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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(b) OR 12(g) OF
THE SECURITIES EXCHANGE ACT OF 1934
THE DENNIS FUND LIMITED PARTNERSHIP
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(Exact Name of Registrant as Specified in Its Charter)
CONNECTICUT 06-1456461
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
TWO AMERICAN LANE, P.O. BOX 5150, GREENWICH, CONNECTICUT 06831-8150
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (203) 861-1000
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Securities to be registered pursuant to Section 12(b) of the Act: NONE
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Securities to be registered pursuant to Section 12(g) of the Act:
LIMITED PARTNERSHIP INTERESTS
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(Title of Class)
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ITEM 1. BUSINESS.
OVERVIEW
The Dennis Fund Limited Partnership (the "Partnership") was formed as a limited
partnership on June 18, 1996 under the Connecticut Uniform Limited Partnership
Act (the "Partnership Act"). The Partnership maintains its principal office at
Two American Lane, P.O. Box 5150, Greenwich, Connecticut 06831-8150, with a
telephone number of (203) 861-1000. The Partnership is engaged in the business
of trading, buying, selling, spreading, swapping or otherwise acquiring, holding
or disposing of commodities, futures contracts, forward contracts, foreign
exchange commitments, exchange for physicals, swap contracts, spot (cash)
commodities and other items, options on the foregoing, and any rights pertaining
to the foregoing contracts, instruments or investments throughout the world
("Commodities"). The objective of the Partnership's business is appreciation of
the assets through the speculative trading of Commodities. Although currently
the Partnership's activities are intended to be limited to trading Commodities
and investing capital not needed for margin purposes in securities approved by
the Commodity Futures Trading Commission (the "CFTC") for investment of customer
funds, the Limited Partnership Agreement of the Partnership, dated June 18, 1996
and as amended on December 15, 1997 (the "Partnership Agreement"), also permits
the Partnership to trade (i) any security as defined in Section 2(1) of the
Securities Act of 1933, as amended (the "1933 Act"), (ii) any option, warrant or
other right on or pertaining to any of the foregoing, whether in the United
States of America or anywhere else throughout the world, and (iii) any other
investment or transaction that the General Partner (as defined herein) deems, in
its sole discretion, to be consistent with the objectives of the Partnership
(with Commodities, collectively, the "Investments").
In June, 1996, the Partnership commenced a private placement of units of limited
partnership interest ("Units") in reliance on the exemptions afforded by, among
others, Section 4(2) of the 1933 Act and Rule 506 of Regulation D promulgated
thereunder. Units are offered monthly at a price per Unit equal to the
then-current Net Asset Value per Unit (as defined below) plus a selling
commission equal to 5% unless such selling commission is waived in whole or in
part. Since the Partnership began the private placement in 1996, through March
1999, 27,357.6775 Units had been sold for a total of $38,406,152. See "Item 10.
Recent Sales of Unregistered Securities". The minimum subscription is $26,250
for new investors other than IRAs (as defined herein) and Keogh plans, or
$10,500 for Employee Benefit Plans and existing limited partners of the
Partnership ("Limited Partners"), which amounts include selling commissions of
$1,250 and $500, respectively. "Net Asset Value" of the Partnership in general
means total assets of the Partnership, including, but not limited to, all cash
and cash equivalents, accrued interest, earned discount, and open Commodities
positions, less total liabilities, including, but not limited to, brokerage
commissions that would be payable with respect to the closing of open
Commodities positions, all as determined in accordance with the principles set
forth in the Partnership Agreement or, where no such principles are specified
therein, in accordance with United States generally accepted accounting
principles applied on a consistent basis ("GAAP"). "Net Asset Value per Unit"
means the Net Asset Value of the Partnership divided by the number of Units
outstanding as of the date of determination. The value of all Commodities shall
be the market value thereof. The market value of a Commodity traded on an
exchange shall be based upon the settlement price on the exchange on the date of
determination; provided, however, that if a Commodity could not be liquidated on
the day with respect to which the assets of the Partnership are being
determined, the settlement price on the first subsequent day on which the
contract could be liquidated shall be the basis for determining the liquidating
value thereof. The market value of a forward contract, a swap contract, or any
other off-exchange contract, instrument, or transaction shall mean its market
value as determined by the General Partner on a basis consistently applied.
Investors receive a Confidential Private Placement Memorandum and Disclosure
Document (the "Disclosure Document") which sets forth the material terms of the
investment. The Disclosure Document is updated every nine (9) months or upon any
material change (whichever is sooner), as required by the regulations
promulgated under the Commodity Exchange Act, as amended (the "CEAct"), and
filed with the CFTC for compliance therewith.
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Since October, 1996, the Partnership has engaged in the speculative trading of
Investments and will continue to do so until its dissolution and liquidation,
which will occur on the earlier of December 31, 2026 or the occurrence of any of
the events set forth in Article VIII, Section 8.1 of the Partnership Agreement.
A copy of the Partnership Agreement is being filed herewith as Exhibit 3.2.
The Partnership's general partner, Kenmar Advisory Corp. (the "General
Partner"), is a Connecticut corporation formed in September 1983 as a New York
corporation and subsequently reorganized as a Connecticut corporation in January
1996. Kenneth A. Shewer is its Chairman and Marc S. Goodman is its President.
Messrs. Shewer and Goodman are the General Partner's sole directors. All of the
General Partner's stock is owned directly by Kenmar Holdings Inc., which is
ultimately owned, indirectly and equally, by Messrs. Shewer and Goodman. The
General Partner has been registered with the CFTC as a commodity pool operator
("CPO") and a member in good standing of the National Futures Association (the
"NFA") in such capacity since February 1984. The registration of the General
Partner with the CFTC and its membership in the NFA must not be taken as an
indication that any such agency or self-regulatory body has recommended or
approved either the General Partner or the Partnership.
Under the Partnership Agreement, responsibility for managing the Partnership is
vested solely in the General Partner. The Limited Partners will not participate
in the management or operations of the Partnership. Any participation by a
Limited Partner in the management of the Partnership may jeopardize the limited
liability of such Limited Partner. Responsibilities of the General Partner
include, but are not limited to, the following: selecting and monitoring the
commodity broker(s); determining whether the Partnership will make
distributions; administering redemptions of Units; preparing periodic and annual
reports to the Limited Partners; preparing reports, filings, registrations, and
other documents required by applicable regulatory bodies, exchanges, or boards;
depositing the Partnership's assets in the form of cash in an account or
accounts at banks or brokers selected by the General Partner; borrowing money
(but only in connection with making or taking delivery of a Commodity);
directing the investment of the Partnership's assets; executing various
documents on behalf of the Partnership and the Limited Partners pursuant to the
power of attorney described below; and supervising the liquidation of the
Partnership if an event causing termination of the Partnership occurs. To
facilitate the execution of various documents by the General Partner on behalf
of the Partnership, the Limited Partners appoint the General Partner, with full
power of substitution, such Limited Partner's attorney-in-fact by executing the
Signature Page of the Partnership Agreement and Power of Attorney and by
becoming a Limited Partner. For additional information regarding the Partnership
Agreement, see "Item 11. Description of Registrant's Securities to be
Registered". The General Partner has selected E. D. & F. Man International Inc.
(the "Broker") to be the broker for the Partnership.
The Partnership itself does not have any employees. Rather, the General Partner,
in its capacity as a CFTC-regulated CPO, employs 42 persons (as of March 31,
1999) and provides the Partnership with the services of certain personnel to
conduct its operational activities.
The sole commodity trading advisor ("CTA") to the Partnership is Dennis Trading
Group, Inc. (the "Advisor"), an Illinois corporation and registered CTA and CPO.
The Advisor is responsible for making the trading decisions for the Partnership.
Investors should note that the Advisor is the sole advisor for the Partnership.
The Partnership is not an operating company with "traditional" income or
expenses. It is a stand-alone investment vehicle that offers investors the
opportunity to participate in the futures markets under the guidance of a
professional CTA.
FEES AND EXPENSES
The General Partner has complete discretionary authority regarding the admission
of additional Limited Partners and may admit additional Limited Partners under
terms and conditions comparable to or different from those under which the
existing Limited Partners were solicited.
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Except as otherwise noted, the fees and expenses set described are for investors
who subscribe for Units on or after April 1, 1997. Limited Partners who
subscribed for Units prior to April 1, 1997 were charged different Advisor fees
and will continue to be charged those fees on those Units purchased prior to
that date but will pay the Advisor fees described below with respect to any
additional investments.
Fees to the General Partner
Offering Fee. For managing the continuing offering of Units, as of the end of
each month, the Partnership currently pays to the General Partner a fee (the
"Offering Fee") equal to 0.25% (3% annually) of that month's beginning Net Asset
Value of the Partnership except that the Offering Fee for Million Dollar
Investors will equal 0.0833% (1% annually) of each month's beginning Net Asset
Value of the Partnership. A Million Dollar Investor will be charged the reduced
Offering Fee by receiving a rebate equal to two-thirds of the Offering Fee. The
amount of this reduction will be rebated monthly by the General Partner to the
Partnership for the benefit of such Million Dollar Investor in the form of
additional Units. A "Million Dollar Investor" is an investor whose aggregate
investment in the Partnership (net of redemptions and excluding any appreciation
and/or depreciation in Net Asset Value) equals or exceeds $1,000,000. The
General Partner, in its sole and absolute discretion, will determine whether an
investment or series of investments constitutes treatment as a Million Dollar
Investor. The General Partner, in its sole discretion, is authorized to set its
compensation for managing the continuing offering of Units. For additional
information on the General Partner's authority, see "Conflicts of Interest --
The General Partner" below.
Advisor's Fees. As compensation for managing the Partnership, the General
Partner currently receives 4/7 of the Advisor's management fee and 4/11 of the
Advisor's incentive fee. See "Fees to the Advisor" below and "Item 7.
Certain Relationships and Related Transactions".
Out of all compensation paid to the General Partner, the General Partner may
also pay selling agents additional selling compensation and/or compensation for
ongoing services up to 3% annually.
Fees to the Advisor
Advisor's Management Fee. Pursuant to the Advisory Agreement (as defined
herein), the Partnership currently pays to the Advisor a monthly management fee
(the "Management Fee"). The monthly Management Fee is assessed proportionately:
(i) for Units purchased prior to April 1, 1997, the monthly Management Fee is
equal to 1/6 of 1% (2% annually) of the Net Asset Value of the Partnership, and
(ii) for Units purchased on or after April 1, 1997, the monthly Management Fee
is equal to 0.1458% (1.75% annually) of the Net Asset Value of the Partnership.
Advisor's Incentive Fee. Pursuant to the Advisory Agreement, the Partnership
currently pays to the Advisor (i) a quarterly incentive fee equal to 25% of the
Net New Trading Profits for Units purchased prior to April 30, 1997, and (ii) a
quarterly incentive fee equal to 27.5% of the Net New Trading Profits for Units
purchased on or after April 30, 1997.
"Net New Trading Profits" in general means the net trading profits (realized and
change, if any, in unrealized) earned on the Partnership's net assets (excluding
interest or interest-equivalent income), decreased by brokerage commissions
(paid and change, if any, in accrued) and the Advisor's management fee, with all
such items determined from the first day of the calendar quarter that
immediately follows the last calendar quarter for which an incentive fee was
earned by the Advisor (or, if no incentive fee was earned previously by the
Advisor, from the commencement of trading) to the close of business on the last
day of the calendar quarter with respect to which such incentive fee calculation
was made. Operating expenses of the Partnership do not reduce Net New Trading
Profits when calculating the Advisor's incentive fee.
Pursuant to an arrangement between the Advisor and the General Partner: (i) the
Advisor receives 3/7 and the General Partner 4/7 of the management fee, and (ii)
the Advisor receives 7/11 and the General Partner 4/11 of the incentive fee.
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Other Fees and Expenses
Brokerage Commissions. The Partnership's current brokerage commission expense is
$10 per roundturn transaction plus administrative "give-up" fees. Such "give-up"
fees are expected to be approximately 0.4% of the Net Asset Value of the
Partnership.
Administrative and Ongoing Operating Fees and Expenses. The Partnership will pay
all administrative and ongoing operating fees and expenses. Ordinary
administrative expenses include, but are not limited to, accounting, auditing,
record keeping, administration, computer and clerical expenses (including
expenses incurred in preparing reports and tax information to Limited Partners
and regulatory authorities, printing and duplication expenses and mailing
expenses), legal fees and expenses and other expenses incurred by such persons
and by the General Partner and its affiliates in providing services to the
Partnership. Legal fees and expenses include outside counsel's fax and copying
charges and other disbursements (such as filing fees, whether paid by the
General Partner or outside counsel). Such fees were approximately 0.5%
(annualized) of the Net Asset Value of the Partnership for 1998 and are not
expected to exceed 0.5% of the Net Asset Value of the Partnership per year.
Extraordinary Expenses. The Partnership is responsible for all extraordinary
expenses (e.g., litigation expenses) incurred on behalf of the Partnership. As
of March 31, 1999, the Partnership has not paid, and does not anticipate paying,
any extraordinary expenses.
Other Expenses of the Limited Partners
Although not an expense of the Partnership, investors may be subject to a
selling commission, payable to independent selling agents, equal to 5% of the
then-current Net Asset Value per Unit unless the payment of all or any portion
of such amount is waived.
The Partnership furnishes each subscriber with monthly statements and a
certified annual report of financial condition covering certain aspects of the
Partnership's operations.
The following chart reflects the actual fees and expenses for the periods
presented.
<TABLE>
<CAPTION>
Year ended December 31, Period June 18, 1996
Three months ended -------------------------- (inception) to
March 31, 1999 1998 1997 December 31, 1996
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(in thousands)
<S> <C> <C> <C> <C>
Brokerage
Commissions $420,211 $1,400,182 $943,428 $25,235
Management Fees $174,258 $ 482,628 $219,334 $13,548
Incentive Fees $ 0 $3,229,070 $702,920 $ 0
General Partner's
Offering Fees $282,651 $ 748,537 $324,867 $20,516
Operating Expenses $ 50,108 $ 135,589 $ 79,101 $19,825
</TABLE>
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INCOME TAX ASPECTS
THE PRIMARY BENEFIT INTENDED TO BE ACHIEVED FROM AN INVESTMENT IN THE
PARTNERSHIP IS CURRENT INCOME AND CAPITAL APPRECIATION AND NOT TAX BENEFITS. THE
INFORMATION BELOW IS PRESENTED TO GIVE PROSPECTIVE INVESTORS GUIDANCE AS TO
CERTAIN FEDERAL INCOME TAX ASPECTS OF THEIR INVESTMENT IN THE PARTNERSHIP.
This discussion will outline some of the more significant aspects of Federal
income tax law that might affect, or result from, an investment in the
Partnership. This discussion is not intended as a substitute for careful tax
planning. Each prospective Limited Partner should consult his own tax advisor to
satisfy himself as to the income and other tax consequences of an investment in
the Partnership generally and specifically with reference to his own tax
situation.
The statements in this discussion are based upon current provisions of the
United States Internal Revenue Code of 1986, as amended (the "Code"), existing
and currently proposed Treasury Regulations, legislative history, administrative
rulings, and judicial decisions, any of which could be changed at any time by
legislation or otherwise. Thus, no assurance can be given that changes,
including retroactive changes, will not be forthcoming which would affect the
accuracy of any statements in this discussion. Prospective Limited Partners
should be aware that, although the Partnership intends to adopt positions it
believes are in accord with current interpretations of the Federal income tax
law, the Internal Revenue Service (the "IRS") may not agree with the tax
positions taken by the Partnership and that, if challenged by the IRS, the
Partnership's tax positions might not be sustained by the courts. An examination
of the Partnership's tax return could result in an audit of a Limited Partner's
personal return and a disallowance or challenge of the treatment thereon or a
challenge or disallowance of other items not attributable to an investment in
the Partnership.
Interests are expected to be purchased by two types of investors: (i) tax-exempt
Employee Benefit Plans (as defined herein) or other entities intended to be
exempt from Federal income taxation, such as certain charitable, scientific and
education organizations, funds and foundations ("Tax-exempt Limited Partners")
and (ii) taxable individuals and entities ("Taxable Limited Partners"). Except
where otherwise noted, the following discussion relates generally to the Federal
income tax consequences of an investment in the Partnership by Taxable Limited
Partners who are individuals who are either United States citizens or United
States residents.
Partnership Status
Provided the Partnership does not elect to be taxed as a corporation, then
subject to the discussion on publicly-traded partnerships in the following
paragraphs, the Partnership should be classified as a partnership for Federal
income tax purposes (and not as an association taxable as a corporation) and,
therefore, as an entity, will not be subject to any Federal income tax. No
ruling from the IRS with respect to partnership status has been or will be
sought. In the absence of a ruling, there can be no assurance that the IRS will
not successfully contend that the Partnership should be treated as an
association taxable as a corporation.
Generally, a publicly-traded partnership is taxable as a corporation unless 90%
or more of its gross income is composed of "qualifying income," including gains
from the sale of commodities or futures, forwards and options with respect to
commodities. A partnership will be considered publicly-traded if interests in
the partnership are readily tradable on a secondary market or its substantial
equivalent. The Partnership anticipates that at least 90% of its income will be
qualifying income. Therefore, the Partnership should not be classified as an
association taxable as a corporation. However, if the Partnership should at any
time be classified as an association taxable as a corporation, the Limited
Partners would not be treated as partners for tax purposes, income or loss of
the Partnership would not be passed through to the Limited Partners and the
Partnership would be subject to tax on its income at the rates applicable to
corporations. In addition, all or a portion of distributions made by the
Partnership to the Limited Partners could be taxable to them as dividends (to
the extent of current or accumulated earnings and profits) or capital gains,
while none of those distributions would
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be deductible by the Partnership in computing its taxable income. Any such
recharacterization would reduce the after-tax return to a Limited Partner from
his investment in the Partnership.
Taxation of Limited Partners
Subject to the publicly traded partnership rules, the Partnership, as an entity,
will not be subject to any Federal income tax, and each Limited Partner will be
taxed on his allocable share of the Partnership's taxable income, regardless of
whether any cash is distributed. In any particular year, a Limited Partner's
income tax liability attributable to Partnership income will likely exceed the
cash distributed to him by the Partnership. Each Limited Partner will be
required to report on his Federal income tax return his distributive share of
Partnership income, gain, loss or deduction for each year. The character of an
item of income or loss (e.g., as capital or ordinary) usually will be the same
for the Limited Partner as for the Partnership. Moreover, the taxable income
allocated to a Partner may bear no relationship to the amount debited or
credited to his book Capital Account. Each Limited Partner may be entitled to
deduct on his own income tax return his allocable share of the Partnership's net
losses, if any, to the extent of the tax basis and the amount "at risk" (see
"Tax and `At Risk' Basis of Limited Partnership Interests" below) of his Units
at the end of the Partnership year in which such losses occur. The amount of
each Partner's distributive share of income or loss will be based, in part, upon
the method of accounting and the tax year of the Partnership and of any other
partnership in which the Partnership invests, as discussed below.
Tax and "At Risk" Basis of Limited Partnership Interests
Generally, both the tax and "at risk" basis of any Limited Partner's Units will
be equal to the amount paid for his Units reduced by the Limited Partner's share
of Partnership distributions and net losses and increased by his share of
Partnership net income. Partnership debt (attributable to direct borrowings or
margin) may not be included in the tax or "at risk" basis of a Unit since such
debt will not be a personal liability of the Limited Partners. Instead, the
General Partner will be ultimately liable for such debt if it is not repaid by
the Partnership.
Each Limited Partner's tax basis for his Units is important because it is used
in measuring gain or loss (or tax basis of assets received) upon partial or
complete dispositions and withdrawals by the Limited Partner of his Units. Tax
basis is also important because a Limited Partner may not deduct his share of
any Partnership net losses to the extent that they exceed his at risk tax basis.
This limitation may be material to a Limited Partner who finances the
acquisition of his Units with funds borrowed with non-recourse debt. Each
Limited Partner should compute his own tax basis in the Partnership since the
Partnership does not intend to compute the tax basis of each Limited Partner in
the Partnership.
Partnership Allocation of Profits and Losses
For Federal income tax purposes, a Limited Partner's distributive share of items
of Partnership income, gain, loss, or deduction will be determined as provided
under the Partnership Agreement.
Treasury regulations set forth requirements to determine when partnership profit
and loss allocations will be respected for Federal income tax purposes. While
the General Partner believes that, if examined, the Partnership's allocations
will be respected, there is no assurance that the regulations could not be
interpreted by the IRS in a manner materially adverse to the Limited Partners.
If the allocations provided by the Partnership Agreement are not respected by
the IRS or otherwise require amendment for Federal income tax purposes, the
amount of taxable income allocated to any Partner for Federal income tax
purposes may be increased, without any corresponding increase in distributions
to pay the additional tax liability.
Cash Distributions, Withdrawals and Redemptions of Units
Cash distributions from a partnership are generally not equivalent to
partnership income as determined for income tax purposes. A Limited Partner will
normally not recognize additional taxable income resulting from
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Partnership distributions except that a Limited Partner may be allocated taxable
income upon a partial or complete withdrawal from the Partnership. However, any
cash distribution (whether on a withdrawal, redemption or otherwise) in excess
of a Limited Partner's tax basis will be taxable to him as though it was
attributable to a sale or exchange of his Partnership interest. Loss will be
recognized only if, after the distributions following the complete redemption of
a Limited Partner's Partnership interest, he has any tax basis remaining in the
Partnership, in which case he will recognize loss to the extent of such
remaining basis.
Provided the Limited Partner is not a dealer in "securities", such gain or loss
generally will be capital gain or loss, subject to an exception for certain
types of partnership income (e.g., original issue discount or market discount
which has accrued, but not yet been recognized, as discussed in "Recognition and
Characterization of Partnership Income" below.)
Deduction of Partnership Expenses
The Partnership will be deducting certain operating expenses including
reimbursements that it will pay to the General Partner. Applicable case law
indicates that expenses, including reimbursements such as those that will be
paid to the General Partner, must be "ordinary and necessary" in order to be
deductible by the Partnership. Whether such expenses are ordinary and necessary
and incurred in connection with a trade or business depends to a large extent on
a factual determination of the purposes for which they are paid and their
reasonableness in light of the Partnership's forecasted operations. The IRS may
closely examine the deductions for these fees and expenses, and may challenge
such deductions based upon such payments being excessive or based upon a
recharacterization of such payments. In that event, each Limited Partner may be
required to report and pay tax on an increased allocable share of Partnership
income, without any corresponding increase in distributions to pay the
additional tax liability.
The Partnership will take the position that it is engaged in a trade or business
on its Federal income tax returns, and that expenses allocated to Limited
Partners are not investment expenses. Investment expenses characterized as
miscellaneous itemized expenses are deductible only to the extent that the
aggregate amount of such expenses exceeds two percent (2%) of an individual
taxpayer's adjusted gross income. Moreover, the deduction for allowable itemized
deductions (other than medical expenses, casualty and theft losses and
investment interest) is reduced by an amount equal to three percent (3%) of a
taxpayer's adjusted gross income in excess of a threshold amount. This amount is
$126,600 in 1999 for taxpayers filing jointly and is increased annually to
account for inflation. No assurance can be given that the IRS will not
successfully contend that the Partnership's expenses should be treated as
incurred in investment activities, rather than in a trade or business. The IRS
also may attempt to recharacterize any incentive allocation to the General
Partner as a miscellaneous itemized expense.
Offering Fee Rebate for Million Dollar Investors
A Million Dollar Investor will be charged the reduced Offering Fee by receiving
a monthly rebate equal to two-thirds of the Offering Fee, in the form of
additional Units. The General Partner expects that the issuance of additional
Units pursuant to such rebate should not result in any adverse tax consequences
to a Million Dollar Investor. However, the IRS might recharacterize the Offering
Fee such that the rebate and the issuance of additional Units may be treated as
ordinary income in an amount equal to the value of such additional Units, and
any corresponding deduction for the Offering Fee may be disallowed in whole or
in part.
Sale or Redemption of Partnership Units
Upon the sale or redemption of his Units, the selling Limited Partner will
recognize gain or loss measured by the difference between the consideration
received and his adjusted tax basis in the Units (adjusted for such Limited
Partner's distributive share of Partnership net income or net losses or
deduction attributable to such Partnership interest for the portion of the year
such Units are owned by such Limited Partner). If the selling Limited Partner is
not a "dealer" in securities, such gain or loss generally will be capital gain
or loss, subject to an exception for certain types of partnership income (e.g.,
original issue discount or market discount which
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has accrued, but not yet been recognized, as discussed in "Recognition and
Characterization of Partnership Income" below).
Recognition and Characterization of Partnership Income
The Partnership's investments are expected to generate ordinary income (or loss)
as well as short-term and long-term capital gains (or losses). As the character
and timing of Partnership income depends on the performance of each investment,
it is impossible to predict the character or magnitude of such income for any
year. The Internal Revenue Service Restructuring and Reform Bill of 1998 revised
the treatment of capital gains and losses for non-corporate investors. For sales
and exchanges of capital assets occurring after December 31, 1997, assets must
be held for more than twelve months for gains to qualify as long-term capital
gains, and such gains are generally taxed at a 20% rate. Gains or losses from
sales of capital assets that are held for less than twelve months are treated as
short-term gains (or losses) and are taxed at ordinary income rates. Capital
losses may be used only to offset capital gains plus (for individuals) up to
$3,000 of ordinary income annually. Rules which govern the manner in which
Partnership income will be realized are complex and varied. The following
discussion is intended to highlight only some of those rules; it is not an
exhaustive description. Investors are urged to consult their own tax advisors as
to the specific tax treatment of the Partnership's transactions.
Section 1256 Contracts. The Code distinguishes between "Section 1256 Contracts"
and other interests in property. Section 1256 Contracts include commodity
futures contracts, certain foreign currency contracts and non-equity options.
Moreover, the Partnership may from time to time trade in certain foreign
currency contracts or options. Under the Code, open positions in Section 1256
Contracts at the end of the taxable year are marked-to-market as if they had
been sold at their fair market value on such date. Unrealized gains and losses
on open positions in Section 1256 Contracts held by the Partnership at the end
of its taxable year are taken into account along with realized gains and losses
of the Partnership in determining each Partner's distributive share of taxable
gain and loss. Appropriate adjustment is made to the gain or loss realized upon
the ultimate disposition of Section 1256 Contracts to reflect the fact that
unrealized gain or loss was reported in the prior year.
Except as provided by Section 988 of the Code, gain or loss from
marking-to-market generally is deemed to consist of 60% long-term capital gain
or loss and 40% short-term capital gain or loss (so-called, "60/40 Rule"),
regardless of the period for which the Section 1256 Contracts are held and
regardless of whether the taxpayer's positions in Section 1256 Contracts were
short or long. Net long-term capital gains are subject to Federal income tax at
a maximum stated rate of 20% for individuals, while ordinary income and net
short-term capital gains are subject to tax at a maximum stated rate of 39.6%.
Thus, Section 1256 Contracts may be subject to tax at more favorable rates than
other investments.
Foreign Currency Transactions. The Partnership may recognize income from
contracts that are denominated in a foreign currency. Generally, foreign
currency gain or loss from a transaction described in Code Section 988 realized
by reason of a change in the exchange rate, will give rise to ordinary income or
loss. The Code, however, provides exceptions for certain contracts, options and
other instruments which may either require mark-to-market treatment under rules
applicable to Section 1256 Contracts or may otherwise give rise to short-term
capital gain or loss.
Original Issue Discount; Market Discount and Bond Premium. The Partnership may
acquire bonds and other debt instruments for less than their face amount. The
amount of the discount will generally be treated as original issue discount
("OID") for debt instruments purchased at issue or as "market discount" for
instruments purchased in the secondary market. The OID which accrues will be
reported as interest income by the Limited Partners although the Partnership
will not generally receive payments corresponding to this income until the
maturity of or the disposition by the Partnership of the debt instrument. Market
discount which accrues need not be recognized in income by the Partnership until
maturity or disposition of the debt instrument, but in such case the Partnership
will be unable to deduct interest expense it incurs to purchase or carry the
instrument until the market discount is recognized in income. Taxable income
from OID and market discount recognized by
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the Partnership will result in appropriate adjustments in any gain or loss
recognized upon a sale, exchange or repayment of such obligations. If the
Partnership purchases a bond at a cost which, generally, is in excess of the
amount payable on maturity, the excess may constitute amortizable bond premium
which is treated as a reduction of interest on such bond. If the Partnership
makes an election under Section 171 of the Code, the Partnership generally
allocates amortizable bond premium among the interest payments on the bond and
the amount so allocated generally shall be applied against (and operate to
reduce) the amount of such interest payments.
Conversion Transaction
Capital gains of the Partnership from "conversion transactions" will be
recharacterized in part as ordinary income. "Conversion transactions" result in
a gain that is primarily based upon the time value of a taxpayer's investment
and not upon capital risk. The amount of the taxpayer's ordinary income will be
computed by using 120% of an applicable Federal interest rate times the net
investment in the transaction.
"Conversion transaction" defined. The anti-conversion rules are directed towards
arrangements in which substantially all of the expected return is attributable
to the time value of the net investment in the transaction (i.e., the functional
equivalent of a loan). In addition, the arrangement would have to come within
one of the following:
(1) A transaction in which the taxpayer acquires property and
on a substantially contemporaneous basis enters into a contract to sell the
property (or substantially identical property) for a determined price.
(2) A straddle as defined by Code Section 1092(c) (offsetting
positions in personal property), except that for purposes of the anti-conversion
rules, stock is included in the definition of personal property.
(3) A transaction that is marketed or sold as producing
capital gains.
(4) Other transactions that will be specified in IRS
regulations.
Special rules for options dealers and commodities traders. Transactions of
options dealers in the normal course of dealing in options, and of commodities
traders in the normal course of trading Code Section 1256 contracts will
generally not be treated as conversion transactions. However, this exception
does not apply (and Code Section 1258 applies) to any limited partner or limited
entrepreneur if (i) substantially all of the limited partner's or limited
entrepreneur's expected return from an entity is attributable to the time value
of the net investment, (ii) the transaction was marketed or sold as producing
capital gains treatment, or (iii) the transaction is specified in regulations.
The preceding discussion is a basic synopsis of the taxation of transactions
involving various types of securities. The discussion does not cover some of the
more complex provisions relating to the taxation of these and other
transactions. Therefore, investors are urged to consult their own tax advisors
as to the tax treatment of transactions in which the Partnership may engage.
Minimum Tax on Tax Preferences
Noncorporate taxpayers are subject to the alternative minimum tax to the extent
it exceeds their regular tax. The alternative minimum tax rate for individuals
is 26% on alternative minimum taxable income up to $175,000 ($87,500 for married
persons who file separate returns) and 28% thereafter. The alternative minimum
tax exemption amount is $45,000 ($22,500 for married persons who file separate
returns). Taxpayers liable for alternative minimum tax are required to make
estimated tax payments. Miscellaneous itemized deductions are generally not
allowable in computing alternative minimum taxable income. Thus, a Limited
Partner may not be able to deduct his share of Partnership fees and expenses
including, perhaps, his
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share of any incentive allocation to the General Partner, in determining his
alternative minimum taxable income.
The extent, if any, to which a Limited Partner will be subject to the
alternative minimum tax will depend on that Limited Partner's overall tax
situation. Consequently, prospective Limited Partners should consult their tax
advisors to determine the potential impact, if any, of the alternative minimum
tax on their investment in the Partnership in light of their particular tax
situation.
Limitation on Deduction of Investment Interest
The Partnership will take the position that it is engaged in a trade or business
on its Federal income tax returns, and that interest incurred by the Partnership
is not an investment expense. No assurance can be given that the IRS will not
successfully contend that the interest expense should be treated as incurred in
investment activities. In that event, interest expense incurred by a Limited
Partner to acquire or carry his Partnership interest, will be investment
interest ("Investment Interest"). An individual may deduct Investment Interest
only to the extent of his net investment income (i.e., the excess of non-trade
or business income from interest, dividends and gain from the disposition of
investment property over expenses incurred in earning such income) from the
Partnership or other investments. In computing net investment income, long term
capital gains are includable only if a Limited Partner elects to have such gains
taxed at the same rate as his ordinary income.
Investment Interest in excess of net investment income may be deducted in
subsequent years limited by the amount of net investment income in such year(s).
The Investment Interest limitation is computed separately by each Limited
Partner and not by the Partnership.
Interest Incurred to Purchase Tax Exempt Obligations
Section 265(a)(2) of the Code may disallow any deduction for interest on
indebtedness of a taxpayer or a related person incurred or continued to purchase
or carry obligations the interest on which is wholly exempt from tax. The IRS
announced in Revenue Procedure 72-18 that the prescribed purpose will be deemed
to exist with respect to indebtedness incurred to finance a "portfolio
investment." The Revenue Procedure further states that a limited partnership
interest will be regarded as a "portfolio investment," unless rebutted by other
evidence. Therefore, in the case of a Limited Partner owning tax-exempt
obligations, his allocable portion of any interest expense incurred to purchase
or carry a Partnership interest may be viewed as incurred to continue carrying
tax-exempt obligations, and if so, the Limited Partner would not be allowed to
deduct all or a portion of such interest. Moreover, the deduction of any
interest expense incurred by a Limited Partner or by the Partnership may also be
limited if the Partnership invests in tax-exempt obligations.
Income and Losses from Passive Activities
Losses derived by a limited partner from business activities of a limited
partnership in which the taxpayer does not materially participate ("passive
activities") are generally only deductible to the extent of income from other
passive activities. However, portfolio income (such as dividends, interest and
gain from the sale of securities which are actively traded or held for
investment) or "non-passive" income is not treated as income from a passive
activity, and thus may not be offset by losses from passive activities.
All of the Partnership's income will likely be portfolio or non-passive income.
Therefore, Partnership net income allocable to a Limited Partner likely cannot
be offset by losses from a Limited Partner's passive activities. However,
Partnership losses, if any, should not be subject to the limitation on the
deduction of losses from passive activities.
Tax-exempt Partners
Each Tax-exempt Limited Partner will be subject to tax on its unrelated business
income, and must file a tax return reporting such income. As discussed below,
the Partnership may generate unrelated business taxable
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income allocable to Tax-exempt Limited Partners. To the extent a Tax-exempt
Limited Partner is allocated unrelated business income from the Partnership, it
is generally subject to the same provisions as Taxable Limited Partners with
respect to reporting and paying tax (including estimated tax) on such income.
Tax-exempt Limited Partners that have never realized unrelated business income
should thus be aware that they will be subject to the requirement of making
quarterly estimated income tax payments for any unrelated business income
allocated to them by the Partnership beginning with the quarter in which they
are admitted into the Partnership. The Partnership will attempt to provide each
Tax-exempt Limited Partner with an estimate of the Partnership's prior year's
unrelated business income so that each Tax-exempt Limited Partner can attempt to
make timely estimated tax payments. However, there can be no assurance that the
Partnership's unrelated business income for a prior year will be equal to its
unrelated business income in the following tax year. If the Tax-exempt Limited
Partner is a trust, the tax rates would be the rates applicable to trusts
(including alternative minimum tax). If the Tax-exempt Limited Partner is not a
trust, it would be subject to corporate tax rates (including alternative minimum
tax).
"Unrelated business income" is the gross income derived by an exempt
organization from any unrelated trade or business regularly carried on by it or
by a partnership of which it is a member. Specific deductions which are directly
connected with the carrying on of such trade or business, computed with
modifications, are allowed. Even if the Partnership is not characterized as
being in a trade or business, the Partnership will likely be operated in such a
manner as to result in the receipt of unrelated business income by Tax-exempt
Limited Partners, as described below.
Each prospective Tax-exempt Limited Partner is strongly urged to consult its own
advisor regarding the possible repercussions of an investment in the Partnership
since various investment strategies may be viewed differently by the Partnership
and the IRS.
