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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, 1999
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 Fund, as
well as assumptions made by, and information currently available to, the Fund. A
number of important factors could cause the Fund's actual growth, results,
performance and business prospects and opportunities in 2000 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 "Fund") is a limited partnership under the
New York Revised Limited Partnership Act. The Fund 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 Fund is engaged in the
speculative trading of commodities, futures contracts, forward contracts,
foreign exchange commitments, swap contracts, spot (cash) commodities and other
derivative products pertaining to any of the foregoing, in the United States of
America and elsewhere throughout the world, which are referred to as commodity
interests. The Fund trades commodity interests through the retention of
independent commodity trading advisors, which are referred to as advisors. The
objective of the Fund's business is appreciation of its assets through the
speculative trading of commodity interests. To achieve this purpose, the Fund is
also authorized to purchase the interests of other entities engaged in the
business of trading commodity interests.
In September 1985, the Fund began a private placement of units of limited
partnership interests in reliance on exemptions under the Securities Act of
1933, including Section 4(2) 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 unitholders of the Fund, which amounts include selling commissions
of $1,250 and $500, respectively, unless waived in whole or in part. Since the
Fund began the private placement in 1985, through March 15, 2000, 23,786 units
have been sold for a total of $264,988,978.
"Net Asset Value" is defined as total assets of the Fund less total liabilities
as determined in accordance with the principles set forth in the Second
Restatement of the Limited Partnership Agreement of the Fund, dated September 1,
1993, as amended January 15, 1996, 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 Fund
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 and is updated every nine (9) months or earlier if there
is a material change, as required by the regulations promulgated under the
Commodity Exchange Act (the "CEAct"), and filed with the Commodity Futures
Trading Commission (the "CFTC") in compliance with its Regulations.
Since September 1985, the Fund 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
unitholder for six months and upon ten business days prior written notice, a
unitholder may require the Fund 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, Kenmar
may, in its sole discretion on 10 days' written notice or without notice under
certain circumstances, require any unitholder to withdraw all or a portion of
such unitholder's capital contribution from the Fund.
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The Fund's general partner is Kenmar Advisory Corp., a Connecticut corporation.
Kenmar is owned equally and indirectly by Kenneth A. Shewer and Marc S. Goodman,
the sole directors of Kenmar. In accordance with the provisions of the CEAct and
the rules of the National Futures Association (the "NFA"), Kenmar is registered
as a commodity pool operator, the advisors are registered as such and the
commodity brokers 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.
Kenmar, to the exclusion of the unitholders, manages and conducts the business
of the Fund. Kenmar (1) selects and monitors the independent advisors and the
commodity brokers; (2) allocates and/or reallocates assets of the Fund among the
advisors; (3) determines if an advisor or commodity broker should be removed or
replaced; (4) negotiates management fees, incentive fees and brokerage
commissions; (5) determines its own compensation; and (6) performs such other
services as the Fund may from time to time request, except that all trading
decisions are made by the advisors retained by Kenmar. In addition, Kenmar
selects the commodity brokers that will clear trades for the advisors. Refco,
Inc. and ING (U.S.) Securities, Futures & Options Inc. are currently the Fund's
futures commission merchants, and Refco Capital Markets Ltd. ("Refco Capital
Markets") is the Fund's foreign exchange dealer (Refco, ING BARINGS Futures &
Options Clearing Services and Refco Capital Markets are collectively referred to
herein as the "commodity brokers").
The Fund itself does not have any employees. Rather, Kenmar employs 47 persons
(as of March 15, 2000) and provides the Fund with the services of research, fund
administration, client support (marketing), legal, and management information
systems and analysis personnel to conduct its operational activities.
Kenmar believes that the most effective means of controlling the risks of
trading commodity interests is through a diversified portfolio of advisors. In
general, Kenmar has sought to produce high returns while controlling risk
through the selection of two or more advisors, often with diverse trading
methodologies. Kenmar's ability to manage the Fund 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,
Kenmar alters the portfolio of advisors or the allocation of assets among the
advisors, without prior notice to, or the approval of, the unitholders.
The Fund is not an operating company with "traditional" income or expenses. It
is a stand-alone investment vehicle that offers investors the opportunity to
participate in commodity interest trading under the guidance of professional
advisors.
FEES AND EXPENSES
Due to Kenmar's active and dynamic allocation and reallocation of the Fund'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 Fund as of March 15, 2000.
Fees to Kenmar. Kenmar (1) manages and operates the Fund, (2) manages and
monitors the Fund's portfolio of advisors, (3) pays all of the ordinary
operating and administrative expenses of the Fund (except those described under
"Legal Fees and Expenses" below), and (4) pays appropriately registered selling
agents continuing compensation. To compensate Kenmar for the foregoing, the Fund
pays Kenmar an administrative fee equal to 0.0833% (1% annually) of the
prior month's beginning Net Asset Value of the Fund. Ordinary administrative
expenses include, but are not limited to, accounting, auditing, record keeping,
administration, computer and clerical expenses (including expenses incurred in
preparing reports and tax information to unitholders and regulatory authorities,
printing and duplication expenses and mailing expenses), and other expenses
incurred by such persons and by Kenmar and its affiliates in providing services
to the Fund.
Advisor's Management Fees. The Fund pays each advisor a monthly management fee
ranging from 0.0% to 0.1667% (0% to 2% per year) of the Net Asset Value of the
assets allocated to each advisor for management, referred to as an adivsor's
portion, prior to reduction for the management fee.
Advisor's Incentive Fees. In addition to a management fee, the Fund pays each
advisor an incentive fee ranging from 15% to 25% of the net new trading profits
generated by the advisor through the trading of its 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.
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The net new trading profits, which 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, generated
by an advisor on its advisor's portion generally equals:
- the net trading profits (realized and the change, if any, in
unrealized) earned on the advisor's portion, excluding interest
or interest-equivalent income,
- decreased by brokerage commissions paid and the change, if any,
in accrued, and
- decreased by the management fee, if any.
All of the above items will be determined from (1) 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 (2) if no incentive fee was earned
previously by the advisor, from the date the advisor was allocated its advisor's
portion, to the close of business on the last day of the calendar quarter for
which the incentive fee calculation is being made.
Any incentive fees paid to an advisor will be retained by it even if that
advisor subsequently experiences losses. The Fund will not pay additional
incentive fees to an advisor that has experienced losses, until those loss
Carryforwards have been recovered. An advisor's loss carryforward will be
proportionately reduced for any withdrawals from such advisor of either notional
or actual funds.
Because each advisor receives an incentive fee on its performance, it is
possible that one or more advisors may receive incentive fees during the same
time in which the Fund and other advisors sustain a net loss. In addition, if an
advisor is retained after the Fund has suffered a net loss, that advisor might
receive an incentive fee based on trading profits it earns even though some or
all of those trading profits were merely a recovery of a loss carryforward
previously incurred by the advisors that earlier managed the Fund's assets.
The advisor's incentive fees are subject to equal allocation among investors
even though investors may have purchased their units at different times.
