<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
------------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission File Number 0-28928
ML JWH STRATEGIC ALLOCATION FUND L.P.
-------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3887922
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
-----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-5662
------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
ML JWH STRATEGIC ALLOCATION FUND L.P.
-------------------------------------
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
----------------------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
--------------------- ------------------
<S> <C> <C>
ASSETS
- ------
Cash $ 785 $ -
Accrued interest 2,442,904 196,088
U.S. Government obligations 226,377,496 172,586,264
Equity in commodity futures trading accounts:
Cash and options premium 21,612,540 41,484,775
Net unrealized profit on open contracts 43,443,372 14,898,289
--------------------- ------------------
TOTAL $ 293,877,097 $ 229,165,416
===================== ==================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 1,864,927 $ 1,116,238
Profit share payable - 2,640,194
Brokerage commissions payable 1,897,781 1,473,380
Organization and initial offering costs payable - 114,951
Administrative fees payable 61,219 47,527
--------------------- ------------------
Total liabilities 3,823,927 5,392,290
--------------------- ------------------
MINORITY INTEREST 5,270,844 135,830
PARTNERS' CAPITAL:
General Partner (16622 and 18177 Units) 2,597,584 2,455,940
Limited Partners (1833752 and 1634252 Units) 282,184,742 221,181,356
--------------------- ------------------
Total partners' capital 284,782,326 223,637,296
--------------------- ------------------
TOTAL $ 293,877,097 $ 229,165,416
===================== ==================
NET ASSET VALUE PER UNIT (NOTE 2)
</TABLE>
See notes to consolidated financial statements.
2
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
-------------------------------------
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- --------------------- ----------------- ----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profit:
Realized $ (2,916,484) $ 6,904,041 $ 12,907,329 $ 6,058,874
Change in unrealized 49,608,048 971,971 31,026,507 4,340,611
----------------- --------------------- ----------------- ----------------
Total trading results 46,691,564 7,876,012 43,933,836 10,399,485
----------------- --------------------- ----------------- ----------------
Interest income 3,154,307 3,119,729 9,108,742 9,025,062
----------------- --------------------- ----------------- ----------------
Total revenues 49,845,871 10,995,741 53,042,578 19,424,547
----------------- --------------------- ----------------- ----------------
EXPENSES:
Administrative fees 155,388 142,684 423,017 419,333
Brokerage commissions 4,817,019 4,423,211 13,113,522 12,999,316
----------------- --------------------- ----------------- ----------------
Total expenses 4,972,407 4,565,895 13,536,539 13,418,649
----------------- --------------------- ----------------- ----------------
INCOME BEFORE
MINORITY INTEREST AND
PROFIT SHARE ALLOCATION 44,873,464 6,429,846 39,506,039 6,005,898
Profit Share Allocation - (20,691) - (1,006,037)
Minority Interest (5,136,589) (2,967) (5,135,013) (3,269)
----------------- --------------------- ----------------- ----------------
NET INCOME $ 39,736,875 $ 6,406,188 $ 34,371,026 $ 4,996,592
================= ===================== ================= ================
NET INCOME PER UNIT:
Weighted average number of units
outstanding 1,705,868 1,764,077 1,638,537 2,930,179
================= ===================== ================= ================
Net income per weighted average
General Partner and Limited Partner Unit $ 23.29 $ 3.63 $ 20.98 $ 1.71
================= ===================== ================= ================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
-------------------------------------
(a Delaware limited partnership)
--------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
-------------------------------------------------------
For the nine months ended September 30, 1998 and 1997
-----------------------------------------------------
<TABLE>
<CAPTION>
Units Limited General Subscriptions Total
Partners Partner Receivable
---------------- ---------------- ----------------- ------------------ ----------------
<S> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1996 1,403,427 $ 188,284,065 $ 2,038,044 $ (18,248,494) $ 172,073,615
Subscriptions 409,237 32,927,079 194,570 18,248,494 51,370,143
Net Income - 4,943,078 53,514 - 4,996,592
Organizational and initial
offering costs recovery - 366,712 3,765 - 370,477
Redemptions (88,653) (11,255,936) - - (11,255,936)
---------------- ---------------- ----------------- ------------------ ----------------
PARTNERS' CAPITAL,
