<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
() TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission File Number 0-18702
THE SECTOR STRATEGY FUND(SM) L.P.
----------------------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3568563
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-9757
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE SECTOR STRATEGY FUND(SM) L.P.
---------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
----------------- -----------------
<S> <C> <C>
ASSETS
- ------
Accrued interest $80,454 $88,083
Equity in commodity futures trading accounts:
Cash and options premiums 17,743,963 19,393,407
Net unrealized profit on open contracts 584,782 703,331
Investment 6,053,170 6,996,472
Receivable from investment 113,347 162,042
----------------- -----------------
TOTAL $24,575,716 $27,343,335
================= =================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $361,206 $532,040
Profit shares payable 146,714 83,463
Brokerage commissions payable 134,392 147,339
Administrative fees payable 3,840 4,210
----------------- -----------------
Total liabilities 646,152 767,052
----------------- -----------------
PARTNERS' CAPITAL:
General Partner (2518 and 2518 Units) 465,236 489,837
Limited Partners (126996 and 134097 Units) 23,464,328 26,086,446
----------------- -----------------
Total partners' capital 23,929,564 26,576,283
----------------- -----------------
TOTAL $24,575,716 $27,343,335
================= =================
NET ASSET VALUE PER UNIT
(Based on 129514 and 136615 Units outstanding) $184.76 $194.53
================= =================
</TABLE>
See notes to financial statements.
2
<PAGE>
THE SECTOR STRATEGY FUND(SM) L.P.
----------------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF OPERATIONS
------------------------
For the three For the three
months ended months ended
March 31, March 31,
1998 1997
------------------ -----------------
REVENUES:
Trading (loss) profits:
Realized $(259,443) $1,361,157
Change in unrealized (118,549) (395,117)
------------------ -----------------
Total trading results (377,992) 966,040
------------------ -----------------
Interest income 245,204 295,936
Income from investment (601,217) 106,553
------------------ -----------------
Total revenues (734,005) 1,368,529
------------------ -----------------
EXPENSES:
Profit shares 148,252 182,177
Brokerage commissions 414,742 543,256
Administrative fees 11,850 15,522
------------------ -----------------
Total expenses 574,844 740,955
------------------ -----------------
NET (LOSS) INCOME $(1,308,849) $627,574
================== =================
NET (LOSS) INCOME PER UNIT:
Weighted average number of units
outstanding 133,840 161,146
================== =================
Weighted average net (loss) income
per Limited Partner
and General Partner Unit $(9.78) $3.89
================== =================
See notes to financial statements.
3
<PAGE>
THE SECTOR STRATEGY FUND(SM) L.P.
----------------------------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the three months ended March 31, 1998 and 1997
--------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partners General Partner Total
---------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1996 164,289 $31,459,360 $489,672 $31,949,032
Net Income - 618,077 9,497 627,574
Redemptions (9,130) (1,817,838) - (1,817,838)
---------------- ----------------- ----------------- -----------------
PARTNERS' CAPITAL,
March 31, 1997 155,159 $30,259,599 $499,169 $30,758,768
================ ================= ================= =================
PARTNERS' CAPITAL,
December 31, 1997 136,615 $26,086,446 $489,837 $26,576,283
Net Loss - (1,284,248) (24,601) (1,308,849)
Redemptions (7,101) (1,337,870) - (1,337,870)
---------------- ----------------- ----------------- -----------------
PARTNERS' CAPITAL,
March 31, 1998 129,514 $23,464,328 $465,236 $23,929,564
================ ================= ================= =================
</TABLE>
See notes to financial statements.
4
<PAGE>
THE SECTOR STRATEGY FUND(SM) L.P.
(A Delaware limited partnership)
--------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present
fairly the financial position of The SECTOR Strategy Fund(SM) L.P. (the
"Partnership" or the "Fund") as of March 31, 1998 and the results of its
operations for the three months ended March 31, 1998 and 1997. However,
the operating results for the interim periods may not be indicative of the
results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with general accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Partnership's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1997 (the "Annual Report").
2. INVESTMENT
As of March 31, 1998 and December 31, 1997, the Partnership had an
investment in the ML JWH Financials and Metals Portfolio L.L.C. ("JWH LLC")
of $6,053,170 and $6,996,472.