Therefore, such costs are not reflective of each investor's investment
experience, but of the Fund's performance as a whole. By allocating the expenses
equally among investors, the Fund is able to maintain a uniform Net Asset Value
per Unit.
Investee Pool Fees. If the Fund invests in an investee pool, the Fund will be
responsible for its pro rata share of any fees, expenses or charges of that
investee pool. Currently, the Fund is not invested in any investee pool.
Brokerage Commissions. Commodity brokerage commissions for futures trades are
typically paid on the completion or liquidation of a trade and cover both the
purchase or sale of a futures contract and the subsequent offsetting sale or
purchase (each, a "roundturn transaction"). The Fund's current brokerage
expenses range from $9.56 to $30 per roundturn transaction, plus non-member
exchange 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 Fund's investment with the advisors, Kenmar and/or its
affiliate will receive from the brokers a portion of the brokerage commissions
paid by the Fund. Each of the commodity brokers retains no more than $10 per
roundturn transaction and the ING BARINGS Futures & Options Clearing Services
retains no more than $5.75 per roundturn transaction. Kenmar receives the
remainder of such fees as partial compensation for managing the Fund.
Kenmar may in its sole discretion negotiate brokerage commissions with other
commodity brokers or foreign exchange dealers on such terms as it deems in the
best interest of the Fund. Those agreements may or may not be similar to the
above brokerage arrangements.
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Legal Fees and Expenses. The Fund will be responsible for all legal fees,
expenses and disbursements incurred by the Fund. These expenses may include
outside counsel's telephone, mail, fax and copying charges, as well as the
Fund's filing fees, whether paid by Kenmar or outside counsel. Legal fees for
the calendar year ended December 31, 1999 were approximately $47,000.
Extraordinary Expenses. The Fund will be responsible for all extraordinary
expenses (e.g., litigation expenses) incurred on its behalf. As of the date of
this report, the Fund has not paid, and does not anticipate paying, any
extraordinary expenses.
Other Expenses of the Unitholders. Although not an expense of the Fund, upon
initially investing in the Fund, investors may be subject to a selling
commission payable to independent selling agents. The selling commission may be
equal to up to 5% of the Net Asset Value per Unit at which the units were
purchased, unless the payment of all or any portion of such amount is waived by
the selling agent.
Interest on Assets. Each month, the Fund receives all interest or
interest-equivalent income actually earned on the Fund's assets during that
month.
The following chart reflects the actual fees and expenses for the periods
presented. See "Selected Financial Data" below.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Brokerage Commissions $9,130 $12,437 $16,884 $15,905 $17,165
Management Fees 2,114 2,320 2,721 3,317 3,774
Incentive Fees 854 6,600 1,417 6,406 7,107
General Partner's Administrative
Fee for Operating Expenses 618 646 949 1,233 1,497
Other Expenses 98 100 137 228 191
</TABLE>
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CONFLICTS OF INTEREST
KENMAR
Each broker pays to Kenmar and/or its affiliates a portion of the brokerage
commissions paid by the Fund to the brokers. This arrangement creates a conflict
of interests for Kenmar (1) between its responsibility to minimize brokerage
commissions and its interest in increasing its income through higher fees, and
(2) in selecting advisors who trade more actively over advisors who trade less
actively. In addition, Kenmar maintains business relationships with certain
advisors and brokers. Kenmar has a conflict of interest between its
responsibility to negotiate and minimize brokerage commissions and its desire to
maintain these business relationships.
Kenmar is authorized under the partnership agreement to set the compensation it
receives for its services as general partner of the Fund. As such, Kenmar has a
conflict of interest between limiting fees paid by the Fund and generating fees
for itself.
Kenmar and its affiliates currently manage other commodity pools and managed
accounts. Kenmar may be subject to conflicting demands in respect of allocating
management time, services and other functions between Kenmar's activities on
behalf of the Fund and Kenmar's activities on behalf of other investors,
commodity pools, managed accounts and/or trading advisors. Additionally, Kenmar
may find it more difficult to maintain the quality of these services as the
amount of its assets under management grows. Kenmar also may have a conflict of
interest between its responsibility to select the best commodity trading
advisors for the Fund and its responsibility to select the best commodity
trading advisors for the other commodity pools and managed accounts for which it
serves as manager.
Kenmar and its affiliates are compensated for providing marketing services to
certain commodity trading advisors, including some of the advisors, and for
arranging to have assets placed under the management of such advisors. In
addition, a substantial amount of the assets under the management of certain
advisors are assets of pools and accounts managed by Kenmar or an affiliate.
This could have an influence on how these advisors do business with Kenmar and
the Fund. In allocating the Fund's assets among advisors and in determining
which advisors to retain or dismiss, Kenmar may have a conflict of interest
between allocating funds to trading advisors that have a business relationship
with Kenmar or its affiliates, and allocating funds to trading advisors that do
not have a business relationship with Kenmar.
Kenmar and its affiliates, principals, directors, officers or employees,
referred to as related persons, do not trade commodities for their own accounts,
although it is possible that they may do so in the future. If they do, you will
not have access to the records of their trading. If Kenmar or a related person
were to trade for their own accounts, they could take positions either similar
or opposite to positions taken by the Fund. In addition, the Fund and Kenmar or
a related person could from time to time be competing for similar commodities.
Orders placed by Kenmar or a related person to trade commodities for their
proprietary accounts may reach the market either before or after similar orders
are placed for the Fund and this difference in timing may result in the Fund
receiving less or more favorable prices than the prices received by such
proprietary accounts. Neither Kenmar nor any related person places orders for
any advisor and, therefore, neither Kenmar nor any related person has control
over such timing. It is also possible that the positions taken by the
proprietary accounts of Kenmar or its related persons may not be held for the
same period of time as the positions taken by the Fund. Thus, it is unlikely
that trading results in Kenmar's and the related persons' proprietary accounts
would be the same as the performance in the Fund's account.
THE ADVISORS
The advisors may manage other commodity pools and managed accounts and trade for
their own proprietary accounts. Since some of the advisors are trading and will
continue to trade other pools and accounts, those advisors may be subject to
conflicting demands in respect of allocating management time, services and other
functions between the Fund and those other pools and accounts. In particular, an
advisor may have a conflict of interest when rendering advice to the Fund
because it may be compensated differently for managing other pools and accounts
than for the Fund's account. The advisors may have financial incentives to favor
such other accounts over the Fund. However, each advisor has agreed in its
advisory agreement that it will not deliberately favor other accounts over the
Fund.
An advisor may in the future develop trading methods or strategies for trading
commodities similar to or different from those employed and traded on behalf of
the Fund's account. Other accounts managed by the advisor pursuant to those
strategies may take
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positions similar to or opposite from positions taken by the Fund. No assurance
can be given that the trading results in the other accounts managed by the
advisor will be the same as the performance in the Fund's account.
