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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, 1998
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.
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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
1999 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, 1999, 23,670.213 Units have been
sold for a total of $263,203,991. "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 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
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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, 1999) and provides the Partnership
with the services of research, 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.
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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,
1999.
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 a monthly
management fee ranging from 0.00% 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 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, and Refco Capital Markets retains no more than $5.75 per roundturn
transaction. 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 1998 were approximately $22,000.
Extraordinary Expenses. The Partnership is responsible for all
extraordinary expenses (e.g., 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 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.
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<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Brokerage Commissions $12,437 $16,884 $15,905 $17,165 $20,007
Management Fees 2,320 2,721 3,317 3,774 4,231
Incentive Fees 6,600 1,417 6,406 7,107 5,900
General Partner's Management Fees 0 0 0 0 786
General Partner's Administrative
Fee for Operating Expenses 646 949 1,233 1,497 1,499
Other Expenses 100 137 228 191 358
</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 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. Since at least some of the Advisors are
trading and will
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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 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 are required
to 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, a Limited
Partner may seek legal relief for such Limited Partner 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.
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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 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 may
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 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, making it 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 may 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
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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, 1999, which differs
in part from the portfolio of Advisors in 1998.
Computer Trading Corporation. The sole principal of Computer Trading Corporation
("CTC") is Peter Borish. CTC employs a fully computerized, "expert" trading
system. The approach is comprised of four independent trading systems: a
trend-following system designed to capitalize on long-term price trends; a
pattern recognition system which attempts to identify range consolidation or
expansion situations in the marketplace; a second pattern recognition system
designed to identify market support and resistance levels; and a final system
which attempts to identify trendlines and speedlines. Weightings between the
four systems are examined monthly with assets reallocated based on the previous
five-year performance profile of each system. The portfolio is diversified
throughout the U.S. and non-U.S. marketplace; however, all markets are not
traded across all systems. The multiple systems traded and portfolio
diversification serves to control risk of the overall portfolio. The worst
monthly percentage drawdown, on a composite basis, for CTC from the inception of
the program in December 1995 through February 1999 was -10.87% in April 1998.
The best monthly rate of return, on a composite basis, for CTC from December
1995 through February 1999 was 31.81% in August 1998.
Crabel Capital Management, L.L.C. The sole principal of Crabel Capital
Management, L.L.C. ("Crabel") is Toby Crabel. Crabel employs a multi-system,
countertrend and momentum-based approach designed to profit on the markets'
shortest-term price patterns. Signals are exclusively based off analyses of
intra- and inter-day price data. Crabel will use different systems in each
individual market based on the market's liquidity, historical profitability and
volatility. In all cases, however, the countertrend and momentum strategies are
given equal weightings; there is no bias given to any approach. All trades are
accompanied by profit and time stops with profit stops based on a percent of the
daily average price range. Currently the portfolio is weighted equally between
global interest rates, currencies, global stock indices and traditional
commodity markets. The worst monthly percentage drawdown, on a composite basis,
for Crabel during the most recent five calendar years (through February 1999)
was -2.6% in July 1995. The best monthly rate of return, on a composite basis,
for Crabel during the most recent five calendar years (through February 1999)
was 9.4% in September 1998.
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 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 1999 was -15.6% in
August 1994. The best monthly rate of return, on a composite basis, for DTG from
May 1994 through February 1999 was 45.90% in September 1997.
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, 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
7
<PAGE> 9
percentage drawdown, on a composite basis, for HB & Co.'s Short-Term Portfolio
since its inception in April 1996 through February 1999 was -9.34 in April 1998.
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 1999 was 8.84% in
October 1996.
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 managed by monitoring market volatility, as
well as through defensive option strategies designed to limit potential losses.
The worst monthly percentage drawdown, on a composite basis, for Sheridan during
the most recent five calendar years (through February 1999) was -1.49% in
October 1998. The best monthly rate of return, on a composite basis, for
Sheridan during the most recent five calendar years (through February 1999) was
0.50% in November 1997.
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 1999) was -17.43% in April 1998. The best
monthly rate of return, on a composite basis, for the XLIM Program during the
most recent five calendar years (through February 1999) was 31.21% 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
Refco Capital Markets to act as the Partnership's foreign exchange dealer.
