ITEM 1. Business
(a) General Development of Business
The Balanced Opportunity Fund, L.P. (the "Partnership") is a limited partnership organized in July, 1989, pursuant to a Limited Partnership Agreement and under the Uniform Limited Partnership Act of the State of Illinois and funded through an offering of limited partnership units. The Partnership commenced trading on March 23, 1990. The Partnership conducts speculative trading of commodity interests.
Upon commencement of trading, approximately eighty percent of the Partnership's assets was invested in zero coupon United States Government Treasury securities ("notes") so as to yield (I) $1,000 per unit, plus (II) a five percent compound annual yield approximately six and one-half years after the commencement of trading (the "Guaranteed Yield Pool"). Persons who redeem units prior to the approximate six and one-half year period have no such assured return. The Guaranteed Yield Pool zero coupon note matured in February 1998 and in accordance with the Fund's limited partnership agreement a special redemption at the Fund's net asset value was offered to investors on February 28, 1998. A new zero coupon was purchased after the special redemption offer expired. As of June 30, 2001 and 2000, the maturity value of the notes amounted to $1,350,000 and $1,800,000 respectively. The remainders of the Partnership's assets were invested in speculative trading of commodity interests.
The Balance Opportunity Fund Limited Partnership will terminate on December 31, 2009.
Rosenthal Collins Futures Management, Inc., an Delaware corporation wholly owned by Rosenthal Collins Group L.P., is the General Partner of the Partnership. In May of 1998 Rosenthal Collins Group, an Illinois Limited Partnership, ("the broker"), was enlisted to act as the commodity clearing firm for the Partnership and it performs various administrative services for the fund. Services performed for the Partnership by the commodity broker or the General Partner under the terms of the Customer and the Limited Partnership Agreements, include the following:
1. Executes all trades on behalf of the Partnership based on instructions of the Partnership's Trading Manager.
2. Maintains the Partnership books and records, which limited partners 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 limited partner with a monthly statement describing the performance of the Partnership, which sets forth aggregate management fees, incentive fees, brokerage commissions and other expenses incurred or accrued by the Partnership during the month.
4. Forwards annual certified financial statements (including a balance sheet and a statement of income and expenses) to each limited partner.
5. Provides to each limited partner 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 responsibilities and furnishes office space, equipment and supplies as may be necessary for supervising the affairs of the Partnership.
7. Administers the redemption of Units.
Under the terms of the Customer Agreement, the Partnership pays brokerage commissions to the commodity broker of $50 per round turn per contract for futures contracts.
The Partnership pays Rosenthal Collins Group, L.P., an annual brokerage fee equal to an annual rate of four percent of the average month-end net assets as a whole, as defined, during the year.
RXR serves as the Trading Manager and is responsible for selecting all commodity transactions. RXR is not affiliated with Rosenthal Collins Futures Management or with Rosenthal Collins Group. For their services, RXR receives a consulting fee equal to an annual one percent of the month end net assets, before commissions and charges, of the Fund as a whole. The Fund pays a quarterly incentive fee based on new appreciation on Partnership assets attributable to the Trading Manager, which includes the Partnership's interest income. Such quarterly incentive fee will equal 15% of trading profits. If the fund should incur net losses subsequent to any such payment to the Trading Manager, the Trading Manager shall be entitled to retain amounts previously paid by the Fund; However, no subsequent fee will be paid until the Trading Manager's allocation of equity has experienced new appreciation.
Regulation
Under the Commodity Exchange Act, as amended (the "Act"), commodity exchanges and futures and options trading are subject to regulation by the Commodity Futures Trading Commission (the "CFTC"). The Act requires "Commodity Pool Operators," such as the General Partner and "Commodity Trading Advisors," such as the Trading Managers, to be registered and to comply with various reporting and record keeping requirements. The CFTC may suspend a Commodity Pool Operator's or Trading Advisor's registration if it 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 any Trading Manager's registration as a Commodity Trading Advisor were terminated or suspended, the General Partner and the Trading Manager, respectively, would be unable to continue to manage the business of the Partnership. Should the General Partners' registration be suspended, termination of the Partnership might result. The Act also requires the commodity Broker to be registered as a "Futures Commission Merchant."
In addition to such registration requirements, the CFTC and certain commodity exchanges have established limits on the maximum net long or net short position which any person may hold or control in particular commodities. The CFTC has adopted a rule requiring all domestic commodity exchanges to submit for approval speculative position limits for all futures contracts traded on such exchanges. Most exchanges also limit the changes in commodity futures contract prices that may occur during a single trading day.
