<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
----------------
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------- ----------
Commission File Number 0-18944
THE SECTOR STRATEGY FUND/SM/ VI L.P.
--------------------------------------
(Exact Name of Registrant as
specified in its charter)
Delaware 13-3714541
- ------------------------------- ---------------------------------
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
c/o Merrill Lynch Investment Partners Inc.
Merrill Lynch World Headquarters - South Tower, 6th Fl.
World Financial Center New York, New York 10080-6106
----------------------------------------------------
(Address of principal executive offices)
(Zip Code)
212-236-4161
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
----- -----
This document contains 10 pages.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
THE SECTOR STRATEGY FUND/SM/ VI L.P.
------------------------------------
(a Delaware limited partnership)
STATEMENTS OF FINANCIAL CONDITION
---------------------------------
March 31, December 31,
1997 1996
----------- ------------
ASSETS
- ------
Accrued interest $ 87,107 $ 93,352
Equity in commodity
futures trading accounts:
Cash and option premiums 19,412,663 22,269,250
Net unrealized profit on open contracts 240,904 60,210
Investments 11,108,931 8,288,948
Receivable from investments 377 1,278,557
----------- ------------
TOTAL $30,849,982 $ 31,990,317
=========== ============
LIABILITIES AND PARTNERS' CAPITAL
- ---------------------------------
LIABILITIES:
Redemptions payable $ 568,165 $ 928,164
Brokerage commissions payable 48,450 69,505
Profit shares payable 46,766 43,959
Administrative fees payable 1,373 1,782
----------- ------------
Total liabilities 664,754 1,043,410
----------- ------------
PARTNERS' CAPITAL:
General Partner:
(6,971 and 6,971 Units) 780,871 758,780
Limited Partners:
(262,499 and 277,342 Units) 29,404,357 30,188,127
----------- ------------
Total partners' capital 30,185,228 30,946,907
----------- ------------
TOTAL $30,849,982 $ 31,990,317
=========== ============
NET ASSET VALUE PER UNIT
(Based on 269,470 and 284,313 Units $ 112.02 $ 108.85
outstanding) ======== ========
See notes to financial statements.
<PAGE>
THE SECTOR STRATEGY FUND/SM/ VI L.P.
------------------------------------
(a Delaware limited partnership)
STATEMENTS OF OPERATIONS
------------------------
For the three For the three
months ended months ended
March 31, March 31,
1997 1996
------------- -------------
REVENUES:
Trading profits (loss):
Realized $ 247,346 $ 2,273,059
Change in unrealized 180,694 (985,921)
------------- -------------
Total trading results 428,040 1,287,138
------------- -------------
Interest income 249,293 513,471
Income from investments 419,176 --
------------- -------------
Total revenues 1,096,509 1,800,609
------------- -------------
EXPENSES:
Profit shares 48,023 338,760
Brokerage commissions 151,557 797,404
Administrative fees 4,171 20,447
------------- -------------
Total expenses 203,751 1,156,611
------------- -------------
NET INCOME 892,758 $ 643,998
============= =============
NET INCOME PER UNIT:
Weighted average number of units
outstanding 278,794 441,789
======= =======
Weighted average net income
per Limited Partner
and General Partner Unit $ 3.20 $ 1.46
====== ======
See notes to financial statements.
<PAGE>
THE SECTOR STRATEGY FUND/SM/ VI L.P.
------------------------------------
(a Delaware limited partnership)
------------------------------
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
------------------------------------------
For the three months ended March 31, 1997 and 1996
--------------------------------------------------
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
----- -------- ------- -----
<S> <C> <C> <C> <C>
PARTNERS' CAPITAL,
DECEMBER 31, 1995 484,717 $ 49,707,772 $ 723,241 $ 50,431,013
Net Income - 635,738 8,261 643,998
Redemptions (89,387) (9,474,337) - (9,474,336)
----------- ------------- ------------- --------------
PARTNERS' CAPITAL,
March 31, 1996 395,330 $ 40,869,173 $ 731,502 $ 41,600,675
=========== ============= ============= ==============
PARTNERS' CAPITAL,
DECEMBER 31, 1996 284,313 $ 30,188,127 $ 758,780 $ 30,946,907
Net Income - 870,667 22,091 892,758
Redemptions (14,843) (1,654,437) - (1,654,437)
----------- ------------- ------------- --------------
PARTNERS' CAPITAL,
March 31, 1997 269,470 $ 29,404,357 $ 780,871 $ 30,185,228
=========== ============= ============= ==============
</TABLE>
See notes to financial statements.
