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, 1998
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.
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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 18% 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 $27,190 invested as of December 31, 1998. The General Partner also
invested $20,000 directly into the Trading Company. The General Partner's
investment in the Trading Company was worth $7,304 at December 31, 1998.
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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 18% was invested in the Trading Company and
approximately 82% 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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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, 1998, 1997, 1996, 1995 and 1994 are set forth under
"Item 6. Selected Financial Data." See Exhibit 13(a) containing the Financial
Statements of the Partnership.
(c) Narrative description of business
(1) See Items 1(a) and (b) above.
(i) through (xii) - not applicable.
(xiii) - the Partnership has no employees.
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(d) Financial information about foreign and domestic operations and
export sales
The Partnership does not engage in material operations in foreign
countries (although it does trade on foreign exchanges and in foreign currency
futures contracts), nor is a material portion of its revenues derived from
foreign customers. 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
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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 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. For the year ended December 31, 1998 there were
no redemption charges paid to the Partnership.
Holders. As of December 31, 1998 there were 39 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;
and the fifth distribution having been made on February 20, 1998 to Unitholders
of record on February 20, 1998. Except for the distribution referred to above,
no other dividends have been made or are contemplated.
Securities Sold. None. Items (b) through (f) of item
701 of Regulation S-K are not applicable.
(b) Not Applicable.
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Item 6. Selected Financial Data
The following is a summary of operations and total assets of the
Partnership for the years ended December 31, 1998, 1997,1996, 1995 and 1994. 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.
<TABLE>
<CAPTION>
For the Years Ended
-------------------
December 31, 1998 December 31, 1997 December 31, 1996 December 31, 1995 December 31, 1994
----------------- ----------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C>
Revenues:
Gain (loss) on trading of
Commodities Positions $217,965 $330,164 $(250,241) $1,205,872 $(788,637)
Interest Income 152,631 202,467 408,523 519,388 570,942
Redemption income 0 0 0 0 0
Realized gain (loss) on U.S.
Treasury Strip Notes 34,961 14,148 69,419 (7,719) (87,300)
Unrealized gain (loss) on U.S.
Treasury Strip Notes 0 0 0 557,725 (557,725)
------- ------- ------- --------- -------
Total revenue 405,557 546,779 227,701 2,275,266 (862,720)
Expenses:
Brokerage commissions
and fees 64,231 83,269 165,938 211,672 257,170
Management Fees 25,243 32,675 64,846 83,141 96,466
Incentive Fees 0 0 0 0 0
GP Fees 18,963 24,536 48,685 62,416 72,412
Operating Expenses 29,198 23,311 32,475 33,859 25,627
------- ------- ------- ------- -------
Total Expenses 137,635 163,791 311,944 391,088 451,675
Income (loss) before
Allocation of Majority
Interest 267,922 382,988 (84,243) 1,884,178 (1,314,395)
Minority Interest
operating (income) loss (3,228) (7,391) 6,992 (11,213) 14,840
--------- --------- ------- -------- ---------
Net income (loss) $ 264,694 $ 375,597 $(77,251) $ 1,872,965 $(1,299,555)
========= ========= ======= ========= ==========
Net income (loss)
allocated to
General Partner 6,060 10,813 (3) 19,503 (16,261)
========= ========= ======= ========= ==========
Net income (loss)
allocated to
Limited Partners 258,634 364,784 (77,248) 1,853,462 (1,283,294)
========= ========= ======= ========= ==========
Net Income (loss)
per Unit
(for a Unit
outstanding
throughout the
year/period) 120.71 124.68 (.03) 277.14 (135.51)
========= ========= ======= ========= ==========
Total assets $2,279,865 $2,724,165 $5,566,829 $8,652,018 $7,768,405
========= ========= ======= ========= ==========
</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
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futures contract has reached the daily limit for that day, posi tions 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 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 $264,694 for the year ended December
31, 1998, with the Net Asset Value per Unit as of December 31, 1998 at
$1,196.92. The significant components of this aggregate gain were profits on
trading in futures. The net gain on trading in futures and options on futures
was +$217,965 (combined realized and unrealized) for the year, with the largest
declines in British pound futures contracts (-$13,515), Australian 3-year bond
contracts (-$13,327) and 3-month Canadian Banker's Acceptance contracts
(-$12,964), and the most significant increases due to S&P 500 index contracts
(+$148,935), Japanese Government Bond contracts (+$26,370) and 5-year U.S. T-
note contracts (+$21,882). The remaining net gain of +$60,584 was the net result
of smaller trading gains and losses in approximately forty-five other markets.
