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, 1996
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.
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 $89,423 invested as of December 31, 1996. The
General Partner also invested $20,000 directly into the Trading Company. The
General Partner's investment in the Trading Company was worth $13,685 at
December 31, 1996.
-2-
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 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
-3-
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 periods ended December 31, 1996, 1995, 1994 and 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
-4-
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 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 Advisor,
-5-
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, 1996 there were redemption
charges of $1,045 paid to the Partnership.
(b) Holders. As of December 31, 1996 there were 60 holders of
Units.
(c) 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. No other dividends have been made
or are contemplated.
Item 6. Selected Financial Data
The following is a summary of operations and total assets of
the Partnership for the periods ended December 31, 1996, 1995, 1994, and 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. At December 31, 1994, market value was below cost plus accrued
interest.
-6-
Year Ended Year Ended Year Ended Period Ended
December 31, 1996 December 31, 1995 December 31, 1994 December 31, 1993
----------------- ----------------- ----------------- -----------------
Revenues:
Gain (loss) on trading
of futures, forwards,
and options $ 250,241 $1,205,872 $ (788,637) $ 938,021
Interest Income 408,523 519,388 570,942 574,525
Redemption income 0 0 0 1,045
Realized gain (loss) on U.S.
Treasury Strip Notes 69,419 (7,719) (87,300) 0
Unrealized gain (loss) on U.S.
Treasury Strip Notes 0 557,725 (557,725) 0
----------- ---------- ---------- ----------
Total revenue $ 227,701 $2,275,266 $(862,720) $1,513,591
----------- ---------- ---------- ----------
Expenses:
Organizational Costs 0 0 0 226,925
Brokerage commissions and fees 165,938 211,672 257,170 278,969
Management Fee 64,846 83,141 96,466 103,313
Incentive Fee 0 0 0 80,555
Sponsor Fee 48,685 62,416 72,412 77,556
Operating Expenses 32,475 33,859 25,627 40,865
----------- ---------- ---------- ----------
Total Expenses $ 311,944 $ 391,088 $ 451,675 $ 808,183
----------- ---------- ---------- ----------
Income (loss) before
General Partner interest
in Trading Company (84,243) $1,884,178 (1,314,395) 705,408
General Partner interest
in Trading Company
operating (income) loss 6,992 (11,213) 14,840 (4,304)
----------- ---------- ----------- -------
Net income (loss) $ (77,251) $1,872,965 $(1,299,555) $ 701,104
============ ========== ============ ==========
Net income (loss)
allocated to
General Partner (3) 19,503 (16,261) 7,422
============ ========== =========== ==========
Net income (loss)
allocated to
Limited Partners (77,248) 1,853,462 (1,283,294) (693,682)
============ ========== =========== ===========
Net income (loss)
per Unit
(for a Unit
outstanding
throughout the
year/period) (.03) 224.90 (135.51) 61.85
===== ====== ======== =====
Total assets $5,566,829 $8,652,018 $7,768,405 $12,029,362
========== ========== ========== ===========
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
-7-
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 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 loss of -$77,251 for the period 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, forwards and options. The net loss on trading of futures,
forwards 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.
Realized gains from the sale of the bonds in the guaranteed distribution pool
totaled $69,419; the increase in accrued interest on same securities was
$365,638. 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.
Operating results show a gain of $1,872,965 for the period
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
-8-
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 $452,917. 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.
Operating results show a loss of -$1,299,555 for the period
ended December 31, 1994. The Net Asset Value per Unit as of December 31, 1994
was $886.34. The two significant components of this aggregate loss were losses
on trading of futures and options, and a decline in the value of bonds held in
the guaranteed distribution pool. The net loss on trading of futures, forwards
and options was -$788,637 (combined realized and unrealized) for the year, with
the most significant declines due to trading in U.S. Treasury Bond contracts
(-$534,922) and in S&P 500 contracts (-$103,214). The remaining loss of
- -$150,501 is the net result of smaller trading gains and losses in roughly forty
other markets. The decline in market value of the bonds in the guaranteed
distribution pool totaled -$645,025 (combined realized and unrealized), which
more than offset the accreted interest on same securities of $570,942. The
combined loss of these operating activities (-$862,720), less operating expenses
of $451,675, less the allocation of minority interest in the affiliated Trading
Company (-$14,840), equals the total aggregate Partnership loss of -$1,299,555.
Operating expenses were down from the prior year ($451,675 versus $808,183) due
to the lack of organizational and offering expenses associated with start-up and
the lack of incentive fees due to net trading losses.
