<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
____
/ X / Annual Report Pursuant to Section 13 or 15(d)
____ of the Securities Exchange Act of 1934 [Fee Required]
For the Fiscal Year Ended: December 31, 1997
OR
____
/___/ Transition Report Pursuant to Section 13
or 15(d) of the Securities Exchange Act of
1934 [No Fee Required]
Commission File Number: 0-21286
THE FOUR SEASONS FUND II L.P.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 54-1613165
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o JAMES RIVER MANAGEMENT CORP.
103 Sabot Park
Manakin-Sabot, Virginia 23103
---------------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code:
(804) 784-4500
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act: Limited Partnership
Units
Indicate by check mark whether the registrant (1) 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 No X
----- -----
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]
The registrant is a limited partnership and, accordingly, has no voting stock
held by nonaffiliates or otherwise.
<PAGE>
PART I
------
Item 1. Business
---------
(a) General development of business
---------------------------------
The Four Seasons Fund II L.P. (the "Partnership") is a limited
partnership organized on February 13, 1992 pursuant to a Limited Partnership
Agreement (the "Limited Partnership Agreement") and under the Delaware Revised
Uniform Limited Partnership Act. The Partnership was funded through an offering
of Units of Limited Partnership Interest ("Units"). Limited Partners are
referred to herein as "Unitholders." The Partnership implements asset allocation
strategies by trading approximately 17% of its original assets in the futures,
forward and options markets through an affiliated limited partnership (the
"Trading Company") of which the Partnership is the sole limited partner, while
maintaining its remaining assets in a guaranteed distribution pool.
The public offering of Units began on approximately September 8, 1992
and was completed on January 31, 1993. The offering was registered under the
Securities Act of 1933, as amended, and Kidder, Peabody & Co. Incorporated acted
as selling agent. A total of 11,226.272 Units were sold to the public during the
public offering.
James River Management Corp. (formerly named Kidder Peabody Futures
Management Corp.) (the "General Partner"), a Delaware corporation, is the
General Partner of the Partnership and, in that capacity, performs various
administrative services. The General Partner was organized in 1992 to serve as a
commodity pool operator. Until January 1, 1995, the General Partner was a direct
wholly-owned subsidiary of Kidder, Peabody Group Inc. and an indirect wholly-
owned subsidiary of General Electric Company. Effective as of such date, all of
the stock of the General Partner was sold to Paul H. Saunders and Kevin M.
Brandt, the senior officers of the General Partner, and the General Partner is
no longer affiliated with Kidder, Peabody & Co. Incorporated or its affiliates.
In connection with such sale, all of the directors of the General Partner other
than Messrs. Saunders and Brandt resigned as directors.
E. D. & F. Man International Inc. acts as the futures commission
merchant or commodity broker (the "Commodity Broker"), although Kidder, Peabody
& Co. Incorporated was the commodity broker until January 30, 1995. The
Commodity Broker is not an affiliate of the General Partner or the Partnership.
The General Partner and the Commodity Broker perform various services related to
the Partnership pursuant to the Partnership's Limited Partnership Agreement and
the customer agreement with the Commodity Broker. The General Partner's
investment in the Partnership at the outset of trading was $120,000. The General
Partner had $96,767 invested as of December 31, 1997. The General Partner also
invested $20,000 directly into the Trading Company. The General Partner's
investment in the Trading Company was worth $21,076 at December 31, 1997.
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<PAGE>
RXR Inc., a New York corporation (the "Trading Advisor"), is the
Trading Company's Trading Advisor. The Trading Advisor is not an affiliate of
the Partnership or the General Partner. The Trading Advisor directs the
Partnership's futures, forward and options trading pursuant to an Advisory
Agreement with the Trading Company.
The Trading Advisor receives an incentive fee of 15% of New Trading
Profit achieved by the Trading Company as of the end of each calendar quarter,
and a monthly management fee of 0.0833 of 1% of the Partnership's month-end Net
Assets (1% per annum). New Trading Profits and Net Assets are each determined
pursuant to formulas set forth in the Advisory Agreement.
Brokerage commissions are payable by the Trading Company at a flat
rate of 0.2083 of 1% of the Partnership's month-end Net Assets (2.5% per annum)
plus give-up fees of approximately $2 per round-turn trade. Brokerage
commissions are split between the Commodity Broker, the General Partner and the
Partnership's selling agents.
The Trading Company also pays to the General Partner a sponsor fee of
0.0625 of 1% of the Partnership's month-end Net Assets (0.75% per annum).
At the commencement of trading, the Partnership's assets were
allocated as follows: approximately 17% was invested in the Trading Company and
approximately 83% was invested in United States Treasury Strip Notes as the
Partnership's guaranteed distribution pool. The guaranteed distribution pool is
intended to assure each investor a 4% annual distribution and return of initial
net capital contribution at the end of the Partnership's approximately 10-year
time horizon.
The Trading Advisor's trading method is highly systematic and
technical. The Trading Advisor's program has four components, namely stock index
futures, bond futures, managed futures and short-term interest rate futures. The
objective of the trading method is to maintain an optimum asset mix in a fully
diversified portfolio, while integrating a managed futures component to achieve
significant capital gains through speculative trading in the futures, forward
and options markets.
Regulation
- ----------
Under the Commodity Exchange Act, as amended (the "Act"), commodity
exchanges and futures trading are subject to regulation by the Commodity Futures
Trading Commission (the "CFTC"). The National Futures Association ("NFA"), "a
registered futures association" under the Act, is the only non-exchange self-
regulatory organization for futures industry professionals. The CFTC has
delegated to the NFA responsibility for the registration of "commodity trading
advisors," "commodity pool operators," "futures commission merchants,"
"introducing brokers" and their respective associated persons and "floor
brokers." The Act requires "commodity pool operators," such as the General
Partner, "commodity trading advisors," such as the Trading
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<PAGE>
Advisor, and commodity brokers or "futures commission merchants," such as the
Commodity Broker, to be registered and to comply with various reporting and
recordkeeping requirements. The General Partner, the Trading Advisor and the
Commodity Broker are all members of NFA. The CFTC may suspend a commodity pool
operator's or a trading advisor's registration if the CFTC finds that its
trading practices tend to disrupt orderly market conditions or in certain other
situations. In the event that the registration of the General Partner as a
commodity pool operator or the Trading Advisor's registration as a commodity
trading advisor was terminated or suspended, the General Partner and the Trading
Advisor, respectively, would be unable to continue to manage the business of the
Partnership. Should the General Partner's registration be suspended, termination
of the Partnership might result.
As members of NFA, the General Partner, the Trading Advisor and the
Commodity Broker are subject to NFA standards relating to fair trade practices,
financial condition and customer protection. As the self-regulatory body of the
futures industry, the NFA promulgates rules governing the conduct of futures
industry professionals and disciplines those professionals which do not comply
with such standards.
In addition to such registration requirements, the CFTC and certain
futures exchanges have established limits on the maximum net long or net short
position which any person may hold or control in particular futures. The CFTC
has adopted a rule requiring all domestic futures exchanges to submit for
approval speculative position limits for all futures contracts traded on such
exchanges. Many exchanges also limit the changes in futures contract prices that
may occur during a single trading day. The Trading Company may trade on foreign
commodity exchanges which are not subject to regulation by any United States
Government agency.
