Back to GetFilings.com
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, 1998
Commission File Number 0-16526
HUTTON INVESTORS FUTURES FUND L.P. II
- --------------------------------------------------------------------------
(Exact name of registrant as specified inits charter)
Delaware 13-3406160
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management Inc.
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units
of Limited
Partnership
Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
As of February 28, 1999 Limited Partnership Units with an aggregate value
of $6,111.59 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business.
(a) General development of business. Hutton Investors Futures Fund L.P. II
(the "Partnership") is a limited partnership organized on March 31, 1987, under
the Delaware Revised Uniform Limited Partnership Act and commenced trading on
July 24, 1987. The Partnership engages in speculative trading of commodity
futures contracts and other commodity interests, including futures contracts on
United States Treasuries and other financial instruments, foreign currencies and
stock indices. Redemptions of Units of Limited Partnership Interest in the
Partnership ("Units") for the years ended December 31, 1998, 1997 and 1996 are
reported in the Statement of Partners' Capital on page F-5 under "Item 8.
Financial Statements and Supplementary Data."
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership. On September 1, 1998, the Partnership's
commodity broker, Smith Barney Inc., merged with Salomon Brothers Inc and
changed its name to Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of
the General Partner. The General Partner is wholly owned by Salomon Smith Barney
Holdings, Inc. ("SSBH"), which is the sole owner of SSB. On October 8, 1998,
Travelers Group Inc. merged with Citicorp Inc. and changed its name to Citigroup
Inc. SSBH is a wholly owned subsidiary of Citigroup Inc.
The Partnership trades futures contracts on commodities on United States
and foreign commodity exchanges through a commodity brokerage account maintained
with SSB.
2
Under the Limited Partnership Agreement of the Partnership (the "Limited
Partnership Agreement"), the General Partner has sole responsibility for the
management of the business and affairs of the Partnership, but may delegate
trading discretion to one or more trading advisors.
As of December 31, 1998, the General Partner has entered into
advisory agreements (the "Management Agreements") with TrendLogic Associates
Inc. and with John W. Henry & Company, Inc. (collectively the "Advisors"). Two
of the principals of TrendLogic Associates, Inc., Mr. Paul E. Dean and Mr.
Richard Semels, are employees of SSB. The Management Agreements provide that the
Advisors will have sole discretion in determining the investment of the assets
of the Partnership but that the Advisors will have no authority to select the
commodity broker through whom transactions will be executed.
The Management Agreements can be terminated by the General Partner at
any time for any reason whatsoever. The Advisors may terminate the Management
Agreements for any reason upon 30 days' notice to the General Partner. The
Advisors may also terminate the Agreements if the trading policies of the
Partnership are changed in a manner that the Advisor reasonably believes will
adversely affect the performance of its trading strategies.
Pursuant to the terms of the Management Agreements, the Partnership
will pay each Advisor an incentive fee, payable quarterly, equal to 20% of each
Advisor's Trading Profits (as defined in the Management Agreements).
3
Under the terms of a customer agreement between the Partnership and
SSB, (the "Customer Agreement") the Partnership is obligated to pay commodity
brokerage commissions at $50 per round-turn futures transaction and $25 per
option transaction (inclusive of National Futures Association ("NFA"), floor
brokerage, exchange and clearing fees). The Customer Agreement between the
Partnership and SSB gives the Partnership the legal right to net unrealized
gains and losses. In addition, the General Partner (through SSB) invests
approximately eighty percent (80%) of the Partnership's assets in interest
bearing U.S. Treasury obligations (primarily U.S. Treasury Bills).
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests. The Partnership does not engage in sales of goods or services. The
Partnership's net income (loss) from operations for the years ended December 31,
1998, 1997, 1996, 1995 and 1994 are set forth under "Item 6. Selected Financial
Data." The Partnership's capital at December 31, 1998 was $22,978,774.
(c) Narrative description of business.
See Paragraphs (a) and (b)above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Foreign and Domestic Operations and
Export Sales. The Partnership does not engage in sales of goods or services, and
therefore this item is not applicable.
4
Item 2. Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SSB.
Item 3. Legal Proceedings.
There are no material legal proceedings pending against the Partnership
or the General Partner.
This section describes the major legal proceedings, other than ordinary routine
litigation incidental to the business, to which SSBH, the parent company of
this General Partner or its subsidiaries is a party or to which any of their
property is subject.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust ("APT"), Ameritech Corporation, and an officer of
Ameritech filed suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers
Realty Corporation ("SBRC") in the U.S. District Court for the Northern District
of Illinois (Harris Trust Savings Bank, not individually but solely as trustee
for the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended
complaint alleges that three purchases by APT from defendants of participation
interests in net cash flow or resale proceeds of three portfolios of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation interest with respect to a portfolio of motels owned by
5
Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act
("ERISA"), and that the purchase of the participation interests for the third
MOA portfolio and for the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and state law. SBI had acquired the
participation interests in transactions in which it purchased as principal
mortgage notes issued by MOA and Best to finance purchases of motel portfolios;
95% of three such interests and 100% of one such interest were sold to APT for
purchase prices aggregating approximately $20.9 million. Plaintiffs' second
amended complaint seeks (a) judgment on the ERISA claims for the purchase prices
of the four participation interests (approximately $20.9 million), for
rescission and for disgorgement of profits, as well as other relief, and (b)
judgment on the claims brought under RICO and state law in the amount of $12.3
million, with damages trebled to $37 million on the RICO claims and punitive
damages in excess of $37 million on certain of the state law claims as well as
other relief. The court dismissed the RICO, breach of contract, and unjust
enrichment claims. The court also found that defendants did not qualify as an
ERISA fiduciary and dismissed the claims based on that allegation. Defendants
moved for summary judgment on the sole remaining claim. The motion was denied,
and defendants appealed to the U.S. Court of Appeals for the Seventh Circuit.