September 30, 1997 1,724,011 $ 215,264,998 $ 2,289,893 $ - $ 217,554,891
================ ================ ================= ================== ================
PARTNERS' CAPITAL,
December 31, 1997 1,652,429 $ 221,181,356 $ 2,455,940 $ - $ 223,637,296
Additions 412,648 55,482,679 101,403 - 55,584,082
Net Income - 34,017,667 353,359 - 34,371,026
Redemptions (214,703) (28,496,960) (313,118) - (28,810,078)
---------------- ---------------- ----------------- ------------------ ----------------
PARTNERS' CAPITAL,
September 30, 1998 1,850,374 $ 282,184,742 $ 2,597,584 $ - $ 284,782,326
================ ================ ================= ================== ================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
-------------------------------------
(a Delaware limited partnership)
--------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
------------------------------------------
These consolidated financial statements have been prepared without audit. In
the opinion of management, the consolidated financial statements contain all
adjustments (consisting of only normal recurring adjustments) necessary to
present fairly the financial position of ML JWH Strategic Allocation Fund L.P
(the "Partnership" or the "Fund") as of September 30, 1998 and the results of
its operations for the nine months ended September 30, 1998 and 1997. However,
the operating results for the interim periods may not be indicative of the
results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been omitted. It is suggested that these financial statements
be read in conjunction with the financial statements and notes thereto included
in the Partnership's Annual Report on form 10-K filed with the Securities and
Exchange Commission for the year ended December 31, 1997 (the "Annual Report").
2. NET ASSET VALUE PER UNIT
For financial reporting purposes with respect to the Units, the Partnership
deducts organizational and offering costs that are payable to the General
Partner in determining the net asset value per unit. For all other purposes
(including computing net asset value for redemptions) the Partnership deducted
only the organizational and offering reimbursement actually paid. The net asset
value per unit was $153.91 and $135.34 for financial reporting purposes and
$153.91 and $135.40 for all other purposes at September 30, 1998 and December
31, 1997, respectively.
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's total trading results by reporting category for the respective
periods were as follows:
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1998 1997 1998 1997
----------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Interest rates & Stock indices $ 53,111,092 $ 17,654,767 $ 49,192,292 $ 16,730,861
Commodities 658,924 (5,089,416) 2,522,040 (1,265,873)
Currencies (4,062,526) (1,079,442) (7,134,755) 4,140,905
Energy (774,195) (4,462,165) 7,055,060 (12,297,240)
Metals (2,241,731) 852,268 (7,700,801) 3,090,832
----------------- ----------------- ---------------- ----------------
$ 46,691,564 $ 7,876,012 $ 43,933,836 $ 10,399,485
================= ================= ================ ================
</TABLE>
5
<PAGE>
The contract/notional values of the Partnership's open derivative instrument
positions as of September 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- --------------------------------------------
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 rate and
Stock Indices $ 2,171,937,543 $ 42,080,443 $ 926,562,961 $ 351,175,040
Commodities 7,661,703 39,483,115 21,239,916 27,160,968
Currencies 582,281,067 89,023,350 199,371,182 390,721,620
Energy 37,145,864 - - 39,106,920
Metals 8,697,888 30,545,400 18,503,375 43,958,106
-------------------- ------------------ ------------------- ------------------
$ 2,807,724,065 $ 201,132,308 $ 1,165,677,434 $ 852,122,654
==================== ================== =================== ==================
</TABLE>
The contract/notional values of the Partnership's exchange-traded and non-
exchange-traded open derivative instrument positions as of September 30, 1998
and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- -------------------------------------------
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 $ 2,639,877,786 $ 108,615,508 $ 791,818,184 $ 468,259,393
Non-Exchange
traded 167,846,279 92,516,800 373,859,250 383,863,261
-------------------- ------------------ ------------------- -------------------
$ 2,807,724,065 $ 201,132,308 $ 1,165,677,434 $ 852,122,654
==================== ================== =================== ===================
</TABLE>
The average fair values, based on contract/notional values, of the derivative
instruments held or issued as of the end of each calendar month during the nine
months ended September 30, 1998 and the year ended December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- -------------------------------------------