The increase in the market value of zero coupon Treasury strips in the
guaranteed distribution pool totaled $34,961 (combined realized and unrealized);
the increase in accrued interest on same securities was $138,249. The combined
gain of these operating activities (+$405,557), less operating expenses of
$137,635, less the allocation of minority interest in the affiliated Trading
Company (-$3,228), equals the total aggregate Partnership gain of $264,694.
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
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(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 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.
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 Partner ship's
profitability.
Possible Effects of the European Monetary Union
The Trading Advisor historically has traded foreign currencies,
including European currencies, for the Partnership. The January 1, 1999
inauguration of the Euro and the market's reaction to the Euro, or to any
nation's possible future
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withdrawal from the European Monetary Union, may adversely affect the trading
opportunities, or trading results generally, of currency traders. The absence of
historical Euro trading data could be detrimental to traders such as the Trading
Advisor.
The conversion to a single euro-currency is a very significant
and novel political and economic event and there can be no certainty about its
direct or indirect future effects on currency markets. The introduction of the
Euro does not eliminate the global appetite for hedging and speculation in
European Markets. Rather, the Euro and Euro-denominated instruments essentially
provide investors the opportunity to achieve a more diversified exposure to
European markets without the necessity of trading individual instruments in
legacy currency. Unforeseen effects of the European Monetary Union could result
in trading losses for the Partnership.
In response to the planned introduction of the Euro, during the
last quarter of 1998 the Trading Advisor phased out positions in the various
European currencies which were replaced by the Euro on January 1, 1999. Euro
risk, in the form of positions in Euro futures contracts on Euro-denominated
bond interest rates, is being introduced by the Trading Advisor with small
exposure and increased over the first quarter of 1999. This process is intended
to ultimately restore the Partnership's European currency risk allocations to
pre-Euro levels.
As information becomes available on the Euro, the market's
reaction to the Euro and any nation's involvement in the European Monetary
Union, the Trading Advisor will process and analyze such data. The Trading
Advisor has in place a working group responsible for planning and preparing for
the Euro conversion. This group reviews information on this issue as it becomes
available, determines what actions are necessary, establishes policies and
monitors tasks as appropriate. If unanticipated difficulties arise in connection
with the conversion and restoration of the Partnership's European risk
allocations to pre-Euro weightings, the Trading Advisor will notify the General
Partner and Trading Company in a timely manner, and the General Partner will
promptly notify investors.
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 Partnership and James River Management Corp. are essentially
impacted by three components with respect to being "Y2K compliant": (a) the
internally developed systems at James River Capital Corp.; (b) the operating
systems at ED&F Man International; and (c) a third party accounting system,
Commodity Accounting Systems ("CAS").
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As of year-end, CAS has indicated that their system is Y2K
compliant. ED&F Man's completion of their "testing phase" should be done by
March 31, 1999 and June 30, 1999 has been set as the date by which contingency
plans should be finalized. James River Capital Corp. has completed many stages
of its Y2K compliance testing (hardware verification, operating systems and
retail application compliance, and internal systems) through the first quarter
of 1999, with the second quarter of 1999 targeted as the time frame for
developing contingency plans in the event external vendors cannot be certified
as Y2K compliant. The General Partner, not the Partnership, will absorb all
costs related to adopting software applications for the Year 2000.
Based on the above, James River Management Corp. is confident
that all components of its Year 2000 preparedness are in check. However, the
failure of securities and commodity exchanges, clearing organizations, vendors,
clients, and regulators to resolve their own computer application issues in a
timely manner could result in material financial risk to the Partnership.
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk
Not applicable pursuant to the "small business issuer" exemption
from the disclosure requirements of Regulation S-K.
Item 8. Financial Statements and Supplementary Data
Financial statements required by this Item are included in the
Exhibit 13(a) filed herewith.
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 1998, 1997, 1996 and 1995 have been
audited by Arthur Andersen LLP. There have been no changes in or disagreements
with the accountants on accounting or financial disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
(a,b) Identification of directors and executive officers. 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
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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.
