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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 or 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended Commission File No. 0-16515
December 31, 1998
IDS MANAGED FUTURES, L.P.
(Exact name of registrant as specified in its charter)
Delaware 06-1189438
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification #)
233 South Wacker Drive, Suite 2300, Chicago, IL 60606
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (312) 460-4000
Securities registered pursuant to Section 12 (b) of the Act: None
Securities registered pursuant to Section 12 (g) of the Act:
Units of Limited Partnership Interest
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to
such filing requirements for the past 90 days:
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K: [X]
The aggregate market value of the voting and non-voting common equity held
by non-affiliates of the Registrant as of February 28, 1999: $ 54,644,917
Index to exhibits on page 29
Documents Incorporated by Reference
Incorporated by Reference in Part IV, Item 14 is Post-Effective Amendment
No. 1 to Registration Statement No. 33-86894 of the Partnership on Form S-1
under the Securities Act of 1933, filed on June 7, 1996.
Incorporated by Reference in Part IV, Item 14 is Post-Effective Amendment
No. 3 to Registration Statement No. 33-86894 of the Partnership on Form S-1
under the Securities Act of 1933, filed on July 31, 1997.
Incorporated by Reference in Part IV, Item 14 is Post-Effective Amendment
No. 4 to Registration Statement No. 33-86894 of the Partnership on Form S-1
under the Securities Act of 1933, filed on April 21, 1998.
Incorporated by Reference in Part IV, Item 14 is Post-Effective Amendment
No. 5 to Registration Statement No. 33-86894 of the Partnership on Form S-1
under the Securities Act of 1933, filed on March 24, 1999.
Part I
Item 1. Business
IDS Managed Futures, L.P. (the "Partnership") is a limited partnership
organized on December 16, 1986 under the Delaware Revised Uniform Limited
Partnership Act. The Partnership was formed to speculatively trade commodity
interests, including futures contracts, forward contracts, physical
commodities, and related options thereon pursuant to the trading instructions
of independent trading advisors. The General Partners of the Partnership are
CIS Investments, Inc. ("CISI") and IDS Futures Corporation ("IDS Futures")
(collectively, the "General Partners"). The General Partners are registered
commodity pool operators under the Commodity Exchange Act, as amended (the
"CE Act") and are responsible for administering the business and affairs of
the Partnership exclusive of trading decisions. CISI is an affiliate of
Cargill Investor Services, Inc. ("CIS" or the "Clearing Broker"), the clearing
broker for the Partnership. IDS Futures is an affiliate of American Express
Financial Advisors Inc. ("AXP Advisors"), formerly IDS Financial Services
Inc., which acts as the Partnership's introducing broker and selling agent.
Trading decisions for the Partnership for the fiscal year ended December 31,
1998 were made by two independentcommodity trading advisors, John W. Henry &
Company, Inc. and Welton Investment Corporation.
CIS is a "Futures Commission Merchant", the General Partners are "Commodity
Pool Operators", AXP Advisors is an "Introducing Broker" and the trading
advisors to the Partnership are "Commodity Trading Advisors" as those terms
are used in the CE Act. As such, they are registered with and subject to
regulation by the Commodity Futures Trading Commission ("CFTC") and the
National Futures Association ("NFA"). AXP Advisors and CIS are also
registered as broker-dealers with the National Association of Securities
Dealers, Inc. ("NASD") and the Securities and Exchange Commission (the "SEC").
Units of limited partnership interest ("Units") were offered initially by AXP
Advisors commencing March 27, 1987 and concluding June 16, 1987. Subsequent
offerings commenced March 29, 1993, January 31, 1994, June 26, 1995 and August
26, 1997. Units are currently offered pursuant to a Prospectus dated May 1,
1998 and a Supplement to the Prospectus dated February 1, 1999. The total
amount of the initial offering was $7,500,000 and the total amount of the
combined reopenings was $80,000,000. After the initial purchase price of $250
per Unit, investors purchase Units at the then current net asset value per
Unit on the last business day of the month; investors affiliated with the
selling agent of the Partnership are not required to pay selling commissions,
and the current offering has varied selling commission rates depending on the
total dollar amount of the investment. Therefore, the total number of Units
authorized for the Partnership is not determinable and therefore is not
disclosed in the financial statements.
At the close of business on February 28, 1995 each Unit was divided into three
Units (a "3 for 1 split"), each of which has a Net Asset Value per Unit equal
to the previous Net Asset Value per Unit divided by three. Accordingly, the
total number of Units outstanding tripled as of that date.
Should the Partnership engage in forward transactions in foreign currencies,
CIS Financial Services, Inc. ("CISFS") will act as the Partnership's forward
contract broker and in that capacity will arrange for the Partnership to
contract directly for forward transactions in foreign currencies. CISFS is a
direct participant in the interbank market for foreign currencies. The
Partnership will act as a principal in each transaction entered into with a
bank, and CISFS will act only as the Partnership's agent in brokering these
transactions.
Under the terms of the Limited Partnership Agreement, the General Partners
may not select Partnership transactions involving the purchase or sale of any
commodity interests, but must select one or more advisors to direct the
Partnership's trading with respect thereto. Initially, the General Partners
chose and caused the Partnership to enter into Advisory Contracts with each
of John W. Henry and Company, Inc. ("JWH") and Sabre Fund Management Limited
("Sabre"). Commencing on June 16, 1987, after the conclusion of the offering
period with respect to the Partnership's Limited Partnership Units, the
Advisors began to provide commodity trading instructions to CIS on behalf of
the Partnership. The General Partners felt it appropriate to make a change
in trading advisor systems; 70 percent of the assets formerly managed by JWH
pursuant to its Original Investment Program were allocated to another program
operated by JWH, the Financial and Metals Portfolio, as of February 28, 1989.
The remaining assets in the JWH Original Investment Program were closed due to
disappointing performance as of October 13, 1989. This money was reallocated
to Sabre in early 1990. In February 1991, the General Partners felt it
prudent to realign the assets of the Partnership so that JWH and Sabre were
each allocated 50% of the trading assets. On July 2, 1997 the General
Partners entered into an agreement to add Welton Investment Corporation
("Welton") as an additional independent commodity trading advisor for the
Partnership and effective July 8, 1997 the assets of the Partnership were
re-allocated among the three independent commodity trading advisors. In
accordance with the terms of the Advisory Contract between the Partnership
and Sabre, the General Partners elected not to renew the Advisory Contract for
Sabre and it expired on December 31, 1997. Effective January 1,1998, all of
the assets of the Partnership are managed by JWH and Welton. Collectively,
JWH and Welton are herein referred to as the "Advisors".
The General Partners are responsible for the preparation of monthly and
annual reports to the Limited Partners; filing reports required by the CFTC,
the NFA, the SEC and any other Federal or State agencies having jurisdiction
over the Partnership's operations; calculation of the Net Asset Value
(meaning the total assets less total liabilities of the Partnership) and
directing payment of the management and incentive fees payable to the
Advisors under the Advisory Contracts.
The General Partners provide suitable facilities and procedures for handling
redemptions, transfers, distributions of profits (if any) and orderly
liquidation of the Partnership. Although CIS, an affiliate of CISI (one of
the General Partners) acts as the Partnership's clearing broker, the General
Partners are responsible for selecting another clearing broker in the event
CIS is unable or unwilling to continue in that capacity. The General Partners
are further authorized, on behalf of the Partnership (i) to enter into a
brokerage clearing agreement and related customer agreements with their
affiliates, CIS and AXP Advisors, pursuant to which those firms render
clearing and introducing brokerage services to the Partnership; (ii) to cause
the Partnership to pay brokerage commissions at the rates provided for in the
brokerage agreement (until August 31, 1995 this rate was $50 per round turn
trade to CIS which in turn reallocated $30 per round turn trade to AXP
Advisors; effective September 1, 1995, which was the first business day of
themonth following the initial closing of the new offering, the round turn
brokerage commission rate was decreased from $50 to $35 per round turn trade
to CIS which in turn reallocates $20 per round turn trade to AXP Advisors)
and NFA, exchange, clearing, delivery, insurance, storage, service and other
fees and charges including surcharges on foreign exchanges with higher
incremental costs incidental to the Partnership's trading; and (iii) to
receive an annual administrative fee equal, in the case of IDS Futures, to
1.45% of the Partnership's Net Asset Value ("NAV") on the first business day
of each fiscal year and, in the case of CISI, to 0.3% of the Partnership's
NAV on the first business day of each fiscal year until December 31, 1992.
Commencing January 1, 1993, the annual administrative fee payable to IDS
Futures was reduced to 1.125% and the annual administrative fee payable to
CISI was reduced to 0.25%. Although no increase to brokerage commissions or
administrative fees is anticipated, such fees as allowed in the Prospectus may
be increased at rates equivalent to increases in the Consumer Price Index or
other comparable measure of inflation.
The Advisory Contracts between the Partnership and the Advisors provide that
the Advisors shall each have sole discretion in and responsibility for the
selection of the Partnership's commodity transactions with respect to that
portion of the Partnership's assets allocated to it. The Advisory Contract
with JWH was amended on April 30, 1996 (but made effective back to the date
of January 31, 1996) to extend the term of the Advisory Contract through
December 31, 1996 with the automatic renewal for three additional twelve-month
terms (beginning January 1 and ending December 31 of each year) through
December 1999, unless earlier terminated in accordance with the termination
provisions contained therein. The Advisory Contract with Welton commenced
on July 2, 1997 and continued until December 31, 1998, with automatic renewal
for three additional twelve-month terms (beginning January 1 and ending
December 31 of each year) through December 2001, unless earlier terminated in
accordance with the termination provisions contained therein. The renewal
right is applicable irrespective of any change in trading advisors of the
Partnership or any reallocation of Partnership assets among the trading
advisors or to other trading advisors.