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 rate and
Stock Indices $ 1,312,717,996 $ 402,421,718 $ 1,010,667,321 $ 263,783,626
Commodities 11,175,228 38,757,144 25,901,996 21,055,353
Currencies 360,699,702 428,416,827 395,236,535 484,258,015
Energy 8,892,252 34,058,368 22,168,532 21,307,623
Metals 14,019,727 30,368,043 9,266,297 36,089,734
------------------- ------------------- ------------------- --------------------
$ 1,707,504,905 $ 934,022,100 $ 1,463,240,681 $ 826,494,351
=================== =================== =================== ====================
</TABLE>
6
<PAGE>
The gross unrealized profit and the net unrealized profit on the Partnership's
open derivative instrument positions as of September 30, 1998 and December 31,
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit Profit Profit
---------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Exchange
traded $ 43,700,570 $ 42,373,186 $ 14,037,333 $ 12,316,384
Non-Exchange
traded 4,085,307 1,070,186 8,613,088 2,581,905
---------------- ---------------- ---------------- ---------------
$ 47,785,877 $ 43,443,372 $ 22,650,421 $ 14,898,289
================ ================ ================ ===============
</TABLE>
Item 2: Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results of Operations
-----------------------------------
Performance Summary
JANUARY 1, 1997 TO SEPTEMBER 30, 1997 BY QUARTER
January 1, 1997 to March 31, 1997
The Fund was profitable in the first quarter, largely reflecting opportunities
in foreign exchange and agricultural commodity markets.
The quarter began with gains recorded in the foreign exchange sector as
movements in key currencies mirrored the trends of 1996. The U.S. dollar
continued to strengthen against the Japanese yen, German mark and Swiss franc.
Gold prices declined to levels not seen since October 1993 as investors shifted
assets into booming equity markets. The U.S. government bond market was
volatile, reflecting revived inflation concerns. Crude oil prices were
buffeted, in part, by the quirky structure of the U.N./Iraq oil agreement which
exaggerated market movements, both up and down.
By February, world financial markets had grown more volatile and long-term
trends in some sectors, notably gold, were reversed, reducing opportunities for
profit. Gains were generated, however, in positions on coffee, as prices were
pushed up by unfavorable weather threatening crop production in Brazil and
Colombia. In the currency markets, the U.S. dollar remained strong against most
major currencies, despite jawboning by finance ministers at the G-7 conference
early in the month. Global interest rate markets were buffeted by continued
speculation on the direction of interest rates in the U.S., United Kingdom, and
Germany.
Positions in agricultural commodities contributed to profits again in March,
particularly in coffee, as coffee roaster drew down on already limited reserves
of coffee beans. A classic "short squeeze"--where not enough immediate supply
was available to meet current demand sent coffee futures prices to their
highest levels since 1994. Crude oil positions were unprofitable as a bigger-
than-anticipated buildup in U.S. stocks pushed prices down. Opportunities for
gain in interest rate markets were limited as continued speculation over the
direction of U.S. interest rates produced volatile and trendless markets.
April 1, 1997 to June 30, 1997
The Fund was unprofitable in the second quarter of 1997, largely reflecting
losses in currency, global interest rate and energy markets. Overall, gains in
international stock indices, metals and agricultural commodities failed to
offset these losses.
The quarter began with investor sentiment decidedly bearish as U.S. economic
reports strengthened the argument for a rate hike by the Federal Reserve and
global equity markets tracked U.S. stock and bond prices downward. But these
markets rebounded in the second week of April as investor confidence was
restored on new data. Positions in most bond markets traded were unprofitable
in this trendless trading environment. Continuing tends in foreign exchange
markets, however, benefited investment programs with substantial currency
components. Gains were realized also as coffee prices surged above $2 a pound
amid declining inventories. Positions in gold were profitable as the price of
the precious metal continued to decline.
Markets in May were roiled by political as well as economic developments,
including upset elections in Europe and jawboning by Japanese officials to
support the yen. The resulting turbulence in financial markets created a
difficult
7
<PAGE>
trading environment which resulted in significant losses in some programs.
Overall, programs with substantial currency exposure were unprofitable. For the
most part, trading in stock indices and agricultural commodities generated
gains. Trading in metals was mixed.