<PAGE>
THE SECTOR STRATEGY FUND/SM/ VI L.P.
(a Delaware Limited Partnership)
--------------------------------
NOTES TO FINANCIAL STATEMENTS
-----------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These financial statements have been prepared without audit. In the opinion
of management, the financial statements contain all adjustments (consisting
of only normal recurring adjustments) necessary to present fairly the
financial position of The SECTOR Strategy Fund/SM/ VI L.P. (the
"Partnership" or the "Fund") as of March 31, 1997 and the results of its
operations for the three months ended March 31, 1997 and 1996. However, the
operating results for the interim periods may not be indicative of the
results expected for the full year.
Certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with general accepted accounting
principles have been omitted. It is suggested that these financial
statements be read in conjunction with the financial statements and notes
thereto included in the Partnership's Annual Report on Form 10-K filed with
the Securities and Exchange Commission for the year ended December 31, 1996
(the "Annual Report").
2. INVESTMENT
At March 31, 1997 the Partnership had investments in the ML JWH Financial
and Metals Portfolio L.L.C. ("JWH LLC"), ML Chesapeake Diversified L.L.C.
("Chesapeake LLC"), and effective January 1, 1997, the Partnership had an
additional investment in SJO Prospect Global Diversified Portfolio L.L.C.
("SJO LLC").
Total revenues and fees with respect to such investments are set forth as
follows:
<TABLE>
<CAPTION>
Total Brokerage Administrative Profit Income from
Revenue Commissions Fees Shares Investments
---------------- ---------------- ---------------- ---------------- -----------------
<S> <C> <C> <C> <C> <C>
JWH LLC $ 132,898 $ 80,324 $ 2,211 $ 639 $ 49,724
Chesapeake LLC 447,479 112,290 3,046 67,474 264,669
SJO LLC 187,219 64,861 1,785 15,790 104,783
---------------- ---------------- ---------------- ---------------- -----------------
Total $ 767,596 $ 257,475 $ 7,042 $ 83,903 $ 419,176
================ ================ ================ ================ =================
</TABLE>
3. FAIR VALUE AND OFF-BALANCE SHEET RISK
The Partnership's revenues by reporting category for the three months ended
March 31, 1997 and March 31, 1996 were as follows:
1997 1996
------------------ ---------------
Interest rates
Stock indices $ 2,179 $ (301,778)
Commodities 86,988 623,657
Currencies 146,916 (137,579)
Energy 163,296 623,616
Metals 22,100 490,654
6,561 (11,432)
================== ================
$ 428,040 $ 1,287,138
================== ================
<PAGE>
Fair Value
- ----------
The contract/notional values of the Partnership's open derivative instrument
positions as of March 31, 1997 and December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest rates $ 2,311,017 $ 41,931,936 $ 19,868,322 $ 1,564,238
Stock indices - 793,973 - 250,367
Commodities 2,186,616 514,400 120,648 324,279
Currencies 1,682,820 4,976,927 1,050,027 3,065,985
Energy - 611,901 82,109 -
Metals 778,159 448,159 639,127 1,085,360
------------------ ------------------ ------------------ ------------------
$ 6,958,612 $ 49,277,296 $ 21,760,233 $ 6,290,229
================== ================== ================== ==================
</TABLE>
Substantially all of the Partnership's derivative instruments outstanding as
of March 31, 1997 expire within one year.
