<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
--------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ____________
Commission File Number 0-18944
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)
212-236-9757
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE SECTOR STRATEGY FUND/SM/ II L.P.
------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------------------- ------------------
<S> <C> <C>
ASSETS
Accrued interest $ 120,076 $ 127,467
Equity in commodity futures trading accounts:
Cash and options premiums 27,458,526 28,313,407
Net unrealized profit on open contracts 802,323 671,259
Investments 11,010,484 12,352,605
Receivable from investments 202,813 57,819
--------------------- ------------------
TOTAL $ 39,594,222 $ 41,522,557
===================== ==================
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 717,141 $ 259,060
Brokerage commissions payable 206,947 212,278
Administrative fees payable 5,912 6,065
Profit Shares payable 239,782 394,697
--------------------- ------------------
Total liabilities $ 1,169,782 $ 872,100
===================== ==================
PARTNERS' CAPITAL:
General Partner:
(2145 and 2145 SECTOR II Units) 323,365 335,409
(3904 and 3905 SECTOR III Units) 621,671 620,882
Limited Partners:
(82618 and 86300 SECTOR II Units) 12,454,898 13,494,521
(157150 and 164781 SECTOR III Units) 25,024,506 26,199,645
--------------------- ------------------
Total partners' capital 38,424,440 40,650,457
--------------------- ------------------
TOTAL $ 39,594,222 $ 41,522,557
===================== ==================
NET ASSET VALUE PER UNIT:
SECTOR II UNITS
(Based on 84763 and 88445 Units outstanding) $ 150.75 $ 156.37
===================== ==================
SECTOR III UNITS
(Based on 161054 and 168686 Units outstanding) $ 159.24 $ 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
------------------------
For the three For the three
months ended months ended
March 31, March 31,
1998 1997
------------------- ----------------
REVENUES:
Trading profits (loss):
Realized $756,035 $2,717,934
Change in unrealized 131,064 (122,914)
------------------- ----------------
Total trading results 887,099 2,595,020
------------------- ----------------
Interest income 360,238 394,198
(Loss) income from investments (821,241) 481,842
------------------- ----------------
Total revenues 426,096 3,471,060
------------------- ----------------
EXPENSES:
Profit shares 242,877 312,858
Brokerage commissions 623,281 726,161
Administrative fees 17,808 20,747
------------------- ----------------
Total expenses 883,966 1,059,766
------------------- ----------------
NET (LOSS) INCOME $(457,870) $2,411,294
=================== ================
NET (LOSS) INCOME PER UNIT:
Weighted average number of units
outstanding 253,969 294,144
=================== ================
Weighted average net (loss) income
per Limited Partner
and General Partner Unit $(1.80) $8.20
=================== ================
See notes to financial statements.
3
<PAGE>
THE SECTOR STRATEGY FUND(SM) II L.P.
--------------------------------------
(a Delaware limited partnership)
--------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the three months ended March 31, 1998 and 1997
--------------------------------------------------
<TABLE>
<CAPTION>
Units Limited Partners
----- ----------------
SECTOR II SECTOR III SECTOR II SECTOR III
UNITS UNITS UNITS UNITS
----- ----- ----- -----
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1996 106,070 194,467 $14,904,769 $26,822,065
Redemptions (4,707) (11,840) (703,164) (1,762,045)
Net income - - 541,842 1,820,652
---------- ----------- ------------ ------------
PARTNERS' CAPITAL,
March 31, 1997 101,363 182,627 $14,743,447 $26,880,672
========== =========== ============ ============
PARTNERS' CAPITAL,
December 31, 1997 88,445 168,686 $13,494,521 $26,199,645
Redemptions (3,682) (7,632) (561,076) (1,206,912)
Net (loss) income - - (478,547) 31,773
---------- ----------- ------------ ------------
PARTNERS' CAPITAL,
March 31, 1998 84,763 161,054 $12,454,898 $25,024,506
========== =========== ============ ============
<CAPTION>
General Partner
---------------
SECTOR II SECTOR III Total
UNITS UNITS -----
----- -----
<S> <C> <C> <C>
PARTNERS' CAPITAL,
December 31, 1996 $307,633 $549,638 $42,584,105
Redemptions - - (2,465,209)
Net income 11,107 37,693 2,411,294
--------- --------- ------------
PARTNERS' CAPITAL,
March 31, 1997 $318,740 $587,331 $42,530,190
========= ========= ============
PARTNERS' CAPITAL,
December 31, 1997 $335,409 $620,882 $40,650,457
Redemptions - (159) (1,768,147)
Net (loss) income (12,044) 948 (457,870)
--------- --------- ------------
PARTNERS' CAPITAL,
March 31, 1998 $323,365 $621,671 $38,424,440
========= ========= ============
</TABLE>
See notes to financial statements.
