<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, 1999
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.
Princeton Corporate Campus
800 Scudders Mill Road Section 2G
Plainsboro, New Jersey 08536
-----------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (609) 282-6996
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, 2000, limited partnership units
with an aggregate net asset value of $349,592,017 were held by non-affiliates.
Documents Incorporated by Reference
The registrant's "1999 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1999,
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 1999 ON FORM 10-K
Table of Contents
-----------------
Table of Contents
- -----------------
<TABLE>
<CAPTION>
PART I PAGE
------ ----
<S> <C>
Item 1. Business............................................................................. 1
Item 2. Properties........................................................................... 10
Item 3. Legal Proceedings.................................................................... 10
.
Item 4. Submission of Matters to a Vote of Security Holders.................................. 12
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................ 12
Item 6. Selected Financial Data.............................................................. 13
Item 7. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 15
Item 7A. Quantitative and Qualitative Disclosures About Market Risk........................... 16
Item 8. Financial Statements and Supplementary Data.......................................... 22
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure........................................................................... 23
PART III
--------
Item 10. Directors and Executive Officers of the Registrant................................... 23
Item 11. Executive Compensation............................................................... 25
Item 12. Security Ownership of Certain Beneficial Owners and Management....................... 25
Item 13. Certain Relationships and Related Transactions....................................... 26
PART IV
-------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K...................... 27
</TABLE>
<PAGE>
PART I
Item 1: Business
--------
(a) General Development of Business:
-------------------------------
ML JWH Strategic Allocation Fund L.P. (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. ("MLIP") is the general partner
of the Fund. Merrill Lynch Futures Inc. ("MLF") is the Fund's commodity broker.
Merrill Lynch Asset Management, L.P. ("MLAM") provides cash management services
to the Fund within parameters established by MLIP (for which MLAM assumes no
responsibility). MLIP 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."). MLF 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/R/ has been the sole trading advisor for the Fund since inception.
JWH/R/ 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, 1999.
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, 1999, the aggregate Net Asset Value of the Fund was
$360,219,859, and the Net Asset Value per Unit, originally $100 as of July 15,
1996, had risen to $146.40.
Through December 31, 1999, the highest month-end Net Asset Value per
Unit was $164.26 (June 30, 1999) and the lowest $98.89 (August 31, 1996).
(b) Financial Information about Segments:
------------------------------------
The Fund's business constitutes only one segment for financial
reporting purposes, i.e., a speculative "commodity pool." The Fund 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/R/. In managing the Fund's trading, JWH/R/ uses its "JWH/R/
Strategic Allocation Program" in which JWH/R/ selects, and allocates and
reallocates Fund assets in any different combinations of, its JWH/R/ Programs.
The Fund's primary objective is achieving, through speculative trading,
substantial
1
<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.
2
<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/R/ adjusts the Fund's market
commitment to levels which JWH/R/ believes are consistent with the Fund's
desired internal risk/reward profile. For example, in volatile markets, JWH/R/
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/R/ 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/R/ may conclude that the Fund's portfolio offers more risk than
reward. If so, JWH/R/ may reduce the Fund's market commitment, both taking
profits and controlling risk. Conversely, JWH/R/ 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/R/
reincorporated in Florida in 1997. JWH/R/'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/R/'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/R/
generally and not to the Fund itself.
General
JWH/R/ specializes in managing institutional and individual capital in
the global futures, interest rate and foreign exchange markets. Since 1981,
JWH/R/ has developed and implemented proprietary trend-following trading
techniques that focus on long-term rather than short-term, day-to-day trends.
JWH/R/ 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 --
3
<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/R/ 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/R/
programs participate in several markets at one time. In total, JWH/R/
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/R/
investment strategies and attempt to reduce volatility while maintaining the
potential for excellent performance.
JWH/R/ 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/R/ 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/R/'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/R/ 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/R/ investment program is available to be used to
trade in a JWH/R/ program. The amounts committed to margin will vary from time
to time. As capital in each JWH/R/ 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/R/ 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/R/'s
investment strategy. At its discretion, JWH/R/ 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/R/
reserves the right, at its sole discretion, to adjust its position size in
relation to account equity policy without notification to MLIP.
4
<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/R/ 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/R/'s
determination of liquidity or other market conditions, JWH/R/ 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/R/ will be able to achieve the objectives described
above in connection with Fund equity level changes. The use of discretion by
JWH/R/ in the application of this procedure may affect performance positively or
negatively.
Physical and Cash Commodities
JWH/R/ 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/R/ 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 the counterparties'
failure, inability or refusal to perform with respect to such contracts.
The Joint Venture Agreement
The advisory arrangement between the Fund and JWH/R/ is a joint
venture, a general partnership structure. The Joint Venture Agreement terminates
December 31, 2000, subject to automatic one-year renewals, unless either the
Fund or JWH/R/ elects not to renew.
The Fund has agreed to indemnify JWH/R/ 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/R/ and related persons will not be liable to the Joint Venture,
the Fund or any of the Partners in connection with JWH/R/'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 "Fund" unless the context otherwise requires.
Use of Proceeds and Cash Management Income
Subscription Proceeds. The Fund's assets are used as security
---------------------
for and to pay the Fund'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/R/ to trade on a speculative basis in a wide range of different
futures, forwards and options on futures markets on behalf of the Fund. While
being used for this purpose, the Fund's assets are also generally available for
cash management, as more fully described below under "-- Available Assets."
Market Sectors. The Fund trades in a diversified group of
--------------
markets under the direction of JWH/R/. JWH/R/ can, and does, from time to time
materially alter the allocation of its overall trading commitments among
different
5
<PAGE>
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.
Market Types. The Fund 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 Fund'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, 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 Fund.