Total revenues and fees with respect to such investment is set forth as
follows:
<TABLE>
<CAPTION>
For the three months Total Brokerage Administrative Profit Loss from
ended March 31, 1998 Revenue Commissions Fees Shares Investment
-------------- ----------------- ----------------- -------------- --------------------
<S> <C> <C> <C> <C> <C>
JWH LLC $(455,819) $141,359 $4,039 $ - $(601,217)
============== ================= ================= ============== ====================
<CAPTION>
For the three months Total Brokerage Administrative Profit Income from
ended March 31, 1997 Revenue Commissions Fees Shares Investment
-------------- ----------------- ----------------- -------------- ----------------------
<S> <C> <C> <C> <C> <C>
JWH LLC $271,036 $158,509 $4,528 $1,446 $106,553
============== ================= ================= ============== ====================
</TABLE>
5
<PAGE>
Condensed statements of financial condition as of March 31, 1998 and
December 31, 1997 and statements of operations for the three months ended
March 31, 1998 and 1997 are set forth as follows:
1998 1997
---------------- -----------------
Assets $54,294,178 $62,481,438
================ =================
Liabilities $431,357 $1,122,533
Members' Capital 53,862,821 61,358,905
---------------- -----------------
Total $54,294,178 $62,481,438
================ =================
Revenues ($4,026,600) $2,281,696
Expenses 1,342,197 1,487,835
---------------- -----------------
Net (Loss) Income ($5,368,797) $793,861
================ =================
6
<PAGE>
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's revenues by reporting category for the respective periods
were as follows:
For the three For the three
months ended months ended
March 31, March 31,
1998 1997
-------------------- --------------------
Interest rate &
Stock indices $367,031 $48,276
Commodities 115,174 570,423
Currencies 246,123 669,654
Energy (1,198,664) (385,867)
Metals 92,344 63,554
-------------------- --------------------
$(377,992) $966,040
==================== ====================
The contract/notional values of the Partnership's open derivative
instrument positions as of March 31, 1998 and December 31, 1997 were as
follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ -----------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest rate &
Stock indices $155,661,447 $8,837,276 $82,771,267 $65,284,299
Commodities 2,326,561 6,169,802 745,270 8,158,197
Currencies 20,715,542 29,126,548 17,541,232 36,204,865
Energy 2,114,310 1,877,980 772,649 4,558,618
Metals 3,960,731 6,648,582 1,466,026 8,489,672
--------------- ---------------- ---------------- ----------------
$184,778,591 $52,660,188 $103,296,444 $122,695,651
=============== ================ ================ ================
</TABLE>
The contract/notional values of the Partnership's exchange-traded and
non-exchange traded open derivative instrument positions as of March 31, 1998
and December 31, 1997 were as follows
<TABLE>
<CAPTION>
1998 1997
------------------------------------------ ---------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Exchange
traded $168,665,388 $32,428,828 $89,274,821 $100,878,257
Non-Exchange
traded 16,113,203 20,231,360 14,021,623 21,817,394
--------------- ---------------- ---------------- ----------------
$184,778,591 $52,660,188 $103,296,444 $122,695,651
=============== ================ ================ ================
</TABLE>
7
<PAGE>
The average fair values, based on contract/notional values, of the Partnership's
derivative instrument positions which were open as of the end of each calendar
month during the three months ended March 31, 1998 and the year ended December
31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- -------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest rate &
Stock indices $143,832,730 $20,518,314 $77,150,089 $37,849,496
Commodities 2,460,604 6,079,045 3,925,015 3,897,478
Currencies 16,390,231 26,530,233 18,669,147 28,646,929
Energy 1,706,287 3,156,927 3,139,779 2,312,458
Metals 3,023,951 7,664,681 5,072,385 7,398,721
----------------- ----------------- ----------------- -----------------
$167,413,803 $63,949,200 $107,956,415 $80,105,082
================= ================= ================= =================
</TABLE>
The gross unrealized profit and the net unrealized profit (loss) on the
Partnership's open derivative instrument positions as of March 31, 1998 and
December 31, 1997 were as follows
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- -------------------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit Profit Profit (Loss)
-------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Exchange
traded $951,071 $498,381 $1,076,647 $709,701
Non-Exchange
traded 421,862 86,401 362,223 (6,370)
-------------------- ------------------- ------------------- -------------------
$1,372,933 $584,782 $1,438,870 $703,331
==================== =================== =================== ===================
</TABLE>
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
MONTH-END NET ASSET VALUE PER UNIT
----------------------------------
Jan. Feb. Mar.
