The Four Seasons Fund II L.P.
and Affiliate
Combined financial statements and schedules
As of December 31, 2001 and 2000
Together with auditors' report
The Four Seasons Fund II L.P. and Affiliate
Oath
As of December 31, 2001 and 2000
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
The Four Seasons Fund II L.P. and Affiliate
Table of contents
Combined statements of financial condition
As of December 31, 2001 and 2000....................................1
Combined condensed schedule of investments
As of December 31, 2001.............................................2
As of December 31, 2000.............................................3
Combined statements of operations
For the years ended December 31, 2001, 2000, and 1999...............4
Combined statements of changes in partners' capital
For the years ended December 31, 2001, 2000, and 1999...............5
Combined statements of cash flows
For the years ended December 31, 2001, 2000, and 1999...............6
Notes to combined financial statements
December 31, 2001 and 2000..........................................7
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, 2001 and 2000, including the combined condensed schedules of
investments as of December 31, 2001 and 2000, and the related combined
statements of operations, changes in partners' capital and cash flows for each
of the three years in the period ended December 31, 2001. 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 audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the 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, 2001 and 2000, and the combined results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2001, in conformity with accounting principles generally
accepted in the United States.
Richmond, Virginia
February 1, 2002
The Four Seasons Fund II L.P. and Affiliate
Combined statements of financial condition
As of December 31, 2001 and 2000
2001 2000
----------- -----------
Assets
Investments (Note 2):
U.S. Treasury Securities, at cost plus accrued interest $ 1,512,065 $ 1,473,620
Open futures contracts, at fair value 20,577 75,767
Open forward contracts, at fair value 813 (646)
Open options contracts, at fair value -- 11,800
----------- -----------
Total investments 1,533,455 1,560,541
----------- -----------
Receivable for cash retained 255,047 237,079
Accrued interest receivable 193 932
----------- -----------
255,240 238,011
----------- -----------
Cash and cash equivalents -- 18,013
----------- -----------
Other 355 1,120
----------- -----------
Total assets $ 1,789,050 $ 1,817,685
=========== ===========
Liabilities and partners' capital
Liabilities:
Brokerage commissions payable $ 21,683 $ 29,036
Other accrued expenses 15,803 13,728
Payable to General Partner 6,447 9,826
Management fee payable 5,793 2,884
----------- -----------
49,726 55,474
Minority interest in Trading Company (Note 2) 3,591 4,566
----------- -----------
Total liabilities 53,317 60,040
----------- -----------
Partners' capital:
General Partner (units outstanding - 22.717 at
December 31, 2001 and 2000) 26,631 26,967
Limited partners (units outstanding - 1,457.909 at
December 31, 2001 and 2000) 1,709,102 1,730,678
----------- -----------
Total partners' capital 1,735,733 1,757,645
----------- -----------
Total liabilities and partners' capital $ 1,789,050 $ 1,817,685
=========== ===========
Partnership units outstanding 1,480.626 1,480.626
=========== ===========
Net asset value per unit $ 1,172.30 $ 1,187.10
=========== ===========
The accompanying notes are an integral part of these combined statements.
