FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(X) QUARTERLY REPORT UNDER SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR ( ) TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter ended June 30, 1998
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 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)
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
<PAGE>
HUTTON INVESTORS FUTURES FUND L.P. II
FORM 10-Q
INDEX
Page
Number
PART I - Financial Information:
Item 1. Financial Statements:
Statement of Financial Condition at
June 30, 1998 and December 31, 1997. 3
Statement of Income and Expenses and
Partners' Capital for the three and
six months ended June 30, 1998 and 1997. 4
Notes to Financial Statements 5 - 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results of
Operations 9 - 10
Item 3. Quantitative and Qualitative Disclosures
of Market Risk 11
PART II - Other Information 12 - 13
2
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PART I
Item 1. Financial Statements
HUTTON INVESTORS FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
JUNE 30, DECEMBER 31,
1998 1997
------------ ------------
(Unaudited)
ASSETS:
Equity in commodity futures trading account:
Cash and cash equivalents $ 20,482,385 $ 21,096,196
Net unrealized appreciation (depreciation)
on open futures contracts (670,981) 1,285,315
------------ ------------
$ 19,811,404 $ 22,381,511
============ ============
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions on open futures contracts $ 110,993 $ 88,012
Incentive fees 2,651 347,297
Other 27,682 24,732
Redemptions payable 508,709 379,980
------------ ------------
650,035 840,021
------------ ------------
Partners' capital :
General Partner, 44 Unit
equivalents outstanding in 1998 and 1997 226,093 245,869
Limited Partners, 3,685 and 3,811 Units
of Limited Partnership Interest
outstanding in 1998 and 1997, respectively 18,935,276 21,295,621
------------ ------------
19,161,369 21,541,490
------------ ------------
$ 19,811,404 $ 22,381,511
============ ============
See Notes to Financial Statements
3
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HUTTON INVESTORS FUTURES FUND L.P. II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- ----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Income:
Net gains (losses) on trading of commodity futures:
Realized gains (losses) on closed positions $ 583,083 $ (1,009,025) $ 262,367 $ 58,844
Change in unrealized gains/losses on open
positions (1,097,098) 157,504 (1,956,296) 216,880
------------ ------------ ------------ ------------
(514,015) (851,521) (1,693,929) 275,724
Less, brokerage commissions and clearing fees
($4,673, $2,500, $10,353 and $6,117, respectively) (208,551) (193,756) (400,813) (318,036)
------------ ------------ ------------ ------------
Net realized and unrealized losses (722,566) (1,045,277) (2,094,742) (42,312)
Interest income 191,573 192,374 395,173 382,365
------------ ------------ ------------ ------------
(530,993) (852,903) (1,699,569) 340,053
------------ ------------ ------------ ------------
Expenses:
Incentive fees 2,651 4,111 7,214 202,238
Other 12,478 8,354 22,038 20,683
------------ ------------ ------------ ------------
15,129 12,465 29,252 222,921
------------ ------------ ------------ ------------
Net income (loss) (546,122) (865,368) (1,728,821) 117,132
Redemptions (508,709) (143,059) (651,300) (367,398)
------------ ------------ ------------ ------------
Net decrease in Partners' capital (1,054,831) (1,008,427) (2,380,121) (250,266)
Partners' capital, beginning of period 20,216,200 19,911,326 21,541,490 19,153,165
------------ ------------ ------------ ------------
Partners' capital, end of period $ 19,161,369 $ 18,902,899 $ 19,161,369 $ 18,902,899
============ ============ ============ ============
Net asset value per Unit
(3,729 and 3,964 Units outstanding
at June 30, 1998 and 1997, respectively) $ 5,138.47 $ 4,768.64 $ 5,138.47 $ 4,768.64
============ ============ ============ ============
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (142.67) $ (216.67) $ (449.47) $ 26.58
============ ============ ============ ============
</TABLE>
See Notes to Finanacial Statements
4
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HUTTON INVESTORS FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(Unaudited)
1. General
Hutton Investors Futures Fund L.P. II (the "Partnership") is a limited
partnership, organized on March 31, 1987 under the partnership laws of the State
of Delaware, 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 commenced operations on
July 24, 1987.
Smith Barney Futures Management Inc. acts as the general partner
(the "General Partner") of the Partnership. Smith Barney Inc. ("SB"), an
affiliate of the General Partner, acts as commodity broker for the Partnership.
