ITEM 1.
(A) BUSINESS
Ceres Fund, L.P. (the "Partnership") is a limited partnership organized on September 19, 1990, pursuant to a Limited Partnership Agreement (the "Limited Partnership Agreement") under the Uniform Limited Partnership Act of the State of Tennessee and funded through an offering of limited partnership units (the "Units"). The Partnership engages in speculative trading of commodity futures contracts, forward contracts, commodity options and other interests in commodities including, without limitation futures contracts and options on financial instruments, physical commodities and stock indices on organized exchanges in the U.S. and abroad.
The initial offering to the public of 100,000 Units was closed on November 29, 1991, and trading began December 1, 1991. Following the commencement of trading, the Partnership continued the offering of Units, issuing Units and fractions thereof at the Average Net Asset Value as of the last business day of the month during which the purchaser's subscription was received. As of the close of the initial offering on November 29, 1991, 13,471.6805 Units had been sold. As of December 31, 1993, a total of 38,234.7916 Units had been sold of which a total of 24,122.7011 were outstanding. As of December 31, 1994, a total of 40,552.2246 Units had been sold of which a total of 22,679.4144 were outstanding. As of December 31, 1995, a total of 43,256.2273 Units had been sold of which a total of 20,341.7718 were outstanding. As of December 31, 1996, a total of 43,650.9560 had been sold of which a total of 17,938.6369 were outstanding. As of December 31, 1997, a total of 57,203.0471 units had been sold of which a total of 31,797.3173 were outstanding. As of December 31, 1998, a total of 61,556.1411 units had been sold of which a total of 34,206.8517 were outstanding. The Prospectus is regularly updated and Units continue to be offered to the public.
The offering was registered under the Securities Act of 1933, as amended, and members of the National Association of Securities Dealers, Inc. act as selling agents on a best efforts basis. The selling agents received a commission of 5% of the issue price of each Unit sold during the initial offering period with 1% being paid to the General Partner. Effective July 1, 1995, and continuing during the continuous offering period, the selling commission was reduced to 4%, all of which is retained by the selling agent.
Randell Commodity Corporation, a Tennessee corporation, is the Managing General Partner of the Partnership (the "Managing General Partner") and RanDelta Capital Partners, L.P. is the Financial General Partner of the Partnership. Pursuant to a Customer Agreement (the "Customer Agreement"), Refco, Inc. ("Refco") acts as the commodity broker for the Partnership and performs various administrative services for it. Services performed for the Partnership by Refco or the Managing General Partner under the terms of the Customer and the Limited Partnership Agreements, include the following:
(1) Executing all trades on behalf of the Partnership in conjunction with the Partnership's Advisor.
(2) Maintaining 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 Managing General Partner.
(3) Furnishing 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) Forwarding annual certified financial statements (including a balance sheet and statement of income) to each limited partner.
(5) Providing each limited partner with 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) Performing secretarial and other clerical responsibilities and furnishing office space and equipment as may be necessary for supervising the affairs of the Partnership.
(7) Administering the purchase, redemption and transfer of Units and distribution of profits, if any.
The Customer Agreement under which Refco, Inc. acts as the futures broker for the Partnership may be terminated by the Partnership or Refco upon 5 days' notice.
During 1993, and through June 1994, under the terms of the Customer Agreement, the Partnership paid commodity brokerage commissions to Refco on a round-turn basis in an amount equal to the lesser of 80% of Refco's published rates for non-member speculative accounts or $45.50. This commission rate was renegotiated by the General Partner and effective July 1, 1994, commissions payable to Refco were reduced to $32.50 per round-turn. The Partnership's current rate is $32.50. A round-turn is the opening and closing of a commodity futures position consisting of one contract. Effective June 1, 1997, 1/2 of the round-turn commission is charged on the opening of a position and 1/2 is charged on the close. The Partnership assets earn interest from Refco on 100% of the average daily equity maintained in cash in the Partnership's trading account at a rate equal to 80% of the average yield on thirteen week U.S. Treasury Bills issued during each month.