1
The Four Seasons Fund II L.P. and Affiliate
Combined condensed schedule of investments
As of December 31, 2001
Face value ($)/
contracts Security description Carrying value
- ------------- -------------------------------------------------- --------------
U.S. Treasury Securities (87.1%)
$ 1,540,000 U.S. Treasury Securities stripped, due 11/15/02 $ 1,452,566
$ 60,000 U.S. Treasury Securities stripped, due 02/15/02 59,499
-----------
Total U.S. Treasury Securities, at cost plus
accrued interest (fair value $1,575,863) 1,512,065
-----------
Open futures contracts (1.2%)
Long positions-
1 Mar 02 FINEX Euro/Japanese Yen Cross Rate 4,669
2 Mar 02 IMM S&P 500 3,150
2 Mar 02 CBOT 5-Year T-Note 1,305
2 Mar 02 IMM Euro Dollar 1,075
1 Mar 02 CBOT 2-Year T-Note 1,063
1 Mar 02 FINEX Swiss Franc/Japanese Yen Cross Rate 957
1 Mar 02 CBOT U.S. Treasury Bonds (836)
3 Mar 02 LIFE 3-Month Euro Swiss Interest Rate (829)
1 Mar 02 IMM Mexican Peso 813
1 Mar 02 SMX LT Bond (570)
1 Mar 02 CSCE Sugar No. 11 (291)
1 20 Feb 02 LME Copper US (206)
1 Mar 02 SYD 90-Day Bank Bills (99)
Short positions-
1 Mar 02 IMM Japanese Yen 5,375
2 Mar 02 Eurex Euro-Bund 2,846
2 Mar 02 Eurex Euro-Bobl 1,740
1 Mar 02 FINEX Euro/British Pound Cross Rate (874)
1 Mar 02 IMM Swiss Franc (738)
1 Mar 02 SFE 10-Year Treasury Bond 570
3 Mar 02 CBOT Corn 475
1 Mar 02 CBOT Municipal Bond Index 344
2 Mar 02 SFE 3-Year Treasury Bond 312
3 Mar 02 CBOT Soybean Oil 210
3 Mar 02 TIFFE EuroYen 85
1 20 Feb 02 LME Copper US 31
-----------
Total open futures contracts, at fair value 20,577
-----------
Open forward contracts (.1%)
1 20 Mar 02 Singapore Dollar, at fair value
(notional amount - $170,000) 813
-----------
Total investments $ 1,533,455
===========
Note: Percentages in parentheses represent a percent of total net asset value.
The accompanying notes are an integral part of this combined condensed schedule.
2
The Four Seasons Fund II L.P. and Affiliate
Combined condensed schedule of investments
As of December 31, 2000
Face value ($)/
contracts Security description Carrying value
- ------------- -------------------------------------------------- --------------
U.S. Treasury Securities (83.8%)
$ 1,540,000 U.S. Treasury Securities stripped, due 11/15/02 $ 1,358,419
$ 60,000 U.S. Treasury Securities stripped, due 2/15/01 59,513
$ 60,000 U.S. Treasury Securities stripped, due 2/15/02 55,688
-----------
Total U.S. Treasury Securities, at cost plus accrued
interest (fair value - $1,523,168) 1,473,620
-----------
Open futures contracts (4.3%)
Long positions-
4 MAR 01 CBOT Corn 1,275
3 MAR 01 CBOT U.S. Treasury Bonds 8,563
5 MAR 01 CBOT 10-Year U.S. T-Notes 13,922
4 MAR 01 CBOT 5-Year U.S. T-Notes 9,281
2 FEB 01 CME Cattle 1,520
5 MAR 01 LIF 3-Month Euro Swiss Interest Rate 1,678
5 MAR 01 LIF 3-Month Euribor 4,076
1 17 JAN 01 LME Copper US (675)
1 MAR 01 FINEX Euro/British Pound Cross Rate 2,269
1 MAR 01 FINEX New Zealand $/US$ 2,840
5 MAR 01 IMM Euro Dollar 5,625
1 MAR 01 IMM Swiss Franc 3,513
1 MAR 01 IMM Mexican Peso (963)
2 MAR 01 IMM S&P 500 (4,525)
2 MAR 01 SMX LT Bond 262
5 JUN 01 SYD 90-Day Bank Bills 1,810
1 MAR 01 SYD 10-Year Treasury Bonds 775
5 MAR 01 SYD 3-Year Treasury Bonds 1,533
2 MAR 01 MTF 10Y EuroBD 1,376
3 MAR 01 EURX Euro-Bobl 4,213
2 MAR 01 EURX Euro-Bund 1,923
Short positions-
1 MAR 01 CBOT Soybean Oil 294
1 FEB 01 NY LT Crude 2,450
1 17 JAN 01 LME Copper US 1,375
1 MAR 01 NYCE Cotton 1,535
1 MAR 01 IMM Japanese Yen 4,713
2 MAR 01 SMX EuroYen (66)
1 FEB 01 IPE Brent Crude Oil 3,900
1 JAN 01 IPE Gas Oil 1,275
-----------
Total open futures contracts, at fair value 75,767
-----------
Open forward contracts (0%)
1 21 Mar 01 Singapore Dollar (notional amount -$170,000) (120)
1 21 Mar 01 Singapore Dollar (notional amount -$340,000) (228)
1 21 Mar 01 Singapore Dollar (notional amount -$170,000) (298)
-----------
Total open forward contracts, at fair value (646)
-----------
Open option contracts (.7%)
2 JAN 01 IMM S&P 500, at fair value 11,800
-----------
Total investments $ 1,560,541
===========
Note: Percentages in parentheses represent a percent of total net asset value.
