<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, 1998
-------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from_________to_________
Commission File Number 0-18944
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
----- -----
<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>
June 30, December 31,
1998 1997
------------- ------------
<S> <C> <C> <C>
ASSETS
------
Accrued interest $ 8,101 $ 127,467
Equity in commodity futures trading accounts:
Cash and options premiums 379,619 28,313,407
Net unrealized profit on open contracts (62,636) 671,259
Investments 34,515,719 12,352,605
Receivable from investments 733,740 57,819
----------- -----------
TOTAL $35,574,543 $41,522,557
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
----------------------------------
LIABILITIES:
Redemptions payable $ 645,849 $ 259,060
Brokerage commissions payable 25 212,278
Administrative fees payable - 6,065
Profit Shares payable 49,916 394,697
----------- -----------
Total liabilities 695,790 872,100
=========== ===========
PARTNERS' CAPITAL:
General Partner:
(832 and 2145 SECTOR II Units) 122,227 335,409
(1595 and 3905 SECTOR III Units) 246,070 620,882
Limited Partners:
(76881 and 86300 SECTOR II Units) 11,294,565 13,494,521
(150484 and 164781 SECTOR III Units) 23,215,891 26,199,645
----------- -----------
Total partners' capital 34,878,753 40,650,457
----------- -----------
TOTAL $35,574,543 $41,522,557
=========== ===========
NET ASSET VALUE PER UNIT:
SECTOR II UNITS
(Based on 77713 and 88445 Units outstanding) $ 146.91 $ 156.37
=========== ===========
SECTOR III UNITS
(Based on 152079 and 168686 Units outstanding) $ 154.27 $ 159.00
=========== ===========
</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 six For the six
months ended months ended months ended months ended
June 30, June 30, June 30, June 30,
1998 1997 1998 1997
------------------- ------------------ ----------------- -----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading profits (loss):
Realized $ 476,556 $ 645,041 $ 1,232,591 $ 3,362,975
Change in unrealized (864,959) 82,983 (733,895) (39,932)
------------------- ------------------ ----------------- -----------------
Total trading results (388,403) 728,024 498,696 3,323,043
------------------- ------------------ ----------------- -----------------
Interest income 239,015 406,532 599,253 800,731
Loss from investments (522,328) (531,960) (1,343,569) (50,118)
------------------- ------------------ ----------------- -----------------
Total revenues (671,716) 602,596 (245,620) 4,073,656
------------------- ------------------ ----------------- -----------------
EXPENSES:
Profit shares 58,767 136,454 301,644 449,311
Brokerage commissions 391,847 705,293 1,015,128 1,431,454
Administrative fees 11,195 20,150 29,003 40,898
------------------- ------------------ ----------------- -----------------
Total expenses 461,809 861,897 1,345,775 1,921,663
------------------- ------------------ ----------------- -----------------
NET (LOSS) INCOME $ (1,133,525) $ (259,301) $ (1,591,395) $ 2,151,993
=================== ================== ================= =================
NET (LOSS) INCOME PER UNIT:
Weighted average number of units
outstanding 240,862 282,328 247,415 288,237
=================== ================== ================= =================
Weighted average net (loss) income
per Limited Partner
and General Partner Unit $ (4.71) $ (0.92) $ (6.43) $ 7.47
=================== ================== ================= =================
</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 six months ended June 30, 1998 and 1997
-----------------------------------------------
<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, 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
======= ======= =========== =========== ========= ========= ===========
PARTNERS' CAPITAL,
December 31, 1997 88,445 168,686 $13,494,521 $26,199,645 $ 335,409 $ 620,882 $40,650,457
Redemptions (10,732) (16,607) (1,401,094) (2,230,802) (192,460) (355,953) (4,180,309)
Net loss - - (798,862) (752,952) (20,722) (18,859) (1,591,395)
------- ------- ----------- ----------- --------- --------- -----------
PARTNERS' CAPITAL,
June 30, 1998 77,713 152,079 $11,294,565 $23,215,891 $ 122,227 $ 246,070 $34,878,753
======= ======= =========== =========== ========= ========= ===========
</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 June 30, 1998 and the results of its
operations for the six months ended June 30, 1998 and 1997. However, the
operating results for the interim periods may not be indicative of the
results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Partnership's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1997 (the "Annual Report").