Exclusions from Unrelated Business Income. Unless realized with respect to
"debt-financed" property (discussed below), dividends, interest and gains from
the sale or exchange or other disposition of capital assets are specifically
exempted from classification as unrelated business income. Unrelated business
taxable income also does not include gains or losses recognized in connection
with the organization's investment activities, or from the lapse or termination
of an option to buy or sell securities. Subject to the debt-financed property
rules below, most, if not all, of the Partnership's income should be excluded
from unrelated business income even if the Partnership is regarded as being in a
trade or business.
Debt-financed Property. Notwithstanding the exclusions discussed in the
preceding paragraph, a Tax-exempt Limited Partner will be taxed on its
distributive share of any income from the Partnership to the extent that either
the Tax-exempt Limited Partner's investment in the Partnership or the
Partnership's investment in the asset from which such income is derived is
debt-financed. An investment by the Partnership (or an investment by a Partner
in the Partnership itself) will be debt-financed (i) if indebtedness incurred
before the investment would not have been incurred but for the investment, (ii)
if the investment is actually made with the use of borrowed funds, or (iii) if
the investment necessitates future borrowings and this eventuality was
foreseeable at the time the investment was made.
$1,000 Annual Exemption. Each Tax-exempt Limited Partner is allowed in the
aggregate a $1,000 annual exemption from tax on its unrelated business income.
Therefore, if a Tax-exempt Limited Partner has unrelated business income from
other investments, only a portion of the $1,000 exemption may be available to
offset any taxable income from the Partnership, and the remainder of such income
will be subject to tax.
State and Local Taxes. Tax-exempt Limited Partners will also generally be exempt
from state and local taxation except as to any unrelated business income.
However, Tax-exempt Limited Partners should consult with their own tax advisors
concerning the applicability and impact of state and local tax laws.
Private Foundations, Charitable Remainder Trusts and other Organizations. In
addition to any potential Federal or state income tax liability resulting from
unrelated business income, private foundations that are otherwise exempt from
taxation (and not exempt operating foundations) are subject to tax equal to two
percent
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(2%) of their net investment income in a taxable year. Net investment income is
equal to gross investment income (interests, dividends, rents and payments with
respect to securities, loans and royalties, unless such amounts are unrelated
business income) plus capital gain net income less certain deductions for all
ordinary and necessary expenses. This tax may be reduced to one percent (1%)
where a private foundation meets certain distribution requirements. Private
foundations are likely to be allocated net investment income from the
Partnership.
Private foundations may also be subject to various excise taxes including some
that may be affected by an investment in the Partnership. Such taxes might
include taxes on self-dealing, on excess business holdings, on failure to make
distributions, and from investments which jeopardize the carrying out of any of
their exempt purposes. As a result of their potential tax liabilities resulting
from an investment in the Partnership, private foundations should consult their
own tax advisors prior to investing in the Partnership.
For some types of tax-exempt organizations, such as charitable remainder trusts,
the receipt of any unrelated business income during a year could cause the
trust's income from all sources to be taxable in such year. Potential tax-exempt
Limited Partners are urged to consult with their tax advisors concerning the
potential consequences of this investment.
Foreign Limited Partners
Foreign Limited Partners will be subject to United States tax on Partnership
income in the same manner as any other Taxable Limited Partner if the
Partnership is regarded as engaged in a trade or business as opposed to an
investment activity. A "Foreign Limited Partner" means a Limited Partner who or
which is not, for U.S. federal income tax purposes, (i) a citizen or resident of
the U.S., (ii) a corporation or partnership created or organized under the laws
of the U.S. or any political subdivision thereof, (iii) an estate the income of
which is includable in gross income for U.S. federal income tax purposes,
regardless of its source, or (iv) a trust described in Section 7701(a)(30) of
the Code (taking into account effective dates, transition rules and elections in
connection therewith).
The determination of whether the Partnership is regarded as engaged in a trade
or business or an investment activity is based on facts and circumstances.
Factors which have been examined in making this determination include, but are
not limited to, whether the taxpayer maintains an office or employs any persons
in the activity, the holding period of the securities in the portfolio and the
magnitude and continuous volume of purchases and sales. Because this
determination is essentially factual in nature, Foreign Limited Partners should
consult with their tax advisors concerning whether the Partnership should be
regarded as engaged in a trade or business.
If the Partnership is deemed to be engaged in a United States trade or business,
a Foreign Limited Partner would be required to file a United States Federal tax
return and may be required to file state tax returns, report his distributive
share of the Partnership's net income and pay United States and state tax
thereon in the same manner as United States citizens and residents. In addition,
the Partnership would be required to withhold 39.6% of the taxable income
allocable to a Foreign Limited Partner who is an individual (35% for
corporations), to be credited against such Foreign Limited Partner's United
States income tax liabilities.
If the Partnership is not deemed to be engaged in a United States trade or
business, a Foreign Limited Partner generally will not be subject to United
States tax on capital gains realized by the Partnership. However, if an
individual Foreign Limited Partner is present in the United States for 183 days
or more during the taxable year, he will be subject to a 30% tax on any capital
gains of the Partnership. (A foreign trust will be subject to tax on capital
gains if the trustee is present in the United States for 183 days or more during
the taxable year.) In general, any Partnership non-contingent interest income
from portfolio investments allocated to a Foreign Limited Partner will not be
subject to United States federal income or withholding tax as long as the
Foreign Limited Partner has provided the General Partner with a statement
certifying that he is not a United States person on IRS Form W-8BEN. Any
Partnership dividend income and non-portfolio or contingent interest income
allocated to a Foreign Limited Partner will be subject to United States
withholding tax of 30% on the gross amount received unless reduced by a treaty
or convention (as discussed below).
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A Foreign Limited Partner's United States tax liability with respect to
Partnership income may be reduced under an applicable tax treaty or other
convention. A Foreign Limited Partner should also note that the amount of tax it
may actually owe with respect to its allocable share of Partnership income may
be greater or less than the amount which may be withheld on its behalf by the
Partnership. If such a disparity exists, the Foreign Limited Partner may have to
pay additional tax or seek a refund from the IRS, as the case may be. If the
withholding rate on any income which is not derived from a United States trade
or business is reduced for any Foreign Limited Partner by a tax treaty or other
convention, the Foreign Limited Partner must file an IRS Form 1001 with the
Partnership at the time of subscription for a Partnership interest to permit the
Partnership to withhold at the lower rate. Under recently issued Treasury
regulations that generally will be effective on January 1, 2001, the required
IRS Form 1001 was replaced by a new IRS Form W-8BEN. Under these Treasury
regulations, a Foreign Limited Partner claiming the benefits of a treaty may be
required to obtain a United States Taxpayer identification number and make
certain certifications to the Partnership. Foreign persons that are considering
investing in the Partnership should consult their own tax advisors regarding the
effect, if any, of these new Treasury Regulations.
Foreign Limited Partners that have been organized as corporations, or are
otherwise treated as corporations for purposes of United States taxation, may
also be subject to a "branch profits tax" of 30% on their earnings and profits
from the Partnership if the Partnership is regarded as engaged in a trade or
business. Where the branch profits tax does not apply to a corporate Foreign
Limited Partner, the Foreign Limited Partner's shareholders may be subject to
the 30% withholding tax (described above) on the Foreign Limited Partner's
dividend distributions if at least 25% of such Foreign Limited Partner's
worldwide gross income for the 3-year period ending with the close of a taxable
year preceding the year of payment of the dividend is effectively connected with
the conduct of a United States trade or business. Foreign corporations
considering investing in the Partnership should consult their own tax advisors
concerning the possible application of these additional taxes.
The rules governing United States income taxation of non-resident alien
individuals, foreign corporations, foreign partnerships and other foreign
investors are very complex and their application to various fact patterns and
financial instruments is uncertain, and the foregoing provides no more than a
summary of such rules. Furthermore, no advice can be given as to the tax
treatment of items of Partnership income, deduction or loss in the foreign
investor's country of residence or other countries or as to whether any country
would allow a credit or other tax benefit with respect to any United States tax
paid on the investor's United States source income. Prospective investors should
be aware that they may be subject to United States Federal and state income
and/or estate taxes if they invest in the Partnership and, accordingly, it is
the responsibility of each prospective investor to consult with its tax advisor
concerning the treatment by its country of residence and other countries (where
applicable) and as to the impact of the United States Federal and state income,
estate and gift tax laws on any foreign investor who makes an investment in the
Partnership.
Partnership Tax Returns and Reports
The Partnership has adopted December 31 as its fiscal year-end and files its
returns on the accrual basis. The Partnership itself will file an annual
informational Federal income tax return. However, the Partnership will not be
able to complete and file its tax return or deliver Schedule K-1s for any year
to its Limited Partners until it has received a Schedule K-1 for that year from
each of the partnerships in which it invests, and a Limited Partner will not be
able to complete and file his income tax return for that year until he receives
a Schedule K-1 from the Partnership.
As a practical matter, because of the number of calendar year taxpayers and the
time needed for preparation of income tax returns, it is highly unlikely that
calendar year Limited Partners of the Partnership will receive final information
in time to file their tax returns by the April 15 due date. It may, therefore,
be necessary for each Limited Partner to obtain an extension of the filing date
for his return.
In order to facilitate this process, the Partnership will request each manager
of a partnership in which it invests to supply estimated tax information to the
Partnership as soon as possible after the close of the year. Then,
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the Partnership will provide its Limited Partners with this information for
their use in determining the amount of the tax payment which they should make
with their extension request. The General Partner does not intend to provide
such information other than on an annual basis. WHILE THE PARTNERSHIP WILL
ATTEMPT TO OBTAIN ACCURATE INFORMATION, IT CANNOT BE CERTAIN THAT THE ESTIMATED
FIGURES WILL BE SUFFICIENTLY ACCURATE TO ENABLE ITS LIMITED PARTNERS TO AVOID
PENALTIES AND INTEREST FOR AN UNDERPAYMENT OF THEIR INCOME TAX LIABILITY.
Partnership Audit Procedure
In general, the tax treatment of items of Partnership income, gain, loss and
deduction will be determined at the Partnership level in a unified partnership
proceeding rather than in separate proceedings with the Partners. In general,
the IRS must send notices to the General Partner acting as the "tax matters
partner" ("TMP") in accordance with the Partnership Agreement. The TMP may act
on behalf of all of the Partners. The TMP is also authorized to litigate matters
on behalf of the Partnership.
Possible Legislative Tax Changes
In recent years there have been a number of proposals made in Congress, by
government agencies and by the executive branch of the Federal government for
changes in the Federal income tax laws. In addition, the IRS has proposed and
may still be considering changes in regulations and procedures, and numerous
private interest groups have lobbied for regulatory and legislative changes in
Federal income taxation. It is impossible to predict what past proposals may be
revived or what new proposals may be forthcoming, the likelihood of adoption of
any such proposals, the likely effect of any such proposals upon the income tax
treatment presently associated with an investment in the Partnership, or the
effective date of any legislation which may derive from any such past or future
proposals. Potential investors are strongly urged to consider ongoing
developments in this uncertain area and to consult their own tax advisors in
assessing the risks of investment in the Partnership.
State and Local Taxes
In addition to the Federal income tax consequences described above, the
Partnership and the Limited Partners may be subject to various state and local
taxes. States or jurisdictions in which the Partnership may conduct business may
require a Limited Partner who does not reside in such state to file a tax return
and may impose a tax on his share of Partnership income derived from activities
in such states or localities. The amount of such taxes may be significant.
Each Limited Partner also will generally be required to include his share of
Partnership income in determining his taxable income in the state and local
jurisdiction in which he is a resident and may also be subject to personal
property taxes. To the extent that a non-resident Limited Partner pays taxes to
Connecticut or other jurisdictions due to the Partnership's conduct of business
there, he may be entitled to a deduction or credit against taxes owed to his
state of residence with respect to the same income.
Since Limited Partners may be affected in different ways by state and local law,
each prospective Limited Partner is advised to consult with his personal tax
advisor regarding the state and local taxes payable in connection with an
investment in the Partnership.
PURCHASES BY EMPLOYEE BENEFIT PLANS
Subject to the following discussion, the purchase of Units may be a suitable
investment for any benefit plan investor (within the meaning of Department of
Labor Regulation ss 2510.3-101(f)(2)) ("Employee Benefit Plan") that meets the
minimum investment requirements that otherwise apply to prospective subscribers
for Units. Such Employee Benefit Plans might include corporate pension, stock
bonus and profit-sharing plans, "simplified employee pension plans," so-called
SIMPLE plans, "Keogh" plans for self-employed individuals
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and individual retirement accounts ("IRAs"), welfare benefit plans (such as
medical plans, death benefit plans and prepaid legal service plans),
governmental plans, church plans or any entity whose underlying assets are
considered to be plan assets by reason of any investment in the entity by
another Employee Benefit Plan or otherwise.
The following discussion is not intended to be exhaustive, but rather
representative of the legal issues that may be of concern to an Employee Benefit
Plan investor. Because of the many factual patterns that may develop in
connection with the purchase or holding of a Unit by an Employee Benefit Plan,
independent advice should be sought regarding each Employee Benefit Plan's
situation.
Employee Benefit Plans and IRAs
Before proceeding with an investment in the Partnership of a portion of the
assets of an Employee Benefit Plan, the person with investment discretion on
behalf of the Employee Benefit Plan ("Fiduciary"), taking into account the facts
and circumstances of such plan, should consider any applicable fiduciary
standards and any prohibitions imposed against certain transactions under ERISA
or the Code, and the permissibility of such investment under the governing
documents of the Employee Benefit Plan. Thus, taking into consideration the
information contained herein, the Fiduciary should give special attention to (i)
the Department of Labor's regulations (the "Regulations") regarding the
definition of plan assets (discussed below) and the impact of the Regulations
upon the Fiduciary's decision to invest in the Partnership, and (ii) the
prudence of an investment in the Partnership considering all facts and
circumstances of the investment that the Fiduciary knows or should know are
relevant to the investment or a series or program of investments of which an
investment in the Partnership is a part.
Fiduciaries can be personally liable for (i) losses incurred by the plan
resulting from a breach of fiduciary duties, (ii) a civil penalty, imposed by
the Department of Labor, of as much as 20% of the amount recovered on behalf of
the Employee Benefit Plan and (iii) prohibited transaction excise taxes.
Plan Asset Regulations. The Regulations set forth guidelines to determine when
an investment by an Employee Benefit Plan in an entity, such as the Partnership,
will cause the assets of the entity to be treated as assets of the investing
plan under ERISA ("Plan Assets"). These Regulations contain an exemption,
however, upon which the Partnership intends to rely. The exemption generally
provides that the acquisition or disposition of an interest in an entity by an
Employee Benefit Plan will not result in the underlying assets of the entity
being treated as Plan Assets provided that the Units are (i) "widely held" (held
by 100 or more investors who are independent of the Partnership and each other),
(ii) freely transferable and (iii) sold as part of an offering pursuant to (A)
an effective registration under the 1933 Act, and then subsequently registered
under the Securities Exchange Act of 1934, as amended (the "1934 Act") or (B) an
effective registration statement under Section 12(b) or 12(g) of the 1934 Act.
Potential Employee Benefit Plan investors should consult with their legal
counsel concerning the impact of ERISA and the Code, the potential application
of the exemption to the purchase and holding of the Units and the potential
consequences to their specific circumstances, prior to making an investment in
the Units.
If the Partnership were treated as a Plan Asset, the General Partner would most
likely become an ERISA fiduciary with respect to the Partnership's assets and
the assets of the Partnership would be subject to the prohibited transaction
rules of ERISA and the Code. Accordingly, although the Partnership will operate
under the assumption (until it has knowledge to the contrary) that the assets of
the Partnership are not Plan Assets, if at any time that assumption is
incorrect, the consequences of the Partnership's assets being treated as Plan
Assets under ERISA could make the Partnership an inappropriate investment for an
Employee Benefit Plan. Also, IRAs could lose their tax-qualified status (which
would cause IRA assets to be treated as if they were distributed), the
investment in Units could violate the prohibition against maintaining the
indicia of ownership of any assets of an Employee Benefit Plan outside the
jurisdiction of the district courts of the United States, and the purchasing or
holding of Units could likely give rise to "unrelated business taxable income"
under Section 512 of the Code. Moreover, because it will be assumed that the
Partnership's assets are not Plan Assets, the consequences of their being Plan
Assets are not being discussed in greater detail. Potential
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Employee Benefit Plan and IRA investors are therefore urged to consult with
their own legal counsel concerning this issue.
Additional Fiduciary Responsibilities and Considerations. In addition, the
purchase and retention of any Units by an Employee Benefit Plan or IRA will be
subject to any fiduciary standards of conduct (including the prohibited
transaction rules) that are otherwise applicable to Employee Benefit Plans under
ERISA and the Code. For example, Units should not be purchased by an Employee
Benefit Plan if the General Partner, an Advisor, the Broker, a selling agent or
any of their respective affiliates (i) is a party-in-interest or disqualified
person with respect to the plan as those terms are defined in ERISA and the Code
(for example, an employer of employees covered by ERISA) or (ii) either (A) has
investment discretion with respect to the investment of such plan's assets or
(B) regularly gives investment advice with respect to such plan's assets for a
fee, pursuant to an understanding that such advice will serve as a primary basis
for investment decisions with respect to such plan's assets and that such advice
will be based on the particular investment needs of the plan, if, as result of
exercising such discretion or giving such advice, the Employee Benefit Plan
would acquire any Units.
Also, a prohibited transaction may still occur under ERISA or the Code where
there are circumstances indicating that (i) the investment in a Unit is made or
retained for the purpose of avoiding application of the fiduciary standards of
ERISA, (ii) the investment in a Unit constitutes an arrangement under which it
is expected that the Partnership will engage in transactions that would
otherwise be prohibited if entered into directly by the Employee Benefit Plan
purchasing the Unit, (iii) the investing plan, by itself, has the authority or
influence to cause the Partnership to engage in such transactions or (iv) the
person who is prohibited from transacting with the investing plan may, but only
with the aid of certain of its affiliates and the investing plan, cause the
Partnership to engage in such transactions with such person.
Reporting and Disclosure. ERISA and the Code require that a Form 5500 (Annual
Return/Report) be filed by certain (if not most) ERISA Plans that will be
investing in the Partnership. Pursuant to the Regulations, the Form 5500 for
such plans must include information relating to the fair market value of the
plan's investment in the Partnership as of the close of the plan's fiscal year
(i.e., the plan year), and the plan's acquisition or disposition of any interest
in the Partnership. If the Employee Benefit Plan's fiscal year differs from the
Partnership's fiscal year, such Employee Benefit Plan investor may not be able
to obtain valuation information on its interest in the Partnership as of the
last day of the plan's fiscal year. Also, any prohibited transaction must be
reported on the Form 5500 and any disqualified person involved in a prohibited
transaction is subject to self-reporting on Form 5330.
Exempt Plans
Certain Employee Benefit Plans may be governmental plans or church plans.
Governmental plans and church plans are generally not subject to ERISA, nor do
the above-described prohibited transaction provisions apply. However, such plans
are subject to prohibitions against certain related-party transactions under
Section 503 of the Code. In addition, the fiduciary of any governmental or
church plan must consider applicable state or local laws, if any, and the
restrictions and duties of common law, if any, imposed upon such plan.
No view is expressed whether an investment in the Partnership (and any continued
investment in the Partnership), or the operation and administration of the
Partnership, is appropriate or permissible for any governmental plan or church
plan under Code Section 503, or under any state, county, local, or other law
respecting such plan.
Trust Requirement
Purchasing Units does not establish a trust for purposes of the trust
requirement of ERISA or for purposes of the custodial rules that apply to IRAs.
Therefore, each Employee Benefit Plan Fiduciary must ensure that any necessary
trust or custodial requirements are satisfied outside of the Partnership.
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Requests for Information
The General Partner reserves the right to request from any investor or potential
investor in the Partnership such information as the General Partner deems
necessary to monitor Partnership investments relating to Employee Benefit Plans.
Unrelated Business Taxable Income
See "Income Tax Aspects -- Tax-exempt Partners" for a discussion of the extent
to which the purchase of a Unit may give rise to "unrelated business taxable
income" under the Code.
CONFLICTS OF INTEREST
There are substantial and inherent conflicts of interest in the structure of the
Partnership which are, on their face, inconsistent with the fiduciary duties of
the General Partner. Prospective investors should be aware that the General
Partner presently intends to assert that Limited Partners have, by investing in
the Partnership, consented to the following conflicts of interest in the event
of any proceeding alleging that such conflicts violated any duty owed by the
General Partner and its affiliates ("Kenmar") to investors.
The General Partner
The General Partner, in its sole discretion, is authorized under the Partnership
Agreement to set the compensation it shall receive for its services as general
partner of the Partnership. The General Partner may change its compensation to
such amount and/or in such forms as the General Partner, in its sole discretion,
shall determine without the consent of the Limited Partners; provided that the
General Partner has given the Limited Partners ninety (90) days' prior written
notice of such change. As such, the General Partner has a conflict of interest
between limiting fees paid by the Partnership and generating fees for itself.
Kenmar currently manages other commodity pools and managed accounts, each with a
different combination of trading advisors, and intends to continue to solicit
and manage the trading for these other commodity pools and managed accounts.
Thus, Kenmar may be subject to conflicting demands in respect of allocating
management time, services and other functions between the activities the General
Partner has undertaken with respect to the Partnership and the activities Kenmar
has undertaken or will undertake with respect to other investors, commodity
pools, managed accounts and/or trading advisors. As another consequence, the
greater the amount of assets managed by Kenmar, the more difficult it may be for
the General Partner to maintain the quality of these services.
The General Partner and the Broker maintain a business relationship unrelated to
their efforts on behalf of the Partnership. Thus, the General Partner has a
conflict between its responsibility to negotiate an amount and form of
compensation to be paid to the Broker that best serves the Partnership's
interests and the General Partner's desire to maintain its business relationship
with the Broker. In addition, the General Partner may receive a brokerage
commission rebate from the Broker.
The General Partner and the Advisor maintain a business relationship unrelated
to their efforts on behalf of the Partnership. A substantial amount of the
assets under the management of the Advisor are assets of pools and accounts
managed by the General Partner or an affiliate. Thus, the General Partner has a
conflict between its responsibility to negotiate an amount and form of
compensation to be paid to the Advisor that best serves the Partnership's
interests and the General Partner's desire to maintain its business relationship
with the Advisor.
Neither the General Partner nor any of its affiliates, principals, directors,
officers or employees (the "Related Persons") trade Commodities for their own
accounts, although it is possible that they may do so in the future. The records
of such trading and any written policies related thereto would not be available
to the Limited Partners. If the General Partner or a Related Person were to
trade for their own accounts they could take
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positions either similar or opposite to positions taken by the Partnership,
and/or the Partnership and such Related Persons could from time to time be
competing for similar Commodities. Orders placed by the General Partner or a
Related Person to trade Commodities for their proprietary accounts may reach the
market either before or after similar orders are placed for the Partnership and
this difference in timing may result in the Partnership receiving less favorable
(or more favorable) prices than those received by such proprietary accounts.
Neither the General Partner nor any Related Person places orders for the Advisor
and, therefore, neither the General Partner nor any Related Person has control
over such timing. It is also possible that the positions taken by such
proprietary accounts may not be held for the same period of time as those
positions taken by the Partnership. Thus, it is unlikely that trading results in
such proprietary accounts would be the same as the performance in the
Partnership's account.
The Partnership and the General Partner are affiliated entities and are
represented by the same counsel, Katten Muchin & Zavis, Chicago, Illinois. No
independent experts or professionals have been retained on behalf of the Limited
Partners. To the extent that Limited Partners would benefit by further
independent representation, that benefit will not be available to Limited
Partners and they should seek independent counsel.
The Advisor
The Advisory Agreement allows the Advisor and its principals to manage other
commodity pools and managed accounts as well as trade for its own proprietary
accounts. Since the Advisor trades other accounts, the Advisor is subject to
conflicting demands in respect of allocating management time, services and other
functions between the Partnership and such other accounts. In particular, the
Advisor may have a conflict of interest when rendering advice to the Partnership
because its compensation for managing some other account may differ from its
compensation for managing the Partnership's account, and therefore may provide
an incentive to favor such other account.
The Advisor may in the future develop and furnish to, or employ on behalf of,
other investors trading methods or strategies for trading similar to or
different from those employed and traded on behalf of the Partnership's account
and pursuant to which such other investors may take positions similar to or
opposite from positions taken by the Partnership. No assurance may be given that
the trading results in such other accounts will be the same as or similar to the
performance in the Partnership's account.
The Advisor and its employees trade Commodities for their own accounts. The
records of such trading and any written policies related thereto will not be
available for inspection by Limited Partners. Such trading activity could differ
from the trading activity of the Partnership. For example, the trading positions
taken and the length of time such positions are held by the Partnership could
differ from those taken with respect to such proprietary accounts. In addition,
such proprietary accounts could be charged brokerage commissions in a
significantly different form and amount than those charged the Partnership and,
as a result, the Advisor could be more or less likely to modify, liquidate or
open a position for that account than for the Partnership's account. Orders for
trades for such proprietary accounts could be placed either before or after
similar orders are placed for the Advisor's investor accounts, and this
difference in timing could result in the investor accounts receiving less
favorable (or more favorable) prices than those received by such proprietary
accounts. Thus, no assurance may be given that the trading results in such
proprietary accounts will be similar to the performance in the Partnership's
account.
The CFTC and certain United States commodity exchanges have established
"speculative position limits" that limit the net long or net short speculative
position any person(s) may hold, own or control in a particular Commodity on any
given day. An Advisor and its principal(s) may, on any given day, trade up to
the position limit established by such regulatory authorities and, therefore,
might be unable to trade those Commodities for the Partnership. The effect of
speculative position limits may be to preclude the Advisor and, consequently,
the Partnership, from taking potentially profitable positions, thereby reducing
the profit potential of the Partnership.
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The Broker
The Broker effects transactions for other customers (including public and
private commodity pools) who may compete with the Partnership's transactions,
including with respect to priorities of order entry. In addition, employees of
the Broker may trade for their own account. Since the identities of the
purchaser and seller are not disclosed until after the trade, it is possible
that a Broker could effect transactions for the Partnership in which the other
parties to the transactions are that Broker's officers, directors, employees,
customers or affiliates. Such persons might also compete with the Partnership in
making purchases or sales of Commodities without knowing that the Partnership is
also bidding on such Commodities. Since orders are filled in the order in which
they are received by a particular floor broker, transactions for any of such
persons might be executed when similar trades for the Partnership are not
executed or are executed at less favorable prices. However, in entering orders
for the Partnership and such other customer accounts, the Broker will attempt to
achieve an equitable treatment of all accounts, including with respect to
priorities of order entry and allocations of executed trades. In addition, CFTC
regulations prohibit a futures commission merchant ("FCM") from utilizing its
knowledge of one customer's trades for its own or its other customers' benefit.
Recourse by Limited Partners
In evaluating the foregoing potential and actual conflicts of interest, an
investor should be aware that the General Partner will have a responsibility to
the Limited Partners to exercise good faith and fairness in all dealings
affecting the Partnership. The responsibility of a general partner to limited
partners is a changing area of the law and Limited Partners who have questions
concerning the responsibilities of the General Partner should consult their
legal counsel. In the event that a Limited Partner believes that the General
Partner has violated its responsibilities, the Limited Partner may seek legal
relief for himself and all other similarly situated Limited Partners or on
behalf of the Partnership under applicable laws to recover damages from, or to
require an accounting by, the General Partner. Furthermore, Limited Partners are
afforded certain rights to institute reparation proceedings under the CEAct for
violations of the CEAct or of any rule, regulation or order of the CFTC by the
General Partner or the Broker. A Limited Partner may also institute legal
proceedings in court against the General Partner, the Broker or the Advisor for
certain violations of the CEAct or rules, regulations or orders of the CFTC.
Excessive trading of the Partnership's account has been held to constitute a
violation of the antifraud provisions of the CEAct. Limited Partners should be
aware that it may be difficult to establish that excessive trading has occurred
due to the broad trading discretion given to the General Partner in the
Partnership Agreement and the Advisor in the Advisory Agreement, exculpatory
provisions in the Partnership Agreement and in the Advisory Agreement, and the
lack of definitive standards in judicial and administrative decisions as to what
constitutes excessive trading.
Under the exculpatory provisions of the Partnership Agreement, the General
Partner shall not be liable to the Partnership or to any of the Partners except
by reason of acts or omissions constituting fraud, willful misconduct, gross
negligence or bad faith. Limited Partners may have a more limited right of
action than they would absent such limitations. The Partnership has agreed to
indemnify the General Partner and its Limited Partners, officers, directors,
employees, and agents against any loss, liability, damage, cost, or expense
resulting from any claim, action, or proceeding relating to the business or
activities undertaken by them on behalf of the Partnership or actions taken or
omitted to be taken by the General Partner in its capacity as such; provided
that the conduct of such person did not constitute willful malfeasance or gross
negligence and was done in good faith and in a manner reasonably believed to be
in, or not opposed to, the best interests of the Partnership. In any action
brought by a Limited Partner in the right of the Partnership to which the
General Partner or any other person indemnified pursuant to the foregoing are
party defendants, any such person will be indemnified by the Partnership only to
the extent and subject to the conditions specified in the Partnership Act.
Notwithstanding the foregoing, in any action brought by a Limited Partner in the
right of the Partnership to which the General Partner or any other person
indemnified pursuant to the foregoing are party defendants, any such person will
be indemnified by the Partnership only to the extent and subject to the
conditions specified
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in the Partnership Act. Also, indemnification of the General Partner or its
affiliates by the Partnership will be limited for losses and liabilities
resulting from violations of United States Federal, state or foreign securities
law in connection with the offer or sale of Units. The CFTC has issued a
statement of policy relating to indemnification of officers and directors of an
FCM (such as the Broker) and its controlling persons under which the CFTC has
taken the position that whether such an indemnification is consistent with the
policies expressed in the CEAct will be determined by the CFTC on a case-by-case
basis. See "Item 12. Indemnification of Directors and Officers".
COMMODITIES TRADING GENERALLY
Trading Commodities is Speculative and Volatile
The profitability of the Partnership will depend primarily on the Advisor's
ability to predict fluctuations in Commodity prices. Such prices are highly
volatile and, in general, are influenced by a number of external factors,
including, but not limited to, changing supply and demand relationships;
agricultural, trade, fiscal, monetary and exchange control programs and policies
of governments; national and/or international political and economic events and
policies; and changes in interest rates. Certain additional factors may also
affect individual Commodities or certain groups of Commodities. For example,
currency Commodities are influenced by, among other things, political events
(including restrictions on local exchanges or markets, limitations on
investments in a country or on investment by residents of a country in other
countries, and restrictions on currency flows); changes in balances of payments
and trade; rates of inflation; international trade restrictions; currency
devaluations and revaluations; and governmental intervention (which is often
intended to influence prices directly). Metal Commodities can be affected by,
among other things, production and, particularly with respect to gold
Commodities, governmental regulation. Agricultural Commodities are influenced
by, among other things, unexpected weather, damage by insects or plant diseases
and/or unexpected purchases by countries. The above list is by no means all
inclusive, for no document could possibly list all the factors that influence
the price of various Commodities or how much influence each of those factors has
on such prices. Volatile price movements may result in unprofitable trading by
the Advisor, thereby resulting in losses to the Partnership.
Trading Commodities is Highly Leveraged
To trade futures contracts a trader is not required to deposit funds equal to
the value of the futures contract; rather, the trader need only make a deposit,
called an "initial margin deposit", equal to a small percentage (typically
between 2% and 15%) of the value of the futures contract. As a result, a
relatively small adverse move in the price of a futures contract may result in
immediate and substantial losses to a trader. For example, if at the time of
purchase 10% of the price of a futures contract is deposited as margin, a 10%
decrease in the price of that contract would, if the contract were then closed
out, result in a total loss of the initial margin deposit (brokerage commissions
and other transaction costs also would be incurred). A decrease of more than 10%
would result in a loss of more than the total initial margin deposit.
Trading in the currency forward and interbank markets does not require margin
but generally does require the extension of credit by a bank to those with whom
that bank trades. The General Partner does not anticipate that the banks with
which the Broker (or other commodity broker) and the Partnership may trade will
require margin with respect to the trading of currencies. However, to ensure
payment by the Partnership on currency contracts, the Broker (or other commodity
broker) will generally require margin in amounts approximately equivalent to
those required for trading foreign currency futures contracts on United States
exchanges when the Partnership trades the same currencies for which futures
contracts are traded on such exchanges and amounts that may be higher than such
exchange margin requirements when the Partnership trades world currencies for
which no futures contracts are traded on such exchanges. Thus, as with futures
contracts, a relatively small adverse move in the price of a forward contract
may result in a loss of an amount equal to or greater than the amount deposited.
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To some extent, options are even more highly leveraged than either futures or
forward contracts. For example, if an in-the-money call (put) option is sold for
its intrinsic value plus a premium representing the time value of that option, a
10% rise (drop) in the value of the underlying futures contract or physical
commodity (the "Underlying Interest") does not create a loss equal to just 10%
of the value of the option; rather it creates a loss approximately equal to 10%
of the value of the Underlying Interest, less the time value, which loss may be
many times greater than the price for which a trader sold the option. In
addition, a trader who sells options is required only to deposit a percentage of
the value of the option at the time of sale as margin, thereby leveraging the
investment even further.
Thus, like other leveraged investments, any purchase or sale of certain
Commodities may result in losses in excess of the amount invested. Investors
should note, however, that while the Partnership's assets are subject to losses
in excess of margin deposits, a Limited Partner cannot lose more than his
unredeemed capital contribution, undistributed profits (if any) and, under
certain limited circumstances, capital distributed to him or received by him
upon redemption, with interest thereon. See "Nature of the Partnership" under
Item 11.
Trading Commodities May be Illiquid
While the Partnership normally will trade only Commodities that have sufficient
liquidity to enable the Partnership to enter and close out positions without
causing value price movements, there is no assurance that intervening events,
such as an exchange or the CFTC suspending trading in a particular futures
contract, ordering immediate liquidation or settlement of a particular futures
contract or ordering trading in a particular futures contract be conducted for
liquidation only, will not render a once-liquid Commodity illiquid.
In addition, most United States commodity exchanges limit the amount by which
certain Commodities may move during a single day by regulations referred to as
"daily price fluctuation limits", or "daily limits". Pursuant to such
regulations, no trades may be executed on any given day at prices beyond the
daily limits. The price of a futures contract has occasionally moved the daily
limit for several consecutive days with little or no trading, thereby
effectively preventing a party from liquidating his position.
Similarly, trading options may become illiquid if trading in the Underlying
Interest becomes illiquid. Also, it is possible that major banks may, from time
to time, effectively stop making markets in certain currency forward contracts
or that governments may intervene to stabilize or fix exchange rates or impose
credit controls, thereby restricting or substantially eliminating trading in the
affected currencies.
While the occurrence of such events may reduce or effectively eliminate the
liquidity of a particular market, they do not limit ultimate losses, and may in
fact substantially increase losses because of this inability to liquidate
unfavorable positions. In addition, if there is little or no trading in a
particular futures or forward contract that the Partnership is trading, whether
such illiquidity is caused by any of the above reasons or otherwise, the
Partnership may be unable to execute trades at favorable prices and/or may be
unable or unwilling to liquidate its position prior to its expiration date,
thereby requiring the Partnership to make or take delivery of the Underlying
Interest.
Trading Forward Contracts
The Partnership may trade forward contracts in certain items (such as currencies
and metals) with United States and foreign banks and dealers.
A forward contract is a contractual obligation to purchase or sell a specified
quantity of a Commodity at or before a specified date in the future at a
specified price and, therefore, is similar to a futures contract. Forward
contracts, however, are not traded on exchanges and, as a consequence, investors
in forward contracts are not afforded the regulatory protections of such
exchanges or the CFTC; rather, banks and dealers act as principals in such
markets. Neither the CFTC nor banking authorities regulate trading in forward
contracts on currencies, and non-United States banks may not be regulated by any
United States governmental agency. The principals who deal in the forward
contract markets are not required to continue to make markets in the forward
contracts
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they trade. There have been periods during which certain participants in forward
markets have refused to quote prices for contracts or have quoted prices with an
unusually wide spread between the price at which they are prepared to buy and
that at which they are prepared to sell.