The partnership 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 operates in one business segment, speculative trading of commodity futures and related contracts. The Partnership does not engage in sales of goods or services.
(c) Narrative Description of Business
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
The Partnership does not engage in sales of goods or services. See Paragraph 1(b) Financial information about industry segments.
PART II
Item 2.
Item 2. Properties
The Partnership does not own any properties.
Item 3.
Item 3. Legal Proceedings
The General Partner is not aware of any pending legal proceedings to which the Partnership or the General Partner is a party.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
Item 5.
Item 5. Market for Registrant's Common Equity and Related Stockholders Matters
(a) Market Information
There is no trading market for the Units, and none is likely to develop. Units are transferable only after written notice has been given to the General Partner.
Units may be redeemed upon ten days notice at their Net Asset Value (as defined in the Limited Partnership Agreement) as of the end of any calendar
quarter, less any early redemption penalty as provided in the Limited Partnership Agreement.
(b) Holders
As of June 30, 2001, there were 88 holders of the Limited Partner Units. 721 units were outstanding on this date, including 111 units of General Partnership interest.
(c) Dividends
There were no dividends or distributions made in respect of the Units and any future distributions will only be made at the discretion of the General Partner.
Item 6.
Item 6. Selected Financial Data
The following page contains a summary of selected consolidated financial data for the Partnership for the fiscal years ended June 30, 2001, 2000, 1999, 1998, and 1997.
See notes to consolidated financial statement
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation
Liquidity
Reference is made to "Item 6. Selected Financial Data" and "Item 8.
Item 8. Financial Statements and Supplementary Data
Financial statements meeting the requirements of Regulation S-X are listed on page of this report.
The supplementary financial information, specified by Item 302 of Regulation S-K, is not applicable.
Item 9.
Item 9. Disagreements on Accounting and Financial Disclosure
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant
The Partnership has no directors or executive officers. The Partnership is managed by its General Partner. The Trading Manager makes trading decisions for the Partnership. The General Partner is Rosenthal Collins Futures Management, Inc., which is owned by Rosenthal Collins Group, L.P. The address of the General Partner is 216 W. Jackson Blvd. Suite 300, Chicago, Illinois 60606.
Item 11.
Item 11. Executive Compensation
The Partnership has no directors or officers. The Fund is managed by the General Partner as described in "Item 1. Business" herein.
During the past year, RXR acted as the Partnership's sole Trading Manager, pursuant to the Management Contracts described in "Item 1. Business." For the years ended June 30, 2001 and 2000, RXR was paid $16,000 and $20,000 in consulting fees, respectively. For the years ended June 30, 2001 and 2000, Rosenthal Collins Futures Management, Inc. has been paid $35,000 and $50,000, respectively, in brokerage fees, and Rosenthal Collins Group has been paid $30,000 and $36,000, respectively, in brokerage clearing commission.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) Security Ownership of Certain Beneficial Owners
The Trading Manager, RXR, owns no units in the Partnership. On June 30, 2001, Rosenthal Collins Futures Management, Inc., the General Partner, owned 15.4% of the Fund.
(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 Manager has discretionary authority over the Partnership's commodity investments. As of June 30, 2001, the General Partner's interest in the Partnership was worth $213,000.
(c) Changes in Control
The Fund's General Partner is Rosenthal Collins Futures Management, Inc., a Delaware corporation. The General Partner was a wholly-owned subsidiary of Rosenthal Collins Group, L.P., an Illinois Limited Partnership. Rosenthal Collins Group, L.P. is a registered Futures Commission Merchant and serves as the clearing broker for The Balanced Opportunity Fund, L.P.
J. Robert Collins is a General Partner of Rosenthal Collins Group and is the President of Rosenthal Collins Futures Management, Inc., the General Partner of the Balanced Opportunity Fund, L.P.
Item 13.
Item 13. Certain Relationships and Related Transactions
Refer to Item 12, section (c)
The General Partner, Rosenthal Collins Futures Management, Inc., is a Corporation wholly owned by Rosenthal Collins Group.
All charges are described in Item 1. Business, and amounts paid are described in Item 11. Executive Compensation.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) (1) Financial Statements
See Index to Financial Statements on page.
(a) (2) Financial Statements Schedules
Schedules are omitted for the reason that they are not required or are not applicable or that equivalent information has been included in the financial statements or the notes thereto.
