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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended December 31, 1999
Commission File Number 0-16526
HUTTON INVESTORS FUTURES FUND L.P. II
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(Exact name of registrant as specified in its charter)
Delaware 13-3406160
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
390 Greenwich St. - 1st Fl.
New York, New York 10013
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(Address and Zip Code of principal executive offices)
(212) 723-5424
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units
of Limited
Partnership
Interest
Title of Class)
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]
As of February 29, 2000 Limited Partnership Units with an aggregate value of
$18,352,414 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business.
(a) General development of business. Hutton Investors Futures Fund
L.P. II (the "Partnership") is a limited partnership organized on March 31,
1987, under the Delaware Revised Uniform Limited Partnership Act and commenced
trading on July 24, 1987. The Partnership engages in speculative trading of
commodity futures contracts and other commodity interests, including futures
contracts on United States Treasury bills and other financial instruments,
foreign currencies and stock indices. Redemptions of Units of Limited
Partnership Interest in the Partnership ("Units") for the years ended December
31, 1999, 1998 and 1997 are reported in the Statement of Partners' Capital on
page F-5 under "Item 8. Financial Statements and Supplementary Data."
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form of
organization from a corporation to a limited liability company on October 1,
1999. The Partnership's commodity broker is Salomon Smith Barney Inc. ("SSB").
SSB is an affiliate of the General Partner. The General Partner is wholly owned
by Salomon Smith Barney Holdings Inc. ("SSBHI"), which is the sole owner of SSB.
SSBHI is a wholly owned subsidiary of Citigroup Inc.
The Partnership trades futures contracts on commodities on United
States and foreign commodity exchanges through a commodity brokerage account
maintained with SSB.
2
Under the Limited Partnership Agreement of the Partnership (the
"Limited Partnership Agreement"), the General Partner has sole responsibility
for the management of the business and affairs of the Partnership, but may
delegate trading discretion to one or more trading advisors.
As of December 31, 1999, the General Partner has entered into
advisory agreements (the "Management Agreements") with TrendLogic Associates
Inc. and with John W. Henry & Company, Inc. (collectively the "Advisors"). Two
of the principals of TrendLogic Associates, Inc., Mr. Paul E. Dean and Mr.
Richard Semels, are employees of SSB. The Management Agreements provide that the
Advisors will have sole discretion in determining the investment of the assets
of the Partnership but that the Advisors will have no authority to select the
commodity broker through whom transactions will be executed.
The Management Agreements can be terminated by the General Partner at
any time for any reason whatsoever. The Advisors may terminate the Management
Agreements for any reason upon 30 days' notice to the General Partner. The
Advisors may also terminate the Agreements if the trading policies of the
Partnership are changed in a manner that the Advisor reasonably believes will
adversely affect the performance of its trading strategies.
Pursuant to the terms of the Management Agreements, the Partnership
will pay each Advisor an incentive fee, payable quarterly, equal to 20% of each
Advisor's Trading Profits (as defined in the Management Agreements).
3
Under the terms of a customer agreement between the Partnership and SSB,
(the "Customer Agreement") the Partnership is obligated to pay commodity
brokerage commissions at $50 per round-turn futures transaction and $25 per
option transaction (inclusive of National Futures Association ("NFA"), floor
brokerage, exchange and clearing fees). The Customer Agreement between the
Partnership and SSB gives the Partnership the legal right to net unrealized
gains and losses. In addition, the General Partner (through SSB) invests
approximately eighty percent (80%) of the Partnership's assets in interest
bearing U.S. Treasury obligations (primarily U.S. Treasury Bills).
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests. The Partnership does not engage in sales of goods or services. The
Partnership's net income (loss) from operations for the years ended December 31,
1999, 1998, 1997, 1996 and 1995 are set forth under "Item 6. Selected Financial
Data." The Partnership's capital at December 31, 1999 was $18,854,081.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does
not engage in sales of goods or services or own any long lived assets, and
therefore this item is not applicable.
4
Item 2. Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SSB.
Item 3. Legal Proceedings.
There have been no material administrative, civil or criminal actions
within the past five years against SSB or any of its individual principals and
no such actions are currently pending, except as follows.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust), Ameritech Corporation, and an officer of Ameritech
sued Salomon Brothers Inc ("SBI") and Salomon Brothers Realty Corporation
("SBRC") in the U.S. District Court for the Northern District of Illinois
(Harris Trust Savings Bank, not individually but solely as trustee for the
Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v. Salomon
Brothers Inc and Salomon Brothers Realty Corp.). The complaint alleged that
purchases by Ameritech Pension Trust from the Salomon entities of approximately
$20.9 million in participations in a portfolio of motels owned by Motels of
America, Inc. and Best Inns, Inc. violated the Employee Retirement Income
Security Act ("ERISA"), the Racketeer Influenced and Corrupt Organization Act
("RICO") and state law. SBI had acquired the participations issued by Motels of
America and Best Inns to finance purchases of motel portfolios and sold 95% of
three such issues and 100% of one such issue to Ameritech Pension Trust.
5
Ameritech Pension Trust's complaint sought (1) approximately $20.9 million on
the ERISA claim, and (2) in excess of $70 million on the RICO and state law
claims as well as other relief. In various decisions between August 1993 and
July 1999, the courts hearing the case have dismissed all of the allegations in
the complaint against the Salomon entities. In October 1999, Ameritech appealed
to the U.S. Supreme Court and in January 2000, the Supreme Court agreed to hear
the case and oral argument will be heard April 17, 2000. The appeal seeks review
of the decision of the U.S. Court of Appeals for the Seventh Circuit that
dismissed the sole remaining ERISA claim against the Salomon entities.
Both the Department of Labor and the Internal Revenue Service ("IRS") have
advised SBI that they were or are reviewing the transactions in which Ameritech
Pension Trust acquired such participations. With respect to the IRS review,
SSBHI, SBI and SBRC have consented to extensions of time for the assessment of
excise taxes that may be claimed to be due with respect to the transactions for
the years 1987, 1988 and 1989. As of the date of this report, the IRS has not
issued such 30-day letters to SSBHI, SBI or SBRC.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
SSB, in the U.S. Bankruptcy Court for the Central District of California.
