<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 June 30, 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)
212-236-5662
----------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
This document contains 15 pages.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE SECTOR STRATEGY FUNDSM II L.P.
------------------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
June 30, December 31,
1997 1996
-------------- --------------
ASSETS
- ------
Accrued interest $128,987 $119,603
Equity in commodity futures trading accounts:
Cash and option premiums 31,720,465 29,105,401
Net unrealized profit on open contracts 533,109 573,041
Investments 11,434,633 10,807,733
Receivable from outside investments 95,936 3,284,473
----------- -----------
TOTAL $43,913,130 $43,890,251
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable 451,398 837,870
Brokerage commissions payable 237,335 217,676
Administrative fees payable 6,746 6,204
Profit shares payable 377,626 244,396
Payable to outside investments 1,543,013 -
----------- -----------
Total liabilities $2,616,118 $1,306,146
=========== ===========
PARTNERS' CAPITAL:
General Partner:
(2145 and 2145 SECTOR II Units) 323,396 307,633
(3905 and 3905 SECTOR III Units) 577,218 549,638
Limited Partners:
(95977 and 103925 SECTOR II Units) 14,470,172 14,904,769
(175403 and 190562 SECTOR III Units) $25,927,226 $26,822,065
----------- -----------
Total partners' capital $41,298,012 $42,584,105
----------- -----------
TOTAL $43,914,130 $43,890,251
============ ===========
NET ASSET VALUE PER UNIT
SECTOR II UNITS
(Based on 98122 and 106070 Units
outstanding) $150.77 $143.42
============ ===========
SECTOR III UNITS
(Based on 179308 and 194467 Units outstanding) $147.82 $140.75
============ ===========
See notes to financial statements.
2
<PAGE>
THE SECTOR STRATEGY FUNDSM II L.P.
----------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $645,041 $1,919,644 $3,362,975 $1,012,498
Change in unrealized 82,983 (356,052) (39,932) (1,392,169)
-------------- -------------- -------------- --------------
Total trading results 728,024 1,563,592 3,323,043 (379,671)
-------------- -------------- -------------- --------------
Interest income 406,532 551,356 800,731 1,157,245
Income (loss) from investments (531,960) - (50,118) -
-------------- -------------- -------------- --------------
Total revenues 602,596 2,114,948 4,073,656 777,574
-------------- -------------- -------------- --------------
EXPENSES:
Profit shares 136,454 24,604 449,311 35,041
Brokerage commissions 705,293 1,165,324 1,431,454 2,468,760
Administrative fees 20,150 31,032 40,898 65,754
-------------- -------------- -------------- --------------
Total expenses 861,897 1,220,960 1,921,663 2,569,555
-------------- -------------- -------------- --------------
NET INCOME (LOSS) $(259,301) $893,988 $2,151,993 $(1,791,981)
============== ============== ============== ==============
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 282,328 397,223 288,237 419,732
============== ============== ============== ==============
Weighted average net income (loss)
per Limited Partner
and General Partner Unit $(0.92) $2.25 $7.47 $(4.27)
============== ============== ============== ==============
</TABLE>
See notes to financial statements.
3
<PAGE>
THE SECTOR STRATEGY FUNDSM II L.P.
----------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the six months ended June 30, 1997 and 1996
-----------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partners General Partner
----- ---------------- ---------------
SECTOR II SECTOR III SECTOR II SECTOR III SECTOR II SECTOR III Total
UNITS UNITS UNITS UNITS UNITS UNITS -----
----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1995 164,541 288,481 $20,324,051 $36,499,903 $268,488 $500,814 $57,593,256
Redemptions (38,373) (58,864) (4,754,209) (7,329,052) - - (12,083,261)
Net loss - - (478,474) (1,287,609) (7,442) (18,456) (1,791,981)
--------- ------------- -------------- -------------- ------------- ------------- --------------
PARTNERS' CAPITAL,
June 30, 1996 126,168 229,617 $15,091,368 $27,883,242 $261,046 $482,358 $43,718,014
========= ============= ============== ============== ============= ============= ==============
PARTNERS' CAPITAL,
December 31, 1996 106,070 194,467 $14,904,769 $26,822,065 $307,633 $549,638 $42,584,105
Redemptions (7,948) (15,159) (1,188,009) (2,250,077) - - (3,438,086)
Net income - - 753,412 1,355,238 15,763 27,580 2,151,993
--------- ------------- -------------- -------------- ------------- ------------- --------------
PARTNERS' CAPITAL,
June 30, 1997 98,122 179,308 $14,470,172 $25,927,226 $323,396 $577,218 $41,298,012
========= ============= ============== ============== ============= ============= ==============
</TABLE>
See notes to financial statements.
