<PAGE> 1
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File Number 0-23950
KENMAR PERFORMANCE PARTNERS L.P.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2751509
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
Two American Lane, P.O. Box 5150, Greenwich, Connecticut 06831-8150
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (203) 861-1000
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Limited Partnership Interests
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No ___
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The registrant has no outstanding voting or non-voting common equity.
- -------------------------------------------------------------------------------
<PAGE> 2
PART I
ITEM 1. BUSINESS
The discussion below and elsewhere in this Form 10-K contains "certain
forward-looking statements" (as such term is defined in Section 21E of the
Securities Exchange Act of 1934) 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 1998 and beyond to differ materially from those expressed in,
or implied by, any such forward-looking statements. These factors include,
without limitation, the factors described below and elsewhere in this Form
10-K.
OVERVIEW
Kenmar Performance Partners L.P. (the "Partnership") was formed as a
limited partnership on June 24, 1985 under the New York Uniform Limited
Partnership Act and adopted the New York Revised Limited Partnership Act (the
"Partnership Act") on October 18, 1991. 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 speculative trading of commodities, futures contracts, forward
contracts, foreign exchange commitments, swap contracts, spot (cash)
commodities and options, warrants and other rights on or pertaining to any of
the foregoing, in the United States of America and elsewhere throughout the
world ("Commodity Interests") through the retention of independent commodity
trading advisors ("Advisors"). The objective of the Partnership's business is
appreciation of its assets through the speculative trading of Commodity
Interests. To effectuate this purpose, the Partnership is also authorized to
purchase the interests of other entities engaged in the business of trading,
buying, selling, spreading, swapping and otherwise acquiring, holding and
disposing of Commodity Interests.
In September 1985, the Partnership commenced a private placement of units
of limited partnership interests ("Units") in reliance on the exemptions
afforded by, among others, Sections 4(2) of the Securities Act of 1933, as
amended (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, with a minimum subscription of $26,250 for new investors
other than individual retirement accounts ("IRAs") and qualified retirement
plans and Keogh Plans ("Plans") and $10,500 for IRAs, Plans and existing
Limited Partners, which amounts include selling commissions of $1,250 and $500,
respectively, unless waived in whole or in part. Since the Partnership began
the private placement in 1985, through March 15, 1998, 23,580.88 Units have
been sold for a total of $261,740,403. "Net Asset Value" is defined as total
assets of the Partnership less total liabilities as determined in accordance
with the principles set forth in the Second Restatement of the Limited
Partnership Agreement of the Partnership, dated September 1, 1993, as amended
January 15, 1996 (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. The term "Net Asset Value
Per Unit" is defined in the Partnership Agreement to mean the Net Asset Value
of the Partnership divided by the number of Units issued and outstanding as of
the date of computation. Investors receive a Confidential
1
<PAGE> 3
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
Commodity Futures Trading Commission (the "CFTC") in compliance with its
Regulations.
Since September 1985, the Partnership has engaged in the speculative
trading of Commodity Interests and will continue to do so until its dissolution
and liquidation, which will occur on the earlier of December 31, 2013 or the
occurrence of any of the events set forth in Section 8.1 of the Partnership
Agreement. The Partnership Agreement also provides that, after having been a
Limited Partner for six months and upon ten business 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. In addition, pursuant to the Partnership
Agreement, the General Partner may, in its sole discretion on 10 days' written
notice or without notice under certain circumstances, require any Limited
Partner to withdraw all or a portion of such Limited Partner's capital
contribution from the Partnership.
The Partnership's general partner is Kenmar Advisory Corp. (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 is owned equally and indirectly by Kenneth A. Shewer and
Marc S. Goodman, the sole directors of the General Partner. In accordance with
the provisions of the CEAct and the rules of the National Futures Association
(the "NFA"), the General Partner is registered as a commodity pool operator,
the Advisors are registered as commodity trading advisors and the Commodity
Brokers (as defined below) required to be registered as futures commission
merchants are registered as such, each subject to regulation by the CFTC. Each
is also a member of the NFA in its respective capacity.
The General Partner, to the exclusion of the limited partners of the
Partnership (the "Limited Partners"), manages and conducts the business of the
Partnership. The General Partner (i) selects and monitors the independent
Advisors and the Commodity Brokers; (ii) allocates and/or reallocates assets of
the Partnership among the Advisors; (iii) determines if an Advisor or Commodity
Broker should be removed or replaced; (iv) negotiates management fees,
incentive fees and brokerage commissions; (v) determines its own compensation;
and (vi) performs such other services as the Partnership may from time to time
request, except that all trading decisions are made by the Advisors retained by
the General Partner. In addition, the General Partner selects the commodity
brokers that will clear trades for the Advisors. Refco, Inc. ("Refco") and ING
(U.S.) Securities, Futures & Options Inc. ("ING BARINGS Futures & Options
Clearing Services") are currently the Partnership's futures commission
merchants, and ING Baring Futures & Options (U.K.) Limited ("ING-FX") and
Refco Capital Markets Ltd. ("Refco Capital Markets") are the Partnership's
foreign exchange dealers (Refco, ING BARINGS Futures & Options Clearing
Services, ING-FX and Refco Capital Markets are collectively referred to herein
as the "Commodity Brokers").
The Partnership itself does not have any employees. Rather, the General
Partner employs 38 persons (as of March 15, 1998) and provides the Partnership
with the services of research,
2
<PAGE> 4
fund administration, client support (marketing), legal, and management
information systems and analysis personnel to conduct its operational
activities.
The General Partner believes that the most effective means of controlling
the risks of trading Commodity Interests is through a diversified portfolio of
Advisors. In general, the General Partner has sought to produce high returns
while controlling risk through the selection of two or more Advisors, often
with diverse trading methodologies. The General Partner's ability to manage
the Partnership is dependent upon an informed and aggressive management style,
one that identifies and acts quickly and decisively on shifting market trends.
Market conditions must dictate the selection of a portfolio of Advisors and the
reallocation of assets among the Advisors. Therefore, when market conditions
suggest that an alternative trading style or methodology might be better suited
to the current market environment, the General Partner alters the portfolio of
Advisors or the allocation of assets among the Advisors, without prior notice
to, or the approval of, the Limited Partners.
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 Commodity Interest trading under the guidance of
professional Advisors.
FEES AND EXPENSES
Due to the General Partner's active and dynamic allocation and
reallocation of the Partnership's assets, the fees and expenses set forth below
are subject to change at any time. Accordingly, the following fees and
expenses are the current fees charged and expenses of the Partnership as of
March 15, 1998.
Administrative Fee. In partial payment of the General Partner's assuming
the substantial financial burden of paying all the operating and administrative
expenses of the Partnership (other than the legal fees and expenses of
independent counsel and extraordinary expenses), each month the Partnership
pays to the General Partner an Administrative Fee equal to 1/12 of 1% (1%
annually) of the prior month's beginning Net Asset Value of the Partnership.
Ordinary administrative expenses include but are not limited to accounting,
auditing, recordkeeping, administration, computer and clerical expenses
(including expenses incurred in preparing reports and tax information for
Limited Partners and regulatory authorities, printing and duplication expenses
and mailing expenses), and other expenses incurred by such persons and by the
General Partner and affiliates in providing services to the Partnership.
Advisors' Management Fees. The Partnership pays each Advisor, other than
Sheridan Investments Incorporated, a monthly management fee ranging from
0.0833% to 0.1667% of the Net Asset Value of the assets allocated to each
Advisor for management (each, an "Advisor's Portion"), prior to reduction for
this fee and the Advisor's Incentive Fee, if any (as described below),
adjusted, with respect to certain Advisors, to reflect the leverage at which
such Advisor trades its Portion.