Gains were recorded in June as a modicum of clarity and order returned to world
financial markets on an improving outlook for European Monetary Union (EMU).
European bond markets strengthened on positive EMU developments. Trading as
proxy for the union's future currency (the euro), the German mark fell, against
the traditional safe haven currencies--the Swiss Franc, British pound and U.S.
dollar on investor's concerns that proposed fiscal standards might be
compromised by weaker nations in the union. In general, programs with strong
financial components realized gains. Diversified programs suffered losses as
trends in some agricultural commodities were challenged.
July 1, 1997 to September 30, 1997
The fund was profitable in the third quarter of 1997, largely reflecting gains
in global interest rates and metals. Positions in currencies, agricultural
commodities, energy and stock indices were unprofitable overall.
The third quarter was a period of contrasts, with sharply divergent economic
outlooks forming between Asian countries and continental Europe, Britain and the
U.S. The world's second largest economy, Japan, moved one step closer to
recession. The government reported that gross domestic product contracted 2.9%
in the prior quarter, or at an annualized rate of 11.2%, the sharpest quarterly
decline in over 25 years. Lon-term government bonds yields fell to 1.86%, their
lowest level ever; positions in the Japanese Government bond resulted in gains.
European markets presented a more positive picture. Investors found reasons to
be optimistic over the prospect for European Union (EMU): European Union finance
ministers had agreed to fix the conversion rates between single-currency
countries by May 1998, seven months ahead of the EMU start-up date. Economic
forecasts for Germany, France, Italy and Spain were as bright as they had been
in nearly a decade; European bond markets rallied on the expectation that EMU
membership would be broad based including Italy and Spain and would help push
European interest rates lower. Positions in the German, French, Italian and
Spanish bond markets were profitable.
Investor faith in a "new era" of uninterrupted economic prosperity in the U.S.
sent stocks and the dollar to new highs. The dollar soared to its highest level
in four years against the Swiss franc and German mark during the period.
The price of gold slid to an 11-year low during the quarter, following the
announcement by the Australian central bank of the sale of two-thirds of its
gold reserves; proceeds of the sale were put into bonds denominated in U.S.
dollars, Japanese yen and German marks. Increasingly, central banks are viewing
gold as a pure commodity rather than as a store of value held as an alternative
to currencies. Silver prices moved in tandem with gold, falling to four-year
lows. Positions in both metals resulted in gains.
JANUARY 1, 1998 TO SEPTEMBER 30, 1998 BY QUARTER
January 1, 1998 to March 31, 1998
Much of the first quarter of 1998 offered a less-than-ideal trading environment
for the Fund. In January and February, well-established trends in key markets
were interrupted, and many markets traded within a tight range, reducing
opportunities for profit. But the profit picture improved in March, as the U.S.
dollar and other currencies returned to their prior patterns of price movement.
For the period, losses were incurred in positions in most currencies, metals,
stock indices and agricultural commodities. These losses more than offset gains
in energy markets which, despite interim turbulence, ultimately succumbed to the
bearish fundamentals which have pressured prices downward for over nine months.
Small gains were also recorded in positions in European interest rates, which
continued to decline as markets of the EMU nations converged.
The quarter began with political and financial scandals in Japan. Even so,
investors were hopeful that the Japanese government would rescue the nation's
economy with a much-anticipated economic stimulus package. Investor optimism
supported the Nikkei and caused the Japanese yen to gain against the U.S.
dollar. Positions in the Nikkei and the yen were unprofitable. January was
also a month of reversals in key metals. The price of gold rose as the dollar
weakened, turning profitable positions in the metal into losses. Gains were
recorded in European and U.S. government bond markets and in crude oil.
Financial markets lacked direction in February. Losses were incurred in nearly
all currencies traded. Trading was also unprofitable in U.S. Treasury bonds,
which traded within a narrow range during the month. Gains continued to be
recorded, however, in European bond markets where yields approached post-war
lows. The silver market hit a 9 1/2 year high on news that a major investor
had purchased 20% of the world's yearly mining output. Strong gains were
realized in silver and in crude oil, which succumbed to weakening fundamentals.