In its exchange of futures for physical ("EFP") trading, the
Partnership acquires cash currency positions through banks and dealers,
including Merrill Lynch. The Fund 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.
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 Fund'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.
6
<PAGE>
The Fund's U.S. Dollar Available Assets Managed by MLAM.
-------------------------------------------------------
Approximately 80% of the Fund's U.S. dollar Available Assets are
managed directly by MLAM, pursuant to guidelines established by MLIP for which
MLAM assumes no responsibility, in the Government Securities markets. MLIP's
objective in retaining MLAM to provide cash management services to the Fund is
to enhance the return earned on the Fund's U.S. dollar Available Assets managed
by MLAM to slightly above the 91-day Treasury bill rate. 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 is 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, 1999, the Asset Management Group of ML&Co. (which includes MLAM)
had a total of approximately $557 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 Fund'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
- -------
Fund, the Fund 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 Fund does, however, earn interest on its non-U.S. dollar
Available Assets. Specifically, the Fund is credited
7
<PAGE>
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.
The Fund 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 Fund'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
1999, 1998 and 1997.
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------------------------------------------------
Dollar Dollar Dollar
Charges Amount Amount Amount
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Brokerage $ 28,008,137 $ 19,086,026 $ 7,377,236
Commissions
Administrative Fees 903,488 615,678 560,556
Organizational and Initial 108,777 98,530 298,039
Offering Costs
--------------------------------------------------------------------
Total $ 29,020,402 $ 19,800,234 $ 18,235,831
====================================================================
</TABLE>
In addition to the above charges, the Fund and JWH/R/ share in the
profits of the Joint Venture, 15% of the Joint Venture's quarterly New Trading
Profits are allocated to JWH/R/. For the years ended December 31, 1999, 1998 and
1997, JWH /R/ received a profit share allocation of $4,103,927, $5,383,828 and
$2,601,187 and earned interest of $103,835, $52,523 and $39,007 on such amounts,
respectively.
Description of Current Charges
------------------------------
The Fund and the Fund/JWH/R/ Joint Venture are subject to the
following charges and priority profit allocation (Profit Share):
Recipient Nature of Payment Amount of Payment
- --------- ----------------- -----------------
MLIP Organizational and ongoing Up to .25 of 1% of the
offering costs reimbursement Fund's average month-end
assets. (currently estimated
at $261,000 annually)
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 1999, 1998 and 1997,
the round-turn (each purchase
and sale or sale and purchase
of a single futures contract)
equivalent rate of the Fund's
flat-rate Brokerage
Commissions was approximately
$264, $145 and $212.
MLF Use of Fund assets MLF may derive an economic
benefit from the deposit of
certain of the Fund's U.S.
dollar Available Assets not
managed by MLAM in offset
accounts.
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.
8
<PAGE>
MLIB; Other Bid-ask spreads Bid-ask spreads on forward and
Counterparties related trades.
Government Securities Bid-ask spreads The dealers with which MLAM
Dealers executes Government Securities
trades include bid-ask spreads
in the prices they quote to
the Fund.
JWH Profit Share 15% of any New Trading
Profits, (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).
As Profit Shares are
calculated on the basis of
quarter-end highs in
cumulative Trading Profit,
substantial Profit Shares may
(irrespective of the fact that
Units are purchased at
different times and prices,
and may have materially
different investment
experiences during a year) be
accrued during a calendar year
even though the joint venture
has an overall loss for such
year.
9
<PAGE>
<TABLE>
<S> <C> <C>
JWH Consulting Fees MLF pays JWH/R/ annual Consulting Fees of 4% of the
Fund'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
MLIP, JWH/R/ and MLF 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 Fund 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 Fund has no employees.
(d) Financial Information about Geographic Areas:
--------------------------------------------
The Fund and the Joint Venture do not engage in material operations
in foreign countries, nor is a material portion of the Fund's revenues derived
from customers in foreign countries. The Fund does, however, trade from the
United States on a number of foreign commodity exchanges. The Fund does not
engage in the sales of goods or services.
Item 2: Properties
----------
The Fund does not use any physical properties in the conduct of
its business.
The Fund's only place of business is the place of business of MLIP
(Merrill Lynch Investment Partners Inc., Princeton Corporate Campus, 800
Scudders Mill Road - Section 2G, Plainsboro, New Jersey 08536). MLIP performs
all administrative services for the Fund from MLIP's offices.
Item 3: Legal Proceedings
-----------------
JWH/R/
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.
10
<PAGE>
MLIP itself has never been the subject of any material litigation.
11
<PAGE>
Item 4: Submission of Matters to a Vote of Security Holders
---------------------------------------------------
The Fund 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, 1999, there were 9,429 holders of Units,
including MLIP.
(c) Dividends:
---------
MLIP 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 2,000,000 units of limited
partnership interest. The Fund subsequently registered an additional 2,960,000
units of limited partnership interest. As of December 31, 1999, the Fund has
sold 4,123,182 units of limited partnership interest, with an aggregate price of
$429,731,810.
Item 5(b)
Not applicable.
