<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 September 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 17 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
---------------------------------
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
- ------
Accrued interest $ 120,772 $ 119,603
Equity in commodity futures trading
accounts:
Cash and option premiums 29,371,632 29,105,401
Net unrealized profit on open 207,808 573,041
contracts
Investments 11,985,864 10,807,733
Receivable from outside investments 170,452 3,284,473
--------------- -----------
TOTAL $41,856,528 $43,890,251
=============== ===========
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 556,483 $ 837,870
Brokerage commissions payable 213,487 217,676
Administrative fees payable 6,187 6,204
Profit shares payable 344,126 244,396
Payable to outside investments 4,288 -
--------------- -----------
Total liabilities $ 1,124,571 $ 1,306,146
=============== ===========
PARTNERS' CAPITAL:
General Partner:
(2145 and 2145 SECTOR II Units) 332,638 307,633
(3905 and 3905 SECTOR III Units) 598,971 549,638
Limited Partners:
(91092 and 103925 SECTOR II 14,126,187 14,904,769
Units)
(167383 and 190562 SECTOR III 25,674,161 26,822,065
Units)
--------------- -----------
Total partners' capital 40,731,957 42,584,105
--------------- -----------
TOTAL $41,856,528 $43,890,251
=============== ===========
NET ASSET VALUE PER UNIT
SECTOR II UNITS
(Based on 93237 and 106070
Units outstanding) $155.08 $143.42
=============== ===========
SECTOR III UNITS
(Based on 171288 and 194467
Units outstanding) $153.39 $140.75
=============== ===========
</TABLE>
See notes to financial statements.
2
<PAGE>
THE SECTOR STRATEGY FUND/SM/ II L.P.
------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF OPERATIONS
------------------------
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
---------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ 949,254 $ 49,467 $4,312,229 $1,061,965
Change in unrealized (325,301) 1,858,822 (365,233) 466,653
---------------- ---------------- ----------- -------------
Total trading results 623,953 1,908,289 3,946,996 1,528,618
---------------- ---------------- ----------- -------------
Interest income 377,289 482,880 1,178,020 1,640,125
Income (loss) from investments 1,122,370 - 1,072,252 -
---------------- ---------------- ----------- -------------
Total revenues 2,123,612 2,391,169 6,197,268 3,168,743
---------------- ---------------- ----------- -------------
EXPENSES:
Profit shares 7,815 52,084 457,126 87,125
Brokerage commissions 666,523 1,016,929 2,097,977 3,485,689
Administrative fees 19,044 27,066 59,942 92,820
---------------- ---------------- ----------- -------------
Total expenses 693,382 1,096,079 2,615,045 3,665,634
---------------- ---------------- ----------- -------------
NET INCOME (LOSS) $1,430,230 $1,295,090 $3,582,223 $ (496,891)
================ ================ =========== =============
NET INCOME (LOSS) PER UNIT:
Weighted average number of units
outstanding 273,052 346,469 283,174 395,311
================ ================ =========== =============
Weighted average net income (loss)
per Limited Partner
and General Partner Unit $5.24 $3.74 $12.65 $(1.26)
================ ================ =========== =============
</TABLE>
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 nine months ended September 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 (49,784) (76,288) (6,185,763) (9,503,936) (629) - (15,690,328)
Net loss - - 226,509 (720,314) 5,156 (8,242) (496,891)
---------- ----------- ------------ ---------- ----------- ---------- -------------
PARTNERS' CAPITAL,
September 30, 1996 114,757 212,193 $14,364,797 $26,275,653 $273,015 $492,572 $ 41,406,037
========== =========== ============ =========== =========== ========== =============
PARTNERS' CAPITAL,
December 31, 1996 106,070 194,467 $14,904,769 $26,822,065 $307,633 $549,638 $ 42,584,105
Redemptions (12,833) (23,179) (1,949,914) (3,484,457) - - (5,434,371)
Net income - - 1,171,332 2,336,553 25,005 49,333 3,582,223
---------- ----------- ------------ ---------- ----------- ---------- -------------
PARTNERS' CAPITAL,
September 30, 1997 93,237 171,288 $14,126,187 $25,674,161 $332,638 $598,971 $ 40,731,957
========== =========== ============ =========== =========== ========== =============
</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 September 30, 1997 and the results of its operations for
the nine months ended September 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 September 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 from
ended September 30, 1997 Revenue Commissions Fees Shares Investments
------------ ------------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
SECTOR II UNITS
- ---------------
JWH LLC $ 331,421 $ 49,600 $1,417 $11,953 $ 268,451
============ ======== ====== ======= ==========
SECTOR III UNITS