Operating results showed a gain for the period ended December
31, 1993. The Partnership began trading on February 16, 1993. The net gain on
trading of futures and options was $938,021 (combined realized and unrealized)
for the year, with the most significant gains coming in U.S. Treasury Bond
contracts ($482,937) and in Japanese government 10-year bond contracts
($169,419). The remaining profit of $285,665 is the net result of smaller
trading gains and losses in roughly forty other markets. The Partnership reports
its investment in the bonds held in the guaranteed distribution pool at the
lower of cost plus accrued interest or market value. Since market value of the
bonds exceeds cost plus accrued interest as of December 31, 1993, the financial
report includes only accreted interest from the bonds of $574,525. The combined
gain of these operating activities of $1,512,546, less operating expenses of
$808,183, plus $1,045 in income from redemption charges on outgoing investors,
-9-
less the allocation of minority interest in the affiliated Trading Company of
$4,304, equals the total aggregate Partnership gain of $701,104.
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
initial capital investment.
Inflation is not a significant factor in the Partnership's
profitability.
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
As of November 10, 1995, the General Partner replaced Deloitte
& Touche LLP ("Deloitte") as the independent accountant to the Partnership with
Arthur Andersen LLP. Deloitte's reports on the Partnership's financial
statements did not contain any adverse opinion, disclaimer of opinion or
qualification or modification. There were never any disagreements with Deloitte
on any matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure.
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.
-10-
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
(a) Security ownership of certain beneficial owners
The Partnership knows of one Unitholder who own beneficially
more than 5% of the Units. All beneficial ownership is direct ownership.
Name and Address Number of Units Percentage of Units
---------------- --------------- -------------------
American Pacific Corporation 2,050 43.05%
3770 Howard Hughes Parkway
Suite 300
Las Vegas, Nevada 89109
(b) 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 86.7171 Unit-equivalents valued at $89,423 as of December
31, 1996, 1.82% of the Partnership's total equity. The General Partner also
owned a $13,685 interest in the Trading Company as of such date.
(c) 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
-11-
The required financial statements are included in the 1996
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.
(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 Fiscal Year Ended December 31, 1994.
(13) 1996 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.
-12-
(b) Reports on Form 8-K
The Partnership filed a report on Form 8-K dated November 10,
1995.
THE FOUR SEASONS FUND II L.P.
1996 FORM 10-K
INDEX TO EXHIBITS
EXHIBIT PAGE
------- ----
Exhibit 13(a) 1996 Annual Report and Independent
Auditors' Reports E-1
-14-
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
28, 1997.
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.
Signature Title With Registrant Date
--------- --------------------- ----
/s/ PAUL H. SAUNDERS Chairman and Chief March 28, 1997
- -------------------- Executive Officer
Paul H. Saunders (Principal Executive Officer
and Chief Operating Officer)
/s/ KEVIN M. BRANDT President, Treasurer and March 28, 1997
- -------------------- 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.)
-16-
JAMES RIVER MANAGEMENT CORP. General Partner March 28, 1997
of Registrant
By: /s/ KEVIN M. BRANDT
--------------------
Kevin M. Brandt
President
-16-
The Four Seasons Fund II L.P.
and Affiliate
Combined Financial Statements
As of December 31, 1996 and 1995
Together With Auditors' Report
-17-
The Four Seasons Fund II L.P. and Affiliate
Oath or Affirmation
As of December 31, 1996 and 1995
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.
(formerly Kidder, Peabody Futures
Management Corp.), General Partner for
The Four Seasons Fund II L.P.
and Affiliate
-18-
The Four Seasons Fund II L.P. and Affiliate
Table of Contents
Page(s)
Report of Independent Public Accountants 1
Financial Statements:
Combined Statements of Financial Condition as
of December 31, 1996 and 1995 2
Combined Statements of Operations for the Years
Ended December 31, 1996, 1995 and 1994 3
Combined Statements of Changes in Partners'
Capital for the Years Ended
December 31, 1996, 1995 and 1994 4
Combined Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 5
Notes to Combined Financial Statements 6 - 14
-19-
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, 1996 and 1995, and the related combined statements of
operations, changes in partners' capital and cash flows for the years then
ended. 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. The combined statements of operations, changes in partners'
capital and cash flows of The Four Seasons Fund II L.P. and Affiliate for the
year ended December 31, 1994, were audited by other auditors whose report, dated
March 15, 1995, expressed an unqualified opinion on those statements.