Advisors' Incentive Fees. In addition to the above, the Partnership pays
each Advisor an incentive fee ranging from 15% to 25% of the appreciation on
that Advisor's Portion. The
3
<PAGE> 5
General Partner will not receive any portion of the fees payable to any
Advisor. The Partnership may enter into substantially similar compensation
arrangements with other Advisors.
Any incentive fees paid to an Advisor will be retained by it even if that
Advisor subsequently experiences losses. No subsequent payment will be made to
that Advisor, however, until that Advisor's Portion again experiences Net New
Trading Profits. In general, "Net New Trading Profits" are the net trading
profits earned on an Advisor's Portion (excluding interest or
interest-equivalent income), decreased by brokerage commissions (paid and
change, if any, in accrued), and decreased by the management fee, if any, 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 date such Advisor was allocated its Advisor's Portion) to the
close of business on the last day of the calendar quarter with respect to which
such incentive fee calculation was made. Moreover, because each Advisor is
treated separately, it is possible that one or more Advisors may receive
incentive fees during the same periods for which the Partnership and other
Advisors sustain a net loss.
Brokerage Commissions. The Partnership's current brokerage expenses range
from $9.56 to $30 per roundturn transaction plus non-member exchange fees,
clearing fees and NFA transaction fees. United States exchange fees (including
NFA fees) range from approximately $1.24 to $2.84 per roundturn transaction.
Foreign exchange fees range from approximately $1.18 to $16 per roundturn
transaction, except that foreign exchange fees on certain Japanese financial
instruments are $55 per roundturn transaction. For managing the Partnership's
investment with the Advisors, the General Partner receives from the Commodity
Brokers a portion of the brokerage commissions paid by the Partnership to each.
Refco and ING Futures & Options retain no more than $10 per roundturn
transaction, Refco Capital Markets no more than $5.75, and ING FX no more than
$4.00. Each remits the remainder to the General Partner as compensation for
managing the Partnership.
The General Partner may, in its sole discretion, negotiate brokerage
commissions with other commodity brokers on such terms as it deems in the best
interest of the Partnership, which may or may not be similar to the above
brokerage arrangements.
Legal Fees and Expenses. The Partnership will be responsible for all
legal fees, expenses (such as outside counsel's fax and copying charges) and
disbursements (such as filing fees, whether paid by the General Partner or
outside counsel). Legal fees for fiscal 1997 were approximately $33,000.
Extraordinary Expenses. The Partnership is responsible for all
extraordinary expenses (i.e., litigation expenses) incurred on behalf of the
Partnership. As of the date of this Annual Report, 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, upon initially investing in the Partnership, investors may be
subject to a selling commission
4
<PAGE> 6
payable to independent selling agents, equal to up to 5% of the then current
Net Asset Value per Unit, unless the payment of all or any portion of such
amount is waived by the selling agent.
Interest on Assets. Each month, the Partnership receives all interest or
interest-equivalent income actually earned on the Partnership's assets during
that month.
The following chart reflects the actual fees and expenses for the periods
presented. See "Selected Financial Data" below.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Brokerage Commissions $16,884 $15,905 $17,165 $20,007 $11,511
Management Fees 2,721 3,317 3,774 4,231 2,326
Incentive Fees 1,417 6,406 7,107 5,900 3,804
General Partner's Management Fees 0 0 0 786 894
General Partner's Administrative
Fee for Operating Expenses 949 1,233 1,497 1,499 656
Other Expenses 137 228 191 358 135
</TABLE>
CONFLICTS OF INTEREST
The General Partner. The General Partner receives from the Commodity
Brokers a portion of the brokerage commissions paid by the Partnership to the
Commodity Brokers. Thus, the General Partner has a conflict between its
responsibility to limit or reduce brokerage commissions and its interest in
arranging for higher fees for itself by selecting Advisors who trade more
actively over Advisors who trade less actively.
The General Partner is authorized under the Partnership Agreement to set
the compensation it shall receive for its services as general partner of the
Partnership. As such, the General Partner has a conflict of interest between
limiting fees paid by the Partnership and generating fees for itself.
The General Partner and its affiliates ("Kenmar") currently manage other
commodity pools and managed accounts, each with a different combination of
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 Kenmar have undertaken with respect to
the Partnership and the activities Kenmar have undertaken or will undertake
with respect to other investors, commodity pools, managed accounts and/or
Advisors. Additionally, the greater the amount of
5
<PAGE> 7
assets managed by the General Partner, the more difficult it may be for the
General Partner to maintain the quality of these services.
The General Partner may also have a conflict of interest between its
responsibility to select the best Advisors for the Partnership and its
responsibility to select the best Advisors for the other commodity pools and
managed accounts for which it serves as manager, because other pools may have
fee structures more advantageous to the General Partner.
Kenmar maintains business relationships unrelated to the Partnership with
commodity trading advisors. In particular, affiliates of the General Partner
have entered into, and may in the future enter into, marketing agreements with
commodity trading advisors pursuant to which such affiliates are compensated
for providing marketing services to such advisors and for getting assets placed
under the management of such advisors. In allocating the Partnership's assets
among Advisors and in determining which Advisors to retain or dismiss, the
General Partner may also have a conflict of interest between allocating funds
to Advisors who otherwise conduct trading on behalf of, or who otherwise have a
business relationship with, the General Partner and/or its affiliates and
allocating funds to Advisors with which the General Partner and/or its
affiliates has no present relationship.
The General Partner and the Commodity Brokers maintain business
relationships 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 the Commodity Brokers that best
serves the Partnership's interests and the General Partner's desire to maintain
its business relationships with the Commodity Brokers.
Neither the General Partner nor any of its affiliates, principals,
directors, officers or employees (the "Related Persons") trade Commodity
Interests for their own accounts, although it is possible that they may do so
in the future. The records of such trading 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 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 Commodity Interests.
Orders placed by the General Partner or a Related Person to trade Commodity
Interests 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 any 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 Advisors. Subject to certain limitations, one or more of the Advisors
manage other commodity pools and/or managed accounts as well as trade for their
own proprietary accounts.
6
<PAGE> 8
Since at least some of the Advisors are trading and will continue to trade
other client accounts, such Advisors may be subject to conflicting demands in
respect of allocating management time, services and other functions between the
Partnership and other client accounts. In particular, such Advisors may have a
conflict of interest when rendering advice to the Partnership, because its
compensation for managing some other client account may differ from its
compensation for managing the Partnership's account, and therefore may provide
an incentive to favor such other account.
An Advisor may in the future develop and furnish to, or employ on behalf
of, other investors trading methods or strategies for trading Commodity
Interests 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.
Thus, no assurance may be given that the trading results in such other accounts
will be the same as the performance in the Partnership's account.
Some of the Advisors or their employees currently trade Commodity
Interests for their own account and any or all could do so in the future. 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 a
proprietary account. 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, an 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 an Advisor's
other 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
Investment 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 Commodity Interests for the
Partnership. It is not known what effect such inability to trade would have on
the performance results of the Partnership.
A substantial amount of the assets under the management of certain
Advisors for the Partnership are assets of pools and accounts managed by the
General Partner or an affiliate. This could have an influence on how these
Advisors do business with the General Partner and the Partnership.
