<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, 1998
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 or 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, New York, NY 10080
-------------------------------
(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
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
------- -------
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 common equity held by
non-affiliates of the registrant: as of February 1, 1999, limited partnership
units with an aggregate net asset value of $309,901,936 were held by
non-affiliates.
Documents Incorporated by Reference
The registrant's "1998 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1998,
is incorporated by reference into Part II, Item 8 and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
ANNUAL REPORT FOR 1998 ON FORM 10-K
Table of Contents
-----------------
<TABLE>
<CAPTION>
PART I PAGE
------ ----
<S> <C>
Item 1: Business ..............................................................................................1
Item 2: Properties ...........................................................................................22
Item 3: Legal Proceedings ....................................................................................22
Item 4: Submission of Matters to a Vote of Security Holders ..................................................23
PART II
-------
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters ................................23
Item 6: Selected Financial Data ..............................................................................24
Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations ................26
Item 7A: Quantitative and Qualitative Disclosures About Market Risk ...........................................30
Item 8: Financial Statements and Supplementary Data ..........................................................36
Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure .................37
PART III
--------
Item 10: Directors and Executive Officers of the Registrant ....................................................37
Item 11: Executive Compensation ................................................................................39
Item 12: Security Ownership of Certain Beneficial Owners and Management ........................................39
Item 13: Certain Relationships and Related Transactions ........................................................40
PART IV
-------
Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K .......................................41
</TABLE>
<PAGE>
PART I
Item 1: Business
--------
(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 within parameters established by MLIP (for which MLAM assumes no
responsibility). 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. ("ML&Co."). The Commodity Broker and MLAM are each indirect
wholly-owned subsidiaries of ML&Co. (ML&Co. and its affiliates are herein
sometimes referred to as "Merrill Lynch").
JWH 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 $2.2 billion in client capital as
of December 31, 1998.
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.
As of December 31, 1998, the aggregate Net Asset Value of the
Fund was $314,512,911, and the Net Asset Value per Unit, originally $100 as of
July 15, 1996, had risen to $154.34.
Through December 31, 1998, the highest month-end Net Asset
Value per Unit was $155.19 (October 31, 1998) and the lowest $98.89 (August 31,
1996).
(b) Financial Information about Segments:
------------------------------------
The Partnership's business constitutes only one segment for
financial reporting purposes, i.e., a speculative "commodity pool." The
Partnership does not engage in sales of goods or services.
(c) Narrative Description of Business:
---------------------------------
General
The Fund trades in the international futures, options on
futures and forward markets applying the multiple proprietary trading strategies
("Programs") of JWH. In managing the Fund's trading, JWH uses its "JWH Strategic
Allocation Program" in which JWH selects, and allocates and reallocates Fund
assets in any different combinations of, its JWH Programs. The Fund's primary
objective is achieving, through speculative trading, substantial
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<PAGE>
long-term 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 eleven active Programs are all
--------------------
available to the JWH Strategic Allocation Program. As of December 31, 1998,
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, 1998 provide exposure
to a wide range of markets, using different quantitative filters.
% of
Fund Assets
----------------
Original Investment Program 20.0%
JWH Global Analytics /TM/ Family 17.5
Global Financial Portfolio 15.0
G-7 Currency Portfolio 12.5
Financial and Metals Portfolio 12.5
Global Diversified Portfolio 10.0
Dollar Program 7.5
Worldwide Bond Program 5.0
----------------
100.0%
================
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<PAGE>
- ------------------------------------------------------------------------------
Average Compounded Annualized Rates of Return**
- ------------------------------------------------------------------------------
January 1, 1994-
- ------------------------------------------------------------------------------
Name of Program December 31, 1998
- --------------- -----------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Financial and Metals Portfolio 16.0%
- ------------------------------------------------------------------------------
Original Investment Program 15.7
- ------------------------------------------------------------------------------
Global Diversified Portfolio 16.4
- ------------------------------------------------------------------------------
Global Financial Portfolio 13.3 (6/1/94-12/31/98)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
International Foreign Exchange Program 17.3
- ------------------------------------------------------------------------------
G-7 Currency Portfolio 10.7
- ------------------------------------------------------------------------------
JWH GlobalAnalytics/TM/ Family of Programs* 25.0 (6/1/97-12/31/98)
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
International Currency and Bond Portfolio 16.8
- ------------------------------------------------------------------------------
The World Financial Perspective 13.3
- ------------------------------------------------------------------------------
Dollar Program* 5.8 (7/1/96-12/31/98)
- ------------------------------------------------------------------------------
Worldwide Bond Program* 21.3 (7/1/96-12/31/98)
- ------------------------------------------------------------------------------
* The Average Compounded Annualized Rate of Return for these
programs reflects the actual performance of all client accounts traded pursuant
to the same methodology. Performance is derived from (1) the program's composite
performance from inception until May 7, 1998 and (2) the performance of JWH's
Exclusive Fund Accounts from May 8, 1998 through December 31, 1998.
** 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.
-3-
<PAGE>
The following are brief summaries of the active JWH Programs.
- ------------------------------------------------------------------------------
Financial and Metals Portfolio Assets Managed
January 1, 1999
- ------------------------------------------------------
- ------------------------------------------------------------------------------
Program Composition: $1.182 billion
- ------------------------------------------------------------------------------
Global Interest Rates
- ------------------------------------------------------------------------------
Global Stock Indices
- ------------------------------------------------------------------------------
Foreign Exchange
- ------------------------------------------------------------------------------
Precious Metals
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Worst Monthly Decline on
- ------------------------------------------------------------------------------
an Individual Account Basis: (10.1)% (2/96)
- ------------------------------------------------------------------------------
Worst Peak-to-Valley Decline
- ------------------------------------------------------------------------------
on an Individual Account Basis: (30.5)% (6/94-1/95)
- ------------------------------------------------------------------------------
1998 Compound Annual Rate of Return: 7.2%
- ------------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 15.2%
- ------------------------------------------------------------------------------
1996 Compound Annual Rate of Return: 29.7%
- ------------------------------------------------------------------------------
1995 Compound Annual Rate of Return: 38.5%
- ------------------------------------------------------------------------------
1994 Compound Annual Rate of Return: (5.3%)
- ------------------------------------------------------------------------------
Average Compounded Annualized Rate of 16.0%
Return since January 1994:
- ------------------------------------------------------------------------------
The Financial and Metals Portfolio seeks to identify and
capitalize on intermediate and long-term price movements in global financial and
precious metals markets. 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. Historically, the program has had a low statistical
correlation to the S&P 500.
Currency positions are traded primarily in the interbank
market and occasionally on futures exchanges, and may be held both as
outrights -- positions taken in foreign currencies versus the U.S. dollar --
and cross rates -- foreign currencies against each other. This program began
trading client capital in October 1984.
-4-
<PAGE>
- -------------------------------------------------------------------------------
Original Investment Program Assets Managed
January 1, 1999
- -------------------------------------------------------------------------------
Program Composition: $405 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)
- -------------------------------------------------------------------------------
1998 Compound Annual Rate of Return: 10.8%
- -------------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 5.7%
- -------------------------------------------------------------------------------
1996 Compound Annual Rate of Return: 22.6%
- -------------------------------------------------------------------------------
1995 Compound Annual Rate of Return: 53.2%
- -------------------------------------------------------------------------------
1994 Compound Annual Rate of Return: (5.7%)
- -------------------------------------------------------------------------------
Average Compounded Annualized Rate of Return 15.7%
since January 1994:
- -------------------------------------------------------------------------------
The Original Investment Program seeks to capitalize on
long-term trends in a broad spectrum of worldwide financial and nonfinancial
futures markets. The program always maintains a position -- long or short -- in
every market traded. Historically, it has had a low statistical correlation to
the S&P 500.
In 1992, a broad research effort was initiated to enhance the
risk-reward ratios of the Original Investment Program, without changing its
fundamental trading approach. Except for the removal of a few markets traded,
the program had remained virtually unchanged from its inception in 1982 through
the middle of 1992. After extensive testing, a number of strategic adjustments
were made beginning in July 1992: global markets were added; sector allocations
were shifted, with greater weighting given to financial markets; some contracts
which had become too illiquid to support sizeable assets were eliminated; and
overall position size relative to account equity was reduced. The quantitative
model underlying the program was not changed. This program began trading client
capital in October 1982.
-5-
<PAGE>
- -------------------------------------------------------------------------------
Global Diversified Portfolio Assets Managed
January 1, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Program Composition: $202 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)
- -------------------------------------------------------------------------------
1998 Compound Annual Rate of Return 23.6%
- -------------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 3.3%
- -------------------------------------------------------------------------------
1996 Compound Annual Rate of Return: 26.9%
- -------------------------------------------------------------------------------
1995 Compound Annual Rate of Return: 19.6%
- -------------------------------------------------------------------------------
1994 Compound Annual Rate of Return: 10.1%
- -------------------------------------------------------------------------------
Average Compounded Annualized Rate of Return
since January 1994: 16.4%
- -------------------------------------------------------------------------------
The Global Diversified Portfolio seeks to capitalize on
long-term price movements a broad spectrum of financial and non-financial
markets. The program does not maintain continuous positions and, in fact, may
take a neutral stance if a long-term trend fails to develop or during periods of
nontrending markets. Historically, the program has had a low statistical
correlation to the S&P 500. The Global Diversified Portfolio began trading
client capital in June 1988.
- -------------------------------------------------------------------------------
Assets Managed
January 1, 1999
Global Financial Portfolio
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
Program Composition: $158 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%) (7/94-1/95)
- -------------------------------------------------------------------------------
1998 Compound Annual Rate of Return 9.9%
- -------------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 4.9%
- -------------------------------------------------------------------------------
1996 Compound Annual Rate of Return: 32.4%
- -------------------------------------------------------------------------------
1995 Compound Annual Rate of Return: 86.2%
- -------------------------------------------------------------------------------
1994 Compound Annual Rate of Return: (37.7%) (7 mos.)
- -------------------------------------------------------------------------------
Average Compounded Annualized Rate of Return 13.3%
Since Inception in June 1994:
- -------------------------------------------------------------------------------
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<PAGE>
The Global Financial Portfolio seeks to identify and
capitalize on long-term price movements in a small group of energy, metals, and
financial markets. The program always maintains a position -- long or short --
in every market traded. Historically, the program has had a low statistical
correlation to the S&P 500.
This program began in April 1992 with one proprietary account
which composed the entire performance record through May 1994. The actual
historical performance of the account has been retroactively adjusted on a pro
forma basis to reflect the approximate interest income, management fee,
incentive fee, and brokerage commissions. This program began trading client
capital in June 1994.
- --------------------------------------------------------------------------------
Assets Managed
January 1, 1999
G-7 Currency Portfolio
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Program Composition: $96 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)
- --------------------------------------------------------------------------------
1998 Compound Annual Rate of Return: (4.8%)
- --------------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 21.0%
- --------------------------------------------------------------------------------
1996 Compound Annual Rate of Return: 14.5%
- --------------------------------------------------------------------------------
1995 Compound Annual Rate of Return: 32.2%
- --------------------------------------------------------------------------------
1994 Compound Annual Rate of Return: (4.9%)
- --------------------------------------------------------------------------------
Average Compounded Annualized Rate of Return
Since January 1994: 10.7%
- --------------------------------------------------------------------------------
The G-7 Currency Portfolio seeks to identify and capitalize on
intermediate and long-term price movements in the highly liquid currencies of
the Group of Seven Industrialized nations and Switzerland. The program attempts
to take a position if a trend is identified, and takes a neutral stance during
periods of nontrending markets. Historically, the program has had a low
statistical correlation to the S&P 500.