The Partnership may trade forward contracts with and through a limited number of
entities. As a result, liquidity problems might be greater in the Partnership's
forward trading than would be the case if trades were to be placed with and
through a larger number of forward market participants. The imposition of
exchange and credit controls or the fixing of currency exchange rates by
governmental authorities (e.g., Latin American countries) might eliminate or
substantially reduce trading in certain currencies and might limit such forward
trading to less than the amount that the Advisor would otherwise recommend, to
the possible detriment of the Partnership. See "Trading Commodities May be
Illiquid" above. The amount of loss that may be claimed for tax purposes in
respect of the Partnership's unprofitable forward trades may be limited by the
loss limitation rules applicable to straddles. See "Income Tax Aspects".
Because performance under forward contracts is not guaranteed by any exchange or
clearinghouse, the Partnership will be subject to the risk of the inability, or
refusal by, the counterparty to perform with respect to such contracts. Any such
failure or refusal, whether due to insolvency, bankruptcy or other causes, could
subject the Broker (or other commodity broker) and in turn the Partnership to
substantial losses. The Broker (or other commodity broker) and the Partnership
will not be excused from the performance of any forward contracts into which
they have entered due to the default of third parties in respect of other
forward trades in the Advisor's trading strategies that were to have
substantially offset such contracts.
In addition, the CFTC has been studying the regulatory propriety of "exchange of
futures for physicals" or "EFP" transactions, whereby traders are able to
exchange positions in the forward markets for ones on regulated exchanges on a
24-hour basis. If the Partnership's ability to engage in such transactions were
restricted, trading techniques that may be employed by the Advisor might be
impaired to the potential detriment of the Partnership.
Trading Options
Options on futures contracts and physical commodities are traded on United
States and foreign exchanges. A call (put) option grants the purchaser thereof
the right, but not the obligation, to buy (sell) the Underlying Interest during
a certain period of time for a fixed price. An option is purchased for its
intrinsic value, if any, plus a premium, representing the time value of that
option. Unless the price of the Underlying Interest increases (decreases) by at
least the time value of that option, the Partnership may lose the entire amount
of such premium. (The more out-of-the-money an option is, the greater the
increase (decrease) would have to be before the Partnership would recover the
entire amount of such premium.) Conversely, if the Partnership sells an option
(whether a call or a put), it will be credited with the sales price but will
have to deposit margin due to its contingent liability to make or take delivery
of the Underlying Interest in the event the option is exercised. A trader who
sells options may be subject to loss in an amount equal to the entire price
movement that occurs in the Underlying Interest (less any premium received) from
the date he sold the option until the date he liquidates such position. The
ability to trade or exercise options may be restricted in the event that trading
in the Underlying Interest becomes restricted. Options trading on United States
commodity exchanges is subject to regulation by both the CFTC and such
exchanges. Options trading on foreign exchanges is not regulated by the CFTC.
Trading on Non-United States Exchanges
The Partnership may trade Commodities on exchanges located outside of the United
States, where CFTC regulations and other protections customary on United States
exchanges may not apply. The Advisor has limited experience trading on
non-United States exchanges and markets. The collapse of Baring Securities
Limited ("Barings") in early 1995, which was caused by a Barings trader making a
series of large, unauthorized and unprofitable trades in Japanese stock index
futures and options contracts on the Singapore International Monetary Exchange
and various Japanese exchanges, illustrated some of the potential risks of
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trading on foreign contract markets. Although, ultimately, customer funds were
recovered, the Barings collapse, and much of the initial uncertainty regarding
the disposition of customer funds and positions, may have been avoided had these
foreign markets established certain regulatory practices and financial
safeguards that exist in the United States, such as omnibus account reporting,
strict customer funds segregation, position transfer mechanisms, and risk
assessment and audit procedures.
In contrast to United States exchanges, some non-United States exchanges are
"principals' markets" in which performance with respect to a contract is the
responsibility only of the individual member with whom the trader has entered
into a contract. In the case of its trading on non-United States exchanges, the
Partnership will be subject to the risk of the inability of, or refusal by, the
counterparty to perform with respect to such contracts. Any such failure could
subject the Partnership to substantial losses or substantial reductions of the
profits it might otherwise have realized.
The Partnership will determine the Partnership's assets in United States
dollars. Unless the Partnership hedges itself against fluctuations in exchange
rates between the United States dollar and the currencies in which trading is
done on such non-United States exchanges, any profits that the Partnership might
realize in such trading could be eliminated as a result of adverse changes in
exchange rates, and the Partnership could even incur losses as a result of any
such changes. The Partnership, in general, does not intend to hedge itself.
Trading Facilities and Electronic Trading
Most open-outcry and electronic trading facilities are supported by
computer-based component systems for the order-routing, execution, matching,
registration and clearing of trades. As with all facilities and systems, they
are vulnerable to disruption or failure. The Partnership's ability to recover
losses may be subject to limits on liability imposed by the system provider, the
market, the clearing house and/or member firms.
Trading on an electronic system may differ not only from trading in an
open-outcry market but also from trading on other electronic systems. If the
Partnership undertakes transactions on an electronic trading system, the
Partnership will be exposed to risks associated with the system including the
failure of hardware and software. The result of any system failure may be that
the Partnership's order is either not executed according to its instructions or
is not executed at all.
THE ADVISOR
The Advisor is responsible for making the trading decisions for the Partnership.
Investors should note that the Advisor is the sole advisor for the Partnership.
The Advisor has prepared the following description. This description is simply a
synopsis and is therefore qualified in its entirety by reference to the detailed
descriptions contained in the Advisor's disclosure document, copies of which may
be obtained by a prospective investor upon request to the General Partner. Due
to the confidential and/or proprietary nature of most of the information, such
as trading methods and strategies and the performance tables, the General
Partner is relying on the Advisor for the accuracy thereof.
Dennis Trading Group, Inc., (the "Advisor"), formerly known as Richard J. Dennis
& Company, is an Illinois corporation and registered CTA and CPO. The address
and telephone number of the Advisor are 250 South Wacker Drive, Suite #650,
Chicago, Illinois 60606 and (312) 559-1895. The principals of the Advisor are
Richard J. Dennis, President, and Thomas A. Dennis, Chairman. The Advisor may
employ agents and employees to implement the trading program described herein.
Except with respect to partnership interests in Richard J. Dennis & Company
Preferred Futures Fund, L.P., and Richard J. Dennis & Company Preferred Futures
Fund II, L.P. and a limited partnership interest in another commodity pool, the
Advisor has not traded for its own account in the past and does not trade for
itself
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presently. The Advisor, however, may trade for its own account in the future. If
the Advisor trades for its own account in the future, Limited Partners will not
be permitted to inspect records of such trading or any written policies relating
thereto. Richard J. Dennis and Thomas A. Dennis presently trade commodities for
their own accounts. Due to the confidential nature of such trading, Limited
Partners will not be permitted to inspect such trading or any written policies
relating thereto.
As of March 31, 1999, neither the Advisor nor its principals owned any Units.
Principals
The Advisor was incorporated in Illinois as Richard J. Dennis & Company in
September 1982 and is registered as a CTA and CPO under the CEAct. The Advisor
became registered with the NFA as a CTA and CPO on May 11, 1983. In July 1991,
the Advisor changed its name to Dennis Trading Group, Inc.
Richard J. Dennis ("R. Dennis") is the founder of the Advisor. He has had over
29 years experience in the futures industry. R. Dennis has been trading futures
for his own account since 1970 and will continue to do so. Throughout his
career, he has been a member, at various times, of the Chicago Mercantile
Exchange, the Chicago Board of Trade, the Mid-America Commodity Exchange and the
Commodity Exchange, Inc. (commonly known as COMEX). Currently, R. Dennis is not
a member of any exchange. R. Dennis was a partner of C&D Commodities ("C&D"),
which formerly was registered as an FCM. C&D, however, is no longer engaged in
business. In March 1991, C&D Commodities, Inc. ("C&D, Inc.") was formed. R.
Dennis is a Vice-President of C&D, Inc. which is primarily engaged in providing
administrative services to CTAs, including the Advisor. However, R. Dennis has
no ownership interest in C&D, Inc. R. Dennis was first registered as a CTA in
his individual capacity in 1982 and rendered commodity advisory services in his
individual capacity from July 1982 through May 1983. In May 1983, the Advisor
assumed responsibility for managing the accounts previously managed by R.
Dennis. R. Dennis has been a director of the Advisor from its inception until
June 1991. R. Dennis also served as Chairman of the Advisor. R. Dennis' duties
for the Advisor include the direction and supervision of the Advisor's account
management services, research and development of trading strategies, review of
account performance and other administrative and managerial functions relating
to the business of the Advisor.
Thomas A. Dennis ("T. Dennis") joined the Mid-America Commodity Exchange in 1974
and traded for his own account. In 1976, he purchased a seat on the Chicago
Board of Trade and for the next four years was both a floor broker and a floor
trader there. In late 1979, he joined the COMEX, the New York Cotton Exchange
and the Coffee, Sugar, and Cocoa Exchange. T. Dennis was both a floor broker and
a floor trader at these exchanges. In the early eighties, he also joined the New
York Mercantile Exchange. In 1981, T. Dennis embarked upon a career as an
"off-floor" trader, and has continued to trade off-floor since then. T. Dennis
is the sole shareholder and President of C&D, Inc.
Except as described below, during the past five years neither the Advisor nor
its principals have been the subject of any material administrative, civil or
criminal action relating to the way in which client accounts were traded or
managed. Beginning in or about December 1988, the Advisor and R. Dennis were the
subject of a number of actions, filed as class actions, which involved the
manner in which the accounts of two commodity pools, the Richard J. Dennis &
Company Preferred Futures Fund, L.P. and the Richard J. Dennis & Company
Preferred Futures Fund II, L.P. were traded. The actions were consolidated under
the caption In Re: Richard J. Dennis & Co. Securities Litigation. The
consolidated action was settled in or about September 1990.
In connection with the consolidated action, the Advisor and R. Dennis deny any
and all liability. The consolidated action is subject to the ongoing
jurisdiction of the court in which it was pending at the time of settlement.
This procedure exists in order to insure compliance by the parties with the
terms of the Settlement Agreement. The terms of the Settlement Agreement
provided for the payment of a cash amount which had no material impact on the
Advisor's ability to conduct its business. The terms of the Settlement Agreement
also provided for certain contingent payments by R. Dennis through December 31,
1993. For the period from September 1988 through June 1991, the Advisor had not
managed customer accounts.
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The General Partner has been advised that there have never been any criminal
actions against the Advisor or its principals and that there have never been any
administrative, civil or criminal proceedings brought against any of the other
principals of the Advisor. The General Partner has been advised that there are
no pending actions against the Advisor or its principals.
Trading Methods and Strategies
The trading ideas utilized by the Advisor are proprietary and confidential. The
following description therefore is general by necessity and is not intended to
be exhaustive.
The Advisor's objective is to effect appreciation of its clients' assets through
the speculative trading of Commodities. The Advisor currently expects the
majority of its trading for clients to be limited to regulated futures contracts
and options on regulated futures contracts on commodity exchanges within the
United States which are designated by the CFTC as contract markets. However, the
Advisor may engage in the trading of forward contracts (which may not be traded
on exchanges), including forward contracts on foreign currencies, and contracts
on foreign exchanges (which are not regulated by the CFTC). The specific futures
contracts and options on futures contracts to be traded will be selected from
time to time by the Advisor on the basis discussed below. Examples of futures
contracts and options on futures contracts which have been traded by the Advisor
include, but are not necessarily limited to: gold, silver, copper, grains, the
soybean complex, sugar, United States Treasury bonds and notes, certain foreign
currencies, foreign bonds traded on foreign exchanges, heating and crude oil,
Eurodollars and the S & P 500 Stock Price Index and various foreign stock
indices. The Advisor may also engage in transactions in physical commodities,
including exchange for physical transactions. An exchange for physical is a
transaction permitted under the rules of many futures exchanges in which two
parties holding futures positions may close out their positions without making
an open, competitive trade on the exchange.
Trading decisions of the Advisor for accounts for which it provides trading
advice are based in part on ideas which have been developed over time by R.
Dennis, T. Dennis and their associates, acting individually or from time to time
in connection with the activities of the Advisor. The ideas are basically
trend-following and are not generally based on analysis of fundamental supply
and demand factors, economic factors or anticipated world events ("fundamental
factors"), but rather upon a study of actual price fluctuations. The Advisor
may, however, consider certain fundamental factors in applying the trading idea.
Further, the Advisor may at times trade on the basis of its analysis of the
impact of various fundamental factors on the market. The Advisor will exercise
no discretionary judgment in following its trading systems, except in regard to
timing of trade executions or as needed to reduce risk in extreme circumstances.
The Advisor may, however, elect to add new trading systems, eliminate systems
that have been in use or restore systems that have been eliminated.
The markets traded, generally, have been chosen for their historical performance
and for their customary liquidity. From time to time, the Advisor may trade in
less liquid markets. There can be no assurance of liquidity in any of the
markets in which the Advisor trades.
The Advisor believes that the development of a commodity trading strategy is a
continual process. As a result of further analysis and research into the
performance of the Advisor's ideas, changes have been and will be made from time
to time in the specific manner in which these trading ideas evaluate price
movements in various Commodities. As a result of such modifications, the trading
ideas that may be used by the Advisor in the future might differ from those
previously used. Limited Partners will not be informed with respect to such
changes in the Advisor's trading ideas. For diversification, a number of
different ideas may be used concurrently.
Judgment is required in the evaluation of the trading ideas used by the Advisor,
in the evaluation and consideration of modifications of the trading ideas from
time to time and in the implementation of the trading ideas. The decision not to
trade certain Commodities or not to make certain trades may result at times in
missing price moves and hence profits of great magnitude, which other trading
managers who are willing to trade these Commodities may be able to capture.
Specific trading decisions for the Advisor are made by R. Dennis, T. Dennis or
other traders who are, or become, associated with the Advisor. However, all
trading
25
<PAGE> 27
directed by the Advisor is under the supervision of R. Dennis or T. Dennis.
There is no assurance that the performance of the Advisor will result in
profitable trading.
The periods at the commencement of trading or at which a drawdown from starting
equity has occurred are considered to be the periods of highest risk. From these
points, risk management techniques are emphasized over those which invite
greater risk in the interest of enhancing performance. These risk management
techniques include diversification, such as the commitment of equity to many
markets and to a number of trading strategies. Also, the Advisor generally
considers money management techniques which determine and limit the equity
committed to each trade, market, complex and account.
Furthermore, the risk assumed and, consequently, the potential for profit
experienced by a particular account at different times, and by different
accounts at the same time, vary significantly among the accounts due to a number
of factors, including market conditions, the size of each account, the
percentage gained or lost in each account, and the perceived risk aversion of
each account's owner. For these and other reasons described in this document, no
investor should expect necessarily the same performance as that of any other
account traded previously, simultaneously, or subsequently by the Advisor or any
of its principals.
The Advisory Agreement
To utilize the commodity trading advice of the Advisor, the Partnership has
entered into a management agreement (the "Advisory Agreement") with the Advisor.
Set forth below is a brief description of certain points of the Advisory
Agreement. Accordingly, the following description is qualified in its entirety
by the actual Advisory Agreement, a copy of which is filed herewith as Exhibit
10.2 to this Registration Statement.
Indemnification. The Partnership has agreed to indemnify the Advisor from and
against any loss, liability, claim, demand, damage, cost or expense (including
reasonable attorneys' and accountants' fees) arising out of the Advisor's
performance of its services except for certain actions by an Advisor, including
but not limited to (i) a material breach of the Advisory Agreement; (ii) an act
of, or omission to act due to, breach of fiduciary duty, bad faith, misconduct
or negligence by the Advisor or its principal; or (iii) a materially misleading
or untrue statement of material fact contained in the Advisor's disclosure
document or an omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not materially misleading.
The Advisor shall be liable to the Partnership for, and shall indemnify, hold
harmless, and defend the Partnership from and against, any loss, liability,
claim, demand, damage, cost and expense (including reasonable attorneys' and
accountants' fees), to which the Partnership may become subject arising out of
or based upon an act, omission, conduct or activity of the Advisor arising from
(i) a material breach of any term of the Advisory Agreement; (ii) an act of, or
omission to act due to, breach of fiduciary duty, bad faith, misconduct or
negligence by the Advisor; or (iii) a materially misleading or untrue statement
of material fact contained in the Advisor's disclosure document or an omission
to state therein a material fact required to be stated therein or necessary to
make the statements therein not materially misleading.
Status. The Advisor is, and for all purposes shall be deemed to be, an
independent contractor and, unless otherwise expressly provided in the Advisory
Agreement or with the prior written authorization of the Partnership, the
Advisor and its principals shall have no authority to act for or represent the
Partnership in any way and shall not otherwise be deemed to be an agent of the
Partnership. The Advisor is neither a sponsor nor promoter of the Partnership.
THE BROKER
The General Partner has responsibility for monitoring the Partnership's brokers
and for negotiation of their brokerage commission rates. The General Partner has
selected E. D. & F. Man International Inc. (the "Broker") to be the clearing
broker for the Partnership. The Broker is registered under the CEAct, as
amended,
26
<PAGE> 28
as an FCM and a CPO, and is a member of the NFA in such capacities. In addition,
the Broker is registered with the National Association of Securities Dealers,
Inc. as a broker-dealer. The Broker, which is part of the E. D. & F. Man Group
of companies, is a member of major United States futures and securities
exchanges. The Broker's main office is located at Two World Financial Center,
27th Floor, New York, New York 10281-2700. The Broker's telephone number at such
location is (212) 566-9000.
At any given time, the Broker is involved in numerous legal actions and
administrative proceedings, which in the aggregate, are not, as of the date of
this registration statement, expected to have a material effect upon its
condition, financial or otherwise or to the services it will render to the
Partnership. There have been no material, administrative, civil or criminal
proceedings pending on appeal or concluded against the Broker or its principals
within five years preceding the date of this registration statement.
The Broker acts only as clearing broker for the Partnership and as such is paid
commissions for executing and clearing trades on behalf of the Partnership. The
Broker has not passed upon the adequacy or accuracy of this registration
statement. The Broker neither will act in any supervisory capacity with respect
to the General Partner nor participate in the management of the General Partner
or the Partnership. Therefore, prospective investors should not rely on the
Broker in deciding whether or not to participate in the Partnership.
Customer Agreement
The Partnership and the Broker have entered into a non-exclusive customer
agreement (the "Customer Agreement") that provides that the Broker may execute
some, and clear all, transactions by or on behalf of the Partnership in
accordance with the instructions of the Advisor. The Broker is responsible for
holding and maintaining certain Partnership assets; execution of some and
clearance of all foreign currency Commodity transactions; preparation and
transmittal of daily confirmations of transactions and monthly statements of
account; calculation of equity balances and margin requirements, and similar
transaction-related administrative functions. The Customer Agreement provides
that the Partnership will post margin as required. For a description of the
brokerage commissions payable, see "Item 1. Business--Fees and Expenses--Other
Fees and Expenses". A copy of the Customer Agreement is filed herewith as
Exhibit 10.1.
ITEM 2. FINANCIAL INFORMATION.
SELECTED FINANCIAL DATA
The following Selected Financial Data is derived from the audited financial
statements of the Partnership for the years ended December 31, 1998 and 1997
and for the period June 18, 1996 (inception) to December 31, 1996, and the
unaudited financial statements for the three months ended March 31, 1999. The
Partnership commenced trading operations on October 9, 1996. See "Index to
Financial Statements" at page F-1.
<TABLE>
<CAPTION>
Three Months
Ended Period Ended
March 31, Year Ended December 31,
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Assets $41,187,678 $35,864,129 $13,814,909 $ 6,641,963
Total Partners' Capital 40,664,472 35,559,179 13,550,922 6,535,088
Total Income 1,523,704 12,380,097 4,056,330 25,451
Net Income (Loss) 596,476 6,384,091 1,786,680 (53,673)
A Units
Net Income (Loss) Per A Unit
(Based on weighted average number of
A Units outstanding during the period) $ 32.88 $ 555.83 $ 130.21 $ (21.29)
=========== =========== =========== ===========
Increase in Net Asset Value Per A Unit $ 32.28 $ 545.59 $ 202.22 $ 81.40
=========== =========== =========== ===========
B Units
Net Income Per B Unit
(Based on weighted average number of
B Units outstanding during the period) $ 26.91 $ 307.36 $ 285.90
=========== =========== ===========
Increase in Net Asset Value Per B Unit $ 32.29 $ 506.82 $ 198.02
=========== =========== ===========
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion below and elsewhere in this Registration Statement contains
"forward looking" information that are based on the beliefs of the Partnership,
as well as assumptions made by, and information currently available to, the
Partnership. A number of important factors could cause the Partnership's actual
growth, results, performance and business prospects and opportunities in 1999
and beyond to differ materially from those expressed in, or implied by, any such
forward looking information. These factors include, without limitation, the
factors described below and in "Item 1. Business -- Commodities Trading
Generally."
The assets of the Partnership are used to engage, directly or indirectly, in the
speculative trading of Investments. From time to time, a portion of such
proceeds may be used for transactions in the cash markets or for interbank
trading.
The assets of the Partnership are deposited with the Broker in a trading account
established by the Partnership for the Advisor and are used by the Partnership
as margin to engage in trading. Such assets are held in either a non-interest
bearing bank account or in securities approved by the CFTC for investment of
customer funds. In addition, certain of the Partnership's assets may also be
placed in a custodian account with a cash manager to maximize the interest
earned on assets not committed as margin.
27
<PAGE> 29
Capital Resources
The Partnership does not have, nor does it expect to have, any capital assets.
Redemptions and sales of additional Units in the future will affect the amount
of funds available for trading Investments in subsequent periods.
There are only three factors that affect the Partnership's capital resources:
(i) the trading profit or loss generated by the Advisor (including interest
income); (ii) the money invested or redeemed by the Limited Partners; and (iii)
capital invested or redeemed by the General Partner. The General Partner has
maintained, and shall maintain, at all times a capital account in such an
amount, up to a total of $500,000, as is necessary for the General Partner to
maintain a one percent (1%) interest in the capital, income and losses of the
Partnership. All capital contributions by the General Partner necessary to
maintain such capital account balance shall be evidenced by Units of general
partnership interest, each of which shall have an initial value equal to the Net
Asset Value per Unit at the time of such contribution. The General Partner, in
its sole discretion, may withdraw any excess above its required capital
contribution without notice to the Limited Partners. The General Partner, in its
sole discretion, may also contribute any greater amount to the Partnership, for
which it shall receive, at its option, additional Units of general partnership
interest at their then-current Net Asset Value.
Results of Operations
The success of the Partnership is dependent upon the ability of the Advisor to
generate trading profits through the speculative trading of Investments
sufficient to produce capital appreciation after payment of all fees and
expenses. Future results will depend in large part upon the Investment markets
in general, the performance of the Advisor, the amount of additions and
redemptions, and changes in interest rates. Due to the highly leveraged nature
of Investment trading, small price movements may result in substantial losses.
Because of the nature of these factors and their interaction, it is impossible
to predict future operating results.
The Partnership has incurred and will continue to incur substantial charges from
the payment of brokerage commissions to the Broker, management and/or incentive
fees to the Advisor, management fees, offering fees and/or incentive fees to the
General Partner and operating expenses. The Partnership is required to make
substantial trading profits to avoid depletion and exhaustion of its assets from
the above-mentioned fees and expenses.
Due to the nature of the Partnership's business, the Partnership's trading
results depend on the Advisor and the ability of its individual trading system
to take advantage of price movement or other profit opportunities in the
Investment markets. The following paragraphs present a summary of the
Partnership's operations since inception. It is important to note, however, that
the Advisor trades in various markets at different times and that prior activity
in a particular market does not mean that such markets will be actively traded
by an Advisor or will be profitable in the future. Consequently, the results of
operations of the Partnership can only be discussed in the context of the
overall trading activities of the Partnership, the Advisor's trading activities
on behalf of the Partnership as a whole and how the Partnership has performed in
the past.
Set forth below is a summary of the results of operations of the Partnership
since inception.
As of the three-month period ended March 31, 1999 the Net Asset Value of the
Partnership was $40,664,472, an increase of $5,105,293 from its Net Asset Value
of $35,559,179 at December 31, 1998. The Partnership's subscriptions and
redemptions as of the three-month period ended March 31, 1999 totaled $5,156,516
and $647,699, respectively. For the three-month period ended March 31, 1999, the
Partnership had revenue comprised of $818,966 in realized trading gains,
$351,700 in unrealized trading gains and $353,038 in interest income. For that
same period, the Partnership had expenses comprised of $420,211 in brokerage
commissions, $174,258 in management fees, $282,651 in General Partner offering
fees and $50,108 in operating expenses. This resulted in the Partnership having
a net gain of $596,476 for that period. For the three-month period ended March
31, 1999, the Net Asset Value of Class A Units increased 1.76% from $1,829.21 to
$1,861.49 and the Net Asset Value of Class B Units increased 1.83% from
$1,760.76 to $1,793.05. The Partnership's
28
<PAGE> 30
gains during the three-month period ended March 31, 1999 were attributable to S
& P 500 futures, grains and Japanese interest rates.
As of December 31, 1998 the Net Asset Value of the Partnership was $35,559,179,
an increase of $22,008,257 from its Net Asset Value of $13,550,922 at December
31, 1997. The Partnership's 1998 subscriptions and redemptions totaled
$18,134,670 and $2,510,504, respectively. For the year ended December 31, 1998,
the Partnership had revenue comprised of $10,374,018 in realized trading gains,
$943,011 in unrealized trading gains and $1,063,068 in interest income. For that
same period, the Partnership had expenses comprised of $1,400,182 in brokerage
commissions, $482,628 in management fees, $3,229,070 in incentive fees, $748,537
in General Partner offering fees and $135,589 in operating expenses. This
resulted in the Partnership having a net gain of $6,384,091 for that period. For
the year ended December 31, 1998, the Net Asset Value of Class A Units increased
42.5% from $1,283.62 to $1,829.21 and the Net Asset Value of Class B Units
increased 40.42% from $1,253.94 to $1,760.76. The Partnership's gains during
1998 were attributable to global interest rates, European and U.S. stock indices
and grains.
As of December 31, 1997 the Net Asset Value of the Partnership was $13,550,922,
an increase of $7,015,834 from its Net Asset Value of $6,535,088 at December 31,
1996. The Partnership's 1997 subscriptions and redemptions totaled $8,507,205
and $3,278,051, respectively. For the year ended December 31, 1997, the
Partnership had revenue comprised of $3,239,951 in realized trading gains,
$353,365 in unrealized trading gains and $463,014 in interest income. For that
same period, the Partnership had expenses comprised of $943,428 in brokerage
commissions, $219,334 in management fees, $702,920 in incentive fees, $324,867
in General Partner offering fees and $79,101 in operating expenses. This
resulted in the Partnership having a net gain of $1,786,680 for that period. For
the year ended December 31, 1997, the Net Asset Value of Class A Units increased
18.70% from $1,081.40 to $1,283.62. For the period April 1997 (inception of the
Class B Units) to December 31, 1997, the Net Asset Value of Class B Units
increased 18.75% from $1,055.92 to $1,253.94. The Partnership's gains during
1997 were attributable to European and U.S. interest rates and energies.
As of December 31, 1996 the Net Asset Value of the Partnership was $6,535,088.
The Partnership's 1996 subscriptions and redemptions totaled $6,607,761 and
$19,000, respectively. For the year ended December 31, 1996, the Partnership
had revenue comprised of $80,440 in realized trading losses, $84,444 in
unrealized trading gains and $21,447 in interest income. For that same period,
the Partnership had expenses comprised of $25,235 in brokerage commissions,
$13,548 in management fees, $20,516 in General Partner offering fees and
$19,825 in operating expenses. This resulted in the Partnership having a net
loss of $53,673 for that period. The Net Asset Value of a Unit at December 31,
1996 increased 8.14% from $1,000 at June 18, 1996 (inception) to $1,081.40 at
December 31, 1996. The Partnership's losses during 1996 were attributable to
global interest rates, European stock indices and grains.
For the reasons described in this section, past performance is not indicative of
future results. As a result, any recent increases in net realized or unrealized
trading gains may have no bearing on any results that may be obtained in the
future.
To enhance the foregoing comparison of results of operations from year to year,
prospective investors can examine the Statements of Financial Condition and the
Statements of Operations for the periods described above.
Liquidity
Although there is no public market for the Units, a Limited Partner may redeem
his Units in the Partnership as of any month-end upon ten days' written notice
to the General Partner in the form of a request for redemption. See "Item 11.
Description of Registrant's Securities to be Registered - Redemption".
With respect to the Partnership's trading, in general, the Advisor will trade
only Investments that have sufficient liquidity to enable it to enter and close
out positions without causing major price movements. Notwithstanding the
foregoing, most United States commodity exchanges limit the amount by which
certain
29
<PAGE> 31
commodities may move during a single day by regulations referred to as "daily
price fluctuation limits", or "daily limits". Pursuant to such regulations, no
trades may be executed on any given day at prices beyond daily limits. The price
of a futures contract has occasionally moved the daily limit for several
consecutive days, with little or no trading, thereby effectively preventing a
party from liquidating its position. While the occurrence of such an event may
reduce or effectively eliminate the liquidity of a particular market, it will
not limit ultimate losses and may in fact substantially increase losses because
of this inability to liquidate unfavorable positions. In addition, if there is
little or no trading in a particular futures or forward contract that the
Partnership is trading, whether such illiquidity is caused by any of the above
reasons or otherwise, the Partnership may be unable to execute trades at
favorable prices and/or may be unable or unwilling to liquidate its position
prior to its expiration date, thereby requiring the Partnership to make or take
delivery of the Underlying Interest.
The Partnership's trading also may be impacted by the various conflicts of
interest between the Partnership and the General Partner, the Advisor, the
Broker, and their affiliates. See "Item 1. Business - Conflicts of Interest".
Year 2000 Compliance
Many computer systems were designed using only two digits to designate years.
These systems may not be able to distinguish the Year 2000 from the Year 1900
(commonly known as the "Year 2000 Problem"). Like other investment funds and
financial business organizations, the Partnership could be adversely affected if
the computer systems used by the General Partner or the Partnership's service
providers do not properly address this problem prior to January 1, 2000.
Currently, the General Partner does not anticipate that the transition to the
21st century will have any material effect on the Partnership.
The General Partner has established a "Y2K Task Force" consisting of
representatives of its information technology, research, accounting, compliance
and trading departments to specifically address all Year 2000 issues in a timely
manner. Actions taken have included an analysis of all in-house software and
hardware to determine Year 2000 compliance. The General Partner is currently in
the process of requesting confirmation from all third parties with which it and
the Partnership have a material relationship that said parties have taken the
same actions. In-house compliance for all mission-critical software is in
progress. Testing of corrected software has already begun. Contingency plans are
being established for all non-mission critical systems. No direct costs have
been or are expected to be incurred in addressing the Year 2000 Problem. The
General Partner has addressed all of the issues as a part of its ongoing
operations, so the Partnership will not be required to reimburse the General
Partner for any expenses incurred.
Despite the corrective measures that the General Partner has implemented, no
assurance can be given that the Partnership's service providers have anticipated
every step necessary to avoid any adverse effect on the Partnership attributable
to the Year 2000 Problem. A most likely worst case scenario would be one in
which trading of contracts on behalf of the Partnership becomes impossible as a
result of the Year 2000 Problem. The General Partner would be able to assess
such a situation in advance of the December 31, 1999 deadline and either
liquidate all positions prior to that date and/or establish relationships with
additional counterparties. Further, prospective investors should understand that
the failure of third parties, such as futures exchanges, clearing organizations
or regulators, to resolve the Year 2000 Problem in a timely manner could result
in a material financial risk to the Partnership.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Past Results 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
30
<PAGE> 32
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 contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership, under the direction of the Advisor, rapidly acquires and
liquidates 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
Quantitative 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 1933 Act and Section 21E of the 1934 Act. 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 (such as the terms of particular contracts and the number of market risk
sensitive instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by the
Advisor 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.
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<PAGE> 33
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 March 31, 1999. All open
position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of March 31, 1999, the Partnership's
total capitalization was approximately $40.7 million.
March 31, 1999
--------------
% of Total
Market Sector Value at Risk Capitalization
- ------------- ------------- --------------
Currencies $4.8 million 11.92%
Interest Rates 4.2 million 10.40
Commodities 1.8 million 4.36
Stock Indices 1 million 2.36
Metals 0.7 million 1.72
Energy 0.2 million 0.51
------------ --------
Total $12.7 million 31.26%
============= ========
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 the market risk they
represent) are immaterial.
As of March 31, 1999, the Partnership held the following fixed income
securities in its portfolio:
<TABLE>
<CAPTION>
Face Value Description Value
---------- ----------- -----
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
---------------------------
$7,000,000 U.S. Treasury Notes, 5.00%, 2/28/01 $ 7,028,825
1,000,000 U.S. Treasury Notes, 6.25%, 6/30/02 1,048,291
470,000 U.S. Treasury Notes, 6.375%, 5/15/00 488,591
300,000 U.S. Treasury Notes, 6.00%, 8/15/00 306,363
FEDERAL AGENCY OBLIGATIONS
--------------------------
1,000,000 Federal Home Loan Bank,
4.875%, 1/22/02 997,375
279,687 Federal Home Loan Mortgage Corporation,
Gold 7-Year Balloon, 6.00%, 8/1/00 281,900
300,000 Federal Home Loan Mortgage Corporation,
5.75%, 7/15/03 305,910
450,000 Federal National Mortgage Association,
6.50%, 1/1/14 454,077
450,000 Federal National Mortgage Association,
7.00%, 1/1/14 459,846
1,060,000 Federal National Mortgage Association,
6.375%, 1/16/02 1,101,606
450,000 Federal National Mortgage Association,
7.50%, 1/1/29 462,447
450,000 Federal National Mortgage Association,
8.00%, 1/1/29 468,139
200,000 Federal National Mortgage Association,
6.03%, 10/23/00 207,639
-----------
TOTAL FIXED INCOME SECURITIES
(COST, INCLUDING ACCRUED INTEREST, - $13,621,279) $13,611,009
===========
</TABLE>
32
<PAGE> 34
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 manages its primary market
risk exposures-constitute forward-looking statements within the meaning of
Section 27A of the 1933 Act and Section 21E of the 1934 Act. The Partnership's
primary market risk exposures as well as the strategies used and to be used by
the General Partner and the Advisor 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
March 31, 1999, by market sector.
Interest Rates. 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 Stated and the other G-7 countries
(Canada, France, Germany, Great Britain, Italy and Japan). However, the
Partnership also takes positions in the government debt of other nations-e.g.,
New Zealand and Australia. The General Partner anticipates that G-7 interest
rates will remain the primary market exposure of the Partnership for the
foreseeable future.
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 United States dollar. However, the Partnership's major exposures have
typically been in the dollar/yen, dollar/mark and dollar/pound positions.
Stock Indices. The Partnership's primary equity exposure is in the S & P 500.
The stock index futures traded by the Partnership are by law limited to futures
on broadly based indices. The General Partner anticipates little, if any 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 United States, 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 primary metals market exposure is to fluctuations in
the price of gold, silver and copper. Although the Advisor may from time to time
trade base metals such as aluminum and tin, the principal market exposures of
the Partnership have consistently been in the precious metals, gold, silver and
copper (and, to a much lesser extent, platinum). The General Partner anticipates
that gold, silver and copper will remain the primary metals market exposure for
the Partnership.
