstanding (Note 5) 1,739,531 1,163,568
================== ==================
Net income per weighted average General Partner
and Limited Partner Unit $11.76 $23.88
================== ==================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE PERIOD FROM JULY 15, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Limited General Subscriptions
Units Partners Partner Receivable Total
------------- ---------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Initial offering 14,832 $100,516,800 $1,483,200 $ - $102,000,000
Organizational and initial
offering costs - (985,459) (14,541) - (1,000,000)
Additions 1,565,526 64,575,292 198,925 - 64,774,217
Redemptions (28,762) (3,241,918) - - (3,241,918)
Net Income - 27,419,350 370,460 - 27,789,810
Subscriptions Receivable (148,169) - - (18,248,494) (18,248,494)
------------- ---------------- --------------- ---------------- ----------------
PARTNERS' CAPITAL, 1,403,427 188,284,065 2,038,044 (18,248,494) 172,073,615
DECEMBER 31, 1996
Organizational and initial - 366,712 3,765 - 370,477
offering cost recovery
Additions 409,237 32,969,453 152,196 18,248,494 51,370,143
Redemptions (160,235) (20,629,719) - - (20,629,719)
Net Income - 20,190,845 261,935 - 20,452,780
------------- ---------------- --------------- ---------------- ----------------
PARTNERS' CAPITAL,
DECEMBER 31, 1997 1,652,429 $221,181,356 $2,455,940 $ - $223,637,296
============= ================ =============== ================ ================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997 AND
THE PERIOD FROM JULY 15, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
ML JWH Strategic Allocation Fund L.P. (the "Partnership") was organized
under the Delaware Revised Uniform Limited Partnership Act on December 11,
1995 and commenced trading on July 15, 1996. When available for investment,
the Partnership issues new units of limited partnership interest ("Units") at
Net Asset Value as of the beginning of each calendar month. The Partnership
engages in the speculative trading of futures, options on futures and forward
contracts on a wide range of commodities through its joint venture (the "Joint
Venture") with John W. Henry & Company, Inc. ("JWH"), the trading advisor for
the Partnership, and investing in Government Securities, as defined. Merrill
Lynch Investment Partners Inc., ("MLIP" or the "General Partner"), a wholly-
owned subsidiary of Merrill Lynch Group Inc., which, in turn, is a wholly-
owned subsidiary of Merrill Lynch & Co., Inc. ("Merrill Lynch"), is the
general partner of the Partnership. Merrill Lynch Futures Inc. ("MLF") is the
Partnership's commodity broker and Merrill Lynch Asset Management Inc.
("MLAM"), also an affiliate of Merrill Lynch, provides cash management
services to the Partnership. Substantially all of the Partnership's assets
are held in accounts maintained at Merrill Lynch, Pierce, Fenner & Smith
Incorporated, also a Merrill Lynch affiliate.
The General Partner has agreed to maintain a general partner's interest of
at least 1% of the total capital in the Partnership. The General Partner and
each Limited Partner share in the profits and losses of the Partnership in
proportion to their respective interests in it.
The Joint Venture trades in the international futures and forward markets,
applying multiple proprietary trading strategies under the direction of JWH.
JWH selects, allocates and reallocates the Partnership's assets among
different combinations of JWH's programs--an approach which JWH refers to as
the "JWH Strategic Allocation Program."
The consolidated financial statements include the accounts of the Joint
Venture to which the Partnership has contributed substantially all of its
capital, representing a current equity interest in the Joint Venture of
approximately 99%. All related transactions between the Partnership and the
Joint Venture are eliminated in consolidation.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
5
<PAGE>
U.S. Government Securities
--------------------------
The Partnership invests a portion of its assets in obligations of the U.S.
Treasury and certain U.S. government agencies ("Government Securities") under
the direction of MLAM within the parameters established by MLIP for which MLAM
accepts no responsibility. These investments are carried at fair value.
Revenue Recognition
-------------------
Commodity futures, options on futures and forward contract transactions are
recorded on the trade date, and open contracts are reflected in net unrealized
profit on open contracts in the Consolidated Statements of Financial Condition
at the difference between the original contract value and the fair value. The
change in net unrealized profit on open contracts from one period to the next
is reflected in change in unrealized in the Consolidated Statements of Income.
Fair value is based on quoted market prices on the exchange or market on which
the contract is traded.
Organizational and Initial Offering Costs, Operating Expenses and Selling
-------------------------------------------------------------------------
Commissions
-----------
The General Partner advanced all organizational and initial offering costs
relating to the Partnership. The Partnership is reimbursing the General
Partner for such costs in 24 monthly installments. For financial reporting
purposes, the Partnership deducted the estimated organizational and initial
offering reimbursement costs of $1,000,000 from the Partners' capital at
inception. For all other purposes (including determining the Net Asset Value
of the Units), the Partnership deducted the organizational and initial
offering cost reimbursements only as actually paid. Adjustments in the final
organizational and initial offering costs were added back to the Partners'
capital.