4
<PAGE>
THE SECTOR STRATEGY FUNDSM 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 FundSM II L.P. (the "Partnership"
or the "Fund") as of June 30, 1997 and the results of its operations for
the six months ended June 30, 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 Partnership's 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 June 30, 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>
For the three Months Total Brokerage Administrative Profit Income (loss)
ended June 30, 1997 Revenue Commissions Fees Shares from Investments
--------------- --------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
SECTOR II UNITS
- ---------------
JWH LLC $(103,674) $45,425 $1,298 $ - $(150,397)
=============== =============== =============== ============== ================
SECTOR III UNITS
- ----------------
JWH LLC $(236,431) $104,140 $2,975 $ - $(343,546)
Millburn LLC 26,441 73,142 2,090 (10,774) (38,017)
--------------- --------------- --------------- -------------- ----------------
Total $(209,990) $177,282 $5,065 $(10,774) $(381,563)
=============== =============== =============== ============== ================
TOTAL ALL UNITS
- ---------------
JWH LLC $(340,105) $149,565 $4,273 $ - $(493,943)
Millburn LLC 26,441 73,142 2,090 (10,774) (38,017)
--------------- --------------- --------------- -------------- ----------------
Total $(313,664) $222,707 $6,363 $(10,774) $(531,960)
=============== =============== =============== ============== ================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
For the six Months Total Brokerage Administrative Profit Income (loss)
ended June 30, 1997 Revenue Commissions Fees Shares from Investments
--------------- --------------- --------------- -------------- ----------------
<S> <C> <C> <C> <C> <C>
SECTOR II UNITS
- ---------------
JWH LLC $(18,504) $95,172 $2,718 $ - $(116,864)
=============== =============== =============== ============== ================
SECTOR III UNITS
- ----------------
JWH LLC $(37,987) $219,267 $6,264 $ - $(264,801)
Millburn LLC 569,480 150,910 4,312 82,711 331,547
--------------- --------------- --------------- -------------- ----------------
Total $531,493 $370,177 $10,576 $83,994 $66,746
=============== =============== =============== ============== ================
TOTAL ALL UNITS
- ---------------
JWH LLC $(56,491) $314,439 $8,982 $ - $(381,665)
Millburn LLC 569,480 150,910 4,312 82,711 331,547
--------------- --------------- --------------- -------------- ----------------
Total $512,989 $465,349 $13,294 $84,464 $(50,118)
=============== =============== =============== ============== ================
</TABLE>
6
<PAGE>
3. INCOME (LOSS) PER UNIT
The profit and loss of the Sector II and Sector III Units for the three and
six months ended June 30, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
3 Months
----------------------------------------------------------
1997 1996
----------------------------------------------------------
Sector II Sector III Sector II Sector III
Units Units Units Units
----------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $123,564 $521,477 $(17,350) $1,936,994
Change in unrealized 441,359 (358,376) 162,600 (518,652)
-------------- ---------------------------- --------------
Total trading results 564,923 163,101 145,250 1,418,342
Interest income 164,504 242,028 202,696 348,660
Income from investments (150,397) (381,563) - -
-------------- ---------------------------- --------------
Total revenues 579,030 23,566 347,946 1,767,002
-------------- ---------------------------- --------------
EXPENSES
Profit shares 67,188 69,266 16,764 7,840
Brokerage commissions 287,405 417,888 392,925 772,399
Administrative fees 8,211 11,939 11,227 19,805
-------------- ---------------------------- --------------
Total expenses 362,804 499,093 420,916 800,044
-------------- ---------------------------- --------------
NET INCOME $216,226 $(475,527) $(72,970) $966,958
============== ============================ ==============
NET INCOME (LOSS) PER UNIT:
Weighted average number
of units outstanding 100,662 181,666 144,447 252,776
-------------- ---------------------------- --------------
Weighted average net
income (loss) per Limited
Partner and General
Partner Unit $2.15 $(2.62) $(0.51) $3.83
============== ============================ ==============
<CAPTION>
6 Months
---------------------------------------------------------
1997 1996
-------------- --------------
Sector II Sector III Sector II Sector III
UNITS UNITS UNITS UNITS