The contract/notional values of the Partnership's exchange-traded and non-
exchange-traded open derivative instrument positions as of March 31, 1997 and
December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Exchange
traded $ 6,372,453 $ 49,183,762 $ 21,171,231 $ 5,598,019
Non-Exchange
traded 586,159 93,534 589,002 692,210
------------------ ------------------ ------------------ ------------------
$ 6,958,612 $ 49,277,296 $ 21,760,233 $ 6,290,229
================== ================== ================== ==================
</TABLE>
The average fair value of the Partnership's derivative instrument positions
which were open as of the end of each calendar month during the three months
ended March 31, 1997 and the year ended December 31, 1996 were as follows:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------------- --------------------------------------------
Commitment to Commitment to Commitment to Commitment to
Purchase (Futures, Sell (Futures, Purchase (Futures, Sell (Futures,
Options & Forwards) Options & Forwards) Options & Forwards) Options & Forwards)
------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C>
Interest rates $ 17,546,881 $ 20,206,878 $ 99,859,109 $ 61,662,340
Stock indices 781,539 1,160,102 9,556,040 2,455,672
Commodities 1,932,750 528,631 8,046,443 1,227,924
Currencies 1,742,600 5,627,918 21,644,329 27,211,306
Energy 191,440 611,628 3,186,493 101,599
Metals 1,185,896 819,653 12,593,308 6,776,261
------------------ ------------------ ------------------ ------------------
$ 23,381,106 $ 28,954,810 $ 154,885,722 $ 99,435,102
------------------ ------------------ ------------------ ------------------
</TABLE>
As of March 31, 1997 and December 31, 1996, $17,476,973 and $19,782,856 of
the Partnership's assets, respectively, were held in segregated accounts at
MLF in accordance with Commodity Futures Trading Commission regulations.
The gross unrealized profit and the net unrealized profit (loss) on the
Partnership's open derivative instrument positions as of March 31, 1997 and
December 31, 1996 were as follows:
<PAGE>
<TABLE>
<CAPTION>
1997 1996
---- ----
Gross Net Gross Net
Unrealized Unrealized Unrealized Unrealized
Profit Profit (Loss) Profit Profit (Loss)
---------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Exchange
traded $ 279,905 $ 239,145 $ 80,876 $ 64,542
Non-Exchange
traded 21,355 1,759 34,397 (4,332)
------------- ---------------- ------------- ----------------
$ 301,260 $ 240,904 $ 115,273 $ 60,210
============= ================ ============= =================
</TABLE>
Item 2: Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Operational Overview: Advisor Selections
- ----------------------------------------
Due to the nature of the Fund's business, its results of operations
depend on Merrill Lynch Investment Partners Inc., ("MLIP")'s ability to select
Advisors and determine the appropriate percentage of each series' assets to
allocate to them for trading, as well as the Advisors' ability to recognize and
capitalize on trends and other profit opportunities in different sectors of the
world commodity markets. MLIP's Advisor selection procedure and leveraging
analysis, as well as the Advisors' trading methods, are confidential, so that
substantially the only information that can be furnished regarding the Fund's
results of operations is contained in the performance record of its trading.
Unlike operating businesses, general economic or seasonal conditions do not
directly affect the profit potential of the Fund, and its past performance is
not necessarily indicative of future results. Because of the speculative nature
of its trading, operational or economic trends have little relevance to the
Fund's results. MLIP believes, however, that there are certain market
conditions, for example, markets with strong price trends, in which the Fund has
a better likelihood of being profitable than in others.
As of April 1, 1997, the Partnership's assets were allocated as
follows:
%
TRADING ADVISOR SECTOR ALLOCATION
--------------- ------ ----------
Chesapeake Capital Corp. Diversified 15.66
John W. Henry & Co., Inc. Financial/
Metals 11.35
SJO, Inc. Financial 9.11
Rabar Market Research, Inc. Diversified 9.47
Northfield Trading Diversified 11.65
Cash 42.76
------
100.00%
MLIP expects to continue to change both allocations and Advisor
selections from time to time without advance notice to existing investors.
MLIP has no timetable or schedule for making Advisor changes or
reallocations, and generally intends to make a medium- to long-term commitment
to all Advisors selected. However, there can be no assurance as to the
frequency or number of the Advisor changes which may take place in the future,
or as to how long any of the current Advisors will continue to manage assets for
the Fund.
Results of Operations - General
- -------------------------------
MLIP believes that multi-Advisor futures funds should be regarded as
medium- to long-term investments but, unlike an operating business, it is
difficult to identify "trends" in the Fund's operations and virtually impossible
to make any predictions regarding future results based on results to date.
Markets in which sustained price trends occur with some frequency tend
to be more favorable to managed futures investments than "whipsaw," "choppy"
markets, but (i) this is not always the case, (ii) it is impossible to predict
when trending markets will occur and (iii) different Advisors are affected
differently by trends in general as well as by particular types of trends.