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, 1996 and 1995, and the combined results
of their operations and their cash flows for the years then ended, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Richmond, Virginia,
January 22, 1997
-1-
The Four Seasons Fund II L.P. and Affiliate
Combined Statements of Financial Condition
As of December 31, 1996 and 1995
Assets
1996 1995
---------- ----------
Equity in commodity trading accounts:
Receivable for cash retained $ 717,902 $1,483,956
Net unrealized gain on open futures contracts and forwards 28,290 160,902
Accrued interest receivable 3,058 7,162
---------- ----------
749,250 1,652,020
Investment in Guaranteed Distribution Pool (Note 2) 4,816,886 6,999,832
Other 693 166
---------- ----------
Total assets $5,566,829 $8,652,018
========== ==========
Liabilities and Partners' Capital
Liabilities:
Redemptions payable $ 595,229 $ 781,448
Brokerage commissions payable 23,692 35,413
Management fee payable 4,603 14,124
Payable to General Partner 7,145 10,603
Other accrued expenses 11,645 21,988
---------- ----------
642,314 863,576
Minority interest in Trading Company (Note 2) 13,685 20,677
---------- ----------
Total liabilities 655,999 884,253
---------- ----------
Partners' Capital:
General Partner (units outstanding - 86.717 at
December 31, 1996 and 1995) 89,423 92,895
Limited Partners (units outstanding -
4,675.497 and 7,164.463 at December 31, 1996
and 1995, respectively) 4,821,407 7,674,870
---------- ----------
Total partners' capital 4,910,830 7,767,765
---------- ----------
Total liabilities and partners' capital $5,566,829 $8,652,018
========== ==========
Partnership units outstanding 4,762.214 7,251.180
========== ==========
Net asset value per unit $ 1,031.21 $ 1,071.24
========== ==========
The accompanying notes are an integral part of these combined statements.
-2-
The Four Seasons Fund II L.P. and Affiliate
Combined Statements of Operations
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
----------- ----------- ----------
Revenues:
Net realized trading (loss) gain $ (21,881) $ 1,160,060 $ (312,567)
Net change in unrealized trading (loss) gain (132,612) 119,162 (147,402)
Net option premiums (95,748) (93,600) (416,218)
Net change in unexpired options -- 20,250 87,550
----------- ----------- ----------
Net trading (loss) gain (250,241) 1,205,872 (788,637)
Gain (loss) on sale of U.S. Treasury securities 69,419 (7,719) (87,300)
Unrealized gain (loss) on U.S. Treasury securities (Note 2) -- 557,725 (557,725)
Interest income (Note 2) 408,523 519,388 570,942
----------- ----------- ----------
Total revenues (loss) 227,701 2,275,266 (862,720)
----------- ----------- ----------
Expenses:
Brokerage commissions (Note 4) 165,938 211,672 257,170
Management fee (Note 5) 64,846 83,141 96,466
General Partner fee (Note 3) 48,685 62,416 72,412
Other 32,475 33,859 25,627
----------- ----------- ----------
Total expenses 311,944 391,088 451,675
----------- ----------- ----------
(Loss) income before allocation of minority interest (84,243) 1,884,178 (1,314,395)
Allocation of minority interest (Note 2) 6,992 (11,213) 14,840
----------- ----------- ----------
Net (loss) income $ (77,251) $ 1,872,965 $(1,299,555)
=========== =========== ==========
Allocation of net (loss) income:
Limited Partners $ (77,248) $ 1,853,462 $(1,283,294)
General Partner (3) 19,503 (16,261)
Net (loss) income per unit (.03) 224.90 (135.51)
The accompanying notes are an integral part of these combined statements.
-3-
The Four Seasons Fund II L.P. and Affiliate
Combined Statements of Changes in Partners' Capital
For the Years Ended December 31, 1996, 1995 and 1994
Limited General
Units Partners Partner Total
---------- ----------- -------- -----------
Partners' capital, December 31, 1993 11,247.262 $11,815,505 $127,422 $11,942,927
Capital withdrawals (2,742.720) (2,626,050) (29,500) (2,655,550)
Capital distribution to partners (Note 3) - (445,090) (4,800) (449,890)
Net loss - (1,283,294) (16,261) (1,299,555)
---------- ------------ -------- -----------
Partners' capital, 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
---------- ------------ --------- ----------
Partners' capital, 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)
---------- ------------ --------- ----------
Partners' capital, December 31, 1996 4,762.214 $ 4,821,407 $ 89,423 $ 4,910,830
========== ============ ========== ============
Net asset value per unit:
December 31, 1994:
Amount $886.34
=======
Units outstanding 8,504.542
=========
December 31, 1995:
Amount $1,071.24
=========
Units outstanding 7,251.180
=========
December 31, 1996:
Amount $1,031.21
=========
Units outstanding 4,762.214
=========
The accompanying notes are an integral part of these combined statements.