2. INVESTMENTS
Many of the multi-advisor funds (the "Multi-Advisor Funds") sponsored by
Merrill Lynch Investment Partners Inc. ("MLIP") allocate their assets to a
number of the same Trading Advisors. However, because different Multi-
Advisor Funds have historically allocated assets to slightly different
Advisor groups, the Multi-Advisor Funds have often been required to open
and maintain individual trading accounts with each Advisor. MLIP has
decided to consolidate the trading accounts of nine of its Multi-Advisor
Funds (including the Partnership) as of June 1, 1998. The consolidation is
achieved by having these Multi-Advisor Funds close their existing trading
accounts and invest in a limited liability company, ML Multi-Manager
Portfolio L.L.C. ("MM LLC ") which will open a single account with each
Advisor selected. MM LLC is managed by MLIP, initially has no investors
other than the Multi-Advisor Funds and serves solely as the vehicle through
which the assets of such Multi-Advisor Funds are combined in order to be
managed through single rather than multiple accounts.
As of June 30, 1998 the Partnership had an investment in MM LLC and as of
December 31, 1997, the Partnership had investments in the ML JWH Financial
and Metals Portfolio L.L.C. ("JWH LLC") and ML Millburn Global L.L.C.
("Millburn LLC") as follows:
1998 1997
------------------ -------------------
MM LLC $ 34,515,719 $ -
JWH LLC - 9,266,578
Millburn LLC - 3,086,027
------------------ -------------------
Total $ 34,515,719 $ 12,352,605
================== ===================
During the second quarter of 1998, the Partnership withdrew its investments
in JWH LLC and Millburn LLC.
5
<PAGE>
Total revenues and fees with respect to such investments are set forth as
follows:
<TABLE>
<CAPTION>
For the three months Total Brokerage Administrative Profit (Loss) Income from
ended June 30, 1998 Revenue Commissions Fees Shares Investments
-------------- --------------- ---------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
SECTOR II Units
- ---------------
JWH LLC $ (77,951) $ 26,217 $ 749 $ - $ (104,917)
MM LLC 123,860 85,317 2,438 18,450 17,655
-------------- --------------- ---------------- ------------- -------------------
Total $ 45,909 $ 111,534 $ 3,187 $ 18,450 $ (87,262)
============== =============== ================ ============= ===================
SECTOR III Units
- ----------------
JWH LLC $ (247,779) $ 84,347 $ 2,409 $ - $ (334,535)
MM LLC 252,407 173,838 4,967 51,630 21,972
Millburn LLC (80,851) 40,495 1,157 - (122,503)
-------------- --------------- ---------------- ------------- -------------------
Total $ (76,223) $ 298,680 $ 8,533 $ 51,630 $ (435,066)
============== =============== ================ ============= ===================
Total All Units
- ---------------
JWH LLC $ (325,730) $ 110,564 $ 3,158 $ - $ (439,452)
MM LLC 376,267 259,155 7,405 70,080 39,627
Millburn LLC (80,851) 40,495 1,157 - (122,503)
-------------- --------------- ---------------- ------------- -------------------
Total $ (30,314) $ 410,214 $ 11,720 $ 70,080 $ (522,328)
============== =============== ================ ============= ===================
For the three months Total Brokerage Administrative Profit (Loss) from
ended June 30, 1997 Revenue Commissions Fees Shares Investments
-------------- --------------- ---------------- ------------- -------------------
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>
6
<PAGE>
<TABLE>
<CAPTION>
For the six months Total Brokerage Administrative Profit (Loss) Income from
ended June 30, 1998 Revenue Commissions Fees Shares Investments
-------------- --------------- ---------------- ------------- -------------------
<S> <C> <C> <C> <C> <C>
SECTOR II Units
- ---------------
JWH LLC $ (222,269) $ 71,032 $ 2,029 $ - $ (295,330)
MM LLC 123,860 85,317 2,438 18,450 17,655
-------------- --------------- ---------------- ------------- -------------------
Total $ (98,409) $ 156,349 $ 4,467 $ 18,450 $ (277,675)
============== =============== ================ ============= ===================
SECTOR III Units
- ----------------
JWH LLC $ (711,700) $ 228,238 $ 6,521 $ - $ (946,459)
MM LLC 252,407 173,838 4,967 51,630 21,972
Millburn LLC (31,859) 106,408 3,040 100 (141,407)
-------------- --------------- ---------------- ------------- -------------------
Total $ (491,152) $ 508,484 $ 14,528 $ 51,730 $ (1,065,894)
============== =============== ================ ============= ===================
Total All Units
- ---------------
JWH LLC $ (933,969) $ 299,270 $ 8,550 $ - $ (1,241,789)
MM LLC 376,267 259,155 7,405 70,080 39,627
Millburn LLC (31,859) 106,408 3,040 100 (141,407)
-------------- --------------- ---------------- ------------- -------------------
Total $ (589,561) $ 664,833 $ 18,995 $ 70,180 $ (1,343,569)