(County of Orange et al. v. Bear Stearns & Co. Inc. et al.) The complaint
alleged, among other things, that the brokerage firms recommended and sold
unsuitable securities to Orange County. SSB and the remaining brokerage firms
6
settled with Orange County in mid 1999.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
determination that Smith Barney Inc. and another underwriter will be responsible
for any damages that the City may incur in the event the IRS denies tax exempt
status to the City's General Obligation Refunding Bonds Series 1991. The
complaints were subsequently amended. SSB has asked the court to dismiss the
amended complaints. In May 1999, the Court denied SSB's motion to dismiss, but
stayed the litigation because the matter was not ripe. In March 2000, the city
filed a notice of discontinuance dismissing the complaint.
In November 1998, a class action complaint was filed in the United
States District Court for the Middle District of Florida (Dwight Brock as Clerk
for Collier County v. Merrill Lynch, et al.). The complaint alleged that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced refunding transactions.
Among other relief, plaintiffs sought compensatory and punitive damages,
restitution and/or rescission of the transactions and disgorgement of alleged
excessive profits. In October 1999, the plaintiff filed a second amended
complaint. SSB has asked the court to dismiss the amended complaint.
In connection with the Louisiana and Florida matters, the IRS and SEC
7
have been conducting an industry-wide investigation into the pricing of Treasury
securities in advanced refunding transactions.
In December 1998, SSB was one of twenty-eight market making firms that
reached a settlement with the SEC in the matter titled In the Matter of Certain
Market Making Activities on NASDAQ. As part of the settlement of that matter,
SSB, without admitting or denying the factual allegations, agreed to an order
that required that it: (i) cease and desist from committing or causing any
violations of Sections 15(c)(1) and (2) of the Securities Exchange Act of 1934
and Rules 15c1-2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling
approximately $760,000, and (iii) submit certain policies and procedures to an
independent consultant for review.
In March 1999, a complaint seeking in excess of $250 million was filed
by a hedge fund and its investment advisor against SSB in the Supreme Court of
the State of New York, County of New York (MKP Master Fund, LDC et al. v.
Salomon Smith Barney Inc.). The complaint included allegations that, while
acting as prime broker for the hedge fund, SSB breached its contracts with
plaintiffs, misused their monies, and engaged in tortious (wrongful) conduct,
including breaching its fiduciary duties. SSB asked the court to dismiss the
complaint in full. In October 1999, the court dismissed the tort claims,
including the breach of fiduciary duty claims. The court allowed the breach of
contract and misuse of money claims to stand. In December 1999, SSB filed an
answer and asserted counterclaims against the investment advisor. In response to
8
plaintiff's motion to strike the counterclaims, in January 2000, SSB amended its
counterclaims against the investment advisor to seek indemnification and
contribution. Plaintiffs moved to strike SSB's amended counterclaims in February
2000. SSB will continue to contest this lawsuit vigorously.
In the course of its business, SSB, as a major futures commission
merchant and broker-dealer is a party to various claims and routine regulatory
investigations and proceedings that the general partner believes do not have a
material effect on the business of SSB. Item 4. Submission of Matters to a Vote
of Security Holders.
There were no matters submitted to the security holders for a vote
during the year ended December 31, 1999.
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a)Market Information. The Partnership has issued no stock. There is
no public market for the Units of Limited Partnership Interest.
(b)Holders. The number of holders of Units of Partnership Interest as of
December 31, 1999 was 367.
(c)Distribution. The Partnership did not declare a distribution in 1999
or 1998.
(d)Use of Proceeds. There were no additional sales in the years ended
December 31, 1999, 1998 and 1997.
9
Item 6. Selected Financial Data.
Net realized and unrealized trading gains (losses), interest income, net
income (loss), increase (decrease) in net asset value per Unit for the years
ended December 31, 1999, 1998, 1997, 1996 and 1995 and total assets as of
December 31, 1999, 1998, 1997, 1996 and 1995 were as follows:
1999 1998 1997 1996 1995
-------------- ----------- ------------ ------------ ------------
Net realized and unrealized trading gains
(losses) net of brokerage commissions
and clearing fees of $740,877,
$725,585, $653,350, $609,752 and
$473,316, respectively $ (3,188,507) $ 2,062,231 $ 3,259,116 $ 4,725,245 $ 4,798,547
Interest income 735,148 784,546 777,388 625,578 640,056
------------ ------------ ------------ ------------ ------------
$ (2,453,359) $ 2,846,777 $ 4,036,504 $ 5,350,823 $ 5,438,603
============ ============ ============ ============ ============
Net income (loss) $ (2,746,410) $ 2,350,037 $ 3,348,067 $ 4,409,205 $ 4,824,554
============ ============ ============ ============ ============
Increase (decrease)
in net asset value
per Unit $ (773.76) $ 644.44 $ 845.88 $ 1,069.22 $ 1,082.24
============ ============ ============ ============ ============
Total assets $ 19,553,584 $ 23,279,963 $ 22,381,511 $ 20,205,672 $ 16,025,794
============ ============ ============ ============ ============
10
33
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(1) Liquidity. The Partnership does not engage in sales of goods
or services. The Partnership's only assets are its equity in its commodity
futures trading account, consisting of cash and cash equivalents, and net
unrealized appreciation (depreciation) on open futures contracts. Approximately
80% of the Partnership=s assets are maintained in interest bearing U.S. Treasury
obligations. Because of the low margin deposits normally required in commodity
futures trading, relatively small price movements may result in substantial
losses to the Partnership. Substantial losses resulting from such price
movements could lead to a material decrease in liquidity. To minimize this risk,
the Partnership follows certain policies including:
(a) Partnership funds are invested only in commodity interests
which are traded in sufficient volume to permit, in the opinion of the Advisors,
ease of taking and liquidating positions.