Not all of the G-7 currencies are traded at all times. Forward
positions are primarily taken on the interbank market as outrights against the
U.S. dollar, or as cross rates, which reduces dependence on the U.S. dollar. G-7
began trading client capital in February 1991.
-7-
<PAGE>
- -----------------------------------------------------------------------------
International Foreign Assets Managed
Exchange Program
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Program Composition: $92 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)
- -----------------------------------------------------------------------------
1998 Compound Annual Rate of Return 14.0%
- -----------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 71.1%
- -----------------------------------------------------------------------------
1996 Compound Annual Rate of Return: 3.7%
- -----------------------------------------------------------------------------
1995 Compound Annual Rate of Return: 16.9%
- -----------------------------------------------------------------------------
1994 Compound Annual Rate of Return: (6.3%)
- -----------------------------------------------------------------------------
Average Compounded Annualized Rate of Return
Since January 1994: 17.3%
- -----------------------------------------------------------------------------
The International Foreign Exchange Program ("Forex") seeks to
identify and capitalize on intermediate and long-term price movements in a broad
range of major and minor currencies on the interbank market. Forex attempts to
take a position if a trend is identified, and takes a neutral stance if
long-term trends fail to continue or during periods of nontrending markets.
Historically, the program has had a low statistical correlation to the S&P 500.
Positions are taken as outrights against the U.S. dollar, or
cross rates, which eliminates dependence on the dollar. This program began
trading client capital in August 1986.
- -----------------------------------------------------------------------------
Approximate
JWH GlobalAnalytics/TM/ Assets Managed
Family of Programs*
- -----------------------------------------------------------------------------
- -----------------------------------------------------------------------------
Program Composition: $86 million
- -----------------------------------------------------------------------------
Global Interest Rates
- -----------------------------------------------------------------------------
Global Stock Indices
- -----------------------------------------------------------------------------
Foreign Exchange
- -----------------------------------------------------------------------------
Energy
- -----------------------------------------------------------------------------
Softs, Grains, Fiber
- -----------------------------------------------------------------------------
Precious Metals
- -----------------------------------------------------------------------------
Worst Monthly Decline on
- -----------------------------------------------------------------------------
an Individual Account Basis: (5.0)% (4/98)
- -----------------------------------------------------------------------------
Worst Peak-to-Valley Decline
- -----------------------------------------------------------------------------
on an Individual Account Basis: (5.0)% (4/98)
- -----------------------------------------------------------------------------
1998 Compound Annual Rate of Return (3.6) (5 mos.)
- -----------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 17.6% (7 mos.)
- -----------------------------------------------------------------------------
Average Compounded Annualized Rate of Return since
inception in June 1997: 6.2% (7/96-5/98)
- -----------------------------------------------------------------------------
JWH GlobalAnalytics/TM/ Family of Programs seeks to identify
and invest in a wide range of price trends -- from very short to exceptionally
long term. The firm's most broadly diversified investment program, JWH
GlobalAnalytics remains neutral if no substantive trends are apparent, and
builds or reduces positions over time as the system indicates.
Introduced in June 1997, JWH GlobalAnalytics is the result of
extensive research and testing by the firm. Unlike other JWH programs, which
invest in intermediate and long-term price movements, JWH GlobalAnalytics
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<PAGE>
integrates a wide variety of trend identification methodologies into a single,
broadly diversified investment portfolio or family of programs. It invests in
both financial and commodity markets, including certain energy and agricultural
contracts not available through other JWH investment programs.
*The performance data for this program is only through May 7,
1998. The program continues to operate, but only as a portion of the Fund and
its offshore counterpart, ML JWH Strategic Allocation Fund Ltd. For performance
information subsequent to May 7, 1998, please see the Exclusive Fund Accounts.
- ----------------------------------------------------------------------------
Approximate
Assets Managed
Dollar Program*
- ----------------------------------------------------------------------------
- ----------------------------------------------------------------------------
Program Composition: $40 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)
- ----------------------------------------------------------------------------
1998 Compound Annual Rate of Return: (5.0%) (5 mos.)
- ----------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 6.8%
- ----------------------------------------------------------------------------
1996 Compound Rate of Return: 10.6% (6 mos.)
- ----------------------------------------------------------------------------
Average Compounded Annualized Rate of Return: 6.2% (7/96-5/98)
- ----------------------------------------------------------------------------
The Dollar Program seeks to identify and capitalize on
intermediate and long-term price movements in the foreign exchange sector,
trading major currencies against the U.S. dollar (outright trading).
The program may employ a neutral stance during periods of nontrending markets.
The program trades the Japanese yen, Euro, Swiss franc and
British pound. Because this program invests in a limited number of contracts, it
may experience greater volatility than other JWH foreign exchange programs.
This program began in June 1994 with one proprietary account
which composed the entire performance record through June 1996. The actual
historical performance of the account has been retroactively adjusted on a pro
forma basis to reflect the approximate interest income, management fee,
incentive fee, and brokerage commission of the program currently offered.
*The performance data for this program is only through May 7,
1998. The program continues to operate, but only as a portion of the Fund and
its offshore counterpart, ML JWH Strategic Allocation Fund Ltd. For performance
information subsequent to May 7, 1998, please see the Exclusive Fund Accounts.
-9-
<PAGE>
- ------------------------------------------------------------------------------
Assets Managed
The World Financial January 1, 1999
Perspective
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Program Composition: $30 million
- ------------------------------------------------------------------------------
Global Interest Rates
- ------------------------------------------------------------------------------
Global Stock Indices
- ------------------------------------------------------------------------------
Foreign Exchange
- ------------------------------------------------------------------------------
Energy
- ------------------------------------------------------------------------------
Precious Metals
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Worst Monthly Decline on
- ------------------------------------------------------------------------------
an Individual Account Basis: (11.7%) (2/94)
- ------------------------------------------------------------------------------
Worst Peak-to-Valley Decline
- ------------------------------------------------------------------------------
on an Individual Account Basis: (25.9%) (7/94-1/95)
- ------------------------------------------------------------------------------
1998 Compound Annual Rate of Return 7.2%
- ------------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 10.4%
- ------------------------------------------------------------------------------
1996 Compound Annual Rate of Return: 40.9%
- ------------------------------------------------------------------------------
1995 Compound Annual Rate of Return: 32.2%
- ------------------------------------------------------------------------------
1994 Compound Annual Rate of Return: (15.2%)
- ------------------------------------------------------------------------------
Average Compounded Annualized Rate of Return since
January 1994: 13.3%
- ------------------------------------------------------------------------------
The World Financial Perspective seeks to capitalize on
long-term price movements in financial, metals and energy markets and holds
positions from multiple currency perspectives, including the British pound,
Euro, Japanese yen, Swiss franc and U.S. dollar. The program always maintains a
position -- long or short -- in every market traded. Historically, the program
has had a low statistical correlation to the S&P 500.
- -------------------------------------------------------------------------------
Assets Managed
International Currency January 1, 1999
and Bond Portfolio
- -------------------------------------------------------------------------------
Program Composition: $28 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)
- -------------------------------------------------------------------------------
1998 Compound Annual Rate of Return 16.1%
- -------------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 17.0%
- -------------------------------------------------------------------------------
1996 Compound Annual Rate of Return: 19.9%
- -------------------------------------------------------------------------------
1995 Compound Annual Rate of Return: 36.5%
- -------------------------------------------------------------------------------
1994 Compound Annual Rate of Return: (2.3)%
- -------------------------------------------------------------------------------
Average Compounded Annualized Rate of Return
since January 1994: 16.8%
- -------------------------------------------------------------------------------
The International Currency and Bond Portfolio seeks to
identify and capitalize on intermediate and long-term price movements in the
world's bond and foreign exchange markets. If a trend is identified, the program
will take a position; in nontrending market environments, the program may
liquidate positions and remain neutral. Historically, ICB has had a low
statistical correlation with the S&P 500.
Using a more conservative approach to position size in
relation to account equity than in other JWH programs, ICB targets currencies
and the long-term portion of interest rates of major industrialized nations.
Foreign
-10-
<PAGE>
exchange positions are held both as outrights -- positions taken in foreign
currencies versus the U.S. dollar -- and cross rates -- foreign currencies
traded against each other. ICB began trading client capital in January 1993.
- ------------------------------------------------------------------------------
Assets Managed
January 1, 1999
Worldwide Bond Program*
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Program Composition: $23 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)
- ------------------------------------------------------------------------------
1998 Compound Annual Rate of Return 0.4% (5 mos.)
- ------------------------------------------------------------------------------
1997 Compound Annual Rate of Return: 9.5%
- ------------------------------------------------------------------------------
1996 Compound Annual Rate of Return: 17.8% (6 mos.)
- ------------------------------------------------------------------------------
Average Compounded Annualized Rate of Return since
inception in July 1996: 14.0%
- ------------------------------------------------------------------------------
The Worldwide Bond Program ("WWB") seeks to capitalize on
intermediate and long-term trends by investing through financial futures in the
long-term portion of global interest rate markets. The program may take a
neutral stance during periods of nontrending markets. Historically, the program
has had a low statistical correlation with the S&P 500.
Although WWB concentrates in one sector, diversification is
achieved by trading futures contracts on the interest rate instruments of
numerous countries, including the U.S. 30-year bond, U.S. 10-year note, British
long gilt, the French, German and Italian bonds and Australian 10-year bond. The
program also takes smaller position sizes compared to other JWH programs that
participate in multiple market sectors.
This program began in October 1994 with one proprietary
account which composed the entire performance record through June 1996. The
actual historical performance of the account has been retroactively adjusted on
a pro forma basis to reflect the approximate interest income, management fee,
incentive fee, and brokerage commission of the program currently offered. WWB
began trading client capital in July 1996.
* The performance data for this program is only through May 7,
1998. The program continues to operate, but only as a portion of the Fund and
its offshore counterpart, ML JWH Strategic Allocation Fund Ltd. For performance
information subsequent to May 7, 1998, please see the Exclusive Fund Accounts.
-----------
Exclusive Fund Accounts
Pursuant to JWH's Strategic Allocation Program, which is currently the
subject of an exclusivity arrangement with the Fund and its offshore counterpart
(the "Exclusive Fund Accounts"), JWH can make various discretionary trading
adjustments for the accounts of those Exclusive Fund Accounts, including ongoing
allocations and reallocations of fund assets among the investment programs and
periodic trading leverage adjustments. As a result of a change made to these
Exclusive Fund Accounts on May 8, 1998, these programs have traded differently
from the other accounts in the respective JWH investment program. Capsule
performance records for these programs are set forth below. Because of the
exclusivity agreement related to the Strategic Allocation Program, these
modified programs are not currently available for investment by other clients.