============== =============== ================ ============= ===================
For the six months Total Brokerage Administrative Profit (Loss) Income from
ended June 30, 1997 Revenue Commissions Fees Shares Investments
-------------- --------------- ---------------- ------------- -------------------
SECTOR II Units
- ---------------
JWH LLC $ (18,504) $ 95,642 $ 2,718 $ - $ (116,864)
============== =============== ================ ============= ===================
SECTOR III Units
- ----------------
JWH LLC $ (37,987) $ 220,550 $ 6,264 $ - $ (264,801)
Millburn LLC 569,480 150,910 4,312 82,711 331,547
-------------- --------------- ---------------- ------------- -------------------
Total $ 531,493 $ 371,460 $ 10,576 $ 82,711 $ 66,746
============== =============== ================ ============= ===================
Total All Units
- ---------------
JWH LLC $ (56,491) $ 316,192 $ 8,982 $ - $ (381,665)
Millburn LLC $ 569,480 $ 150,910 $ 4,312 $ 82,711 $ 331,547
-------------- --------------- ---------------- ------------- -------------------
Total $ 512,989 $ 467,102 $ 13,294 $ 82,711 $ (50,118)
============== =============== ================ ============= ===================
</TABLE>
7
<PAGE>
Condensed statements of financial condition and statements of operation for MM
LLC, JWH LLC and Millburn LLC are set forth as follows:
<TABLE>
<CAPTION>
MM LLC JWH LLC Millburn LLC
------------------ ----------------- -----------------
<S> <C> <C> <C>
June 30, 1998 December 31, 1997 December 31, 1997
Assets $ 123,484,970 $ 62,481,438 $ 35,584,936
================== ================= =================
Liabilities $ 3,872,011 $ 1,122,533 $ 1,454,659
Members' Capital 119,612,959 61,358,905 34,130,277
------------------ ----------------- -----------------
Total $ 123,484,970 $ 62,481,438 $ 35,584,936
================== ================= =================
<CAPTION>
MM LLC
For the three months
ended June 30, 1998
------------------
<S> <C>
Revenues $ 1,307,775
Expenses 1,187,403
------------------
Net Income $ 120,372
==================
</TABLE>
8
<PAGE>
<TABLE>
<CAPTION>
JWH LLC
For the three months For the three months For the six months For the six months
ended June 30, 1998 ended June 30, 1997 ended June 30, 1998 ended June 30, 1997
------------------------- ------------------------ ----------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues $ (3,235,723) $ (2,656,425) $ (7,262,323) $ (374,729)
Expenses 991,700 1,242,115 2,333,897 2,729,950
------------------------- ------------------------ ----------------------- ----------------------
Net Loss $ (4,227,423) $ (3,898,540) $ (9,596,220) $ (3,104,679)
========================= ======================== ======================= ======================
<CAPTION>
Millburn LLC
For the three months For the three months For the six months For the six months
ended June 30, 1998 ended June 30, 1997 ended June 30, 1998 ended June 30, 1997
------------------------- ------------------------ ----------------------- ----------------------
<S> <C> <C> <C> <C>
Revenues $ (4,405,864) $ 288,163 $ (7,484,700) $ 6,038,312
Expenses - 767,266 - 2,742,491
------------------------- ------------------------ ----------------------- ----------------------
Net (Loss) Income $ (4,405,864) $ (479,103) $ (7,484,700) $ 3,295,821
========================= ======================== ======================= ======================
</TABLE>
9
<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, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
------------------ ----------------- ------------------ -----------------
Sector II Sector III Total Sector II
UNITS UNITS All Units UNITS
------------------ ----------------- ------------------ -----------------
For the three For the three For the three For the three
months ended months ended months ended months ended
June 30, 1998 June 30, 1998 June 30, 1998 June 30, 1997
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $ - $ 476,556 $ 476,556 $ 123,564
Change in unrealized (176,771) (688,188) (864,959) 441,359
------------------ ----------------- ------------------ -----------------
Total trading results (176,771) (211,632) (388,403) 564,923
Interest income 93,577 145,438 239,015 164,504
Loss from investments (87,262) (435,066) (522,328) (150,397)
------------------ ----------------- ------------------ -----------------
Total revenues (170,456) (501,260) (671,716) 579,030
------------------ ----------------- ------------------ -----------------
EXPENSES
Profit shares $ - 58,767 58,767 67,188
Brokerage commissions 154,133 237,714 391,847 287,405
Administrative fees 4,403 6,792 11,195 8,211
------------------ ----------------- ------------------ -----------------
Total expenses 158,536 303,273 461,809 362,804
------------------ ----------------- ------------------ -----------------