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 and 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.
According to Refco, as of December 31, 1998, 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
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
8
<PAGE> 10
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 is 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 name 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.
According to ING BARINGS Futures and Options Clearing Services, 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 1998, a former client filed a demand for arbitration at the National
Futures Association seeking a significant award. It is alleged that the
claimants' liquidation of positions on a foreign futures exchange in
the volatile period of October 1997 resulted in losses. ING BARINGS
Futures & Options Clearing Services is vigorously defending the claim,
which it believes to be baseless.
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 principal office at Suite 542, 48 Par-La-Ville Road,
Hamilton HM11, Bermuda, and has a telephone number of (441) 295-6960.
9
<PAGE> 11
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
Neither the Partnership nor the General Partner is a party to any
material pending legal proceedings.
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 1998.
10
<PAGE> 12
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 774 holders of Units at March 15, 1999. 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, 1999 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 Partners, which
amounts include selling commissions of $1,250 and $500, respectively, unless
waived in whole or in part. A 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 1998, 34.9581 Units were sold for a total
of $601,986.
11
<PAGE> 13
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 1994
through 1998, 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, 1998 and 1997 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, 1998 are
included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT AMOUNTS PER UNIT)
<S> <C> <C> <C> <C> <C>
Operations Data:
Realized Gains (Losses) $33,752 $ 9,630 $ 33,757 $ 30,855 $ 19,918
Change in Unrealized (3,744) 3,796 (16,236) 3,675 (6,498)
Interest Income 3,618 4,981 5,974 7,735 5,967
Brokerage Commissions 12,437 16,884 15,905 17,165 20,007
Management Fees 2,320 2,721 3,317 3,774 4,231
Incentive Fees 6,600 1,417 6,406 7,107 5,900
General Partner's Management Fees 0 0 0 0 786
General Partner's Administrative Fee for
Operating Expenses 646 949 1,233 1,497 1,499
Other Expenses 100 137 228 191 358
Net Income (Loss) $11,523 $(3,701) $ (3,594) $ 12,531 $(13,394)
Net Income (Loss) Per Unit (Based on
Weighted Average Number of Units Outstanding) $ 2,735 $ (567) $ (375) $ 1,104 $ (1,208)
Increase (Decrease) in Net Asset Value Per Unit $ 2,711 $ (308) $ 432 $ 1,068 $ (1,429)
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT AMOUNTS PER UNIT)
<S> <C> <C> <C> <C>
Financial Position Data:
General Partner's Capital $ 914 $ 769 $ 786 $ 763 $ 688
Limited Partners' Capital 64,362 66,626 110,244 153,015 156,450
Partnership Capital 65,276 67,395 111,030 153,778 157,138
Net Asset Value per Unit $17,068 $14,357 $ 14,665 $ 14,233 $ 13,164
</TABLE>
12
<PAGE> 14
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
1999 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 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 1996 through 1998 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, 1998, the Net Asset Value of the Partnership was
$65,276,130, a decrease of approximately 3.14% from its Net Asset Value of
$67,394,957 at December 31, 1997. The Partnership's 1998 subscriptions and
redemptions totaled $1,335,740 and $14,977,792, respectively. For the year ended
December 31, 1998, the Partnership had revenues consisting of $33,752,690 in
realized gains, $3,743,870 in unrealized losses and $3,618,242 in interest
income. For that same year, the Partnership had expenses consisting of
$12,437,404 in brokerage commissions, $2,320,273 in management fees, $6,599,903
in incentive fees, $646,232 in General Partner's administrative fees and
$100,025 in other expenses. This resulted in the Partnership having net income
of $11,523,225. The Partnership's trading gains in 1998 were primarily realized
in global interest rates and global stock indices. The Net Asset Value Per Unit
at December 31, 1998 increased 18.88% from $14,356.76 at December 31, 1997 to
$17,067.65 at December 31, 1998.
13
<PAGE> 15
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.
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.
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 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTRODUCTION
Past Performance Not Necessarily Indicative of Future Results. The
Partnership is a speculative commodity pool. The market sensitive instruments
held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
14
<PAGE> 16
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projects, the inclusion of the quantification included
in this Item 7A should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Standard of Materiality. Materiality as used in this Item 7A, is based
on an assessment of reasonably possible market movements and the potential
losses caused by such movements, taking into account the leverage, optionality
and multiplier features of the Partnership's market sensitive instruments.
