<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(x) Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended: December 31, 1997
or
( ) Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of 1934
Commission file number: 0-21112
THE SECTOR STRATEGY FUND/SM/ V L.P.
---------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 13-3674792
------------------------------- --------------------
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
C/O MERRILL LYNCH INVESTMENT PARTNERS INC.
MERRILL LYNCH WORLD HEADQUARTERS
WORLD FINANCIAL CENTER
SOUTH TOWER, 6TH FLOOR, NEW YORK, NY 10080-6106
------------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (212) 236-5662
--------------
<TABLE>
<S> <C>
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Limited Partnership Units
---------------------------
(Title of Class)
</TABLE>
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
----- ------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
[X]
Aggregate market value of the voting and non-voting common stock held by non-
affiliates of the registrant: the registrant is a limited partnership; as of
February 1, 1998, limited partnership units with an aggregate value of
$11,489,974 were outstanding and held by non-affiliates:
DOCUMENTS INCORPORATED BY REFERENCE
The registrant's "1997 Annual Report and Independent Auditors' Report," the
annual report to security holders for the fiscal year ended December 31, 1997,
is incorporated by reference into Part II, Item 8, and Part IV hereof and filed
as an Exhibit herewith.
<PAGE>
THE SECTOR STRATEGY FUND V L.P.
ANNUAL REPORT FOR 1997 ON FORM 10-K
Table of Contents
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<TABLE>
<CAPTION>
PART I
------
PAGE
----
<S> <C> <C>
Item 1. Business............................................................................... 1
Item 2. Properties............................................................................. 7
Item 3. Legal Proceedings...................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders.................................... 8
PART II
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Item 5. Market for Registrant's Common Equity and Related Stockholder Matters................. 8
Item 6. Selected Financial Data............................................................... 9
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations. 12
Item 7A. Quantitative and Qualitative Disclosures About Market Risk............................ 15
Item 8. Financial Statements and Supplementary Data........................................... 16
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.. 16
PART III
--------
Item 10. Directors and Executive Officers of the Registrant.................................... 16
Item 11. Executive Compensation................................................................ 18
Item 12. Security Ownership of Certain Beneficial Owners and Management........................ 19
Item 13. Certain Relationships and Related Transactions........................................ 19
PART IV
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Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K....................... 20
</TABLE>
-ii-
<PAGE>
PART I
ITEM 1: BUSINESS
--------
(a) General Development of Business:
-------------------------------
The SECTOR Strategy Fund V L.P. (the "Partnership" or the "Fund") was
organized under the Delaware Revised Uniform Limited Partnership Act on July 16,
1992 and began trading operations on January 4, 1993. The Fund made only the
initial offering of its units of limited partnership interest ("Units"); Units
may be redeemed as of the end of each calendar month. The Partnership engages
in the speculative trading of a portfolio of futures and forward contracts and
related options in the currencies, interest rates, stock index, metals,
agricultural and energy sectors of the world commodity markets. The Fund's
objective is achieving substantial capital appreciation even while assuring
investors of at least a predetermined minimum Net Asset Value per Unit as of the
Principal Assurance Date.
Merrill Lynch Investment Partners Inc. (the "General Partner" or
"MLIP") acts as the general partner of the Partnership and selects and allocates
the Fund's assets among professional advisors ("Trading Advisors" or
"Advisors"), each unaffiliated with MLIP and each of which trades independently
of the others. MLIP also determines what percentage of the Fund's assets to
allocate to trading and what percentage to hold in reserve. Merrill Lynch
Futures Inc. (the "Commodity Broker" or "MLF") is the Partnership's commodity
broker. The General Partner is a wholly-owned subsidiary of Merrill Lynch
Group, Inc., which, in turn, is a wholly-owned subsidiary of Merrill Lynch &
Co., Inc. ("ML&Co."). The Commodity Broker is an indirect wholly-owned
subsidiary of ML&Co. (ML&Co. and its affiliates are herein sometimes referred
to as "Merrill Lynch.")
In addition to its trading accounts, the Partnership maintains a cash
account. From time to time, the General Partner allocates and reallocates
Partnership assets among its trading and cash accounts in an attempt to increase
profit potential while limiting the downside risks associated with futures and
forward trading (in order to prevent ML&Co. from incurring any obligations under
its guarantee of a minimum Net Asset Value per Unit, as described below).
Initially, the General Partner allocated approximately 30% of the Partnership's
assets to cash and approximately 70% to the trading accounts. As of December
31, 1997, that ratio was approximately 10% to cash and 90% to trading.
The total initial capitalization of the Partnership as of January 4,
1993 was $137,500,000. Through December 31, 1997, Units with an aggregate Net
Asset Value of $132,363,314 have been redeemed, the Partnership's capitalization
is $12,210,714, and the Net Asset Value of a Unit sold as of January 4, 1993 for
$100 was $132.21.
The Fund is a "principal protected" commodity pool. ML&Co. provides
the guarantee described below under Item 1(c), "Narrative Description of
Business -- ML&Co.'s 'Principal Protection' Undertaking to the Fund" -- that the
Net Asset Value per Unit will equal at least $105.77 (the initial subscription
price as of January 4, 1993) as of December 31, 1999 (the "Principal Assurance
Date"). Originally the Fund's Principal Assurance Date was set at
approximately five years after trading commenced. Effective January 1, 1998
the Fund restarted its trading program for a new Time Horizon of two years'
duration. This guarantee does not prevent substantial investor losses, but
rather serves only as a form of "stop loss," limiting the maximum loss which
investors who retain their Units until the Principal Assurance Date can incur.
In order to protect ML&Co. from any liability under its guarantee at such time,
if any, as the Net Asset Value per Unit were to decline to 110% or less of the
present value of $100 discounted back from the Principal Assurance Date, MLIP
would terminate trading altogether in order to ensure that ML&Co. incurred no
financial obligation to the Fund under ML&Co.'s guarantee of the minimum Net
Asset Value per Unit.
Through December 31, 1997, the highest month-end Net Asset Value per
Unit was $132.21 (December, 1997) and the lowest $98.60 (January, 1993).
(b) Financial Information about Industry Segments:
---------------------------------------------
The Partnership's business constitutes only one segment for financial
reporting purposes, i.e., a speculative "commodity pool."
-1-
<PAGE>
(c) Narrative Description of Business:
---------------------------------
GENERAL
The Fund trades in futures, options on futures and forward contracts
in major sectors of the world economy, with the objective of achieving capital
appreciation over time, while assuring investors of at least a predetermined
minimum Net Asset Value per Unit as of the Principal Assurance Date.
The General Partner is the Partnership's trading manager, with
responsibility for selecting Advisors to manage the Partnership's assets,
allocating and reallocating assets among the Advisors and determining the
percentage of the Partnership's assets committed to trading from time to time.
Although considered as a whole, the Partnership trades in a
diversified range of international markets, certain of the Trading Advisors,
considered individually, concentrate primarily on trading in a limited portfolio
of markets. The different "sectors" included in the Partnership's portfolio,
and the extent to which the portfolios traded by two or more Trading Advisors
may overlap, varies substantially over time.
The Fund accesses certain of the Trading Advisors not by opening
individual managed accounts with them, but rather through investing in private
funds sponsored by MLIP through which the trading accounts of different MLIP-
sponsored funds managed by the same Advisor and pursuant to the same strategy
are consolidated.
MLIP may from time to time direct certain individual Advisors to
manage their Fund accounts as if they were managing up to 50% more equity than
the actual capital allocated to them. This additional leverage is subject to
the condition that the Fund as a whole will not trade as if it had in excess of
20% more equity than actual capital.
One of the objectives of the Fund is to provide diversification for a
limited portion of the risk segment of the Limited Partners' portfolios.
Commodity pool performance has historically often demonstrated a low degree of
performance correlation with traditional stock and bond holdings. Since it
began trading, the Fund's returns have, in fact, frequently been significantly
non-correlated (not, however, negatively correlated) with the United States
stock and bond markets.
ML&CO.'S "PRINCIPAL PROTECTION" UNDERTAKING TO THE FUND
ML&Co., the parent company of the Merrill Lynch organization, which
includes the General Partner and the Commodity Broker, has agreed to contribute
sufficient capital to the Partnership so that it will have adequate funds, after
adjustment for all liabilities to third parties, that the Net Asset Value per
Unit will be no less than $105.77 as of the second Principal Assurance Date
(December 31, 1999). This guarantee, which is effective only as of the
Principal Assurance Date, is a guarantee only of the return of subscribers'
initial investment, and not on a present value basis, not of profit. This
guarantee is a general, unsecured obligation of ML&Co.
OPERATION OF THE PARTNERSHIP AFTER PRINCIPAL ASSURANCE DATE
MLIP may determine to dissolve the Partnership as of the Principal
Assurance Date, to extend the ML&Co. guarantee for a certain period of time
(resetting the minimum Net Asset Value per Unit guaranteed by ML&Co.) or to
continue to operate the Fund without a "principal protection" feature. All
investors will be given notice by no later than November 15, 1999 as to what the
operation of the Fund (if any) will be after the Principal Assurance Date.
USE OF PROCEEDS AND INTEREST INCOME
General. The Fund's assets are not used to purchase or acquire any
-------
asset but rather held as security for and to pay the Fund's trading losses as
well as its expenses and redemptions. The primary use of the Fund's capital is
to permit the Advisors to trade on a speculative basis in a wide range of
different futures, forwards and options on
-2-
<PAGE>
futures markets, while allocating to the Partnership's cash account such amounts
as MLIP deems appropriate in order to protect ML&Co. from any liability under
its guarantee. While being used for this purpose, the Fund's assets are also
generally available to earn interest, as more fully described below under "--
Available Assets."
Market Sectors. The Partnership trades in a diversified group of
--------------
markets under the direction of multiple independent Advisors. These Advisors
can, and do, from time to time materially alter the allocation of their overall
trading commitments among different market sectors. Except in the case of
certain trading programs which are purposefully limited in the markets which
they trade, there is essentially no restriction on the commodity interests which
may be traded by any Advisor or the rapidity with which an Advisor may alter its
market sector allocations.
The Fund's financial statements contain information relating to the
market sectors traded by the Fund. There can, however, be no assurance as to
which markets may be included in the Fund's portfolio or as to in which market
sectors the Fund's trading may be concentrated at any one time or over time.
Market Types. The Fund trades on a variety of United States and
------------
foreign futures exchanges. Applicable exchange rules differ significantly among
different countries and exchanges. Substantially all of the Fund's off-exchange
trading takes place in the highly liquid, institutionally-based currency forward
markets. The forward markets are generally unregulated, and in its forward
trading the Fund does not deposit margin with respect to its positions. The
Partnership's forward currency trading is executed exclusively through the
Foreign Exchange Service Desk (the "F/X Desk") operated by MLIP and certain of
its affiliates, with MLF as the "back-to-back" intermediary to the ultimate
counterparties, which include Merrill Lynch International Bank ("MLIB").
As in the case of its market sector allocations, the Fund's
commitments to different types of markets -- U.S. and non-U.S., regulated and
unregulated -- differ substantially from time to time as well as over time. The
Fund has no policy restricting its relative commitments to any of these
different types of markets.
The Fund's financial statements contain information relating to the
types of markets traded by the Fund. There can, however, be no assurance as to
in which markets the Fund may trade or the Fund's trading may be concentrated at
any one time or over time.
Custody of Assets. All of the Fund's assets are currently held in
-----------------
customer accounts at Merrill Lynch.