---------------------------- ----------------------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $1,158,532 $2,204,443 $(91,854) $1,104,352
Change in unrealized 119,961 (159,893) 59,362 (1,451,531)
---------------------------- ----------------------------
Total trading results 1,278,493 2,044,550 (32,492) (347,179)
Interest income 319,913 480,818 425,929 731,316
Income from investments (116,864) 66,746 - -
---------------------------- ----------------------------
Total revenues 1,481,542 2,592,114 393,437 384,137
---------------------------- ----------------------------
EXPENSES
Profit shares 115,301 334,010 18,595 16,446
Brokerage commissions 580,481 850,973 836,848 1,631,912
Administrative fees 16,585 24,313 23,910 41,844
---------------------------- ----------------------------
Total expenses 712,367 1,209,296 879,353 1,690,202
---------------------------- ----------------------------
NET INCOME $769,175 $1,382,818 $(485,916) $(1,306,065)
============================ ============================
NET INCOME (LOSS) PER UNIT:
Weighted average number
of units outstanding 102,436 185,801 152,543 267,189
---------------------------- ----------------------------
Weighted average net
income (loss) per Limited
Partner and General
Partner Unit $7.51 $7.44 $(3.19) $(4.89)
============================ ============================
</TABLE>
7
<PAGE>
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's revenues by reporting category for the respecitive periods
were as follows;
<TABLE>
<CAPTION>
For the three For the three For the six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
1997 1996 1997 1996
---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C>
Interest rates $(456,765) $(961,503) $(328,037) $(1,756,913)
Stock indices 373,255 (442,724) 626,828 (409,660)
Commodities 792,761 1,074,092 1,430,589 491,174
Currencies 173,962 1,522,941 1,210,744 1,913,991
Energy (86,491) 36,933 (53,694) (318,292)
Metals (68,698) 333,853 436,613 (299,971)
---------------- ---------------- ---------------- -----------------
$728,024 $1,563,592 $3,323,043 $(379,671)
================ ================ ================ =================
</TABLE>
Fair Value
- ----------
The contract/notional values of the Partnership's open derivative instrument
positions as of June 30, 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 & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Interest rates $49,403,625 $42,248,428 $95,138,798 $26,476,691
Stock indices 1,901,661 2,350,456 176,868 2,826,046
Commodities 11,610,321 13,185,668 9,295,728 9,341,382
Currencies 33,484,937 38,676,300 29,153,110 38,839,020
Energy 407,106 914,587 730,109 1,523,142
Metals 8,462,833 9,529,306 25,259,693 26,658,962
--------------- --------------- ---------------- ---------------
$105,270,483 $106,904,745 $159,754,306 $105,665,243
=============== =============== ================ ===============
</TABLE>
The contract/notional value of the Partnership's exchange-traded and
non-exchange-traded open derivative instrument positions as of June 30, 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 & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Exchange
traded $ 75,668,316 $ 70,092,421 $ 113,185,811 $ 52,878,509
Non-Exchange
traded 29,602,167 36,812,324 46,568,495 52,786,734
--------------- --------------- ---------------- ---------------
$ 105,270,483 $ 106,904,745 $ 159,754,306 $ 105,665,243
=============== =============== ================ ===============
</TABLE>
8
<PAGE>
The average fair value of the Partnership's derivative instrument positions
which were open as of the end of each calendar month during the six months ended
June 30, 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 & Options & Options & Options &
Forwards) Forwards) Forwards) Forwards)
------------------------------------- -------------------------------------
<S> <C> <C> <C> <C>
Interest rates $55,329,100 $57,014,493 $162,359,930 $98,605,923
Stock indices 2,458,557 3,867,207 9,700,138 5,632,075
Commodities 10,662,596 11,885,917 16,978,613 10,571,424
Currencies 27,562,225 39,066,944 102,425,601 113,840,092
Energy 449,523 901,886 1,582,405 1,435,678
Metals 12,802,682 10,408,502 15,520,586 18,971,130
--------------- --------------- ---------------- ---------------
$109,264,683 $123,144,949 $308,567,273 $249,056,322
=============== =============== ================ ===============
</TABLE>
As of June 30, 1997 and December 31, 1996, $16,682,671 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.