The quarter ended with a sharp revival of the U.S. dollar in world markets,
especially against the yen, and a soaring British pound, which investors viewed
as a safe haven from EMU jitters. Investment programs with large currency
components benefited from decisive moves in these markets as well as in the
Swiss franc and German mark. The
8
<PAGE>
price of crude oil rose sharply during the month, following the surprise
decision by OPEC and non-OPEC oil-producing nations to cut production. By month
end, however, investors had judged the cutbacks insufficient and prices fell
back; positions in energy markets were profitable overall. Positions in metals
and agricultural commodities were unprofitable overall.
April 1, 1998 to June 30, 1998
Investor optimism regarding developments in Japan dissipated rapidly in the
second quarter, as economic reports grew bleak. Performance of the Fund
reflected the erratic behavior of the markets as investors grappled with the
possible impact of a Japanese recession on diverse global markets. Losses were
incurred overall in the three month period ended September 30, 1998, despite
strong gains realized in May.
The quarter began with trendless trading conditions in financial markets as
prospects for interest rate hikes in the U.S. and Germany gave stock and bond
markets on both sides of the Atlantic a good case of the jitters. Interventions
by the Bank of Japan to support the Japanese yen kept the currency markets on
edge for much of the month. Gains in some agricultural commodities traded
failed to offset losses in financial markets. The Fund recorded strong gains in
May, however, as financial market trends showed more definition. Gains were
substantial overall in positions on the yen, which hit a seven year low against
the U.S. dollar.
In a move that surprised the markets, the U.S. and Japan jointly intervened on
June 17 on behalf of the Japanese currency, selling dollars and buying yen in
global foreign exchange markets. The impact on the Fund was sharp, if brief.
Losses were incurred in short positions on the yen, as the Japanese currency
rose against the dollar. But by month's end, the market had returned to
fundamentals, and yen losses were reversed, resulting in small gains in the
currency overall. Nonetheless, the Fund's performance was spotty in June, with
moderate losses recorded overall for the month.
Despite U.S./Japan intervention, the Fund realized sizeable gains in positions
on the yen in the second quarter. Positions in the Japanese Government bond,
where yields declined to historic lows, also resulted in strong gains in the
quarter, as did positions in short sterling; but these gains failed to offset
losses in other interest rate markets traded.
Also in the second quarter, the Fund recorded solid gains in crude oil positions
as prices fell on ample world supply. Profitable positions in coffee, sugar,
corn and wheat offset losses in other agricultural commodities traded in the
period. With the exception of London Metals Exchange aluminum, positions in
other metals traded resulted in losses overall, as did positions in stock
indices.
July 1, 1998 to September 30, 1998
The Fund recorded strong gains during the quarter capitalizing for the most
part on trending opportunities in interest rate and agricultural commodity
markets worldwide in the majority of the Fund's programs, reversing the modest
losses experienced in the first half of the year. This favorable performance
for the quarter was in direct contrast with the performance of world equity
markets, which were down substantially.
Worldwide economic turmoil was the focus of investors during the quarter.
Global investor uncertainty, the Russian default on its debt, decline in
financial market liquidity, fears of recession, commodity deflation and a flight
to quality, all contributed to the development of trends in key markets. Chief
among these trends were the rising government bond markets, particularly in
Germany and the U.S., where yields which move in the opposite direction to
prices fell to historic lows. Positions in this sector resulted in substantial
gains for the quarter.
Prices for agricultural commodities continued to be pressured downward by
reduced demand from emerging markets as well as expectations of large crops from
producer nations, the result of nearly ideal growing conditions. Corn and sugar
prices plummeted to 11-year lows on the bearish fundamentals; positions in both
commodities were profitable as were positions in wheat, cocoa, soybeans, soybean
oil and meal, offsetting losses in other commodities traded.
Currencies afforded fewer opportunities for profit. The U.S. dollar, rangebound
against the Japanese yen for much of the quarter, began a steep decline in
September, as Japanese officials renewed their threats of intervention in the
currency markets and prospects for passage of a bank reform bill in Parliament
improved. The German mark rose against its major counterparts, including the
dollar which suffered from its association with the declining U.S. equity
market. Trends in other currencies also shifted, negatively impacting positions
taken.
On balance for the quarter, profitable positions in interest rates and
agricultural commodities more than offset losses in currencies, metals and stock
indices. Performance in energy markets was mixed.
