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, 2002
Commission File Number 0-16526
HUTTON INVESTORS FUTURES FUND L.P. II
(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 Citigroup Managed Futures LLC
399 Park Ave - 7th Fl.
New York, New York 10022
(Address and Zip Code of principal executive offices)
(212) 559-2011
(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: Redeemable 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].
Indicated by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes No X
----
Limited Partnership Redeemable Units with an aggregate value of $21,120,020 were
outstanding and held by non-affiliates as of the last business day of the
registrants most recently completed second fiscal quarter.
As of February 29, 2004, 2,200.0950 Limited Partnership Redeemable Units were
outstanding.
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 redeemable units of Limited Partnership
Interest in the Partnership ("Redeemable Units") for the years ended December
31, 2003, 2002 and 2001 are reported in the Statements of Partners' Capital on
page F-6 under "Item 8. Financial Statements and Supplementary Data."
The general partner has agreed to make capital contributions, if necessary,
so that its general partnership interest will be equal to the greater of (i) an
amount to entitle it to 1% of each material item of Partnership income, loss,
deduction or credit and (ii) the greater of (a) 1% of the partners'
contributions to the Partnership or (b) $25,000. The Partnership will be
liquidated upon the first of the following to occur: December 31, 2013; the net
asset value per Redeemable Unit falls below $400 as of the close of any business
day; or under certain circumstances as defined in the limited partnership
agreement of the Partnership (the "Limited Partnership Agreement").
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management
LLC, acts as the general partner (the "General Partner") of the Partnership. The
Partnership's commodity broker is Citigroup Global Markets Inc. ("CGM"),
formerly Salomon Smith Barney Inc. CGM is an affiliate of the General Partner.
The General Partner is wholly owned by Citigroup Global Markets Inc. ("CGMHI"),
formerly Salomon Smith Barney Holdings Inc., which is the sole owner of CGM.
CGMHI is a wholly owned subsidiary of Citigroup Inc.
The Partnership trades futures, forwards and options contracts, if
applicable, on United States and foreign commodity exchanges through a commodity
brokerage account maintained with CGM.
Under 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.
The General Partner has entered into management agreements (the "Management
Agreements") with John W. Henry & Company, Inc. ("JWH") and Trendlogic
Associates (collectively, the "Advisors"). 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
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Agreements for any reason upon 30 days' notice to the General Partner. The
Advisors may also terminate the Management 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. Trendlogic
Associates was terminated as an Advisor to the Partnership on March 31, 2003.
Pursuant to the terms of the Management Agreements, the Partnership will
pay the Advisor an incentive fee, payable quarterly, equal to 20% of each
Advisor's New Trading Profits (as defined in the Management Agreements).
Under the terms of a customer agreement between the Partnership and CGM,
(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 CGM gives the Partnership the legal right to net unrealized
gains and losses. CGM has agreed to pay the Partnership interest on 80% of the
average daily equity maintained in cash in its account during each month at the
rate of the average non-competitive yield of 13-week U.S. Treasury bills as
determined at the weekly auctions thereof during the month.
(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,
2003, 2002, 2001, 2000 and 1999 are set forth under "Item 6. Selected Financial
Data." The Partnership's capital at December 31, 2003, was $21,140,673.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) 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.
(e) Available Information. The Partnership does not have an Internet
address. The Partnership will provide paper copies of its annual report on Form
10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and any
amendments to these reports free of charge upon request.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, CGM.
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Item 3. Legal Proceedings.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which CGMHI or its
subsidiaries is a party or to which any of their property is subject. There are
no material legal proceedings pending against the Partnership or the General
Partner.
CGM is a New York corporation with its principal place of business at 388
Greenwich St., New York, New York 10013. CGM is registered as a broker-dealer
and futures commission merchant ("FCM"), and provides futures brokerage and
clearing services for institutional and retail participants in the futures
markets. CGM and its affiliates also provide investment banking and other
financial services for clients worldwide.
There have been no administrative, civil or criminal actions pending, on
appeal or concluded against CGM or any of its individual principals within the
past five years that management believes may have a material impact on CGM's
ability to act as an FCM. In the ordinary course of its business, CGM is a party
to various claims and regulatory inquiries.
Settlement of Certain Legal and Regulatory Matters
On April 28, 2003, CGMI announced final agreements with the SEC, the
National Association of Securities Dealers ("NASD"), the New York Stock Exchange
("NYSE") and the New York Attorney General to resolve on a civil basis all of
their outstanding investigations into its research and IPO allocation and
distribution practices (the "Research Settlement"). To effectuate the Research
Settlement, the SEC filed a Complaint and Final Judgment in the United States
District Court for the Southern District of New York. On October 31, 2003, final
judgment was entered against CGMI and nine other investment banks. The NASD has
accepted the Letter of Acceptance, Waiver and Consent entered into with CGMI in
connection with the Research Settlement. In May 2003, the NYSE advised CGMI that
the Hearing Panel's Decision, in which it accepted the Research Settlement, had
become final. As required by the Research Settlement, CGMI has entered into
separate settlement agreements with 48 states and various U.S. territories and
is in settlement negotiations with the remaining 2 states.
Enron Corp.
In April 2002, Citigroup was named as a defendant along with, among others,
commercial and/or investment banks, certain current and former Enron officers
and directors, lawyers and accountants in a putative consolidated class action
complaint that was filed in the United States District Court for the Southern
District of Texas seeking unspecified damages. The action, brought on behalf of
individuals who purchased Enron securities (NEWBY, ET AL. V. ENRON CORP., ET
AL.), alleges violations of Sections 11 and 15 of the Securities Act of 1933, as
amended, and Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended. Citigroup's motion to dismiss the complaint was denied in December
2002, and Citigroup filed an answer in January 2003. In May 2003, plaintiffs
filed an amended consolidated class action complaint, and Citigroup filed a
motion to dismiss in June 2003. Plaintiffs filed a motion for class
certification in May 2003. Discovery is proceeding pending the Court's decision
on class certification.
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Additional actions have been filed against Citigroup and certain of its
affiliates, including CGMI, along with other parties, including (i) actions
brought by a number of pension and benefit plans, investment funds, mutual
funds, and other individual and institutional investors in connection with the
purchase of Enron and Enron-related equity and debt securities, alleging
violations of various state and federal securities laws, state unfair
competition statutes, common law fraud, misrepresentation, unjust enrichment,
breach of fiduciary duty, conspiracy, and other violations of state law; (ii) an
action by banks that participated in two Enron revolving credit facilities,
originally alleging fraud, gross negligence, breach of implied duties, aiding
and abetting and civil conspiracy in connection with defendants' administration
of a credit facility with Enron; the Court granted Citigroup's motion to dismiss
with respect to all claims except for certain claims of aiding and abetting and
civil conspiracy; (iii) an action brought by several funds in connection with
secondary market purchases of Enron debt securities, alleging violations of the
federal securities law, including Section 11 of the Securities Act of 1933, as
amended, and claims for fraud and misrepresentation; (iv) a series of putative
class actions by purchasers of NewPower Holdings common stock, alleging
violations of the federal securities law, including Section 11 of the Securities
Act of 1933, as amended, and Section 10(b) of the Securities Exchange Act of
1934, as amended; (v) a putative class action brought by clients of CGMI in
connection with research reports concerning Enron, alleging breach of contract;
(vi) an action brought by a retirement and health benefits plan in connection
with the purchase of certain Enron notes, alleging violation of federal
securities law, including Section 11 of the Securities Act of 1933, as amended,
violations of state securities and unfair competition law, and common law fraud
and breach of fiduciary duty; (vii) an action brought by the Attorney General of
Connecticut in connection with various commercial and investment banking
services provided to Enron; (viii) an action brought by purchasers in the
secondary market of Enron bank debt, alleging claims for common law fraud,
conspiracy, gross negligence, negligence and breach of fiduciary duty; (ix) an
action brought by an investment company, alleging that Enron fraudulently
induced it to enter into a commodity sales contract; (x) five adversary
proceedings filed by Enron in its chapter 11 bankruptcy proceedings to recover
alleged preferential payments and fraudulent transfers involving Citigroup,
certain of its affiliates and other entities, and to disallow or to subordinate
claims that Citigroup and other entities have filed against Enron; (xi)
third-party actions brought by former Enron officers and directors, alleging
violation of state securities and other laws and a right to contribution from
Citigroup, in connection with claims under state securities and common law
brought against the officers and directors and others; and (xii) a purported
class action brought on behalf of Connecticut municipalities, alleging violation
of state statutes, conspiracy to commit fraud, aiding and abetting a breach of
fiduciary duty and unjust enrichment. Several of these cases have been
consolidated or coordinated with the NEWBY action and are now generally inactive
pending the Court's decision on the pending motion on class certification.