(B) REGULATION
Under the Commodity Exchange Act, as amended (the "Act"), commodity exchanges and commodity futures trading are subject to regulation by the Commodity Futures Trading Commission (the "CFTC"). The Act requires "commodity pool operators," and "commodity trading advisors," to be registered and to comply with various reporting and record keeping requirements. The CFTC may suspend a commodity pool operator's or 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 Managing General Partner as a commodity pool operator or as a commodity trading advisor is terminated or suspended, the Managing General Partner would be unable to continue to manage the business of the Partnership. Should the Managing General Partner's registration be suspended, termination of the Partnership might result. The act also requires Refco 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 will not trade on any commodity exchanges which are not subject to regulation by any United States government agency.
(C) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
The Partnership's business constitutes only one segment, speculative trading of commodity futures contracts, for financial reporting purposes. The Partnership does not engage in sales of goods or services. The Partnership began trading activities December 1, 1991, at which time Partnership capital was $1,392,168.
(D) NARRATIVE DESCRIPTION OF BUSINESS
(1) See Items 1(a), (b) and (c) above.
(i) through (xii) - Not applicable.
(xiii) - the Partnership has no employees.
(E) FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES
Not applicable because the Partnership does not engage in sales of goods or services.
ITEM 2.
ITEM 2. PROPERTIES
The Partnership does not own or lease any properties. The Managing General Partner operates out of facilities provided by its parent, Randell Corporation.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Managing General Partner is not aware of any pending legal proceedings to which the Partnership is a party or to which any of its assets are subject.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
N/A - No security holders.
PART II
ITEM 5.
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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 Managing General Partner. Units may be redeemed as of the last day of any calendar quarter upon 10 days written notice to the Managing General Partner at the Redemption Net Asset Value (as defined in the Limited Partnership Agreement).
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
The following is a summary of the total assets of the Partnership as of December 31, 1998, 1997, 1996, 1995, and 1994, and the results of operations for each of the years in the five-year period ended December 31, 1998.
Net increase (decrease) in components of Partnership capital from operations are as follows:
* Calculated as net earnings (loss) allocated to limited partners divided by average units outstanding during the year.
7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
(A) RESULTS OF OPERATIONS
Trading results were unprofitable for the fiscal year ended December 31, 1998. Trading during the fiscal year resulted in a decrease in net asset value per Unit from $192.66 to $146.24 a decrease of 24.09% attributable primarily to losses in grains.
Trading results were unprofitable for the fiscal year ended December 31, 1997. Trading during the fiscal year resulted in a decrease in net asset value per Unit from $245.41 to $192.66 a decrease of 21.49% attributable primarily to losses in grains and livestock.
Trading results were profitable for the fiscal year ended December 31, 1996. Trading during the fiscal year resulted in an increase in net asset value per Unit from $125 (after payment of distributions of $288,507) to $245.41 an increase of 96.3% attributable primarily to gains in grain contracts.
(B) LIQUIDITY.
The Partnership does not engage in sales of goods or services. Its only assets are its capital in its commodity futures trading account, consisting of cash and net unrealized appreciation on open futures contracts, and interest receivable. Because of the low margin deposits normally required in commodity futures trading, relatively small price movements may result in substantial losses to the Partnership. Such substantial losses could lead to a material decrease in liquidity. To minimize this risk the Partnership follows certain policies including:
(1) Partnership funds will be invested only in futures contracts which are traded in sufficient volume to permit, in the opinion of the Advisor, ease of taking and liquidating positions.
(2) The Partnership will diversify its positions among various commodities. The Partnership will not initiate additional positions in a single commodity if such additional positions would result in a net single long or short position in such commodity requiring as margin more than 15% of the net assets of the Partnership.
(3) The Partnership will not establish commodity positions if such positions would result in required margins in excess of 80% of its net asset value for all commodities combined.
(4) The Partnership may occasionally accept delivery of a commodity. Unless such delivery is disposed of promptly by retendering the warehouse receipt representing the delivery to the appropriate clearing house, the Partnership's position in the physical commodity will be fully hedged.
(5) The Partnership will not employ the trading technique commonly known as "pyramiding", in which the speculator uses unrealized profits on existing positions as margin for the purchase or sale of additional positions in the same or related commodities.
(6) The Partnership may from time to time employ trading strategies such as spreads or straddles on behalf of the Partnership. The term "spread" describes a commodity futures trading strategy involving the simultaneous buying and selling of futures contracts on the same commodity but involving different delivery dates or markets and in which the trader expects to earn a profit from a widening or narrowing of the difference between the prices of the two contracts.