NET (LOSS) INCOME $ (328,992) $ (804,533) $ (1,133,525) $ 216,226
================== ================= ================== =================
NET (LOSS) INCOME PER UNIT:
Weighted average number of
units outstanding 82,576 158,286 240,862 100,662
------------------ ----------------- ------------------ -----------------
Weighted average net (loss) income per
Limited Partner and General Partner Unit $ (3.98) $ (5.08) $ (4.71) $ 2.15
================== ================= ================== =================
<CAPTION>
----------------- ------------------
Sector III Total
UNITS All Units
----------------- ------------------
For the three For the three
months ended months ended
June 30, 1997 June 30, 1997
----------------- ------------------
REVENUES:
Trading (loss) profits:
Realized $ 521,477 $ 645,041
Change in unrealized (358,376) 82,983
----------------- ------------------
<S> <C> <C>
Total trading results 163,101 728,024
Interest income 242,028 406,532
Loss from investments (381,563) (531,960)
----------------- ------------------
Total revenues 23,566 602,596
----------------- ------------------
EXPENSES
Profit shares 69,266 136,454
Brokerage commissions 417,888 705,293
Administrative fees 11,939 20,150
----------------- ------------------
Total expenses 499,093 861,897
----------------- ------------------
NET (LOSS) INCOME $ (475,527) $ (259,301)
================= ==================
NET (LOSS) INCOME PER UNIT:
Weighted average number of
units outstanding 181,666 282,328
----------------- -------------------
Weighted average net (loss) income per
Limited Partner and General Partner Unit $ (2.62) $ (0.92)
================= ==================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
------------------ ----------------- ------------------ -----------------
Sector II Sector III Total Sector II
UNITS UNITS All Units UNITS
------------------ ----------------- ------------------ -----------------
For the six For the six For the six For the six
months ended months ended months ended months ended
June 30, 1998 June 30, 1998 June 30, 1998 June 30, 1997
------------------ ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $ (242,380) $ 1,474,971 $ 1,232,591 $ 1,158,532
Change in unrealized (122,884) (611,011) (733,895) 119,961
------------------ ----------------- ------------------ -----------------
Total trading results (365,264) 863,960 498,696 1,278,493
Interest income 239,375 359,878 599,253 319,913
(Loss) Income from investments (277,675) (1,065,894) (1,343,569) (116,864)
------------------ ----------------- ------------------ -----------------
Total revenues (403,564) 157,944 (245,620) 1,481,542
------------------ ----------------- ------------------ -----------------
EXPENSES
Profit shares 517 301,127 301,644 115,301
Brokerage commissions 403,962 611,166 1,015,128 580,481
Administrative fees 11,541 17,462 29,003 16,585
------------------ ----------------- ------------------ -----------------
Total expenses 416,020 929,755 1,345,775 712,367
------------------ ----------------- ------------------ -----------------
NET (LOSS) INCOME $ (819,584) $ (771,811) $ (1,591,395) $ 769,175
================== ================= ================== =================
NET (LOSS) INCOME PER UNIT:
Weighted average number of
units outstanding 85,000 162,415 247,415 102,436
------------------ ----------------- ------------------ -----------------
Weighted average net (loss) income per
Limited Partner and General Partner Unit $ (9.64) $ (4.75) $ (6.43) $ 7.51
================== ================= ================== =================
<CAPTION>
----------------- ------------------
Sector III Total
UNITS All Units
----------------- ------------------
For the six For the six
months ended months ended
June 30, 1997 June 30, 1997
----------------- ------------------
<S> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $ 2,204,443 $ 3,362,975
Change in unrealized (159,893) (39,932)
----------------- ------------------
Total trading results 2,044,550 3,323,043
Interest income 480,818 800,731
(Loss) Income from investments 66,746 (50,118)
----------------- ------------------
Total revenues 2,592,114 4,073,656
----------------- ------------------
EXPENSES
Profit shares 334,010 449,311
Brokerage commissions 850,973 1,431,454
Administrative fees 24,313 40,898
----------------- ------------------
Total expenses 1,209,296 1,921,663
----------------- ------------------
NET (LOSS) INCOME $ 1,382,818 $ 2,151,993
================= ==================
NET (LOSS) INCOME PER UNIT:
Weighted average number of
units outstanding 185,801 288,237
----------------- -------------------
Weighted average net (loss) income per
Limited Partner and General Partner Unit $ 7.44 $ 7.47
================= ==================
</TABLE>
11
<PAGE>