12
<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 For the Year For the Period
Ended Ended Ended July 15, 1996 to
December 31, December 31, December 31, December 31,
Income Statement Data 1999 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues:
<S> <C> <C> <C> <C>
Trading Profits (Loss):
Realized Gain $ 9,335,723 $ 35,957,735 $ 18,820,033 $ 29,800,074
Change in Unrealized Gain (14,570,342) 12,141,395 10,201,917 4,696,372
----------------------------------------------------------------------------------------
Total Trading Results (5,234,619) 48,099,130 29,021,950 34,496,446
Interest Income 17,854,409 12,766,955 12,021,263 3,030,330
----------------------------------------------------------------------------------------
Total Revenues 12,619,790 60,866,085 41,043,213 37,526,776
----------------------------------------------------------------------------------------
Expenses:
Brokerage Commissions 28,008,137 19,086,026 17,377,236 4,873,368
Administrative Fees 903,488 615,678 560,556 157,205
Ongoing Offering Expense 108,777 - - -
----------------------------------------------------------------------------------------
Total Expenses 29,020,402 19,701,704 17,937,792 5,030,573
----------------------------------------------------------------------------------------
Net Income before Minority Interest and
Special Profit Share Allocation (16,400,612) 41,164,381 23,105,421 32,469,203
Special Profit Share Allocation (4,207,762) (5,436,351) (2,640,194) (4,683,010)
Minority Interest In Income 7,926 (19,071) (12,447) (23,383)
----------------------------------------------------------------------------------------
Net Income (Loss) (20,600,448) $ 35,708,959 $ 20,452,780 $ 27,789,810
========================================================================================
Balance Sheet Data December 31, 1999 December 31, 1998 December 31, 1997 December 31, 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Fund Net Asset Value $360,219,859 $314,512,911 $223,735,828 $ 172,840,660
Net Asset Value per Unit $146.40 $154.34 $135.10 $ 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
- -----------------------------------------------------------------------------------------------------------------
1999 $149.98 $153.81 $152.11 $158.66 $158.41 $164.26 $159.64 $159.75 $156.13 $143.66 $146.91 $146.40
- -----------------------------------------------------------------------------------------------------------------
</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.
13
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
December 31, 1999
Type of Pool: Single-Advisor/Publicly-Offered/Not "Principal Protected"/(1)/
Inception of Trading: July 15, 1996
Aggregate Subscriptions: $429,731,810
Current Capitalization: $360,219,859
Worst Monthly Drawdown:(2) (8.11)% (11/98)
Worst Peak-to-Valley Drawdown:(3) (10.26)% (6/99 - 12/99)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------
Monthly Rates of Return/(4)/
- -------------------------------------------------------------------------------------
Month 1999 1998 1997 1996
- -------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January (2.82)% (1.51)% 3.01% N/A
- -------------------------------------------------------------------------------------
February 2.56 (0.66) (0.03) N/A
- -------------------------------------------------------------------------------------
March (1.11) 0.77 0.07 N/A
- -------------------------------------------------------------------------------------
April 4.30 (3.38) (0.46) N/A
- -------------------------------------------------------------------------------------
May (0.15) 4.04 (3.11) N/A
- -------------------------------------------------------------------------------------
June 3.69 (1.54) 0.27 N/A
- -------------------------------------------------------------------------------------
July (2.81) (1.22) 7.11 (1.02)%
- -------------------------------------------------------------------------------------
August 0.07 9.68 (3.31) (0.09)
- -------------------------------------------------------------------------------------
September (2.26) 7.53 (0.66) 5.49
- -------------------------------------------------------------------------------------
October (7.99) 0.83 2.58 10.20
- -------------------------------------------------------------------------------------
November 2.26 (8.11) 0.97 6.62
- -------------------------------------------------------------------------------------
December (0.35) 8.23 3.52 0.47
- -------------------------------------------------------------------------------------
Compound Annual
Rate of Return (5.15)% 14.00% 9.93% 23.15%
(5-1/2 months)
- -------------------------------------------------------------------------------------
</TABLE>
_________________________
(1) Certain funds, including funds sponsored by MLIP, are structured
so as to guarantee to investors that their investment will be worth no less than
a specified amount (typically, the amount initially invested) as of a date
certain after the date of investment. The CFTC refers to such funds as
"principal protected." The Fund has no such feature.
(2) Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced by the Fund; a drawdown is measured on the basis of
month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage
decline from a month-end cumulative Monthly Rate of Return without such
cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent
month-end. For example, if the Monthly Rate of Return was (1)% in each of
January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown
would still be continuing at the end of April in the amount of approximately
(3)%, whereas if the Monthly Rate of Return had been approximately 3% in March,
the Peak-to-Valley Drawdown would have ended as of the end of February at
approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during
the month of determination (including interest income and after all expenses
accrued or paid) divided by the total equity of the Fund as of the beginning of
such month.
14
<PAGE>
Item 7: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
- -------------
Results of Operations
General
- -------
Because JWH/R/'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/R/ 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
- -------------------
1999
<TABLE>
<CAPTION>
<S> <C>
Interest Rates and Stock Indices $(34,470,825)
Commodities (4,165,419)
Currencies 27,765,382
Energy 27,637,758
Metals (22,001,515)
-----------
$(5,234,619)
===========
</TABLE>
ML JWH Strategic Allocation Fund L.P. finished 1999 with gains in
currencies and energies and losses in agricultural commodities, metals, interest
rates and stock indices. Decreasing world inventories for oil pushed prices to
some of their highest levels seen since the Gulf War. Positions in currencies
were profitable as the yen appreciated throughout most of the year and the euro
continued a downward bias since its inception. The announcement by European
Central Banks to limit gold sales resulted in a spike in the gold market that
proved unprofitable and diminished market liquidity. The Fund also suffered
losses in Australian and Asian interest rates from volatile and uncertain market
conditions.
Currency trading produced the largest gains during 1999 for the Fund.
The first half of the year saw profitable positions in the Japanese yen and Euro
trading, which outweighed small losses in the British pound and the Australian
dollar. The continuation of the strong dollar, especially relative to the new
euro, offset losses in other markets. The second half of the year produced mixed
results, as profitable trading in the Japanese yen were offset by losses in
European and emerging currency trading. Long yen positions resulted in strong
gains as the prospect of continued economic recovery boosted share prices in
Japan and the yen appreciated against the dollar. Euro currency trading
sustained losses as it continued to trade in the same choppy pattern that has
been evident during most of 1999.