Commodities. The Partnership's primary commodities exposure is to agricultural
price movements which are often directly affected by severe or unexpected
weather conditions. Soybeans and wheat accounted for the substantial bulk of the
Partnership's commodities exposure as of March 31, 1999. The General Partner
anticipates that the Advisor will maintain an emphasis on grains and tropicals,
in which the Partnership has historically taken its largest positions.
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 Advisor trades natural gas to a limited extent, oil is by far the
dominant energy market exposure of the Partnership.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership as of
March 31, 1999.
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Foreign Currency Balances. The Partnership's primary foreign currency balances
are in Japanese yen, German marks, British pounds and French francs. The
Partnership controls the non-trading risk of these balances by regularly
converting these balances back into dollars.
Securities Positions. The Partnership's only market exposure in instruments held
other than for trading is in its securities portfolio. The Partnership holds
only cash or interest-bearing money market accounts, short-term Treasury bills
and agency securities with durations generally less than 3 years. Violent
fluctuations in prevailing interest rates could cause interim mark-to-market
losses on the Partnership's securities, although substantially all of these
short-term instruments are held to maturity.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The means by which the Partnership and the Advisor attempt to manage the risk of
the Partnership's open positions is essentially the same in all market
categories traded. The Advisor applies its own risk management policies to its
trading. These policies generally limit the total exposure that may be taken per
"risk unit" of assets under management. In addition, the Advisor follows
diversification guidelines (often formulated in terms of the maximum margin
which they will commit to positions in any one contract or group of related
contracts), as well as imposing "stop-loss" points at which open positions must
be closed out. Occasionally, the Advisor will limit the market exposure of its
Partnership account through acquiring put or call options which "collar" the
risk of open positions. However, because of the typically high degree of
liquidity in the markets traded by the Partnership and the expense of acquiring
options, the Advisor mostly relies on stop-loss policies, requiring the
liquidation of positions once losses of a certain magnitude have been incurred.
The General Partner controls the risk of the Partnership's non-trading
instruments (interest-bearing securities held for cash management purposes)-the
only Partnership investments, as opposed to Advisor selections, directed by the
General Partner-generally limiting the duration of such instruments to no more
than 3 years.
ITEM 3. PROPERTIES.
The Partnership does not own or lease any physical properties. The Partnership's
office is located within the office of the General Partner at Two American Lane,
P.O. Box 5150, Greenwich, Connecticut 06831-8150.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Security Ownership of Certain Beneficial Owners
Security Ownership of Management
The Partnership has no directors or officers. The Partnership delegates all
management of the Partnership's affairs to the General Partner. As of March 31,
1999, the General Partner owned 238.9919 units of general partnership interest,
representing a 1.07% investment in the Partnership. The General Partner is
indirectly and equally owned by Messrs. Kenneth A. Shewer and Marc S. Goodman.
Changes In Control
None.
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ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
The General Partner, Kenmar Advisory Corp., is the sole general partner of the
Partnership. The General Partner, a corporation originally organized as a New
York corporation in September 1983 and reorganized as a Connecticut corporation
on January 1, 1996. The General Partner has been registered with the CFTC as a
CPO and a member in good standing of the NFA in such capacity since February
1984. Its address is Two American Lane, P.O. Box 5150, Greenwich, Connecticut
06831-8150 and its telephone number is (203) 861-1000. It is owned equally and
indirectly by Messrs. Shewer and Goodman. The directors and executive officers
of the General Partner currently are as follows:
MR. KENNETH A. SHEWER, age 45, has been the Chairman and a director of the
General Partner since September 1983. Mr. Shewer was employed by Pasternak, Baum
and Co., Inc. ("Pasternak, Baum"), an international cash commodity firm, from
June 1976 until September 1983. Mr. Shewer left Pasternak, Baum in September
1983 to form Kenmar Advisory Corp. with Mr. Goodman. Mr. Shewer created and
managed Pasternak, Baum's Grain Logistics and Administration Department and
created its Domestic Corn and Soybean Trading Department. In 1982, Mr. Shewer
became co-manager of Pasternak, Baum's F.O.B. Corn Department. In 1983, Mr.
Shewer was made Vice President and Director of Pasternak, Baum. Mr. Shewer
graduated from Syracuse University with a B.S. degree in 1975.
MR. MARC S. GOODMAN, age 50, has been the President and a director of the
General Partner since September 1983. Mr. Goodman joined Pasternak, Baum in
September 1974 and was a Vice President and Director from July 1981 until
September 1983. Mr. Goodman left Pasternak, Baum in September 1983 to form
Kenmar Advisory Corp. with Mr. Shewer. While at Pasternak, Baum, Mr. Goodman was
largely responsible for business development outside of the United States, for
investment of its corporate retirement funds and for selecting trading
personnel. Mr. Goodman has conducted extensive business in South America, Europe
and the Far East. Mr. Goodman was awarded an Economics and Finance Department
Fellowship from September 1969 through June 1971. Mr. Goodman graduated from the
Bernard M. Baruch School of Business of the City University of New York with a
B.B.A. in 1969 and an M.B.A. in 1971 in Finance and Investments.
MS. ESTHER ECKERLING GOODMAN, age 46, has been the Senior Executive Vice
President of the General Partner since March 1991 and has also served as Chief
Operating Officer of the General Partner since October 1995. Ms. Goodman joined
Kenmar in July 1986 and has been involved in the futures industry since 1974.
From 1974 through 1976, she was employed by Conti-Commodity Services, Inc. and
ACLI Commodity Services, Inc., in the areas of hedging, speculative trading and
tax arbitrage. In 1976, Ms. Goodman joined Loeb Rhoades and Company, Inc., where
she was responsible for the development and management of a managed futures
program which, in 1979, became the trading system for an independent CTA of
which Ms. Goodman was a founder and principal. From 1983 through mid-1986, Ms.
Goodman was employed as a marketing executive at Commodities Corp. (USA) of
Princeton, New Jersey. Ms. Goodman was a Director of the Managed Futures
Association and its predecessor, the Managed Futures Trade Association, from
1987 through 1995. In addition, she has written several articles and has spoken
before various professional groups and organizations on the subject of managed
futures. Ms. Goodman attended Vassar College from 1970-1972 and graduated from
Stanford University in 1974 with a B.A. degree. Ms. Goodman is married to Mr.
Marc S. Goodman.
MR. ROBERT L. CRUIKSHANK, age 62, joined the General Partner as its Executive
Vice President in March 1991. Mr. Cruikshank spent 20 years (1958-1978) at Blyth
Eastman Dillon in New York and was its Executive Vice President in charge of the
Securities Division, which included all domestic and international sales and
branch office activities, all trading departments and the research areas. In
1979, Mr. Cruikshank jointly formed Neild, Cruikshank & Co., an independent
market-maker on the Chicago Board of Options Exchange ("CBOE"), where he
remained until 1984, when he formed his own market making firm, Nassau
Corporation. From 1982 to 1984 Mr. Cruikshank also served as Director and Vice
Chairman of the Board of the CBOE, during which time he was instrumental in the
development of the S&P 100 (OEX) option contract. From 1985, when he left Nassau
Corporation, until March 1991, he served as President and CEO of First Capital
Financial Corporation, a national real estate syndication firm owned by Sam
Zell. Mr. Cruikshank graduated cum laude from Princeton University with a B.A.
degree in economics in 1958.
Each director of the General Partner serves until the next annual meeting of
stockholders or until a successor is elected. Executive officers of the General
Partner are appointed annually and serve at the discretion of its Board of
Directors. Messrs. Shewer and Goodman hold directorships in various affiliates
of the General Partner.
Significant Employees of the General Partner
MR. THOMAS J. DIVUOLO, age 38, Senior Vice President responsible for account
administration, oversight and risk management, joined the General Partner in
March 1989. From 1982 through 1984, Mr. DiVuolo was
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employed by Balfour Maclaine International Ltd. working in the commodity
accounting and compliance areas. From 1984 through 1986 he was employed at E.F.
Hutton and Company, Inc. as a manager of commodity regulatory reporting. From
1986 until he joined the General Partner in 1989, Mr. DiVuolo worked for Lloyds
International Trading, a commodity trading division of Lloyds Bank. Mr. DiVuolo
is a 1982 graduate of Pace University with a B.B.A. degree in Public Accounting.
He received his M.B.A. in Finance from Wagner College in 1990.
MR. GARY J. YANNAZZO, age 46, Senior Vice President and Chief Financial Officer,
joined the General Partner in August 1997. From March 1992 to July 1995, he was
Senior Vice President and Controller of Mettallgesellschaft Corp., a diversified
commodity marketing and trading company, with 30 worldwide subsidiaries and $5
billion in annual revenues. From January 1990 through February 1992, Mr.
Yannazzo was President, Chief Executive Officer and part owner of Holland
Mortgage Corporation. From December 1982 through November 1989, Mr. Yannazzo was
First Vice President of Security Capital Corporation, a publicly traded
financial services company and affiliate of Smith Barney, Inc. From June 1975
through November 1982, Mr. Yannazzo was with Arthur Andersen & Co., serving as
an Audit Manager from June 1980. From August 1995 until he joined the General
Partner, Mr. Yannazzo was a private consultant, engaged primarily in projects
and ventures in the commodity and derivative areas. Mr. Yannazzo received his
B.S. in business administration from Seton Hall University in 1975 and his
certified public accountant ("CPA") certification in 1977.
MR. JEFFREY S. ROTHSTEIN, age 41, Vice President and Chief Information Officer,
joined the General Partner in May of 1996. From August 1991 to April 1996, Mr.
Rothstein was Vice President in charge of Commodity Trading Systems Development
and Support at AIG Trading Group, AIG's Commodity Trading subsidiary. From
January 1986 through July 1991, he worked for Bankers Trust Company, building
equity trading systems, and marketing and implementing foreign exchange trading
systems at international merchant banks. From September 1981 through June 1985,
Mr. Rothstein was employed as a programmer, project leader and manager by
Digital Equipment Corporation; he was with Hewlett Packard Company from July
1979 through September 1981. Mr. Rothstein received an MBA from Columbia
University in December 1985 and a B.S. in Computer Science from Cornell
University in 1979.
ITEM 6. EXECUTIVE COMPENSATION.
The Partnership has no directors or officers. As a limited partnership, the
business of the Partnership is managed by its General Partner which is
responsible for the administration of the business affairs of the Partnership
and receives the compensation described in "Item 1. Business".
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The General Partner is the sole general partner of the Partnership and manages
and conducts the business of the Partnership. The Partnership Agreement provides
that the General Partner may be compensated in such form(s) and in such amount
as the General Partner, in its sole discretion, shall determine, after giving
due weight to industry standards. As more fully described in Item 1 hereto, to
compensate the General Partner for its management and operations of the
Partnership, its management and monitoring of the portfolio of the Advisor, the
Partnership currently pays the General Partner a management fee and/or incentive
fee, which is subsequently shared with the Advisor (as described below), and an
offering fee. For the period January 1, 1999 to March 31, 1999, the General
Partner received $174,258 in management fees and $282,651 in offering fees. For
the year ending December 31, 1998, the General Partner received $482,628 in
management fees, $3,229,070 in incentive fees and $748,537 in offering fees.
The General Partner forwards to the Advisor 3/7 of the management fees and 7/11
of the incentive fees it receives. See "Item 1. Business - Fees and Expenses -
Fees to the Advisor." In addition, because the General Partner negotiated a
brokerage commission rate for the Partnership which is generally lower than the
rate available to the public, the General Partner may
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receive from the Broker a portion of the brokerage commissions paid by the
Partnership to the Broker. See "Item 1. Business--Fees and Expenses--Fees to
the General Partner".
ITEM 8. LEGAL PROCEEDINGS.
The General Partner is not aware of any material pending legal proceedings to
which the Partnership or the General Partner is a party or to which any of its
or the Partnership's assets is subject.
ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS.
Market Information
There is no established public trading market for the Units.
Holders
The number of holders of Units at March 31, 1999 was approximately 477.
Dividends
Pursuant to the Partnership Agreement, distributions of profits, if any, will be
made at the sole discretion of the General Partner. As of March 31, 1999, the
General Partner has not made, and does not intend presently to make,
distributions.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
In June, 1996, the Partnership commenced a private placement of Units in
reliance on the exemptions afforded by, among others, Section 4(2) of the 1933
Act and Rule 506 of Regulation D promulgated thereunder. Similar reliance has
been placed on available exemptions from securities qualification requirements
under applicable state securities laws. Units are offered monthly at a price per
Unit equal to the then-current Net Asset Value per Unit plus a selling
commission equal to 5% unless such selling commission is waived in whole or in
part. The minimum subscription is $26,250 for new investors other than IRAs and
Keogh plans, or $10,500 for IRAs, Keogh plans and existing Limited Partners,
which amounts include selling commissions of $1,250 and $500, respectively. The
Units are being sold by Kenmar Securities, Inc., an affiliate of the General
Partner, and certain other selling agents.
As of the date hereof, Units are continuing to be offered and there is no
maximum number of Units that may be purchased or sold. The sales qualify as an
exempt offering under Rule 506 of Regulation D because all of the Investors are
"accredited investors" as defined by Regulation D. Since the Partnership began
the private placement in 1996, through March 1999, 27,357.6775 Units had been
sold for an aggregate subscription amount of $38,406,152.
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ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
The securities to be registered are Units of the Partnership. The rights of the
Limited Partners are governed by the Partnership Act and the Partnership
Agreement. The following is an explanation of certain terms and provisions of
the Partnership Agreement, which is being hereto filed herewith as Exhibit 3.2.
The following description is a summary only, is not intended to be complete, and
is qualified in its entirety by the Partnership Agreement.
Nature of the Partnership
The Partnership is a limited partnership governed by the Partnership Act. If the
assets of the Partnership are insufficient to discharge all of the liabilities
and obligations of the Partnership, the General Partner will be liable for all
excess liabilities and obligations. Except as provided in the Partnership Act,
no Limited Partner shall be personally liable for any debt, liability or
obligation of the Partnership or be required to return any distribution made to
him or to contribute any capital in addition to his capital contribution. Absent
fraud, willful misconduct, gross negligence or bad faith, the General Partner
will not be liable for the return of a Limited Partner's capital contribution if
such Limited Partner were to experience a loss.
Management of Partnership Affairs
Responsibility for managing the Partnership is vested solely in the General
Partner. The Limited Partners will not participate in the management or
operations of the Partnership. Any participation by a Limited Partner in the
management of the Partnership may jeopardize the limited liability of such
Limited Partner. To facilitate the General Partner's management of the
Partnership, each Limited Partner has appointed the General Partner, with full
power of substitution, such Limited Partner's attorney-in-fact.
Monthly Allocations
Each Partner, including the General Partner, has a capital account with an
initial balance equal to the amount such Partner paid for his Units and, in the
case of the General Partner, its capital contribution. The Partnership's Net
Assets will be determined monthly and any increase or decrease from the end of
the preceding month will be credited or charged to the capital account of each
Partner in the ratio that the balance of each Partner's account bears to the
balance of all accounts. Realized income and expense shall be allocated pro rata
among the Partners based on their respective capital accounts (exclusive of such
items of income and expense) as of the end of each month in which such items are
paid or accrued.
Sharing of Profits and Losses
See "Income Tax Aspects -- Partnership Allocation of Profits and Losses".
Additional Limited Partners
The General Partner may, in its sole discretion, admit at month end, or at such
other time as the General Partner determines, additional Limited Partners who
subscribe for Units. The General Partner has complete discretionary authority
regarding the admission of additional Limited Partners (including but not
limited to the right to admit additional Limited Partners under terms and
conditions comparable to or different from those under which the existing
Limited Partners were solicited), the number that may be admitted and the
acceptance of additional capital contributions from existing Limited Partners;
provided that no offer or sale to investors shall be made if it would violate
any applicable law, rule or regulation.
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Restrictions on Transfers or Assignments
No Limited Partner may assign, sell, transfer, pledge, hypothecate or otherwise
dispose of his interest in the Partnership, in whole or in part (and the
transferee may not become a substituted Limited Partner), unless the interest
is subsequently registered under the 1933 Act and applicable state securities
or Blue Sky laws or the disposition is exempt from registration, and the Limited
Partner has received the express prior written consent of the General Partner,
which may be granted or denied in its sole discretion. Any attempt in violation
of the above shall be null and void.
Termination of the Partnership
The affairs of the Partnership will be wound up and the Partnership liquidated
as soon as practicable upon the first to occur of a number of events including
but not limited to December 31, 2026 or the election of the General Partner to
terminate the Partnership upon thirty (30) days' prior written notice to the
Limited Partners.
Mandatory Withdrawal of Limited Partner
The General Partner may, at any time in its sole discretion, require any Limited
Partner to withdraw entirely from the Partnership or to withdraw a portion of
his Units (i) by giving no less than ten (10) days' written notice to the
Limited Partner(s) thus designated; or (ii) without giving notice if (A) the
General Partner determines such Limited Partner is a benefit plan investor
(within the meaning of DOL Regulations Section 2510.3-101(f)(2)) and such action
is advisable, in the sole discretion of the General Partner, to ensure that the
assets of the Partnership are not treated as "plan assets" under ERISA, (B) such
Limited Partner made a misrepresentation to the General Partner in connection
with his purchase of Units, or (C) such Limited Partner's ownership of a Unit
would result in the violation of any Law or Rule and Regulation applicable to
the Partnership or a Partner. See "Item 1. Business -- Purchases by Employee
Benefit Plans".
Amendments
The Partnership Agreement may not be amended except upon consent by the General
Partner and by Limited Partners owning more than 50% of the Units then-owned by
Limited Partners; provided, however, that without the consent of the Limited
Partners, the General Partner may amend the Partnership Agreement (i) to clarify
any ambiguity or to supplement or clarify any inconsistent provisions, (ii) to
reflect changes validly made in the membership of the Partnership or in
contributions of the Partners to the Partnership, (iii) to conform to changes in
GAAP applicable to the Partnership or to bring the Partnership into compliance
with applicable laws, rules and regulations, including but not limited to the
Code, Federal and state securities laws, rules and regulations, (iv) to amend
Article V, (v) to amend the General Partner's compensation as provided under
Section 6.2(b) of the Partnership Agreement and/or (vi) to amend provisions of
Article VII regarding redemption of Units if the General Partner, in its sole
discretion, deems that such amendment is necessary or advisable to prevent the
Partnership from being classified as a publicly-traded partnership pursuant to
Section 7704(b) of the Code, without reference to Section 7704(c) thereof.
Notwithstanding the preceding, without the vote of a majority-in-interest of the
Limited Partners, the General Partner may not amend this Agreement if such
amendment would (i) directly or indirectly, affect or jeopardize the then status
of the Partnership as a partnership for Federal income tax purposes or (ii)
reduce the capital account of any Partner, or modify the percentage of profits,
losses, or distributions to which any Partner is entitled.
Books and Records
The General Partner shall keep at the principal office of the Partnership such
books and records relating to the business of the Partnership as it deems
necessary or advisable or as are required by the CEAct and the rules and
regulations thereunder. To the extent required by applicable laws, rules and
regulations, such books and records shall be available to Limited Partners or
their authorized attorneys or agents for inspection and copying during normal
business hours of the Partnership and, upon request, copies shall be sent to any
Limited Partner
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upon payment by such Partner of reasonable reproduction and distribution costs.
Ten (10) business days' written notice to the General Partner shall be required
for such inspection and copying by a Limited Partner or his authorized attorney.
Redemption
With respect to redemption by a Limited Partner, upon ten days' prior written
notice, a Limited Partner may require the Partnership to redeem all or part of
its Units effective as of the close of business on the last day of any month at
the Net Asset Value thereof on such date.
Notwithstanding the above, pursuant to the Partnership Agreement, the General
Partner may, in its sole discretion and on ten days' notice, require a Limited
Partner to redeem all or part of its Units in the Partnership as of the end of
any month.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Pursuant to Section 6.5 of the Partnership Agreement, the Partnership has agreed
to indemnify, defend, and hold harmless the General Partner and its affiliates,
shareholders, officers, directors, employees and agents from and against any
Damages (as defined below) actually and reasonably incurred resulting from
actions, omissions, or conduct concerning the business or activities undertaken
by or on behalf of the Partnership, including, without limitation, any demands,
claims, lawsuits, or proceedings initiated by a Limited Partner (or assignee);
provided that a court of competent jurisdiction upon entry of a final judgment
shall find (or, if no final judgment is entered, an opinion is rendered to the
Partnership by independent legal counsel) to the effect that the conduct that
was the basis for such Damages was not the result of gross negligence or willful
misconduct and was done in good faith and in the reasonable belief that it was
in, or not opposed to, the best interests of the Partnership.
Notwithstanding the above, no indemnification of the General Partner or any
other party indemnified by the Partnership is permitted for damages, losses,
claims, liabilities, whether for it or several expenses (including legal fees
and disbursements), judgments, fines, settlements, and other amounts suffered in
connection with or arising from any and all claims, demands, actions, suits or
proceedings, whether civil or criminal, administrative or investigative
("Damages") resulting from any violation of federal or state securities laws in
connection with the offer or sale of Units. In addition, in any action or
proceeding brought by a Limited Partner in the right of the Partnership to which
the General Partner or any other party indemnified under the Partnership
Agreement, is a party defendant, any such person shall be indemnified only to
the extent and subject to the conditions specified in the Partnership Act.
To the extent permitted by law, expenses (including attorneys' fees) incurred by
the General Partner or any person to be indemnified in defending any action,
proceeding or claim referred to in Section 6.5 of the Partnership Agreement may
be paid voluntarily by the Partnership in advance of the final disposition of
the action, proceeding or claim; provided that the indemnified person or entity
shall agree to reimburse the Partnership unless it is ultimately determined that
indemnification of such expenses is permitted under the Partnership Agreement.
Insofar as indemnification for liabilities arising under the 1933 Act may be
permitted to directors, officers or persons controlling the Partnership or the
General Partner pursuant to the provisions described above, the Partnership has
been informed that, in the opinion of the Securities and Exchange Commission,
such indemnification is against public policy as expressed in the 1933 Act and
is therefore unenforceable. The CFTC has issued a statement of policy relating
to indemnification of officers and directors of an FCM (such as the Broker) and
its controlling persons under which the CFTC has taken the position that whether
such an indemnification is consistent with the policies expressed in the CEAct
will be determined by the CFTC on a case-by-case basis.
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ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Partnership's and the General Partner's financial statements, together with
the auditors' reports thereon, appearing on pages F-1 through F-32 hereof, are
incorporated herein by reference.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) INDEX TO FINANCIAL STATEMENTS
(1) Financial Statements:
THE DENNIS FUND LIMITED PARTNERSHIP:
<TABLE>
<S> <C>
Independent Auditor's Report................................................................F-2
Audited Financial Statements:
Statements of Financial Condition as of December 31, 1998 and 1997.....................F-3
Schedule of Securities as of December 31, 1998.........................................F-4
Statements of Operations For the Years Ended December 31, 1998 and 1997
and For the Period June 18, 1996 (inception) to December 31, 1996 ..................F-5
Statements of Changes in Partners' Capital (Net Asset Value)
For the Years Ended December 31, 1998 and 1997 and
For the Period June 18, 1996 (inception) to December 31, 1996.......................F-6
Notes to Financial Statements..................................................F-7 -- F-11
Interim Financial Statements (Unaudited):
Statement of Financial Condition as of March 31, 1999.................................F-12
Schedule of Securities as of March 31, 1999...........................................F-13
Statements of Operations For the Three Months Ended March 31, 1999 and 1998...........F-14
Statements of Changes in Partners' Capital (Net Asset Value)
For the Three Months Ended March 31, 1999 and 1998.................................F-15
Notes to Financial Statements.................................................F-16 -- F-20
KENMAR ADVISORY CORP.:
Independent Auditor's Report...............................................................F-21
Audited Financial Statement:
Statement of Financial Condition as of September 30, 1998.............................F-22
Notes to Statement of Financial Condition.....................................F-23 -- F-30
Interim Financial Statements (Unaudited):
Statement of Financial Condition as of March 31, 1999.................................F-31
Notes to Statement of Financial Condition.............................................F-32
</TABLE>
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(2) Financial Statement Schedules:
No financial statement schedules are required to be filed with
this report because the information included therein is
included in the financial statements and the footnotes
thereto.
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(b) EXHIBITS
--------
Exhibit No. Description
----------- -----------
3.1 Certificate of Limited Partnership for The
Dennis Fund Limited Partnership, dated June 17, 1996
3.2 Limited Partnership Agreement of The Dennis Fund
Limited Partnership, dated June 18, 1996 and as
amended December 15, 1997
10.1 Customer Agreement between the Partnership and
E. D. & F. Man International Inc., dated August 27,
1996.
10.2 Cover Letter and Model Advisory Agreement between The
Dennis Fund Limited Partnership and Kenmar Advisory
Corp., dated August 27, 1996, as amended January 15,
1997.
27.1 Financial Data Schedule (Class A Units)
27.2 Financial Data Schedule (Class B Units)
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SIGNATURES
Pursuant to the requirements of Section 12 of the 1934 Act, the
registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE DENNIS FUND LIMITED PARTNERSHIP
BY: KENMAR ADVISORY CORP., ITS GENERAL PARTNER
Dated: June 22, 1999 BY: /s/ ESTHER ECKERLING GOODMAN
------------------------------------
Esther Eckerling Goodman
Senior Executive Vice President and
Chief Operating Officer
<PAGE> 46
-----------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
THE DENNIS FUND LIMITED PARTNERSHIP
Independent Auditor's Report F-2
Audited Financial Statements:
Statements of Financial Condition as of December 31, 1998 and 1997 F-3
Schedule of Securities as of December 31, 1998 F-4
Statements of Operations For the Years Ended December 31, 1998 and 1997 and
For the Period June 18, 1996 (inception) to December 31, 1996 F-5
Statements of Changes in Partners' Capital (Net Asset Value)
For the Years Ended December 31, 1998 and 1997 and
For the Period June 18, 1996 (inception) to December 31, 1996 F-6
Notes to Financial Statements F-7 - F-11
Interim Financial Statements (Unaudited):
Statement of Financial Condition as of March 31, 1999 F-12
Schedule of Securities as of March 31, 1999 F-13
Statements of Operations For the Three Months Ended March 31, 1999 and 1998 F-14
Statements of Changes in Partners' Capital (Net Asset Value)
For the Three Months Ended March 31, 1999 and 1998 F-15
Notes to Financial Statements F-16 - F-20
KENMAR ADVISORY CORP.
Independent Auditor's Report F-21
Audited Financial Statement:
Statement of Financial Condition as of September 30, 1998 F-22
Notes to Statement of Financial Condition F-23 - F-30
Interim Financial Statement (Unaudited):
Statement of Financial Condition as of March 31, 1999 F-31
Notes to Statement of Financial Condition F-32
</TABLE>
Schedules are omitted for the reason that they are not required or are not
applicable or that equivalent information has been included in the financial
statements or notes thereto.
F-1
<PAGE> 47
INDEPENDENT AUDITOR'S REPORT
To the Partners
The Dennis Fund Limited Partnership
We have audited the accompanying statements of financial condition of The Dennis
Fund Limited Partnership as of December 31, 1998 and 1997, including the
December 31, 1998 schedule of securities, and the related statements of
operations and changes in partners' capital (net asset value) for the years then
ended and for the period June 18, 1996 (inception) to December 31, 1996. 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. Our procedures included
confirmation of securities owned as of December 31, 1998 and 1997, by
correspondence with brokers. 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 The Dennis Fund Limited
Partnership as of December 31, 1998 and 1997, and the results of its operations
and the changes in its net asset values for the years then ended and for the
period June 18, 1996 (inception) to December 31, 1996, in conformity with
generally accepted accounting principles.
ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C.
Hunt Valley, Maryland
February 24, 1999
F-2
<PAGE> 48
THE DENNIS FUND LIMITED PARTNERSHIP
STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
___________
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Equity in broker trading accounts
Cash $19,677,383 $ 9,190,301
Unrealized gain on open contracts 1,383,936 428,797
----------- -----------
Deposits with broker 21,061,319 9,619,098
Cash and cash equivalents 3,279,209 796,414
Fixed income securities (cost, including
accrued interest, - $11,322,815 and $3,390,385) 11,319,699 3,399,397
Subscriptions receivable 203,902 0
----------- -----------
Total assets $35,864,129 $13,814,909
=========== ===========
LIABILITIES
Accounts payable $ 84,488 $ 20,541
Commissions and other trading fees
on open contracts 22,505 10,560
General Partner offering fee 77,444 24,180
Advisor management fee 50,836 21,343
Advisor incentive fee 0 83,027
Redemptions payable 44,677 104,336
Subscription received in advance 25,000 0
----------- -----------
Total liabilities 304,950 263,987
----------- -----------
PARTNERS' CAPITAL (NET ASSET VALUE)
General Partner:
A Units - 107.1387 units outstanding
at December 31, 1998 and 1997 195,979 137,525
B Units - 131.8532 and 32.3102 units outstanding
at December 31, 1998 and 1997 232,161 40,515
Limited Partners:
A Units - 6,923.1908 and 7,537.4040 units
outstanding at December 31, 1998 and 1997 12,663,939 9,675,138
B Units - 12,759.9200 and 2,948.9024 units outstanding
at December 31, 1998 and 1997 22,467,100 3,697,744
----------- -----------
Total partners' capital
(Net Asset Value) 35,559,179 13,550,922
----------- -----------
$35,864,129 $13,814,909
=========== ===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 49
THE DENNIS FUND LIMITED PARTNERSHIP
SCHEDULE OF SECURITIES
December 31, 1998
___________
FIXED INCOME SECURITIES
- -----------------------
<TABLE>
<CAPTION>
Face Value Description Value
---------- ----------- -----
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
---------------------------
5,650,000 U.S. Treasury Notes, 4.625%, 11/30/00 $ 5,677,718
1,000,000 U.S. Treasury Notes, 6.25%, 6/30/02 1,049,653
470,000 U.S. Treasury Notes, 6.375%, 5/15/00 484,484
300,000 U.S. Treasury Notes, 6.00%, 8/15/00 313,069
FEDERAL AGENCY OBLIGATIONS
--------------------------
304,411 Federal Home Loan Mortgage Corporation,
Gold 7-Year Balloon, 6.00%, 8/1/00 306,213
300,000 Federal Home Loan Mortgage Corporation,
5.75%, 7/15/03 316,782
1,060,000 Federal National Mortgage Association,
6.375%, 1/16/02 1,129,662
450,000 Federal National Mortgage Association,
6.50%, 1/1/13 456,471
450,000 Federal National Mortgage Association,
6.50%, 1/1/28 452,322
450,000 Federal National Mortgage Association,
7.50%, 1/1/28 462,303
450,000 Federal National Mortgage Association,
8.00%, 1/1/28 465,084
200,000 Federal National Mortgage Association,
6.03%, 10/23/00 205,938
-----------
TOTAL FIXED INCOME SECURITIES
(COST, INCLUDING ACCRUED INTEREST, - $11,322,815) $11,319,699
===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 50
THE DENNIS FUND LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998 and 1997 and
For the Period June 18, 1996 (inception) to December 31, 1996
___________
<TABLE>
<CAPTION>
Year Ended Year Ended Period Ended
December 31, December 31, December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCOME
Commodity trading gains (losses)
Realized $10,291,095 $ 3,238,488 $ (80,440)
Change in unrealized 955,139 344,353 84,444
----------- ----------- ------------
Gain from commodity trading 11,246,234 3,582,841 4,004
----------- ----------- ------------
Fixed income securities gains (losses)
Realized 82,923 1,463 0
Change in unrealized (12,128) 9,012 0
----------- ----------- ------------
Gain from fixed income securities 70,795 10,475 0
----------- ----------- ------------
Interest income 1,063,068 463,014 21,447
----------- ----------- ------------
Total income 12,380,097 4,056,330 25,451
----------- ----------- ------------
EXPENSES
Brokerage commissions 1,400,182 943,428 25,235
General Partner offering fee 748,537 324,867 20,516
Advisor management fee 482,628 219,334 13,548
Advisor incentive fee 3,229,070 702,920 0
Operating expenses 135,589 79,101 19,825
----------- ----------- ------------
Total expenses 5,996,006 2,269,650 79,124
----------- ----------- ------------
NET INCOME (LOSS) $ 6,384,091 $ 1,786,680 $ (53,673)
=========== =========== ============
A UNITS
NET INCOME (LOSS) PER A UNIT
(based on weighted average number of
A Units outstanding during the period) $ 555.83 $ 130.21 $ (21.29)
=========== =========== ============
INCREASE IN NET ASSET VALUE PER A UNIT $ 545.59 $ 202.22 $ 81.40
=========== =========== ============
B UNITS
NET INCOME PER B UNIT
(based on weighted average number of
B Units outstanding during the period) $ 307.36 $ 285.90
=========== ===========
INCREASE IN NET ASSET VALUE PER B UNIT $ 506.82 $ 198.02
=========== ===========
</TABLE>
See accompanying notes.
F-5
<PAGE> 51
<TABLE>
<CAPTION>
THE DENNIS FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE)
For the Years Ended December 31, 1998 and 1997 and For the Period June 18, 1996 (inception) to December 31, 1996
___________
Partners' Capital
----------------------------------------------------------------------------------
A Units B Units
-------------------------------------- ----------------------------------------
General Limited General Limited
Units Partner Partners Units Partner Partners Total
----- ------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at
June 18, 1996 (inception) 0.0000 $ 0 $ 0 0.0000 $ 0 $ 0 $ 0
Additions 6,060.5461 71,000 6,536,761 0.0000 0 0 6,607,761
Net (loss) for the period
June 18, 1996 (inception) to
December 31, 1996 (598) (53,075) 0 0 (53,673)
Redemptions (17.3947) 0 (19,000) 0.0000 0 0 (19,000)
----------- -------- ----------- ----------- -------- ----------- -----------
Balances at
December 31, 1996 6,043.1514 70,402 6,464,686 0.0000 0 0 6,535,088
Net income for the year
ended December 31, 1997 19,123 1,077,109 6,515 683,933 1,786,680
Additions 4,046.4401 48,000 4,577,840 3,676.3211 34,000 3,847,365 8,507,205
Redemptions (2,445.0488) 0 (2,444,497) (695.1085) 0 (833,554) (3,278,051)
----------- -------- ----------- ----------- -------- ----------- -----------
Balances at
December 31, 1997 7,644.5427 137,525 9,675,138 2,981.2126 40,515 3,697,744 13,550,922
Net income for the year
ended December 31, 1998 58,454 4,010,069 23,646 2,291,922 6,384,091
Additions 0.0000 0 0 10,729.4750 168,000 17,966,670 18,134,670
Redemptions (614.2132) 0 (1,021,268) (818.9144) 0 (1,489,236) (2,510,504)
----------- -------- ----------- ----------- -------- ----------- -----------
Balances at
December 31, 1998 7,030.3295 $195,979 $12,663,939 12,891.7732 $232,161 $22,467,100 $35,559,179
=========== ======== =========== =========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
A Units B Units
---------------------------------- ------------------------
Net Asset Value Per Unit Net Asset Value Per Unit
---------------------------------- ------------------------
December 31, December 31,
1998 1997 1996 1998 1997
---- ---- ---- ---- ----
<S> <C> <C> <C> <C>
$1,829.21 $1,283.62 $1,081.40 $1,760.76 $1,253.94
========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 52
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
___________
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General Description of the Partnership
The Dennis Fund Limited Partnership (the Partnership) is a
Connecticut limited partnership which operates as a commodity pool.
The Partnership engages in the speculative trading of futures
contracts and other financial instruments. It is subject to the
regulations of the Commodity Futures Trading Commission, an agency
of the United States (U.S.) government which regulates most aspects
of the commodity futures industry; rules of the National Futures
Association, an industry self-regulatory organization; and the
requirements of commodity exchanges and Futures Commission Merchants
(brokers) through which the Partnership trades.
The Partnership was organized on June 18, 1996 and commenced trading
on October 9, 1996.