Dynegy Inc.
On June 6, 2003, the complaint in a pre-existing putative class action
pending in the United States District Court for the Southern District of Texas
(IN RE: DYNEGY INC. SECURITIES LITIGATION) brought by purchasers of publicly
traded debt and equity securities of Dynegy Inc. was amended to add Citigroup,
Citibank and CGMI as defendants. The plaintiffs allege violations of Sections
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, against the
Citigroup defendants.
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WorldCom, Inc.
Citigroup, CGMI and certain executive officers and current and former
employees have been named as defendants--along with twenty-two other investment
banks, certain current and former WorldCom officers and directors, and
WorldCom's former auditors--in a consolidated class action brought on behalf of
individuals and entities who purchased or acquired publicly traded securities of
WorldCom between April 29, 1999 and June 25, 2002 (IN RE: WORLDCOM INC.
SECURITIES LITIGATION). The class action complaint asserts claims against CGMI
under (i) Sections 11 and 12(a)(2) of the Securities Act of 1933, as amended, in
connection with certain bond offerings in which it served as underwriter, and
(ii) Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as
amended, and Rule 10b-5 promulgated under Section 10(b), alleging that it
participated in the preparation and/or issuance of misleading WorldCom
registration statements and disseminated misleading research reports concerning
WorldCom stock. On May 19, 2003, the Court denied CGMI's motion to dismiss the
consolidated class action complaint. On October 24, 2003, the Court granted the
plaintiffs' motion for class certification. On December 31, 2003, the United
States Court of Appeals for the Second Circuit granted CGMI's petition seeking
leave for an interlocutory appeal of the class certification order. The District
Court has scheduled trial to begin in January 2005.
Pursuant to an order entered May 28, 2003, the District Court consolidated
approximately seventy individual actions with the class action for pretrial
proceedings. Certain individual plaintiffs have appealed the district court's
order denying their motions to remand. The claims asserted in these individual
actions are substantially similar to the claims alleged in the class action and
assert state and federal securities law claims based on CGMI's research reports
concerning WorldCom and/or CGMI's role as an underwriter in WorldCom offerings.
Numerous other actions asserting claims against CGMI in connection with its
research reports about WorldCom and/or its role as an investment banker for
WorldCom are pending in other federal and state courts. These actions have been
remanded to various state courts, are pending in other federal courts, or have
been conditionally transferred to the United States District Court for the
Southern District of New York to be consolidated with the class action. In
addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its WorldCom research reports are pending in numerous
arbitrations around the country. These arbitration proceedings assert claims
that are substantially similar to the claims asserted in the class action.
Global Crossing
On or about January 28, 2003, lead plaintiff in a consolidated putative
class action in the United States District Court for the Southern District of
New York (IN RE: GLOBAL CROSSING, LTD. SECURITIES LITIGATION) filed a
consolidated complaint on behalf of purchasers of the securities of Global
Crossing and Asia Global Crossing, which names as defendants, among others,
Citigroup, CGMI, CGMHI and certain executive officers and current and former
employees. The putative class action complaint asserts claims against these
Citigroup defendants under (i) Sections 11, 12(a)(2) and 15 of the Securities
Act of 1933, as amended, and Section 14(a) of the Securities Exchange Act of
1934, as amended and Rule 14A-9A promulgated thereunder, in connection with
certain offerings in which CGMI served as underwriter and in connection with
certain transactions in which CGMI issued fairness opinions, and (ii) Section
10(b) and 20(a) of the Securities Exchange Act of 1934, as amended, and Rule
10b-5 promulgated thereunder, alleging that they disseminated misleading
6
research reports concerning Global Crossing and Asia Global Crossing. The
Citigroup-related defendants have moved to dismiss these claims.
In addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its Global Crossing research reports are pending in
numerous arbitrations around the country. These arbitration proceedings assert
claims that are substantially similar to the claims asserted in the putative
class action.
Adelphia Communications Corporation
On July 6, 2003, an adversary proceeding was filed by the Official
Committee of Unsecured Creditors on behalf of Adelphia Communications
Corporation against certain lenders and investment banks, including CGMI,
Citibank, N.A., Citicorp USA, Inc., and Citigroup Financial Products, Inc.
(together, the Citigroup Parties). The complaint alleges that the Citigroup
Parties and numerous other defendants committed acts in violation of the Bank
Holding Company Act and the common law. The complaints seek equitable relief and
an unspecified amount of compensatory and punitive damages. In November 2003, a
similar adversary proceeding was filed by the Equity Holders Committee of
Adelphia.
In addition, CGMI is among the underwriters named in numerous civil actions
brought to date by investors in Adelphia debt securities in connection with
Adelphia securities offerings between September 1997 and October 2001. Three of
the complaints also assert claims against Citigroup Inc. and Citibank, N.A. All
of the complaints allege violations of federal securities laws, and certain of
the complaints also allege violations of state securities laws and the common
law. The complaint seeks unspecified damages. In December 2003, a second amended
complaint was filed and consolidated before the same judge of the United States
District Court for the Southern District of New York.
Mutual Funds
In 2003, several issues in the mutual fund industry have come under the
scrutiny of federal and state regulators. The Company has received subpoenas and
other requests for information from various government regulators regarding
market timing, fees, sales practices and other mutual fund issues in connection
with various investigations, including an investigation by the Securities and
Exchange Commission and a United States Attorney into the arrangements under
which we became the transfer agent for many of the mutual funds in the Smith
Barney fund complex. CGM is cooperating fully with all such reviews.
Research
Since May 2002, Citigroup, CGMI and certain executive officers and current
and former employees have been named as defendants in numerous putative class
action complaints, individual actions, and arbitration demands by purchasers of
various securities, alleging that they violated federal securities law,
including Sections 10 and 20 of the Securities Exchange Act of 1934, as amended,
and certain state laws for allegedly issuing research reports without a
reasonable basis in fact and for allegedly failing to disclose conflicts of
interest with companies in connection with published investment research,
7
including AT&T Corp., Winstar Communications, Inc., Rhythm NetConnections, Inc.,
Level 3 Communications, Inc., Metromedia Fiber Network, Inc., XO Communications,
Inc., Williams Communications Group Inc., and Qwest Communications International
Inc. The putative class actions relating to research of these companies are
pending before a single judge in the United States District Court for the
Southern District of New York for coordinated proceedings. The Court has
consolidated these actions into separate proceedings corresponding to the
companies named above. On January 30, 2004, plaintiffs in the Rhythm
NetConnections, Inc. action voluntarily dismissed their complaint with
prejudice.
In addition, actions asserting claims against Citigroup and certain of its
affiliates relating to its research reports on these companies are pending in
numerous arbitrations around the country. These arbitration proceedings assert
claims that are substantially similar to the claims asserted in the class and
individual actions.
Three additional putative class actions are pending in federal courts
against Citigroup and certain of its affiliates, including CGMI, and certain of
their current and former directors, officers and employees, along with other
parties, on behalf of persons who maintained accounts with CGMI. These actions
assert, among other things, common law claims, claims under state statutes, and
claims under the Investment Advisers Act of 1940, for allegedly failing to
provide objective and unbiased investment research and investment management,
seeking, among other things, return of fees and commissions. In all three of
these actions, the Citigroup-related defendants have moved to dismiss the
complaints. In two of these putative class actions, these motions were granted
and appeals are now pending.