----------------------------------
1997 $198.92 $199.62 $198.24
----------------------------------
1998 $190.87 $188.05 $184.76
----------------------------------
Performance Summary
January 1, 1997 to March 31, 1997
In currency markets, the U.S. dollar rallied and started 1997 on a
strong note, rising to a four-year high versus the Japanese yen and
two-and-a-half year highs versus the Deutsche mark and the Swiss franc. January,
February and March were all profitable months for the Fund's currency positions.
Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. Profits were incurred
in January and March. Losses were incurred from positions in interest rates for
February.
In energy markets, a slump in crude oil prices was characteristic of its
lackluster performance from the beginning of the year. Early in 1997, volatility
returned in the energy markets, reflecting the impact of a winter significantly
warmer than normal. January and March saw losses in energy; however, February
proved profitable.
8
<PAGE>
Agricultural commodity trading proved profitable in February and March.
Soybean prices reached their highest level in over eight years, on continued
demand and fears that inventories could fall to critically low levels before the
next harvest.
January 1, 1998 to March 31, 1998
The Fund's positions in the global interest rate markets were
profitable during the quarter. In Europe, an extended bond market rally
continued despite an environment of robust growth in the United States, Canada
and the United Kingdom, as well as a strong pick-up in growth in continental
Europe.
Gold prices drifted sideways and lower as Asian demand continued to
slow and demand in the Middle East was affected by low oil prices. Initially
buoyed on concerns about a U.S.-led military strike against Iraq, crude oil fell
to a nine year low, as the globally warm winter, the return of Iraq as a
producer and the Asian economic crisis added to OPEC's supply glut problems.
Trading results in stock index markets were mixed, but profitable,
despite a strong first-quarter performance by the U.S. equity market as several
consecutive weekly gains were recorded with most market averages setting new
highs. Results in currency trading were also mixed, but profitable. In
particular, the Swiss franc weakened versus the U.S. dollar.
Agricultural commodity markets provided profitable trading results
overall. Live cattle and hog prices trended downward throughout the quarter.
Cotton prices moved mostly upward during the quarter, but prices dropped off
sharply at the end of March.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
9
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the General
Partner is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Mr. Michael A. Karmelin, Chief Financial Officer, Vice President
and Treasurer of Merrill Lynch Investment Partners Inc. ("MLIP"), has
announced that he will resign from MLIP effective April 15, 1998 to pursue
other business opportunities. MLIP expects to announce his successor in the
near future.
The Fund will consolidate its trading accounts with those of
certain other MLIP sponsored multi-advisor funds effective June 1, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
There are no exhibits required to be filed with this report.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the first three
months of fiscal 1998.
10
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SECTOR STRATEGY FUND(SM) L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 11, 1998 By /s/ JOHN R. FRAWLEY JR
----------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: May 11, 1998 By /s/ SERGIO M. PAVONE
--------------------
Sergio M. Pavone
Vice President and Controller
(Chief Accounting Officer)
11
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 0 0
<RECEIVABLES> 24,575,716 31,551,431
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 24,575,716 31,551,431
<SHORT-TERM> 0 0
<PAYABLES> 646,152 792,663
<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> 23,929,564 30,758,768
<TOTAL-LIABILITY-AND-EQUITY> 24,575,716 31,551,431
<TRADING-REVENUE> (377,992) 966,040
<INTEREST-DIVIDENDS> 245,204 295,936
<COMMISSIONS> 574,844 740,955
<INVESTMENT-BANKING-REVENUES> (601,217) 106,553
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (1,308,849) 627,574
<INCOME-PRE-EXTRAORDINARY> (1,308,849) 627,574
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,308,849) 627,574
<EPS-PRIMARY> (9.78) 3.89
<EPS-DILUTED> (9.78) 3.89
</TABLE>