The Advisory Contracts shall terminate automatically in the event that the
Partnership is terminated in accordance with the Restated and Amended Limited
Partnership Agreement. The Advisory Contracts may be terminated by the
Partnership with respect to any Advisor individually upon written notice to
the Advisor in the event that (i) the Partnership assets allocated to the
Advisor has trading losses in excess of 30% of the assets originally allocated
to the Advisor; (ii) the Advisor is unable, to any material extent, to use its
agreed upon Trading Approach; (iii) the Advisor's registration is revoked or
not renewed; (iv) there is unauthorized assignment of the Contract by the
Advisor (v) the Advisor dissolves, merges, consolidates with another entity,
sells a substantial portion of its assets, changes control, become bankrupt
or insolvent or has a change in executive officer; or (vi) the General
Partners determine in good faith that such termination is necessary for the
protection of the Partnership.
An Advisor may terminate the Advisory Contract at any time upon written notice
to the Partnership in the event (i) that its continued trading on behalf of
the Partnership would require the Advisor to become registered as an
investment advisor under the Investment Advisors Act of 1940; (ii) that assets
in excess of 50% of the initially allocated assets are reallocated from the
Advisor; (iii) that the registration of either General Partner is revoked,
suspended, terminated or not renewed; (iv) that the General Partners elect to
have the Advisor use a trading approach which is different from that initially
used; (v) that the General Partners override a trading instruction or impose
additional trading limitations; (vi) that there is an unauthorized assignment
of the Advisory Contract by the General Partners; or (vii) other good cause is
shown to which the written consent of the General Partners is also obtained.
An Advisor may also terminate the Advisory Contract on 60 days written notice
to the General Partners during any renewal term.
The Advisors will continue to advise other futures trading accounts. The
Advisors and their officers, directors and employees also will be free to
trade commodity interests for their own accounts provided such trading is
consistent with the Advisors' obligations and responsibilities to the
Partnership. To the extent that the Advisors recommend similar or identical
trades to the Partnership and other accounts which they manage, the
Partnership may compete with those accounts for the execution of the same or
similar trades.
The Partnership initially paid JWH a monthly management fee of 1/4 of 1% of
the Partnership's NAV under management as of the end of the month, whether or
not the Partnership was profitable, and a quarterly incentive fee of 18% of
trading profits achieved on the NAV of the Partnership allocated to such
Advisor's management until June 30, 1992. Effective July 1, 1992, the
Partnership began paying JWH 1/3 of 1% of the month end NAV of the Partnership
and a quarterly incentive fee of 15% of the Partnership's net trading profits,
if any, attributable to its management. Pursuant to an agreement between the
Partnership and Welton, the Partnership pays Welton a monthly management fee
of 1/4 of 1% of the month-end net asset value of the Partnership under its
management and a quarterly incentive fee of 18% of trading profits achieved
on the NAV of the Partnership allocated to such Advisor's management. See
pages 6-8 of Exhibit 10.1 incorporated by reference herein for a description
of NAV and trading profits. The incentive fee is paid to an Advisor only
when the cumulative trading profits for assets allocated to that Advisor at
the end of a quarter exceed the highest previous cumulative trading profits
at the end of a quarter for which an incentive fee was paid to the Advisor.
The calculation and payment of incentive fees is not affected by the
performance of the other Advisors.
The Limited Partnership Agreement provides that (i) funds will be invested
only in futures contracts which are traded in sufficient volume to permit, in
the opinion of each Advisor, ease of taking and liquidating positions; (ii)
no Advisor will establish futures positions in a commodity interest such that
the margin required for those positions, when added to that required for
existing positions for the same commodity interest, would exceed 15% of the
Partnership assets allocated to the Advisor; (iii) it is expected that 20% to
60% of the Net Assets of the Partnership will normally be committed to initial
margin, however, no Advisor may commit more than 66 2/3% of the assets under
its management to initial margins; (iv) the Partnership will not generally
enter into an open position for a particular commodity interest during a
delivery month; (v) the Partnership may not trade in securities or options on
securities, commodity futures contracts, or physical commodities unless such
options have been approved for trading on a designated contract market by the
CFTC; the Partnership may trade in foreign options if permitted under the CE
Act and CFTC regulations; the Partnership may trade in futures contracts,
futures contracts on foreign currencies through foreign and domestic commodity
exchanges and forward contracts on foreign currencies; (vi) the Partnership
may not engage in pyramiding, but may employ spreads or straddles; (vii) the
Partnership's assets will not be commingled with the assets of any other
person; (viii) no Advisor will be permitted to engage in churning the assets
of the Partnership; and (ix) no rebates or give-ups may be paid to or received
by the General Partners. The Partnership will not generally utilize borrowing
except for short-term borrowing when the Partnership takes delivery of a
physical commodity. Material changes in these trading policies must be
approved by a vote of a majority of the outstanding Limited Partnership Units.
The Partnership's net assets are deposited in the Partnership's account with
CIS, the Partnership's clearing broker. The Partnership earns interest on
100 percent of the Partnership's average monthly cash balance on deposit with
the Clearing Broker at a rate equal to 90 percent of the average 90-day
Treasury bill rate for U.S. Treasury bills issued during that month.
The Partnership currently has no salaried employees and all administrative
services performed for the Partnership are performed by the General Partners.
The General Partners have no employees other than their officers and directors,
all of whom are employees of the affiliated companies of the General Partners.
For these administrative services, the General Partners received an annual
fee, as described above, equal to 1.75% of the NAV on the first day of the
Partnership's fiscal year (paid on a pro rata basis for the first year of the
Partnership's trading) until December 31, 1992. Commencing January 1, 1993
the annual administrative fee for the General Partners was reduced to 1.375%
of the NAV on the first day of the Partnership's fiscal year.
The Partnership's business constitutes only one segment for financial
reporting purposes; it is a limited partnership whose purpose is to trade,
buy, sell, spread or otherwise acquire, hold or dispose of commodity interests
including futures contracts, forward contracts, physical commodities and
related options thereon. The Partnership does not engage in the production
or sale of any goods or services. The objective of the Partnership business
is appreciation of its assets through speculative trading in such commodity
interests. Financial information about the Partnership's business, as of
December 31, 1998, is set forth under Items 6 and 7 herein.
Competition
Each Advisor and its principals, affiliates and employees are free to trade
for their own accounts and to manage other commodity accounts during the term
of the Advisory Contract and to use the same information and trading strategy
which the Advisor obtains, produces or utilizes in the performance of services
for the Partnership. To the extent that the Advisor recommends similar or
identical trades to the Partnership and other accounts which it manages, the
Partnership may compete with those accounts for the execution of the same or
similar trades.
Other trading advisors who are not affiliated with the Partnership may utilize
trading methods which are similar in some respects to those methods used by
the Partnership's Advisors. These other trading advisors could also be
competing with the Partnership for the same or similar trades as requested by
the Partnership's Advisors.
Item 2. Properties
The Partnership does not utilize any physical properties in the conduct of
its business. The General Partners use the offices of CIS and AXP Advisors,
at no additional charge to the Partnership, to perform their administration
functions, and the Partnership uses the offices of CIS, again at no additional
charge to the Partnership, as its principal administrative offices.
Item 3. Legal Proceedings
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Part II
Item 5. Market for the Registrant's Units and Related Security Holder Matters
(a) There is no established public market for the Units and none is
expected to develop.
(b) As of December 31, 1998, there were 148,334.99 Units held
by Limited Partners and 2,884.19 Units held by the General
Partners. A total of 14,354.27 Units had been redeemed by
Limited Partners during the period from January 1, 1998 to
December 31, 1998 (52,616.37 Units were redeemed prior to
calendar year 1998). The Partnership's Restated and Amended
Limited Partnership Agreement (Exhibit 3.1 hereto) contains a
full description of redemption and distribution procedures.
(c) To date no distributions have been made to partners in
the Partnership.
The Limited Partnership Agreement does not provide for regular or periodic
cash distributions, but gives the General Partners sole discretion in
determining what distributions, if any, the Partnership will make to its
partners. The General Partners have not declared any such distributions to
date, and do not currently intend to declare such distributions.
Item 6. Selected Financial Data
Year ended December 31,
1994 1995 1996 1997 1998
1. Operating Revenues(000) $ 279 $8,419 $10,190 $7,619 $9,513
2. Income (Loss) From
Continuing Operations(000) (1,530) 5,755 6,701 3,778 4,578
3. Income (Loss) Per Unit (16.30) 50.46 54.14 28.09 30.08
4. Total Assets(000) 24,185 33,276 41,669 50,592 58,570
5. Long Term Obligations 0 0 0 0 0
6. Cash Dividend Per Unit 0 0 0 0 0
Note: All references to Units reflect the 3-for-1 Unit split effective
February 28, 1995.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Liquidity and Capital Resources
Most United States commodity exchanges limit the amount of fluctuation in
commodity futures contract prices during a single trading day by regulations.
These regulations specify what are referred to as "daily price fluctuation
limits" or "daily limits". The daily limits establish the maximum amount the
price of a futures contract may vary either up or down from the previous day's
settlement price at the end of a trading session. Once the daily limit has
been reached in a particular commodity, no trades may be made at a price
beyond the limit. Positions in the commodity could then be taken or liquidated
only if traders are willing to effect trades at or within the limit during
the period for trading on such day. Because the "daily limit" rule only
governs price movement for a particular trading day, it does not limit losses.