(c) Identification of certain significant
employees. None.
(d) Family relationships. None.
(e) Business experience. See "Item 1 (a)" and
"Item 10 (a,b)" above.
(f) Involvement in certain legal proceedings.
None.
(g) Promoters and control persons. Not applicable.
Item 405 of Regulation S-K is not applicable.
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."
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Item 12. Security Ownership of Certain Beneficial Owners and
Management
Security ownership of certain beneficial owners
The Partnership knows of eight Unitholders who own beneficially
more than 5% of the Units. All beneficial ownership is direct ownership.
Name and Address Number of Units Percentage of Units
---------------- --------------- -------------------
Kosman Inc. 125.00 6.76%
190498 CR-G
Scottbluff, NE 69361
Betty C. LaRoe IRA Rollover 210.89 11.40%
P.O. Box 69
Terrell, TX 75160
James K. LaRoe IRA Rollover 217.82 11.78%
P.O. Box 69
Terrell, TX 75160
Ralph Balcof Separate 100.00 5.41%
Property Trust
P.O. Box 1269
Azusa, CA 91702
Joyce & Michael Dileo 100.00 5.41%
21 Jefferson Place
Massapequa, NY 11758
Georgiana M. Ely Trust 100.00 5.41%
c/o Jane Mace
13122 Mission Valley Drive
Houston, TX 77069
Cella, McKeon & Williams 100.00 5.41%
P.O. Box 221
North Haven, CT 06473
Milton L. Shifman Scholarship Trust 100.00 5.41%
U/w/o Milton L. Shifman
111-34 Shearwater Court
Jersey City, NJ 07305
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 22.717 Units valued at $27,190 as of December 31, 1998,
1.23% of the Partnership's total equity. The General Partner also owned a $7,304
interest in the Trading Company as of such date.
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Changes in control
None.
Item 13. Certain Relationships and Related Transactions
See "Item 1. Business," "Item 2. Properties," "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 (found in Exhibit 13(a))
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 informa tion has been
included in the financial statements or the notes thereto.
(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.
-14-
<PAGE>
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) 1998 Annual Report and Independent Auditors' Report -- 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.
(27) Financial Data Schedule.
(b) Reports on Form 8-K
The Partnership filed a report on Form 8-K dated November 10,
1995. No reports on Form 8-K were filed during the fourth quarter of 1998.
-15-
<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.
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
Date: March 31, 1999
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 and 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 31, 1999
- -------------------- Executive Officer
Paul H. Saunders (Principal Executive Officer
and Chief Operating Officer)
/s/ KEVIN M. BRANDT President, Treasurer and March 31, 1999
- ------------------- Director (Principal Financial
Kevin M. Brandt and Accounting Officer)
(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 31, 1999
of Registrant
</TABLE>
By: /s/ KEVIN M. BRANDT
-------------------
Kevin M. Brandt
President
-16-
<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.
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
Date: March 31, 1999
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 and 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 31, 1999
- --------------------- Executive Officer
Paul H. Saunders (Principal Executive Officer
and Chief Operating Officer)
/s/ KEVIN M. BRANDT President, Treasurer and March 31, 1999
- ------------------- Director (Principal Financial
Kevin M. Brandt and Accounting Officer)
(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 31, 1999
of Registrant
</TABLE>
By: /s/ KEVIN M. BRANDT
-------------------
Kevin M. Brandt
President
-17-
<PAGE>
THE FOUR SEASONS FUND II L.P.
1998 FORM 10-K
INDEX TO EXHIBITS
EXHIBIT PAGE
------- ----
Exhibit 13(a) 1998 Annual Report and Independent
Auditors' Reports E-1
Exhibit 27.01 Financial Data Schedule E-2
-18-
THE FOUR SEASONS FUND II L.P.