The General Partner pays for all routine operating costs (including legal,
accounting, printing, postage and similar administrative expenses) of the
Partnership, including the Partnership's share of any such costs incurred by
the Joint Venture (Note 2), other than the costs of the ongoing offering of
the Units. The General Partner receives an administrative fee, as well as a
portion of the brokerage commissions paid to MLF by the Joint Venture, as
reimbursement for the foregoing expenses.
No selling commissions have been or are paid by the Limited Partners.
Income Taxes
------------
No provision for income taxes has been made in the accompanying consolidated
financial statements as each Partner is individually responsible for reporting
income or loss based on such Partner's respective share of the Partnership's
income and expenses as reported for income tax purposes.
Redemptions
-----------
A Limited Partner may require the Partnership to redeem some or all of such
Partner's Units at Net Asset Value as of the close of business on the last
business day of any month upon ten calendar days' notice. Units redeemed on or
prior to the end of the twelfth full month after purchase are assessed an
early redemption charge of 3% of their Net Asset Value as of the date of
redemption. If an investor acquires Units at more than one time, such Units
are treated on a "first-in, first-out" basis for purposes of determining
whether redemption charges are applicable.
6
<PAGE>
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2026 or at an earlier date if
certain conditions occur, as well as under certain other circumstances as
defined in the Limited Partnership Agreement.
2. JOINT VENTURE AGREEMENT
The Partnership and JWH entered into a Joint Venture Agreement whereby JWH
contributed $100,000 to the Joint Venture and the Partnership contributed
substantially all of its capital. The Joint Venture Agreement initially
expired September 30, 1997, subject to two one-year renewals at the option of
MLIP. The first renewal option was exercised at September 30, 1997. The
General Partner is the manager of the Joint Venture, while JWH has sole
discretion in determining the commodity futures, options on futures and
forward trades to be made on its behalf, subject to the trading limitations
outlined in the Joint Venture Agreement.
Pursuant to the Joint Venture Agreement, JWH and the Partnership share in the
profits of the Joint Venture based on equity ownership before 15% of the
Partnership's quarterly New Trading Profits, as defined, are allocated to
JWH. Losses are allocated to JWH and the Partnership based on equity
ownership.
Pursuant to the Joint Venture Agreement, JWH's share of profits may earn
interest at the prevailing rates for 91-day U.S. Treasury bills or such share
of profits may participate in the profits and losses of the Joint Venture.
For the year ended December 31, 1997 JWH received a profit share allocation
of $2,601,187 and earned interest of $39,006 on such amount. For the period
from July 15, 1996 to December 31, 1996 JWH received a profit share
allocation of $4,675,905, and earned interest of $7,105 on such amount.
3. RELATED PARTY TRANSACTIONS
Approximately 80% of the Joint Venture's U.S. dollar assets are managed by
MLAM pursuant to the guidelines established by MLIP for which MLAM assumes no
responsibility, in the Government Securities market. MLF pays MLAM annual
management fees of .20 of 1% on the first $25 million of certain assets
("Capital"), including assets of the Joint Venture managed by MLAM, .15 of 1%
on the next $25 million of Capital, .125 of 1% on the next $50 million, and
.10 of 1% on Capital in excess of $100 million. Such fees are paid quarterly
in arrears and are calculated on the basis of the average daily assets
managed by MLAM.
A portion of the Joint Venture's U.S. dollar assets are held at MLF in cash.
On the cash held at MLF, the Joint Venture receives interest from Merrill
Lynch at the prevailing 91-day U.S. Treasury bill rate. Merrill Lynch may
derive certain economic benefits, in excess of the interest which Merrill
Lynch pays to the Joint Venture, from possession of such cash.
Merrill Lynch credits the Joint Venture with interest on the Joint Venture's
non-U.S. dollar-denominated assets based on local short-term rates. Merrill
Lynch charges the Joint Venture Merrill Lynch's cost of financing realized
and unrealized losses on the Joint Venture's non-U.S. dollar-denominated
positions.
The Joint Venture pays brokerage commissions to MLF at a flat rate of .646 of
1% (a 7.75% annual rate) of the Joint Venture's month-end assets, and pays
MLIP a monthly administrative fee of .021 of 1% (a .25% annual rate) of the
Joint Venture's month-end assets. Month-end assets are not reduced, for
purposes of calculating brokerage and administrative fees, by any accrued
brokerage commissions, administrative fees, Profit Shares or other fees or
charges.