Available Assets. The Fund earns interest, as described below, on its
----------------
"Available Assets," which can be generally described as the cash actually held
by the Fund. Available Assets are held primarily in U.S. dollars, and to a
lesser extent in foreign currencies, and are comprised of the following: (a)
the Fund's cash balance in the offset accounts (as described below) -- which
includes "open trade equity" (unrealized gains and losses on open positions) on
United States futures contracts, which is paid into or out of the Fund's account
on a daily basis; (b) the Fund's cash balance in foreign currencies derived from
its trading in non-U.S. dollar denominated futures and options contracts, which
includes open trade equity on those exchanges which settle gains and losses on
open positions in such contracts prior to the closing out of such positions.
Available Assets do not include, and the Fund does not earn interest on, the
Fund's gains or losses on its open forward, commodity option and certain foreign
futures positions since such gains or losses are not collected or paid until
such positions are closed out.
The Partnership's Available Assets may be greater than, less than or
equal to the Fund's Net Asset Value (on which the redemption value of the Units
is based) primarily because Net Asset Value reflects all gains and losses on
open positions as well as accrued but unpaid expenses.
The interest income arrangements for the Partnership's U.S. dollar
Available Assets differ from those applicable to its non-U.S. dollar Available
Assets. Interest income, once accrued by the Fund, is subject to the risk of
trading losses.
Interest Earned on the Fund's U.S. Dollar Available Assets. The
----------------------------------------------------------
Fund's U.S. dollar Available Assets are held in cash in offset accounts and in
short-term Treasury bills purchased from dealers unaffiliated with Merrill
-3-
<PAGE>
Lynch. Offset accounts are non-interest bearing demand deposit accounts
maintained with banks unaffiliated with Merrill Lynch. An integral feature of
the offset arrangements is that the participating banks specifically acknowledge
that the offset accounts are MLF customer accounts, not subject to any Merrill
Lynch liability.
MLF credits the Partnership, as of the end of each month, with
interest at the effective daily 91-day Treasury bill rate on the average daily
U.S. dollar Available Assets held in the offset accounts during such month. The
Fund receives all the interest paid on the short-term Treasury bills in which it
invests. The Fund receives all interest paid on the short-term Treasury bills
in which it invests.
The use of the offset account arrangements for the Partnership's U.S.
dollar Available Assets may be discontinued by Merrill Lynch whether or not
Merrill Lynch otherwise continues to maintain its offset arrangements. The
offset arrangements are dependent on the banks' continued willingness to make
overnight credits available to Merrill Lynch, which, in turn, is dependent on
the credit standing of ML&Co. If Merrill Lynch were to determine that the
offset arrangements had ceased to be practicable (either because ML&Co. credit
lines at participating banks were exhausted or for any other reason), Merrill
Lynch would thereafter attempt to invest all of the Fund's U.S. dollar Available
Assets to the maximum practicable extent in short-term Treasury bills. All
interest earned on the U.S. dollar Available Assets so invested would be paid to
the Fund, but MLIP would expect the amount of such interest to be less than that
available to the Fund under the offset account arrangements. The remaining U.S.
dollar Available Assets of the Fund would be kept in cash to meet variation
margin payments and pay expenses, but would not earn interest for the Fund.
The banks at which the offset accounts are maintained make available
to Merrill Lynch interest-free overnight credits, loans or overdrafts in the
amount of the Fund's U.S. dollar Available Assets held in the offset accounts,
charging Merrill Lynch a small fee for this service. The economic benefits
derived by Merrill Lynch -- net of the interest credits paid to the Fund and the
fee paid to the offset banks -- from the offset accounts have not exceeded 3/4
of 1% per annum of the Fund's average daily U.S. dollar Available Assets held in
the offset accounts. These revenues to Merrill Lynch are in addition to the
Brokerage Commissions and Administrative Fees paid by the Fund to MLF and MLIP,
respectively.
Interest Paid by Merrill Lynch on the Fund's Non-U.S. Dollar Available
----------------------------------------------------------------------
Assets. Under the single currency margining system implemented for the
- ------
Partnership, the Partnership itself does not deposit foreign currencies to
margin trading in non-U.S. dollar denominated futures contracts and options. MLF
provides the necessary margin, permitting the Fund to retain the monies which
would otherwise be required for such margin as part of the Fund's U.S. dollar
Available Assets. The Fund does not earn interest on foreign margin deposits
provided by MLF. The Fund does, however, earn interest on its non-U.S. dollar
Available Assets. Specifically, the Fund is credited by Merrill Lynch with
interest at the local short-term rate on realized and unrealized gains on non-
U.S. dollar denominated positions for such gains actually held in cash by the
Fund. Merrill Lynch charges the Fund Merrill Lynch's cost of financing realized
and unrealized losses on such positions.
In order to avoid the expense of daily currency conversions, the Fund
holds foreign currency gains and finances foreign currency losses on an interim
basis until converted into U.S. dollars and either paid into or out of the
Fund's U.S. dollar Available Assets. Foreign currency gains or losses on open
positions are not converted into U.S. dollars until the positions are closed.
Assets of the Fund while held in foreign currencies are subject to exchange rate
risk.
____________________
The General Partner has determined that there may have been a
miscalculation in the interest credited to the Fund for a period prior to
November 1996. Accordingly, Merrill Lynch has credited the Fund's investors
(directly, not by crediting the fund itself.) For current Merrill Lynch
clients, this credit, which includes compounded interest, appears on the
December 1997 account statements. The total amount of the adjustment is
approximately $1,464,000.
-4-
<PAGE>
CHARGES
The following table summarizes the charges incurred by the Fund during
1995, 1996, and 1997.
<TABLE>
<CAPTION>
1995 1996 1997
---------- -------- -------
% OF AVERAGE % OF % OF
DOLLAR MONTH-END DOLLAR AVERAGE DOLLAR AVERAGE
COST AMOUNT NET ASSETS AMOUNT MONTH- AMOUNT MONTH-END
- ------- ---------- ---------- END NET -------- NET ASSETS
ASSETS
--------
<S> <C> <C> <C> <C> <C> <C>
Brokerage $2,378,476 7.71% $1,198,690 6.77% $348,042 2.69%
Commissions
Administrative -- -- 30,735 0.17 9,839 .08
Fees
Profit Shares 524,877 1.74 50,339 0.28 9,118 .07
---------- ---- ---------- ---- -------- ----
Total $2,903,353 9.65% $1,279,764 7.22% $366,999 2.84%
========== ==== ========== ==== ======== ====
</TABLE>
The Fund reimbursed MLIP for a total of $1,000,000 of organizational and
offering costs over the first 24 months of operations.
____________________
The foregoing table does not reflect the bid-ask spreads paid by the
Fund on its forward trading, or the benefits which may be derived by Merrill
Lynch from the deposit of certain of the Fund's U.S. dollar Available Assets in
offset accounts. See Item 1(c), "Narrative Description of Business -- Use of
Proceeds and Interest Income."
The Fund's average month-end Net Assets during 1995, 1996 and 1997
equaled $30,089,340, $17,712,482 and $12,922,688 respectively.
During 1995, 1996, and 1997, the Fund earned $1,600,013, $782,522 and
$292,197 in interest income, or approximately 5.32%, 4.42% and 2.26% of the
Fund's average month-end Net Assets.
As of January 1, 1996, the 10% per annum Brokerage Commissions paid by
the Fund to MLF were recharacterized as 9.75% per annum Brokerage Commissions
and a 0.25% per annum Administrative Fee paid by the Fund to MLIP. This
recharacterization had no economic effect on the Fund.
As of February 1, 1997, the 9.75% per annum Brokerage Commissions were
reduced to 8.75% per annum (0.7291% of the Fund's month-end assets).
The variations in charges is primarily due to placing assets in Trading LLCs
(See Item 7)
______________________________
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<PAGE>
DESCRIPTION OF CURRENT CHARGES
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
MLF Brokerage Commissions A flat-rate monthly commission of 0.8125 of 1% (a 9.75%
annual rate) of the Fund's month-end assets committed to
trading. As of December 31, 1997 approximately 100% of
the Fund's assets were allocated to trading.
During 1995, 1996, and 1997, the round-turn (each
purchase and sale or sale and purchase of a single futures
contract) equivalent rate of the Fund's flat-rate Brokerage
Commissions was approximately $21, $55 and $136,
respectively.
As of February 1, 1997, the Fund's Brokerage
Commissions were reduced to 8.75% per annum, or
0.7291% of the Fund's assets committed to trading as of
the end of each month.
MLF Use of Fund assets Merrill Lynch may derive an economic benefit from the
deposit of certain of the Fund's U.S. dollar Available
Assets in offset accounts; such benefit to date has not
exceeded 3/4 of 1% of such average daily U.S. dollar
Available Assets.
MLIP Administrative Fees The Fund pays MLIP a monthly Administrative Fee equal
to 0.02083 of 1% of the Fund's month-end assets
committed to trading (0.25% annually). MLIP pays all of
the Fund's routine administrative costs.
MLIB Bid-ask spreads Under MLIP's F/X Desk arrangements, MLIB receives
bid-ask spreads on the forward trades it executes with the
Fund.
Other Bid-ask spreads The counterparties other than MLIB with which the F/X
Counterparties Desk deals also each receive bid-ask spreads on the
forward trades executed with the Fund.
MLIP F/X Desk service fees Under the F/X Desk arrangements, MLIP or another
Merrill Lynch entity receives a service fee equal, at current
exchange rates, to approximately $5.00 to $12.50 on each
purchase or sale of each futures contract-equivalent
forward contract executed with counterparties other than
MLIB.
MLIB EFP differentials MLIB or an affiliate receives a differential spread for
exchanging the Fund's spot currency positions (which are
acquired through the F/X Desk, as described above) for
equivalent futures positions.
</TABLE>
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<PAGE>
DESCRIPTION OF CURRENT CHARGES (CONT'D)
<TABLE>
<CAPTION>
RECIPIENT NATURE OF PAYMENT AMOUNT OF PAYMENT
- --------- ----------------- -----------------
<S> <C> <C>
Trading Advisors Profit Shares Prior to January 1, 1997, all Advisors received quarterly
Profit Shares ranging from 15% to 25% (depending on the
Trading Advisor) of any New Trading Profit achieved by
their Fund account. As of January 1, 1997, a number of
Advisors agreed to receive only annual Profit Shares.
Profit Shares are also paid upon redemption of Units. New
Trading Profit is calculated separately in respect of each
Advisor, irrespective of the overall performance of the
Fund. The Fund may pay substantial Profit Shares during
periods when it is incurring significant overall losses.
MLF; Extraordinary expenses Actual costs incurred; none paid to date, and expected to
Others be negligible.
</TABLE>
REGULATION
The General Partner, the Trading Advisors and the Commodity Broker are
each subject to regulation by the Commodity Futures Trading Commission (the
"CFTC") and the National Futures Association. Other than in respect of its
periodic reporting requirements under the Securities Exchange Act of 1934, the
Partnership itself is generally not subject to regulation by the Securities and
Exchange Commission. However, MLIP itself is registered as an "investment
adviser" under the Investment Advisers Act of 1940.
(i) through (xii) -- not applicable.
(xiii) The Partnership has no employees.
(d) Financial Information about Foreign and Domestic Operations and Export
----------------------------------------------------------------------
Sales:
- -----
The Partnership does not engage in material operations in foreign
countries, nor is a material portion of the Partnership's revenues derived from
customers in foreign countries. The Partnership does, however, trade, from the
United States, on a number of foreign commodity exchanges.
ITEM 2: PROPERTIES
----------
The Partnership does not use any physical properties in the conduct of its
business.
The Partnership's only place of business is the place of business of the
General Partner (see Item 10 herein). The General Partner performs all
administrative services for the Partnership from the General Partner's offices.