AND AFFILIATE
COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
TOGETHER WITH AUDITORS' REPORT
<PAGE>
THE FOUR SEASONS FUND II L.P. AND AFFILIATE
OATH OR AFFIRMATION
AS OF DECEMBER 31, 1998 AND 1997
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
PAGE
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS 4
COMBINED STATEMENTS OF FINANCIAL CONDITION
As of December 31, 1998 and 1997 5
COMBINED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997, and 1996 6
COMBINED STATEMENTS OF CHANGES IN PARTNERS'CAPITAL
For the Years Ended December 31, 1998, 1997, and 1996 7
COMBINED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1998, 1997, and 1996 8
NOTES TO COMBINED FINANCIAL STATEMENTS
As of December 31, 1998 and 1997 9
<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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the combined results
of their operations and their cash flows for each of the three years in the
period ending December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Anderson LLP
Richmond, Virginia
January 21, 1999
<PAGE>
THE FOUR SEASONS FUND II L.P. AND AFFILIATE
COMBINED STATEMENTS OF FINANCIAL CONDITION
AS OF DECEMBER 31, 1998 AND 1997
ASSETS
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
EQUITY IN COMMODITY TRADING ACCOUNTS:
Receivable for cash retained $ 375,836 $ 435,891
Net unrealized gain on open futures contracts and forwards 48,168 32,663
Net unexpired options - (29,400)
Accrued interest receivable 961 1,116
----------- -----------
424,965 440,270
INVESTMENT IN GUARANTEED DISTRIBUTION POOL (Note 2) 1,854,829 2,282,981
OTHER 71 914
----------- -----------
Total assets $2,279,865 $2,724,165
=========== ===========
LIABILITIES AND PARTNERS' CAPITAL
LIABILITIES:
Redemptions payable $ 35,204 $ 15,000
Management fee payable 5,566 4,461
Brokerage commissions payable 4,724 5,637
Payable to General Partner 1,413 1,753
Other accrued expenses 11,617 10,637
----------- -----------
58,524 37,488
Minority interest in Trading Company (Note 2) 7,304 21,076
----------- -----------
Total liabilities 65,828 58,564
----------- -----------
PARTNERS' CAPITAL:
General Partner (units outstanding - 22.717 and 86.717 at
December 31, 1998 and 1997, respectively) 27,190 96,767
Limited Partners (units outstanding - 1,827.066 and 2,302.055 at
December 31, 1998 and 1997, respectively) 2,186,847 2,568,834
----------- -----------
Total partners' capital 2,214,037 2,665,601
----------- -----------
Total liabilities and partners' capital $2,279,865 $2,724,165
=========== ===========
PARTNERSHIP UNITS OUTSTANDING 1,849.783 2,388.772
=========== ===========
NET ASSET VALUE PER UNIT $ 1,196.92 $ 1,115.89
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
<PAGE>
THE FOUR SEASONS FUND II L.P. AND AFFILIATE
COMBINED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
REVENUES:
Net realized trading gain (loss) $279,153 $346,707 $ (21,881)
Net change in unrealized trading gain 15,505 4,373 (132,612)
Net option premiums (106,093) 8,484 (95,748)
Net change in unexpired options 29,400 (29,400) -
-------- -------- ---------
Net trading gain (loss) 217,965 330,164 (250,241)
Gain on sale of U.S. Treasury securities 34,961 14,148 69,419
Interest income (Note 2) 152,631 202,467 408,523
-------- -------- ---------
Total revenues 405,557 546,779 227,701
-------- -------- ---------
EXPENSES:
Brokerage commissions (Note 4) 64,231 83,269 165,938
Management fee (Note 5) 25,243 32,675 64,846
General Partner fee (Note 3) 18,963 24,536 48,685
Other 29,198 23,311 32,475
-------- -------- ---------
Total expenses 137,635 163,791 311,944
-------- -------- ---------
INCOME (LOSS) BEFORE ALLOCATION OF MINORITY INTEREST
267,922 382,988 (84,243)
ALLOCATION OF MINORITY INTEREST (Note 2) (3,228) (7,391) 6,992
-------- -------- ---------
NET INCOME (LOSS) $264,694 $375,597 $ (77,251)
======== ======== =========
ALLOCATION OF NET INCOME (LOSS):
Limited Partners $258,634 $364,784 $ (77,248)
General Partner 6,060 10,813 (3)
Net income (loss) per unit 120.71 124.68 (.03)
</TABLE>
The accompanying notes are an integral part of these combined statements.