-4-
The Four Seasons Fund II L.P. and Affiliate
Combined Statements of Cash Flows
For the Years Ended December 31, 1996, 1995 and 1994
1996 1995 1994
------------ ----------- ------------
Cash flows from operating activities:
Net (loss) income $ (77,251) $1,872,965 $(1,299,555)
Adjustments to reconcile net income to net cash provided by operating
activities:
Allocation of income to minority interest (6,992) 11,213 (14,840)
Amortization of discount on Guaranteed Distribution Pool (365,638) (452,917) (521,716)
(Gain) loss on sale of investment in Guaranteed Distribution Pool
(69,419) 7,719 87,300
Net change in unrealized loss on investment in Guaranteed
Distribution Pool - (557,725) 557,725
Net change in unrealized gains on open futures contracts 132,612 (119,162) 147,402
Net change in unexpired options - (20,250) (87,550)
(Increase) decrease in operating assets:
Net receivable from Commodity Broker 770,158 (690,140) 1,600,748
Purchase of bonds in Guaranteed Distribution Pool - (40,748) -
Sale of bonds in Guaranteed Distribution Pool 2,327,003 646,600 2,023,048
Maturity of bonds in Guaranteed Distribution Pool 291,000 343,000 454,000
Other (527) - -
Increase (decrease) in operating liabilities:
Payable to General Partner (3,458) 5,422 (2,308)
Brokerage commissions payable (11,721) 14,987 (7,599)
Accrued management fee (9,521) 7,218 (3,075)
Other accrued expenses (10,343) 6,598 (1,245)
---------- ---------- ----------
Total adjustments 3,043,154 838,185 4,231,890
========== ========== ==========
Net cash provided by operating activities 2,965,903 1,034,780 2,932,335
========== ========== ==========
Cash flows from financing activities:
Proceeds from the sale of partnership units - 44,685 -
Redemption of partnership units (2,675,857) (737,323) (2,482,445)
Capital distribution to partners (290,046) (342,142) (449,890)
---------- ---------- ----------
Net cash used in financing activities (2,965,903) (1,034,780) (2,932,335)
---------- ---------- ----------
Net change in cash - - -
Cash, beginning of period - - -
---------- ---------- ----------
Cash, end of period $ - $ - $ -
========== ========== ==========
The accompanying notes are an integral part of these combined statements.
-5-
The Four Seasons Fund II L.P. and Affiliate
Notes to Combined Financial Statements
For the Years Ended December 31, 1996 and 1995
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. ("JRCC"), 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 ("KP&Co.") was the primary commodity broker and
selling agent for the Fund.
The accompanying notes are an integral part of these combined statements.
-13-
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, 1996,
the cost plus accrued interest totalled $4,816,886, whereas market value
totalled $4,951,658. At December 31, 1995, the cost plus accrued interest
totalled $6,999,832, whereas market value totalled $7,515,499. 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 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, 1996 and 1995.
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) 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 the
prevailing rate for 90-day U.S. Treasury bills applied to the Trading Company's
average daily cash balance. 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 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) on outstanding foreign
balances as of year-end.
The accompanying notes are an integral part of these combined statements.
-14-
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.
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.
The accompanying notes are an integral part of these combined statements.
-15-
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.
Redemption of Partnership Units - Investors may redeem part or all of their
units in the Partnership 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 23, 1996, February 16, 1995, and February 16, 1994. 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 accompanying notes are an integral part of these combined statements.
-16-
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.
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 (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 1996, 1995 or 1994.
The accompanying notes are an integral part of these combined statements.
-17-
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. At December 31, 1996 and 1995, the Trading Company
had no outstanding written options on futures contracts.
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 statements of
operations.
The accompanying notes are an integral part of these combined statements.