QUANTIFYING THE PARTNERSHIP'S TRADING VALUE AT RISK
Quantitative Forward-Looking Statements. The following quantitative
disclosures regarding the Partnership's market risk exposures contain
"forward-looking statements" within the meaning of the safe harbor from civil
liability provided for such statements by the Private Securities Litigation
Reform Act of 1995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). All quantitative
disclosures in this section are deemed to be forward-looking statements for
purposes of the safe harbor, except for statements of historical fact (such as
the terms of particular contracts and the number of market risk sensitive
instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized) and cash flow (at least in the case of exchange-traded
contracts in which profits and losses on open positions are settled daily
through variation margin).
Exchange maintenance margin requirements have been used by the
Partnership as the measure of its Value at Risk. Maintenance margin requirements
are set by exchanges to equal or exceed the maximum losses reasonably expected
to be incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been aggregated to determine each trading category's
aggregate Value at Risk. The diversification effects resulting from the fact
that the Partnership's positions are rarely, if ever, 100% positively correlated
have not been reflected.
15
<PAGE> 17
THE PARTNERSHIP'S TRADING VALUE AT RISK IN DIFFERENT MARKET SECTORS
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of December 31, 1998. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1998, the
Partnership's total capitalization was approximately $65 million.
December 31, 1998
-----------------
% of Total
Market Sector Value at Risk Capitalization
- ------------- ------------- --------------
Interest Rates $ 6,900,000 10.6%
Currencies 2,300,000 3.5%
Stock Indices 2,000,000 3.1%
Metals 700,000 1.1%
Commodities 1,700,000 2.6%
Energy 700,000 1.1%
------------ ------
Total $ 14,300,000 22.0%
MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK
The face value of the market sector instruments held by the Partnership
is typically many times the applicable maintenance margin requirement
(maintenance margin requirements generally ranging between approximately 1% and
10% of contract face value), as well as many times the capitalization of the
Partnership. The magnitude of the Partnership's open positions creates a "risk
of ruin" not typically found in most other investment vehicles. Because of the
size of its positions, certain market conditions--unusual, but historically
recurring from time to time--could cause the Partnership to incur severe losses
over a short period of time. The foregoing Value at Risk table--as well as the
past performance of the Partnership--give no indication of this "risk of ruin".
NON-TRADING RISK
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. However, these balances (as well as the market
risk they represent) are immaterial.
As of December 31, 1998, the Partnership held the following
fixed-income securities in its portfolio:
<TABLE>
<CAPTION>
Face Value Description Value
---------- ----------- -----
U.S. GOVERNMENT OBLIGATIONS
---------------------------
<S> <C> <C>
$17,500,000 United States Treasury Notes, 4.625%, 11/30/2000 $17,585,854
3,900,000 United States Treasury Notes, 6.375%, 3/31/2001 4,107,666
615,000 United States Treasury Notes, 6.625%, 3/31/2002 660,600
2,000,000 United States Treasury Notes, 6.25%, 6/30/2002 2,099,306
-------------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $24,459,608) 24,453,426
------------
FEDERAL AGENCY OBLIGATIONS
--------------------------
2,000,000 Federal Home Loan Bank Bond, 6.31%, 5/17/1999 2,024,164
5,100,000 Federal Home Loan Mortgage Corporation, 5.75%, 7/15/2003 5,385,293
1,411,177 Federal Home Loan Mortgage Corporation Gold 7-Year Balloon,
</TABLE>
16
<PAGE> 18
<TABLE>
<S> <C> <C>
6.00%, 8/1/2000 1,419,531
1,227,571 Federal National Mortgage Association Adjustable Rate Mortgage,
currently 6.827%, 11/1/2018 1,270,872
1,015,000 Federal National Mortgage Association Bond, 6.375%, 1/16/2002 1,081,705
2,000,000 Federal National Mortgage Association Bond, 7.12%, 4/19/2002 2,041,380
858,774 Federal National Mortgage Association Collateralized Mortgage
Obligation, 6.00%, 2/15/2016 862,295
1,000,000 Federal National Mortgage Association, 6.50%, 1/1/2013 1,014,380
1,000,000 Federal National Mortgage Association, 6.50%, 1/1/2028 1,005,160
1,000,000 Federal National Mortgage Association, 7.50%, 1/1/2028 1,027,340
1,000,000 Federal National Mortgage Association, 8.00%, 1/1/2028 1,033,520
2,000,000 Student Loan Marketing Association, 7.50%, 3/8/2000 2,103,603
-------------
TOTAL FEDERAL AGENCY OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $20,228,848) 20,269,243
------------
TOTAL FIXED INCOME SECURITIES
(COST, INCLUDING ACCRUED INTEREST, - $44,688,456) $44,722,669
============
</TABLE>
17
<PAGE> 19
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
The following qualitative disclosures regarding the Partnership's
market risk exposures--except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
primary market risk exposures--constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk
controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price
relationships, an influx of new market participants, increased regulation and
many other factors could result in material losses as well as in material
changes to the risk exposures and the risk management strategies of the
Partnership. There can be no assurance that the Partnership's current market
exposure and/or risk management strategies will not change materially, that any
such strategies will be effective in either the short- or long-term, or that
investors will not lose all or substantially all of their investment in the
Partnership.