In May 2003, the SEC, NYSE and NASD issued a subpoena and letters to CGMI
requesting documents and information with respect to their continuing
investigation of individuals in connection with the supervision of the research
and investment banking departments of CGMI. Other parties to the Research
Settlement have received similar subpoena and letters.
On June 23, 2003, the West Virginia Attorney General filed an action
against CGMI and nine other firms that were parties to the Research Settlement.
The West Virginia Attorney General alleges that the firms violated the West
Virginia Consumer Credit and Protection Act in connection with their research
activities and seeks monetary penalties. CGMI and the other defendants have
moved to dismiss the action.
Other
In April 2002, consolidated amended complaints were filed against CGMI and
other investment banks named in numerous putative class actions filed in the
United States District Court for the Southern District of New York, alleging
violations of certain federal securities laws (including Section 11 of the
Securities Act of 1933, as amended, and Section 10(b) of the Securities Exchange
Act of 1934, as amended) with respect to the allocation of shares for certain
initial public offerings and related aftermarket transactions and damage to
investors caused by allegedly biased research analyst reports. On February 19,
2003, the Court issued an opinion denying defendants' motion to dismiss. Also
filed in the Southern District of New York against CGMI and other investment
banks were several putative class actions that were consolidated into a single
class action, alleging violations of certain federal and state antitrust laws in
8
connection with the allocation of shares in initial public offerings when acting
as underwriters. On November 3, 2003, the Court granted CGMI's motion to dismiss
the consolidated amended complaint in the antitrust case.
Additional lawsuits containing similar claims to those described above may
be filed in the future.
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, 2003.
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 Redeemable Units of Limited Partnership
Interest.
(b) Holders. The number of holders of Redeemable Units of Limited
Partnership Interest as of December 31, 2003 was 252.
(c) Distribution. The Partnership did not declare a distribution in 2003
or 2002.
(d) Use of Proceeds. There were no additional sales of Redeemable Units in
the years ended December 31, 2003, 2002 and 2001.
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 Redeemable Unit for the years ended December 31, 2003, 2002, 2001,
2000 and 1999 and total assets as of December 31, 2003, 2002, 2001, 2000 and
1999 were as follows:
2003 2002 2001 2000 1999
--------- --------- ----------- ----------- -------------
Net realized and unrealized
trading gains (losses) net of
brokerage commissions and
clearing fees of $950,659,
$700,652, $661,355, $731,557, and
$740,877, respectively $3,206,193 $5,902,156 $(49,114) $417,740 $(3,188,507)
Interest income 171,640 218,809 446,258 699,719 735,148
---------- --------- ---------- ---------- -----------
$3,377,833 $6,120,965 $397,144 $1,117,459 $(2,453,359)
---------- --------- ---------- ---------- -----------
Net income (loss) $3,049,340 $4,992,978 $276,352 $1,097,353 $(2,746,410)
----------- --------- ---------- ---------- -----------
Increase (decrease) in Net Asset
Value per Redeemable Unit $1,281.06 $1,997.72 $88.23 $594.95 $(773.76)
---------- --------- ---------- ---------- ----------
Total assets $21,495,947 $20,316,806 $15,777,724 $16,864,975 $19,553,584
---------- ---------- ----------- ----------- -----------
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Overview
The Partnership aims to achieve substantial capital appreciation through
speculative trading in U.S. and international markets for currencies, interest
rates, stock indices, agricultural and energy products and precious and base
metals. The Partnership may employ futures, options on futures, and forward,
spot and swap contracts in those markets.
The General Partner manages all business of the Partnership. The General
Partner has delegated its responsibility for the investment of the Partnership's
assets to JWH. The General Partner employs a team of approximately 15
professionals whose primary emphasis is on attempting to maintain quality
control among the Advisor to the Partnership operated or managed by the General
Partner. A full-time staff of due diligence professionals use state-of-the-art
technology and on-site evaluations to monitor new and existing futures money
managers. The accounting and operations staff provide processing of trading
activity and reporting to limited partners and regulatory authorities. In
selecting the Advisor for the Partnership, the General Partner considered past
performance, trading style, volatility of markets traded and fee requirements.
Responsibilities of the General Partner include:
o due diligence examinations of the Advisor;
o selection, appointment and termination of the Advisor;
o negotiation of the management agreement; and
o monitoring the activity of the Advisor.
In addition, the General Partner prepares the books and records and
provides the administrative and compliance services that are required by law or
regulation from time to time in connection with operation of the Partnership.
These services include the preparation of required books and records and reports
to limited partners, government agencies and regulators; computation of net
asset value; calculation of fees; effecting subscriptions, redemptions and
limited partner communications; and preparation of offering documents and sales
literature.
The General Partner shall seek the best prices and services available in
its commodity futures brokerage transactions. The General Partner reviews at
least annually, the brokerage rates charged to commodity pools similar to the
Partnership to determine that the brokerage fee the Partnership pays is
competitive with other rates.
The Advisor specializes in managing institutional and individual capital in
the global futures, interest rate and foreign exchange markets. Since 1981, JWH
has developed and implemented proprietary trend-following trading techniques
that focus on long-term trends.
JWH trades its Financials and Metals Portfolio ("F&M") and Original
Investment Program ("Original") on behalf of the Partnership. Of the
Partnership's assets allocated to JWH, 78% is currently traded using F&M and 22%
is currently traded using Original, each of which is described below.
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F&M seeks to identify and capitalize on intermediate-term price movements in
four worldwide market sectors: currencies, interest rates, metals and global
stock indicies. The program uses the three-phase investment style. Beginning in
August 1992, the position size in relation to account equity in this program was
reduced 50%. Since the changes were implemented in 1992, F&M has experience
lower volatility.
Original seeks to capitalize on long-term trends in a broad spectrum of
worldwide financial and non-financial futures markets including agricultural,
currency, energy, interest rate, metals and global stock index contracts. This
program uses the two-phase investment style.
(a) Liquidity.
The Partnership does not engage in sales of goods or services. Its only
assets are its equity in its commodity futures trading account, consisting of
cash and cash equivalents, net unrealized appreciation (depreciation) on open
futures contracts and interest receivable. Because of the low margin deposits
normally required in commodity futures trading, relatively small price movements
may result in substantial losses to the Partnership. Such substantial losses
could lead to a material loss in liquidity.
To minimize this risk relating to low margin deposits, the Partnership
follows certain trading policies, including:
(i) The Partnership invests its assets only in commodity interests that the
Advisor believes are traded in sufficient volume to permit ease of taking and
liquidating positions. Sufficient volume, in this context, refers to a level of
liquidity that the Advisor believes will permit it to enter and exit trades
without noticeably moving the market.
(ii) The Advisor will not initiate additional positions in any commodity if
these positions would result in aggregate positions requiring a margin of more
than 66 2/3% of the Partnership's net assets allocated to the Advisor.
(iii) 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 clearinghouse, the physical
commodity position is fully hedged.
(iv) 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 purchases or sale of additional positions in the
same or related commodities.
(v) The Partnership does not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
(vi) The Advisor 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
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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.
(vii) The Partnership will not permit the churning of its commodity trading
account. The term "churning" refers to the practice of entering and exiting
trades with a frequency unwarranted by legitimate efforts to profit from the
trades, driven by the desire to generate commission income.
In the normal course of business, the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial instruments
include forwards, futures, options and swaps, whose values are based upon an
underlying asset, index or reference rate, and generally represent future
commitments to exchange currencies or cash flows, or to purchase or sell other
financial instruments at specified terms at specified future dates, or, in the
case of derivative commodity interests, 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, swaps and certain options. Each of these instruments is
subject to various risks similar to those relating 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 counterparty to the transactions. The
Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statements of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has credit risk and concentration risk because the sole counterparty
or broker with respect to the Partnership's assets is CGM.