The Commodity Brokers. The Commodity Brokers effect transactions for
their customers (including public and private commodity pools) in addition to
the Partnership, and such other customers may compete with the Partnership's
transactions, including with respect to priority of
7
<PAGE> 9
order entry. In addition, employees of the Commodity Brokers may trade for
their own accounts. Since the identities of the purchaser and seller are not
disclosed until after the trade, it is possible that the Commodity Brokers
could effect transactions for the Partnership in which the other parties to the
transactions are the Commodity Brokers' officers, directors, employees,
customers or affiliates. Such persons might also compete with the Partnership
in making purchases or sales of Commodity Interests without knowing that the
Partnership is also bidding on such Commodity Interests. 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 Commodity Brokers will use their good faith, best efforts 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 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, Limited Partners should be aware that the General
Partner has 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 a Commodity
Broker. A Limited Partner may also institute legal proceedings in court
against the General Partner, the Commodity Brokers or an 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 Advisors in the Management Agreements, exculpatory provisions
in the Partnership Agreement and in the Management Agreements, 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. Purchasers of Units 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
shareholders, officers, directors, employees, and agents against any loss,
liability, damage, costs, 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
8
<PAGE> 10
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, Kenmar may be indemnified only to the extent
and subject to the conditions specified 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 laws 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 a futures commission merchant
(such as a Commodity 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.
COMMODITY INVESTMENT TRADING AND THE ADVISORS
The profitability of Commodity Investment trading depends in large part
upon the accurate forecasting of price moves or trends in some Commodity
Interests. No assurance can be given as to the accuracy of any Advisor's
forecasts or that any Advisor's trading methods, strategies or decisions will
be successful.
Although an oversimplification, most Advisors use varying mixtures of
technical and fundamental analysis. A trading approach based on fundamental
analysis attempts to examine external factors (such as governmental policies,
national and international political and economic events, changing trade
prospects and similar factors that affect the supply and demand for a
particular Commodity Investment) to predict Commodity Investment prices. A
limiting factor in the use of fundamental analysis is that the analyst may not
have knowledge of all of the pertinent factors affecting supply and demand of a
particular commodity. Prices may be affected by factors the analyst did not
consider.
A trading approach based on technical analysis attempts to examine
objective data (such as actual daily, weekly and monthly price fluctuations,
volume variations, and changes in open interest and other related mathematical,
statistical or quantitative data) to predict Commodity Investment prices. A
limiting factor in the use of technical analysis is that such an approach
generally requires price movement data that can be translated into price trends
sufficient to dictate a market entry or exit decision. No assurance can be
given as to the existence of major price moves. Moreover, a trading method or
strategy will not be profitable if there are no price moves or trends of the
kind the method or strategy seeks to identify and follow. In the past there
have been periods without discernible trends and, presumably, such periods will
continue to occur in the future. Periods without such price moves may produce
losses. In addition, any factor that would lessen the prospect of major trends
occurring in the future (such as increased governmental control of or
participation in the markets) may reduce the prospect that a particular trading
9
<PAGE> 11
method will be profitable in the future. Finally, a technical trading approach
may underperform other trading approaches when fundamental factors dominate
price moves within a given Commodity Investment market.
Regardless of whether a trader uses fundamental analysis, technical
analysis or some combination of the two or some other method, any factor that
would make it more difficult to execute trades at desired prices in accordance
with the signals of that trading method (such as a significant lessening of
liquidity in a particular market) would be detrimental to profitability. Also,
many Advisors may utilize similar analyses in making trading decisions;
therefore, bunching of buy and sell orders can occur, which makes it more
difficult for a position to be taken or liquidated.
The development of a Commodity Investment trading strategy is a continual
process. As a result of further analysis and research into the performance of
an Advisor's methods, changes may have been made from time to time in the
specific manner in which these trading methods evaluate price movements in
various Commodity Interests; it is likely that similar revisions will be made
in the future. As a result of such modifications, the trading methods that may
be used by an Advisor in the future might differ from those presently being
used. Limited Partners will not be informed of such changes in Advisor's
trading methods. Additionally, trading decisions of discretionary Advisors
require the exercise of judgment. The decision not to trade certain Commodity
Interests or not to make certain trades may result at times in missing price
moves and hence profits of great magnitude, which other Advisors willing to
trade these Commodity Interests may be able to capture.
Certain Advisors may also engage in transactions in physical commodities,
including exchange for physical transactions. An exchange for physical ("EFP")
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. Generally, the holder of a
short futures position sells the physical commodity. The prices at which such
transactions are executed are negotiated between the parties, and such prices
may, under certain circumstances, vary significantly from the actual prices at
which the transactions are traded on the relevant exchanges.
SYNOPSIS OF THE ADVISORS
The Commodity Futures Trading Commission only requires disclosure of
"Major Advisors", i.e., those allocated at least ten percent of the
Partnership's assets. Set forth below is a brief description of the portfolio
of Major Advisors trading for the Partnership as of March 15, 1998, which
differs in part from the portfolio of Advisors in 1997.
DENNIS TRADING GROUP, INC. The principals of Dennis Trading Group, Inc.
("DTG") are Richard J. Dennis and Thomas A. Dennis. DTG employs a multisystem,
computerized strategy comprised of a number of distinct proprietary trading
systems which can be classified as either trend-following or counter-trend in
nature. Based on DTG's on-going research, the number of systems will vary
dynamically over time. In addition, the systems vary in their trade duration;
DTG seeks to profit from short, intermediate and long-term market opportunities
with signal generation based
10
<PAGE> 12
on the study of price movement both on a daily and intra-day basis. DTG's
portfolio is broadly diversified throughout the global market sectors,
including currencies, interest rates, stock indices, energies, metals,
agriculturals, softs and meats. The worst monthly percentage drawdown, on a
composite basis, for DTG from May 1994 through February 1998 was -15.6% in
August 1994. The best monthly rate of return, on a composite basis, for DTG
from May 1994 through February 1998 was 45.90% in September 1997.
EMC CAPITAL MANAGEMENT, INC. The principals of EMC Capital Management, Inc.
("EMC") are Elizabeth A. Cheval and Jeffrey D. Izenman. The trading strategy
EMC utilizes for the Partnership is technical and generally trend-following.
EMC may trade in more than ten Commodities at one time including, but not
necessarily limited to, precious metals, U.S. and foreign financials, stock
indices, certain foreign currencies, grains and grain products, crude oil and
oil products, sugar, coffee, cocoa and orange juice. The worst monthly
percentage drawdown, on a composite basis, for EMC and its principal during the
most recent five calendar years (through February 1998) was -19.3% in July
1995. The best monthly rate of return, on a composite basis, for EMC and its
principal during the most recent five calendar years (through February 1998)
was 22.8% in May 1995.
HIRST INVESTMENT MANAGEMENT INC. The sole principal of Hirst Investment
Management, Inc. ("Hirst") is Dr. Gary T. Hirst. Hirst employs a new trading
technology based on digital signal processing (DSP) developed by Dr. Hirst
which is designed to anticipate trend formation rather than identify existing
trends. Because the system employs no fixed time frame, it is able to profit
from trends of varying length. The DSP Trading System is completely automated
and has been tested in over 100 different markets with no significant
performance dilution. The markets that Hirst will trade at any one time are
determined by a sophisticated risk-balancing matrix that investigates and
allocates based on intermarket behavior. Hirst's portfolio is diversified
across many market sectors, including currencies, global interest rates, stock
indices, energies, metals, agriculturals, softs and meats. The worst monthly
percentage drawdown, on a composite basis, for Hirst since its inception in
October 1995 through February 1998 was -7.34% in February 1996. The best
monthly rate of return, on a composite basis, for Hirst since its inception in
October 1995 through February 1998 was 16.10% in December 1995.
