SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10
GENERAL FORM FOR REGISTRATION OF SECURITIES
Pursuant to Section 12(b) or (g) of
The Securities Exchange Act of 1934
SMITH BARNEY AAA ENERGY FUND L.P.
(Exact name of registrant as specified in
its limited partnership agreement)
New York 13-3986032
(State or other jurisdiction (I. R. S. Employer
of incorporation or organization) Identification No.)
390 Greenwich Street-1st floor
New York, New York 10013
(Address of principal executive (Zip Code)
offices)
Registrant's telephone number,
including area code 212-723-5424
Securities to be registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
to be so registered which each class is to be
registered
Securities to be registered pursuant to Section 12(g) of the Act:
Units of Limited Partnership Interest
(Title of Class)
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Item 1. Business
(a) General development of business. Smith Barney AAA Energy Fund L.P.
(the "Partnership") is a limited partnership organized on January 5, 1998 under
the partnership laws of the State of New York. The objective of the Partnership
is to achieve substantial appreciation of its assets through speculative
trading, directly or indirectly, in commodity interests generally including
commodity options and commodity futures contracts on United States exchanges and
certain foreign exchanges. At present, the Partnership may trade commodity
futures and options contracts of any kind, but initially it traded solely energy
and energy related products. In addition, the Partnership has entered into swap
contracts on energy related products (together with other traded futures and
options contracts, the "Commodity Interests"). The Partnership commenced trading
on March 16, 1998, after 49,538 Units had been sold. A total of 66,013 Units in
the Partnership were offered and sold. No units are currently offered, but the
General Partner may, in its sole discretion, offer additional Units at any time.
Redemptions for the year ended December 31, 1998 are reported in the Statements
of Partners' Capital under "Item 13. Financial Statements and Supplementary
Data."
The Partnership engages in its trading through a commodity
brokerage account maintained with its commodity broker, Salomon Smith Barney
Inc. ("SSB"), pursuant to a Customer Agreement of February 12, 1998 between SSB
and the Partnership (the "Customer Agreement"). The Customer Agreement is
attached hereto as Exhibit 10(b)(i). SSB also acted as the Partnership's selling
agent.
Smith Barney Futures Management Inc., a corporation formed
under the laws of the State of Delaware, is the General Partner of the
Partnership (the "General Partner"). The General Partner is registered as a
commodity pool operator and commodity trading advisor with the Commodity Futures
Trading Commission (the "CFTC"). Registration as a commodity pool operator or as
a commodity trading advisor requires annual filings setting forth the
organization and identity of the management and controlling persons of the
commodity pool operator or commodity trading advisor. In addition, the CFTC has
authority under the Commodity Exchange Act, as amended (the "CEA") to require
and review books and records of, and review documents prepared by, a commodity
pool operator or a commodity trading advisor. The CFTC has adopted regulations
which impose certain disclosure, reporting and record-keeping requirements on
commodity pool operators and commodity trading advisors. The CFTC is authorized
to suspend a person's registration as a commodity pool operator or commodity
trading advisor if the CFTC finds that such person's trading practices tend to
disrupt orderly market conditions, that any controlling person thereof is
subject to an order of the CFTC denying such person trading privileges on any
exchange, and in certain other circumstances.
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The General Partner is wholly owned by Salomon Smith Barney
Holdings, Inc. ("SSBH"), which is the sole owner of SSB. SSBH is itself a wholly
owned subsidiary of Citigroup Inc., a publicly held company whose shares are
listed on the New York Stock Exchange and which is engaged in various financial
services and other businesses.
Under the Limited Partnership Agreement of the Partnership
(the "Limited Partnership Agreement") the General Partner has sole
responsibility for the administration of the business and affairs of the
Partnership, but may delegate trading discretion to one or more trading
advisors. The General Partner currently has a Management Agreement in effect
with AAA Capital Management, Inc. (the "Advisor" or "AAA"), pursuant to which
the Advisor manages the Partnership's assets. Pursuant to the express terms of
the Management Agreement, the Advisor is considered to be an independent
contractor of the Partnership. The Advisor has managed the Partnership's assets
since the Partnership's commencement of trading. The General Partner selected
the Advisor on the basis of the trading strategies employed by the sole trading
principal of the Advisor, Mr. A. Anthony Annunziato, as well as the Mr.
Annunziato's previous background and experience in commodity trading.
Since 1984, Mr. Annunziato has been employed by, and is an
associated person of, SSB (or its predecessors) where he currently is a Senior
Vice President/Financial Consultant in Houston, Texas, and where he continues to
trade commodity interests on behalf of client accounts. Because SSB receives
brokerage commissions from the Partnership on a round turn basis, Mr. Annunziato
has a potential conflict of interest insofar as there is an incentive to
generate a large number of trades to benefit his employer. SSB will share a
portion of the brokerage fee with its Financial Consultants who sell Units in
the offering. Mr. Annunziato will not share in the brokerage commissions
generated by the Partnership's account except that SSB will credit Mr.
Annunziato with a portion of the brokerage commissions attributable to the Units
that he or the Advisor owns in the Partnership.
The Advisor will trade the assets of the Partnership in
accordance with its sole trading program. The Advisor primarily trades energy
futures contracts and options on energy futures contracts on domestic and
international exchanges, as well as on the Goldman Sachs Commodity Index (an
index future comprised of approximately 65% energy products) traded on the
Chicago Mercantile Exchange. The Advisor also engages in swap transactions (for
crude oil and other energy related products) on behalf of the Partnership from
time to time. Pursuant to such swap transactions, the Partnership makes payments
of collateral (similar to margin deposits that the Partnership makes on its
futures transactions) to an affiliate of Citibank N.A. located outside of the
United States or its territories. Such depositories are not subject to U.S.
regulation. The Partnership's assets held in these depositories are subject to
the risk that events could occur which would hinder or prevent the availability
of these funds for distribution to customers including the Partnership. Such
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events may include actions by the government of the jurisdiction in which the
depository is located including expropriation, taxation, moratoria and political
or diplomatic events. At this time, the General Partner does not expect that
more than 15% of the Partnership's assets will be deposited in such offshore
depositories.
The Advisor will generally base its trading decisions on
"fundamental" factors, namely supply and demand for a particular group or type
of commodity. The Advisor attempts to buy undervalued commodities and sell
overvalued commodities, often--but not always--simultaneously. The Advisor uses
options to attempt either to reduce or define risks.
The Advisor is aware of price trends but does not trade upon
trends. It often takes profits in positions with specific trends even though
that trend may still be intact or perhaps even strong. The Advisor occasionally
establishes positions that are countertrend.
Effective risk management is a crucial aspect of this trading
program. Account size, expectation, volatility of the market traded and the
nature of other positions taken are all factors in determining the amount of
equity committed to each trade. The Partnership's account has been and is
expected to continue to be the Advisor's largest account.
In addition to other futures interests, the Advisor trades, or
may trade, futures and options contracts and swaps on crude oil, heating oil,
gasoline, natural gas and electricity. Additional energy related contracts may
be also be traded. The preference of a trade will depend upon which commodity
futures or options the Advisor expects will provide the best opportunities for
profit.
The trading strategy to be followed by the Advisor does not
assure successful trading. Investment decisions made in accordance with this
strategy will be based on an assessment of available facts. However, because of
the large quantity of facts at hand, the number of available facts that may be
overlooked and the variables that may shift, any investment decision must, in
the final analysis, be based on the judgment of the Advisor.
The decision by the Advisor not to trade certain markets or
not to make certain trades may result at times in missing price moves and hence
profits of great magnitude, which other trading managers who are willing to
trade these commodities may be able to capture. The Advisor's approach is
dependent in part on the existence of certain fundamental indicators. There have
been periods in the past when there were no such market indicators, and those
periods may reoccur.
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The trading method utilized by the Advisor is proprietary and
confidential. The foregoing description is of necessity general and is not
intended to be exhaustive. Clients of the Advisor will not be able to determine
the full details of those methods, or whether those methods are being followed.
There can be no assurance that any trading strategy of the Advisor will produce
profitable results or will not result in losses.
A limited partner may require the Partnership to redeem some
or all of its Units at Net Asset Value per Unit as of the last day of a month
(the "Redemption Date"). The right to redeem is contingent upon the
Partnership's having property sufficient to discharge its liabilities on the
Redemption Date and upon receipt by the General Partner of a written or oral
request for redemption at least 10 days prior to the Redemption Date. There is
no fee charged to limited partners in connection with redemptions. The General
Partner may also, at its sole discretion and upon 10 days' notice to a limited
partner, require that any limited partner redeem its Units if such redemption is
in the best interests of the Partnership.
Additional Information About the Partnership.
The Partnership is a continuously and privately offered
single-advisor pool, as those terms are defined in Part 4 of the CFTC
regulations.
Fees and Expenses
The break-even point per Unit (that is, the trading profit the
Partnership must realize) during the first year of a participant's investment,
assuming the participant purchased Units at $1,000 each, is 10.99% or $109.87
per Unit invested assuming a partnership size of $85,000,000. These figures
assume that such participant would redeem its Units after one year of
participation.
The following table is a summary of fees and expenses for the
Partnership and expresses the break-even point per Unit both as a dollar amount
and as a percentage of a $1,000 investment. (Note: The current minimum
investment is $25,000.)
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Estimated Partnership Size: $85,000,000
Initial Selling Price per Unit (1) $1,000.00
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Interest Income Credit (2) $ (35.20)
Brokerage Fees (3) $ 126.00
Other Operating Expenses (4) $ 0.90
Advisory Fee (5) $ 18.17
---------
Amount of Trading Income Required for the
Partnership's Net Asset Value per Unit at the
End of One Year to Equal the Selling Price per Unit
$ 109.87
Percentage of Initial Selling Price per Unit to break even:
10.99%
Explanatory Notes
(1) Investors initially purchased Units at $1,000. When Units
are offered they can be purchased at the Partnership's Net Asset Value per Unit
as of the purchase date.
(2) At December 31, 1998, the amount of cash held for minimum
margin requirements was $13,798,637. The Partnership earns interest income on
80% of the average daily equity maintained in cash in the Partnership's accounts
at a rate equal to the average yield on the 30-day U.S. Treasury bills issued
during each month. For purposes of this analysis, the interest rate used was
estimated at 3.52% of the Partnership's Net Asset Value (assuming an estimated
annual interest rate of 4.4%). Interest income was first used after trading
commenced to reimburse SSB for expenses incurred during the Initial Offering
Period plus interest at the prime rate as quoted by Chase Manhattan Bank. Such
expenses were fully reimbursed as of March, 31 1998.
(3) Brokerage fees were estimated at $21.00 per round turn
($18 for brokerage and $3 for other trading related expenses) based on 6,000
round turn transactions annually per $1,000,000 invested. In 1998, the
Partnership paid approximately $5,527,260 in such fees, which is equal to
approximately 9.5% of the Partnership Net Assets. Pursuant to the Customer
Agreement, SSB will execute transactions for the Partnership's account in
accordance with orders placed by the Advisor. The services to be provided by SSB
include the execution of orders and the rendering of bookkeeping and clerical
assistance to the Partnership and the General Partner. The Customer Agreement
may be terminated upon notice by either party. SSB will share a portion of the
brokerage fee with its Financial Consultants who sell Units in the offering. Mr.
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Annunziato will not share in the brokerage commissions generated by the
Partnership's account except that SSB will credit Mr. Annunziato with a portion
of the brokerage commissions attributable to the Units that he or the Advisor
owns in the Partnership.
(4) Other operating expenses include periodic legal,
accounting, filing and reporting fees; expenses of printing and other
administrative costs; and expenses of the Continuous Offering. These expenses
are expected to amount to 0.09% of Net Asset Value (based upon $75,000 in
estimated expenses and an estimated Partnership size of $85,000,000).
(5) The Partnership pays an advisory fee of 2% per annum
(payable monthly) which is split evenly between the Advisor and SSB. The trading
advisor's Profit Share allocation of 20% is not included in computing the
break-even point per Unit because it is paid, if at all, after deducting all
other expenses.
The Partnership's Organizational & Offering Expenses, which
include the expenses of the Initial Offering Period, were $75,951. Such expenses
were borne initially by SSB. The Partnership has reimbursed SSB for the offering
and organizational expenses of the initial offering period.
ERISA Considerations
The Units in the Partnership which are offered may be
purchased by employee benefit plans subject to the Employee Retirement Income
Security Act of 1974 ("ERISA") and/or Section 4975 of the Internal Revenue Code
of 1986, as amended (the "Code"). The phrase "employee benefit plan" refers to
plans of various types including corporate pension and profit-sharing plans
(including 401(k) plans), "simplified employee pension plans", so-called "Keogh"
(H.R. 10) plans for self-employed individuals, including partners, and
"Individual Retirement Accounts" (or "IRAs") for persons (including employees
and self-employed persons) who receive compensation income.
Units may not be purchased by an employee benefit plan if the
selling agent or its Financial Consultants, the General Partner or their
affiliates (a) exercise any discretionary authority or discretionary control
respecting management of such employee benefit plan, (b) exercise any authority
or control respecting management or disposition of the assets of such employee
benefit plan, (c) render investment advice for a fee or other compensation,
direct or indirect, with respect to any moneys or other property of such
employee benefit plan, (d) have any authority or responsibility to render
investment advice with respect to any moneys or other property of such employee
benefit plan, or (e) have any discretionary authority or discretionary
responsibility in the administration of such employee benefit plan. For the
purposes of this paragraph, "investment advice" shall mean rendering investment
advice as to the value of securities or other property, or making
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recommendations as to the advisability of investing in securities, directly or
indirectly, and either (i) having discretionary authority or control, whether or
not pursuant to an agreement, arrangement or understanding, with respect to
purchasing or selling securities or other property for the plan, or (ii)
rendering such investment advice on a regular basis to the employee benefit plan
pursuant to a mutual agreement, arrangement or understanding, written or
otherwise, between such person and the employee benefit plan or a fiduciary with
respect to such employee benefit plan, that such services will serve as a
primary basis for investment decisions with respect to assets of the employee
benefit plan, and that such person will render individualized investment advice
to the employee benefit plan based on the particular needs of the employee
benefit plan regarding such matters, as, among other things, investment policies
or strategy, overall portfolio composition, or diversification of plan
investments.
Under ERISA, a fiduciary of an employee benefit plan is
required, among other things, to discharge his duties toward such plan with the
care, skill, prudence and diligence under the circumstances then prevailing that
a prudent man acting in a like capacity and familiar with such matters would use
in the conduct of an enterprise of a like character and with like aims. In
considering an investment in the Partnership of a portion of the assets of an
employee benefit plan, a fiduciary having investment responsibilities with
respect to an employee benefit plan should give appropriate consideration to
those facts and circumstances that, given the scope of his or her investment
duties, he or she knows or should know are relevant to investment in the
Partnership, including the role the investment in the Partnership plays in that
portion of the plan's investment portfolio with respect to which the fiduciary
has investment duties.
A fiduciary having investment responsibilities with respect to
an employee benefit plan should consult regulations of the Department of Labor
to determine whether he or she has made appropriate consideration of relevant
factors in investing in the Partnership. In addition to any factors which must
be considered by such fiduciary with respect to investment of assets of an
employee benefit plan in the Partnership under the above regulation, such
fiduciary should also consider (i) whether the investment is in accordance with
the documents and instruments governing said plan, (ii) whether the investment
satisfies the diversification rules of Section 404(a)(1)(C) of ERISA, if
applicable, (iii) whether the investment will result in unrelated business
taxable income to the Plan, (iv) whether the investment provides sufficient
liquidity, (v) the need to value the assets of the plan annually, and (vi)
whether the investment is prudent.
Assets of employee benefit plans ("plan assets") are generally
subject to the fiduciary duty provisions of ERISA and the prohibited transaction
provisions of ERISA and the Code. ERISA does not define "plan assets", however,
the Department of Labor has published a final regulation defining the term "plan
assets" (the "Final Regulation") for purposes of Title I of ERISA and Section
4975 of the Code. Under the Final Regulation, generally, when a plan makes an
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equity investment in another entity, the underlying assets of that entity will
be considered plan assets unless (i) the equity interest is a "publicly offered"
security or a security issued by an investment company registered under the
Investment Company Act of 1940, (ii) the entity is an "operating company", or
(iii) equity participation by benefit plans is not "significant".
The Units will not be deemed to be "publicly offered"
securities for purposes of the Final Regulation. In addition, the Partnership is
not an "operating company" within the meaning of the Final Regulation. The final
exception to the "plan assets" rule is for investment in entities in which there
is not "significant" investment by "benefit plan investors". "Benefit plan
investors" include employee-benefit plans subject to ERISA as well as plans not
subject to ERISA, such as governmental plans and IRAs. Investment by benefit
plan investors is not "significant" as defined in the Final Regulation, if the
aggregate investment by benefit plan investors in each class of securities of
the investment entity is less than 25%. Determinations of the percentage of
participation by benefit plan investors must be made after each such investment
or redemption, and investments held by the investment entity's managers,
investment advisers and their affiliates must be disregarded in calculating the
percentage.
The Partnership intends to qualify under the "significant
participation" exception in the Final Regulation by monitoring the percentage
investment by benefit plan investors and maintaining it below 25%. In order to
accomplish this, the subscription agreement requires that a benefit plan
investor may be required to redeem its Units upon notice from the General
Partner.
In the unlikely event that the Partnership were deemed to hold
plan assets, prohibited transactions could arise under ERISA and the Code. In
addition, investment by a fiduciary of an employee-benefit plan could be deemed
an improper delegation of investment authority, and the fiduciary could be
liable, either directly or under the co-fiduciary rules of ERISA, for the acts
of the General Partner. Additional issues relating to "plan assets" and
"prohibited transactions" under ERISA and the Code could arise by virtue of the
General Partner's ownership of interests in the Partnership and the possible
relationship between an affiliate of the General Partner and any
employee-benefit plan which may purchase Units. Further, certain transactions
between the Partnership and the General Partner and certain affiliates of the
General Partner could be prohibited transactions.
It should be noted that even if the Partnership's assets are
not deemed to be plan assets, the Department of Labor has stated in Interpretive
Bulletin 75-2 (29 C.F.R. ss.2509.75-2, as amended by the Final Regulation) that
it would consider a fiduciary who makes or retains an investment in a
partnership for the purpose of avoiding application of the fiduciary
responsibility provisions of ERISA to be in contravention of the fiduciary
provisions of ERISA. The Department of Labor has indicated further that if a
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plan invests in or retains its investment in a partnership and as part of the
arrangement it is expected that the partnership will enter into a transaction
with a party in interest to the plan (within the meaning of ERISA) which
involves a direct or indirect transfer to or use by the party in interest of any
assets of the plan, the plan's investment in the partnership would be a
prohibited transaction under ERISA.
A prohibited transaction may result in the imposition of
potential personal liability upon fiduciaries of employee-benefit plans subject
to ERISA and an excise tax under Section 4975 of the Code upon the "disqualified
person" with respect to the plan (as explained in Section 4975 of the Code). Any
fiduciary that has engaged in any prohibited transaction would be required to
(i) restore to the plan any profit realized on the transaction and (ii) make
good to the plan any losses suffered by the plan as a result of such investment.
The disqualified person involved would be liable to pay an excise tax of 15% of
the amount involved in the prohibited transaction for each year in which the
investment is in place and would be required to eliminate the prohibited
transaction by reversing the transaction and making good to the employee-benefit
plan any losses resulting from the prohibited transaction. If the transaction is
not corrected within a certain time period, the disqualified person could also
be liable for an additional excise tax in an amount equal to 100% of the amount
involved.
In addition to liability for plan losses, ERISA imposes a
civil penalty against fiduciaries of employee-benefit plans who breach the
prudence and other fiduciary standards of ERISA and against non-fiduciaries who
knowingly participate in the transaction giving rise to the breach. A prohibited
transaction by an employee-benefit plan fiduciary would constitute a breach of
the ERISA fiduciary standards. The civil penalty is equal to 20% of the amount
recovered from a fiduciary or non-fiduciary with respect to such breach or
knowing participation pursuant to a settlement agreement with the United States
Secretary of Labor or a court order resulting from a proceeding instituted by
the Secretary. The penalty may be waived and, in any event, would be offset to
the extent of the responsible party's liability for excise tax under the Code.
Each limited partner will be furnished with monthly statements
and annual reports which include the Net Asset Value per Unit. The General
Partner believes that these statements will be sufficient to permit plan
fiduciaries to provide an annual valuation of plan investments as required by
ERISA; however, fiduciaries should note that they have the ultimate
responsibility for providing such valuation. Accordingly, plan fiduciaries
should consult with their attorneys or other advisors regarding their
obligations under ERISA with respect to making such valuations.
Plan fiduciaries should understand the potentially illiquid
nature of an investment in the Partnership and that a secondary market does not
exist for a Unit. Accordingly, plan fiduciaries should review both anticipated
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and unanticipated liquidity needs for their respective plans, particularly those
for a participant's termination of employment, retirement, death, disability or
plan termination. Plan fiduciaries should be aware that distributions to
participants may be required to commence in the year after the participant
attains age 70-1/2.
The Advisor does not participate in any way in the decision by
any particular employee benefit plan to invest in the Partnership, including any
determination with respect to fees and expenses to be paid by the Partnership.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests including commodity options, commodity futures contracts and swap
contracts, with an emphasis on energy and energy related products. The
Partnership's net income (loss) from operations for the year ended December 31,
1998 (the period from March 16, 1998 (commencement of trading) to December 31,
1998) are set forth under "Item 2. Financial Information." The Partnership does
not engage in sales of goods or services. Partnership capital as of December 31,
1998 was $79,727,340.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - not applicable.
(xi) through (xii) - not applicable.
(xiii) - The Partnership has no employees. The directors and officers
of the General Partner and the Advisor are listed in "Item 5. Directors and
Executive Officers".
Item 2. Financial Information.
(a) The Partnership commenced trading operations on March 16, 1998.
Realized and unrealized trading gains (losses), interest income, net income
(loss) and increase (decrease) in net asset value per Unit for the period from
March 16, 1998 (commencement of trading) to December 31, 1998 and total assets
at December 31, 1998 were as follows:
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1998
Realized and unrealized trading gains net of
brokerage commissions and clearing fees of $686,659 $14,675,192
Interest income $ 1,978,202
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$16,653,394
Net Income before Special Allocation to Advisor $15,401,913
Increase in net asset value per unit $ 184.33
Total assets $84,035,617
Investors should note that past performance is not necessarily
indicative of future performance and the Partnership's level of future
performance cannot be predicted.
(b) Management's Discussion and Analysis of Financial
Condition and Results of Operations
(1) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its (i) equity in its commodity futures trading
account, consisting of cash and cash equivalents, net unrealized appreciation
(depreciation) on open futures contracts and interest receivable, and (ii)
collateral in the form of cash deposited with its swaps counterparty. Because of
the low margin deposits normally required in commodity futures trading,
relatively small price movements may result in substantial losses to the
Partnership. Such substantial losses could lead to a material loss in liquidity.
To minimize this risk, the Partnership follows certain trading policies,
including:
(i) Partnership funds are invested only in futures contracts which are
traded in sufficient volume to permit, in the opinion of the Advisor at the time
a position is entered into, ease of taking and liquidating positions.
(ii) The Advisor does not initiate additional positions in any
commodity for the Partnership if such additional positions would result in
aggregate positions for all commodities requiring a margin of more than 66-2/3%
of net assets of the Partnership managed by the Advisor.
(iii) The Partnership may occasionally accept delivery of a commodity.
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(iv) The Partnership does not employ the trading technique commonly
known as "pyramiding", in which the speculator uses unrealized profits on
existing positions as margin for the purchases or sale of additional positions
in the same or related commodities.
(v) The Partnership does not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
(vi) The Advisor may, from time to time, employ trading strategies such
as spreads or straddles on behalf of the Partnership. The term "spread" or
"straddle" describes a commodity futures trading strategy involving the
simultaneous buying and selling of futures contracts on the same commodity but
involving different delivery dates or markets and in which the trader expects to
earn a profit from a widening or narrowing of the difference between the prices
of the contracts.
(vii) The Partnership will not permit the churning of its commodity
trading account.
The Partnership is party to financial instruments with off-balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
include forwards, futures, options and swaps, whose value is based upon an
underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, or to purchase or sell other
financial instruments at specified terms at specified future dates, or, in the
case of derivative commodity interests, to have a reasonable possibility to be
settled in cash, through physical delivery or with another financial instrument.
These instruments may be traded on an exchange or over-the-counter ("OTC").
Exchange traded instruments are standardized and include futures and certain
option contracts. OTC contracts are negotiated between contracting parties and
include forwards, swaps and certain options. Each of these instruments is
subject to various risks similar to those relating to the underlying financial
instruments including market and credit risk. In general, the risks associated
with OTC contracts are greater than those associated with exchange traded
instruments because of the greater risk of default by the counterparty to an OTC
contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including interest
and foreign exchange rate movements and fluctuations in commodity or security
prices. Market risk is directly impacted by the volatility and liquidity in the
markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure
of a counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as counterparty to the transactions. The
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Partnership's risk of loss in the event of counterparty default is typically
limited to the amounts recognized in the statement of financial condition and
not represented by the contract or notional amounts of the instruments. The
Partnership has concentration risk because the sole counterparty or broker with
respect to the Partnership's assets is SSB. As of December 31, 1998 the sole
counterparty to the Partnership's swap contracts was Citibank, N.A. which is
affiliated with the Partnership.