Energy trading produced strong gains during 1999. The Fund profited from
long positions in crude oil, gasoil and unleaded gas positions as OPEC cut
production to 1.716 million barrels per day and this resulted in higher prices
for crude. Near the end of the year, there was a continued upward momentum in
crude oil reflecting the tightening between supply and demand and prices hitting
ten-year highs.
Trading in agricultural was unprofitable overall for Fund in 1999.
Losses in coffee, corn, sugar and cotton, outweighed small gains in coffee,
soybean and cocoa during the first half of the year. Agricultural commodities
were weak almost across the board as they were saddled with supply/demand
imbalances and unpredictable weather throughout the world. Despite a severe
drought, Brazil issued higher than expected crop projections, this coupled the
anticipation of supply/demand imbalance for coffee from an expected 2000-2001
bumper crop pushed coffee prices lower during the fourth quarter.
Metals trading generated the large losses for the Fund in 1999 as losses
in copper, nickel and silver offset gains in aluminum and gold. Gold had failed
to maintain its status as a safety vehicle and a monetary asset during the first
half of 1999. In early June, gold had reached its lowest level in over 20 years.
A major statement from the president of the European Central Bank stated that
the member banks had agreed not to expand their gold lending. This sent gold
prices sharply higher in late September. Short positions in gold resulted in
losses as prices hit multi-year highs. Early in the year, burdensome warehouse
stocks and questionable demand prospects weighed on base metals as aluminum fell
to a five-year low and copper fell to nearly an 11-year low. The economic
scenario for Asia, Brazil, Europe and emerging market nations helped to keep
copper and other base metals on the defensive as demand receded with virtually
no supply side response in the second quarter. A substantial increase in Chinese
imports combined with the recovery in the rest of Asia and Europe had
significantly improved demand for aluminum pushing prices higher during
December.
Stock index trading was unprofitable for the Fund in 1999. The first
half of the year saw gains in the in Nikkei 225, slightly outweigh losses in the
All Ordinaries and the FTSE 100. The Nikkei 225 index continued to show upward
trends during the first half of the year in response to the economic numbers
that suggest the Japanese economy is firming. The second half of the year
produced losses that offset the gains from the first half of 1999. Stock indices
continued there volatile and choppy trading throughout the remainder of the year
as losses in the FTSE 100 and All Ordinaries greatly offset gains in the Nikkei
225.
Interest rate trading was volatile during the year as the Federal
Reserve raised interest rates three times and the Japanese government's
continued desire to keep short term rates at zero loomed over the markets
throughout the year. Interest rates generated the largest losses for the Fund in
1999. Early in the year, the yield on the Japanese government ten-year bond
increased to 1.8%, sharply above the record low of 0.695% it reached on October
7, 1998. This was triggered by the Japanese Trust Fund Bureau's decision to
absorb a smaller share of future issues, leaving the burden of financing future
budget deficits to the private sector. The second half of the year saw losses in
the both the short and long end of the U.S. yield curve as the bond markets were
bearish after the Federal Reserve raised rates and the potential for more rates
hikes in 2000. Also, the long end of the Japanese yield curve and short end of
the Eurodollar yield curve generated losses during the fourth quarter.
1998
<TABLE>
<CAPTION>
Total Trading
Results
<S> <C>
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
===========
</TABLE>
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.
15
<PAGE>
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.
1997
<TABLE>
<CAPTION>
Total Trading
Results
<S> <C>
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
============
</TABLE>
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.
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
In 1999 Merrill Lynch completed its efforts to address the Year 2000
problem (the "Y2K issue"). The Y2K issue was the result of a widespread
programming technique that caused 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 issue may have caused serious failures in information technology systems
and other systems.
In 1995 Merrill Lynch established the Year 2000 Compliance Initiative
to address the internal and external risks associated with the Y2K issue. The
initiative consisted of six phases, completed by the millennium: planning,
pre-renovation, renovation, production testing, certification, and integration
testing. Contingency plans were established in the event of any failures or
disruptions.
Through the date of this filing, there have been no material failures
or disruptions of systems or services at Merrill Lynch attributable to the Y2K
issue. Similarly we have not been notified of any material failure or disruption
of systems or services affecting third parties in their capacity to transact
business with Merrill Lynch or in Merrill Lynch's capacity to transact business
with others. Merrill Lynch continues to monitor the performance of its systems
for any possible future failures or disruptions attributable to the Y2K issue.
As of December 31, 1999, the total estimated expenditures for the
entire Year 2000 Compliance Initiative were approximately $510 million,
including $102 million of occupancy, communications, and other related overhead
expenditures, as Merrill Lynch is applying a fully costed pricing methodology
for this project. Of the total estimated expenditures, approximately $12
million, related to continued testing, contingency planning, risk management,
and the wind down of the efforts, has not yet been spent.
Item 7A: Quantitative and Qualitative Disclosures About Market Risk
----------------------------------------------------------
Introduction
- ------------
16
<PAGE>
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/R/, 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.
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
17
<PAGE>
The following table indicates the average,highest and lowest trading
Value at Risk associated with the Fund's open positions by market category for
the fiscal year 1999. During the fiscal year 1999, the Fund's average
capitalization was approximately $352,593,851. As of December 31, 1998, the
Fund's total capitalization was approximately $314,512,911.