(b) Financial information about industry segments
----------------------------------------------
The Partnership's business constitutes only one segment, speculative
trading of forward and futures and options on futures contracts, for financial
reporting purposes. The Partnership does not engage in sales of goods and
services. The Partnership's revenue, operating results and total assets for
the years ended December 31, 1997, 1996, 1995 and 1994 and the period
ending December 31, 1993 are set forth under
"Item 6. Selected Financial Data."
-------------------------
(c) Narrative description of business
----------------------------------
(1) See Items 1(a) and (b) above.
(i) through (xii) - not applicable.
(xiii) - the Partnership has no employees.
(d) Financial information about foreign and domestic operations and export
----------------------------------------------------------------------
sales
-----
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<PAGE>
The Partnership does not engage in sales of goods or services. See
"Item 1(b). Financial information about industry segments."
-----------------------------------------------
Item 2. Properties
-----------
The Partnership does not own any properties. Under the terms of the
Limited Partnership Agreement, the General Partner performs the following
services for the Partnership:
(1) Manages the business of the Partnership. Pursuant to this
authority, the General Partner has entered into an Advisory Agreement with the
Trading Advisor (under which the Trading Advisor has complete discretion with
respect to determination of the Trading Company's trading decisions) and a
Customer Agreement with the Commodity Broker (pursuant to which the Commodity
Broker executes all trades on behalf of the Trading Company based on the
instructions of the Trading Advisor).
(2) Maintains the Partnership's books and records, which Unitholders
or their duly authorized representatives may inspect during normal business
hours for any proper purpose upon reasonable written notice to the General
Partner.
(3) Furnishes each Unitholder with a monthly statement describing the
performance of the Partnership, which sets forth the brokerage commissions,
management fee, sponsor fee and other expenses incurred or accrued and any
incentive fees allocable to the Trading Advisor for the month.
(4) Forwards annual audited financial statements (including a
statement of financial condition and statement of operations) to each
Unitholder.
(5) Provides to each Unitholder tax information necessary for the
preparation of his/her annual federal income tax return and such other
information as the CFTC may by regulation require.
(6) Performs secretarial and other clerical duties and furnishes
office space, equipment and supplies as may be necessary for supervising the
affairs of the Partnership.
(7) Administers the redemption of Units.
(8) Administers the annual distribution.
Item 3. Legal Proceedings
-----------------
The General Partner is not aware of any pending legal proceedings to
which the General Partner, the Partnership or the Trading Company is a party or
to which any of their respective assets are subject. In the ordinary course of
its business, the Commodity Broker is involved in certain legal actions.
However, no pending proceeding affects the Commodity Broker's ability to provide
its services to the Partnership. None of the Trading
-5-
<PAGE>
Advisor, the General Partner, the Partnership or the Trading Company has any
connection with such litigation.
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None.
PART II
Item 5. Market for the Registrant's Common Equity and Related Stockholder
-----------------------------------------------------------------
Matters
-------
(a) Market Information. There is no trading market for the Units,
and none is likely to develop. They are transferable only after written notice
has been given to and approved by the General Partner. Units may be redeemed
effective as of the close of business on the last business day of any calendar
quarter, and only in whole Units, at Net Asset Value per Unit (less any
redemption fee, if applicable, as described below) calculated as of the close of
business (as determined by the General Partner) on the effective date of
redemption. Units redeemed on or prior to the end of the fourth full calendar
quarter of the Partnership's operations were subject to a redemption charge of
2%, 1% or 0% depending on the amount of selling commissions paid by the
Unitholder. Requests for redemption must be received by the General Partner ten
days before the redemption date. Through December 31, 1997 there were
redemption charges of $1,045 paid to the Partnership.
Holders. As of December 31, 1997 there were 51 holders of Units.
--------
Dividends. The Partnership will make a $40 per Unit annual
----------
distribution to each Unitholder, the first distribution having been made on
March 4, 1994 to Unitholders of record on February 16, 1994; the second
distribution having been made on February 23, 1995 to Unitholders of record on
February 16, 1995; the third distribution having been made on February 23, 1996
to Unitholders of record on February 23, 1996; the fourth distribution having
been made on February 18, 1997 to Unitholders of record on February 18, 1997.
Except for the distribution referred to above, no other dividends have been made
or are contemplated.
(b) Not Applicable.
Item 6. Selected Financial Data
-----------------------
The following is a summary of operations and total assets of the
Partnership for the years ended December 31, 1997, 1996, 1995 and 1994 and the
period ended December 31, 1993. For this purpose, the U.S. Treasury securities
held in the guaranteed distribution pool are valued at the lower of (1) cost
plus accrued interest or (2) market value.
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<PAGE>
<TABLE>
<CAPTION> For the Years Ended
-------------------------------------------------------------------------- Period Ended
December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- ----------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain (loss) on trading of
Commodities Positions $ 330,164 $ (250,241) $1,205,872 $ (788,637) $ 938,021
Interest Income 202,467 408,523 519,388 570,942 574,525
Redemption income 0 0 0 0 1,045
Realized gain (loss) on U.S.
Treasury Strip Notes 14,148 69,419 (7,719) (87,300) 0
Unrealized gain (loss) on U.S.
Treasury Strip Notes 0 0 557,725 (557,725) 0
---------- ---------- ---------- ----------- -----------
Total revenue 546,779 227,701 2,275,266 (862,720) 1,513,591
Expenses:
Organizational Costs 0 0 0 0 226,925
Brokerage commissions
and fees 83,269 165,938 211,672 257,170 278,969
Management Fees 32,675 64,846 83,141 96,466 103,313
Incentive Fees 0 0 0 0 80,555
GP Fees 24,536 48,685 62,416 72,412 77,556
Operating Expenses 23,311 32,475 33,859 25,627 40,865
---------- ---------- ---------- ----------- -----------
Total Expenses 163,791 311,944 391,088 451,675 808,183
---------- ---------- ---------- ----------- -----------
Income (loss) before
allocation of Minority
Interest 382,988 (84,243) 1,884,178 (1,314,395) 705,408
Minority Interest
operating (income) loss ($7,391) 6,992 (11,213) 14,840 (4,304)
---------- ---------- ---------- ----------- -----------
Net income (loss) $ 375,597 $ (77,251) $1,872,965 $(1,299,555) $ 701,104
========== ========== ========== =========== ===========
Net income (loss)
allocated to
General Partner 10,813 (3) 19,503 (16,261) 7,422
========== ========== ========== =========== ===========
Net income (loss)
allocated to
Limited Partners 364,784 (77,248) 1,853,462 (1,283,294) (693,682)
========== ========== ========== =========== ===========
Net Income (loss)
per Unit
(for a Unit
outstanding
throughout the
year/period) 124.68 (.03) 227.14 (135.51) 61.85
========== ========== ========== =========== ===========
Total assets $2,724,165 $5,566,829 $8,652,018 $ 7,768,405 $12,029,362
========== ========== ========== =========== ===========
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and
---------------------------------------------------------------
Results of Operations
---------------------
Reference is made to "Item 6. Selected Financial Data" and "Item 8.
-----------------------
Financial Statements and Supplementary Data." The information contained therein
- -------------------------------------------
is essential to, and should be read in conjunction with, the following analysis.