(a) (3) Exhibits
(3) Articles of Incorporation and By-laws
a. Limited Partnership Agreement (attached to the Prospectus as Exhibit B)
b. Subscription Requirements (attached to the Prospectus as Exhibit B)
c. Power of Attorney (attached to the Prospectus as Exhibit B)
d. Request for Redemption (attached to the Prospectus as Exhibit D)
(b) Reports on Form 8-K
INDEX OF EXHIBITS
(The following exhibits have been previously filed)
Exhibit Description Number
3.1 Limited Partnership Agreement (attached to the Prospectus as Exhibit A).
3.2 Subscription Requirements (attached to the Prospectus as Exhibit B).
3.3 Power of Attorney (attached to the Prospectus as Exhibit C).
3.4 Request for Redemption (attached to the Prospectus as Exhibit D).
10.01 Customer Agreement between Registrant and Rosenthal Collins Group
10.02 Advisory contract between Registrant and RXR
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, in the City of Chicago and State of Illinois on the ________ day of _______________, 2001.
THE BALANCED OPPORTUNITY FUND, L.P. STATE OF ILLINOIS COUNTY OF COOK By ROSENTHAL COLLINS FUTURES MANAGEMENT, INC.
SUBSCRIBED and SWORN to before me this _____ day of _________ 2001
________________________________ By J. Robert Collins President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the General
Partner of the Registrant in the capacities and on the date indicated.
By ROSENTHAL COLLINS FUTURES MANAGEMENT, INC. STATE OF ILLINOIS General Partner of the Registrant COUNTY OF COOK
SUBSCRIBED and SWORN to before me this ____ day of ___________2001
______________________________ By J. Robert Collins President
(the above signatories being the principal executive officer of Rosenthal Collins Futures Management, Inc.)
The Balanced Opportunity Fund, L.P. (An Illinois Limited Partnership)
Pages
Independent Auditor's Report
Financial Statements: Consolidated statements of financial condition, June 30, 2001 and 2000
Consolidated statements of operations for the years ended June 30, 2001, 2000, and 1999
Consolidated statements of changes in partners' capital for the years ended June 30, 2001, 2000, and 1999
Notes to financial statements /F-10
Schedules are omitted because they are inapplicable or equivalent information has been included elsewhere herein.
INDEPENDENT AUDITOR'S REPORT
To the Partners of The Balanced Opportunity Fund Limited Partnership Chicago, Illinois
We have audited the accompanying consolidated statements of financial condition of The Balanced Opportunity Fund Limited Partnership as of June 30, 2001 and 2000, and the related consolidated statements of operations and changes in partners' capital for each of the three years in the period ended June 30, 2001. These consolidated financial statements are the responsibility of the Partnership's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audits 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Balanced Opportunity Fund Limited Partnership as of June 30, 2001 and 2000, and the results of their operations and changes in partners' capital for each of the three years in the period ended June 30, 2001, in conformity with accounting principles generally accepted in the United States of America.
/s/ McGladrey & Pullen, LLP
Chicago, Illinois July 25, 2001
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THE BALANCED OPPORTUNITY FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION June 30, 2001 and 2000
ASSETS 2001 2000 ------------------------ Equity in commodity futures trading accounts: Cash $ 151,000 $ 264,000 Net unrealized gain on open contracts - 30,000 ------------------------ Total equity in commodity futures trading accounts 151,000 294,000
Guaranteed yield pool - at market 1,271,000 1,576,000
Other receivables 1,000 1,000 ------------------------ $ 1,423,000 $ 1,871,000 ======================== LIABILITIES AND PARTNERS' CAPITAL
Liabilities Accrued administrative expenses $ 18,000 $ 21,000 Accrued brokerage commissions and fees 3,000 5,000 Accrued management fees 1,000 1,000 Net unrealized loss on open contracts 12,000 - Redemptions payable 4,000 71,000 ------------------------ Total liabilities 38,000 98,000 ------------------------ Partners' Capital Limited partners (units outstanding: 2001 - 610; 2000 - 823) 1,172,000 1,562,000 General partner (units outstanding: 2001 and 2000 - 111) 213,000 211,000 ------------------------ 1,385,000 1,773,000 ------------------------ $ 1,423,000 $ 1,871,000 ========================