Defendants are awaiting a decision.
6
Both the Department of Labor and the Internal Revenue Service have
advised SBI that they were or are reviewing the transactions in which APT
acquired such participation interests. With respect to the Internal Revenue
Service review, SSBH, SBI and SBRC have consented to extensions of time for the
assessment of excise taxes that may be claimed to be due with respect to the
transactions for the years 1987, 1988 and 1989. In August 1996, the IRS sent
SSBH, SBI and SBRC what appeared to be draft "30-day letters" with respect to
the transactions and SSBH, SBI and SBRC were given an opportunity to comment on
whether the IRS should issue 30-day letters, which would actually commence the
assessment process. In October 1996, SSBH, SBI and SBRC submitted a memorandum
setting forth reasons why the IRS should not issue 30-day letters with respect
to the transactions.
In December 1996, a complaint seeking unspecified monetary damages
was filed by Orange County, California against numerous brokerage firms,
including Smith Barney, in the U.S. Bankruptcy Court for the Central District of
California (County of Orange et al. v. Bear Stearns & Co. Inc. et al.).
Plaintiff alleges, among other things, that defendants recommended and sold to
plaintiff unsuitable securities and that such transactions were outside the
scope of plaintiff's statutory and constitutional authority (ultra vires).
Defendants' motion for summary judgment was granted with respect to the ultra
vires claims in February 1999. The court allowed the filing of an amended
complaint asserting claims based on alleged breaches of fiduciary duty.
7
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
declaratory judgment that Smith Barney Inc. and another underwriter are
responsible for any damages that the City may incur in the event the Internal
Revenue Service denies tax exempt status to the City's General Obligation
Refunding Bonds Series 1991. The Company filed a motion to dismiss the
complaints in September 1998, and the complaints were subsequently amended. The
Company has filed a motion to dismiss the amended complaints.
In November 1998, a purported class action complaint was filed in the
United States District Court for the Middle District of Florida (Dwight Brock as
Clerk for Collier County v. Merrill Lynch, et al.). The complaint alleges that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced refunding transactions.
The Company intends to contest this complaint vigorously.
Environmental Matters
In July 1996, the City and County of Denver ("Denver") enacted an ordinance
imposing a substantial fee on any radioactive waste or radium-contaminated
material disposed of in the City of Denver. Under this ordinance, Denver
assessed a subsidiary of Salomon, the S.W. Shattuck Chemical Company, Inc.
("Shattuck"), $9.35 million for certain disposal already carried out. Shattuck
sued to enjoin imposition of the fee on constitutional grounds. The United
8
States also sued, seeking to enjoin imposition of the fee of constitutional
grounds. Denver counterclaimed and moved to add SSBH as a
defendant for past costs. These cases have been consolidated before the U.S.
District Court in Colorado, which granted Shattuck's motion for a preliminary
injunction enjoining Denver from enforcing the ordinance during the pendency of
the litigation. The parties have reached a settlement.
The Company and various subsidiaries have also been named as defendants
in various matters incident to and typical of the businesses in which they are
engaged. These include numerous civil actions, arbitration proceedings and other
matters in which the Company's broker-dealer subsidiaries have been named,
arising in the normal course of business out of activities as a broker and
dealer in securities, as an underwriter of securities, as an investment banker
or otherwise. In the opinion of the Company's management, none of these actions
is expected to have a material adverse effect on the consolidated financial
condition of the Company and its subsidiaries.
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, 1998.
9
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a) Market Information. The Partnership has issued no
stock. There is no public market for the Units of
Limited Partnership Interest.
(b) Holders. The number of holders of Units of
Partnership Interest as of December 31, 1998 was 389.
(c) Distribution. The Partnership did not declare
a distribution in 1998 or 1997.
10
Item 6. Selected Financial Data.
Net realized and unrealized trading gains (losses), interest
income, net income (loss), increase (decrease) in net asset
value per Unit for the years ended December 31, 1998, 1997,
1996, 1995 and 1994 and total assets as of December 31, 1998,
1997, 1996, 1995 and 1994 were as follows:
1998 1997 1996 1995 1994
-------------- ------------- ------------- ------------ ------------
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
of $725,585, $653,350, $609,752,
$473,316, and 472,333, respectively $ 2,062,231 $ 3,259,116 $ 4,725,245 $ 4,798,547 $ (653,598)
Interest income 784,546 777,388 625,578 640,056 416,641
------------ ------------ ------------ ------------ ------------
$ 2,846,777 $ 4,036,504 $ 5,350,823 $ 5,438,603 $ (236,957)
============ ============ ============ ============ ============
Net income (loss) $ 2,350,037 $ 3,348,067 $ 4,409,205 $ 4,824,554 $ (578,344)
============ ============ ============ ============ ============
Increase (decrease)
in net asset value
per Unit $ 644.44 $ 845.88 $ 1,069.22 $ 1,082.24 $ (126.76)
============ ============ ============ ============ ============
Total assets $ 23,279,963 $ 22,381,511 $ 20,205,672 $ 16,025,794 $ 12,055,108
============ ============ ============ ============ ============
11
35
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(1) Liquidity. The Partnership does not engage in sales of goods
or services. The Partnership's only assets are its equity in its commodity
futures trading account, consisting of cash and cash equivalents, and net
unrealized appreciation (depreciation) on open futures contracts. Approximately
80% of the Partnership=s assets are maintained in interest bearing U.S. Treasury
obligations. Because of the low margin deposits normally required in commodity
futures trading, relatively small price movements may result in substantial
losses to the Partnership. Substantial losses resulting from such price
movements could lead to a material decrease in liquidity. To minimize this risk,
the Partnership follows certain policies including:
(a) Partnership funds are invested only in commodity interests
which are traded in sufficient volume to permit, in the opinion of the Advisors,
ease of taking and liquidating positions.