(b) The Partnership diversifies its positions among various
commodities. The Partnership does not initiate additional positions in a
commodity if such additional positions would result in a net long or short
position in such commodity requiring as margin more than 15% of the net assets
of the Partnership.
(c) The Partnership does not initiate additional positions in
any commodity if such additional positions would result in aggregate positions
for all commodities requiring as margin more than 66 2/3% of the Partnership's
net assets.
11
(d) The Partnership may occasionally accept delivery of a
commodity. Unless such delivery is disposed of promptly by retendering the
warehouse receipt representing the delivery to the appropriate clearing house,
the physical commodity position is fully hedged.
(e) The Partnership does not employ the trading technique
commonly known as "pyramiding," in which the speculator uses unrealized profits
on existing positions as margin for the purchase or sale of additional positions
in the same or related commodities.
(f) The Partnership does not utilize borrowings except
short-term borrowings if the Partnership takes delivery of any cash commodities.
(g) The Advisors may, from time to time, employ trading
strategies such as spreads or straddles on behalf of the Partnership. The term
"spread" or "straddle" describes a commodity futures trading strategy involving
the simultaneous buying and selling of futures contracts on the same commodity
but involving different delivery dates or markets and in which the trader
expects to earn a profit from a widening or narrowing of the difference between
the prices of the two contracts.
The Partnership is party to financial instruments with off-balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
may include forwards, futures and options, whose value is based upon an
underlying asset, index, or reference rate, and generally represent future
12
commitments to exchange currencies or cash flows, or to purchase or sell other
financial instruments at specified terms at specified future dates. Each of
these instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. The General
Partner monitors and controls the Partnership's risk exposure on a daily basis
through financial, credit and risk management monitoring systems and accordingly
believes that it has effective procedures for evaluating and limiting the credit
and market risks to which the Partnership is subject. (See also Item 8.
AFinancial Statements and Supplementary Data.@ for further information on
financial instrument risk included in the notes to financial statements.)
Other than the risks inherent in commodity futures trading, the
Partnership knows of no trends, demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement requires dissolution of the Partnership under
certain circumstances as defined in the Limited Partnership Agreement including,
but not limited to, a decrease in the net asset value of a Unit to less than
$500 as of the close of business on any business day, or a decrease in the
aggregate net assets of the Partnership to less than $1,000,000, or on December
31, 2007.
(2) Capital resources. (a) The Partnership has made no material
commitments for capital expenditures as of the end of the latest fiscal period.
13
(b) The Partnership's capital consists of the capital
contributions of the Partners as increased or decreased by gains or losses on
trading of commodity interests, expenses, interest income, redemptions of Units
and distributions of profits, if any. Gains or losses on commodity futures
trading cannot be predicted. Market movements in commodities are dependent upon
fundamental and technical factors which the Partnership's Advisors may or may
not be able to identify. Partnership expenses consist of, among other things,
commissions and incentive fees. The level of these expenses is dependent upon
the level of trading and the ability of the Advisors to identify and take
advantage of price movements in the commodity markets, in addition to the level
of net assets maintained. No forecast can be made as to the level of redemptions
in any given period. For the year ended December 31, 1999, 233 Units were
redeemed for a total of $1,378,283. For the year ended December 31, 1998, 168
Units were redeemed for a total of $912,753. For the year ended December 31,
1997, 184 Units were redeemed for a total of $959,742.
(3) Results of Operations. For the year ended December 31, 1999,
the net asset value per Unit decreased 12.4% from $6,232.38 to $5,458.62. For
the year ended December 31, 1998 the net asset value per Unit increased 11.5%
from $5,587.94 to $6,232.38. For the year ended December 31, 1997, the net asset
value per Unit increased 17.8% from $4,742.06 to $5,587.94.
The Partnership experienced net trading loss of $2,447,630 before
commissions and expenses for the year ended December 31, 1999. These losses were
14
primarily attributable to the trading of commodity futures in non-U.S. interest
rates, metals, softs, livestock, grains and indices and were partially offset by
gains in the trading of currencies, energy and U.S. interest rates.
The Partnership experienced net trading gains of $2,787,816 before
commissions and expenses for the year ended December 31, 1998. These gains were
primarily attributable to the trading of commodity futures in currencies, U.S.
and non-U.S. interest rates, livestock and energy products and were partially
offset by losses realized in metals, softs, grains and indices.
The Partnership experienced net trading gains of $3,912,466 before
commissions and expenses for the year ended December 31, 1997. These gains were
primarily attributable to the trading of commodity futures in currencies, U.S.
and non-U.S. interest rates, metals and indices and were partially offset by
losses in the trading of energy products, grains, livestock and softs.
Commodity futures markets are highly volatile. Broad price fluctuations and
rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the existence of major price trends and the ability of the Advisors to
identify those price trends correctly. Price trends are influenced by, among
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. The
Advisors' technical trading methods do not generally take into account such
fundamental factors. To the extent that market trends exist and the Advisors are
15
able to identify them, the Partnership expects to increase capital through
operations.
(4) Operational Risk
The Partnership is directly exposed to market risk and credit risk,
which arise in the normal course of its business activities. Slightly less
direct, but of critical importance, are risks pertaining to operational and back
office support. This is particularly the case in a rapidly changing and
increasingly global environment with increasing transaction volumes and an
expansion in the number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss and
legal liability attributable to operational problems, such as inaccurate pricing
of transactions, untimely trade execution, clearance and/or settlement, or the
inability to process large volumes of transactions. The Partnership is subject
to increased risks with respect to its trading activities in emerging market
securities, where clearance, settlement, and custodial risks are often greater
than in more established markets. Technological Risk - the risk of loss
attributable to technological limitations or hardware failure that constrain the
Partnership's ability to gather, process, and communicate information
efficiently and securely, without interruption, with customers, among units
within the Partnership, and in the markets where the Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
16
documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements. Financial
Control Risk - the risk of loss attributable to limitations in financial systems
and controls. Strong financial systems and controls ensure that assets are
safeguarded, that transactions are executed in accordance with management's
authorization, and that financial information utilized by management and
communicated to external parties, including the Partnership's unitholders,
creditors, and regulators, is free of material errors.