Other than the risks inherent in commodity futures trading, the Partnership knows of no trends, demands, commitments, events or uncertainties which will result in or which are reasonably likely to result in the Partnership's liquidity increasing or decreasing in any material way. The Limited Partnership Agreement requires dissolution of the Partnership under certain circumstances as defined in the Limited Partnership Agreement including a decrease in the net asset value of a Unit at the close of business on any business day to less than 50% of the highest average net asset value at which Units have been sold.
In order to limit credit risks, the Partnership does not enter into counterparty transactions such as currency or other swaps and it limits its trading activities to futures and options traded on U.S. commodity exchanges.
(C) CAPITAL RESOURCES
The Partnership does not intend to raise any additional capital through borrowing. Due to the nature of the Partnership's business, it will make no significant capital expenditures, and substantially all its assets are and will be represented by cash, United States Treasury securities and commodity futures investments.
The Partnership's capital consists of the capital contributions of the partners as increased or decreased by gains or losses on commodity futures trading and by expenses, interest income, redemptions of Units and distributions of profits, if any. Gains or losses on commodity futures trading cannot be predicted. Market moves in commodities are dependent upon fundamental and technical factors which the Partnership may or may not be able to identify. Partnership expenses consist of, among other things, commissions, management fees and incentive fees. The level of these expenses is dependent upon the level of trading and the ability of the Advisors to identify and take advantage of price movements in the commodity markets, in addition to the level of net assets maintained. Furthermore, interest income is dependent upon interest rates over which the Partnership has no control. A forecast cannot be made as to the level of redemptions in any given period.
(D) INFLATION
Inflation does have an effect on commodity prices and the volatility of commodity markets; however, continued inflation is not expected to have a material adverse effect on the Partnership's operations or assets. Because the Partnership conducts business as a Partnership, and, as such does not pay federal income taxes, neither the Taxpayer Relief Act of 1997 nor the Tax Reform Act of 1986 had no effect on its operations or on its tax liability. However, some expenses may be limited as to deductibility by individual partners.
(E) YEAR 2000 ISSUE
The Partnership relies on the General Partners to provide the Partnership with certain calculations and reports, so if the Year 2000 Issue is material to the General Partners, then it may impact the Partnership. However, the Year 2000 issue is not material for the General Partners since the administration software is generally "off-the-shelf and the vendors have advised the General Partners that the software is Year 2000 compliant. In addition, the Partnership utilizes computer systems and applications maintained by its commodity broker for trading activities and recordkeeping. The General Partners have been advised by the operators of these systems that conversion and implementation activities for mission critical systems are in process of being implemented and tested and are expected to be in compliance by the middle of 1999. Neither the software replacement nor the compliance review is expected to be material or to yield noncompliance issues that are material.
ITEM 7(A). QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial statements meeting the requirements of Regulation S-X are indexed and included beginning on page of this report.
The supplementary financial information specified by Item 302 of Regulation S-K is not applicable.
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS 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 Managing General Partner. Trading decisions for the Partnership are made by the Managing General Partner.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors or officers. The Managing General Partner and Refco perform the services described in "Item 1. Business" herein.
For the fiscal year ended December 31, 1998, incentive fees expensed totaled $14,116. Management fees expensed totaled $259,437. A total of $737,296 in brokerage commissions were paid to Refco.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(A) SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
None.
(B) SECURITY OWNERSHIP OF MANAGEMENT
Under the terms of the Limited Partnership Agreement, the Partnership's affairs are managed by the Managing General Partner and it has discretionary authority over the Partnership's investments. As of December 31, 1998, the General Partners' investment in the Partnership was $283,263.
(C) CHANGES IN CONTROL
None.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(A) ACCOUNTS OF AFFILIATES OF THE COMMODITY BROKER
The officers, directors and employees and associated persons of Refco trade in commodity futures contracts for their own accounts. In addition, Refco is a registered futures commission merchant and executes transactions in commodity futures contracts for its customers. Thus, it is possible that Refco could execute transactions for the Partnership in which the other parties to the transactions are its officers, directors, employees or customers. Such persons might also compete with the Partnership in making purchases or sales of contracts without knowing that the Partnership is also bidding on such contracts.