(b) The Partnership diversifies its positions among various
commodities. The Partnership does not initiate additional positions in a
commodity if such additional positions would result in a net long or short
position in such commodity requiring as margin more than 15% of the net assets
of the Partnership.
(c) The Partnership does not initiate additional positions in
any commodity if such additional positions would result in aggregate positions
for all commodities requiring as margin more than 66 2/3% of the Partnership's
net assets.
12
(d) The Partnership may occasionally accept delivery of a
commodity. Unless such delivery is disposed of promptly by retendering the
warehouse receipt representing the delivery to the appropriate clearing house,
the physical commodity position is fully hedged.
(e) The Partnership does not employ the trading technique
commonly known as "pyramiding", in which the speculator uses unrealized profits
on existing positions as margin for the purchase or sale of additional positions
in the same or related commodities.
(f) The Partnership does not utilize borrowings except short-
term borrowings if the Partnership takes delivery of any cash commodities.(g)
The Advisors may, from time to time, employ trading strategies such as spreads
or straddles on behalf of the Partnership. The term"spread" or "straddle"
describes a commodity futures trading strategy involving the simultaneous
buying and selling of futures contracts on the same commodity but involving
different delivery dates or markets and in which the trader expects to earn a
profit from a widening or narrowing of the difference between the prices
of the two contracts.
The Partnership is party to financial instruments with off-balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
13
include forwards, futures and options, whose value is 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. Each of these
instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. The General
Partner monitors and controls the Partnership's risk exposure on a daily basis
through financial, credit and risk management monitoring systems and,
accordingly believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Partnership is subject. (See
also Item 8. "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 futures trading, the
Partnership knows of no trends, demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement requires dissolution of the Partnership under
certain circumstances as defined in the Limited Partnership Agreement including,
but not limited to, a decrease in the net asset value of a Unit to less than
$500 as of the close of business on any business day, or a decrease in the
aggregate net assets of the Partnership to less than $1,000,000, or December 31,
2007.
14
(2) Capital resources. (a) The Partnership has made no
material commitments for capital expenditures as of the end of the latest fiscal
period.
(b) The Partnership's capital consists of the capital
contributions of the Partners as increased or decreased by gains or losses on
trading of commodity interests, expenses, interest income, redemptions of Units
and distributions of profits, if any. Gains or losses on commodity futures
trading cannot be predicted. Market movements in commodities are dependent upon
fundamental and technical factors which the Partnership's Advisors may or may
not be able to identify. Partnership expenses consist of, among other things,
commissions and incentive fees. The level of these expenses is dependent upon
the level of trading and the ability of the Advisors to identify and take
advantage of price movements in the commodity markets, in addition to the level
of net assets maintained. No forecast can be made as to the level of redemptions
in any given period. For the year ended December 31, 1998, 168 Units were
redeemed for a total of $912,753. For the year ended December 31, 1997, 184
Units were redeemed for a total of $959,742. For the year ended December 31,
1996, 215 Units were redeemed for a total of $880,296.
(3) Results of Operations. For the year ended December 31, 1998,
the net asset value per Unit increased 11.5% from $5,587.94 to $6,232.38. For
the year ended December 31, 1997, the net asset value per Unit increased 17.8%
from $4,742.06 to $5,587.94. For the year ended December 31, 1996, the net asset
value per Unit increased 29.1% from $3,672.84 to $4,742.06.
15
The Partnership experienced net trading gains of $2,787,816 before
commissions and expenses for the year ended December 31, 1998. These gains were
primarily attributable to the trading of commodity futures in currencies, U.S.
and non-U.S. interest rates, livestock and energy products and were partially
offset by losses realized in metals, softs, grains and indices.
The Partnership experienced net trading gains of $3,912,466
before commissions and expenses for the year ended December 31, 1997. These
gains were primarily attributable to the trading of commodity futures in
currencies, U.S. and non-U.S. interest rates, metals and indices and were
partially offset by losses in the trading of energy products, grains, livestock
and softs.
The Partnership experienced net trading gains of $5,334,997 before
commissions and expenses for the year ended December 31, 1996. These gains were
primarily attributable to the trading of commodity futures in U.S. and non-U.S.
interest rates, metals, currencies and energy and were partially offset by
losses in the trading of agricultural products and indices.
Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the existence of major price trends and the ability of the Advisors to
identify those price trends correctly. Price trends are influenced by, among
16
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. The
Advisors' technical trading methods do not generally take into account such
fundamental factors. To the extent that market trends exist and the Advisors are
able to identify them, the Partnership expects to increase capital through
operations.
(4) Operational Risk
The Company is directly exposed to market risk and credit risk, which
arise in the normal course of its business activities. Slightly less direct, but
of critical importance, are risks pertaining to operational and back office
support. This is particularly the case in a rapidly changing and increasingly
global environment with increasing transaction volumes and an expansion in the
number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss and
legal liability attributable to operational problems, such as inaccurate pricing
of transactions, untimely trade execution, clearance and/or settlement, or the
inability to process large volumes of transactions. The Company 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
17
or hardware failure that constrain the Company's ability to gather, process, and
communicate information efficiently and securely, without interruption, with
customers, among units within the Company, and in the markets where the Company
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 Company's
stockholder, creditors, and regulators, is free of material errors.