4
<PAGE>
THE SECTOR STRATEGY FUND(SM)II L.P.
(A Delaware limited partnership)
--------------------------------
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the
opinion of management, the financial statements contain all adjustments
(consisting of only normal recurring adjustments) necessary to present
fairly the financial position of The SECTOR Strategy Fund(SM) II L.P. (the
"Partnership" or the "Fund") as of March 31, 1998 and the results of its
operations for the three months ended March 31, 1998 and 1997. However,
the operating results for the interim periods may not be indicative of the
results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with general accepted
accounting principles have been omitted. It is suggested that these
financial statements be read in conjunction with the financial statements
and notes thereto included in the Partnership's Annual Report on Form 10-K
filed with the Securities and Exchange Commission for the year ended
December 31, 1997 (the "Annual Report").
2. INVESTMENTS
As of March 31, 1998 and 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
------------ ------------
JWH LLC $ 8,081,444 $ 9,266,578
Millburn LLC 2,929,040 3,086,027
------------ ------------
Total $ 11,010,484 $ 12,352,605
============ ============
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 from
ended March 31, 1998 Revenue Commissions Fees Shares Investments
---------------- ------------------- -------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
SECTOR II Units
- ---------------
JWH LLC $(144,317) $44,815 $1,281 $- $(190,413)
================ =================== ==================== ================== ====================
SECTOR III Units
- ----------------
JWH LLC $(463,921) $143,891 $4,112 $- $(611,924)
Millburn LLC 48,992 65,913 1,883 100 (18,904)
---------------- ------------------- -------------------- ------------------ --------------------
Total $(414,929) $209,804 $5,995 $100 $(630,828)
================ =================== ==================== ================== ====================
Total All Units
- ---------------
JWH LLC $(608,238) $188,706 $5,393 $- $(802,337)
Millburn LLC 48,992 65,913 1,883 100 (18,904)
---------------- ------------------- -------------------- ------------------ --------------------
Total $(559,246) $254,619 $7,276 $100 $(821,241)
================ =================== ==================== ================== ====================
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
For the three months Total Brokerage Administrative Profit Income from
ended March 31, 1997 Revenue Commissions Fees Shares Investments
------------------- ------------------- -------------------- ------------------ --------------------
<S> <C> <C> <C> <C> <C>
SECTOR II Units
- ---------------
JWH LLC $85,170 $49,747 $1,420 $470 $33,533
=================== =================== ==================== ================== ====================
SECTOR III Units
- ----------------
JWH LLC $198,444 $115,127 $3,290 $ 1,283 $78,744
Millburn LLC 543,039 77,768 2,222 93,484 369,565
------------------- ------------------- -------------------- ------------------ --------------------
Total $741,483 $192,895 $5,512 $ 94,767 $448,309
=================== =================== ==================== ================== ====================
Total All Units
- ---------------
JWH LLC $283,614 $164,874 $4,710 $1,753 $112,277
Millburn LLC 543,039 77,768 2,222 93,484 369,565
------------------- ------------------- -------------------- ------------------ --------------------
Total $826,653 $242,642 $6,932 $95,237 $481,842
=================== =================== ==================== ================== ====================
</TABLE>
Condensed statements of financial condition as of March 31, 1998 and December
31, 1997 and statements of operations for the periods ended March 31, 1998
and 1997 are set forth as follows:
<TABLE>
<CAPTION>
1998 1997
---------------------------------- -----------------------------------
JWH Millburn JWH Millburn
LLC LLC LLC LLC
----------------- ---------------- ----------------- -----------------
<S> <C> <C> <C> <C>
Assets $54,294,178 $33,747,360 $62,481,438 $35,584,936
================= ================ ================= =================
Liabilities $431,357 $662,386 $1,122,533 $1,454,659
Members' Capital 53,862,821 33,084,974 61,358,905 34,130,277
----------------- ---------------- ----------------- -----------------