Some of the advisors or their employees currently trade commodities for their
own accounts, and any or all could do so in the future. You will not have access
to the records of such proprietary trading. The advisors' proprietary trading
activity could differ from the Fund's trading activity. For example, the trading
positions taken and the length of time such positions are held by the Fund could
differ from those taken with respect to an advisor's proprietary accounts. In
addition, the advisors' proprietary accounts could be charged brokerage
commissions in a significantly different form and amount than those charged the
Fund and, as a result, could be more or less likely to modify, liquidate or open
a position for that account than for the Fund's account. Orders for trades for
an advisor's proprietary accounts could be placed either before or after similar
orders are placed for the Fund's account, and this difference in timing could
result in the Fund's account receiving less favorable (or more favorable) prices
than those received by the advisor's proprietary accounts. No assurance can be
given that the trading results in an advisor's proprietary accounts will be
similar to the performance in the Fund's account.
The CFTC and certain U.S. commodity exchanges have established "speculative
position limits" that limit the net long or net short speculative position any
person may control in a particular commodity on any day. An advisor and its
affiliates may, on any day, reach the established position limits in a given
commodity for all or a portion of its accounts and, therefore, might be unable
to trade that commodity for the Fund in the same manner it otherwise would. The
Fund is unable to determine what effect an advisor's inability to trade a
commodity as a result of speculative position limits would have on the Fund's
performance results.
THE BROKERS
The brokers effect transactions for other customers, including public and
private commodity pools, from time to time. A broker's other customers may
compete with the Fund's transactions, including the priority of order entry. In
addition, employees of the brokers may trade for their own accounts. Since the
identities of the purchaser and seller of a commodity are typically not
disclosed until after the trade, the brokers may effect transactions for the
Fund in which the other parties to the transactions are the broker's officers,
directors, employees, customers, or affiliates. Such persons may compete with
the Fund in making purchases or sales of commodities without knowing that the
Fund is also bidding on such commodities. Since orders are filled in the order
in which they are received by a particular floor broker, transactions for any of
those persons might be executed when similar trades for the Fund are not
executed or are executed at less favorable prices. However, in entering orders
for the Fund and its other customer accounts, each broker has agreed to use its
good faith and best efforts to treat all of its accounts equitably. 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 UNITHOLDERS
In evaluating the potential and actual conflicts of interest described above,
you should be aware that Kenmar has a responsibility to each unitholder to
exercise good faith and fairness in all dealings affecting the Fund. The
responsibility of a general partner to limited partners is a changing area of
the law. You should consult your legal counsel if you have questions regarding
Kenmar's duties. In the event that you believe that Kenmar has violated its
responsibilities, you may seek legal relief for yourself and all other similarly
situated unitholders or on behalf of the Fund under applicable laws to recover
damages from, or to require an accounting by, Kenmar. Furthermore, you 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
Kenmar, a commodity broker, or a foreign exchange dealer subject to
regulation under the CEAct. You also may institute legal proceedings in court
against Kenmar, the brokers or an advisor for certain violations of the CEAct or
rules, regulations or orders of the CFTC.
Excessive trading of an account has been held to constitute a violation of the
antifraud provisions of the CEAct. You should be aware, however, that it may be
difficult to establish that the Fund's account has been excessively traded due
to the broad trading discretion given to Kenmar in the partnership agreement and
the advisors in the advisory agreements, the exculpatory provisions in the
partnership agreement and in the advisory agreements, and the lack of definitive
standards in judicial and administrative decisions as to what constitutes
excessive trading.
Under the exculpatory provisions of the partnership agreement, Kenmar will not
be liable to the Fund or to any of the unitholders for its conduct, unless its
actions constitute fraud, willful misconduct, gross negligence or bad faith. As
a result, you may have a more limited right of action than you would if the
partnership agreement did not contain such limitations.
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The Fund has agreed to indemnify Kenmar and its shareholders, officers,
directors, employees, and agents for Kenmar's conduct taken as the general
partner of the Fund or in connection with the partnership agreement, provided
that such person's conduct 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 Fund.
In any action brought by a unitholder on behalf of the Fund, Kenmar and its
affiliates may be indemnified only to the extent and subject to the conditions
specified in the New York Revised Limited Partnership Act. Also, indemnification
of Kenmar and its affiliates by the Fund may be limited for losses and
liabilities resulting from violations of federal, state or foreign securities
law in connection with the offer or sale of units.
The CFTC has issued a statement of policy relating to indemnification of
officers and directors of a futures commission merchant (such as each of the
commodity brokers) and its controlling persons. The CFTC takes the position that
the determination of whether or not such an indemnification is consistent with
the policies expressed in the CEAct will be made by the CFTC on a case-by-case
basis.
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COMMODITY INVESTMENT TRADING AND THE ADVISORS
The profitability of commodity trading depends in large part upon the accurate
forecasting of price moves or trends in commodities. No assurance can be given
as to the accuracy of an advisor's forecasts or that an advisor's trading
methods, strategies or decisions will be successful. Competing trading
approaches and analysis methods are discussed below.
SYSTEMATIC AND DISCRETIONARY TRADING APPROACHES
A systematic trader primarily relies on trading programs or models that generate
trading signals. Although the systems are changed from time to time (typically
infrequently), the trading instructions generated by the advisor's system are
usually followed without significant additional analysis or interpretation.
However, systematic traders do make decisions concerning which markets to follow
and which commodities to trade, whether to liquidate a position in a contract
that is about to expire, whether to engage in an exchange of futures for
physical ("EFP") transaction, and how large a position to take in a particular
commodity. Although a systematic trader's judgment on these issues may affect a
trader's performance, the trader's performance will primarily be based on the
system used to generate signals.
A discretionary trader makes all trading decisions on the basis of its own
judgment. Although a discretionary trader may use computer programs, fundamental
analysis and market charts to assist its decision-making process, it generally
will make its trading decisions based on "trading instinct" rather than trading
signals generated by a systematic program or model.
Both systematic and discretionary trading approaches necessarily involve risks,
including the possibility that a trader will incur substantial losses because it
has misjudged a market. Systematic traders sometimes fail to capitalize on
market trends that their systems have identified due to the judgmental decisions
they make in applying their automated trading systems. On the other hand,
discretionary traders may enter trades that would not be signaled by a system,
possibly resulting in significant losses.
TECHNICAL AND FUNDAMENTAL ANALYSIS
Many commodity trading advisors use varying mixtures of technical and
fundamental analysis. Fundamental analysis is based on a study of factors
external to the trading markets that affect supply and demand of a particular
commodity in an attempt to predict future price levels. The factors considered
include 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. 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, and prices may be
affected by factors the analyst did not consider.
Technical analysis, to the contrary, 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 prices. A limiting factor in the use of
technical analysis is that a technical 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 technical 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, the markets have endured
sustained 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 a market) 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 market.
Regardless of whether a trader uses fundamental analysis, technical analysis,
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 commodity
trading advisors may utilize similar analyses in making trading decisions,
possibly resulting in a bunching of buy and sell orders. When that occurs, the
Fund may find it more difficult to take or liquidate a position.