ITEM 3: LEGAL PROCEEDINGS
-----------------
ML&Co. -- the sole stockholder of Merrill Lynch Group, Inc. (which is
the sole stockholder of MLIP) -- as well as certain of its subsidiaries and
affiliates have been named as defendants in civil actions, arbitration
proceedings and claims arising out of their respective business activities.
Although the ultimate outcome of these actions cannot be ascertained at this
time and the results of legal proceedings cannot be predicted with certainty, it
is the opinion of management that the result of these matters will not be
materially adverse to the business operations of financial condition of MLIP or
the Fund.
-7-
<PAGE>
MLIP itself has never been the subject of any material litigation.
On June 24, 1997, the CFTC accepted an Offer of Settlement from MLF
and others, in a matter captioned "In the Matter of Mitsubishi Corporation and
Merrill Lynch Futures Inc., et al.," CFTC Docket No. 97-10, pursuant to which
MLF, without admitting or denying the allegations against it, consented to a
finding by the Commission that MLF had violated Section 4c(a)(A) of the
Commodity Exchange Act, relating to wash sales (the CFTC alleged that the
customer entered nearly simultaneous orders without the intent to engage in a
bona fide trading transaction), and CFTC Regulation 1.37(a), relating to
recordkeeping requirements. MLF agreed to cease and desist from violating
Section 4c(a)(A) of the Act and Regulation 1.37(a), and to pay a civil monetary
penalty of $175,000.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
The Partnership has never submitted any matters to a vote of its Limited
Partners.
PART II
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
---------------------------------------------------------------------
(a) Market Information:
------------------
There is no public trading market for the Units, nor will one develop.
Rather, Limited Partners may redeem Units as of the end of each month at Net
Asset Value, subject to certain early redemption charges. Units redeemed prior
to the Principal Assurance Date are not entitled to any benefits of the ML&Co.
guarantee.
(b) Holders:
-------
As of December 31, 1997, there were 669 holders of Units, including
the General Partner.
(c) Dividends:
---------
The Partnership has made no distributions since trading commenced, nor
does the General Partner presently intend to make any distributions in the
future.
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<PAGE>
ITEM 6: SELECTED FINANCIAL DATA
-----------------------
The following selected financial data has been derived from the audited
financial statements of the Partnership.
<TABLE>
<CAPTION>
JANUARY 4, 1993
YEAR ENDED YEAR ENDED YEAR ENDED YEAR ENDED (COMMENCEMENT
OF
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, TRADING) TO
DECEMBER 31,
INCOME STATEMENT DATA 1997 1996 1995 1994 1993
------------- ------------- ------------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
Revenues:
Trading Profits (Loss)
Realized Gain (Loss) 368,946 $ 1,264,013 $ 5,460,869 $(1,405,309) $ 13,366,846
Change in Unrealized (Loss) Gain (39,093) (1,945,383) (152,635) (410,982) 2,565,151
----------- ----------- ----------- ----------- ------------
Total Trading Results 329,853 (681,370) 5,308,234 (1,816,291) 15,931,997
Interest Income 292,197 782,522 1,600,013 2,197,769 3,267,738
----------- ----------- ----------- ----------- ------------
Total Revenues 622,050 101,152 6,908,247 381,478 19,199,735
----------- ----------- ----------- ----------- ------------
Expenses:
Brokerage Commissions 348,042 1,198,690 2,378,476 4,458,470 9,665,514
Administrative Fees 9,839 30,735 - - -
Profit Shares 9,118 50,339 524,877 249,343 2,297,599
----------- ----------- ----------- ----------- ------------
Total Expenses 366,999 1,279,764 2,903,353 4,707,813 11,963,113
----------- ----------- ----------- ----------- ------------
Income from Investment 1,114,196 708,715 - - -
----------- ----------- ----------- ----------- ------------
Net (Loss) Income $ 1,369,247 $ (469,897) $ 4,004,894 $(4,326,335) $ 7,236,622
=========== =========== =========== =========== ============
DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31, DECEMBER 31,
BALANCE SHEET DATA* 1997 1996 1995 1994 1993
- ------------------- ----------- ----------- ----------- ----------- ------------
Fund Net Asset Value $12,210,714 $14,034,296 $26,056,054 $38,533,142 $126,742,834
Net Asset Value per Unit $132.21 $119.09 $115.50 $101.12 $104.99
</TABLE>
The variations in income statement line items is primarily due to
placing assets in Trading LLCs (see Item 7).
-9-
<PAGE>
Balance Sheet Data is based on redemption values, which differ immaterially from
Net Asset Values as determined under Generally Accepted Accounting Principles
("GAAP") due to the treatment of organizational and initial offering cost
reimbursements.
<TABLE>
<CAPTION>
MONTH-END NET ASSET VALUE PER UNIT*
- ------------------------------------------------------------------------------------------------------------------
JAN. FEB. MAR. APR. MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC.
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1993 $ 98.60 $100.74 $100.63 $101.04 $100.82 $102.88 $104.33 $106.18 $106.24 $104.68 $103.99 $104.99
- ------------------------------------------------------------------------------------------------------------------
1994 $101.89 $100.01 $101.05 $ 99.97 $102.92 $104.78 $104.26 $101.53 $101.84 $101.01 $102.90 $101.12
- ------------------------------------------------------------------------------------------------------------------
1995 $ 99.58 $103.91 $107.84 $109.57 $113.00 $110.57 $106.99 $105.71 $104.67 $104.05 $107.30 $115.50
- ------------------------------------------------------------------------------------------------------------------
1996 $115.53 $106.85 $105.04 $107.19 $104.38 $103.82 $104.12 $105.68 $109.65 $115.91 $122.45 $119.09
- ------------------------------------------------------------------------------------------------------------------
1997 $122.53 $124.41 $124.03 $120.91 $119.51 $120.99 $132.18 $126.72 $129.82 $128.17 $129.08 $132.21
- ------------------------------------------------------------------------------------------------------------------
</TABLE>
-10-
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
DECEMBER 31, 1997
Type of Pool: Selected-Advisor/Publicly-Offered/"Principal Protected"/(1)/
Inception of Trading: January 4, 1993
Aggregate Subscriptions: $137,500,000
Current Capitalization: $12,210,714
Worst Monthly Drawdown/(2)/: (7.51)% (2/96)
Worst Peak-to-Valley Drawdown/(3)/: (10.14)% (2/96-6/96 )
_____________
Net Asset Value per Unit, December 31, 1997: $132.21
<TABLE>
<CAPTION>
MONTHLY RATES OF RETURN/(4)/
MONTH 1997 1996 1995 1994 1993
- -------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January 2.89% 0.03% (1.52)% (2.95)% (1.40)%
February 1.53 (7.51) 4.35 (1.84) 2.17
March (0.31) (1.70) 3.79 1.04 (0.12)
April (2.52) 2.05 1.61 (1.07) 0.41
May (1.16) (2.62) 3.12 2.95 (0.21)
June 1.24 (0.54) (2.14) 1.80 2.04
July 9.25 0.28 (3.24) (0.49) 1.41
August (4.13) 1.50 (1.20) (2.62) 1.77
September 2.45 3.76 (0.99) 0.31 0.06
October (1.27) 5.71 (0.59) (0.82) (1.47)
November 0.71 5.64 3.12 1.87 (0.66)
December 2.42 (2.74) 7.64 (1.73) 0.96
- -------------------------------------------------------------
Compound Annual
Rate of Return 11.00% 3.11% 14.22% (3.68)% 4.99%
- -------------------------------------------------------------
</TABLE>
(1) Pursuant to applicable CFTC regulations, a "Multi-Advisor" fund
is defined as one that allocates no more than 25% of its trading assets (i.e.,
assets committed to trading) to any single manager. As the Fund may allocate
more than 25% of its trading assets to one or more Advisors, it is referred to
as a "Selected-Advisor" fund. Applicable CFTC regulations define a "Principal
Protected" fund as one which is designed to limit the loss of participants'
initial investment. MLIP's trading leverage policies and the ML&Co. guarantee
limit Limited Partners' losses on their Units to the time value of their
investments over the Time Horizon from the beginning of trading to the Principal
Assurance Date.
(2) Worst Monthly Drawdown represents the largest negative Monthly
Rate of Return experienced by the Fund; a drawdown is measured on the basis of
month-end Net Asset Value only, and does not reflect intra-month figures.
(3) Worst Peak-to-Valley Drawdown represents the greatest percentage
decline from a month-end cumulative Monthly Rate of Return without such
cumulative Monthly Rate of Return being equaled or exceeded as of a subsequent
month-end. For example, if the Monthly Rate of Return was (1)% in each of
January and February, 1% in March and (2)% in April, the Peak-to-Valley Drawdown
would still be continuing at the end of April in the amount of approximately
(3)%, whereas if the Monthly Rate of Return had been approximately 3% in March,
the Peak-to-Valley Drawdown would have ended as of the end of February at
approximately the (2)% level.
(4) Monthly Rate of Return is the net performance of the Fund during
the month of determination (including interest income and after all expenses
have been accrued or paid) divided by the total equity of the Fund as of the
beginning of such month.
-11-
<PAGE>
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
---------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
OPERATIONAL OVERVIEW; ADVISOR SELECTIONS
The Fund's results of operations depend on MLIP's ability to select
Advisors and the Advisors' ability to trade profitably. MLIP's selection
procedures, as well as the Advisors' trading methods, are confidential, so that
substantially the only available information relevant to the Fund's results of
operations is its actual performance record to date. However, because of the
speculative nature of its trading, the Fund's past performance is not
necessarily indicative of its future results.
MLIP's decision to terminate or reallocate assets among Trading Advisors is
based on a combination of numerous factors. Advisors are, in general,
terminated primarily for unsatisfactory performance, but other factors -- for
example, a change in MLIP's or an Advisor's market outlook, apparent deviation
from announced risk control policies, excessive turnover of positions, changes
in principals, commitment of resources to other business activities, etc. -- may
also have a role in the termination or reallocation decision. The market
judgment and experience of MLIP's principals is an important factor in its
allocation decisions.
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally makes a medium- to long-term commitment to all
Advisors selected. There can be no assurance as to the frequency or number of
Advisor changes that may take place in the future, or as to how long any Advisor
will manage assets for the Partnership.
RESULTS OF OPERATIONS
General. MLIP believes that multi-advisor futures funds should be regarded
-------
as medium- to long-term (i.e., three to five year) investments, but it is
difficult to identify trends in the Fund's operations and virtually impossible
to make any predictions regarding future results based on the results to date.
An investment in the Fund may be less successful over a longer than over a
shorter period.
Markets with sustained price trends 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 price trends will occur and (iii)
different Advisors are affected differently by trending markets as well as by
particular types of trends.
MLIP attempts to control credit risk in the Fund's futures, forward and
options trading (the Fund does not trade derivatives other than futures and
forward contracts and options thereon) by trading only through MLF. MLF acts
solely as a broker or counterparty to the Fund's trades; it does not advise with
respect to, or direct, any such trading.
MLIP attempts to control the market risk inherent in the Fund's trading by
MLIP's multi-advisor strategy and Trading Advisor selections. MLIP reviews the
positions acquired by the Advisors on a daily basis in an effort to determine
whether the overall positions of the Fund may have become what MLIP analyzes as
being excessively concentrated in a limited number of markets -- in which case
MLIP may, as of the next month-end or quarter-end, adjust the Fund's Advisor
combination and/or allocations so as to attempt to reduce the risk of such over-
concentration occurring in the future. MLIP also adjusts the percentage of each
series' capital allocated to trading, with the principal objective of protecting
ML&Co. from any liability under its guarantee of a $105.77 minimum Net Asset
Value per Unit as of the Principal Assurance Date. The market risk to the Fund
is limited by the combination of its "principal protection" feature and multi-
advisor strategy.