All trading decisions for the Partnership are made by John W. Henry & Company,
Inc. and TrendLogic Associates. (collectively, the "Advisors"). On November 28,
1997, Smith Barney Holdings Inc. was merged with Salomon Inc to form Salomon
Smith Barney Holdings Inc. ("SSBH"), a wholly owned subsidiary of Travelers
Group. SB is a wholly owned subsidiary of SSBH.
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Partnership's financial
condition at June 30, 1998 and the results of its operations for the three and
six months ended June 30, 1998 and 1997. These financial statements present the
results of interim periods and do not include all disclosures normally provided
in annual financial statements. It is suggested that these financial statements
be read in conjunction with the financial statements and notes included in the
Partnership's annual report on Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1997.
Due to the nature of commodity trading, the results of operations for the
interim periods presented should not be considered indicative of the results
that may be expected for the entire year.
5
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HUTTON INVESTORS FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
June 30, 1998
(continued)
2. Net Asset Value Per Unit
Changes in net asset value per Unit for the three and six months ended
June 30, 1998 and 1997 were as follows:
THREE-MONTHS ENDED SIX-MONTHS ENDED
JUNE 30, JUNE 30,
1998 1997 1998 1997
Net realized and unrealized
losses $ (188.75) $ (261.71) $ (544.69) $ (13.39)
Interest income 50.04 48.16 102.86 95.20
Expenses (3.96) (3.12) (7.64) (55.23)
--------- --------- --------- ---------
Increase (decrease) for
period (142.67) (216.67) (449.47) 26.58
Net Asset Value per Unit,
beginning of period 5,281.14 4,985.31 5,587.94 4,742.06
--------- --------- --------- ---------
Net Asset Value per Unit,
end of period $5,138.47 $4,768.64 $5,138.47 $4,768.64
========= ========= ========= =========
3. 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.
The Customer Agreement between the Partnership and SB gives the
Partnership the legal right to net unrealized gains and losses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The fair value of these commodity interests, including options
thereon, at June 30, 1998 and December 31, 1997 was $(670,981) and $1,285,315,
respectively, and the average fair value during the three and six and twelve
months then ended, based on monthly calculation, was $527,091 and $1,284,957,
respectively.
4. Financial Instrument Risk:
The Partnership is party to financial instruments with off- balance sheet
risk, including derivative financial instruments and
6
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derivative commodity instruments, in the normal course of its business. These
financial instruments 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 SB.
The General Partner monitors and controls the Partnership's risk exposure
on a daily basis through financial, credit and risk management monitoring
systems and, accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions.
The notional or contractual amounts of these instruments, while not
recorded in the financial statements, reflect the extent of the
7
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Partnership's involvement in these instruments. At June 30, 1998, the notional
or contractual amounts of the Partnership's commitment to purchase and sell
these instruments was $164,272,608 and $162,407,878, respectively, as detailed
below. All of these instruments mature within one year of June 30, 1998.
However, due to the nature of the Partnership's business, these instruments may
not be held to maturity. At June 30, 1998, the fair value of the Partnership's
derivatives, including options thereon, was $(670,981), as detailed below.
JUNE 30, 1998
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded contracts $ 704,348 $ 721,825 $ 7,978
- - OTC Contracts 29,782,586 51,065,772 (893,565)
Energy 192,000 1,499,458 96,296
Grains - 1,110,858 14,613
Interest Rates U.S. 70,289,456 - 183,787
Interest Rates Non-U.S 61,993,236 95,351,034 (7,533)
Livestock - 273,250 7,340
Metals 274,425 6,968,633 (140,616)
Softs 502,833 1,908,764 126,416
Indices 533,724 3,508,284 (65,697)
------------ ------------ ------------
Totals $164,272,608 $162,407,878 $ (670,981)
============ ============ ============
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, 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
------------ ------------ ------------
Totals $ 93,971,478 $106,119,565 $ 1,285,315
============ ============ ============
8
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Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Liquidity and Capital Resources
The Partnership does not engage in the sale of goods or services. Its only
assets are its equity in its commodity futures trading account, consisting of
cash and cash equivalents (such as U.S. Treasury Bills, which constituted
approximately 79% of the Partnership's assets at June 30, 1998) and net
unrealized appreciation (depreciation) on open futures contracts. Because of the
low margin deposits normally required in commodity futures trading, relatively
small price movements may result in substantial losses to the Partnership. While
substantial losses could lead to a substantial decrease in liquidity, no such
losses occurred in the Partnership's second quarter of 1998.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by gains or losses on commodity futures
trading, expenses, interest income, redemptions of Units and distributions of
profits, if any.