The accompanying notes are an integral part of this combined condensed schedule.
3
The Four Seasons Fund II L.P. and Affiliate
Combined statements of operations
For the years ended December 31, 2001, 2000, and 1999
2001 2000 1999
--------- --------- ---------
Investment income:
Gain on sale of securities in
Guaranteed Distribution Pool $ -- $ 6,847 $ 5,757
Interest income (Note 2) 103,630 114,351 127,103
--------- --------- ---------
Total income 103,630 121,198 132,860
--------- --------- ---------
Expenses:
Brokerage commissions (Note 4) 43,676 46,644 53,748
Management fee (Note 5) 17,155 18,205 21,013
General Partner fee (Note 3) 12,859 13,674 15,784
Other 24,348 18,328 23,582
--------- --------- ---------
Total expenses 98,038 96,851 114,127
--------- --------- ---------
Net investment income 5,592 24,347 18,733
--------- --------- ---------
Net realized and unrealized gain
(loss) on investments (Note 2):
Net realized trading gain 77,692 48,098 36,305
Net change in unrealized trading
gain (53,731) 56,840 (29,887)
Net option premiums 18,585 (41,818) (18,185)
Net change in unexpired options (11,800) 11,800 --
--------- --------- ---------
Net trading gain (loss) on
investments 30,746 74,920 (11,767)
--------- --------- ---------
Income before allocation of
minority interest 36,338 99,267 6,966
Allocation of minority interest
(Note 2) 975 537 2,201
--------- --------- ---------
Net income $ 37,313 $ 99,804 $ 9,167
========= ========= =========
Allocation of net income:
Limited partners $ 36,740 $ 98,322 $ 9,054
General Partner 573 1,482 113
Net income per unit 25.20 65.23 4.95
The accompanying notes are an integral part of these combined statements.
4
The Four Seasons Fund II L.P. and Affiliate
Combined statements of changes in partners' capital
For the years ended December 31, 2001, 2000, and 1999
Limited General
Units partners Partner Total
--------- ------------ --------- ------------
Balance, December 31, 1998 1,849.783 $ 2,186,847 $ 27,190 $ 2,214,037
Capital withdrawals (79.157) (91,979) -- (91,979)
Capital distribution to
partners (Note 3) -- (73,082) (909) (73,991)
Net income -- 9,054 113 9,167
--------- ------------ --------- ------------
Balance, December 31, 1999 1,770.626 2,030,840 26,394 2,057,234
Capital withdrawals (290.000) (328,568) -- (328,568)
Capital distribution to
partners (Note 3) -- (69,916) (909) (70,825)
Net income -- 98,322 1,482 99,804
--------- ------------ --------- ------------
Balance, December 31, 2000 1,480.626 1,730,678 26,967 1,757,645
Capital distribution to
partners (Note 3) -- (58,316) (909) (59,225)
Net income -- 36,740 573 37,313
--------- ------------ --------- ------------
Balance, December 31, 2001 1,480.626 $ 1,709,102 $ 26,631 $ 1,735,733
========= ============ ========= ============
Net asset value per unit:
December 31, 1999-
Amount $ 1,161.87
============
Units outstanding 1,770.626
============
December 31, 2000-
Amount $ 1,187.10
============
Units outstanding 1,480.626
============
December 31, 2001-
Amount $ 1,172.30
============
Units outstanding 1,480.626
============
The accompanying notes are an integral part of these combined statements.
