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 March 31, 1998
Commission File Number 0-16526
HUTTON INVESTORS FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York 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
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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
March 31, 1998 and December 31, 1997. 3
Statement of Income and Expenses and
Partners' Capital for the three months
ended March 31, 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
PART II - Other Information 11 - 12
2
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PART I
Item 1. Financial Statements
HUTTON INVESTORS FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1998 1997
----------------------------
(Unaudited)
<S> <C> <C>
ASSETS:
Equity in commodity futures trading account:
Cash and cash equivalents $20,041,681 $21,096,196
Net unrealized appreciation on open
futures contracts 426,117 1,285,315
----------- -----------
$20,467,798 $22,381,511
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL:
Liabilities:
Accrued expenses:
Commissions on open futures contracts $ 84,835 $ 88,012
Incentive fees 4,563 347,297
Other 19,609 24,732
Redemptions payable 142,591 379,980
----------- -----------
251,598 840,021
----------- -----------
Partners' capital :
General Partner, 44 Unit
equivalents outstanding in 1998 and 1997 232,370 245,869
Limited Partners, 3,784 and 3,811 Units
of Limited Partnership Interest
outstanding in 1998 and 1997, respectively 19,983,830 21,295,621
----------- -----------
20,216,200 21,541,490
----------- -----------
$20,467,798 $22,381,511
=========== ===========
</TABLE>
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
MARCH 31,
--------------------------
1998 1997
--------------------------
<S> <C> <C>
Income:
Net gains (losses) on trading of commodity
futures:
Realized gains (losses) on closed positions (320,716) 1,067,869
Change in unrealized gains/losses on open
positions (859,198) 59,376
------------ ------------
(1,179,914) 1,127,245
Less, brokerage commissions and clearing fees
($5,680 and $3,617, respectively) (192,262) (124,280)
------------ ------------
Net realized and unrealized gains (losses) (1,372,176) 1,002,965
Interest income 203,600 189,991
------------ ------------
(1,168,576) 1,192,956
------------ ------------
Expenses:
Incentive fees 4,563 198,127
Other 9,560 12,329
------------ ------------
14,123 210,456
------------ ------------
Net income (loss) (1,182,699) 982,500
Redemptions (142,591) (224,339)
------------ ------------
Net increase (decrease) in Partners' capital (1,325,290) 758,161
Partners' capital, beginning of period 21,541,490 19,153,165
------------ ------------
Partners' capital, end of period $20,216,200 $ 19,911,326
============ ============
Net asset value per Unit
(3,828 and 3,994 Units outstanding
at March 31, 1998 and 1997, respectively) $ 5,281.14 $ 4,985.31
============ ============
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent $ (306.80) $ 243.25
============ ============
</TABLE>
4
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HUTTON INVESTORS FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
March 31, 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").
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 March 31, 1998 and the results of its operations for the three
months ended March 31, 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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2. Net Asset Value Per Unit
Changes in net asset value per Unit for the three months ended March
31, 1998 and 1997 were as follows:
THREE MONTHS ENDED
MARCH 31,
1998 1997
Net realized and unrealized gains
(losses) $ (355.94) $ 248.32
Interest income 52.82 47.04
Expenses (3.68) (52.11)
--------- ---------
Increase(decrease) for period (306.80) 243.25
Net Asset Value per Unit,
beginning of period 5,587.94 4,742.06
--------- ---------
Net Asset Value per Unit,
end of period $ 5,281.14 $ 4,985.31
========= =========
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 March 31, 1998 and 1997 was $426,117 and $533,711, respectively, and
the average fair value during the three months then ended, based on monthly
calculation, was $567,988 and $1,073,927, respectively.
4. Financial Instrument Risk:
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
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
6
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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 Partnership's
involvement in these instruments. At March 31, 1998, the notional or contractual
amounts of the Partnership's commitment to purchase and sell these instruments
was $118,737,660
7
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and $125,717,120, respectively, as detailed below. All of these instruments
mature within one year of March 31, 1998. However, due to the nature of the
Partnership's business, these instruments may not be held to maturity. At March
31, 1998, the fair value of the Partnership's derivatives, including options
thereon, was $426,117, as detailed below.