The General Partner monitors and controls the Partnership risk exposure
on a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject. These monitoring systems allow the General Partner to statistically
analyze actual trading results with risk adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide account
analysis of futures, forwards and options positions by sector, margin
requirements, gain and loss transactions and collateral positions. (See also
"Item 13. Financial Statements and Supplementary Data" for further information
on financial instrument risk included in the notes to financial statements.)]
Other than the risks inherent in commodity futures and swaps trading,
the Partnership knows of no trends, demands, commitments, events or
uncertainties which will result in or which are reasonably likely to result in
the Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, in its
discretion, cause the Partnership to cease trading operations and liquidate all
open positions under certain circumstances including a decrease in Net Asset
Value per Unit to less than $400 as of the close of business on any business
day.
As of December 31, 1998, the Partnership had privately offered 66,013
Units of limited partnership interest resulting in aggregate proceeds to the
Partnership of $50,038,000, which includes proceeds of $49,538,000 from the
initial offering of 49,538 Units of limited partnership interest. All of the
proceeds of the Partnership's offering of its Units are deposited in its
commodity trading account at SSB where they are available to margin the
Partnership's commodity futures trading.
The Partnership is not currently offering additional Units, but its
Limited Partnership Agreement permits it to do so in the future.
(2) Capital Resources. (i) The Partnership has made no material
commitments for capital expenditures.
<PAGE>
(ii) The Partnership's capital consists of the capital contributions
of the partners as increased or decreased by gains or losses on Commodity
Interest trading and by expenses, interest income, redemptions of Units and
distributions of profits, if any. Gains or losses on commodity futures trading
cannot be predicted. Market moves in commodities are dependent upon fundamental
and technical factors which the Partnership may or may not be able to identify,
such as changing supply and demand relationships, weather, government
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates.
Partnership expenses consist of, among other things, commissions, management
fees and a profit share allocation to the Advisor. The level of these expenses
is dependent upon the level of trading and the ability of the Advisor to
identify and take advantage of price movements in the commodity markets, in
addition to the level of Net Assets maintained. The amount of interest income
payable by SSB is dependent upon interest rates over which the Partnership has
no control. No forecast can be made as to the level of redemptions in any given
period. In 1998, 1,642.7041 Units were redeemed for a total of $1,848,573.
(c) Results of Operations. From March 16, 1998, the commencement of
trading, until December 31, 1998, the net asset value per Unit increased 18.4%
from $1,000.00 to $1,184.33. "Net Assets" is defined as the total assets of the
Partnership including all cash, accrued interest, and the market value of all
open commodity positions maintained by the Partnership, less brokerage charges
accrued and less all other liabilities of the Partnership. Net Assets equal Net
Asset Value. Net Asset Value of a Unit means Net Asset Value divided by the
number of Units outstanding.
The Partnership experienced a net trading gain of $20,202,452 before
commissions and expenses for the period from March 16, 1998 (the commencement of
trading)to December 31, 1998, respectively. Trading gains for the year ended
December 31, 1998 were primarily attributable to gains recognized in Energy
contracts.
Commodity futures markets are highly volatile. Broad price fluctuations
and rapid inflation increase the risks involved in commodity trading, but also
increase the possibility of profit. The profitability of the Partnership depends
on the ability of the Advisor to identify correctly commodity positions that
will profit from price changes. Such price changes could be influenced by, among
other things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. To
the extent that the Advisor is able to take advantage of commodity price
changes, the Partnership expects to increase capital through operations.
<PAGE>
The business reason for the success or failure of the Partnership's
operations in any given period (including the period from March 16, 1998
(commencement of trading) to December 31, 1998) is the relative success or
failure of the Advisor's trading strategy in trading various worldwide commodity
markets during the relevant periods. In addition, during the period from
February 12, 1998 (commencement of offering period) to December 31, 1998, the
Partnership sold 66,013 Units of limited partnership interest, respectively,
resulting in aggregate proceeds to the Partnership of $65,511,000 in 1998. The
increase in the Partnership's capital over these periods entailed a commensurate
increase in the Partnership's contracts traded on various markets worldwide,
particularly energy markets, with an increased exposure to the possibility of
gain or loss on any given contract. There is no assurance that the Partnership's
performance in the past will be the same or different in the future.
d. Quantitative and Qualitative Disclosures about Market
Risk.
(1) Past Results Not Necessarily Indicative of Future
Performance. The Partnership is a speculative commodity pool. The
market sensitive instruments held by it are acquired for speculative trading
purposes, and all or substantially all of the Partnership's assets are subject
to the risk of trading loss. Unlike an operating company, the risk of market
sensitive instruments is integral, not incidental, to the Partnership's main
line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors.
These primarily include factors which affect energy price levels, including
supply factors and weather conditions, but could also include the level and
volatility of interest rates, exchange rates, equity price levels, the market
value of financial instruments and contracts, the diversification effects among
the Partnership's open positions and the liquidity of the markets in which it
trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
<PAGE>
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership 's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
(2) Standard of Materiality. Materiality as used in this section,
"Qualitative and Quantitative Disclosures About Market Risk," is based on an
assessment of reasonably possible market movements and the potential losses
caused by such movements, taking into account the leverage, optionality and
multiplier features of the Partnership's market sensitive instruments.
(3) Quantifying the Fund's Trading Value at Risk. The following
quantitative disclosures regarding the Partnership's market risk exposures
contain "forward-looking statements" within the meaning of the safe harbor civil
liability provided for such statements by the Private Securities Litigation
Reform Act of l995 (set forth in Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934). All quantitative
disclosures in this section are deemed to be forward-looking statements for
purposes of the safe harbor, except for statements of historical fact (such as
the terms of particular contracts and the number of market risk sensitive
instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by
the Advisor is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized) and cash flow (at least in the case of exchange-traded
contracts in which profits and losses on open positions are settled daily
through variation margin).
Exchange maintenance margin requirements have been used by the 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.
<PAGE>
In the case of market sensitive instruments which are not
exchange-traded (such as swaps on various energy-related products), the margin
requirements for the equivalent futures positions have been used as Value at
Risk. When a futures-equivalent margin is not available, dealers' margins have
been used.
The fair value of the Partnership's futures and forward positions does
not have any optionality component. However, the Advisor trades commodity
options. The Value at Risk associated with options is reflected in the table set
forth below as the margin requirement attributable to the instrument underlying
each option. Where this instrument is a futures contract, the futures margin,
and where this instrument is a physical commodity, the futures-equivalent
maintenance margin has been used. This calculation is conservative in that it
assumes that the fair value of an option will decline by the same amount as the
fair value of the underlying instruments whereas, in fact the fair values of the
options traded by the Partnership in all cases fluctuate to a lesser extent than
those of the underlying Instruments.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been aggregated to determine each trading category's
aggregate Value at Risk. The diversification effects resulting from the fact
that the Partnership's positions are rarely, if ever, 100% positively correlated
have not been reflected.
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of December 31, 1998. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1998, the
Partnership's total capitalization was approximately $79,727,340.
December 31, 1998
% of Total
Market Sector Value at Risk Capitalization
Energy $11,939,250 14.98%
Energy Swaps $1,644,887 2.06%
Indices $214,500 0.27%
------------ -----
Total $13,798,637 17.31%
(4) Material Limitations on Value at Risk as an Assessment
of Market Risk. The face value of the market sector instruments
held by the Partnership is typically many times the applicable maintenance
margin requirement (maintenance margin requirements generally ranging between
<PAGE>
approximately 1% and 10% of contract face value) as well as many times the
capitalization of the Partnership. The magnitude of the Partnership's open
positions creates a "risk of ruin" not typically found in most other investment
vehicles. Because of the size of its positions, certain market conditions
- --unusual, but historically recurring from time to time -- could cause the
Partnership to incur severe losses over a short period of time. The foregoing
Value at Risk table -- as well as the past performance of the Partnership --
give no indication of this "risk of ruin."
Additionally, the Fund enters into swap agreements with respect to
certain energy related products. While these swaps are represented in the table
above, such representation is achieved through the addition of maintenance
margins corresponding to exchange-traded futures contracts that would be needed
to achieve equivalent positions to the swaps. However, it may not be possible to
fully ascertain an exact equivalent of an off-exchange swap with exchange-traded
futures. Swaps may have unique terms not present in such futures. Furthermore,
swaps carry an element of counterparty risk which may not be accurately
represented in exchange-set maintenance margins. As of December 31, 1998, the
Partnership's sole counterparty in these transactions was Citibank N.A. The
General Partner attempts to reduce the Partnership's counterparty risk by
permitting the Partnership to contract only with well-capitalized
counterparties.
(5) Qualitative Disclosures Regarding Primary Trading Risk
Exposures. The following qualitative disclosures regarding the
Partnership's market risk exposures -except for (i) those disclosures that are
statements of historical fact and (ii) the descriptions of how the Partnership
manages its primary market risk exposures -- constitute forward-looking
statements within the meaning of Section 27A of the Securities Act and Section
21E of the Securities Exchange Act. The Partnership's primary market risk
exposures as well as the strategies used and to be used by the General Partner
and the Advisor for managing such exposures are subject to numerous
uncertainties, contingencies and risks, any one of which could cause the actual
results of any of the Advisor's risk controls to differ materially from the
objectives of such strategies. Government interventions, defaults and
expropriations, illiquid markets, the emergence of dominant fundamental factors,
political upheavals, changes in historical price relationships, an influx of new
market participants, increased regulation and many other factors could result in
material losses as well as in material changes to the risk exposures and the
risk management strategies of the Partnership. There can be no assurance that
the Partnership's current market exposure and/or risk management strategies will
not change materially or that any such strategies will be effective in either
the short- or long-term. Investors must be prepared to lose all or substantially
all of their investment in the Partnership.
<PAGE>
The following were the primary trading risk exposures of the
Partnership as of December 31, 1998, by market sector.
(a) Energy. Energy related products, such as crude oil, heating oil,
gasoline, natural gas and electricity, constitute the principal market exposure
of the Fund. The Partnership has substantial market exposure to gas and oil
price movements, often resulting from political developments in the Middle East.
Political developments in other countries or regions can also materially impact
upon the prices of energy products, as could changing supply and demand
relationships, weather, governmental, commercial and trade programs and
policies, and other significant economic events. Energy prices can be volatile
and substantial profits and losses have been and are expected to continue to be
experienced in these markets.
The Partnership engages in swap transactions in crude oil and other
energy related products. In this connection, the Partnership has contracted with
Citibank N.A. to exchange a stream of payments computed by reference to a
notional amount and the price of the energy product that is the subject of the
swap. Swap contracts are not guaranteed by an exchange or clearing house.
The Partnership will usually enter into swaps on a net basis, i.e., the
two payment streams are netted out in a cash settlement on the payment date or
dates specified in the agreement, with the Partnership receiving or paying, as
the case may be, only the net amount of the two payments. Swaps do not involve
the delivery of underlying assets or principal. Accordingly, the risk of loss
with respect to swaps is limited to the net amount of payments that the
Partnership is contractually obligated to make. If the counterparty to a swap
defaults, the Partnership's risk of loss consists of the net amount of payments
that the Partnership is contractually entitled to receive.
The Partnership may also enter into spot transactions to purchase or
sell commodities with SSB, or one of its affiliates, as principal. Such spot
transactions provide for two day settlement and are not margined. Such
transactions may be entered into in connection with exchange for physical
transactions. Like the swap contract market, the spot market is a principals'
market so there is no clearinghouse guarantee of performance. Instead, the
Partnership is subject to the risk of inability of, or refusal by, a
counterparty to perform with respect to the underlying contract.
(b) Other Commodity Interests. The Fund primarily emphasizes the
trading of energy products, but may also trade some portion of its assets in
other commodity interests, including, but not limited to, commodity interest
contracts on the Goldman Sachs Commodity Index (an index future comprised of
approximately 65% energy products). Commodity interest prices can be affected by
numerous factors, including political developments, weather conditions, seasonal
effects and other factors which affect supply and demand for the underlying
commodity.
<PAGE>
(6) Qualitative Disclosures Regarding Non-Trading Risk
Exposure. The following were the non-trading risk exposures of the
Partnership as of December 31, 1998.
(a) Non-Segregated Account. Since 10% or more of the Units are owned by
employees of SSB, the General Partner and their principals and employees
(including the principals of the Advisor), the Partnership's commodity futures
account with SSB will be carried as a "proprietary account". Such accounts do
not receive the protections afforded by Section 4d(2) of the Commodity Exchange
Act relating to the segregation of customer funds. This means that in the event
of a bankruptcy of the futures commission merchant carrying the account, the
balance in the account would be classified in the liquidation as that of a
general creditor. As such, the Partnership's account would not be a
first-priority distribution of the firm's assets. By contrast, segregated
accounts are a first priority distribution.
(b) Operational Risk. The Partnership is directly exposed to market
risk and credit risk, which arise in the normal course of its business
activities. Slightly less direct, but of critical importance, are risks
pertaining to operational and back office support. This is particularly the case
in a rapidly changing and increasingly global environment with increasing
transaction volumes and an expansion in the number and complexity of products in
the marketplace.
Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity
loss and legal liability attributable to operational problems, such as
inaccurate pricing of transactions, untimely trade execution, clearance and/or
settlement, or the inability to process large volumes of transactions.
Technological Risk - the risk of loss attributable to technological
limitations or hardware failure that constrain the Partnership's ability to
gather, process, and communicate information efficiently and securely, without
interruption, within the Partnership and among limited partners, and in the
markets where the Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to
deficiencies in the documentation of transactions (such as trade confirmations)
or errors that result in noncompliance with applicable legal and regulatory
requirements.
<PAGE>
Financial Control Risk - the risk of loss attributable to limitations
in financial systems and controls. Strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
authorization, and that financial information utilized by the Advisor and
communicated to external parties, including limited partners and regulators, is
free of material errors.
(c) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires that an entity recognize all derivatives in the statement of
financial condition and measure those instruments at fair value. SFAS 133 is
effective for fiscal year beginning after June 15, 1999 SFAS 133 is expected to
have no material impact on the financial statements of the Partnership as all
commodity interests are recorded at fair value, with changes therein reported in
the statement of income and expenses
(d) Risk of Computer System Failure (Year 2000 Issue)
The Year 2000 issue is the result of existing computers in many
businesses using only two digits to identify a year in the date field. These
computers and programs, often referred to as "information technology," were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, many computer applications could fail or create
erroneous results at the Year 2000. Such systems and processes are dependent on
correctly identifying dates in the next century.
The General Partner administers the business of the Partnership through
various systems and processes maintained by SSBH and SSB. In addition, the
operation of the Partnership is dependent on the capability of the Partnership's
Advisor, the brokers and exchanges through which the Advisor trades, and other
third parties to prepare adequately for the Year 2000 impact on their systems
and processes. The Partnership itself has no systems or information technology
applications relevant to its operations.
<PAGE>
The General Partner, SSB, SSBH and their parent organization Citigroup
Inc. have undertaken a comprehensive, firm-wide evaluation of both internal and
external systems (systems related to third parties) to determine the specific
modifications needed to prepare for the year 2000. The combined Year 2000
program in SSB is expected to cost approximately $140 million over the four
years from 1996 through 1999, and involve over 450 people at the peak staffing
level. SSB expects to complete all compliance and certification work by June
1999. At this time, over 95% of SSBH systems have completed the correction
process and are Year 2000 compliant. Over 73% of the systems have completed
certification testing. The Year 2000 project at SSBH remains on schedule.
The systems and components supporting the General Partner's business
that require remediation have been identified and modifications have been made
to bring them into Year 2000 compliance. Testing of these systems was completed
in the fourth quarter of 1998. Final testing and certification are expected to
be completed by the end of the first quarter of 1999.
This expenditure and the General Partner's resources dedicated to the
preparation for Year 2000 do not and will not have a material impact on the
operation or results of the Partnership.
The General Partner has requested and received statements from the
Advisor that it has undertaken its own evaluation and remediation plans to
identify any of its computer systems that are Year 2000 vulnerable. The Advisor
has confirmed it is taking immediate actions to remedy those systems as
necessary. The General Partner will continue to inquire into and to confirm the
Advisor's readiness for Year 2000.
The most likely and most significant risk to the Partnership associated
with the lack of Year 2000 readiness is the failure of outside organizations,
including the commodities exchanges, clearing organizations, or regulators with
which the Partnership interacts to resolve their Year 2000 issues in a timely
manner. This risk could involve the inability to determine the value of the
Partnership at some point in time and would make effecting purchases or
redemptions of Units in the Partnership infeasible until such valuation was
determinable.
SSB has successfully participated in industry-wide testing including:
The Streetwide Beta Testing organized by the Securities Industry Association
(SIA), a government securities clearing test with the Federal Reserve Bank of
New York, The Depository Trust Company, and The Bank of new York, and Futures
Industry Association participants test. The firm is also participating in the
streetwide testing which commenced in March 1999.
It is possible that problems may occur that would require some time to
repair. Moreover, it is possible that problems will occur outside SSBH for which
SSBH could experience a secondary effect. Consequently, SSBH is preparing
comprehensive, written contingency plans so that alternative procedures and a
framework for critical decisions are defined before any potential crisis occurs.
The goal of Year 2000 contingency planning is a set of alternate
procedures to be used in the event of a critical system failure or a failure by
a supplier or counterparty. Planning work was completed in December 1998, and
testing of alternative procedures will be conducted in the first half of 1999.
<PAGE>
(7) Qualitative Disclosures Regarding Means of Managing Risk
Exposure. The General Partner monitors the Partnership's
performance and the concentration of its open positions, and consults with the
Advisor concerning the Partnership's overall risk profile. If the General
Partner felt it necessary to do so, the General Partner could require the
Advisor to close out individual positions as well as enter programs traded on
behalf of the Partnership. However, any such intervention would be a highly
unusual event. The General Partner primarily relies on the Advisor's own risk
control policies while maintaining a general supervisory overview of the
Partnership's market risk exposures. See also Item 2(b), "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Advisor applies its own risk management policies to its trading.
The Advisor often follows diversification guidelines, margin limits and stop
loss points to exit a position. The Advisor's research of risk management often
suggests ongoing modifications to its trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisor to discuss its risk management and to look
for any material changes to the Advisor's portfolio balance and trading
techniques. The Advisor is required to notify the General Partner of any
material changes to its programs.
The General Partner controls the risk of the Partnership's non-trading
assets by depositing them in bank accounts and pays monthly interest to the
Partnership on 80% of the average daily equity maintained in cash in such
accounts during each month at a 30-day U.S. Treasury bill rate.
Item 3.Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SSB.
Item 4. Security Ownership of Certain Beneficial Owners and Management.
(a) Security ownership of certain beneficial owners. The Partnership
knows of no person who beneficially owns more than 5% of the Units outstanding.
(b) Security ownership of management. Under the terms of the Limited
Partnership Agreement, the Partnership's affairs are managed by the General
Partner, and the General Partner is required to contribute to the Partnership an
amount at least equal to the greater of 1% of capital contributions or $25,000.
As set forth in the table below, the General Partner owned Units of General
Partnership interest equivalent to 667.0550 Units at December 31, 1998. David J.
<PAGE>
Vogel, the President and a Director of the General Partner, owned 75 Units at
December 31, 1998. Michael R. Schaefer, a Director of the General Partner, owned
50 Units at December 31, 1998. Daniel R. McAuliffe, Jr., the Director of
Administration and a Director of the General Partner, owned 10.3165 Units at
December 31, 1998. Other than Messrs. Vogel, Schaefer and McAuliffe, none of the
directors and executive officers of the General Partner beneficially owns any
Units. The Advisor owned 2,279.7 Units as of December 31, 1998, and receives a
20% profit share allocation of new trading profits in the form of Units.
<TABLE>
<CAPTION>
Title of Class Name of beneficial owner Amount and nature of Percent of class
beneficial ownership
<S> <C> <C> <C>
Units of general Smith Barney Futures 667.0550 100%
partnership interest Management Inc.
Units of limited David J. Vogel 75.0000 0.11%
partnership interest
Units of limited Michael R. Schaefer 50.0000 0.075%
partnership interest
Units of limited Daniel R. McAuliffe, Jr. 10.3165 0.02%
partnership interest
Units of limited AAA Capital Management, Inc. 2,279.7128 3.42%
partnership interest
</TABLE>
(c) Changes in control. None.
Item 5. Directors and Executive Officers
The Partnership has no officers or directors and its affairs are
managed by its General Partner, Smith Barney Futures Management Inc. The
officers and directors of the General Partner are Jack H. Lehman, III (Chairman
and Director), David J. Vogel (Director and President), Michael R. Schaefer
(Director), Steven J. Keltz (Secretary and Director), Daniel A. Dantuono (Chief
Financial Officer, Treasurer and Director), Daniel R. McAuliffe, Jr. (Director),
Shelley Ullman (Senior Vice President and Director) and Maureen O'Toole (Senior
Vice President). Each director and officer is subject to re-appointment
annually.
<PAGE>
The business background for the past five years of each director and
officer of the General Partner is as follows:
Mr. Lehman, age 52, has been a Senior Executive Vice President and
Director of SSB's commodity division since May 1992. In addition, he has been a
Director of the General Partner since July 1993 and was Co-Chairman of SSB's
commodity division from July 1992 through May 1996. Before joining SSB, he was
employed for twenty years at the brokerage firm of Shearson Lehman Brothers Inc.
("SLB") where from 1982 through April 1992 he was a Senior Executive Vice
President and Director of Commodities. He was a director and the Chairman of
Lehman Brothers Capital Management Corp., one of the predecessors of the General
Partner. Mr. Lehman is a past Chairman of the Futures Industry Association and
currently serves on its Executive Committee. He has been a member of the Board
of Governors of the Commodity Exchange, Inc. and the Comex Clearing Association.
Mr. Vogel, age 53, became an Executive Vice President of SSB and a
Director of the General Partner on August 2, 1993. In May 1996, he was appointed
President of the General Partner. From January 1993 to July 1993, Mr. Vogel was
an Executive Vice President of SLB. Formerly, Mr. Vogel was the chairman and CEO
of LIT America, Inc. (September 1988 through December 1992) and an Executive
Vice President of Thomson McKinnon Securities Inc. (June 1979 through August
1988). Mr. Vogel is also a past chairman of the Futures Industry Association, a
past Director of Comex Clearing Corporation and the Commodity Exchange, Inc. and
a past Governor of the Chicago Mercantile Exchange.
Mr. Schaefer, age 48, has been involved in the securities and
commodities brokerage business for over thirty years and is an Executive Vice
President of SSB since early 1992. He has been employed with the firm in various
capacities associated with its commodity businesses since 1981. His principal
areas of responsibility include futures research, trade execution, clearing and
administration. He is a member of various major U.S. commodity exchanges and a
Director of the NFA. He has been a Director of the General Partner since its
organization in 1986.
Mr. Keltz, age 49, is an Associate General Counsel in the Law
Department of SSB. He became Secretary and Director of the General Partner on
August 2, 1993. He has been a Director of SBFM since October 1995. From October
1988 through July 1993, Mr. Keltz was employed by SLB as First Vice President
and Associate General Counsel where he provided legal counsel to various
derivative products businesses. Mr. Keltz was Vice President, Product
Manager-Futures and an Associate General Counsel for Paine Webber Incorporated
from 1985 through September 1988.
Mr. Dantuono, age 41, is a Senior Vice President of SSB (since March
1994) prior to which he was a First Vice President (since August 1993). Mr.
Dantuono was a Vice President at SLB where he was employed since 1980. He has
been Chief Financial Officer, Treasurer and Director of the General Partner
since August 1993. Prior to August 1993, Mr. Dantuono was Controller and
Treasurer of a corporate predecessor of the General Partner.
<PAGE>
Mr. McAuliffe, age 49, is a Senior Vice President of SSB (since August
1990) and became a Director of the General Partner in April 1994. Mr. McAuliffe
is Director of Administration for Smith Barney Managed Futures. From 1986
through 1997, he was responsible for the marketing and sales of retail futures
products, including public and private futures funds and managed account
programs. Prior to joining SLB, Mr. McAuliffe was employed by Merrill Lynch
Pierce Fenner & Smith from 1983 through 1986. Prior to joining Merrill Lynch,
Mr. McAuliffe was employed by Citibank from 1973 to 1983. He is a member of the
Managed Fund Association.
Ms. Ullman, age 40, is a Senior Vice President of SSB (since October
1989) and a Senior Vice President and Director of the General Partner (since May
1997 and April 1994, respectively). Previously, Ms. Ullman was a First Vice
President of SLB and a vice president and assistant secretary of a predecessor
of the General Partner, with responsibility for execution, administration,
operations and performance analysis for managed futures funds and accounts.
Ms. O'Toole, age 41, is a Senior Vice President of SSB (since April
1995) and a Senior Vice President of the General Partner (since 1997). Ms.
O'Toole is Director of Managed Futures Sales and Marketing. Prior to joining SSB
in March 1993, Ms. O'Toole was the director of managed futures quantitative
analysis at Rodman and Renshaw from 1989 to 1993. Ms. O'Toole began her career
in the futures industry in 1981 when she joined Drexel Burnham Lambert in the
research department of the Financial Futures Division. She has an MBA with a
concentration in Finance from Northwestern University.
There have been no administrative, civil or criminal actions pending,
on appeal or concluded against the General Partner or any of its individual
principals within the past five years.