In the past, futures prices have moved the daily limit for numerous
consecutive trading days and thereby prevented prompt liquidation of futures
positions on one side of the market, subjecting commodity futures traders
holding such positions to substantial losses for those days.
It is also possible for an exchange or the CFTC to suspend trading in a
particular contract, order immediate settlement of a particular contract, or
direct that trading in a particular contract be for liquidation only.
The Partnership's net assets are held in a brokerage account with CIS. The
Partnership initially earned interest on 100% of the Partnership's average
monthly cash balance at a rate equal to 80% of the average yield on the
90-day U.S. Treasury Bills issued during that month until July 31, 1993.
Commencing August 1, 1993, the Partnership began to earn interest at a rate
of 90% of the average yield on the 90-day U.S. Treasury Bills issued during
that month. For the calendar year ended December 31, 1998 CIS had paid or
accrued to pay interest of $2,148,711 to the Partnership. Similarly, for the
calendar year ended December 31, 1997 CIS had paid or accrued to pay interest
of $2,032,524 to the Partnership.
For the fiscal year ended December 31, 1998, investors redeemed a total of
14,354.27 Units for $4,951,407. For the fiscal year ended December 31, 1997
investors redeemed a total of 10,395.53 Units for $3,515,603.
During 1998, Limited Partners purchased 24,695.21 Units for $9,378,300.
The General Partners purchased 265 Units for $100,000 in 1998.
On December 31, 1998, the Partnership had unrealized profits of $5,740,766
and cash on deposit of $52,649,782. These positions required margin deposits
at CIS of $6,224,367. The total balance of the Partnership's account at CIS
was $58,390,548. These figures compare to unrealized profits of $2,454,648,
cash on deposit of $47,936,067, margin requirements of $4,973,284 and total
balance of the Partnership's account of $50,390,715 as of December 31, 1997.
On December 31, 1996, the Partnership had unrealized profits of $868,069 and
cash on deposit at CIS of $39,998,782. These positions required margin
deposits at CIS of $2,645,728. The total balance of the Partnership's
account was $41,516,951.
During the fiscal year ended December 31, 1998, the Partnership had no credit
exposure to a counterparty which is a foreign commodities exchange which was
material.
The Partnership currently only trades on recognized global futures exchanges.
In the event the Partnership begins trading over the counter contracts, any
credit exposure to a counterparty which exceeds 10% of the Partnership's
total assets will be disclosed.
See Footnote 5 of the Financial Statements for procedures established by the
General Partners to monitor and minimize market and credit risks for the
Partnership. In addition to the procedures set out in Footnote 5, the
General Partners review on a daily basis reports of the Partnership's
performance, including monitoring of the daily net asset value of the
Partnership. The General Partners also review the financial situation of the
Partnership's Clearing Broker on a monthly basis. The General Partners rely
on the policies of the Clearing Broker to monitor specific credit risks. The
Clearing Broker does not engage in proprietary trading and thus has no direct
market exposure which provides the General Partners assurance that the
Partnership will not suffer trading losses through the Clearing Broker.
Year 2000 Readiness Disclosure
CIS surveyed major applications in 1996 to see if they were Year 2000
compliant. Systems identified with Year 2000 issues were targeted for
replacement or modification. Replacement and modification projects are
currently underway. In addition, CIS has dedicated resources to assess our
work processes and verify that it will be able to handle the changes in the
next millennium. This process addresses software applications as well as key
vendor, bank and customer relationships.
During 1997, CIS participated in developing the industry-wide test plan with
the Futures Industry Association, with whom it continues to work closely.
CIS has participated in BETA testing, which began in September 1998, and will
participate again with the FIA in "street wide" testing during the second
quarter of 1999.
In addition, CIS has begun developing various "contingency plans" in the event
that mission critical systems should fail. This development is proceeding on
schedule.
CIS is taking this issue seriously and has a goal of maintaining reasonable
procedures in order to eliminate as much risk as possible to its customers
(including the Partnership), its counterparties and itself. Despite the best
efforts of CIS, CISFS and CISI, there can be no assurance that the above steps
will be sufficient or that all potential problems have been identified in
order to avoid any adverse impact to the Partnership. CIS and its affiliates
make no representations or warrants related to Year 2000 readiness or
compliance, including but not limited to business interruption, whether
from failures in their own computer systems, those of the Advisors, or any
other third party.
Results of Operations
The Partnership posted positive returns for 1998, 1997 and 1996.
1998
The year 1998 was marked by declining global interest rates and commodity
prices and extremely volatile currency fluctuations. The Partnership produced
a net gain of 8.55% for the calendar year. One of the key markets that
consistently reported profits during the year was the energy sector, primarily
crude oil. Short crude oil prices throughout the year were beneficial to the
Partnership. Additionally, coffee prices fell 28% during the year and the
Partnership benefited from its short positions in coffee prices.
The first quarter was marked by a flight to quality in the bond market, namely
German bunds and U.S. bonds amidst turbulence in the Asian markets. The U.S.
dollar remained volatile for the first two months of the year and strengthened
during March, primarily versus the German mark and Swiss franc. The
volatility in both these sectors produced overall losses for the Partnership.
Warren Buffett was rumored and then confirmed to be holding significant silver
positions anticipating a rise in silver prices. Long silver prices were
beneficial to the Partnership.
In the second quarter, the U.S. dollar strengthened against the Japanese yen
until the U.S. Government intervened to support the Japanese yen, essentially
selling the U.S. dollar and depressing the value of the U.S. dollar relative
to most major world currencies. By July, the U.S. dollar was back at all-time
highs against the Japanese yen. Overall, the Partnership gained as a result
of the fluctuation of the U.S. dollar. However, the ripple effect created
volatility for the U.S. dollar versus the European currencies and the
Partnership lost on its positions in these currencies. Precious metals,
namely silver, reversed as prices slumped. Gold prices seesawed up and down
never settling on direction. The volatility in these markets was unprofitable
to the Partnership.
The third quarter was highlighted by a devaluation of the Russian ruble which
sent shock waves through the world equity markets as traders liquidated
equities in favor of sovereign debt. Even prior to the Russian crisis, the
Partnership was well positioned to take advantage of rising bonds. The
Partnership was long the U.S., German and Japan bond markets. Interest rates
on the U.S. 30-year long bond fell below 5%, the lowest level in over 30 years.
In addition, the Partnership was short the Nikkei and FTSE equity indices.
Gold and silver prices fell to 1998 lows, as short positions in these precious
metals were profitable.
The fourth quarter saw extremes in the currency sector as the U.S. dollar
again gyrated for the last three months of the year. The long Japanese yen
position that provided the only profit for the Partnership in October was the
largest losing position in November, yet by December, long Japanese yen
positions were providing profits. The Fed eased interest rates one quarter
point three times in seven weeks. However, long U.S. bond positions reaped
few rewards as these rate cuts had already been factored in the market.
Global stock indices rebounded beginning in October and long positions in the
S&P and German DAX proved rewarding. The Partnership ended the year with a
profit of $4,578,497.
1997
In 1997 the global futures markets showed a great deal of volatility and the
Advisors were well positioned to profit from several of these moves. The
Partnership produced a net gain of 8.68% for the calendar year. The year 1997
was marked by declining gold prices and interest rates around the globe and a
rising U.S. dollar relative to the German mark and Japanese yen. The strength
of these market moves proved beneficial to the Partnership. The price of gold
declined to the lowest level in over a decade reflecting its declining value
as an alternative monetary asset as central banks increased their willingness
to sell or lease the precious metal. Solid gains were generated in the global
interest rate markets, particularly in the Japanese Government bond where
yields plummeted to historic lows as the nation sank relentlessly into a
recession. Strong gains were also recorded in Australian 10-year bonds and
3-year notes and in German and Italian bonds. Gains were realized in
positions in the German mark, which weakened in world markets as hopes for
European monetary union rose. The U.S. dollar dominated the world currencies
reflecting sound economic fundamentals in the U.S. The Partnership benefited
from the upward price movement in natural gas during the summer and fall.
However, energy markets were disappointing as ample world inventories and mild
weather kept supply and demand in balance. In addition, losses were incurred
in agricultural markets, despite strong performance by coffee futures earlier
in the year. The Partnership ended the year with a profit of $3,778,125.
1996
In 1996 there were numerous opportunities in the global futures markets and
the Advisors were well-positioned to profit from many of them. The
Partnership produced a net gain of 20.01% for the calendar year. The profits
for the Partnership were made in the latter part of the year in currencies,
global interest rates, energies and precious metals. The U.S. dollar reached
a ten-week high against the Japanese yen, the German mark and the Swiss franc
in September as sound economic fundamentals kept the U.S. dollar strong
against most of the major currencies. The British pound was even stronger
than the U.S. dollar as Europe debated European Monetary Union issues and
viewed the pound as a safe haven. These factors led to excellent trends in
the currency markets and profitable trading. Signs of a slowing U.S. economy
drove the 30-year Treasury bond to its highest level in six and one-half years.
Foreign central banks were heavy buyers of U.S. bonds, producing a nice profit
for the Partnership. In Asia, investors flocked to the higher-yielding
Australian bond as the yield on the Japanese Government bond was at its lowest
level in the nation's history. The Partnership benefited handsomely from
opposite positions in both the Australian and Japanese bonds. The Partnership
ended the year with a profit of $6,701,475.
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.
Item 7(A). Quantitative and Qualitative Disclosures About Market Risk
Introduction
Past Results Are Not Necessarily Indicative of Future Performance
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all
or substantially all of the Partnership's assets are subject to the risk of
trading loss. Unlike an operating company, the risk of market sensitive
instruments is integral, not incidental, to the Partnership's main line of
business.