HYMAN BECK & COMPANY, INC. The principals of Hyman Beck & Company, Inc. ("HB &
Co.") are Alexander Hyman, Carl Beck, Chris J. Garavente, Troy Buckner, David
B. Fuller, Richard A. DeFalco, John J. McCormick and John S. Ryan. HB & Co.'s
Short-Term Portfolio strategy is systematic and attempts to combine
discretionary trading principles and non-linear modeling. The selective,
short-term nature of trades in the Short-Term Portfolio generates results
exhibiting an unusually low level of risk, combined with attractive annual
returns. There are currently 44 markets in the portfolio (diversified across
both U.S. and non-U.S. markets), resulting in positions being held in an
average of 20 futures and forward markets at any point in time. The worst
monthly percentage drawdown, on a composite basis, for HB & Co.'s Short-Term
Portfolio since its inception in April 1996 through February 1998 was -7.80% in
August 1996. The best monthly rate of return, on a composite basis, for HB &
Co.'s Short-Term Portfolio since its inception in April 1996 through February
1998 was 8.84% in October 1996.
11
<PAGE> 13
NESSLER FUTURES TRADING COMPANY. Peter Nessler, Jr. is the sole principal and
shareholder of Nessler Futures Trading Company ("Nessler"). Nessler's trading
strategy is fundamentally based, focusing on factors affecting supply and
demand which are likely to provide an indication of future market price. In
addition, technical analysis and historical and seasonal pattern identification
represents a small portion of the advisor's trading process. The majority of
Nessler's trading is short-term in nature, generally seeking to capture profits
from interim market fluctuations. Nessler trades primarily agricultural
markets, but may occasionally trade non-agricultural markets. The worst monthly
percentage drawdown, on a composite basis, for Nessler during the most recent
five calendar years (through February 1998) was -6.30% in June 1995. The best
monthly rate of return, on a composite basis, for Nessler during the most
recent five calendar years (through February 1998) was 7.10% in May 1994.
SHERIDAN INVESTMENTS INCORPORATED. Donald M. Newell, Philip G. Hubbard and
Richard Morrison are the sole managing principals of Sheridan Investments
Incorporated ("Sheridan"). Mr. Newell has also been a principal of LaSalle
Portfolio Management, Inc., a registered commodity trading advisor and
commodity pool operator, since 1984. The approach used to direct the trading
for Sheridan focuses on exchange-traded futures and options on U.S. fixed
income investments, seeking to add value to a long fixed income portfolio
through a variety of option related strategies. Risk is controlled by paying
close attention to market volatility, as well as through defensive option
strategies designed to cap potential losses. The worst monthly percentage
drawdown, on a composite basis, for Sheridan during the most recent five
calendar years (through February 1998) was -0.8% in April 1993. The best
monthly rate of return, on a composite basis, for Sheridan during the most
recent five calendar years (through February 1998) was 3.11% in August 1993.
WILLOWBRIDGE ASSOCIATES INC. The principals of Willowbridge Associates Inc.
("Willowbridge") are Philip L. Yang, Michael Y. Gan, Theresa C. Morris, Richard
G. Faux, Jr., John C. Plimpton, James J. O'Donnell and Steven R. Crane.
Willowbridge is trading its XLIM Trading Approach ("XLIM") for the Partnership
which is traded on a discretionary basis by Mr. Yang. Trading decisions are
based primarily on Mr. Yang's analysis of technical factors, fundamentals and
market action. XLIM trades are selected from a wide variety of futures
contracts, forwards, spot and options on United States and international
markets including, but not limited to, financial instruments, currencies,
precious and base metals and agricultural commodities. Mr. Yang reserves the
right to change the portfolio composition of XLIM. The worst monthly
percentage drawdown, on a composite basis, for the XLIM Program during the most
recent five calendar years (through February 1998) was -12.67% in February
1994. The best monthly rate of return, on a composite basis, for the XLIM
Program during the most recent five calendar years (through February 1998) was
31.21% in March 1995. In addition to the XLIM Trading Approach (XLIM),
Willowbridge is also trading its MTech Trading Approach (MTech) for the
Partnership. MTech is a highly discretionary and judgmental trading approach
relying primarily on Mr. Gan's subjective analysis of the markets. Trading
decisions are made on technical, as well as fundamental analysis. MTech
currently trades the United States and non-U.S. futures, forward, spot and
option markets. The worst monthly percentage drawdown, on a composite basis,
for the MTech Program during the most recent five calendar years (through
February 1998) was -16.10%
12
<PAGE> 14
in February 1998. The best monthly rate of return, on a composite basis, for
the MTech Program during the most recent five calendar years (through February
1998) was 24.48% in March 1995.
THE COMMODITY BROKERS
The General Partner has responsibility for selecting and monitoring the
Partnership's commodity brokers. The General Partner has selected Refco and
ING Futures & Options to act as the Partnership's futures commission merchants
and ING FX and Refco Capital Markets to act as the Partnership's foreign
exchange dealers.
The Partnership and the Commodity Brokers have entered into non-exclusive
Customer Agreements that provide that the Commodity Brokers may execute some
and will clear all Commodity Interests transactions by or on behalf of the
Partnership in accordance with the instructions provided to the Commodity
Brokers by the Advisors. The Commodity Brokers are responsible for holding and
maintaining certain Partnership assets; executing some and clearing all
Commodity Interests transactions; preparing and transmitting daily
confirmations of transactions and monthly statements of account; calculating
equity balances and margin requirements; and performing similar
transaction-related administrative functions. The Customer Agreements provide
that the Partnership will post margin as required.
REFCO, INC. Refco is an Illinois corporation with a principal place of
business at 111 West Jackson Boulevard, Chicago, Illinois 60604-3593, with a
telephone number of (312) 930-6500. Refco is registered as a futures
commission merchant with the CFTC and is a member of the NFA in such capacity.
As of the date of this Form 10-K, neither Refco nor any of its principals have
been the subject of any administrative, civil, or criminal action, whether
pending, on appeal, or concluded, within the preceding five years that Refco
would deem material for purposes of Part 4 of the Regulations of the CFTC,
except as follows:
On December 20, 1994, Refco settled a CFTC administrative proceeding (In
the Matter of Refco, Inc., CFTC Docket No. 95-2) in which Refco was
alleged to have violated certain financial reporting, recordkeeping and
segregation provisions of the CEAct and CFTC regulations as a result of
some reporting and investment practices of Refco during 1990 and 1991.
Without any hearing on the merits of the CFTC allegations and without
admitting any of the allegations, Refco settled the matter and agreed to
payment of a $1.25 million civil penalty, entry of a cease and desist
order, and appointment of an independent consultant to review Refco's
financial manual.
On January 23, 1996, Refco settled a CFTC administrative proceeding (In
the Matter of Refco, Inc., CFTC Docket No. 96-2) in which Refco was
alleged to have violated certain segregation and supervision requirements
and prior cease and desist orders. The CFTC allegations concerned
Refco's consolidated margining of certain German accounts which were
maintained at Refco from 1989 through April 1992. Refco simply executed
and cleared transactions for these accounts in
13
<PAGE> 15
accordance with client instructions; Refco had no role in raising funds
from investors or in the trading decisions for these accounts. Refco had
received what it considered appropriate authorization from the controlling
shareholder of the accounts' promoters to margin the accounts and transfer
funds between and among the accounts on a consolidated basis. The CFTC
maintained that Refco should not have relied upon such authorizations for
the final consolidation of the accounts. Without admitting any of the CFTC
allegations or findings, Refco settled the proceeding and agreed to payment
of a $925,000 civil penalty, entry of a cease and desist order, and
implementation of certain internal controls and procedures.
ING (U.S.) SECURITIES, FUTURES & OPTIONS INC. ING BARINGS Futures & Options
Clearing Services is a duly registered futures commission merchant and a member
of the National Futures Association. ING BARINGS Futures & Options Clearing
Services is also registered as a broker dealer and a member of the National
Association of Securities Dealers. ING (U.S.) Securities, Futures & Options
Inc. which was formed in 1990, operates under the trade names ING BARINGS
Futures & Options Clearing Services and is a clearing firm of each of the
principal U.S. futures exchanges and the Chicago Board of Options Exchange.