Risk of Computer System Failure (Year 2000 Issue)
The Year 2000 issue is the result of existing computers in
many businesses using only two digits to identify a year in the date field.
These computers and programs, often referred to as "information technology,"
were designed and developed without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could fail
or create erroneous results at the Year 2000. Such systems and processes are
18
dependent on correctly identifying dates in the next century.
The General Partner administers the business of the
Partnership through various systems and processes maintained by SSBH and SSB. In
addition, the operation of the Partnership is dependent on the capability of the
Partnership's Advisors, the brokers and exchanges through which the Advisors
trade, and other third parties to prepare adequately for the Year 2000 impact on
their systems and processes. The Partnership itself has no systems or
information technology applications relevant to its operations.
The General Partner, SSB, SSBH and their parent organization
Citigroup Inc. have undertaken a comprehensive, firm-wide evaluation of both
internal and external systems (systems related to third parties) to determine
the specific modifications needed to prepare for the year 2000. The combined
Year 2000 program in SSB is expected to cost approximately $140 million over the
four years from 1996 through 1999, and involve over 450 people at the peak
staffing level. SSB expects to complete all compliance and certification work by
June 1999. At this time, over 95% of SSBH systems have completed the correction
process and are Year 2000 compliant. Over 73% of the systems have completed
certification testing. The Year 2000 project at SSBH remains on schedule.
The systems and components supporting the General Partner's
business that require remediation have been identified and modifications have
been made to bring them into Year 2000 compliance. Testing of these systems was
completed in the fourth quarter of 1998. Final testing and certification are
19
expected to be completed by the end of the first quarter of 1999.
This expenditure and the General Partner's resources dedicated
to the preparation for Year 2000 do not and will not have a material impact
on the operation or results of the Partnership.
The General Partner has requested and received statements from
the Advisors that each has undertaken its own evaluation and remediation plans
to identify any of its computer systems that are Year 2000 vulnerable. Each
Advisor has confirmed it is taking immediate actions to remedy those systems as
necessary. The General Partner will continue to inquire into and to confirm each
Advisor's readiness for Year 2000.
The most likely and most significant risk to the Partnership
associated with the lack of Year 2000 readiness is the failure of outside
organizations, including the commodities exchanges, clearing organizations, or
regulators with which the Partnership interacts to resolve their Year 2000
issues in a timely manner. This risk could involve the inability to determine
the value of the Partnership at some point in time and would make effecting
purchases or redemptions of Units in the Partnership infeasible until such
valuation was determinable.
SSB has successfully participated in industry-wide testing
including: The Streetwide Beta Testing organized by the Securities Industry
Association (SIA), a government securities clearing test with the Federal
Reserve Bank of New York, The Depository Trust Company, and The Bank of new
York, and Futures Industry Association participants test. The firm is also
participating in the streetwide testing which commenced in March 1999.
20
It is possible that problems may occur that would require some time to
repair. Moreover, it is possible that problems will occur outside SSBH for which
SSBH could experience a secondary effect. Consequently, SSBH is preparing
comprehensive, written contingency plans so that alternative procedures and a
framework for critical decisions are defined before any potential crisis occurs.
The goal of Year 2000 contingency planning is a set of alternate procedures
to be used in the event of a critical system failure or a failure by a supplier
or counterparty. Planning work was completed in December 1998, and testing of
alternative procedures will be conducted in the first half of 1999.
European Economic and Monetary Union
European Economic and Monetary Union ("EMU") is an historic event in
Europe involving the unification of currency in eleven major countries. The new
unified currency, called the Euro, is expected to compete on a global scale with
the U.S. Dollar and the Japanese Yen.
Introduction of the Euro began on January 1, 1999, when the European
Central Bank assumed control of the monetary policy for participating nations.
Exchange rates between the participating countries were fixed and the Euro is
available for electronic payments. Also on January 1, 1999, various issuers
re-denominated their securities and harmonized bond payment conventions. A
three-year transition period began on January 1, 1999, after which Euro notes
and coins will be issued by the European Central Bank and national currencies
will be phased out.
21
The Company completed a successful conversion to the Euro and has commenced
trading and settlement in the new currency with no major exceptions.
As the preceding risks are largely interrelated, so are the Company's
actions to mitigate and manage them. The Company's Chief Administrative Officer
is responsible for, among other things, oversight of global operations and
technology. An essential element in mitigating the risks noted above is the
optimization of information technology and the ability to manage and implement
change. To be an effective competitor in an information-driven business of a
global nature requires the development of global systems and databases that
ensure increased and more timely access to reliable data.
(5) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires that an entity recognize all derivatives in the statement of
financial condition and measure those instruments at fair value. SFAS 133 is
effective for fiscal year beginning after June 15, 1999 SFAS 133 is expected to
have no material impact on the financial statements of the Partnership as all
commodity interests are recorded at fair value, with changes therein reported in
the statement of income and expenses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
22
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification effects 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
23
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's
market risk exposures contain "forward-looking statements" within the meaning of
the safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor except for statements of historical
fact (such as the terms of particular contracts and the number of market risk
sensitive instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized).
Exchange maintenance margin requirements have been used by the
Partnership as the measure of its Value at Risk. Maintenance margin requirements
are set by exchanges to equal or exceed the maximum losses reasonably expected
to be incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In the case of market sensitive instruments which are not exchange
traded (almost exclusively currencies in the case of the Partnership), the
margin requirements for the equivalent futures positions have been used as Value
at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers' margins have been used.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been added to determine each trading category's aggregate
Value at Risk. The diversification effects resulting from the fact that the
25
Partnership's positions are rarely, if ever, 100% positively correlated have not
been reflected. 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, 1998. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1998, the
Partnership's total capitalization was $22,978,774.