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. (See also
"Item 8. Financial 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 trading, the Partnership knows
of no trends, demands, commitments, events or uncertainties which will result in
13
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 Redeemable 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.
(b) Capital resources.
(i) The Partnership has made no material commitments for capital
expenditures.
(ii) The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by gains or losses on trading and by
expenses, interest income, redemptions of Redeemable Units and distributions of
profits, if any. Gains or losses on trading cannot be predicted. Market moves in
commodities are dependent upon fundamental and technical factors which the
Advisors may or may not be able to identify, such as changing supply and demand
relationships, weather, government agricultural, commercial and trade programs
and policies, national and international political and economic events and
changes in interest rates. Partnership expenses consist of, among other things,
commissions, advisory fees and administrative 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. In addition, the amount of
interest income payable by CGM is dependent upon interest rates over which the
Partnership has no control.
No forecast can be made as to the level of redemptions in any given period.
A limited partner may redeem some or all of their Redeemable 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. For the year ended December 31, 2003, 150
Redeemable Units were redeemed for a total of $1,395,441. For the year ended
December 31, 2002, 144 Redeemable Units were redeemed for a total of $1,094,685.
For the year ended December 31, 2001, 120.9050 Redeemable Units were redeemed
for a total of $784,312.
(c) Results of Operations.
For the year ended December 31, 2003, the Net Asset Value per Redeemable
Unit increased 15.7% from $8,139.52 to $9,420.58. For the year ended December
31, 2002, the Net Asset Value per Redeemable Unit increased 32.5% from $6,141.80
to $8,139.52. For the year ended December 31, 2001, the Net Asset Value per
Redeemable Unit increased 1.5% from $6,053.57 to $6,141.80.
The Partnership experienced net trading gains of $4,156,852 before
commissions and expenses for the year ended December 31, 2003. Gains were
primarily attributable to the trading of commodity futures in currencies,
livestock, metals and indices and were partially offset by losses in the trading
of energy, grains, U.S. and non-U.S. interest rates and softs.
14
Overall, the JWH programs had a good year on behalf of the Partnership for
2003 much as a result of the trading models used. The financial programs
participated successfully in the declining value of the U.S. dollar and lower
global interest rates. On the other hand, the diversified programs employed by
the Advisor traded several sectors, including agricultural and energy markets,
and some financial programs also actively traded the energy complex. In both of
these cases, the inclusion of these sectors was a slight drag on overall
performance. Energy markets showed extremely choppy behavior, especially in the
second half of the year, while the agricultural sector was driven lower by
losses in the soft commodities of coffee, sugar, and cotton.
Over the course of the year, on a very broad basis, the year 2003 can be
divided into three periods: the time surrounding the Iraq War (January through
May), the transition to higher world growth (June through October), and the
renewed dollar decline (November and December).
The Iraq war was the focus for much of the first half of the year. Like any
uncertain event, there is the market reaction to the impending event, the event
itself when uncertainty is resolved and the response to the event. The first two
months of the year represented the pre-war uncertainty. With uncertainty
concerning when hostilities would begin and the possible impact of these events,
investors showed a desire to move to a defensive and conservative stance. Equity
markets sold-off, the dollar sold-off, gold prices rose, bond markets rallied,
and the energy markets exhibited a risk premium concerning potential supply
disruptions. This was a continuation of many of the trends carried over from
2002. During the first two months of the year, the Advisor's programs had solid
performance, up approximately 14%.
Just prior to the inception of the hostilities, JWH reduced leverage in all
programs by 50 percent, in expectation of higher volatility in the markets.
Markets were more volatile with a reduction of liquidity in response to events
in March. During this period, bond markets sold-off, the dollar stabilized,
crude oil prices declined significantly, and the stock market started to rally.
Even with this reduced leverage the markets were volatile and prior trends
disrupted leading to losses for the month of March. Positions returned to normal
leverage in all programs in April and May saw a solid recovery of Partnership
performance with profits coming from short dollar, long interest rate and long
commodity positions. The Advisor performance during these periods was consistent
with its past actions in uncertain and potentially highly volatile markets. The
General Partner was aware of and acknowledged the Advisor's actions as
appropriate for the conditions of the economic and political environment.
In a transition to economic recovery and growth, the major markets began to
reflect changed expectations in the middle of June. The announcements of
consistent, positive macroeconomic news led to the unexpected pronouncement of
no further easing actions by the European Central Bank and the U. S. Federal
Reserve. News of stronger growth, especially in the U.S., suggested that
deflationary expectations may have been over-done; consequently, there was a
trend change and interest rates moved up off 40 year lows. Additionally, the
dollar actually rallied on the positive U.S. economic news, reversing the slide
from earlier in the year. In both cases, the programs saw a giveback of trading
profits, as the markets transitioned to new trends.
While there were gains in stock index trading, the Advisor's exposure in
these markets has been relatively low; so they were not able to make a
15
sustainable impact on performance. In additional to this negative market action,
there were further increases in volatility for the energy sector and growing
volatility within a relatively tight range for many agricultural markets. The
third quarter and the beginning of the fourth quarter were unprofitable for the
Advisor's trading programs. This was the result of a transition to higher
worldwide economic growth.
The final period of 2003 was the renewed dollar decline beginning in late
November. Regardless of the strong growth exhibited in the United States in the
third quarter, the best in 20 years, the dollar began a new significant slide
against both the euro and yen. This led to a fourth quarter profit.
In the General Partner's opinion, the Advisor continues to employ its
trading methods in a consistent and disciplined manner and its results are
consistent with the objectives of the Partnership and expectations for the
Advisor's programs. The General Partner continues to monitor the Advisor's
performance on a daily, weekly, monthly and annual basis to assure these
objectives are met.
The Partnership experienced net trading gains of $6,602,808 before
commissions and expenses for the year ended December 31, 2002. Gains were
primarily attributable to the trading of commodity futures in currencies,
energy, grains, U.S. and non-U.S. interest rates, livestock and indices and were
partially offset by losses in the trading of softs and metals.
The Partnership experienced net trading gains of $612,241 before
commissions and expenses for the year ended December 31, 2001. Gains were
primarily attributable to the trading of commodity futures in currencies, U.S.
and non-U.S. interest rates, livestock and indices products and were partially
offset by losses in the trading in energy, metals, softs and grains.
It should be noted that commodity 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 Advisor 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. To the extent that market trends exist and the Advisor is able to
identify them, the Partnership expects to increase capital through operations.
(d) 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
16
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, to
customers, among Redeemable Units within the Partnership, and in the markets
where the Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
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
limited partners, creditors, and regulators, is free of material errors.
(e) Critical Accounting Policies.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities, revenues and expenses, and related disclosures of
contingent assets and liabilities in the financial statements and accompanying
notes.
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
statements of financial condition at fair value on the last business day of the
period, which represents market value for those commodity interests for which
market quotations are readily available or other measures of fair value deemed
appropriate by management of the General Partner for those commodity interests
and foreign currencies for which market quotations are not readily available,
including dealer quotes for swaps and certain option contracts. 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 period.
Realized gains (losses) and changes in unrealized values on commodity interests
and foreign currencies 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.
Foreign currency contracts are those contracts where the Partnership agrees
to receive or deliver a fixed quantity of foreign currency for an agreed-upon
price on an agreed future date. Foreign currency contracts are valued daily, and
the Partnership's net equity therein, representing unrealized gain or loss on
the contracts as measured by the difference between the forward foreign exchange
rates at the dates of entry into the contracts and the forward rates at the
17
reporting dates, is included in the statements of financial condition. Realized
gains (losses) and changes in unrealized values on foreign currency contracts
are recognized in the period in which the contract is closed or the changes
occur and are included in the statements of income and expenses and partners'
capital.