Investments made prior to April 30, 1997 are referred to as "A
Units" and investments made on or after April 30, 1997 are referred
to as "B Units." The initial net asset value per B Unit was the net
asset value per A Unit at April 30, 1997; accordingly, net income
applicable to B Units during 1997 is for the period May 1, 1997 to
December 31, 1997. The only difference between A Units and B Units
are the advisor management and incentive fee rates as further
described in Note 3.
B. Method of Reporting
The Partnership's financial statements are presented in accordance
with generally accepted accounting principles, which require the use
of certain estimates made by the Partnership's management.
C. Commodities
Gains or losses are realized when contracts are liquidated.
Unrealized gains or losses on open contracts (the difference between
contract purchase price and market price) at the date of the
statement of financial condition are included in equity in broker
trading accounts. Any change in net unrealized gain or loss from the
preceding period is reported in the statement of operations.
Brokerage commissions include other trading fees and are charged to
expense when contracts are opened.
D. Cash and Cash Equivalents
Cash and cash equivalents includes cash and all highly liquid
investments, including money market mutual funds and other
investments with a maturity of three months or less from the date of
purchase.
F-7
<PAGE> 53
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
___________
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. Fixed Income Securities
Fixed income securities are reported at market value plus accrued
interest. Fixed income securities transactions are accounted for on
the trade date. Interest income is recorded on the accrual basis.
F. Income Taxes
The Partnership prepares calendar year U.S. and state information
tax returns and reports to the partners their allocable shares of
the Partnership's income, expenses and trading gains or losses.
G. Foreign Currency Transactions
The Partnership's functional currency is the U.S. dollar; however,
it transacts business in currencies other than the U.S. dollar.
Assets and liabilities denominated in currencies other than the U.S.
dollar are translated into U.S. dollars at the rates in effect at
the date of the statement of financial condition. Income and expense
items denominated in currencies other than the U.S. dollar are
translated into U.S. dollars at the rates in effect during the
period. Gains and losses resulting from the translation to U.S.
dollars are reported in income currently.
Note 2. GENERAL PARTNER
The General Partner of the Partnership is Kenmar Advisory Corp., which
conducts and manages the business of the Partnership. The Limited
Partnership Agreement requires the General Partner to maintain a capital
account of no less than the lesser of 1% of the aggregate capital
accounts of all partners or $500,000.
Effective February 1, 1998, for managing the continuing offering of
units, the General Partner receives a monthly offering fee equal to
0.25% (3% annually) of that month's beginning Net Asset Value (as
defined in the Limited Partnership Agreement) of the Partnership. Prior
to February 1, 1998, the General Partner received a monthly offering fee
equal to .25% (3% annually) of the prior month's beginning Net Asset
Value (as defined) of the Partnership. Commencing April 1998, the
General Partner rebated to Million Dollar Investors (as defined in the
Confidential Private Placement Memorandum and Disclosure Document) a
monthly amount equal to two-thirds of the offering fee applicable to
such Million Dollar Investors. Such rebates were made to Million Dollar
Investors by issuing additional B Units.
F-8
<PAGE> 54
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
___________
Note 3. COMMODITY TRADING ADVISOR
The Partnership has an advisory agreement with Dennis Trading Group,
Inc. (the commodity trading advisor) pursuant to which the A Units pay a
monthly management fee of 1/6 of 1% (2% annually) of the month-end Net
Asset Value of the subaccount (as defined in the advisory agreement) and
a quarterly incentive fee equal to 25% of the Net New Trading Profits
(as defined). The commodity trading advisor and General Partner each
receive one-half of the management and incentive fees applicable to A
Units. Pursuant to the advisory agreement, the B Units pay a monthly
management fee of 1/12 of 1.75% (1.75% annually) of the month-end Net
Asset Value of the subaccount (as defined) and a quarterly incentive fee
equal to 27.5% of the Net New Trading Profits (as defined). The
commodity trading advisor receives 3/7 of the management fee and 7/11 of
the incentive fee applicable to B Units and the General Partner receives
4/7 of the management fee and 4/11 of the incentive fee applicable to B
Units.
Note 4. DEPOSITS WITH BROKER
The Partnership deposits cash with E.D. & F. Man International Inc. to
act as broker subject to Commodity Futures Trading Commission
regulations and various exchange and broker requirements. Margin
requirements are satisfied by the deposit of cash with such broker. The
Partnership earns interest income on its cash deposited with the broker.
Note 5. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS
Investments in the Partnership are made by subscription agreement,
subject to acceptance by the General Partner. The subscription price is
equal to the Net Asset Value of the units purchased plus a 5% selling
commission, unless such selling commission is waived in whole or in part
by the General Partner. Additions to partners' capital are shown net of
such selling commissions which amounted to $198,839, $164,086 and
$141,781 in 1998, 1997 and 1996, respectively.
The Partnership is not required to make distributions, but may do so at
the sole discretion of the General Partner. A Limited Partner may
request and receive redemption of units owned, subject to restrictions
in the Limited Partnership Agreement.
Note 6. TRADING ACTIVITIES AND RELATED RISKS
The Partnership engages in the speculative trading of U.S. and foreign
futures contracts ("derivatives"). These derivatives include both
financial and non-financial contracts held as part of a diversified
trading program. The Partnership is exposed to both market risk, the
risk arising from changes in the market value of the contracts, and
credit risk, the risk of failure by another party to perform according
to the terms of a contract.
F-9
<PAGE> 55
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
___________
Note 6. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED)
Purchase and sale of futures contracts requires margin deposits with the
broker. Additional deposits may be necessary for any loss on contract
value. The Commodity Exchange Act requires a broker to segregate all
customer transactions and assets from such broker's proprietary
activities. A customer's cash and other property (for example, U.S.
Treasury bills) deposited with a broker are considered commingled with
all other customer funds subject to the broker's segregation
requirements. In the event of a broker's insolvency, recovery may be
limited to a pro rata share of segregated funds available. It is
possible that the recovered amount could be less than total cash and
other property deposited.
The Partnership has a substantial portion of its assets on deposit with
brokers and dealers in securities and other financial institutions in
connection with its cash management activities. In the event of a
financial institution's insolvency, recovery of Partnership assets on
deposit may be limited to account insurance or other protection afforded
such deposits. In the normal course of business, the Partnership does
not require collateral from such financial institutions.
For derivatives, risks arise from changes in the market value of the
contracts. Theoretically, the Partnership is exposed to a market risk
equal to the value of futures contracts purchased and unlimited
liability on such contracts sold short.
The fair value of derivatives represents unrealized gains and losses on
open futures contracts. The average fair value of derivatives during
1998 and 1997, was approximately $880,000 and $600,000, respectively,
and was approximately $100,000 during the period October 9, 1996
(commencement of trading) to December 31, 1996. The related year-end
fair values as of December 31, 1998 and 1997, are approximately
$1,384,000 and $429,000, respectively.
Net trading results from derivatives for the years ended December 31,
1998 and 1997 and for the period June 18, 1996 (inception) to December
31, 1996, are reflected in the statement of operations and equal gain
from commodity trading less brokerage commissions. Such trading results
reflect the net gain (loss) arising from the Partnership's speculative
trading of futures contracts.
At December 31, 1998 and 1997, the notional amount of open contracts is
as follows:
1998 1997
---- ----
Contracts to Contracts to Contracts to Contracts to
Purchase Sell Purchase Sell
-------- ---- -------- ----
$766,400,000 $499,500,000 $278,000,000 $173,000,000
F-10
<PAGE> 56
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
___________
Note 6. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED)
The above amounts do not represent the Partnership's risk of loss due to
market and credit risk, but rather represent the Partnership's extent of
involvement in derivatives at the date of the statement of financial
condition.
The General Partner has established procedures to actively monitor
market risk and minimize credit risk. The Limited Partners bear the risk
of loss only to the extent of the market value of their respective
investments and, in certain specific circumstances, distributions and
redemptions received.
F-11
<PAGE> 57
THE DENNIS FUND LIMITED PARTNERSHIP
STATEMENT OF FINANCIAL CONDITION
March 31, 1999
(Unaudited)
___________
ASSETS
Equity in broker trading accounts
Cash $19,915,054
Unrealized gain on open contracts 1,742,790
-----------
Deposits with broker 21,657,844
Cash and cash equivalents 4,956,118
Fixed income securities (cost, including
accrued interest, - $13,621,279) 13,611,009
Subscriptions receivable 962,707
-----------
Total assets $41,187,678
===========
LIABILITIES
Accounts payable $ 110,203
Commissions and other trading fees
on open contracts 27,965
General Partner offering fee 99,446
Advisor management fee 59,291
Redemptions payable 226,301
-----------
Total liabilities 523,206
-----------
PARTNERS' CAPITAL (NET ASSET VALUE)
General Partner:
A Units - 107.1387 units outstanding 199,438
B Units - 158.8705 units outstanding 284,863
Limited Partners:
A Units - 6,767.6910 units outstanding 12,598,019
B Units - 15,382.7872 units outstanding 27,582,152
-----------
Total partners' capital
(Net Asset Value) 40,664,472
-----------
$41,187,678
===========
See accompanying notes.
F-12
<PAGE> 58
THE DENNIS FUND LIMITED PARTNERSHIP
SCHEDULE OF SECURITIES
March 31, 1999
(Unaudited)
___________
FIXED INCOME SECURITIES
- -----------------------
<TABLE>
<CAPTION>
Face Value Description Value
---------- ----------- -----
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
---------------------------
7,000,000 U.S. Treasury Notes, 5.00%, 2/28/01 $ 7,028,825
1,000,000 U.S. Treasury Notes, 6.25%, 6/30/02 1,048,291
470,000 U.S. Treasury Notes, 6.375%, 5/15/00 488,591
300,000 U.S. Treasury Notes, 6.00%, 8/15/00 306,363
FEDERAL AGENCY OBLIGATIONS
--------------------------
1,000,000 Federal Home Loan Bank,
4.875%, 1/22/02 997,375
279,687 Federal Home Loan Mortgage Corporation,
Gold 7-Year Balloon, 6.00%, 8/1/00 281,900
300,000 Federal Home Loan Mortgage Corporation,
5.75%, 7/15/03 305,910
450,000 Federal National Mortgage Association,
6.50%, 1/1/14 454,077
450,000 Federal National Mortgage Association,
7.00%, 1/1/14 459,846
1,060,000 Federal National Mortgage Association,
6.375%, 1/16/02 1,101,606
450,000 Federal National Mortgage Association,
7.50%, 1/1/29 462,447
450,000 Federal National Mortgage Association,
8.00%, 1/1/29 468,139
200,000 Federal National Mortgage Association,
6.03%, 10/23/00 207,639
-----------
TOTAL FIXED INCOME SECURITIES
(COST, INCLUDING ACCRUED INTEREST, - $13,621,279) $13,611,009
===========
</TABLE>
See accompanying notes.
F-13
<PAGE> 59
THE DENNIS FUND LIMITED PARTNERSHIP
STATEMENTS OF OPERATIONS
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
___________
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1999 1998
---- ----
<S> <C> <C>
INCOME
Commodity trading gains
Realized $913,291 $4,527,691
Change in unrealized 358,854 786,108
---------- ----------
Gain from commodity trading 1,272,145 5,313,799
---------- ----------
Fixed income securities gains (losses)
Realized (94,325) 8,938
Change in unrealized (7,154) (3,428)
---------- ----------
Gain (loss) from fixed income securities (101,479) 5,510
---------- ----------
Interest income 353,038 180,621
---------- ----------
Total income 1,523,704 5,499,930
---------- ----------
EXPENSES
Brokerage commissions 420,211 221,029
General Partner offering fee 282,651 114,155
Advisor management fee 174,258 81,394
Advisor incentive fee 0 1,287,786
Operating expenses 50,108 21,443
---------- ----------
Total expenses 927,228 1,725,807
---------- ----------
NET INCOME $ 596,476 $3,774,123
========== ==========
A UNITS
NET INCOME PER A UNIT
(based on weighted average number of
A Units outstanding during the period) $ 32.88 $ 361.93
========== ==========
INCREASE IN NET ASSET VALUE PER A UNIT $ 32.28 $ 361.00
========== ==========
B UNITS
NET INCOME PER B UNIT
(based on weighted average number of
B Units outstanding during the period) $ 26.91 $ 339.26
========== ==========
INCREASE IN NET ASSET VALUE PER B UNIT $ 32.29 $ 340.74
========== ==========
</TABLE>
See accompanying notes.
F-14
<PAGE> 60
THE DENNIS FUND LIMITED PARTNERSHIP
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE)
For the Three Months Ended March 31, 1999 and 1998
(Unaudited)
___________
<TABLE>
<CAPTION>
Partners' Capital
--------------------------------------------------------------------------------
A Units B Units
-------------------------------------- --------------------------------------
General Limited General Limited
Units Partner Partners Units Partner Partners Total
----- ------- -------- ----- ------- -------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
THREE MONTHS ENDED MARCH 31, 1999
Balances at December 31, 1998 7,030.3295 $195,979 $12,663,939 12,891.7732 $232,161 $22,467,100 $35,559,179
Net income for the three months
ended March 31, 1999 3,459 226,627 3,702 362,688 596,476
Additions 0.0000 0 0 2,844.8952 49,000 5,107,516 5,156,516
Redemptions (155.4998) 0 (292,547) (195.0107) 0 (355,152) (647,699)
---------- -------- ----------- ----------- -------- ----------- -----------
Balances at March 31, 1999 6,874.8297 $199,438 $12,598,019 15,541.6577 $284,863 $27,582,152 $40,664,472
========== ======== =========== =========== ======== =========== ===========
THREE MONTHS ENDED MARCH 31, 1998
Balances at December 31, 1997 7,644.5427 $137,525 $ 9,675,138 2,981.2126 $ 40,515 $ 3,697,744 $13,550,922
Net income for the three months
ended March 31, 1998 38,678 2,708,746 11,009 1,015,690 3,774,123
Additions 0.0000 0 0 3,467.4827 53,000 5,464,602 5,517,602
Redemptions (105.8710) 0 (161,825) (10.0457) 0 (15,000) (176,825)
---------- -------- ----------- ----------- -------- ----------- -----------
Balances at March 31, 1998 7,538.6717 $176,203 $12,222,059 6,438.6496 $104,524 $10,163,036 $22,665,822
========== ======== =========== =========== ======== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
A Units B Units
------------------------------------------------- --------------------------------------------------
Net Asset Value Per Unit Net Asset Value Per Unit
------------------------------------------------- --------------------------------------------------
March 31, December 31, March 31, December 31, March 31, December 31, March 31, December 31,
1999 1998 1998 1997 1999 1998 1998 1997
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C>
$1,861.49 $1,829.21 $1,644.62 $1,283.62 $1,793.05 $1,760.76 $1,594.68 $1,253.94
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
F-15
<PAGE> 61
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
___________
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General Description of the Partnership
The Dennis Fund Limited Partnership (the Partnership) is a
Connecticut limited partnership which operates as a commodity pool.
The Partnership engages in the speculative trading of futures
contracts and other financial instruments. It is subject to the
regulations of the Commodity Futures Trading Commission, an agency
of the United States (U.S.) government which regulates most aspects
of the commodity futures industry; rules of the National Futures
Association, an industry self-regulatory organization; and the
requirements of commodity exchanges and Futures Commission Merchants
(brokers) through which the Partnership trades.
Investments made prior to April 30, 1997 are referred to as "A
Units" and investments made on or after April 30, 1997 are referred
to as "B Units." The initial net asset value per B Unit was the net
asset value per A Unit at April 30, 1997. The only difference
between A Units and B Units are the advisor management and incentive
fee rates as further described in Note 3.
B. Method of Reporting
The Partnership's financial statements are presented in accordance
with generally accepted accounting principles, which require the use
of certain estimates made by the Partnership's management.
C. Commodities
Gains or losses are realized when contracts are liquidated.
Unrealized gains or losses on open contracts (the difference between
contract purchase price and market price) at the date of the
statement of financial condition are included in equity in broker
trading accounts. Any change in net unrealized gain or loss from the
preceding period is reported in the statement of operations.
Brokerage commissions include other trading fees and are charged to
expense when contracts are opened.
D. Cash and Cash Equivalents
Cash and cash equivalents includes cash and all highly liquid
investments, including money market mutual funds and other
investments with a maturity of three months or less from the date of
purchase.
F-16
<PAGE> 62
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
___________
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
E. Fixed Income Securities
Fixed income securities are reported at market value plus accrued
interest. Fixed income securities transactions are accounted for on
the trade date. Interest income is recorded on the accrual basis.
F. Income Taxes
The Partnership prepares calendar year U.S. and state information
tax returns and reports to the partners their allocable shares of
the Partnership's income, expenses and trading gains or losses.
G. Foreign Currency Transactions
The Partnership's functional currency is the U.S. dollar; however,
it transacts business in currencies other than the U.S. dollar.
Assets and liabilities denominated in currencies other than the U.S.
dollar are translated into U.S. dollars at the rates in effect at
the date of the statement of financial condition. Income and expense
items denominated in currencies other than the U.S. dollar are
translated into U.S. dollars at the rates in effect during the
period. Gains and losses resulting from the translation to U.S.
dollars are reported in income currently.
Note 2. GENERAL PARTNER
The General Partner of the Partnership is Kenmar Advisory Corp., which
conducts and manages the business of the Partnership. The Limited
Partnership Agreement requires the General Partner to maintain a capital
account of no less than the lesser of 1% of the aggregate capital
accounts of all partners or $500,000.
Effective February 1, 1998, for managing the continuing offering of
units, the General Partner receives a monthly offering fee equal to
0.25% (3% annually) of that month's beginning Net Asset Value (as
defined in the Limited Partnership Agreement) of the Partnership. Prior
to February 1, 1998, the General Partner received a monthly offering fee
equal to .25% (3% annually) of the prior month's beginning Net Asset
Value (as defined) of the Partnership. Commencing April 1998, the
General Partner rebated to Million Dollar Investors (as defined in the
Confidential Private Placement Memorandum and Disclosure Document) a
monthly amount equal to two-thirds of the offering fee applicable to
such Million Dollar Investors. Such rebates were made to Million Dollar
Investors by issuing additional B Units.
F-17
<PAGE> 63
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
___________
Note 3. COMMODITY TRADING ADVISOR
The Partnership has an advisory agreement with Dennis Trading Group,
Inc. (the commodity trading advisor) pursuant to which the A Units pay a
monthly management fee of 1/6 of 1% (2% annually) of the month-end Net
Asset Value of the subaccount (as defined in the advisory agreement) and
a quarterly incentive fee equal to 25% of the Net New Trading Profits
(as defined). The commodity trading advisor and General Partner each
receive one-half of the management and incentive fees applicable to A
Units. Pursuant to the advisory agreement, the B Units pay a monthly
management fee of 1/12 of 1.75% (1.75% annually) of the month-end Net
Asset Value of the subaccount (as defined) and a quarterly incentive fee
equal to 27.5% of the Net New Trading Profits (as defined). The
commodity trading advisor receives 3/7 of the management fee and 7/11 of
the incentive fee applicable to B Units and the General Partner receives
4/7 of the management fee and 4/11 of the incentive fee applicable to B
Units.
Note 4. DEPOSITS WITH BROKER
The Partnership deposits cash with E.D. & F. Man International Inc. to
act as broker subject to Commodity Futures Trading Commission
regulations and various exchange and broker requirements. Margin
requirements are satisfied by the deposit of cash with such broker. The
Partnership earns interest income on its cash deposited with the broker.
Note 5. SUBSCRIPTIONS, DISTRIBUTIONS AND REDEMPTIONS
Investments in the Partnership are made by subscription agreement,
subject to acceptance by the General Partner. The subscription price is
equal to the Net Asset Value of the units purchased plus a 5% selling
commission, unless such selling commission is waived in whole or in part
by the General Partner. Additions to partners' capital are shown net of
such selling commissions which amounted to $84,713 and $8,925 for the
three months ended March 31, 1999 and 1998, respectively.
The amount of subscriptions receivable at March 31, 1999 of $962,707 was
received by the Partnership on or prior to the third business day of
April 1999.
The Partnership is not required to make distributions, but may do so at
the sole discretion of the General Partner. A Limited Partner may
request and receive redemption of units owned, subject to restrictions
in the Limited Partnership Agreement.
F-18
<PAGE> 64
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
___________
Note 6. TRADING ACTIVITIES AND RELATED RISKS
The Partnership engages in the speculative trading of U.S. and foreign
futures contracts ("derivatives"). These derivatives include both
financial and non-financial contracts held as part of a diversified
trading program. The Partnership is exposed to both market risk, the
risk arising from changes in the market value of the contracts, and
credit risk, the risk of failure by another party to perform according
to the terms of a contract.
Purchase and sale of futures contracts requires margin deposits with the
broker. Additional deposits may be necessary for any loss on contract
value. The Commodity Exchange Act requires a broker to segregate all
customer transactions and assets from such broker's proprietary
activities. A customer's cash and other property (for example, U.S.
Treasury bills) deposited with a broker are considered commingled with
all other customer funds subject to the broker's segregation
requirements. In the event of a broker's insolvency, recovery may be
limited to a pro rata share of segregated funds available. It is
possible that the recovered amount could be less than total cash and
other property deposited.
The Partnership has a substantial portion of its assets on deposit with
brokers and dealers in securities and other financial institutions in
connection with its cash management activities. In the event of a
financial institution's insolvency, recovery of Partnership assets on
deposit may be limited to account insurance or other protection afforded
such deposits. In the normal course of business, the Partnership does
not require collateral from such financial institutions.
For derivatives, risks arise from changes in the market value of the
contracts. Theoretically, the Partnership is exposed to a market risk
equal to the value of futures contracts purchased and unlimited
liability on such contracts sold short.
The fair value of derivatives represents unrealized gains and losses on
open futures contracts. The average fair value of derivatives during the
three months ended March 31, 1999 and 1998, was approximately $3,060,000
and $570,000, respectively, and the related fair value as of March 31,
1999, is approximately $1,743,000.
Net trading results from derivatives for the three months ended March
31, 1999 and 1998, are reflected in the statement of operations and
equal gain from commodity trading less brokerage commissions. Such
trading results reflect the net gain arising from the Partnership's
speculative trading of futures contracts.
At March 31, 1999, the notional amount of open contracts to purchase
totaled approximately $848,000,000, and the notional amount of open
contracts to sell totaled approximately $452,100,000. These amounts do
not represent the Partnership's risk of loss due to market and credit
risk, but rather represent the Partnership's extent of involvement in
derivatives at the date of the statement of financial condition.
F-19
<PAGE> 65
THE DENNIS FUND LIMITED PARTNERSHIP
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
(Unaudited)
___________
Note 6. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED)
The General Partner has established procedures to actively monitor
market risk and minimize credit risk. The Limited Partners bear the risk
of loss only to the extent of the market value of their respective
investments and, in certain specific circumstances, distributions and
redemptions received.
Note 7. INTERIM FINANCIAL STATEMENTS
The statement of financial condition as of March 31, 1999 and the
statements of operations and changes in partners' capital (net asset
value) for the three months ended March 31, 1999 and 1998, are
unaudited. In the opinion of the Partnership's management, such
financial statements reflect all adjustments, which were of a normal and
recurring nature, necessary for a fair presentation of financial
position as of March 31, 1999 and the results of operations for the
three months ended March 31, 1999 and 1998.
F-20
<PAGE> 66
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholder
Kenmar Advisory Corp.
We have audited the accompanying statement of financial condition of Kenmar
Advisory Corp. as of September 30, 1998. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the statement of financial condition is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the statement of financial condition. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall statement of financial
condition presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the statement of financial condition referred to above presents
fairly, in all material respects, the financial position of Kenmar Advisory
Corp. as of September 30, 1998, in conformity with generally accepted accounting
principles.
As discussed in the notes to the statement of financial condition, Kenmar
Advisory Corp. is a wholly-owned subsidiary and a member of a group of
affiliated companies and, as described in the statement of financial condition
and notes thereto, has extensive transactions and relationships with members of
the group.
ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C.
Lutherville, Maryland
December 16, 1998
F-21
<PAGE> 67
KENMAR ADVISORY CORP.
STATEMENT OF FINANCIAL CONDITION
September 30, 1998
___________
ASSETS
Cash and cash equivalents $ 432,380
Fees receivable 2,449,276
Due from affiliates, net 2,325,845
Investments in affiliated commodity pools 1,832,266
Property and equipment, net 476,634
Other assets 5,063
----------
Total assets $7,521,464
==========
LIABILITIES
Accrued expenses and other liabilities $2,663,940
Obligations under capital leases 310,841
Commercial loan payable 613,264
----------
Total liabilities 3,588,045
----------
STOCKHOLDER'S EQUITY
Common stock, $1 par value:
Authorized - 1,000 shares; issued
and outstanding - 100 shares 100
Additional paid-in capital 1,479,584
Retained earnings 2,453,735
----------
Total stockholder's equity 3,933,419
----------
Total liabilities and stockholder's equity $7,521,464
==========
See accompanying notes.
F-22
<PAGE> 68
KENMAR ADVISORY CORP.
NOTES TO STATEMENT OF FINANCIAL CONDITION
___________
Note 1. GENERAL DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
A. General
Kenmar Advisory Corp. (the "Company"), a registered commodity pool
operator, organizes and operates commodity pools that engage in the
speculative trading of futures, forwards and option contracts and
receives the majority of its revenue from the management thereof.
The Company is a wholly-owned subsidiary of Kenmar Holdings Inc.
(the "Parent"), which, in turn, is wholly-owned by Kenmar Investment
Associates ("KIA"). Two of the Company's officers are the sole
shareholders of KAS Commodities, Inc. and MSG Commodities, Inc.,
respectively, which, in turn, are the sole and equal owners of KIA.
The accompanying statement of financial condition is presented in
accordance with generally accepted accounting principles, which
require the use of certain estimates made by the Company's
management.
B. Cash and Cash Equivalents
Cash and cash equivalents include all cash and money market account
balances. The Company maintains its cash and cash equivalents with
primarily one financial institution. Such balances on deposit may be
in excess of available federal deposit insurance.
C. Investments in Affiliated Commodity Pools
The Company's investments in affiliated commodity pools, of which
the Company is General Partner, Managing Owner or Managing Member,
are carried at its share of the underlying equity in the net assets
of the commodity pools.
D. Revenue Recognition
Commissions are recognized as affiliated commodity pools place
transactions with clearing brokers. Management and incentive fees
accrue in accordance with the terms of the respective agreements.
E. Property and Equipment
Depreciation of furniture, fixtures and office equipment is computed
using the straight-line method over the estimated useful lives of
the assets, which range from 5 to 7 years. Amortization of leasehold
improvements is computed using the straight-line method over the
lesser of the term of the related lease or the estimated useful
lives of the assets.
F-23
<PAGE> 69
KENMAR ADVISORY CORP.
NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)
___________
Note 1. GENERAL DESCRIPTION OF THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
F. Income Taxes
The Company is part of the Parent's consolidated group for U.S. and
state income tax purposes. Income tax returns are prepared on the
accrual basis of accounting on a fiscal year ended September 30. The
Company uses an asset and liability approach in accounting for
income taxes. The Company is allocated income tax in an amount equal
to its separate tax liability computed as if it were filing
individually. State taxing jurisdictions also assess taxes on bases
in addition to income.
Note 2. INVESTMENTS IN AFFILIATED COMMODITY POOLS
The Company has General Partner interests in various limited
partnerships, is the Managing Owner of a trust and is the Managing
Member of a limited liability company, collectively referred to as
commodity pools.
Summarized activity as of and for the year ended September 30, 1998,
related to these General Partner, Managing Owner or Managing Member
interests is as follows:
<TABLE>
<CAPTION>
Income
Value at (Loss) Value at
September 30, 1997 Additions Allocation September 30, 1998
------------------ --------- ---------- ------------------
<S> <C> <C> <C> <C>
Kenmar Performance Partners L.P. $ 785,206 $ 0 $210,197 $ 995,403
Kenmar Venture Partners Limited Partnership 112,706 0 (2,805) 109,901
The Dennis Fund Limited Partnership 168,685 128,000 124,507 421,192
Kenmar Global Trust 115,550 65,400 29,113 210,063
Oberdon Partners L.L.C. 29,109 0 (946) 28,163
The Dennis Friends & Family Limited
Partnership 0 27,437 12,768 40,205
The Hirst Investment Fund Limited
Partnership 0 25,000 2,339 27,339
---------- -------- -------- ----------
$1,211,256 $245,837 $375,173 $1,832,266
========== ======== ======== ==========
</TABLE>
F-24
<PAGE> 70
KENMAR ADVISORY CORP.
NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)
___________
Note 2. INVESTMENTS IN AFFILIATED COMMODITY POOLS (CONTINUED)
As General Partner, Managing Owner or Managing Member of these commodity
pools, the Company conducts and manages the respective businesses of
such commodity pools. Each limited partnership, trust or operating
agreement requires the Company to maintain a specified investment in the
respective commodity pools. The limited partnership agreement of Kenmar
Performance Partners L.P. requires the Company to maintain an investment
in the Partnership of 1% of Net Asset Value, up to a total of $500,000.
The limited partnership agreement of The Dennis Fund Limited Partnership
requires the Company to maintain a capital account of no less than the
lesser of 1% of the aggregate capital accounts of all partners or
$500,000. The limited partnership agreement of Kenmar Venture Partners
Limited Partnership requires the Company to maintain an investment of 1%
of the aggregate capital contributions as well as a net worth of not
less than 10% of the total contributions to the Partnership. The
operating agreement of Oberdon Partners L.L.C. requires the Company, as
Managing Member, to maintain a capital account of no less than $25,000.
The limited partnership agreements of The Dennis Friends & Family
Limited Partnership and The Hirst Investment Fund Limited Partnership
require the company to maintain a capital account of no less than the
Net Asset Value of twenty-five units. The Trust Agreement of Kenmar
Global Trust (KGT) requires the Company, as Managing Owner, to maintain
a capital account equal to 1% of the total capital accounts of KGT. As
of September 30, 1998, the minimum aggregate investments required under
the terms of the agreements with these commodity pools was approximately
$1,200,000. Each limited partnership agreement also requires the Company
to maintain a net worth as required for the partnership to be treated as
a partnership for U.S. income tax purposes. The Company, as Managing
Owner of KGT, has also agreed to maintain a net worth of not less than
$1,000,000. The Company is currently maintaining net worth in excess of
$3,900,000.
For managing the business of the commodity pools, the Company earns fees
and commissions in accordance with the terms of the respective limited
partnership, trust or operating agreements. As General Partner, Managing
Owner or Managing Member, the Company has a fiduciary responsibility to
the pools, and potential liability beyond the amounts recognized as an
asset in the statement of financial condition. In addition, the Company
has similar, shared fiduciary responsibilities in connection with two
offshore investment funds sponsored by its affiliate, Kenmar Management
Ltd.
Kenmar Global Trust (KGT) is a public fund which commenced operations in
May 1997. As Managing Owner, the Company has paid KGT's organizational
and initial offering costs. KGT is reimbursing the Company for such
costs in monthly installments of .2% of KGT's beginning of month net
asset value, commencing with the first month of trading operations. As
of September 30, 1998, the Company has paid $527,000, of which $412,000
has been reimbursed. The Company recorded an expense when such amounts
were incurred and records the reimbursement from KGT as income when it
is received. In the event KGT terminates prior to the completion of the
reimbursement of such costs, the Company will not be entitled to any
additional reimbursement from KGT.
F-25
<PAGE> 71
KENMAR ADVISORY CORP.
NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)
___________
Note 2. INVESTMENTS IN AFFILIATED COMMODITY POOLS (CONTINUED)
Summarized financial information for the most significant commodity
pool, Kenmar Performance Partners L.P., as of and for the year ended
September 30, 1998, is as follows:
Assets $77,740,000
Liabilities 4,559,000
-----------
Net asset value $73,181,000
===========
Income $38,224,000
Expenses 22,676,000
-----------
Net income $15,548,000
===========
Note 3. PROPERTY AND EQUIPMENT
At September 30, 1998, the Company's property and equipment consists of:
Furniture and fixtures $ 55,231
Office equipment 307,178
Leasehold improvements 10,541
Leased assets 585,736
---------
958,686
Less: Accumulated depreciation and
amortization (482,052)
---------
$ 476,634
=========
Leased assets are comprised primarily of furniture, fixtures and office
equipment. Accumulated amortization related to leased assets aggregated
$298,694 at September 30, 1998.
F-26
<PAGE> 72
KENMAR ADVISORY CORP.
NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)
___________
Note 4. OBLIGATIONS UNDER LEASES
The Company leases furniture, fixtures and office equipment under
noncancelable capital leases which expire at various dates through 2001.
The future minimum lease payments required by these capital leases are
as follows:
Year Ending September 30
------------------------
1999 $154,164
2000 150,970
2001 56,502
--------
Total minimum lease payments 361,636
Less: Amounts representing interest (50,795)
--------
Present value of obligations under
capital leases $310,841
========
The Company leases office facilities in Greenwich, Connecticut. The
lease commenced in January, 1996 for an initial term of nine years with
one five year option to renew. The future minimum lease payments under
this noncancelable operating lease are as follows:
Year Ending September 30
------------------------
1999 $ 379,851
2000 403,719
2001 471,334
2002 477,300
2003 477,300
Thereafter 517,075
----------
$2,726,579
==========
Note 5. INCOME TAXES
The Company is included in the consolidated U.S. and state income tax
returns filed by the Parent. Deferred income taxes are provided for all
significant temporary differences in the recognition of assets and
liabilities for tax and financial reporting purposes. These temporary
differences have resulted principally from the tax benefit of operating
loss carryforwards, differences in the timing of recognition of income
from affiliated commodity pools, and from differences in the
depreciation methods and useful lives of property and equipment.
Income taxes payable to the Parent as of September 30, 1998, was
$110,921. Such amount is included in due from affiliates on the
statement of financial condition.
F-27
<PAGE> 73
KENMAR ADVISORY CORP.
NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)
___________
Note 6. RELATED PARTY TRANSACTIONS
The Company has extensive transactions and relationships with members of
a group of affiliated companies that result in advances to and from such
affiliates. The Company provides administrative, accounting, research,
marketing and other services to its affiliates. The Company also pays
certain expenses on behalf of the Parent that benefit the group. The
Company, in turn, charges the appropriate portion of such common
expenses among the affiliates.
The following amounts are due from the affiliates at September 30, 1998:
Members of the Parent group, net $1,348,294
Kenmar Management Limited 276,745
Kenmar Institutional Investment
Management L.L.C. 239,275
Kenmar Global Strategies, Inc. 136,262
Kenmar Investment Management Limited 11,520
KAS Commodities, Inc. 114,113
Receivables from officers 76,645
Other 122,991
----------
$2,325,845
==========
No specific terms apply to the liquidation of amounts due from
affiliates; however, such amounts are settled periodically. The Company
has reflected its right of offset in reporting net intercompany balances
in the statement of financial condition.
As compensation for services provided to affiliated commodity pools, the
Company receives from commodity brokers a portion of the brokerage
commissions paid to them by the commodity pools. The Company also
receives commissions, management, incentive, organization, offering,
redemption and other fees directly from the commodity pools, in
accordance with the respective agreements. For certain pools, the
Company in turn pays management and incentive fees to the trading
advisors. At September 30, 1998, the Company is owed fees of $2,396,241
from these commodity pools.
Note 7. COMMERCIAL LOAN PAYABLE AND LINE OF CREDIT AGREEMENT
The Company entered into a line of credit agreement with a financial
institution in April 1997 under which secured notes may be executed to
fund specified costs incurred by the Company as Managing Owner of Kenmar
Global Trust (KGT). The aggregate borrowings may not exceed $1,000,000.
Each note executed under the agreement is payable in eighteen equal
monthly installments. Interest is payable monthly at a floating rate,
which is based upon the higher of: a) the Federal Funds Rate plus .5%,
or b) the Prime Rate, as specified in the agreement. The average
interest rate is approximately 8.5% as of September 30, 1998, for all
notes outstanding.