ING BARINGS Futures & Options Clearing Services is a wholly-owned subsidiary
of ING Bank N.V. in Amsterdam, one of the largest financial institutions in the
world. ING BARINGS Futures & Options Clearing Services is an Illinois
corporation with a principal place of business at 233 South Wacker Drive, Suite
5200, Chicago, Illinois 60606 and a telephone number of (312) 496-7000.
At any given time, ING BARINGS Futures & Options Clearing Services may be
involved in legal actions, some of which may seek significant damages. With
the exception of the action noted below, during the five years preceding the
date hereof, there have been no administrative, civil or criminal actions
against ING BARINGS Futures & Options Clearing Services or any of its
principals - whether pending, on appeal or concluded - which is material in
light of all circumstances:
In 1996, two former shareholders filed a demand for arbitration at the
Chicago Board of Trade charging breach of contract and misappropriation
of certain customers and employees. On July 28, 1997, the Arbitrators of
the Chicago Board of Trade found in favor of ING and granted no award in
this matter.
ING-FX. ING Baring Futures & Options (U.K.) Limited ("ING-FX") is regulated by
the Securities and Futures Authority. ING-FX is also a clearing member of
LIFFE, IPE, & LCE and an Associate Broker Clearing Member of the LME. ING-FX,
a wholly owned subsidiary of ING Bank N.V., is a limited company incorporated
in the United Kingdom with its registered and principal office at 75 King
William Street, London, England, EC4N 7EE and a telephone number of
44-171-410-9944.
REFCO CAPITAL MARKETS. Refco Capital Markets Ltd., a wholly owned subsidiary
of The Refco Group Ltd., is organized under the laws of Bermuda. Refco Capital
Markets maintains its
14
<PAGE> 16
principal office at Suite 542, 48 Par-La-Ville Road, Hamilton HM11, Bermuda,
and a telephone number of (441) 295-6960.
ITEM 2. 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, CT 06831-8150.
ITEM 3. 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 assets is subject.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the fourth
quarter of 1997.
15
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
There is no established public trading market for the Units. There were
approximately 902 holders of Units at March 15, 1998. Pursuant to the
Partnership Agreement, distributions of profits, if any, will be made at the
sole discretion of the General Partner. As of March 15, 1998 the General
Partner had not made, and the General Partner does not currently intend to
make, any distributions.
In September 1985, 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, with a
required minimum subscription of $26,250 for new investors other than IRAs and
Plans and $10,500 for IRAs, Plans and existing Limited Partnership, which
amounts include selling commissions of $1,250 and $500, respectively, unless
waived in whole or in part. As subscriber may subscribe for Units in excess of
the foregoing minimum amount in increments of $1000. 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.
During the fourth quarter of 1997, 22.8142 Units were sold for a total of
$310,000.
16
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Partnership has been derived
from the Partnership's financial statements for each of the years 1992 through
1997, which were audited by independent certified public accountants. The
auditor's report of Arthur F. Bell, Jr. & Associates, L.L.C. on the
Partnership's statements of financial position at December 31, 1997 and 1996
and the related statements of operations and changes in partners' capital (net
asset value) for each of the three years in the period ended December 31, 1997
are included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
------- -------- ------- -------- -------
(In thousands, except amounts per Unit)
<S> <C> <C> <C> <C> <C>
Operations Data:
Realized Gains (Losses).............. $9,630 $33,757 $30,855 $19,918 $18,746
Change in Unrealized................. 3,796 (16,236) 3,675 (6,498) 19,469
Interest Income...................... 4,981 5,974 7,735 5,967 2,050
Brokerage Commissions................ 16,884 15,905 17,165 20,007 11,511
Management Fees...................... 2,721 3,317 3,774 4,231 2,326
Incentive Fees....................... 1,417 6,406 7,107 5,900 3,804
General Partner's
Management Fees...................... 0 0 0 786 894
General Partner's
Administrative Fee for
Operating Expenses................... 949 1,233 1,497 1,499 656
Other Expenses....................... 137 228 191 358 135
Net Income (Loss).................... $(3,701) $(3,594) $12,531 $(13,394) $20,939
Net Income (Loss) Per
Unit (Based on
Weighted Average
Number of Units
Outstanding)......................... $(567) $(375) $1,104 $(1,208) $3,738
Increase (Decrease) in Net
Asset Value Per
Unit................................. $(308) $432 $1,068 $(1,429) $4,753
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In thousands, except amounts per Unit)
<S> <C> <C> <C> <C> <C>
Financial Position Data:
General Partner's Capital............. $769 $786 $763 $688 $1,249
Limited Partners' Capital............. 66,626 110,244 153,015 156,450 123,115
Partnership Capital................... 67,395 111,030 153,778 157,138 124,364
Net Asset Value per Unit.............. $14,357 $14,665 $14,233 $13,164 $14,593
</TABLE>
17
<PAGE> 19
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The discussion below and elsewhere in this Form 10-K contains certain
"forward-looking statements" (as such term is defined in Section 21E of the
Securities Exchange Act of 1934) 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 1998 and beyond to differ materially from those expressed in,
or implied by, any such forward-looking statements. These factors include,
without limitation, the factors described below and elsewhere in this Form
10-K.
OVERVIEW
The assets of the Partnership are used to engage, directly or indirectly,
in the speculative trading of Commodity Interests.
The assets of the Partnership are deposited with the Commodity Brokers in
trading accounts established by the Partnership for the Advisors 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.
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 Commodity
Interests in subsequent periods. None of the Partnership's assets are
committed to overhead or operational expenses.
There are three factors that affect the Partnership's capital resources:
(i) the trading profit or loss generated by the Advisors (including interest
income); (ii) the money invested or redeemed by the Limited Partners; and (iii)
the capital invested or redeemed by the General Partner. The General Partner
has maintained, and has agreed to maintain, at all times a capital account in
such 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 interests, 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 interests or Units at their then-current Net Asset Value.
Results of Operations. The Partnership incurs substantial charges from the
payment of management and/or incentive fees to the Advisors and administrative
fees to the General Partner
18
<PAGE> 20
which are payable based upon the Net Asset Value of the Partnership and are
payable without regard to the profitability of the Partnership. The brokerage
commissions to the Commodity Brokers are also payable without regard to the
profitability of the Partnership, although under certain circumstances such
commissions have been, and may continue to be, higher when Advisors experience
profits and as a result increase their trading activity. As a result, in
certain years the Partnership may have incurred a net loss when trading profits
were not substantial enough to avoid depletion of the Partnership's assets from
such fees and expenses. Thus, due to the nature of the Partnership's business,
the success of the Partnership is dependent upon the ability of the Advisors to
generate trading profits through the speculative trading of Commodity Interests
sufficient to produce capital appreciation after payment of all fees and
expenses.
The following paragraphs present a summary of the Partnership's operations
for the calendar years 1995 through 1997 and a general discussion of the
Partnership's trading activities in certain markets during such period. It is
important to note, however, that (i) the Advisors trade 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 and (ii) the Advisors trade independently of each other using
different trading systems and may trade different markets with various
concentrations at various times. Consequently, the results of operations of
the Partnership can only be discussed in the context of the overall trading
activities of the Partnership, the Advisors' trading activities on behalf of
the Partnership as a whole and how the Partnership has performed in the past.
