<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, 1997
----------------
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 0-18944
THE SECTOR STRATEGY FUND/SM/ II L.P.
---------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3584544
- ------------------------------- ---------------------------------
(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)
212-236-4161
-------------------------------------------------
(Registrants 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
----- -----
This document contains 12 pages.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE SECTOR STRATEGY FUND/SM/ II L.P.
--------------------------------------
(a Delaware limited partnership)
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
March 31, December 31,
1997 1996
------------ ------------
ASSETS
- ------
Accrued interest $ 140,776 $ 119,603
Equity in commodity futures trading accounts:
Cash and option premiums 32,258,108 29,105,401
Net unrealized profit on open contracts 450,127 573,041
Investments 10,780,020 10,807,733
Receivable from outside investments 2,834 3,284,473
------------ ------------
TOTAL $43,631,865 $43,890,251
============ ============
LIABILITIES AND PARTNERS CAPITAL
- --------------------------------
LIABILITIES:
Redemptions payable $ 547,817 $ 837,870
Brokerage commissions payable 239,526 217,676
Administrative fees payable 6,843 6,204
Profit shares payable 303,200 244,396
Payable to outside investments 4,289 -
------------ ------------
Total liabilities 1,101,675 1,306,146
------------ ------------
PARTNERS CAPITAL:
General Partner:
(2,145 and 2,145 SECTOR II Units) 318,740 307,633
(3,905 and 3,905 SECTOR III Units) 587,331 549,638
Limited Partners:
( 99,218 and 103,925 SECTOR II Units) 14,743,447 14,904,769
(178,722 and 190,562 SECTOR III Units) 26,880,672 26,822,065
------------ ------------
Total partners capital 42,530,190 42,584,105
------------ ------------
TOTAL $43,631,865 $43,890,251
============ ============
NET ASSET VALUE PER UNIT
SECTOR II UNITS
(Based on 101,363 and 106,070
Units outstanding) $ 148.60 $ 143.42
======== ========
SECTOR III UNITS
(Based on 182,627 and 194,467
Units outstanding) $ 150.41 $ 140.75
======== ========
See notes to financial statements.
2
<PAGE>
THE SECTOR STRATEGY FUND/SM/ II L.P.
---------------------------------------
(a Delaware limited partnership)
STATEMENTS OF OPERATIONS
------------------------
For the three For the three
months ended months ended
March 31, March 31,
1997 1996
------------- -------------
REVENUES:
Trading profits (loss):
Realized $ 2,717,934 $ (907,146)
Change in unrealized (122,914) (1,036,117)
------------- -------------
Total trading results 2,595,020 (1,943,263)
------------- -------------
Interest income 394,198 605,889
Income from investments 481,842 -
------------- -------------
Total revenues 3,471,060 (1,337,374)
------------- -------------
EXPENSES:
Profit shares 312,858 10,437
Brokerage commissions 726,161 1,303,436
Administrative fees 20,747 34,722
------------- -------------
Total expenses 1,059,766 1,348,595
------------- -------------
NET INCOME (LOSS): $ 2,411,294 $ (2,685,969)
============= =============
NET INCOME (LOSS) PER UNIT
Weighted average number of units
outstanding 294,144 442,240
======= =======
Weighted average net income (loss)
per Limited Partner
and General Partner Unit $ 8.20 $ (6.07)
====== =======
See notes to financial statements.
3
<PAGE>
THE SECTOR STRATEGY FUND/SM/ II L.P.