The General Partner believes that the accounting policies that will be most
critical to the Partnership's financial condition and results of operations
relate to the valuation of the Partnership's positions. The majority of the
Partnership's positions will be exchange-traded futures contracts, which will be
valued daily at settlement prices published by the exchanges. If applicable, the
Partnership's spot and forward foreign currency contracts will also be valued at
published daily settlement prices or at dealers' quotes. The General Partner
expects that under normal circumstances substantially all of the Partnership's
assets will be valued by objective measures and without difficulty.
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.
The risk to the limited partners that have purchased interests in the
Partnership is limited to the amount of their capital contributions to the
Partnership and their share of Partnership assets and undistributed profits.
This limited liability is a consequence of the organization of the Partnership
as a limited partnership under applicable law.
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
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 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.
18
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
Advisor 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).
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.
The fair value of the Partnership's futures and forward positions does not
have any optionality component. However, the Advisor trades commodity options.
The Value at Risk associated with options is reflected in the following table as
the margin requirement attributable to the instrument underlying each option.
Where this instrument is a futures contract, the futures margin, and where this
instrument is a physical commodity, the futures-equivalent maintenance margin
has been used. This calculation is conservative in that it assumes that the fair
value of an option will decline by the same amount as the fair value of the
underlying instrument, whereas, in fact, the fair values of the options traded
by the Partnership in almost all cases fluctuate to a lesser extent than those
of the underlying instruments.
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 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.
19
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, 2003 and the
highest and lowest value at any point during the year. All open position trading
risk exposures of the Partnership have been included in calculating the figures
set forth below. As of December 31, 2003, the Partnership's total capitalization
was $21,140,673.
December 31, 2003
Year to Date
-------------------------------------------
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Average*
- --------------------------------------------------------------------------------------------------------------------
Currencies
- - Exchange Traded Contracts $901,672 4.27% $1,054,384 $253,548 $794,094
Energy 308,400 1.46% 439,000 122,300 273,908
Grains 40,300 0.19% 41,000 17,350 34,752
Interest rates U.S. 319,250 1.51% 319,250 36,750 178,546
Interest rates Non-U.S. 532,550 2.52% 1,008,733 240,324 699,317
Livestock 32,000 0.15% 34,000 2,400 11,558
Metals
- Exchange Traded Contracts 144,500 0.68% 260,000 29,000 127,483
- OTC Contracts 199,290 0.94% 216,600 65,550 142,790
Softs 90,869 0.43% 118,073 39,888 82,117
Indices 684,636 3.24% 698,073 208,911 451,177
--------- -------
Total $3,253,467 15.39%
--------- -----
* Monthly average based on month-end value at risk.
20
As of December 31, 2002, the Partnership's total capitalization was $19,486,774.
December 31, 2002
Year to Date
----------------------------------------
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk Average*
- ------------------------------------------------------------------------------------------------------------------
Currencies
- - Exchange Traded Contracts $ 12,008 0.06% $ 13,775 $9,145 $ 10,768
- - OTC Contracts 912,221 4.69% 1,051,702 303,337 640,472
Energy 299,000 1.53% 299,000 24,500 203,375
Grains 36,750 0.19% 47,450 20,750 31,500
Interest rates U.S. 119,700 0.61% 235,500 57,370 195,818
Interest rates Non-U.S. 775,144 3.98% 833,947 183,290 741,753
Livestock 5,600 0.03% 7,800 3,600 6,150
Metals
- Exchange Traded Contracts 96,000 0.49% 96,000 35,000 86,625
- OTC Contracts 165,500 0.85% 184,850 17,250 130,069
Softs 74,718 0.38% 116,180 26,327 85,388
Indices 216,683 1.11% 498,415 157,432 358,575
--------- -----
Total $2,713,324 13.92%
--------- -----
* Quarterly Average
21
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."
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.
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
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, 2003, by market sector.
Interest Rates. Interest rate movements directly affect the price of the
22
futures positions held by the Partnership and indirectly affect the value of its
stock 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-8 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia.
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 U.S. dollar-based Partnership in
expressing Value at Risk in a functional currency other than U.S. dollars.
Stock Indices. The Partnership's primary equity exposure is to equity price
risk in the G-8 countries. The stock index futures traded by the Partnership are
limited to futures on broadly based indices. As of December 31, 2003, the
Partnership's primary exposures were in the NASDAQ, EUREX (Germany) and Nikkei
(Japan) stock indices. The General Partner anticipates little, if any, trading
in non-G-8 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 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 General Partner anticipates that gold and silver will remain the primary
metals market exposure for the Partnership.
Softs. The Partnership's primary commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. Cocoa, cotton and sugar accounted for the substantial bulk
of the Partnership's commodity exposure as of December 31, 2003.
Energy. The Partnership's primary energy market exposure is 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, 2003.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, Euro dollars and Canadian dollars. The Advisor
regularly converts foreign currency balances to dollars in an attempt to control
the Partnership's non-trading risk.
23
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 Advisor concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require the Advisor 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.
The Advisor applies its own risk management policies to its trading. The
Advisor often follows diversification guidelines, margin limits and stop loss
points to exit a position. The Advisor's 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 Advisor to discuss their risk management and to look
for any material changes to the Advisor's portfolio balance and trading
techniques. The Advisor is required to notify the General Partner of any
material changes to their programs.
24
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
Independent Auditors' Report. F-3 - F-4
Financial Statements: F-5
Statements of Financial Condition at December 31, 2003 and
2002.
Condensed Schedules of Investments at December 31, 2003 and F-6 - F-7
2002.
Statements of Income and Expenses for the years ended F-8
December 31, 2003, 2002 and 2001.
Statements of Partners' Capital for the years ended F-9
December 31, 2003, 2002 and 2001.
Notes to Financial Statements. F-10 - F-13
Selected Unaudited Quarterly Financial Data. F-14
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:/s/ Daniel R. McAulifee, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
Citigroup Managed Futures LLC
General Partner, Hutton Investors Futures
Fund L.P. II
Citigroup Managed Futures LLC
399 Park Avenue
7th Floor
New York, N.Y. 10022
212-559-2011
F-2
Independent Auditors' Report
To the Partners of
Hutton Investors Futures Fund L.P. II:
We have audited the accompanying statements of financial condition of Hutton
Investors Futures Fund L.P. II (the Partnership), including the condensed
schedules of investments, as of December 31, 2003 and 2002, and the related
statements of income and expenses, and partners' capital for the years then
ended. These financial statements are the responsibility of the Partnership's
management. Our responsibility is to express an opinion on these financial
statements based on our audits. The statements of income and expenses, and
partners' capital of the Partnership for the year ended December 31, 2001 were
audited by other auditors whose report dated February 28, 2002 expressed an
unqualified opinion on those statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Hutton Investors Futures Fund
L.P. II as of December 31, 2003 and 2002, and the results of its operations and
its partners' capital for the years then ended, in conformity with accounting
principles generally accepted in the United States of America.
/s/ KPMG LLP
KPMG LLP
New York, New York
February 27, 2004
F-3
Report of Independent Auditors
To the Partners of
Hutton Investors Futures Fund L.P. II:
In our opinion, the accompanying statements of income and expenses and partners'
capital present fairly, in all material respects, the results of Hutton
Investors Futures Fund L.P. II's operations for the year ended December 31,
2001, in conformity with accounting principles generally accepted in the United
States of America. 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 audit. We conducted our audit of
these financial statements in accordance with auditing standards generally
accepted in the United States of America, 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 audit provides a reasonable basis
for our opinion.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
New York, New York
February 28, 2002
F-4
Hutton Investors
Futures Fund L.P. II
Statements of Financial Condition
December 31, 2003 and 2002
2003 2002
------------- -------------
Assets:
Equity in commodity futures trading account:
Cash (restricted $3,593,800 and $2,945,807 in 2003 and
2002, respectively) (Note 3b) $19,769,476 $17,912,046
Net unrealized appreciation (depreciation) on open futures positions (9,154) 1,170,056
Unrealized appreciation on open forward contracts 1,724,478 1,219,150
------------ ------------
21,484,800 20,301,252
Interest receivable (Note 3b) 11,147 15,554
------------ ------------
$21,495,947 $20,316,806
------------- -------------
Liabilities and Partners' Capital:
Liabilities:
Unrealized depreciation on open forward contracts $64,801 $538,452
Accrued expenses:
Commissions (Note 3b) 63,600 72,150
Professional fees 35,580 37,521
Other 2,881 2,840
Redemptions payable (Note 5) 188,412 179,069
------------ ------------
355,274 830,032
------------ ------------
Partners' capital: (Notes 1 and 5)
General Partner, 44 Unit equivalents outstanding
in 2003 and 2002 414,505 358,139
Limited Partners 2,200.0950 and 2,350.0950 Redeemable Units of
Limited Partnership Interest outstanding in 2003 and 2002,
respectively 20,726,168 19,128,635
------------ ------------
21,140,673 19,486,774
------------ ------------
$21,495,947 $20,316,806
------------- -------------
See accompanying notes to financial statements.