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
As of June 1, 1998, the Partnership invested all of its assets in MM LLC. The
Partnership is thus, invested indirectly in the trading of derivative
instruments. The only derivative instruments held by the Partnership were
offsetting commitments to purchase and sell the same derivative instruments on
the same date in the future. These commitments were economically offsetting but
were not, as a technical matter, offset in the forward market until settlement
date.
The Partnership's total trading results by reporting category for the respective
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,
1998 1997 1998 1997
------------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Interest rates $ (188,447) $ (456,765) $ 85,862 $ (328,037)
Stock indices (23,475) 373,255 (139,134) 626,828
Commodities 215,500 792,761 518,301 1,430,589
Currencies (415,288) 173,962 (343,653) 1,210,744
Energy 40,544 (86,491) 312,851 (53,694)
Metals (17,237) (68,698) 64,469 436,613
------------------- ----------------- ----------------- -----------------
$ (388,403) $ 728,024 $ 498,696 $ 3,323,043
=================== ================= ================= =================
</TABLE>
Fair Value
- ----------
The contract/notional values of the Partnership's open derivative instrument
positions as of June 30, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- --------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rates $ - $ - $ 111,822,582 $ 61,960,093
Stock indices - - 702,713 1,344,492
Commodities - - 6,118,437 10,527,025
Currencies 6,716,268 6,716,268 29,226,864 47,464,361
Energy - - - 1,638,290
Metals 5,015,407 5,015,407 10,026,403 13,459,084
------------------- ------------------ ------------------- -------------------
$ 11,731,675 $ 11,731,675 $ 157,896,999 $ 136,393,345
=================== ================== =================== ===================
</TABLE>
The contract/notional values of the Partnership's exchange-traded and
non-exchange traded open derivative instrument positions as of June 30, 1998 and
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------------- ------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
--------------------- ---------------------- --------------------- ---------------------
<S> <C> <C> <C> <C>
Exchange
traded $ - $ - $ 122,018,586 $ 86,758,401
Non-Exchange
traded 11,731,675 11,731,675 35,878,413 49,634,944
--------------------- ---------------------- --------------------- ---------------------
$ 11,731,675 $ 11,731,675 $ 157,896,999 $ 136,393,345
===================== ====================== ===================== =====================
</TABLE>
12
<PAGE>
The average fair values, based on contract/notional values, of the Partnership's
derivative instrument positions which were open as of the end of each calendar
month during the six months ended June 30, 1998 and the year ended December 31,
1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------- --------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------ ------------------- -------------------
<S> <C> <C> <C> <C>
Interest rates $ 110,834,643 $ 34,826,315 $ 77,088,151 $ 56,479,505
Stock indices 3,655,697 4,182,365 2,167,668 3,574,752
Commodities 7,431,033 11,690,438 9,214,751 10,374,651
Currencies 28,698,720 37,883,065 29,245,884 41,682,837
Energy 504,061 1,591,262 480,943 1,090,424
Metals 8,308,205 9,647,544 11,335,877 11,258,160
------------------- ------------------ ------------------- -------------------
$ 159,432,359 $ 99,820,989 $ 129,533,274 $ 124,460,329
=================== ================== =================== ===================
</TABLE>
The gross unrealized profit and the net unrealized profit(loss) on the
Partnership's open derivative instrument positions as of June 30, 1998 and
December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- -----------------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Loss Profit Profit
---------------- ------------------ ------------------- ----------------
<S> <C> <C> <C> <C>
Exchange
traded $ - $ - $ 1,026,367 $ 604,825
Non-Exchange
traded 560,820 (62,636) 1,284,841 66,434
================ ================== =================== ================
$ 560,820 $ (62,636) $ 2,311,208 $ 671,259
================ ================== =================== ================
</TABLE>
Item 2: Management's Discussion and Analysis of Financial Condition and Results
-----------------------------------------------------------------------
of Operations
-------------
The significant variations in both the statement of financial condition and the
statement of operations line items is primarily due to the Partnership placing
assets under the management of Advisors not through opening managed accounts
with them but rather through investing in MM LLC.