Market movements result in frequent changes in the fair market value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and commodity
contracts, the diversification effects among the Partnership's open positions
and the liquidity of the markets in which it trades.
The Partnership can acquire and/or liquidate both long and short positions in
a wide range of different markets. Consequently, it is not possible to
predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its
future results.
Value at Risk is a measure of the maximum amount which the Partnership could
reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the
recurrence in the markets traded by the Partnership of market movements far
exceeding expectations could result in actual trading or non-trading losses
far beyond the indicated Value at Risk or the Partnership's experience to date
(i.e., "risk of ruin"). In light of the foregoing as well as the risks and
uncertainties intrinsic to all future projections, the inclusion of the
quantification included in this section should not be considered to
constitute any assurance or representation that the Partnership's losses in
any market sector will be limited to Value at Risk or by the Partnership's
attempts to manage its market risk.
Standard of Materiality
Materiality as used in this section, "Qualitative and Quantitative Disclosures
About Market Risk," is based on an assessment of reasonably possible market
movements and the potential losses caused by such movements, taking into
account the leverage, optionality and multiplier features of the Partnership's
market sensitive instruments.
Quantifying the Partnership's Trading Value at Risk
Qualitative Forward-Looking Statements
The following quantitative disclosures regarding the Partnership's market risk
exposures contain "forward-looking statements" within the meaning of the safe
harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act and Section 21E of the Securities Exchange Act of 1934). All
quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor, except for statements of
historical fact.
The Partnership's risk exposure in the various market sectors traded by the
Trading Advisors is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's
earnings (realized or unrealized) and cash flow (at least in the case of
exchange-traded contracts in which profits and losses on open positions are
settled daily through variation margin).
Exchange maintenance margin requirements have been used by the Partnership as
the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic
estimate of the maximum expected near-term one-day price fluctuation.
Maintenance margin has been used rather than the more generally available
initial margin, because initial margin includes a credit risk component which
is not relevant to Value at Risk.
In the case of market sensitive instruments which are not exchange traded
(which will be forward currencies should the Partnership begin trading them),
the margin requirements for the equivalent futures positions have been used
as Value at Risk. In those rare cases in which a futures-equivalent margin is
not available, dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does not
have any optionality component. However, Welton also trades commodity options
on behalf of the Partnership. The Value at Risk associated with options is
reflected in the following table as the margin requirement attributable to the
instrument underlying each option. Where this instrument is a futures
contract, the futures margin, and where this instrument is a physical
commodity, the futures-equivalent maintenance margin has been used. This
calculation is conservative in that it assumes that the fair value of an
option will decline by the same amount as the fair value of the underlying
instrument, whereas, in fact, the fair values of the options traded by the
Partnership in all cases fluctuate to a lesser extent than those of the
underlying instruments.
In quantifying the Partnership's Value at Risk, 100% positive correlation in
the different positions held in each market risk category has been assumed.
Consequently, the margin requirements applicable to the open contracts have
simply been aggregated to determine each trading category's aggregate Value
at Risk. The diversification effects resulting from the fact that the
Partnership's positions are rarely, if ever, 100% positively correlated have
not been reflected.
The Partnership's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with the
Partnership's open positions by market category as of December 31, 1998. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1998, the
Partnership's total capitalization was approximately $57.7 million.
December 31, 1998
% of Total
Market Sector Value at Risk Capitalization
Interest Rates $ 3.9 million 6.8%
Currencies $ 0.7 million 1.3%
Stock Indices $ 0.6 million 1.0%
Precious Metals $ 0.5 million 0.8%
Commodities $ 0.1 million 0.2%
Energies $ 0.1 million 0.2%
Total $ 5.9 million 10.3%
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership is
typically many times the applicable maintenance margin requirement
(maintenance margin requirements generally ranging between approximately 1%
and 10% of contract face value) as well as many times the capitalization of
the Partnership. The magnitude of the Partnership's open positions creates a
"risk of ruin" not typically found in most other investment vehicles. Because
of the size of its positions, certain market conditions _ unusual, but
historically recurring from time to time _ could cause the Partnership to
incur severe losses over a short period of time. The foregoing Value at Risk
table as well as the past performance of the Partnership _ give no indication
of this "risk of ruin."
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash balances not
needed for margin. However, these balances (as well as any market risk they
represent) are immaterial.
The Partnership holds substantially all of its assets in cash on deposit with
CIS and CISFS. The Partnership has cash flow risk on these cash deposits
because if interest rates decline, so will the interest paid out by CIS and
CISFS at the 90% of 90-day Treasury bill rate. As of December 31, 1998, the
Partnership had approximately $53 million in cash on deposit with CIS and
CISFS.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's market risk
exposures except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the Partnership and the Trading Advisors
manage the Partnership's primary market risk exposures constitute forward-
looking statements within the meaning of Section 27A of the Securities Act
and Section 21E of the Securities Exchange Act. The Partnership's primary
market risk exposures as well as the strategies used and to be used by the
Trading Advisors for managing such exposures are subject to numerous
uncertainties, contingencies and risks, any one of which could cause the
actual results of the Partnership's risk controls to differ materially from
the objectives of such strategies. Government interventions, defaults and
expropriations, illiquid markets, the emergence of dominant fundamental
factors, political upheavals, changes in historical price relationships, an
influx of new market participants, increased regulation and many other factors
could result in material losses as well as in material changes to the risk
exposures and the risk management strategies of the Partnership. There can be
no assurance that the Partnership's current market exposure and/or risk
management strategies will not change materially or that any such strategies
will be effective in either the short or long-term. Investors must be
prepared to lose all or substantially all of their investment in the
Partnership.
The following were the primary trading risk exposures of the Partnership as of
December 31, 1998, by market sector.
Interest Rates. Interest rate risk is the principal market exposure of the
Partnership. Interest rate movements directly affect the price of the
sovereign bond positions held by the Partnership and indirectly the value of
its stock index and currency positions. Interest rate movements in one
country as well as relative interest rate movements between countries
materially impact the Partnership's profitability. The Partnership's primary
interest rate exposure is to interest rate fluctuations in the United States
and the other G-7 countries. However, the Partnership also takes positions in
the government debt of smaller nations e.g., Australia and New Zealand. The
General Partners anticipate that G-7 interest rates will remain the primary
market exposure of the Partnership for the foreseeable future. The changes
in interest rates which have the most effect on the Partnership are changes
in long-term, as opposed to short-term, rates. Most of the speculative
positions held by the Partnership are in medium- to long-term instruments.
Consequently, even a material change in short-term rates would have little
effect on the Partnership were the medium to long-term rates to remain steady.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The Partnership trades in a large number of
currencies, including cross-rates i.e., positions between two currencies
other than the U.S. dollar. However, the Partnership's major exposures have
typically been in the dollar/yen, dollar/mark, dollar/Swiss franc and dollar/
pound positions. The General Partners do not anticipate that the risk
profile of the Partnership's currency sector will change significantly in the
future, although it is difficult at this point to predict the effect of the
introduction of the Euro on the Trading Advisors currency trading strategies.
The currency trading Value at Risk figure includes foreign margin amounts
converted into U.S. dollars with an incremental adjustment to reflect the
exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in a functional currency other than dollars.
Stock Indices. The Partnership's primary equity exposure is to equity price
risk in the G-7 countries. The stock index futures traded by the Partnership
are by law limited to futures on broadly based indices. As of December 31,
1998, the Partnership's primary exposures were in the S&P and NASDAQ (US),
FTSE (England) and Hang Seng (Hong Kong) stock indices. The General Partners
anticipate little trading in non-G-7 stock indices. The Partnership is
primarily exposed to the risk of adverse price trends or static markets in
the major U.S., European and Japanese indices. (Static markets would not
cause major market changes but would make it difficult for the Partnership to
avoid being "whipsawed" into numerous small losses.)
Metals. The Partnership's metals market exposure is to fluctuations in the
price of gold and silver as well as various of the industrial metals. The
Trading Advisors have from time to time taken substantial positions as they
have perceived market opportunities to develop. The General Partners
anticipate that trading will continue across most of the available metals
contracts.
Commodities. The Partnership's primary commodities exposure is to
agricultural price movements which are often directly affected by severe or
unexpected weather conditions. Soybean oil, coffee, cattle, cotton and rubber
accounted for the substantial bulk of the Partnership's commodities exposure as
of December 31, 1998. In the past, the Partnership also has had material
market exposure to grains, sugar and cocoa and may do so again in the future.
Welton and the Partnership will continue to trade a wide variety of commodity
contracts.
Energy. The Partnership's primary energy market exposure is to gas and oil
price movements, often resulting from political developments in the Middle
East. Although the Trading Advisors trade natural gas to a limited extent,
oil and oil products are by far the dominant energy market exposure of the
Partnership. Oil prices are currently depressed, but they can be volatile and
substantial profits and losses have been and are expected to continue to be
experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership as
of December 31, 1998.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, German marks, British pounds and Australian
dollars. The Partnership controls the non-trading risk of these balances by
regularly converting these balances back into dollars (no less frequently
than twice a month).
Cash Position. The Partnership holds substantially all its assets in cash at
CIS and CISFS, earning interest at 90% of the average 90-day Treasury bill
rate for Treasury bills issued during each month.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partners monitor the Partnership's performance and the
concentration of its open positions, and consult with the Trading Advisors
concerning the Partnership's overall risk profile. If the General Partners
felt it necessary to do so, the General Partners could require the Trading
Advisors to close out individual positions as well as entire programs traded
on behalf of the Partnership. However, any such intervention would be a
highly unusual event. The General Partners primarily rely on the Trading
Advisors own risk control policies while maintaining a general supervisory
overview of the Partnership's market risk exposures.