The following were the primary trading risk exposures of the
Partnership as of December 31, 1998, by market sector.
INTEREST RATES. Interest rate risk is the principal market exposure of
the Partnership. Interest rate movements directly affect the price of the
sovereign bond positions held by the Partnership and indirectly the value of its
stock index and currency positions. Interest rate movements in one country, as
well as relative interest rate movements between countries, materially impact
the Partnership's profitability. The Partnership's primary interest rate
exposure is to interest rate fluctuations in the United Stated and the other G-7
countries. However, the Partnership also takes positions in the government debt
of smaller nations--e.g., New Zealand and Australia. The General Partner
anticipates that G-7 interest rates will remain the primary market exposure of
the Partnership for the foreseeable future.
CURRENCIES. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes, as well as political and
general economic conditions. The Partnership trades in a large number of
currencies, including cross-rates--i.e., positions between two currencies other
than the U.S. dollar. The General Partner does not anticipate that the risk
profile of the Partnership's currency sector will change significantly in the
future, although it is difficult at this point to predict the effect of the
introduction of the Euro on the Advisors' currency trading strategies.
STOCK INDICES. The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by the
Partnership are by law limited to futures on broadly based indices. As of
December 31, 1998, the Partnership's primary exposures were in the S&P 500 and
the Financial Times (England) stock indices. The General Partner anticipates
little, if any, trading in non G-7 stock indices. The Partnership is primarily
exposed to the risk of adverse price trends or static markets in the major U.S.,
European and Japanese indices.
METALS. The Partnership's primary metals market exposure is to
fluctuations in the price of gold and silver. Although certain of the Advisors
will from time to time trade base metals such as aluminum, copper and tin, the
principal market exposures of the Partnership have consistently been in the
precious metals, gold and silver (and, to a much less extent, platinum). The
General Partner anticipates that gold and silver will remain the primary metals
market exposure for the Partnership.
18
<PAGE> 20
COMMODITIES. The Partnership's primary commodities exposure is to
agricultural price movements, which are often directly affected by severe or
unexpected weather conditions. Wheat, corn, soybean oil and sugar accounted for
the substantial bulk of the Partnership's commodities exposure as of December
31, 1998. The General Partner anticipates that the Advisors will maintain an
emphasis on grains and tropicals, in which the Partnership has historically
taken its largest positions.
ENERGY. The Partnership's primary energy market exposure is to gas and
oil price movements, often resulting from political developments in the Middle
East. Natural gas, unleaded gas and crude oil accounted for the substantial
bulk of the Partnership's energy exposure as of December 31, 1998.
QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE
The following were the only non-trading risk exposures of the
Partnership as of December 31, 1998.
FOREIGN CURRENCY BALANCES. The Partnership's primary foreign currency
balances are in Japanese yen, Canadian dollars, Australian dollars, British
pounds and Swiss francs. The Partnership controls the non-trading risk of these
balances by regularly converting these balances back into dollars.