5
The Four Seasons Fund II L.P. and Affiliate
Combined statements of cash flows
For the years ended December 31, 2001, 2000, and 1999
2001 2000 1999
--------- --------- ---------
Cash flows from operating activities:
Net income $ 37,313 $ 99,804 $ 9,167
Adjustments to reconcile net income to net
cash provided by operating activities-
Allocation of loss to minority interest (975) (537) (2,201)
Accretion of discount on Guaranteed
Distribution Pool (98,446) (106,259) (117,945)
Gain on sale of securities in Guaranteed
Distribution Pool -- (6,847) (5,757)
Net change in unrealized gain on open
futures contracts and forwards 53,731 (56,840) 29,887
Net change in unexpired options 11,800 (11,800) --
(Increase) decrease in operating assets:
Receivable for cash retained (17,229) 47,486 91,300
Sale of bonds in Guaranteed Distribution
Pool -- 362,743 109,250
Maturity of bonds in Guaranteed
Distribution Pool 60,000 71,000 75,000
Other 765 (693) (332)
Increase (decrease) in operating
liabilities:
Management fee payable 2,909 (546) (2,136)
Other accrued expenses 2,076 (2,200) 4,311
Payable to General Partner (3,379) 5,965 2,448
Brokerage commissions payable (7,353) 16,130 8,182
--------- --------- ---------
Total adjustments 3,899 317,602 192,007
--------- --------- ---------
Net cash provided by operating activities 41,212 417,406 201,174
--------- --------- ---------
Cash flows from financing activities:
Redemption of partnership units -- (328,568) (127,183)
Capital distribution to partners (59,225) (70,825) (73,991)
--------- --------- ---------
Net cash used in financing activities (59,225) (399,393) (201,174)
--------- --------- ---------
Net change in cash (18,013) 18,013 --
Cash, beginning of period 18,013 -- --
--------- --------- ---------
Cash, end of period $ -- $ 18,013 $ --
========== ========= =========
The accompanying notes are an integral part of these combined statements.
6
The Four Seasons Fund II L.P. and Affiliate
Notes to combined financial statements
December 31, 2001 and 2000
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), scheduled to end November,
2002. At the discretion of the General Partner, and with the concurrence of the
limited partners, the Partnership may continue to operate beyond the Time
Horizon utilizing its current trading strategy. 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. Effective December 3, 2001,
the assets of the Trading Advisor were acquired by SSARIS Advisors, LLC
(SSARIS). SSARIS was recently formed as a new investment advisory firm by State
Street Global Alliance, LLC (State Street) and the Dutch pension fund, ABP.
State Street has taken a majority ownership stake in SSARIS and the former
management team of the Trading Advisor owns the remaining interest and will
manage the day-to-day business and operations of SSARIS. The Trading Advisor's
trading program will continue to be employed and no change of strategy or
charges are contemplated. This change should not affect the trading or cost
structure of the Fund.
James River Management Corp., a Delaware corporation, is the general partner
(the General Partner) of the Partnership and the Trading Company and is a
registered commodity pool operator. E.D.& F. Man International Inc. is the
commodity broker (the Commodity Broker) for the Partnership.
7
2. Summary of significant accounting policies:
Cash and cash equivalents
The Partnership considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents. As of December 31, 2001
and 2000, a portion of assets that are temporarily not invested in a futures
account or in the Guaranteed Distribution Pool are maintained at SunTrust Bank
(SunTrust).
Guaranteed distribution pool
Due to restrictions on the securities included in the 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, 2001, the cost
plus accrued interest was $1,512,065, whereas market value was $1,575,863. At
December 31, 2000, the cost plus accrued interest was $1,473,620 whereas market
value was $1,523,168. This investment is restricted in its 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 approximate 2 percent interest in the Trading
Company. The Partnership is the sole limited partner of the Trading Company.
Receivable for cash retained
In addition to cash held at SunTrust, the remaining assets that are temporarily
not invested in the Guaranteed Distribution Pool are maintained in the Trading
Company's account with 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, 2001 and 2000.
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 and SunTrust. The Commodity Broker
credits the Trading Company monthly for interest earned, based on
8
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.
Reclassifications
Certain prior year balances have been reclassified to conform to current year
presentation.
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States 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
9
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 at least 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 26, 2001, February 16, 2000, and February 18, 1999. The distribution
equaled 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.
10
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 the 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:
. December 31, 2021;
. 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;
. 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
. 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 12.9 percent as of December 31, 2001.
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
11
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 fees 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 fees, General Partner fees 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 2001, 2000 or 1999.
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
12
options are executed. The Trading Company has not taken or made physical
delivery on futures contracts.