-11-
<PAGE>
<TABLE>
<CAPTION>
JOHN W. HENRY & COMPANY, INC. PROGRAMS
EXCLUSIVE FUND ACCOUNTS
May 1998 - December 1998
-------------------------------------------------------------------------------------------
Name of Program: Financial and Original Global Global Financial G-7 Currency
Metals Portfolio Investment Diversified Portfolio Portfolio
Exclusive Program Exclusive Portfolio Exclusive Exclusive
Exclusive
-------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Aggregate Assets
(excluding
"notional" equity)
in Program: $62 million $103 million $49 million $79 million $59 million
-------------------------------------------------------------------------------------------
Worst Monthly
Decline on an
Individual Account
Basis: (8.6)% (11/98) (12.0)% (11/98) (9.3)% (10/98) (8.7)% (11/98) (8.6)% (11/98)
-------------------------------------------------------------------------------------------
Worst
Peak-to-Valley
Decline
on an Individual (11.7)% (12.0)% (11/98) (12.2)% (8.7)% (11/98) (10.0)%
Account Basis: (10/98-11/98) (10/98-11/98) (11/98-12/98)*
-------------------------------------------------------------------------------------------
Average Compounded
Annualized
Rate of Return: N/A N/A N/A N/A N/A
-------------------------------------------------------------------------------------------
1998 Compound
Annual Rate of 33.5% 20.2% 39.7% 18.4% 0.7%
Return: (8 mos.) (8 mos.) (8 mos.) (8 mos.) (8 mos.)
- ----------------------------------------------------------------------------------------------------------------
<CAPTION>
-----------------------------------------------------
Name of Program: Worldwide Bond JWH Dollar Program
Program Exclusive Global-Analytics(TM) Exclusive
Family of
Programs
Exclusive
-----------------------------------------------------
<S> <C> <C> <C>
Aggregate Assets
(excluding
"notional" equity)
in Program: $25 million $86 million $38 million
-----------------------------------------------------
Worst Monthly
Decline on an
Individual Account
Basis: (7.0)% (10/98) (5.8)% (11/98) (7.2)% (11/98)
-----------------------------------------------------
Worst
Peak-to-Valley
Decline
on an Individual (7.4)% (6.1)% (7.2)% (11/98)
Account Basis: (10/98-11/98) (10/98-11/98)
-----------------------------------------------------
Average Compounded
Annualized
Rate of Return: N/A N/A N/A
-----------------------------------------------------
1998 Compound
Annual Rate of 25.9% 25.5% 2.7%
Return: (8 mos.) (8 mos.) (8 mos.)
- --------------------------------------------------------------------------
</TABLE>
* This program is currently in a drawdown the valley of which has not yet been
reached.
-12-
<PAGE>
JWH Program Selection
- ---------------------
JWH's eleven active programs are all available to the JWH
Strategic Allocation Program. As of January 1, 1999, eight programs -- listed
above at page 2 -- were being used for the Fund.
The Strategic Allocation Program is not a systematic or even a
formalized strategy for selecting combinations of JWH programs. On the contrary,
program selections and the size of the allocations among them are made entirely
by the subjective, collective judgment of certain JWH principals. From time to
time, these principals consider a wide range of different factors in deciding
which programs to use for the Fund. There is no way to predict which programs
will be used or what allocation of the Fund's assets will be made among the
various programs chosen at any given time or over time. It is also not possible
to predict which factors the JWH principals may consider in selecting any
individual program or program combination.
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:
-13-
<PAGE>
<TABLE>
<CAPTION>
Currencies
<S> <C>
Australian Dollar Malaysian Ringitt*
British Pound New Zealand Dollar*
Canadian Dollar* Norwegian Krone
Danish Krone* Singapore Dollar*
Euro South African Rand*
Hong Kong Dollar Swedish Krone*
Japanese Yen Swiss Franc
Financial Instruments
Australian (90-day) Bank Bills French PIBOR
Australian (3-year and 10-year) Treasury Bonds German Bonds
Canadian Bonds* Italian bonds
Eurobibor Japanese Bonds
Eurodollar Spanish Bonds*
Eurolibor Spanish MIBOR
Eurolira U.K. Long "Gilts"
Euroswiss U.K. Short Sterling
Euroyen U.S. 10-year Treasury Notes
French Notionnel Bonds U.S. Treasury Bonds
Stock Indices
Australian All Ordinaries Index* FTSE 100 (UK)
CAC 40 Stock Index (France)* New York Composite*
DAX (German)* Nikkei 225 Index (Japan)
S&P 500 Stock Index*
Metals
Aluminum* Palladium*
Copper Platinum*
Gold Silver
Lead* Tin*
Nickel* Zinc*
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
-------------------------------------------------------------------
</TABLE>
* These markets are integrated into the JWH Trading Programs
as contract liquidity, legal constraints, market conditions and date realibility
standards meet JWH's specifications.
-14-
<PAGE>
Leverage Considerations
- -----------------------
The larger the Fund's market commitment (generally equivalent
to the face amount of the positions held) in relation to its assets, the higher
the position size in relation to account equity at which the Fund is said to be
trading. In general, the larger the Fund's market commitment, the greater the
profit potential as well as risk of loss. JWH adjusts the Fund's market
commitment to levels which JWH believes are consistent with the Fund's desired
internal risk/reward profile. For example, in volatile markets, JWH might decide
- -- in order to reduce market exposure and, accordingly, the risk of loss, but
with a corresponding decrease in profit potential -- that the positions
ordinarily appropriate for a $50 million Fund allocation are all a $75 million
allocation should acquire. On the other hand, market factors might cause JWH to
decide -- in order to increase market exposure and, accordingly, profit
potential as well as risk of loss -- that the positions ordinarily indicated for
a $100 million allocation are appropriate for a Fund allocation 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 301 Yamato Road,
Suite 2200, Boca Raton, Florida, 33431-4931, (561) 241-0018 and One Glendinning
Place, Westport, Connecticut 06880, (203) 221-0431. JWH's registration as a
Commodity Trading Advisor became effective in November 1980. JWH is a member of
the National Futures Association ("NFA") in this capacity.
Trading Strategy
- ----------------
The following description of JWH's trading strategy relates to
JWH generally and not to the Fund itself.
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.
Implementing the Program
------------------------
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 --
-15-
<PAGE>
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 greatest cumulative percentage decline in daily net asset
value which JWH has experienced in any single program was nearly sixty percent
on a composite basis since its inception. Investors in the Fund 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 designed to
reduce the possibility of an extraordinary loss in any one market are
maintained. 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 cyclically during holiday seasons or on the basis of
irregularly-occurring market events. Subjective aspects of JWH's quantitative
models also include the determination of the size of the position in relation to
account equity, when an account should commence trading, markets traded,
contracts and contract month selection, and effective trade execution.
Program Modifications
---------------------
Proprietary research is conducted on an ongoing basis to
refine the JWH investment strategies and attempt to reduce volatility. 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, or in varying combinations, is a subject of continual
testing, review and evaluation. Extensive research 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 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. However, most investment programs maintain a
consistent portfolio composition to allow opportunities in as many major market
trends as possible.
All cash in a JWH investment program is available to be used
to trade in a JWH program. The amounts committed to margin will vary from time
to time. 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.
Adjustments to the size of trading positions taken in relation
to account equity have been and continue to be an integral part of JWH's
investment strategy. At its discretion, JWH may adjust position size in relation
to account equity in certain markets or entire programs. Position size in
relation to account equity adjustments may be made at certain times for some
accounts but not for others. Factors which may affect the decision to adjust
position size in relation to account equity 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 position size in relation to account equity may positively or negatively
affect performance, and will alter risk exposure for an account. Position size
in relation to account equity adjustments may lead to greater profits or losses,
more frequent and larger margin calls and greater brokerage expense. No
assurance is given that such position size in relation to account equity
adjustments will be to the financial advantage of investors in the Fund. JWH
reserves the right, at its sole discretion, to adjust its position size in
relation to account equity policy without notification to MLIP.
-16-
<PAGE>
Addition, Redemption and Reallocation of Capital for Commodity
--------------------------------------------------------------
Pool or Fund Accounts
---------------------
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 Joint Venture Agreement
---------------------------
The advisory arrangement between the Fund and JWH is a joint
venture, a general partnership structure. The Joint Venture Agreement terminates
December 31, 1999, subject to automatic one-year renewals, unless either the
Fund or JWH elects not to renew.
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 Joint Venture 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 Joint
Venture, 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 of the
Joint Venture 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 joint venture.
The Partnership and the Joint Venture 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.
-17-
<PAGE>
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 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. Substantially all of the Fund's
off-exchange trading takes place in the highly liquid, institutionally-based
currency forward markets.
Many of the Partnership's currency trades are executed in the
spot and forward foreign exchange markets (the "FX Markets") where there are no
direct execution costs. Instead, the participants, banks and dealers, including
Merrill Lynch International Bank ("MLIB"), in the FX Markets take a "spread"
between the prices at which they are prepared to buy and sell a particular
currency and such spreads are built into the pricing of the spot or forward
contracts with the Partnership. The General Partner anticipates that some of the
Partnership's foreign currency trades will be executed through MLIB, an
affiliate of the General Partner. MLIB has discontinued the operation of the
foreign exchange service desk, which included seeking multiple quotes from
counterparties unrelated to MLIB for a service fee and trade execution.
In its exchange of futures for physical ("EFP") trading, the
Partnership acquires cash currency positions through banks and dealers,
including Merrill Lynch. The Partnership pays a spread when it exchanges these
positions for futures. This spread reflects, in part, the different settlement
dates of the cash and the futures contracts, as well as prevailing interest
rates, but also includes a pricing spread in favor of the banks and dealers,
which may include a Merrill Lynch entity.
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 which markets the Fund may trade or as to how 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 Treasury bills or Government Securities.
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 assets managed by
MLAM and the Fund's cash balances 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 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 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
-18-
<PAGE>
managed by MLAM to slightly above the 91-day Treasury bill rate. However, cash
management returns cannot be assured and there may be losses to principal.
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.
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, 1998, the Asset Management Group of ML&Co. (which includes MLAM)
had a total of approximately $501 billion in investment company and other
portfolio assets under management.
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 Fund, 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 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 0.75% per annum of the Fund's average daily U.S. dollar Available
Assets 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, if
any. MLF provides the necessary margin, permitting the Fund to retain the monies
which would otherwise be required for such margin as part of the Fund'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 prevailing short-term rates on realized and unrealized
gains on non-U.S. dollar denominated positions for such gains actually held in
cash by the Fund. Merrill Lynch charges the Fund Merrill Lynch's cost of
financing realized and unrealized losses on such positions.
-19-
<PAGE>
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.
Charges
The following table summarizes the charges incurred by the Fund during
1998, 1997 and the last 5 1/2 months of 1996.
<TABLE>
<CAPTION>
1998 1997 1996
----------------------------------------------------------------
Charges Dollar Dollar Dollar
Amount Amount Amount
----------------------------------------------------------------- --------------------- ------------------
<S> <C> <C> <C>
Brokerage $ 19,086,026 $ 17,377,236 $ 4,873,368
Commissions
Administrative Fees 615,678 560,556 157,205
Organizational and Initial
Offering Costs 98,530 298,039 232,954
----------------------------------------------------------------
Total $ 19,800,234 $ 18,235,831 $ 5,263,527
================================================================
</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 allocated to JWH. Through December 31, 1998, JWH
received Profit Shares of $12,759,555 (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 initial Reimbursement for these costs
offering costs reimbursement ended June 30, 1998.