SECURITIES POSITIONS. The Partnership's only market exposure in
instruments held other than for trading is in its securities portfolio. The
Partnership holds only cash, interest-bearing money-market accounts, short-term
Treasury bills and intermediate Treasury and Agency securities with durations
generally less than 3 years. Violent fluctuations in prevailing interest rates
could cause interim mark-to-market losses on the Partnership's securities,
although substantially all of these instruments are held to maturity.
QUALITATIVE DISCLOSURES REGARDING MEANS OF MANAGING RISK EXPOSURE
The means by which the Partnership and the Advisors, severally, attempt
to manage the risk of the Partnership's open positions is essentially the same
in all market categories traded. At the Partnership-wide level, the General
Partner attempts to manage market exposure by (i) diversifying the Partnership's
assets among different Advisors whose strategies focus on different market
sectors and trading approaches, and (ii) monitoring the Partnership's actual
market exposures on a daily basis. At the Advisor level, each Advisor applies
its own risk management policies to its trading. These policies generally limit
the total exposure that may be taken per "risk unit" of assets under management.
In addition, many Advisors follow diversification guidelines (often formulated
in terms of the maximum margin which they will commit to positions in any one
contract or group of related contracts), as well as imposing "stop-loss" points
at which open positions must be closed out. Occasionally, Advisors will limit
the market exposure of their Partnership account through acquiring put or call
options which "collar" the risk of open positions. However, because of the
typically high degree of liquidity in the markets traded by the Partnership and
the expense of acquiring options, most Advisors rely simply on stop-loss
policies, requiring the liquidation of positions once losses of a certain
magnitude have been incurred.
Certain Advisors treat their risk control policies as strict rules;
others only as general guidelines for controlling risk.
The General Partner controls the risk of the Partnership's non-trading
instruments (interest-bearing securities held for cash management purposes)--the
only Partnership investments, as opposed to Advisor selections, directed by the
General Partner--limiting the duration of such instruments to no more than one
year.
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.
19
<PAGE> 21
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE> 22
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 45, has been the Chairman and a director of
the General Partner since September 1983. Mr. Shewer was employed by Pasternak,
Baum and Co., Inc. ("Pasternak, Baum"), an international cash commodity firm,
from June 1976 until September 1983. Mr. Shewer left Pasternak, Baum in
September 1983 to form Kenmar Advisory Corp. with Mr. Goodman. Mr. Shewer
created and managed Pasternak, Baum's Grain Logistics and Administration
Department and created its Domestic Corn and Soybean Trading Department. In
1982, Mr. Shewer became co-manager of Pasternak, Baum's F.O.B. Corn Department.
In 1983, Mr. Shewer was made Vice President and Director of Pasternak, Baum. Mr.
Shewer graduated from Syracuse University with a B.S. degree in 1975.
MR. MARC S. GOODMAN, age 50, has been the President and a director of
the General Partner since September 1983. Mr. Goodman joined Pasternak, Baum in
September 1974 and was a Vice President and Director from July 1981 until
September 1983. Mr. Goodman left Pasternak, Baum in September 1983 to form
Kenmar Advisory Corp. with Mr. Shewer. While at Pasternak, Baum, Mr. Goodman was
largely responsible for business development outside of the United States, for
investment of its corporate retirement funds and for selecting trading
personnel. Mr. Goodman has conducted extensive business in South America, Europe
and the Far East. Mr. Goodman was awarded an Economics and Finance Department
Fellowship from September 1969 through June 1971. Mr. Goodman graduated from the
Bernard M. Baruch School of Business of the City University of New York with a
B.B.A. in 1969 and an M.B.A. in 1971 in Finance and Investments.
MS. ESTHER ECKERLING GOODMAN, age 46, has been the Senior Executive
Vice President of the General Partner since March 1991 and has also served as
Chief Operating Officer of the General Partner since October 1995. Ms. Goodman
joined Kenmar in July 1986 and has been involved in the futures industry since
1974. From 1974 through 1976, she was employed by Conti-Commodity Services, Inc.
and ACLI Commodity Services, Inc., in the areas of hedging, speculative trading
and tax arbitrage. In 1976, Ms. Goodman joined Loeb Rhoades and Company, Inc.,
where she was responsible for the development and management of a managed
futures program which, in 1979, became the trading system for an independent
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
1970-1972 and graduated from Stanford University in 1974 with a B.A. degree. Ms.