The gross unrealized profit and the net unrealized profit (loss) on the
Partnership's open derivative instrument positions as of June 30, 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 $1,358,763 $602,825 $992,271 $536,071
Non-Exchange
traded 464,077 (69,716) 1,763,586 36,970
-------------- -------------- --------------- ---------------
$1,822,840 $533,109 $2,755,857 $573,041
=============== =============== ================ ================
</TABLE>
Item 2: Management's 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.,'s ("MLIP") 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.
9
<PAGE>
As of July 1, 1997, the Partnership's assets were allocated as follows:
SECTOR II UNITS:
---------------
%
TRADING ADVISOR SECTOR ALLOCATION
- --------------- ------ ----------
John W. Henry & Company, Inc. Financial/
Metals 13.56
Hyman Beck & Company, Inc. Diversified 19.58
Dominion Capital Management Inc. Diversified 20.52
Trendstat Capital Management, Inc. Currencies 25.24
Range Wise, Inc. Agriculture 21.10
-----
100.00%
SECTOR III UNITS:
----------------
%
TRADING ADVISOR SECTOR ALLOCATION
- --------------- ------ ----------
John W. Henry & Company, Inc. Financial/
Metals 23.38
Graham Capital Management, L.P. Diversified 17.58
Range Wise, Inc. Agriculture 11.80
Sunrise Capital Management Diversified 21.06
Millburn Ridgefield Corporation Financial/
Metals 12.20
Hyman Beck & Company, Inc. Diversified 13.98
-----
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 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 six months of 1996, the Series' average month-end Net Assets
equaled $18,610,682, and the Series recognized gross trading losses of $32,493
or 0.17% of average month-end Net Assets. Brokerage commissions of $836,848 or
4.50%, Administrative fees of $23,910 or .13% and Profit Shares of $18,595 or
.10% of average month-end Net Assets were paid. Interest income of $425,929 or
2.29% of average month-end Net Assets resulted in a net loss of $485,916 or
2.61% of average month-end Net Assets, which resulted in a 2.77% decrease in the
Net Asset Value per Unit since December 31, 1995.
During the first six months of 1997, the Series' average month-end Net Assets
equaled $15,125,521, and the Series recognized gross trading gains of $1,278,493
or 8.45% of average month-end Net Assets. Brokerage commissions of $580,481 or
3.84%, Administrative fees of $16,585 or .11% and Profit Shares of $115,301 or
.76% of average month-end Net Assets were paid. Interest income of $319,913 or
2.12%, Losses from investments of $116,864 or .77% of average month-end Net
Assets resulted in net gain of $769,175 or 5.09% of average month-end Net
Assets which resulted in a 5.12% increase in the Net Asset Value of the Series
per Unit since December 31, 1996.
10
<PAGE>
During the first six months of 1997 and 1996, the Series experienced 5
profitable months and 7 unprofitable months.
MONTH-END NET ASSET VALUE PER SECTOR II UNIT
------------------------------------------------------
Jan. Feb. Mar. Apr May Jun
------------------------------------------------------
1996 $129.65 $123.52 $122.45 $124.82 $123.17 $121.68
------------------------------------------------------
1997 $150.05 $149.10 $148.60 $149.07 $147.91 $150.77
------------------------------------------------------
SECTOR III UNITS:
----------------
During the first six months of 1996, the Series' average month-end Net Assets
equaled $32,854,238 and the Series recognized gross trading losses of $347,178
or 1.06% of average month-end Net Assets. Brokerage commissions of $1,631,912 or
4.97%, Administrative fees of $41,844 or .13% and Profit Shares of $16,446 or
.05% of average month-end Net Assets were paid. Interest income of $731,316 or
2.23% of average month-end Net Assets resulted in net loss of $1,306,065 or
3.98% of average month-end Net Assets, which resulted in a 3.69% decrease in the
Net Asset Value per Unit since December 31, 1995.