The Units began trading with 70% of their capital committed to trading. As
of December 31, 1997 that percentage was 90%. MLIP determinations as to what
percentage of the Fund's assets to allocate to trading from time to time --
again, a determination primarily dictated by MLIP's objective of ensuring that
ML&Co. is never required to make any payments under its guarantee that the Net
Asset Value per Unit will be at least $105.77 as of the Principal Assurance
Date -- has a material impact on the performance of the Fund.
-12-
<PAGE>
MLIP may consider making distributions to investors under certain
circumstances (for example, if substantial profits are recognized); however,
MLIP has not done so to date and does not presently intend to do so.
The variations in both the statement of financial condition and the income
statement line items is primarily due to the Partnership placing assets under
the management of certain of the Advisors not through opening managed accounts
with them but rather through investing in a private limited liability company
("Trading LLC") sponsored by MLIP. The only members of the Trading LLC are
commodity pools sponsored by MLIP. The Trading LLC trades under the management
of a single Advisor pursuant to a single strategy and at a uniform degree of
leverage. Placing assets with an Advisor through investing in a Trading LLC
rather than a managed account has no economic effect on the Partnership, except
to the extent that the Partnership benefits from the Advisor not having to
allocate trades among a number of different accounts (rather than acquiring a
single position for the Trading LLC as a whole).
The results of the Partnership's Trading LLC investments are reflected in
the Partnership's financial statements as "Income from Investments." These
investments are reflected in the financial statements at fair value based upon
the net asset value of the Partnership's interest in the Trading LLCs. Fair
value is equal to the market value of the net assets of the Trading LLC. The
resulting difference between cost and fair value is reflected on the Statement
of Operations as income or loss from investments.
PERFORMANCE SUMMARY
1995
In 1995, prevailing price trends in several key markets enabled the
Advisors to trade profitably for the Fund. Although trading in many of the
traditional commodity markets may have been lackluster, the currency and
financial markets offered exceptional trading conditions. After months
characterized by very difficult trading environments, solid price trends across
many markets (including U.S. Treasury and non-dollar bond markets) began to
emerge during the first quarter of 1995. In the second quarter, market
volatility once again began to affect trading, as many previously strong price
trends began to weaken and, in some cases, reverse. The U.S. dollar hit new
lows versus the Japanese yen and Deutschemark before rebounding sharply. In
addition, there were strong indications that the U.S. economy was slowing which,
when coupled with a failure of the German Central Bank to lower interest rates,
stalled a rally in the German bond market. During the third quarter, there was
a correction in U.S. bond prices after several months of a strong uptrend.
Despite exposure to the global interest-rate markets, the Fund's long positions
in Treasury bonds had a negative impact on the Fund. Throughout August and into
September, the U.S. dollar rallied sharply against the Japanese yen and the
Deutschemark as a result of the coordinated intervention by major central banks
and widespread recognition of the growing banking crisis in Japan. Despite
continued price volatility during the final quarter of 1995, the Trading
Advisors were able to identify several trends in key markets. U.S. Treasury
bond prices continued their strong move upward throughout November, due both to
weak economic data and optimism on federal budget talks. As the year ended, the
yield on the 30-year Treasury bond was pushed to its lowest level in more than
two years.
1996
1996 began with the East Coast blizzard, continuing difficulties in federal
budget talks and an economic slowdown having a negative impact on many markets.
The Fund was profitable in January due to strong profits in currency trading as
the U.S. dollar reached a 23-month high against the Japanese yen. In February,
however, the Fund incurred its worst monthly loss due to the sudden reversals in
several strong price trends and considerable volatility in the currency and
financial markets. During March, large profits were taken in the crude oil and
gasoline markets as strong demand continued and talks between the United Nations
and Iraq were suspended. This trend continued into the second quarter, during
which strong gains were also recognized in the agricultural markets as a
combination of drought and excessive rain drove wheat and grain prices to
historic highs. In the late summer and early fall months, the Fund continued to
trade profitably as trending prices in a number of key markets favorably
impacted the Fund's performance. In September heating oil hit a five-year high
on soaring prices in Europe, and the Fund was also able to capitalize on
downward trends in the metals markets. Strong trends in the currency and global
bond markets produced significant gains in October and November, but the year
ended with declining performance as December witnessed the reversal of several
strong upward trends and increased volatility in key markets.
-13-
<PAGE>
1997
Trend reversals and extreme market volatility, affected by such factors as
the Asian flu and El Nino, were characteristic of most of 1997. However, the
year proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
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. However, the dollar
underwent two significant corrections during the year. The first correction
occurred 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. From August through mid-November, the dollar
corrected against the Eurocurrencies in advance of a well-advertised tightening
by the Bundesbank. By mid-December the dollar had bounced back to new highs
against the yen and was rallying against the mark.
Global interest rate markets began the year on a volatile note, as
investors evaluated economic data for signs of inflation. By the middle of the
year, economic data in key countries was positive indicating lower inflation and
igniting a worldwide rally in the bond markets. Specifically, investor
sentiment was particularly strong in the U.S., where prices on the 30-year
Treasury bond and 10-year Treasury note rose to their highest levels in over two
years. This followed a largely positive economic report delivered by Federal
Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
In energy markets, a slump in crude oil prices was characteristic of its
lackluster performance from the beginning of the year. Early in 1997,
volatility returned in the energy markets, reflecting the impact of a winter
significantly warmer than normal. By mid-year, the decline in prices reversed
sharply as Saudi Arabia and Iran, together representing about 45% of OPEC's oil
production, joined forces to pressure oil-producing nations to stay within OPEC
production quotas. In December, financial and economic problems in Asia reduced
demand for oil, and, in combination with ample supplies, resulted in crude oil
prices declining once again.
PERFORMANCE OVERVIEW
The principal variables which determine the net performance of the
Partnership are gross profitability and interest income. During all periods set
forth under "Selected Financial Data," the interest rates in many countries were
at unusually low levels. This negatively impacted revenues because interest
income is typically a major component of commodity pool profitability. In
addition, low interest rates are frequently associated with reduced fixed-income
market volatility, and in static markets the Fund's profit potential generally
tends to be diminished. On the other hand, during periods of higher interest
rates, the relative attractiveness of a high risk investment such as the
Partnership may be reduced as compared to high yielding and much lower risk
fixed-income investments.
The Partnership's Brokerage Commissions and Administrative Fees are a
constant percentage of assets charge. The only Fund costs (other than the
insignificant F/X Desk service fees and EFP differentials as well as bid-ask
spreads on forward contracts) which are not based on a percentage of the Fund's
assets are the Profit Shares payable to the Trading Advisors on an Advisor-by-
Advisor basis. During periods when Profit Shares are a high percentage of net
trading gains, it is likely that there has been substantial performance non-
correlation among the Advisors (so that the total Profit Shares paid to those
Advisors which have traded profitably are a high percentage, or perhaps even in
excess, of the total profits recognized, as other Advisors have incurred
offsetting losses, reducing overall trading gains but not the Profit Shares paid
to the successful Advisors) -- suggesting the likelihood of generally trendless,
non-consensus markets.
-14-
<PAGE>
The events that primarily determine the Fund's profitability are those that
produce sustained and major price movements. The Advisors are generally more
likely to be able to profit from sustained trends, irrespective of their
direction, than from static markets. During the course of the Partnership's
performance to date, such events have ranged from Federal Reserve Board
reductions in interest rates, the apparent refusal of Iraq to arrive at a
settlement which would permit it to sell oil internationally, the inability of
the U.S. government to agree upon a federal budget and a combination of drought
and excessive rain negatively impacting U.S. agricultural harvesting as well as
planting. While these events are representative of the type of circumstances
which materially affect the Fund, the specific events which will do so in the
future cannot be predicted or identified.
Unlike many investment fields, there is no meaningful distinction in the
operation of the Fund between realized and unrealized profits. Most of the
contracts traded by the Fund are highly liquid and can be closed out at any
time. Furthermore, the profits on many open positions are effectively realized
on a daily basis through the payment of variation margin.
Except in unusual circumstances, factors -- regulatory approvals, cost of
goods sold, employee relations and the like -- which often materially affect an
operating business have virtually no impact on the Fund.
LIQUIDITY AND CAPITAL RESOURCES
The Fund's costs are generally proportional to its asset base, and, within
broad ranges of capitalization, the Advisors' trading positions (and the
resulting gains and losses) should increase or decrease in approximate
proportion to the size of the Fund account managed by each of them,
respectively.
Inflation per se is not a significant factor in the Fund's profitability,
although inflationary cycles can give rise to the type of major price movements
that can have a materially favorable or adverse impact on the Fund's
performance.
Changes in the level of prevailing interest rates could have a material
effect on the Fund's trading leverage. Interest rates directly affect the
calculation of the discounted value (discounted back from the Principal
Assurance Date) of the guaranteed minimum Net Asset Value per Unit and,
accordingly, the assets which a given series of Units has available for trading.
In its trading to date, the Fund has from time to time had substantial
unrealized gains and losses on its open positions. These gains or losses are
received or paid on a periodic basis as part of the routine clearing cycle on
exchanges or in the over-the-counter markets (the only over-the-counter market
in which the Fund trades is the inter-bank forward market in currencies). In
highly unusual circumstances, market illiquidity could make it difficult for
certain Advisors to close out open positions, and any such illiquidity could
expose the Fund to significant losses, or cause it to be unable to recognize
unrealized gains. However, in general, there is no meaningful difference
between the Fund's realized and unrealized gains.
THE YEAR 2000 COMPUTER ISSUE
Merrill Lynch's modifications for Year 2000 systems compliance are
proceeding according to plan and are expected to be completed in early 1999.
Based on information currently available, the remaining expenditures are
estimated at $200 million and will cover hardware and software upgrades, systems
consulting, and computer maintenance. These expenditures are not expected to
have a material adverse impact on Merrill Lynch's financial position, results of
operations, or cash flows in future periods. However, the failure of Merrill
Lynch's securities exchanges, clearing organizations, vendors, clients, or
regulators to resolve their own processing issues in a timely manner could
result in a material financial risk. Merrill Lynch is devoting necessary
resources to address all Year 2000 issues in a timely manner.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
Not applicable.
-15-
<PAGE>
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------------------------------------------
The financial statements required by this Item are included in Exhibit
13.01.
The supplementary financial information ("selected quarterly financial
data" and "information about oil and gas producing activities") specified by
Item 302 of Regulation S-K is not applicable.
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
---------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
There were no changes in or disagreements with accountants on accounting or
financial disclosure.
PART III
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
--------------------------------------------------
(a,b) Identification of Directors and Executive Officers:
--------------------------------------------------
As a limited partnership, the Partnership itself has no officers or
directors and is managed by the General Partner. Trading decisions are made by
the Trading Advisors on behalf of the Partnership.
The directors and executive officers of MLIP as of February 1, 1998
and their respective business backgrounds are as follows.