Liquidity
- ---------
Most United States commodity exchanges limit fluctuations in futures
contract prices during a single day by regulations referred to as "daily price
fluctuation limits" or "daily limits." During a single trading day, no trades
may be executed at prices beyond the daily limit. Once the price of a futures
contract has reached the daily limit for that day, positions in that contract
can neither be taken nor liquidated. Futures prices have occasionally moved the
daily limit for several consecutive days with little or no trading. Similar
occurrences could prevent the Trading Company from promptly liquidating
unfavorable positions and subject the Trading Company to substantial losses
which could
-7-
<PAGE>
exceed the margin initially committed to such trades. In addition, even if
futures prices have not moved the daily limit, the Trading Company may not be
able to execute futures trades at favorable prices if little trading in such
contracts is taking place. Other than these limitations on liquidity, which are
inherent in the Trading Company's futures trading operations, the Partnership's
assets are highly liquid and are expected to remain so.
Capital Resources
- -----------------
The Partnership does not intend to raise any additional capital
through borrowing and, because it is a closed-end fund, it cannot sell any more
Units unless it undertakes a new public offering, which would require another
registration with the Securities and Exchange Commission. Due to the nature of
the Partnership's business, it will make no significant capital expenditures and
substantially all of its assets are and will be represented by U.S. Treasury
Strip Notes and investments in futures, forwards and options.
Results of Operations
- ---------------------
Operating results show a gain of +$375,597 for the year ended
December 31, 1997. The Net Asset Value per Unit as of December 31, 1997 was
$1,115.89. The significant components of this aggregate gain were gains on
trading of futures and options. The net gain on trading of futures and options
was +$330,164 (combined realized and unrealized) for the year, with the most
significant declines due to trading in soybean oil contracts (-$24,014) and in
sugar contracts (-$15,902) and the most significant increases due to S&P 500
contracts (+$92,800) and dollar indices (+$32,700). The remaining gain of
+$244,580 is the net result of smaller trading gains and losses in approximately
forty other markets. The increase in the market value of the bonds in the
guaranteed distribution pool totaled $14,148 (combined realized and unrealized);
the increase in accrued interest on same securities was $202,467. The combined
gain of these operating activities (+$546,779), less operating expenses of
$163,791, plus the allocation of minority interest in the affiliated Trading
Company (-$7,391), equals the total aggregate Partnership gain of +$375,597.
Operating results show a loss of -$77,251 for the year ended
December 31, 1996. The Net Asset Value per Unit as of December 31, 1996 was
$1,031.21. The significant components of this aggregate loss were losses on
trading of futures and options. The net loss on trading of futures and options
was -$250,241 (combined realized and unrealized) for the year, with the most
significant declines due to trading in U.S. Treasury Bond contracts (-$134,103)
and in coffee contracts (-$57,004) and the most significant increases due to 10-
year Note contracts (+$86,078) and corn contracts (+$62,976). The remaining
loss of -$208,188 is the net result of smaller trading gains and losses in
approximately forty other markets. The increase in the market value of the
bonds in the guaranteed distribution pool totaled $69,419 (combined realized and
unrealized); the increase in accrued interest on same securities was $408,523.
The combined gain of these operating
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<PAGE>
activities (+$227,701), less operating expenses of $311,944, plus the allocation
of minority interest in the affiliated Trading Company (+$6,992), equals the
total aggregate Partnership loss of -$77,251.
Operating results show a gain of $1,872,965 for the year ended
December 31, 1995. The Net Asset Value per Unit as of December 31, 1995 was
$1,071.24. The significant components comprising this aggregate gain were
attributable to the trading of futures and options, and the increase in the
value of bonds held in the guaranteed distribution pool. The net gain on
trading of futures and options was $1,205,872 (combined realized and unrealized)
for the year, with the most significant gains due to trading in the Standard &
Poor's 500 index contracts (+$361,943), U.S. Treasury Bond contracts
(+$166,285), 5-Year CBOT Note contracts (+$236,258), 10-Year Note contracts
(+$181,531), and 2-Year T-Note contracts (+$61,173); the remaining net gain of
$198,682 is the net result of smaller trading gains and losses in approximately
thirty-five other markets. The increase in market value of the bonds in the
guaranteed distribution pool totaled $550,006 (combined realized and
unrealized); the increase in accrued interest on same securities was $519,388.
The combined gain of these operating activities (+$2,275,266), less operating
expenses of $391,088, less the allocation of minority interest in the affiliated
Trading Company ($11,213), equals the total aggregate Partnership gain of
$1,872,965. Operating expenses were down from the prior year ($391,088 versus
$451,675) due to the downsizing of the Partnership through partner redemptions.
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<PAGE>
As disclosed in the Prospectus of the Partnership, there is a risk of
loss inherent in the speculative nature of the futures and options trading
activity. Past performance is not necessarily indicative of future prospects for
profitability. As also disclosed in the Prospectus of the Partnership, the value
of the bonds in the guaranteed distribution pool is subject to interim declines
in market value. However, if an investment in the Partnership is held to the end
of its defined time horizon, thereby allowing all bonds in the guaranteed
distribution pool to liquidate upon maturity, an investor will realize an annual
4% distribution plus a full return of his/her initial capital investment .
Inflation is not a significant factor in the Partnership's
profitability.
The Year 2000 Computer Issue
- ----------------------------
Many computer applications currently in use were designed and
developed using two digits to identify the year. These programs were implemented
without considering the impact of the change in the century. Consequently, these
computer applications could fail or create erroneous results if not corrected.
The General Partner is currently in the process of ensuring that all
of its computer systems are Year 2000 compliant. The General Partner anticipates
that it will be Year 2000 compliant by Spring 1999. The cost of addressing the
Year 2000 issue is expected to be immaterial. However, the failure of securities
exchanges, clearing organizations, vendors, clients or regulators to resolve
their own processing issues in a timely manner could result in a material
financial risk. The General Partner, not the Fund, will absorb all costs related
to adopting computer applications for the Year 2000.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
-----------------------------------------------------------
The required disclosure is included in the 1997 Annual Report,
Footnote 7.--Financial Instruments With Market and Credit Risks and
------------------------------------------------------
Concentrations of Credit Risk, a copy of which is filed herein as Exhibit 13(a).
- -----------------------------
Item 8. Financial Statements and Supplementary Data
--------------------------------------------
Financial statements required by this Item are included in the Exhibit
13(a) filed herewith.
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<PAGE>
The supplementary financial information specified by Item 302 of
Regulation S-K is not applicable.
Item 9. Changes in and Disagreements with Accountants on Accounting and
---------------------------------------------------------------
Financial Disclosure
--------------------
Arthur Andersen LLP has served as the Partnership's independent public
accountants since 1995. Results for 1997, 1996 and 1995 have been audited by
Arthur Andersen LLP.
PART III
Item 10. Directors and Executive Officers of the Registrant
--------------------------------------------------
The Partnership and the Trading Company have no directors or executive
officers. There are no "significant employees" of the Partnership or the
Trading Company. The Partnership and the Trading Company are managed by the
General Partner. In January 1995, all directors of the General Partner other
than Paul H. Saunders and Kevin M. Brandt resigned as directors in connection
with the sale of the General Partner to Mr. Saunders and Mr. Brandt. Trading
decisions for the Trading Company are made by the Trading Advisor.
The General Partner is a commodity pool operator registered with the
National Futures Association. The Trading Advisor and its respective principals
have been trading commodities accounts for investors pursuant to their
respective trading methods for several years.
Item 11. Executive Compensation
----------------------
The Partnership and the Trading Company have no directors or officers.