MONTH-END NET ASSET VALUE PER SECTOR II UNIT
Jan. Feb. Mar. Apr. May Jun
-------------------------------------------------------------------------
1997 $150.05 $149.10 $148.60 $149.07 $147.91 150.77
-------------------------------------------------------------------------
1998 $155.45 $151.98 $150.75 $145.57 146.58 146.91
-------------------------------------------------------------------------
MONTH-END NET ASSET VALUE PER SECTOR III UNIT
Jan. Feb. Mar. Apr. May Jun
-------------------------------------------------------------------------
1997 $146.95 $149.44 $150.41 $146.96 146.16 147.82
-------------------------------------------------------------------------
1998 $159.04 $156.52 $159.24 $151.72 154.09 154.27
-------------------------------------------------------------------------
13
<PAGE>
Performance Summary
January 1, 1997 to June 30, 1997
January 1, 1997 to March 31, 1997
In the currency markets, the U.S. dollar rallied and started 1997 on a strong
note, rising to a four-year high versus the Japanese yen and two-and-a-half year
highs versus the Deutsche mark and the Swiss franc. January and February proved
profitable in currency trading; losses, however, were incurred in March.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. Interest rate trading ended the
quarter on a profitable note.
Agricultural commodity trading was mixed during the quarter. Soybean prices
reached their highest level in over eight years, on continued demand and fears
that inventories could fall to critically low levels before the next harvest.
April 1, 1997 to June 30, 1997
In the currency markets, the dollar underwent a significant correction in the
Spring against the Japanese yen due to the G7 finance ministers' determination
that a further dollar advance would be counter-productive to their current
goals. Currency trading was profitable for the quarter.
Global interest rate trading was unprofitable for the quarter. Losses were
incurred in April and May. During April, U.S. bond prices moved in a
directionless pattern, as investors remained concerned over inflation and its
impact on further increases in interest rates by the U.S. Federal Reserve.
Agricultural commodity trading was profitable throughout the second quarter.
May's profits were due to coffee prices surging beyond three dollars a pound for
the first time in twenty years, on the possibility of frost in Brazil and
reports of poor crops in smaller countries.
January 1, 1998 to June 30, 1998
January 1, 1998 to March 31, 1998
The Fund's positions in the global interest rate markets were profitable during
the quarter. In Europe, an extended bond market rally continued despite an
environment of robust growth in the United States, Canada and the United
Kingdom, as well as a strong pick-up in growth in continental Europe.
Gold prices drifted sideways and lower as Asian demand continued to slow and
demand in the Middle East was affected by low oil prices. Initially buoyed on
concerns about a U.S.-led military strike against Iraq, crude oil fell to a nine
year low, as the globally warm winter, the return of Iraq as a producer and the
Asian economic crisis added to OPEC's supply glut problems.
Trading results in stock index markets were mixed, but unprofitable, despite a
strong first-quarter performance by the U.S. equity market as several
consecutive weekly gains were recorded with most market averages setting new
highs. Results in currency trading were also mixed, but profitable. In
particular, the Swiss franc weakened versus the U.S. dollar.