Risk of Computer System Failure (Year 2000 Issue)
SSBHI's computer systems and business processes successfully handled
the date change from December 31, 1999 to January 1, 2000. SSBHI is not aware of
any significant year 2000 problems encountered internally or with the third
parties with which it interfaces, including customers and counterparties, the
global financial market infrastructure, and the utility infrastructure on which
all corporations rely.
Based on operations since January 1, 2000, SSBHI does not expect any
significant impact to its ongoing business as a result of the year 2000 issue.
However, it is possible that the full impact of year 2000 issues has not been
fully recognized and no assurances can be given that year 2000 problems will not
emerge.
The pretax costs associated with required system modifications and
conversions totaled approximately $130 million. These costs were funded through
operating cash flow and expensed in the period in which they were incurred.
17
The expenditures and the General Partner's resources dedicated
to the preparation for Year 2000 did not have a material impact on the operation
or results of the Partnership.
The most likely and most significant risk to the Partnership
associated with the lack of Year 2000 readiness is the failure of outside
organizations, including the commodities exchanges, clearing organizations, or
regulators with which the Partnership interacts to resolve their Year 2000
issues in a timely manner. This risk could involve the inability to determine
the value of the Partnership at some point in time and would make effecting
purchases or redemptions of Units in the Partnership infeasible until such
valuation was determinable.
(5) New Accounting Pronouncements
The Partnership adopted Statement on Financial Accounting Standards No.
133 ("SFAS 133"), Accounting For Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize all
derivative instruments in the statement of financial condition and measure those
financial instruments at fair value. SFAS 133 has no impact on Partners' Capital
and operating results as all derivative instruments are recorded at fair value,
with changes therein reported in the statement of income and expenses.
18
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification results among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
19
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's
market risk exposures contain "forward-looking statements" within the meaning of
the safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor except for statements of historical
fact (such as the terms of particular contracts and the number of market risk
sensitive instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized).
20
Exchange maintenance margin requirements have been used by the
Partnership as the measure of its Value at Risk. Maintenance margin requirements
are set by exchanges to equal or exceed the maximum losses reasonably expected
to be incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In the case of market sensitive instruments which are not exchange
traded (almost exclusively currencies in the case of the Partnership), the
margin requirements for the equivalent futures positions have been used as Value
at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers' margins have been used.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been added to determine each trading category's aggregate
21
Value at Risk. The diversification effects resulting from the fact that the
Partnership's positions are rarely, if ever, 100% positively correlated have not
been reflected.
22
The Partnership's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of December 31, 1999. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1999, the
Partnership's total capitalization was $18,854,081.
December 31, 1999
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- --------------------------------------------------------------------------------
Currencies
- -Exchange Traded Contracts $ 9,654 0.05% $1,032,005 $ 650,468
- -OTC Contracts 772,587 4.10% 12,874 13,700
Energy 142,600 0.76% 145,800 121,500
Grains 29,550 0.16% 48,050 29,900
Interest rates U.S. 276,700 1.46% 357,150 236,051
Interest rates Non-U.S 605,380 3.21% 1,274,425 667,425
Livestock 4,925 0.03% 11,225 9,666
Metal 358,750 1.90% 473,200 247,100
Softs 157,754 0.84% 162,423 102,891
Indices 330,285 1.75% 627,583 172,971
--------- ----
Total $2,688,185 14.26%
========== ======
23
As of December 31, 1998, the Partnership's total capitalization was $22,978,774.
December 31, 1998
% of Total
Market Sector Value at Risk Capitalization
Currencies
- -Exchange Traded Contracts $ 8,430 0.04%
- -OTC Contracts 486,070 2.12%
Energy 110,300 0.48%
Interest rates U.S. 249,620 1.09%
Interest rates Non-U.S 1,087,517 4.73%
Grains 27,400 0.12%
Livestock 4,025 0.02%
Softs 99,729 0.43%
Indices 164,631 0.72%
Metals 122,150 0.53%
---------- -----
Total $2,359,872 10.28%
========== =====
Material Limitations on Value at Risk as an Assessment of Market Risk.
The face value of the market sector instruments held by the Partnership
is typically many times the applicable maintenance margin requirement (margin
requirements generally range between 2% and 15% of contract face value) as well
as, many times, the capitalization of the Partnership. The magnitude of the
Partnership's open positions creates a "risk of ruin" not typically found in
most other investment vehicles. Because of the size of its positions, certain
market conditions -- unusual, but historically recurring from time to time --
could cause the Partnership to incur severe losses over a short period of time.
The foregoing Value at Risk table -- as well as the past performance of the
Partnership -- give no indication of this "risk of ruin."
24
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. However, these balances (as well as any market
risk they represent) are immaterial.
The Partnership also has non-trading cash flow risk as a result of
investing a substantial portion (approximately 80%) (as well as any market risk
it represents) of its available assets in U.S. Treasury bills for cash
management purposes. Although the General Partner does not anticipate that, even
in the case of major interest rate movements, the Partnership would sustain a
material mark-to-market loss on its securities positions, if short-term interest
rates decline so will the Partnership's cash management income. The Partnership
also maintains a portion (approximately 24%) of its available assets in cash in
interest-bearing accounts at the Commodity Broker. These cash balances are also
subject (as well as any market risk they represent) to cash flow risk, which is
not material.
Materiality as used in this section, "Qualitative and Quantitative
Disclosures About Market Risk," is based on an assessment of reasonably possible
market movements and the potential losses caused by such movements, taking into
account the leverage, optionality and multiplier features of the Partnership's
market sensitive instruments. Qualitative Disclosures Regarding Primary Trading
Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
25
primary market risk exposures constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk
controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price
relationships, an influx of new market participants, increased regulation and
many other factors could result in material losses as well as in material
changes to the risk exposures and the management strategies of the Partnership.