The Fund controls credit risk in its trading in the derivatives markets
by trading only through Merrill Lynch entities which MLIP believes to be
creditworthy. The Fund attempts to control the market risk inherent in its
derivatives trading by utilizing a multi-advisor, multi-strategy structure.
This structure purposefully attempts to diversify the Fund's Advisor group among
different strategy types and market sectors in an effort to reduce risk
(although the Fund's portfolio currently emphasizes technical and trend-
following approaches).
<PAGE>
Performance Summary
- -------------------
During the first quarter of 1996, the Fund's average month-end Net
Assets equalled $44,870,327, and the Fund recognized gross trading gains of
$1,287,138 or 2.87% of such average month-end Net Assets. Brokerage commissions
of $797,404 or 1.78%, Administrative fees of $20,447 or 0.05%, and Profit Shares
of $338,760 or 0.75% of average month-end Net Assets were paid. Interest income
of $513,471 or 1.14% of average month-end Net Assets resulted in net income of
$643,998 or 1.44% of average month-end Net Assets, which resulted in a 3.26%
increase in the Net Asset Value per Unit since December 31, 1995.
During the first three months of 1997, the Fund's average month-end Net
Assets equalled $30,706,543, and the Fund recognized gross trading gain of
$428,040 or 1.39% and Earnings from Investments of $419,176 or 1.37% of such
average month-end Net Assets. Brokerage commissions of $151,557 or .49%,
Administrative fees of $4,171 or .01% and Profit Shares of $48,023 or .16% of
average month-end Net Assets were paid. Interest income of $249,293 or .82% of
average month-end Net Assets resulted in a net gain of $892,758 or 2.91% of
average month-end Net Assets, which resulted in a 2.91% gain in the Net Asset
Value per Unit since December 31, 1996.
During the first three months of 1997 and 1996, the Fund experienced 4
profitable months and 2 unprofitable months.
MONTH-END NET ASSET VALUE PER UNIT
Jan. Feb. Mar.
------- -------- -------
1996 $107.43 $103.23 $105.23
1997 $110.66 $112.34 $112.02
Importance of Market Factors
- ----------------------------
Comparisons between the Fund's performance in a given period in one
fiscal year to the same period in a prior year are unlikely to be meaningful,
given the uncertainty of price movements in the markets traded by the Fund. In
general, MLIP expects that the Fund is most likely to trade successfully in
markets which exhibit strong and sustained price trends. The current Advisor
group emphasizes technical and trend-following methods. Consequently, one would
expect that in trendless, "choppy" markets the Fund would likely be
unprofitable, while in markets in which major price movements occur, the Fund
would have its best profit potential (although there could be no assurance that
the Fund would, in fact, trade profitably). However, trend-followers not
infrequently will miss major price movements, and market corrections can result
in rapid and material losses (sometimes as much as 5% in a single day).
Although MLIP monitors market conditions and Advisor performance on an ongoing
basis in overseeing the Fund's trading, MLIP does not attempt to "market
forecast" or to "match" trading styles with predicted market conditions.
Rather, MLIP concentrates on quantitative and qualitative analysis of
prospective Advisors, as well as on statistical studies of the historical
performance parameters of different Advisor combinations in selecting Advisors
and allocating and reallocating Fund assets among them.
Because managed futures advisors' strategies are proprietary and
confidential and market movements unpredictable, selecting advisors to implement
speculative trading strategies involves considerable uncertainty. Furthermore,
the concentration of the Fund's current Advisor portfolio, both in terms of the
number of managers retained and the common emphasis of their strategies on
technical and trend-following methods, increases the risk that unexpectedly bad
performance, turbulent market conditions or a combination of the two will result
in significant losses.
Liquidity
- ---------
Most of the Partnership's assets are held as cash which, in turn, is
used to margin its futures positions and earns interest income and is withdrawn,
as necessary, to pay redemptions and fees.
The futures contracts in which the Partnership trades may become illiquid
under certain market conditions. Commodity exchanges limit fluctuations in
futures prices during a single day by regulations referred to as "daily limits."
During a single day no trades may be executed at prices beyond the daily limit.