F-5
Hutton Investors
Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2003
Sector Contract Fair Value
- -------- -------- -----------
Currencies
Unrealized appreciation on forward contracts 5.76% $1,217,525
Unrealized depreciation on forward contracts (0.31)% (64,801)
---------
Total Currencies 5.45% 1,152,724
---------
Total Energy 0.31% Futures contracts purchased 0.31% 65,248
---------
Total Grains 0.04% Futures contracts purchased 0.04% 8,875
---------
Total Interest Rates U.S. (0.10)% Futures contracts purchased (0.10)% (21,600)
---------
Interest Rates Non-U.S.
Futures contracts purchased 0.07% 14,680
Futures contracts sold (0.07)% (15,507)
---------
Total Interest Rates Non-U.S. (0.00)%* (827)
---------
Total Livestock (0.56)% Futures contracts purchased (0.56)% (118,460)
---------
Metals
Futures contracts purchased 1.17% 247,038
Unrealized appreciation on forward contracts 2.40% 506,953
---------
Total Metals 3.57% 753,991
---------
Softs Futures contracts purchased (0.45)% (93,654)
Futures contracts sold (0.17)% (36,475)
---------
Total Softs (0.62)% (130,129)
---------
Indices Futures contracts purchased 0.74% 157,218
Futures contracts sold (1.02)% (216,517)
---------
Total Indices (0.28)% (59,299)
---------
Total Fair Value 7.81% $1,650,523
==========
Investments % of Investments
Country Composition at Fair Value at Fair Value
- ---------------------------------- -------------------------- ------------------------
Australia $(15,507) (0.94)%
Canada 7,586 0.46
Germany 96,946 5.87
Japan (226,712) (13.74)
United Kingdom 514,548 31.17
United States 1,273,662 77.18
-------------------------- ------------------------
$1,650,523 100.00%
========================== ========================
Percentages are based on Partners' capital unless otherwise indicated
*Due to rounding
See accompanying notes to financial statements
F-6
Hutton Investors
Futures Fund L.P. II
Condensed Schedule of Investments
December 31, 2002
Number of
Sector Contracts Contract Fair Value
- ------ --------- -------- ---------
Currencies Unrealized depreciation on forward contracts (2.21)% $(431,679)
Unrealized appreciation on forward contracts 6.14%
EURO 21,400,000 EURO/USD 2.94%, March 19, 2003 573,398
Other 3.20% 623,722
---------
Total forward contracts 3.93% 765,441
---------
Futures contracts sold 0.05% 11,000
Futures contracts purchased 0.14% 26,588
---------
Total futures contracts 0.19% 37,588
---------
Total Currencies 4.12% 803,029
---------
Total Energy 0.75% Futures contracts purchased 0.75% 145,228
---------
Grains Futures contracts sold 0.43% 84,575
Futures contracts purchased (0.03)% (5,385)
---------
Total Grains 0.40% 79,190
---------
Interest Rates Futures contracts sold (0.48)% (92,719)
Futures contracts purchased 0.72% 140,228
---------
Total Interest Rates U.S. 0.24% 47,509
---------
Total Interest Rates Non-U.S. 3.22% Futures contracts purchased 3.22% 627,010
---------
Livestock Futures contracts sold 0.00% * 740
Futures contracts purchased 0.04% 7,240
---------
Total Livestock 0.04% 7,980
---------
Metals Futures contracts sold (0.01)% (1,470)
Futures contracts purchased 1.03% 200,645
---------
Total futures contracts 1.02% 199,175
Unrealized depreciation on forward contracts (0.54)% (106,773)
Unrealized appreciation on forward contracts 0.11% 22,030
---------
Total forward contracts (0.43)% (84,743)
---------
Total Metals 0.59% 114,432
---------
Softs Futures contracts sold 0.02% 3,245
Futures contracts purchased 0.21% 41,050
---------
Total Softs 0.23% 44,295
---------
Indices Futures contracts sold 0.19% 36,488
Futures contracts purchased (0.28)% (54,407)
---------
Total Indices (0.09)% (17,919)
---------
Total Fair Value 9.50% $1,850,754
==========
Investments % of Investments
Country Composition at Fair Value at Fair Value
- -------------------- ------------- --------------
Australia $55,016 2.97%
Canada 4,532 0.24
Germany 228,676 12.36
Japan 197,886 10.69
United Kingdom 64,517 3.49
United States 1,300,127 70.25
------------- --------
$1,850,754 100.00%
============= =========
Percentages are based on Partners' capital unless otherwise indicated
*Due to rounding
See accompanying notes to financial statements
F-7
Hutton Investors
Futures Fund L.P. II
Statements of Income and Expenses
for the years ended
December 31, 2003, 2002 and 2001
2003 2002 2001
----------- ----------- -----------
Income:
Net gains (losses) on trading of
commodity interests:
Realized gains on closed positions and
foreign currencies $4,357,083 $5,410,193 $2,632,696
Change in unrealized gains
(losses) on open positions (200,231) 1,192,615 (2,020,455)
----------- ----------- -----------
4,156,852 6,602,808 612,241
Interest income (Note 3b) 171,640 218,809 446,258
----------- ----------- -----------
4,328,492 6,821,617 1,058,499
----------- ----------- -----------
Expenses:
Brokerage commissions including clearing
fees of $26,176, $17,270 and $14,966,
respectively (Note 3b) 950,659 700,652 661,355
Incentive fees (Note 3a) 286,455 1,083,961 72,636
Professional fees 35,694 42,789 42,551
Other expenses 6,344 1,237 5,605
----------- ----------- -----------
1,279,152 1,828,639 782,147
----------- ----------- -----------
Net income $3,049,340 $4,992,978 $276,352
---------- ----------- ------------
Net income per Redeemable Unit of Limited
Partnership Interest and General Partner
Unit equivalent (Notes 1 and 6) $1,281.06 $1,997.72 $88.23
---------- ----------- ------------
See accompanying notes to financial statements.
F-8
Hutton Investors
Futures Fund L.P. II
Statements of Partners' Capital
for the years ended
December 31, 2003, 2002 and 2001
Limited General
Partners Partner Total
------------- ------------- -------------
Partners' capital at December 31, 2000 $15,830,084 $266,357 $16,096,441
Net income 272,470 3,882 276,352
Redemption of 120.9050 Redeemable Units
of Limited Partnership Interest (784,312) -- (784,312)
------------- ------------- -------------
Partners' capital at December 31, 2001 15,318,242 270,239 15,588,481
Net income 4,905,078 87,900 4,992,978
Redemption of 144.0000 Redeemable Units
of Limited Partnership Interest (1,094,685) -- (1,094,685)
------------- ------------- -------------
Partners' capital at December 31, 2002 19,128,635 358,139 19,486,774
Net income 2,992,974 56,366 3,049,340
Redemption of 150.0000 Redeemable Units
of Limited Partnership Interest (1,395,441) -- (1,395,441)
------------- ------------- -------------
Partners' capital at December 31, 2003 $20,726,168 $414,505 $21,140,673
-------------- ------------- -------------
See accompanying notes to financial statements.