December 31, 1999
-----------------
<TABLE>
<CAPTION>
Average Value % of Average Highest Value Lowest Value
Market Sector at Risk Capitalization at Risk at Risk
- ------------- ------------- -------------- ------------- ------------
<S> <C> <C> <C> <C>
Interest Rates 23,626,211 6.70% 19,485,183 12,987,107
Currencies 13,608,002 3.86% 17,225,422 11,644,992
Stock Indices 3,366,115 0.95% 6,158,544 2,715,599
Metals 2,732,533 0.77% 2,993,250 1,561,000
Commodities 2,797,471 0.79% 3,400,696 2,363,144
Energy 4,525,408 1.28% 5,602,967 3,989,200
----------- ----- ---------- ----------
Total 50,655,740 14.37% 54,866,062 35,261,042
=========== ===== ========== ==========
</TABLE>
December 31, 1998
-----------------
<TABLE>
<CAPTION>
Average Value % of Average
Market Sector at Risk Capitalization
- ------------- ------------- --------------
<S> <C> <C>
Interest Rates $12,538,585 3.98%
Currencies 5,492,878 1.75%
Stock Indices 998,918 0.32%
Metals 1,551,500 0.49%
Commodities 2,159,281 0.69%
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 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, 1999, the Fund's MLAM account totaled
$302,660,752.
18
<PAGE>
As of December 31, 1999, the Fund's MLAM account held the following
securities:
<TABLE>
<CAPTION>
Par Value Description Rate Maturity Date Fair Value
--------- ----------- ---- ------------- ----------
Long-Term
---------
<S> <C> <C> <C> <C>
30,000,000 U.S. Treasury Note 5.375% February 15, 2001 $ 29,751,563
15,000,000 U.S. Treasury Note 5.000% February 28, 2001 14,810,156
13,500,000 U.S. Treasury Note 5.625% May 15, 2001 13,399,804
13,000,000 U.S. Treasury Note 6.125% December 31, 2001 12,972,578
1,000,000 U.S. Treasury Note 6.000% November 15, 2004 994,375
25,000,000 U.S. Treasury Note 5.875% February 15, 2001 24,513,672
12,000,000 Federal National Mortgage Association 5.720% January 9, 2001 11,926,200
25,000,000 Federal National Mortgage Association 5.625% March 15, 2001 24,781,250
23,000,000 Federal National Mortgage Association 5.375% March 15, 2002 22,468,240
--------------
Subtotal $ 155,617,838
--------------
Short-Term
----------
8,125,000 Federal Home Loan Discount Note 0.000% January 14, 2000 $ 8,108,750
6,370,000 Federal National Discount Note 0.000% January 19, 2000 6,352,164
50,550,000 Federal Home Loan Discount Note 0.000% February 17, 2000 50,175,930
4,000,000 U.S. Treasury Note 5.375% July 31, 2000 3,989,375
20,000,000 U.S. Treasury Note 4.500% September 30, 2000 19,775,000
59,500,000 U.S. Treasury Note 4.625% November 30, 2000 58,641,695
--------------
Subtotal $ 147,042,914
--------------
Total Debt $ 302,660,752
==============
</TABLE>
19
<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/R/ 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, 1999, 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/euro
and dollar/pound positions. MLIP does not anticipate that the risk profile of
the Fund's currency sector will change significantly in the future. 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, 1999, 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 Asian indices.
Metals. The Fund's primary metals market exposure is to fluctuations
------
in the price of gold and silver. Although JWH/R/ 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 and gold prices have remained volatile over
this period, and JWH/R/ 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.
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, 1999. 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/R/ will maintain an emphasis on
soybeans, grains and orange juice, in which the Fund has historically taken its
largest positions.
20
<PAGE>
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 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, 1999.
Foreign Currency Balances. The Fund's primary foreign currency
-------------------------
balances are in Japanese yen, Euro and British pounds.
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/R/ to reallocate positions in an attempt to
avoid over-concentrations. However, such interventions are unusual. Except in
cases in which it appears that JWH/R/ 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/R/ with the market risk controls being applied by
JWH/R/ itself.
Risk Management
- ---------------
JWH/R/ 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/R/ 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/R/ seeks to control overall risk as well as the
risk of any one position, and JWH/R/ 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/R/ factors the
point of exit into the decision to enter (stop loss). The size of JWH/R/'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.
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/R/ 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
21
<PAGE>
to account equity. The weighting of capital committed to various markets in the
investment programs is dynamic, and JWH/R/ may vary the weighting at its
discretion as market conditions, liquidity, position limit considerations and
other factors warrant.
JWH/R/ 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/R/ 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/R/'s investment strategy. At its
discretion, JWH/R/ 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
two 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. MLIP promoted the Fund and is its
controlling person.
22
<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
Michael L. Pungello Vice President, Chief Financial Officer and Treasurer
Allen N. Jones Director
Stephen G. Bodurtha Director
Michael J. Perini 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.
Michael L. Pungello was born in 1957. Effective May 1, 1999, Mr.
Pungello became 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
23
<PAGE>
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.
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.
Michael J. Perini was born in 1947. Effective May 11, 1999, Mr. Perini
became a Director of MLIP. Since February 1998, Mr. Perini has been First Vice
President and Senior Director of the Defined and Managed Funds Group, which
includes Defined Asset Funds, Special Investments and MLIP. This is part of the
Investment Strategy Product Group of Merrill Lynch Private Client. Previously
Michael Perini was Director of Defined Asset Funds and has held various
management positions since he joined Merrill Lynch in 1970. Mr. Perini attended
St. John's University and New York University as well as The Stanford University
Marketing Management Program. He was elected to the Board of Governors of the
Investment Company Institute in Washington, D.C., and is Chairman of the Unit
Investment Trust Committee of the Institute.
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, 1999, the principals of MLIP had no investments in
the Fund and MLIP's general partner interest in the Fund was valued at
$4,087,563.
MLIP acts as general partner to eleven public futures funds whose
units of limited partnership interest are registered under the Securities
Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, 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.
24
<PAGE>
(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 MLIP are remunerated in their respective
positions. The Fund does not itself have any officers, directors or
employees. The Fund pays Brokerage Commissions to an affiliate of MLIP and
Administrative Fees to MLIP. MLIP 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 Fund and
the directors receive no compensation for serving as directors of MLIP.