The accompanying notes are an integral part of these consolidated financial statements. F - 3
THE BALANCED OPPORTUNITY FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended June 30, 2001, 2000 and 1999
2001 2000 1999 ---------- ---------- ---------- Income: Trading gain (loss): Realized $ 101,000 $(60,000) $ 118,000 Changes in unrealized (41,000) 21,000 8,000 Foreign currency gain (loss) (5,000) (3,000) 1,000 ---------- ---------- ---------- Gain (loss) from trading 55,000 (42,000) 127,000 ---------- ---------- ---------- Guaranteed yield pool: Interest income 89,000 34,000 73,000 Unrealized market value gain (loss) 19,000 59,000 (3,000) Realized gain 5,000 11,000 54,000 ---------- ---------- ---------- Guaranteed yield pool revenue 113,000 104,000 124,000 ---------- ---------- ---------- Interest income 10,000 17,000 23,000 ---------- ---------- ---------- Total income 178,000 79,000 274,000 ---------- ---------- ---------- Expenses: Brokerage commissions and fees 65,000 86,000 115,000 Consulting fees 16,000 20,000 28,000 Administrative expenses 72,000 61,000 78,000 ---------- ---------- ---------- 153,000 167,000 221,000 ---------- ---------- ---------- Net income (loss) $ 25,000 $(88,000) $ 53,000 ========== ========== ========== Net income (loss) allocated to: Limited Partners $ 23,000 $(79,000) $ 49,000 ========== ========== ========== General Partner $ 2,000 $ (9,000) $ 4,000 ========== ========== ========== Net income (loss) per Limited Partner unit outstanding throughout each period $ 23 $ (96) $ 28 ========== ========== ========== Net income (loss) per General Partner unit outstanding throughout each period $ 20 $ (81) $ 35 ========== ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
F - 4
THE BALANCED OPPORTUNITY FUND LIMITED PARTNERSHIP
CONSOLIDATED STATEMENTS OF CHANGES IN PARTNERS' CAPITAL Years Ended June 30, 2001, 2000 and 1999
Total Number of Limited General Units Partners Partner Total ---------- ---------- ---------- ----------
Balance, June 30, 1998 1,433 $2,578,000 $ 216,000 $2,794,000
Redemption of units of Limited Partnership interest (290) (585,000) - (585,000) Net income - 49,000 4,000 53,000 ---------- ---------- ---------- ---------- Balance, June 30, 1999 1,143 2,042,000 220,000 2,262,000
Redemption of units of Limited Partnership interest (209) (401,000) - (401,000) Net (loss) - (79,000) (9,000) (88,000) ---------- ---------- ---------- ---------- Balance, June 30, 2000 934 1,562,000 211,000 1,773,000
Redemption of units of Limited Partnership interest (213) (413,000) - (413,000) Net income - 23,000 2,000 25,000 ---------- ---------- ---------- ----------
Balance, June 30, 2001 721 $1,172,000 $ 213,000 $1,385,000 ========== ========== ========== ========== June 30, 2001 2000 ---------- ---------- Net asset value per unit, Limited Partner $1,920.84 $1,897.93 ========== ========== Net asset value per unit, General Partner $1,921.11 $1,900.90 ========== ========== The accompanying notes are an integral part of these consolidated financial statements.
F - 5
THE BALANCED OPPORTUNITY FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
Note 1. Organization of the Partnership and Significant Accounting Policies
General Description of the Partnership: The Balanced Opportunity Fund, Limited Partnership (The Fund or the Partnership) was organized under the Illinois Revised Uniform Limited Partnership Act in July 1989 to engage in the speculative trading of commodity futures, forward contracts, and other commodity interests. It is subject to the regulations of the Commodity Futures Trading Commission (CFTC), an agency of the U.S. Government that regulates most aspects of the commodity futures industry, the rules of the National Futures Association (NFA), an industry self-regulatory organization, and the requirements of commodity exchanges where the Partnership executes transactions. Additionally, the Partnership is subject to the requirements of futures commission merchants (FCMs) through which the Partnership trades.
50,000 units of Limited Partnership interest were available during the initial offering period. The Partnership is closed and not presently selling additional units.
The General Partner and each Limited Partner share in the profits and losses of the partnership in proportion to their respective interest in the partnership. A Limited Partner's loss is limited to the amount of his or her investment.