MONTH-END NET ASSET VALUE PER UNIT
<TABLE>
<CAPTION>
Jan Feb Mar Apr. May Jun. Jul Aug Sep
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1997 $126.87 $126.83 $126.92 $126.34 $122.41 $122.74 $131.47 $127.12 $126.28
- ------------------------------------------------------------------------------------------------------
1998 $133.35 $132.47 $133.48 $133.35 $134.18 $132.11 $130.50 $143.13 $153.91
- ------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
Year 2000 Compliance
- --------------------
As the millennium approaches, Merrill Lynch has undertaken initiatives to
address the Year 2000 problem (the "Y2K problem"). The Y2K problem is the
result of a widespread programming technique that causes computer systems to
identify a date based on the last two numbers of a year, with the assumption
that the first two numbers of the year are "19." As a result, the year 2000
would be stored as "00," causing computers to incorrectly interpret the year as
1900. Left uncorrected, the Y2K problem may cause information technology
systems (e.g., computer databases) and non-information technology systems (e.g.,
elevators) to produce incorrect data or cease operating completely.
Merrill Lynch believes that it has identified and evaluated its internal Y2K
problem and that the company is devoting sufficient resources to renovating
technology systems that are not already Year 2000 compliant. Merrill Lynch
expects the renovation phase (as discussed below) of its Year 2000 efforts to be
substantially completed by December 31, 1998, thereby allowing the company to
focus on additional testing efforts and integration of the Year 2000 programs of
recent acquisitions during 1999. In order to focus attention on the Y2K
problem, management has deferred certain other technology projects; however this
deferral is not expected to have a material adverse effect on the company's
business, results of operations, or financial condition.
The failure of Merrill Lynch's technology systems relating to a Y2K problem
would likely have a material adverse effect on the company's business, results
of operations, or financial condition. This effect could include disruption of
normal business transactions, such as the settlement, execution, processing, and
recording of trades in securities, commodities, currencies, and other assets.
The Y2K problem could also increase Merrill Lynch's exposure to risk and its
need for liquidity.
In 1995, Merrill Lynch established the Year 2000 Compliance Initiative, which
is an enterprisewide effort to address the risks associated with the Y2K
problem, both internal and external. The Year 2000 Compliance Initiative's
efforts to address the risks associated with the Y2K problem have been organized
into six segments or phases: planning, pre-renovation, renovation, production
testing, certification, and integration testing.
The planning phase involved defining the scope of the Year 2000 Compliance
Initiative, including its annual budget and strategy, and determining the level
of expert knowledge available within Merrill Lynch regarding particular systems
or applications. The pre-renovation phase involved developing a detailed
enterprisewide inventory of applications and systems, identifying the scope of
necessary renovations to each application or system, and establishing a
conversion schedule. During the renovation phase, source codes are actually
converted, date fields are expanded or windowed (windowing is used on an
exception basis only), test data is prepared, and each system or application is
tested using a variety of Year 2000 scenarios. The production testing phase
validates that a renovated system is functionally the same as the existing
production version, that renovation has not introduced defects, and that
expanded or windowed date fields continue to handle current dates properly. The
certification phase validates that a system can run successfully in a Year 2000
environment. Finally, the integration testing phase, which will occur
throughout 1999, validates that a system can successfully interface with both
internal and external systems.
In 1996 and 1997, as part of the planning and pre-renovation phases, both
plans and funding of plans for inventory, preparation, renovation, and testing
of computer systems for the Y2K problem were approved. All plans for both
mission-critical and non-mission-critical systems are tracked and monitored.
The work associated with the Year 2000 Compliance Initiative has been
accomplished by Merrill Lynch employees, with the assistance of consultants
where necessary.
As part of the production testing and certification phases, Merrill Lynch has
performed, and will continue to perform, both internal and external Year 2000
testing intended to address the risks from the Y2K problem. In July 1998,
Merrill Lynch participated in an industrywide Year 2000 systems test sponsored
by the Securities Industry Association ("SIA"), in which selected firms tested
their computer systems in mock stock trades that simulated dates in December
1999 and January 2000. Merrill Lynch will participate in further industrywide
testing sponsored by the SIA, currently scheduled for March and April 1999,
which will involve an expanded number of firms, transactions, and conditions.