F-28
<PAGE> 74
KENMAR ADVISORY CORP.
NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)
___________
Note 7. COMMERCIAL LOAN PAYABLE AND LINE OF CREDIT AGREEMENT (CONTINUED)
Amounts outstanding under the agreement are secured by the amounts due
to the Company from KGT and the intercompany note to an affiliate from
Kenmar Management Limited. The agreement also contains certain covenants
which, if not met, could subject amounts outstanding under the agreement
to accelerated repayment.
At September 30, 1998, notes totaling $613,264 are outstanding under
this line of credit agreement, of which $552,370 is due within twelve
months.
Note 8. TRADING ACTIVITIES AND RELATED RISKS
The commodity pools for which the Company is either the General Partner,
Managing Owner or Managing Member engage in the speculative trading of
futures contracts, options on futures contracts and forward contracts
(collectively, "derivatives") in U.S. and foreign markets.
Theoretically, the commodity pools, and therefore, the Company, as
General Partner, Managing Owner or Managing Member, are exposed to both
market risk (the risk arising from changes in the market value of the
contracts) and credit risk (the risk of failure by another party to
perform according to the terms of a contract). The commodity pools are
exposed to market risk equal to the value of contracts purchased and
unlimited liability on contracts sold short. Written options expose the
commodity pools to potentially unlimited liability and purchased options
expose the commodity pools to a risk of loss limited to the premiums
paid. Since forward contracts are traded in unregulated markets between
principals, the commodity pools also assume the risk of loss from
counterparty nonperformance.
The commodity pools have a substantial portion of their assets on
deposit with futures commission merchants, brokers and dealers in
securities and other financial institutions in connection with trading
and cash management activities. In the event of a financial
institution's insolvency, recovery of partnership, trust or company
assets on deposit may be limited to account insurance or other
protection afforded such deposits.
The fair value of derivatives represents unrealized gains and losses on
open futures and forward contracts, and the market value of option
contracts. The average month-end fair value of open derivatives held by
the commodity pools during the year ended September 30, 1998, was
approximately $6,640,000. The related year-end fair value was
approximately $6,264,000.
At September 30, 1998, the notional amount of open contracts is as
follows:
Contracts to Contracts to
Purchase Sell
-------- ----
Derivatives (excluding
purchased options) $1,083,000,000 $747,800,000
Purchased options 3,200,000 100,000
F-29
<PAGE> 75
KENMAR ADVISORY CORP.
NOTES TO STATEMENT OF FINANCIAL CONDITION (CONTINUED)
___________
Note 8. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED)
The Company, as General Partner, Managing Owner or Managing Member, has
established procedures to actively monitor and minimize market and
credit risk.
F-30
<PAGE> 76
KENMAR ADVISORY CORP.
STATEMENT OF FINANCIAL CONDITION
March 31, 1999
(Unaudited)
___________
ASSETS
Cash and cash equivalents $1,198,981
Fees receivable 593,882
Due from affiliates, net 3,582,719
Investments in affiliated commodity pools 1,801,450
Property and equipment, net 467,219
Other assets 6,978
----------
Total assets $7,651,229
==========
LIABILITIES
Accrued expenses and other liabilities $2,559,521
Obligations under capital leases 250,850
Commercial loan payable 593,539
----------
Total liabilities 3,403,910
----------
STOCKHOLDER'S EQUITY
Common stock, $1 par value:
Authorized - 1,000 shares; issued
and outstanding - 100 shares 100
Additional paid-in capital 1,534,084
Retained earnings 2,713,135
----------
Total stockholder's equity 4,247,319
----------
Total liabilities and stockholder's equity $7,651,229
==========
See accompanying notes.
F-31
<PAGE> 77
KENMAR ADVISORY CORP.
NOTES TO STATEMENT OF FINANCIAL CONDITION
(Unaudited)
___________
The interim statement of financial condition as of March 31, 1999 is unaudited
and does not include all disclosures required by generally accepted accounting
principles. Such interim statement of financial condition should be read in
conjunction with the Company's audited statement of financial condition as of
September 30, 1998, included on the preceding pages. In the opinion of
management, such financial statement reflects all adjustments, which were of a
normal and recurring nature, necessary for a fair presentation of financial
position as of March 31, 1999.
Subsequent to September 30, 1998, the Company entered into a partnership
agreement with The Hirst Investment 2X Fund Limited Partnership. The Company, as
General Partner, is required to maintain its capital account at no less that the
Net Asset Value of twenty-five (25) units. The Company had 25.6497 units with a
Net Asset Value of $21,000 in its capital account as of March 31, 1999.
As discussed in Note 2 of the September 30, 1998 audited statement of financial
condition, the remaining organizational and initial offering costs of Kenmar
Global Trust have been fully reimbursed as of March 31, 1999.
F-32
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF LIMITED PARTNERSHIP
OF
THE DENNIS FUND LIMITED PARTNERSHIP
The undersigned, desiring to form a limited partnership under the Connecticut
Uniform Limited Partnership Act (the "Act"), does hereby certify as follows:
I. The name of the partnership is The Dennis Fund Limited Partnership (the
"Partnership"). It has an office address of Two American Lane, Greenwich,
Connecticut 06831-8150.
II. The agent for service of process is Kenneth A. Shewer, who has a business
address of Two American Lane, Greenwich, Connecticut 06831-8150 and a home
address at 112 Gunn Hill Road, New Preston, Connecticut 06777.
III. The name and address of the sole general partner is Kenmar Advisory Corp.,
Two American Lane, Greenwich, Connecticut 06831-8150.
IV. The Partnership shall dissolve and its affairs wound up on December 31,
2026 unless sooner terminated under the terms of the Limited Partnership
Agreement or the Act.
IN WITNESS WHEREOF, the undersigned general partner has executed this
Certificate of Limited Partnership this 17th day of June, 1996.
GENERAL PARTNER:
KENMAR ADVISORY CORP.
By: /s/ Esther Eckerling Goodman
-------------------------------
Esther Eckerling Goodman
Chief Operating Officer and
Senior Executive Vice President
ACCEPTANCE OF APPOINTMENT AS STATUTORY AGENT
Kenneth A. Shewer hereby accepts and agrees to his appointment as statutory
agent for service for the Partnership.
Dated: June 17, 1996
/s/ Kenneth A. Shewer
-------------------------------
Kenneth A. Shewer
<PAGE> 1
EXHIBIT 3.2
LIMITED PARTNERSHIP AGREEMENT
THE DENNIS FUND LIMITED PARTNERSHIP
LIMITED PARTNERSHIP INTERESTS CREATED BY THIS AGREEMENT ARE BEING ACQUIRED FOR
INVESTMENT, HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND MAY NOT BE ASSIGNED, SOLD, TRANSFERRED, PLEDGED, HYPOTHECATED OR
OTHERWISE DISPOSED OF UNLESS THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER
SAID ACT OR SUCH ASSIGNMENT, SALE, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER
DISPOSITION IS EFFECTED IN COMPLIANCE WITH THIS AGREEMENT. IN ADDITION,
REGISTRATION UNDER APPLICABLE STATE SECURITIES LAWS AND/OR THE APPROVAL OF
CERTAIN STATE COMMISSIONS OR OTHER AUTHORITIES MAY BE REQUIRED FOR THE
ASSIGNMENT, SALE, TRANSFER, PLEDGE, HYPOTHECATION OR OTHER DISPOSITION OF THE
INTERESTS.
Dated June 18, 1996
As Amended December 15, 1997
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<PAGE> 2
LIMITED PARTNERSHIP AGREEMENT
OF
THE DENNIS FUND LIMITED PARTNERSHIP
THIS LIMITED PARTNERSHIP AGREEMENT, dated this 18th day of June, 1996, is
between Kenmar Advisory Corp. (the "General Partner") and the limited partners
(the "Limited Partners") listed on the books and records of The Dennis Fund
Limited Partnership (the "Partnership").
WHEREAS, by this limited partnership agreement, the Partnership was formed as a
limited partnership pursuant to the Act (as defined below); and
WHEREAS, the General Partner desires to offer and sell Units (as defined below)
to investors; and
NOW, THEREFORE, based upon the above representations, and other good and
valuable consideration, the receipt and adequacy of which are hereby
acknowledged, the General Partner and the Limited Partners agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following terms shall have the following
meanings:
Act. The Connecticut Uniform Limited Partnership Act.
Advisor. Dennis Trading Group, Inc., an Illinois corporation with a principal
place of business at 250 South Wacker Drive, Suite 650, Chicago, Illinois 60606,
and a telephone number of (312) 559-1895, or such successor or assign as
permissible under the Advisory Agreement.
Agreement. This Limited Partnership Agreement, as amended, modified or
supplemented from time to time.
Applicable Laws. (i) The provisions of all applicable statutes and laws of the
United States of America (including the states thereof) including the CEA, and
(ii) the constitution, by-laws, rules, regulations, orders, customs and usage of
(A) any United States market (and its clearing house, if any) on which a
transaction is executed on behalf of the Partnership and (B) the NFA or any
other United States regulatory or self-regulatory organization with jurisdiction
over any market, clearing house and/or member thereof and/or any bank, broker,
advisor or other intermediary dealing in Investments on behalf of the
Partnership.
CEAct. The Commodity Exchange Act, as amended.
CFTC. The Commodity Futures Trading Commission or such other governmental agency
that performs the functions presently being performed by the Commodity Futures
Trading Commission.
Capital Account. An account established for each Partner on the books of the
Partnership (i) as of the date of formation of the Partnership, (ii) on such
later date on which such Partner is admitted to the Partnership, and (iii) on
each such other date as such Partner acquires an additional Unit.
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<PAGE> 3
Capital Contribution. The amount of money and the fair market value of property
(net of liabilities) contributed by each Partner to the capital of the
Partnership.
Code. The Internal Revenue Code of 1986, as amended from time to time. A
reference to a section of the Code shall be deemed to include a reference to any
amendatory or successor provision thereto.
Damages. Damages, losses, claims, liabilities, whether joint or several,
expenses (including legal fees and disbursements), judgments, fines, settlements
and other amounts suffered in connection with or arising from any and all
claims, demands actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which the indemnitee may be involved, or
threatened to be involved, as a party or otherwise, by reason of his status as a
Partner or an officer, director, shareholder, constituent Partner, trustee,
employee or other representative of a Partner.
DOL. The United States Department of Labor or such other governmental agency
that performs the functions that are performed as of the date of this Agreement
by the United States Department of Labor.
ERISA. The Employment Retirement Income Security Act of 1974, as amended. A
reference to a section of ERISA shall be deemed to include a reference to any
amendatory or successor provision thereto.
General Partner. Kenmar Advisory Corp., a Connecticut corporation with a
principal place of business at Two American Lane, P.O. Box 5150, Greenwich,
Connecticut 06831-8150, a telephone number of (203) 861-1000 and a facsimile
transmission number of (203) 861-1095.
IRS. The United States Internal Revenue Service or such other governmental
agency that performs the functions that are performed as of the date of this
Agreement by the United States Internal Revenue Service.
Investments. (i) Commodities, futures contracts, forward contracts, foreign
exchange commitments, exchange for physicals, swap contracts, spot (cash)
commodities and other items, options on the foregoing and any rights pertaining
to the foregoing contracts, instruments or investments throughout the world,
(ii) any security as defined in Section 2(1) of the Securities Act of 1933, as
amended, (iii) any option, warrant or other right on or pertaining to any of the
foregoing, whether in the United States of America or anywhere else throughout
the world, or (iv) any other investment or transaction that the General Partner
deems, in its sole discretion, to be consistent with the objectives of the
Partnership.
Legal Representative. Executor, conservator, administrator or other legal
representative, or estate, heir, beneficiary or legal successor.
Limited Partners. The persons listed as such on the books and records of the
Partnership as having been admitted to the Partnership as limited partners as
set forth in this Agreement.
NFA. The National Futures Association or such other self-regulatory agency
having jurisdiction over the Partnership that performs the functions presently
being performed by the National Futures Association.
Net Asset Value per Unit. The Net Asset Value of the Partnership divided by the
number of Units outstanding as of the date of calculation.
Net Asset Value of the Partnership. Total assets of the Partnership less total
liabilities, all as determined in accordance with the principles set forth in
this Agreement or, where no such principles are specified herein, in accordance
with United States generally accepted accounting principles applied on a
consistent basis.
3
<PAGE> 4
The value of all Investments shall be the market value thereof. The value of a
Commodity traded on an exchange shall be the settlement or closing price thereof
on the exchange on the date of determination; provided, however, that if a
Commodity could not be liquidated on the day with respect to which the assets of
the Partnership are being determined, the settlement or closing price on the
first subsequent day on which the contract could be liquidated shall be the
basis for determining the liquidating value thereof. The market value of a
Commodity not traded on an exchange shall mean its market value as determined by
the General Partner on a basis consistently applied.
Partners. The General Partner and the Limited Partners.
Partnership. The Dennis Fund Limited Partnership, a limited partnership formed
under, governed by and operated pursuant to the provisions of the Act.
SEC. The United States Securities and Exchange Commission or such other
governmental agency that performs the functions that are being performed by the
United States Securities and Exchange Commission as of the date of this
Agreement.
Securities Act. The Securities Act of 1933, as amended.
Unit. A unit of general or limited partnership interest (including a unit of
limited partnership interest owned by the General Partner).
ARTICLE II
ORGANIZATION
2.1 FORMATION. The Partnership is hereby formed as a limited partnership
under and pursuant to the provisions of the Act, with the General Partner as
general partner and the Limited Partners as limited partners. Unless expressly
provided for herein, the rights and liabilities of the Partners shall be as
provided in the Act.
2.2 NAME. The Partnership shall do business under the name The Dennis Fund
Limited Partnership. All the business of the Partnership shall be conducted in
such name and all contracts, property and contract rights of the Partnership
shall be held in such name.
2.3 PRINCIPAL PLACE OF BUSINESS. The Partnership shall maintain a principal
place of business at Two American Lane, P.O. Box 5150, Greenwich, Connecticut
06831-8150. The Partnership may maintain such additional offices as the General
Partner deems necessary and the General Partner may change the location of those
offices and/or the principal office at any time by notice to the Limited
Partners.
2.4 TERM. The Partnership shall continue until terminated as set forth in
Section 8.1 below.
2.5 CHARACTER OF THE BUSINESS. The Partnership shall trade, buy, sell,
spread or otherwise acquire, hold or dispose of Investments through the
retention of the Advisor. The objective of the Partnership's business is
appreciation of its assets through the speculative trading of Investments.
4
<PAGE> 5
ARTICLE III
CAPITALIZATION AND UNITS
3.1 CAPITAL CONTRIBUTIONS.
(a) The General Partner has initially contributed cash to the capital of
the Partnership in the amount of $1,000. As additional Limited Partners are
admitted to the Partnership, the General Partner shall maintain its capital
account at no less than the lesser of (i) 1% of the aggregate capital accounts
of all Partners or (ii) $500,000. Such additional contributions by the General
Partner shall be evidenced by units of general partnership interest, each of
which shall have an initial value equal to the Net Asset Value per Unit at the
time of such contribution. Such capital contributions shall represent the
General Partner's total obligation to make capital contributions to the
Partnership, now and in the future. Notwithstanding the foregoing, the General
Partner, in its sole discretion, may (i) withdraw any excess above its required
capital contribution without notice to the Limited Partners or (ii) may
contribute any greater amount to the Partnership, for which it shall receive
additional Units of general partnership interest of the Partnership at their
then current Net Asset Value. Additionally, the General Partner may, directly or
indirectly, buy Units of limited partnership interest.
3.2 OFFERING OF UNITS OF LIMITED PARTNERSHIP INTERESTS.
(a) Interests in the Partnership, other than the Units of general
partnership interest of the General Partner, shall be evidenced by Units of
limited partnership interest. The General Partner shall have complete
discretionary authority regarding the admission of additional Limited Partners
(including but not limited to the right to admit additional Limited Partners
under terms and conditions comparable to or different from those under which the
existing Limited Partners were solicited), the number that may be admitted and
the acceptance of additional Capital Contributions from existing Limited
Partners, provided that no offer or sale to investors shall be made if it would
violate any Applicable Law. Units shall be offered and sold by the General
Partner at a price per Unit equal to the Net Asset Value per Unit as of the
close of business on the last business day of any month plus a selling
commission.
(b) A party shall become a Limited Partner at such time as:
(i) He has contributed cash (or other consideration acceptable to the
General Partner in its sole discretion) to the capital of the
Partnership for deposit in the Partnership's account established for
that purpose, and such contribution has been accepted by the General
Partner; and
(ii) The General Partner has designated such person as a Limited
Partner on the books and records of the Partnership.
(c) All Units subscribed for upon receipt of a check or draft of a
subscriber shall be issued subject to the collection of the funds represented by
such check or draft. In the event that a check or draft of a subscriber for
Units representing payment for Units is returned unpaid, the Partnership shall
cancel such Units. Any losses or profits sustained by the Partnership allocable
to such canceled Units shall be deemed an increase or decrease in the Net Asset
Value of the Partnership and allocated among the remaining Partners as described
in Article IV. Each Limited Partner agrees to reimburse the Partnership for any
expense of loss (including any trading loss) incurred in connection with the
issuance and cancellation of any Units issued to such Partner.
3.3 ADDITIONAL UNDERSTANDINGS WITH RESPECT TO CAPITAL CONTRIBUTIONS.
(a) No Limited Partner shall have priority over any other Limited Partner
with respect to the return of his Capital Contribution.
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<PAGE> 6
(b) No Limited Partner shall be entitled to demand or receive property
other than cash in return for his Unit.
(c) Except as provided in Subsection 3.1(a) above with respect to the
General Partner, no Partner shall be obligated to make any additional Capital
Contribution to the Partnership.
(d) No Partner shall be entitled to receive any interest on his Capital
Contribution.
ARTICLE IV
CAPITAL ACCOUNTS AND ALLOCATIONS
4.1 CAPITAL ACCOUNT. A Separate Capital Account shall be maintained by the
Partnership for each Partner. The initial balance of each Partner's Capital
Account shall be the amount of his initial Capital Contribution to the
Partnership which shall be net of any offering expenses and selling commissions.
Thereafter, each Partner's Capital Account shall be (i) increased by all income,
gains, profits and credits allocated to such Partner and (ii) decreased by (A)
all losses, deductions and expenses allocated to such Partner, (B) all
distributions made to such Partner and (C) all redemptions by such Partner.
Maintenance of the Capital Accounts is intended to comply with Treasury
Regulation Section 1.704-1 (b) (2) (iv).
4.2 MONTHLY ALLOCATIONS OF PROFITS AND LOSSES FOR BOOK PURPOSES. As of the
close of business (as determined by the General Partner) on the last day of each
calendar month during each fiscal year of the Partnership, the following
determinations and allocations shall be made:
(a) The Net Asset Value of the Partnership, but before accrual of
management and incentive fees payable to the General Partner and the Advisor,
shall be determined.
(b) Accrued management fees, if any, shall then be charged against the Net
Asset Value of the Partnership.
(c) Accrued incentive fees, if any, shall then be charged against the Net
Asset Value of the Partnership.
(d) Any increase or decrease in the Net Asset Value of the Partnership
(after the adjustments in Subsections 4.2(b) and 4.2(c) above) as compared to
the next previous determination of the Net Asset Value of the Partnership shall
then be credited or charged to the capital accounts of each Partner in the ratio
that the balance of each account bears to the balance of all accounts.
(e) The amount of any distribution to a Partner, any amount paid to a
Partner upon redemption of Units, and any amount paid to the General Partner
upon withdrawal of its interest in the Partnership, shall then be charged to
that Partner's capital account.
4.3 ALLOCATION OF PROFIT AND LOSS FOR FEDERAL INCOME TAX PURPOSES. As of
the end of each fiscal year, the Partnership's realized profit or loss shall be
allocated among the Partners pursuant to Subsections 4.3(b) and 4.3(c) below for
federal income tax purposes. Such allocations of profit and loss shall be pro
rata from net capital gain or loss and net operating income or loss realized by
the Partnership. For United States federal income tax purposes, a distinction
shall be made between net short-term capital gain or loss, net mid-term capital
gain or loss and net long-term capital gain or loss.
(a) Items of ordinary income (such as interest or credits in lieu of
interest) and expense (such as monthly management fees, incentive fees, costs
for legal, accounting and auditing services and extraordinary expenses) shall be
allocated pro rata among the Partners based on their respective capital accounts
as of the end of the month in which the items of ordinary income or expense
accrued.
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<PAGE> 7
(b) Net realized capital gain or loss from the Partnership's trading
activities shall be allocated as follows:
(i) For the purpose of allocating the Partnership's net realized
capital gain or loss among the Partners, there shall be established an
allocation account with respect to each outstanding Unit. The initial
balance of each allocation account shall be the amount paid to the
Partnership for the Unit, which shall be net of any organizational and
offering expenses and selling commissions. Allocation accounts shall be
adjusted as of the end of each fiscal year as follows:
(A) Each allocation account shall be increased by the amount of
income allocated to the holder of the Unit pursuant to Section
4.3(a) above and Subsection 4.3 (b)(iii) below.
(B) Each allocation account shall be decreased by the amount of
expense or loss allocated to the holder of the Unit pursuant to
Section 4.3(a) above, Subsection 4.3(b)(v) below and by the
amount of any distribution the holder of the Unit has received
with respect to the Unit (other than on redemption of Units).
(C) When a Unit is redeemed, the allocation account with
respect to such Unit shall be eliminated.
(ii) Net realized capital gain shall be allocated first to each
Partner who has redeemed a Unit during the fiscal year up to the
excess, if any, of the amount received upon redemption of the Unit over
the allocation account attributable to the redeemed Unit.
(iii) Net realized capital gain remaining after the allocation thereof
pursuant to Subsection 4.3(b)(ii) above shall be allocated next among
all Partners whose capital accounts are in excess of the Unit's
allocation accounts (after the adjustments in Subsection 4.3(b)(ii)) in
the ratio that each such Partner's excess bears to all such Partners'
excesses. In the event that gain to be allocated pursuant to this
Subsection 4.3(b)(iii) is greater than the excess of all such Partner's
capital accounts over all such allocation accounts, the excess will be
allocated among all Partners in the ratio that each Partner's capital
account bears to all Partners' capital accounts.
(iv) Net realized capital loss shall be allocated first to each
Partner who has redeemed a Unit during the fiscal year up to the
excess, if any, of the allocation account attributable to the redeemed
Unit over the amount received upon redemption of the Unit.
(v) Net realized capital loss remaining after the allocation thereof
pursuant to Subsection 4.3(b)(iv) above shall be allocated next among
all Partners whose Units' allocation accounts are in excess of their
capital accounts (after the adjustments in Subsection 4.3(b)(iv)) in
the ratio that each such Partner's excess bears to all such Partners'
excesses. In the event that loss to be allocated pursuant to this
Subsection 4.3(b)(v) is greater than the excess of all such allocation
accounts over all such Partners' capital accounts, the excess loss will
be allocated among all Partners in the ratio that each Partner's
capital account bears to all Partners' capital accounts.
(c) The tax allocations prescribed by this section 4.3 shall be made to each
holder of a Unit, whether or not the holder is a substituted Limited
Partner. In the event that a Unit has been assigned, the allocations
prescribed by this section 4.3 shall be made with respect to such Unit
without regard to the assignment, except that in the year of assignment the
allocations prescribed by this section 4.3 shall be divided between the
assignor and the assignee based on the number of months each held the
assigned Unit. For purposes of this section 4.3, tax allocations shall be
made to the General Partner's general partnership interest on a
Unit-equivalent basis.
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<PAGE> 8
ARTICLE V
GENERAL PARTNER'S NET WORTH
For as long as the General Partner remains the general partner of the
Partnership, the General Partner shall maintain its net worth as may be required
so that the Partnership will be treated as a partnership for federal income tax
purposes.
ARTICLE VI
POWERS, RIGHTS AND DUTIES OF THE GENERAL PARTNER
6.1 MANAGEMENT OF THE PARTNERSHIP.
(a) Although the Limited Partners rely exclusively on the judgment and the
ability of the Advisor in trading Investments for the Partnership, the
management of the Partnership shall be vested exclusively in the General
Partner, who, subject only to those limitations specifically set forth in this
Agreement, shall exercise full, exclusive and complete control over the
management of the Partnership's affairs for the purposes herein stated, shall
make all decisions affecting Partnership affairs, and shall devote such time to
the affairs of the Partnership, as it, in its sole discretion, deems necessary
or appropriate to accomplish the purposes of the Partnership. To facilitate the
execution of various documents by the General Partner on behalf of the
Partnership and the Limited Partners, each Limited Partner has, pursuant to
Article X, appointed the General Partner, with full power of substitution, such
Limited Partner's attorney-in-fact.
(b) In furtherance (and not in limitation) of Subsection 6.1(a) above, the
General Partner shall possess and may exercise the same powers, rights and
privileges as a general partner in a partnership without Limited Partners,
including but not limited to the following rights, powers and privileges to act
on behalf of the Partnership:
(i) Upon such terms and subject to such conditions as the General
Partner, in its sole discretion, shall deem necessary or appropriate,
to open, maintain and close accounts (including margin accounts) with
any bank, brokerage house, broker, clearinghouse, futures commission
merchant, dealer, mutual fund or other financial institution, including
but not limited to state or national banks and/or money market and cash
management funds, and to draw checks or other orders for the payment of
money.
(ii) To incur, disburse and pay all fees, expenses, costs and charges
of the Partnership, including to pay the General Partner and the
Advisor their respective fees.
(iii) To make all reports to the Partners required by this Agreement,
Law or the Rules and Regulations.
(iv) To retain, engage or otherwise hire or employ any person or
entity that the General Partner, in its sole discretion, deems
necessary or appropriate, and to compensate such parties in such amount
as the General Partner, in its sole discretion, deems appropriate,
including but not limited to the Advisor, banks, brokers and dealers.
(v) To negotiate and enter into agreements with any person or entity
retained, engaged or otherwise hired or employed by the Partnership
(including but not limited to the Advisor, banks, brokers, dealers,
attorneys and accountants) upon such terms and conditions as the
General Partner, in its sole discretion, shall deem to be in the best
interests of the Partnership and to compensate such parties in such
amount as the General Partner, in its sole discretion, deems
appropriate.
(vi) To fire or remove any person or entity previously retained,
engaged or otherwise hired or employed the Partnership at any time and
from time to time as the General Partner, in its absolute discretion,
deems appropriate.
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<PAGE> 9
(vii) To allocate part or all of the Net Asset Value of the
Partnership to the Advisor (including to increase and decrease the
amount of any such allocation). Notwithstanding the preceding sentence,
to increase (or decrease) the leverage at which the Advisor trades the
assets of the Partnership or to increase (or decrease) the leverage at
which the assets of the Partnership as a whole are traded, the General
Partner may instruct the Advisor to trade the assets of the Partnership
as if the Advisor has more (or less) Partnership assets under
management than have been actually allocated to the Advisor. The
increase in leverage may be accomplished by, among other ways,
allocating "notional funds" to the Advisor and compensating the Advisor
based upon such notional funds. In addition, in the aggregate, the sum
of "notional" funds allocated and actual funds allocated may exceed the
total Net Asset Value of the Partnership.
(viii) In connection with the Partnership's private placement of Units
as described above, the General Partner, on behalf of the Partnership,
shall: (A) file or cause to be filed all required documents with the
CFTC and NFA, Form D with the SEC and such state forms as required by
the state securities administrators; (B) qualify Units for sale
initially and on a continuing basis under the Blue Sky and securities
laws of such states of the United States or other jurisdictions as it
shall deem advisable; and (C) make other arrangements for the sale of
Units as it deems necessary or appropriate.
(ix) To negotiate and, on behalf of the Partnership, enter into a
customer agreement with each bank, broker and/or dealer upon such terms
and conditions as the General Partner, in its sole discretion, shall
deem to be in the best interests of the Partnership.
(x) To admit additional Limited Partners, each of which
newly-admitted Limited Partners shall contribute to the capital of the
Partnership in an amount that shall not be less than the Net Asset
Value of each Unit acquired. The General Partner at its option, may
admit any permitted transferee or assignee of Units as a substituted
Limited Partner in accordance with this Agreement.
(xi) To waive all or any portion of selling commissions, minimum
investment requirements or redemption procedures.
(xii) To act in all matters incidental to the foregoing.
(c) No person dealing with the General Partner shall be required to
determine its authority to make any undertaking on behalf of the Partnership,
nor to determine any fact or circumstances bearing upon the existence of its
authority.
6.2 COMPENSATION.
(a) As compensation for managing the continuing offering of Units, the
General Partner shall receive a monthly offering fee equal to 0.25% (3%
annually) of the prior month's beginning Net Asset Value of the Partnership (or,
for the first month of operation, the initial Net Asset Value of the
Partnership).
(b) The General Partner may amend Subsection 6.2 (a) above without the
consent of the Limited Partners to change its compensation to such amount and/or
in such forms as the General Partner, in its sole discretion, shall determine,
provided that the General Partner has given the Limited Partners ninety (90)
days' prior written notice of such change. Forms of compensation may include,
but are not limited to one or more of the following: receiving a commission
rebate from a commodity broker, receiving a management fee based upon a
percentage of the Net Asset Value of the Partnership or of the assets under an
Advisor's management or receiving an incentive allocation based upon a
percentage of Trading Profits.
6.3 ABSOLUTE RESTRICTIONS. Notwithstanding anything to the contrary in
this Agreement, the General Partner shall have no authority:
(a) To do any act in contravention of this Agreement or any Law or any Rule
or Regulation;
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(b) To do any act that would make it impossible to carry on its business;
or
(c) To possess Partnership property or assign the rights of the Partnership
in specific property for other than a Partnership purpose.
6.4 TAX MATTERS PARTNER. The General Partner shall be the "tax matters
partner" as described in Sections 6221-6231 of the Code, and the General Partner
may enter into any settlement agreement pursuant to the Code. The tax matters
partner shall prepare (or cause to be prepared) and sign all tax returns of the
Partnership. The Partnership will reimburse the tax matters partner for all
costs and expenses incurred by him in connection with any audit or
administrative or judicial proceeding with respect to the tax liabilities of the
Partners that relate to the Partnership.
6.5 STANDARD OF LIABILITY; INDEMNIFICATION.
(a) The General Partner shall perform his duties under this Agreement with
due care and in accordance with the good practices of the industry, but the
General Partner shall have no liability whatsoever to the Partnership or a
Limited Partner for any Damages suffered by the Partnership or a Limited Partner
that arises out of any act or failure to act by the General Partner not
amounting to fraud, willful misconduct, gross negligence or bad faith.
(b) The Partnership shall indemnify, defend, and hold harmless the General
Partner and its affiliates, shareholders, officers, directors, employees and
agents from and against any Damages actually and reasonably incurred resulting
from actions, omissions, or conduct concerning the business or activities
undertaken by or on behalf of the Partnership, including, without limitation,
any demands, claims, lawsuits, or proceedings initiated by a Limited Partner (or
assignee); provided, that a court of competent jurisdiction upon entry of a
final judgment shall find (or, if no final judgment is entered, an opinion is
rendered to the Partnership by independent legal counsel) to the effect that the
conduct that was the basis for such Damages was not the result of gross
negligence or willful misconduct and was done in good faith and in the
reasonable belief that it was in, or not opposed to, the best interests of the
Partnership. The termination of any action, proceeding, or claim by judgment,
order, or settlement shall not, of itself, create a presumption that the conduct
in question was the result of willful malfeasance or gross negligence, or was
not undertaken in good faith and in a manner reasonably believed to be in, or
not opposed to, the best interests of the Partnership.
(c) To the extent permitted by law, expenses (including attorneys' fees)
incurred by the General Partner or any person to be indemnified hereunder in
defending any action, proceeding, or claim referred to in this Section 6.5 may
be paid voluntarily by the Partnership in advance of the final disposition of
the action, proceeding, or claim, provided, that the indemnified person or
entity shall agree to reimburse the Partnership unless it is ultimately
determined that indemnification of such expenses is permitted hereunder.
(d) Nothing contained in this Section 6.5 shall increase the liability of
any Limited Partner to the Partnership beyond the amount of such Partner's
unredeemed capital contribution and his share of undistributed profits, if any,
and any distributions and amounts received upon redemption of Units together
with interest thereon. All rights to indemnification and payment of legal fees
and expenses shall not be affected by the termination or dissolution of the
Partnership or the withdrawal, insolvency, or dissolution of the General Partner
or of any successor general partner. The General Partner shall be entitled to
rely on advice of counsel and any act or omission of the General Partner
pursuant to such advice shall not subject the General Partner to liability to
the Partnership or to the Limited Partners.
(e) In the event that the Partnership is made a party to any claim,
dispute, or litigation or otherwise incurs any loss or expense as a result of,
or in connection with, any Partner's obligations or liabilities unrelated to the
Partnership's business, such Partner (or assignees cumulatively) shall indemnify
and reimburse the Partnership for all loss and expense incurred, including
attorneys fees.
(f) Notwithstanding Subsections 6.5 (b) and (c) above, indemnification will
be permitted only to the extent permissible under, and subject to the conditions
prescribed by, Applicable Law.
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<PAGE> 11
(g) Notwithstanding Subsections 6.5 (b) and (c) above, no indemnification
of the General Partner or any other party indemnified hereunder by the
Partnership shall be permitted for Damages resulting from any violations of
federal or state securities laws, or any other intentional or criminal
wrongdoing.
6.6 LIABILITY FOR RETURN OF CAPITAL. Except to the extent that Damages
arose out of any act or failure to act by the General Partner amounting to
fraud, gross negligence, willful misconduct or bad faith, the General Partner
shall not be liable for the return of any portion of any Limited Partner's
Capital Contribution.
6.7 OTHER ACTIVITIES OF THE GENERAL PARTNER. Nothing in this Agreement
shall limit or restrict the right of the General Partner to engage in business
ventures or investments other than the Partnership, of any nature whatsoever,
including any venture involving investing in or trading Investments, nor shall
anything in this Agreement be deemed to confer upon the Partnership or any other
Partner any right or interest in any other such other venture or investment or
any income, gain, profit or other benefit derived therefrom.
6.8 TRANSFERABILITY OF INTEREST; WITHDRAWAL.
(a) The General Partner may not assign, sell, transfer, pledge, hypothecate
or otherwise dispose of his interest in the Partnership, in whole or in part,
other than by last will and testament or by operation of Law. Any attempt in
violation of the above shall be null and void.
(b) Subject to the Rules and Regulations, the General Partner may withdraw
from the Partnership upon thirty (30) days' prior written notice to all of the
Partners, which notice shall specify the effective date of withdrawal.
ARTICLE VII
POWERS, RIGHTS AND LIABILITIES OF THE LIMITED PARTNERS
7.1 NO RIGHT TO MANAGE OR REPRESENT PARTNERSHIP.
(a) No Limited Partner (or group of Limited Partners) shall take part in
the management of the business of the Partnership, transact any business for the
Partnership or have the power to sign for or to bind the Partnership to any
agreement or document, said powers being vested solely and exclusively with the
General Partner as set forth herein.
(b) Except as specifically set forth in this Agreement, Limited Partners
shall have no voting rights.
7.2 LIMITATIONS ON LIABILITY. Except as provided in the Act, each Limited
Partner's liability shall be limited to the amount in his Capital Account.
Except as provided in the Act, no Limited Partner shall be personally liable for
any debt, liability or obligation of the Partnership or be required to return
any distribution made to him or to contribute any capital in addition to his
Capital Contribution.
7.3 TRANSFERABILITY OF INTEREST.
(a) Except as provided in Section 7.4 below, no Limited Partner may assign,
sell, transfer, pledge, hypothecate or otherwise dispose of his interest in the
Partnership, in whole or in part (and the transferee may not become a
substituted Limited Partner), unless they are subsequently registered under the
Securities Act and applicable state securities or Blue Sky laws or are exempt
from registration, and without the express prior written consent of the General
Partner, which may be granted or denied in its sole discretion. Any attempt in
violation of the above shall be null and void.