<PAGE>
<TABLE>
<CAPTION>
THE FOUR SEASONS FUND II L.P. AND AFFILIATE
COMBINED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
LIMITED GENERAL
UNITS PARTNERS PARTNER TOTAL
----- -------- ------- -----
<S> <C> <C> <C> <C>
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
Capital withdrawals (538.989) (548,539) (72,168) (620,707)
Capital distribution to partners
(Note 3) - (92,082) (3,469) (95,551)
Net income - 258,634 6,060 264,694
--------- --------- ------- ---------
BALANCE, December 31, 1998 1,849.783 $2,186,847 $27,190 $2,214,037
========= ========= ======= =========
NET ASSET VALUE PER UNIT:
December 31, 1996-
Amount $1,031.21
=========
Units outstanding 4,762.214
=========
December 31, 1997-
Amount $1,115.89
=========
Units outstanding 2,388.772
=========
December 31, 1998-
Amount $1,196.92
=========
Units outstanding 1,849.783
=========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
THE FOUR SEASONS FUND II L.P. AND AFFILIATE
COMBINED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES: $264,694 $ 375,597 $(77,251)
Net income (loss)
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Allocation of income (loss) to minority interest 3,228 7,391 (6,992)
Accretion of discount on Guaranteed
Distribution Pool (138,248) (183,828) (365,638)
Gain on sale of investment in Guaranteed
Distribution Pool (34,961) (14,148) (69,419)
Net change in unrealized (loss) gain on open
futures contracts and forwards (15,505) (4,373) 132,612
Net change in unexpired options (29,400) 29,400 -
(Increase) decrease in operating assets:
Net receivable from Commodity Broker 60,210 283,953 770,158
Sale of bonds in Guaranteed Distribution Pool 504,361 2,539,856 2,327,003
Maturity of bonds in Guaranteed Distribution
Pool 97,000 192,000 291,000
Other 843 (221) (527)
Increase (decrease) in operating liabilities:
Payable to General Partner (340) (5,392) (3,458)
Brokerage commissions payable (913) (18,055) (11,721)
Management fee payable 1,105 (142) (9,521)
Other accrued expenses 980 (983) (10,343)
------ ------- --------
Total adjustments 448,360 2,825,458 3,043,154
Net cash provided by operating activities 713,054 3,201,055 2,965,903
CASH FLOWS FROM FINANCING ACTIVITIES:
Redemption of partnership units (600,503) (3,010,566) (2,675,857)
Redemption of minority interest (17,000) - -
Capital distribution to partners (95,551) (190,489) (290,046)
-------- ---------- ----------
Net cash used in financing activities (713,054) (3,201,055) (2,965,903)
-------- ---------- ----------
Net change in cash - - -
CASH, beginning of period - - -
-------- ---------- ----------
CASH, end of period $ - $ - $ -
======== ========== ==========
</TABLE>
<PAGE>
THE FOUR SEASONS FUND II L.P. AND AFFILIATE
NOTES TO COMBINED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 1998 AND 1997
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. E.D.&F. Man International Inc. is the commodity broker (the "Commodity
Broker") for the Partnership.
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, 1998,
the cost plus accrued interest was $1,854,829, whereas market value was
$2,007,822. At December 31, 1997, the cost plus accrued interest was $2,282,981
whereas market value was $2,389,617. 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.
<PAGE>
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 combined statements of
financial condition reflect the net gains and (losses) of all open positions as
of December 31, 1998 and 1997.
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.
<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.
ANNUAL DISTRIBUTION - The Fund made annual distributions to all Limited Partners
of record as of February 20, 1998, February 18, 1997, and February 23, 1996. The
distribution equaled 4 percent of the original investor contributions to the
<PAGE>
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.
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. This percentage was
approximately 18 percent as of December 31, 1998.
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
<PAGE>
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 1998, 1997 or 1996.
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.
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, and 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.
<PAGE>
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, 1998 and 1997, the Trading Company held
derivative financial instruments with the following approximate, aggregate
notional values:
<TABLE>
<CAPTION>
1998 1997
--------------------- -------------------
LONG SHORT LONG SHORT
--------------------- -------------------
<S> <C> <C> <C> <C>
Exchange traded futures:
Commodity $ 47,668 $ 362,904 $ - $ 290,145
Financial 6,872,925 2,363,057 6,304,450 1,793,341
Foreign currency 151,600 74,298 - 252,713
Options:
Financial futures - - - 980,000
Currency forward contracts 688,811 - 310,304 -
</TABLE>
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, 1998, mature during 1999.