As mentioned above, the General Partner has selected AAA Capital
Management, Inc. as the Partnership's trading advisor. The principals of the
Advisor are: A. Anthony Annunziato, Angelo Joseph Annunziato and Gordon K.
Rutledge.
The business background for the past five years of each director and
executive officer of the Advisor is as follows:
Mr. A. Anthony Annunziato, age 51, is president and the sole trading
principal of the Advisor and will make all trading decisions on behalf of the
Partnership. Mr. Annunziato has been involved in the commodity business since
1973. Since 1984 Mr. Annunziato has been an associated person of SSB (and its
predecessors) where he currently is a Senior Vice President/Financial Consultant
in Houston, Texas, and where he continues to trade commodity interests on behalf
of client accounts. Since March 1991, Mr. Annunziato has operated Petrocom
Energy Trading Corp., a privately held company which makes energy related
investments with proprietary funds.
<PAGE>
Mr. Angelo Joseph Annunziato and Mr. Gordon K. Rutledge are also
principals of the Advisor. They do not participate in making trading decisions
for the Advisor or supervise or select persons so engaged. They are each
registered as a floor broker at the New York Mercantile Exchange ("NYMEX"). The
Advisor may direct all or a portion of the Partnership's NYMEX trades to them
for execution.
There have been no administrative, civil or criminal actions pending,
on appeal or concluded against the Advisor or any of its individual principals
within the past five years.
Item 6. Executive Compensation
The Partnership has no directors or officers. Its affairs are managed
by the General Partner, which receives compensation for its services, as set
forth under "Item 1. Business". SSB, an affiliate of the General Partner, is the
commodity broker for the Partnership and receives brokerage commissions for such
services, as described under "Item 1. Business". For the year ended December 31,
1998, SSB earned $5,527,260 in brokerage commissions and clearing fees. The
directors and officers of the General Partner are employees of SSB and do not
receive any compensation from the Partnership or the General Partner. One
hundred percent (100%) of the compensation paid by SSB to Daniel A. Dantuono,
Chief Financial Officer and Treasurer of the General Partner, and Daniel R.
McAullife, Jr., Director of Administration of the General Partner, is allocated
to the General Partner. No part of any compensation paid by SSB to any other
officer of the General Partner is allocated to the General Partner. The
Directors and Officers of the General Partner may have an indirect interest in
the affairs of the Partnership insofar as they are employed by SSB, and SSB is
the broker and selling agent of the Partnership. In addition to his interest as
sole trading principal of the Advisor, Mr. A. Anthony Annunziato may have an
indirect interest in the affairs of the Partnership insofar as he is employed by
SSB.
As compensation for its services, the Partnership pays the Advisor the
fees described under "Item 1. Business". For the year ended December 31, 1998,
the Partnership paid $1,125,531 in management fees and $2,699,932 as a profit
share allocation in the form of limited partnership units.
Item 7. Certain Relationships and Related Transactions
a. Transactions with Management and Others. Not applicable to Directors
or Officers of the General Partner, except as described under "Item 6. Executive
Compensation". The profit share allocation to the Advisor is described in the
Special Limited Partner section of the Summary of Limited Partnership Agreement
under "Item 11. Description of Registrant's Securities to be Registered".
<PAGE>
b. Certain Business Relationships. Not applicable.
c. Indebtedness of Management. Not applicable.
d. Transactions with Promoters.
1. SSB is the broker-dealer and selling agent for the
Partnership, providing both commodity brokerage and clearing services. SSB
charges the Partnership a brokerage fee equal to $18.00 per round turn for
futures transactions and $9.00 per side for options transactions. These fees may
be changed at any time by SSB. SSB advanced $75,951 for initial offering and
organizational expenses. SSB was reimbursed for these expenses by the
Partnership. Citibank N.A., an affiliate of the General Partner, is the sole
swaps counterparty for the Partnership as of December 31, 1998.
2. The assets raised by SSB as selling agent for the
Partnership are transferred entirely to the Partnership. No portion of the
assets are retained by SSB.
Item 8. Legal Proceedings
There are no material legal proceedings pending, on appeal or concluded
to which the Partnership is a party or to which any of its assets is subject.
There have been no material legal proceedings pending, on appeal or concluded
against the General Partner, the Advisor, or any of their respective directors
or executive officers within the past five years.
This section describes the major legal proceedings, other than ordinary
routine litigation incidental to the business, to which SSBH, the parent company
of the General Partner or its subsidiaries is a party or to which any of their
property is subject.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust ("APT"), Ameritech Corporation, and an officer of
Ameritech filed suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers
Realty Corporation ("SBRC") in the U.S. District Court for the Northern District
of Illinois (Harris Trust Savings Bank, not individually but solely as trustee
for the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended
complaint alleges that three purchases by APT from defendants of participation
interests in net cash flow or resale proceeds of three portfolios of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation interest with respect to a portfolio of motels owned by
Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act
("ERISA"), and that the purchase of the participation interests for the third
<PAGE>
MOA portfolio and for the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and state law. SBI had acquired the
participation interests in transactions in which it purchased as principal
mortgage notes issued by MOA and Best to finance purchases of motel portfolios;
95% of three such interests and 100% of one such interest were sold to APT for
purchase prices aggregating approximately $20.9 million. Plaintiffs' second
amended complaint seeks (a) judgment on the ERISA claims for the purchase prices
of the four participation interests (approximately $20.9 million), for
rescission and for disgorgement of profits, as well as other relief, and (b)
judgment on the claims brought under RICO and state law in the amount of $12.3
million, with damages trebled to $37 million on the RICO claims and punitive
damages in excess of $37 million on certain of the state law claims as well as
other relief. The court dismissed the RICO, breach of contract, and unjust
enrichment claims. The court also found that defendants did not qualify as an
ERISA fiduciary and dismissed the claims based on that allegation. Defendants
moved for summary judgment on the sole remaining claim. The motion was denied,
and defendants appealed to the U.S. Court of Appeals for the Seventh Circuit.
Defendants are awaiting a decision.
Both the Department of Labor and the Internal Revenue Service have
advised SBI that they were or are reviewing the transactions in which APT
acquired such participation interests. With respect to the Internal Revenue
Service review, SSBH, SBI and SBRC have consented to extensions of time for the
assessment of excise taxes that may be claimed to be due with respect to the
transactions for the years 1987, 1988 and 1989. In August 1996, the IRS sent
SSBH, SBI and SBRC what appeared to be draft "30-day letters" with respect to
the transactions and SSBH, SBI and SBRC were given an opportunity to comment on
whether the IRS should issue 30-day letters, which would actually commence the
assessment process. In October 1996, SSBH, SBI and SBRC submitted a memorandum
setting forth reasons why the IRS should not issue 30-day letters with respect
to the transactions.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
Smith Barney, in the U.S. Bankruptcy Court for the Central District of
California (County of Orange et al. v. Bear Stearns & Co. Inc. et al.).
Plaintiff alleges, among other things, that defendants recommended and sold to
plaintiff unsuitable securities and that such transactions were outside the
scope of plaintiff's statutory and constitutional authority (ultra vires).
Defendants' motion for summary judgment was granted with respect to the ultra
vires claims in February 1999. The court allowed the filing of an amended
complaint asserting claims based on alleged breaches of fiduciary duty.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
<PAGE>
declaratory judgment that Smith Barney Inc. and another underwriter are
responsible for any damages that the City may incur in the event the Internal
Revenue Service denies tax exempt status to the City's General Obligation
Refunding Bonds Series 1991. SSBH filed a motion to dismiss the complaints in
September 1998, and the complaints were subsequently amended. SSBH has filed a
motion to dismiss the amended complaints.
In November 1998, a purported class action complaint was filed in the
United States District Court for the Middle District of Florida (Dwight Brock as
Clerk for Collier County v. Merrill Lynch, et al.). The complaint alleges that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced refunding transactions.
SSBH intends to contest this complaint vigorously.
Environmental Matters
In July 1996, the City and County of Denver ("Denver") enacted an
ordinance imposing a substantial fee on any radioactive waste or
radium-contaminated material disposed of in the City of Denver. Under this
ordinance, Denver assessed a subsidiary of Salomon, the S.W. Shattuck Chemical
Company, Inc. ("Shattuck"), $9.35 million for certain disposal already carried
out. Shattuck sued to enjoin imposition of the fee on constitutional grounds.
The United States also sued, seeking to enjoin imposition of the fee on
constitutional grounds. Denver counterclaimed and moved to add SSBH as a
defendant for past costs. These cases have been consolidated before the U.S.
District Court in Colorado, which granted Shattuck's motion for a preliminary
injunction enjoining Denver from enforcing the ordinance during the pendency of
the litigation. The parties have reached a settlement.
SSBH and various subsidiaries have also been named as defendants in
various matters incident to and typical of the businesses in which they are
engaged. These include numerous civil actions, arbitration proceedings and other
matters in which the SSBH's broker-dealer subsidiaries have been named, arising
in the normal course of business out of activities as a broker and dealer in
securities, as an underwriter of securities, as an investment banker or
otherwise. In the opinion of SSBH's management, none of these actions is
expected to have a material adverse effect on the consolidated financial
condition of SSBH and its subsidiaries.
Item 9. Market Price of and Dividends on the Registrant's Common Equity and
Related Stockholder Matters.
(a) Market Information. The Partnership has issued no stock. There is
no public market for the Units of Limited Partnership Interest.
(b) Holders. The number of holders of Units of Partnership Interest as
of December 31, 1998 was 807.
<PAGE>
(c) Distributions. The Partnership did not declare a distribution in
1998.
Item 10. Recent Sales of Unregistered Securities.
(a) Securities sold. As of March 16, 1998, the initial private offering
of Units of limited partnership interest resulted in aggregate proceeds to the
Partnership of $49,538,000. Between March 16, 1998 and July 1, 1998, the
Partnership sold additional limited partnership Units which resulted in
aggregate proceeds to the Partnership of $15,973,000.
(b) Underwriters and other purchasers. Units of Limited Partnership
Interest were sold to persons and entities who are accredited investors as that
term is defined in Rule 501(a) of Regulation D as well as to those persons who
are not accredited investors but who have either a net worth (exclusive of home,
furnishings and automobiles) either individually or jointly with the investor's
spouse of at least three times his investment in the Partnership (the minimum
investment for which is $25,000) or gross income for the two previous years and
projected gross income for the current fiscal year of not less than three times
his investment in the Partnership for each year.
(c) Consideration. The aggregate proceeds of securities sold during the
period from February 12, 1998 (commencement of offering period) through December
31, 1998 was $66,172,000, of which $661,000 was from Units sold to the General
Partner.
Units have been sold monthly at net asset value per Unit. No
underwriting discounts or commissions are paid in connection with the Units. At
the present time, no Units are offered for sale.
(d) Exemption from registration claimed. Exemption is claimed from
registration under Securities Act Section 4(2) and Regulation D promulgated
thereunder. The purchasers are accredited investors under Rule 501(a) of
Regulation D, as discussed in paragraph (a) above.
The minimum subscription for Units is $25,000. The General Partner may
in its sole discretion accept subscriptions of less than $25,000. The minimum
additional subscription for investors who are currently limited partners is
$10,000.
In accordance with Part 4 of the CFTC regulations, before making any
investment in the Partnership, each investor is provided with a Disclosure
Document, as supplemented, that contains information concerning the Partnership
as prescribed in CFTC regulations.
<PAGE>
Item 11. Description of Registrant's Securities to be Registered.
The Partnership is registering Units of Limited Partnership Interest,
which are privately offered. Profits and losses of the Partnership are allocated
among the partners on a monthly basis in proportion to their capital accounts
(the initial balance of which is the amount paid for their Units). Distributions
of profits will be made at the sole discretion of the General Partner.
The Units may not be transferred without the written consent of the
General Partner except in the cases of the death of an individual limited
partner or the termination of an entity that is a limited partner as provided in
the Limited Partnership Agreement. No transfer or assignment will be permitted
unless the General Partner is satisfied that such transfer or assignment will
not violate federal or state securities laws and will not jeopardize the
Partnership's status as a partnership for federal income tax purposes. No
substitution may be made unless the transferor delivers an instrument of
substitution, the transferee adopts the terms of, and executes, the Limited
Partnership Agreement, and the General Partner consents to such substitution
(which consent may be withheld at its sole and absolute discretion). A
transferee who becomes a substituted limited partner will be subject to all of
the rights and liabilities of a limited partner of the Partnership. A transferee
who does not become a substituted limited partner will be entitled to receive
the share of the profits or the return of capital to which his transferor would
otherwise be entitled, but will not be entitled to vote, to an accounting of
Partnership transactions, to receive tax information, or to inspect the books
and records of the Partnership. Under the New York Revised Limited Partnership
Act, an assigning limited partner remains liable to the Partnership for any
amounts for which he may be liable under such law regardless of whether any
assignee to whom he has assigned Units becomes a substituted limited partner.
A limited partner may require the Partnership to redeem some or all of
his Units at Net Asset Value per Unit as of the last day of any month (the
"Redemption Date"). The right to redeem is contingent upon the Partnership's
having property sufficient to discharge its liabilities on the Redemption Date
and upon receipt by the General Partner of a written or oral request for
redemption at least 10 days prior to the Redemption Date. Because Net Asset
Value fluctuates daily, limited partners will not know the Net Asset Value
applicable to their redemption at the time a notice of redemption is submitted.
Payment for a redeemed interest will be made within 10 business days following
the Redemption Date. There is no fee charged to limited partners in connection
with redemptions. The General Partner reserves the right in its sole discretion
to permit redemptions more frequently than monthly and to waive the 10-day
notice period. The General Partner may also, at its sole discretion and upon 10
days' notice to a limited partner, require that any limited partner redeem his
Units if such redemption is in the best interests of the Partnership.
<PAGE>
Summary of the Limited Partnership Agreement
The following is an explanation of some of the more significant terms
and provisions of the Limited Partnership Agreement, a copy of which is attached
as Exhibit 3(ii) hereto and is incorporated herein by this reference. Each
prospective investor should read the Limited Partnership Agreement thoroughly
before investing. The following description is a summary only, is not intended
to be complete, and is qualified in its entirety by reference to the Limited
Partnership Agreement itself.
Liability of Limited Partners
The Partnership was formed under the laws of the State of New York on
January 5, 1998. The General Partner has been advised by its counsel that except
as required by New York law and as set forth in Paragraph 7(f) of the Limited
Partnership Agreement, Units of limited partnership interest purchased and paid
for pursuant to this offering will be fully paid and non-assessable, and a
limited partner will not be liable for amounts in excess of his contributions to
the Partnership and his share of Partnership assets and undistributed profits.
The General Partner will be liable for all obligations of the Partnership to the
extent that assets of the Partnership are insufficient to discharge such
obligations.
Special Limited Partner
The Advisor is a Special Limited Partner of the Partnership. In partial
consideration for its advisory services to the Partnership, it will receive a
Profit Share allocation, in the form of Units, equal to 20% of the Partnership's
New Trading Profits (as that term is defined in the Limited Partnership
Agreement), if any, earned during a year.
Management of Partnership Affairs
The limited partners will not participate in the management or control
of the Partnership. Under the Limited Partnership Agreement, responsibility for
managing the Partnership is vested solely in the General Partner. The General
Partner may select one or more trading advisors to direct all trading for the
Partnership. Other responsibilities of the General Partner include, but are not
limited to, the following: reviewing and monitoring the trading of the trading
advisors; administering redemptions of limited partners' Units; preparing
monthly and annual reports to the limited partners; preparing and filing
necessary reports with regulatory authorities; calculating the Net Asset Value;
executing various documents on behalf of the Partnership and the limited
partners pursuant to powers of attorney; and supervising the liquidation of the
Partnership if an event causing dissolution of the Partnership occurs.
<PAGE>
Additional Partners
The General Partner has the sole discretion to determine whether to
offer for sale additional Units of limited partnership interest and to admit
additional limited partners. There is no limitation on the number of Units which
may be outstanding at any time. All Units offered by the Partnership will be
sold at the Partnership's then current Net Asset Value per Unit. The General
Partner may make arrangements for the sale of additional Units in the future.
Dissolution of the Partnership
The affairs of the Partnership will be wound up and the Partnership
liquidated as soon as practicable upon the first to occur of the following: (i)
December 31, 2018; (ii) the vote to dissolve the Partnership by limited partners
owning more than 50% of the Units; (iii) assignment by the General Partner of
all of its interest in the Partnership, or the withdrawal, removal, bankruptcy
or dissolution of the General Partner, unless the Partnership is continued as
described in the Limited Partnership Agreement; (iv) a decline in Net Asset
Value to less than $400 per Unit as of the end of any trading day; or (v) the
occurrence of any event which shall make it unlawful for the existence of the
Partnership to be continued. In addition, the General Partner may, in its sole
discretion, cause the Partnership to dissolve if the Partnership's aggregate Net
Assets decline to less than $1,000,000.
Removal or Admission of General Partner
The General Partner may be removed and successor general partners may
be admitted upon the vote of a majority of the outstanding Units.
Amendments; Meetings
The Limited Partnership Agreement may be amended if approved in writing
by the General Partner and limited partners owning more than 50% of the
outstanding Units. In addition, the General Partner may amend the Limited
Partnership Agreement without the consent of the limited partners in order to
clarify any clerical inaccuracy or ambiguity or reconcile any inconsistency
(including any inconsistency between the Limited Partnership Agreement and the
Prospectus); to delete or add any provision of or to the Limited Partnership
Agreement required to be deleted or added by the staff of any federal or state
agency; or to make any amendment to the Limited Partnership Agreement which the
General Partner deems advisable (including but not limited to amendments
necessary to effect the allocations proposed therein) provided that such
amendment is not adverse to the Limited Partners, or is required by law.
<PAGE>
Any limited partner, upon written request addressed to the General
Partner, may obtain from the General Partner a list of the names and addresses
of record of all limited partners and the number of Units held by each for a
purpose reasonably related to such Limited Partner's interest as a limited
partner in the Partnership. Upon receipt of a written request, signed by limited
partners owning at least 10% of the outstanding Units, that a meeting of the
Partnership be called to consider any matter upon which limited partners may
vote pursuant to the Limited Partnership Agreement, the General Partner, by
written notice to each limited partner of record mailed within fifteen days
after such receipt, must call a meeting of the Partnership. Such meeting must be
held at least thirty but not more than sixty days after the mailing of such
notice and the notice must specify the date, a reasonable time and place, and
the purpose of such meeting.
At any such meeting, upon the approval by an affirmative vote of
limited partners owning more than 50% of the Units, the following actions may be
taken: (i) the Limited Partnership Agreement may, with certain exceptions, be
amended; (ii) the Partnership may be dissolved; (iii) the General Partner may be
removed and a new general partner may be admitted; (iv) a new general partner or
general partners may be admitted if the General Partner elects to withdraw from
the Partnership; (v) any contracts with the General Partner or any of its
affiliates or any trading advisor may be terminated without penalty on 60 days'
notice; and (vi) the sale of all assets of the Partnership may be approved.
However, no such action may be taken unless the General Partner has been
furnished with an opinion of counsel that the action to be taken will not
adversely affect the status of the limited partners as limited partners under
the New York Revised Limited Partnership Act and that the action is permitted
under such law.
Reports to Limited Partners
The books and records of the Partnership will be maintained at its
principal office and the limited partners have the right at all times during
reasonable business hours to have access to and copy the Partnership's books and
records for a purpose reasonably related to such limited partner's interest as a
limited partner in the Partnership. Within 30 days of the end of each month, the
General Partner will provide the limited partners with a financial report
containing information relating to the Net Assets and Net Asset Value of a Unit
as of the end of such month, as well as other information relating to the
operations of the Partnership which is required to be reported to the limited
partners by CFTC regulations. In addition, if any of the following events occur,
notice thereof will be mailed to each limited partner within seven business days
of such occurrence: a decrease in the Net Asset Value of a Unit to $400 or less
as of the end of any trading day; any change in trading advisors; any change in
commodity brokers; any change in the General Partner; any material change in the
Partnership's trading policies or any material change in an advisor's trading
strategies. In addition, a certified annual report of financial condition will
be distributed to the limited partners not more than 90 days after the close of
the Partnership's fiscal year. Not more than 75 days after the close of the
<PAGE>
fiscal year and if required by the then applicable tax law, tax information
necessary for the preparation of the limited partners' annual federal income tax
returns will be distributed to the limited partners.
Income Tax Aspects
The trading activities of the Partnership, in general, generate capital
gain and loss and ordinary income. The Partnership pays no federal income tax;
rather, limited partners are allocated their proportionate share of the taxable
income or losses realized by the Partnership during the period of the
Partnership's taxable year that Units were owned by them. Unrealized gains on
"Section 1256 contracts" (as defined in the Code) held by the Partnership at the
end of its taxable year must be included in income under the "mark-to-market"
rule and will be allocated to partners in proportion to their respective capital
accounts.
Item 12. Indemnification of Directors and Officers.
Section 17 of the Limited Partnership Agreement (attached as Exhibit
3(ii) hereto) provides for indemnification of the General Partner, its officers,
directors, more than 10% stockholders, and persons who directly or indirectly
control, are controlled by or under common control with the General Partner. The
Registrant is not permitted to indemnify the General Partner or its affiliates
for liabilities resulting from a violation of the Securities Act of 1933 or any
State securities law in connection with the offer or sale of the Units of
Limited Partnership Interest.
Section 6 of the Management Agreement (attached as Exhibit 10(a)
hereto) provides for indemnification by the General Partner of the Advisor for
any loss, liability, damage, cost, expense (including, without limitation,
attorneys' and accountants' fees), judgments and amounts paid in settlement
actually and reasonably incurred by it in connection with such action, suit, or
proceeding if the Advisor acted in good faith and in a manner reasonably
believed to be in or not opposed to the best interests of the Partnership and
provided that its conduct did not constitute negligence, intentional misconduct,
or a breach of its fiduciary obligations to the Partnership as a commodity
trading advisor, unless and only to the extent that the court or administrative
forum in which such action or suit was brought shall determine upon application
that, despite the adjudication of liability but in view of all circumstances of
the case, the Advisor is fairly and reasonably entitled to indemnity for such
expenses which such court or administrative forum shall deem proper; and further
<PAGE>
provided that no indemnification shall be available from the Partnership if such
indemnification is prohibited by Section 17 of the Limited Partnership
Agreement.
Furthermore, under certain circumstances, the Advisor will indemnify,
defend and hold harmless the General Partner, the Partnership and their
affiliates against any loss, liability, damage, cost or expense (including,
without limitation, attorneys' and accountants' fees), judgments and amounts
paid in settlement actually and reasonably incurred by them (A) as a result of
the material breach of any material representations and warranties made by the
Advisor in the Management Agreement, or (B) as a result of any act or omission
of the Advisor relating to the Partnership if there has been a final judicial or
regulatory determination or, in the event of a settlement of any action or
proceeding with the prior written consent of the Advisor, a written opinion of
an arbitrator, to the effect that such acts or omissions violated the terms of
the Management Agreement in any material respect or involved negligence, bad
faith, recklessness or intentional misconduct on the part of the Advisor (except
as otherwise provided in Section 1(g) of the Management Agreement).
Item 13. Financial Statements and Supplementary Data.
The registrant does not fall within the criteria set forth in Item
302(a)(5) of Regulation S-K of the Securities Exchange Act of 1934.
The Financial Statements of the Partnership are attached hereto as
exhibits.
Item 14. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the last two fiscal years and any subsequent interim period, no
independent accountant who was engaged as the principal accountant to audit the
Partnership's financial statements has resigned or was dismissed.
Item 15. Financial Statements and Exhibits.
(a) Financial Statements.
The following financial statements have been filed as part of
this registration statement:
Statement of Financial Condition of the Partnership at
December 31, 1998
Statement of Income and Expenses for the period from March 16,
1998 (commencement of trading) to December 31, 1998
<PAGE>
Statement of Partners' Capital for the period from January 5,
1998 (date Partnership was organized) to December 31, 1998
Notes to Financial Statements
Statement of Financial Condition of Smith Barney Futures
Management Inc. at December 31, 1998
<PAGE>
(b) Exhibits.
Exhibit 3(i)- Certificate of Limited Partnership
Exhibit 3(ii)- Limited Partnership Agreement
Exhibit 10(a)- Management Agreement among the Partnership, the
General Partner and AAA Capital Management, Inc.
Exhibit 10(b)(i)- Customer Agreement between the Partnership and Smith
Barney Inc. (the predecessor to Salomon Smith Barney
Inc.)
Exhibit 10(c)- Form of Subscription Agreement
Exhibit 27- Financial Data Schedule
Exhibit 99.1- Annual Report of the Partnership
Exhibit 99.2- Annual Report of the Parntership
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange
Act of 1934, the registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
SMITH BARNEY AAA ENERGY FUND L.P.
(Registrant)
Date: April 29, 1999
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono,
Chief Financial Officer
CERTIFICATE OF LIMITED PARTNERSHIP
OF
SMITH BARNEY AAA ENERGY FUND L.P.
UNDER SECTION 121-201 OF
THE REVISED LIMITED PARTNERSHIP ACT
THE UNDERSIGNED, for the purpose of forming a limited
partnership pursuant to Section 121-201 of the Revised Limited Partnership Act
of New York, does hereby certify:
1. The name of the limited partnership is as follows:
Smith Barney AAA Energy Fund L.P.