December 31, 1998
% of Total
Market Sector Value at Risk Capitalization
Currencies
- -Exchange Traded Contracts $ 8,430 0.04%
- -OTC Contracts 486,070 2.12%
Energy 110,300 0.48%
Interest rates U.S. 249,620 1.09%
Interest rates Non-U.S 1,087,517 4.73%
Grains 27,400 0.12%
Livestock 4,025 0.02%
Softs 99,729 0.43%
Indices 164,631 0.72%
Metals 122,150 0.53%
---------- -----
Total $2,359,872 10.28%
========== =====
Material Limitations on Value at Risk as an Assessment of Market Risk.
The face value of the market sector instruments held by the Partnership
is typically many times the applicable margin requirement (margin requirements
generally range between 2% and 15% of contract face value) as well as the
26
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.
The Partnership also has non-trading cash flow risk as a result of
investing a substantial portion (approximately 66%) (as well as any market risk
it represents) of its available assets in U.S. Treasury bills for cash
management purposes. Although the General Partner does not anticipate that, even
in the case of major interest rate movements, the Partnership would sustain a
material mark-to-market loss on its securities positions, if short-term interest
rates decline so will the Partnership's cash management income. The Partnership
also maintains a portion (approximately 24%) of its available assets in cash in
interest-bearing accounts at the Commodity Broker. These cash balances are also
subject (as well as any market risk they represent) to cash flow risk, which is
not material.
Materiality as used in this section, "Qualitative and Quantitative
27
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
28
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, 1998, by market sector.
Interest Rates. Interest rate risk is the principal market exposure of
the Partnership. Interest rate movements directly affect the price of the
futures positions held by the Partnership and indirectly 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-7 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7
interest rates will remain the primary market exposure of the Partnership for
the foreseeable future. The changes in interest rates which have the most effect
on the Partnership are changes in long-term, as opposed to short-term, rates.
Consequently, even a material change in short-term rates would have little
effect on the Partnership were the medium- to long-term rates to remain steady.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
29
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, although it is difficult at this point to predict the effect of the
introduction of the Euro on the Advisors' currency trading strategies. The
currency trading Value at Risk figure includes foreign margin amounts converted
into U.S. dollars with an incremental adjustment to reflect the exchange rate
risk inherent to the dollar-based Partnership in expressing Value at Risk in a
functional currency other than dollars.
Stock Indices. The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by the
Partnership are by law limited to futures on broadly based indices. As of
December 31, 1998, the Partnership's primary exposures were in the S&P 500,
Financial Times (England), Nikkei (Japan) and Hang Seng (Hong Kong) stock
indices. The General Partner anticipates little, if any, trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.
(Static markets would not cause major market changes but would make it difficult
for the Partnership to avoid being "whipsawed" into numerous small losses.)
Metals. The Partnership's primary metal market exposure is to
fluctuations in the price of gold and silver. Although certain of the Advisors
will from time to time trade base metals such as aluminum and copper, the
30
principal market exposures of the Partnership have consistently been in the
precious metals, gold and silver. The Advisors' gold trading has been
increasingly limited due to the long-lasting and mainly non-volatile decline in
the price of gold over the last 10-15 years. However, silver prices have
remained volatile over this period, and the Advisors have from time to time
taken substantial positions as they have perceived market opportunities to
develop. The General Partner anticipates that gold and silver will remain the
primary metals market exposure for the Partnership.
Commodities. The Partnership's primary commodities exposure is to
agricultural price movements which are often directly affected by severe or
unexpected weather conditions. Coffee, cocoa, cotton and sugar accounted for the
substantial bulk of the Partnership's commodity exposure as of December 31,
1998.
Energy. The Partnership's primary energy market exposure is to gas and oil
price movements, often resulting from political developments in the Middle East.
Oil prices are currently depressed, but they 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, 1998.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, German marks, British pounds and French francs.
31
The Advisor regularly converts foreign currency balances to dollars in an
attempt to control the Partnership's non-trading risk.
Securities Positions. The Partnership's only market exposure in
instruments held other than for trading is in its securities portfolio. The
Partnership holds only cash or interest-bearing, credit risk-free, short-term
paper -- typically Treasury bills of duration up to 1 year. Violent fluctuations
in prevailing interest rates could cause immaterial mark-to-market losses on the
Partnership's securities, although substantially all of these short-term
instruments are held to maturity.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
individual positions as well as enter programs traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisors' own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
Each Advisor applies its own risk management policies to its trading.
The Advisors often follow diversification guidelines, margin limits and stop
loss points to exit a position. The Advisors' research of risk management often
suggests ongoing modifications to their trading programs.
32
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisors to discuss their risk management and to
look for any material changes to the Advisors' portfolio balance and trading
techniques. The Advisors are required to notify the General Partner of any
material changes to their programs.
The General Partner controls the risk of the non-trading instruments
(interest-bearing securities held for cash management purposes) - the only
Partnership investments, as opposed to Advisor selections, directed by the
General Partner - limiting the duration to no more than 1 year.
33
Item 8. Financial Statements and Supplementary Data.
HUTTON INVESTORS FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath or Affirmation F-2
Report of Independent Accountants. F-3
Financial Statements:
Statement of Financial Condition at
December 31, 1998 and 1997. F-4
Statement of Income and Expenses for
the years ended December 31, 1998,
1997 and 1996. F-5
Statement of Partners' Capital for the
years ended December 31, 1998, 1997
and 1996. F-6
Notes to Financial Statements. F-7 - F-11
F-1
Continued
To The Limited Partners of
Hutton Investors Futures Fund L.P. II
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: Daniel A. Dantuono, Chief Financial Officer
Smith Barney Futures Management Inc.