Approximately 80 percent of the Fund's assets at the commencement of trading was invested in zero coupon United States Government Treasury Securities (Stripped Notes) so as to yield (i) $1,000 per unit, plus (ii) a five percent compound annual yield approximately six and one-half years after the commencement of trading (the Guaranteed Yield Pool). Due to the interest rate sensitivity of the market value of the Stripped Notes, persons who redeem prior to the dissolution date have no such assured return. The Guaranteed Yield Pool note matured in February 1997 and in accordance with the Fund's limited partnership agreement, a special redemption at the Fund's net asset market value was offered to investors on February 28, 1997. A new Stripped Note was purchased after the special redemption offer expired. As of June 30, 2001 and 2000, the maturity value of the Stripped Notes amounted to $1,350,000 and $1,800,000, respectively. The Stripped Note held as of June 30, 2001, had a maturity date of November 15, 2002. The remainder of the Fund's assets were invested in the Trading Company in which the Fund is the sole limited partner and possessor of substantially all the beneficial interest.
F - 6
Note 1. Organization of the Partnership and Significant Accounting Policies (continued)
The two-tier structure of the Fund and the Trading Company insulates the Guaranteed Yield Pool against any liability for losses which might be incurred by the Trading Company. Consequently, the Fund controls all of the substantive activities of the Trading Company and, as such, has consolidated its results for financial reporting purposes.
The Fund has elected not to provide statements of cash flows as permitted by Statement of Financial Accounting Standards No. 102, Statements of Cash Flows - Exemption of Certain Enterprises and Classification of Cash Flows from Certain Securities Acquired for Resale.
Significant accounting policies are as follows:
Principles of consolidation: All material intercompany accounts and transactions are eliminated in consolidation. The consolidated financial statements include the Trading Company and the Guaranteed Yield Pool (collectively, the Fund or the Partnership).
Accounting estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Revenue recognition: Futures contracts are recorded on trade date and gains or losses are realized when contracts are liquidated. Unrealized gains or losses on open contracts (the difference between contract purchase price and market price) at the date of the statement of financial condition are included in equity in commodity trading accounts. Any change in net unrealized gain or loss from the preceding period is reported in the statement of operations. Market value of futures contracts is based upon exchange settlement prices.
Foreign exchange gains and losses: The Partnership trades in foreign denominated contracts. Realized foreign currency gains result from closed foreign currency contracts and other foreign currency denominated contracts. The Partnership does not separately report the effect of changes in foreign currency rates from changes in other market prices on open contracts. Such changes are included in net unrealized trading profit.
Transaction fees and costs: Transaction fees and costs are accrued at approximately $50 per contract on a round-turn basis adjusted to equal 4 percent of the average annual net assets of the Partnership. Also, the Partnership incurs ongoing legal, accounting, and administrative costs.
F - 7
Note 1. Organization of Partnership and Significant Accounting Policies (continued)
Income taxes: No provision for federal income taxes has been made in these financial statements as each partner is individually responsible for reporting income or loss based on their respective share of the Partnership's income and expenses as reported for income tax purposes. The Partnership is required to pay an Illinois replacement tax of 1.5% of net income related to those limited partners who are not otherwise subject to the tax.
Dissolution of Partnership: The Partnership will terminate on December 31, 2009.
Right of setoff of certain amounts: Pursuant to the Trading Company's agreement with its FCM, all balances placed on deposit with such broker, whether used for trading purposes or not, are available to be used for margin purposes on any exchange and for any contract in which the Trading Company trades. The Trading Company has similar agreements with a financial institution for its over-the-counter contracts. As a result, the consolidated financial statements only present the net asset or liability relating to such trading activities.
Note 2. General Partner
The Fund's General Partner is Rosenthal Collins Futures Management, Inc., a Delaware corporation. The General Partner is a wholly owned subsidiary of Rosenthal Collins Group, L.P., an Illinois Limited Partnership. Rosenthal Collins Group, L.P. is a registered Futures Commission Merchant and serves as the clearing broker for The Balanced Opportunity Fund, L.P. The General Partner conducts and manages the business of the Partnership and was required by the Limited Partnership Agreement to make an initial investment in the Partnership equal to the lesser of $100,000 or 3% of the total contributions to the Partnership, but in no event less than 1% of such contributions.
Note 3. Related Party Transactions
The Partnership pays Rosenthal Collins Group, L.P. 0.333 of 1% (a 4% annual rate) of the Partnership's month-end assets for brokerage and other services. Furthermore, the Partnership pays all "give-up" fees, as defined. For the years ended June 30, 2001, 2000 and 1999, brokerage commission expenses totaled $65,000, $86,000 and $115,000, respectively. As of June 30, 2001 and 2000, brokerage commissions payable to the General Partner were $3,000 and $5,000, respectively. See also Note 4 for transactions with the trading manager.