2. The county within this state, in which the office of the
limited partnership is to be located is:
New York.
3. The Secretary of State of the State of New York is hereby
designated the agent of the limited partnership upon whom process served against
the limited partnership may be served. The post office address within or without
New York State to which the Secretary will mail a copy of any process against
the limited partnership served upon him is:
Smith Barney Futures Management Inc.
390 Greenwich Street - 1st floor
New York, New York 10013
Attention: David J. Vogel
4. CT Corporation System, having a business address at 1633
Broadway, New York, New York 10019, is hereby designated pursuant to section
121-105 of the Revised Limited Partnership Act of New York, the registered agent
of the limited partnership upon whom process against the limited partnership may
be served.
5. The name and business or residence address of each general
partner is as follows:
Smith Barney Futures Management Inc.
390 Greenwich Street - 1st floor
New York, New York 10013
6. The latest date upon which the limited partnership is to
dissolve is:
December 31, 2018
7. Additional information determined by the general partner to
be included:
None.
IN WITNESS WHEREOF, the undersigned has executed this
certificate this 30th day of December 1997, and affirms that the statements
contained herein are true under penalty of perjury.
General Partner
Smith Barney Futures Management Inc.
By: /s/ Daniel A. Dantuono
Daniel A. Dantuono
Chief Financial Officer
Limited Partnership Agreement
This Limited Partnership Agreement dated as of January 5, 1998
by and among Smith Barney Futures Management Inc., 390 Greenwich Street - 1st
floor, New York, New York 10013 (the "General Partner"), AAA Capital Management,
Inc. (the "Special Limited Partner") and David J. Vogel (the "Initial Limited
Partner") and those other parties who shall execute this Agreement, whether in
counterpart or by attorney-in-fact, as limited partners. (The Initial Limited
Partner and such other parties are hereinafter collectively referred to as the
"Limited Partners". The General Partner and the Limited Partners may be
collectively referred to herein as "Partners".)
W I T N E S S E T H :
WHEREAS, the parties hereto desire to form a limited
partnership for the purpose of trading in commodity interests, including futures
contracts, forward contracts, physical commodities and options, directly and
through investment in other commodity pools;
NOW, THEREFORE, the parties hereto agree as follows:
1. Formation and Name.
The parties hereto hereby form a limited partnership under the
New York Revised Uniform Limited Partnership Act. The name of the limited
partnership is Smith Barney AAA Energy Fund L. P. (the "Partnership"). The
General Partner shall execute and file a Certificate of Limited Partnership in
accordance with the provisions of the New York Revised Limited Partnership Act
and execute, file, record and publish, as appropriate, such amendments,
restatements and other documents as are or become necessary or advisable, as
determined by the General Partner. As used herein, "Partnership Act" means the
New York Revised Uniform Limited Partnership Act.
2. Principal Office.
The principal office of the Partnership shall be 390
Greenwich Street - 1st floor, New York, New York 10013 or such other place as
the General Partner may designate from time to time.
3. Business.
(a) The Partnership's business and purpose is to trade, buy,
sell or otherwise acquire, hold or dispose of interests in commodities of all
descriptions (including futures contracts, commodity options, forward contracts
and any other rights or interests pertaining thereto, including interests in
commodity pools). The objective of the Partnership business is appreciation of
its assets through speculative trading.
(b) The Partnership shall not:
(1) engage in the pyramiding of its positions by using
unrealized profits on existing positions as margin for the purchase or sale of
additional positions in the same or related commodities;
(2) utilize borrowings except short-term borrowings if the
Partnership takes delivery of cash commodities; or
(3) permit the churning of its account.
(c) The Partnership shall make no loans. Assets of the
Partnership will not be commingled with assets of any other entity. Deposit of
assets with a commodity broker or dealer as margin shall not constitute
commingling.
4. Term, Dissolution and Fiscal Year.
(a) Term. The term of the Partnership shall commence on the
date the Certificate of Limited Partnership is filed in the office of the County
Clerk of New York County, State of New York, and shall end as soon as
practicable upon the first to occur of the following: (1) December 31, 2018; (2)
receipt by the General Partner of an election to dissolve the Partnership at a
specified time by Limited Partners owning more than 50% of the Units of Limited
Partnership Interest then outstanding, notice of which is sent by registered
mail to the General Partner not less than 90 days prior to the effective date of
such dissolution; (3) assignment by the General Partner of all of its interest
in the Partnership, withdrawal, removal, bankruptcy or any other event that
causes the General Partner to cease to be a general partner under the
Partnership Act (unless the Partnership is continued pursuant to Paragraph 17);
(4) a decline in Net Asset Value on any business day after trading to less than
$400 per Unit; or (5) any event which shall make it unlawful for the existence
of the Partnership to be continued.
(b) Dissolution. Upon dissolution of the Partnership, the
assets of the Partnership shall be distributed to creditors, including any
Partners who may be creditors, to the extent otherwise permitted by law, in
satisfaction of liabilities of the Partnership (whether by payment or the making
of reasonable provision for payment thereof) other than liabilities for which
reasonable provision for payment has been made and liabilities for distributions
to Partners; to Partners and former Partners in satisfaction of liabilities for
distributions; and to Partners first for the return of their contributions and
second respecting their Partnership interests, in the proportions in which the
Partners share in distributions. Following distributions of the assets of the
Partnership, a Certificate of Cancellation for the Partnership shall be filed as
required by the Partnership Act.
(c) Fiscal Year. The fiscal year of the Partnership will
commence on January 1 and end on December 31 each year ("fiscal year"). Each
fiscal year of the Partnership is divided into four fiscal quarters commencing
on the first day of January, April, July and October ("fiscal quarter").
5. Net Worth of General Partner.
The General Partner agrees that, at all times after the
termination of the initial offering period of the Partnership's Units of Limited
Partnership Interest described in Paragraph 11 hereof (the "Private Placement"),
so long as it remains a general partner of the Partnership, it will maintain its
Net Worth at an amount not less than 5% of the total contributions to the
Partnership by all Partners. The General Partner also agrees, with respect to
each additional limited partnership of which it is general partner, to maintain
a net worth (excluding capital contributions to the additional partnership) at
an amount not less than 5% of the total contributions to the additional limited
partnership. In no event will the General Partner be required to maintain a net
worth in excess of $1,000,000.
For the purposes of this Paragraph 5, Net Worth shall be based
upon current fair market value of the assets of the General Partner. The
requirements of this Paragraph 5 may be modified if the General Partner obtains
an opinion of counsel for the Partnership that a proposed modification will not
adversely affect the classification of the Partnership as a partnership for
federal income tax purposes and will not violate any state securities or blue
sky laws to which the Partnership may be subject from time to time.
6. Capital Contributions and Units of Partnership Interest.
The General Partner shall contribute to the Partnership,
immediately prior to the date on which the Partnership commences trading
operations and as necessary thereafter, an amount at least equal to the greater
of (a) 1% of capital contributions or (b) $25,000. The General Partner's
contribution shall be evidenced by "Units of General Partnership Interest." The
General Partner may not make any transfer or withdrawal of its contribution to
the Partnership while it is General Partner which would reduce its aggregate
percentage interest in the Partnership to less than such required interest in
the Partnership. Any withdrawal of any such excess interest by the General
Partner may be made only upon not less than thirty (30) days' notice to the
Limited Partners prior to the end of a fiscal quarter.
Interests in the Partnership, other than those of the General
Partner, shall be evidenced by "Units of Limited Partnership Interest" which the
General Partner on behalf of the Partnership shall, in accordance with the
Private Placement Offering Memorandum and Disclosure Document (the "Memorandum")
referred to in Paragraph 11, sell to persons desiring to become Limited
Partners. For each Unit of Limited Partnership Interest purchased prior to the
commencement of trading operations, a Limited Partner shall contribute $1,000 to
the capital of the Partnership. For any Unit (or partial unit rounded to four
decimal places) of Limited Partnership Interest purchased thereafter (except as
noted below with respect to the Special Limited Partner), a Limited Partner
shall contribute to the capital of the Partnership an amount equal to the Net
Asset Value of a Unit (or partial unit, as the case may be) of Limited
Partnership Interest as of the close of business on the day preceding the
effective date of such purchase, and shall pay in addition the selling
commission, if any, which must be paid with respect to such purchase. The
Special Limited Partner will contribute advisory services and will receive an
annual allocation in Units as described in Paragraph 8. The aggregate of all
contributions shall be available to the Partnership to carry on its business,
and no interest shall be paid on any such contribution. All subscriptions for
Units of Limited Partnership Interest made pursuant to the Private Placement of
the Units of Limited Partnership Interest must be on the form provided in the
Memorandum.
The proceeds from the sale of the Units of Limited Partnership
Interest pursuant to the Private Placement shall be placed in an escrow account
and shall not be contributed to the capital of the Partnership prior to the
termination of the initial offering period. If subscriptions for at least 5,000
Units of Limited Partnership Interest shall not have been received and accepted
by the General Partner when the initial offering period is terminated, the full
amount of all subscriptions shall be returned promptly to the subscribers, and
the Certificate of Limited Partnership may, in the discretion of the General
Partner, be canceled. If subscriptions for at least 5,000 Units of Limited
Partnership Interest shall have been received and accepted by the General
Partner prior to the termination of the initial offering period, the proceeds
thereof shall be contributed to the capital of the Partnership and the
Partnership shall thereafter commence trading operations. All subscribers shall
receive the interest earned on their subscriptions while held in escrow. All
subscribers who have been accepted by the General Partner shall be deemed
admitted as Limited Partners at the time they are reflected as such in the books
and records of the Partnership.
7. Allocation of Profits and Losses.
(a) Capital Accounts. A capital account shall be established
for each Partner. The initial balance of each Partner's capital account shall be
the amount of his initial capital contribution to the Partnership. A Partner's
capital account shall be increased by the amount of any additional capital
contributions to the Partnership by such Partner, and shall be further adjusted
as provided in Paragraph 7(b).
(b) Allocations. As of the close of business on the last day
of each month during each fiscal year of the Partnership, [and on such other
dates as the General Partner in its discretion shall determine (each, an
"Allocation Date"),] the following determinations and allocations shall be made:
(1) The Net Assets of the Partnership (as defined in
Paragraph 7(d)(1)) [but before any advisory fees or profit share allocations] as
of such date shall be determined.
(2) Monthly advisory fees, if any, payable by the Partnership
as of such date shall then be charged against Net Assets.
(3) Any increase or decrease in Net Assets of the Partnership
from the previous Allocation Date (or, with respect to the first calendar month
of operations, from the first day of operations) allocable to Limited Partners
or the General Partner, as the case may be, shall then be credited or charged to
the capital accounts of the Limited Partners or the General Partner, as the case
may be, in the ratio that the balance of each such Partner's capital account
bears to the balance of all such relevant Partners' capital accounts. For the
purpose of this Paragraph 7(b)(3), Net Assets shall be determined without regard
to (A) any Profit Share allocations to the Special Limited Partner pursuant to
Paragraph 7(b)(4), (B) distributions and withdrawals described in Paragraph
7(b)(5), and (C) any contributions made to the Partnership by a Partner during
such month.
(4) As of each calendar year-end, the aggregate amount of net
increase in Net Assets allocated pursuant to Paragraph 7(b)(3) shall be adjusted
by charging the Partnership an amount equal to the Special Limited Partner's
Profit Share allocation payable as of such calendar year-end, pursuant to
Paragraph 8 and by crediting such amount to the Special Limited Partner's
capital account.
(5) The amount of any distribution to a Partner and any
amount paid to a Partner upon withdrawal of capital from the Partnership with
respect to such month shall be charged against the Partner's capital account.
Upon liquidation of the Partnership, the balance of the proceeds of liquidation
after payment of Partnership obligations shall be distributed to the Partners in
proportion to their remaining positive capital account balances after adjustment
for prior distributions and allocations.
(c) Allocations for Tax Purposes. All items of income, gains,
losses, deductions and credits of the Partnership for each fiscal year will be
allocated among the Partners for income tax purposes in a manner that reflects,
as closely as possible, the amounts and the components credited or debited to
each Partner's capital account pursuant to this Paragraph 7. Allocations
pursuant to this Paragraph 7(c) will not be credited or debited to capital
accounts.
(d) Definitions.
(1) Net Assets. Net Assets of the Partnership shall mean the
total assets of the Partnership, including all cash, accrued interest and the
market value of all open commodity positions maintained by the Partnership less
brokerage charges accrued and less all other liabilities of the Partnership
determined in accordance with generally accepted accounting principles under the
accrual basis of accounting. The value of a commodity futures or option contract
is the unrealized gain or loss on the contract that is determined by marking it
to the current settlement price for a like contract acquired on the valuation
date. Physical commodities, options, forward contracts and futures contracts,
when no market quote is available, will be valued at their fair market value as
determined in good faith by the General Partner. U.S. Treasury securities and
other interest bearing obligations will be valued at cost plus accrued interest.
Interests in other commodity pools will be valued at their net asset value as
determined by the pool operator, or, if the General Partner has not received
such determination or believes that fairness so requires, at fair value
determined by the General Partner. Net Assets equals Net Asset Value.
(2) Net Asset Value per Unit. The Net Asset Value of each
Unit of Limited Partnership Interest and each Unit of General Partnership
Interest shall be determined by dividing the Net Assets of the Partnership by
the aggregate number of Units of Limited and General Partnership Interest
outstanding.
(e) Expenses and Limitation Thereof. The Partnership's
organizational expenses and the expenses of the initial private offering of the
Units of Limited Partnership Interest described in Paragraph 11 hereof shall be
initially paid by Smith Barney Inc. ("SB") and reimbursed as discussed in the
Memorandum. Subject to the limitations set forth below in this Paragraph 7(e),
the Partnership shall be obligated to pay all liabilities incurred by it,
including, without limitation, all expenses incurred in connection with its
trading activities, and any advisory or other expenses. The General Partner
shall bear all other operating expenses except legal, accounting, filing, data
processing and reporting fees and extraordinary expenses. Appropriate reserves
may be created, accrued and charged against Net Assets for contingent
liabilities, if any, as of the date any such contingent liability becomes known
to the General Partner.
(f) Limited Liability of Limited Partners.
(1) Each Unit of Limited Partnership Interest, when purchased
by a Limited Partner, subject to the qualifications set forth below, shall be
fully paid and non-assessable.
(2) A Limited Partner will have no liability in excess of his
obligation to make contributions to the capital of the Partnership and his share
of the Partnership's assets and undistributed profits, subject to the
qualifications provided in the Partnership Act.
(g) Return of Limited Partner's Capital Contribution. Except
to the extent that a Limited Partner shall have the right to withdraw capital
through redemption of Units of Limited Partnership Interest, no Limited Partner
shall have any right to demand the return of his capital contribution or any
profits added thereto, except upon dissolution and termination of the
Partnership. In no event shall a Limited Partner be entitled to demand and
receive property other than cash.
8. Profit Share Allocation to the Special Limited Partner.
The Special Limited Partner shall receive an annual profit
share (a "Profit Share") allocation to its capital account in the Partnership in
the form of additional Units and/or partial Units the value of which shall be
equal to 20% of the New Trading Profits generated by the Special Limited Partner
on behalf of the Partnership as of each calendar year-end. The Profit Share
allocation shall be made to the Special Limited Partner within twenty (20)
business days following the end of the calendar year.
New Trading Profits means the excess, if any, of Net Assets
managed by the Special Limited Partner at the end of the fiscal year over Net
Assets managed by the Special Limited Partner at the end of the highest previous
fiscal year or Net Assets allocated to the Special Limited Partner at the date
trading commences, whichever is higher, and as further adjusted to eliminate the
effect on Net Assets resulting from new capital contributions, redemptions,
reallocations or capital distributions, if any, made during the fiscal year
decreased by interest or other income not directly related to trading activity,
earned on the Partnership's assets during the fiscal year whether the assets are
held separately or in margin accounts. Ongoing expenses will be attributed to
the Special Limited Partner based on the Special Limited Partner's proportionate
share of Net Assets. Ongoing expenses above will not include expenses of
litigation not involving the activities of the Special Limited Partner on behalf
of the Partnership. Ongoing expenses include offering and organizational
expenses of the Partnership. No Profit Share shall be allocable until the end of
the first calendar year of trading, which allocation shall be based on New
Trading Profits earned from the commencement of trading operations by the
Partnership through the end of the first calendar year. Interest income earned,
if any, will not be taken into account in computing New Trading Profits earned
by the Special Limited Partner.
If any Profit Share allocation is made to the Special Limited
Partner with respect to New Trading Profits, and the Partnership thereafter
incurs a net loss for a subsequent period, the Special Limited Partner will
retain the Profit Share previously allocated in respect of New Trading Profits.
If Net Assets allocated to the Special Limited Partner are reduced due to net
redemptions, distributions or reallocations (net of additions), there will be a
corresponding proportional reduction in the related loss carryforward amount
that must be recouped before the Special Limited Partner is eligible to receive
another Profit Share. However, the Special Limited Partner would not be
allocated any Profit Share thereafter until all of such losses were recovered
and the Special Limited Partner achieved additional New Trading Profits.
If the Partnership is terminated or the Special Limited
Partner is removed as advisor of the Partnership on a date other than a calendar
year-end, the Profit Share allocation described above shall be determined and
made as if such date were a calendar year-end.
9. Management of the Partnership.
(a) General. The General Partner, to the exclusion of all
Limited Partners, shall conduct, control and manage the business of the
Partnership, including, without limitation, the investment of the funds of the
Partnership. The General Partner may, but is not obliged to, delegate its
rights, duties and powers hereunder, including but not limited to the duty to
make trading decisions for the Partnership. The General Partner has initially
selected AAA Capital Management Inc. to make trading decisions for the
Partnership pursuant to an Advisory Agreement. Except as provided herein, no
Partner shall be entitled to any salary, draw or other compensation from the
Partnership. Each Limited Partner hereby undertakes to advise the General
Partner of such additional information as may be deemed by the General Partner
to be required or appropriate to open and maintain an account or accounts with
commodity brokerage firms for the purpose of trading in commodity futures
contracts.
Subject to Paragraph 5 hereof, the General Partner may engage
in other business activities and shall not be required to refrain from any other
activity nor disgorge any profits from any such activity, whether as general
partner of additional partnerships for investment in commodity futures contracts
or otherwise. The General Partner may engage and compensate on behalf of the
Partnership from funds of the Partnership, such persons, firms or corporations,
including any affiliated person or entity, as the General Partner in its sole
judgment shall deem advisable for the conduct and operation of the business of
the Partnership.
No person dealing with the General Partner shall be required
to determine its authority to make any undertaking on behalf of the Partnership,
nor to determine any fact or circumstance bearing upon the existence of its
authority.
The General Partner shall monitor the trading and performance
of any trading advisor for the Partnership and shall not permit the "churning"
of the Partnership's account. The General Partner is authorized to enter into
the Customer Agreement with SB, and the Advisory Agreement with AAA Capital
Management Inc., each as described in the Memorandum and to cause the
Partnership to pay the fees and/or allocations described therein and to
negotiate Customer and Advisory Agreements in the future on those or other
terms. The General Partner may take such other actions as it deems necessary or
desirable to manage the business of the Partnership, including, but not limited
to, the following: opening bank accounts with state or national banks; paying,
or authorizing the payment of expenses of the Partnership, such as advisory
fees, legal and accounting fees, printing and reporting fees, and registration
and other fees of governmental agencies; and investing or directing the
investment of funds of the Partnership not being utilized as margin deposits.
The General Partner shall maintain a list of the names and
addresses of, and interests owned by, all Partners, a copy of which shall be
furnished to Limited Partners upon request either in person or by mail and upon
payment of the cost of reproduction and mailing for a purpose reasonably related
to such Limited Partner's interest as a limited partner in the Partnership, and
such other books and records relating to the business of the Partnership as it
deems necessary or advisable at the principal office of the Partnership. The
General Partner shall retain such records for a period of not less than six
years. The Limited Partners, shall be given reasonable access to the books and
records of the Partnership for a purpose reasonably related to such Limited
Partner's interest as a limited partner in the Partnership.
Except as provided herein and in the Memorandum, the
Partnership shall not enter into any contract with any of its affiliates or with
any trading advisor which has a term of more than one year. Except as provided
herein and in the Memorandum: (1) no person may receive, directly or indirectly,
any advisory fee for investment advice or management who shares or participates
in commodity brokerage commissions or fees from transactions for the
Partnership; (2) no broker may pay, directly or indirectly, rebates or give ups
to any trading advisor; and (3) such prohibitions shall not be circumvented by
any reciprocal business arrangements. On loans made available to the Partnership
by the General Partner or any of its affiliates, the lender may not receive
interest in excess of its interest costs, nor may the lender receive interest in
excess of the amounts which would be charged the Partnership (without reference
to the lender's financial abilities or guarantees) by unrelated banks on
comparable loans for the same purpose and the lender shall not receive points or
other financing charges or fees regardless of the amounts.
10. Audits and Reports to Limited Partners.
The Partnership books and records shall be audited annually by
independent accountants. The Partnership will cause each Partner to receive (i)
within 90 days after the close of each fiscal year, audited financial
statements, including a balance sheet and statements of income and partners'
equity for the fiscal year then ended, and (ii) within 75 days after the close
of each fiscal year such tax information as is necessary for him to complete his
federal income tax return. In addition, within 30 days of the end of each month
the Partnership will provide each Limited Partner with reports showing Net
Assets and Net Asset Value per Unit of Limited and General Partnership Interest
as of the end of such month, as well as information relating to the fees and
other expenses incurred by the Partnership during such month. Both annual and
monthly reports shall include such additional information as the Commodity
Futures Trading Commission may require under the Commodity Exchange Act to be
given to participants in commodity pools such as the Partnership. The General
Partner shall calculate the Net Asset Value per Unit of Partnership Interest
daily and shall make such information available upon the request of a Limited
Partner for a purpose reasonably related to such Limited Partner's interest as a
Limited Partner in the Partnership.
In addition, if any of the following events occur, notice of
such event shall be mailed to each Limited Partner within seven business days of
the occurrence of the event: (i) a decrease in the Net Asset Value of a Unit of
Limited Partnership Interest to $400 or less as of the end of any trading day;
(ii) any change in trading advisors; (iii) any change in the General Partner;
(iv) any change in commodity brokers; or (v) any material change in the
Partnership's trading policies or in an advisor's trading strategies.
11. Transfer and Redemption of Units.
(a) Initial Limited Partner. As of the day after trading
commences, the Initial Limited Partner may redeem his Unit for $1,000 and
withdraw from the Partnership.
(b) Transfer. Each Limited Partner expressly agrees that he
will not assign, transfer or dispose of, by gift or otherwise, any of his Units
of Limited Partnership Interest or any part or all of his right, title and
interest in the capital or profits of the Partnership without the consent of the
General Partner except (i) in the case of an individual Limited Partner,
disposition of Units by last will and testament or by virtue of the laws of
descent and distribution and (ii) in the case of a Limited Partner that is not
an individual, disposition of Units upon liquidation, dissolution or other
termination of the entity that is a Limited Partner. No transfer or assignment
shall be permitted unless the General Partner is satisfied that (i) such
transfer or assignment would not violate the Securities Act of 1933 or any state
securities law and (ii) notwithstanding such transfer or assignment, the
Partnership will continue to be classified as a Partnership under the Internal
Revenue Code. No assignment, transfer or disposition permitted by this Agreement
shall be effective against the Partnership or the General Partner until the
first day of the quarter next succeeding the quarter in which the General
Partner gives its consent, except as otherwise provided in this sub-paragraph
11(b). Any assignment, transfer or disposition by an assignee of Units of
Limited Partnership Interest of his interest in the capital or profits of the
Partnership shall not be effective against the Partnership or the General
Partner until the first day of the quarter next succeeding the quarter in which
the General Partner gives its consent. If an assignment, transfer or disposition
occurs by reason of the death or by termination of a Limited Partner or
assignee, written notice must be given to the General Partner by the duly
authorized representative of the estate of the Limited Partner or assignee and
shall be supported by such proof of legal authority and valid assignment as may
reasonably be requested by the General Partner. Any such assignee shall become a
substituted Limited Partner only upon the consent of the General Partner (which
consent may be withheld at its sole and absolute discretion), upon the execution
of a Power of Attorney by such assignee appointing the General Partner as his
attorney-in-fact in the form contained in Paragraph 14 hereof. The estate or any
beneficiary of a deceased Limited Partner or assignee shall have no right to
withdraw any capital or profits from the Partnership except by redemption of
Units of Limited Partnership Interest. A substituted Limited Partner shall have
all the rights and powers and shall be subject to all the restrictions and
liabilities of a limited partner of the Partnership. A substituted Limited
Partner is also liable for the obligations of his assignor to make contributions
to the Partnership, but shall not be liable for the obligations of his assignor
under the Partnership Act to return distributions received by the assignor;
provided, however, that a substituted Limited Partner shall not be obligated for
liabilities unknown to him at the time he became a substituted Limited Partner
and which could not be ascertained from this Agreement. Each Limited Partner
agrees that with the consent of the General Partner any assignee may become a
substituted Limited Partner without the approval of any Limited Partner. If the
General Partner withholds consent, an assignee shall not become a substituted
Limited Partner and shall not have any of the rights of a Limited Partner except
that the assignee shall be entitled to receive that share of capital or profits
and shall have that right of redemption to which his assignor would otherwise
have been entitled. An assigning Limited Partner shall remain liable to the
Partnership as provided in the Partnership Act, regardless of whether his
assignee becomes a substituted Limited Partner. The transfer of Units of Limited
Partnership Interest shall be subject to all applicable securities laws. The
transferor or assignor shall bear the cost related to such transfer or
assignment. Certificates representing Units of Limited Partnership Interest may
bear appropriate legends to the foregoing effect.