Risk Management
JWH attempts to control risk in all aspects of the investment process from
confirmation of a trend to determining the optimal exposure in a given market,
and to money management issues such as the startup or upgrade of investor
accounts. JWH double checks the accuracy of market data, and will not trade
a market without multiple price sources for analytical input. In constructing
a portfolio, JWH seeks to control overall risk as well as the risk of any one
position, and JWH trades only markets that have been identified as having
positive performance characteristics. Trading discipline requires plans for
the exit of a market as well as for entry. JWH factors the point of exit
into the decision to enter (stop loss). The size of JWH's positions in a
particular market is not a matter of how large a return can be generated but
of how much risk it is willing to take relative to that expected return.
To attempt to reduce the risk of volatility while maintaining the potential
for excellent performance, proprietary research is conducted on an ongoing
basis to refine the JWH investment strategies. Research may suggest
substitution of alternative investment methodologies with respect to
particular contracts; this may occur, for example, when the testing of a new
methodology has indicated that its use might have resulted in different
historical performance. In addition, risk management research and analysis
may suggest modifications regarding the relative weighting among various
contracts, the addition or deletion of particular contracts from a program,
or a change in position size in relation to account equity. The weighting of
capital committed to various markets in the investment programs is dynamic,
and JWH may vary the weighting at its discretion as market conditions,
liquidity, position limit considerations and other factors warrant.
JWH may determine that risks arise when markets are illiquid or erratic, such
as may occur cyclically during holiday seasons, or on the basis of irregularly
occurring market events. In such cases, JWH at its sole discretion may
override computer-generated signals and may at times use discretion in the
application of its quantitative models, which may affect performance
positively or negatively.
Adjustments in position size in relation to account equity have been and
continue to be an integral part of JWH's investment strategy. At its
discretion, JWH may adjust the size of a position in relation to equity in
certain markets or entire programs. Such adjustments may be made at certain
times for some programs but not for others. Factors which may affect the
decision to adjust the size of a position in relation to account equity
include ongoing research, program volatility, assessments of current market
volatility and risk exposure, subjective judgment, and evaluation of these
and other general market conditions.
Welton's portfolios are subject to an on-going process of monitoring and
review. Risk is managed at all levels in the investment process. In advance
of entering a position, the risk of each trade is determined in relationship
to the potential exposure and volatility impact of that open position in an
account proportionate to its size. Multiple indicators of risk exposure are
calculated including initial risk, volatility, intra-period volatility, open
equity risk, and margin exposure. Various risk measures for each trade are
determined before trade entry and monitored throughout the life span of the
trade.
The factors used to assess risk exposure and performance risks more generally
include (i) initial risk per trade (by model and market); (ii) volatility
(standard deviation of returns) per trade throughout the holding period; (iii)
open equity risk (by market, market group and portfolio); (iv) margin to
equity ratio (by market and portfolio); (v) judgment of extraordinary event
or report risk; (vi) portfolio level volatility (standard deviation and
negative semi-variant standard deviation); (vii) slippage (model efficiency
and market liquidity) monitoring overtime; and (viii) value-at-risk measures
by market, sector, macro-economic views, and portfolio. Multiple other
factors would need to be included for business risks, implementation quality
assessments, and the like. Furthermore, Welton retains the right to exercise
discretion.
Item 8. Financial Statements and Supplementary Data
Reference is made to the financial statements and the notes thereto appearing
on Pages 31 through 41 of this report.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Part III
Item 10. Directors and Executive Officers of the Registrant
The Partnership is managed by its General Partners, IDS Futures Corporation
and CIS Investments, Inc. The officers and directors of the General Partners
as of December 31, 1998 were as follows:
IDS Futures Corporation
Peter L. Slattery (born in July 1965), President and Director. Mr. Slattery
is the Director of Non-Proprietary Products for American Express Financial
Advisors, Variable Assets Division. During his tenure at AEFA, he has led the
transition to multiple classes for the IDS mutual fund line, developed five
new retail funds and led the creation of the flagship Flexible Portfolio
Annuity. He currently is responsible for all Non-proprietary relationships
involving products sold through AEFA's various distribution channels. Mr.
Slattery holds a BS from Babson College and an MBA from the University of
Colorado.
Michael L. Weiner (born in July 1946), Vice President, Secretary and Treasurer.
Mr. Weiner is the Vice President-Corporate Tax Operations of AMERICAN EXPRESS
FINANCIAL CORPORATION. He has been employed by AMERICAN EXPRESS FINANCIAL
CORPORATION since 1975. His responsibilities include research, planning and
compliance for the American Express Financial Corporation corporate tax group.
Mr. Weiner is also an officer of AXP Advisors. Mr. Weiner graduated from the
University of Minnesota Law School in 1974 and completed the Masters of
Business Administration program at St. Thomas College of Minnesota in 1979.
John M. Knight (born in February 1952), Vice President. Mr. Knight has been
employed by American Express Financial Corporation since July 1975. He was
Controller - Variable Assets and Services of American Express Financial
Corporation until February 1999, thus charged with overall finance
responsibilities for Mutual Funds, Limited Partnerships, Variable Annuities,
Retail Retirement Plans, Personal Trust and Wealth Management Services. In
February 1999 Mr. Knight was appointed Vice President - Investment Accounting
of American Express Financial Corporation. From 1981 to March 1994 he held
a number of positions in the IDS Certificate Company, including Controller of
that organization. Mr. Knight is a graduate of the University of Wisconsin-
Eau Claire and a FLMI.
Peter J. Anderson (born in March 1942), Director. Mr. Anderson is Chairman
and Chief Investment Officer of IDS Advisory Group Inc., as well as Senior
Vice President - Investments and a member of the board of directors of
American Express Financial Advisors Inc. Mr. Anderson joined IDS Advisory
Group Inc. in April 1982 as Senior Vice President - IDS Equity Advisors, a
division of IDS Advisory Group Inc. He became President of IDS Advisory Group
in January 1985. In July 1987 Mr. Anderson was named Senior Vice President of
American Express Financial Advisors Inc. and at that point assumed
responsibility for common stock mutual funds. In January 1993 Mr. Anderson
assumed responsibility for the portfolio management, research and economic
functions of American Express Financial Advisors Inc. Mr. Anderson has a B.A.
from Yale University and an M.B.A. with a major in finance from Wharton
Graduate School.
CIS Investments, Inc.
Bernard W. Dan (born in December 1960), President and Director. Mr. Dan has
served as President and Director of CISI since June 1, 1998. He received a
B.S. degree in accounting from St. John's University, Collegeville, Minnesota.
He joined Cargill Investor Services, Inc. in 1985 and held various operational
positions. In 1986 Mr. Dan was assigned to Cargill Investor Services, Ltd.
in London as Administrative Manager for all operational activities. In 1989
Mr. Dan was assigned to the CIS New York Regional Office as the Administrative
Manager. Mr. Dan was named Director of Cargill Investor Services (Singapore)
Pte Ltd. at the formation of the company in November 1994 and continued in
that position until April 1997. Mr. Dan was named President of Cargill
Investor Services, Inc. on June 1, 1998. Mr. Dan actively serves within the
futures industry on exchange committees and industry user groups.
Richard A. Driver (born in September 1947), Vice President, Treasurer and
Director. Mr. Driver has served as Vice President and Director of CISI since
June 1993 and was elected Treasurer of CISI in August 1997. Mr. Driver
graduated from the University of North Carolina in 1969 and received a
Masters Degree from American Graduate School of International Management in
1973. Mr. Driver began working for Cargill, Incorporated in 1973 and joined
Cargill Investor Services, Inc. in 1977 as Vice President of Operations. Mr.
Driver currently serves as Vice President, Controller, Treasurer and Director
of Cargill Investor Services, Inc.
Barbara A. Pfendler (born in May 1953), Vice President and Director. Ms.
Pfendler was appointed Vice President of CISI in May 1990 and Director of
CISI in June 1998. Ms. Pfendler graduated from the University of Colorado in
1975. She began her career with Cargill, Incorporated in 1975, holding
various merchandising and management positions within Cargill Incorporated's
Oilseed Processing Division before transferring to Cargill Investor Services,
Inc. in 1986. She is currently the manager responsible for all activities of
the Fund Services Group at Cargill Investor Services, Inc. She was appointed
Vice President of Cargill Investor Services, Inc. in June 1996 and Director
Cargill Investor Services, Inc. in June 1998.
Jan R. Waye (born in June 1948), Vice President. Mr. Waye was appointed Vice
President of CISI in June 1997. Mr. Waye graduated from Concordia College,
Moorhead, MN, with a B.A. degree in Communications and Economics in 1970.
Mr. Waye assumed the position of Senior Vice President of Cargill Investor
Services, Inc. in September 1996, after returning from London where he held
various management positions for Cargill Investor Services, Ltd. including
most recently Managing Director for CIS Europe. Mr. Waye joined Cargill,
Incorporated in 1970 and served in various commodity trading and management
positions in Chesapeake, VA; Winnipeg, Manitoba; and Vancouver, BC. In 1978
he moved to New York and shortly thereafter Minneapolis as head of Foreign
Exchange for Cargill's metals trading business. Mr. Waye served in various
management positions in the Financial Markets Group until 1988 when he
assisted in the management and sale of Cargill's life insurance business in
Akron, Ohio. He moved to London in late 1988. Mr. Waye has served as a
member of the Board of LIFFE, the London International Financial Futures and
Options Exchange, and as Vice Chairman of its Membership and Rules Committee.
He also served on the Board of the London Commodity Exchange up to its merger
with LIFFE.