--------------------------------------
(a Delaware limited partnership)
STATEMENTS OF CHANGES IN PARTNERS CAPITAL
-----------------------------------------
For the three months ended March 31, 1997 and 1996
--------------------------------------------------
<TABLE>
<CAPTION>
SECTOR II SECTOR III Limited Partners General Partner
---------------- ---------------
Units Units SECTOR II SECTOR III SECTOR II SECTOR III Total
----- ----- --------- ---------- --------- ---------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995 164,541 288,481 $20,324,051 $36,499,903 $268,488 $500,814 $57,593,256
Redemptions (10,190) (23,467) (1,279,425) (2,904,327) - - (4,183,752)
Net loss - - (407,149) (2,241,088) (5,797) (31,935) (2,685,969)
--------- --------- ------------ ------------ --------- --------- ------------
PARTNERS CAPITAL,
MARCH 31, 1996 154,351 265,014 $18,637,477 $31,354,488 $262,691 $468,879 $50,723,535
========= ========= ============ ============ ========= ========= ============
PARTNERS CAPITAL,
DECEMBER 31, 1996 106,070 194,467 $14,904,769 $26,822,065 $307,633 $549,638 $42,584,105
Redemptions (4,707) (11,840) (703,164) (1,762,045) - - (2,465,209)
Net income - - 541,842 1,820,652 11,107 37,693 2,411,294
--------- --------- ------------ ------------ --------- --------- ------------
PARTNERS CAPITAL,
MARCH 31, 1997 101,363 182,627 $14,743,447 $26,880,672 $318,740 $587,331 $42,530,190
========= ========= ============ ============ ========= ========= ============
</TABLE>
See notes to financial statements.
4
<PAGE>
THE SECTOR STRATEGY FUND/SM/ II 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/ II L.P. (the Partnership
or the Fund) as of March 31, 1997 and the results of its operations for the
three months ended March 31, 1997 and 1996. 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 Partnerships Annual Report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 1996
(the Annual Report).
2. INVESTMENT
At March 31, 1997, the Partnership had an investment in the ML JWH Financial
and Metals Portfolio L.L.C. (JWH LLC) and ML Millburn Global L.L.C.
(Millburn LLC).
Total revenues and fees with respect to such investments are set forth as
follows:
<TABLE>
<CAPTION>
Total Brokerage Administrative Profit Income from
Revenue Commissions Fees Shares Investments
---------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
SECTOR II UNITS
- ---------------
JWH LLC $ 85,170 $ 49,747 $ 1,420 $ 470 $ 33,533
================ ================ ================ ================ =================
SECTOR III UNITS
JWH LLC $ 198,444 $ 115,127 $ 3,290 $ 1,283 $ 78,744
Millburn LLC 543,039 77,768 2,222 93,484 369,565
---------------- ---------------- ---------------- ---------------- -----------------
Total $ 741,483 $ 192,895 $ 5,512 $ 94,767 $ 448,309
================ ================ ================ ================ =================
TOTAL ALL UNITS
- ------------------
JWH LLC $ 283,614 $ 164,874 $ 4,710 $ 1,753 $ 112,277
Millburn LLC 543,039 77,768 2,222 93,484 369,565
---------------- ---------------- ---------------- ---------------- -----------------
Total $ 826,653 $ 242,642 $ 6,932 $ 95,237 $ 481,842
================ ================ ================ ================ =================
</TABLE>
5
<PAGE>
3. INCOME (LOSS) PER UNIT
The profit and loss of the Sector II and Sector III units for the three
months ended March 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------------
Sector II Sector III Sector II Sector III
------------ ------------ ----------- ------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ 1,034,967 $ 1,682,967 $ (74,504) $ (832,642)
Change in unrealized (321,397) 198,483 (103,238) (932,879)
------------ ------------ ----------- ------------
Total trading results 713,570 1,881,450 (177,742) (1,765,521)
Interest income 155,409 238,789 223,233 382,656
Income from investments 33,533 448,309 - -
------------ ------------ ----------- ------------
Total revenues 902,512 2,568,548 45,491 (1,382,865)
------------ ------------ ----------- ------------
EXPENSES
Profit shares 48,113 264,745 1,831 8,606
Brokerage commissions 293,076 433,085 443,923 859,513
Administrative fees 8,374 12,373 12,683 22,039
------------ ------------ ----------- ------------
Total expenses 349,563 710,203 458,437 890,158
------------ ------------ ----------- ------------
NET INCOME $ 552,949 $ 1,858,345 $(412,946) $(2,273,023)
============ ============ =========== ============
NET INCOME (LOSS) PER UNIT:
Weighted average number