(c) Redemption. Beginning with the first full month ending at
least three months after trading commences, a Limited Partner (or any assignee
thereof) may withdraw all or part of his capital contribution and undistributed
profits, if any, from the Partnership in multiples of the Net Asset Value of a
Unit of Limited Partnership Interest (such withdrawal being herein referred to
as "redemption") as of the last day of a month (the "Redemption Date") after a
request for redemption has been made to the General Partner; provided that all
liabilities, contingent or otherwise, of the Partnership, except any liability
to Partners on account of their capital contributions, have been paid or there
remains property of the Partnership sufficient to pay them. As used herein,
"request for redemption" shall mean a written or oral request in a form
specified by the General Partner and received by the General Partner at least
ten days in advance of the Redemption Date. The General Partner, in its
discretion, may waive the ten day notice requirement. A form of Request for
Redemption is included in the Memorandum referred to in Paragraph 11. Additional
forms of Request for Redemption may be obtained by written request to the
General Partner. Redemption of partial Units will be permitted at the General
Partner's discretion. Upon redemption, a Limited Partner (or any assignee
thereof) shall receive, per Unit of Limited Partnership Interest redeemed, an
amount equal to the Net Asset Value of a Unit of Limited Partnership Interest as
of the Redemption Date, less any amount owing by such Partner (and his assignee,
if any) to the Partnership. If redemption is requested by an assignee, all
amounts owed by the Partner to whom such Unit of Limited Partnership Interest
was sold by the Partnership as well as all amounts owed by all assignees of such
Unit of Limited Partnership Interest shall be deducted from the Net Asset Value
of such Unit of Limited Partnership Interest upon redemption by any assignee.
Payment will be made within 10 business days after the Redemption Date. The
General Partner may temporarily suspend redemptions if necessary in order to
liquidate commodity positions in an orderly manner and may permit less frequent
redemptions if it has received an opinion from counsel that such action is
advisable to prevent the Partnership from being considered a publicly traded
partnership by the Internal Revenue Service.
The General Partner may, at its sole discretion and upon
notice to the Limited Partners, declare a special Redemption Date on which date
Limited Partners may redeem their Units at Net Asset Value per Unit, provided
that the Limited Partners submit requests for redemption in a form acceptable to
the General Partner.
The General Partner may require that any Limited Partner
redeem his Units on 10 days' notice to the Limited Partner if, in the sole
discretion of the General Partner, it is in the best interests of the
Partnership to require such redemption.
12. Private Placement of Units of Limited Partnership Interest.
The General Partner on behalf of the Partnership shall (i)
cause to be filed a Private Placement Offering Memorandum and Disclosure
Document, and such amendments thereto as the General Partner deems advisable,
with the United States Commodity Futures Trading Commission for private
placement of the Units of Limited Partnership Interest, and (ii) qualify the
Units of Limited Partnership Interest for sale under the securities laws of such
States of the United States as the General Partner shall deem advisable. The
General Partner may make such other arrangements for the sale of the Units of
Limited Partnership Interest as it deems appropriate including, without
limitation, the execution on behalf of the Partnership of an agency agreement
with SB as an agent of the Partnership for the offer and sale of the Units as
contemplated in the Memorandum.
13. Admission of Additional Partners.
After the Private Placement of the Units of Limited
Partnership Interest has been terminated by the General Partner, no additional
General Partner will be admitted to the Partnership except as described in
Paragraph 18(c). The General Partner may take such actions as may be necessary
or appropriate at any time to offer new Units or partial Units and to admit new
or substituted Limited Partners to the Partnership. All subscribers who have
been accepted by the General Partner shall be deemed admitted as Limited
Partners at the time they are reflected as such in the books and records of the
Partnership.
14. Special Power of Attorney.
Each Limited Partner does irrevocably constitute and appoint
the General Partner, and each other person or entity that shall after the date
of this Agreement become a general partner of the Partnership, with the power of
substitution, as his true and lawful attorney-in-fact, in his name, place and
stead, to execute, acknowledge, swear to, file and record in his behalf in the
appropriate public offices and publish (i) this Agreement and a Certificate of
Limited Partnership, including amendments and/or restatements thereto; (ii) all
instruments which the General Partner deems necessary or appropriate to reflect
any amendment, change or modification of the Partnership in accordance with the
terms of this Agreement, including any instruments necessary to dissolve the
Partnership; (iii) Certificates of Assumed Name; and (iv) Customer Agreements
with SB or other commodity brokerage firms. The Power of Attorney granted herein
shall be irrevocable and deemed to be a power coupled with an interest and shall
survive and not be affected by the subsequent incapacity, disability or death of
a Limited Partner. Each Limited Partner hereby agrees to be bound by any
representation made by the General Partner and by any successor thereto, acting
in good faith pursuant to such Power of Attorney and each Limited Partner hereby
waives any and all defenses which may be available to contest, negate or
disaffirm the action of the General Partner and any successor thereto, taken in
good faith under such Power of Attorney. In the event of any conflict between
this Agreement and any instruments filed by such attorney pursuant to the Power
of Attorney granted in this Paragraph, this Agreement shall control.
15. Withdrawal of a Partner.
The Partnership shall be dissolved and its affairs wound up
upon the assignment by the General Partner of all of its interest in the
Partnership, withdrawal, removal, bankruptcy, or any other event that causes the
General Partner to cease to be a general partner under the Partnership Act
(unless the Partnership is continued pursuant to Paragraph 18). The General
Partner shall not withdraw from the Partnership without giving the Limited
Partners ninety (90) days' prior written notice. The death, incompetency,
withdrawal, insolvency or dissolution of a Limited Partner shall not (in and of
itself) dissolve the Partnership, and such Limited Partner, his estate,
custodian or personal representative shall have no right to withdraw or value
such Limited Partner's interest in the Partnership except as provided in
Paragraph 11 hereof. Each Limited Partner (and any assignee of such Partner's
interest) expressly agrees that, in the event of his death, he waives on behalf
of himself and his estate, and he directs the legal representative of his estate
and any person interested therein to waive, the furnishing of any inventory,
accounting, or appraisal of the assets of the Partnership and any right to an
audit or examination of the books of the Partnership; provided, however, that
this waiver in no way limits the rights of the Limited Partners or their
representatives to have access to the Partnership's books and records as
described in Paragraph 9 hereof.
16. No Personal Liability for Return of Capital.
The General Partner, subject to Paragraph 17 hereof, shall not
be personally liable for the return or repayment of all or any portion of the
capital or profits of any Partner (or assignee), it being expressly agreed that
any such return of capital or profits made pursuant to this Agreement shall be
made solely from the assets (which shall not include any right of contribution
from the General Partner) of the Partnership.
17. Indemnification.
(a) The General Partner and its Affiliates shall have no
liability to the Partnership or to any Partner for any loss suffered by the
Partnership which arises out of any action or inaction of the General Partner or
its Affiliates if the General Partner or its Affiliates in good faith determined
that such course of conduct was in the best interest of the Partnership and such
course of conduct did not constitute negligence or misconduct of the General
Partner or its Affiliates. To the fullest extent permitted by law, the General
Partner and its Affiliates shall be indemnified by the Partnership against any
losses, judgments, liabilities, expenses and amounts paid in settlement of any
claims sustained by them in connection with the Partnership, provided that the
same were not the result of negligence or misconduct on the part of the General
Partner or its Affiliates.
(b) Notwithstanding (a) above, the General Partner and its
Affiliates shall not be indemnified for any losses, liabilities or expenses
arising from or out of an alleged violation of federal or state securities laws
in connection with the offer or sale of Units.
(c) The Partnership shall not incur the cost of that portion
of any insurance which insures any party against any liability the
indemnification of which is herein prohibited.
(d) For purposes of this Paragraph 16, the term "Affiliates"
shall mean any person performing services on behalf of the Partnership and
acting within the scope of the General Partner's authority as set forth in this
Agreement who: (1) directly or indirectly controls, is controlled by, or is
under common control with the General Partner; or (2) owns or controls 10% or
more of the outstanding voting securities of the General Partner; or (3) is an
officer or director of the General Partner.
(e) The provision of advances from Partnership funds to the
General Partner and its Affiliates for legal expenses and other costs incurred
as a result of any legal action initiated against the General Partner by a
Limited Partner of the Partnership is prohibited.
(f) Any indemnification under subparagraph (a) above, unless
ordered by a court, shall be made by the Partnership only as authorized in the
specific case and only upon a determination by independent legal counsel in a
written opinion that indemnification of the General Partner or its Affiliates is
proper in the circumstances because it has met the applicable standard of
conduct set forth in subparagraph (a) above.
18. Amendments; Meetings.
(a) Amendments with Consent of the General Partner. If at any
time during the term of the Partnership the General Partner shall deem it
necessary or desirable to amend this Agreement (including the Partnership's
basic investment policies set forth in paragraph 3(b) hereof), such amendment
shall be effective only if approved in writing by the General Partner and,
except as specified in this sub-section (a), by Limited Partners owning more
than 50% of the Units of Limited Partnership Interest then outstanding and if
made in accordance with the Partnership Act. Any such supplemental or amendatory
agreement shall be adhered to and have the same effect from and after its
effective date as if the same had originally been embodied in and formed a part
of this Agreement.
The General Partner may amend this Limited Partnership
Agreement without the consent of the Limited Partners in order (i) to clarify
any clerical inaccuracy or ambiguity or reconcile any inconsistency (including
any inconsistency between this Limited Partnership Agreement and the
Memorandum); (ii) to delete or add any provision of or to the Limited
Partnership Agreement required to be deleted or added by the staff of any
federal or state agency; or (iii) to make any amendment to the Limited
Partnership Agreement which the General Partner deems advisable (including but
not limited to amendments necessary to effect the allocations proposed herein)
provided that such amendment is not adverse to the Limited Partners, or is
required by law.
The General Partner may, however, change the trading policies
in paragraph 3(b) of this Agreement without the approval of the Limited Partners
when such change is deemed to be in the best interests of the Partnership. In
addition, if the General Partner determines to offer Units to the public in the
future, the General Partner may amend this Agreement as necessary to effect such
public offering without obtaining the consent of the Limited Partners, provided,
however, that such amendments are deemed to be in the best interests of the
Limited Partners. Amendments that are consistent with the North American
Securities Administrators Association's Guidelines for the Registration of
Commodity Pools will be presumed to be in the best interests of the Limited
Partners.
(b) Meetings. Upon receipt of a written request, signed by
Limited Partners owning at least 10% of the Units of Limited Partnership
Interest then outstanding, that a meeting of the Partnership be called to vote
upon any matter which the Limited Partners may vote upon pursuant to this
Agreement, the General Partner shall, by written notice to each Limited Partner
of record mailed within fifteen (15) days after receipt of such request, call a
meeting of the Partnership. Such meeting shall be held at least thirty (30) but
not more than sixty (60) days after the mailing of such notice, and such notice
shall specify the date, a reasonable place and time, and the purpose of such
meeting.
(c) Amendments and Actions without Consent of the General
Partner. At any meeting called pursuant to Paragraph 18(b), upon the approval by
an affirmative vote (which may be in person or by proxy) of Limited Partners
owning more than 50% of the outstanding Units of Limited Partnership Interest,
the following actions may be taken: (i) this Agreement may be amended in
accordance with and only to the extent permissible under the Partnership Act;
(ii) the Partnership may be dissolved; (iii) the General Partner may be removed
and a new general partner may be admitted immediately prior to the removal of
the General Partner provided that the new general partner of the Partnership
shall continue the business of the Partnership without dissolution; (iv) if the
General Partner elects to withdraw from the Partnership, a new general partner
or general partners may be admitted immediately prior to the withdrawal of the
General Partner provided that the new general partner of the Partnership shall
continue the business of the Partnership without dissolution; (v) any contracts
with the General Partner, any of its Affiliates or any commodity trading advisor
to the Partnership may be terminated on sixty days' notice without penalty; and
(vi) the sale of all of the assets of the Partnership may be approved; provided,
however, that no such action may be taken unless the Partnership has been
furnished with an opinion of counsel that the action to be taken will not
adversely affect the liability of the Limited Partners and that the action is
permitted by the Partnership Act.
(d) Continuation. Upon the assignment by the General Partner
of all of its interest in the Partnership, the withdrawal, removal, bankruptcy
or any other event that causes the General Partner to cease to be a general
partner under the Partnership Act, the Partnership is not dissolved and is not
required to be wound up by reason of such event if, (i) there is a remaining
general partner who continues the business of the Partnership or (ii) within
ninety (90) days after such event, all remaining Partners agree in writing to
continue the business of the Partnership and to the appointment, effective as of
the date of such event, of a successor General Partner.
19. Governing Law.
The validity and construction of this Agreement shall be
determined and governed by the laws of the State of New York.
20. Miscellaneous.
(a) Priority among Limited Partners. With the exception of
the Profit Share allocation to the Special Limited Partner, no Limited Partner
shall be entitled to any priority or preference over any other Limited Partner
with regard to the return of contributions of capital or to the distribution of
any profits or otherwise in the affairs of the Partnership.
(b) Notices. All notices under this Agreement, other than
reports by the General Partner to the Limited Partners, shall be in writing and
shall be effective upon personal delivery, or, if sent by registered or
certified mail, postage prepaid, addressed to the last known address of the
party to whom such notice is to be given, upon the deposit of such notice in the
United States mail. Reports by the General Partner to the Limited Partners shall
be in writing and shall be sent by first class mail to the last known address of
each Limited Partner.
(c) Binding Effect. This Agreement shall inure to and be
binding upon all of the parties, their successors, permitted assigns,
custodians, estates, heirs and personal representatives. For purposes of
determining the rights of any Partner or assignee hereunder, the Partnership and
the General Partner may rely upon the Partnership records as to who are Partners
and assignees and all Partners and assignees agree that their rights shall be
determined and that they shall be bound thereby, including all rights which they
may have under Paragraph 17 hereof.
(d) Captions. Captions in no way define, limit, extend or
describe the scope of this Agreement nor the effect of any of its provisions.
IN WITNESS WHEREOF, the parties hereto have executed this
Agreement as of the day first mentioned above.
General Partner: Initial Limited Partner:
Smith Barney Futures Management Inc.
By: /s/ David J. Vogel /s/ David J. Vogel
David J. Vogel David J. Vogel
President and Director
Special Limited Partner:
AAA Capital Management, Inc.
By: /s/ A. Anthony Annunziato
A. Anthony Annunziato
President
Limited Partners:
All Limited Partners now and hereafter admitted as limited partners of the
Partnership pursuant to powers of attorney now and hereafter executed in favor
of and delivered to the General Partner.
By: SMITH BARNEY FUTURES MANAGEMENT INC.
ATTORNEY-IN-FACT
By: /s/ David J. Vogel
David J. Vogel
President and Director
Exhibit 10(a)
ADVISORY AGREEMENT
AGREEMENT made as of the 30th day of January 1998 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM"), SMITH BARNEY
AAA ENERGY FUND L.P., a New York limited partnership (the "Partnership") and AAA
CAPITAL MANAGEMENT INC., a Texas corporation (the "Advisor").
W I T N E S S E T H :
WHEREAS, SBFM is the general partner of SMITH BARNEY AAA
ENERGY FUND L.P. a limited partnership organized for the purpose of speculative
trading of commodity interests, including futures contracts, options and forward
contracts with the objective of achieving substantial capital appreciation; and
WHEREAS, the Limited Partnership Agreement establishing the
Partnership (the "Limited Partnership Agreement") permits SBFM to delegate to
one or more commodity trading advisors SBFM's authority to make trading
decisions for the Partnership; and
WHEREAS, the Advisor is registered as a commodity trading
advisor with the Commodity Futures Trading Commission ("CFTC") and is a member
of the National Futures Association ("NFA"); and
WHEREAS, SBFM is registered as a commodity pool operator with
the CFTC and is a member of the NFA; and
WHEREAS, SBFM, the Partnership and the Advisor wish to enter
into this Agreement in order to set forth the terms and conditions upon which
the Advisor will render and implement advisory services in connection with the
conduct by the Partnership of its commodity trading activities during the term
of this Agreement;
NOW, THEREFORE, the parties agree as follows:
1. DUTIES OF THE ADVISOR. (a) Upon the commencement of trading
operations by the Partnership and for the period and on the terms and conditions
of this Agreement, the Advisor shall have sole authority and responsibility, as
one of the Partnership's agents and attorneys-in-fact, for directing the
investment and reinvestment of the assets and funds of the Partnership allocated
to it by the General Partner in commodity interests, including commodity futures
contracts, options and forward contracts. All such trading on behalf of the
Partnership shall be in accordance with the trading strategies and trading
policies set forth in the Private Placement Memorandum and Disclosure Document
to be dated on or about February 23, 1998, as supplemented (the "Memorandum"),
and as such trading policies may be changed from time to time upon receipt by
the Advisor of prior written notice of such change and pursuant to the trading
strategy selected by SBFM to be utilized by the Advisor in managing the
Partnership's assets. SBFM has initially selected the Advisor's Sole trading
program to manage the Partnership's assets allocated to it. Any open positions
or other investments at the time of receipt of such notice of a change in
trading policy shall not be deemed to violate the changed policy and shall be
closed or sold in the ordinary course of trading. The Advisor may not deviate
from the trading policies set forth in the Memorandum without the prior written
consent of the Partnership given by SBFM. The Advisor makes no representation or
warranty that the trading to be directed by it for the Partnership will be
profitable or will not incur losses.
(b) SBFM acknowledges receipt of the Advisor's Disclosure
Document dated January 1, 1998 as filed with the NFA and the CFTC. All trades
made by the Advisor for the account of the Partnership shall be made through
such commodity broker or brokers as SBFM shall direct, and the Advisor shall
have no authority or responsibility for selecting or supervising any such broker
in connection with the execution, clearance or confirmation of transactions for
the Partnership or for the negotiation of brokerage rates charged therefor.
However, the Advisor, with the prior written permission (by either original or
fax copy) of SBFM, may direct all trades in commodity futures and options to a
futures commission merchant or independent floor broker it chooses for execution
with instructions to give-up the trades to the broker designated by SBFM,
provided that the futures commission merchant or independent floor broker and
any give-up or floor brokerage fees are approved in advance by SBFM. All give-up
or similar fees relating to the foregoing shall be paid by the Partnership after
all parties have executed the relevant give-up agreements (by either original or
fax copy).
(c) The initial allocation of the Partnership's assets to the
Advisor will be made to the Advisor's Sole trading program. In the event the
Advisor wishes to use a trading system or methodology other than or in addition
to the system or methodology outlined in the Memorandum in connection with its
trading for the Partnership, either in whole or in part, it may not do so unless
the Advisor gives SBFM prior written notice of its intention to utilize such
different trading system or methodology and SBFM consents thereto in writing. In
addition, the Advisor will provide five days' prior written notice to SBFM of
any change in the trading system or methodology to be utilized for the
Partnership which the Advisor deems material. If the Advisor deems such change
in system or methodology or in markets traded to be material, the changed system
or methodology or markets traded will not be utilized for the Partnership
without the prior written consent of SBFM. In addition, the Advisor will notify
SBFM of any changes to the trading system or methodology that would require a
change in the description of the trading strategy or methods described in the
Memorandum. Further, the Advisor will provide the Partnership with a current
list of all commodity interests to be traded for the Partnership's account and
will not trade any additional commodity interests for such account without
providing notice thereof to SBFM and receiving SBFM's written approval. The
Advisor also agrees to provide SBFM, on a monthly basis, with a written report
of the assets under the Advisor's management together with all other matters
deemed by the Advisor to be material changes to its business not previously
reported to SBFM.
(d) The Advisor agrees to make all material disclosures to
the Partnership regarding itself and its principals as defined in Part 4 of the
CFTC's regulations ("principals"), shareholders, directors, officers and
employees, their trading performance and general trading methods, its customer
accounts (but not the identities of or identifying information with respect to
its customers) and otherwise as are required in the reasonable judgment of SBFM
to be made in any filings required by Federal or state law or NFA rule or order.
Notwithstanding Sections 1(d) and 4(d) of this Agreement, the Advisor is not
required to disclose the actual trading results of proprietary accounts of the
Advisor or its principals unless SBFM reasonably determines that such disclosure
is required in order to fulfill its fiduciary obligations to the Partnership or
the reporting, filing or other obligations imposed on it by Federal or state law
or NFA rule or order. The Partnership and SBFM acknowledge that the trading
advice to be provided by the Advisor is a property right belonging to the
Advisor and that they will keep all such advice confidential. Further, SBFM
agrees to treat as confidential any results of proprietary accounts and/or
proprietary information with respect to trading systems obtained from the
Advisor.
(e) The Advisor understands and agrees that SBFM may
designate other trading advisors for the Partnership and apportion or
reapportion to such other trading advisors the management of an amount of Net
Assets (as defined in Section 3(b) hereof) as it shall determine in its absolute
discretion. The designation of other trading advisors and the apportionment or
reapportionment of Net Assets to any such trading advisors pursuant to this
Section 1 shall neither terminate this Agreement nor modify in any regard the
respective rights and obligations of the parties hereunder.
(f) SBFM may, from time to time, in its absolute discretion,
select additional trading advisors and reapportion funds among the trading
advisors for the Partnership as it deems appropriate. SBFM shall use its best
efforts to make reapportionments, if any, as of the first day of a month. The
Advisor agrees that it may be called upon at any time promptly to liquidate
positions in SBFM's sole discretion so that SBFM may reallocate the
Partnership's assets, meet margin calls on the Partnership's account, fund
redemptions, or for any other reason, except that SBFM will not require the
liquidation of specific positions by the Advisor. SBFM will use its best efforts
to give two days' prior notice to the Advisor of any reallocations or
liquidations.
(g) The Advisor will not be liable for trading losses in the
Partnership's account including losses caused by errors; provided, however, that
(i) the Advisor will be liable to the Partnership with respect to losses
incurred due to errors committed or caused by it or any of its principals or
employees in communicating improper trading instructions or orders to any broker
on behalf of the Partnership and (ii) the Advisor will be liable to the
Partnership with respect to losses incurred due to errors committed or caused by
any executing broker (other than any SBFM affiliate) selected by the Advisor,
(it also being understood that SBFM, with the assistance of the Advisor, will
first attempt to recover such losses from the executing broker).
2. INDEPENDENCE OF THE ADVISOR. For all purposes herein, the
Advisor shall be deemed to be an independent contractor and, unless otherwise
expressly provided or authorized, shall have no authority to act for or
represent the Partnership in any way and shall not be deemed an agent, promoter
or sponsor of the Partnership, SBFM, or any other trading advisor.
3. COMPENSATION. (a) In consideration of and as compensation
for all of the services to be rendered by the Advisor to the Partnership under
this Agreement, the Partnership shall pay the Advisor (i) a monthly fee for
professional Advisory services equal to 1/12 of 1% (1% per year) of the
month-end Net Assets of the Partnership allocated to the Advisor; and (ii) an
annual Profit Share allocation to its capital account in the Partnership equal
to 20% of New Trading Profits (as such term is defined in the Limited
Partnership Agreement) earned by the Advisor for the Partnership during each
calendar year in the form of Units.
(b) "Net Assets" shall have the meaning set forth in
Paragraph 7(d)(1) of the Limited Partnership Agreement dated as of January 5,
1998 and without regard to further amendments thereto, provided that in
determining the Net Assets of the Partnership on any date, no adjustment shall
be made to reflect any distributions, redemptions or Profit Share allocable as
of the date of such determination.
(c) Monthly Advisory fees shall be paid within twenty (20)
business days following the end of the period, for which such fee is payable. In
the event of the termination of this Agreement as of any date which shall not be
the end of a fiscal year or a calendar month, as the case may be, the monthly
Advisory fee shall be prorated to the effective date of termination. If, during
any month, the Partnership does not conduct business operations or the Advisor
is unable to provide the services contemplated herein for more than two
successive business days, the monthly Advisory fee shall be prorated by the
ratio which the number of business days during which SBFM conducted the
Partnership's business operations or utilized the Advisor's services bears in
the month to the total number of business days in such month.
(d) The provisions of this Paragraph 3 shall survive the
termination of this Agreement.
4. RIGHT TO ENGAGE IN OTHER ACTIVITIES. (a) The services
provided by the Advisor hereunder are not to be deemed exclusive. SBFM on its
own behalf and on behalf of the Partnership acknowledges that, subject to the
terms of this Agreement, the Advisor and its officers, directors, employees and
shareholder(s), may render advisory, consulting and management services to other
clients and accounts. The Advisor and its officers, directors, employees and
shareholder(s) shall be free to trade for their own accounts and to advise other
investors and manage other commodity accounts during the term of this Agreement
and to use the same information, computer programs and trading strategies,
programs or formulas which they obtain, produce or utilize in the performance of
services to SBFM for the Partnership. However, the Advisor represents, warrants
and agrees that it believes the rendering of such consulting, advisory and
management services to other accounts and entities will not require any material
change in the Advisor's basic trading strategies and will not affect the
capacity of the Advisor to continue to render services to SBFM for the
Partnership of the quality and nature contemplated by this Agreement.