MLF Brokerage commissions A flat-rate, monthly Brokerage Commissions of
0.646 of 1% of the Fund/JWH joint venture's
month-end assets (a 7.75% annual rate).
During 1998, 1997 and the 5 1/2 months of 1996,
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 $145,
$212 and $208.
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.
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; Other Counterparties Bid-ask spreads Bid-ask spreads on forward and related trades.
</TABLE>
-20-
<PAGE>
<TABLE>
<CAPTION>
Recipient Nature of Payment Amount of Payment
- --------- ----------------- ----------------
<S> <C> <C>
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 Although, according to the terms of the
Prospectus, the General Partner is entitled to
receive, from the Partnership, ongoing
offering cost reimbursement of up to .25 of 1%
of the Partnership's average month-end assets,
the General Partner is currently paying for
all ongoing offering costs incurred in
connection with the offering of units.
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
</TABLE>
-21-
<PAGE>
<TABLE>
<CAPTION>
Recipient Nature of Payment Amount of Payment
- --------- ----------------- ----------------
<S> <C> <C>
experiences during a year) be accrued during a
calendar year even though the joint venture
has an overall loss for such year.
JWH Management Fees
MLF pays JWH annual Management Fees of 4% of
the Partnership's average month-end assets,
after reduction for a portion of the Brokerage
Commissions.
MLF; Other Extraordinary expenses Actual payments to third parties; none paid to
Third Parties date.
</TABLE>
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 Geographic Areas:
--------------------------------------------
The Partnership and the Joint Venture 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. The Partnership does not engage in the sales of goods or
services.
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 (Merrill Lynch World Headquarters, World
Financial Center, South Tower, New York, New York, 10080). 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 material administrative, civil or criminal action against JWH or its
principals.
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 predicted 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.
-22-
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Partnership has never submitted any matter to a vote of its Limited
Partners.
PART II
Item 5: Market for Registrant's Common Equity and Related Stockholder Matters
---------------------------------------------------------------------
Item 5(a)
(a) Market Information:
------------------
There is no established public trading market for the Units,
nor will one develop. Limited Partners may 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, 1998, there were 8,681 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
--------------------------------------------------------
from Registered Securities:
--------------------------
The Fund originally registered units of limited partnership
interest. The Fund subsequently registered an additional 2,000,000 units of
limited partnership interest. As of December 31, 1998, the Fund has sold
2,702,658 units of limited partnership interest, with an aggregate price of
$319,154,710.
Item 5(b)
Not applicable.
-23-
<PAGE>
Item 6: Selected Financial Data
-----------------------
The following selected financial data has been derived from the audited
consolidated financial statements of the Partnership:
<TABLE>
<CAPTION>
For the Year For the Year
Ended Ended July 15, 1996 to
December 31, December 31, December 31,
Income Statement Data 1998 1997 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Revenues:
Trading Profits
Realized Gain $ 35,957,735 $ 18,820,033 $ 29,800,074
Change in Unrealized Gain 12,141,395 10,201,917 4,696,372
---------------------------------------------------------------------
Total Trading Results 48,099,130 29,021,950 34,496,446
Interest Income 12,766,955 12,021,263 3,030,330
---------------------------------------------------------------------
Total Revenues 60,866,085 41,043,213 37,526,776
---------------------------------------------------------------------
Expenses:
Brokerage Commissions 19,086,026 17,377,236 4,873,368
Administrative Fees 615,678 560,556 157,205
---------------------------------------------------------------------
Total Expenses 19,701,704 17,937,792 5,030,573
---------------------------------------------------------------------
Income before Minority Interest and
Profit Share Allocation 41,164,381 23,105,421 32,496,203
Profit Share Allocation (5,436,351) (2,640,194) (4,683,010)
Minority Interest In Income (19,071) (12,447) (23,383)
---------------------------------------------------------------------
Net Income $ 35,708,959 $ 20,452,780 $ 27,789,810
=====================================================================
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data December 31, 1998 December 31, 1997 December 31, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fund Net Asset Value $ 314,512,911 $ 223,735,828 $ 172,840,660
Net Asset Value per Unit $ 154.34 $ 135.40 $ 123.16
---------------------------------------------------------------------
</TABLE>
* 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 June 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
1998 $133.35 $132.47 $133.48 $128.97 $134.18 $132.11 $130.50 $143.13 $153.91 $155.19 $142.61 $154.34
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Prior to June 30, 1998, 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.
-24-
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
December 31, 1998
Type of Pool: Single-Advisor/Publicly-Offered/Not "Principal Protected"(1)
Inception of Trading: July 15, 1996
Aggregate Subscriptions: $319,154,710
Current Capitalization: $314,512,911
Worst Monthly Drawdown:(2) (8.11)% (11/98)
Worst Peak-to-Valley Drawdown:(3) (8.11)% (11/98)
- ------------------------------------------------------------------------
Monthly Rates of Return(4)
Month 1998 1997 1996
January (1.51)% 3.01% N/A
February (0.66) (0.03) N/A
March 0.77 0.07 N/A
April (3.38) (0.46) N/A
May 4.04 (3.11) N/A
June (1.54) 0.27 N/A
July (1.22) 7.11 (1.02)%
August 9.68 (3.31) (0.09)
September 7.53 (0.66) 5.49
October 0.83 2.58 10.20
November (8.11) 0.97 6.62
December 8.23 3.52 0.47
Compound Annual 23.15 %
Rate of Return 14.00% 9.93% (5-1/2 months)
- ------------------------------------------------------------------------
-------------------------
(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.
-25-
<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
- -------------------
1998
Total
Trading
Results
Interest Rates and Stock Indices $ 44,472,322
Commodities 218,353
Currencies 1,242,166
Energy 9,562,147
Metals (7,395,858)
--------------------------
$ 48,099,130
==========================
The year began with global markets negatively impacted by the
worsening economies of Asia. In the financial markets, global liquidity declined
sharply as investors grew more risk averse, unwilling to commit funds to any but
the most conservative investments. The decline in investor participation
exaggerated market movements, generating substantial volatility. At mid-year,
Russia's default on sovereign debt led to significant losses in leveraged
investment vehicles, shaking investor confidence further. The result was a
classic liquidity crisis which threatened to unsettle the global economy and led
to a series of activist interventions by the U.S. Federal Reserve Bank to
restore stability.
In the commodity markets, the continued global slowdown raised
the specter of deflation. Massive oversupply was complicated by a lack of
demand. The vast gulf between the price deflation in commodities relative to the
inflated value of financial assets was striking.
The Fund's performance in the first half of 1998 was hampered
by volatility and a shift in several trends that had been in place since the
beginning of the Asian crisis. May and June showed promise of reversing this
decline in performance, but the Fed's intervention in support of the Japanese
yen against the U.S. dollar roiled markets once again.
By August, equity markets showed clear signs of a bear market
in the making. However, this period also saw some of the best performance in the
Fund's history, presenting almost a mirror image of the performance of the stock
market. Significant profits were recorded in the Fund's interest rate and
currency positions even as equity investors saw an estimated $4 trillion of net
worth vanish.
October and November produced mixed performance as trends in
key markets shifted direction again and other markets remained undefined by any
trends at all. By year's end, however, markets appeared to be more calm and
underlying trends were evident in a number of financial products. Overall,
worldwide trading volume was light, particularly in the currency markets pending
the launch of the Euro on January 1.
Ultimately, the favorable one-year total returns for investors
in most major asset classes in 1998 belie the level of risk faced by most
investors during the year. On balance, 1998 served as a reminder, if one was
needed,
-26-
<PAGE>
that the world is a volatile and uncertain place where stability may be the
exception and not the rule. But the market swings of 1998 also served to
reinforce our confidence in our disciplined, systematic trading system -- one
which pays little heed to short-term volatility and remains focused on the
long-term. Notably, the Fund's strong performance during the sharp declines of
the stock market is an important indicator of its value as a portfolio
diversifier in these dynamic and uncertain markets.
1997
Total
Trading
Results
Interest Rates and Stock Indices $ 19,982,977
Commodities (2,328,550)
Currencies 19,023,250
Energy (14,267,006)
Metals 6,611,279
---------------------------
$ 29,021,950
===========================
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)
Total Trading
Results
Interest Rates and Stock Indices $ 18,719,739
Commodities (2,473,692)
Currencies 10,116,005
Energy 6,404,320
Metals 1,730,074
--------------------------
$ 34,496,446
==========================
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.
-27-
<PAGE>
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, 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; Capital Resources
The fund borrows only to a limited extent and only on a
strictly short-term basis in order to finance losses on non-U.S. dollar
denominated trading positions pending the conversion of the Fund's dollar
deposits. These borrowings are at a prevailing short-term rate in the relevant
currency.
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.
Year 2000 Compliance Initiative
-------------------------------
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 it is devoting sufficient resources to
renovating technology systems that are not already Year 2000 compliant. The
resource-intensive renovation phase (as further discussed) of Merrill Lynch's
Year 2000 efforts was approximately 95% completed as of January 31, 1999.
Merrill Lynch will focus primarily on completing its renovation and testing and
on integration of the Year 2000 programs of recent acquisitions during the
remainder of 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, and 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.
-28-
<PAGE>
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 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 system, and
establishing a conversion schedule. During the renovation phase, source code is
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. The integration testing phase, which will occur throughout 1999,
validates that a system can successfully interface with both internal and
external systems. Finally, as Merrill Lynch continues to implement new systems,
they are also being tested for Year 2000 readiness.
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.
As of January 31, 1999, production testing was approximately 93% completed. 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 various other domestic and
international industry tests during 1998.
Merrill Lynch continues to survey and communicate with third
parties whose Year 2000 readiness is important to the company. Information
technology and non-information technology vendors and service providers are
contacted in order to obtain their Year 2000 compliance plans. Based on the
nature of the response and the importance of the product or service involved,
Merrill Lynch determines if additional testing is needed. The results of these
efforts are maintained in a database that is accessible throughout the firm.
Third parties that have been contacted include transactional counterparties,
exchanges, and clearinghouses; a process to access and rate their responses has
been developed. This information as well as other Year 2000 readiness
information on particular countries and their political subdivisions will be
used by Merrill Lynch to manage risk resulting from the Y2K problem. Management
is unable at this point to ascertain whether all significant third parties will
successfully address the Y2K problem. Merrill Lynch will continue to monitor
third parties' Year 2000 readiness to determine if additional or alternative
measures are necessary. In connection with information technology and
non-information technology products and services, contingency plans, which are
developed at the business unit level, may include selection of alternative
vendors or service providers and changing business practices so that a
particular system is not needed. In the case of securities exchanges and
clearinghouses, risk mitigation could include the re-routing of business. 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 will be successful. The
failure of exchanges, clearing organizations, vendors, service providers,
counterparties, regulators, or others to resolve their own processing issues in
a timely manner could have a material adverse effect on Merrill Lynch's
business, results of operations, and financial condition.