Forward contracts are negotiated contractual commitments to purchase or sell a
specified amount of financial instruments, currencies or commodities at a future
date at a predetermined price.
An option on a futures contract gives the purchaser of the option the right to
take a position at a specified price in the underlying futures contract. Options
have limited life spans, usually tied to the settlement date of the underlying
futures contract. As a writer of options, the Trading Company receives a premium
in exchange for bearing the risk of unfavorable changes in the market value of
the underlying instrument.
The Trading Company records all contractual commitments involving future
settlement at market 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 combined statements of
operations.
Credit risk and concentration of credit risk
Exchange traded futures and option contracts possess low credit risk since all
transactions are guaranteed by the 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, 2001, approximately $69,100 was held in margin at the Commodity
Broker for the benefit of the Trading Company.
There exists a risk of 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.
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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, 2001 and 2000. 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
2001 2001 2001 2001
------- ------- ------- -------
Revenues $ 12 $ 14 $ 51 $ 58
Expenses 26 27 23 23
------- ------- ------- -------
(Loss) income before allocation of
minority interest (14) (13) 28 35
Allocation of minority interest 1 1 -- (1)
------- ------- ------- -------
Net (loss) income $ (13) $ (12) $ 28 $ 34
======= ======= ======= =======
Net assets $ 1,685 $ 1,673 $ 1,701 $ 1,736
======= ======= ======= =======
Partnership units outstanding, end
of period 1,481 1,481 1,481 1,481
======= ======= ======= =======
Net asset value per unit, end of
period $ 1,138 $ 1,130 $ 1,149 $ 1,172
======= ======= ======= =======
Net (loss) income per unit $ (8.94) $ (8.33) $ 18.98 $ 23.49
======= ======= ======= =======
First Second Third Fourth
quarter quarter quarter quarter
2000 2000 2000 2000
------- ------- ------- -------
Revenues $ 69 $ (22) $ 29 $ 120
Expenses 27 24 23 23
------- ------- ------- -------
Income (loss) before allocation of
minority interest 42 (46) 6 97
Allocation of minority interest -- 1 -- --
------- ------- ------- -------
Net income (loss) $ 42 $ (45) $ 6 $ 97
======= ======= ======= =======
Net assets $ 1,851 $ 1,694 $ 1,661 $ 1,758
======= ======= ======= =======
Partnership units outstanding, end
of period 1,616 1,516 1,481 1,481
======= ======= ======= =======
Net asset value per unit, end of
period $ 1,145 $ 1,118 $ 1,122 $ 1,187
======= ======= ======= =======
Net income (loss) per unit $ 23.57 $(27.74) $ 3.90 $ 65.50
======= ======= ======= =======
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9. Financial highlights:
2001 2000 1999 1998 1997
-------------- -------------- -------------- -------------- --------------
Per unit operating performance
(For a unit outstanding
throughout the year):
Net asset value, beginning of year $ 1,187.10 $ 1,161.87 $ 1,196.92 $ 1,115.89 $ 1,031.21
-------------- -------------- -------------- -------------- --------------
Income from investment
operations-
Net investment income 4.08 15.43 10.44 24.86 16.32
Net realized and unrealized
gain (loss) on investments 21.12 49.80 (5.49) 96.17 108.36
-------------- -------------- -------------- -------------- --------------
Total from investment operations 25.20 65.23 4.95 121.03 124.68
-------------- -------------- -------------- -------------- --------------
Distributions (40.00) (40.00) (40.00) (40.00) (40.00)
-------------- -------------- -------------- -------------- --------------
Net asset value, end of year $ 1,172.30 $ 1,187.10 $ 1,161.87 $ 1,196.92 $ 1,115.89
============== ============== ============== ============== ==============
Total return 2.12% 5.61% 0.41% 10.85% 12.09%
Supplemental data:
Net assets, end of year $ 1,735,733 $ 1,757,645 $ 2,057,234 $ 2,214,037 $ 2,665,601
Ratio to average net assets:
Expenses 5.74% 5.34% 5.45% 5.48% 5.04%
Net investment income 0.33% 1.34% 0.89% 1.99% 1.62%
Returns and ratios for individual investors may differ from these
returns and ratios based on the timing of capital transactions.
15