(b) If, at any time during the term of this Agreement, the
Advisor is required to aggregate the Partnership's commodity positions with the
positions of any other person for purposes of applying CFTC- or exchange-imposed
speculative position limits, the Advisor agrees that it will promptly notify
SBFM in writing if the Partnership's positions are included in an aggregate
amount which exceeds the applicable speculative position limit. The Advisor
agrees that, if its trading recommendations are altered because of the
application of any speculative position limits, it will not modify the trading
instructions with respect to the Partnership's account in such manner as to
affect the Partnership substantially disproportionately as compared with the
Advisor's other accounts. The Advisor further represents, warrants and agrees
that under no circumstances will it knowingly or deliberately use trading
strategies or methods for the Partnership that are inferior to strategies or
methods employed for any other client or account and that it will not knowingly
or deliberately favor any client or account managed by it over any other client
or account in any manner, it being acknowledged, however, that different trading
strategies or methods may be utilized for differing sizes of accounts, accounts
with different trading policies, accounts experiencing differing inflows or
outflows of equity, accounts which commence trading at different times, accounts
which have different portfolios or different fiscal years, accounts utilizing
different executing brokers and accounts with other differences, and that such
differences may cause divergent trading results.
(c) It is acknowledged that the Advisor and/or its officers,
employees, directors and shareholder(s) presently act, and it is agreed that
they may continue to act, as advisor for other accounts managed by them, and may
continue to receive compensation with respect to services for such accounts in
amounts which may be more or less than the amounts received from the
Partnership.
(d) The Advisor agrees that it shall make such information
available to SBFM respecting the performance of the Partnership's account as
compared to the performance of other accounts managed by the Advisor or its
principals as shall be reasonably requested by SBFM. The Advisor presently
believes and represents that existing speculative position limits will not
materially adversely affect its ability to manage the Partnership's account
given the potential size of the Partnership's account and the Advisor's and its
principals' current accounts and all proposed accounts for which they have
contracted to act as trading manager.
5. TERM. (a) This Agreement shall continue in effect until
June 30, 1998. SBFM may, in its sole discretion, renew this Agreement for
additional one-year periods upon notice to the Advisor not less than 30 days
prior to the expiration of the previous period. At any time during the term of
this Agreement, SBFM may terminate this Agreement at any month-end upon 30 days'
notice to the Advisor. At any time during the term of this Agreement, SBFM may
elect to immediately terminate this Agreement upon 30 days' notice to the
Advisor if (i) the Net Asset Value per Unit shall decline as of the close of
business on any day to $400 or less; (ii) the Net Assets allocated to the
Advisor (adjusted for redemptions, distributions, withdrawals or reallocations,
if any) decline by 50% or more as of the end of a trading day from such Net
Assets' previous highest value; (iii) limited partners owning at least 50% of
the outstanding Units shall vote to require SBFM to terminate this Agreement;
(iv) the Advisor fails to comply with the terms of this Agreement; (v) SBFM, in
good faith, reasonably determines that the performance of the Advisor has been
such that SBFM's fiduciary duties to the Partnership require SBFM to terminate
this Agreement; or (vi) SBFM reasonably believes that the application of
speculative position limits will substantially affect the performance of the
Partnership. At any time during the term of this Agreement, SBFM may elect
immediately to terminate this Agreement if (i) the Advisor merges, consolidates
with another entity, sells a substantial portion of its assets, or becomes
bankrupt or insolvent, except as provided in Section 10 hereof, (ii) A. Anthony
Annunziato dies, becomes incapacitated, leaves the employ of the Advisor, ceases
to control the Advisor or is otherwise not managing the trading programs or
systems of the Advisor, or (iii) the Advisor's registration as a commodity
trading advisor with the CFTC or its membership in the NFA or any other
regulatory authority, is terminated or suspended. This Agreement will
immediately terminate upon dissolution of the Partnership or upon cessation of
trading prior to dissolution.
(b) The Advisor may terminate this Agreement by giving not
less than 30 days' notice to SBFM (i) in the event that the trading policies of
the Partnership as set forth in the Memorandum are changed in such manner that
the Advisor reasonably believes will adversely affect the performance of its
trading strategies; (ii) after June 30, 1998; or (iii) in the event that the
General Partner or Partnership fails to comply with the terms of this Agreement.
The Advisor may immediately terminate this Agreement if SBFM's registration as a
commodity pool operator or its membership in the NFA is terminated or suspended.
(c) Except as otherwise provided in this Agreement, any
termination of this Agreement in accordance with this Paragraph 5 or Paragraph
1(e) shall be without penalty or liability to any party, except for any fees due
to the Advisor pursuant to Section 3 hereof.
6. INDEMNIFICATION. (a)(i) In any threatened, pending or
completed action, suit, or proceeding to which the Advisor was or is a party or
is threatened to be made a party arising out of or in connection with this
Agreement or the management of the Partnership's assets by the Advisor or the
offering and sale of units in the Partnership, SBFM shall, subject to
subparagraph (a)(iii) of this Paragraph 6, indemnify and hold harmless the
Advisor against any loss, liability, damage, cost, expense (including, without
limitation, attorneys' and accountants' fees), judgments and amounts paid in
settlement actually and reasonably incurred by it in connection with such
action, suit, or proceeding if the Advisor acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership, and provided that its conduct did not constitute negligence,
intentional misconduct, or a breach of its fiduciary obligations to the
Partnership as a commodity trading advisor, unless and only to the extent that
the court or administrative forum in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the Advisor is fairly and reasonably
entitled to indemnity for such expenses which such court or administrative forum
shall deem proper; and further provided that no indemnification shall be
available from the Partnership if such indemnification is prohibited by Section
16 of the Partnership Agreement. The termination of any action, suit or
proceeding by judgment, order or settlement shall not, of itself, create a
presumption that the Advisor did not act in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership.
(ii) Without limiting sub-paragraph (i) above, to the extent
that the Advisor has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subparagraph (i) above, or in
defense of any claim, issue or matter therein, SBFM shall indemnify it against
the expenses (including, without limitation, attorneys' and accountants' fees)
actually and reasonably incurred by it in connection therewith.
(iii) Any indemnification under subparagraph (i) above,
unless ordered by a court or administrative forum, shall be made by SBFM only as
authorized in the specific case and only upon a determination by independent
legal counsel in a written opinion that such indemnification is proper in the
circumstances because the Advisor has met the applicable standard of conduct set
forth in subparagraph (i) above. Such independent legal counsel shall be
selected by SBFM in a timely manner, subject to the Advisor's approval, which
approval shall not be unreasonably withheld. The Advisor will be deemed to have
approved SBFM's selection unless the Advisor notifies SBFM in writing, received
by SBFM within five days of SBFM's telecopying to the Advisor of the notice of
SBFM's selection, that the Advisor does not approve the selection.
(iv) In the event the Advisor is made a party to any claim,
dispute or litigation or otherwise incurs any loss or expense as a result of, or
in connection with, the Partnership's or SBFM's activities or claimed activities
unrelated to the Advisor, SBFM shall indemnify, defend and hold harmless the
Advisor against any loss, liability, damage, cost or expense (including, without
limitation, attorneys' and accountants' fees) incurred in connection therewith.
(v) As used in this Paragraph 6(a), the terms "Advisor" shall
include the Advisor, its principals, officers, directors, stockholders and
employees and the term "SBFM" shall include the Partnership.
(b)(i) The Advisor agrees to indemnify, defend and hold
harmless SBFM, the Partnership and their affiliates against any loss, liability,
damage, cost or expense (including, without limitation, attorneys' and
accountants' fees), judgments and amounts paid in settlement actually and
reasonably incurred by them (A) as a result of the material breach of any
material representations and warranties made by the Advisor in this Agreement,
or (B) as a result of any act or omission of the Advisor relating to the
Partnership if there has been a final judicial or regulatory determination or,
in the event of a settlement of any action or proceeding with the prior written
consent of the Advisor, a written opinion of an arbitrator pursuant to Paragraph
14 hereof, to the effect that such acts or omissions violated the terms of this
Agreement in any material respect or involved negligence, bad faith,
recklessness or intentional misconduct on the part of the Advisor (except as
otherwise provided in Section 1(g)).
(ii) In the event SBFM or the Partnership is made a party to
any claim, dispute or litigation or otherwise incurs any loss or expense as a
result of, or in connection with, the activities or claimed activities of the
Advisor or its principals, officers, directors, shareholder(s) or employees
unrelated to SBFM's or the Partnership's business, the Advisor shall indemnify,
defend and hold harmless SBFM and the Partnership against any loss, liability,
damage, cost or expense (including, without limitation, attorneys' and
accountants' fees) incurred in connection therewith.
(c) In the event that a person entitled to indemnification
under this Paragraph 6 is made a party to an action, suit or proceeding alleging
both matters for which indemnification can be made hereunder and matters for
which indemnification may not be made hereunder, such person shall be
indemnified only for that portion of the loss, liability, damage, cost or
expense incurred in such action, suit or proceeding which relates to the matters
for which indemnification can be made.
(d) None of the indemnifications contained in this Paragraph
6 shall be applicable with respect to default judgments, confessions of judgment
or settlements entered into by the party claiming indemnification without the
prior written consent, which shall not be unreasonably withheld, of the party
obligated to indemnify such party.
(e) The provisions of this Paragraph 6 shall survive the
termination of this Agreement.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) The Advisor represents and warrants that:
(i) All references to the Advisor and its principals in the
Memorandum are accurate in all material respects and as to them the Memorandum
does not contain any untrue statement of a material fact or omit to state a
material fact which is necessary to make the statements therein not misleading,
except that with respect to Table B in the Memorandum, this representation and
warranty extends only to the underlying data made available by the Advisor for
the preparation thereof and not to any hypothetical or pro forma adjustments.
(ii) The information with respect to the Advisor set forth in
the actual performance tables in the Memorandum is based on all of the customer
accounts managed on a discretionary basis by the Advisor's principals and/or the
Advisor during the period covered by such tables and required to be disclosed
therein.
(iii) The Advisor will be acting as a commodity trading
advisor with respect to the Partnership and not as a securities investment
adviser and is duly registered with the CFTC as a commodity trading advisor, is
a member of the NFA, and is in compliance with such other registration and
licensing requirements as shall be necessary to enable it to perform its
obligations hereunder, and agrees to maintain and renew such registrations and
licenses during the term of this Agreement.
(iv) The Advisor is a corporation duly organized, validly
existing and in good standing under the laws of the State of Texas and has full
power and authority to enter into this Agreement and to provide the services
required of it hereunder.
(v) The Advisor will not, by acting as a commodity trading
advisor to the Partnership, breach or cause to be breached any undertaking,
agreement, contract, statute, rule or regulation to which it is a party or by
which it is bound.
(vi) This Agreement has been duly and validly authorized,
executed and delivered by the Advisor and is a valid and binding agreement
enforceable in accordance with its terms.
(vii) At any time during the term of this Agreement that a
prospectus relating to the Units is required to be delivered in connection with
the offer and sale thereof, the Advisor agrees upon the request of SBFM to
provide the Partnership with such information as shall be necessary so that, as
to the Advisor and its principals, such prospectus is accurate.
(viii) In the event that the Advisor forms another commodity
pool unrelated to SBFM with substantially similar investors, whether or not the
Advisor terminates this Agreement or continues trading for the Partnership, the
Advisor shall pay to SBFM all expenses incurred by SBFM, Smith Barney Inc. and
the Partnership in connection with the organization and offering of the
Partnership, including but not limited to attorneys', accountants' and filing
fees, to the extent that SBFM and Smith Barney Inc. have not previously been
reimbursed by the Partnership.
(b) SBFM represents and warrants for itself and the
Partnership that:
(i) The Memorandum (as from time to time amended or
supplemented, which amendment or supplement is approved by the Advisor as to
descriptions of itself and its actual performance) does not contain any untrue
statement of a material fact or omit to state a material fact which is necessary
to make the statements therein not misleading, except that the foregoing
representation does not apply to any statement or omission concerning the
Advisor in the Memorandum, made in reliance upon, and in conformity with,
information furnished to SBFM by or on behalf of the Advisor expressly for use
in the Memorandum (it being understood that the hypothetical and pro forma
adjustments in Table B were not furnished by the Advisor).
(ii) It is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has full corporate
power and authority to perform its obligations under this Agreement.
(iii) SBFM and the Partnership have the capacity and
authority to enter into this Agreement on behalf of the Partnership.
(iv) This Agreement has been duly and validly authorized,
executed and delivered on SBFM's and the Partnership's behalf and is a valid and
binding agreement of SBFM and the Partnership enforceable in accordance with its
terms.
(v) SBFM will not, by acting as General Partner to the
Partnership and the Partnership will not, breach or cause to be breached any
undertaking, agreement, contract, statute, rule or regulation to which it is a
party or by which it is bound which would materially limit or affect the
performance of its duties under this Agreement.
(vi) It is registered as a commodity pool operator and is a
member of the NFA, and it will maintain and renew such registration and
membership during the term of this Agreement.
(vii) The Partnership is a limited partnership duly organized
and validly existing under the laws of the State of New York and has full power
and authority to enter into this Agreement and to perform its obligations under
this Agreement.
8. COVENANTS OF THE ADVISOR, SBFM AND THE PARTNERSHIP.
(a) The Advisor agrees as follows:
(i) In connection with its activities on behalf of the
Partnership, the Advisor will comply with all applicable rules and regulations
of the CFTC, NFA and/or the commodity exchange on which any particular
transaction is executed.
(ii) The Advisor will promptly notify SBFM of the
commencement of any material suit, action or proceeding involving it, whether or
not any such suit, action or proceeding also involves SBFM. The Advisor will
provide SBFM with copies of any correspondence from or to the CFTC, NFA or any
commodity exchange in connection with an investigation or audit of the Advisor's
business activities.
(iii) In the placement of orders for the Partnership's
account and for the accounts of any other client, the Advisor will utilize a
pre-determined, systematic, fair and reasonable order entry system, which shall,
on an overall basis, be no less favorable to the Partnership than to any other
account managed by the Advisor. The Advisor acknowledges its obligation to
review the Partnership's positions, prices and equity in the account managed by
the Advisor daily and within two business days to notify, in writing, the broker
and SBFM and the Partnership's brokers of (i) any error committed by the Advisor
or its principals or employees; (ii) any trade which the Advisor believes was
not executed in accordance with its instructions; and (iii) any discrepancy with
a value of $10,000 or more (due to differences in the positions, prices or
equity in the account) between its records and the information reported on the
account's daily and monthly broker statements.
(iv) The Advisor will maintain a net worth of not less than $
1,000,000 during the term of this Agreement.
(v) The Advisor will make no representations, other than
those contained in the Memorandum, to investors or prospective investors in the
Partnership with respect to the offering and sale of Units in the Partnership
without the prior written approval of SBFM.
(b) SBFM agrees for itself and the Partnership that:
(i) SBFM and the Partnership will comply with all applicable
rules and regulations of the CFTC and/or the commodity exchange on which any
particular transaction is executed.
(ii) SBFM will promptly notify the Advisor of the
commencement of any material suit, action or proceeding involving it or the
Partnership, whether or not such suit, action or proceeding also involves the
Advisor.
9. COMPLETE AGREEMENT. This Agreement constitutes the entire
agreement between the parties pertaining to the subject matter hereof.
10. ASSIGNMENT. This Agreement may not be assigned by any
party without the express written consent of the other parties.
11. AMENDMENT. This Agreement may not be amended except by the
written consent of the parties.
12. NOTICES. All notices, demands or requests required to be
made or delivered under this Agreement shall be in writing and delivered
personally or by registered or certified mail or expedited courier, return
receipt requested, postage prepaid, to the addresses below or to such other
addresses as may be designated by the party entitled to receive the same by
notice similarly given:
<PAGE>
If to SBFM:
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, New York 10013
Attention: David J. Vogel
If to the Advisor:
AAA Capital Management Inc.
Suite 900
5065 Westheimer
Houston, Texas 77056
Attention: A. Anthony Annunziato
with a copy to:
David R. Allen, Esq.
407 East Main Street
Murfreesboro, TN 37130
13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
14. ARBITRATION. The parties agree that any dispute or
controversy arising out of or relating to this Agreement or the interpretation
thereof, shall be settled by arbitration in accordance with the rules, then in
effect, of the National Futures Association or, if the National Futures
Association shall refuse jurisdiction, then in accordance with the rules, then
in effect, of the American Arbitration Association; provided, however, that the
power of the arbitrator shall be limited to interpreting this Agreement as
written and the arbitrator shall state in writing his reasons for his award.
Judgment upon any award made by the arbitrator may be entered in any court of
competent jurisdiction.
15. NO THIRD PARTY BENEFICIARIES. There are no third party
beneficiaries to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
SMITH BARNEY FUTURES MANAGEMENT INC.
By /s/ David J. Vogel
David J. Vogel
President and Director
SMITH BARNEY AAA ENERGY FUND L. P.
By: Smith Barney
Futures Management Inc.
(General Partner)
By /s/ David J. Vogel
David J. Vogel
President and Director
AAA CAPITAL MANAGEMENT INC.
By /s/ A. Anthony Annunziato
A. Anthony Annunziato
President
Exhibit 10(b)(i)
CUSTOMER AGREEMENT
SMITH BARNEY AAA ENERGY FUND L.P.
This Agreement made and entered into as of the 12th day of
February 1998, by and between SMITH BARNEY AAA ENERGY FUND L.P., a New York
limited partnership (the "Partnership"), and SMITH BARNEY INC., a Delaware
corporation ("SB").
W I T N E S S E T H :
WHEREAS, the Partnership has been organized under the laws of
the State of New York for the purpose of achieving substantial capital
appreciation through speculative trading of commodity interests, including, but
not limited to, futures contracts, options, spot, and forward contracts; and
WHEREAS, the Partnership and SB wish to enter into this
Agreement setting forth the terms and conditions upon which SB will perform
brokerage and other services for the Partnership;
NOW, THEREFORE, in consideration of the premises and the
mutual covenants contained herein, it is agreed as follows:
1. Appointment of Broker/Dealer and Opening of Account. The Partnership hereby
appoints SB as its commodity broker/dealer through whom the Partnership will
execute trades in commodity interests including futures contracts, options,
spot, and forward contracts. As soon as practicable following the conclusion of
the Initial Offering Period (as defined in the Private Placement Offering
Memorandum and Disclosure Document of the Partnership) of the units of limited
partnership interest in the Partnership (the "Units"), provided at least 5,000
Units are sold, the Partnership shall deposit or cause to be deposited the
partners' capital contributions in a commodity brokerage account with SB, and
will maintain all of its assets, as they from time to time exist, in such
account except for such amounts as may be necessary or desirable to be
maintained in a bank account or with a broker to facilitate trading in interbank
forward foreign currency transactions and the payment of Partnership expenses,
redemptions or distributions. The Partnership shall execute such other documents
as shall be necessary or appropriate to permit SB to perform its services
hereunder.
2. Services of SB. SB agrees to use its best efforts to effect transactions for
the Partnership's account and agrees to assist the Partnership or its general
partner, Smith Barney Futures Management Inc. (the "General Partner"), in (a)
calculating the Partnership's Net Assets and Net Asset value (as such terms are
defined in the Partnership's Limited Partnership Agreement) at such times as may
be required, (b) calculating any fees or allocations due the Partnership's
trading advisor (the "Advisor"), (c) preparing and confirming financial
information for annual or interim audits and reports and (d) establishing
procedures for effecting redemptions, cash distributions and the liquidation of
the Partnership upon termination. SB further agrees to furnish clerical and
bookkeeping support for the administration of the Partnership.
3. (a) Brokerage and Other Fees. The Partnership shall pay to SB $18.00 per
round turn futures transaction and $9.00 per side on option transactions as
brokerage commissions. The Partnership shall also pay all National Futures
Association, exchange, clearing, user and give-up fees, or shall reimburse SB
for all such fees previously paid by SB on behalf of the Partnership. SB's fee
may be increased or decreased at any time at SB's discretion upon notice to the
Partnership.
(b) Offering and Organizational Expenses. SB will initially bear all of
the offering and organizational expenses related to the Initial Offering Period
which are estimated at $75,000. Offering and organizational expenses will be
reimbursed to SB from interest accrued to the Partnership. Offering expenses
incurred in the Continuous Offering will be paid by the Partnership.
4. Payment of Interest. All of the assets of the Partnership which are deposited
in the Partnership's accounts at SB will be deposited and maintained in cash.
During the term of this Agreement, SB will, within ten (10) days following the
end of each calendar month, credit the Partnership's brokerage accounts with a
sum representing interest on eighty percent (80%) of the average daily equity
maintained in cash in such accounts during each month (i.e., the sum of the
daily cash balances in such accounts divided by the total number of calendar
days in that month) at a 30-day Treasury bill rate determined weekly by SB based
on the average non-competitive yield on 3-month U.S. Treasury bills maturing in
30 days (or on the closest maturity date thereto) from the date on which such
weekly rate is determined. The equity maintained in cash in the account on
Saturdays, Sundays and holidays shall be the equity maintained in cash in the
account as of the close of business on the immediately preceding business day.
5. Trading Authorization. The General Partner has entered into an individual
Advisory with AAA Capital Management, Inc. as the Partnership's Advisor pursuant
to which the Advisor shall have discretion to order purchases and sales of
commodity interests including futures contracts, options, spot, and forward
contracts. SB is hereby authorized to execute all orders placed by the Advisor
for the account of the Partnership until notified by the General Partner to the
contrary, and shall have no obligation to inquire into the reason for or method
of determining such orders, nor any obligation to monitor such orders in
relation to the Partnership's trading policies. The provisions of this Paragraph
5 shall apply with equal force and
<PAGE>
effect to any other commodity trading advisor designated in the future by the
General Partner.
6. Terms of the Account. The following terms and conditions shall be applicable
to the Partnership's account:
(a) The word "property" is used herein to mean securities of all kinds, monies,
options, commodities and contracts for the future delivery of, or otherwise
relating to, commodities or securities and all property usually and customarily
dealt in by brokerage firms.
(b) All transactions for the Partnership's account shall be subject to the
regulations of all applicable federal, state and self-regulatory agencies
including, but not limited to, the various commodity exchanges and the
constitutions, rules and customs, as the same may be constituted from time to
time, of the exchange or market (and its clearing house, if any) where executed.
Actual deliveries are intended on all transactions. The Partnership also agrees
not to exceed the speculative position limits for its own account, acting alone
or in concert with others, and promptly to advise SB if it is required to file
reports of its commodity positions with the Commodity Futures Trading
Commission.
(c) Any and all property belonging to the Partnership, or in which it may have
an interest, held by SB or carried in the Partnership's account (either
individually or jointly with others) shall be subject to a general lien for the
discharge of the Partnership's obligations to SB, wherever or however arising
and without regard to whether or not SB has made advances with respect to such
property, and SB is hereby authorized to sell and/or purchase any and all
property in the Partnership's account without notice to satisfy such general
lien.
(d) The Partnership agrees to maintain such collateral and/or margin as SB may,
in its discretion, require from time to time and will pay on demand any amount
owing with respect to its account. Against a "short" position in any commodity
contract, prior to the maturity thereof, the Partnership will give SB
instructions to cover, or furnish SB with all necessary delivery documents, and
in default thereof, SB may, without demand or notice, cover the contracts, or if
an order to buy in such contracts cannot be executed under prevailing
conditions, SB may procure the actual commodity and make delivery thereof upon
any terms and by any method which may be feasible. It is further agreed that if
the Partnership fails to receive sufficient funds to pay for any commodities and
commodity futures contracts and/or to satisfy any demands for original and/or
variation margin, SB may, without prior demand and notice, sell any property
held by it in the Partnership's account and any loss resulting therefrom will be
charged to the Partnership's account.
(e) SB may, whenever in its discretion it considers it necessary for its
protection, sell any or all property held in the Partnership's account, cancel
any open orders for the purchase or sale of any property with or without notice
to the Partnership, and SB may borrow or buy in any property required to make
delivery against any sales, including a short sale, effected for the
Partnership. Such sale or purchase may be public or private and may be made
without advertising or notice to the Partnership and in such manner as SB may,
in its discretion, determine, and no demands, calls, tenders or notices which SB
may make or give in any one or more instances shall invalidate the aforesaid
waiver on the Partnership's part. At any such sale SB may purchase the property
free of any right of redemption and the Partnership shall be liable for any
deficiency in its account.
(f) SB and the Partnership agree that the parties shall have the right to offset
any unrealized gains and losses on the Partnership's open positions and to net
any open orders for the purchase or sale of any property of the Partnership.
(g) The Partnership agrees to pay service fees and/or interest charges upon its
account monthly at the prevailing and/or allowable rates according to the laws
of the State of New York, as determined by SB at the time of the acceptance of
this Agreement in its New York office and thereafter.
(h) If any provisions herein are or should become inconsistent with any present
or future law, rule or regulation of any sovereign government or a regulatory
body having jurisdiction over the subject matter of this Agreement, such
provision shall be deemed to be rescinded or modified in accordance with any
such law, rule or regulation. In all other respects, this Agreement shall
continue and remain in full force and effect.