of units outstanding 104,209 189,935 160,639 281,601
======= ======= ======= =======
Weighted average net
income (loss) per Limited
Partner and General
Partner Unit $ 5.31 $ 9.78 $ (2.57) $ (8.07)
====== ====== ======= =======
</TABLE>
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnerships revenues by reporting category for the three months ended
March 31, 1997 and March 31, 1996 was as follows:
1997 1996
----------- ------------
Interest rates $ 128,728 $ (795,410)
Stock indices 253,573 33,064
Commodities 637,828 (582,918)
Currencies 1,036,782 391,050
Energy 32,797 (355,225)
Metals 505,312 (633,824)
----------- ------------
$2,595,020 $(1,943,263)
=========== =============
6
<PAGE>
Fair Value
----------
The contract/notional values of the Partnership's open derivative instrument
positions as of March 31, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest rates $ 20,303,748 $ 133,018,247 $ 95,138,798 $ 26,476,691
Stock indices - 2,332,855 176,868 2,826,046
Commodities 10,391,724 13,229,908 9,295,728 9,341,382
Currencies 26,567,132 33,109,359 29,153,110 38,839,020
Energy - 1,015,321 730,109 1,523,142
Metals 11,412,536 6,532,907 25,259,693 26,658,962
------------------ ----------------- ------------------ ------------------
$ 68,675,140 $ 189,238,597 $ 159,754,306 $ 105,665,243
================== ================= ================== =================
</TABLE>
Substantially all of the Partnerships derivative instruments outstanding as of
March 31, 1997 expire within one year.
The contract/notional value of the Partnership's exchange-traded and non-
exchange-traded open derivative instrument positions as of March 31, 1997 and
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Exchange
traded $ 37,795,685 $ 158,645,075 $ 113,185,811 $ 52,878,509
Non-Exchange
traded 30,879,455 30,593,522 46,568,495 52,786,734
------------------ ----------------- ------------------ ------------------
$ 68,675,140 $ 189,238,597 $ 159,754,306 $ 105,665,243
================== ================= ================== =================
</TABLE>
The average fair value 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, 1997 and the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest rates $ 60,302,597 $ 68,796,096 $ 162,359,930 $ 98,605,923
Stock indices 1,392,869 5,661,890 9,700,138 5,632,075
Commodities 11,346,118 11,564,331 16,978,613 10,571,424
Currencies 28,494,279 42,604,487 102,425,601 113,840,092
Energy 479,480 1,055,363 1,582,405 1,435,678
Metals 16,292,709 12,468,292 15,520,586 18,971,130
------------------ ----------------- ------------------ ------------------
$ 118,308,052 $ 142,150,459 $ 308,567,273 $ 249,056,322
================== ================= ================== =================
</TABLE>
As of March 31, 1997 and December 31, 1996, $24,378,467 and $19,264,937 of the
Partnership's assets, respectively, were held in segregated accounts at MLF in
accordance with Commodity Futures Trading Commission regulations.
7
<PAGE>
The gross unrealized profit and the net unrealized profit (loss) on the
Partnership's open derivative instrument positions as of March 31, 1997 and
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---- ----
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit (Loss) Profit Profit (Loss)
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Exchange
traded $ 1,108,052 $ 456,628 $ 992,271 $ 536,071
Non-Exchange
traded 715,911 (6,501) 1,763,586 36,970
------------ --------------- ------------- ---------------
$ 1,823,963 $ 450,127 $ 2,755,857 $ 573,041
============ =============== ============= ===============
</TABLE>
Item 2: Managements Discussion and Analysis of Financial Condition and Results
----------------------------------------------------------------------
of Operations
-------------
Operational Overview; Advisor Selections
- ----------------------------------------
Due to the nature of the Fund's business, its results of operations
depend on Merrill Lynch Investment Partners Inc., (MLIP)s ability to select
Advisors and determine the appropriate percentage of each series' assets to
allocate to them for trading, as well as the Advisors' ability to recognize and
capitalize on trends and other profit opportunities in different sectors of the
world commodity markets. MLIP's Advisor selection procedure and leveraging
analysis, as well as the Advisors' trading methods, are confidential, so that
substantially the only information that can be furnished regarding the Fund's
results of operations is contained in the performance record of its trading.