7
<PAGE>
MLIP estimates that the round-turn equivalent commission rate charged to the
Joint Venture during the year ended December 31, 1997 and the period from July
15, 1996 (commencement of operations) to December 31, 1996 was approximately
$212 and $208 (not including, in calculating round-turn equivalents, forward
contracts on a futures-equivalent basis).
MLF pays JWH annual Consulting Fees of 4% of the Partnership's average
month-end assets, after reduction for a portion of the brokerage commissions.
The Joint Venture trades forward contracts through a foreign exchange
service desk (the "F/X Desk") established by MLIP. The F/X Desk gives the
Joint Venture access to counterparties in addition to (but also including)
Merrill Lynch International Bank ("MLIB"). MLIP or another Merrill Lynch
entity charges a service fee equal to, at current exchange rates,
approximately $5.00 to $12.50 on each purchase or sale (not round-turn) of a
futures contract-equivalent face amount of a given currency traded in the
forward markets. No service fees are charged on trades awarded to MLIB (which
receives bid-ask spreads on such trades).
In its exchange of futures for physical ("EFP") trading with Merrill Lynch,
the Joint Venture acquires spot or forward (collectively, "cash") currency
positions through the F/X Desk in the same manner and on the same terms as in
the case of the Joint Venture's other F/X Desk trading. When the Joint
Venture exchanges these positions for futures, there is a differential between
the prices of the two positions. This differential reflects, in part, the
different settlement dates of the cash and the futures contracts and
prevailing interest rates, but also includes a pricing spread in favor of MLIB
or another Merrill Lynch entity. JWH, to date, has made little use of EFPs.
The Joint Venture's F/X Desk service fee and EFP differential costs have, to
date totaled no more than .25 of 1% per annum of the Partnership's average
month-end assets.
4. NET ASSET VALUE PER UNIT
For financial reporting purposes, the Partnership deducted the total
organizational and initial offering cost reimbursement payable to MLIP at
inception. For all other purposes (including computing net asset value for
redemptions), the Partnership deducts the organization and initial offering
cost reimbursement only as actually paid. Consequently, as of December 31,
1997 and 1996, the Net Asset Value per Unit was $135.34 and $122.61 for
financial reporting purposes and $135.40 and $123.16 for all other purposes,
respectively.
5. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes
of disclosing net income per weighted average Unit. The weighted average
Units outstanding at December 31, 1997 and 1996 equals the Units outstanding
as of such date, adjusted proportionately for Units sold and redeemed based on
the respective length of time each was outstanding during the preceding
period.
8
<PAGE>
6. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Joint Venture trades futures, options on futures and forward contracts
in interest rates, stock indices, commodities, currencies, energy and metals.
The Joint Venture's total trading results by reporting category for the years
ended December 31, 1997 and 1996 were as follows:
Total Trading Results
----------------------------------------
1997 1996
--------------- ---------------
Interest rates and
Stock indices $19,982,977 $18,719,739
Commodities (2,328,550) (2,473,692)
Currencies 19,023,250 10,116,005
Energy (14,267,006) 6,404,320
Metals 6,611,279 1,730,074
--------------- ---------------
$ 29,021,950 $34,496,446
=============== ===============
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or market values of the underlying financial
instruments or commodities underlying such derivative instruments frequently
result in changes in the Partnership's unrealized profit on such derivative
instruments as reflected in the Consolidated Statements of Financial
Condition. The Joint Venture's exposure to market risk is influenced by a
number of factors, including the relationships among the derivative
instruments held by the Joint Venture as well as the volatility and liquidity
in the markets in which such derivative instruments are traded.
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing
so. The procedures focus primarily on monitoring the trading of JWH and
reviewing outstanding positions for over-concentrations. While the General
Partner will not itself intervene in the markets to hedge or diversify the
Joint Venture's market exposure, the General Partner may urge JWH to
reallocate positions in an attempt to avoid over-concentrations. However,
such interventions are unusual. Except in cases in which it appears that JWH
has begun to deviate from past practice and trading policies or to be trading
erratically, the General Partner's basic risk control procedures consist
simply of monitoring JWH, with the market risk controls being applied by JWH
itself.
Fair Value
----------
The derivative instruments traded by the Joint Venture are marked to market
daily with the resulting unrealized profit recorded in the Consolidated
Statements of Financial Condition and the related profit reflected in trading
revenues in the Consolidated Statements of Income.