F-9
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 redeemable units of Limited
Partnership Interest ("Redeemable Units") during its initial offering
period.
Citigroup Managed Futures LLC, formerly Smith Barney Futures Management
LLC, acts as the general partner (the "General Partner") of the
Partnership. The Partnership's commodity broker is Citigroup Global Markets
Inc. ("CGM"), formerly Salomon Smith Barney Inc. CGM is an affiliate of the
General Partner. The General Partner is wholly owned by Citigroup Global
Markets Holdings Inc. ("CGMHI"), formerly Salomon Smith Barney Holdings
Inc., which is the sole owner of CGM. CGMHI 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 their 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 Redeemable Unit
decreases to less than $500 per Redeemable 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 statements 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 gains (losses) on open positions
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 their share of the Partnership's
income and expenses.
d. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and
liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates.
e. Certain prior period amounts have been reclassified to conform to
current year presentation.
F-10
3. Agreements:
a. Management Agreements:
The General Partner has entered into Management Agreements with John
W. Henry & Company, Inc., (the "Advisor"). The Agreements provide that
the Advisor has 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 the
management agreement, the Advisor is entitled to an incentive fee,
payable quarterly, equal to 20% of the New Trading Profits, as defined
in the Management Agreements, on the assets under such Advisor's
management. Effective March 31, 2003, Trendlogic Associates was
terminated as an advisor to the Partnership.
b. Customer Agreement:
The Partnership has entered into a Customer Agreement, which has been
assigned to CGM, from a predecessor company, whereby CGM provides
services which include, among other things, the execution of
transactions for the Partnership's account in accordance with orders
placed by the Advisor. The Partnership is obligated to pay brokerage
commissions to CGM at $50 per roundturn futures and forwards
transaction and $25 per option transaction which includes floor
brokerage, exchange, clearing and National Futures Association fees.
All of the Partnership's assets are deposited in the Partnership's
account at CGM. The Partnership's cash is deposited by CGM in
segregated bank accounts to the extent required by Commodity Futures
Trading Commission regulations. At December 31, 2003 and 2002, the
amount of cash held for margin requirements was $3,593,800 and
$2,945,807, respectively. CGM has agreed to pay the Partnership
interest on 80% of the average daily equity maintained in cash in its
account during each month at the rate of the average non-competitive
yield of 13 week U.S. Treasury Bills as determined at the weekly
auctions thereof during the month. The Customer Agreement between the
Partnership and CGM 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 activities are shown in the statements of income and expenses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The average fair value during the years ended December
31, 2003 and 2002, based on a monthly calculation, was $1,355,704 and
$1,802,674, respectively.
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 their Redeemable Units at the Net Asset Value thereof as of the last day
of any calendar quarter on ten business days notice to the General Partner,
provided that no redemption may result in the limited partner holding fewer
than three Redeemable Units after such redemption is effected.
F-11
6. Financial Highlights:
Changes in the Net Asset Value per Redeemable Unit of Limited Partnership
Interest during the years ended December 31, 2003, 2002 and 2001 were as
follows:
2003 2002 2001
---------- ---------- -----------
Net realized and unrealized gains (losses) * $1,345.26 $2,364.24 $(37.27)
Interest income 74.03 88.23 171.40
Expenses ** (138.23) (454.75) (45.90)
---------- ---------- -----------
Increase for the year 1,281.06 1,997.72 88.23
Net asset value per
Redeemable Unit, beginning of year 8,139.52 6,141.80 6,053.57
---------- ---------- ----------
Net asset value per
Redeemable Unit, end of year $9,420.58 $8,139.52 $6,141.80
----------- ----------- -----------
* Includes brokerage commissions
** Excludes brokerage commissions
Ratios to Average Net Assets:
Net investment loss before incentive fees *** (3.8)% (3.0)% (2.6)%
----- ------ -----
Operating expenses 4.7% 4.3% 4.4%
Incentive fees 1.3% 6.2% 0.4%
----- ----- -----
Total expenses 6.0% 10.5% 4.8%
----- ------ -----
Total return:
Total return before incentive fees 17.3% 39.9% 1.6%
Incentive fees (1.6)% (7.4)% (0.1)%
----- ----- -----
Total return after incentive fees 15.7% 32.5% 1.5%
----- ------ -----
*** Interest income less total expenses (exclusive of incentive fees)
The above ratios may vary for individual investors based on the timing of
capital transactions during the year. Additionally, these ratios are
calculated for the Limited Partner class using the Limited Partners' share
of income, expenses and average net assets.
F-12
7. Financial Instrument Risks:
In the normal course of its business, the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial
instruments may include forwards, futures and options, whose values are
based 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. The Partnership's risk of loss in the event of counterparty
default is typically limited to the amounts recognized in the statements of
financial condition and not represented by the contract or notional amounts
of the instruments. The Partnership has credit risk and concentration risk
because the sole counterparty or broker with respect to the Partnership's
assets is CGM.
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 majority of these instruments mature within one year of December 31,
2003. However, due to the nature of the Partnership's business, these
instruments may not be held to maturity.
F-13
Selected unaudited quarterly financial data for the years ended December 31,
2003 and 2002 are summarized below:
For the period from For the period from For the period from For the period from
October 1, 2003 to July 1, 2003 to April 1, 2003 to January 1, 2003 to
December 31, 2003 September 30, 2003 June 30, 2003 March 31, 2003
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
including interest income $ 1,092,170 $ (1,072,709) $ 253,106 $ 3,105,266
Net Income (loss) $ 1,081,789 $ (1,081,325) $ 202,492 $ 2,846,384
Increase (decrease) in Net Asset
Value per Redeemable Unit $ 477.80 $ (472.79) $ 87.14 $ 1,188.91
For the period from For the period from For the period from For the period from
October 1, 2002 to July 1, 2002 to April 1, 2002 to January 1, 2002 to
December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
Net realized and unrealized trading
gains(losses) net of brokerage
commissions and clearing fees
including interest income $(1,820,003) $ 4,899,491 $ 4,503,172 $ (1,461,695)
Net Income (loss) $(1,827,178) $ 3,931,912 $ 4,362,267 $ (1,474,023)
Increase (decrease) in Net Asset
Value per Redeemable Unit $ (754.80) $ 1,587.04 $ 1,746.24 $ (580.76)
F-14
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
PricewaterhouseCoopers LLP was previously the principal accountant for the
Partnership. On July 9, 2002, that firm was dismissed as principal accountant
and KPMG LLP was engaged as principal accountant. The decision to change
accountants was approved by the General Partner of the Partnership.
In connection with the audit of the year ended December 31, 2001, and
through July 9, 2002, there were no disagreements with PricewaterhouseCoopers
LLP on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures, which disagreements if not resolved
to their satisfaction would have caused them to make reference thereto in their
reports on the financial statements for such year.
The audit report of PricewaterhouseCoopers LLP on the financial statements
of the Partnership as of and for the year ended December 31, 2001 did not
contain any adverse opinion or disclaimer of opinion, nor was it qualified or
modified as to uncertainty, audit scope, or accounting principle.
Item 9A. Controls and Procedures.
Based on their evaluation of the Partnership's disclosure controls and
procedures as of year end the Chief Executive Officer and Chief Financial
Officer have concluded that such controls and procedures are effective.
There were no significant changes in the Partnership's internal controls or
in other factors that could significantly affect such controls during the fourth
quarter of 2003.
25
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, Citigroup Managed Futures LLC. Investment decisions are
made by the Advisor.
The Partnership has not adopted a code of ethics that applies to officers
because it has no officers.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are managed by
the General Partner. See "Item 1. Business." CGM 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, 2003, CGM earned $950,659 in brokerage commissions and
clearing fees.