There can be no assurance that the Partnership's current market exposure and/or
risk management strategies will not change materially or that any such
strategies will be effective in either the short- or long- term. Investors must
be prepared to lose all or substantially all of their investment in the
Partnership.
The following were the primary trading risk exposures of the Partnership as
of December 31, 1999, by market sector.
Interest Rates. Interest rate risk is the principal market exposure of the
Partnership. Interest rate movements directly affect the price of the futures
positions held by the Partnership and indirectly affect the value of its stock
26
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7
interest rates will remain the primary market exposure of the Partnership for
the foreseeable future. The changes in interest rates which have the most effect
on the Partnership are changes in long-term, as opposed to short-term, rates.
Consequently, even a material change in short-term rates would have little
effect on the Partnership were the medium- to long-term rates to remain steady.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Partnership's currency sector will change significantly in
the future. The currency trading Value at Risk figure includes foreign margin
amounts converted into U.S. dollars with an incremental adjustment to reflect
the exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in a functional currency other than dollars.
27
Stock Indices. The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by the
Partnership are by law limited to futures on broadly based indices. As of
December 31, 1999, the Partnership's primary exposures were in the S&P 500,
Financial Times (England), Nikkei (Japan) and Hang Seng (Hong Kong) stock
indices. The General Partner anticipates little, if any, trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.
(Static markets would not cause major market changes but would make it difficult
for the Partnership to avoid being "whipsawed" into numerous small losses.)
Metals. The Partnership's primary metal market exposure is to
fluctuations in the price of gold and silver. Although certain of the Advisors
will from time to time trade base metals such as aluminum and copper, the
principal market exposures of the Partnership have consistently been in the
precious metals, gold and silver. The Advisors' gold trading has been
increasingly limited due to the long-lasting and mainly non-volatile decline in
the price of gold over the last 10-15 years. However, silver prices have
remained volatile over this period, and the Advisors have from time to time
taken substantial positions as they have perceived market opportunities to
develop. The General Partner anticipates that gold and silver will remain the
primary metals market exposure for the Partnership.
28
Softs. The Partnership's primary commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. Coffee, cocoa, cotton and sugar accounted for the
substantial bulk of the Partnership's commodity exposure as of December 31,
1999.
Energy. The Partnership's primary energy market exposure is to gas and oil
price movements, often resulting from political developments in the Middle East.
Oil prices can be volatile and substantial profits and losses have been and are
expected to continue to be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the
Partnership as of December 31, 1999.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, German marks, British pounds and French francs.
The Advisor regularly converts foreign currency balances to dollars in an
attempt to control the Partnership's non-trading risk.
Securities Positions. The Partnership's only market exposure in
instruments held other than for trading is in its securities portfolio. The
Partnership holds only cash or interest-bearing, credit risk-free, short-term
paper -- typically Treasury bills of duration up to 1 year. Violent fluctuations
in prevailing interest rates could cause immaterial mark-to-market losses on the
Partnership's securities, although substantially all of these short-term
instruments are held to maturity.
29
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors and controls the Partnership's risk
exposure on a daily basis through financial, credit and risk management
monitoring systems and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject.
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
individual positions as well as enter certain positions traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisors' own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
Each Advisor applies its own risk management policies to its trading.
The Advisors often follow diversification guidelines, margin limits and stop
loss points to exit a position. The Advisors' research of risk management often
suggests ongoing modifications to their trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisors to discuss their risk management and to
look for any material changes to the Advisors' portfolio balance and trading
techniques. The Advisors are required to notify the General Partner of any
material changes to their programs.
30
The General Partner controls the risk of the non-trading instruments
(interest-bearing securities held for cash management purposes) - the only
Partnership investments, as opposed to Advisor selections, directed by the
General Partner - limiting the duration to no more than 1 year.
31
Item 8. Financial Statements and Supplementary Data.
HUTTON INVESTORS FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath or Affirmation F-2
Report of Independent Accountants. F-3
Financial Statements:
Statement of Financial Condition at
December 31, 1999 and 1998. F-4
Statement of Income and Expenses for
the years ended December 31, 1999,
1998 and 1997. F-5
Statement of Partners' Capital for the
years ended December 31, 1999, 1998
and 1997. F-6
Notes to Financial Statements. F-7 - F-11
F-1
Continued
To The Limited Partners of
Hutton Investors Futures Fund L.P. II
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: Daniel A. Dantuono, Chief Financial Officer
Smith Barney Futures Management LLC
General Partner, Hutton Investors Futures
Fund L.P. II
Smith Barney Futures Management LLC
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424
F-2
Report of Independent Accountants
To the Partners of
Hutton Investors Futures Fund L.P. II:
In our opinion, the accompanying statement of financial condition and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Hutton Investors
Futures Fund L.P. II at December 31, 1999 and 1998, and the results of its
operations for each of the three years in the period ended December 31, 1999, in
conformity with accounting principles generally accepted in the United States.
These financial statements are the responsibility of the management of the
General Partner; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States, which 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, assessing the
accounting principles used and significant estimates made by the management of
the General Partner, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 25, 2000
F-3
Hutton Investors Futures Fund L.P. II
Statement of Financial Condition
December 31, 1999 and 1998
1999 1998
Assets:
Equity in commodity futures trading account:
Cash and cash equivalents (Note 3b) $19,229,078 $21,116,563
Net unrealized appreciation on open
futures contracts 324,506 2,163,400
----------- -----------
$19,553,584 $23,279,963
----------- -----------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions on open futures contracts $ 73,856 $ 80,379
Incentive fees -- 5,645
Professional fees 40,284 30,804
Other 23,125 3,623
Redemptions payable (Note 5) 562,238 180,739
----------- -----------
699,503 301,189
----------- -----------
Partners' capital (Notes 1, 5, and 6):
General Partner, 44 Unit equivalents outstanding
in 1999 and 1998 240,179 274,225
Limited Partners, 3,410 and 3,643 Units of Limited
Partnership Interest outstanding in 1999 and 1998,
respectively 18,613,902 22,704,549
----------- -----------
18,854,081 22,978,774
$19,553,584 $23,279,963
----------- -----------
See notes to financial statements.