7. Indemnification. (a) In any action, suit, or proceeding to which SB was or is
a party or is threatened to be made a party by reason of the fact that it is or
was the commodity broker for the Partnership (other than an action by or in the
right of the Partnership), the Partnership shall indemnify and hold harmless SB,
subject to subparagraph (c), against any loss, liability, damage, cost, expense
(including attorneys' fees and accountants' fees), judgments and amounts paid in
settlement actually and reasonably incurred by it in connection with such
action, suit or proceeding if SB acted in good faith and in a manner it
reasonably believed to be in the best interests of the Partnership, except that
no indemnification shall be made in respect of any claim, issue or matter which
as to SB constituted negligence, misconduct or breach of its fiduciary
obligations to the Partnership, unless, and only to the extent that, the court
in which such action or suit was brought shall determine upon application that,
despite the adjudication of liability but in view of all circumstances of the
case, SB is fairly and reasonably entitled to indemnification for such expenses
which such court shall deem proper; and further provided that no indemnification
shall be available from the Partnership if such indemnification is prohibited by
Section 17 of the Partnership's Limited Partnership Agreement. The termination
of any action, suit or proceeding by judgment, order or settlement shall not, of
itself, create a presumption that SB did not act in good faith, and in a manner
which it reasonably believed to be in or not opposed to the best interests of
the Partnership.
(a) To the extent that SB has been successful on the merits or otherwise in
defense of any action, suit or proceeding referred to in subparagraph (a) above,
or in defense of any claim, issue or matter therein, the Partnership shall
indemnify it against the expenses, including attorneys' fees, actually and
reasonably incurred by it in connection therewith.
(b) Any indemnification under subparagraph (a) above, unless ordered by a court,
shall be made by the Partnership only as authorized in the specific case and
only upon a determination by independent legal counsel in a written opinion that
indemnification is proper in the circumstances because SB has met the applicable
standard of conduct set forth in subparagraph (a) above.
(c) The term SB as used in this Paragraph 7 shall include SB, its officers,
directors, stockholders, employees and affiliates.
8. Termination. This Agreement may be terminated at any time by either party
hereto upon notice to the other, in which event the brokerage accounts shall be
closed and all positions open at such time shall be liquidated or shall be
transferred to another broker as directed by the Partnership.
9. Miscellaneous. This Agreement shall be binding upon and inure to the benefit
of the parties hereto and their respective successors and assigns. This
Agreement shall be governed by the laws of the State of New York.
IN WITNESS WHEREOF, this Agreement has been executed by the
parties hereto as of the day and year first above written.
SMITH BARNEY AAA ENERGY FUND L.P.
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel
David J. Vogel
President and Director
SMITH BARNEY INC.
By: /s/ David J. Vogel
Name:
Title:
ACKNOWLEDGMENT OF RISK AND OTHER DISCLOSURES
Receipt of the following Appendices which are attached hereto
is hereby acknowledged by the Partnership.
Appendix I Risk Disclosure Statement for Futures and Options.
I hereby acknowledge that I have received and understood the Risk Disclosure
Statement for Futures and Options.
Appendix II Foreign Currency Subordination Agreement.
I hereby acknowledge that I have received a copy of the Foreign Currency
Subordination Agreement and I understand the information contained therein.
Appendix III Bankruptcy Disclosure Statement.
I hereby acknowledge that I have received and understood this bankruptcy
disclosure statement.
SMITH BARNEY AAA ENERGY FUND L.P.
By: Smith Barney Futures Management Inc.
(General Partner)
By: /s/ David J. Vogel
David J. Vogel
President and Director
<PAGE>
APPI-4
APPI-1
Appendix I
RISK DISCLOSURE STATEMENT FOR FUTURES AND OPTIONS
This brief statement does not disclose all of the risks and other significant
aspects of trading in futures and options. In light of the risks, you should
undertake such transactions only if you understand the nature of the contracts
(and contractual relationships) into which you are entering and the extent of
your exposure to risk. Trading in futures and options is not suitable for many
members of the public. You should carefully consider whether trading is
appropriate for you in light of your experience, objectives, financial resources
and other relevant circumstances.
Futures
1. Effect of 'Leverage' or 'Gearing'
Transactions in futures carry a high degree of risk. The amount of initial
margin is small relative to the value of the futures contract so that
transactions are 'leveraged' or 'geared'. A relatively small market movement
will have a proportionately larger impact on the funds you have deposited or
will have to deposit: this may work against you as well as for you. You may
sustain a total loss of initial margin funds and any additional funds deposited
with the firm to maintain your position. If the market moves against your
position or margin levels are increased, you may be called upon to pay
substantial additional funds on short notice to maintain your position. If you
fail to comply with a request for additional funds within the time prescribed,
your position may be liquidated at a loss and you will be liable for any
resulting deficit.
2. Risk-reducing orders or strategies.
The placing of certain orders (e.g. 'stop-loss' orders, where permitted under
local law, or 'stop-limit' orders) which are intended to limit loss to certain
amounts may not be effective because market conditions may make it impossible to
execute such orders. Strategies using combinations of positions, such as
'spread' and 'straddle' positions may be as risky as taking simple 'long' or
'short' positions.
Options
3. Variable degree of risk
Transactions in options carry a high degree of risk. Purchasers and sellers of
options should familiarize themselves with the type of option (i.e. put or call)
which they contemplate trading and the associated risks. You should calculate
the extent to which the value of the options must increase for your position to
become profitable, taking into account the premium and all transaction costs.
The purchaser of options may offset or exercise the options or allow the options
to expire. The exercise of an option results either in a cash settlement or in
the purchaser acquiring or delivering the underlying interest. If the option is
on a future, the purchaser will acquire a futures position with associated
liabilities for margin (see the section on Futures above). If the purchased
options expire worthless, you will suffer a total loss of your investment which
will consist of the option premium plus transaction costs. If you are
contemplating purchasing deep-out-of-the-money options, you should be aware that
the chance of such options becoming profitable ordinarily is remote.
Selling ('writing' or 'granting') an option generally entails considerably
greater risk than purchasing options. Although the premium received by the
seller is fixed, the seller may sustain a loss well in excess of that amount.
The seller will be liable for additional margin to maintain the position if the
market moves unfavorably. The seller will also be exposed to the risk of the
purchaser exercising the option and the seller will be obligated to either
settle the option in cash or to acquire or deliver the underlying interest. If
the option is on a future, the seller will acquire a position in a future with
associated liabilities for margin (see the section on Futures above). If the
position is 'covered' by the seller holding a corresponding position in the
underlying interest or a future or another option, the risk may be reduced. If
the option is not covered, the risk of loss can be unlimited.
Certain exchanges in some jurisdictions permit deferred payment of the option
premium, exposing the purchaser to liability for margin payments not exceeding
the amount of the premium. The purchaser is still subject to the risk of losing
the premium and transaction costs. When the option is exercised or expires, the
purchaser is responsible for any unpaid premium outstanding at that time.
Additional risks common to futures and options
4. Terms and conditions of contracts
You should ask the firm with which you deal about the terms and conditions of
the specific futures or options which you are trading and associated obligations
(e.g. the circumstances under which you may become obligated to make or take
delivery of the underlying interest of a futures contract and, in respect of
options, expiration dates and restrictions on the time for exercise). Under
certain circumstances the specifications of outstanding contracts (including the
exercise price of an option) may be modified by the exchange or clearing house
to reflect changes in the underlying interest.
5. Suspension or restriction of trading and pricing relationships.
Market conditions (e.g. illiquidity) and/or the operation of the rules of
certain markets (e.g. the suspension of trading in any contract or contract
month because of price limits or 'circuit breakers') may increase the risk of
loss by making it difficult or impossible to effect transactions or
liquidate/offset positions. If you have sold options, this may increase the risk
of loss.
Further, normal pricing relationships between the underlying interest and the
future, and the underlying interest and the option may not exist. This can occur
when, for example, the futures contract underlying the option is subject to
price limits while the option is not. The absence of an underlying reference
price may make it difficult to judge 'fair' value.
6. Deposited cash and property
You should familiarize yourself with the protections accorded money or other
property you deposit for domestic and foreign transactions, particularly in the
event of a firm insolvency or bankruptcy. The extent to which you may recover
your money or property may be governed by specified legislation or local rules.
In some jurisdictions, property which had been specifically identifiable as your
own will be pro-rated in the same manner as cash for purposes of distribution in
the event of a shortfall.
7. Commission and other charges
Before you begin to trade, you should obtain a clear explanation of all
commission, fees and other charges for which you will be liable. These charges
will affect your net profit (if any) or increase your loss.
8. Transactions in other jurisdictions
Transactions on markets in other jurisdictions, including markets formally
linked to a domestic market, may expose you to additional risk. Such markets may
be subject to regulation which may offer different or diminished investor
protection. Before you trade you should inquire about any rules relevant to your
particular transactions. Your local regulatory authority will be unable to
compel the enforcement of the rules of regulatory authorities or markets in
other jurisdictions where your transactions have been effected. You should ask
the firm with which you deal for details about the types of redress available in
both your home jurisdiction and other relevant jurisdictions before you start to
trade.
9. Currency risks
The profit or loss in transactions in foreign currency-denominated contracts
(whether they are traded in your own or another jurisdiction) will be affected
by fluctuations in currency rates where there is a need to convert from the
currency denomination of the contract to another currency.
10. Trading facilities.
Most open-outcry and electronic trading facilities are supported by
computer-based component systems for the order-routing, execution, matching,
registration or clearing of trades. As with all facilities and systems, they are
vulnerable to temporary disruption or failure. Your ability to recover certain
losses may be subject to limits on liability imposed by the system provider, the
market, the clearing house and/or member firms. Such limits may vary; you should
ask the firm with which you deal for details in this respect.
11. Electronic trading
Trading on an electronic trading system may differ not only from trading in an
open-outcry market but also from trading on other electronic trading systems. If
you undertake transactions on an electronic trading system, you will be exposed
to risk associated with the system including the failure of hardware and
software. The result of any system failure may be that your order is either not
executed according to your instructions or is not executed at all.
12. Off-exchange transactions
In some jurisdictions, and only then in restricted circumstances, firms are
permitted to effect off-exchange transactions. The firm with which you deal may
be acting as your counterparty to the transaction. It may be difficult or
impossible to liquidate an existing position, to assess the value, to determine
a fair price or to assess the exposure to risk. For these reasons, these
transactions may involve increased risks. Off-exchange transactions may be less
regulated or subject to a separate regulatory regime. Before you undertake such
transactions, you should familiarize yourself with applicable rules and
attendant risks.
THIS BRIEF STATEMENT CANNOT, OF COURSE, DISCLOSE ALL THE RISKS AND OTHER ASPECTS
OF THE COMMODITY MARKETS.
<PAGE>
APPII-2
APPII-1
Appendix II
FOREIGN CURRENCY SUBORDINATION AGREEMENT
Funds of customers trading on United States contract markets may be
held in accounts denominated in a foreign currency with depositories located
outside the United States or its territories if the customer is domiciled in a
foreign country or if the funds are held in connection with contracts priced and
settled in a foreign currency. Such accounts are subject to the risk that events
could occur which would hinder or prevent the availability of these funds for
distribution to customers. Such accounts also may be subject to foreign currency
exchange rate risks.
By signing the accompanying acknowledgment, the customer authorizes the
deposit of funds into such foreign depositories. For customers domiciled in the
United States, this authorization permits the holding of funds in regulated
accounts offshore only if such funds are used to margin, guarantee, or secure
positions in such contracts or accrue as a result of such positions.
In order to avoid the possible dilution of other customer funds, a
customer who has funds held outside the United States must further agree that
his claims based on such funds will be subordinated as described below in the
unlikely event both of the following conditions are met:
1. The customer's futures commission merchant is placed in
receivership or bankruptcy, and
2. there are insufficient funds available for distribution
denominated in the foreign currency as to which the customer
has a claim to satisfy all claims against those funds.
By signing the accompanying acknowledgment the customer agrees that if
both of the conditions listed above occur, the customer's claim against the
futures commission merchant's assets attributable to funds held overseas in a
particular foreign currency may be satisfied out of segregated customer funds
held in accounts denominated in dollars or other foreign currencies only after
each customer whose funds are held in dollars or in such other foreign
currencies receives its pro-rata portion of such funds. It is further agreed
that in no event may a customer whose funds are held overseas receive more than
its pro-rata share of the aggregate pool consisting of funds held in dollars,
funds held in the particular foreign currency, and non-segregated assets of the
futures commission merchant.
<PAGE>
APPIII-1
Appendix III
BANKRUPTCY DISCLOSURE STATEMENT
THIS STATEMENT IS FURNISHED TO YOU BECAUSE RULE 190.10(C) OF THE COMMODITY
FUTURES TRADING COMMISSION REQUIRES IT FOR REASONS OF FAIR NOTICE UNRELATED TO
THIS COMPANY'S CURRENT FINANCIAL CONDITION.
1) YOU SHOULD KNOW THAT IN THE UNLIKELY EVENT OF THIS COMPANY'S
BANKRUPTCY, PROPERTY, INCLUDING PROPERTY SPECIFICALLY TRACEABLE TO YOU,
WILL BE RETURNED, TRANSFERRED OR DISTRIBUTED TO YOU OR ON YOUR BEHALF,
ONLY TO THE EXTENT OF YOUR PRO RATA SHARE OF ALL PROPERTY AVAILABLE FOR
DISTRIBUTION TO CUSTOMERS.
2) NOTICE CONCERNING THE TERMS FOR THE RETURN OF SPECIFICALLY IDENTIFIABLE
PROPERTY WILL BE PUBLISHED IN A NEWSPAPER OF GENERAL CIRCULATION.
3) THE COMMISSION'S REGULATIONS CONCERNING BANKRUPTCIES OF COMMODITY
BROKERS CAN BE FOUND AT 17 CODE OF FEDERAL REGULATIONS PART 190.
Exhibit 10(c)
APPENDIX D
SB Account No.: _________
________Please check here if
employed by Smith Barney or an
affiliate.
SMITH BARNEY AAA ENERGY FUND L.P.
(a New York limited partnership)
Subscription Agreement
<PAGE>
0383440
0383440
D-1
Smith Barney Futures Management Inc.
390 Greenwich Street - 1st floor
New York, New York 10013
Re: Smith Barney AAA Energy Fund L.P.
Ladies and Gentlemen:
1. Subscription for Units. I hereby irrevocably subscribe for the
amount of Units (and during the Continuous Offering, partial Units rounded to
four decimal places) of Limited Partnership Interest ("Units") of Smith Barney
AAA Energy Fund L.P. (the "Partnership") as indicated on page 5 hereof. I
understand that each Unit will be offered at $1,000 per Unit during the Initial
Offering Period and at Net Asset Value per Unit on the date of sale during the
Continuous Offering. I hereby authorize SB to debit my SB account in the amount
of my subscription as described in "Subscription Procedure" in the Private
Placement Offering Memorandum and Disclosure Document dated February 12, 1998,
as amended or supplemented from time to time (the "Memorandum").
I am aware that this subscription is not binding on the Partnership
unless and until it is accepted by the General Partner, which may reject this
subscription in whole or in part for any reason whatsoever. I understand that
the General Partner will advise me within 5 business days of receipt of my funds
and this Agreement if my subscription has been rejected. I further understand
that if this subscription is not accepted, the full amount of my subscription
will be promptly returned to me without deduction.
2. Representations, Warranties and Covenants of Subscriber. As an
inducement to the General Partner on behalf of the Partnership to sell me the
Units for which I have subscribed I hereby represent, warrant and agree as
follows:
(a) I am over 21 years old, am legally competent to execute this
Agreement and have received and reviewed the Memorandum and, if this purchase is
made during the Continuous Offering, the Partnership's most recent monthly
statement and annual report, if any, and except as set forth in the Memorandum,
no representations or warranties have been made to me by the Partnership, its
General Partner or their agents, with respect to the business of the
Partnership, the financial condition of the Partnership, the deductibility of
any item for tax purposes or the economic, tax, or any other aspects or
consequences of a purchase of a Unit, and I have not relied upon any information
concerning the offering, written or oral, other than that contained in the
Memorandum or provided by the General Partner at my request. In addition, I have
been represented by such legal and tax counsel and others selected by me as I
have found it necessary to consult concerning this transaction. I am in
compliance with all federal and state regulatory requirements applicable to this
investment. Without limiting the generality of the foregoing, if the undersigned
is a passive investment vehicle, it represents that it, its advisor and operator
are each in compliance with the registration requirements imposed by the
Commodity Futures Trading Commission under the Commodity Exchange Act. With
respect to the tax aspects of my investment, I am relying upon the advice of my
own personal tax advisors and upon my own knowledge with respect thereto.
(b) I have carefully reviewed the various conflicts of interest set
forth in the Memorandum, including those arising from the fact that the General
Partner is an affiliate of SB, the selling agent and commodity broker/dealer for
the Partnership.
(c) I hereby acknowledge and agree to the terms of the Customer
Agreement between the Partnership and SB and to payment to SB of the flat rate
brokerage fee as described in the Memorandum. I understand that lower brokerage
fees might be available, but that the General Partner will not negotiate with SB
or any other broker to obtain such lower rates. I also understand and agree that
the fees charged to the Partnership by SB as described in the Memorandum are in
addition to any fees paid to SB by me in connection with any separate agreement
with SB pursuant to which SB receives a flat rate fee based on the value of my
assets held or managed by SB.
(d) The Partnership has made available to me, prior to the date
hereof, the opportunity to ask questions of, and to receive answers from, the
General Partner and its representatives, concerning the terms and conditions of
the offering, and has afforded me access to obtain any information, documents,
financial statements, records and books (i) relative to the Partnership, its
business, the offering and an investment in the Partnership, and (ii) necessary
to verify the accuracy of any information, documents, financial statements,
records and books furnished in connection with the offering. All materials and
information requested by me, including any information requested to verify any
information furnished, have been made available and have been examined to my
satisfaction.
(e) I understand that the Partnership offering has not been registered
under the Securities Act of 1933, as amended (the "Act"), or pursuant to the
provisions of the securities or other laws of certain jurisdictions, in reliance
on exemptions for private offerings contained in the Act and in the laws of
certain jurisdictions. I am fully aware of the restrictions on sale,
transferability and assignment of the Units as set forth in the Limited
Partnership Agreement, and that I must bear the economic risk of my investment
in the Partnership for an indefinite period of time because the offering has not
been registered under the Act. I understand that the Units cannot be offered or
sold unless they are subsequently registered under the Act or an exemption from
such registration is available, and that any transfer requires the consent of
the General Partner, who may determine not to permit any specific transfer.
(f) I represent that I am aware of the speculative nature of this
investment and of the high degree of risk involved, that I can bear the economic
risks of this investment and can afford a complete loss of my investment. As
evidence of the foregoing, I hereby represent to you that I: (i) have sufficient
liquid assets to pay the purchase price for my interest in the Partnership; (ii)
have adequate means of providing for my current needs and possible personal
contingencies and have no present need for liquidity of my investment in the
Partnership; (iii) have adequate net worth and sufficient means to sustain a
complete loss of my investment in the Partnership; and (iv) either (a) I am an
accredited investor as defined in Rule 501 (a) of the Act, the terms of which
are set forth in Exhibit I to this Subscription Agreement by virtue of the
subparagraph indicated on page 5 or (b) I am a resident of Illinois and I am an
accredited investor as that term is defined under the law of my state of
residence set forth in Exhibit II to this Subscription Agreement by virtue of
the subparagraph(s) indicated in the Exhibit or (c) I have a net worth
(exclusive of home, furnishings and automobiles) at least three times my
investment in the Partnership or my actual gross income for the last two
calendar years was, and my projected gross income for the current calendar year
will be, not less than three times my investment in the Partnership for each
year.
(g) I will not transfer or assign this Subscription Agreement, or any
of my interest herein. I am acquiring my interest in the Partnership hereunder
for my own account and for investment purposes only and not with a view to or
for the transfer, assignment, resale or distribution thereof, in whole or in
part. I have no present plans to enter into any such contract, undertaking,
agreement or arrangement. I understand that the General Partner may in its
absolute discretion require any limited partner to redeem all or part of his
Units, upon 10 days' notice to such limited partner.
(h) If I am not a citizen or resident of the United States for U.S.
tax purposes, I agree to pay or reimburse SB or the Partnership for any taxes,
including but not limited to withholding tax imposed with respect to my Units.
(i) FOR ALL ACCREDITED INVESTORS. Subscriber hereby represents and
affirms that (i) Subscriber has a net worth alone or with spouse exceeding ten
(10) times Subscriber's investment or (ii) Subscriber has either alone or with
Subscriber's professional advisor the capacity to protect Subscriber's interests
in connection with this transaction or (iii) Subscriber is able to bear the
economic risk of the investment.
(j) Subscriber represents that the information contained herein is
complete and accurate as of the date hereof and may be relied upon by the
General Partner. Subscriber further represents that Subscriber will notify the
General Partner immediately of any adverse change in any such information which
may occur prior to the acceptance of Subscriber's subscription and will promptly
send the General Partner written confirmation thereof.
3. Acceptance of Limited Partnership Agreement and Power of Attorney. I
hereby apply to become a limited partner as of the date upon which the sale of
my Units becomes effective, and I hereby agree to each and every term of the
Limited Partnership Agreement as if my signature were subscribed thereto. I
hereby constitute and appoint the General Partner of the Partnership, with full
power of substitution, as my true and lawful attorney to execute, acknowledge,
file and record in my name, place and stead: (i) an Agreement of Limited
Partnership (the "Partnership Agreement") of the Partnership substantially in
the form included as an Appendix to the Memorandum; (ii) all certificates and
other instruments which the General Partner of the Partnership shall deem
appropriate to create, qualify, continue or dissolve the Partnership as a
limited partnership in the jurisdictions in which the Partnership may be formed
or conduct business; (iii) all agreements amending or modifying the Partnership
Agreement that may be appropriate to reflect a change in any provision of the
Partnership Agreement or the exercise by any person of any right or rights
thereunder not requiring my specific consent, or requiring my consent if such
consent has been given, and any other change, interpretation or modification of
the Partnership Agreement in accordance with the terms thereof; (iv) such
amendments, instruments and documents which the General Partner deems
appropriate under the laws of the State of New York or any other state or
jurisdiction to reflect any change, amendment or modification of the Partnership
Agreement of any kind referred to in subparagraph (iii) hereof; (v) filings with
agencies of any federal, state or local governmental unit or of any jurisdiction
which the General Partner shall deem appropriate to carry out the business of
the Partnership; and (vi) all conveyances and other instruments which the
General Partner shall deem appropriate to effect the transfer of my Partnership
interest pursuant to the Partnership Agreement or of Partnership assets and to
reflect the dissolution and termination of the Partnership. The foregoing
appointment (a) is a special power of attorney coupled with an interest, is
irrevocable and shall survive my subsequent death, incapacity or disability and
(b) shall survive the delivery of an assignment by me of the whole or any
portion of my interest, except that where an assignee of the whole of such
interest has been approved by the General Partner for admission to the
Partnership as a substituted Limited Partner, the power of attorney shall
survive the delivery of such assignment for the sole purpose of enabling the
General Partner to execute, acknowledge and file any instrument necessary to
effect such substitution.
4. Indemnification. I hereby agree to indemnify and hold harmless the
Partnership, the General Partner and its affiliated persons from any and all
damages, losses, costs and expenses (including reasonable attorneys' fees) which
they may incur by reason of any breach by me of the covenants, warranties and
representations contained in this Subscription Agreement.
5. Survival. All representations, warranties and covenants contained in
this Subscription Agreement and the indemnification contained in Section 4 shall
survive (i) the acceptance of the subscription, (ii) changes in the
transactions, documents and instruments described in the Memorandum that are not
material, and (iii) the death or disability of the undersigned.
6. Miscellaneous. This subscription is not revocable by me and
constitutes the entire agreement among the parties hereto with respect to the
subject matter hereof and may not be amended orally. This Agreement shall be
construed in accordance with and be governed by the laws of the State of New
York.
7. Employee-Benefit Plans. The undersigned individual, employer or
trustee who has investment discretion over the assets of the subscribing
employee-benefit plan (the "Fiduciary") represents and agrees as follows:
(1) Either (a) or (b): (a) neither SB, the General Partner
nor any of their employees, Financial Consultants or affiliates (i) manages any
part of the investment portfolio of the subscribing employee-benefit plan (the
"Plan"), or (ii) has an agreement or understanding, written or unwritten, with
the Fiduciary under which the Fiduciary regularly receives information,
recommendations or advice concerning investments which are used as a primary
basis for the Plan's investment decisions and which are individualized to the
particular needs of the Plan.
or (b) The relationship between the Plan and SB, the General
Partner or any of their employees, Financial Consultants or affiliates comes
within (i) or (ii) above with respect to only a portion of the Plan's assets and
the investment in the Partnership is being made by the Fiduciary from a portion
of Plan assets with respect to which such relationship does not exist.
(2) Although an SB account executive or a Financial
Consultant may have suggested that the Fiduciary consider the investment in the
Partnership, the Fiduciary has studied the Memorandum and has made the
investment decision solely on the basis of the Memorandum and without reliance
on such suggestion.
(3) The Plan is in compliance with all applicable Federal
regulatory requirements.
(4) The undersigned Fiduciary acknowledges that it is:
independent of SB, the General Partner and all of their affiliates; capable of
making an independent decision regarding the investment of Plan assets;
knowledgeable with respect to the Plan in administrative matters and funding
matters related thereto, and able to make an informed decision concerning
participation in the Partnership.