The General Partner performs the services described in "Item 2. Properties"
herein. The General Partner participates in any appreciation in the net assets
of the Partnership in proportion to its investment. E. D. & F. Man
International Inc. acts as the Partnership's commodity broker pursuant to the
Customer Agreement described in "Item 1(a). General development of business."
--------------------------------
Item 12. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Security ownership of certain beneficial owners
-----------------------------------------------
The Partnership knows of three Unitholders who own beneficially more
than 5% of the Units. All beneficial ownership is direct ownership.
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<PAGE>
<TABLE>
<CAPTION>
Name and Address Number of Units Percentage of Units
---------------- --------------- --------------------
<S> <C> <C>
Kosman Inc. 125.00 5.23%
190498 CR-G
Scottbluff, NE 69361
Betty C. LaRoe IRA Rollover 210.89 8.83%
P.O. Box 69
Terrell, TX 75160
James K. LaRoe IRA Rollover 217.82 9.12%
P.O. Box 69
Terrell, TX 75160
</TABLE>
Security ownership of management
--------------------------------
Under the terms of the Limited Partnership Agreement, the
Partnership's affairs are managed by the General Partner and the Trading Advisor
has discretionary authority over futures, forward and options trading. The
General Partner owned 86.717 Unit-equivalents valued at $96,767 as of December
31, 1997, 3.63% of the Partnership's total equity. The General Partner also
owned a $21,076 interest in the Trading Company as of such date.
Changes in control
------------------
None.
Item 13. Certain Relationships and Related Transactions
----------------------------------------------
See "Item 11. Executive Compensation" and "Item 12. Security
----------------------- --------
Ownership of Certain Beneficial Owners and Management."
- -------------------------------------------------------
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
--------------------------------------------
Reports on Form 8-K
-------------------
(a)(1) Financial Statements
--------------------
The required financial statements are included in the 1997 Annual
Report, a copy of which is filed herein as Exhibit 13(a).
(a)(2) Financial Statement Schedules
-----------------------------
All Schedules are omitted for the reason that they are not required,
are not applicable, or because equivalent information has been included in the
financial statements or the notes thereto.
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<PAGE>
(a)(3) Exhibits as required by Item 601 of Regulation S-K
--------------------------------------------------
(3) Articles of Incorporation and By-laws
-------------------------------------
a. Limited Partnership Agreement of the Partnership dated as of
February 13, 1992, amended and restated as of September 8, 1992.
b. Amended and Restated Certificate of Limited Partnership of the
Partnership.
c. Certificate of Amendment to Certificate of Limited Partnership of
the Partnership.
(10) Material Contracts
------------------
a. Advisory Agreement between the Trading Company and RXR Inc.
b. Customer Agreement between the Partnership and Kidder, Peabody &
Co. Incorporated.
c. Guarantee of The RXR Group Inc.
d. Assignment and Assumption Agreement among certain commodity pools
(including the Partnership), Kidder, Peabody & Co. Incorporated and E. D. & F.
Man International Inc.
The above exhibits are incorporated herein by reference from the
----------------------------------------------------------------
Registration Statement filed by the Partnership on Form S-1 (Reg. No. 33-45938)
- -------------------------------------------------------------------------------
and declared effective as of September 8, 1992, except that (1) the Limited
- ---------------------------------------------------------------------------
Partnership Agreement is incorporated by reference from the Prospectus dated
- ----------------------------------------------------------------------------
September 8, 1992 filed pursuant to Rule 424(b), (2) the Certificate of
- -----------------------------------------------------------------------
Amendment to Certificate of Limited Partnership of the Partnership is
- ---------------------------------------------------------------------
incorporated by reference from the Partnership's Annual Report on Form 10-K for
- -------------------------------------------------------------------------------
the Fiscal Year Ended December 31, 1994 and (3) the Assignment and Assumption
- -----------------------------------------------------------------------------
Agreement is incorporated by reference from the Partnership's Annual Report on
- -------------------------------------------------------------------------------
10-K for the for the Fiscal Year Ended December 31,1994.
- --------------------------------------------------------
(13) 1997 Annual Report and Independent Auditors' Reports -- filed
herewith as Exhibit 13(a).
(16) Letter regarding change in certified public accountants is
incorporated by reference to the Partnership's Report on Form 8-K dated November
10, 1995.
(b) Reports on Form 8-K
-------------------
The Partnership filed a report on Form 8-K dated November 10, 1995.
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<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, on March 30, 1998.
THE FOUR SEASONS FUND II L.P.
By: James River Management Corp.,
General Partner
By: /s/ PAUL H. SAUNDERS
--------------------
Paul H. Saunders
Chairman and Chief Executive Officer
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant in the capacities and on the date indicated.
<TABLE>
<CAPTION>
Signature Title With Registrant Date
--------- --------------------- ----
<S> <C> <C>
/s/ PAUL H. SAUNDERS Chairman and Chief March 30, 1998
- -------------------- Executive Officer
Paul H. Saunders (Principal Executive Officer
and Chief Operating Officer)
/s/ KEVIN M. BRANDT President, Treasurer and March 30, 1998
- -------------------- Director (Principal Financial
Kevin M. Brandt and Accounting Officer)
</TABLE>
(Being the principal executive officer, the principal financial and
accounting officer, and a majority of the directors of James River Management
Corp.)
JAMES RIVER MANAGEMENT CORP. General Partner March 30, 1998
of Registrant
By: /s/ KEVIN M. BRANDT
-------------------
Kevin M. Brandt
President
-14-
<PAGE>
THE FOUR SEASONS FUND II L.P.
1997 FORM 10-K
INDEX TO EXHIBITS
-----------------
<TABLE>
<CAPTION>
EXHIBIT PAGE
------- ----
<S> <C>
Exhibit 13(a) 1997 Annual Report and Independent
Auditors' Reports E-1
Exhibit 27 Financial Data Schedule
</TABLE>
-15-
<PAGE>
EXHIBIT 13(a)
The Four Seasons Fund II L.P. and Affiliate
Combined Financial Statements
As of December 31, 1997 and 1996
Together With Auditors' Report
<PAGE>
The Four Seasons Fund II L.P. and Affiliate
Oath or Affirmation
As of December 31, 1997 and 1996
To the best of my knowledge and belief, the information contained in these
combined financial statements is accurate and complete.
/s/ Paul H. Saunders
__________________________________
Paul H. Saunders, Chairman and CEO
James River Management Corp.
General Partner for
The Four Seasons Fund II L.P.
and Affiliate
<PAGE>
The Four Seasons Fund II L.P. and Affiliate
Table of Contents
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Independent Public Accountants 1
Financial Statements:
Combined Statements of Financial Condition as of December 31, 1997 and 1996 2
Combined Statements of Operations for the Years Ended December 31, 1997, 1996 and 1995 3
Combined Statements of Changes in Partners' Capital for the Years Ended
December 31, 1997, 1996 and 1995 4
Combined Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 5
Notes to Combined Financial Statements 6 - 14
</TABLE>
<PAGE>
Report of Independent Public Accountants
To the Partners of
The Four Seasons Fund II L.P. and Affiliate:
We have audited the accompanying combined statements of financial condition of
The Four Seasons Fund II L.P. (a Delaware limited partnership) and Affiliate as
of December 31, 1997 and 1996, and the related combined statements of
operations, changes in partners' capital and cash flows for each of the three
years in the period ending December 31, 1997. These financial statements are
the responsibility of the general partner. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the combined financial position of The Four Seasons Fund
II L.P. and Affiliate as of December 31, 1997 and 1996, and the combined results
of their operations and their cash flows for each of the three years in the
period ending December 31, 1997, in conformity with generally accepted
accounting principles.