Goodman is married to Mr. Marc S. Goodman.
MR. ROBERT L. CRUIKSHANK, age 62, joined the General Partner as its
Executive Vice President in March 1991. Mr. Cruikshank spent 20 years
(1958-1978) at Blyth Eastman Dillon in New York and was its Executive Vice
President in charge of the Securities Division, which included all domestic and
international sales and branch office activities, all trading departments and
the research areas. In 1979, Mr. Cruikshank jointly formed Neild, Cruikshank &
Co., an independent market-maker on the Chicago Board of Options Exchange
("CBOE"), where he remained until 1984, when he formed his own market making
firm, Nassau Corporation. From 1982 to 1984 Mr. Cruikshank also served as
Director and Vice Chairman of the Board of the CBOE, during which time he was
instrumental in the development of the S&P 100 (OEX) option contract. From 1985,
when he left Nassau Corporation, until March 1991, he served as President and
CEO of First Capital Financial Corporation, a national real estate syndication
firm owned by Sam Zell. Mr. Cruikshank graduated cum laude from Princeton
University with a B.A. degree in economics in 1958.
Each director of the General Partner serves until the next annual
meeting of stockholders or until a successor is elected. Executive officers of
the General Partner are appointed annually and serve at the discretion of its
Board of Directors. Messrs. Shewer and Goodman hold directorships in various
affiliates of the General Partner.
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.
ITEM 11. EXECUTIVE COMPENSATION
21
<PAGE> 23
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, 1999, the General Partner owned approximately 53.5807 units of general
partnership interests, representing a 1.40% 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, 1998, the General Partner received $0 in management
fees and $646,232 in administrative fees. For the year ending December 31, 1997,
the General Partner received $0 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. In
addition, the General Partner receives from the Commodity Brokers a portion of
the brokerage commissions paid by the Partnership to the Commodity Brokers.
22
<PAGE> 24
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, 1998 and 1997
Schedule of Securities as of December 31, 1998
Statements of Operations For the Years Ended December 31, 1998,
1997 and 1996
Statements of Changes in Partners' Capital (Net Asset Value) For
the Years Ended December 31, 1998, 1997 and 1996
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:
NUMBER EXHIBIT
- ------ -------
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.
10.5*** Netting Agreement and Customer Agreement between the Partnership
and Refco Capital Markets Ltd.
27 Financial Data Schedule.
_______________
* 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 1998.
23
<PAGE> 25
[ARTHUR F. BELL, JR. & ASSOCIATES, L.L.C. LETTERHEAD]
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, 1998 and 1997, including the
December 31, 1998 schedule of securities, and the related statements of
operations and changes in partners' capital (net asset value) for the years
ended December 31, 1998, 1997 and 1996. These financial statements are the
responsibility of the Partnership's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. Our procedures included
confirmation of securities owned as of December 31, 1998 and 1997, by
correspondence with brokers. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kenmar Performance Partners
L.P. as of December 31, 1998 and 1997, and the results of its operations and the
changes in its net asset values for the years ended December 31, 1998, 1997 and
1996, in conformity with generally accepted accounting principles.
/s/ Arthur F. Bell, Jr. & Associates, L.L.C.
Hunt Valley, Maryland
March 1, 1999
F-1
<PAGE> 26
KENMAR PERFORMANCE PARTNERS L.P.
STATEMENTS OF FINANCIAL CONDITION
December 31, 1998 and 1997
---------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Equity in broker trading accounts
Cash $15,308,018 $25,448,177
Net option premiums paid (received) (903,236) 155,195
Unrealized gain on open contracts 2,683,294 6,236,877
----------- -----------
Deposits with brokers 17,088,076 31,840,249
Cash and cash equivalents 5,150,036 4,756,235
Fixed income securities (cost, including
accrued interest, - $44,688,456 and
$39,579,849) 44,722,669 39,804,349
Other assets 0 78,253
----------- -----------
Total assets $66,960,781 $76,479,086
=========== ===========
LIABILITIES
Accounts payable $ 55,082 $ 41,790
Commissions and other trading fees
on open contracts 433,602 634,814
Management fees 199,471 223,863
Incentive fees 537,584 13,634
Redemptions payable 458,912 8,170,028
----------- -----------
Total liabilities 1,684,651 9,084,129
----------- -----------
PARTNERS' CAPITAL (Net Asset Value)
General Partner - 53.5807 units outstanding at
December 31, 1998 and 1997 914,497 769,245
Limited Partners - 3,770.9723 and 4,640.7205 units
outstanding at December 31, 1998 and 1997 64,361,633 66,625,712
----------- -----------
Total partners' capital
(Net Asset Value) 65,276,130 67,394,957
----------- -----------
$66,960,781 $76,479,086
=========== ===========
</TABLE>
See accompanying notes.