- ----------------
JWH LLC $1,027,371 $153,279 $4,380 $56,895 $ 812,817
Millburn LLC 126,681 73,857 2,110 9,612 41,102
------------ -------- ------ ------- ----------
Total $1,154,052 $227,136 $6,490 $66,507 $ 853,919
============ ======== ====== ======= ==========
TOTAL ALL UNITS
- ---------------
JWH LLC $1,358,792 $202,879 $5,797 $68,848 $1,081,268
Millburn LLC 126,681 73,857 2,110 9,612 41,102
------------ -------- ------ -------- ---------
Total $1,485,473 $276,736 $7,907 $78,460 $1,122,370
============ ======== ====== ======= ==========
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
For the nine months Total Brokerage Administrative Profit Income from
ended September 30, 1997 Revenue Commissions Fees Shares Investments
------------ ------------- -------------- -------- -------------
<S> <C> <C> <C> <C> <C>
SECTOR II UNITS
- ---------------
JWH LLC $ 312,917 $144,772 $ 4,135 $ 12,423 $ 151,587
========== ======== ======= ======== ==========
SECTOR III UNITS
- ----------------
JWH LLC $ 989,384 $372,546 $10,644 $ 58,178 $ 548,016
Millburn LLC 696,161 224,767 6,422 92,323 372,649
---------- -------- -------- -------- ----------
Total $1,685,545 $597,313 $17,066 $150,501 $ 920,665
========== ======== ======= ======== ==========
TOTAL ALL UNITS
- ---------------
JWH LLC $1,302,301 $517,318 $14,779 $ 70,601 $ 699,603
Millburn LLC 696,161 224,767 6,422 92,323 372,649
---------- -------- -------- -------- ----------
Total $1,998,462 $742,085 $21,201 $162,924 $1,072,252
========== ======== ======= ======== ==========
</TABLE>
6
<PAGE>
As significant investees, income statement information for JWH LLC and Millburn
LLC is set forth as follows:
ML JWH FINANCIAL AND METALS PORTFOLIO LLC
-----------------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF INCOME
--------------------
For the three For the nine
months ended months ended
September 30, September 30,
1997 1997
--------------- -------------
REVENUES:
Trading profits (loss):
Realized $6,666,871 $3,199,095
Change in unrealized 1,824,620 3,394,200
--------------- -------------
Total trading results 8,491,491 6,593,295
--------------- -------------
Interest income 788,805 2,312,273
--------------- -------------
Total revenues 9,280,296 8,905,568
--------------- -------------
EXPENSES:
Profit shares 389,699 406,321
Brokerage commissions 1,446,028 4,088,876
Administrative fees 39,632 110,113
--------------- -------------
Total expenses 1,875,359 4,605,310
--------------- -------------
NET INCOME $7,404,937 $4,300,258
=============== =============
7
<PAGE>
<TABLE>
<CAPTION>
ML MILLBURN GLOBAL L.L.C.
-------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF INCOME
--------------------
For the three For the nine
months ended months ended
September 30, September 30,
1997 1997
---------------- -------------
<S> <C> <C>
REVENUES:
Trading profits (loss):
Realized $1,198,944 $ 7,430,295
Change in unrealized (215,294) (1,158,707)
---------------- -------------
Total trading results 983,650 6,271,588
---------------- -------------
Interest income 400,945 1,151,318
---------------- -------------
Total revenues 1,384,595 7,422,906
---------------- -------------
EXPENSES:
Profit shares 103,793 973,415
Brokerage commissions 876,568 2,702,727
Administrative fees 23,235 69,944
---------------- -------------
Total expenses 1,003,596 3,746,086
---------------- -------------
NET INCOME $ 380,999 $ 3,676,820
================ =============
</TABLE>
8
<PAGE>
3. INCOME (LOSS) PER UNIT
The profit and loss of the Sector II and Sector III Units for the three and
nine months ended September 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 $ 570,988 $ 378,266 $ 260,695 $ (211,228)
Change in unrealized (268,524) (56,777) 667,263 1,191,559
------------- ---------- ---------- ----------
Total trading results 302,464 321,489 927,958 980,331
Interest income 163,788 213,501 172,817 310,063
Income from investments 268,451 853,919 - -
------------- ---------- ---------- ----------
Total revenues 734,703 1,388,909 1,100,775 1,290,394
------------- ---------- ---------- ----------
EXPENSES:
Profit shares 13,659 (5,844) 35,307 16,777
Brokerage commissions 285,719 380,804 338,223 678,706
Administrative fees 8,163 10,881 9,664 17,402
------------- ---------- ---------- ----------
Total expenses 307,541 385,841 383,194 712,885
------------- ---------- ---------- ----------
NET INCOME (LOSS) $ 427,162 $1,003,068 $ 717,581 $ 577,509
============= ========== ========== ==========
NET INCOME (LOSS) PER UNIT:
Weighted average
number of units
outstanding 96,540 176,512 122,136 224,333
------------- ---------- ---------- ----------
Weighted average net
income (loss) per
Limited Partner and
General Partner Unit $4.42 $5.68 $5.88 $2.57
============= ========== ========== ==========
<CAPTION>
9 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 $1,729,520 $2,582,709 $ 168,841 $ 893,124