As of December 31, 1998, there were 31 different contracts, with an average
notional value of $318,466 and a maximum notional value of $1,525,219 in any one
contract. There were 29 different contracts as of December 31, 1997, with an
average notional value of $297,953, and a maximum notional value of $1,136,353
in any one contract. Foreign exchange traded futures contracts consisted of
$5,348,835 long and $1,559,517 short as of December 31, 1998; and $3,552,890
long and $1,677,941 million short as of December 31, 1997. There was
participation in seven different major foreign currencies, with the largest
concentration in Japanese Yen denominated contracts ($1,559,517) as of December
31, 1998; and six different major foreign currencies, with the largest
concentration in Japanese Yen denominated contracts ($3,988,348) as of December
31, 1997.
At December 31, 1998 and 1997, 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, 1998 and 1997,
are held with the Commodity Broker. A summary of the fair value of derivative
financial instruments at December 31, 1998 and 1997, appears below:
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
LONG SHORT LONG SHORT
-------- -------- ----- ----------
<S> <C> <C> <C> <C>
Exchange traded futures:
Commodity $ (288) $10,654 $ 9,160 $ 1,030
Finnancial 34,675 1,449 9,000 4,470
Foreign currency (694) 1,328 1,970 3,575
Options:
Financial futures - - - (29,400)
Currency forward contracts 1,044 - 3,458 -
------ ------- ------- ------
Total $34,737 $13,431 $23,588 $(20,325)
</TABLE>
The average fair values of futures contracts, forward contracts and options
during 1998 were $61,129, $15, and $(3,656), respectively. The average fair
values of futures contracts, forward contracts and options on futures contracts
during 1997 were $71,186, $21,545, and $(10,406), respectively. The average fair
value has been computed based on month-end balances.
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 $950, $1,366 and $3,377, for the years
ended December 31, 1998, 1997 and 1996, respectively:
1998 1997 1996
---- ---- ----
Exchange traded futures:
Commodity $ (2,218) $(53,594) $(123,462)
Financial 288,532 171,315 112,379
Foreign currency 9,174 93,994 40,433
Options:
Commodity futures - 60 -
Financial futures (106,172) 8,420 (95,829)
Foreign currency futures - - -
Currency forward contracts (17,206) 133,630 (54,527)
-------- ------- -------
Total $172,110 $353,825 $(121,006)
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, 1998, approximately $110,000 was held in margin at the Commodity
Broker for the benefit of the Trading Company.
<PAGE>
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.
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, 1998 and 1997. 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
1998 1998 1998 1998
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenues $ 175 $ 23 $ 120 $ 88
Expenses 37 35 38 28
------ ------ ------- ------
Income (loss) before allocation of minority interest 138 (12) 82 60
Allocation of minority interest (5) 3 (1) -
------ ------ ------- ------
Net income (loss) $ 133 $ (9) $ 81 $ 60
====== ====== ======= ======
Net assets $2,646 $2,441 $ 2,189 $2,214
====== ====== ======= ======
Partnership units outstanding, end of period 2,339 2,165 1,879 1,850
====== ====== ======= ======
Net asset value per unit, end of period $1,131 $1,128 $ 1,165 $1,197
====== ====== ======= ======
Net income per unit $55.58 $(3.84) $37.00 $32.18
</TABLE>
<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
======= ======= ======= =======
Net income per unit $28.82 $32.41 $58.00 $ 5.84
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE COMBINED
STATEMENTS OF FINANCIAL CONDITION, COMBINED STATEMENTS OF OPERATIONS, COMBINED
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL AND COMBINED STATEMENTS OF CASH FLOW
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 375,836
<SECURITIES> 1,854,829
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,279,865
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 2,279,865
<CURRENT-LIABILITIES> 65,828
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 2,186,847
<TOTAL-LIABILITY-AND-EQUITY> 2,279,865
<SALES> 0
<TOTAL-REVENUES> 405,557
<CGS> 0
<TOTAL-COSTS> 137,635
<OTHER-EXPENSES> 3,228
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 264,694
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264,694
<EPS-PRIMARY> 120.71
<EPS-DILUTED> 120.71
</TABLE>