F-2
<PAGE> 27
KENMAR PERFORMANCE PARTNERS L.P.
SCHEDULE OF SECURITIES
December 31, 1998
-------------
FIXED INCOME SECURITIES
<TABLE>
<CAPTION>
Face Value Description Value
---------- ----------- -----
U.S. Government Obligations
---------------------------
<S> <C> <C>
17,500,000 United States Treasury Notes, 4.625%, 11/30/2000 $17,585,854
3,900,000 United States Treasury Notes, 6.375%, 3/31/2001 4,107,666
615,000 United States Treasury Notes, 6.625%, 3/31/2002 660,600
2,000,000 United States Treasury Notes, 6.25%, 6/30/2002 2,099,306
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $24,459,608) 24,453,426
-----------
FEDERAL AGENCY OBLIGATIONS
--------------------------
2,000,000 Federal Home Loan Bank Bond, 6.31%, 5/17/1999 2,024,164
5,100,000 Federal Home Loan Mortgage Corporation, 5.75%, 7/15/2003 5,385,293
1,411,177 Federal Home Loan Mortgage Corporation Gold 7-Year Balloon,
6.00%, 8/1/2000 1,419,531
1,227,571 Federal National Mortgage Association Adjustable Rate Mortgage,
currently 6.827%, 11/1/2018 1,270,872
1,015,000 Federal National Mortgage Association Bond, 6.375%, 1/16/2002 1,081,705
2,000,000 Federal National Mortgage Association Bond, 7.12%, 4/19/2002 2,041,380
858,774 Federal National Mortgage Association Collateralized Mortgage
Obligation, 6.00%, 2/15/2016 862,295
1,000,000 Federal National Mortgage Association, 6.50%, 1/1/2013 1,014,380
1,000,000 Federal National Mortgage Association, 6.50%, 1/1/2028 1,005,160
1,000,000 Federal National Mortgage Association, 7.50%, 1/1/2028 1,027,340
1,000,000 Federal National Mortgage Association, 8.00%, 1/1/2028 1,033,520
2,000,000 Student Loan Marketing Association, 7.50%, 3/8/2000 2,103,603
-----------
TOTAL FEDERAL AGENCY OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $20,228,848) 20,269,243
-----------
TOTAL FIXED INCOME SECURITIES
(COST, INCLUDING ACCRUED INTEREST, - $44,688,456) $44,722,669
===========
</TABLE>
See accompanying notes.
F-3
<PAGE> 28
KENMAR PERFORMANCE PARTNERS L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1998, 1997 and 1996
-------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
INCOME
Commodity trading gains (losses)
Realized $ 33,490,318 $ 9,871,120 $ 33,536,073
Change in unrealized (3,553,583) 3,551,743 (15,992,440)
------------ ------------- -------------
Gain from commodity trading 29,936,735 13,422,863 17,543,633
------------ ------------- -------------
Fixed income securities gains (losses)
Realized 262,372 (240,705) 221,132
Change in unrealized (190,287) 244,362 (243,786)
------------ ------------- -------------
Gain (loss) from fixed income
securities 72,085 3,657 (22,654)
------------ ------------- -------------
Interest income 3,618,242 4,981,422 5,974,118
------------ ------------- -------------
Total income 33,627,062 18,407,942 23,495,097
------------ ------------- -------------
EXPENSES
Brokerage commissions 12,437,404 16,884,257 15,904,878
Management fees 2,320,273 2,720,907 3,317,507
Incentive fees 6,599,903 1,417,050 6,405,660
General Partner administrative fee for
operating expenses 646,232 949,121 1,232,872
Cash management service charge 77,793 104,573 192,188
Legal expenses 22,232 32,631 36,137
------------ ------------- -------------
Total expenses 22,103,837 22,108,539 27,089,242
------------ ------------- -------------
NET INCOME (LOSS) $ 11,523,225 $ (3,700,597) $ (3,594,145)
============ ============= =============
NET INCOME (LOSS) PER UNIT
(based on weighted average number of
units outstanding during the year) $ 2,734.83 $ (566.93) $ (374.52)
============ ============= =============
INCREASE (DECREASE) IN NET ASSET
VALUE PER UNIT $ 2,710.89 $ (308.15) $ 432.11
============ ============= =============
</TABLE>
See accompanying notes.