At year-end 1998, the total estimated expenditures for the
entire Year 2000 Compliance Initiative were approximately $425 million, of which
approximately $125 million was remaining. The majority of these remaining
expenditures are expected to cover testing, risk management, and contingency
planning. There can be no assurance that the costs associated with such
remediation efforts will not exceed those currently anticipated by Merrill
-29-
<PAGE>
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") Initiative
-------------------------------------------------------
As of January 1, 1999, the "euro" was adopted as the common
legal currency of participating member states of the EMU. As a consequence of
the introduction of and conversion to the euro, Merrill Lynch was required to
make significant changes to nearly 200 global business systems in order to
reflect the substitution of the euro for the 11 member national currencies and
the European currency unit. The introduction of the euro brings about
fundamental changes in the structure and nature of 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.
The introduction of the euro affects 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's systems or procedures that handle such securities or cash were
modified in order to implement the conversion to the euro. The implementation
phase is continuing into the first quarter of 1999 to resolve any
post-conversion issues. The success of Merrill Lynch's euro conversion efforts
was dependent on the euro-compliance of third parties, such as trading
counterparties, financial intermediaries (e.g., securities and commodities
exchanges, depositories, clearing organizations, and commercial banks), and
vendors.
As of the end of the 1998 fiscal year, the total estimated
expenditures associated with the introduction of and conversion to the euro were
approximately $79 million, of which $1 million is remaining to be spent during
the first quarter of 1999 on compliance efforts and project administration.
Management believes that it has identified and evaluated all of the systems and
operational modifications necessary for the conversion to the euro. On January
4, 1999 and since then, Merrill Lynch has conducted normal business operations,
having successfully completed its conversion program. Management does not expect
the introduction of the euro to have a negative effect on its future business,
currency risk, or competitive positioning in the European markets.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
INTRODUCTION
The Fund is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Fund's assets are subject to the risk of trading loss.
Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Fund's main line of business.
Market movements result in frequent changes in the fair market
value of the Fund's open positions and, consequently, in its earnings and cash
flow. The Fund's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification effects among the Fund's open positions and the liquidity of the
markets in which it trades.
The Fund, under the direction of JWH, rapidly acquires and
liquidates both long and short positions in a wide range of different markets.
Consequently, it is not possible to predict how a possible future market
scenario will affect performance, and the Fund's past performance is not
necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the
Fund could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Fund's speculative trading and the recurrence in the
markets traded by the Fund of market movements far exceeding expectations could
result in actual trading or non-trading losses far beyond the indicated Value at
Risk or the Fund's experience to date (i.e., "risk of ruin"). In light of the
foregoing as well as the risks and uncertainties intrinsic to all future
projections, the inclusion of the quantification in this section should not be
considered to constitute any assurance or representation that the Fund's losses
in any market sector will be limited to Value at Risk or by the Fund's attempts
to manage its market risk.
-30-
<PAGE>
QUANTIFYING THE FUND'S TRADING VALUE AT RISK
Quantitative Forward-Looking Statements
---------------------------------------
The following quantitative disclosures regarding the Fund's
market risk exposures contain "forward-looking statements" within the meaning of
the safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor, except for statements of historical
fact.
The Fund's risk exposure in the various market sectors traded
by JWH is quantified below in terms of Value at Risk. Due to the Fund's
mark-to-market accounting, any loss in the fair value of the Fund's open
positions is directly reflected in the Fund's earnings (realized or unrealized)
and cash flow (at least in the case of exchange-traded contracts in which
profits and losses on open positions are settled daily through variation
margin).
Exchange maintenance margin requirements have been used by the
Fund as the measure of its Value at Risk. Maintenance margin requirements are
set by exchanges to equal or exceed the maximum loss in the fair value of any
given contract incurred in 95% to 99% of the one-day time periods included in
the historical sample (generally approximately one year) researched for purposes
of establishing margin levels. The maintenance margin levels are established by
dealers and exchanges using historical price studies as well as an assessment of
current market volatility (including the implied volatility of the options on a
given futures contract) and economic fundamentals to provide a probabilistic
estimate of the maximum expected near-term one-day price fluctuation.
In the case of market sensitive instruments which are not
exchange-traded (almost exclusively currencies in the case of the Fund), the
margin requirements for the equivalent futures positions have been used as Value
at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers' margins have been used.
100% positive correlation in the different positions held in
each market risk category has been assumed. Consequently, the margin
requirements applicable to the open contracts have been aggregated to determine
each trading category's aggregate Value at Risk. The diversification effects
(which would reduce the Value at Risk estimates) resulting from the fact that
the Fund's positions are rarely, if ever, 100% positively correlated have not
been reflected.
The Fund's Trading Value at Risk in Different Market Sectors
- ------------------------------------------------------------
The following table indicates the trading Value at Risk
associated with the Fund's open positions by market category as of December 31,
1998. As of December 31, 1998, the Fund's total capitalization was approximately
$315 million.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
MARKET SECTOR VALUE AT RISK % OF TOTAL CAPITALIZATION
- ------------- ------------- -------------------------
<S> <C> <C>
Interest Rates $ 12,538,585 3.98%
Currencies 5,492,878 1.75
Stock Indices 998,918 .32
Metals 1,551,500 .49
Commodities 2,159,281 .69
Energy 3,844,500 1.22
------------- ------
Total $ 26,585,662 8.45%
============= ======
</TABLE>
MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK
The face value of the market sector instruments held by the
Fund is typically many times the applicable maintenance margin requirement
(maintenance margin requirements generally ranging between approximately 1% and
10% of contract face value) as well as many times the capitalization of the
Fund. The magnitude of the Fund's open positions creates a "risk of ruin" not
typically found in most other investment vehicles. Because of the size of its
positions, certain market conditions -- unusual, but historically recurring from
time to time -- could cause
-31-
<PAGE>
the Fund to incur severe losses over a short period of time. Even comparatively
minor losses could cause MLIP to further deleverage or terminate the Fund's
trading. The foregoing Value at Risk table -- as well as the past performance of
the Fund -- give no indication of this "risk of ruin."
NON-TRADING RISK
Foreign Currency Balances; Cash on Deposit with MLF
The Fund controls the non-trading exchange rate risk of its
foreign currency balances by regularly converting its foreign currency balances
back into dollars (no less frequently than twice a month).
The Fund also has non-trading market risk on the approximately
20% of its assets which are held in cash at MLF. The value of this cash is not
interest rate sensitive, but there is cash flow risk in that if interest rates
decline so will the cash flow generated on these monies.
MLAM's Cash Management
MLAM invests approximately 80% of the Fund's assets in
Government Securities. As of December 31, 1998, the Fund's MLAM account totaled
$266,951,711.
-32-
<PAGE>
As of December 31, 1998, the Fund's MLAM account held the
following securities:
<TABLE>
<CAPTION>
Total
Par Value Description Rate Maturity Date Fair Value
- --------- ----------- ---- ------------- ----------
<S> <C> <C> <C> <C>
Long-Term
---------
2,000,000 U.S. Treasury Note 5.625% December 31, 1999 $ 2,019,531
13,000,000 U.S. Treasury Note 5.500% February 29, 2000 13,123,906
26,000,000 U.S. Treasury Note 5.500% March 31, 2000 26,260,000
15,000,000 U.S. Treasury Note 6.375% May 15, 2000 15,335,156
34,000,000 U.S. Treasury Note 5.375% July 31, 2000 34,377,188
3,000,000 U.S. Treasury Note 6.000% August 15, 2000 3,062,344
20,000,000 U.S. Treasury Note 4.500% September 30, 2000 19,959,375
10,000,000 U.S. Treasury Note 5.750% November 15, 2000 10,195,313
4,000,000 U.S. Treasury Note 5.625% November 30, 2000 4,071,875
20,000,000 U.S. Treasury Note 5.375% February 15, 2001 20,312,500
3,500,000 U.S. Treasury Note 5.625% May 15, 2001 3,584,766
1,000,000 U.S. Treasury Note 6.000% July 31, 2002 1,042,656
2,000,000 U.S. Treasury Note 5.750% April 30, 2003 2,082,187
5,000,000 U.S. Treasury Note 5.250% August 15, 2003 5,128,125
10,000,000 Federal National Mortgage Association 4.450% October 16, 2000 9,910,000
24,000,000 Federal National Mortgage Association 4.820% December 18, 2000 23,928,721
12,000,000 Federal National Mortgage Association 5.720% January 9, 2001 12,167,760
3,000,000 Federal National Mortgage Association 5.420% January 23, 2001 3,025,200
--------------
Subtotal $ 209,586,603
--------------
Short-Term
----------
12,849,000 Federal National Mortgage Association 5.090% January 14,1999 $ 12,823,301
41,655,000 Federal National Mortgage Association 5.080% January 21, 1999 41,530,035
-------------
Subtotal $ 54,353,336
-------------
Total Debt $ 263,939,939
=============
</TABLE>
-33-
<PAGE>
Qualitative Disclosures Regarding Primary Trading Risk Exposures
- ----------------------------------------------------------------
The following qualitative disclosures regarding the Fund's market risk
exposures -- except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the Fund manages its primary market risk
exposures -- constitute forward-looking statements within the meaning of Section
27A of the Securities Act and Section 21E of the Securities Exchange Act. The
Fund's primary market risk exposures as well as the strategies used and to be
used by MLIP and JWH for managing such exposures are subject to numerous
uncertainties, contingencies and risks, any one of which could cause the actual
results of the Fund's risk controls to differ materially from the objectives of
such strategies. Government interventions, defaults and expropriations, illiquid
markets, the emergence of dominant fundamental factors, political upheavals,
changes in historical price relationships, an influx of new market participants,
increased regulation and many other factors could result in material losses as
well as in material changes to the risk exposures and the risk management
strategies of the Fund. There can be no assurance that the Fund's current market
exposure and/or risk management strategies will not change materially or that
any such strategies will be effective in either the short- or long-term.
Investors must be prepared to lose all or substantially all of the time value of
their investment in the Fund.
The following were the primary trading risk exposures of the Fund as of
December 31, 1998, by market sector.
Interest Rates. Interest rate risk is the principal market exposure of
--------------
the Fund. Interest rate movements directly affect the price of derivative
sovereign bond positions held by the Fund and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the Fund's
profitability. The Fund's primary interest rate exposure is to interest rate
fluctuations in the United States and the other G-7 countries. However, the Fund
also takes positions in the government debt of smaller nations -- e.g., New
Zealand and Australia. MLIP anticipates that G-7 interest rates will remain the
primary market exposure of the Fund for the foreseeable future.
Currencies. The Fund trades in a large number of currencies. However,
----------
the Fund's major exposures have typically been in the dollar/yen, dollar/mark
and dollar/pound positions. MLIP does not anticipate that the risk profile of
the Fund's currency sector will change significantly in the future, although it
is difficult at this point to predict the effect of the introduction of the Euro
on JWH's currency trading strategies. The currency trading Value at Risk figure
includes foreign margin amounts converted into U.S. dollars with an incremental
adjustment to reflect the exchange rate risk of maintaining Value at Risk in a
functional currency other than dollars.