Total $54,294,178 $33,747,360 $62,481,438 $35,584,936
================= ================ ================= =================
Revenues ($4,026,600) $553,011 $2,281,696 $5,750,149
Expenses 1,342,197 813,068 1,487,835 1,975,225
----------------- ---------------- ----------------- -----------------
Net (Loss) Income ($5,368,797) ($260,057) $793,861 $3,774,924
================= ================ ================= =================
</TABLE>
6
<PAGE>
3. INCOME (LOSS) PER UNIT
The profit and loss of the Sector II and Sector III Units for the three
months ended March 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------- ------------------------------------------
Sector II Sector III Sector II Sector III
UNITS UNITS UNITS UNITS
----------------- ----------------- ------------------ -----------------
<S> <C> <C> <C> <C>
REVENUES:
Trading (loss) profits:
Realized $(242,380) $998,415 $1,034,967 $1,682,967
Change in unrealized 53,887 77,177 (321,397) 198,483
----------------- ----------------- ------------------ -----------------
Total trading results (188,493) 1,075,592 713,570 1,881,450
Interest income 145,798 214,440 155,409 238,789
(Loss) income from investments (190,413) (630,828) 33,533 448,309
----------------- ----------------- ------------------ -----------------
Total revenues (233,108) 659,204 902,512 2,568,548
----------------- ----------------- ------------------ -----------------
EXPENSES
Profit shares 517 242,360 48,113 264,745
Brokerage commissions 249,829 373,452 293,076 433,085
Administrative fees 7,138 10,670 8,374 12,373
----------------- ----------------- ------------------ -----------------
Total expenses 257,484 626,482 349,563 710,203
----------------- ----------------- ------------------ -----------------
NET (LOSS) INCOME $(490,592) $32,722 $552,949 $1,858,345
================= ================= ================== =================
NET (LOSS) INCOME PER UNIT:
Weighted average
number of units
outstanding 87,424 166,545 104,209 189,935
----------------- ----------------- ------------------ -----------------
Weighted average net
(loss) income per
Limited Partner and
General Partner Unit $(5.61) $0.20 $5.31 $9.78
================= ================= ================== =================
</TABLE>
7
<PAGE>
4. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's total trading results by reporting category for the respective
periods were as follows:
For the three For the three
months ended months ended
March 31, March 31,
1998 1997
-------------------- --------------------
Interest rates $274,309 $128,728
Stock indices (115,659) 253,573
Commodities 302,801 637,828
Currencies 71,635 1,036,782
Energy 272,307 32,797
Metals 81,706 505,312
-------------------- --------------------
$887,099 $2,595,020
==================== ====================
Fair Value
- ----------
The contract/notional values of the Partnership's open derivative instrument
positions as of March 31, 1998 and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- -------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Interest rates $120,213,302 $46,249,277 $111,822,582 $61,960,093
Stock indices 5,844,051 148,993 702,713 1,344,492
Commodities 8,826,872 11,279,467 6,118,437 10,527,025
Currencies 20,885,233 43,029,583 29,226,864 47,464,361
Energy 710,360 1,813,234 - 1,638,290
Metals 8,835,476 11,200,611 10,026,403 13,459,084
------------------- ------------------- ------------------ -------------------
$165,315,294 $113,721,165 $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 March 31, 1998
and December 31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------- ------------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C>
Exchange
traded $ 141,768,682 $ 77,300,848 $ 122,018,586 $ 86,758,401
Non-Exchange
traded 23,546,612 36,420,317 35,878,413 49,634,944
------------------- ------------------- ------------------- -------------------
$ 165,315,294 $ 113,721,165 $ 157,896,999 $ 136,393,345
=================== =================== =================== ===================
</TABLE>
8
<PAGE>
The average fair values, based on contract/notional values, of the Partnership's
derivative instrument positions which were open as of the end of each calendar
month during the three months ended March 31, 1998 and the year ended December
31, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