For the six months ended June 30, 1998, Partnership capital decreased
11.0% from $21,541,490 to $19,161,369. This decrease was attributable to net
loss from operations of $1,728,821 coupled with the redemption of 126 Units
resulting in an outflow of $651,300 for the six months ended June 30, 1998.
Future redemptions can impact the amount of funds available for investment in
commodity contract positions in subsequent months.
Operational Risk
The General Partner administers the business of the Partnership through
various systems and processes maintained by SSBH. SSBH has analyzed the impact
of the year 2000 on its systems and processes and modifications for compliance
are proceeding according to plan. All modifications necessary for year 2000
compliance are expected to be completed by the first quarter of 1999. In July
1998, SB participated in successful industry-wide testing coordinated by the
Securities Industry Association and plans to participate in such tests in the
future. The purpose of industry-wide testing is to confirm that exchanges,
clearing organizations, and other securities industry participants are prepared
for the year 2000. The failure of vendors, clients, or regulators to resolve
their own Year 2000 compliance issues in a timely manner could result in
material financial risk to the Partnership.
Results of Operations
During the Partnership's second quarter of 1998, the net asset
9
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value per Unit decreased 2.7% from $5,281.14 to $5,138.47, as compared to the
second quarter of 1997 in which the net asset value per Unit decreased 4.3%. The
Partnership experienced a net trading loss before commissions and expenses in
the second quarter of 1998 of $514,015. Losses were recognized in the trading of
U.S. and non U.S. interest rates, indices and metals and were partially offset
by gains in livestock, softs, grains, currencies and energy products. The
Partnership experienced a net trading loss before commissions and expenses in
the second quarter of 1997 of $851,521. Losses were recognized in the trading of
commodity futures in currencies, U.S. and non U.S. interest rates and energy
products and were partially offset by gains recognized in metals, softs,
indices, grains and livestock.
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 correctly those price trends. These 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 Advisors are able to identify
them, the Partnership expects to increase capital through operations.
Interest income earned on U.S. Treasury Bills decreased by $801 for the
three months ended June 30, 1998, as compared to the corresponding period in
1997. This decrease in interest income was primarily attributable to the effect
of redemptions on the Partnership's equity maintained in cash. Interest income
for the six months ended June 30, 1998, increased by $12,808 as compared to the
corresponding period in 1997. This increase is primarily due to the Partnership
holding a higher percentage of U.S. Treasury Bills to assets in 1998 as a result
of negative trading performance and its effect on overall assets.
Brokerage commissions are based on the number of trades executed by the
Advisors. Brokerage commissions and clearing fees for the three and six months
ended June 30, 1998 increased by $14,795 and $82,777, respectively as compared
to the corresponding periods in 1997.
Incentive fees are based on the new trading profits generated by each
Advisor as defined in the advisory agreements between the Partnership, the
General Partner and each Advisor. Trading performance for the three and six
months ended June 30, 1998 and 1997 resulted in incentive fees of $2,651, $4,111
$7,214 and $202,238, respectively.
10
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Item 3. Quantitative and Qualitative Disclosures of Market Risk
The fund is subject to SEC Financial Reporting Release No. 48,
Quantitative and Qualitative Disclosures of Market Risk and will comply with the
disclosure and reporting requirements in its form 10K as of December 31, 1998.
11
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
Between May 1994 and the present, Salomon Brothers Inc. ("SBI"), SB and The
Robinson Humphrey Company, Inc. ("R-H"), all currently subsidiaries of
Salomon Smith Barney Holdings Inc. ("SSBHI"), along with a number of other
broker-dealers, were named as defendants in approximately 25 federal court
lawsuits and two state court lawsuits, principally alleging that companies
that make markets in securities traded on NASDAQ violated the federal
antitrust laws by conspiring to maintain a minimum spread of $.25 between
the bid and asked price for certain securities. The federal lawsuits and one
state court case were consolidated for pre-trial purposes in the Southern
District of New York in the fall of 1994 under the caption In re NASDAQ
Market-Makers Antitrust Litigation, United States District Court, Southern
District of New York No. 94-CIV-3996 (RWS); M.D.L. No. 1023. The other state
court suit, Lawrence A. Abel v. Merrill Lynch & Co., Inc. et al.; Superior
Court of San Diego, Case No. 677313, has been dismissed without prejudice in
conjunction with a tolling agreement.