As of December 31, 1997, the Net Asset Value of the Partnership was
$67,394,957, a decrease of approximately 39.30% from its Net Asset Value of
$111,030,275 at December 31, 1996. The Partnership's 1997 subscriptions and
redemptions totaled $1,699,251 and $41,633,972, respectively. For the year
ended December 31, 1997, the Partnership had revenues consisting of $9,630,415
in realized trading gains, $3,796,105 in unrealized trading gains and
$4,981,422 in interest income. For that same year, the Partnership had
expenses consisting of $16,884,257 in brokerage commissions, $2,720,907 in
management fees, $1,417,050 in incentive fees, $949,121 in General Partner's
administrative fees and $137,204 in other expenses. This resulted in the
Partnership having net losses of $3,700,597. The Partnership's trading losses
in 1997 were primarily realized in U.S. stock indices, tropicals, meats and
grains. The Net Asset Value Per Unit at December 31, 1997 decreased 2.10% from
$14,664.91 at December 31, 1996 to $14,356.76 at December 31, 1997.
19
<PAGE> 21
As of December 31, 1996, the Net Asset Value of the Partnership was
$111,030,275, a decrease of $42,747,810 from its Net Asset Value of $153,778,085
at December 31, 1995. The Partnership's 1996 subscriptions and redemptions
totaled $11,587,994 and $50,741,659, respectively. For the year ended December
31, 1996, the Partnership had revenues consisting of $33,757,205 in realized
trading gains, $16,236,226 in unrealized trading losses and $5,974,118 in
interest income. For that same year, the Partnership had expenses consisting of
$15,904,878 in brokerage commissions, $3,317,507 in management fees, $6,405,660
in incentive fees, $1,232,872 in General Partner's administrative fees and
$228,325 in other expenses. This resulted in the Partnership having net losses
in 1996 of $3,594,145. The Partnership's trading losses in 1996 were primarily
realized in tropicals, petroleums, metals, U.S. interest rates and European
stock indices. The Net Asset Value Per Unit at December 31, 1996 increased
3.04% from $14,233 at December 31, 1995 to $14,665 at December 31, 1996.
As of December 31, 1995, the Net Asset Value of the Partnership was
$153,778,085, a decrease of $3,359,938 from its Net Asset Value of $157,138,023
at December 31, 1994. The Partnership's 1995 subscriptions and redemptions
totaled $30,526,165 and $46,416,920 respectively. For the year ended December
31, 1995, the Partnership had revenues consisting of $30,855,057 in realized
trading gains, $3,675,033 in unrealized trading gains and $7,735,524 in
interest income. For that same year, the Partnership had expenses consisting
of $17,165,519 in brokerage commissions, $3,774,200 in management fees,
$7,106,694 in incentive fees, $1,497,246 in General Partner's administrative
fees and $191,138 in other expenses. This resulted in the Partnership having
net gains in 1995 of $12,530,817. The Partnership's trading gains during 1995
were primarily realized in currencies, global interest rates and petroleum.
The Net Asset Value Per Unit at December 31, 1995 increased 8.12% from $13,164
at December 31, 1994 to $14,233 at December 31, 1995.
Past performance is not indicative of future results. As a result, any
recent increases in 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, readers of the Annual Report should examine the Statements of Financial
Condition and Operations for the years discussed above, which are included
herein.
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 occurring
six months or more after such investment was made.
With respect to the Partnership's trading, in general, the Partnership's
Advisors will trade only Commodity Interests that have sufficient liquidity to
enable them 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 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
20
<PAGE> 22
consecutive days, with little or no trading, thereby effectively preventing a
party from liquidating his 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 of the Commodity Investment.
The Partnership's trading may also be impacted by the various conflicts of
interest among the Partnership and the General Partner, the Advisors and the
Commodity Brokers. See "Item 1. Business - Conflicts of Interest".
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Partnership's financial statements, together with the auditor's report
thereon, are included on pages F-1 through F-9 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
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, 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 44, 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 49, 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 45, 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 commodity trading advisor 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
22
<PAGE> 24
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 61, 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.
JOSHUA B. PARKER, ESQ., age 41, has been an Executive Vice President and
the General Counsel of the General Partner since June 1991 and October 1988,
respectively. Mr. Parker has been with Kenmar since October 1988. From
January 1986 through October 1988, Mr. Parker was the general counsel of
Michael Becker & Co., a member firm of the American Stock Exchange. During
that time he was also an independent floor trader, first in association with
Michael Becker & Co. and later in his own firm, Premium Investments. From May
1985 through January 1986, Mr. Parker was the associate general counsel of a
company in the over-the-counter drug and personal care industry. From August
1981 through May 1985, Mr. Parker was associated with the law firm of Baer
Marks & Upham. Mr. Parker is a 1981 graduate of the New York University School
of Law with a J.D. degree and a 1977 graduate of Yale University with a B.A.
degree.
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.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
the General Partner and the directors of the General Partner to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Based solely on a review of the forms it has received and on written
representations from certain reporting persons that no such forms were required
for them, the Company believes that all Section 16(a) filing requirements
applicable to the reporting persons were complied with by them.
23
<PAGE> 25
ITEM 11. EXECUTIVE COMPENSATION
The Partnership has no directors or executive 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 hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND 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 15, 1998, the General Partner owned approximately 53.5807 units of
general partnership interests, representing a 1.21% investment in the
Partnership. The General Partner is indirectly and equally owned by Messrs.
Shewer and Goodman.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The General Partner, Kenmar Advisory Corp., 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 Advisors and its assumption of the substantial financial
burden of paying all the operating and administrative expenses of the
Partnership, the Partnership currently pays the General Partner an
administrative fee. For the year ending December 31, 1997, the General Partner
received $0.00 in management fees and $1,053,694 administrative fees. For the
year ending December 31, 1996, the General Partner received $0 in management
fees and $1,232,872 in administrative fees. For the year ending December 31,
1995, the General Partner received $0 in management fees and $1,497,246
administrative fees. In addition, the General Partner receives from the
Commodity Brokers a portion of the brokerage commissions paid by the
Partnership to the Commodity Brokers.
24
<PAGE> 26
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Form 10-K:
1. The following financial statements of the Partnership, with the
independent auditor's report, are filed as part of this Form 10-K:
Independent Auditor's Report
Statements of Financial Condition as of December 31, 1997
and 1996
Schedule of Securities as of December 31, 1997
Statements of Operations For the Years Ended December 31, 1997,
1996 and 1995
Statements of Changes in Partners' Capital (Net Asset Value) For
the Years Ended December 31, 1997, 1996 and 1995
Notes to Financial Statements
2. All financial schedules are omitted because such schedules are not
required or the information required has been presented in the
aforementioned financial statements.
3. The following exhibits are filed with this Report or incorporated by
reference as set forth below:
<TABLE>
<CAPTION>
Number Exhibit
- ------- -------
<S> <C>
3.1* Certificate of Limited Partnership for Kenmar Performance
Partners L.P.
3.2* Second Restatement of the Limited Partnership Agreement of Kenmar
Performance Partners L.P., as amended.
10.1* Customer Agreement between the Partnership and Refco, Inc.
10.2* Form of Advisory Agreement between the General Partner and
the Advisor.
10.3** Master Agreement between the Partnership and ING Derivatives, Ltd.,
dated as of March 22, 1995.
10.4*** Commodity Customer Agreement between the Partnership and
Internationale Nederlanden (U.S.) Derivatives Clearing, Inc.
</TABLE>
25
<PAGE> 27
<TABLE>
<S> <C>
10.5*** Netting Agreement and Customer Agreement between the Partnership and
Refco Capital Markets Ltd.
27 Financial Data Schedule.
</TABLE>
__________________
* Incorporated herein by reference to the Partnership's Registration
Statement on Form 10, filed with the Securities and Exchange Commission on
April 29, 1994.
** Incorporated herein by reference to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
*** Incorporated herein by reference to the Partnership's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(b) Reports on Form 8-K:
The Partnership did not file any reports on Form 8-K during the
fourth quarter of 1997.