(B) OTHER ACTIVITIES AND ACCOUNTS OF THE GENERAL PARTNER
The Managing General Partner trades in commodity futures contracts for its own accounts and for the accounts of other customers. It is possible that the Managing General Partner may engage in transactions on its own behalf or on behalf of others having an effect on transactions involving the Partnership.
(C) OTHER RELATIONSHIPS
The sole shareholder of the parent of the Managing General Partner is a partner in the law firm which is counsel to the Partnership, the Managing General Partner and the Memphis branch of Refco.
PART IV
ITEM 14.
ITEM 14. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES AND REPORTS
(A)(1) FINANCIAL STATEMENTS
See Index to Financial Statements; infra.
(A)(2) FINANCIAL STATEMENT 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*
i) Limited Partnership Agreement dated as of September 19, 1990.*
ii) Certificate of Limited Partnership of the Partnership as filed with the Shelby County Recorder of Deeds on September 19, 1990.*
(a)(3)(2) Material Contracts
i) Form of Selling Agreement among the Partnership and National Association of Securities Dealers, Inc. member.*
ii) Form of Customer Agreement between the Partnership and Refco, Inc.*
iii) Form of Subscription Agreement to be executed by each purchaser of Units.*
iv) Form of Escrow of Funds Agreement among the Partnership and National Bank of Commerce.*
(27) Financial Data Schedule (For SEC use only).
- --------------------
*Incorporated herein by reference to the Partnership's Registration Statement on Form S-1, Commission File No. 33-37802.
CERES FUND, L.P.
----------------------
INDEPENDENT AUDITORS' REPORT
The Partners Ceres Fund, L.P.:
We have audited the accompanying statements of financial condition of Ceres Fund, L.P. (a Tennessee Limited Partnership) as of December 31, 1998 and 1997 and summary of net asset values as of December 31, 1998, 1997 and 1996, and the related statements of operations, changes in partners' capital and cash flows for each of the years in the three-year period ended December 31, 1998. 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 generally accepted auditing standards. 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 financial position of Ceres Fund, L.P. (a Tennessee Limited Partnership) as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998, in conformity with generally accepted accounting principles.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The supplementary information included in Schedule 1 is presented for purposes of additional analysis and is not a required part of the basic financial statements. Such information has been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, is fairly stated in all material respects in relation to the basic financial statements taken as a whole.
KPMG LLP
Memphis, Tennessee February 12, 1999
CERES FUND, L.P. (A Tennessee Limited Partnership)
Statements of Financial Condition
December 31, 1998 and 1997
See accompanying notes to financial statements.
CERES FUND, L.P. (A Tennessee Limited Partnership)
Statements of Operations
Years ended December 31, 1998, 1997 and 1996
See accompanying notes to financial statements.
CERES FUND, L.P. (A Tennessee Limited Partnership)
Statements of Changes in Partners' Capital
Years ended December 31, 1998, 1997 and 1996
See accompanying notes to financial statements.
CERES FUND, L.P. (A Tennessee Limited Partnership)
Statements of Cash Flows
Years ended December 31, 1998, 1997 and 1996
See accompanying notes to financial statements.
CERES FUND, L.P. (A Tennessee Limited Partnership)
Summary of Net Asset Values
December 31, 1998
See accompanying notes to financial statements.
CERES FUND, L.P. (A Tennessee Limited Partnership)
Summary of Net Asset Values
December 31, 1997
See accompanying notes to financial statements.
CERES FUND, L.P. (A Tennessee Limited Partnership)
Summary of Net Asset Values
December 31, 1996
See accompanying notes to financial statements.
CERES FUND, L.P. (A Tennessee Limited Partnership)
Notes to Financial Statements
December 31, 1998 and 1997
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) ORGANIZATION
Ceres Fund, L.P. (the Partnership) is a Tennessee limited partnership organized on September 19, 1990 to engage in the speculative trading of commodities futures contracts and other commodity interests. Randell Commodity Corporation (Randell) and RanDelta Capital Partners, L.P. (RanDelta) are the general partners. Randell serves as the managing general partner and RanDelta serves as the financial general partner. Randell acts as commodity trading advisor with respect to the Partnership.