General Partner, Hutton Investors Futures
Fund L.P. II
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424
F-2
Report of Independent Accountants
To the Partners of
Hutton Investors Futures Fund L.P. II:
In our opinion, the accompanying statement of financial condition and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Hutton Investors
Futures Fund L.P. II at December 31, 1998 and 1997, and the results of its
operations for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the management of the General Partner; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by the management of the General Partner, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
F-3
Hutton Investors Futures Fund L.P. II
Statement of Financial Condition
December 31, 1998 and 1997
1998 1997
Assets:
Equity in commodity futures trading
account:
Cash and cash equivalents (Note 3b) $21,116,563 $21,096,196
Net unrealized appreciation on open
futures contracts 2,163,400 1,285,315
----------- -----------
$23,279,963 $22,381,511
----------- -----------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions on open futures contracts $ 80,379 $ 88,012
Incentive fees 5,645 347,297
Other 34,426 24,732
Redemptions payable (Note 5) 180,739 379,980
----------- -----------
301,189 840,021
----------- -----------
Partners' capital (Notes 1, 5, and 6):
General Partner, 44 Unit equivalents
outstanding in 1998 and 1997 274,225 245,869
Limited Partners, 3,643 and 3,811 Units
of Limited Partnership
Interest outstanding in 1998 and 1997,
respectivel 22,704,549 21,295,621
----------- -----------
22,978,774 21,541,490
----------- -----------
$23,279,963 $22,381,511
=========== ===========
See notes to financial statements.
F-3
Hutton Investors Futures Fund L.P. II
Statement of Income and Expenses
for the Years Ended
December 31, 1998, 1997, and 1996
1998 1997 1996
Income:
Net gains on trading
of commodity interests:
Realized gains
on closed positions $ 1,909,731 $ 3,101,486 $ 5,696,368
Change in unrealized
gains/losses on open
positions 878,085 810,980 (361,371)
----------- ----------- -----------
2,787,816 3,912,466 5,334,997
Less, Brokerage
commissions including
clearing fees of
$18,793, $17,953, and
$17,066, respectively
(Note 3b) (725,585) (653,350) (609,752)
----------- ----------- -----------
Net realized and
unrealized gains 2,062,231 3,259,116 4,725,245
Interest income
(Note 3b) 784,546 777,388 625,578
----------- ----------- -----------
2,846,777 4,036,504 5,350,823
----------- ----------- -----------
Expenses:
Incentive fees
(Note 3a) 446,819 641,927 887,679
Other expenses 49,921 46,510 53,939
----------- ----------- -----------
496,740 688,437 941,618
----------- ----------- -----------
Net income $ 2,350,037 $ 3,348,067 $ 4,409,205
=========== =========== ===========
Net income per Unit
of Limited Partnership
Interest and General
Partner Unit equivalent
(Notes 1 and 6) $ 644.44 $ 845.88 $ 1,069.22
=========== =========== ===========
See notes to financial statements.
F-4
Hutton Investors Futures Fund L.P. II
Statement of Partners' Capital
for the Years Ended
December 31, 1998, 1997, and 1996
Limited General
Partners Partner Total
Partners' capital at
December 31, 1995 $ 15,462,651 $ 161,605 $ 15,624,256
Net income 4,362,160 47,045 4,409,205
Redemption of 215
Units of
Limited Partnership
Interest (880,296) -- (880,296)
------------ ------------ ------------
Partners' capital at
December 31, 1996 18,944,515 208,650 19,153,165
Net income 3,310,848 37,219 3,348,067
Redemption of 184
Units of Limited
Partnership Interest (959,742) -- (959,742)
------------ ------------ ------------
Partners' capital at
December 31, 1997 21,295,621 245,869 21,541,490
Net income 2,321,681 28,356 2,350,037
Redemption of 168
Units of
Limited Partnership
Interest (912,753) -- (912,753)
------------ ------------ ------------
Partners' capital at
December 31, 1998 $ 22,704,549 $ 274,225 $ 22,978,774
============ ============ ============
See notes to financial statements.
F-5
Hutton Investors
Futures Fund L.P. II
Notes to Financial Statements
1. Partnership Organization:
Hutton Investors Futures Fund L.P. II (the "Partnership") is a limited
partnership which was organized under the partnership laws of the State of
Delaware on March 31, 1987 to engage in the speculative trading of a
diversified portfolio of commodity interests including futures contracts,
options and forward contracts. The commodity interests that are traded by
the Partnership are volatile and involve a high degree of market risk. The
Partnership was authorized to sell 30,000 Units of Limited Partnership
Interest ("Units") during the public offering period.
SmithBarney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership. On September 1, 1998, the
Partnership's commodity broker, Smith Barney Inc., merged with Salomon
Brothers Inc and changed its name to Salomon Smith Barney Inc. ("SSB"). SSB
is an affiliate of the General Partner. The General Partner is wholly owned
by Salomon Smith Barney Holdings, Inc. ("SSBH"), which is the sole owner
of SSB. On October 8, 1998, Travelers Group Inc. merged with Citicorp Inc.
and changed its name to Citigroup Inc. SSBH is a wholly owned subsidiary of
Citigroup Inc.
The General Partner and each limited partner share in the profits and losses
of the Partnership in proportion to the amount of partnership interest owned
by each except that no limited partner shall be liable for obligations of
the Partnership in excess of his initial capital contribution and profits,
if any, net of distributions.