The following are the principal officers and directors of MLIP:
John R. Frawley, Jr. Chairman, Chief Executive Officer, President and
Director
Jeffrey F. Chandor Senior Vice President, Director of Sales,
Marketing and Research and Director
Joseph H. Moglia Director
Allen N. Jones Director
Stephen G. Bodurtha Director
Michael A. Karmelin Chief Financial Officer, Vice President and
Treasurer
Steven B. Olgin Vice President, Secretary and Director of
Administration
-16-
<PAGE>
John R. Frawley, Jr. was born in 1943. Mr. Frawley is Chairman, Chief
Executive Officer, President and a Director of MLIP and Co-Chairman of MLF. He
joined Merrill Lynch, Pierce, Fenner & Smith Incorporated ("MLPF&S") in 1966 and
has served in various positions, including Retail and Institutional Sales,
Manager of New York Institutional Sales, Director of Institutional Marketing,
Senior Vice President of Merrill Lynch Capital Markets and Director of
International Institutional Sales. Mr. Frawley holds a Bachelor of Science
degree from Canisius College. Mr. Frawley served on the CFTC's Regulatory
Coordination Advisory Committee from its formation in 1990 through its
dissolution in 1994. Mr. Frawley is currently serving his fourth consecutive
one-year term as Chairman of the Managed Funds Association (formerly, the
Managed Futures Association), a national trade association that represents the
managed futures, hedge funds and fund of funds industry. Mr. Frawley is also a
Director of that organization. Mr. Frawley currently serves on a panel created
by the Chicago Mercantile Exchange and The Board of Trade of the City of Chicago
to study cooperative efforts related to electronic trading, common clearing and
the issues regarding a potential merger.
Jeffrey F. Chandor was born in 1942. Mr. Chandor is Senior Vice
President, the Director of Sales, Marketing and Research and a Director of MLIP.
He joined MLPF&S in 1971 and has served as the Product Manager of International
Institutional Equities, Equity Derivatives and Mortgage-Backed Securities as
well as Managing Director of International Sales in the United States, and
Managing Director of Sales in Europe. Mr. Chandor holds a Bachelor of Arts
degree from Trinity College, Hartford, Connecticut.
Joseph H. Moglia was born in 1949. He is a director of MLIP. In
1971, he graduated from Fordham University with a Bachelor of Arts degree in
Economics. He later received his Master of Science degree from the University
of Delaware. He taught at the high school and college level for sixteen years.
Mr. Moglia joined MLPF&S in 1984, and has served in a number of senior roles,
including Director of New York Fixed Income Institutional Sales, Director of
Global Fixed Institutional Sales, and Director of the Municipal Division. He is
currently Senior Vice President and Director of the Investment Strategy and
Product Group in Merrill Lynch Private Client, and Director of Middle Markets.
Allen N. Jones was born in 1942. Mr. Jones is a Director of MLIP and,
from July 1995 until January 1998, Mr. Jones was Chairman of the Board of
Directors of MLIP. Mr. Jones graduated from the University of Arkansas with a
Bachelor of Science, Business Administration degree in 1964. Since June 1992,
Mr. Jones has held the position of Senior Vice President of MLPF&S. From June
1992 through February 1994, Mr. Jones was the President and Chief Executive
Officer of Merrill Lynch Insurance Group, Inc. ("MLIG") and remains on the Board
of Directors of MLIG and its subsidiary companies. From February 1994 to April
1997, Mr. Jones was the Director of Individual Financial Services of the Merrill
Lynch Private Client Group. In April 1997, Mr. Jones became the Director of
Private Client marketing.
Stephen G. Bodurtha was born in 1958. Mr. Bodurtha is a Director of
MLIP. In 1980, Mr. Bodurtha graduated from Wesleyan University, Middletown,
Connecticut with a Bachelor of Arts degree in Government, magna cum laude. From
1980 to 1983, Mr. Bodurtha worked in the Investment Banking Division of Merrill
Lynch. In 1985, he was awarded his Master of Business Administration degree
from Harvard University, where he also served as Associates Fellow (1985-1986).
From 1986 to 1989, Mr. Bodurtha held the positions of Associate and Vice
President with Kidder, Peabody & Co., Incorporated where he worked in their
Financial Futures & Options Group. Mr. Bodurtha joined MLPF&S in 1989 and has
held the position of First Vice President since 1995. He has been the Director
in charge of MLPF&S's Structured Investments Group since 1995.
Michael A. Karmelin was born in 1947. Mr. Karmelin is Chief Financial
Officer, Vice President and Treasurer of MLIP. Prior to joining MLIP in April
1997, Mr. Karmelin was Chief Financial Officer of Merrill Lynch, Hubbard Inc.
("ML Hubbard"), a sponsor of real estate limited partnerships. Mr. Karmelin
joined ML Hubbard in January 1994 and was a Vice President of ML Hubbard. From
May 1994 to April 1997, he was the Chief Financial Officer of ML Hubbard,
responsible for its accounting, treasury and tax functions. Prior to joining ML
Hubbard, Mr. Karmelin held several senior financial positions with ML&Co and
MLPF&S from December 1985 to December 1993, including Vice President/Senior
Financial Officer Corporate Real Estate and Purchasing, Manager Commitment
Control/Capital Budgeting, and Senior Project Manager/Project Analysis. Prior
to joining ML&Co., Mr. Karmelin was employed at Avco Corporation for 17 years,
where he held a variety of financial positions. Mr. Karmelin holds a B.B.A.
-17-
<PAGE>
degree in Accounting from Baruch College, C.U.N.Y. and a Master of Business
Administration degree in Corporate Strategy and Finance from New York
University. Mr. Karmelin passed the Certified Public Accounting examination in
1974 and is a member of the Treasury Management Association, the Institute of
Management Accountants and The Strategic Leadership Forum.
Steven B. Olgin was born in 1960. Mr. Olgin is Vice President,
Secretary and the Director of Administration of MLIP. He joined MLIP in July
1994 and became a Vice President in July 1995. From 1986 until July 1994, Mr.
Olgin was an associate of the law firm of Sidley & Austin. In 1982, Mr. Olgin
graduated from The American University with a Bachelor of Science degree in
Business Administration and a Bachelor of Arts degree in Economics. In 1986, he
received his Juris Doctor degree from The John Marshall Law School. Mr. Olgin
is a member of the Managed Funds Association's Government Relations Committee
and has served as an arbitrator for the NFA. Mr. Olgin is also a member of the
Committee on Futures Regulation of the Association of the Bar of the City of New
York.
Messrs. Moglia and Bodurtha became Directors in January 1998.
As of December 31, 1997, the principals of MLIP had no investment in
the Fund, and MLIP's general partner interest in the Fund was valued at
$395,313.
MLIP acts as general partner to twelve public futures funds whose
units of limited partnership interest are registered under the Securities
Exchange Act of 1934: The Futures Expansion Fund Limited Partnership, The
Growth and Guarantee Fund L.P., ML Futures Investments II L.P., ML Futures
Investments L.P., John W. Henry & Co./Millburn L.P., The S.E.C.T.O.R. Strategy
Fund L.P., The SECTOR Strategy Fund II L.P.,The SECTOR Strategy Fund VI L.P.,
ML Global Horizons L.P., ML Principal Protection L.P. (formerly, ML Principal
Protection Plus L.P.), ML JWH Strategic Allocation Fund L.P. and the Fund.
Because MLIP serves as the sole general partner of each of these funds, the
officers and directors of MLIP effectively manage them as officers and directors
of such funds.
(c) Identification of Certain Significant Employees:
-----------------------------------------------
None.
(d) Family Relationships:
--------------------
None.
(e) Business Experience:
-------------------
See Item 10(a)(b) above.
(f) Involvement in Certain Legal Proceedings:
----------------------------------------
None.
(g) Promoters and Control Persons:
-----------------------------
Not applicable.
ITEM 11: EXECUTIVE COMPENSATION
----------------------
The directors and officers of the General Partner are remunerated by the
General Partner. The Partnership does not itself have any officers, directors
or employees. The Partnership pays Brokerage Commissions to an affiliate of the
General Partner and Administrative Fees to the General Partner. The General
Partner or its affiliates may also receive certain economic benefits from
holding the Fund's dollar Available Assets in offset accounts, as described in
Item 1(c) above. The directors and officers receive no "other compensation"
from the Partnership, and the directors receive no
-18-
<PAGE>
compensation for serving as directors of the General Partner. There are no
compensation plans or arrangements relating to a change in control of either the
Partnership or the General Partner.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
--------------------------------------------------------------
(a) Security Ownership of Certain Beneficial Owners:
-----------------------------------------------
As of December 31, 1997, no person or "group" is known to be or have
been the beneficial owner of more than five percent of the Units.
(b) Security Ownership of Management:
--------------------------------
As of December 31, 1997, the General Partner owned 2,990 Units (unit-
equivalent general partnership interests), which was less than 4% of the total
Units outstanding.
(c) Changes in Control:
------------------
None.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
----------------------------------------------
(a) Transactions with Management and Others:
---------------------------------------
The General Partner acts as administrative and trading manager of the
Fund. The General Partner provides all normal ongoing administrative functions
of the Partnership, such as accounting, legal and printing services. The
General Partner, which receives the Administrative Fees, pays all expenses
relating to such services.
(b) Certain Business Relationships:
------------------------------
MLF, an affiliate of the General Partner, acts as the principal
commodity broker for the Partnership.
In 1997 the Partnership accrued: (i) Brokerage Commissions of $348,042
to the Commodity Broker, which included $55,551 in consulting fees accrued by
the Commodity Broker to the Trading Advisors; and (ii) Administrative Fees of
$9,839 to MLIP. Through its investments in Trading LLCs, the following fees were
paid: (i) Brokerage Commissions of $673,049 to the Commodity Broker, which
included $225,805 in consulting fees accrued by the Commodity Broker to the
Trading Advisors; and (ii) Administrative Fees of $19,079 to MLIP. In addition,
MLIP and its affiliates may have derived certain economic benefits from
maintaining a portion of the Fund's assets in "offset accounts," as described
under Item 1(c), "Narrative Description of Business -- Use of Proceeds and
Interest Income -- Interest Earned on the Fund's U.S. Dollar Available Assets"
and Item 11, "Executive Compensation" herein, as well as from the Fund's F/X
Desk and "exchange of futures for physical" ("EFP") trading.
See Item 1(c), "Narrative Description of Business -- Charges" and "--
Description of Current Charges" for a discussion of other business dealings
between MLIP affiliates and the Partnership.
(c) Indebtedness of Management:
--------------------------
The Partnership is prohibited from making any loans, to management or
otherwise.
(d) Transactions with Promoters:
---------------------------
Not applicable.
-19-
<PAGE>
PART IV
ITEM 14: EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
---------------------------------------------------------------
(a)1. Financial Statements (found in Exhibit 13.01): Page
----------------------------------------------------- ----
Independent Auditors' Report 1
Statements of Financial Condition as of December 31, 1997
and 1996 2
For the years ended December 31, 1997, 1996 and 1995:
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-13
(a)2. Financial Statement Schedules:
-----------------------------
Financial statement schedules not included in this Form 10-K have been
omitted for the reason that they are not required or are not applicable or that
equivalent information has been included in the financial statements or notes
thereto.
(a)3. Exhibits:
--------
The following exhibits are incorporated by reference or are filed
herewith to this Annual Report on Form 10-K:
Designation Description
- ----------- -----------
3.01(i) Amended and Restated Certificate of Limited Partnership of
the Registrant, dated July 27, 1995.
Exhibit 3.01(i): Is incorporated herein by reference from Exhibit 3.02(a)
- --------------- contained in the Registrant's report on Form 10-Q for the
Quarter ended June 30, 1995.
3.01(ii) Amended and Restated Limited Partnership Agreement of the
Partnership dated October 19, 1992.
Exhibit 3.01(ii): Is incorporated herein by reference from Exhibit 3.01
- ---------------- contained in Amendment No. 1 to the Registration Statement
(File No. 33-49852) filed on October 16, 1992, on Form S-1
under the Securities Act of 1933 (the "Registrant's
Registration Statement").
10.01 Form of Advisory Agreement between the Partnership, Merrill
Lynch Investment Partners Inc., Merrill Lynch Futures Inc.
and each Trading Advisor.
Exhibit 10.01: Is incorporated by reference from Exhibit 10.01(o) contained
- ------------- in the Registrant's report on Form 10-Q for the Quarter
Ended June 30, 1995.