Unlike operating businesses, general economic or seasonal conditions do not
directly affect the profit potential of the Fund, and its past performance is
not necessarily indicative of future results. Because of the speculative nature
of its trading, operational or economic trends have little relevance to the
Fund's results. MLIP believes, however, that there are certain market
conditions, for example, markets with strong price trends, in which the Fund has
a better likelihood of being profitable than in others.
As of April 1, 1997, the Partnerships assets were allocated as follows:
SECTOR II UNITS:
----------------
%
TRADING ADVISOR SECTOR ALLOCATION
--------------- ------ ----------
John W. Henry & Co., Inc. Financial/
Metals 14.70
Hyman Beck & Company, Inc. Diversified 20.30
Dominion Capital Management Inc. Diversified 19.80
Trendstat Capital Management, Inc. Currencies 25.10
Range Wise, Inc. Agriculture 20.10
------
100.00%
SECTOR III UNITS:
-----------------
%
TRADING ADVISOR SECTOR ALLOCATION
--------------- ------ ----------
John W. Henry & Co., Inc. Financial/
Metals 18.52
Graham Capital Management, L.P. Diversified 18.76
Range Wise, Inc. Agriculture 10.92
Sunrise Capital Management Diversified 15.03
Millburn Ridgefield Corporation Financial/
Metals 12.12
Hyman Beck & Co., Inc. Diversified 12.47
Rabar Market Research, Inc. Diversified 12.18
------
100.00%
MLIP expects to continue to change both allocations and Advisor
selections from time to time without advance notice to existing investors.
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally intends to make a medium- to long-term commitment
to all Advisors selected. However, there can be no assurance as to the
frequency or number of the Advisor changes which may take place
8
<PAGE>
in the future, or as to how long any of the current Advisors will continue to
manage assets for the Fund.
Results of Operations - General
- -------------------------------
MLIP believes that multi-Advisor futures funds should be regarded as
medium- to long-term investments but, unlike an operating business, it is
difficult to identify trends in the Fund's operations and virtually impossible
to make any predictions regarding future results based on results to date.
Markets in which sustained price trends occur with some frequency tend
to be more favorable to managed futures investments than whipsaw, choppy
markets, but (i) this is not always the case, (ii) it is impossible to predict
when trending markets will occur and (iii) different Advisors are affected
differently by trends in general as well as by particular types of trends.
The Fund controls credit risk in its trading in the derivatives markets
by trading only through Merrill Lynch entities which MLIP believes to be
creditworthy. The Fund attempts to control the market risk inherent in its
derivatives trading by utilizing a multi-advisor, multi-strategy structure.
This structure purposefully attempts to diversify the Fund's Advisor group among
different strategy types and market sectors in an effort to reduce risk
(although the Fund's portfolio currently emphasizes technical and trend-
following approaches).
Performance Summary
- -------------------
SECTOR II UNITS:
----------------
During the first three months of 1996, the Funds average month-end Net
Assets equalled $19,997,627, and the Fund recognized gross trading losses of
$177,742 or 0.89% of such average month-end Net Assets. Brokerage commissions
of $443,923 or 2.22%, Administrative fees of $12,683 or .06% and Profit Shares
of $1,831 or .01% of average month-end Net Assets were paid. Interest income of
$223,233 or 1.12% of average month-end Net Assets resulted in a net loss of
$412,946 or 2.07% of average month-end Net Assets, which resulted in a 2.16%
decrease in the Net Asset Value per Unit since December 31, 1995.