There are no compensation plans or arrangements relating to a change in
control of either the Fund or MLIP.
Item 12: Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1999, no person or "group" is known to be
or have been the beneficial owner of more than 5% of the Units. All of the
Fund's units of general partnership interest are owned by MLIP.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1999, MLIP owned 27,921 unit-equivalent
general partnership interests, which was 1.13% of the total Units
outstanding.
(c) Changes in Control:
------------------
None.
25
<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 MLIP, acts as the principal commodity broker
for the Fund.
In 1999, the Fund expensed: (i) Brokerage Commissions of
$28,088,137 to MLF, which included $14,455,813 in Management Fees paid by MLF to
JWH; and (ii) Administrative Fees of $903,488 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 Fund is prohibited from making any loans, to management or
otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
26
<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, 1999 and 1998 2
For the years ended December 31, 1999, 1998 and 1997:
Consolidated Statements of Operations 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-10
</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 Partners Inc.,
Merrill Lynch Futures Inc. and the Fund.
27
<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 1999 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 1999.
28
<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 30, 2000 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 30, 2000
- -------------------------
John R. Frawley, Jr. (Principal Executive Officer)
/s/Michael L. Pungello Vice President, Chief Financial Officer and Treasurer March 30, 2000
- -------------------------
Michael L. Pungello (Principal Financial and Accounting Officer)
/s/Jeffrey F. Chandor Senior Vice President, Director of Sales, March 30, 2000
- -------------------------
Jeffrey F. Chandor Marketing and Research and Director
/s/Michael J. Perini Director March 30, 2000
- -------------------------
Michael J. Perini
</TABLE>
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
MERRILL LYNCH INVESTMENT General Partner of Registrant March 30, 2000
PARTNERS INC.
By: /s/John R. Frawley, Jr.
------------------------
John R. Frawley, Jr.
29
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
1999 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 10.04 Joint Venture Agreement Amendment among JWH and the Fund
Exhibit 13.01 1999 Annual Report and Independent Auditors' Report
<PAGE>
JOINT VENTURE AGREEMENT AMENDMENT
This Joint Venture Agreement Amendment dated as of January 31, 2000, by
and among ML JWH STRATEGIC ALLOCATION FUND L.P. (the "Partnership") and JOHN W.
HENRY & COMPANY INC. ("JWH").
WITNESSETH
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 to the date hereof, the "Joint Venture
Agreement," certain defined terms are used herein as defined therein); and
WHEREAS, the parties hereto wish to amend the Joint Venture Agreement in
order to provide for the termination of the exclusivity provisions contained
therein.
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. Exclusivity. The exclusivity arrangement contained in Section 31 of
-----------
the Joint Venture Agreement shall terminate on February 29, 2000.
2. 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.
3. Counterparts. This Amendment may be executed in one or more
------------
counterparts, each of which shall, however, together constitute one and the same
document.
<PAGE>
IN WITNESS WHEREOF, the undersigned have hereto duly set forth their
hand as of the 31st day of January, 2000.
ML JWH STRATEGIC ALLOCATION FUND
L.P.
By: MERRILL LYNCH INVESTMENT
PARTNERS INC., its general
partner
/s/ Steven B. Olgin
By: ___________________________
Name: Steven B. Olgin
Title: VP and Secretary
JOHN W. HENRY & COMPANY INC.
/s/ David M. Kozak
By: ___________________________
Name: David M. Kozak
Title: Sr. VP
Confirmed:
not as a Joint Venturer but
solely for the limited purposes
set forth herein
MERRILL LYNCH FUTURES INC.
/s/ John R. Frawley, Jr.
By: ________________________________
Name: John R. Frawley, Jr.
Title: Chairman, Chief Executive
Officer, President and Director
<PAGE>
Exhibit 13.01
ML JWH STRATEGIC ALLOCATION FUND L.P.
(A Delaware Limited Partnership)
AND JOINT VENTURE
Consolidated Financial Statements for the years ended
December 31, 1999, 1998 and 1997 and Independent
Auditors' Report
[LOGO] Merrill Lynch
<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, 1999, 1998 and 1997:
Consolidated Statements of Financial Condition 2
Consolidated Statements of Operations 3
Consolidated Statements of Changes in Partners' Capital 4
Notes to Consolidated Financial Statements 5-10
<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 the ML JWH
Strategic Joint Venture (the "Joint Venture") as of December 31, 1999 and 1998,
and the related consolidated statements of operations and of changes in
partners' capital for each of the three years in the period ended December 31,
1999. 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 ML JWH Strategic Joint Venture as of December 31, 1999 and 1998,
and the results of their operations and changes in partners' capital for each of
the three years in the period ended December 31, 1999, in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
New York, New York
February 4, 2000
<PAGE>
ML JWH STRATEGIC ALLOCATION FUND L.P.