Richmond, Virginia
January 23, 1998
-1-
<PAGE>
The Four Seasons Fund II L.P. and Affiliate
Combined Statements of Financial Condition
As of December 31, 1997 and 1996
<TABLE>
<CAPTION>
Assets
1997 1996
---------- ----------
<S> <C> <C>
Equity in commodity trading accounts:
Receivable for cash retained $ 435,891 $ 717,902
Net unrealized gain on open futures contracts and forwards 32,663 28,290
Net unexpired options (29,400) -
Accrued interest receivable 1,116 3,058
---------- ----------
440,270 749,250
Investment in Guaranteed Distribution Pool (Note 2) 2,282,981 4,816,886
Other 914 693
---------- ----------
Total assets $2,724,165 $5,566,829
========== ==========
Liabilities and Partners' Capital
Liabilities:
Redemptions payable $ 15,000 $ 595,229
Brokerage commissions payable 5,637 23,692
Management fee payable 4,461 4,603
Payable to General Partner 1,753 7,145
Other accrued expenses 10,637 11,645
---------- ----------
37,488 642,314
Minority interest in Trading Company (Note 2) 21,076 13,685
---------- ----------
Total liabilities 58,564 655,999
---------- ----------
Partners' Capital:
General Partner (units outstanding - 86.717 at December 31, 1997 and 1996) 96,767 89,423
Limited Partners (units outstanding - 2,302.055 and 4,675.497 at
December 31, 1997 and 1996, respectively) 2,568,834 4,821,407
---------- ----------
Total partners' capital 2,665,601 4,910,830
---------- ----------
Total liabilities and partners' capital $2,724,165 $5,566,829
========== ==========
Partnership units outstanding 2,388,772 4,762,214
========== ==========
Net asset value per unit $ 1,115.89 $ 1,031.21
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
-2-
<PAGE>
The Four Seasons Fund II L.P. and Affiliate
Combined Statements of Operations
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ----------
<S> <C> <C> <C>
Revenues:
Net realized trading gain (loss) $346,707 $ (21,881) $1,160,060
Net change in unrealized trading gain 4,373 (132,612) 119,162
Net option premiums 8,484 (95,748) (93,600)
Net change in unexpired options (29,400) - 20,250
-------- --------- ----------
Net trading gain (loss) 330,164 (250,241) 1,205,872
Gain (loss) on sale of U.S. Treasury securities 14,148 69,419 (7,719)
Interest income (Note 2) 202,467 408,523 519,388
Unrealized gain on U.S. Treasury securities (Note 2) - - 557,725
-------- --------- ----------
Total revenues 546,779 227,701 2,275,266
-------- --------- ----------
Expenses:
Brokerage commissions (Note 4) 83,269 165,938 211,672
Management fee (Note 5) 32,675 64,846 83,141
General Partner fee (Note 3) 24,536 48,685 62,416
Other 23,311 32,475 33,859
-------- --------- ----------
Total expenses 163,791 311,944 391,088
-------- --------- ----------
Income (loss) before allocation of minority interest 382,988 (84,243) 1,884,178
Allocation of minority interest (Note 2) (7,391) 6,992 (11,213)
-------- --------- ----------
Net income (loss) $375,597 $ (77,251) $1,872,965
======== ========= ==========
Allocation of net income (loss):
Limited Partners $364,784 $ (77,248) $1,853,462
General Partner 10,813 (3) 19,503
Net income (loss) per unit 124.68 (.03) 227.14
</TABLE>
The accompanying notes are an integral part of these combined statements.
-3-
<PAGE>
The Four Seasons Fund II L.P. and Affiliate
Combined Statements of Changes in Partners' Capital
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
Limited General
Units Partners Partner Total
---------- ----------- -------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1994 8,504.542 $ 7,461,071 $76,861 $ 7,537,932
Capital contributions 49.020 44,685 - 44,685
Capital withdrawals (1,302.382) (1,345,675) - (1,345,675)
Capital distribution to partners (Note 3) - (338,673) (3,469) (342,142)
Net income - 1,853,462 19,503 1,872,965
---------- ----------- ------- -----------
Balance, December 31, 1995 7,251.180 7,674,870 92,895 7,767,765
Capital withdrawals (2,488.966) (2,489,638) - (2,489,638)
Capital distribution to partners (Note 3) - (286,577) (3,469) (290,046)
Net loss - (77,248) (3) (77,251)
---------- ----------- ------- -----------
Balance, December 31, 1996 4,762.214 4,821,407 89,423 4,910,830
Capital withdrawals (2,373.442) (2,430,337) - (2,430,337)
Capital distribution to partners (Note 3) - (187,020) (3,469) (190,489)
Net income - 364,784 10,813 375,597
---------- ----------- ------- -----------
Balance, December 31, 1997 2,388.772 $ 2,568,834 $96,767 $ 2,665,601
========== =========== ======= ===========
Net asset value per unit:
December 31, 1995-
Amount $ 1,071.24
===========
Units outstanding 7,251.180
===========
December 31, 1996-
Amount $ 1,031.21
===========
Units outstanding 4,762.214
===========
December 31, 1997-
Amount $ 1,115.89
===========
Units outstanding 2,388.772
===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
-4-
<PAGE>
The Four Seasons Fund II L.P. and Affiliate
Combined Statements of Cash Flows
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 375,597 $ (77,251) $ 1,872,965
Adjustments to reconcile net income (loss) to net cash provided by
operating activities:
Allocation of income (loss) to minority interest 7,391 (6,992) 11,213
Amortization of discount on Guaranteed Distribution Pool (183,828) (365,638) (452,917)
(Gain) loss on sale of investment in Guaranteed Distribution Pool (14,148) (69,419) 7,719
Net change in unrealized loss on investment in Guaranteed Distribution
Pool - - (557,725)
Net change in unrealized (loss) gain on open futures contracts and
forwards (14,089) 132,612 (119,162)
Net change in unexpired options 29,400 - (20,250)
(Increase) decrease in operating assets:
Net receivable from Commodity Broker 283,953 770,158 (690,140)
Purchase of bonds in Guaranteed Distribution Pool - - (40,748)
Sale of bonds in Guaranteed Distribution Pool 2,549,572 2,327,003 646,600
Maturity of bonds in Guaranteed Distribution Pool 192,000 291,000 343,000
Other (221) (527) -
Increase (decrease) in operating liabilities:
Payable to General Partner (5,392) (3,458) 5,422
Brokerage commissions payable (18,055) (11,721) 14,987
Management fee payable (142) (9,521) 7,218
Other accrued expenses (983) (10,343) 6,598
----------- ----------- -----------
Total adjustments 2,825,458 3,043,154 (838,185)
----------- ----------- -----------
Net cash provided by operating activities 3,201,055 2,965,903 1,034,780
----------- ----------- -----------
Cash flows from financing activities:
Proceeds from the sale of partnership units - - 44,685
Redemption of partnership units (3,010,566) (2,675,857) (737,323)
Capital distribution to partners (190,489) (290,046) (342,142)
----------- ----------- -----------
Net cash used in financing activities (3,201,055) (2,965,903) (1,034,780)
----------- ----------- -----------
Net change in cash - - -
Cash, beginning of period - - -
----------- ----------- -----------
Cash, end of period $ - $ - $ -
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
-5-
<PAGE>
The Four Seasons Fund II L.P. and Affiliate
Notes to Combined Financial Statements
1. Organization:
The Four Seasons Fund II L.P. (the "Partnership") was organized under the
Delaware Revised Uniform Limited Partnership Act on February 13, 1992. An
initial public offering of its limited partnership units was completed on
January 31, 1993, at which time approximately 18 percent of the proceeds were
used to purchase limited partnership units of an affiliated limited partnership
(the "Affiliate" or "Trading Company"). All trading activity of the Partnership
and Trading Company (collectively the "Fund") takes place through the Trading
Company. The remaining proceeds from the Partnership's initial public offering
were used to purchase zero coupon U.S. Treasury securities (the "Guaranteed
Distribution Pool"). The management of the Partnership intends to utilize the
Guaranteed Distribution Pool to assure Limited Partners of an annual 4 percent
distribution and a return of their initial net capital investment at the end of
the Partnership's approximate ten-year time horizon (the "Time Horizon"). The
accompanying combined financial statements reflect the activities of the Fund.