The Partnership solicited subscriptions for a maximum of 100,000 units of limited partnership interest at $105 per unit ($100 net of commission). During the initial offering period 13,471.6805 units were sold and the Partnership commenced trading commodity futures contracts on December 1, 1991. The Partnership continues to sell units as of the end of each month at the then average net asset value per unit plus a selling commission of 4% in accordance with the terms of the Limited Partnership Agreement, and can continue selling units until the maximum number of units offered have been sold.
Income and expenses of the Partnership (excluding the Management Allocation and Incentive Allocation) are allocated pro rata among the partners based on their respective capital accounts as of the beginning of the month in which the items of income and expense accrue, except that limited partners have no liability for partnership obligations in excess of his or her capital account, including earnings. The Management Allocation and Incentive Allocation are allocated to the Limited Partners only in accordance with the terms of the Limited Partnership Agreement.
Units may not be redeemed during the first six months after they are purchased. Thereafter, limited partners may redeem their units at the redemption net asset value per unit as of the end of any calendar quarter upon ten days written notice to the managing general partner. The redemption charge will be based on the redemption net asset value on all units redeemed as more fully described in the offering prospectus.
Under the terms of the partnership agreement, the Partnership will terminate on the earlier of December 31, 2020, or the occurrence of certain events as more fully described in the Limited Partnership Agreement.
(B) EQUITY IN COMMODITY FUTURES TRADING ACCOUNT
U.S. government obligations represent investments in U.S. Treasury Bills with a maturity of 90 days or less and are carried at fair value and any unrealized gains and losses are reflected in income. Cash represents deposits at brokers and funds temporarily held in interest bearing accounts.
(Continued) CERES FUND, L.P. (A Tennessee Limited Partnership)
Notes to Financial Statements
December 31, 1998 and 1997
(C) FUTURES CONTRACTS AND OPTIONS CONTRACTS
Futures contracts are required to be made on a commodity exchange and call for the future delivery of various agricultural and nonagricultural commodities, currencies or financial instruments at a specified time and place. These contractual obligations, depending on whether one is a buyer or a seller, may be satisfied either by taking or making physical delivery of an approved grade of the particular commodity (or, in the case of some contracts, by cash settlement) or by making an offsetting sale or purchase of an equivalent commodity futures contract on the same (or a linked) exchange prior to the designated date of delivery. In market terminology, a trader who purchases a futures contract is "long" in the futures market, and a trader who sells a futures contract is "short" in the futures market. Outstanding futures contracts (those that have not been closed out by an offsetting purchase or sale or by delivery) are known as "open trades" or "open positions."
Among the agricultural commodities for which there are futures contracts are corn, oats, wheat, soybeans, soybean oil, soybean meal, live cattle, live hogs, pork bellies, coffee, sugar, cocoa and cotton. Nonagricultural commodities for which there are futures contracts include copper, silver, gold, platinum, lumber, currency, Treasury bonds and bills, mortgage-backed securities, Eurodollar deposits, certain petroleum products and stock, inflation and interest rate related indices.
An option on a futures contract gives the purchaser of the option the right (but not the obligation) to take a position at a specified price (the "striking", "strike" or "exercise" price) in the underlying futures contract. Options have limited life spans, usually tied to the delivery or settlement date of the underlying futures contract. Some options, however, expire significantly in advance of such date. The value of an option at any given point in time is a function of market volatility and the price level of the underlying futures contract.
Open futures contracts are valued at the settlement price on the date of valuation as determined by the exchange on which the contract was traded. Changes in the market value of open futures contracts, entered into for speculative investing, are recorded as unrealized gains or losses in the accompanying statement of operations. Realized gains and losses (excluding commissions and other exchange related fees) are recognized when such contracts are closed.
(D) INCOME TAXES
No provision for income taxes has been made in the accompanying financial statements since, as a partnership, income and losses for tax purposes are allocated to the partners for inclusion in their respective tax returns.
(Continued)
CERES FUND, L.P. (A Tennessee Limited Partnership)
Notes to Financial Statements
December 31, 1998 and 1997
(E) MANAGEMENT ESTIMATES
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 disclosure 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.
(F) RECLASSIFICATIONS
Certain 1997 and 1996 amounts have been reclassified to conform to their 1998 presentation.
(G) AVERAGE NET (LOSS) EARNINGS PER UNIT
The average net (loss) earnings per unit as reported on the statement of operations was calculated as (loss) earnings allocated to the limited partners divided by average outstanding units during the year.