26
<PAGE> 28
ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C.
CERTIFIED PUBLIC ACCOUNTANTS
(410) 821-8000
FAX (410) 321-8359
Member: Heaver Plaza
American Institute of Certified Public Accountants Suite 200
SEC Practice Section 1301 York Road
Maryland Association of Certified Public Accountants Lutherville, Maryland
21093
INDEPENDENT AUDITOR'S REPORT
To the Partners
Kenmar Performance Partners L.P.
We have audited the accompanying statements of financial condition of Kenmar
Performance Partners L.P. as of December 31, 1997 and 1996, including the
December 31, 1997 schedule of securities, and the related statements of
operations and changes in partners' capital (net asset value) for the years
ended December 31, 1997, 1996 and 1995. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kenmar Performance Partners
L.P. as of December 31, 1997 and 1996, and the results of its operations and
the changes in its net asset values for the years ended December 31, 1997, 1996
and 1995, in conformity with generally accepted accounting principles.
[ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C. SIGNATURE]
March 6, 1998
F-1
<PAGE> 29
KENMAR PERFORMANCE PARTNERS L.P.
STATEMENTS OF FINANCIAL CONDITION
December 31, 1997 and 1996
_________
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Equity in broker trading accounts
Cash $ 25,448,177 $ 33,605,676
Net option premiums paid (received) 155,195 (444,673)
Unrealized gain on open contracts 6,236,877 2,685,134
------------ ------------
Deposits with brokers 31,840,249 35,846,137
Cash and cash equivalents 4,756,235 9,047,700
Fixed income securities (cost, including
accrued interest, - $39,579,849 and
$73,923,849) 39,804,349 73,903,987
Subscriptions receivable 0 500,000
Other assets 78,253 0
------------ ------------
Total assets $ 76,479,086 $119,297,824
============ ============
LIABILITIES
Accounts payable $ 41,790 $ 146,270
Commissions and other trading fees
on open contracts 634,814 563,004
Management fees 223,863 286,256
Incentive fees 13,634 3,383,341
Redemptions payable 8,170,028 3,888,678
------------ ------------
Total liabilities 9,084,129 8,267,549
------------ ------------
PARTNERS' CAPITAL (NET ASSET VALUE)
General Partner - 53.5807 units outstanding at
December 31, 1997 and 1996 769,245 785,756
Limited Partners - 4,640.7205 and 7,517.5721 units
outstanding at December 31, 1997 and 1996 66,625,712 110,244,519
------------ ------------
Total partners' capital
(Net Asset Value) 67,394,957 111,030,275
------------ ------------
$ 76,479,086 $119,297,824
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE> 30
KENMAR PERFORMANCE PARTNERS L.P.
SCHEDULE OF SECURITIES
December 31, 1997
_________
FIXED INCOME SECURITIES
<TABLE>
<CAPTION>
Face Value Description Value
- ---------- ----------- ------------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
9,655,000 United States Treasury Notes, 5.625%, 11/30/1999 $ 9,693,669
2,500,000 United States Treasury Notes, 6.375%, 5/15/2000 2,558,192
4,000,000 United States Treasury Notes, 6.00%, 8/15/2000 4,119,412
2,800,000 United States Treasury Notes, 6.25%, 6/30/2002 2,856,035
2,615,000 United States Treasury Notes, 6.00%, 7/31/2002 2,708,038
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $21,835,366) 21,935,346
-----------
FEDERAL AGENCY OBLIGATIONS
2,000,000 Federal Home Loan Bank Debenture, 6.31%, 5/17/1999 2,029,165
2,054,274 Federal Home Loan Mortgage Corporation, 6.00%, 8/1/2000 2,052,589
1,521,882 Federal National Mortgage Association Adjustable Rate
Mortgage, currently 7.391%, 11/1/2018 1,592,132
1,292,568 Federal National Mortgage Association Adjustable Rate
Mortgage, currently 5.503%, 4/1/2027 1,314,654
3,000,019 Federal National Mortgage Association Collateralized Mortgage
Obligation, 7.50%, 12/25/2001 3,090,019
1,996,240 Federal National Mortgage Association Collateralized Mortgage
Obligation, 6.00%, 2/15/2016 2,001,849
1,599,146 Federal National Mortgage Association Collateralized Mortgage
Obligation, 7.00%, 6/25/2007 1,616,471
2,000,000 Federal National Mortgage Association Debenture, 7.12%,
4/19/2002 2,056,920
2,000,000 Student Loan Marketing Association, 7.50%, 3/8/2000 2,115,204
-----------
TOTAL FEDERAL AGENCY OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $17,744,483) 17,869,003
-----------
TOTAL FIXED INCOME SECURITIES
(COST, INCLUDING ACCRUED INTEREST, - $39,579,849) $39,804,349
===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 31
KENMAR PERFORMANCE PARTNERS L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
--------------
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
INCOME
Commodity trading gains (losses)
Realized $ 9,871,120 $ 33,536,073 $30,252,139
Change in unrealized 3,551,743 (15,992,440) 3,424,071
----------- ------------ -----------
Gain from commodity trading 13,422,863 17,543,633 33,676,210
----------- ------------ -----------
Fixed income securities gains (losses)
Realized (240,705) 221,132 602,918
Change in unrealized 244,362 (243,786) 250,962
----------- ------------ -----------
Gain (loss) from fixed income
securities 3,657 (22,654) 853,880
----------- ------------ -----------
Interest income 4,981,422 5,974,118 7,735,524
----------- ------------ -----------
Total income 18,407,942 23,495,097 42,265,614
----------- ------------ -----------
EXPENSES
Brokerage commissions 16,884,257 15,904,878 17,165,519
Management fees 2,720,907 3,317,507 3,774,200
Incentive fees 1,417,050 6,405,660 7,106,694
General Partner administrative fee for
operating expenses 949,121 1,232,872 1,497,246
Cash management service charge 104,573 192,188 145,292
Legal expenses 32,631 36,137 45,846
----------- ------------ -----------
Total expenses 22,108,539 27,089,242 29,734,797
----------- ------------ -----------
NET INCOME (LOSS) $(3,700,597) $ (3,594,145) $12,530,817
=========== ============ ===========
NET INCOME (LOSS) PER UNIT
(based on weighted average number of
units outstanding during the year) $ (566.93) $ (374.52) $ 1,104.32
=========== ============ ===========
INCREASE (DECREASE) IN NET ASSET
VALUE PER UNIT $ (308.15) $ 432.11 $ 1,068.33
=========== ============ ===========
</TABLE>
See accompanying notes.