Merrill Lynch also participated in a test sponsored by the Bank of England's
Central Gilts Office.
Each business area within Merrill Lynch also continues to develop specific
contingency plans, with the particular choice of contingency action dependent on
the severity of the problem being addressed, the availability of alternative
products, and the level of importance of the business activity supported by the
problematic system. As part of the Year 2000 Compliance Initiative, Merrill
Lynch has undertaken a business readiness/risk management effort in which each
line of business will identify scenarios in order to develop plans to reduce
risks associated with a Y2K problem.
Merrill Lynch continues to survey and communicate with parties with whom it
has important relationships that may be associated with information technology
Y2K problems, as well as parties that may be associated with non-information
technology Y2K problems, such as landlords. Management is unable, at this
point, to ascertain whether all such third parties will successfully address the
Y2K problem, particularly parties outside the U.S., where it is believed that
remediation efforts relating to the Y2K problem may be less advanced than in the
U.S. Merrill Lynch will continue to monitor third parties' Year 2000 readiness
to determine whether additional or alternative measures are necessary. Such
measures may include the selection of alternate third parties or other efforts
designed to mitigate some of the effects of a third party's noncompliance. In
light of the interdependency of the parties in or serving the financial markets,
however, there can be no assurance that all Y2K problems will be identified and
remediated on a timely basis or that all remediation efforts will be successful.
The failure of securities exchanges, clearing organizations, vendors, clients,
or regulators to resolve their own processing issues in a timely manner could
have a material adverse effect on Merrill Lynch's business, results of
operations, or financial condition.
Nearly 10% of the current year's technology budget has been allocated to the
Year 2000 Compliance Initiative. As of the end of the 1998 third quarter, the
total estimated expenditures associated with the entire Year 2000 Compliance
Initiative were expected to be approximately $400 million, of which $160 million
is remaining. The majority of these remaining expenditures are expected to
cover software remediation, testing, and contingency planning. There can be no
assurance that the costs associated with such remediation efforts will not
exceed those currently anticipated by Merrill Lynch, or that the costs
associated with the remediation efforts or the possible failure of such
remediation efforts would not have a material adverse effect on Merrill Lynch's
business, results of operations, or financial condition.
European Economic and Monetary Union ("EMU")
- --------------------------------------------
As of January 1, 1999, the "euro" will be adopted as the common legal currency
of participating member states of the EMU. The euro and participating member
currencies will co-exist through July 1, 2002, with the euro gradually replacing
member national currencies. The introduction of and conversion to the euro is
expected to have significant implications for the business, as well as the
computer systems and operational processes, of Merrill Lynch.
The introduction of the euro will bring about fundamental changes in the
structure and nature of the European financial markets, including the creation
of a unified, more liquid capital market in Europe. As financial markets in EMU
member states converge and local barriers are removed, competition is expected
to increase. Merrill Lynch does not expect the introduction of the euro to have
a negative effect on its business, currency risk, or competitive positioning in
the European markets. The International Swaps and Derivatives Association, Inc.
has established an EMU protocol agreement that parties to derivatives contracts
may use to amend their agreements to ensure continuity of contract during the
conversion period. Merrill Lynch is a party to this protocol agreement.
Merrill Lynch's program to address the introduction of and conversion to the
euro and the associated systems and operational implications and challenges has
been divided into three phases: analysis, mobilization, and implementation. The
analysis phase began in the third quarter of 1997 and focused upon analyzing the
likely implications of the EMU and assessing the operational and systems impact
on Merrill Lynch. During this phase, a database containing the primary
compliance challenges of the EMU was developed, and working groups were
established to drive the EMU preparation effort within the different product
lines and principal operating locations. The mobilization phase began in the
fourth quarter of 1997 and focused upon developing project plans and
establishing an organizational and project structure to address various business
requirements. The implementation phase, which began in December 1997, is
concerned with implementing the operational and systems changes identified as
necessary to ensure Merrill Lynch's compliance with EMU. The implementation
phase is expected to continue into the first quarter of 1999 to resolve any
post-conversion issues.