-18-
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, 1996 and 1995, the Trading Company held
financial instruments with the following approximate, aggregate notional values:
December 31, 1996 December 31, 1995
-------------------------- -------------------------
Long Short Long Short
------------ --------- ------------ ----------
Exchange traded futures:
Commodity $ 801,883 $ 214,372 $ 911,603 $ 468,118
Financial 18,221,957 2,519,380 14,541,923 3,232,549
Foreign currency 538,078 841,288 - 968,680
Currency forward contracts - 11,508 - -
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, 1995, matured during 1996. As of
December 31, 1996, there were 33 different contracts, with an average notional
value of $701,120, and a maximum notional value of $3,493,858 in any one
contract. There were 36 different contracts as of December 31, 1995, with an
average notional value of $558,969, and a maximum notional value of $2.1 million
in any one contract. Foreign exchange traded futures contracts consisted of
$14,883,207 long and $1,340,880 short as of December 31, 1996; and $10.1 million
long and $3.2 million short as of December 31, 1995. There was participation in
7 different major foreign currencies, with the largest concentration in French
Franc dollars denominated contracts ($3,988,348) as of December 31, 1996; and
seven different major foreign currencies, with the largest concentration in
Australian dollars denominated contracts ($2.9 million) as of December 31, 1995.
At December 31, 1996 and 1995, all of the Trading Company's financial
instruments are carried at fair value. The fair value of a futures contract,
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, 1996 and 1995,
are held with the Commodity Broker. A summary of the fair value of derivative
financial instruments at December 31, 1996 and 1995, appears below:
1996 1995
-------------------------- -----------------------------
Long Short Long Short
--------- ---------- ----------- -----------
Exchange traded futures:
Commodity $ 5,762 $ 5,370 $ 41,091 $ 8,442
Financial (2,328) 14,260 117,916 2,718
Foreign currency 5,091 12,638 - (9,265)
Currency forward contracts - (12,503) - -
The accompanying notes are an integral part of these combined statements.
-19-
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 values of futures contracts and options during
1995 were $149,176 and $(1,017), 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 statements of operations. The following summarizes the
components of the Trading Company's net trading gain, net of "round-turn"
brokerage commissions of $3,377 and $2,730, for the years ended December 31,
1996 and 1995, respectively:
1996 1995
--------- ----------
Exchange traded futures:
Commodity $(123,462) $ (52,979)
Financial 112,379 1,243,213
Foreign currency 40,433 (32,868)
Options:
Financial futures (95,829) (95,943)
Foreign currency futures - 2,307
Currency forward contracts (54,527) -
--------- ----------
Total $(121,006) $1,063,730
========= ==========
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, 1996, $250,540 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.
The accompanying notes are an integral part of these statements.
-20-
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, 1996 and 1995. Such information, which has not
been audited, is presented in thousands, except for unit and per unit data.
First Second Third Fourth
Quarter Quarter Quarter Quarter
1996 1996 1996 1996
-------- -------- ------- --------
Revenues $ (261) $ 64 $ 185 $ 240
Expenses 92 80 73 67
-------- -------- ------- --------
Income (loss) before allocation of minority interest (353) (16) 112 173
Allocation of minority interest 7 2 - (2)
-------- -------- ------- --------
Net income (loss) $ (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
======== ======== ====== ========
First Second Third Fourth
Quarter Quarter Quarter Quarter
1995 1995 1995 1995
-------- -------- ------- --------
Revenues $ 933 $ 757 $ 73 $ 512
Expenses 95 100 98 98
-------- -------- ------- --------
Income (loss) before allocation of minority interest 838 657 (25) 414
Allocation of minority interest 5 4 (2) 4
-------- -------- ------- --------
Net income (loss) $ 833 $ 653 $ (23) $ 410
======== ======== ====== ========
Net assets $ 7,821 $ 8,365 $ 8,139 $ 7,768
======== ======== ====== ========
Partnership units outstanding, end of period 8,286 8,180 7,981 7,251
======== ======== ====== ========
Net asset value per unit, end of period $ 944 $ 1,023 $ 1,020 $ 1,071
======== ======== ====== ========
The accompanying notes are an integral part of these combined statements.
-21-
Report of Independent Public Accountants
To the Partners of
The Four Seasons Fund II L.P.:
We have audited the accompanying combined statement of financial condition of
The Four Seasons Fund II L.P. (the "Partnership") and Affiliate as of December
31, 1994 and the related combined statements of operations, changes in partners'
capital and cash flows for the year ended December 31, 1994. These financial
statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The combined financial statements of the Partnership for the period
from February 16, 1993 were audited by other auditors, whose report, dated
January 28, 1994 expressed an unqualified opinion on those statements.
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 1994 financial statements present fairly, in all material
respects, the financial position of The Four Seasons Fund II L.P. and Affiliate
as of December 31, 1994 and the combined results of their operations and their
combined cash flows for the year then ended in conformity with generally
accepted accounting principles.
DELOITTE & TOUCHE LLP
March 15, 1995
The accompanying notes are an integral part of these combined statements.
-22-