Christopher Malo (born in August 1956), Vice President. Mr. Malo graduated
from Indiana University in 1976 with a B.S. in Accounting and further
completed the University of Minnesota Executive Program in 1993. He started
working at Cargill, incorporated in June 1978 as an internal auditor. He
transferred to Cargill Investor Services, Inc. in August 1979 and served as
Secretary/Treasurer and Controller from November 1983 until July 1991. He
was elected Vice President, Administration and Operations in July 1991. Mr.
Malo was Managing Director in Europe from 1996 until January 1999, responsible
for CIS activities and operations in Europe, the Middle East and Russia. He
was an active member of the FIA-UK Chapter and LIFFE Membership and Rules
committee. He currently serves on the Board of the FIA in Chicago.
Ronald L.Davis (born in September 1953), Vice President. Mr.Davis was elected
Vice President of CISI in June 1998. Mr. Davis graduated from Illinois
Institute of Technology, Chicago, Illinois with a B.S. in 1975 and with an
M.B.A in 1977. He began his career in the futures industry with A.G. Becker,
Incorporated in 1980 and joined Cargill Investor Services, Inc. in 1987 as
the Administrative Manager of the Fund Services Group. He is responsible for
all administrative, accounting and reporting functions of all CISI funds.
In June 1998 Mr. Davis became Business Development Manager of the Fund
Services Group.
Rebecca S. Steindel (born in April 1965), Secretary. Ms. Steindel was
elected Secretary of CISI in September 1997. Ms. Steindel graduated from
the University of Illinois in 1987. She began working at Cargill Investor
Services, Inc. in August 1987. She has held various financial and risk
management positions at Cargill Investor Services, Inc. and was elected Risk
and Compliance Officer and Secretary of Cargill Investor Services, Inc. in
August 1997. She currently serves on the Board of Directors and Executive
Committee of the FIA Financial Management Division.
Bruce H. Barnett (born in June 1947), Assistant Secretary. Mr. Barnett
graduated in 1968 from Southern Connecticut State College. New York
University Law School awarded Mr. Barnett a J.D. in 1971 and an LL.M. in 1973.
He started working at Cargill, Incorporated in 1990 as Vice President, Taxes.
From 1987 to 1990, Mr. Barnett was employed in various positions at Unilever,
a European based multinational corporation.
Henry W. Gjersdal, Jr. (born in May 1954), Assistant Secretary. Mr. Gjersdal
was elected Assistant Secretary of CISI in June 1996. Mr. Gjersdal received
a bachelor of arts degree from Gustavus Adolphus College in 1976 and a J.D.
degree from the University of Michigan in 1979. He is a member of the
American Bar Association and the Tax Executives Institute. He joined the
Law Department of Cargill, Incorporated in April 1981. He had previously been
an associate with Doherty, Rumble and Butler, Minneapolis, Minnesota. In June
1985 he was named European Tax Manager for Cargill, International, Geneva, and
in 1987 was named Senior Tax Attorney for the Law Department. He became
Assistant Tax Director in the Tax Department in December 1990. Mr. Gjersdal
was named Assistant Vice President of Cargill, Incorporated's Administrative
Division in April 1994 with responsibility for the audit and international
groups in Cargill's Tax Department.
Patrice H. Halbach (born in August 1953), Assistant Secretary. Ms. Halbach
became Assistant Secretary of CISI in June 1996. Ms. Halbach graduated phi
beta kappa from the University of Minnesota with a bachelor of arts degree in
history. In 1980 she received a J.D. degree cum laude from the University of
Minnesota. She is a member of the Tax Executives Institute, the American Bar
Association and the Minnesota Bar Association. Ms. Halbach joined the Law
Department of Cargill, Incorporated in February 1983. She had previously
been an attorney with Fredrikson & Byron, Minneapolis, Minnesota. In
December 1990 she was named Senior Tax Manager for Cargill, Incorporated's
Tax Department and became Assistant Tax Director in March 1993. She was
named Assistant Vice President of Cargill, Incorporated's Administrative
Division in April 1994. In January 1999 she was named Vice President, Tax,
of Cargill, Incorporated. In her current position as Vice President, Tax,
Ms. Halbach oversees Cargill, Incorporated's global tax function.
Each officer and director holds such office until the election and
qualification of his or her successor or until his or her earlier death,
resignation or removal.
Item 11. Executive Compensation
The Partnership has no officers or directors. The General Partners, IDS
Futures and CISI, administer the business and affairs of the Partnership
(exclusive of Partnership trading decisions which are made by independent
commodity trading advisors). The officers and directors of the General
Partners receive no compensation from the Partnership for acting in their
respective capacities with the General Partners.
All operating and administrative expenses attributable to the Partnership are
paid by the General Partners except for brokerage commissions, NFA, clearing
and exchange fees, advisory fees, legal, accounting, auditing, printing,
recording and filing fees and postage charges which are paid directly by the
Partnership. All expenses other than brokerage commissions incurred by the
Partnership and administrative fees are paid to persons not affiliated with
the Partnership. For the services performed through December 31, 1992 on
behalf of the Partnership, the General Partners received an annual
administrative fee totaling 1.75% of the Partnership's net assets. On
January 1, 1993 this fee was reduced to 1.375%. The General Partners received
a total of $680,117 in 1998, $554,056 in 1997 and $447,067 in 1996 for this
fee.
CIS, an affiliate of CISI, is the Partnership's clearing broker. During the
year ended December 31, 1998, the Partnership accrued and paid $1,354,116 in
brokerage commissions to CIS, as compared to $1,142,101 in 1997 and $851,858
in 1996. Of these commissions, $20 per round turn trade is paid to AXP
Advisors as the Partnership's introducing broker and $15 is retained by CIS
as clearing broker (based on a commission rate of $35 per round turn trade).
Prior to September 1, 1995, $30 per round turn trade was paid to AXP Advisors
and $20 was retained by CIS (based on a commission rate of $50 per round turn
trade).
The Partnership did not transact any business through CISFS during the year
ended December 31, 1998 and therefore paid no commissions to CISFS.
Item 12. Security Ownership of Certain Beneficial Owners and Management
(a) As of December 31, 1998, no person was known to the Partnership to
own beneficially more than 5% of the outstanding Units.
(b) As of December 31, 1998, the General Partners beneficially owned
2,884.19 Units or approximately 1.91% of the Units outstanding as of
that date.
(c) As of December 31, 1998, no arrangements were known to the registrant,
including any pledges by any person of Units of the Partnership or
shares of its General Partners or the parents of the General Partners,
such that a change in control of the Partnership may occur at a
subsequent date.
Item 13. Certain Relationships and Related Transactions.
(a) None other than the compensation arrangements described herein.
(b) None.
(c) None.
(d) Not Applicable.
Part IV
Item 14. Exhibits, Financial Statements, Schedules and Reports on Form 8-K
(a) The following documents are included herein:
(1) Financial Statements:
a. Report of Independent Public Accountants.
b. Statements of Financial Condition as of December 31, 1998 and 1997.
c. Statements of Operations, Statements of Partners' Capital and
Statements of Cash Flows forthe years ended December 31, 1998,
1997 and 1996.
d. Notes to Financial Statements.
(2) All financial statement schedules have been omitted either because
the information required by the schedules is not applicable, or
because the information required is contained in the financial
statements included herein or the notes hereto.
(3) Exhibits:
See the Index to Exhibits annexed hereto.
(b) Reports on Form 8-K:
None.
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.
Date: March 26, 1999 IDS Managed Futures, L.P.
By: IDS Futures Corporation By: CIS Investments, Inc.
(General Partner) (General Partner)
By: /s/ Peter L. Slattery By: /s/ Bernard W.Dan
Peter L. Slattery Bernard W.Dan
President President
By: /s/ Michael L. Weiner By: /s/ Richard A. Driver
Michael L. Weiner Richard A. Driver
Vice President, Secretary Vice President
and Treasurer and Treasurer
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
registrant and in the capacities and on the date indicated.
Date: March 26, 1999
/s/ Peter L. Slattery /s/ Bernard W.Dan
Peter L. Slattery Bernard W.Dan
Director and President Director and
President
/s/ Peter J. Anderson /s/ Barbara A. Pfendler
Peter J. Anderson Barbara A. Pfendler
Director Director and Vice
President
/s/ Michael L. Weiner /s/ Richard A. Driver
Michael L. Weiner Richard A. Driver
Vice President, Secretary and Vice President and
Treasurer Treasurer
Index to Exhibits
Number Exhibit
3.1 Amended and Restated Limited Partnership Agreement.
10.1 Advisory Contract dated as of March 27, 1987 between CIS
Investments, Inc., IDS Futures Corporation, IDS Managed
Futures, L.P., John W. Henry & Company, Inc. and Sabre
Fund Management Limited.
10.2 Amended Advisory Contracts dated January 23, 1992 between
CIS Investments, Inc., IDS Futures Corporation, IDS Managed
Futures, L.P. and each of John W. Henry & Company, Inc. and
Sabre Fund Management Limited.
10.3 Amended Advisory Contract dated April 30, 1996 between CIS
Investments, Inc., IDS Futures Corporation, IDS Managed
Futures, L.P., John W. Henry & Company,Inc. and Sabre Fund
Management Limited.
10.4 Advisory Contract dated as of July 2, 1997 between CIS
Investments, Inc., IDS Futures Corporation, IDS Managed
Futures, L.P. and Welton Investment Corporation
(Incorporated by reference to Post-Effective Amendment
No.3 to the Registration Statement as filed by the
Partnership on July 31, 1997).