Agricultural commodity markets provided profitable trading results overall.
Live cattle and hog prices trended downward throughout the quarter. Cotton
prices moved mostly upward during the quarter, but prices dropped off sharply at
the end of March.
April 1, 1998 to June 30, 1998
As swings in the U.S. dollar and developments in Japan affected bond markets,
the Fund's interest rate trading during the quarter resulted in losses,
particularly in Eurodollar deposits. Early in the quarter, U.S. Treasury
trading was range-bound, as concern that the economy might be overheating was
balanced by the potential impact of the Asian recession. Additionally,
Australian bonds and bills saw a dramatic drop in prices in early June, as
dollar-bloc currencies remained under pressure versus the U.S. dollar due to the
Japanese/Asian crisis.
Metals and energy also resulted in losses. The depressed gold market weakened
further following news of a European Central Bank consensus that ten to fifteen
percent of reserves should be made up of gold bullion which was at the low end
of expectations. Despite production cuts initiated by OPEC at the end of March,
world oil supplies remained excessive and oil prices stood at relatively low
levels throughout the quarter.
14
<PAGE>
Results in currency trading were unprofitable, despite strong gains realized
from Japanese yen positions, which weakened during June to an eight-year low
versus the U.S. dollar. Trading results in stock index markets were
unprofitable, as the Asia-Pacific region's equity markets weakened across the
board. In particular, Hong Kong's Hang Seng index trended downward during most
of the quarter and traded at a three-year low.
Agricultural commodity trading produced profits. The U.S. soybean crop got off
to a good start which contributed to higher yield expectations and a more
burdensome supply outlook and soybean prices traded in a volatile pattern for
the second half of the quarter. Sugar futures maintained mostly a downtrend, as
no major buyers emerged to support the market. Similarly, coffee prices trended
downward, as good weather conditions in Central America and Mexico increased the
prospects of more output from these countries.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
15
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the General Partner
is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Effective May 11, 1998, Jo Ann Di Dario became a Vice President, Treasurer
and Chief Financial Officer of Merrill Lynch Investment Partners Inc. (AMLIP@).
Ms. Di Dario was born in 1946. Before joining MLIP, she was self-employed for
one year. From February 1996 to May 1997, she worked as a consultant for Global
Asset Management, an international mutual fund organizer and operator
headquartered in London, where she offered advice on restructuring the back
office operations. From May 1992 to January 1996, Ms. Di Dario served as Vice
President of Meridian Bank Corporation, a regional bank holding company. She
was responsible for managing the treasury operations of the bank holding company
and its wholly-owned subsidiary, Meridian Investment Company Inc. Ms. Di Dario
managed the domestic treasury operation of First Fidelity Bank, a regional bank,
from September 1991 to May 1992. From 1985 until December 1990, Ms. Di Dario
was Vice President, Secretary and Controller of Caxton Corporation, a commodity
pool operator and commodity trading advisor. Her background includes seven
years of public accounting experience. She graduated with high honors from
Stockton State College with a Bachelor of Science Degree in Accounting.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
There are no exhibits required to be filed as part of this report.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the first six months of
fiscal 1998.
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: August 11, 1998 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: August 11, 1998 By /s/ JO ANN DI DARIO
-------------------
Jo Ann Di Dario
Vice President, Chief Financial Officer
and Treasurer
17
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> JUN-30-1998 JUN-30-1997
<CASH> 0 0
<RECEIVABLES> 35,574,543 41,522,557
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 35,574,543 41,522,557
<SHORT-TERM> 0 0
<PAYABLES> 695,790 872,100
<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> 34,878,753 40,650,457
<TOTAL-LIABILITY-AND-EQUITY> 35,574,543 41,522,557
<TRADING-REVENUE> 498,696 3,323,043
<INTEREST-DIVIDENDS> 599,253 800,731
<COMMISSIONS> 1,345,775 1,921,663
<INVESTMENT-BANKING-REVENUES> (1,343,569) (50,118)
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (1,591,395) 2,151,993
<INCOME-PRE-EXTRAORDINARY> (1,591,395) 2,151,993
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,591,395) 2,151,993
<EPS-PRIMARY> (6.43) 7.47
<EPS-DILUTED> (6.43) 7.47
</TABLE>