During the first three months of 1997, the Funds average month-end Net
Assets equalled $15,344,583, and the Fund recognized gross trading gain of
$713,570 or 4.65% of such average month-end Net Assets. Brokerage commissions
of $293,076 or 1.91%, Administrative fees of $8,374 or .05% and Profit Shares of
$48,113 or .31% of average month-end Net Assets were paid. Interest income of
$155,409 or 1.01%, Earnings from investments of $33,533 or .22% of average
month-end Net Assets resulted in net gain of $552,949 or 3.6% of average month-
end Net Assets which resulted in a 3.6% increase in the Net Asset Value of the
Fund per Unit since December 31, 1996.
During the first three months of 1997 and 1996, the Fund experienced 2
profitable months and 4 unprofitable months.
MONTH-END NET ASSET VALUE PER SECTOR II UNIT
Jan. Feb. Mar.
------- ------- -------
1996 $129.65 $123.52 $122.45
1997 $150.05 $149.10 $148.60
SECTOR III UNITS:
-----------------
During the first three months of 1996, the Funds average month-end Net
Assets equalled $35,635,244 and the Fund recognized gross trading losses of
$1,765,521 or 4.95% of such average month-end Net Assets. Brokerage commissions
of $859,513 or 2.41%, Administrative fees of $22,039 or .06% and Profit Shares
of $8,606 or .02% of average month-end Net Assets were paid. Interest income of
$382,656 or 1.07% of average month-end Net Assets resulted in net loss of
$2,273,023 or 6.38% of average month-end Net Assets, which resulted in a 6.38%
decrease in the Net Asset Value per Unit since December 31, 1995.
During the first three months of 1997, the Funds average month-end Net
Assets equalled $27,691,691, and the Fund recognized gross trading gains of
$1,881,450 or 6.79% of such average month-end Net Assets. Brokerage commissions
of $433,085 or 1.56%, Administrative fees of $12,373 or .044% and Profit Shares
of $264,745 or .96% of average month-end Net Assets were paid. Interest income
of $238,789 or .86%, Earnings from Investments of $448,309 or 1.62% of average
month-end Net Assets resulted in net gain of $1,858,345 or 6.71% of average
month-end Net Assets which resulted in a 6.86% increase in the overall Net Asset
Value per Unit since December 31, 1996.
During the first three months of 1997 and 1996, the Fund experienced 4
profitable months and 2 unprofitable months.
9
<PAGE>
MONTH-END NET ASSET VALUE PER SECTOR III UNIT
Jan. Feb. Mar.
------- ------- -------
1996 $132.39 $120.96 $120.08
1997 $146.95 $149.44 $150.41
Importance of Market Factors
- ----------------------------
Comparisons between the Fund's performance in a given period in one
fiscal year to the same period in a prior year are unlikely to be meaningful,
given the uncertainty of price movements in the markets traded by the Fund. In
general, MLIP expects that the Fund is most likely to trade successfully in
markets which exhibit strong and sustained price trends. The current Advisor
group emphasizes technical and trend-following methods. Consequently, one would
expect that in trendless, "choppy" markets the Fund would likely be
unprofitable, while in markets in which major price movements occur, the Fund
would have its best profit potential (although there could be no assurance that
the Fund would, in fact, trade profitably). However, trend-followers not
infrequently will miss major price movements, and market corrections can result
in rapid and material losses (sometimes as much as 5% in a single day).
Although MLIP monitors market conditions and Advisor performance on an ongoing
basis in overseeing the Fund's trading, MLIP does not attempt to "market
forecast" or to "match" trading styles with predicted market conditions.
Rather, MLIP concentrates on quantitative and qualitative analysis of
prospective Advisors, as well as on statistical studies of the historical
performance parameters of different Advisor combinations in selecting Advisors
and allocating and reallocating Fund assets among them.
Because managed futures advisors' strategies are proprietary and
confidential and market movements unpredictable, selecting advisors to implement
speculative trading strategies involves considerable uncertainty. Furthermore,
the concentration of the Fund's current Advisor portfolio, both in terms of the
number of managers retained and the common emphasis of their strategies on
technical and trend-following methods, increases the risk that unexpectedly bad
performance, turbulent market conditions or a combination of the two will result
in significant losses.