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<PAGE> 12
(b) Any transferee or assignee of Units who has not been admitted to the
Partnership as a substituted Limited Partner shall be entitled only to the
economic benefits (including the right to receive that share of capital and
profits and that right of redemption) to which his assignor would have otherwise
been entitled and shall not have any of the rights of a Limited Partner under
the Act or this Agreement; and such transferee or assignee shall remain subject
to the other terms of this Agreement binding upon Limited Partners.
7.4 REDEMPTIONS.
(a) A Limited Partner may require the Partnership to redeem all or part of
his Units effective as of the close of business on the last business day of a
month at the Net Asset Value per Unit as of such date, if (i) the General
Partner receives, at least ten (10) business days before the last business day
of the month, a Request for Redemption in writing (by registered, certified or
first class mail or by facsimile transmission) containing the information
requested in Subsection 7.4(b) below or in the form annexed to this Agreement
and (ii) a Limited Partner is either redeeming all his Units or, if a Limited
Partner is redeeming less than all his Units, the aggregate Net Asset Value of
his remaining Units is at least $10,000.
(b) A Request for Redemption must contain (i) the name in which the Units
are owned; (ii) the number of Units or the dollar amount to be redeemed; and
(iii) the signature of the person(s) authorized to request such redemption. A
Request for Redemption cannot be revoked by a Limited Partner unless such
revocation is acknowledged by the General Partner in his sole discretion. A form
of Request for Redemption is annexed to the Limited Partnership Agreement.
Additional copies of Requests for Redemption may be obtained by written request
to the General Partner.
(c) Upon redemption, a Limited Partner will receive, for each Unit
redeemed, an amount equal to the Net Asset Value per Unit as of such date, less
any amount owed by such Partner to the Partnership or the General Partner,
including but not limited to (i) taxes the Partnership and the General Partner
may have been required to withhold (or may have paid out of its or his assets)
on certain income of the Partnership allocable to a Limited Partner and (ii)
amounts owed pursuant to Section 6.5. If a Limited Partner desires to be paid
other than by Partnership check, the expenses associated with payment of
redemption by means other than Partnership check (or bank or broker check at the
discretion of the General Partner) will be borne by the Limited Partner.
(d) The General Partner will endeavor to pay redemptions within a
reasonable time after the applicable redemption date. The right to obtain
redemption is contingent upon the Partnership's having assets sufficient to
discharge all of its liabilities, contingent or otherwise, of the Partnership
(except any liability to Partners on account of their capital contributions) and
upon the Partnership having property sufficient to pay such redemptions on such
Date (in addition to the condition set forth in Subsection 7.5(a) above). Under
certain circumstances (including but not limited to the inability on the part of
the Partnership to liquidate positions or the default or delay in payments due
the Partnership from banks, brokers, dealers or other persons), the Partnership
may delay payment to Limited Partners requesting redemption of Units of the
proportionate part of the Net Asset Value of the Partnership represented by the
sums subject to such default or delay.
(e) The General Partner reserves the right to establish reserves for
contingencies and, in connection therewith to withhold such amounts from
redemptions.
(f) The General Partner may, at any time, in its sole discretion, require
any Limited Partner to withdraw entirely from the Partnership, or to withdraw a
portion of his Units as follows:
(i) By giving no less than ten (10) days' written notice to the
Limited Partner(s) thus designated; or
(ii) Without giving notice if (A) the General Partner determines such
Limited Partner is a benefit plan investor (within the meaning of DOL
Regulations Section 2510.3-101(f)(2)) and such action is advisable, in
the sole discretion of the General Partner, to ensure that the assets
of the Partnership are not treated as plan assets under ERISA, (B) such
Limited Partner made a misrepresentation to the General Partner in
connection with his purchase of Units, or (C) such Limited Partner's
ownership of a Unit would result in the violation of any Law or Rule
and Regulation applicable to the Partnership or a Partner.
12
<PAGE> 13
7.5 EFFECT OF TRANSFER OR REDEMPTION. Notwithstanding anything to the
contrary, the redemption, death, incompetence, legal incapacity or dissolution
of a Limited Partner shall not cause the business of the Partnership to be
dissolved, wound up or terminated. The Legal Representative shall become a
Limited Partner and a party to this Agreement to the same extent as the
decedent, insane, incompetent or legally incapacitated Limited Partner was, and
with the same rights and obligations.
7.6 OTHER ACTIVITIES. Nothing in this Agreement shall limit or restrict the
right of a Limited Partner to engage in business ventures or investments other
than the Partnership, of any nature whatsoever, including any venture involving
Investments, nor shall anything in this Agreement be deemed to confer upon the
Partnership or any other Partner any right or interest therein or any Profit or
other benefit derived therefrom.
ARTICLE VIII
DISSOLUTION AND LIQUIDATION
8.1 DISSOLUTION. The Partnership shall dissolve and the assets of the
Partnership shall be liquidated and the Partnership terminated pursuant to
Section 8.2 below, upon the earliest to occur of the following events:
(a) December 31, 2026;
(b) The General Partner elects to terminate the Partnership upon thirty
(30) days prior written notice to the Limited Partners;
(c) The General Partner withdraws from the Partnership pursuant to
Subsection 6.8(b) above, unless the Partners elect in writing to continue the
Partnership with a substituted General Partner;
(d) The General Partner is bankrupt or insolvent or seeks relief as a
bankrupt or insolvent under any statute, law or regulation;
(e) Upon the election of the General Partner, which may be made in its sole
discretion, and notice to the Limited Partners, on the bankruptcy, insolvency,
death, incapacity or insanity of Richard J. Dennis or Thomas A. Dennis, the
principals of the Advisor to the Partnership;
(f) The sale, transfer or other disposition of all or substantially all of
the assets of the Partnership (other than a pledge as collateral security),
unless the Partners elect in writing to continue the Partnership for the purpose
of the receipt and collection of any payments or other consideration due to it
or for the fulfillment of any continuing obligations or has collected all such
payments or consideration, or the General Partner has determined that there is
no material likelihood that any further payments or consideration will be
collected by the Partnership;
(g) The acquisition by a Partner of all of the interests of all other
Partners; or
(h) The occurrence of an event specified under the Act as one effecting
such dissolution, except that if, under the terms of this Agreement, the
Partnership is not required to terminate a new Partnership automatically shall
be in effect among the remaining Limited Partners, and such successor
Partnership shall succeed to all the property, assets and business, subject to
all liabilities and contracts, of the prior Partnership and shall be controlled
by the terms of this Agreement.
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<PAGE> 14
8.2 LIQUIDATION.
(a) Upon dissolution of the Partnership (except dissolution pursuant to
Subsection 8.1(g)), and in the absence of an election to continue the business
of the Partnership pursuant to Subsection 8.1(f) or its reconstitution under
Subsection 8.1(h), the General Partner or a person selected by the General
Partner (or, if the General Partner is unable or unwilling to select such
person, by a liquidating trustee selected by the Limited Partners) shall proceed
to wind up the affairs of the Partnership, liquidate the remaining property and
assets of the Partnership and terminate the Partnership. In carrying out the
business of liquidating the Partnership, the liquidating trustee shall have all
the rights and powers of the General Partner hereunder.
(b) The operations of the Partnership shall continue for a reasonable time
so as to enable the General Partner or the liquidating trustee, as the case may
be, to reduce the risk of the Partnership's positions and liquidate the assets
of the Partnership, discharge the Partnership's debts, liabilities and
obligations and generally wind up the affairs of the Partnership in an orderly
manner so as to minimize the normal losses attendant upon liquidation.
(c) Upon completion of the liquidation, each Partner shall be furnished
with a statement setting forth the assets and liabilities of the Partnership as
at the date of completed liquidation, at which time the General Partner or the
liquidating trustee (as the case may be) shall cause a certificate of
cancellation of the Partnership to be prepared, executed and filed.
(d) Nothing herein shall be construed as a limitation upon or termination
of any right of any Limited Partner during or following liquidation.
8.3 DISTRIBUTION OF ASSETS.
(a) The proceeds of liquidation shall be applied and distributed in the
following manner and order of priority:
(i) To the payment of all lawful and proper fees and expenses
attributable thereto;
(ii) To any outstanding debts or obligations of the Partnership;
(iii) The balance, if any, to the Partners in accordance with positive
Capital Account balances.
(b) No Partner shall have the right to require a partition of any or all of
the Partnership property.
ARTICLE IX
BOOKS, RECORDS AND REPORTS
9.1 FISCAL YEAR. The fiscal year of the Partnership shall end December 31
except that in the final year of the Partnership the fiscal year shall end on
the earlier of the date of liquidation or the date of final distribution.
9.2 RECORDKEEPING.
(a) The General Partner shall keep, or cause to be kept, full and accurate
records of all transactions of the Partnership in accordance with generally
accepted accounting principles, and as required by the CEAct and the Rules and
Regulations.
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<PAGE> 15
(b) The General Partner shall keep at the principal office of the
Partnership such books and records relating to the business of the Partnership
as it deems necessary or advisable or as are required by the CEAct and the Rule
and Regulations. To the extent required by applicable Rules and Regulations,
such books and records shall be available to Limited Partners or their
authorized attorneys or agents for inspection and copying during normal business
hours of the Partnership and, upon request, copies shall be sent to any Limited
Partner upon payment by such Partner of reasonable reproduction and distribution
costs. Ten (10) business days written notice to the General Partner shall be
required for such inspection and copying by a Limited Partner or his authorized
attorney.
9.3 AUDIT; ANNUAL REPORT TO PARTNERS. The Partnership's books shall be
audited annually by an independent certified public accountant selected by the
General Partner. To the extent required by Applicable Law, the Partnership shall
use its best efforts to cause each Partner to receive: (a) within 90 days after
the close of each fiscal year, a certified annual report containing audited
financial statements (including a statement of income and statement of financial
condition) of the Partnership for the fiscal year then ended, prepared in
accordance with generally accepted accounting principles and accompanied by a
report of the independent certified public accountant which audited such
statements, and such other information as the CFTC or NFA from time to time may
require; and (b) within 90 days after the close of each fiscal year, such tax
information relating to the Partnership as is necessary for such Partner to
complete such Partner's Federal income tax return. In addition, to the extent
required by Applicable Law, the General Partner shall provide or cause to be
provided monthly statements of account to the Limited Partners and such
financial and other information with respect to the Partnership as the CFTC or
NFA by regulation from time to time may require under the CEA to be given to
participants in commodity pools such as the Partnership. In addition, if any of
the following events occurs, notice of such event shall be mailed to each
Limited Partner within the time allotted by Law after the occurrence of the
event: (i) any change in the compensation payable to the General Partner; (ii)
any change in the Advisor; (iii) any change in commodity brokers; (iv) any
change in general partners; or (v) any change in the Partnership's fiscal year.
9.4 ACCOUNTANT. The determination of the independent certified public
accountant retained by the Partnership as of the time at which the annual
statement for a particular year is furnished to each Partner shall be binding.
ARTICLE X
POWER OF ATTORNEY
Each Limited Partner, by becoming a Limited Partner, hereby constitutes and
appoints the General Partner as his true and lawful attorney-in-fact, in his
name, place and stead, to make, execute, sign, acknowledge, file and record for
and on behalf of the Partnership:
(i) A Certificate of Limited Partnership and any restatement
thereof or amendment or supplement thereto;
(ii) All instruments that the General Partner deems appropriate to
reflect any amendment, change or modification of this Agreement made in
accordance with Subsection 11.5 below;
(iii) All papers that may be deemed necessary or desirable by the
General Partner to effect the dissolution and liquidation of the
Partnership to the extent authorized by Article VIII; and
(iv) All other instruments, documents and certificates that may, from
time to time, be required by Law or Rules and Regulations.
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<PAGE> 16
The foregoing Power of Attorney is hereby declared to be irrevocable and a power
coupled with an interest, and it shall survive the death, incompetence, legal
incapacity or dissolution of such Limited Partner and extend to his Legal
Representative. Each Limited Partner hereby agrees to be bound by any
representation made by the General Partner acting in good faith pursuant to this
Power of Attorney, and each Limited Partner hereby waives any and all defenses
that may be available to contest, negate or disaffirm the action of the General
Partner taken in good faith under this Power of Attorney.
This power of attorney shall be exercisable by the General Partner for each
Limited Partner by a facsimile signature and/or by listing any or all the
Limited Partners executing any instrument with a single signature of the General
Partner.
ARTICLE XI
MISCELLANEOUS
11.1 NO WAIVER. The waiver by any party of a breach of any provision hereof
shall not operate or be construed to operate as a waiver by such party of any
subsequent breach by any other party of any provision hereof.
11.2 BINDING EFFECT. This Agreement shall be binding upon the Legal
Representatives of each Partner.
11.3 ENTIRE AGREEMENT. This Agreement contains the entire Agreement among
the Partners, and supersedes and replaces any and all prior agreements among the
Partners concerning the subject matter hereof.
11.4 COUNTERPARTS. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
11.5 AMENDMENT.
(a) This Agreement may not be amended except upon consent by the General
Partner and by Limited Partners owning more than 50% of the Units then-owned by
Limited Partners; provided, however, that without the consent of the Limited
Partners, the General Partner may amend this Agreement (i) to clarify any
ambiguity or to supplement or clarify any inconsistent provisions, (ii) to
reflect changes validly made in the membership of the Partnership or in
contributions of the Partners to the Partnership, (iii) to conform to changes in
generally accepted accounting principles applicable to the Partnership or to
bring the Partnership into compliance with applicable Laws or Rules and
Regulations, including but not limited to the Code, Federal and state securities
laws and Rules and Regulations, (iv) to amend Article V, (v) to amend Section
6.2 (a) as provided in Section 6.2 (b), (vi) to amend provisions of Article VII
regarding redemption of Units if the General Partner, in its sole discretion,
deems that such amendment is necessary or advisable to prevent the Partnership
from being classified as a publicly-traded partnership pursuant to Section
7704(b) of the Code, without reference to Section 7704(c) thereof, and/or (vii)
to make any other amendment not adverse to the interests of Limited Partners.
(b) Notwithstanding Subsection 11.5(a) above, without the vote of a
majority-in-interest of the Limited Partners, the General Partner may not amend
this Agreement if such amendment would, (i) directly or indirectly, affect or
jeopardize the then status of the Partnership as a partnership for Federal
income tax purposes or (ii) reduce the Capital Account of any Partner, or modify
the percentage of profits, losses, or distributions to which any Partner is
entitled.
(c) All amendments made in accordance with this Section 11.5 shall be
evidenced by a writing executed by the General Partner making such amendment in
his capacity as such and as attorney-in-fact for the Limited Partners and a copy
of such written amendments shall be kept at the office of the Partnership.
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11.6 GOVERNING LAW. This Agreement shall be governed by, and construed and
enforced under, the laws of the State of Connecticut.
11.7 NOTICE. Any notice or consent relating to this Agreement shall be in
writing and delivered in person or by certified or registered mail to the
address set forth on the books and records of the Partnership.
11.8 CONSENTS. Consent to any action or amendment provided for herein shall
be deemed granted by a Limited Partner if either (i) the Limited Partner
affirmatively grants such consent or (ii) the Limited Partner receives notice of
a contemplated action or amendment and fails to object to such action or
amendment within the time period specified therefor in the notice to the Limited
Partner.
[THE REST OF THIS PAGE HAS BEEN LEFT BLANK INTENTIONALLY]
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SIGNATURE PAGE OF PARTNERSHIP AGREEMENT
IN WITNESS WHEREOF, the General Partner and the undersigned Limited Partner have
executed the Partnership Agreement, dated June 18, 1996.
GENERAL PARTNER:
KENMAR ADVISORY CORP.
By: /s/ Esther Eckerling Goodman
----------------------------
LIMITED PARTNERS:
KENMAR ADVISORY CORP.,
As Attorney-in-Fact
By: /s/ Esther Eckerling Goodman
----------------------------
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REQUEST FOR REDEMPTION
Date: , 199__
Mr. Thomas J. DiVuolo
Kenmar Advisory Corp., General Partner
The Dennis Fund Limited Partnership
Two American Lane, P.O. Box 5150
Greenwich, Connecticut 06831-8150
Dear Mr. DiVuolo:
I hereby request redemption of The Dennis Fund Limited Partnership in amount of
(fill in one blank): ____________ Units (number) or $___________ (dollars). My
Partner ID # is .
IF THIS IS A PARTIAL REDEMPTION OF UNITS, I REQUEST THAT THE UNITS ARE REDEEMED
FROM (PLEASE CHECK OR COMPLETE, IF APPLICABLE):
<TABLE>
<S> <C>
PRE-APRIL 1, 1997 SUBSCRIPTION: POST-APRIL 1, 1997 SUBSCRIPTION:
</TABLE>
I understand that Redemption shall be effective and valuation of the Units shall
occur as of the close of business as of the last business day of the month
provided that: (i) The General Partner receives, at least ten (10) business days
before the last business day of the month, this letter (Requests for Redemption
received by the General Partner thereafter will be effective as of the last
business day of the next month) and (ii) I am either redeeming all my Units or,
if I am redeeming less than all my Units, the Net Asset Value of my remaining
Units is at least $10,000.
Unless I specify differently, payment by the Partnership will be by check and
any additional costs associated with a request of payment in a different form
will be borne by me.
Remit Payment To:
My Telephone Number Is: ______________________________
SIGNATURE(S) MUST BE IDENTICAL TO NAME(S) IN WHICH UNITS ARE REGISTERED.
IF THE LIMITED PARTNER IS AN INDIVIDUAL OR JOINT TENANCY OR CO-TENANCY, COMPLETE
THE FOLLOWING:
<TABLE>
<S> <C>
X___________________________________________ X
Signature of Subscriber Signature of Joint Subscriber, if any
____________________________________________
Print Name of Subscriber Print Name of Joint Subscriber, if any
</TABLE>
IF LIMITED PARTNER IS A CORPORATION, PARTNERSHIP, TRUST (OTHER THAN REVOCABLE
GRANTOR TRUST) OR ESTATE, COMPLETE THE FOLLOWING:
<TABLE>
<S> <C>
____________________________________________ X
Print Name of Entity Signature of authorized signatory
____________________________________________
Print Name of authorized signatory Print capacity of authorized signatory
</TABLE>
19
<PAGE> 1
[E D & F MAN CAPITAL LOGO] EXHIBIT 10.1
Corporation and Partnership
Customer Agreement
E D & F MAN CAPITAL INC
E D & MAN CAPITAL INC Account
Two World Financial Center, 27th Floor Number
New York, New York 10281-2700 ------------------------
TERMS AND CONDITIONS
These standard following terms and conditions (hereinafter called "Terms") shall
apply to all transaction between E D & F Man Capital Inc (hereinafter called
"FMC") and the undersigned ("the client") in spot, forward, and option
contract ("contracts").
For purposes of these Terms, "transaction" shall mean any purchase of, sale of,
entering into, trading of, marking or taking delivery under or otherwise
dealing in or with contracts. For the purposes of these Terms "contracts" shall
include without limitation forward, spot and option contracts for precious
metals, currencies, and any other commodity and financial instrument including
foreign exchange.
FMC shall open one or more accounts for the purpose of the client engaging in
transactions through the facilities of FMC.
FMC shall not be obliged to quote a price to the client in respect of any
transaction. Any price which FMC may quote shall, upon acceptance by the
client, be binding upon the client save for manifest error.
The client warrants to and undertakes with FMC that the client has full power
and authority to enter into and perform its obligations hereunder.
The word "property" in these Terms means securities of all kinds, monies,
options, commodities and contracts for the future delivery of, or otherwise
relating to commodities or securities and all property, including, but not
limited to, property customarily dealt in by brokerage firms, including
warehouse receipts and warrants.
The client agrees that any property belonging to the client or in which the
client has an interest held by FMC or any of FMC's subsidiaries or affiliates
("affiliates") or carried in any account with any of them shall be subject to a
first priority lien and security interest for the discharge of client's
obligations to FMC and/or any of FMC's affiliates, wherever or however arising
and without regard to whether or not FMC or any of the affiliates has made
advances with respect to such property. FMC and all or any of the affiliates
are hereby authorized to sell and/or purchase any and all such property without
notice to satisfy such lien and security interest. The client hereby irrevocably
appoints FMC as the client's attorney-in-fact with power of substitution to
execute any documents for the perfection or registration of such security
interest and lien.
The client agrees to maintain with FMC such property as FMC may from time to
time in its discretion require and to pay immediately on demand any amount
owing with respect to any of the client's accounts. In the event that: (a) the
client is in breach of any provision hereof (including but not limited to the
failure to maintain required property margin, and/or to make or take delivery,
and/or to pay promptly any amount owned to FMC or its affiliates); (b) the
client dies, becomes bankrupt, or commits an act of bankruptcy or insolvency,
or if a company, it goes into liquidation, whether voluntary or otherwise; (c)
the client ceases to carry on its business, disposes or threatens to dispose of
a substantial portion of its assets, becomes unable or fails to pay its debts
as they become due; (d) FMC is reasonably of the opinion that the obligations
of the client may not be fulfilled; or (e) FMC reasonably considers it
necessary or desirable for its own protection: then FMC may liquidate the
positions in all or any of the client's accounts, hedge and/or offset those
positions at the client's sole risk, sell any property belonging to the client,
or in which the client has an interest, cancel any open orders for the purchase
and sale of any property, and FMC may borrow or buy any property required to
make delivery against any sales. Such sale or purchase may be public or private
and without advertising, and no demands, tenders or notices which FMC may make
or give shall invalidate the client's aforesaid waiver. At any such sale FMC
may purchase the property free of any right of redemption and the client agrees
not to make any claim against FMC concerning the manner or sale or timing
thereof. The proceeds of such transactions are to be applied to reduce any
indebtedness owing to FMC or any affiliate. FMC may take any of the actions in
this paragraph without notice to or demand of the client. Notwithstanding this,
FMC will attempt to notify the client before taking any such action.
The client shall be liable for all losses and/or debts in the client's
account(s) whether or not such account(s) are liquidated and this shall
include debts resulting from a liquidation of an account or accounts.
The client agrees to pay storage, insurance, taxes, delivery charges and
service fees, if any, charged to its account(s). The client also agrees to pay
interest charges upon any monies owed to FMC in connection with its account(s)
at either 2% per annum over the prime lending rate for US Dollars are charged
by Chemical Bank New York or, for other currencies, 2% per annum over the
overnight London Interbank Offered Rate (LIBOR), as charged by Chemical Bank
London. The client acknowledges that interest will not be paid to the client on
any cash balances, securities or other property in the client's account(s)
unless specifically agreed to by FMC in writing, provided, however, that if
either of the above rates are unavailable from Chemical Bank, then, another
money center bank's rates may be used.
The client understands that FMC charges commissions for the execution of
certain transactions at rates agreed to by the parties and that for certain
transactions the price charged to the client includes a charge made by FMC on
the transaction.
Confirmation of transactions may be sent by telex and/or by facsimile
transmission and/or by mail. Telex and facsimile confirmation shall be
conclusive upon receipt unless objected to within one business day. Receipt by
telex will be evidenced by telex answerback on the telex confirmation. Receipt
by facsimile will be evidenced by the receipt log generated by the transmitting
machine. In the event that no telex or facsimile confirmation is sent,
confirmation by mail shall be conclusive if not objected to in writing within
the earlier of seven days after mailing by FMC or one business day after
receipt. In the event that the client fails to receive a confirmation within
five days from the date of the dealing, the client agrees to notify FMC
<PAGE> 2
immediately in writing.
In any legal action which arises out of these Terms, or any transaction
hereunder, the client agrees that: (i) service of process may be made upon the
client by first class or certified mail to the address as shown on FMC's
records and the client hereby waives any objection to such service; (ii) the
courts of the State of New Jersey and United States courts sitting in the State
of New York shall have jurisdiction over the client, and the client hereby
waives any objection to such jurisdiction; (iii) the venue of any such action
shall be New York County or the Southern District of New York; and (iv) the
client will pay FMC's reasonable disbursements including the costs of
collection, attorney's fees and sheriff's poundage fees, if any.
Notwithstanding the agreements in (ii) and (iii) above, the client agrees that
FMC may in its sole discretion, initiate proceedings in the courts of any other
jurisdiction in which the client is resident or in which its assets are
situated.
FMC is not responsible for any losses that it reasonably determines result
directly or indirectly from any government restriction, exchange ruling,
suspension of trading, war, strike, natural disaster or wire malfunction, delay
in mails, or any other delay or inaccuracy in other information or orders or in
the transmission of such other information or orders because of a breakdown or
failure of communication facilities, or for any other act not within FMC's
control. Commodity information, price quotations and/or trade reports given to
the client are also subject to change and to errors as well as to delays in
reporting, and the client acknowledges that reliance upon such information
shall be at the client's own risk.
If a provision of these Terms is or shall become inconsistent with any law or
regulation of any government or regulatory body having jurisdiction, such
provision shall be deemed to be rescinded or modified in accordance with any
such law or regulation. In all other respects, these Terms shall continue and
remain in full force and effect.
FMC's failure to insist at any time and for any period of time upon strict
compliance with these Terms shall not constitute or be a waiver by FMC of any
of its rights. These Terms may be translated by FMC into a language other than
English as convenience to the client but the client agrees that FMC is not
responsible for the accuracy of such transaction and that only the English
version will be binding.
It is understood that obligation arising out of transactions denominated and/or
paid for in currencies other than US Dollars may be converted to US Dollars at
the discretion of FMC, at an exchange rate determined by FMC in its discretion
based on prevailing market rates (where applicable), and that the client will
then be required to pay FMC in US Dollars.
These Terms are governed by the laws of the State of New York without reference
to conflict of laws principles. FMC may amend these Terms by written notice
to the client and any such amendment will be effective on a date specified in
the notice. Any modification of the Terms must be in writing and accepted by
FMC in writing. No employee of FMC is authorized to make any representations
contrary to these Terms.
CUSTOMER NAME: The Dennis Fund Limited Partnership
--------------------------------------------------------
SIGNATURE: /s/ Thomas J. DiVuolo
------------------------------------------------------------
Thomas J. DiVuolo
PRINT NAME & TITLE: Senior Vice President of Kenmar Advisory Corp. G.P.
---------------------------------------------------
CUSTOMER ADDRESS: Two American Lane
-----------------------------------------------------
P.O. Box 5150
-----------------------------------------------------
Greenwich, CT 06831-8150
-----------------------------------------------------
TELEPHONE: (203) 861-1000
------------------------------------------------------------
FAX#: (203) 861-1095
------------------------------------------------------------------
DATE: 8/27/96
------------------------------------------------------------------
<PAGE> 3
CORPORATION CERTIFICATE
Gentlemen:
I am the Secretary of _____________________________________, a corporation
organized under the laws of _______________________ (the "Corporation"). I
hereby certify that the following resolutions were duly adopted by the Board of
Directors of the Corporation on ____________________ and are now in full force
and effect:
RESOLVED THAT:
1. The Customer Agreement and related applications, declarations,
certificates, questionnaires and other account documents (collectively, the
"Account Agreements") of _____________________________________________________
(FMC), in the form presented at this meeting, be and hereby are approved,
subject, however, to such changes therein as may be approved by the President
or any Vice President of the Corporation, acting singly, such approval to be
evidenced by the execution of the Account Agreements by any one of said
officers; that each such officer of the Corporation, acting singly, be and
hereby is authorized, empowered and directed to execute and deliver the
definitive Account Agreements, in the name and on behalf of the Corporation,
and to take all such actions and to execute and deliver all such other
agreements, instruments, or documents FMC, in its discretion, may require in
connection with this Corporation's request to open one or more accounts with
FMC and any transactions involving any such account.
2. Each of the following officers of the Corporation, acting alone,
be and hereby is authorized, in the name and on behalf of this Corporation, to
take all such actions as may be necessary or appropriate in connection with any
transaction involving any account of this Corporation with FMC, including
without limitation:
(A) To give orders to buy, sell, trade and otherwise deal in
contracts as defined in the Customer Agreement for immediate delivery or for
delivery under the terms of spot, forward, or option contracts, on margin or
otherwise;
(B) To deposit with or withdraw from any such account any Property,
as defined in the Customer Agreement;
(C) To pay all commissions, fees or other charges of FMC and to
deposit any margins or premiums required by FMC;
(D) To receive and acquiesce in the correctness of notices,
confirmations, requests, demands, and communications of every kind;
(E) To settle, compromise, adjust, and give releases with respect to
any and all claims, demands, disputes and controversies;
(F) To make agreements and take any other action relating to any of
the foregoing matters;
and FMC shall be entitled to act in accordance with any instructions, whether
oral or written, that may be given by any one of such officers with respect to
any account or transaction of this Corporation:
The President, any Vice President, and _____________________________
____________________________________________________________________
3. The Secretary be and hereby is authorized, empowered and
directed, in the name and on behalf of this Corporation, to certify to FMC the
names and signatures of the officers referred to in the preceding resolution
and to certify to FMC that these resolutions have been duly adopted, are in
full force and effect and are in accordance with the provisions of the charter,
certificate of incorporation, by-laws, resolutions and other organizational
documents of this Corporation and all laws, rules, regulations, court or
government rulings and orders, contracts and agreements which are or may be
binding on this Corporation.
I further certify that the following are the names and signatures of the
officers referred to in the preceding resolutions, which officers have been
duly elected and qualified and now hold the respective offices set forth
opposite their names below:
President _____________________________ _____________________________
Full Name Signature
Vice President _____________________________ _____________________________
Full Name Signature
__________________ _____________________________ _____________________________
Full Name Signature
__________________ _____________________________ _____________________________
Full Name Signature
__________________ _____________________________ _____________________________
Full Name Signature
I further certify that the resolutions set forth above are in accordance with
the charter, certificate of incorporation, by-laws, resolutions and other
organizational documents of the Corporation and all laws, rules, regulations,
court or governmental rulings and orders, contracts and agreements which are or
may be binding on the Corporation.
Very truly yours,
(CORPORATE SEAL) ____________________________________
Secretary
<PAGE> 4
TRADING AUTHORIZATION
Gentlemen:
The undersigned Customer, hereby authorizes DENNIS TRADING GROUP, INC.
whose signature appears below, as its agent and attorney-in-fact (the "Agent"),
to purchase, sell (including short sales) and trade for it in contracts as
defined in the Customer Agreement, on margin or otherwise, in accordance with
your rules, terms and conditions, for the account and risk of the Customer, and
in the name or number of the Customer on your books.
In connection with such purchases, sales and trades, you are directed to
follow the instructions of the Agent concerning the Customer's account with you.
The Agent is hereby authorized to act on the Customer's behalf with the same
force and effect as it might or could do with respect to such purchases, sales
and trades.
The Customer hereby ratifies and confirms any and all transactions with you
heretofore or hereafter made by the Agent for the account of the Customer.
The provisions of this Authorization are in addition to, and do not
restrict or otherwise limit, any rights that you may have pursuant to any other
agreement between you and the Customer, including any Customer Agreement.
This Authorization may be terminated by the Customer at any time as of the
receipt by you of written notice of termination, which is mailed by registered
mail to you. Termination of this Agreement shall not affect any obligations of
the Customer to you under any other agreement between you and the Customer
(including any Customer Agreement), or in connection with any outstanding
amounts, including debit balances and other costs and expenses.
KENMAR ADVISORY CORP., G.P.
Customer: THE DENNIS FUND LIMITED PARTNERSHIP By: Thomas J. DiVuolo
----------------------------------- ---------------------------
Title: SENIOR VICE PRESIDENT
SIGNATURE OF AGENT
Dated: 8/27/96
- --------------------------------------------- --------------------------
PARTNERSHIP CERTIFICATE
Gentlemen:
The undersigned general partners of THE DENNIS FUND LIMITED PARTNERSHIP, a
partnership organized under the laws of CONNECTICUT (the "Partnership"), hereby
certify and agree that:
1. The persons listed in Exhibit A are all of the general partners of the
Partnership and the document annexed as Exhibit B is a true and correct copy of
the partnership agreement of the Partnership.
2. Each of the following partners, acting alone, is authorized, in the
name and on behalf of the Partnership and its partners, to take all such actions
as may be necessary or appropriate in connection with any transaction involving
any account of the Partnership with you, including without limitation:
(a) To give orders to buy, sell, trade and otherwise deal in contracts as
defined in the Customer Agreement for immediate delivery or for delivery under
the terms of spot, forward, or option contracts, on margin or otherwise;
(b) To deposit with or withdraw from any such account any Property, as
defined in the Customer Agreement;
(c) To pay all commissions, fees or other charges of FMC and to deposit any
margins or premiums required by FMC;
(d) To receive and acquiesce in the correctness of notices, confirmations,
requests, demands, and communications of every kind;
(e) To settle, compromise, adjust, and give releases with respect to any
and all claims, demands, disputes and controversies;
(f) To make agreements and take any other action relating to any of the
foregoing matters;
and you shall be entitled to act in accordance with instructions, whether oral
or written, that may be given by any one of the following partners with respect
to any account or transaction of the Partnership.
3. In the event of the death or withdrawal of any general partners, the
remaining partners will immediately notify you of such fact.
Very truly yours,
General Partner Thomas J. DiVuolo
--------------------------------
General Partner
--------------------------------
General Partner
--------------------------------
General Partner
--------------------------------
General Partner
--------------------------------
<PAGE> 1
January 15, 1997
By Airborne
Mr. Richard J. Dennis
250 South Wacker Drive
Suite 650
Chicago, IL 60606
Dear Rich:
We are writing this letter to amend the Cover Letter dated August 27, 1996 and
the Model Advisory Agreement, dated August 27, 1996 (together, the "Existing
Agreement"). To the extent this letter contradicts the Existing Agreement, this
letter will govern and the Existing Agreement will be deemed to have been
amended accordingly. All capitalized terms used but not defined herein will
have the meanings assigned to such terms in the Existing Agreement.
Effective April 1, 1997, The Dennis Fund Limited Partnership (the "Fund") will
amend the fees payable to the Advisor as follows: an annual management fee of
1.75% and a quarterly incentive fee of 27.5%. All new investors will be
required to invest in this class.
Annual management fees and quarterly incentive fees payable to the Advisor by
the Fund will continue to be 2% & 25%, respectively, for those Units purchased
prior to April 1, 1997.
If the above is in accordance with your understanding of our agreement, please
countersign this letter agreement.
THE DENNIS FUND LIMITED PARTNERSHIP
By: Kenmar Advisory Corp., its general partner
By: /s/ ESTHER ECKERLING GOODMAN
----------------------------
Esther Eckerling Goodman
Chief Operating Officer and
Senior Executive Vice President
ACCEPTED AND AGREED TO:
DENNIS TRADING GROUP, INC.
By: /s/ RICHARD J. DENNIS
---------------------
Richard J. Dennis
<PAGE> 2
August 27, 1996
Via Airborne Express
Mr. Brian Proctor
Dennis Trading Group, Inc.
250 South Wacker Drive, Suite 650
Chicago, IL 60606
RE: THE DENNIS FUND LIMITED PARTNERSHIP
Dear Brian:
We are writing this letter (the "Cover Letter") to confirm our understanding
that you will manage the above-captioned entity pursuant to the Model Advisory
Agreement, dated August 27, 1996 (the "Model Agreement"), a copy of which is
attached hereto and incorporated herein as if each and every paragraph were set
forth in this Cover Letter.
In addition, we have agreed to the following:
1. Each capitalized term used in this Cover Letter will have the meaning
assigned to it in the Model Agreement.
2. The Kenmar Pool is Kenmar The Dennis Fund Limited Partnership, a
Connecticut limited partnership.
3. The Advisor is Dennis Trading Group, Inc., an Illinois corporation with a
principal place of business at 250 South Wacker Drive, Suite 650, Chicago, IL
60606, a telephone number of (312) 559-1895 and a facsimile number of (312)
559-9159.