(A Delaware Limited Partnership) AND JOINT VENTURE
-------------------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1999 AND 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Equity in commodity futures trading accounts:
Cash and options premiums $ 49,466,829 $ 34,991,460
Net unrealized profit on open contracts 15,377,657 26,157,000
Government securities (Cost: $305,569,068 and $263,057,253) 302,660,752 263,939,939
Cash 15,003 57,273
Accrued interest (Note 3) 3,127,363 3,064,653
------------ ------------
TOTAL $370,647,604 $328,210,325
============ ============
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Brokerage commissions payable (Note 3) $ 2,366,595 $ 2,086,278
Profit Share payable (Note 2) 4,207,026 5,436,351
Redemptions payable 3,609,053 5,952,585
Administrative fees payable (Note 3) 76,341 67,299
Ongoing offering costs payable (Note 1) 21,755 --
------------ ------------
Total liabilities 10,280,770 13,542,513
------------ ------------
MINORITY INTEREST 146,975 154,901
------------ ------------
PARTNERS' CAPITAL:
General Partner (27,921 Units and 17,281 Units) 4,087,563 2,667,093
Limited Partners (2,432,642 Units and 2,020,545 Units) 356,132,296 311,845,818
------------ ------------
Total partners' capital 360,219,859 314,512,911
------------ ------------
TOTAL $370,647,604 $328,210,325
============ ============
NET ASSET VALUE PER UNIT $ 146.40 $ 154.34
============ ============
</TABLE>
(Based on 2,460,563 and 2,037,826 Units outstanding)
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 OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998 1997
------------- ------------ -------------
<S> <C> <C> <C>
REVENUES:
Trading profit (loss):
Realized $ 9,335,723 $ 35,957,735 $ 18,820,033
Change in unrealized (14,570,342) 12,141,395 10,201,917
------------ ------------ ------------
Total trading results (5,234,619) 48,099,130 29,021,950
Interest income (Note 3) 17,854,409 12,766,955 12,021,263
------------ ------------ ------------
Total revenues 12,619,790 60,866,085 41,043,213
------------ ------------ ------------
EXPENSES:
Brokerage commissions (Note 3) 28,008,137 19,086,026 17,377,236
Administrative fees (Note 3) 903,488 615,678 560,556
Ongoing offering costs (Note 1) 108,777 -- --
------------ ------------ ------------
Total expenses 29,020,402 19,701,704 17,937,792
------------ ------------ ------------
INCOME (LOSS) BEFORE PROFIT SHARE (16,400,612) 41,164,381 23,105,421
ALLOCATION AND MINORITY INTEREST
Profit Share Allocation (Note 2) (4,207,762) (5,436,351) (2,640,194)
Minority interest in (income) loss 7,926 (19,071) (12,447)
------------ ------------ ------------
NET INCOME (LOSS) $(20,600,448) $ 35,708,959 $ 20,452,780
============ ============ ============
NET INCOME (LOSS) PER UNIT:
Weighted average number of General Partner 2,325,460 1,736,281 1,739,531
and Limited Partner Units outstanding (Note 4)
============ ============ ============
Net income (loss) per weighted average General Partner $ (8.86) $ 20.57 $ 11.76
and Limited Partner Unit
============ ============ ============
</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, 1999, 1998 AND 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Subscriptions
Units General Partner Limited Partners Receivable Total
---------- --------------- ---------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL, 1,403,427 $ 2,038,044 $ 188,284,065 $ (18,248,494) $ 172,073,615
DECEMBER 31, 1996
Organizational and initial -- 3,765 366,712 -- 370,477
offering cost recovery
Additions 409,237 152,196 32,969,453 18,248,494 51,370,143
Redemptions (160,235) -- (20,629,719) -- (20,629,719)
Net Income -- 261,935 20,190,845 -- 20,452,780
--------- ------------- ------------- ------------- -------------
PARTNERS' CAPITAL, 1,652,429 2,455,940 221,181,356 -- 223,637,296
DECEMBER 31, 1997
Additions 713,063 214,178 100,796,172 -- 101,010,350
Redemptions (327,666) (330,082) (45,513,612) -- (45,843,694)
Net Income -- 327,057 35,381,902 -- 35,708,959
--------- ------------- ------------- ------------- -------------
PARTNERS' CAPITAL, 2,037,826 2,667,093 311,845,818 -- 314,512,911
DECEMBER 31, 1998
Additions 713,679 1,788,180 108,788,920 -- 110,577,100
Redemptions (290,942) (78,597) (44,191,107) -- (44,269,704)
Net Loss -- (289,113) (20,311,335) -- (20,600,448)
--------- ------------- ------------- ------------- -------------
PARTNERS' CAPITAL, 2,460,563 $ 4,087,563 $ 356,132,296 $ -- $ 360,219,859
DECEMBER 31, 1999
========= ============= ============= ============= =============
</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, through investing in
Government securities, as defined. Merrill Lynch Investment Partners Inc.,
("MLIP"), 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.
MLIP and each Limited Partner share in the profits and losses of the
Partnership in proportion to their respective interests.
The Joint Venture trades in the international futures and forward markets,
applying multiple proprietary trading strategies under the direction of
JWH(R). JWH(R) selects, allocates and reallocates the Partnership's assets
among different combinations of JWH(R)'s programs--an approach which JWH(R)
refers to as the "JWH Strategic Allocation Program."
The consolidated financial statements include the accounts of the Joint
Venture to which the Partnership has contributed substantially all of its
capital, representing a current equity interest in the Joint Venture of
approximately 99%. All related transactions between the Partnership and the
Joint Venture are eliminated in consolidation.
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
5
<PAGE>
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 Trading profit (loss): Change in
unrealized in the Consolidated Statements of Operations.
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.
Organizational and Initial Offering Costs, Ongoing Operating Costs,
-------------------------------------------------------------------
Operating Expenses and Selling Commissions
------------------------------------------
MLIP 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.
MLIP is entitled to receive, from the Partnership, ongoing offering cost
reimbursements subject to a ceiling of up to .25 of 1% of the Partnership's
average month-end assets in any fiscal year (currently estimated at
$261,000 annually). MLIP 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) and is being reimbursed by the
Partnership. MLIP 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 Limited Partners 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, 1999.
Redemptions
-----------
A Limited Partner may 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, Units are
treated on a "first-in, first-out" basis for purposes of determining
whether redemption charges are applicable. Redemption charges are
subtracted from redemption proceeds and paid to MLIP.
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.