The Advisor manages the Partnership's investments and receives a quarterly
incentive fee, as described under "Item 1. Business." Trading performance for
the year ended December 31, 2003, resulted in an incentive fee of $286,455.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners. As of March 1, 2004,
one beneficial owner who is neither director nor executive officer owns more
than five percent (5%) of the outstanding Redeemable Units issued by the
Registrant as follows:
Name and Address of Beneficial Amount and Nature of Percent of
Title of Class Owner Beneficial Ownership Class
Redeemable Units of Cheryl A. Schwartz 135 Redeemable Units 6.0%
Limited Partnership Fbo R. Schwartz Flint Trust
Interest P.O. Box 1312
Page, AZ 86040-1312
(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 Unit equivalents (2.0%) as of December 31, 2003.
(c). Changes in control. None.
26
Item 13. Certain Relationships and Related Transactions.
Citigroup Global Markets Inc. and Citigroup Managed Futures LLC would be
considered promoters for purposes of Item 404(d) of Regulation S-K. The nature
and the amount of compensation received by CGM 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."
Item 14. Principal Accountant Fees and Services.
(1) Audit Fees. The aggregate fees billed for each of the last two fiscal
years for professional services rendered by KPMG LLP for the audit of the
Partnership's annual financial statements, review of financial statements
included in the Partnership's Forms 10-Q and other services normally provided in
connection with regulatory filings or engagements are as follows:
2003 $13,041
2002 $11,123
(2) Audit-Related Fees. None.
(3) Tax Fees. The aggregate fees billed for each of the last two fiscal
years for professional services rendered by KPMG LLP for tax compliance and tax
advice given in the preparation of the Partnership's Schedule K1s, the
preparation of the Partnership's Form 1065 and preparation of all State Tax
Returns are as follows:
2003 $4,809
2002 $4,809
(4) All Other Fees. None.
(5) Not Applicable.
(6) Not Applicable.
27
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statements of Financial Condition at December 31, 2003 and 2002.
Condensed Schedules of Investments at December 31, 2003 and 2002.
Statements of Income and Expenses for the years ended December 31,
2003, 2002 and 2001.
Statements of Partners' Capital for the years ended December 31, 2003,
2002 and 2001.
Notes to Financial Statements.
(2) Financial Statement Schedules: Financial Data Schedule for the year
ended December 31, 2003.
(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).
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. (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).
28
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).
10.10 Letter 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).
10.11 Letter dated August 28, 1990 from Partnership to Desai &
Company extending Management Agreement (filed as Exhibit l
to Form 10-K for the fiscal year ended December 31, 1990 and
incorporated herein by reference).
10.12 Letter dated 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).
10.13 Advisory 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).
10.14 Letter 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).
10.15 Letter 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).
10.16 Letter 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).
10.17 Letter 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).
10.18 Letter 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).
10.19 Letter 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).
10.20 Letter 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).
10.21 Letter 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).
10.22 Letter extending Management Agreements with John W. Henry &
Company, Inc. and TrendLogic Associates, Inc. for 1996
and 1997 (previously filed).
29
10.23 Letters extending Management Agreements with John W. Henry &
Company, Inc. and TrendLogic Associates, Inc. for 1998
(previously filed).
10.24 Letters extending Management Agreements with John W. Henry &
Company, Inc. and TrendLogic Associates, Inc. for 1999
(previously filed).
10.25 Letters extending Management Agreements with John W. Henry
and Company, Inc. and TrendLogic Associates, Inc. for
2000 (previously filed).
10.26 Letters extending Management Agreements with John W. Henry
and Company, Inc. and Trendlogic Associates, Inc. for
2001 (previously filed).
10.27 Letters extending Management Agreements with John W. Henry
and Company, Inc. and TrendLogic Associates, Inc. for
2002 (previously filed).
10.28 Letter terminating TrendLogic Associates, Inc. (filed herein).
10.29 Letter extending Management Agreements with John W. Henry and
Company, Inc. for 2003 (filed herein).
16.1 Letter from PricewaterhouseCoopers LLP (filed herein).
The exhibits required to be filed by Item 601 of regulation
S-K are incorporated herein by reference
31.1 Rule 13a-14(a)/15d-15(a) Certification (Certification of
President and Director)
31.2 Rule 13a-14(a)/15d-14(a) Certification (Certification of Chief
Financial Officer and Director)
32.1 Section 1350 Certification (Certification of President and
Director)
32.2 Section 1350 Certification (Certification of Chief Financial
Officer and Director)
(b) Report on Form 8-K: None Filed.
30
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
No proxy material has been sent to Limited Partners.
31
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 29th day of March 2003.
HUTTON INVESTORS FUTURES FUND L.P. II
By: Citigroup Managed Futures 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/ Shelley Ullman
David J. Vogel Shelley Ullman
President and Director Director
/s/ Maureen O'Toole /s/ Steve J. Keltz
Maureen O'Toole Steve J. Keltz
Director Secretary and Director
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
32
Exhibit 31.1
CERTIFICATION
I, David J. Vogel, certify that:
1. I have reviewed this Annual Report on Form 10-K of Hutton Investors Futures
Fund L.P. II (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, is made known to us
by others within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 29, 2004
/s/ David J. Vogel
David J. Vogel
Citigroup Managed Futures LLC
President and Director
33
Exhibit 31.2
CERTIFICATION
I, Daniel R. McAuliffe, Jr., certify that:
1. I have reviewed this Annual Report on Form 10-K of Hutton Investors Futures
Fund L.P. II (the "registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a
material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial
information included in this report, fairly present in all material respects the
financial condition and results of operations of the registrant as of, and for,
the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the registrant, is made known to us
by others within those entities, particularly during the period in which this
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered
by this report based on such evaluation; and
c) disclosed in this report any change in the registrant's internal control
over financial reporting that occurred during the registrant's most recent
fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual
report) that has materially affected, or is reasonably likely to materially
affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation of internal control over financial reporting, to the
registrant's auditors and the audit committee of the registrant's board of
directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are reasonably
likely to adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal control over
financial reporting.
Date: March 29, 2004
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
34
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hutton Investors Futures Fund L.P. II.
(the "Partnership") on Form 10-K for the year ending December 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, David J. Vogel, President and Director of Citigroup Managed Futures LLC,
certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ David J. Vogel
David J. Vogel
Citigroup Managed Futures LLC
President and Director
Date: March 29, 2004
35
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of Hutton Investors Futures Fund L.P. II.
(the "Partnership") on Form 10-K for the year ending December 31, 2003 as filed
with the Securities and Exchange Commission on the date hereof (the "Report"),
I, Daniel R. McAuliffe, Jr., Chief Financial Officer and Director of Citigroup
Managed Futures LLC, certify, pursuant to 18 U.S.C. ss. 1350, as adopted
pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and results of operations of the
Partnership.
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Citigroup Managed Futures LLC
Chief Financial Officer and Director
Date: March 29, 2004
36
Smith Barney Futures Management LLC
388 Greenwich Street, 7th Floor
New York, New York 10013-2396
June 11, 2002
John W. Henry & Company, Inc.
301 Yamato Road, Suite 2200
Boca Raton, Fl. 33431-4931
Attn: Mr. Ken Webster
Re: Management Agreement Renewals
Dear Mr. Webster:
We are writing with respect to your management agreements concerning the
commodity pools to which reference is made below (the "Management Agreements").
We are extending the term of the Management Agreements through June 30, 2003 and
all other provisions of the Management Agreements will remain unchanged.
o Shearson Mid-West Futures Fund
o Shearson Lehman Select Advisors Futures Fund L.P.
o JWH Strategic Allocation Master FD LLC
o Smith Barney Mid-West Futures Fund L.P. II
o Smith Barney Westport Futures Fund L.P.
o Hutton Investors Futures Fund, L.P. II (HIFF II)
o AURORA 2001
Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel McAuliffe at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5435.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT LLC
By: /s/ Daniel R. McAuliffe, Jr.
-------------------------
Daniel R. McAuliffe, Jr.
Chief Financial Officer & Director
JOHN W. HENRY & COMPANY, INC.
By: /s/ Ken Webster
-------------------------
Print Name: Ken Webster