Stock Indices. The Fund's primary equity exposure is to G-7 equity
-------------
index price movements. As of December 31, 1998, the Fund's primary exposures
were in the S&P 500, Financial Times (England), Nikkei (Japan) and DAX (Germany)
stock indices. MLIP anticipates little, if any, trading in non-G-7 stock
indices. The Fund is primarily exposed to the risk of adverse price trends or
static markets in the major U.S., European and Japanese indices.
Metals. The Fund's primary metals market exposure is to fluctuations in
------
the price of gold and silver. Although JWH trades base metals such as aluminum,
copper and tin, the principal market exposures of the Fund have consistently
been in the precious metals, gold and silver (and, to a much lesser extent,
platinum). However, silver prices have remained volatile over this period, and
JWH has from time to time taken substantial positions as it has perceived market
opportunities to develop. MLIP anticipates that gold and silver will remain the
primary metals market exposure for the Fund.
-34-
<PAGE>
Commodities. The Fund's primary commodities exposure is to agricultural
-----------
price movements which are often directly affected by severe or unexpected
weather conditions. Soybeans and grains accounted for the substantial bulk of
the Fund's commodities exposure as of December 31, 1998. In the past, the Fund
has had material market exposure to live cattle and may do so again in the
future. However, MLIP anticipates that JWH will maintain an emphasis on
soybeans, grains and orange juice, in which the Fund has historically taken its
largest positions.
Energy. The Fund's primary energy market exposure is to gas and oil
------
price movements, often resulting from political developments in the Middle East.
Although JWH trades natural gas to a limited extent, oil is by far the dominant
energy market exposure of the Fund. Oil prices are currently depressed, but they
can be volatile and substantial profits and losses have been and are expected to
continue to be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
- -----------------------------------------------------------
The following were the only non-trading risk exposures of the Fund as
of December 31, 1998.
Foreign Currency Balances. The Fund's primary foreign currency balances
-------------------------
are in Japanese yen, German marks, British pounds and French francs.
Securities Positions. The Fund holds only cash or interest-bearing
--------------------
Government Securities. The Fund's market exposure in instruments held other than
for trading is in the interest rate risk exposure of the Fund's Government
Securities portfolio, managed by MLAM pursuant to policies established by MLIP
for which MLAM assumes no responsibility, as well as on the Fund's cash on
deposit with MLF. In a period of rapidly rising interest rates (since the Fund's
inception in 1996, interest rates have generally declined until quite recently),
the Fund could incur marked-to-market losses on its MLAM account, but MLIP would
attempt to prevent or control these losses by further reducing the permissible
durations of the Fund's Government Securities in order to reduce the interest
rate sensitivity of these instruments.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
- -----------------------------------------------------------------
Trading Risk
MLIP has procedures in place intended to control market risk, although
there can be no assurance that they will, in fact, succeed in doing so. While
MLIP does not itself intervene in the markets to hedge or diversify the Fund's
market exposure, MLIP 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 (which has not happened to date),
MLIP's basic risk control procedures consist simply of the ongoing process of
monitoring JWH with the market risk controls being applied by JWH itself.
Risk Management
- ---------------
JWH attempts to control risk in all aspects of the investment process
- -- from confirmation of a trend to determining the optimal exposure in a given
market, and to money management issues such as the startup or upgrade of
investor accounts. JWH double checks the accuracy of market data, and will not
trade a market without multiple price sources for analytical input. In
constructing a portfolio, JWH seeks to control overall risk as well as the risk
of any one position, and JWH trades only markets that have been identified as
having positive performance characteristics. Trading discipline requires plans
for the exit of a market as well as for entry. JWH factors the point of exit
into the decision to enter (stop loss). The size of JWH's positions in a
particular market is not a matter of how large a return can be generated but of
how much risk it is willing to take relative to that expected return.
-35-
<PAGE>
To attempt to reduce the risk of volatility while maintaining the
potential for excellent performance, proprietary research is conducted on an
ongoing basis to refine the JWH investment strategies. Research may suggest
substitution of alternative investment methodologies with respect to particular
contracts; this may occur, for example, when the testing of a new methodology
has indicated that its use might have resulted in different historical
performance. In addition, risk management 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
position size in relation to account equity. The weighting of capital committed
to various markets in the investment programs is dynamic, and JWH may vary the
weighting at its discretion as market conditions, liquidity, position limit
considerations and other factors warrant.
JWH may determine that risks arise when markets are illiquid or
erratic, such as may occur cyclically during holiday seasons, or on the basis of
irregularly occurring market events. In such cases, 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.
Adjustments in position size in relation to account equity have been
and continue to be an integral part of JWH's investment strategy. At its
discretion, JWH may adjust the size of a position in relation to equity in
certain markets or entire programs. Such adjustments may be made at certain
times for some programs but not for others. Factors which may affect the
decision to adjust the size of a position in relation to account equity include
ongoing research, program volatility, assessments of current market volatility
and risk exposure, subjective judgment, and evaluation of these and other
general market conditions.
Non-Trading Risk
- ----------------
The Fund controls the non-trading exchange rate risk by regularly
converting foreign currency balances back into dollars (no less frequently than
twice a month, and more frequently if a particular foreign currency balance
becomes unusually high).
MLIP controls the interest-rate risk of the Fund's non-trading
instruments (Government Securities invested by MLAM for cash management
purposes) by limiting the overall duration of such instruments to no more than 2
years and the maximum duration of any Government Securities held by the Fund to
no more than seven years. These risk control policies have been successful in
the Fund's operations to date, and MLIP does not anticipate any change in these
policies. However, where the interest rate environment changes materially, MLIP
might shorten the permissible duration of the Fund's Government Securities
portfolio.
The Fund has cash flow interest rate risk on its cash on deposit with
MLF in that declining interest rates would cause the income from such cash to
decline. However, a certain amount of cash or cash equivalents must be held by
the Fund in order to facilitate margin payments and pay expenses and
redemptions. MLIP does not take any steps to limit the cash flow risk on the
approximately 20% of its cash held on deposit at MLF.
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. The General Partner
promoted the Fund and is its controlling person.
-36-
<PAGE>
Item 9: Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
There were no changes in or disagreements with independent
auditors on accounting and financial disclosure.
PART III
Item 10: Directors and Executive Officers of the Registrant
--------------------------------------------------
10(a) and 10(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.
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
Jo Ann Di Dario Vice President, Chief Financial Officer and Treasurer
through April 30, 1999
Michael L. Pungello Vice President, Chief Financial Officer and Treasurer
effective May 1, 1999
Joseph H. Moglia Director
Allen N. Jones Director
Stephen G. Bodurtha Director
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 has served four consecutive one-year terms
as Chairman of the Managed Funds Association (formerly, the Managed Futures
Association), a national trade association that represents the managed futures,
hedge funds and fund of funds industry. Mr. Frawley currently serves as a member
of the CFTC's Global Markets Advisory Committee.
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. Mr. Chandor is
serving a two-year term as a director of the Managed Funds Association.
Jo Ann Di Dario was born in 1946. Ms. Di Dario is, through
April 30, 1999, Vice President, Chief Financial Officer and Treasurer of MLIP.
Before joining MLIP in May 1998, she was self-employed for one year. From
February 1996 to May 1997, she worked as a consultant for Global Asset
Management, an international mutual
-37-
<PAGE>
fund organizer and operator headquartered in London, where she offered advice on
restructuring their back-office operations. From May 1992 to January 1996, she
served as a Vice President of Meridian Bank Corporation, a regional bank holding
company. She was responsible for managing the treasury operations of Meridian
Bank Corporation including its wholly-owned subsidiary, Meridian Investment
Company Inc. From September 1991 to May 1992, Ms. Di Dario managed the Domestic
Treasury Operations of First Fidelity Bank, a regional bank. From January 1991
to September 1991, Ms. Di Dario was self-employed. For the previous five years,
Ms. Di Dario was Vice President, Secretary and Controller of Caxton Corporation,
a Commodity Pool Operator and Commodity Trading Advisor. Her background includes
seven years of public accounting experience, and she graduated with high honors
from Stockton State College with a Bachelor of Science degree in Accounting.
Michael L. Pungello was born in 1957. Effective May 1, 1999, Mr.
Pungello will become Vice President, Chief Financial Officer and Treasurer of
MLIP. He was First Vice President and Senior Director of Finance for Merrill
Lynch's Operations, Services and Technology Group from January 1998 to March
1999. Prior to that, Mr. Pungello spent over 18 years with Deloitte & Touche
LLP, and was a partner in their Financial Services practice from June 1990 to
December 1997. He graduated from Fordham University in 1979 with a Bachelor of
Science degree in accounting and received his Master of Business Administration
degree in Finance from New York University in 1987.
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 Income 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 magna cum laude from Wesleyan
University, Middletown, Connecticut with a Bachelor of Arts degree in
Government. 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 to 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.
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, 1998, the principals of MLIP had no
investments in the Fund and MLIP's general partner interest in the Fund was
valued at approximately $2,667,093.
-38-
<PAGE>
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., The SECTOR Strategy Fund (SM) VI L.P., ML Global Horizons L.P., ML
Principal Protection 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:
-----------------------------
Not applicable.
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, 1998, no person or "group" is known to be
or have been the beneficial owner of more than 5% 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, 1998, the General Partner owned 17,281
unit-equivalent general partnership interests, which was less than 1% of the
total Units outstanding.
(c) Changes in Control:
------------------
None.
-39-
<PAGE>
Item 13: Certain Relationships and Related Transactions
----------------------------------------------
(a) Transactions Between Merrill Lynch and the Fund
-----------------------------------------------
All of the service providers to the Fund, other than JWH, are
affiliates of Merrill Lynch. Merrill Lynch negotiated with JWH over the level of
its advisory fees and Profit Share. However, none of the fees paid by the Fund
to any Merrill Lynch party were negotiated, and they are higher than would have
been obtained in arm's-length bargaining.
The Fund pays Merrill Lynch substantial Brokerage Commissions
and Administrative Fees as well as bid-ask spreads on forward currency trades.
The Fund also pays MLF interest on short-term loans extended by MLF to cover
losses on foreign currency positions.
Within the Merrill Lynch organization, MLIP is the direct
beneficiary of the revenues received by different Merrill Lynch entities from
the Fund. MLIP controls the management of the Fund and serves as its promoter.
Although MLIP has not sold any assets, directly or indirectly, to the Fund, MLIP
makes substantial profits from the Fund due to the foregoing revenues.
No loans have been, are or will be outstanding between MLIP or
any of its principals and the Fund.
MLIP pays substantial selling commissions and trailing
commissions to MLPF&S for distributing the Units. MLIP is ultimately paid back
for these expenditures from the revenues it receives from the Fund.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as the
principal commodity broker for the Partnership.
In 1998, the Partnership expensed: (i) Brokerage Commissions
of $19,086,026 to the Commodity Broker, which included $9,820,068 in Management
Fees paid by the Commodity Broker to JWH; and (ii) Administrative Fees of
$615,678 to MLIP. In addition, MLIP and its affiliates derived certain economic
benefit from possession of the Fund's assets, as well as from foreign exchange
and 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.