Note: Exhibits 3.1, 10.1, 10.2 and 10.3 are incorporated
by reference to Post-Effective Amendment No. 1 to the
Registration Statement as filed by the Partnership on
June 7, 1996.
Index to Financial Statements
IDS Managed Futures, L.P.
Report of Independent Public Accountants Page 31
Statements of Financial Condition as of
December 31, 1998 and 1997 Page 32
Statements of Operations, for the years ended
December 31, 1998, 1997 and 1996 Page 33
Statements of Changes in Partners' Capital,
for the years ended December 31, 1998,
1997 and 1996 Page 34
Statements of Cash Flows, for the years ended
December 31, 1998, 1997 and 1996 Page 35
Notes to Financial Statements Page 36
Acknowledgment Page 41
Independent Auditors' Report
The Partners
IDS Managed Futures, L.P.:
We have audited the accompanying statements of financial condition of IDS
Managed Futures, L.P. (the Partnership) as of December 31, 1998 and 1997, and
the related statements of operations, 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 IDS Managed Futures, L.P.
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.
KPMG LLP
Chicago, Illinois
February 5, 1999
IDS MANAGED FUTURES, L.P.
STATEMENTS OF FINANCIAL CONDITION
Dec 31, 1998 Dec 31, 1997
--------------- -------------
ASSETS
Cash at Escrow Agent $0 $0
Equity in commodity futures
trading accounts:
Account balance 52,649,782 47,936,067
Unrealized gain on open
futures contracts 5,740,766 2,454,648
--------------- -------------
58,390,548 50,390,715
Interest receivable 179,775 201,717
Prepaid G.P. fee 0 0
--------------- -------------
Total assets $58,570,323 $50,592,432
=============== =============
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued commissions on open
futures contracts due to AXP Advisors and C $129,531 $99,412
Accrued exchange, clearing, and NFA fees $2,100 $3,642
Accrued management fee 173,726 150,667
Accrued incentive fee 0 184,102
Accrued operating expenses 125,906 114,033
Redemptions payable 308,694 490,756
Selling and Offering Expenses Payable 87,188 86,819
--------------- -------------
Total liabilities 827,145 1,129,431
Partners' Capital:
Limited partners ( 148,334.99 and 56,642,072 48,541,669
137,994.05 units outstanding at
12/31/98 and 12/31/97, respectively) (see Note 1)
General partners (2,884.19 and 2,619.16 units 1,101,106 921,332
outstanding at 12/31/98 and 12/31/97,
respectively) (see Note 1) --------------- -------------
Total partners' capital 57,743,178 49,463,001
--------------- -------------
Total liabilities and
partners' capital $58,570,323 $50,592,432
=============== =============
See Accompanying notes to financial statements.
IDS MANAGED FUTURES, L.P.
STATEMENTS OF OPERATIONS
1998 1997 1996
--------------- ------------- --------------
REVENUES
Gains on trading of commodity futures
and forwards contracts, physical
commodities and related options:
Realized gain (loss) on closed positions $4,255,156 $4,545,484 $9,559,339
Change in unrealized gain (loss)
on open positions 3,286,118 1,586,579 (837,500)
Interest income 2,148,711 2,032,524 1,575,843
Foreign currency transaction gain (loss) (177,410) (546,087) (108,047)
--------------- ------------- --------------
Total revenues 9,512,575 7,618,500 10,189,635
EXPENSES
Commissions paid to AXP Advisors and CIS 1,354,116 1,142,101 851,858
Exchange, clearing and NFA fees 64,522 41,957 30,222
Management fees 1,852,486 1,609,144 1,088,343
Incentive fees 876,259 396,625 978,214
General Partner fee to IDS Futures Corp. and 680,117 554,056 447,067
Operating expenses 106,578 96,492 92,456
--------------- ------------- --------------
Total expenses 4,934,078 3,840,375 3,488,160
--------------- ------------- --------------
Net profit (loss) $4,578,497 $3,778,125 $6,701,475
=============== ============= ==============
PROFIT (LOSS) PER UNIT OF LIMITED PARTNERSHIP IN $30.08 $28.09 $54.14
PROFIT (LOSS) PER UNIT OF GENERAL PARTNERSHIP IN $30.08 $28.09 $54.14
=============== ============= ==============
(see Note 1) (see Note 1) (see Note 1)
See accompanying notes to financial statements.
IDS MANAGED FUTURES, L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
FOR THE YEARS ENDED DECEMBER 31, 1998,1997, AND 1996
Total
Limited General Partners'
Units* Partners Partners Capital
--------------- ------------- -------------- -------------
Balance at December 31, 1995 118,310.37 31,889,868 624,084 $32,513,952
Sale of partnership interests 17,812.20 5,568,008 0 $5,568,008
Selling commissions and organization & offering 0.00 (488,220) 0 ($488,220)
Net sales of partnership interests 17,812.20 5,079,788 0 $5,079,788
Net loss 0.00 6,576,138 125,337 $6,701,475
Redemptions (13,946.78) (4,000,267) 0 ($4,000,267)
Balance at December 31, 1996 122,175.79 39,545,527 749,421 $40,294,948
Sale of partnership interests 26,213.79 9,652,700 100,000 $9,752,700
Selling commissions and organization & offering 0.00 (844,169) (3,000) ($847,169)
Net sales of partnership interests 26,213.79 8,808,531 97,000 $8,905,531
Net profit 0.00 3,703,214 74,911 $3,778,125
Redemptions (10,395.53) (3,515,603) 0 ($3,515,603)
Balance at December 31, 1997 137,994.05 48,541,669 921,332 $49,463,001
Sale of partnership interests 24,695.21 9,378,300 100,000 $9,478,300
Selling commissions and organization & offering 0.00 (822,213) (3,000) ($825,213)
Net sales of partnership interests 24,695.21 8,556,087 97,000 $8,653,087
Net profit 0.00 4,495,723 82,774 $4,578,497
Redemptions (14,354.27) (4,951,407) 0 ($4,951,407)
Balance at December 31, 1998 148,334.99 56,642,072 1,101,106 57,743,178
Net asset value per unit at December 31, 1998 (see Note 1) $381.85 $381.85
Net asset value per unit at December 31, 1997 (see Note 1) $351.77 $351.77
Net asset value per unit at December 31, 1996 (see Note 1) $323.68 $323.68
*Units of limited partnership interest; all unit amounts reflect
the 3-for-1 split as described in Note 1.
See accompanying notes to financial statements.
IDS MANAGED FUTURES, L.P.
STATEMENTS OF CASH FLOWS
1998 1997 1996
--------------- ------------- --------------
Cash flows from operating activities:
Net profit (loss) 4,578,497 3,778,125 6,701,475
Adjustments to reconcile net profit
(loss) to net cash provided by
(used in) operating activities:
Change in assets and liabilities:
Unrealized gain (loss) on open
futures contracts (3,286,118) (1,586,579) 837,500
Interest receivable 21,942 (49,359) (22,249)
Accrued liabilities (120,593) (632,835) 793,189
--------------- ------------- --------------
Net cash provided by (used in)
operating activities 1,193,728 1,509,352 8,309,915
Cash flows from financing activities:
Additional Units Sold 8,653,456 9,585,141 4,486,997
Partner Redemptions (5,133,469) (3,157,208) (4,238,326)
--------------- ------------- --------------
Net cash provided by (used in)
financing activities 3,519,987 6,427,933 248,671
--------------- ------------- --------------
Net increase (decrease) in cash 4,713,715 7,937,285 8,558,586
Cash at beginning of period 47,936,067 39,998,782 31,440,196
--------------- ------------- --------------
Cash at end of period $52,649,782 $47,936,067 $39,998,782
=============== ============= ==============
See accompanying notes to financial statements.
(1) General Information and Summary
IDS Managed Futures, L.P. (the Partnership), a limited partnership organized
on December 16, 1986 under the Delaware Revised Uniform Limited Partnership
Act, was formed to engage in the speculative trading of commodity interests
including futures contracts, forward contracts, physical commodities, and
related options thereon pursuant to the trading instructions of independent
trading advisors. The Partnership began trading on June 16, 1987. The General
Partners are IDS Futures Corporation (IDSFC) and CIS Investments, Inc. (CISI).
The clearing broker is Cargill Investor Services, Inc. (Clearing Broker or
CIS), the parent company of CISI.
Each unit of limited partnership interest was divided into three units
("3-for-1 split") at the close of business on February 28, 1995, each unit
having a net asset value per unit equal to the previous net asset value per
unit divided by three. Accordingly, the total number of units outstanding
tripled as of that date. For comparative purposes, the respective prior years'
unit amounts and net asset value per unit amounts have been restated for the
3-for-1 split.
Units of the Partnership representing an additional investment of $10,000,000
were offered by American Express Financial Advisors, Inc. (AXP Advisors),
formerly IDS Financial Services Inc., commencing March 29, 1993. An additional
investment of $20,000,000 was offered by AXP Advisors commencing January 31,
1994. Commencing June 26, 1995, AXP Advisors offered an additional investment
of $50,000,000. By December 31, 1998, a total of 165,503 units representing a
total investment of $49,457,119 of limited partnership interest had been sold
in the combined offerings. During the offerings, the General Partners purchased
a total of 1,606 additional units representing a total investment of $459,880.
Selling commissions of $2,887,066 were paid to AXP Advisors by the new limited
partners. All new investors paid organization and offering expenses totaling
$2,142,050. See the IDS Managed Futures, L.P. prospectus dated August 26,
1997 for further details concerning the offerings.