(G) RECENT ACCOUNTING PRONOUNCEMENT
In June 1998, SFAS No. 133, " Accounting for Derivative Instruments and Hedging Activity," was issued. This statement establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. This statement is effective for fiscal years, and quarters of fiscal years beginning after June 15, 1999. The Partnership intends to comply with this statement in 2000.
(H) YEAR 2000
The Partnership is addressing the issues associated with the programming code in existing computer systems as the millennium (year 2000) approaches. The year 2000 problem is pervasive and complex as virtually every computer operation will be affected in some way by the rollover of the two digit year value to 00. The issue is whether computer systems will properly recognize date sensitive information when the year changes to 2000. Systems that do not properly recognize such information could generate erroneous data or cause a system to fail.
The Partnership utilizes computer systems and applications maintained by Refco, Inc. ("Refco"), its commodity broker, for trading activities and recordkeeping. Management has assessed the impact of Year 2000 issues on the computer systems and applications, on which the Partnership relies. The operators of the systems have developed a remediation plan. Conversion and implementation activities for mission critical systems are in process and management expects
(Continued)
CERES FUND, L.P. (A Tennessee Limited Partnership)
Notes to Financial Statements
December 31, 1998 and 1997
implementation and testing, by the operators, to be completed by the middle of 1999. The Partnership's costs associated with these systems changes will not be material, because of its relationship with Refco. Estimates of the completion date for implementation and testing of mission critical systems are based on assumptions which management and the operators believe are reasonable and appropriate.
(2) MANAGEMENT AGREEMENT
The Partnership has entered into a Management Agreement in consideration of and as compensation for the services to be rendered by the General Partners and trading advisors. The Partnership pays a monthly Management Allocation equal to 1/3 of 1% (4% per annum) of the Adjusted Net Asset Value of units at month end, plus a quarterly Incentive Allocation of 15% of any net new appreciation in the adjusted net asset value of units for the quarter. Such fees were as follows:
(3) CUSTOMER AGREEMENT WITH REFCO, INC.
The Partnership entered into a customer agreement with Refco, pursuant to which the Partnership deposits its assets in a commodity trading account with Refco who executes trades on behalf of the Partnership. The Partnership agrees to pay such brokerage and commission charges and fees as Refco may establish and charge from time to time. Refco charges the Partnership commissions on commodity trades at the rate of $32.50 per round-turn. Total commissions charged to the Partnership by Refco in 1998, 1997 and 1996 were $737,296, $797,000 and $541,907, respectively. The Partnership earns interest on Treasury Bills held in its account, on interest-bearing accounts and on 80% of the average daily equity maintained as cash in the Partnership's trading account at a rate that approximated the average yield on 13-week United States Treasury Bills. Total interest earned by the Partnership in 1998, 1997 and 1996 was $332,240, $294,507 and $187,206, respectively.
(4) RELATED PARTIES
The sole shareholder of the parent of the managing General Partner is an active partner in the law firm which is the counsel to the Partnership, the General Partners and the Memphis branch of Refco, the Partnership's commodity broker.
(Continued)
CERES FUND, L.P. (A Tennessee Limited Partnership)
Notes to Financial Statements
December 31, 1998 and 1997
(5) DISTRIBUTION TO LIMITED PARTNERS
On January 16, 1997, the General Partner declared a distribution to the limited partners equal to the difference between the December 31, 1996 net asset value per unit and $210 per unit. This distribution, totaling $244,228 in cash (approximately $13.61 per unit) and 1,861.94 in units, resulted in each unit holder having a net asset value of $210 per unit on January 1, 1997. No distributions were declared in 1998.
(6) OFF-BALANCE-SHEET RISK
In the normal course of business, the Partnership enters into transactions in financial instruments with off-balance-sheet risk. These financial instruments include financial futures contracts and option contracts. Futures contracts provide for the delayed delivery of commodities, which the seller agrees to make delivery at a specified future date, at a specified price. Futures contracts and options on such contracts are held for trading and arbitrage purposes. The notional value of these contracts reflect the extent of involvement the Partnership has in particular types of contracts. Risk arises from movements in commodities' values. At December 31, 1998, the underlying notional value of open contract commitments were long $(18,214,281) and short $(13,052,700).