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TREND-FOLLOWING TRADERS
"Trend-followers" employ a trading approach that seeks to take advantage of
major price movements, while other traders seek profitability by making numerous
small trades on a short-term basis or by using various arbitrage techniques.
Because trend-followers assume that most of their trades will be unprofitable,
they must make large profits from major trends to offset the numerous, smaller
losses they incur. During periods when no major price trends develop in a
market, a trend-follower will likely incur substantial losses.
ADDITIONAL MATTERS
The development of a commodity trading strategy is a continual process. As a
result of ongoing 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 commodities, and
it is likely that similar revisions will be made in the future. In other words,
the trading methods that an advisor may use in the future might differ from
those presently being used. In addition, each advisor may trade any available
commodity or in any market -- whether inside or outside of the U.S. -- it
chooses, even if the advisor has never previously traded that commodity or in
that market. However, you will not be informed of any changes in an advisor's
trading methods, unless Kenmar is informed of that change and considers it a
material change. Additionally, as discussed above, trading decisions of
discretionary advisors require a substantial exercise of judgment. The decision
not to trade certain commodities or not to make certain trades may result at
times in missing price moves and profits of great magnitude, which other trading
managers who are willing to trade these commodities may be able to capture.
Certain advisors may also engage in transactions in physical commodities,
including EFPs. An EFP is a transaction permitted under the rules of many
futures exchanges in which two parties holding futures positions may close out
their positions without making an open, competitive trade on the exchange.
Generally, the holder of a short futures position sells the physical commodity.
The prices at which such transactions are executed are negotiated between the
parties, and such prices may, under certain circumstances, vary significantly
from the actual prices at which the transactions are traded on the relevant
exchanges.
10
<PAGE> 11
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 Fund's assets. Set
forth below is a brief description of the portfolio of major advisors trading
for the Fund as of March 15, 2000, which differs in part from the portfolio of
advisors in 1999.
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.
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.
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 ongoing 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.
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.
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.
11
<PAGE> 12
THE BROKERS
Kenmar has responsibility for selecting and monitoring the Fund's brokers.
Kenmar has selected Refco, Inc. and ING BARINGS Futures & Options Clearing
Services as the Fund's commodity brokers and Refco Capital Markets Ltd. as the
Fund's foreign exchange dealer. The Fund has received the information below from
each of the brokers. Accordingly, the Fund makes no representation as to the
completeness, accuracy, or adequacy of the following disclosures.
THE COMMODITY BROKERS
Refco, Inc. Refco, Inc. ("Refco") is an Illinois corporation with a principal
place of business at 111 West Jackson Boulevard, Chicago, Illinois 60604-3593,
with a telephone number of (312) 930-6500. Refco is registered as a futures
commission merchant with the CFTC and is a member of the NFA in such capacity.
According to Refco, as of December 31, 1999, 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 payment of a $925,000 civil penalty, entry
of a cease and desist order, and implementation of certain internal controls and
procedures.
On May 24, 1999, Refco settled a CFTC administrative proceeding (In the Matter
of Refco, Inc., CFTC Docket No. 99-12) in which Refco was alleged to have
violated certain order taking, recordkeeping, and supervisory rules. The CFTC
allegations pertained to the period from January 1995 through December 1995 in
which Refco took trading instructions from an independent introducing
broker/broker-dealer that had discretionary trading authority over approximately
70 accounts. Without any hearing on the merits and without admitting any of the
allegations, Refco settled the proceeding and agreed to payment of a $6 million
civil penalty, entry of a cease and desist order, funding of a study on order
entry and transmission procedures, and a review of its compliance policies and
procedures related to its handling of trades by floor and back office personnel.
ING BARINGS Futures & Options Clearing Services. 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 NFA. ING BARINGS
Futures & Options Clearing Services is also registered as a broker dealer and a
member of the National Association of Securities Dealers. ING (U.S.) Securities,
Futures & Options Inc. which was formed in 1990, operates under the trade 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. 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 NFA 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 is vigorously defending the claim, which it believes to be
baseless.
12
<PAGE> 13
THE FOREIGN EXCHANGE DEALER
Refco Capital Markets, Ltd. Refco Capital Markets, Ltd., a wholly owned
subsidiary of the Refco Group Ltd., LLC is organized under the laws of Bermuda.
Refco Capital Markets, Ltd. maintains its principal office at Suite 542, 48
Par-La-Ville Road, Hamilton HM11, Bermuda, and a telephone number of (441)
295-6960.
ITEM 2. PROPERTIES
The Fund does not own or lease any physical properties. The Fund's office is
located within the office of Kenmar at Two American Lane, P.O. Box 5150,
Greenwich, CT 06831-8150.
ITEM 3. LEGAL PROCEEDINGS
Neither the Fund nor Kenmar 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 1999.
13
<PAGE> 14
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 531 holders of units at March 15, 2000. Pursuant to the
partnership agreement, distributions of profits, if any, will be made at the
sole discretion of Kenmar. As of March 15, 2000 Kenmar had not made, and Kenmar
does not currently intend to make, any distributions.
In September 1985, the Fund commenced a private placement of units in reliance
on exemptions under the Securities Act of 1933, including Section 4(2) 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 unitholders, 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 $1,000. 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 1999, 30.1765 units were sold for a total of
$374,794.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data of the Fund has been derived from the
Fund's financial statements for each of the years 1995 through 1999, which were
audited by independent certified public accountants. The auditor's report of
Arthur F. Bell, Jr. & Associates, L.L.C. on the Fund's statements of financial
position at December 31, 1999 and 1998 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, 1999 are included elsewhere herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1999 1998 1997 1996 1995
--------- -------- -------- -------- ---------
(IN THOUSANDS, EXCEPT AMOUNTS PER UNIT)
<S> <C> <C> <C> <C> <C>
Operations Data:
Realized Gains (Losses) $ (4,461) $ 33,752 $ 9,630 $ 33,757 $ 30,855
Change in Unrealized (2,871) (3,744) 3,796 (16,236) 3,675
Interest Income 2,603 3,618 4,981 5,974 7,735
Brokerage Commissions 9,130 12,437 16,884 15,905 17,165
Management Fees 2,114 2,320 2,721 3,317 3,774
Incentive Fees 854 6,600 1,417 6,406 7,107
General Partner's Administrative Fee
for
Operating Expenses 618 646 949 1,233 1,497
Other Expenses 98 100 137 228 191
Net Income (Loss) $(17,543) $ 11,523 $ (3,701) $ (3,594) $ 12,531
Net Income (Loss) Per Unit (Based on
Weighted Average Number of Units
Outstanding) $ (4,951) $ 2,735 $ (567) $ (375) $ 1,104
Increase (Decrease) in Net Asset Value
Per Unit $ (5,297) $ 2,711 $ (308) $ 432 $ 1,068
</TABLE>
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1999 1998 1997 1996 1995
-------- -------- -------- -------- --------
Financial Position Data: (IN THOUSANDS, EXCEPT AMOUNTS PER UNIT)
General Partner's Capital $ 631 $ 914 $ 769 $ 786 $ 763
Unitholders' Capital 35,058 64,362 66,626 110,244 153,015
Partnership Capital 35,689 65,276 67,395 111,030 153,778
Net Asset Value per Unit $ 11,770 $ 17,068 $ 14,357 $ 14,665 $ 14,233
15
<PAGE> 16
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 Fund, as
well as assumptions made by, and information currently available to, the Fund. A
number of important factors could cause the Fund's actual growth, results,
performance and business prospects and opportunities in 2000 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 Fund are used to engage, directly or indirectly, in the
speculative trading of commodity interests.