F-4
<PAGE> 32
KENMAR PERFORMANCE PARTNERS L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE)
For the Years Ended December 31, 1997, 1996 and 1995
________
<TABLE>
<CAPTION>
Partners' Capital
------------------------------------------------------------------------------------
General Limited Total
-------------------- ----------------------------- ---------------------------
Units Amount Units Amount Units Amount
------- -------- ------------ ------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Balances at
December 31, 1994 52.2682 $688,084 11,884.2564 $156,449,939 11,936.5246 $157,138,023
Net income for the year
ended December 31, 1995 58,519 12,472,298 12,530,817
Additions 1.3125 16,000 2,347.5515 30,510,165 2,348.8640 30,526,165
Redemptions 0.0000 0 (3,480.9003) (46,416,920) (3,480.9003) (46,416,920)
------- -------- ----------- ----------- ----------- -----------
Balances at
December 31, 1995 53.5807 762,603 10,750.9076 153,015,482 10,804.4883 153,778,085
Net income (loss) for the year
ended December 31, 1996 23,153 (3,617,298) (3,594,145)
Additions 0.0000 0 881.1030 11,587,994 881.1030 11,587,994
Redemptions 0.0000 0 (4,114.4385) (50,741,659) (4,114.4385) (50,741,659)
------- -------- ----------- ----------- ----------- -----------
Balances at
December 31, 1996 53.5807 785,756 7,517.5721 110,244,519 7,571.1528 111,030,275
Net (loss) for the year
ended December 31, 1997 (16,511) (3,684,086) (3,700,597)
Additions 0.0000 0 120.4929 1,699,251 120.4929 1,699,251
Redemptions 0.0000 0 (2,997.3445) (41,633,972) (2,997.3445) (41,633,972)
------- -------- ----------- ----------- ----------- -----------
Balances at
December 31, 1997 53.5807 $769,245 4,640.7205 $66,625,712 4,694.3012 $67,394,957
======= ======== =========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Net Asset Value Per Unit
------------------------------------
December 31,
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
$14,356.76 $14,664.91 $14,232.80
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 33
KENMAR PERFORMANCE PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS
_________
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General Description of the Partnership
Kenmar Performance Partners L.P. (the Partnership) is a New York
limited partnership. The Partnership is a multi-advisor,
multi-strategy commodity pool which trades in United States (U.S.)
and foreign futures, options, forwards and related markets. It is
subject to the regulations of the Commodity Futures Trading
Commission, an agency of the 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 where the Partnership
executes transactions. Additionally, the Partnership is subject to
the requirements of Futures Commission Merchants (FCMs) and
interbank market makers (collectively, "brokers") through which the
Partnership trades.
The Partnership is a registrant with the Securities and Exchange
Commission pursuant to the Securities Exchange Act of 1934. As a
registrant, the Partnership is subject to the regulation of the
Securities and Exchange Commission.
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, investments in money
market mutual funds and short-term time deposits at financial
institutions. Interest income includes interest equivalent
dividends on money market mutual funds.
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 is recorded on the accrual basis.
F-6
<PAGE> 34
KENMAR PERFORMANCE PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
__________
Note 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
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 General
Partner is required by the Limited Partnership Agreement to maintain
an investment in the Partnership of 1% of the Net Asset Value, up to a
total of $500,000.
A portion of the brokerage commissions paid by the Partnership to
certain brokers is, in turn, paid by the brokers to the General
Partner.
Note 3. COMMODITY TRADING ADVISORS
The Partnership has advisory agreements with various commodity trading
advisors pursuant to which the Partnership pays monthly management
fees of 0% to 1/3 of 1% (4% annually) of the net asset value under
management (as defined in the advisory agreements) and quarterly
incentive fees of 15% to 25% of the profit subject to incentive fee
(as defined in the advisory agreements).
Note 4. DEPOSITS WITH BROKERS
The Partnership deposits cash with brokers subject to Commodity
Futures Trading Commission regulations and various exchange and broker
requirements. Margin requirements are satisfied by the deposit of
cash with such brokers. The Partnership earns interest income on its
cash deposited with the brokers.
F-7
<PAGE> 35
KENMAR PERFORMANCE PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
_________
Note 5. OTHER EXPENSES
The General Partner pays substantially all ordinary operating and
administrative expenses incurred by the Partnership. The Partnership
pays the General Partner a monthly administrative fee equal to 1/12 of
1% of the prior month's beginning Net Asset Value of the Partnership.
The Partnership also pays actual amounts incurred for cash management
services and services performed by independent legal counsel.
Note 6. 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 waived in whole or in part by the General
Partner. Additions to partners' capital are shown net of such selling
commissions, which amounted to $14,991, $37,702 and $174,431 in 1997,
1996 and 1995, 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 7. TRADING ACTIVITIES AND RELATED RISKS
The Partnership engages in the speculative trading of U.S. and foreign
futures contracts, options on U.S. and foreign futures contracts and
forward contracts (collectively, "derivatives"). These derivatives
include both financial and non-financial contracts held as part of a
diversified trading strategy. The Partnership is exposed to both
market risk, the risk arising from changes in the market value of the
contracts, and credit risk, the risk of failure by another party to
perform according to the terms of a contract.
Purchase and sale of futures and options on futures contracts requires
margin deposits with the FCMs. Additional deposits may be necessary
for any loss on contract value. The Commodity Exchange Act requires
an FCM to segregate all customer transactions and assets from such
FCM's proprietary activities. A customer's cash and other property
(for example, U.S. Treasury bills) deposited with an FCM are
considered commingled with all other customer funds subject to the
FCM's segregation requirements. In the event of an FCM's insolvency,
recovery may be limited to a pro rata share of segregated funds
available. It is possible that the recovered amount could be less
than 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 requires collateral for repurchase
agreements in excess of the face value of such agreements.
F-8
<PAGE> 36
KENMAR PERFORMANCE PARTNERS L.P.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
________________
Note 7. TRADING ACTIVITIES AND RELATED RISKS (CONTINUED)
For derivatives, risks arise from changes in the market value of the
contracts. Theoretically, the Partnership is exposed to a market risk
equal to the value of futures contracts purchased and unlimited
liability on such contracts sold short. As both a buyer and seller of
options, the Partnership pays or receives a premium at the outset and
then bears the risk of unfavorable changes in the price of the
contract underlying the option. Written options expose the
Partnership to potentially unlimited liability, and purchased options
expose the Partnership to a risk of loss limited to the premiums paid.
The fair value of derivatives represents unrealized gains and losses
on open futures and forward contracts and long and short options at
market value. The average fair value of derivatives during 1997, 1996
and 1995 was approximately $6,240,000, $9,700,000 and $12,240,000,
respectively, and the related fair values as of December 31, 1997 and
1996 are approximately $6,392,000 and $2,240,000, respectively.
Net trading results from derivatives for the years ended December 31,
1997, 1996 and 1995 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, options on
futures contracts and forward contracts.
At December 31, 1997 and 1996, the notional amount of open contracts
is as follows:
<TABLE>
1997 1996
---- ----
Contracts to Contracts to Contracts to Contracts to
Purchase Sell Purchase Sell
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Derivatives (excluding
purchased options) $1,490,800,000 $756,300,000 $1,805,000,000 $671,800,000
Purchased options 23,900,000 59,600,000 41,600,000 5,800,000
</TABLE>
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 and
minimize market and 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-9
<PAGE> 37
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized, on the 28th day of
March, 1998.
KENMAR PERFORMANCE PARTNERS L.P.
By:Kenmar Advisory Corp., general partner
By: /s/ KENNETH A. SHEWER
-----------------------
Kenneth A. Shewer
Chairman
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on the 28th day of March, 1998.
KENMAR PERFORMANCE PARTNERS L.P.
By:Kenmar Advisory Corp., general partner
By: /s/ KENNETH A. SHEWER
----------------------------------
Kenneth A. Shewer
Chairman and Director
(Principal Executive Officer)
By: /s/ MARC S. GOODMAN
----------------------------------
Marc S. Goodman
President and Director
By: /s/ THOMAS J. DIVUOLO
---------------------------------
Thomas J. DiVuolo
Senior Vice President
(Principal Financial and Accounting Officer
for the Partnership)
<PAGE> 38
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
<S> <C>
27 Financial Data Schedule.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 4,756,235
<SECURITIES> 39,804,349
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 76,479,086
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 76,479,086
<CURRENT-LIABILITIES> 9,084,129
<BONDS> 0
<COMMON> 0
0
0
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 76,479,086
<SALES> 0
<TOTAL-REVENUES> 18,407,942
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,108,539
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (3,700,597)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,700,597)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,700,597)
<EPS-PRIMARY> (566.93)
<EPS-DILUTED> (566.93)
</TABLE>