The Fund's trading activity, which commenced on February 16, 1993, is directed
by a single trading advisor, RXR Inc. (the "Trading Advisor"), which is given
discretionary authority over the assets of the Trading Company. An advisory
agreement has been entered into with the Trading Advisor enumerating the terms
and conditions of the agreement and the basis of remuneration. The Trading
Advisor engages in the speculative trading of stock index futures, bond futures,
managed futures and short-term interest rate futures under its proprietary
Balanced Portfolio Program asset allocation system.
James River Management Corp., a Delaware corporation, is the general partner
(the "General Partner") of the Partnership and is a registered commodity pool
operator. Through December 31, 1994, the General Partner was a wholly owned
subsidiary of Kidder, Peabody Group, Inc. Effective January 1, 1995, 100 percent
of the ownership of the General Partner was acquired by Paul H. Saunders and
Kevin M. Brandt, the senior officers of the General Partner. Effective January
26, 1995, the name of the General Partner was changed to James River Management
Corp. from Kidder Peabody Futures Management Corp.
As of January 30, 1995, E.D.&F. Man International Inc. became the commodity
broker (the "Commodity Broker") for the Fund. Prior to such date, Kidder,
Peabody & Co., Incorporated was the primary commodity broker and selling agent
(the "Selling Agent") for the Fund.
2. Summary of Significant Accounting Policies:
Guaranteed Distribution Pool - The Partnership's investment in the Guaranteed
Distribution Pool is valued at the lower of cost plus accrued interest or market
within the accompanying combined statements of financial condition. For purposes
of several fee calculations, based on a percentage of net assets, the Guaranteed
Distribution Pool is valued at cost plus accrued interest. At December 31, 1997,
the cost plus accrued interest was $2,282,981, whereas market value was
-6-
<PAGE>
$2,389,617. At December 31, 1996, the cost plus accrued interest was $4,816,886
whereas market value was $4,951,658. These securities are restricted in their
use and will only be sold upon withdrawal by a partner or to fund distributions.
Minority Interest - Minority interest reflected in the accompanying combined
financial statements represents the General Partner's interest in the Trading
Company. The Partnership is the sole limited partner of the Trading Company.
Receivable for Cash Retained - Assets that are temporarily not invested are
maintained in the Trading Company's account with the Commodity Broker. All cash
receipts and disbursements of the Partnership occur at the Commodity Broker. The
Partnership may liquidate its account immediately upon written notice.
Net Unrealized Gain (Loss) on Open Futures Contracts - All of the Partnership's
commodity transactions and open positions are cleared and held, respectively,
with the Commodity Broker. Therefore, the accompanying statements of financial
condition reflect the net gains and losses of all open positions as of December
31, 1997 and 1996.
Revenue Recognition - Open futures and option contracts entered into by the
Trading Company are valued at closing market quotations. The difference between
the cost and the market value of open contracts is reflected as net change in
unrealized trading gain (loss) and net change in unexpired options on a trade-
date basis in the accompanying combined statements of operations.
Interest income - Interest income includes both the accreted interest earned on
zero coupon U.S. Treasury securities in the Guaranteed Distribution Pool and
interest credited on cash balances held at the Commodity Broker. The Commodity
Broker credits the Trading Company monthly for interest earned, based on
prevailing short term money market rates, as defined, applied to the Trading
Company's average daily cash balance, as defined. Interest income is accrued
when earned.
Foreign Currency Translation - Assets and liabilities denominated in foreign
currencies are translated at year-end exchange rates. Gains and losses resulting
from foreign currency translations are calculated using daily exchange rates and
are included in the accompanying combined statements of operations as (a) net
realized trading gain (loss) at the time foreign currency is converted back to
U.S. dollars and upon recognition of a realized loss in foreign denominated
trades, and (b) net change in unrealized trading gain (loss) and net change in
unexpired options on outstanding foreign balances as of year-end.
Income Taxes - Income taxes have not been provided for, as partners are
individually liable for taxes, if any, on their share of the Partnership's net
income or loss.
Use of Estimates in the Preparation of Financial Statements - 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 and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
-7-
<PAGE>
3. Partnership Agreement:
The Partnership is governed by the terms of a limited partnership agreement (the
"Agreement"). A general summary of salient points of the Agreement is provided
below. Partners or prospective partners should refer to the Agreement to obtain
a complete understanding of all pertinent information. Responsibility for
managing the Partnership and the Trading Company is vested solely in the General
Partner. The Trading Company is also governed by a limited partnership agreement
which has been structured to mirror the Agreement of the Partnership. The only
material difference between the two agreements is with respect to the tax
allocations of profits and losses made by the Trading Company to the
Partnership, as opposed to the special tax allocations made by the Partnership
to its Limited Partners. Whereas the Agreement of the Partnership provides for
special allocations of gains and losses for tax purposes when limited
partnership units are redeemed during a fiscal year, the agreement of the
Trading Company simply passes the Partnership's share of the Trading Company's
annual profits and losses to the Partnership. As such, the Partnership, in turn,
will make the special allocations of such profits and losses.
General Partner Fee - As compensation for operating the Partnership, reporting
to investors and assuming the risk that the Trading Company will have
insufficient assets to pay amounts due in the event that its trading account
with the Commodity Broker is liquidated, the General Partner receives a fee at
the annual rate of 0.75 percent of the average month-end net assets of the Fund,
as defined, after reduction of such net assets for brokerage commissions, but no
other expenses or fees due or accrued as of such month-end. All expenses of the
Fund are paid by the Trading Company.
Contribution of General Partner - The General Partner is required to make and
maintain an investment in both the Partnership and Trading Company equal to 1
percent of their respective total capitalization. The General Partner may make a
withdrawal of either such investment as of the end of any month, but at all
times its capital account in each must be equal to at least 1 percent of net
assets, as defined.
Selling Commissions - Investors purchasing units in the initial public offering
were subject to a selling commission payable to the Selling Agent. The
commission was dependent on the size of the individual subscription and ranged
from $0 to $20 per unit. In aggregate, total selling commissions were
approximately $89,000. Such charges, which were remitted to the Selling Agent,
are not reflected in the accompanying combined statements of operations.
Organizational and Offering Costs - Organizational and offering costs incurred
in connection with the formation of the Fund amounted to approximately $454,000.