The assets of the Fund are deposited with the commodity brokers in trading
accounts established by the Fund for the advisors and are used by the Fund 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 Fund'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 Fund 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 Fund's assets are committed to overhead or
operational expenses.
There are three factors that affect the Fund's capital resources: (1) the
trading profit or loss generated by the advisors (including interest income);
(2) the money invested or redeemed by the unitholders; and (3) the capital
invested or redeemed by Kenmar. Kenmar 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 Kenmar to maintain a one percent (1%) interest in
the capital, income and losses of the Fund. All capital contributions by Kenmar
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. Kenmar,
in its sole discretion, may withdraw any excess above its required capital
contribution without notice to the unitholders. Kenmar, in its sole discretion,
may also contribute any greater amount to the Fund, 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 Fund incurs substantial charges from the payment of
management and/or incentive fees to the advisors and administrative fees to
Kenmar which are payable based upon the Net Asset Value of the Fund and are
payable without regard to the profitability of the Fund. The brokerage
commissions to the commodity brokers are also payable without regard to the
profitability of the Fund, 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
Fund may have incurred a net loss when trading profits were not substantial
enough to avoid depletion of the Fund's assets from such fees and expenses.
Thus, due to the nature of the Fund's business, the success of the Fund 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 Fund's operations for the
calendar years 1997 through 1999 and a general discussion of the Fund's trading
activities in certain markets during such period. It is important to note,
however, that (1) 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 (2)
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 Fund can only be discussed in the
context of the overall trading activities of the Fund, the advisors' trading
activities on behalf of the Fund as a whole and how the Fund has performed in
the past.
As of December 31, 1999, the Net Asset Value of the Fund was $35,688,878, a
decrease of approximately 45.33% from its Net Asset Value of $65,276,130 at
December 31, 1998. The Fund's 1999 subscriptions and redemptions totaled
$1,923,122 and $13,967,250, respectively. For the year ended December 31, 1999,
the Fund had revenues comprised of $4,461,303 in realized losses, $2,871,454 in
unrealized losses and $2,603,113 in interest income. For that same year, the
Fund had expenses consisting of $9,129,970 in
16
<PAGE> 17
brokerage commissions, $2,114,161 in management fees, $853,963 in incentive
fees, $617,880 in Kenmar's administrative fees and $97,506 in other expenses.
This resulted in the Fund having net losses of $17,543,124. The Fund's trading
losses in 1999 were primarily realized in European and Pacific Rim interest
rates, European and U.S. stock indices and tropicals. The Net Asset Value per
Unit at December 31, 1999 decreased 31.04% from $17,067.65 at December 31, 1998
to $11,770.46 at December 31, 1999.
As of December 31, 1998, the Net Asset Value of the Fund was $65,276,130, a
decrease of approximately 3.14% from its Net Asset Value of $67,394,957 at
December 31, 1997. The Fund's 1998 subscriptions and redemptions totaled
$1,335,740 and $14,977,792, respectively. For the year ended December 31, 1998,
the Fund 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
Fund 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 Fund
having net income of $11,523,225. The Fund'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.
As of December 31, 1997, the Net Asset Value of the Fund was $67,394,957, a
decrease of approximately 39.30% from its Net Asset Value of $111,030,275 at
December 31, 1996. The Fund's 1997 subscriptions and redemptions totaled
$1,699,251 and $41,633,972, respectively. For the year ended December 31, 1997,
the Fund 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 Fund 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 Fund having net losses of $3,700,597. The Fund'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.
Past performance is not indicative of future results. As a result, any recent
increases in realized or unrealized trading losses 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 Fund as of any month-end occurring six months or
more after such investment was made.
With respect to the Fund's trading, in general, the Fund'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 Fund is trading, whether such illiquidity is caused
by any of the above reasons or otherwise, the Fund 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 Fund to make or
take delivery of the underlying interest of the commodity interest.
The Partnership's trading may also be impacted by the various conflicts of
interest among the Fund and Kenmar, the advisors and the commodity brokers. See
"Item 1. Business - Conflicts of Interest".
17
<PAGE> 18
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
INTRODUCTION
Past Performance Not Necessarily Indicative of Future Results. The Fund 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
Fund'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 Fund's main line of business.
Market movements result in frequent changes in the fair market value of the
Fund's open positions and, consequently, in its earnings and cash flow. The
Fund'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 Fund's open positions and the liquidity of the markets in which it
trades.
The Fund 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 Fund's past
performance is not necessarily indicative of its future results.
Value at Risk is a measure of the maximum amount which the Fund could reasonably
be expected to lose in a given market sector. However, the inherent uncertainty
of the Fund's speculative trading and the recurrence in the markets traded by
the Fund of market movements far exceeding expectations could result in actual
trading or non-trading losses far beyond the indicated Value at Risk or the
Fund'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 Fund's losses
in any market sector will be limited to Value at Risk or by the Fund'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 Fund's market sensitive instruments.
QUANTIFYING THE PARTNERSHIP'S TRADING VALUE AT RISK
Quantitative Forward-Looking Statements. The following quantitative disclosures
regarding the Fund'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 Fund's risk exposure in the various market sectors traded by the advisors is
quantified below in terms of Value at Risk. Due to the Fund's mark-to-market
accounting, any loss in the fair value of the Fund's open positions is directly
reflected in the Fund'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 Fund 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 Fund'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
18
<PAGE> 19
each trading category's aggregate Value at Risk. The diversification effects
resulting from the fact that the Fund's positions are rarely, if ever, 100%
positively correlated have not been reflected.