In consolidated action, the plaintiffs purport to represent a class of
persons who bought one or more of what they currently estimate to be
approximately 1,650 securities on NASDAQ between May 1, 1989 and May 27,
1994. They seek unspecified monetary damages, which would be trebled under
the antitrust laws. The plaintiffs also seek injunctive relief, as well as
attorney's fees and the costs of the action. (The state cases seek similar
relief.) Plaintiffs in the consolidated action filed an amended consolidated
complaint that defendants answered in December 1995. On November 26, 1996,
the Court certified a class composed of retail purchasers. A motion to
include institutional investors in the class and to add class
representatives was granted. In December 1997, SBI, SB and R- H, along with
several other broker-dealer defendants, executed a settlement agreement with
the plaintiffs. This agreement has been preliminarily approved by the U.S.
District Court for the Southern District of New York but is subject to final
approval.
On July 17, 1996, the Antitrust Division of the Department of Justice filed
a complaint against a number of firms that act as market makers in NASDAQ
stocks. The complaint basically alleged that a common understanding arose
among NASDAQ market makers which worked to keep quote spreads in NASDAQ
stocks artificially wide. Contemporaneous with the filing of the
12
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complaint, SBI, SB and other defendants entered into a stipulated settlement
agreement, pursuant to which the defendants would agree not to engage in
certain practices relating to the quoting of NASDAQ securities and would
further agree to implement a program to ensure compliance with federal
antitrust laws and with the terms of the settlement. In entering into the
stipulated settlement, SBI and SB did not admit any liability. There are no
fines, penalties, or other payments of monies in connection with the
settlement. In April 1997, the U.S. District Court for the Southern District
of New York approved the settlement. In May 1997, plaintiffs in the related
civil action (who were permitted to intervene for limited purposes) appealed
the district court's approval of the settlement. The appeal was argued in
March 1998 and was affirmed in August 1998.
The Securities and Exchange Commission ("SEC") is also conducting a review
of the NASDAQ marketplace, during which it has subpoenaed documents and
taken the testimony of various individuals including SBI and SB personnel.
In July 1996, the SEC reached a settlement with the National Association of
Securities Dealers and issued a report detailing certain conclusions with
respect to the NASD and the NASDAQ market.
In December 1996, a complaint seeking unspecified monetary damages was filed
by Orange County, California against numerous brokerage firms, including SB,
in the U.S. Bankruptcy Court for the Central District of California.
Plaintiff alleged, among other things, that the defendants recommended and
sold to plaintiff unsuitable securities. The case (County of Orange et al.
v. Bear Stearns & Co. Inc. et al.) had been subject to a stay by agreement
of the parties which will expire on August 21, 1998.
Item 2. Changes in Securities and Use of Proceeds - None
Item 3. Defaults Upon Senior Securities - None
Item 4. Submission of Matters to a Vote of Security Holders - None
Item 5. Other Information - None
Item 6. (a) Exhibits - None
(b) Reports on Form 8-K - None
13
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
HUTTON INVESTORS FUTURES FUND L.P. II
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 8/14/98
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel, President
David J. Vogel, President
Date: 8/14/98
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and Director
Date: 8/14/98
14
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000812818
<NAME> HUTTON INVESTORS FUTURES FUND, L.P. II
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,482,385
<SECURITIES> (670,981)
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 19,811,404
<PP&E> 0
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<TOTAL-ASSETS> 19,811,404
<CURRENT-LIABILITIES> 650,035
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 19,161,369
<TOTAL-LIABILITY-AND-EQUITY> 19,811,404
<SALES> 0
<TOTAL-REVENUES> (1,699,569)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 29,252
<LOSS-PROVISION> 0
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<INCOME-PRETAX> (1,728,821)
<INCOME-TAX> 0
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