10.02 Form of Consulting Agreement between each Trading Advisor of
the Partnership and Merrill Lynch Futures Inc.
Exhibit 10.02: Is incorporated herein by reference from Exhibit 10.02(a)
- ------------- contained in the Registrant's Registration Statement.
-20-
<PAGE>
10.03 Form of Customer Agreement between the Partnership and
Merrill Lynch Futures Inc.
Exhibit 10.03: Is incorporated herein by reference from Exhibit 10.03
- ------------- contained in the Registrant's Registration Statement.
10.05 ML&Co., Inc. Guarantee.
Exhibit 10.05: Is incorporated herein by reference from Exhibit 10.05
- ------------- contained in the Registrant's Registration Statement.
10.07(i) Foreign Exchange Desk Service Agreement among Merrill Lynch
Investment Bank, Merrill Lynch Investment Partners Inc.,
Merrill Lynch Futures Inc. and the Fund.
Exhibit 10.07(i): Is incorporated herein by reference from Exhibit 10.07(i)
- ---------------- contained in the Registrant's report on Form 10-K for the
year ended December 31, 1996.
10.07(ii) Form of Advisory and Consulting Agreement Amendment among
Merrill Lynch Investment Partners Inc., each Advisor, the
Fund and Merrill Lynch Futures Inc.
Exhibit 10.07(ii): Is incorporated herein by reference from Exhibit 10.07(ii)
- ----------------- contained in the Registrant's report on Form 10-K for the
year ended December 31, 1996.
10.07(iii) Form of Amendment to the Customer Agreement among the
Partnership and MLF.
Exhibit 10.07(iii): Is incorporated herein by reference from Exhibit 10.07(iii)
- ------------------ contained in the Registrant's report on Form 10-K for the
year ended December 31, 1996.
13.01 1997 Annual Report and Independent Auditors' Report.
Exhibit 13.01: Is filed herewith.
- -------------
13.01(a) 1997 Annual Reports and Independent Auditors' Reports for
the following Trading Limited Liability Companies sponsored
by Merrill Lynch Investment Partners' Inc.:
ML Millburn Global L.L.C.
ML Sjo Prospect L.L.C.
ML Chesapeake Diversified L.L.C.
ML JWH Financial and Metals Portfolio L.L.C.
Exhibit 13.01(a): Is incorporated herein by reference from Form 10-K (fiscal
- ----------------- year ended December 31, 1997) Commission File number
0-18702 for the S.E.C.T.O.R. Fund (SM) L.P. (Registration
Statement File No. 33-34432 filed on May 25, 1990 under
the Securities Act of 1933.)
13.01(b) 1997 ML Sjo Prospect L.L.C. Annual Report and Independent
Auditors' Report.
Exhibit 13.01(b) Is filed herewith.
- ----------------
28.01 Prospectus of the Partnership dated October 19, 1992.
Exhibit 28.01: Is incorporated by reference as filed with the Securities
- -------------- and Exchange Commission pursuant to Rule 424 under the
Securities Act of 1933 on October 19, 1992.
(b) Report on Form 8-K:
------------------
No reports on Form 8-K were filed during the fourth quarter of 1997.
-21-
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 S.E.C.T.O.R. STRATEGY FUND/SM/ V L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS
INC.
General Partner
By: /s/ John R. Frawley, Jr.
------------------------
John R. Frawley, Jr.
Chairman, Chief Executive Officer, President
and Director (Principal Executive Officer)
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed on March 25, 1998 by the
following persons on behalf of the Registrant and in the capacities indicated.
<TABLE>
<CAPTION>
Signature Title Date
- --------- ----- ----
<S> <C> <C>
/s/ John R. Frawley, Jr. Chairman, Chief Executive Officer, President and March 25, 1998
- -------------------------- Director (Principal Executive Officer)
John R. Frawley, Jr.
/s/ Michael A. Karmelin Vice President, Chief Financial Officer and Treasurer March 25, 1998
- -------------------------- (Principal Financial and Accounting Officer)
Michael A. Karmelin
/s/ Jeffrey F. Chandor Senior Vice President, Director of Sales, March 25, 1998
- -------------------------- Marketing and Research, and Director
Jeffrey F. Chandor
/s/ Allen N. Jones Director March 25, 1998
- --------------------------
Allen N. Jones
</TABLE>
(Being the principal executive officer, the principal financial and accounting
officer and a majority of the directors of Merrill Lynch Investment Partners
Inc.)
MERRILL LYNCH INVESTMENT General Partner of Registrant March 25, 1998
PARTNERS INC.
By: /s/ John R. Frawley, Jr.
----------------------------
John R. Frawley, Jr.
-22-
<PAGE>
THE SECTOR STRATEGY FUND V L.P.
1997 FORM 10-K
INDEX TO EXHIBITS
-----------------
Exhibit
-------
Exhibit 13.01 1997 Annual Report and Independent Auditors' Report
Exhibit 13.01(a) 1997 Annual Reports and Independent Auditors' Reports for the
following Trading Limited Liability Companies sponsored by
Merrill Lynch Investment Partners' Inc.:
ML Millburn Global L.L.C.
ML Sjo Prospect L.L.C.
ML Chesapeake Diversified L.L.C.
ML JWH Financial and Metals Portfolio L.L.C.
-23-
<PAGE>
The SECTOR Strategy Fund/SM/ V L.P.
(A Delaware Limited Partnership)
Financial Statements for the years ended
December 31, 1997, 1996 and 1995
and Independent Auditors' Report
<PAGE>
To: The Limited Partners of THE SECTOR STRATEGY FUND/SM/ V L.P.
The SECTOR Strategy Fund/SM/ V L.P. (the "Fund" or "Partnership") ended its
fifth fiscal year of trading on December 31, 1997 with a Net Asset Value ("NAV")
per Unit of $132.21, representing an increase of 11.02% from the December 31,
1996 NAV per Unit of $119.09. During 1997, trading profits were generated in the
interest rate, currency, metals, stock index and agriculture markets while
losses were incurred in energy trading. (Trading results include that of the
Advisors, as well as, the Trading LLCs (defined in Note 5 to the financial
statements)).
Trend reversals and extreme market volatility, affected by such factors as the
Asian flu and El Nio, were characteristic of most of 1997. However, the year
proved to be a profitable one overall for the Fund as trends in several key
markets enabled the Trading Advisors to profit despite the significant
obstacles. Although trading results in several sectors may have been
lackluster, the global currency and bond markets offered noteworthy trading
opportunities, which resulted in significant profits in these markets during the
year. Additionally, the currency and interest rate sectors of the Fund's
portfolio represented its largest percentage of market commitments.
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. However, the dollar underwent two
significant corrections during the year. The first correction occurred 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. From August through mid-November, the dollar corrected against the
Eurocurrencies in advance of a well-advertised tightening by the Bundesbank. By
mid-December the dollar had bounced back to new highs against the yen and was
rallying against the mark.
Global interest rate markets began the year on a volatile note, as investors
evaluated economic data for signs of inflation. By the middle of the year,
economic data in key countries was positive indicating lower inflation and
igniting a worldwide rally in the bond markets. Specifically, investor
sentiment was particularly strong in the U.S., where prices on the 30-year
Treasury bond and 10-year Treasury note rose to their highest levels in over two
years. This followed a largely positive economic report delivered by Federal
Reserve Chairman Greenspan in testimony before Congress. Effects of the plunge
in the Hong Kong stock market in late October spread rapidly throughout the
world's financial markets, including global bond markets. After continued
volatility in subsequent months made trading difficult, 1997 interest rate
trading ended on a positive note when U.S. and Japanese bond markets rallied as
a flight to safety from plunging stock markets around the world occurred in
December.
In energy markets, a slump in crude oil prices was characteristic of its
lackluster performance from the beginning of the year. Early in 1997,
volatility returned in the energy markets, reflecting the impact of a winter
significantly warmer than normal. By mid-year, the decline in prices reversed
sharply as Saudi Arabia and Iran, together representing about 45% of OPEC's oil
production, joined forces to pressure oil-producing nations to stay within OPEC
production quotas. In December, financial and economic problems in Asia reduced
demand for oil, and in combination with ample supplies, resulted in crude oil
prices declining once again.
<PAGE>
Although the overall return for the Fund might have paled in comparison to some
of the popular market indices during 1997, a significant observation is worth
noting. From the time the Dow Jones industrial average hit its high of 8259.31
in August through the end of the year, it declined 4.25% with a continued
increase in volatility. Conversely, the Fund, which has been designed with the
objective of producing returns non-correlated to traditional debt and equity
markets, steadily improved performance during the same time period. We
appreciate your continued investment in the Fund and look forward to 1998 and
the trading opportunities it may bring.
Sincerely,
John R. Frawley, Jr.
President
MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
FUTURES TRADING IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
------------------------------
TABLE OF CONTENTS
- ------------------------------------------------------------------------
Page
----
INDEPENDENT AUDITORS' REPORT 1
FINANCIAL STATEMENTS FOR THE YEARS ENDED DECEMBER 31, 1997, 1996
AND 1995:
Statements of Financial Condition 2
Statements of Operations 3
Statements of Changes in Partners' Capital 4
Notes to Financial Statements 5-13
<PAGE>
INDEPENDENT AUDITORS' REPORT
- ----------------------------
To the Partners of
The SECTOR Strategy Fund/SM/ V L.P.:
We have audited the accompanying statements of financial condition of The SECTOR
Strategy Fund/SM/ V L.P. (a Delaware limited partnership; the "Partnership") as
of December 31, 1997 and 1996 and the related statements of operations and
changes in partners' capital for each of the three years in the period ended
December 31, 1997. These financial statements are the responsibility of the
Partnership's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of The SECTOR Strategy Fund/SM/ V L.P. as of
December 31, 1997 and 1996 and the results of its operations for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
February 6, 1998
New York, New York
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
- -------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996
- -------------------------------------------------------------------------------------------
ASSETS 1997 1996
----------- -----------
<S> <C> <C> <C>
Accrued interest (Note 2) $ 15,390 $ 42,724
Equity in commodity futures trading accounts:
Cash and option premiums 3,396,218 10,635,825
Net unrealized profit on open contracts 17,058 56,151
Investment (Note 6) 8,871,133 3,405,293
Receivable from investment (Note 6) 155,372 327,498
----------- -----------
TOTAL $12,455,171 $14,467,491
=========== ===========
LIABILITIES AND PARTNERS CAPITAL
LIABILITIES:
Redemptions payable $ 215,502 $ 327,498
Brokerage commissions payable (Note 2) 24,892 58,450
Profit Shares payable (Note 3) 3,352 45,748
Administrative fees payable (Note 2) 711 1,499
----------- -----------
Total liabilities 244,457 433,195
----------- -----------
PARTNERS CAPITAL:
General Partner (2,990 Units and 2,990 Units) 395,313 356,079
Limited Partner (89,367 Units and 114,856 Units) 11,815,401 13,678,217
----------- -----------
Total partners' capital 12,210,714 14,034,296
----------- -----------
TOTAL $12,455,171 $14,467,491
=========== ===========
NET ASSETS VALUE PER UNIT
(Based on 92,357 and 117,846 Units outstanding) $ 132.21 $ 119.09
=========== ===========
</TABLE>
See notes to financial statements.