THE PARTNERSHIP'S TRADING VALUE AT RISK IN DIFFERENT MARKET SECTORS
The following table indicates the trading Value at Risk associated with the
Fund's open positions by market category as of November 30, 1999 and December
31, 1998. All open position trading risk exposures of the Fund have been
included in calculating the figures set forth below. As of November 30, 1999 and
December 31, 1998, the Fund's total capitalization was approximately $44 million
and $65 million respectively.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------
AVERAGE 1999 % OF
QUARTERLY GAIN (LOSS) TOTAL
MARKET SECTOR FROM TRADING NOVEMBER 30, 1999* VALUE AT RISK CAPITALIZATION
- --------------- -------------------- ----------------- ------------- --------------
<C> <S> <C> <C> <C>
Interest Rates $(2,210,000) 7,300,000 16.6% $ 6,900,000 10.6%
Currencies 42,000 7,100,000 16.2% 2,300,000 3.5%
Stock Indices (1,107,000) 1,400,000 3.3% 2,000,000 3.1%
Metals (284,000) 700,000 1.7% 700,000 1.1%
Commodities (1,251,000) 1,800,000 4.1% 1,700,000 2.6%
Energy 970,000 1,800,000 4.1% 700,000 1.1%
----------- ----------- ----
Total $(3,840,000) 20,100,000 46.0% $14,300,000 22.0%
===========
</TABLE>
MATERIAL LIMITATIONS ON VALUE AT RISK AS AN ASSESSMENT OF MARKET RISK
The face value of the market sector instruments held by the Fund is typically
many times the applicable maintenance margin requirement (maintenance margin
requirements generally ranging between approximately 1% and 1%% of contract face
value), as well as many times the capitalization of the Fund. The magnitude of
the Fund'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 Fund to incur severe losses over a short period of time. The foregoing Value
at Risk table--as well as the past performance of the Fund--give no indication
of this "risk of ruin".
NON-TRADING RISK
The Fund 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.
- ---------------
*Value at Risk as of December 31, 1999 was $0 due to the full liquidation of
all positions. November 30, 1999 is being used for a better indication of a
typical portfolio.
19
<PAGE> 20
As of December 31, 1999, the Fund held the following fixed-income securities
in its portfolio:
<TABLE>
<CAPTION>
FACE VALUE DESCRIPTION VALUE
- ------------ ----------- -----------
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS
---------------------------
$ 3,500,000 United States Treasury Notes, 5.5%, 8/31/2000 $ 3,524,238
4,000,000 United States Treasury Notes, 5.875%, 11/30/2001 3,993,987
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $7,557,743) 7,518,225
-----------
FEDERAL AGENCY OBLIGATIONS
--------------------------
2,400,000 Federal Home Loan Mortgage Corporation, 5.75%, 7/15/2003 2,386,953
935,139 Federal Home Loan Mortgage Corporation Gold 7-Year Balloon,
6.00%, 8/1/2000 935,093
3,515,000 Federal National Mortgage Association Bond, 6.375%, 1/16/2002 3,603,292
-----------
TOTAL FEDERAL AGENCY OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $7,100,889) 6,925,338
-----------
TOTAL FIXED INCOME SECURITIES
(COST, INCLUDING ACCRUED INTEREST, - $14,658,632) $14,443,563
===========
</TABLE>
QUALITATIVE DISCLOSURES REGARDING PRIMARY TRADING RISK EXPOSURES
The following qualitative disclosures regarding the Fund's market risk
exposures--except for (i) those disclosures that are statements of historical
fact and (ii) the descriptions of how the Fund 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
Fund's primary market risk exposures as well as the strategies used and to be
used by Kenmar 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 Fund'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 Fund. There can be no assurance that the
Fund'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 Fund.
The following were the primary trading risk exposures of the Fund as of November
30, 1999, by market sector.
INTEREST RATES. Interest rate risk is the principal market exposure of the Fund.
Interest rate movements directly affect the price of the sovereign bond
positions held by the Fund 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 Fund's
profitability.
20
<PAGE> 21
The Fund's primary interest rate exposure is to interest rate fluctuations in
the United Stated and the other G-7 countries. However, the Fund also takes
positions in the government debt of smaller nations--e.g., New Zealand and
Australia. Kenmar anticipates that G-7 interest rates will remain the primary
market exposure of the Fund for the foreseeable future. This is consistent with
the Fund's exposure as of December 31, 1998.
CURRENCIES. The Fund'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 Fund trades in a large number of currencies, including the Euro.
Kenmar does not anticipate that the risk profile of the Fund's currency sector
will change significantly in the future. The risk profile for the Fund has
changed compared to 1998 when the Euro was not traded.
STOCK INDICES. The Fund's primary equity exposure is to equity price risk in the
G-7 countries. The stock index futures traded by the Fund are by law limited to
futures on broadly based indices. As of November 30, 1999, the Fund's primary
exposure was in the S&P 500. Kenmar anticipates little, if any, trading in non
G-7 stock indices. The Fund is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.
METALS. The Fund'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 Fund have consistently been in the precious metals, gold and
silver (and, to a much less extent, platinum). Kenmar anticipates that gold and
silver will remain the primary metals market exposure for the Fund. This is
consistent with the Fund's exposure as of December 31, 1998.
COMMODITIES. The Fund's primary commodities exposure is to agricultural price
movements, which are often directly affected by severe or unexpected weather
conditions. Wheat, corn, soybean and sugar accounted for the substantial
bulk of the Fund's commodities exposure as of November 30, 1999. Kenmar
anticipates that the advisors will maintain an emphasis on grains and tropicals,
in which the fund has historically taken its largest positions. This is
consistent with the Fund's exposure as of December 31, 1998.
ENERGY. The Fund's primary energy market exposure is to natural gas and crude
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 Fund's energy exposure as of November 30, 1999. The Fund's exposure is
similar to its December 31, 1998 positions.
QUALITATIVE DISCLOSURES REGARDING NON-TRADING RISK EXPOSURE
The following were the only non-trading risk exposures of the Fund as of
November 30, 1999.
FOREIGN CURRENCY BALANCES. The Fund's primary foreign currency balances are in
Japanese yen, Canadian dollars, Australian dollars, British pounds and Swiss
francs. The Fund controls the non-trading risk of these balances by regularly
converting these balances back into dollars.
SECURITIES POSITIONS. The Fund's only market exposure in instruments held other
than for trading is in its securities portfolio. The Fund 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 Fund'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 Fund and the advisors, severally, attempt to manage the
risk of the Fund's open positions is essentially the same in all market
categories traded. At the Fund-wide level, Kenmar attempts to manage market
exposure by (i) diversifying the Fund's assets among different advisors whose
strategies focus on different market sectors and trading approaches, and (ii)
monitoring the Fund'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 Fund
21
<PAGE> 22
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.
Kenmar controls the risk of the Fund's non-trading instruments (interest-bearing
securities held for cash management purposes)--the only Partnership investments,
as opposed to advisor selections, directed by Kenmar--limiting the duration of
such instruments to no more than one year.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Fund's financial statements, together with the auditor's report thereon, are
included on pages F-1 through F-9 hereof.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
22
<PAGE> 23
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Kenmar, Kenmar Advisory Corp., is the sole general partner of the Fund. Kenmar,
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 Kenmar currently are as follows:
MR. KENNETH A. SHEWER, age 47, has been the Chairman and a director of Kenmar
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 52, has been the President and a director of Kenmar
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 48, has been the Senior Executive Vice
President of Kenmar since March 1991 and has also served as Chief Operating
Officer of Kenmar 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 64, joined Kenmar 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 Kenmar serves until the next annual meeting of stockholders or
until a successor is elected. Executive officers of Kenmar are appointed
annually and serve at the discretion of its Board of Directors. Messrs. Shewer
and Goodman hold directorships in various affiliates of Kenmar.
SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934, as amended, requires
Kenmar and the directors of Kenmar to file reports of
23
<PAGE> 24
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
The Fund has no directors or executive officers. As a limited partnership, the
business of the Fund is managed by its General Partner, which is responsible for
the administration of the business affairs of the Fund and receives the
compensation described in Item 1 hereof.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Fund has no directors or officers. The Fund delegates all management of the
Fund's affairs to Kenmar. As of March 15, 2000, Kenmar owned approximately
53.5807 units of general partnership interests, representing a 2.3% investment
in the Fund. Kenmar is indirectly and equally owned by Messrs. Shewer and
Goodman.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Kenmar, Kenmar Advisory Corp., is the sole general partner of the Fund and
manages and conducts the business of the Fund. The partnership agreement
provides that Kenmar may be compensated in such form(s) and in such amount as
Kenmar, in its sole discretion, shall determine, after giving due weight to
industry standards. As more fully described in Item 1 hereto, to compensate
Kenmar for its management and operations of the Fund, 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 Fund, the Fund currently pays Kenmar an administrative fee. For
the year ending December 31, 1999, Kenmar received $0 in management fees and
$617,880 in administrative fees. For the year ending December 31, 1998, Kenmar
received $0 in management fees and $646,232 administrative fees. For the year
ending December 31, 1997, Kenmar received $0 in management fees and $949,121
in administrative fees. In addition, Kenmar receives from the commodity brokers
a portion of the brokerage commissions paid by the Fund to the commodity
brokers.
24
<PAGE> 25
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 Fund, 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, 1999 and 1998 Schedule of Securities as of December 31,
1999 Statements of Operations For the Years Ended December 31, 1999,
1998 and 1997 Statements of Changes in Partners' Capital (Net Asset
Value) For the Years Ended December 31, 1999, 1998 and 1997 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 Fund and Refco, Inc.
10.2* Form of Advisory Agreement between Kenmar and the Advisor.
10.3** Master Agreement between the Fund and ING Derivatives, Ltd., dated
as of March 22, 1995.
10.4*** Commodity Customer Agreement between the Fund and Internationale
Nederlanden (U.S.) Derivatives Clearing, Inc.
10.5*** Netting Agreement and Customer Agreement between the Fund and Refco
Capital Markets Ltd.
27.1 Financial Data Schedule.
- -------------------
* Incorporated herein by reference to the Fund's Registration
Statement on Form 10, filed with the Securities and Exchange
Commission on April 29, 1994.
** Incorporated herein by reference to the Fund's Annual Report on
Form 10-K for the fiscal year ended December 31, 1994.
*** Incorporated herein by reference to the Fund's Annual Report on
Form 10-K for the fiscal year ended December 31, 1995.
(b) Reports on Form 8-K:
The Fund did not file any reports on Form 8-K during the fourth quarter of 1999.
25
<PAGE> 26
KENMAR PERFORMANCE PARTNERS L.P.
-----------------
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
PAGES
-----
<S> <C>
Independent Auditor's Report F-1
Financial Statements
Statements of Financial Condition
December 31, 1999 and 1998 F-2
Schedule of Securities
December 31, 1999 F-3
Statements of Operations For the Years
Ended December 31, 1999, 1998 and 1997 F-4
Statements of Changes in Partners' Capital (Net Asset Value)
For the Years Ended December 31, 1999, 1998 and 1997 F-5
Notes to Financial Statements F-6 - F-9
</TABLE>
<PAGE> 27
[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, 1999 and 1998, including the
December 31, 1999 schedule of securities, and the related statements of
operations and changes in partners' capital (net asset value) for the years
ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998, 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, 1999 and 1998, and the results of its operations and the
changes in its net asset values for the years ended December 31, 1999, 1998 and
1997, in conformity with generally accepted accounting principles.
/s/ Arthur F. Bell, Jr. & Associates, L.L.C.
Hunt Valley, Maryland
February 17, 2000
F-1
<PAGE> 28
KENMAR PERFORMANCE PARTNERS L.P.
STATEMENTS OF FINANCIAL CONDITION
December 31, 1999 and 1998
-----------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Equity in broker trading accounts
Cash $ 4,036,550 $ 15,308,018
Net option premiums (received) 0 (903,236)
Unrealized gain on open contracts 61,122 2,683,294
------------ ------------
Deposits with brokers 4,097,672 17,088,076
Cash and cash equivalents 19,355,234 5,150,036
Fixed income securities (cost, including accrued
interest, - $14,658,632 and $44,688,456) 14,443,563 44,722,669
Subscriptions receivable 16,880 0
------------ ------------
Total assets $ 37,913,349 $ 66,960,781
============ ============
LIABILITIES
Accounts payable $ 19,710 $ 55,082
Commissions and other trading fees
on open contracts 5,895 433,602
Management fees 132,919 199,471
Incentive fees 0 537,584
Redemptions payable 2,065,947 458,912
------------ ------------
Total liabilities 2,224,471 1,684,651
------------ ------------
PARTNERS' CAPITAL (NET ASSET VALUE)
General Partner - 53.5807 units outstanding at
December 31, 1999 and 1998 630,670 914,497
Limited Partners - 2,978.4899 and 3,770.9723 units
outstanding at December 31, 1999 and 1998 35,058,208 64,361,633
------------ ------------
Total partners' capital
(Net Asset Value) 35,688,878 65,276,130
------------ ------------
$ 37,913,349 $ 66,960,781
============ ============
</TABLE>
See accompanying notes.
F-2
<PAGE> 29
KENMAR PERFORMANCE PARTNERS L.P.
SCHEDULE OF SECURITIES
December 31, 1999
-----------------
FIXED INCOME SECURITIES (40.5%) *
<TABLE>
<CAPTION>
Face Value Description Value
---------- ----------- -----
<S> <C> <C>
U.S. GOVERNMENT OBLIGATIONS (21.1%)
3,500,000 United States Treasury Notes, 5.5%, 8/31/2001 $ 3,524,238
4,000,000 United States Treasury Notes, 5.875%, 11/30/2001 3,993,987
-----------
TOTAL U.S. GOVERNMENT OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $7,557,743) 7,518,225
-----------
FEDERAL AGENCY OBLIGATIONS (19.4%)
2,400,000 Federal Home Loan Mortgage Corporation, 5.75%, 7/15/2003 2,386,953
935,139 Federal Home Loan Mortgage Corporation Gold 7-Year Balloon,
6.00%, 8/1/2000 935,093
3,515,000 Federal National Mortgage Association Bond, 6.375%, 1/16/2002 3,603,292
-----------
TOTAL FEDERAL AGENCY OBLIGATIONS
(COST, INCLUDING ACCRUED INTEREST, - $7,100,889) 6,925,338
-----------
TOTAL FIXED INCOME SECURITIES
(COST, INCLUDING ACCRUED INTEREST, - $14,658,632) $14,443,563
===========
</TABLE>
* Percent of December 31, 1999 Net Asset Value is shown for each category.