-40-
<PAGE>
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, 1998 and 1997 2
For the years ended December 31, 1998 and 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 5-12
</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.
(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. 33-80509) 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.
-41-
<PAGE>
Exhibit 10.03: Is incorporated herein by reference from Exhibit
- ------------- 10.03 contained in the Registrant's Registration
Statement.
10.04 Joint Venture Agreement Amendment among JWH and the
Fund.
Exhibit 10.04: Is filed herewith.
- -------------
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.
Exhibit 10.08: Is incorporated herein by reference from Exhibit
- ------------- 10.08 contained in the Registrant's Form 10-K, for
the fiscal year ended December 31, 1997, filed March
30, 1998.
10.09 Form of Amendatory Agreement.
Exhibit 10.09: Is incorporated herein by reference from Exhibit
- ------------- 10.09 contained in the Registrant's Registration
Statement.
13.01 1998 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
1998.
-42-
<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, 1999
- ----------------------- (Principal Executive Officer)
John R. Frawley, Jr.
/s/Jo Ann Di Dario Vice President, Chief Financial Officer and Treasurer March 25, 1999
- ------------------ (Principal Financial and Accounting Officer)
Jo Ann Di Dario
/s/Jeffrey F. Chandor Senior Vice President, Director of Sales, March 25, 1999
- --------------------- Marketing and Research and Director
Jeffrey F. Chandor
/s/Allen N. Jones Director March 25, 1999
- -----------------
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, 1999
PARTNERS INC.
By: /s/John R. Frawley, Jr.
-----------------------
John R. Frawley, Jr.
</TABLE>
-43-
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
1998 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 10.04 Joint Venture Agreement Amendment among JWH and the Fund
Exhibit 13.01 1998 Annual Report and Independent Auditors' Report
-44-
<PAGE>
EXHIBIT 10.4
JOINT VENTURE AGREEMENT AMENDMENT
This Joint Venture Agreement Amendment dated as of October 30, 1998 by
and among ML JWH STRATEGIC ALLOCATION FUND L.P. (the "Partnership") and JOHN W.
HENRY & COMPANY, INC. ("JWH").
W I T N E S S E T H
WHEREAS, the parties hereto entered an Joint Venture Agreement dated
as of April 25, 1996 pursuant to which JWH is acting as a commodity trading
advisor for the Partnership (as amended, the "Joint Venture Agreement;" certain
defined terms are used herein as defined therein); and
WHEREAS, the parties hereto wish to amend the Term and Termination
provisions of the Joint Venture Agreement.
NOW THEREFORE, in consideration of the premises and mutual covenants
contained in the Joint Venture Agreement and herein, the receipt and sufficiency
of which are hereby acknowledged, the parties hereto agree to amend the Joint
Venture Agreement as follows:
1. Term. Section 13 of the Joint Venture Agreement is replaced in
----
its entirety by the following:
Unless sooner terminated pursuant to Section 14 hereof, this Joint
Venture Agreement shall continue in effect until (i) December 31, 1999
or (ii) the earlier termination of the Partnership (and hence of the
Joint Venture); provided, however, that the indemnity provisions set
-------- -------
forth in Sections 11 and 12 of this Agreement shall survive any such
termination of this Joint Venture Agreement for 3 years from the date
that Units are sold to the public.
This Joint Venture Agreement will be automatically renewed, for
successive annual terms, unless either party provides the other party
with 90 days' prior written notice of its intention not to renew.
2. Termination. The fourth paragraph of Section 14 of the Joint
-----------
Venture Agreement is replaced in its entirety by the following:
JWH may, as of the end of any calendar month upon 90 days' prior
written notice, terminate this Agreement.
<PAGE>
3. Acknowledgement of Previous Renewals. The parties hereto
------------------------------------
acknowledge that the Joint Venture Agreement was previously renewed for one-year
terms as of September 30, 1997 and as of September 30, 1998.
4. Entire Agreement. This Amendment, together with the Joint
----------------
Venture Agreement and all amendments thereto, constitutes the entire agreement
among the parties hereto with respect to the matters referred to herein, and no
other agreement, verbal or otherwise, shall be binding as between the parties
unless it shall be in writing and signed by the party against whom enforcement
is sought.
5. Governing Law. This Amendment 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.
6. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall, however, together constitute one and the same
documents.
-2-
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereto duly set forth their
hand as of the 30th day of October 1998.
ML JWH STRATEGIC ALLOCATION FUND L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC., its general partner
By:
------------------------------
Name: Steven B. Olgin
Title: Vice President
JOHN W. HENRY & COMPANY, INC.
By:
------------------------------
Name: David Kozak
Title: General Counsel
Confirmed:
not as a Joint Venturer but
solely for the limited purposes
set forth herein
MERRILL LYNCH FUTURES INC.
By:
------------------------------
Name: John R. Frawley, Jr.
Title: Co-Chairman
-3-
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
(A Delaware Limited Partnership)
AND JOINT VENTURE
Consolidated Financial Statements for the years ended December 31,
1998 and 1997 and for the period from July 15, 1996 (Commencement
of Operations) to December 31, 1996 and Independent Auditors'
Report
[LOGO] MERRILL LYNCH
<PAGE>
To: The Limited Partners of ML JWH Strategic Allocation Fund L.P.
ML JWH Strategic Allocation Fund L.P. (the "Fund" or the "Partnership") ended
its third fiscal year of trading on December 31, 1998 with a Net Asset Value
("NAV") per Unit of $154.34, representing an increase of 13.99% from the
December 31, 1997 NAV per Unit of $135.40.
Set forth below is a report from John W. Henry & Company, Inc. addressing
performance for 1998. This report is included for the convenience of the Fund's
investors and may not reflect the opinions or recommendations of the General
Partner.
We appreciate your continued investment in the Fund and look forward to 1999 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.
Calendar 1998 was a profitable one for the ML JWH Strategic Allocation Fund
L.P., even though global markets were among the most volatile experienced to
date by the Fund.
The year began with global markets negatively impacted by the worsening
economies of Asia. In the financial markets, global liquidity declined sharply
as investors grew more risk averse, unwilling to commit funds to any but the
most conservative investments. The decline in investor participation exaggerated
market movements, generating substantial volatility. At mid-year, Russia's
default on sovereign debt led to significant losses in leveraged investment
vehicles, shaking investor confidence further. The result was a classic
liquidity crisis which threatened to unsettle the global economy and led to a
series of activist interventions by the U.S. Federal Reserve Bank ("Fed") to
restore stability.
In the commodity markets, the continued global slowdown raised the specter of
deflation. Massive oversupply was complicated by a lack of demand. The vast gulf
between the price deflation in commodities relative to the inflated value of
financial assets was striking.
The Fund's performance in the first half of 1998 was hampered by volatility and
a shift in several trends that had been in place since the beginning of the
Asian crisis. May and June showed promise of reversing this decline in
performance, but the Fed's intervention in support of the Japanese yen against
the U.S. dollar roiled markets once again.
<PAGE>
By August, equity markets showed clear signs of a bear market in the making.
However, this period also saw some of the best performance in the Fund's
history, presenting almost a mirror image of the performance of the stock
market. Significant profits were recorded in the Fund's interest rate and
currency positions even as equity investors saw an estimated $4 trillion of net
worth vanish.
October and November produced mixed performance as trends in key markets shifted
direction again and other markets remained undefined by any trends at all. By
year's end, however, markets appeared to be more calm and underlying trends were
evident in a number of financial products. Overall, worldwide trading volume was
light, particularly in the currency markets pending the launch of the euro on
January 1.
Ultimately, the favorable one-year total returns for investors in most major
asset classes in 1998 belie the level of risk faced by most investors during the
year. On balance, 1998 served as a reminder, if one was needed, that the world
is a volatile and uncertain place where stability may be the exception and not
the rule. But the market swings of 1998 also served to reinforce our confidence
in our disciplined, systematic trading system - one which pays little heed to
short-term volatility and remains focused on the long-term. Notably, the Fund's
strong performance during the sharp declines of the stock market is an important
indicator of its value as a portfolio diversifier in these dynamic and uncertain
markets.
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 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
- --------------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1998 AND 1997
AND FOR 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
<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. (the "Partnership") and its joint
venture (the "Joint Venture") with John W. Henry & Company, Inc. as of December
31, 1998 and 1997, and the related consolidated statements of income and changes
in partners' capital for the years ended December 31, 1998 and 1997 and for 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, such 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, 1998 and 1997 and the results of
their operations for the years ended December 31, 1998 and 1997 and for the
period from July 15, 1996 (commencement of operations) to December 31, 1996 in
conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 1999
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
(A Delaware Limited Partnership) AND JOINT VENTURE
- --------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
ASSETS
<S> <C> <C>
Equity in commodity futures trading accounts:
Cash and options premiums $ 34,991,460 $ 42,006,060
Net unrealized profit on open contracts 26,157,000 14,377,004
Government Securities (Cost: $263,057,253 and $170,434,242) 263,939,939 170,955,529
Cash 57,273 --
Accrued interest (Note 3) 3,064,653 1,826,823
-------------- ------------
TOTAL $328,210,325 $229,165,416
============== ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 3) $ 2,086,278 $ 1,473,380
Profit Share payable (Note 2) 5,436,351 2,640,194
Redemptions payable 5,952,585 1,116,238
Administrative fees payable (Note 3) 67,299 47,527
Organizational and initial offering costs payable (Note 1) -- 114,951
-------------- ------------
Total liabilities 13,542,513 5,392,290
-------------- ------------
MINORITY INTEREST 154,901 135,830
-------------- ------------
PARTNERS' CAPITAL:
General Partner (17,281 Units and 18,177 Units) 2,667,093 2,455,940
Limited Partners (2,020,545 Units and 1,634,252 Units) 311,845,818 221,181,356
-------------- ------------
Total partners' capital 314,512,911 223,637,296
-------------- ------------
TOTAL $328,210,325 $229,165,416
============== ============
NET ASSET VALUE PER UNIT (NOTE 4)
</TABLE>
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 YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE PERIOD FROM JULY 15, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ -------------
<S> <C> <C> <C>
REVENUES:
Trading profit:
Realized $ 35,957,735 $ 18,820,033 $ 29,800,074
Change in unrealized 12,141,395 10,201,917 4,696,372
------------ ------------ -------------
Total trading results 48,099,130 29,021,950 34,496,446
Interest income (Note 3) 12,766,955 12,021,263 3,030,330
------------ ------------ -------------
Total revenues 60,866,085 41,043,213 37,526,776
------------ ------------ -------------
EXPENSES:
Brokerage commissions (Note 3) 19,086,026 17,377,236 4,873,368
Administrative fees (Note 3) 615,678 560,556 157,205
------------ ------------ -------------
Total expenses 19,701,704 17,937,792 5,030,573
------------ ------------ -------------
INCOME BEFORE PROFIT SHARE
ALLOCATION AND MINORITY INTEREST 41,164,381 23,105,421 32,496,203
Profit Share Allocation (Note 2) (5,436,351) (2,640,194) (4,683,010)
Minority interest in income (19,071) (12,447) (23,383)
------------ ------------ -------------
NET INCOME $ 35,708,959 $ 20,452,780 $ 27,789,810
============ ============ =============
NET INCOME PER UNIT:
Weighted average number of General Partner
and Limited Partner Units outstanding (Note 5) 1,736,281 1,739,531 1,163,568
============ ============ =============
Net income per weighted average General Partner
and Limited Partner Unit $ 20.57 $ 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 YEARS ENDED DECEMBER 31, 1998 AND 1997
AND THE PERIOD FROM JULY 15, 1996 (COMMENCEMENT OF OPERATIONS)
TO DECEMBER 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Subscriptions
Units Limited Partners General 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,
DECEMBER 31, 1996 1,403,427 188,284,065 2,038,044 (18,248,494) 172,073,615
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
Additions 713,063 100,796,172 214,178 -- 101,010,350
Redemptions (327,666) (45,513,612) (330,082) -- (45,843,694)
Net Income -- 35,381,902 327,057 -- 35,708,959
-------- ---------------- --------------- --------------- -------------
PARTNERS' CAPITAL,
DECEMBER 31, 1998 2,037,826 $ 311,845,818 $ 2,667,093 $ -- $ 314,512,911
========== ============== ============== =============== =============
</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
- --------------------------------------------------------------------------------
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(R)"), 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"), a Merrill Lynch affiliate,
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.