During the first six months of 1997, the Series' average month-end Net Assets
equaled $27,195,209, and the Fund recognized gross trading gains of $2,044,550
or 7.52% of average month-end Net Assets. Brokerage commissions of $850,973 or
3.13%, Administrative fees of $24,313 or .09% and Profit Shares of $334,010 or
1.23% of average month-end Net Assets were paid. Interest income of $480,818 or
1.77%, Income from Investments of $66,746 or .25% of average month-end Net
Assets resulted in net gain of $1,382,818 or 5.08% of average month-end Net
Assets which resulted in a 5.02% increase in the overall Net Asset Value per
Unit since December 31, 1996.
During the first six months of 1997 and 1996, the Series experienced 6
profitable months and 6 unprofitable months.
MONTH-END NET ASSET VALUE PER SECTOR III UNIT
------------------------------------------------------
Jan. Feb. Mar. Apr May Jun
------------------------------------------------------
1996 $132.39 $120.96 $120.08 $127.41 $124.26 $123.53
------------------------------------------------------
1997 $146.95 $149.44 $150.41 $146.96 $146.16 $147.82
------------------------------------------------------
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 Partnership's 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
11
<PAGE>
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.
12
<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 aproximately 13.56% of the Sector II and 23.38% of the
Sector III assets committed to trading July 1, 1997. In September 1996, JWH was
named as a co-defendant in a class action lawsuit 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
Witter's 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.
On June 24, 1997, the Commodity Futures Trading Commission("CFTC")
accepted an Offer of Settlement from Merrill Lynch Futures Inc. ("MLF") and
others, in a matter captioned "In the Matter of Mitsubishi Corporation and
Merrill Lynch Futures Inc., et al.", CFTC Docket No. 97-10, pursuant to which
MLF, without admitting or denying the allegations against it, consented to a
finding by the CFTC that MLF had violated Section 4c(a)(A) of the Commodity
Exchange Act (the "Act"), relating to wash sales, and CFTC Regulation 1.37(a),
relating to recordkeeping requirements . MLF agreed to cease and desist from
violating Section 4c(a)(A) of the Act and Regulation 1.37(a), and to pay a civil
monetary penalty of $175,000`.
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
James M. Bernard, formerly a Senior Vice President of MLIP, is no
longer with the firm.
Michael A. Karmelin has been appointed Chief Financial Officer, Vice
President and Treasurer of MLIP. Mr. Karmelin assumed these positions on April
14, 1997, when he completed his tenure as Chief Financial Officer of Merrill
Lynch, Hubbard Inc. ("ML Hubbard"), a sponsor of real estate limited
partnerships. Mr. Karmelin was born in 1947. Mr. Karmelin joined ML Hubbard in
January 1994 as a Vice President. From May 1994 until he joined MLIP, Mr.
Karmelin was the Chief Financial Officer of ML Hubbard, responsible for its
accounting, treasury and tax functions. Prior to joining ML Hubbard, Mr.
Karmelin held several senior financial positions with Merrill Lynch & Co., Inc.
("ML&Co.") and Merrill Lynch, Pierce, Fenner & Smith Incorporated from December
1985 to December 1993, including Vice President/Senior Financial Officer
Corporate Real Estate and Purchasing, Manager Commitment Control/Capital
Budgeting, and Senior Project Manager/Project Analysis. Prior to joining ML&Co.,
Mr. Karmelin was employed at Avco Corporation for 17 years, where he held a
variety of financial positions. Mr. Karmelin holds a B.B.A. degree in Accounting
from Baruch College, C.U.N.Y. and a Master of Business Administration degree in
Corporate Strategy and Finance from New York University. Mr. Karmelin passed the
Certified Public Accountant examination in 1974 and is a member of the Treasury
Management Association, the Institute of Management Accountants and The
Strategic Leadership Forum.
13
<PAGE>
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 six months of
fiscal 1997.
14
<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 FUNDSM II L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: August 12, 1997 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: August 12, 1997 By /s/MICHAEL A. KARMELIN
----------------------
Michael A. Karmelin
Chief Financial Officer, Vice President
and Treasurer
15
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<PERIOD-START> JAN-01-1997 JAN-01-1996
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