See accompanying notes.
F-3
<PAGE> 30
KENMAR PERFORMANCE PARTNERS L.P.
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1999, 1998 and 1997
----------------------
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
INCOME
Commodity trading gains (losses)
Realized $ (3,759,349) $ 33,490,318 $ 9,871,120
Change in unrealized (2,622,172) (3,553,583) 3,551,743
------------ ------------ ------------
Gain (loss) from commodity trading (6,381,521) 29,936,735 13,422,863
------------ ------------ ------------
Fixed income securities gains (losses)
Realized (701,954) 262,372 (240,705)
Change in unrealized (249,282) (190,287) 244,362
------------ ------------ ------------
Gain (loss) from fixed income
securities (951,236) 72,085 3,657
------------ ------------ ------------
Interest income 2,603,113 3,618,242 4,981,422
------------ ------------ ------------
Total income (loss) (4,729,644) 33,627,062 18,407,942
------------ ------------ ------------
EXPENSES
Brokerage commissions 9,129,970 12,437,404 16,884,257
Management fees 2,114,161 2,320,273 2,720,907
Incentive fees 853,963 6,599,903 1,417,050
General Partner administrative fee for
operating expenses 617,880 646,232 949,121
Cash management service charge 50,167 77,793 104,573
Legal expenses 47,339 22,232 32,631
------------ ------------ ------------
Total expenses 12,813,480 22,103,837 22,108,539
------------ ------------ ------------
NET INCOME (LOSS) $(17,543,124) $ 11,523,225 $ (3,700,597)
============ ============ ============
NET INCOME (LOSS) PER UNIT
(based on weighted average number of
units outstanding during the year) $ (4,950.97) $ 2,734.83 $ (566.93)
============ ============ ============
INCREASE (DECREASE) IN NET ASSET
VALUE PER UNIT $ (5,297.19) $ 2,710.89 $ (308.15)
============ ============ ============
</TABLE>
See accompanying notes.
F-4
<PAGE> 31
KENMAR PERFORMANCE PARTNERS L.P.
STATEMENTS OF CHANGES IN PARTNERS' CAPITAL (NET ASSET VALUE)
For the Years Ended December 31, 1999, 1998 and 1997
-----------------------
<TABLE>
<CAPTION>
Partners' Capital
---------------------------------------------------------------------------------------
General Limited Total
----------------------- --------------------------- ---------------------------
Units Amount Units Amount Units Amount
----- ------ ----- ------ ----- ------
<S> <C> <C> <C> <C> <C> <C>
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
Net (loss) for the year
ended December 31, 1999 (283,827) (17,259,297) (17,543,124)
Additions 0.0000 0 120.8024 1,923,122 120.8024 1,923,122
Redemptions 0.0000 0 (913.2848) (13,967,250) (913.2848) (13,967,250)
------------------------ ------------ -------------- ------------ --------------
Balances at
December 31, 1999 53.5807 $ 630,670 2,978.4899 $ 35,058,208 3,032.0706 $ 35,688,878
======== ========= =========== ============= =========== =============
</TABLE>
<TABLE>
<CAPTION>
Net Asset Value Per Unit
--------------------------------------------------
December 31,
1999 1998 1997
---- ---- ----
<S> <C> <C>
$11,770.46 $17,067.65 $14,356.76
========== ========== ==========
</TABLE>
See accompanying notes.
F-5
<PAGE> 32
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 and forward contracts. 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 (SEC) pursuant to the Securities Exchange Act of 1934
(the Act). As a registrant, the Partnership is subject to the
regulations of the SEC and the informational requirements of the
Act.
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) are reflected
in the statement of financial condition. 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> 33
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 1999 and 1998, amounted to
$263,639 and $145,460, respectively.
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% (2% 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> 34
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 $8,733, $15,478 and $14,991 in 1999,
1998 and 1997, respectively.
The Partnership is not required to make distributions, but may do so
at the sole discretion of the General Partner. A Limited Partner may
request and receive redemption of units owned, subject to
restrictions in the Limited Partnership Agreement.
Note 7. TRADING ACTIVITIES AND RELATED RISKS
The Partnership engages in the speculative trading of U.S. and
foreign futures contracts, options on U.S. and foreign futures
contracts and forward contracts (collectively, "derivatives"). These
derivatives include both financial and non-financial contracts held
as part of a diversified trading strategy. The Partnership is exposed
to both market risk, the risk arising from changes in the market
value of the contracts, and credit risk, the risk of failure by
another party to perform according to the terms of a contract.
Purchase and sale of futures and options on futures contracts
requires margin deposits with the FCMs. Additional deposits may be
necessary for any loss on contract value. The Commodity Exchange Act
requires an FCM to segregate all customer transactions and assets
from such FCM's proprietary activities. A customer's cash and other
property (for example, U.S. Treasury bills) deposited with an FCM are
considered commingled with all other customer funds subject to the
FCM's segregation requirements. In the event of an FCM's insolvency,
recovery may be limited to a pro rata share of segregated funds
available. It is possible that the recovered amount could be less
than total cash and other property deposited.
The Partnership has a substantial portion of its assets on deposit
with brokers and dealers in securities and other financial
institutions in connection with its cash management activities. In
the event of a financial institution's insolvency, recovery of
Partnership assets on deposit may be limited to account insurance or
other protection afforded such deposits.
F-8
<PAGE> 35
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 and forward 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 1999, 1998
and 1997, was approximately $3,300,000, $3,550,000 and $6,240,000,
respectively, and the related fair values as of December 31, 1999 and
1998, are approximately $61,000 and $1,780,000, respectively.
Net trading results from derivatives for the years ended December 31,
1999, 1998 and 1997, are reflected in the statement of operations and
equal gain (loss) 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, 1999 and 1998, the notional amount of open contracts
is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
Contracts to Contracts to Contracts to Contracts to
Purchase Sell Purchase Sell
-------- ---- -------- ----
<S> <C> <C> <C> <C>
Derivatives (excluding
purchased options) $14,000,000 $14,100,000 $1,165,100,000 $803,800,000
Purchased options 0 0 1,600,000 6,600,000
</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> 36
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 30th day of
March, 2000.
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 30th day of March, 2000.
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 Fund)
26
<PAGE> 37
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION
------ -----------
27 Financial Data Schedule.
27
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 19,355,234
<SECURITIES> 14,443,563
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 37,913,349
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 37,913,349
<CURRENT-LIABILITIES> 2,224,471
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 35,688,878
<TOTAL-LIABILITY-AND-EQUITY> 37,913,349
<SALES> 0
<TOTAL-REVENUES> (4,729,644)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 12,813,480
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (17,543,124)
<INCOME-TAX> 0
<INCOME-CONTINUING> (17,543,124)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (17,543,124)
<EPS-BASIC> (4,950.97)
<EPS-DILUTED> (4,950.97)
</TABLE>