With respect to operational and systems matters, the introduction of the euro
will affect all Merrill Lynch facilities that transact, distribute, or provide
custody or recordkeeping for securities or cash denominated in the currency of a
participating member state. Merrill Lynch systems or procedures that handle
such securities or cash may require modification. The procedural and systems
modifications that Merrill Lynch has identified as necessary for conversion to
the euro include, but are not limited to, such activities as:
. modification of application systems to enable the systems to recognize and
process the euro on an ongoing basis;
. conversion of data, which will require updates to master files to reflect
redenomination;
. alteration of transaction data that includes converting trading and cash
positions from member currency to the euro;
. procedural modifications to reflect the replacement of member currency bank
accounts and settlement instructions with euro equivalents; and
. development of the capability for certain business functions to translate
member currencies into euro at a fixed exchange rate until July 2002.
The introduction of the euro exposes Merrill Lynch to operational and systems
risks in that the necessary systems modifications will affect clearance,
settlement, and financial reporting of transactions. If not handled correctly,
these modifications could result in failed trades and other improper accounting
for transactions.
The success of Merrill Lynch's euro conversion efforts also is dependent on
the euro-compliance of third parties, such as trading counterparties, financial
intermediaries (for example, securities and commodities exchanges, depositories,
clearing organizations, and commercial banks), and vendors. Merrill Lynch will
monitor risks associated with third parties on a regular basis, including, for
example, performing assessments of counterparties' readiness.
In anticipation of the introduction of the euro, the financial authorities and
securities exchanges of certain of the EMU member states are conducting market
tests to assess euro-conversion readiness. Merrill Lynch is participating in
such testing procedures as required, and to date the outcome of each of those
tests has been satisfactory. In addition to participating in the testing
procedures of the EMU member states' financial authorities and securities
exchanges, Merrill Lynch also is implementing its own internal testing
procedures, including four systemwide practice sessions, to prepare for the
conversion. The purpose of these practice sessions is to better ensure that the
conversion plans are comprehensive and that the schedule is acceptable. The
results of such practice sessions will be evaluated and used to identify those
areas in which further modification or remediation is necessary. While Merrill
Lynch will engage in these testing procedures, certain elements of the
conversion process can only be undertaken for the first time during the
conversion. Accordingly, there can be no assurances that the tests will
identify all system deficiencies and necessary modifications prior to the
conversion.
Due to the unprecedented scale of change, including the volume and magnitude
of transactions affected and the number of third parties involved, market
participants are anticipating a period of some disruption immediately following
the conversion. Merrill Lynch has developed, and is continuing to develop,
contingency plans in an effort to reduce the impact of such disruptions on its
business.
As of the end of the 1998 third quarter, the total estimated expenditures
associated with the introduction of and conversion to the euro are expected to
be approximately $79 million, of which approximately $20 million is remaining
(of these amounts, $71 million and $19 million, respectively, pertain to 1998).
These remaining expenditures are expected to be spent on EMU compliance efforts
and project administration. Merrill Lynch expects to become fully EMU-compliant
during the 1998 fourth quarter.
Merrill Lynch believes that it has identified and evaluated those systems and
operational modifications necessary for the conversion to the euro and is in the
process of implementing the identified modifications. In light of the
interdependency of the parties in or serving the financial markets, however,
there can be no assurance that all necessary modifications will be identified
and renovated on a timely basis, that all modification efforts will be
successful, or that all third parties with whom Merrill Lynch's operations
interface will be EMU-ready. In addition, there can be no assurance that the
remaining euro conversion expenditures will not exceed those anticipated by
Merrill Lynch at this time or that the expenditures associated with the
conversion efforts and the possible failure of such conversion efforts will not
have a material adverse effect on Merrill Lynch's business, results of
operations, or financial condition.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the General
Partner is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) The Fund registered $464,840,000 of limited partnership
interest. The Fund has sold 2,383,291 Units of limited partnership
interest, with an aggregate price of $253,544,224.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits required to be filed as part of this report.
(b) Reports on Form 8-K
There were no reports on Form 8-K filed during the first nine months of
fiscal 1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ML JWH STRATEGIC ALLOCATION FUND L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: November 11, 1998 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: November 11, 1998 By /s/ JO ANN DI DARIO
-------------------
Jo Ann Di Dario
Vice President, Chief Financial Officer
and Treasurer
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