Once the price of a futures contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
generally neither be taken nor liquidated unless traders are willing to effect
trades at or within the limit. Futures contracts have occasionally moved to the
daily limit for several consecutive days with little or no trading. Such market
conditions could prevent the Partnership from promptly liquidating its futures
(including its options) positions. There are no limitations on the daily price
moves in trading foreign currency forward contracts through banks, although
illiquidity may develop in the forward markets due to large spreads between
"bid" and "ask" prices quoted. (Forward contracts are the bank version of
currency futures contracts and are not traded on exchanges.)
<PAGE>
Capital Resources
- -----------------
The Partnership does not have, nor does it expect to have, any capital
assets and has no material commitments for capital expenditures. The
Partnership uses its assets to supply the necessary margin or premiums for, and
to pay any losses incurred in connection with, its trading activity and to pay
redemptions and fees.
Inflation is not a significant factor in the Fund's profitability,
although inflationary cycles can give rise to the type of major price movements
which can have a materially favorable or adverse impact on the Fund's
performance.
Changes in the level of prevailing interest rates (a factor generally
associated with inflation) could have a material effect on the percentage of the
total capital which is committed to trading, as interest rates affect the
calculation of the discounted minimum Net Asset Value per Unit which Merrill
Lynch & Co., Inc. has guaranteed to investors.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
There are no pending proceedings to which the Partnership or the General
Partner is a party.
John w. Henry & Company, Inc. ("JWH") is one of the Advisors retained by
the Fund, managing approximately 11% of the Fund's assets committed to trading
April 1, 1997. In September 1996, JWH was named as a co-defendant in a class
action lawsuits brought in the California Superior Court, Los Angeles County and
in the New York Supreme Court, New York County. In November, JWH was named as a
co-defendant in a class action complaint filed in Superior Court of the State of
Delaware for Newcastle County that contained the same allegations as the New
York and California complaints. The actions, which seek unspecified damages,
purport to be brought on behalf of investors in certain Dean Witter, Discover &
Co. ("Dean Witter") commodity pools, some of which are advised by JWH, and are
primarily directed at Dean Witter's alleged fraudulent selling practices in
connection with the marketing of those pools. JWH is essentially alleged to
have aided and abetted or directly participated with Dean Witter in those
practice. JWH believes the allegations against it are without merit; it intends
to contest these allegations vigorously, and is convinced that it will be shown
to have acted properly and in the best interest of the investors.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
--------
There are no exhibits required to be filed as part of this document.
(b) Reports on Form 8-K
-------------------
There were no reports on Form 8-K filed during the first three months
of fiscal 1997.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE SECTOR STRATEGY FUND/SM/ VI L.P.
By: MERRILL LYNCH INVESTMENT PARTNERS INC.
(General Partner)
Date: May 13, 1997 By /s/JOHN R. FRAWLEY, JR.
-----------------------
John R. Frawley, Jr.
President, Chief Executive Officer
and Director
Date: May 13, 1997 By /s/MICHAEL A. KARMELIN
----------------------
Michael A. Karmelin
Chief Financial Officer,
and Director
<TABLE> <S> <C>
<PAGE>
<ARTICLE> BD
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION, CONSOLIDATED STATEMENTS
OF OPERATIONS, CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> MAR-31-1997 MAR-31-1996
<CASH> 0 0
<RECEIVABLES> 30,849,982 43,578,541
<SECURITIES-RESALE> 0 0
<SECURITIES-BORROWED> 0 0
<INSTRUMENTS-OWNED> 0 0
<PP&E> 0 0
<TOTAL-ASSETS> 30,849,982 43,578,541
<SHORT-TERM> 0 0
<PAYABLES> 664,754 1,977,866
<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> 30,185,228 41,600,675
<TOTAL-LIABILITY-AND-EQUITY> 30,849,982 43,578,541
<TRADING-REVENUE> 428,040 1,287,138
<INTEREST-DIVIDENDS> 249,293 513,471
<COMMISSIONS> 203,751 1,156,611
<INVESTMENT-BANKING-REVENUES> 419,176 0
<FEE-REVENUE> 0 0
<INTEREST-EXPENSE> 0 0
<COMPENSATION> 0 0
<INCOME-PRETAX> 892,758 643,998
<INCOME-PRE-EXTRAORDINARY> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 892,758 643,998
<EPS-PRIMARY> 3.20 1.46
<EPS-DILUTED> 3.20 1.46
</TABLE>