The Partnership will be liquidated upon the first to occur of the following:
December 31, 2007; the net asset value of a Unit decreases to less than $500
per unit; the aggregate net assets of the Partnership decline to less than
$1,000,000; or under certain other circumstances as defined in the Limited
Partnership Agreement.
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at fair value on the
last business day of the year, which represents market value for those
commodity interests for which market quotations are readily available.
Investments in commodity interests denominated in foreign currencies are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the year. Realized gains (losses) and changes in
unrealized values on commodity interests are recognized in the period in
which the contract is closed or the changes occur and are included in net
gains (losses) on trading of commodity interests.
b. Commission charges to open and close futures contracts are expensed at
the time the positions are opened.
c. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
d. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
F-6
3. Agreements:
a. Management Agreements:
The General Partner has Management Agreements with Trendlogic Associates
and John W. Henry & Company, Inc., (individually an "Advisor" or
collectively, the "Advisors"). Two of the principals of Trendlogic
Associates, Mr. Paul E. Dean and Mr. Richard Semels, are employees of
SSB. The Agreements provide that the Advisors have sole discretion to
determine the investment of the assets of the Partnership, subject to the
Partnership's trading policies set forth in the Partnership's prospectus.
Pursuant to each Management Agreement, each Advisor is entitled to an
incentive fee, payable quarterly, equal to 20% of the Trading Profits, as
defined, on the assets under such Advisor's management.
b. Customer Agreement:
The Partnership has entered into a Customer Agreement, which has been
assigned to SSB, from a predecessor company, whereby SSB provides
services which include, among other things, the execution of transactions
for the Partnership's account in accordance with orders placed by the
Advisors. The Partnership is obligated to pay brokerage commissions to
SSB at $50 per roundturn futures transaction and $25 per option
transaction which includes floor brokerage, exchange, clearing and NFA
fees. All of the Partnerships' assets are deposited in the Partnership's
account at SSB. The Partnership's cash is deposited by SSB in segregated
bank accounts to the extent required by Commodity Futures Trading
Commission regulations. At December 31, 1998 and 1997, the amount of cash
held for margin requirements was $2,552,926 and $2,879,447, respectively.
The Customer Agreement provides that approximately 80% of the
Partnership's assets be maintained in interest bearing U.S. Treasury
obligations, including assets to be utilized as margin for commodities
positions. For the purposes of these financial statements, these U.S.
Treasury obligations are cash equivalents. The Customer Agreement between
the Partnership and SSB gives the Partnership the legal right to net
unrealized gains and losses.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
All of the commodity interests owned by the Partnership are held for trading
purposes. The fair value of these commodity interests, including options
thereon, if applicable, at December 31, 1998 and 1997 was $2,163,400 and
$1,285,315, respectively, and the average fair value during the years then
ended, based on a monthly calculation, was $1,359,853 and $1,284,957,
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 his
Units at the net asset value thereof as of the last day of any calendar
quarter on 10 business days' notice to the General Partner, provided that no
redemption may result in the limited partner holding fewer than three Units
after such redemption is effected.
F-7
6. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest during the
years ended December 31,1998, 1997 and 1996 were as follows:
1998 1997 1996
Net realized and unrealized gains $ 570.01 $ 824.10 $ 1,148.02
Interest income 207.46 195.38 150.06
Expenses (133.03) (173.60) (228.86)
--------- --------- ---------
Increase for year 644.44 845.88 1,069.22
Net asset value per
Unit, beginning of year 5,587.94 4,742.06 3,672.84
--------- --------- ---------
Net asset value per
Unit, end of year $ 6,232.38 $ 5,587.94 $ 4,742.06
========= ========= =========
7. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial
instruments may include forwards, futures and options, whose value is based
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 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 statement of
financial condition and not represented by the contract or notional amounts
of the instruments. The Partnership has concentration risk because the sole
counterparty or broker with respect to the Partnership's assets is SSB.
The General Partner monitors and controls the Partnership's risk exposure on
a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
F-8
evaluating and limiting the credit and market risks to which the Partnership
is subject. These monitoring systems allow the General Partner to
statistically analyze actual trading results with risk adjusted performance
indicators and correlation statistics. In addition, on-line monitoring
systems provide account analysis of futures, forwards and options positions
by sector, margin requirements, gain and loss transactions and collateral
positions.
The notional or contractual amounts of these instruments, while not recorded
in the financial statements, reflect the extent of the Partnership's
involvement in these instruments.
At December 31, 1998, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was
$108,181,799 and $127,926,600, respectively, as detailed below. All of these
instruments mature within one year of December 31, 1998. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity. At December 31, 1998, the fair value of the Partnership's
derivatives, including options thereon, if applicable, was $2,163,400, as
detailed below.
December 31, 1998
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair Value
Currencies
-Exchange Traded
Contracts $ 411,875 $ 580,480 $ (2,080)
-OTC Contracts 14,206,101 12,487,422 161,573
Energy 126,000 1,063,986 53,388
Grains 105,624 852,175 17,550
Interest Rates U.S. 15,761,211 28,262,556 (160,305)
Interest Rates Non-U.S 74,172,100 80,325,196 2,072,871
Livestock -- 174,990 5,520
Metals -- 3,249,325 24,909
Softs 1,533,560 809,481 37,315
Indices 1,865,328 120,989 (47,341)
------------ ------------ ------------
Total $108,181,799 $127,926,600 $ 2,163,400
============ ============ ============
F-9
At December 31, 1997, the notional or contractual amounts of the Partnership's
commitment to purchase and sell these instruments was $93,971,478 and
$106,119,565, respectively, and the fair value of the Partnership's derivatives,
including options thereon, if applicable, was $1,285,315 as detailed below.