In accordance with the terms of the Agreement, the Fund paid a portion of such
costs, amounting to $226,925, from the proceeds of the initial public offering
up to the maximum of $20 per limited partnership unit. Additional organizational
and offering costs in excess of the $20 per unit maximum amounted to
approximately $227,000 and were paid by the General Partner.
Redemptions - Investors may redeem part or all of their units as of any calendar
quarter and upon ten days' written notice to the General Partner. Upon
redemption, investors will receive their allocable share of the net asset value,
as defined, of the Trading Company plus their allocable share of the Guaranteed
Distribution Pool valued at the lower of the cost plus accrued interest or
market value. Due to the nature of the investments comprising the Guaranteed
Distribution Pool, investors who redeem prior to the end of the Time Horizon may
not receive a return of their full initial net investment.
-8-
<PAGE>
Annual Distribution - The Fund made annual distributions to all Limited Partners
of record as of February 18, 1997, February 23, 1996 and February 16, 1995. The
distribution equalled 4 percent of the original investor contributions to the
Fund (after subtraction of up-front selling commissions, if applicable), also
equal to $40 per unit. Except for the annual 4 percent distribution, the General
Partner has no intention to make any further distributions except in
extraordinary circumstances.
Allocations - As of the last business day of each month and on each redemption
date, the net assets of the Partnership are determined, valuing the Guaranteed
Distribution Pool at the lower of cost plus accrued interest or market. Any
increase or decrease in the Fund's net assets as compared to the last such
determination of net assets is credited or charged to the capital accounts of
each partner in the ratio that the balance of each account bears to the balance
of all accounts. A separate allocation is performed for Federal income tax
purposes.
Termination of Partnership - The Partnership was organized to implement the
Trading Advisor's Balanced Portfolio Program asset allocation strategy over an
approximate ten-year Time Horizon. In the event that the Trading Company is
unable to sustain sufficient trading profits to avoid depletion of its assets
from commissions, fees or trading losses and is subsequently liquidated prior to
the end of the Time Horizon, limited partners who do not redeem prior to the end
of the Time Horizon will nevertheless receive a return of their full initial net
investment plus an annual 4 percent distribution due to the nature of the zero
coupon investments comprising the Guaranteed Distribution Pool.
The Partnership will terminate and be dissolved upon the occurrence of any of
the following events:
a. December 31, 2021;
b. receipt by the General Partner of an approval to dissolve the Partnership
at a specified time by Limited Partners owning more than 50 percent of the
units then outstanding and owned by the Limited Partners, notice of which
is sent by registered mail to the General Partner not less than 90 days
prior to the effective date of such dissolution;
c. the withdrawal, dissolution, insolvency or removal of the General Partner
unless the Partnership is continued in accordance with the terms of the
Partnership Agreement; or
d. the occurrence of any event which shall make the continued existence of the
Partnership unlawful or require termination of the Partnership.
-9-
<PAGE>
The Trading Company may terminate trading and liquidate in the event that its
net assets decline to the level where they are less than or equal to 5 percent
of the current net assets of the Fund, as defined. The Trading Company is
required to liquidate in the event that its net assets decline to less than or
equal to 3 percent of the current net assets of the Fund.
4. Brokerage Commissions:
The Trading Company is charged brokerage commissions monthly at a fixed annual
rate of 2.5 percent as applied to month-end net assets, as defined, of the Fund,
including the Guaranteed Distribution Pool, as valued at cost plus accrued
interest. The fixed rate includes all exchange, clearing and National Futures
Association fees and floor brokerage, but not any give-up charges. The brokerage
commission is allocated among the Commodity Broker, Selling Agents and General
Partner in accordance with the clearing and selling agreements negotiated by the
General Partner.
5. Management and Incentive Fees:
The Trading Company has entered into an advisory agreement with the Trading
Advisor that specifies the terms of remuneration. The Trading Company pays the
Trading Advisor a monthly management fee at the annual rate of 1 percent of the
month-end net assets of the Fund, as defined. For purposes of calculating the
monthly management fee, net assets are computed prior to incentive fees and are
reduced by brokerage commissions, general partner fee and administrative costs
as of the end of the month of determination. In addition, the Guaranteed
Distribution Pool is valued at cost plus accrued interest.
The Trading Advisor is also entitled to a quarterly incentive fee of 15 percent
of any cumulative new trading profits recognized by the Trading Company. New
trading profits include net profits earned from (i) realized trading profit or
loss, plus or minus and (ii) the change in unrealized trading profit or loss on
open contracts from the inception of trading to the end of a particular calendar
quarter. Such fees are calculated after payment of monthly brokerage
commissions, management fee, general partner fee and administrative costs but
without deduction of incentive fees paid. New trading profits do not include
interest earned and are not reduced by organizational expenses or selling
commissions. There was no incentive fee in 1997, 1996 or 1995.
6. Operating Expenses:
The Fund pays its routine legal, accounting, audit, computer and other operating
costs. The net assets of the Fund reflect an accrual for such expenses incurred
but not yet paid.
7. Financial Instruments With Market and Credit Risks and Concentrations of
Credit Risk:
In the normal course of operations, the Trading Company enters into various
contractual commitments with elements of market risk in excess of the amounts
recognized in the statements of financial condition. These contractual
commitments may include exchange traded futures, forward contracts and exchange
traded options on futures contracts.
-10-
<PAGE>
Contractual commitments which involve future settlement give rise to both market
and credit risk. Market risk represents the potential loss that can be caused by
a change in the market value of a particular financial instrument. The Trading
Company's exposure to market risk is determined by a number of factors,
including the size, composition and diversification of positions held,
volatility of interest, market currency rates and liquidity. The market risk is
monitored by both the Trading Advisor and the General Partner, independently
from the other. Trade positions and the corresponding commodity markets are
monitored by both on a daily basis through computer link to the futures
commission merchants and access to on-line commodity pricing systems. All trades
are monitored with respect to volatility, daily profit and loss, margin usage (a
risk parameter assigned by the exchanges) and when necessary, appropriate review
and actions are taken.
Exchange traded futures and options contracts are marked to market daily, with
variations in value settled on a daily basis with the exchange upon which they
are traded and with the futures commission merchant through which the futures
and options are executed. The Trading Company has not taken or made physical
delivery on futures contracts.
Forward contracts are negotiated contractual commitments to purchase or sell a
specified amount of financial instruments, currencies or commodities at a future
date at a predetermined price.
An option on a futures contract gives the purchaser of the option the right to
take a position at a specified price in the underlying futures contract.
Options have limited life spans, usually tied to the settlement date of the
underlying futures contract. As a writer of options, the Trading Company
receives a premium in exchange for bearing the risk of unfavorable changes in
the market value of the underlying instrument.
The Trading Company records all contractual commitments involving future
settlement at market or fair value. Consequently, changes in the amounts
recorded in the Trading Company's statements of financial condition resulting
from movement in market prices are included currently in the accompanying
statements of operations.