Liquidity
- ---------
Most of the Partnerships assets are held as cash which, in turn, is
used to margin its futures positions and earn interest income and is withdrawn,
as necessary, to pay redemptions and fees.
The futures contracts in which the Partnership trades may become illiquid
under certain market conditions. Commodity exchanges limit fluctuations in
futures prices during a single day by regulations referred to as daily limits.
During a single day no trades may be executed at prices beyond the daily limit.
Once the price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
generally neither be taken nor liquidated unless traders are willing to effect
trades at or within the limit. Futures contracts have occasionally moved to the
daily limit for several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly liquidating its futures
(including its options) positions. There are no limitations on the daily price
moves in trading foreign currency forward contracts through banks, although
illiquidity may develop in the forward markets due to large spreads between bid
and ask prices quoted. (Forward contracts are the bank version of currency
futures contracts and are not traded on exchanges.)
Capital Resources
- -----------------
The Partnership does not have, nor does it expect to have, any capital
assets and has no material commitments for capital expenditures. The
Partnership uses its assets to supply the necessary margin or premiums for, and
to pay any losses incurred in connection with, its trading activity and to pay
redemptions and fees.
Inflation is not a significant factor in the Fund's profitability,
although inflationary cycles can give rise to the type of major price movements
which can have a materially favorable or adverse impact on the Fund's
performance.
Changes in the level of prevailing interest rates (a factor generally
associated with inflation) could have a material effect on the percentage of the
total capital attributable to various series of Units which is committed to
trading, as interest rates affect the calculation of the discounted minimum Net
Asset Value per Unit which Merrill Lynch & Co., Inc. has guaranteed to
investors.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the
General Partner is a party.
John W. Henry & Company, Inc. (JWH) is one of the Advisors retained by
the Fund, managing approximately 15% of the SECTOR II and 19% of the SECTOR III
assets committed to trading April 1, 1997. In September 1996, JWH was named as
a co-defendant in a class action lawsuits brought in the California Superior
Court, Los Angeles County and in the New York Supreme Court, New York County. In
November, JWH was named as a co-defendant in a class action complaint filed in
Superior Court of the State of Delaware for Newcastle County that contained the
same allegations as the New York and California complaints. The actions, which
seek unspecified damages, purport to be brought on behalf of investors in
certain Dean Witter, Discover & Co. (Dean Witter) commodity pools, some of which
are advised by JWH, and are primarily directed at Dean Witters alleged
fraudulent selling practices in connection with the marketing of those pools.
JWH is essentially alleged to have aided and abetted or directly participated
with Dean Witter in those practice. JWH believes the allegations against it are
without merit; it intends to contest these allegations vigorously, and is
convinced that it will be shown to have acted properly and in the best interest
of the investors.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
There are no exhibits required to be filed as part of this document.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the first three months
of fiscal 1997.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SECTOR STRATEGY FUND/SM/ II L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 13, 1997 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: May 13, 1997 By /s/MICHAEL A. KARMELIN
----------------------
Michael A. Karmelin
Chief Financial Officer,
and Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS
OF OPERATIONS, CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<CIK> 0000867247
<NAME> SECTOR STRATEGY FUND II LP
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 0 0
<RECEIVABLES> 43,631,865 52,549,427
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 43,631,865 52,549,427
<SHORT-TERM> 0 0
<PAYABLES> 1,101,675 1,825,892
<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> 42,530,190 50,723,535
<TOTAL-LIABILITY-AND-EQUITY> 43,631,865 52,549,427
<TRADING-REVENUE> 2,595,020 (1,943,263)
<INTEREST-DIVIDENDS> 394,198 605,889
<COMMISSIONS> 1,059,766 1,348,595
<INVESTMENT-BANKING-REVENUES> 481,842 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 2,411,294 (2,685,969)
<INCOME-PRE-EXTRAORDINARY> 2,411,294 (2,685,969)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,411,294 (2,685,969)
<EPS-PRIMARY> 8.20 (6.07)
<EPS-DILUTED> 8.20 (6.07)
</TABLE>