Change in unrealized (148,563) (216,670) 726,625 (259,972)
----------- ------------ ---------- ----------
Total trading results 1,580,957 2,366,039 895,466 633,152
Interest income 483,701 694,319 598,746 1,041,379
Income from investments 151,587 920,665 - -
----------- ------------ ---------- ----------
Total revenues 2,216,245 3,981,023 1,494,212 1,674,531
----------- ------------ ---------- ----------
EXPENSES:
Profit shares 128,960 328,166 53,902 33,223
Brokerage commissions 866,200 1,231,777 1,175,071 2,310,618
Administrative fees 24,748 35,194 33,574 59,246
----------- ------------ ---------- ----------
Total expenses 1,019,908 1,595,137 1,262,547 2,403,087
----------- ------------ ---------- ----------
NET INCOME (LOSS) $1,196,337 $2,385,886 $ 231,665 $ (728,556)
=========== ============ ========== ==========
NET INCOME (LOSS) PER UNIT:
Weighted average
number of units
outstanding 100,470 182,704 142,407 252,904
----------- ------------ ---------- ----------
Weighted average net
income (loss) per
Limited Partner and
General Partner Unit $11.91 $13.06 $1.63 $(2.88)
=========== ============ ========== ==========
</TABLE>
9
<PAGE>
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's revenues by reporting category for the respective periods were
as follows:
<TABLE>
<CAPTION>
For the three For the three For the nine For the nine
months ended months ended months ended months ended
September 30, September 30, September 30, September 30,
1997 1996 1997 1996
--------------------- --------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Interest rates $ 347,873 $ 2,277,587 $ 19,836 $ 520,674
Stock indices 182,751 (273,439) 809,579 (683,099)
Commodities (542,091) 824,140 888,498 1,315,314
Currencies 532,423 (1,222,491) 1,743,167 691,500
Energy 170,414 204,955 116,720 (113,337)
Metals (67,417) 97,537 369,196 (202,434)
--------------------- --------------------- --------------------- ---------------------
$ 623,953 $ 1,908,289 $3,946,996 $1,528,618
===================== ===================== ===================== =====================
</TABLE>
Fair Value
- ----------
The contract/notional values of the Partnership's open derivative instrument
positions as of September 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 & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Interest rates $ 98,819,412 $37,317,932 $ 95,138,798 $ 26,476,691
Stock indices 1,392,722 2,955,591 176,868 2,826,046
Commodities 6,816,571 5,470,592 9,295,728 9,341,382
Currencies 31,069,836 38,546,293 29,153,110 38,839,020
Energy 252,960 902,891 730,109 1,523,142
Metals 11,709,998 12,563,389 25,259,693 26,658,962
-------------------- -------------------- -------------------- --------------------
$150,061,499 $97,756,688 $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 September 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 & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Exchange
traded $114,151,189 $51,411,742 $113,185,811 $ 52,878,509
Non-Exchange
traded 35,910,310 46,344,946 46,568,495 52,786,734
-------------------- -------------------- -------------------- --------------------
$150,061,499 $97,756,688 $159,754,306 $105,665,243
==================== ==================== ==================== ====================
</TABLE>
10
<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 nine months
ended September 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 & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
-------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Interest rates $ 70,486,633 $ 53,673,766 $162,359,930 $ 98,605,923
Stock indices 2,267,261 3,864,805 9,700,138 5,632,075
Commodities 10,502,191 10,697,801 16,978,613 10,571,424
Currencies 26,917,618 41,827,489 102,425,601 113,840,092
Energy 548,612 859,590 1,582,405 1,435,678
Metals 12,744,850 11,350,409 15,520,586 18,971,130
-------------------- -------------------- -------------------- --------------------
$123,467,165 $122,273,860 $308,567,273 $249,056,322
==================== ==================== ==================== ====================
</TABLE>
As of September 30, 1997 and December 31, 1996, $21,076,691 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 September 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 $ 766,787 $202,178 $ 992,271 $536,071
Non-Exchange
traded 1,311,964 5,630 1,763,586 36,970
-------------------- -------------------- -------------------- --------------------
$2,078,751 $207,808 $2,755,857 $573,041
==================== ==================== ==================== ====================
</TABLE>
5. RELATED PARTY TRANSACTIONS
MLIP is currently reviewing certain aspects of the interest arrangements between
the Partnership and certain affiliates of MLIP. The purpose of the review is to
confirm that the Partnership received interest credits as described in its
Prospectus. The results of this review have not been determined.