Statement of Financial Accounting Standards ("SFAS") No. 105, "Disclosure of
Information about Financial Instruments with Off-Balance Sheet Risk and
Financial Instruments with Concentrations of Credit Risk," and SFAS No. 119,
"Disclosure About Derivative Financial Instruments and Fair Value of Financial
Instruments," require the disclosure of notional or contractual amounts of
financial instruments. At December 31, 1997 and 1996, the Trading Company held
derivative financial instruments with the following approximate, aggregate
notional values:
<TABLE>
<CAPTION>
1997 1996
-----------------------------------------------
Long Short Long Short
---------- ---------- ----------- ----------
<S> <C> <C> <C> <C>
Exchange traded futures:
Commodity $ - $ 290,145 $ 801,883 $ 214,372
Financial 6,304,450 1,793,341 18,221,957 2,519,380
Foreign currency - 252,713 538,078 841,288
Options:
Commodity - 980,000 - -
Currency forward contracts 1,126 - - 11,508
</TABLE>
-11-
<PAGE>
Notional or contractual amounts of financial instruments presented above include
both purchase and sale commitments and are indicative only of the volume of
activity and should not be used as a measure of market or credit risk. The
various instruments held at December 31, 1997, mature during 1998.
As of December 31, 1997, there were 29 different contracts, with an average
notional value of $297,953, and a maximum notional value of $1,136,353 in any
one contract. There were 33 different contracts as of December 31, 1996, with an
average notional value of $701,120, and a maximum notional value of $3,493,858
in any one contract. Foreign exchange traded futures contracts consisted of
$3,552,890 long and $1,677,941 short as of December 31, 1997; and $14,883,207
long and $1,340,880 million short as of December 31, 1996. There was
participation in six different major foreign currencies, with the largest
concentration in Japanese Yen dollars denominated contracts ($3,988,348) as of
December 31, 1997; and seven different major foreign currencies, with the
largest concentration in French Franc dollars denominated contracts ($3,988,348)
as of December 31, 1996.
At December 31, 1997 and 1996, all of the Trading Company's financial
instruments are carried at fair value. The fair value of futures contracts,
options on futures contracts and forward contracts represents the unrealized
gain or (loss) of the position. All open positions are netted on the Trading
Company's balance sheet as all open positions as of December 31, 1997 and 1996,
are held with the Commodity Broker. A summary of the fair value of derivative
financial instruments at December 31, 1997 and 1996, appears below:
<TABLE>
<CAPTION>
1997 1996
-------------------------------------
Long Short Long Short
======= ======== ======= ========
<S> <C> <C> <C> <C>
Exchange traded futures:
Commodity $ 9,160 $ 1,030 $ 5,762 $ 5,370
Financial 9,000 4,470 (2,328) 14,260
Foreign currency 1,970 3,575 5,091 12,638
Options:
Financial - (29,400) - -
Currency forward contracts 3,458 - - (12,503)
------- -------- ------- --------
$23,588 $(20,325) $ 8,525 $ 19,765
======= ======== ======= ========
</TABLE>
The average fair values of futures contracts, forward contracts and options
during 1997 were $71,186, $21,545 and $(10,406), respectively. The average fair
values of futures contracts, forward contracts and options on futures contracts
during 1996 were $103,559, $(10,581) and $(11,773), respectively. The average
fair value has been computed based on month-end balances.
-12-
<PAGE>
The composition of the Trading Company's net trading gains and (losses) is
recorded in the accompanying statements of operations. The following summarizes
the components of the Trading Company's net trading gain (loss), net of "round-
turn" brokerage commissions of $1,366, $3,377and $2,730, for the years ended
December 31, 1997, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
1997 1996 1995
-------- --------- ----------
<S> <C> <C> <C>
Exchange traded futures:
Commodity $(53,594) $(123,462) $ (52,979)
Financial 171,315 112,379 1,243,213
Foreign currency 93,994 40,433 (32,868)
Options:
Commodity 60 - -
Financial futures 8,420 (95,829) (95,943)
Foreign currency futures - - 2,307
Currency forward contracts 133,630 (54,527) -
-------- --------- ----------
Total $353,825 $(121,006) $1,063,730
======== ========= ==========
</TABLE>
Credit Risk and Concentration of Credit Risk
Exchange traded futures and option contracts possess low credit risk since all
transactions are guaranteed by exchange on which they are traded and daily cash
settlements by all counterparties are required for changes in the market value
of the contracts. Furthermore, the bonds held by the Partnership in the
Guaranteed Distribution Pool are U.S. Government obligations. Credit risk is
measured by the loss that the Trading Company would record if its counterparties
failed to perform pursuant to the terms of contractual commitments. Management
of credit risk involves a number of considerations, such as the financial
profile of the counterparty, specific terms and duration of the contractual
agreement and the value of collateral held, if any. All of the Trading Company's
open financial futures, and exchange traded options were transacted with the
Commodity Broker. All Trading Company assets (other than those used to fund
margin requirements on foreign futures positions) are maintained by the
Commodity Broker in a segregated customer account, as required by the Commodity
Futures Trading Commission. In general, approximately 20 percent to 40 percent
of the Trading Company's assets are used in funding margin requirements. As of
December 31, 1997, $97,167 was held in margin at the Commodity Broker for the
benefit of the Trading Company.
There exists a risk on non-performance related to forward contracts. E.D.&F. Man
International Inc. is the Partnership's primary forward contract counterparty.
Management believes that the exposure to credit risk associated with the non-
performance of its counterparty is minimal. However, credit risk can be directly
impacted by volatile financial markets.
-13-
<PAGE>
8. Quarterly Financial Information (Unaudited):
The following summarized quarterly financial information presents the results of
operations and other data for the three-month periods ended March 31, June 30,
September 30 and December 31, 1997 and 1996. Such information, which has not
been audited, is presented in thousands, except for unit and per unit data.
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
1997 1997 1997 1997
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 200 $ 123 $ 182 $ 42
Expenses 62 38 36 29
------- ------- ------- -------
Income before allocation of minority interest 138 85 146 13
Allocation of minority interest (1) (2) (5) 1
------- ------- ------- -------
Net income $ 137 $ 83 $ 141 $ 14
======= ======= ======= =======
Net assets $2,614 $2,581 $2,666 $2,666
======= ======= ======= =======
Partnership units outstanding, end of period 2,562 2,452 2,402 2,389
======= ======= ======= =======
Net asset value per unit, end of period $1,020 $1,052 $1,110 $1,116
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
1996 1996 1996 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ (261) $ 64 $ 185 $ 240
Expenses 92 80 73 67
------- ------- ------- -------
(Loss) income before allocation of minority
interest (353) (16) 112 173
Allocation of minority interest 7 2 - (2)
------- ------- ------- -------
Net (loss) income $ (346) $ (14) $ 112 $ 171
======= ======= ======= =======
Net assets $6,638 $6,192 $5,335 $4,911
======= ======= ======= =======
Partnership units outstanding, end of period 6,749 6,309 5,339 4,762
======= ======= ======= =======
Net asset value per unit, end of period $ 984 $ 981 $ 999 $1,031
======= ======= ======= =======
</TABLE>
-14-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND> This schedule contains summary financial information extracted from
combined statements of Financial Condition, Operations, Changes in Partners'
Capital and Cash Flows and is qualified in its entirety by reference to such
financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 435,891
<SECURITIES> 2,282,981
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,724,165
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,724,165
<CURRENT-LIABILITIES> 58,564
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,665,601
<TOTAL-LIABILITY-AND-EQUITY> 2,724,165
<SALES> 0
<TOTAL-REVENUES> 546,779
<CGS> 0
<TOTAL-COSTS> 163,791
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 375,597
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 375,597
<EPS-PRIMARY> 124.68
<EPS-DILUTED> 124.68
</TABLE>