The Partnership shall be terminated on December 31, 2006 if none of the
following occur prior to that date: (1) investors holding more than 50% of
the outstanding units notify the General Partners to dissolve the Partnership
as of a specific date; (2) disassociation of the General Partners with the
Partnership; (3) bankruptcy of the Partnership; (4) decrease in the net asset
value to less than $500,000; (5) the Partnership is declared unlawful; or (6)
the net asset value per unit declines to less than $125 per unit and the
Partners elect to terminate the Partnership.
(2) Summary of Significant Accounting Policies
The accounting and reporting policies of the Partnership conform to generally
accepted accounting principles and to general practices within the commodities
industry. The following is a description of the more significant of those
policies which the Partnership follows in preparing its financial statements.
Revenue Recognition
Commodity futures contracts, forward contracts, physical commodities, and
related options are recorded on the trade date. All such transactions are
reported on an identified cost basis. Unrealized gains and losses reflected
in the statements of financial condition represent the difference between
original contract amount and market value (as determined by exchange
settlement prices for futures contracts and related options and cash dealer
prices at a predetermined time for forward contracts, physical commodities,
and their related options) as of the last business day of the year or as of
the last date of the financial statements.
The Partnership earns interest on 100% of the Partnership's average monthly
cash balance on deposit with the Clearing Broker at a rate equal to 90% of
the average 90-day Treasury bill rate for Treasury bills issued during that
month.
Redemptions
No redemptions are permitted by a subscriber during the first six months after
he or she has been admitted to the Partnership. Thereafter, a limited partner
may cause any or all of his or her units to be redeemed by the Partnership
effective as of the last trading day of any month of the Partnership based on
the Net Asset Value per unit on 10 days' written notice to the General
Partners. Payment will be made within 10 business days of the effective date
of the redemption. The Partnership's Limited Partnership Agreement contains a
full description of redemption and distribution procedures.
Commissions
Brokerage commissions and National Futures Association (NFA) clearing and
exchange fees are accrued on a round-turn basis on open commodity futures
contracts. Prior to June 26, 1995 the Partnership paid CIS commissions on
trades executed on its behalf at a rate of $50.00 per round-turn contract.
With the June 26, 1995 offering, the rate was changed to $35.00 per round-
turn contract. The first subscribers to that offering came into the fund at
the end of August 1995. Therefore, the new rate became applicable in September
1995. The Partnership pays this commission directly to CIS and CIS then
reallocates the appropriate portion to AXP Advisors.
Foreign Currency Transactions
Trading accounts in foreign currency denominations are susceptible both to
movements in the underlying contract markets as well as to fluctuation in
currency rates. Translation of foreign currencies into U.S. dollars for
closed positions are translated at an average exchange rate for the year,
while year-end balances are translated at the year-end currency rates.
The impact of the translation is reflected in the statements of operations.
Statements of Cash Flows
For purposes of the statements of cash flows, cash includes cash on deposit
with Clearing Broker in commodity futures trading accounts.
Use of 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 increase and decrease in net assets from operations
during the period. Actual results could differ from those estimates.
(3) Fees
Management fees are accrued and paid monthly, incentive fees are accrued
monthly and paid quarterly, and General Partners' administrative fees are paid
annually and amortized monthly. Trading decisions for the period of these
financial statements were made by the following Commodity Trading Advisors
(CTAs): John W. Henry & Company, Inc. (JWH); Welton Investment Corporation
(Welton); and Sabre Fund Management Limited (Sabre).
Under signed agreement for the periods presented prior to January 1, 1996,
Sabre received a monthly management fee of 1/4 of 1% of the month-end net
asset value of the Partnership under their management and 18% of the
Partnership's net trading profits, if any, in each quarter attributable to
their trading. Effective January 1, 1996, the agreement with Sabre was changed
to reduce the management fees paid to them to 1/8th of 1% of the month-end
net assets. Effective February 1, 1997 the agreement with Sabre was changed
to increase the management fees paid to them to 1/4 of 1% of the month-end net
assets. The agreement with Sabre, which expired on December 31, 1997, was not
renewed.
Under signed agreement, JWH will receive a monthly management fee of 1/3 of 1%
of the month-end net asset value of the Partnership under its management and
15% of the Partnership's net trading profits, if any, attributable to its
management.
Under signed agreement, Welton will receive a monthly management fee of 1/4
of 1% of the month-end net asset value of the Partnership under its management
and 18% of the Partnership's net trading profits, if any, attributable to its
management.
The Partnership pays an annual administrative fee of 1.125% and .25% of the
beginning of the year net asset value of the Partnership to IDSFC and CISI,
respectively.
(4) Income Taxes
No provision for Federal income taxes has been made in the accompanying
financial statements as each partner is responsible for reporting income
(loss) based on the pro rata share of the profits or losses of the Partnership.
The Partnership is responsible for the Illinois State Partnership Information
and Replacement Tax based on the operating results of the Partnership. Such
tax amounted to $71,906, $56,820, and $100,027 for the years ended December
31, 1998, 1997 and 1996, respectively, and is included in operating expenses
in the statement of operations.
(5) Financial Instruments with Off-balance Sheet Risk
The Partnership was formed to speculatively trade commodity interests. The
Partnership's commodity interest transactions and its related cash balance
are on deposit with the Clearing Broker at all times. In the event that
volatility of trading of other customers of the Clearing Broker impaired the
ability of the Clearing Broker to satisfy its obligations to the Partnership,
the Partnership would be exposed to off-balance sheet risk. Such risk is
defined in Statement of Financial Accounting Standards No. 105 (SFAS 105) as
a credit risk. To mitigate this risk, the Clearing Broker, pursuant to the
mandates of the Commodity Exchange Act, is required to maintain funds
deposited by customers relating to futures contracts in regulated commodities
in separate bank accounts which are designated as segregated customers'
accounts. In addition, the Clearing Broker has set aside funds deposited by
customers relating to foreign futures and options in separate bank accounts
which are designated as customer secured accounts. Lastly, the Clearing Broker
is subject to the Securities and Exchange Commission's Uniform Net Capital
Rule which requires the maintenance of minimum net capital at least equal to
4% of the funds required to be segregated pursuant to the Commodity Exchange
Act. The Clearing Broker has controls in place to make certain that all
customers maintain adequate margin deposits for the positions which they
maintain at the Clearing Broker. Such procedures should protect the
Partnership from the off-balance sheet risk as mentioned earlier. The
Clearing Broker does not engage in proprietary trading and thus has no direct
market exposure.
The contractual amounts of commitments to purchase and sell exchange traded
futures contracts were $869,511,990 and $820,115,419, respectively, on
December 31, 1998 and $137,689,850 and $231,540,372, respectively, on
December 31, 1997. The contractual amounts of these instruments reflect the
extent of the Partnership's involvement in the related futures contracts and
do not reflect the risk of loss due to counterparty performance. Such risk is
defined by SFAS 105 as credit risk. The counterparty of the Partnership for
futures contracts traded in the United States and most non-U.S. exchanges on
which the Partnership trades is the Clearing House associated with the
exchange. In general, Clearing Houses are backed by the membership and will
act in the event of nonperformance by one of their members or one of the
members' customers and as such should significantly reduce this credit risk.
In the cases where the Partnership trades on exchanges on which the Clearing
House is not backed by the membership, the sole recourse of the Partnership
for nonperformance will be the Clearing House.
The average fair value of commodity interests was $3,929,112 and $2,545,273
during 1998 and 1997, respectively. Fair value as of December 31, 1998 and
1997 was $5,740,766 and $2,454,648, respectively. The net gains or losses
arising from the trading of commodity interests are presented in the statement
of operations.
The Partnership holds futures and futures options positions on the various
exchanges throughout the world. The Partnership does not trade over-the-
counter contracts. As defined by SFAS 105, futures positions are classified
as financial instruments. SFAS 105 requires that the Partnership disclose the
market risk of loss from all of its financial instruments. Market risk is
defined as the possibility that future changes in market prices may make a
financial instrument less valuable or more onerous. If the markets should
move against all of the futures positions held by the Partnership at the same
time, and if the markets moved such that the CTAs were unable to offset the
futures positions of the Partnership, the Partnership could lose all of its
assets and the partners would realize a 100% loss. As of December 31, 1998,
the Partnership has contracts with two CTAs who make the trading decisions.
One of the CTAs trades a program diversified among all commodity groups,
while the other is diversified among the various futures contracts in the
financial and metals group. Both CTAs trade on U.S. and non-U.S. exchanges.
Such diversification should greatly reduce this market risk.
At December 31, 1998, the cash requirement of the commodity interests of the
Partnership was $6,224,367. This cash requirement was met by $51,092,138 held
in segregated funds and $7,298,410 held in secured funds. At December 31, 1997,
the cash requirement of the commodity interests of the Partnership of
$4,973,284 was met by $44,749,995 being held in segregated funds and
$5,641,720 being held in secured funds. At December 31, 1997 and 1996, cash
was on deposit with the Clearing Broker which exceeded the cash requirement
amount.
The following chart discloses the dollar amount of the unrealized gain or loss
on open contracts related to exchange traded contracts for the Partnership at
December 31, 1998 and 1997:
Commodity Group 1998 1997
Agricultural $ 91,344 $ 315,072
Currency 339,704 257,116
Stock Indices 511,912 226,950
Energies 133,111 52,616
Metals (2,413) 1,219,510
Interest 4,667,108 383,384
Total 5,740,766 2,454,648
The range of expiration dates of these exchange traded open contracts is
January 1999 to December 1999.
Acknowledgment
To the best of my knowledge and belief, the information contained herein is
accurate and complete.
/s/ Richard A. Driver
Richard A. Driver
Treasurer, CIS Investments, Inc.,
one of the General Partners and Commodity Pool Operators of
IDS Managed Futures, L.P.