December 31, 1997
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair Value
Currencies
-Exchange Traded Contracts $ 202,585 $ 1,130,915 $ 6,183
-OTC Contracts 20,110,834 40,229,303 90,831
Energy -- 1,835,392 114,647
Grains 269,580 998,400 16,461
Interest Rates U.S. 26,445,738 471,375 122,125
Interest Rates Non-U.S 42,438,955 50,816,858 134,897
Livestock -- 120,150 4,750
Metals 2,269,614 6,174,125 661,030
Softs 1,891,654 1,664,380 23,372
Indices 342,518 2,678,667 111,019
------------ ------------ ------------
Total $ 93,971,478 $106,119,565 $ 1,285,315
============ ============ ============
8. New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 requires that an entity recognize all derivatives in the statement
of financial condition and measure those instruments at fair value. SFAS 133
is effective for fiscal years beginning after June 15, 1999. SFAS 133 is
expected to have no material impact on the financial statements of the
Partnership as all commodity interests are recorded at fair value, with
changes therein reported in the statement of income and expenses.
F-10
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the last two fiscal years and any subsequent interim
period, no independent accountant who was engaged as the principal accountant to
audit the Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs
are managed by its General Partner, Smith Barney Futures Management Inc.
Investment decisions are made by the Advisors.
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by the General Partner. See "Item 1. Business." SSB is the commodity
broker for the Partnership and receives brokerage commissions for its services
at an amount equal to $50 per round-turn futures transaction and $25 per option
transaction (inclusive of NFA, exchange and clearing fees) as described in "Item
1. Business." and "Item 8. Financial Statements and Supplementary Data." For the
year ended December 31, 1998, SSB earned $725,585 in brokerage commissions and
clearing fees.
The Advisors manage the Partnership's investments and receive a
quarterly incentive fee, as described under "Item 1. Business." For the year
ended December 31, 1998, the Advisors earned $446,819 in incentive fees.
34
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners.
The Partnership knows of no person who beneficially owns more than 5% of the
Units outstanding.
(b). Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnership's affairs are managed by the General
Partner. The General Partner owns Units of general partnership interest
equivalent to 44 Units (1.2%) of Limited Partnership Interest as of December 31,
1998.
(c). Changes in control. None.
Item 13. Certain Relationships and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management Inc.
would be considered promoters for purposes of Item 404(d) of Regulation S-K.
The nature and the amount of compensation received by SSSB and the General
Partner from the Partnership are set forth under "Item 1. Business.",
"Item 8. Financial Statements and Supplementary Data.", Note 3b. and "Item
11. Executive Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1998 and 1997.
Statement of Income and Expenses for the years ended December
31, 1998, 1997 and 1996.
35
Statement of Partners' Capital for the
years ended December 31, 1998, 1997 and 1996
(2) Financial Statement Schedules: Financial Data Schedule for the
year ended December 31, 1998.
(3) Exhibits:
a. 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).
b. 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).
c. Form of Request for Redemption
(incorporated by reference form 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).
36
d. Escrow Agreement dated June 9, 1987,
among the Partnership, Hutton Commodity
Management Inc., E.F. Hutton & Company
Inc. and Chemical Bank (previously
filed).
e. Brokerage Agreement dated as of July 23,
1987, between the Partnership and E.F.
Hutton & Company Inc. (previously
filed).
f. Advisory Agreement dated as of March 31,
1987, among the Partnership, Hutton
Commodity Management Inc., Desai &
Company and John W. Henry & Company,
Inc. the Partnership, Hutton Commodity
Management Inc., (previously filed).
g. 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).
h. Net Worth Agreement dated as of June 3,
1987, between Hutton Commodity
Management Inc. and the E.F. Hutton
Group Inc. (previously filed).
37
i. Copy of executed Promissory Note dated
June 3, 1987, from The E.F. Hutton Group
Inc. to Hutton Commodity Management Inc.
(previously filed).
j. 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).
k. Letter dated August 28, 1990 from
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).
l. Letter dated August 28, 1990 from
Partnership to Desai & Company extending
Management Agreement (filed as Exhibit 1
to Form 10-K for the fiscal year ended
December 31, 1990 and incorporated
herein by reference).
m. Letter dated January 17, 1991 from
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).
38
n. 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).
o. Letter dated August 30, 1991 from
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).
p. Letter dated August 30, 1991 from
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).
q. Letter dated August 31, 1992 from
General Partner to John W. Henry &
Company, Inc. (filed as Exhibit q to
Form 10-K for the fiscal year ended
December 31, 1991).
39
r. Letter dated August 31, 1992 from
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).
s. Letter dated August 31, 1993 from
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).
t. Letter dated August 31, 1993 from
General Partner to TrendLogic
Associates, Inc. (filed as Exhibit t to
Form 10-K for the fiscal year ended
December 31, 1993).
u. Letter dated February 16, 1995 from
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).
v. Letter dated February 16, 1995 from
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).
40
w. Letters extending Management Agreements with John W.
Henry & Company, Inc. and TrendLogic Associates, Inc.
for 1996 and 1997 (filed as Exhibit to Form 10-K for
the year ended December 31, 1997).
x. Letters extending Management Agreements with John W.
Henry & Company, Inc. and TrendLogic Associates, Inc.
for 1998 (filed herein).
(b) Report on Form 8-K: None Filed
41
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
42
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Registration Statement
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 24th day of March 1999.
HUTTON INVESTORS FUTURES FUND L.P.II
By: Smith Barney Futures Management Inc.
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Exchange Act of 1934
this Registration Statement has been signed below by the following persons in
the capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel, Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael R. Schaefer /s/ Daniel A. Dantuono
Michael R. Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
43