MARCH 31, 1998
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded contracts $ 514,690 $ 3,696,243 $ (685)
- - OTC Contracts 13,997,178 30,470,258 513,326
Energy 113,000 1,607,278 51,777
Grains 391,749 895,238 13,805
Interest Rates U.S. -- 48,805,964 (83,998)
Interest Rates Non-U.S 99,575,320 36,964,863 17,920
Metals 1,196,928 971,810 (110,766)
Softs 861,319 1,933,199 63,225
Indices 2,087,476 372,267 (38,487)
------------ ------------ ------------
Totals $118,737,660 $125,717,120 $ 426,117
============ ============ ============
At March 31, 1997, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was $29,547,656
and $98,088,275, respectively, and, the fair value of the Partnership's
derivatives, including options thereon, was $533,711, as detailed below.
MARCH 31, 1997
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
TO PURCHASE TO SELL FAIR VALUE
Currencies:
- - Exchange Traded contracts $ 685,700 $ 1,635,625 $ 10,135
- - OTC Contracts 13,717,252 25,892,738 (93,130)
Energy 130,020 1,068,502 11,664
Grains 928,014 -- 58,579
Interest Rates U.S. 1,415,550 19,761,919 240,450
Interest Rates Non-U.S 9,212,289 46,586,062 91,963
Metals 2,265,508 789,568 (15,325)
Softs 651,855 1,134,218 234,714
Indices 541,468 1,219,643 (5,339)
----------- ----------- -----------
Totals $29,547,656 $98,088,275 $ 533,711
=========== =========== ===========
8
<PAGE>
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 82% of the Partnership's assets at March 31, 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 first 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 three months ended March 31, 1998, Partnership capital
decreased 6.2% from $21,541,490 to $20,216,200. This decrease was attributable
to net loss from operations of $1,182,699 coupled with the redemption of 27
Units resulting in an outflow of $142,591 for the three months ended March 31,
1998. Future redemptions can impact the amount of funds available for investment
in commodity contract positions in subsequent months.
Results of Operations
During the Partnership's first quarter of 1998, the net asset value per
Unit decreased 5.5% from $5,587.94 to $5,281.14, as compared to the first
quarter of 1997 in which the net asset value per Unit increased 5.1%. The
Partnership experienced a net trading loss before commissions and expenses in
the first quarter of 1998 of $1,179,914. Losses were recognized in the trading
of U.S. interest rates, currencies, grains, metals, softs and indices and were
partially offset by gains in livestock, non-U.S. interest rates and energy
products. The Partnership experienced a net trading gain before commissions and
expenses in the first quarter of 1997 of $1,127,245. Gains were recognized in
the trading of commodity futures in currencies, non-U.S. interest rates,
indices, softs, grains and metals and were partially offset by losses recognized
in energy products, U.S. interest rates 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
9
<PAGE>
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 increased by $13,609 for
the three months ended March 31, 1998, as compared to the corresponding period
in 1997. This increase in interest income was attributable to an increase in
interest rates in the first quarter of 1998 as compared to the corresponding
period in 1997.
Brokerage commissions are based on the number of trades executed by the
Advisors. Brokerage commissions and clearing fees for the three months ended
March 31, 1998 increased by $67,982, as compared to the corresponding period 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 months ended
March 31, 1998 and 1997 resulted in incentive fees of $4,563 and $198,127,
respectively.
10
<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
11
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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 is pending.
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 Sterns & Co. Inc. et al.) Has been
stayed by agreement of the parties.
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
12
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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:
David J. Vogel, President
Date:
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:
David J. Vogel, President
Date:
By
Daniel A. Dantuono
Chief Financial Officer and
Director
Date:
13
<PAGE>
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: 5/15/98
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: 5/15/98
By /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer and Director
Date: 5/15/98
13
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000812818
<NAME> HUTTON INVESTORS FUTURES FUND, L.P.II
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 20,041,681
<SECURITIES> 426,117
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 20,467,798
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 20,467,798
<CURRENT-LIABILITIES> 251,598
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 20,216,200
<TOTAL-LIABILITY-AND-EQUITY> 20,467,798
<SALES> 0
<TOTAL-REVENUES> (1,168,576)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 14,123
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (1,182,699)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,182,699)
<EPS-PRIMARY> (306.80)
<EPS-DILUTED> 0
</TABLE>