-2-
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
- -------------------------------
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- ----------------------------------------------------------------------------------------------------------------------
1997 1996 1995
---------- ------------ ----------
REVENUES:
Trading profits (loss):
<S> <C> <C> <C>
Realized $ 368,946 $ 1,264,013 $5,460,869
Change in unrealized (39,093) (1,945,383) (152,635)
---------- ----------- ----------
Total trading results 329,853 (681,370) 5,308,234
Interest income (Note 2) 292,197 782,522 1,600,013
---------- ----------- ----------
Total revenues 622,050 101,152 6,908,247
---------- ----------- ----------
EXPENSES:
Brokerage commissions (Note 2) 348,042 1,198,690 2,378,476
Profit Shares (Note 3) 9,118 50,339 524,877
Administrative fees (Note 2) 9,839 30,735 --
---------- ----------- ----------
Total expenses 366,999 1,279,764 2,903,353
---------- ----------- ----------
INCOME FROM INVESTMENT (Note 6) 1,114,196 708,715 --
---------- ----------- ----------
NET INCOME (LOSS) $1,369,247 $ (469,897) $4,004,894
========== =========== ==========
NET INCOME (LOSS) PER UNIT:
Weighted average number of General
Partner and Limited Partner Units
outstanding (Note 4) 104,332 166,173 293,583
========== =========== ==========
Net income (loss) per weighted average
General Partner and Limited Partner Unit $ 13.12 $ (2.83) $ 13.64
========== =========== ==========
</TABLE>
See notes to financial statements.
-3-
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Units of
Partnership Limited General
Interest Partners Partner Total
----------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
PARTNERSAE CAPITAL, DECEMBER 31, 1994 381,064 $ 38,004,265 $ 528,877 $ 38,533,142
Redemptions (155,470) (16,248,910) (233,072) (16,481,982)
Net income -- 3,955,320 49,574 4,004,894
----------- ------------ ----------- ------------
PARTNERSAE CAPITAL, DECEMBER 31, 1995 225,594 25,710,675 345,379 26,056,054
Redemptions (107,748) (11,551,861) -- (11,551,861)
Net income (loss) -- (480,597) 10,700 (469,897)
----------- ------------ ----------- ------------
PARTNERSAE CAPITAL, DECEMBER 31, 1996 117,846 13,678,217 356,079 14,034,296
Redemptions (25,489) (3,192,829) (3,192,829)
Net income 1,330,013 39,234 1,369,247
----------- ------------ ------------ -----------
PARTNERSAE CAPITAL, DECEMBER 31, 1997 92,357 $ 11,815,401 $ 395,313 $ 12,210,714
=========== ============ =========== ============
</TABLE>
See notes to financial statements.
-4-
<PAGE>
THE SECTOR STRATEGY FUND/SM/ V L.P.
(A Delaware Limited Partnership)
------------------------------
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
------------
The SECTOR Strategy Fund/SM/ V L.P. (the "Partnership") was organized under
the Delaware Revised Uniform Limited Partnership Act on July 16, 1992 and
commenced trading activities on January 4, 1993. The Partnership engages in
the speculative trading of futures, options on futures and forward contracts
on a wide range of commodities. The initial capitalization included an
investment from The SECTOR Strategy Fund/SM/ International V Ltd. (the
"Company"). On April 1, 1994 the Company redeemed its investments from the
Partnership to become a stand-alone trading company. Merrill Lynch
Investment Partners Inc. (formerly, ML Futures Investment Partners Inc.)
("MLIP" or the "General Partner"), a wholly-owned subsidiary of Merrill
Lynch Group, Inc., which, in turn, is a wholly owned subsidiary of Merrill
Lynch & Co., Inc. ("Merrill Lynch"), is the general partner of the
Partnership and Merrill Lynch Futures Inc. ("MLF"), also a Merrill Lynch
affiliate, is its commodity broker. The General Partner has agreed to
maintain a general partner's interest of at least 1% of the total capital of
the Partnership. The General Partner and each Limited Partner share in the
profits and losses of the Partnership in proportion to their respective
interests in it.
MLIP selects independent advisors (the "Advisors" or the "Trading Advisors")
to manage the Partnership's assets, and allocates and reallocates the
Partnership's trading assets among existing, replacement and additional
Advisors.
MLIP also determines what percentage of the Partnership's total capital to
allocate to trading from time to time, attempting to balance the
desirability of reducing the opportunity costs of the Partnership's
"principal protection" structure by allocating 100% (or more) of the
Partnership's assets to trading against the necessity of preventing Merrill
Lynch from ever being required to make any payments to the Partnership under
the Merrill Lynch guarantee. (See Note 5.)
Estimates
---------
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Revenue Recognition
-------------------
Commodity futures, options on futures and forward contract transactions are
recorded on the trade date and open contracts are reflected in net
unrealized profit on open contracts in the Statements of Financial Condition
at the difference between the original contract value and the fair value.
The change in net unrealized profit (loss) on open contracts from one period
to the next is reflected in change in unrealized in the Statements of
Operations. Fair value is based on quoted market prices on the exchange or
market on which the contract is traded.
-5-
<PAGE>
Operating Expenses
------------------
The General Partner pays for all routine operating costs (including all
legal, accounting, printing, postage and similar administrative expenses) of
the Partnership. The General Partner receives an administrative fee as well
as a portion of the brokerage commissions paid to MLF by the Partnership as
reimbursement for the foregoing expenses.
Income Taxes
------------
No provision for income taxes has been made in the accompanying financial
statements as each Partner is individually responsible for reporting income
or loss based on such Partner's respective share of the Partnership's income
and expenses as reported for income tax purposes.
Distributions
-------------
The Unitholders are entitled to receive, equally per Unit, any distribution
which may be made by the Partnership. No such distributions had been made as
of December 31, 1997.
Redemptions
-----------
A Limited Partner may require the Partnership to redeem some or all of such
Partner's Units at Net Asset Value as of the close of business on the last
business day of any month upon ten calendar days' notice. Units redeemed
during the four successive six-month periods ending after the Partnership
commenced trading were assessed early redemption charges of 4%, 3%, 2% and
1%, respectively, of their Net Asset Value as of the date of redemption.
Dissolution of the Partnership
------------------------------
The Partnership will terminate on December 31, 2022 or at an earlier date if
certain conditions occur, as well as certain other circumstances set forth
in the Limited Partnership Agreement.
2. RELATED PARTY TRANSACTIONS
The Partnership's U.S. dollar assets are held at MLF in cash. On the cash
held at MLF, the Partnership receives interest from Merrill Lynch at the
prevailing 91-day U.S. Treasury bill rate. Merrill Lynch may derive certain
economic benefits, in excess of the interest which Merrill Lynch pays to the
Partnership, from possession of such cash.
Merrill Lynch credits the Partnership with interest on the Partnership's
non-U.S. dollar-denominated assets based on local short-term rates. Merrill
Lynch charges the Partnership Merrill Lynch's cost of financing realized and
unrealized losses on the Partnership's non-U.S. dollar-denominated
positions.
The General Partner has determined that there may have been a miscalculation
in the interest credited to the Partnership for a period prior to November
1996 (such period may extend prior to that covered by these financial
statements). Accordingly, the General Partner credited current and former
investors who maintained a Merrill Lynch customer account in December 1997
with interest which was compounded. Former investors who do not maintain a
Merrill Lynch customer account will be credited as their response forms are
processed. The total amount of the adjustment is approximately $1,464,000.
Since this amount was paid directly to investors by the General Partner, it
is not reflected in these financial
-6-
<PAGE>
statements. The General Partner has determined that interest has been
calculated appropriately since November 1996.
The Partnership paid brokerage commissions to MLF at a flat monthly rate of
.833 of 1% (a 10% annual rate) of the Partnership's month-end net assets
allocated to the trading. Effective January 1, 1996, the percentage was
reduced to .813 of 1% (a 9.75% annual rate) of the Partnership's month-end
assets allocated to trading and the Partnership began to pay MLIP a monthly
administrative fee of .021 of 1% (a .25% annual rate) of the Partnership's
month-end assets allocated to trading (this recharacterization had no
economic effect on the Partnership). Effective February 1, 1997, the
Partnership's brokerage commission rate was reduced to .729 of 1% (an 8.75%
annual rate). Assets allocated to trading are not reduced, for purposes of
calculating brokerage commissions and administrative fees, by any accrued
brokerage commissions, administrative fees, Profit Shares or other fees or
charges.
The General Partner estimates that the round-turn equivalent commission rate
charged to the Partnership during the years ended December 31, 1997, 1996
and 1995 was approximately $136 , $55 and $21, respectively (not including,
in calculating round-turn equivalents, forward contracts on a futures-
equivalent basis).
MLF pays the Advisors annual Consulting Fees ranging up to 4% of the
Partnership's average month-end assets allocated to them for management
after reduction for a portion of the brokerage commissions.
The Partnership trades forward contracts through a foreign exchange service
desk (the "F/X Desk") established by MLIP. The F/X Desk gives the
Partnership access to counterparties in addition to (but also including)
Merrill Lynch International Bank ("MLIB") MLIP or another Merrill Lynch
entity charges a service fee equal to, at current exchange rates,
approximately $5.00 to $12.50 on each purchase or sale (not round-turn) of a
futures contract-equivalent face amount of a given currency traded in the
forward markets. No service fees are charged on trades awarded to MLIB (
which receives bid-ask spreads on such trades).
In its exchange of futures for physical ("EFP") trading with Merrill Lynch,
the Partnership acquires spot or forward (collectively, "cash") currency
positions through the F/X Desk in the same manner and on the same terms as
in the case of the Partnership's other F/X Desk trading. When the
Partnership exchanges these positions for futures, there is a differential
between the prices of the two positions. This differential reflects, in
part, the different settlement dates of the cash and the futures contracts
and prevailing interest rates, but also includes a pricing spread in favor
of MLIB or another Merrill Lynch entity. The Advisors, to date, have made
little use of EFPs.
The Partnership's F/X Desk service fee and EFP differential costs have, to
date totaled no more than .25 of 1% per annum of the Partnership's average
month-end assets.
3. AGREEMENTS
The Partnership and the Advisors have each entered into Advisory Agreements.
The Advisory Agreements generally terminate one year after they are entered
into, subject to certain renewal rights exercisable by the Partnership. The
Advisors determine the commodity futures and forward contract trades to be
made on behalf of their respective Partnership accounts, subject to certain
Partnership trading policies and to certain rights reserved by the General
Partner.
In the case of the Trading LLCs, as defined in Note 6, each Trading LLC
entered into an Advisory Agreement with an Advisor.
-7-
<PAGE>
Profit Shares, generally ranging from 15% to 25% of any New Trading Profit,
as defined, recognized by each Advisor considered individually irrespective
of the overall performance of the Partnership, either as of the end of each
calendar quarter or year, are paid by the Partnership to each Advisor.
Profit Shares are also paid out in respect of Units redeemed as of the end
of interim months, to the extent of the applicable percentage of any New
Trading Profit attributable to such Units.
4. WEIGHTED AVERAGE UNITS
The weighted average number of Units outstanding was computed for purposes
of disclosing net income (loss) per weighted average Unit. The weighted
average number of Units outstanding at December 31, 1997, 1996 and 1995
equals the Units outstanding as of such date, adjusted proportionately for
Units redeemed based on the respective length of time each was outstanding
during the preceding period.
5. MERRILL LYNCH & CO., INC. GUARANTEE
Merrill Lynch has guaranteed to the Partnership that it will have sufficient
Net Assets as of the Principal Assurance Date, that the Net Asset Value per
Unit as of such Principal Assurance Date will equal, after adjustment for
all liabilities to third parties, not less the minimum assured Net Asset
Value per Unit. Effective January 1, 1998, the Partnership restarted its
trading program for an additional Time horizon, as defined, of two years'
duration, with a new Principal Assurance Date of December 31, 1999 and a
minimum assured Net Asset Value of $105.77.