F-4
Hutton Investors Futures Fund L.P. II
Statement of Income and Expenses
for the years ended
December 31, 1999, 1998 and 1997
1999 1998 1997
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed
positions $ (608,736) $ 1,909,731 $ 3,101,486
Change in unrealized gains
(losses) on open positions (1,838,894) 878,085 810,980
----------- ----------- -----------
(2,447,630) 2,787,816 3,912,466
Less, Brokerage commissions including
clearing fees of $21,682, $18,793 and
$17,953, respectively (Note 3b) (740,877) (725,585) (653,350)
----------- ----------- -----------
Net realized and unrealized gains (losses) (3,188,507) 2,062,231 3,259,116
Interest income (Note 3b) 735,148 784,546 777,388
----------- ----------- -----------
(2,453,359) 2,846,777 4,036,504
----------- ----------- -----------
Expenses:
Incentive fees (Note 3a) 222,126 446,819 641,927
Professional fees 46,635 45,634 39,008
Other expenses 24,290 4,287 7,502
----------- ----------- -----------
293,051 496,740 688,437
----------- ----------- -----------
Net income (loss) $(2,746,410) $ 2,350,037 $ 3,348,067
----------- ----------- -----------
Net income (loss) per Unit of Limited
Partnership Interest and General Partner
Unit equivalent (Notes 1 and 6) $ (773.76) $ 644.44 $ 845.88
----------- ----------- -----------
See notes to financial statements.
F-5
Hutton Investors Futures Fund L.P. II
Statement of Partners' Capital
for the years ended
December 31, 1999, 1998 and 1997
Limited General
Partners Partner Total
Partners' capital at December 31, 1996 $ 18,944,515 $ 208,650 $ 19,153,165
Net income 3,310,848 37,219 3,348,067
Redemption of 184 Units of
Limited Partnership Interest (959,742) -- (959,742)
------------ ------------ ------------
Partners' capital at December 31, 1997 21,295,621 245,869 21,541,490
Net income 2,321,681 28,356 2,350,037
Redemption of 168 Units of
Limited Partnership Interest (912,753) -- (912,753)
------------ ------------ ------------
Partners' capital at December 31, 1998 22,704,549 274,225 22,978,774
Net loss (2,712,364) (34,046) (2,746,410)
Redemption of 233 Units of
Limited Partnership Interest (1,378,283) -- (1,378,283)
------------ ------------ ------------
Partners' capital at December 31, 1999 $ 18,613,902 $ 240,179 $ 18,854,081
------------ ------------ ------------
See notes to financial statements.
F-6
Hutton Investors
Futures Fund L.P. II
Notes to Financial Statements
1. Partnership Organization:
Hutton Investors Futures Fund L.P. II (the "Partnership") is a limited
partnership which was organized under the partnership laws of the State of
Delaware on March 31, 1987 to engage in the speculative trading of a
diversified portfolio of commodity interests including futures contracts,
options and forward contracts. The commodity interests that are traded by
the Partnership are volatile and involve a high degree of market risk. The
Partnership was authorized to sell 30,000 Units of Limited Partnership
Interest ("Units") during the public offering period.
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form
of organization from a corporation to a limited liability company on October
1, 1999. The Partnership's commodity broker is Salomon Smith Barney Inc.
("SSB"). SSB is an affiliate of the General Partner. The General Partner is
wholly owned by Salomon Smith Barney Holdings Inc. ("SSBHI"), which is the
sole owner of SSB.
SSBHI is a wholly owned subsidiary of Citigroup Inc.
The General Partner and each limited partner share in the profits and losses
of the Partnership in proportion to the amount of partnership interest owned
by each except that no limited partner shall be liable for obligations of
the Partnership in excess of his initial capital contribution and profits,
if any, net of distributions.
The Partnership will be liquidated upon the first to occur of the following:
December 31, 2007; the net asset value of a Unit decreases to less than $500
per unit; the aggregate net assets of the Partnership decline to less than
$1,000,000; or under certain other circumstances as defined in the Limited
Partnership Agreement.
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at fair value on the
last business day of the year, which represents market value for those
commodity interests for which market quotations are readily available.
Investments in commodity interests denominated in foreign currencies are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the year. Realized gains (losses) and changes in
unrealized values on commodity interests are recognized in the period in
which the contract is closed or the changes occur and are included in net
gains (losses) on trading of commodity interests.
b. Commission charges to open and close futures contracts are expensed at
the time the positions are opened.
c. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
d. 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 at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
F-7
3. Agreements:
a. Management Agreements:
The General Partner has Management Agreements with Trendlogic Associates
and John W. Henry & Company, Inc., (individually an "Advisor" or
collectively, the "Advisors"). Two of the principals of Trendlogic
Associates, Mr. Paul E. Dean and Mr. Richard Semels, are employees of
SSB. The Agreements provide that the Advisors have sole discretion to
determine the investment of the assets of the Partnership, subject to the
Partnership's trading policies set forth in the Partnership's prospectus.
Pursuant to each management agreement, each Advisor is entitled to an
incentive fee, payable quarterly, equal to 20% of the Trading Profits, as
defined in the Management Agreements, on the assets under such Advisor's
management.
b. Customer Agreement:
The Partnership has entered into a Customer Agreement, which has been
assigned to SSB, from a predecessor company, whereby SSB provides
services which include, among other things, the execution of transactions
for the Partnership's account in accordance with orders placed by the
Advisors. The Partnership is obligated to pay brokerage commissions to
SSB at $50 per roundturn futures transaction and $25 per option
transaction which includes floor brokerage, exchange, clearing and NFA
fees. All of the Partnerships' assets are deposited in the Partnership's
account at SSB. The Partnership's cash is deposited by SSB in segregated
bank accounts to the extent required by Commodity Futures Trading
Commission regulations. At December 31, 1999 and 1998, the amount of cash
held for margin requirements was $3,005,430 and $2,552,926, respectively.