Certain of the prior year balances have been reclassified to conform with
the current year's presentation.
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>
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 market value (for those commodity interests for which market
quotations are readily available) or at fair value. The change in
unrealized profit on open contracts and Government Securities from one
period to the next is reflected in change in unrealized in the Consolidated
Statements of Income.
Foreign Currency Transactions
-----------------------------
The Partnership's functional currency is the U.S. dollar; however, it
transacts business in currencies other than the U.S. dollar. Assets and
liabilities denominated in currencies other than the U.S. dollar are
translated into U.S. dollars at the rates in effect at the dates of the
Statements of Financial Condition. Income and expense items denominated in
currencies other than the U.S. dollar are translated into U.S. dollars at
the rates in effect during the period. Gains and losses resulting from the
translation to U.S. dollars are reported in total trading results
currently.
Organizational and Initial Offering Costs, Ongoing Operating Costs,
------------------------------------------------------------------
Operating Expenses and Selling Commissions
------------------------------------------
The General Partner advanced all organizational and initial offering costs
relating to the Partnership. The Partnership reimbursed 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.
Although, according to the terms of the Prospectus, as of September 1,
1998, the General Partner is entitled to receive, from the Partnership,
ongoing offering cost reimbursements (estimated at $600,000) of up to .25
of 1% of the Partnership's average month-end assets, the General Partner is
currently paying for all ongoing offering costs incurred in connection with
the offering of Units. 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 (See Note 2). The
General Partner receives an administrative fee, as well as a portion of the
brokerage commissions paid to MLF by the Joint Venture.
No selling commissions have been or are paid directly by the Limited
Partners. All selling commissions are paid by MLIP.
6
<PAGE>
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.
Distributions
-------------
The Unitholders are entitled to receive, equally per Unit, any distribution
which may be made by the Partnership. No such distributions had been made
as of December 31, 1998.
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.
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 set forth in the Limited Partnership Agreement.
Recently Issued Accounting Pronouncements
-----------------------------------------
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting standard No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"). Such Statement is
effective for fiscal years commencing after June 15, 1999. The General
Partner does not believe that the Statement will have a significant effect
on the financial statements of the Partnership.
2. JOINT VENTURE AGREEMENT
The Partnership and JWH entered into a Joint Venture Agreement as of the
commencement of operations 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 renewal options were
exercised at September 30, 1998 and 1997. As of October 30, 1998, the Joint
Venture Agreement was amended to allow the Joint Venture Agreement to
continue in effect until December 31, 1999 and for automatic renewal for
successive annual terms. 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 provided that
15% of the Partnership's allocable quarterly New Trading Profits, as
defined, are allocated to JWH. Losses are allocated to JWH and the
Partnership based on equity ownership.
7
<PAGE>
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, 1998, JWH received a profit share
allocation of $5,383,828 and earned interest of $52,523 on such amount. For
the year ended December 31, 1997, JWH received a profit share allocation of
$2,601,187 and earned interest of $39,007 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 is maintained at MLF.
On assets held in U.S. dollars, Merrill Lynch credits the Joint Venture
with interest at the prevailing 91-day U.S. Treasury bill rate. The Joint
Venture is credited with interest on any of its net gains actually held by
Merrill Lynch in non-U.S. dollar currencies at a prevailing local rate
received by Merrill Lynch. Merrill Lynch may derive certain economic
benefit in excess of the interest which Merrill Lynch pays to the Joint
Venture, from possession of such assets.
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.
MLIP estimates that the round-turn equivalent commission rate charged to
the Joint Venture during the years ended December 31, 1998 and 1997 and for
the period from July 15, 1996 (commencement of operations) to December 31,
1996 was approximately $145, $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.
Many of the Joint Venture's currency trades are executed in the spot and
forward foreign exchange markets (the "FX Markets") where there are no
direct execution costs. Instead, the participants, banks and dealers,
including Merrill Lynch International Bank ("MLIB"), in the FX Markets take
a "spread" between the prices at which they are prepared to buy and sell a
particular currency and such spreads are built into the pricing of the spot
or forward contracts with the Joint Venture. The General Partner
anticipates that some of the Joint Venture's foreign currency trades will
be executed through MLIB, an affiliate of the General Partner. MLIB has
discontinued the operation of the foreign exchange service desk, which
included seeking multiple quotes from counterparties unrelated to MLIB for
a service fee and trade execution.
8
<PAGE>
In its exchange of futures for physical ("EFP") trading, the Joint Venture
acquires cash currency positions through banks and dealers, including
Merrill Lynch. The Joint Venture pays a spread when it exchanges these
positions for futures. This spread reflects, in part, the different
settlement dates of the cash and the futures contracts, as well as
prevailing interest rates, but also includes a pricing spread in favor of
the banks and dealers, which may include a Merrill Lynch entity.
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 deducted the organizational and initial
offering cost reimbursement only as actually paid. The final payment was
deducted from the Net Asset Value in June 1998. As of December 31, 1997,
the Net Asset Value per Unit was $135.34 for financial reporting purposes
and $135.40 for all other purposes. As of December 31, 1998, the Net Asset
Value per Unit was $154.34 for financial reporting purposes and for all
other purposes.
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, 1998, 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 year.
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, 1998, 1997 and 1996 were as follows:
Total Trading Results
-------------------------------------------------
1998 1997 1996
------------- --------------- --------------
Interest rates and
Stock indices $ 44,472,322 $ 19,982,977 $ 18,719,739
Commodities 218,353 (2,328,550) (2,473,692)
Currencies 1,242,166 19,023,250 10,116,005
Energy 9,562,147 (14,267,006) 6,404,320
Metals (7,395,858) 6,611,279 1,730,074
------------- --------------- --------------
$ 48,099,130 $ 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 the market values of the financial instruments
or commodities underlying such derivative instruments frequently result in
changes in the Partnership's net 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.
9
<PAGE>
The General Partner has procedures in place intended to control market risk
exposure, although there can be no assurance that they will, in fact,
succeed in doing so. 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 (which has not occurred to
date), 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 net unrealized profit recorded in the Consolidated
Statements of Financial Condition and the related profit reflected in
trading results in the Consolidated Statements of Income.
The contract/notional values of the open derivative instrument positions as
of December 31, 1998 and 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 rates and
Stock indices $1,092,704,439 $ 856,715,210 $ 926,562,961 $ 351,175,040
Commodities 25,732,606 34,202,326 21,239,916 27,160,968
Currencies 240,511,095 176,535,503 199,371,182 390,721,620
Energy -- 34,390,257 -- 39,106,920
Metals -- 40,529,780 18,503,375 43,958,106
----------------------- ---------------------- ----------------------- --------------------
$1,358,948,140 $1,142,373,076 $1,165,677,434 $ 852,122,654
======================= ====================== ======================= ====================
</TABLE>
Substantially all of the Joint Venture's derivative financial instruments
outstanding as of December 31, 1998 expire within one year.
The contract/notional values of the Joint Venture's open exchange-traded
and non-exchange-traded derivative instrument positions as of December 31,
1998 and 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 $1,314,058,020 $1,057,972,923 $ 791,818,184 $ 468,259,393
Non-Exchange-
Traded 44,890,120 84,400,153 373,859,250 383,863,261
----------------------- ---------------------- ----------------------- -------------------
$1,358,948,140 $1,142,373,076 $1,165,677,434 $ 852,122,654
======================= ====================== ======================= ===================
</TABLE>
The average fair values, based on contract/notional values, of the Joint
Venture's derivative instrument
10
<PAGE>
positions which were open as of the end of each calendar month during the
year ended December 31, 1998 and 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 rates and
Stock indices $1,203,084,796 $ 469,701,059 $1,010,667,321 $ 263,783,626
Commodities 14,712,644 35,906,262 25,901,996 21,055,353
Currencies 380,746,340 388,335,661 395,236,535 484,258,015
Energy 8,369,033 33,942,343 22,168,532 21,307,623
Metals 15,928,582 30,607,494 9,266,297 36,089,734
----------------------- ---------------------- ----------------------- -------------------
$1,622,841,395 $ 958,492,819 $1,463,240,681 $ 826,494,351
======================= ====================== ======================= ===================
</TABLE>
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 included on the
Consolidated Statements of Financial Condition.
11
<PAGE>
The gross unrealized profit and the net unrealized profit (loss) on the
Joint Venture's open derivative instrument positions as of December 31,
1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------
Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized
Profit Profit (Loss) Profit Profit
----------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Exchange-
Traded $ 34,342,877 $ 27,254,898 $ 14,037,333 $ 12,316,384
Non-Exchange-
Traded 347,586 (1,097,898) 8,613,088 2,060,620
----------------- ---------------- ---------------- -----------------
$ 34,690,463 $ 26,157,000 $ 22,650,421 $ 14,377,004
================= ================ ================ =================
</TABLE>
The Joint Venture has credit risk in respect of its counterparties and
brokers, but attempts to control this risk by dealing almost exclusively
with Merrill Lynch entities as counterparties and brokers.
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 (which includes a netting arrangement), 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.
* * * * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Jo Ann Di Dario
Jo Ann Di Dario
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-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> DEC-31-1998 DEC-31-1997
<CASH> 57,273 0
<RECEIVABLES> 64,213,113 58,209,887
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 263,939,939 170,955,529
<PP&E> 0 0
<TOTAL-ASSETS> 328,210,325 229,165,416
<SHORT-TERM> 0 0
<PAYABLES> 13,697,414 5,528,120
<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> 314,512,911 223,773,126
<TOTAL-LIABILITY-AND-EQUITY> 328,210,325 229,165,416
<TRADING-REVENUE> 48,099,130 29,021,950
<INTEREST-DIVIDENDS> 12,766,955 12,021,263
<COMMISSIONS> 19,086,026 17,377,236
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 35,708,959 20,452,780
<INCOME-PRE-EXTRAORDINARY> 35,708,959 20,452,780
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,736,281 20,452,780
<EPS-PRIMARY> 20.57 11.76
<EPS-DILUTED> 20.57 11.76
</TABLE>