6. INVESTMENTS
The Partnership places assets under the management of certain of the
Advisors not through opening managed accounts with them but rather through
investing in private limited liability companies ("Trading LLCs") sponsored
by MLIP. The only members of the Trading LLCs are commodity pools sponsored
by MLIP. Each Trading LLC trades under the management of a single Advisor
pursuant to a single strategy and at a uniform degree of leverage. Placing
assets with an Advisor through investing in a Trading LLC rather than a
managed account has no economic effect on the Partnership, except to the
extent that the Partnership benefits from the Advisor not having to allocate
trades among a number of different accounts (rather than acquiring a single
position for the Trading LLC as a whole).
The investments are reflected in the financial statements at fair value
based upon the Partnership's interest in the Trading LLCs. Fair value is
equal to the Partnership's portion of the market value of the net assets of
the Trading LLCs. The resulting difference between cost and fair value is
reflected on the Statement of Operations as income or loss from investments.
-8-
<PAGE>
As of December 31, 1997 and 1996 the Partnership had investments in the ML
JWH Financial and Metals Portfolio L.L.C. ("JWH LLC") and ML Sjo Prospect
L.L.C. ("SJO LLC") as follows:
1997 1996
------------ ----------
JWH LLC $ 5,408,273 $3,405,293
SJO LLC 3,462,860 --
------------ ----------
Total $ 8,871,133 $3,405,293
============ ==========
<TABLE>
<CAPTION>
Total revenues and fees with respect to such investment is set forth as
follows:
For the year ended Decemer 31, 1997 Total Brokerage Administrative Profit Income from
Revenue Commissions Fees Share Investment
<S> <C> <C> <C> <C> <C>
JWH LLC $ 1,359,201 $ 383,830 $ 10,887 112,723 $ 851,761
SJO LLC 591,634 289,219 8,192 31,788 262,435
----------- ----------- -------------- --------- -----------
Total $ 1,950,835 $ 673,049 $ 19,079 $ 144,511 $ 1,114,196
=========== =========== ============== ========= ===========
For the year ended Decemer 31, 1996 Total Brokerage Administrative Profit Income from
Revenue Commissions Fees Share Investment
JWH LLC $ 920,605 $ 92,634 $ 2,377 $ 116,879 $ 708,715
============ =========== ============== ========= ===========
</TABLE>
Condensed statements of financial condition as of December 31, 1997 and 1996 and
statements of income for the periods ended December 31, 1997 and 1996 for JWH
LLC and SJO LLC are set forth as follows:
<TABLE>
<CAPTION>
1997 1996
------------------------ ------------
JWH SJO JWH
LLC LLC LLC
<S> <C> <C> <C>
Assets $62,481,438 $21,240,207 $80,825,364
=========== =========== ===========
Liabilities $ 1,122,533 $ 2,058,617 $19,848,210
Members' Capital 61,358,905 19,181,590 60,977,154
----------- ----------- -----------
Total $62,481,438 $21,240,207 $80,825,364
=========== =========== ===========
Revenues $15,279,401 $ 3,903,267 $19,365,949
Expenses 6,714,041 2,144,078 4,426,261
----------- ----------- -----------
Net Income $ 8,565,360 $ 1,759,189 $14,939,688
=========== =========== ===========
</TABLE>
-9-
<PAGE>
7. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership trades futures, options and forward contracts in interest
rates, stock indices, commodities, currencies, energy and metals. The
Partnership's total trading results by reporting category for the years ended
December 31, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
Total Trading Results
---------------------------------------
1997 1996 1995
------------ ----------- ------------
<S> <C> <C> <C>
Interest Rates and
Stock Indices $ (92,197) $ (11,377) $ 4,906,379
Commodities 164,054 (174,780) (839,126)
Currencies 342,016 269,134 1,441,968
Energy (64,047) (603,378) 419,051
Metals (19,973) (160,969) (620,038)
------------ ----------- ------------
$ 329,853 $ (681,370) $ 5,308,234
============ =========== ============
</TABLE>
Market Risk
-----------
Derivative instruments involve varying degrees of off-balance sheet market
risk, and changes in the level or volatility of interest rates, foreign
currency exchange rates or market values of the financial instruments or
commodities underlying such derivative instruments frequently result in
changes in the Partnership's unrealized profit (loss) on such derivative
instruments as reflected in the Statements of Financial Condition. The
Partnership's exposure to market risk is influenced by a number of factors,
including the relationships among the derivative instruments held by the
Partnership as well as the volatility and liquidity of the markets in which
the derivative instruments are traded.
The General Partner has procedures in place intended to control market risk,
although there can be no assurance that they will, in fact, succeed in doing
so. The procedures focus primarily on monitoring the trading of the Advisors
selected from time to time for the Partnership, adjusting the percentage of
the Partnership's total assets allocated to trading, calculating the Net
Asset Value of the Advisors' respective Partnership accounts as of the close
of business on each day and reviewing positions for over-concentrations--both
on an Advisor-by-Advisor and on an overall Partnership basis. While the
General Partner does not itself intervene in the markets to hedge or
diversify the Partnership's market exposure (although the General Partner
does adjust the percentage of the Partnership's total assets allocated to
trading), the General Partner may urge Advisors to reallocate positions, or
itself reallocate Partnership assets among Advisors (although typically only
as of the end of a month) in an attempt to avoid over-concentration. However,
such interventions are unusual. Except in cases in which it appears that an
Advisor has begun to deviate from past practice and trading policies or to be
trading erratically, the General Partner's basic risk control procedures
consist simply of the ongoing process of Advisor monitoring and selection,
with the market risk controls being applied by the Advisors themselves.
One important aspect of the General Partner's risk controls is its
adjustments to the leverage at which the Partnership trades. By controlling
the percentage of the Partnership's assets allocated to trading, the General
Partner can directly affect the market exposure of the Partnership. Leverage
control is the principal means by which the General Partner hopes to be able
to ensure that Merrill Lynch is never required to make any payments under its
guarantee that the Net Asset Value per Unit will equal no less than $100 as
of the Principal Assurance Date.
-10-
<PAGE>
Fair Value
----------
The derivative instruments traded by the Partnership are marked to market
daily with the resulting unrealized profit (loss) recorded in the Statements
of Financial Condition and the related profit (loss) reflected in trading
revenues in the Statements of Operations. The contract/notional values of
open contracts as of December 31, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------- ---------------------------------------
Commitment to Commitment to Commitment Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forward Options & Forwards) Options & Forwards)
-------------------- ----------------- ------------------ ------------------
<S> <C> <C> <C> <C>
Interest Rates and
Stock Indices $ 5,191,446 $ 3,605,481 $ 14,701,885 $ 883,752
Commodities -- 577,742 238,375 174,760
Currencies 2,688,064 3,771,760 2,315,661 5,025,340
Energy -- 70,560 129,600 --
Metals 366,525 628,125 205,624 652,082
-------------------- ----------------- ------------------ ------------------
$ 8,246,035 $ 8,653,668 $ 17,591,145 $ 6,735,934
==================== ================= ================== ==================
</TABLE>
Substantially all of the Partnership's derivative instruments outstanding at
December 31, 1997, expire within one year.
The contract/notional values of the exchange-traded and non-exchange-traded
open derivative instrument positions as of December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------- ----------------------------------------
Commitment to Commitment to Commitment Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forward Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------- ------------------
<S> <C> <C> <C> <C>
Exchange-Traded $ 5,191,446 $ 4,253,783 $ 15,736,015 $ 2,928,090
Non-Exchange-
Traded 3,054,589 4,399,885 1,855,130 3,807,844
------------------ ------------------ ------------------ ------------------
$ 8,246,035 $ 8,653,668 $ 17,591,145 $ 6,735,934
================== ================== ================== ==================
</TABLE>
-11-
<PAGE>
The average fair values, based on contract/notional values, of Partnership's
derivative instrument positions which were open as of the end of each calendar
month during the years ended December 31, 1997 and 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 and
Stock Indices $ 10,943,098 $ 10,638,175 $ 66,308,080 $ 40,648,741
Commodities 646,831 267,468 4,379,786 1,232,126
Currencies 3,882,292 5,239,264 11,852,984 14,288,621
Energy 105,153 247,775 1,947,329 1,377,394
Metals 1,058,720 1,014,697 2,474,297 2,816,658
------------------- ------------------- -------------------- -------------------
$ 16,636,094 $ 17,407,379 $ 86,962,476 $ 60,363,540
=================== =================== ==================== ===================
</TABLE>
A portion of the amounts indicated as off-balance sheet risk reflects
offsetting commitments to purchase and sell the same derivative instrument on
the same date in the future. These commitments are economically offsetting
but are not, as a technical matter, offset in the forward market until the
settlement date.
Credit Risk
-----------
The risks associated with exchange-traded contracts are typically perceived to
be less than those associated with over-the-counter (non-exchange-traded)
transactions, because exchanges typically (but not universally) provide
clearinghouse arrangements in which the collective credit (in some cases
limited in amount, in some cases not) of the members of the exchange is
pledged to support the financial integrity of the exchange. In over-the-
counter transactions, on the other hand, traders must rely solely on the
credit of their respective individual counterparties. Margins, which may be
subject to loss in the event of a default, are generally required in exchange
trading, and counterparties may also require margin in the over-the-counter
markets.
The fair value amounts in the above tables represent the extent of the
Partnership's market exposure in the particular class of derivative instrument
listed, but not the credit risk associated with counterparty nonperformance.
The credit risk associated with these instruments from counterparty
nonperformance is the net unrealized gain, if any, included on the Statements
of Financial Condition.
The Partnership also has credit risk because the sole counterparty or broker
with respect to most of the Partnership's assets is MLF.
-12-
<PAGE>
The gross unrealized profit and net unrealized profit on the Partnership's
open derivative instrument positions as of December 31, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------ ------------------------------------
Gross Unrealized Net Unrealized Gross Unrealized Net Unrealized
Profit Profit (Loss) Profit Profit
---------------- --------------- ---------------- --------------
<S> <C> <C> <C> <C>
Exchange-Traded $ 34,125 $ 30,870 $ 57,600 $ 48,583
Non-Exchange-Traded 48,885 (13,812) 26,193 7,568
---------------- --------------- ---------------- --------------
$ 83,010 $ 17,058 $ 83,793 $ 56,151
================ =============== ================ ==============
</TABLE>
The Partnership controls credit risk by dealing almost exclusively
with Merrill Lynch entities as brokers and counterparties.
The Partnership, in its normal course of business, enters into various
contracts, with MLF acting as its commodity broker. Pursuant to the brokerage
arrangement with MLF, to the extent that such trading results in receivables
from and payables to MLF, these receivables and payables are offset and
reported as a net receivable or payable.
To the best of the knowledge and belief of the
undersigned, the information contained in this
report is accurate and complete.
/s/Michael A. Karmelin
Michael A. Karmelin
Chief Financial Officer
Merrill Lynch Investment Partners Inc.
General Partner of
The SECTOR Strategy Fund/SM/ V L.P.
-13-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 0 0
<RECEIVABLES> 3,584,038 11,062,198
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 8,871,133 3,405,293
<PP&E> 0 0
<TOTAL-ASSETS> 12,455,171 14,467,491
<SHORT-TERM> 0 0
<PAYABLES> 244,457 433,195
<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> 12,210,714 14,034,296
<TOTAL-LIABILITY-AND-EQUITY> 12,455,171 14,467,491
<TRADING-REVENUE> 329,853 (681,370)
<INTEREST-DIVIDENDS> 292,197 782,522
<COMMISSIONS> 348,042 1,198,690
<INVESTMENT-BANKING-REVENUES> 0 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 1,369,247 (469,897)
<INCOME-PRE-EXTRAORDINARY> 1,369,247 (469,897)
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,369,247 (469,897)
<EPS-PRIMARY> 13.12 (2.83)
<EPS-DILUTED> 13.12 (2.83)
</TABLE>