2. JOINT VENTURE AGREEMENT
The Partnership and JWH(R) entered into a Joint Venture Agreement as of the
commencement of operations whereby JWH(R) 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, 2000 subject to automatic one-year
renewals on the same terms, unless either the Partnership or JWH(R) elects
not to renew. MLIP is the manager of the Joint Venture, while JWH(R) 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(R) 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(R). Losses are allocated to JWH(R) and the
Partnership based on equity ownership.
Pursuant to the Joint Venture Agreement, JWH(R)'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 years ended December 31, 1999, 1998 and 1997, JWH(R)
received a profit share allocation of $4,103,927, $5,383,828 and $2,601,187
and earned interest of $103,835, $52,523 and $39,007 on such amounts,
respectively.
7
<PAGE>
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 of MLIP-Sponsored-Funds("Capital"), including assets of the Joint
Venture's 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 at prevailing local rates for
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, 1999, 1998 and 1997
was approximately $264, $145 and $212 (not including, in calculating
round-turn equivalents, forward contracts on a futures-equivalent basis).
MLF pays JWH(R) annual Consulting Fees of 4% of the Partnership's average
month-end assets, after reduction for a portion of the brokerage
commissions.
4. 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 for the years ended December 31, 1999, 1998 and 1997
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.
5. FAIR VALUE AND OFF-BALANCE SHEET RISK
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities" (the "Statement"), effective for fiscal
years beginning after June 15, 2000, as amended by SFAS No. 137. This
Statement supercedes SFAS No. 119 ("Disclosure about Derivative Financial
Instruments and Fair Value of Financial Instruments") and SFAS No. 105
("Disclosure of Information about Financial Instruments with Off-Balance
Sheet Risk and Financial Instruments with Concentrations of Credit
8
<PAGE>
Risk") whereby disclosure of average aggregate fair values and
contract/notional values, respectively, of derivative financial instruments
is no longer required for an entity such as the Partnership which carries
its assets at fair value. Such Statement sets forth a much broader
definition of a derivative instrument. MLIP does not believe that the
adoption of the provisions of such Statement had a significant effect on
the financial statements.
SFAS No. 133 defines a derivative as a financial instrument or other
contract that has all three of the following characteristics: (1) one or
more underlyings and notional amounts or payment provisions; (2) requires
no initial net investment or a smaller initial net investment than would be
required for other types of contracts that would be expected to have a
similar response to changes in market factors; and, (3) terms that require
or permit net settlement. Generally, derivatives include futures, forwards,
swaps, options or other financial instruments with similar characteristics
such as caps, floors and collars.
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk. Changes in the level or volatility of interest rates, foreign
currency exchange rates or the market values of the financial instruments
or commodities underlying such derivative instruments frequently result in
changes in the Partnership's net unrealized profit (loss) on such
derivative instruments as reflected in the Consolidated Statements of
Financial Condition. The Partnership's exposure to market risk is
influenced by a number of factors, including the relationships among the
derivative instruments held by the Partnership as well as the volatility
and liquidity of the markets in which the derivative instruments are
traded.
MLIP has procedures in place intended to control market risk exposure,
although there can be no assurance that they will, in fact, succeed in
doing so. These procedures focus primarily on monitoring the trading of
JWH(R), calculating the Net Asset Value of the Partnership as of the close
of business on each day and reviewing outstanding positions for over-
concentrations. While MLIP does not itself intervene in the markets to
hedge or diversify the Partnership's market exposure, MLIP may urge JWH(R)
to reallocate positions in an attempt to avoid over-concentrations.
However, such interventions are unusual. Except in cases in which it
appears that JWH(R) has begun to deviate from past practice or trading
policies or to be trading erratically, MLIP basic risk control procedures
consist simply of the ongoing process of advisor monitoring, with the
market risk controls being applied by JWH(R) itself.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically perceived
to be less than those associated with over-the-counter
(non-exchange-traded) transactions, because exchanges typically (but not
universally) provide clearinghouse arrangements in which the collective
credit (in some cases limited in amount, in some cases not) of the members
of the exchange is pledged to support the financial integrity of the
exchange. In over-the-counter transactions, on the other hand, traders must
rely solely on the credit of their respective individual counterparties.
Margins, which may be subject to loss in the event of a default, are
generally required in exchange trading, and counterparties may also require
margin in the over-the-counter markets.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized profit, if any, included in the
Consolidated Statements of Financial Condition. The Partnership attempts to
mitigate credit risk by dealing exclusively with Merrill Lynch entities as
clearing brokers.
9
<PAGE>
The Partnership, in its normal course of business, enters into various
contracts, with MLF acting as its commodity broker. Pursuant to the
brokerage agreement 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 and included in the Statement of Financial Condition under
Equity in commodity futures accounts.
* * * * * * * * * * *
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/ Michael L. Pungello
Michael L. Pungello
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
ML JWH Strategic Allocation Fund L.P.
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1999 DEC-31-1998
<PERIOD-START> JAN-01-1999 JAN-01-1998
<PERIOD-END> DEC-31-1999 DEC-31-1998
<CASH> 15,003 57,273
<RECEIVABLES> 67,971,849 64,213,113
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 302,660,752 263,939,939
<PP&E> 0 0
<TOTAL-ASSETS> 370,647,604 328,210,325
<SHORT-TERM> 0 0
<PAYABLES> 10,427,745 13,697,414
<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> 360,219,859 314,512,911
<TOTAL-LIABILITY-AND-EQUITY> 370,647,604 328,210,325
<TRADING-REVENUE> (5,234,619) 48,099,130
<INTEREST-DIVIDENDS> 17,854,409 12,766,955
<COMMISSIONS> 28,008,137 19,086,026
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (20,600,448) 35,708,959
<INCOME-PRE-EXTRAORDINARY> (20,600,448) 35,708,959
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (20,600,448) 35,708,959
<EPS-BASIC> (8.86) 20.57
<EPS-DILUTED> (8.86) 20.57
</TABLE>