4. The Advisor's Disclosure Document is dated March 19, 1996.
5. The Commodity Broker is E. D. & F. Man International Inc.
6. The Subaccount will initially be funded with the assets of the Kenmar Pool
other than those assets necessary for the ongoing operation of the Kenmar Pool.
7. The annualized Management Fee is 2%.
8. The Incentive Fee is 25%.
9. The Brokerage Commissions are $ 10.
<PAGE> 3
Mr. Brian Proctor
August 27, 1996
Page 2
9. Section 3.1 (c) of the Model Agreement is hereby deleted in its
entirety and replaced with the following paragraph:
The Advisor may, in its sole discretion, refine or modify the Trading
Methods; provided, however, that the Advisor shall give the Kenmar Pool
at least 30 days' prior written notice of any proposed change to the
Trading Methods that the Advisor, in its reasonable judgment, deems
material and shall not trade the Subaccount based upon such proposed
material change without the prior written approval of the Kenmar Pool.
The addition and/or deletion of Commodity Interests from the Subaccount
shall be deemed not to be a material change.
10. Section 8.2 (a) is amended to delete the words "sole and exclusive".
If this is acceptable, please have Rich sign both copies of the Cover Letter and
return one of them to Philip E. Pastreich, Esq.
THE DENNIS FUND LIMITED PARTNERSHIP
By: Kenmar Advisory Corp., its general partner
By: /s/ ESTHER ECKERLING GOODMAN
----------------------------
Esther Eckerling Goodman
Chief Operating Officer and
Senior Executive Vice President
ACCEPTED AND AGREED TO:
DENNIS TRADING GROUP, INC.
By: /s/ RICHARD J. DENNIS
---------------------
Richard J. Dennis
President
<PAGE> 4
MODEL ADVISORY AGREEMENT
AUGUST 27, 1996
WITNESSETH:
WHEREAS, the Kenmar Pool was formed to engage in the speculative trading of
Commodity Interests (as defined below);
WHEREAS, the Kenmar Pool is authorized to select, retain, remove and/or replace
commodity trading advisors and to allocate and reallocate the assets of the
Kenmar Pool (as defined below) among such advisors;
WHEREAS, the Kenmar Pool has received and reviewed and understands the Advisor's
Disclosure Document dated as set forth in the Cover Letter;
WHEREAS, the Kenmar Pool desires to allocate to the Advisor a portion of the
assets of the Kenmar Pool to manage upon the terms and subject to the conditions
set forth herein;
WHEREAS, the Advisor desires to serve as an advisor for the Kenmar Pool and to
trade the Subaccount (as defined below) upon the terms and subject to the
conditions set forth herein;
NOW, THEREFORE, in consideration of the premises and mutual covenants contained
herein and other good and valuable consideration, the receipt and adequacy of
which are hereby acknowledged, the parties hereto agree as follows:
ARTICLE I
INTERPRETATION
1.1 DEFINITIONS. As used in this Agreement, the following terms will have the
following meanings:
Advisor. The Advisor, as set forth in the Cover Letter.
Affiliate. Any individual or entity that controls (directly or indirectly), is
controlled by (directly or indirectly), or is under common control with
(directly or indirectly), the individual or entity to which referred.
Agreement. This Advisory Agreement.
Allocation Date. The date on which funds are initially allocated to the
Subaccount.
Applicable Laws. (i) The provisions of all applicable statutes and laws of the
United States of America (including the states thereof) including the Commodity
Exchange Act of 1974, as amended, or of any other country, political subdivision
or jurisdiction in which a transaction is executed on behalf of the Kenmar Pool
and (ii) the constitution, by-laws, rules, regulations, orders, customs and
usage of (A) any market (and its clearing house, if any) on which a transaction
is executed on behalf of the Kenmar Pool and (B) the NFA or any other regulatory
or self-regulatory organization with jurisdiction over the Kenmar Pool or the
<PAGE> 5
Advisor.
Brokerage Commissions. The brokerage commissions to be charged the Subaccount,
as set forth in the Cover Letter, plus floor brokerage, exchange, clearing,
clearinghouse, principal, NFA, and administrative "give-up" fees and other
transaction fees and expenses.
CFTC. The Commodity Futures Trading Commission, or such other governmental
agency that performs the functions that are being performed as of the date of
this Agreement by the Commodity Futures Trading Commission.
Commodity Broker. The Commodity Broker, as set forth in the Cover Letter.
Commodity Interests. Commodity futures and forward contracts, commodity options
and other commodity interests as more fully described in the Disclosure Document
of the Kenmar Pool.
Cover Letter. The cover letter to which the Model Advisory Agreement is
attached.
Dealer. Such commodity dealer as the parties hereto may select.
Disclosure Document. The most current disclosure document, as it may be amended
or supplemented from time to time, of the Advisor or the Kenmar Pool (as the
case may be).
Incentive Fee. A calendar quarterly incentive fee, payable to the Advisor, equal
to the percentage set forth on the Cover Letter of Net New Trading Profits.
Kenmar Pool. The Kenmar entity, as set forth in the Cover Letter.
Management Fee. A monthly management fee payable to the Advisor without regard
to whether the Subaccount is profitable, equal to one-twelfth of the percentage
set forth on the Cover Letter of the month-end Net Asset Value of the Subaccount
before reduction for the Management Fee and Incentive Fee, if any, accrued with
respect to such month, pro rated for the actual number of trading days in the
month for which the Advisor managed the Subaccount or, in the case of mid-month
additions or withdrawals, if any, the applicable portion thereof.
NFA. The National Futures Association, or such other self-regulatory
organization that performs the functions that are being performed as of the date
of this Agreement by the National Futures Association.
Net Asset Value. The total assets of the Subaccount, including, but not limited
to, notional funds, all cash and cash equivalents, accrued interest, earned
discount, and open Commodity Interest positions, less total liabilities,
including, but not limited to, Brokerage Commissions that would be payable with
respect to the closing of open Commodity Interest positions, all as determined
in accordance with the principles set forth in this Agreement or, where no such
principles are specified herein, in accordance with United States generally
accepted accounting principles applied on a consistent basis. The value of all
Commodity Interests shall be the market value thereof. The market value of a
Commodity Interest traded on an exchange shall be based upon the settlement
price on the exchange on the date of determination; provided, however, that if a
Commodity Interest could not be liquidated on the day with respect to which the
assets of the Subaccount are being determined, the settlement price on the first
subsequent day on which the contract could be liquidated shall be the basis for
determining the liquidating value thereof. The market value of a forward
contract, a swap contract, or any other off-exchange contract, instrument, or
transaction shall mean its market value as determined by the Kenmar Pool on a
basis consistently applied.
<PAGE> 6
Net New Trading Profits. The realized (as adjusted by change in unrealized) net
trading profits earned on the Subaccount (excluding interest or
interest-equivalent income), decreased by the Management Fee and Brokerage
Commissions (as adjusted by change in accrued Brokerage Commissions), with all
such items determined from the first day of the calendar quarter that
immediately follows the last calendar quarter for which an Incentive Fee was
earned by the Advisor (or, if no Incentive Fee was earned previously by the
Advisor, from the Allocation Date) to the close of business on the last day of
the calendar quarter with respect to which such Incentive Fee calculation is
being made.
Position Limit. The speculative position limit of a certain Commodity Interest.
Principal. (1) Any person including, but not limited to, a sole proprietor,
general partner, officer or director, or person occupying a similar status or
performing similar functions, having the power, directly or indirectly, through
agreement or otherwise, to exercise a controlling influence over the activities
of the entity; (2) any holder or any beneficial owner of ten percent or more of
the outstanding share of any class of stock of the entity; and (3) any person
who has contributed ten percent or more of the capital of the entity.
Subaccount. The trading Subaccount of the Kenmar Pool to be opened at the
Commodity Broker or Dealer, in which the Advisor is to invest in Commodity
Interests pursuant to the Trading Methods upon the terms and subject to the
conditions set forth herein. The Subaccount will initially be funded as set
forth in the Cover Letter.
Trading Methods. The trading program(s), system(s), method(s), model(s),
strategy(ies) and/or formula(e) of the Advisor as disclosed in its Disclosure
Document. In the event that the Advisor has more than one Trading Method, the
Advisor will manage the Subaccount pursuant to the Trading Method set forth in
the Cover Letter.
Withdrawal Ratio. The ratio created by dividing (x) the Net Asset Value of the
funds withdrawn or allocated from the Subaccount by (y) the Net Asset Value of
the Subaccount as of the close of business on the immediately preceding business
day.
1.2 HEADINGS. Headings herein are for the convenience of the parties only, and
are not intended to affect the meaning or interpretation of this Agreement.
ARTICLE II
DUTIES AND UNDERTAKINGS OF THE KENMAR POOL
2.1 SUBACCOUNT. The Kenmar Pool will open and maintain the Subaccount and
allocate funds thereto and therefrom in accordance with this Agreement. Such
funds will be used to fulfill the margin requirements and other financial
obligations of the Subaccount. The Kenmar Pool, and not the Advisor, will have
the authority and responsibility with regard to the investment, maintenance and
management of assets held in the Subaccount but not needed for margin related
purposes.
2.2 POWER OF ATTORNEY. The Kenmar Pool hereby constitutes, appoints, and
authorizes the Advisor as its agent and attorney-in-fact with respect to the
Subaccount as such Subaccount may be increased or decreased by trading profits
or losses or subsequent additions or withdrawals. The Advisor will trade, buy,
sell, spread, swap or otherwise acquire, hold, or dispose of Commodity
Interests, on margin or otherwise, all in accordance with the authority and
terms and conditions set forth in this Agreement.
<PAGE> 7
ARTICLE III
DUTIES AND UNDERTAKINGS OF THE ADVISOR
3.1 INVEST SUBACCOUNT.
(a) As of the Allocation Date, the Advisor will have sole authority and
responsibility for investing and reinvesting the Subaccount in Commodity
Interests pursuant to the Trading Methods, which investments and reinvestments
will be at and for the risk of the Kenmar Pool and the Subaccount.
(b) Notwithstanding Subsection 3.1(a) above, the Kenmar Pool will have the
right orally, to be confirmed in writing: (i) to increase or decrease (including
decrease to $0) the amount of funds allocated to the Subaccount by such date
certain (including immediately) as the Kenmar Pool deems appropriate (in which
case the Advisor will modify accordingly its positions commensurate with its
risk/money management parameters); and/or (ii) to instruct the Advisor to
liquidate all or a portion of the Kenmar Pool's positions by such date certain
(including immediately) as the Kenmar Pool deems appropriate.
(c) The Advisor may, in its sole discretion, refine or modify the Trading
Methods; provided, however, that the Advisor will give the Kenmar Pool at least
thirty (30) days' prior written notice of any proposed material change to the
Trading Methods and will not trade the Subaccount based upon such proposed
material change without the prior written approval of the Kenmar Pool. The
addition and/or deletion of Commodity Interests from the Subaccount will be
deemed not material.
3.2 UNIFORMITY OF ACTS AND PRACTICES.
(a) The Advisor shall treat the Kenmar Pool in a fiduciary capacity;
accordingly, under no circumstance will the Advisor favor or prefer any client's
Commodity Interest account over the Subaccount. Subject to that standard, the
Advisor will be free (i) to advise other investors as to the purchase and sale
of Commodity Interests and to manage and trade for such other investors'
Commodity Interest accounts as well as trade for the Advisor's own Commodity
Interest accounts and (ii) to trade other accounts using the Trading Methods or,
subject to Subsection 3.2(b) below, using a trading system, method, model,
strategy or formula different from the Trading Methods. Notwithstanding anything
to the contrary in this Subsection 3.2(a), the Advisor will be deemed not to be
favoring or preferring another client's Commodity Interest account over the
Subaccount if the Advisor manages or trades such other client's Commodity
Interest account either (i) in accordance with specific written instructions of
a client, (ii) in accordance with the Advisor's money management approach based
upon the amount of equity and/or profits in such account, or (iii) in accordance
with another trading program, system, method, model, strategy and/or formula
disclosed in the Advisor's Disclosure Document.
(b) In addition to, and not in lieu of Section 3.1 above, the Advisor will
consult with the Kenmar Pool from time to time regarding modified or different
trading programs, systems, methods, models, strategies and/or formulas that the
Advisor has developed and tested and deems suitable for trading client Commodity
Interest accounts, and, if both the Advisor and the Kenmar Pool deem it
appropriate, the Advisor will trade the Subaccount pursuant to such strategy. In
no event will the Advisor employ any such modified or different trading system,
method, model, strategy or formula on behalf of any other client's Commodity
Interest account unless the Advisor has also offered such modified or different
trading system, method, model, strategy or formula to the Kenmar Pool for
trading on behalf of the Subaccount (subject to capacity constraints).
<PAGE> 8
(c) At the reasonable request of the Kenmar Pool and at the Advisor's
expense, the Advisor will promptly provide the Kenmar Pool with an explanation
of the differences, if any, in performance between the Subaccount and any other
client Commodity Interest account for which the Advisor is responsible for
trading (in whole or in part) pursuant to the Trading Methods.
3.3 PLACEMENT OF TRADES.
(a) The Kenmar Pool shall have sole authority and responsibility for
selecting, retaining and supervising clearing brokers and negotiating brokerage
commission rates. The Advisor will cause all Commodity Interest transactions for
the Subaccount to be cleared through the Commodity Broker.
(b) Notwithstanding Subsection 3.3(a) above, the Advisor may arrange for
the execution of orders for the Subaccount through floor brokers selected by the
Advisor, provided that such floor brokers "give up" such transactions to the
Commodity Broker for clearance and carrying in the Subaccount, and provided
further that the Kenmar Pool will have given its prior written consent to the
brokerage and floor commissions and fees and other transaction costs to be
charged by such floor broker.
3.4 SPECULATIVE POSITION LIMITS.
(a) The Advisor will not enter into or own, hold or control (either alone
or together with any other individual or entity) any position in any Commodity
Interest, or control any other Commodity Interest account, or render commodity
trading advice to any other individual or entity, or otherwise engage in any
activity that would cause the Advisor to knowingly cause the Kenmar Pool to be
in violation of any applicable Position Limits.
(b) If the positions in any Commodity Interest owned, held or controlled by
the Advisor (either alone or aggregated with the positions of any other
individual or entity to the extent such aggregation is required by Applicable
Law) equals or exceeds the Position Limits thereof, the Advisor will promptly
notify the Kenmar Pool of that fact and will take the action set forth in
Subsection 3.4(c) below.
(c) If the Advisor reaches a Position Limit, thereby necessitating the
reduction of positions in that Commodity Interest, the Advisor will reduce the
contracts of all those so participating in that Commodity Interest on an
equitable basis, taking into consideration the size of each account and the
leverage at which it is traded.
3.5 INFORMATION.
(a) The Advisor, at its own expense, will provide the Kenmar Pool with (i)
copies of all amendments and supplements to the Advisor's Disclosure Document
and (ii) at the Kenmar Pool's request, monthly reports presenting the updated
actual performance data of the Advisor, in form and substance consistent with
the Applicable Laws for the preceding month.
(b) Upon the reasonable request of the Kenmar Pool, the Advisor will
identify to the Kenmar Pool, and provide to the Kenmar Pool all performance
information with respect to, all client Commodity Interest accounts managed and
directed by it pursuant to the Trading Methods (without providing any client's
name or other identifying information), provide information reasonably requested
by the Kenmar Pool relating to each trade by the Advisor in the Subaccount and
provide all other information reasonably requested by the Kenmar Pool to monitor
the trading activities of the Advisor.
(c) The Advisor will send the Kenmar Pool copies of all trades made by the
Advisor on behalf of the
<PAGE> 9
Subaccount, by facsimile transmission or other means, by 4:30 p.m. (New York
time) on the day such trades are made.
3.6 BOOKS AND RECORDS.
(a) Subject to Subsection 3.6(b) below, the Advisor will permit the Kenmar
Pool and/or its accountants or agents to inspect, and will provide the Kenmar
Pool and/or its accountants or agents at the Kenmar Pool's expense, with copies
of such books, records and other documents of the Advisor relating to its
clients' Commodity Interest accounts as may be necessary for the Kenmar Pool to
confirm or verify (i) the completeness and accuracy of any performance data
provided pursuant to this Agreement or (ii) that the Subaccount is being treated
equitably by the Advisor.
(b) Such inspection will occur at the offices of the Advisor during normal
business hours and following 24 hours' notice by the Kenmar Pool or its
respective accountants or agents (as the case may be) of its intention to
inspect such books, records or other documents of the Advisor.
3.7 NOTICES. The Advisor will notify the Kenmar Pool orally (to be
confirmed in writing) promptly following the occurrence of any of the following
events:
(a) The Advisor modifies or revises its performance numbers so that there
is a material difference between the previous numbers and the revised numbers.
(b) A material error is committed with respect to the Subaccount or an
order or trade on behalf of the Subaccount was executed other than in accordance
with the Advisor's instructions.
(c) The Advisor merges, consolidates with, or sells or otherwise transfers
its advisory business, all or any portion of its assets, all or any portion of
its Trading Method or its goodwill.
(d) The Advisor becomes bankrupt or insolvent.
(e) The Advisor is unable to use any material part or aspect of its Trading
Method.
(f) The Advisor's registration with the CFTC or membership with the NFA is
revoked, suspended, terminated or not renewed, or limited, conditioned,
restricted or qualified in any respect.
3.8 THE KENMAR POOL'S DISCLOSURE DOCUMENT. Without the consent of the
Kenmar Pool, the Advisor will not circulate or distribute the Kenmar Pool's
Disclosure Document or any related promotional, advertising or solicitation
material nor engage in any marketing, selling or promotional activity whatsoever
relating to the Kenmar Pool.
<PAGE> 10
ARTICLE IV
FEES
4.1 MANAGEMENT FEE. For services rendered by the Advisor under this
Agreement the Kenmar Pool will pay the Advisor its Management Fee within thirty
(30) business days following the end of the month for which it is payable or
within thirty (30) business days following termination of this Agreement if
other than at month's end.
4.2 INCENTIVE FEE. In addition to the Management Fee, for services rendered
by the Advisor under this Agreement, the Kenmar Pool will pay the Advisor its
Incentive Fee within thirty (30) business days following the end of each
calendar quarter.
If the Advisor has a loss when funds are withdrawn or allocated away from the
Subaccount (other than for the payment of Brokerage Commissions, Management and
Incentive Fees and other proper charges or expenses), for the purpose of
calculating subsequent Incentive Fees, such loss will be reduced by an amount
equal to the product of (x) such loss and (y) the Withdrawal Ratio (as defined
below). If funds are subsequently reallocated to the Advisor, for the purpose of
calculating subsequent Incentive Fees, Net New Trading Profits will be reduced
by an amount equal to the product of (x) the amount of such earlier loss
reduction(s) and (y) the lesser of (i) 1 and (ii) the ratio created by dividing
(A) the amount of assets reallocated to the Advisor by (B) the amount of assets
previously withdrawn or allocated from the Advisor.
4.3 COMMISSIONS. The Advisor will not receive any share of the Brokerage
Commissions paid to any commodity broker, whether in the form of rebates or
otherwise.
4.4 SURVIVAL. Fees due the Advisor under this Article IV at the expiration
or termination of this Agreement will survive such expiration or termination and
shall be paid within ten (10) business days of Kenmar's receipt of such fees
from the Kenmar Pool.
ARTICLE V
REPRESENTATIONS AND WARRANTIES
5.1 BY THE ADVISOR. The Advisor hereby represents and warrants to the
Kenmar Pool as follows:
(a) If the Advisor is a corporation or partnership, it is duly organized,
validly existing, and in good standing under the laws of its state of
incorporation or formation with full power and authority to execute, deliver and
perform its obligations under this Agreement. This Agreement has been duly and
validly authorized, executed and delivered by the Advisor and is a legal, valid
and binding agreement of the Advisor enforceable against the Advisor in
accordance with its terms. The individual executing and delivering this
Agreement for and on behalf of the Advisor is of full legal age in the
jurisdiction in which he resides and is legally competent and has full power and
authority and is permitted by applicable law to do so on behalf of the Advisor.
(b) The Advisor's Disclosure Document (and any amendments or information
contained in the supplements thereto) and the reports provided to the Kenmar
Pool pursuant to Subsection 3.5(a) above are true, accurate and complete in all
material respects and do not contain any misleading or untrue statement
<PAGE> 11
of a material fact or any omission to state a material fact required to be
stated therein or necessary to make the statements therein not materially
misleading in light of the circumstances under which such statements are made.
Such Disclosure Document complies in all material respects with all Applicable
Laws. Except as otherwise disclosed in the Disclosure Document, the actual
performance of all accounts managed or directed by the Advisor and required to
be disclosed is reflected therein in accordance with the requirements of the
Applicable Laws and such information is fairly presented and is true, correct
and complete in all material respects.
(c) The information relating to the Advisor (including performance of the
Advisor) contained in the most current Offering Memorandum of the Kenmar Pool
(and any amendments or supplements thereto) is true, accurate, complete and
complies in all material respects with the requirements of Applicable Laws
(including the rules and regulations of the CFTC) and does not contain any
materially misleading or untrue statement of a material fact or any omission to
state a material fact required to be stated therein or necessary to make the
statements therein not materially misleading in light of the circumstances under
which such statements are made.
(d) The performance of the obligations under this Agreement by the Advisor
will not conflict with, violate the terms of or constitute a default under: (i)
if the Advisor is a corporation or partnership, the organizational documents of
the Advisor; (ii) any agreement or instrument to which the Advisor is a party or
by which the Advisor is bound or to which any of the property (including but not
limited to the Trading Method) or assets of the Advisor is subject; or (iii) any
order, rule, law, regulation or other legal requirement applicable to the
Advisor or to the property or assets of the Advisor.
(e) The Advisor is currently registered as a commodity trading advisor with
the CFTC and is a member in such capacity with the NFA, and such registration
and membership have not expired or been revoked, suspended, terminated or not
renewed, or limited, conditioned, restricted, or qualified in any respect. The
Advisor and each Principal have all required governmental, regulatory, and
self-regulatory licenses, registrations and memberships necessary to carry out
its obligations under this Agreement and to act as described in this Agreement.
(f) The Advisor and each Principal thereof is in material compliance with
all Applicable Laws, the non-compliance with which will materially effect the
Advisor's ability to perform its obligations under this Agreement.
(g) There is neither pending nor, to the knowledge of the Advisor,
threatened any material investigation, action, suit or proceeding by or before
any court or governmental, regulatory, or self-regulatory authority or other
body to which the Advisor is a party, or to which any assets of the Advisor is
subject that may adversely affect the Advisor's business. The Advisor has not
received any notice of an investigation regarding non-compliance by the Advisor
with the Applicable Laws that may adversely affect the Advisor's business.
(h) The answer of the Advisor's Principals to each question of Part G of
Form 8-R is "no".
(i) Neither the Advisor nor any of its Affiliates or subsidiaries has any
arrangement or relationships with any futures commission merchant or
broker-dealer pursuant to which the Advisor or any of its Affiliates is or may
become entitled to receive any portion of the commissions or fees paid to such
entities by the Kenmar Pool.
<PAGE> 12
5.2 BY THE KENMAR POOL. The Kenmar Pool represents and warrants to the
Advisor as follows:
(a) The Kenmar Pool is duly organized and validly existing in its
jurisdiction of formation with full power and authority to execute, deliver and
perform its obligations under this Agreement. This Agreement has been duly and
validly authorized, executed and delivered by on behalf of the Kenmar Pool and
is a legal, valid and binding agreement of the Kenmar Pool enforceable against
the Kenmar Pool in accordance with its terms. The individual executing and
delivering this Agreement for and on behalf of the Kenmar Pool is of full legal
age in the jurisdiction in which he resides and is legally competent and has
full power and authority and is permitted by applicable law to do so on behalf
of the Kenmar Pool.
(b) The performance of the obligations under this Agreement by the Kenmar
Pool will not conflict with, violate the terms of or constitute a default under:
(i) the Kenmar Pool's organizational documents; (ii) any other agreement or
instrument to which the Kenmar Pool is a party or by which the Kenmar Pool is
bound or to which any of the property or assets of the Kenmar Pool is subject;
or (iii) any order, rule, law, regulation or other legal requirement applicable
to the Kenmar Pool or to the property or assets of the Kenmar Pool.
(c) The information contained in the Kenmar Pool's Disclosure Document is
true, accurate and complete in all material respects and does not contain any
misleading or untrue statement of a material fact and does not omit to state a
material fact required to be stated therein or necessary to make the statements
therein not misleading. Such Disclosure Document complies in all material
respects with the Applicable Laws.
(d) There is neither pending nor, to the knowledge of the Kenmar Pool,
threatened any investigation, action, suit or proceeding before or by any court
or governmental, regulatory or self-regulatory authority or other body to which
the Kenmar Pool is a party, or to which any of its assets are subject that may
adversely affect the Kenmar Pool's business. The Kenmar Pool has not received
any notice of any investigation regarding its non-compliance with the Applicable
Laws that may adversely affect the Kenmar Pool's business.
(e) The Kenmar Pool is in material compliance with all Applicable Laws, the
non-compliance with which will materially effect the Kenmar Pool's ability to
perform its obligations under this Agreement.
(f) The Kenmar Pool has all required governmental, regulatory, and
self-regulatory licenses, registrations and memberships necessary to carry out
its obligations under this Agreement and to act as described in this Agreement.
(h) The Kenmar Pool has received and reviewed a copy of the Advisor's
current Disclosure Document.
5.3 REPRESENTATIONS CONTINUING. The foregoing representations and
warranties will be continuing during the term of this Agreement and, if at any
time any event will occur that could make any of the foregoing incomplete or
inaccurate, the party whose representation and warranty would become incomplete
or inaccurate will promptly notify the other party of the occurrence of the
event causing such incompleteness or inaccuracy.
<PAGE> 13
ARTICLE VI
STANDARD OF LIABILITY AND INDEMNIFICATION
6.1 ADVISOR'S AGREEMENT TO INDEMNIFY. The Advisor will indemnify, hold
harmless and defend the Kenmar Pool, its Affiliates and their respective
officers, directors, employees and agents and each other person, if any, who
controls the Kenmar Pool within the meaning of the Securities Act of 1933, as
amended (the "1933 Act") from and against, any loss, liability, claim, demand,
damage, cost and expense (including reasonable attorneys' and accountants' fees
and cost of investigation) arising out of or based upon an act, omission,
conduct or activity of the Advisor under this Agreement arising out of or based
upon: (i) a breach of any representation, warranty, covenant or material term of
this Agreement by the Advisor; (ii) an act of, or omission to act due to, breach
of fiduciary duty, bad faith, misconduct or negligence by the Advisor; or (iii)
a misleading or untrue statement of a material fact contained in the Advisor's
Disclosure Document or in any information, notice or report provided to the
Kenmar Pool or an omission to state a material fact required to be stated
therein or necessary to make the statements therein not misleading in light of
the circumstances under which such statements are made.
6.2 THE KENMAR POOL'S AGREEMENT TO INDEMNIFY. The Kenmar Pool will
indemnify, hold harmless, and defend the Advisor, its Affiliates and their
respective officers, directors, employees and agents and each other person, if
any, who controls the Advisor within the meaning of the 1933 Act from and
against any loss, liability, claim, demand, damage, cost and expense (including
reasonable attorneys' and accountants' fees and cost of investigation) arising
out of the Advisor's performance of its services under this Agreement except
for: (i) a breach of any representation, warranty, covenant or material term of
this Agreement by the Advisor; (ii) an act of, or omission to act due to, breach
of fiduciary duty, bad faith, misconduct or negligence by the Advisor; or (iii)
a misleading or untrue statement of a material fact contained in the Advisor's
Disclosure Document or an omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading in
light of the circumstances under which such statements are made.
6.3 INDEMNITY PROCEDURE.
(a) Promptly after receipt by an indemnified party under Section 6.1 or 6.2
of notice of the commencement of an action or claim to which either such Section
may apply, the indemnified party will notify the indemnifying party in writing
of the commencement of such action or claim. The omission so to notify the
indemnifying party will not relieve the indemnifying party of any liability that
the indemnifying party may have to the indemnified party under either such
Section except to the extent such omission will have materially prejudiced the
indemnifying party. The indemnity obligations herein will be in addition to any
rights or remedies a party may have under Applicable Law.
(b) In case any such action or claim will be brought against an indemnified
party and the indemnified party will notify the indemnifying party of the
commencement of such action or claim, the indemnifying party will be entitled to
participate in such action or claim and, to the extent that the indemnifying
party may desire, to assume the defense of such action or claim at its own
expense with counsel selected by the indemnifying party and approved by the
indemnified party. After notice from the indemnifying party to the indemnified
party of the indemnifying party's election so to assume the defense of such
action or claim, the indemnifying party will not be liable to the indemnified
party under either such Section for any legal, accounting, and other expenses
subsequently incurred by the indemnified party in connection with the defense of
such action or claim other than reasonable costs of investigation.
(c) Notwithstanding any provision of this Section 6.4 to the contrary, if
in any action or claim as to which indemnity is or may be available an
indemnified party will reasonably determine that its interests are
<PAGE> 14
or may be adverse, in whole or in part, to the interests of the indemnifying
party or that there may be legal defenses available to the indemnified party
that are or may be different from, in addition to, or inconsistent with the
defenses available to the indemnifying party, the indemnified party may retain
its own counsel in connection with such action or claim and will be indemnified
by the indemnifying party for any legal, accounting and other expenses
reasonably incurred by or on behalf of it in connection with investigating or
defending such action or claim.
6.4 SETTLEMENT. If an indemnified party takes over the defense, an
indemnifying party will not be liable for a settlement of any such action or
claim effected without its written consent, but if any such action or claim will
be settled with the written consent of an indemnifying party or if there will be
a final judgment for the plaintiff in any such action or claim, the indemnifying
party will indemnify, hold harmless, and defend the indemnified party from and
against any loss, liability, expense in accordance with this Article VI by
reason of such settlement or judgment. Neither party will consent to entry of
any judgment or enter into any settlement that requires the payment of money, or
imposes any other material obligation on the other party, or that does not
include an unqualified release for the other party, without the other party's
written consent.
6.5 EFFECT OF EXPIRATION OR TERMINATION. This Article VI will survive
expiration or termination of this Agreement.
ARTICLE VII
TERM AND TERMINATION
7.1 TERM. This Agreement will commence on the date hereof and will continue
in full force and effect until terminated pursuant to Section 7.2 below.
7.2 TERMINATION. This Agreement will terminate as follows:
(a) Upon three (3) full month's prior written notice from one party to the
other party, which notice will include the effective date of termination, which
may only be the last day of any month not earlier than two (2) full years from
the date hereof.
(b) Upon thirty (30) days prior written notice from one party to the other
party if there is a material breach of any representation, warranty, covenant or
material term of this Agreement by the other party and the other party has
failed to cure such material breach prior to ten (10) days before the effective
date of termination.
(c) Immediately, upon the dissolution or insolvency of Kenmar or the
Advisor.
(d) Immediately, upon the Advisor's registration with the CFTC or
membership with the NFA as a commodity trading advisor being revoked, suspended,
terminated or not renewed, or limited, conditioned, restricted or qualified in
any respect.
<PAGE> 15
ARTICLE VIII
MISCELLANEOUS
8.1 STATUS.
(a) The Advisor is, and for all purposes will be deemed to be, an
independent contractor, and unless otherwise expressly provided herein or with
the prior written authorization of the Kenmar Pool, the Advisor will have no
authority to act for or represent the Kenmar Pool in any way and will not
otherwise be deemed to be an agent of the Kenmar Pool.
(b) Unless otherwise expressly provided herein or with the prior written
authorization of the Advisor, the Kenmar Pool will have no authority to act for
or represent the Advisor in any way and will not otherwise be deemed to be an
agent of the Advisor.
(c) Nothing contained in this Agreement will create a partnership, joint
venture, association, syndicate, unincorporated business or other separate
entity between or among the Kenmar Pool and/or the Advisor.
(d) The Advisor is neither a sponsor nor a promoter of the Kenmar Pool.
8.2 CONFIDENTIALITY.
(a) The Trading Methods (including Commodity Interest positions established
pursuant to the Trading Methods) are the sole and exclusive property of the
Advisor, and the Kenmar Pool will keep confidential and not disseminate the
Trading Method or any other information with respect to the Advisor that is
known by the Kenmar Pool to be confidential and proprietary to the Advisor.
Nothing herein will require the Advisor to disclose any proprietary or
confidential information concerning its Trading Methods or any customer names.
(b) The obligations of the parties in relation to confidentiality will not
apply to the extent that any information (i) is required to be disclosed in
accordance with any law (including any Applicable Law), rule, regulation or
order of any court, arbitration panel, governmental, regulatory or
self-regulatory authority or any audit requirement or (ii) has entered into the
public domain other than by a breach of duty on the part of any party hereto.
8.3 ENTIRE AGREEMENT. This Agreement constitutes the entire agreement
between the parties hereto with respect to the matters referred to herein, and
no other agreement, verbal or otherwise, will be binding between the parties
hereto with respect to the matters referred to herein unless in writing and
signed by the parties.
8.4 AMENDMENT. This Agreement may not be amended except by a writing
signed by the parties hereto.
8.5 ASSIGNMENT. This Agreement may not be assigned by either party hereto
without the prior written consent of the other party, except that the Kenmar
Pool may assign this Agreement or transfer all or a portion of its assets or
goodwill to, Kenneth A. Shewer and/or Marc S. Goodman and/or any entity
controlled by either or both of them and may merge or consolidate with any
entity controlled by either or both of them.
<PAGE> 16
8.6 SUCCESSORS. This Agreement will be binding upon and inure to the
benefit of the parties hereto, their successors and permitted assigns, and no
other person will have any right or obligation under this Agreement.
8.7 WAIVER. No waiver of any provision of this Agreement will be implied
from any course of dealing between the parties hereto or from any failure by
either party hereto to assert its rights hereunder on any occasion or series of
occasions.
8.8 SEVERABILITY. If any provision of this Agreement, or the application of
any provision to any person or circumstance, will be held to be inconsistent
with any present or future law, ruling, rule or regulation of any court or
governmental, regulatory, or self-regulatory authority having jurisdiction over
the subject matter hereof, such provision will be deemed to be rescinded or
modified in accordance with such law, ruling, rule or regulation, and the
remainder of this Agreement, or the application of such provision to any person
or circumstance other than those as to which it will be held inconsistent, will
not be affected thereby.
8.9 GOVERNING LAW. THIS AGREEMENT WILL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF CONNECTICUT WITHOUT REFERENCE TO CHOICE
OF LAW DOCTRINE.
8.10 CONSENT TO ARBITRATION. ANY ACTION OR PROCEEDING BROUGHT BY ANY PARTY
HERETO TO ENFORCE ANY RIGHT, ASSERT ANY CLAIM OR OBTAIN ANY RELIEF WHATSOEVER
ARISING FROM, IN CONNECTION WITH OR RELATING TO THIS AGREEMENT, ANY BREACH
HEREOF, OR THE ENFORCEMENT HEREOF, OR ANY TRANSACTION COVERED HEREBY WILL BE
BROUGHT AND MAINTAINED BY SUCH PARTY EXCLUSIVELY IN, AND THE OTHER PARTIES
HEREBY CONSENT AND SUBMIT TO THE EXCLUSIVE JURISDICTION OF, AN APPROPRIATE
ARBITRATION BODY LOCATED WITHIN THE COUNTY OF FAIRFIELD, STATE OF CONNECTICUT.
8.11 COUNTERPARTS. This Agreement may be executed in counterparts, each of
which will be deemed an original but all of which together will constitute one
and the same instrument.
8.12 NOTICES. Any notice required or desired to be delivered pursuant to
this Agreement will be in writing and will be delivered by courier service,
postage prepaid mail, telex, facsimile transmission, telegram or other similar
means and will be effective, if by mail, 7 days after mailing, or if notified
otherwise, when actually received by the party to whom such notice will be
directed, addressed as set forth in the Cover Letter.
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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