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.
11
<PAGE>
As of October 1, 1997, the Partnership's assets were allocated as follows:
SECTOR II UNITS:
---------------
<TABLE>
<CAPTION>
%
TRADING ADVISOR SECTOR ALLOCATION
- --------------- ----------- -----------
<S> <C> <C>
John W. Henry & Company, Inc. Financial/
Metals 14.96
Hyman Beck & Company, Inc. Diversified 20.60
Dominion Capital Management Inc. Diversified 20.49
Trendstat Capital Management, Inc. Currencies 24.00
Range Wise, Inc. Agriculture 19.95
------
100.00%
</TABLE>
SECTOR III UNITS:
----------------
<TABLE>
<CAPTION>
%
TRADING ADVISOR SECTOR ALLOCATION
- --------------- ----------- -----------
<S> <C> <C>
John W. Henry & Company, Inc. Financial/
Metals 25.48
Graham Capital Management, L.P. Diversified 17.52
Range Wise, Inc. Agriculture 11.07
Sunrise Capital Management Diversified 20.04
Millburn Ridgefield Corporation Financial/
Metals 11.90
Hyman Beck & Company, Inc. Diversified 13.99
------
100.00%
</TABLE>
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 nine months of 1996, the Series' average month-end Net Assets
equaled $17,395,999, and the Series recognized gross trading gains of $895,466
or 5.15% of such average month-end Net Assets. Brokerage commissions of
$1,175,071 or 6.75%, Administrative fees of $33,574 or .20% and Profit Shares of
$53,902 or .31% of average month-end Net Assets were paid. Interest income of
$598,746 or 3.44% of average month-end Net Assets resulted in a net gain of
$231,665 or 1.33% of average month-end Net Assets, which resulted in a 1.92%
increase in the Net Asset Value per Unit since December 31, 1995.
During the first nine months of 1997, the Series' average month-end Net Assets
equaled $15,047,608, and the Series recognized gross trading gains of $1,580,957
or 10.51% of such average month-end Net Assets. Brokerage commissions of
$866,200 or 5.76%, Administrative fees of $24,748 or .16% and Profit Shares of
$128,960 or .86% of average month-end Net Assets were paid. Interest income of
$483,701 or 3.21%, Gain from investments of $151,587 or 1.01% of average month-
end Net Assets
12
<PAGE>
resulted in net gain of $1,196,337 or 7.95% of average month-end Net Assets
which resulted in a 8.13% increase in the Net Asset Value of the Series per Unit
since December 31, 1996.
During the first nine months of 1997 and 1996, the Series experienced 8
profitable months and 10 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SECTOR II UNIT
Jan. Feb. Mar. Apr May Jun Jul Aug Sep
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $129.65 $123.52 $122.45 $124.82 $123.17 $121.68 $124.98 $123.96 $127.55
- -----------------------------------------------------------------------------------------------------------
1997 $150.05 $149.10 $148.60 $149.07 $147.91 $150.77 $158.23 $155.56 $155.08
- -----------------------------------------------------------------------------------------------------------
</TABLE>
SECTOR III UNITS:
-----------------
During the first nine months of 1996, the Series' average month-end Net Assets
equaled $31,077,384 and the Series recognized gross trading gains of $633,152 or
2.05% of such average month-end Net Assets. Brokerage commissions of $2,310,618
or 7.44%, Administrative fees of $59,246 or .19% and Profit Shares of $33,223 or
.11% of average month-end Net Assets were paid. Interest income of $1,041,379
or 3.35% of average month-end Net Assets resulted in net loss of $728,556 or
2.34% of average month-end Net Assets, which resulted in a 1.65% decrease in the
Net Asset Value per Unit since December 31, 1995.