The Partnership trades in a variety of futures and options financial instruments, and all open positions are reported at fair value. Trading loss, including realized and unrealized gains and losses, from financial futures contracts and options transactions for the year ended December 31, 1998 was $(941,528). The average fair value of open commodity financial instruments, and the year-end market value of open commodities are as follows:
MARKET RISK
Derivative instruments involve varying degrees of off-balance sheet market risks, and changes in the level or volatility of interest rates, foreign currency exchange rates or market values of the underlying financial instruments or commodities underlying such derivative instruments frequently result in changes in the Partnership's unrealized profit (loss) on such derivative instruments as reflected in the Statements of Financial Condition. The Partnership's exposure to market risk is influenced by a number of factors, including the relationships among the derivative instruments held by the Partnership as well as the volatility and liquidity in the markets in which the financial instruments are traded.
(Continued)
CERES FUND, L.P. (A Tennessee Limited Partnership)
Notes to Financial Statements
December 31, 1998 and 1997
CREDIT RISK
The risks associated with exchange-traded contracts are typically perceived to be less than those associated with over-the-counter transactions (non-exchange-traded), because exchanges typically (but not universally) provide clearinghouse arrangements in which the collective credit (in some cases limited in amount, in some cases not) of the members of the exchange is pledged to support the financial integrity of the exchange.
The fair value amounts in the above tables represent the extent of the Partnership's market exposure in the particular class of derivative instrument listed, but not the credit risk associated with counterparty nonperformance. The credit risk associated with these instruments from counterparty nonperformance is the net unrealized gain, if any, included on the Statement of Financial Condition.
(7) FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosure About Fair Value of Financial Instruments, extends existing fair value disclosure practices for some instruments by requiring all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized in the statement of financial condition, for which it is practicable to estimate fair value. If estimating fair value is not practicable, this Statement requires disclosures of descriptive information pertinent to estimating the value of a financial instrument. At December 31, 1998, substantially all of the Partnership's financial instruments, as defined in the Statement, are carried at fair value.
(Continued) CERES FUND, L.P. (A Tennessee Limited Partnership)
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(8) SEGMENT INFORMATION
The Fund's principal activity is speculative trading of agricultural commodities futures contracts and other commodity interests. The Fund has five reportable segments: soybean, cattle, grain spread, corn and cotton. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. All other includes commodities interests traded in coffee, Deutsche Marks, S&P Petroleum, S&P Futures and Wheat.
The results of operations and selected financial information by commodity trading segment for the three years ended December 31, 1998, 1997 and 1996 are presented below:
(Continued)
CERES FUND, L.P. (A Tennessee Limited Partnership)
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(Continued)
CERES FUND, L.P. (A Tennessee Limited Partnership)
Notes to Financial Statements
December 31, 1998, 1997 and 1996
(Continued)
SCHEDULE 1
CERES FUND, L.P. (A Tennessee Limited Partnership)
Schedule of Investments
December 31, 1998
See accompanying independent accountant's report.
AFFIRMATION
STATE OF TENNESSEE ) ) CITY OF MEMPHIS )
I, FRANK L. WATSON, JR. being duly sworn, deposes and says:
1. I am President of Randell Commodity Corporation, the commodity pool operator and the managing general partner of Ceres Fund, L.P., as named in the attached Annual Report and am duly authorized to execute this Affirmation.
2. To the best of my knowledge and belief, the information contained in the attached Annual Report is accurate and complete.
/s/ Frank L. Watson, Jr. - ------------------------------------ Frank L. Watson, Jr., Chairman Randell Commodity Corporation
SWORN TO AND SUBSCRIBED before me this 26 day of March 1999.
/s/ Marty Morgan - ---------------------------------------------- Marty Morgan NOTARY PUBLIC
My Commission Expires: January 31, 2001
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 Memphis, and State of Tennessee on the 26 day of March 1999.
CERES FUND, L.P.
By: RANDELL COMMODITY CORPORATION Managing General Partner
/s/ Frank L. Watson, Jr. ---------------------------------------- By: Frank L. Watson, Jr. Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following person on behalf of the Managing General Partner of the Registrant in the capacities and on the date indicated.
RANDELL COMMODITY CORPORATION Managing General Partner of the Registrant
/s/ Frank L. Watson, Jr. - ----------------------------------------------- By: Frank L. Watson, Jr., Principal Executive Officer & Sole Director
March 26, 1999