The Customer Agreement provides that approximately 80% of the
Partnership's assets be maintained in interest bearing U.S. Treasury
obligations, including assets to be utilized as margin for commodities
positions. For the purposes of these financial statements, these U.S.
Treasury obligations are cash equivalents. The Customer Agreement between
the Partnership and SSB gives the Partnership the legal right to net
unrealized gains and losses.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
F-8
All of the commodity interests owned by the Partnership are held for trading
purposes. The average fair value during the years ended December 31, 1999
and 1998, based on a monthly calculation, was $1,049,373 and $1,359,853,
respectively. The fair value of these commodity interests, including options
thereon, if applicable, at December 31, 1999 and 1998 was $324,506 and
$2,163,400, respectively, as detailed below.
Fair Market Value
December 31, December 31,
1999 1998
Currencies:
-Exchange Traded Contracts $ 5,475 $ (2,080)
-OTC Contract (156,409) 161,573
Energy 76,787 53,388
Grains 37,761 17,550
Interest Rates U.S. 262,064 (160,305)
Interest Rates Non-U.S 71,821 2,072,871
Livestock 810 5,520
Metals (116,506) 24,909
Softs 86,055 37,315
Indices 56,648 (47,341)
----------- -----------
Total $ 324,506 $ 2,163,400
----------- -----------
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner; however, each limited partner may redeem some or all of his
Units at the net asset value thereof as of the last day of any calendar
quarter on 10 business days' notice to the General Partner, provided that no
redemption may result in the limited partner holding fewer than three Units
after such redemption is effected.
6. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest during the
years ended December 31,1999, 1998 and 1997 were as follows:
1999 1998 1997
Net realized and unrealized gains (losses) $ (896.58)$ 570.01 $ 824.10
Interest income 203.69 207.46 195.38
Expenses (80.87) (133.03) (173.60)
--------- --------- ---------
Increase (decrease) for year (773.76) 644.44 845.88
Net asset value per
Unit, beginning of year 6,232.38 5,587.94 4,742.06
--------- --------- ---------
Net asset value per
Unit, end of year $ 5,458.62 $ 6,232.38 $ 5,587.94
--------- --------- ---------
7. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial
instruments may include forwards, futures and options, whose value is based
F-9
upon an underlying asset, index, or reference rate, and generally represent
future commitments to exchange currencies or cash flows, to purchase or sell
other financial instruments at specific terms at specified future dates, or,
in the case of derivative commodity instruments, to have a reasonable
possibility to be settled in cash, through physical delivery or with another
financial instrument. These instruments may be traded on an exchange or
over-the-counter ("OTC"). Exchange traded instruments are standardized and
include futures and certain option contracts. OTC contracts are negotiated
between contracting parties and include forwards and certain options. Each
of these instruments is subject to various risks similar to those related to
the underlying financial instruments including market and credit risk. In
general, the risks associated with OTC contracts are greater than those
associated with exchange traded instruments because of the greater risk of
default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity
or security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as a counterparty to the transactions
(see table in Note 4). The Partnership's risk of loss in the event of
counterparty default is typically limited to the amounts recognized in the
statement of financial condition and not represented by the contract or
notional amounts of the instruments. The Partnership has concentration risk
because the sole counterparty or broker with respect to the Partnership's
assets is SSB.
The General Partner monitors and controls the Partnership's risk exposure on
a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership
is subject. These monitoring systems allow the General Partner to
statistically analyze actual trading results with risk adjusted performance
indicators and correlation statistics. In addition, on-line monitoring
systems provide account analysis of futures, forwards and options positions
by sector, margin requirements, gain and loss transactions and collateral
positions.
The notional or contractual amounts of these instruments, while
appropriately not recorded in the financial statements, reflect the extent
of the Partnership's involvement in these instruments. The majority of these
instruments mature within one year of December 31, 1999. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity.
F-10
8. New Accounting Pronouncements:
The Partnership adopted Statement on Financial Accounting Standards No. 133
("SFAS 133"), Accounting for Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize
all derivative instruments in the statement of financial condition and
measure those financial instruments at fair value. SFAS 133 has no impact on
Partners' Capital and operating results as all derivative instruments are
recorded at fair value, with changes therein reported in the statement of
income and expenses.
F-11
41
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the last two fiscal years and any subsequent interim
period, no independent accountant who was engaged as the principal accountant to
audit the Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs
are managed by its General Partner, Smith Barney Futures Management LLC.
Investment decisions are made by the Advisors.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by the General Partner. See "Item 1. Business." SSB is the commodity
broker for the Partnership and receives brokerage commissions for its services
at an amount equal to $50 per round-turn futures transaction and $25 per option
transaction (inclusive of NFA, exchange and clearing fees) as described in "Item
1. Business." and "Item 8. Financial Statements and Supplementary Data." For the
year ended December 31, 1999, SSB earned $740,877 in brokerage commissions and
clearing fees.
The Advisors manage the Partnership's investments and receive a
quarterly incentive fee, as described under "Item 1. Business." For the year
ended December 31, 1999, the Advisors earned $222,126 in incentive fees.
32
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners. The Partnership
knows of no person who beneficially owns more than 5% of the Units outstanding.
(b). Security ownership of management. Under the terms of the
Limited Partnership Agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns Units of general partnership interest
equivalent to 44 Units (1.3%) of Limited Partnership Interest as of December 31,
1999.
(c). Changes in control. None.
Item 13. Certain Relationships and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management LLC would
be considered promoters for purposes of Item 404(d) of Regulation S-K. The
nature and the amount of compensation received by SSB and the General Partner
from the Partnership are set forth under "Item 1. Business.", "Item 8. Financial
Statements and Supplementary Data.", Note 3b. and "Item 11. Executive
Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1999
and 1998.