-------------------------------------------- -------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------- ------------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Interest rates $126,146,540 $26,020,781 $77,088,151 $56,479,505
Stock indices 3,971,822 3,475,759 2,167,668 3,574,752
Commodities 7,733,317 12,290,572 9,214,751 10,374,651
Currencies 26,789,277 43,631,393 29,245,884 41,682,837
Energy 525,877 1,675,373 480,943 1,090,424
Metals 8,485,203 12,013,394 11,335,877 11,258,160
------------------- ------------------- ------------------ -------------------
$173,652,036 $99,107,272 $129,533,274 $124,460,329
=================== =================== ================== ===================
</TABLE>
The gross unrealized profit and the net unrealized profit on the Partnership's
open derivative instrument positions as of March 31, 1998 and December 31, 1997
were as follows:
<TABLE>
<CAPTION>
1998 1997
--------------------------------------- --------------------------------------
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit Profit Profit
---------------- ---------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Exchange
traded $1,011,515 $562,426 $1,026,367 $604,825
Non-Exchange
traded 770,906 239,897 1,284,841 66,434
---------------- ---------------- ---------------- ----------------
$1,782,421 $802,323 $2,311,208 $671,259
================ ================ ================ ================
</TABLE>
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
MONTH-END NET ASSET VALUE PER SECTOR II UNIT
----------------------------------
Jan. Feb. Mar.
----------------------------------
1997 $150.05 $149.10 $148.60
----------------------------------
1998 $155.45 $151.98 $150.75
----------------------------------
MONTH-END NET ASSET VALUE PER SECTOR III UNIT
----------------------------------
Jan. Feb. Mar.
----------------------------------
1997 $146.95 $149.44 $150.41
----------------------------------
1998 $159.04 $156.52 $159.24
----------------------------------
9
<PAGE>
Performance Summary
January 1, 1997 to March 31, 1997
In currency markets, the U.S. dollar rallied and started 1997 on a strong note,
rising to a four-year high versus the Japanese yen and two-and-a-half year highs
versus the Deutsche mark and the Swiss franc. January 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.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the General Partner
is a party.
Item 2. Changes in Securities and Use of Proceeds
(a) None.
(b) None.
(c) None.
(d) None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
Mr. Michael A. Karmelin, Chief Financial Officer, Vice President and
Treasurer of Merrill Lynch Investment Partners Inc. ("MLIP"), has announced that
he will resign from MLIP effective April 15, 1998 to pursue other business
opportunities. MLIP expects to announce his successor in the near future.
The Fund will consolidate its trading accounts with those of certain other
MLIP sponsored multi-advisor funds effective June 1, 1998.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
There are no exhibits required to be filed as part of this report.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the first three
months of fiscal 1998.
11
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SECTOR STRATEGY FUND(SM) II L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 11, 1998 By /s/ JOHN R. FRAWLEY, JR.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer,
President and Director
Date: May 11, 1998 By /s/ SERGIO M. PAVONE
---------------------
Sergio M. Pavone
Vice President and Controller
(Chief Accounting Officer)
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1997
<PERIOD-START> JAN-01-1998 JAN-01-1997
<PERIOD-END> MAR-31-1998 MAR-31-1997
<CASH> 0 0
<RECEIVABLES> 39,594,222 43,631,864
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 39,594,222 43,631,864
<SHORT-TERM> 0 0
<PAYABLES> 1,169,782 1,101,675
<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> 38,424,440 42,530,190
<TOTAL-LIABILITY-AND-EQUITY> 39,594,222 43,631,865
<TRADING-REVENUE> 887,099 2,595,020
<INTEREST-DIVIDENDS> 360,238 394,198
<COMMISSIONS> 883,966 1,059,766
<INVESTMENT-BANKING-REVENUES> (821,241) 481,842
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> (457,870) 2,411,294
<INCOME-PRE-EXTRAORDINARY> (457,870) 2,411,294
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (457,870) 2,411,294
<EPS-PRIMARY> (1.80) 8.20
<EPS-DILUTED> (1.80) 8.20
</TABLE>