9
<PAGE>
The contract/notional values of the open derivative instrument positions as
of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- ------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
-------------------- ---------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Interest rates and
Stock indices $ 926,562,961 $351,175,040 $144,969,514 $ -
Commodities 21,239,916 27,160,968 6,083,206 17,321,100
Currencies 199,371,182 390,721,620 229,540,645 289,870,043
Energy - 39,106,920 18,094,440 -
Metals 18,503,375 43,958,106 2,693,494 30,540,601
------------------ ---------------- ---------------- ----------------
$1,165,677,434 $852,122,654 $401,381,299 $337,731,744
================== ================ ================ ================
</TABLE>
Substantially all of the Joint Venture's derivative financial instruments
outstanding as of December 31, 1997, expire within one year.
The contract/notional values of the Joint Venture's open exchange-traded and
non-exchange-traded open derivative instrument positions as of December 31,
1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- ------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
-------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Exchange-
Traded $ 791,818,184 $468,259,393 $170,575,723 $ 46,596,770
Non-Exchange-
Traded 373,859,250 383,863,261 230,805,576 291,134,974
----------------- ---------------- ---------------- ----------------
$1,165,677,434 $852,122,654 $401,381,299 $337,731,744
================= ================ ================ ================
</TABLE>
The average fair values, based on contract/notional values, of the Joint
Venture's derivative instrument positions which were open as of the end of
each calendar month during the year ended December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- ------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
-------------------- ------------------- --------------------- -------------------
<S> <C> <C> <C> <C>
Interest rates and
Stock indices $1,010,667,321 $263,783,626 $732,721,810 $ 97,200,016
Commodities 25,901,996 21,055,353 8,192,113 24,113,672
Currencies 395,236,535 484,258,015 300,537,708 312,830,219
Energy 22,168,532 21,307,623 22,546,285 -
Metals 9,266,297 36,089,734 3,818,246 39,804,586
----------------- ---------------- ------------------ ----------------
$1,463,240,681 $826,494,351 $1,067,816,162 $473,948,493
================= ================ ================== ================
</TABLE>
10
<PAGE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and sell the same derivative instrument on
the same date in the future. These commitments are economically offsetting
but are not, as a technical matter, offset in the forward markets until the
settlement date.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically perceived
to be less than those associated with over-the-counter transactions (non-
exchange-traded), 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 fair value amounts in the above tables represent the extent of the Joint
Venture's market exposure in the particular class of derivative instrument
listed, but not the credit risk associated with counterparty nonperformance.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit, if any, included on the
Consolidated Statements of Financial Condition.
The Joint Venture also has credit risk because the sole counterparty or
broker with respect to most of the Joint Venture's assets is MLF.
The gross unrealized profit and the net unrealized profit on the Joint
Venture's open derivative instrument positions as of December 31, 1997 and
1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------- -----------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit Profit Profit
--------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
Exchange-
Traded $14,037,333 $12,316,384 $3,013,592 $1,424,907
Non-Exchange-
Traded 8,613,088 2,581,905 6,937,127 3,271,465
--------------- --------------- -------------- --------------
$22,650,421 $14,898,289 $9,950,719 $4,696,372
=============== =============== ============== ==============
</TABLE>
The Joint Venture controls credit risk by dealing almost exclusively with
Merrill Lynch entities as brokers and counterparties.
The Joint Venture, in its normal course of business, enters into various
contracts, with MLF acting as its commodity broker. Pursuant to the
brokerage arrangement with MLF, to the extent that such trading results in
receivables from and payables to MLF, these receivables and payables are
offset and reported as a net receivable or payable.
11
<PAGE>
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Michael A. Karmelin
Michael A. Karmelin
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
ML JWH Strategic Allocation Fund L.P.
12
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-31-1997 JAN-31-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 0 726
<RECEIVABLES> 56,579,152 59,013,052
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 172,586,264 121,535,012
<PP&E> 0 0
<TOTAL-ASSETS> 229,165,416 180,548,790
<SHORT-TERM> 0 0
<PAYABLES> 5,392,290 8,351,792
<REPOS-SOLD> 0 0
<SECURITIES-LOANED> 0 0
<INSTRUMENTS-SOLD> 0 0
<LONG-TERM> 0 0
0 0
0 0
<COMMON> 0 0
<OTHER-SE> 223,773,126 172,196,998
<TOTAL-LIABILITY-AND-EQUITY> 229,165,416 180,548,790
<TRADING-REVENUE> 29,021,950 34,496,446
<INTEREST-DIVIDENDS> 12,021,263 3,030,330
<COMMISSIONS> 17,377,236 4,873,368
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 20,452,780 27,789,810
<INCOME-PRE-EXTRAORDINARY> 20,452,780 27,789,810
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 20,452,780 27,789,810
<EPS-PRIMARY> 11.76 23.88
<EPS-DILUTED> 11.76 23.88
</TABLE>