Statement of Income and Expenses for the years ended
December 31, 1999, 1998 and 1997.
Statement of Partners' Capital for the years ended December 31,
1999, 1998 and 1997.
33
(2) Financial Statement Schedules: Financial Data Schedule for
the year ended December 31, 1999.
(3) Exhibits:
3. Agreement of Limited Partnership of Hutton Investors
Futures Fund L.P. II (the "Partnership") dated as of
March 30, 1987, as amended and restated as of June 1,
1987).
10.1 Form of Subscription Agreement (incorporated by
reference from Exhibit E to the Prospectus contained in
Amendment No. 1 to the Registration Statement on Form
S-1 (File No.33-13485) filed by the Partnership on June
5, 1987).
10.2 Form of Request for Redemption (incorporated by
reference from Exhibit B to the Prospectus contained in
Amendment No.1 to the Registration Statement on Form
S-1 (File No. 33-13485) filed by the Partnership on
June 5, 1987).
34
10.3 Escrow Agreement dated June 9, 1987, among the
Partnership, Hutton Commodity Management Inc., E.F.
Hutton & Company Inc. and Chemical Bank (previously
filed).
10.4 Brokerage Agreement dated as of July 23, 1987, between
the Partnership and E.F. Hutton & Company Inc.
(previously filed).
10.5 Advisory Agreement dated as of March 31, 1987, among
the Partnership, Hutton Commodity Management Inc.,
Desai & Company and John W. Henry & Company, Inc. the
Partnership, Hutton Commodity Management Inc.,
(previously filed).
10.6 Representation Agreement concerning the Registration
Statement and the Prospectus dated as of June 9, 1987,
among the Partnership, Hutton & Company Inc., Cresta
Commodity Management Inc., Desai & Company and John W.
Henry & Company, Inc. (previously filed).
10.7 Net Worth Agreement dated as of June 3, 1987, between
Hutton Commodity Management Inc. and the E.F. Hutton
Group Inc. (previously filed).
10.8 Copy of executed Promissory Note dated June 3, 1987,
from The E.F. Hutton Group Inc. to Hutton Commodity
Management Inc.(previously filed).
35
10.9 Letter amending and extending Management Agreement
dated March 31, 1987 among the Partnership, Hutton
Commodity Management, Inc., John W. Henry & Company,
Inc. and Desai & Company as of September 26, 1989
(previously filed).
10.10Letter dated August 28, 1990 from the Partnership to
John W. Henry & Company, Inc. extending Management
Agreement (filed as Exhibit k to Form 10-K for the
fiscal year ended December 31, 1990 and incorporated
herein by reference)
10.11Letter dated August 28, 1990 from Partnership to Desai
& Company extending Management Agreement (filed as
Exhibit 1 to Form 10-K for the fiscal year ended
December 31, 1990 and incorporated herein by
reference).
10.12Letter datede January 17, 1991 from the Partnership to
Desai & Company terminating Management Agreement (filed
as Exhibit m to Form 10-K for the fiscal year ended
December 31, 1990 and incorporated herein by
reference).
36
10.13Advisory Agreement dated January 30, 1991 among the
Partnership, the General Partner and TrendLogic
Associates, Inc. (filed as Exhibit n to Form 10-K for
the fiscal year ended December 31, 1990 and
incorporated herein by reference).
10.14Letter dated August 30, 1991 from the General Partner
to John W. Henry & Company, Inc. extending Advisory
Agreement (filed as Exhibit o to Form 10-K for the
fiscal year ended December 31, 1991 and incorporated
herein by reference).
10.15Letter dated August 30, 1991 from the General Partner
to TrendLogic Associates, Inc. extending Advisory
Agreement (filed as Exhibit p to Form 10-K for the
fiscal year ended December 31, 1991).
10.16Letter dated August 31, 1992 from the General Partner
to John W. Henry & Company, Inc. (filed as Exhibit q to
Form 10-K for the fiscal year ended December 31, 1991).
10.17Letter dated August 31, 1992 from the General Partner
to TrendLogic Associates, Inc. extending Advisory
Agreements (filed as Exhibit r to Form 10-K for the
fiscal year ended December 31, 1992 and incorporated
herein by reference).
37
10.18Letter dated August 31, 1993 from the General Partner
to John W. Henry & Company, Inc. extending Advisory
Agreements (filed as Exhibit s to Form 10-K for the
fiscal year ended December 31, 1993 and incorporated
herein by reference).
10.19Letter dated August 31, 1993 from the General Partner
to TrendLogic Associates, Inc. (filed as Exhibit t to
Form 10-K for the fiscal year ended December 31, 1993).
10.20Letter dated February 16, 1995 from the General
Partner to TrendLogic Associates, Inc. extending
Advisory Agreement (filed as Exhibit u to Form 10-K for
the fiscal year ended December 31, 1994)
10.21Letter dated February 16, 1995 from the General
Partner to John W. Henry & Company, Inc. extending
Advisory Agreement (filed as Exhibit v to Form 10-K for
the fiscal year ended December 31, 1994).
10.22Letter extending Management Agreements with John W.
Henry & Company, Inc. and TrendLogic Associates, Inc.
for 1996 and 1997 (previously filed).
38
10.23Letters extending Management Agreements with John W.
Henry & Company, Inc. and TrendLogic Associates, Inc.
for 1998 (previously filed).
10.24Letter extending Management Agreements with John W.
Henry & Company, Inc. and TrendLogic Associates, Inc.
for 1999 (filed herein).
(b) Report on Form 8-K: None Filed
39
Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.
Annual Report to Limited Partners
40
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York on the 30th day of March 2000.
HUTTON INVESTORS FUTURES FUND L.P.II
By: Smith Barney Futures Management LLC
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this annual report on Form 10-K has been signed below by the following persons
in the capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael R. Schaefer /s/ Daniel A. Dantuono
Michael R. Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
41