F-4
<PAGE> 29
KENMAR PERFORMANCE PARTNERS L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE)
For the Years Ended December 31, 1998, 1997 and 1996
-------------
<TABLE>
<CAPTION>
Partners' Capital
-------------------------------------------------------------------------------------
General Limited Total
---------------------- ---------------------------- ----------------------------
Units Amount Units Amount Units Amount
------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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
Net income for the year
ended December 31, 1998 145,252 11,377,973 11,523,225
Additions 0.0000 0 82.5487 1,335,740 82.5487 1,335,740
Redemptions 0.0000 0 (952.2969) (14,977,792) (952.2969) (14,977,792)
------- ----------- ----------- ------------- ----------- -------------
Balances at
December 31, 1998 53.5807 $ 914,497 3,770.9723 $ 64,361,633 3,824.5530 $ 65,276,130
======= =========== =========== ============= =========== =============
<CAPTION>
Net Asset Value Per Unit
--------------------------------------------------
December 31,
1998 1997 1996
---- ---- ----
<S> <C> <C>
$17,067.65 $14,356.76 $14,664.91
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 30
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 and investments in
money market mutual funds. 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 income is recorded
on the accrual basis.
F-6
<PAGE> 31
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.
Commencing May 1998, the General Partner rebated to certain
multi-million dollar investors a portion of the compensation it
receives for managing the Partnership. Such rebates were made by
issuing additional units and, during 1998, amounted to $145,460.
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 1/12 of 2.5% (2.5% 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> 32
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% (1% annually) 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 $15,478, $14,991 and $37,702 in 1998,
1997 and 1996, respectively.
The Partnership is not required to make distributions, but may do so
at the sole discretion of the General Partner. A Limited Partner may
request and receive redemption of units owned, subject to
restrictions in the Limited Partnership Agreement.
Note 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 a broker 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 trading of forward contracts and
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> 33
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 1998, 1997
and 1996, was approximately $3,550,000, $6,240,000 and $9,700,000,
respectively, and the related fair values as of December 31, 1998 and
1997, are approximately $1,780,000 and $6,392,000, respectively.
Net trading results from derivatives for the years ended December 31,
1998, 1997 and 1996, are reflected in the statement of operations and
equal gain from commodity trading less brokerage commissions. Such
trading results reflect the net gain (loss) arising from the
Partnership's speculative trading of futures contracts, options on
futures contracts and forward contracts.
At December 31, 1998 and 1997, the notional amount of open contracts
is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
Contracts to Contracts to Contracts to Contracts to
Purchase Sell Purchase Sell
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Derivatives (excluding
purchased options) $1,165,100,000 $803,800,000 $1,490,800,000 $756,300,000
Purchased options 1,600,000 6,600,000 23,900,000 59,600,000
</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
market risk and minimize credit risk. The Limited Partners bear the
risk of loss only to the extent of the market value of their
respective investments and, in certain specific circumstances,
distributions and redemptions received.
F-9
<PAGE> 34
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 31st 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 31st 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> 35
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
- ------ -----------
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 20,458,054
<SECURITIES> 44,722,669
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 66,960,781
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 66,960,781
<CURRENT-LIABILITIES> 1,684,651
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 65,276,130
<TOTAL-LIABILITY-AND-EQUITY> 66,960,781
<SALES> 0
<TOTAL-REVENUES> 33,627,062
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 22,103,837
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 11,523,225
<INCOME-TAX> 0
<INCOME-CONTINUING> 11,523,225
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,523,225
<EPS-PRIMARY> 2,734.83
<EPS-DILUTED> 2,734.83
</TABLE>