During the first nine months of 1997, the Series' average month-end Net Assets
equaled $27,056,789, and the Fund recognized gross trading gains of $2,366,039
or 8.74% of such average month-end Net Assets. Brokerage commissions of
$1,231,777 or 4.55%, Administrative fees of $35,194 or .13% and Profit Shares of
$328,166 or 1.21% of average month-end Net Assets were paid. Interest income of
$694,319 or 2.57%, Income from Investments of $920,665 or 3.40% of average
month-end Net Assets resulted in net gain of $2,385,886 or 8.82 % of average
month-end Net Assets which resulted in a 8.98% increase in the overall Net Asset
Value per Unit since December 31, 1996.
During the first nine months of 1997 and 1996, the Series experienced 10
profitable months and 8 unprofitable months.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER SECTOR III UNIT
Jan. Feb. Mar. Apr May Jun Jul Aug Sep
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996 $132.39 $120.96 $120.08 $127.41 $124.26 $123.53 $125.16 $122.91 $126.15
- -----------------------------------------------------------------------------------------------------------
1997 $147.15 $149.44 $150.41 $146.96 $146.16 $147.82 $156.23 $151.82 $153.39
- -----------------------------------------------------------------------------------------------------------
</TABLE>
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
13
<PAGE>
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.
14
<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 14.96% of the Sector II and 25.48% of the Sector
III assets committed to trading October 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 1996, 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.
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
Effective August 11, 1997, Jonathan Bren joined Graham Capital Management
L.P. ("Graham") as Managing Director and as a principal of the firm. Mr. Bren
will be responsible for all aspects of business development and client relations
at Graham. Mr. Bren was previously a Managing Director of Alpha Investment
Management where he was involved in all aspects of the alternative investment
business since September 1990. Prior to joining Alpha, from March 1988 to
August 1990, Mr. Bren worked for Asher Edelman's hedge funds which specialized
in event-driven investing. From January 1985 to February 1988, Mr. Bren worked
in corporate finance at Drexel Burnham Lambert, specializing in the origination
of convertible bonds for small companies. From May 1983 to December 1984, Mr.
Bren was a corporate finance analyst at Allen and Company, Inc. Mr. Bren
graduated from Franklin and Marshall College with a BA in Economics in 1982.
Ms. Eilene Nicoll is the vice president of trading administration and a member
of the Investment Policy Committee of John W. Henry & Company, Inc. ("JWH").
Prior to joining JWH in July 1997, Ms. Nicoll was a vice president beginning in
January 1997 at Commercial Materials, L.L.C., a newly organized corporation
which has not yet begun operations. She was a vice president and director at
West Course Capital, Inc., a CTA, from January 1994 until it dissolved in
December 1996. At West Course Capital, Inc., Ms. Nicoll was responsible for
operations and administration. Prior to joining West Course Capital, Inc., she
was a vice president at REFCO, Inc. from May 1991 to December 1993. While at
REFCO, Inc., she was also a principal of Nikkhah & Nicoll Asset Management,
Inc., a CPO. Ms. Nicoll was at Shearson Lehman Brothers from January 1987 to
December 1990 as vice president-futures, and subsequently, from January 1991 to
May 1991, at Moore Capital Management, Inc. where she was involved in all
aspects of the commodity trading advisor business, including administration,
marketing, and allocation of proprietary capital. From 1984 through 1986, she
was an independent discretionary trader. Ms. Nicoll was employed at
Commodities Corporation (USA) N.V. from 1978 to 1984 where she was an assistant
vice president. Ms. Nicoll received her B.A. in psychology from Brooklyn
College.
Ms. Glenda G. Twist and Mr. John A. Ford are no longer principals of JWH
effective August 1, 1997 and August 31, 1997, respectively.
15
<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 nine months of
fiscal 1997.
16
<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: November 14, 1997 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: November 14, 1997 By /s/MICHAEL A. KARMELIN
----------------------
Michael A. Karmelin
Chief Financial Officer, Vice President
and Treasurer
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> SEP-30-1997 SEP-30-1996
<CASH> 0 0
<RECEIVABLES> 41856528 43120842
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 41856528 43120842
<SHORT-TERM> 0 0
<PAYABLES> 1124571 1714805
<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> 40731957 41406037
<TOTAL-LIABILITY-AND-EQUITY> 41856528 43120842
<TRADING-REVENUE> 3946996 1528618
<INTEREST-DIVIDENDS> 1178020 1640125
<COMMISSIONS> 2615045 3665634
<INVESTMENT-BANKING-REVENUES> 1072252 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 3582223 (496891)
<INCOME-PRE-EXTRAORDINARY> 3582223 (496891)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3582223 (496891)
<EPS-PRIMARY> 12.65 (1.26)
<EPS-DILUTED> 12.65 (1.26)
</TABLE>