F _ 8
Note 4. Trading Manager
RXR serves as the trading manager for the assets of the Trading Company. Compensation to RXR for their services is as follows:
Consulting fee: The Trading Company pays a consulting fee at a one percent annual rate based upon the average month-end net assets of the Partnership before reduction for any brokerage commissions or other charges as of such month-end. Management fee expense was $16,000, $20,000 and $28,000 for the years ended June 30, 2001, 2000 and 1999, respectively. As of June 30, 2001 and 2000, accrued management fees were $1,000 for each year.
Incentive fee: The Trading Company pays an incentive fee to RXR equal to 15 percent of any new trading profit (which includes interest income) achieved by the Trading Company in each calendar quarter. Such incentive fee is accrued in each month in which "New Appreciation" occurs. In those months in which New Appreciation is negative, previous accruals, if any, during the incentive period will be reduced. In those instances in which a limited partner redeems an investment, the incentive fee is to be paid to RXR through the calendar year quarter. No incentive fees have been paid during the three years ended June 30, 2001, 2000 and 1999.
Note 5. Distributions and Redemptions
A Limited Partner may request and receive redemption of units owned as of any calendar quarter-end upon ten days' written notice to the General Partner.
The General Partner does not presently intend to make regular distributions of either profits or capital to Limited Partners, although it may, if doing so, not reduce the Partnership's asset base to a level which would impair the Partnership's objective. In the event that the Partnership recognizes substantial profits, the General Partner may reconsider, but there can be no assurance whatsoever that any distributions will be made. Accordingly, the Limited Partners may incur current income tax liabilities in excess of any distributions received by them from the Partnership.
Note 6. Deposits With Brokers
The Partnership deposits cash and U.S. Government securities with FCMs subject to CFTC regulations and various exchange and broker requirements. Margin requirements are satisfied by the deposit of cash and securities with such FCMs. The Partnership earns interest income on its cash deposited with the FCMs.
F _ 9
Note 7. Trading Activities and Related Risks
The Partnership engages in the speculative trading of U.S. and foreign futures contracts, options on U.S. and foreign futures contracts, and forward contracts (collectively, derivatives). Trading gains (losses) from derivatives for the years ended June 30, 2001, 2000 and 1999, are reflected in the statements of operations. Such trading results reflect the net gain (loss) arising from the Partnership's speculative trading of futures contracts, options on futures contracts, and forward contracts. These derivatives include both financial and nonfinancial contracts held as part of a diversified trading strategy. The Partnership is exposed to both market risk, the risk arising from changes in the market value of the contracts; and credit risk, the risk of failure by another party to perform according to the terms of a contract.
The purchase and sale of futures and options on futures contracts requires margin deposits with FCMs. Additional deposits may be necessary for any loss on contract value. The Commodity Exchange Act (CEAct) requires an FCM to segregate all customer transactions and assets from the FCM's proprietary activities. A customer's cash and other property (for example, U.S. Treasury bills) deposited with an FCM are considered commingled with all other customer funds subject to the FCM's segregation requirements. In the event of an FCM's insolvency, recovery may be limited to a pro rata share of segregated funds available. It is possible that the recovered amount could be less than the total of cash and other property deposited.
Note 7. Trading Activities and Related Risks (continued)
For derivatives, risks arise from changes in the market value of the contracts. Theoretically, the Partnership is exposed to a market risk equal to the value of futures and forward contracts purchased and unlimited liability on such contracts sold short. As both a buyer and seller of options, the Partnership pays or receives a premium at the outset and then bears the risk of unfavorable changes in the price of the contract underlying the option. Written options expose the Partnership to potentially unlimited liability; for purchased options the risk of loss is limited to the premiums paid.
The General Partner has established procedures to actively monitor and minimize market and credit risks. The Limited Partners bear the risk of loss only to the extent of the market value of their respective investments and, in certain specific circumstances, distributions and redemptions received.
Note 8. Fair Value of Financial Instruments
The Partnership believes that the carrying value of its financial instruments is a reasonable estimate of fair value. Equity in commodity futures trading accounts and the United States Treasury securities are recorded at market using market quotations from the Partnership's FCM. The fair value of all other financial instruments reflected in the statement of financial condition (primarily receivable from commodity broker and accrued expenses) approximate the recorded value due to their short-term nature. The General Partner reviews the trading advisor's market activity on a daily basis and is appraised of general futures market activity on an ongoing basis. F - 10