(5) The undersigned Fiduciary, if the Plan is an IRA or Keogh
account of which SB is the custodian, hereby directs said custodian as custodian
of the Plan to subscribe for the amount indicated under paragraph 1 above. In
addition, the Fiduciary represents and confirms that all of the information
contained in this Subscription Agreement and relating to the subscribing Plan is
complete and accurate.
Please complete this Subscription Agreement by filling in the
blanks and executing it on the following page.
<PAGE>
EXECUTION PAGE
A. I hereby subscribe for $_____________ (minimum $25,000).
B. Please select one of the following:
1. ___ I am an accredited investor under paragraph _________ of
Exhibit I on page D-7.
OR
2. ___ I am a resident of ____Illinois and am accredited as
indicated on Exhibit II on page D-8.
OR
3. ___ I am an unaccredited investor.
If you selected #3 above, please fill in the Prospective Purchaser
Questionnaire (Exhibit III on page D-10) and, if applicable, the Purchaser
Representative Questionnaire (Exhibit III-1 on page D-12)
The foregoing statements are complete and accurate as of the
date hereof and may be relied upon by the General Partner. I further represent
that I will notify the General Partner immediately of any adverse change in any
such information and will promptly send the General Partner written confirmation
thereof.
IN WITNESS WHEREOF, I have executed this Subscription
Agreement including Power of Attorney this day of , 199__.
[If Joint Ownership, All Parties Must Sign (if fiduciary,
partnership or corporation, indicate capacity of signatory under
signature line)]
- ------------------------------- -------------------------------
Signature Signature
- -------------------------------
Branch Manager Signature
ACCEPTED:
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
------------------------------------
PLEASE COMPLETE INFORMATION ON THE NEXT PAGE
<PAGE>
0383440
D-6
Registration Data
___________________________ _____________________________
Name of Limited Partner Name of Joint Limited
(Please Print) Partner (if any)
(See Note 1 Below) (Please Print)
___________________________ ______________________________
Residence Street Address Mail Address (if different
(See Note 2 Below) than Residence Address)
___________________________________ _________________________________
City State Zip Code City State Zip Code
- -----------------------
Social Security or
Federal Employer I.D.
Number If Joint Ownership, check one:
_________________ / / Joint Tenants with right to
SB Account Number Survivorship (all parties must sign)
Note 1: If subscriber is an ERISA / / Tenants in Common
plan or account, please so indicate
(e.g.: "XYZ" Co. Pension Plan", "Dr.
A Keogh Account", "Mr. B IRA Account"). / / Community Property
If Fiduciary or
Corporation, check one:
Note 2: The address given above must
be the residence address of the Limited / / Trust / / Partnership
Partner. Post Office boxes and other
nominee addresses will not be accepted. / / Corporation
- -----------------------------------------------------------------
For Branch Use
FC Instructions:
Enter a ticket for purchase amount using security #8955777 and route through
IOI.
See front cover for mailing instructions of Subscription Agreement.
<PAGE>
0383440
D-17
0383440
D-7
Exhibit I
"Accredited investor" shall mean any person who comes within any of the
following categories, or who the issuer reasonably believes comes within any of
the following categories, at the time of the sale of the securities to that
person:
(1) Any bank as defined in section 3(a)(2) of the Act; any savings and
loan association or other institution as defined in section 3(a)(5)(A) of the
Act whether acting in its individual or fiduciary capacity or any broker or
dealer registered pursuant to section 15 of the Securities Exchange Act of 1934;
insurance company as defined in section 2(13) of the Act; investment company
registered under the Investment Company Act of 1940 or a business development
company as defined in section 2(a)(48) of that Act; Small Business Investment
Company licensed by the U.S. Small Business Administration under section 301(c)
or (d) of the Small Business Investment Act of 1958; any plan established and
maintained by a state, its political subdivisions, or any agency or
instrumentality of a state or its political subdivisions, for the benefit of its
employees, if such plan has total assets in excess of $5,000,000; employee
benefit plan within the meaning of Title I of the Employee Retirement Income
Security Act of 1974, if the investment decision is made by a plan fiduciary, as
defined in section 3(21) of such Act, which is either a bank, insurance company,
or registered investment adviser, or if the employee benefit plan has total
assets in excess of $5,000,000, or if a self-directed plan, with investment
decisions made solely by persons that are accredited investors;
(2) Any private business development company as defined in section
202(a)(22) of the Investment Advisers Act of 1940;
(3) Any organization described in Section 501(c)(3) of the Internal
Revenue Code, any corporation, Massachusetts or similar business trust, or
partnership, not formed for the specific purpose of acquiring the securities
offered, with total assets in excess of $5,000,000;
(4) Any director, executive officer, or general partner of the issuer
of the securities being offered or sold, or any director, executive officer, or
general partner of a general partner of that issuer;
(5) Any natural person whose individual net worth, or joint net worth
with that person's spouse, at the time of his purchase exceeds $1,000,000;
(6) Any natural person who had an individual income in excess of
$200,000 in each of the two most recent years or joint income with that person's
spouse in excess of $300,000 in each of those years and has a reasonable
expectation of reaching the same income level in the current year;
(7) Any trust, with total assets in excess of $5,000,000, not formed
for the specific purpose of acquiring the securities offered, whose purchase is
directed by a sophisticated person as described in Rule 506(b)(2)(ii);
(8) Any entity in which all of the equity owners are accredited
investors.
<PAGE>
Exhibit II
FOR ILLINOIS INVESTORS ONLY
SUPPLEMENT TO
SUBSCRIPTION AGREEMENT
Smith Barney AAA Energy Fund L.P. (the "Partnership") will rely on the following
information for the purpose of determining whether individuals subscribing for
limited partnership interests in the Partnership ("Interests") who are Illinois
investors, or entities subscribing for Interests which have their primary place
of business in Illinois, meet the standards for securities sold in reliance upon
the exemption set forth in Illinois Laws, as amended, Section 4.G. ALL
INFORMATION CONTAINED IN THIS SUPPLEMENT WILL BE TREATED CONFIDENTIALLY;
provided, however, that the Supplement may be presented to such parties as the
Partnership deems appropriate if it is called upon to establish that the
proposed offer and sale of the Interests meet the requirements of applicable
securities laws.
Please check any of the following categories that apply to Subscriber:
(a) A corporation, bank, savings bank, savings institution, trust
company, insurance company, building and loan association,
dealer, pension fund or pension trust, employees' profit sharing
trust, other financial institution or institutional investor,
any government or political subdivision or instrumentality
thereof, whether the purchaser is acting for itself or in some
fiduciary capacity; or a partnership or other association
engaged as a substantial part of its business or operations in
purchasing or holding securities; or a trust in respect of which
a bank or trust company is trustee or co-trustee; or an entity
in which at least 90% of the equity is owned by persons
described under paragraphs (a), (b), (d) or (e); or an employee
benefit plan within the meaning of Title I of the Federal ERISA
Act if (i) the investment decision is made by a plan fiduciary
as defined in Section 3(21) of the Federal ERISA Act and such
plan fiduciary is either a bank, insurance company, registered
investment adviser or an investment adviser registered under the
Federal 1940 Investment Advisers Act, or (ii) the plan has total
assets in excess of $5,000,000, or (iii) in the case of a
self-directed plan, investment decisions are made solely by
persons that are described under paragraphs (a), (b), (d) or (e)
(b) A director, executive officer or general partner of the
Partnership or a director, executive officer or general partner
of a general partner of the Partnership
(c) Subscriber is purchasing at least $150,000 of Interests and
Subscriber's net worth*, or joint net worth with spouse, exceeds
five (5) times the amount Subscriber proposes to purchase
(d) A natural person whose net worth, individually, or jointly with
spouse, exceeds $1,000,000
(e) A natural person who had individually, and not jointly with
spouse, income in excess of $200,000 in each of the two most
recent years and who reasonably expects an income in excess of
$200,000 in the current year
(f) A person that is not an individual and in which 90% of the
equity interest is owned by persons who meet either of the tests
set forth in paragraphs (d) and (e) above
Subscriber represents that the information contained herein is complete and
accurate and may be relied upon by the Partnership and agrees to notify the
Partnership if the answer to any item changes from "Yes" to "No" prior to being
admitted as a Limited Partner of the Partnership.
IN WITNESS WHEREOF, Subscriber has executed this Supplement and declares that it
is truthful and correct.
Dated: , 199__ __________________________________
(Signature)
----------------------------------
(Print Name)
*"Net worth" for the purpose of this question includes only (i) cash, (ii)
securities for which market quotations are readily available, and (iii) an
unconditional obligation to pay cash or securities for which market quotations
are readily available, which obligation is to be discharged within five years of
Subscriber's purchase of Interests.
<PAGE>
EXHIBIT III
Prospective Purchaser Questionnaire
[To be completed by unaccredited investors]
The purpose of this Questionnaire is to determine whether you meet the
standards imposed by Regulation D promulgated under the Securities Act of 1933,
since the Units have not been and will not be registered under that Act and are
being sold in reliance upon the exemption provided by Section 4(2) of that Act.
Please complete these questions as thoroughly as possible.
(i) I have a net worth (exclusive of home,
furnishings and automobiles) either individually or jointly
with my spouse of at least three times my investment in the
Partnership.
Yes___ No___
(ii) My gross income for each of the past two years
and my projected gross income for the current year is not less
than three times my investment in the Partnership.
Yes___ No___
(iii) In the space below, please provide information regarding other
types of investments which you have made during the last five years:
(Check if applicable)
Stocks Limited Partnership Interests: _________
----------
Bonds Real Estate _________
----------
Mutual Funds Oil and Gas _________
----------
Commodities Equipment _________
----------
Options Other (specify) _________
----------
(iv) Please indicate below the highest educational degree you hold.
(v) Describe below your principal business activities during the last
five years and provide any additional information which would evidence your
ability to evaluate the merits and risks of investing in the Partnership.
(vi) If you cannot demonstrate to the General Partner's satisfaction
that you have such knowledge and experience in financial and business matters
that you are capable of evaluating the merits and risks of investment in the
Partnership (e.g., you are a lawyer or accountant or you have sufficient prior
investment of business experience), you must seek advice from a Purchaser
Representative.
In evaluating the merits and risks of this investment, will you seek the
advice of any other person?
Yes No____
If YES, please identify below each such person and indicate his business
address and telephone number and have him complete and return one copy of the
Purchaser Representative Questionnaire accompanying this Subscription Agreement.
If YES, has your Purchaser Representative disclosed to you whether or not
any material relationship (that he has with the Partnership or any of its
affiliates) exists and whether or not he expects to receive any compensation
from the Partnership or its affiliates as a result of this sale?
Yes No____
<PAGE>
EXHIBIT III-1
Questionnaire for Purchaser Representatives
[For unaccredited investors only, if applicable]
Smith Barney AAA Energy Fund L.P.
(the "Partnership")
THIS QUESTIONNAIRE IS TO BE COMPLETED AND DELIVERED TO THE GENERAL PARTNER OF
THE PARTNERSHIP PRIOR TO THE DETERMINATION BY THE GENERAL PARTNER WHETHER OFFERS
FOR SUBSCRIPTIONS FOR UNITS OF LIMITED PARTNERSHIP INTEREST MAY BE ACCEPTED
FROM:
________________________________(THE "INVESTOR").
(Fill in name of investor)
INSTRUCTIONS
This Questionnaire is being given to each person who has been designated as a
"purchaser representative" by an individual who has expressed an interest in
purchasing Units in the Partnership. The purpose of this Questionnaire is to
determine whether you are qualified to act as a purchaser representative (as
that term is defined in Regulation D under the Securities Act of 1933) since the
Units have not been and will not be registered under that Act and are being sold
in reliance upon an exemption contained in the Act.
Please contact Smith Barney Futures Management Inc., the General Partner of the
Partnership, at 390 Greenwich Street - 1st floor, New York, New York 10013,
telephone number (212) 723-5424, if you have any questions in answering this
Questionnaire.
Your answers will, at all times, be kept strictly confidential. However, you
agree that, should the investor whom you are representing agree to purchase a
Unit, the Partnership may present this Questionnaire to such parties as it deems
appropriate in order to insure itself that the offer and sale of Units in the
Partnership to such investor will not result in the loss of the exemption from
registration under the Act which is being relied upon by the Partnership in
connection with the sale of the Units.
Please complete this Questionnaire as thoroughly as possible and sign, date and
return one copy to the General Partner at the above address. Attach additional
pages if necessary to fully answer any question.
If the answer to any question is "None" or "Not applicable", please so state.
<PAGE>
Name of Purchaser Representative: ______________________________
Name of Represented Investor: ______________________________
Your Business Address: ______________________________
Your Occupation: ______________________________
Your Bus. Tel. No.: ______________________________
1. Have you received and reviewed the Private Placement
Offering Memorandum and Disclosure Document (as supplemented from time to time)
with regard to the offering of interests in the Partnership which has previously
been delivered to the investor?
Yes ____ No ____
2(a). Describe principal business positions you have held
during the last five years, or since graduation from college, whichever is the
shorter period. Please be specific listing dates of employment and if possible
provide us with telephone numbers where previous employers can be contacted:
(b). Describe any other business, financial or investment
experience that would help you to evaluate the merits and risks of an investment
in the Partnership:
(c). Have you had experience in advising investors with
respect to similar investments in the past?
Yes ____ No____
If you have answered "yes" to this question, please describe briefly such
experience indicating amounts you have caused to be invested, number of
offerings you have reviewed and their names if possible.
<PAGE>
3(a). Please place ONE check mark next to the space which
indicates the HIGHEST level of education you have completed; on the lines
following, PLEASE DESCRIBE IN DETAIL any business or professional education you
have received, listing names of schools, degrees received and dates of
attendance.
___Completed College, awarded degree, B.A., B.S. or equivalent
___Some Postgraduate Education
___Two years of Postgraduate Training, awarded M.A. or equivalent
___Completed Postgraduate Training and received Ph.D.
(list date degree obtained and awarding school)
___Professional School, awarded J.D., or M.B.A.
(list date degree obtained and awarding school)
Other (PLEASE EXPLAIN IN DETAIL YOUR EDUCATIONAL
BACKGROUND AND LIST DATES OF ATTENDANCE AND NAMES OF SCHOOLS)
(b). List any professional licenses or registrations held by
you; if none are held please note this in writing on the space provided below:
(c). Are you registered as a broker-dealer within your state?
Yes No___
(d). Are you registered as an investment advisor in your state?
Yes No___
(e). List all memberships in professional organizations; if
you belong to no professional organizations please indicate this on the space
provided below:
<PAGE>
4(a). In advising the investor, will you be relying in part on
the investor's own expertise in certain areas? Yes No___
(b). If yes, please state the basis for your reliance, i.e.,
number of deals you know this investor has invested in, amounts invested and the
dates of these previous investments. Please note that what is sought here is not
a reference to the general soundness of the business judgment of the investor
but rather a specific basis for relying upon the investor's own expertise:
(c). In advising the investor, will you be relying in part
on the expertise of an additional Purchaser Representative? Yes No___
NOTE: YOU MAY NOT RELY ON AN ADDITIONAL PURCHASER
REPRESENTATIVE UNLESS EACH ADDITIONAL PURCHASER REPRESENTATIVE HAS COMPLETED A
QUESTIONNAIRE AND HAS BEEN ACKNOWLEDGED BY THE INVESTOR TO BE HIS PURCHASER
REPRESENTATIVE.
(d). If the answer to (c) is "yes," please list the name and
address of any additional Purchaser Representative:
5(a). Have you ever been convicted in a criminal proceeding,
or are you the subject of a criminal proceeding which is presently pending
(except for traffic violations)? Yes No __
(b). Have you ever been the subject of any order, judgment or
decree enjoining, barring or suspending you from acting as an investment
advisor, broker or dealer or from engaging in any practice in connection with
the purchase or sale of any security?
Yes No___
(c). If the answer to either (a) or (b) is "yes," please
explain:
<PAGE>
6(a). Do you or any of your affiliates have, with the General
Partner or any of its affiliates1, any relationship, that a reasonable investor
might consider important, in making their decision as to whether or not to
designate you as their Purchaser Representative (i.e. a "material" relationship
within the meaning of Regulation D)? Yes No
(b). Is such a material relationship contemplated?
Yes No___
(c). Has such a material relationship existed during the past
two years?
Yes No___
NOTE: THE RECEIPT OF ANY SALES COMMISSION WITH RESPECT TO THE INVESTOR'S
PURCHASE OF UNITS CONSTITUTES COMPENSATION TO BE RECEIVED AS A RESULT OF A
MATERIAL RELATIONSHIP.
(d). If the answer to (a), (b) or (c) is "yes," please
describe your relationship to the Partnership and indicate the amount of
compensation you have received or you expect to receive as a result of this
relationship:
(e). Was the information, if any, set forth in response to
6(d) above, disclosed in writing to the proposed investor, prior to his
acknowledgment that you are to act as his Purchaser Representative in connection
with this investment?
Yes No ___
(f) Are you an affiliate, officer, director or employee of
either the Partnership or its General Partner?
Yes No ___
I understand that the Partnership as well as the investor will
be relying on the accuracy and completeness of my responses to the foregoing
questions, and I hereby represent and warrant to the Partnership as follows:
(i) The answers to the above questions are complete
and correct and may be relied upon by the Partnership in determining
whether the offering in connection with which I have executed this
Questionnaire is exempt from registration under the Securities Act of
1933 and also by the investor in determining my suitability to be his
advisor in connection with his possible investment in the Partnership;
<PAGE>
(ii) I will notify the Partnership immediately of
any material change in any statement made herein occurring prior to the
closing of the purchase by the above-named investor of any interest in
the Partnership.
(iii) If I have not checked "yes" in answer to
question 6(a), 6(b) or 6(c) I have no "material relationship" as that
term is defined in Regulation D, and if I have not checked "yes" in
answer to question 6(f), I am not an affiliate, officer, director or
employee of either the Partnership or of the General Partner, or any of
their affiliates, nor am I a direct or beneficial owner of 10% or more
of any class of the equity securities of the General Partner or any of
its affiliates.
(iv) I personally (or, if I have checked "yes" in
answer to question 4(a) or (b) above, together with the investor or the
additional Purchaser Representative or Purchaser Representatives
indicated above) have such knowledge and experience in financial and
business matters that I am capable of evaluating the merits and risks
of the investor's prospective investment in the Partnership.
IN WITNESS WHEREOF, I have signed this Questionnaire this__day of___, 199__.
------------------------------------
(Signature)
------------------------------------
(Print Name)
1The term "affiliate" of a person means a person that directly or
indirectly, through one or more intermediaries, controls, or is controlled by,
or is under common control with such person.
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001057051
<NAME> Smith Barney AAA Energy Fund L.P.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> FEB-02-1998
<PERIOD-END> DEC-31-1998
<CASH> 70,049,894
<SECURITIES> 13,768,529
<RECEIVABLES> 217,194
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 84,035,617
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 84,035,617
<CURRENT-LIABILITIES> 4,308,277
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 79,727,340
<TOTAL-LIABILITY-AND-EQUITY> 84,035,617
<SALES> 0
<TOTAL-REVENUES> 16,653,394
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,251,481
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,701,981
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,701,981
<EPS-PRIMARY> 184.33
<EPS-DILUTED> 0
</TABLE>
To The Limited Partners of
Smith Barney AAA Energy Fund L.P.
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: Daniel A. Dantuono, Chief Financial Officer
Smith Barney Futures Management Inc.
General Partner, Smith Barney AAA
Energy Fund L.P.
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424
F-2
<PAGE>
Report of Independent Accountants
To the Partners of
Smith Barney AAA Energy Fund L.P.:
In our opinion, the accompanying statement of financial condition and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Smith Barney AAA
Energy Fund L.P. at December 31, 1998 and the results of its operations for the
period from January 15, 1998 (date Partnership was organized) to December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the management of the General
Partner; our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these financial
statements in accordance with generally accepted auditing standards which
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, assessing the accounting principles
used and significant estimates made by the management of the General Partner,
and evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
F-3
<PAGE>
Smith Barney AAA
Energy Fund L.P.
Statement of Financial Condition
December 31, 1998
<TABLE>
<CAPTION>
1998
<S> <C>
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $70,049,894
Net unrealized appreciation on open
futures contracts 6,718,299
Net unrealized appreciation on open
swaps contracts 606,945
Commodity options owned, at fair
value (cost $8,098,837) 6,443,285
-----------
83,818,423
Interest receivable 217,194
-----------
$84,035,617
===========
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 488,115
Management fees 135,859
Other 29,536
Due SSB 951
Redemptions payable 118,433
Commodity options written, at fair value
(premium $4,970,916) 3,535,383
-----------
4,308,277
Partners' capital (Notes 1 and 7):
General Partner, 667.0550 Unit equivalents
outstanding in 1998 790,013
Limited Partners, 64,371.5518 Units of
Limited Partnership Interest outstanding in 1998 76,237,395
Special Limited Partner, 2,279.7128 Units of
Limited Partnership Interest outstanding in 1998 2,699,932
-----------
79,727,340
-----------
$84,035,617
===========
</TABLE>
See notes to financial statements.
F-4
<PAGE>
Smith Barney AAA
Energy Fund L.P.
Statement of Income and Expenses
for the period from March 16, 1998
(commencement of trading operations)
to December 31, 1998
<TABLE>
<CAPTION>
1998
<S> <C>
Income:
Net gains on trading of commodity interests:
Realized gains on closed positions $ 13,097,227
Change in unrealized gains on open positions 7,105,225
------------
20,202,452
Less, Brokerage commissions including
clearing fees of $686,659 (Note 3c) (5,527,260)
------------
Net realized and unrealized gains 14,675,192
Interest income (Notes 3c and 6) 1,978,202
------------
16,653,394
Expenses:
Management fees (Note 3b) 1,125,531
Organization expense (Note 6) 75,951
Other expenses 49,999
1,251,481
------------
Net income before allocation to the
Special Limited Partner 15,401,913
------------
Allocation to the Special Limited Partner 2,699,932
------------
Net income available for pro rata distribution $ 12,701,981
============
Net income per Unit of Limited
Partnership Interest and
General Partner Unit equivalent (Notes 1 and 7) $ 184.33
============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
Smith Barney AAA
Energy Fund L.P.
Statement of Partners' Capital
for the period from January 5, 1998
(date Partnership was organized)
to December 31, 1998
<TABLE>
<CAPTION>
Special
Limited Limited General
Partners Partner Partner Total
<S> <C> <C> <C> <C>
Initial capital contributions $ 1,000 $ -- $ 1,000 $ 2,000
Proceeds from offering of 49,538
Units of Limited Partnership Interest
and General Partner's
contribution representing 500 Unit
equivalents (Note 1) 49,538,000 -- 500,000 50,038,000
------------ ------------ ------------ ------------
Opening Partnership capital for operations 49,539,000 -- 501,000 50,040,000
Sale of 16,475.2559 Units of Limited
Partnership Interest and General Partner's
contribution representing 166.0550 Unit
equivalents 15,973,000 -- 161,000 16,134,000
Redemption of 1,642.7041 Units of Limited
Partnership Interest (1,848,573) -- -- (1,848,573)
Allocation of net income for the year
ended December 31, 1998:
Allocation of 2,279.7128 Units of Limited
Partnership Interest to the Special
Limited Partner (Note 3b) -- 2,699,932 -- 2,699,932
Net income available for pro rata
distribution 12,573,968 -- 128,013 12,701,981
------------ ------------ ------------ ------------
Partners' capital at December 31, 1998 $ 76,237,395 $ 2,699,932 $ 790,013 $ 79,727,340
============ ============ ============ ============
</TABLE>
See notes to financial statements.
F-6
<PAGE>
Smith Barney AAA
Energy Fund L.P.
Notes to Financial Statements
1. Partnership Organization:
Smith Barney AAA Energy Fund L.P. (the "Partnership") is a limited
partnership which was organized on January 5, 1998 under the partnership
laws of the State of New York to engage in the speculative trading of a
diversified portfolio of commodity interests, generally including commodity
options and commodity futures contracts on United States exchanges and
certain foreign exchanges. The Partnership may trade commodity futures and
options contracts of any kind but intends initially to trade solely energy
and energy related products. In addition, the Partnership may enter into
swap contracts on energy related products. The commodity interests that are
traded by the Partnership are volatile and involve a high degree of market
risk.
Between February 12, 1998 (commencement of the offering period) and March
14, 1998, 49,538 Units of Limited Partnership Interest ("Units") were sold
at $1,000 per Unit. The proceeds of the initial offering were held in an
escrow account until March 15, 1998, at which time they were turned over to
the Partnership for trading.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership. On September 1, 1998, the
Partnership's commodity broker, Smith Barney Inc., merged with Salomon
Brothers Inc and changed its name to Salomon Smith Barney Inc. ("SSB"). SSB
is an affiliate of the General Partner. The General Partner is wholly owned
by Salomon Smith Barney Holdings Inc., ("SSBH") which is the sole owner of
SSB. On October 8, 1998, Travelers Group Inc. merged with Citicorp Inc. and
changed its name to Citigroup Inc. SSBH is a wholly owned subsidiary of
Citigroup Inc.
The General Partner and each limited partner share in the profits and losses
of the Partnership, after the allocation to the Special Limited Partner, in
proportion to the amount of partnership interest owned by each except that
no limited partner shall be liable for obligations of the Partnership in
excess of his initial capital contribution and profits, if any, net of
distributions.
The Partnership will be liquidated upon the first to occur of the following:
December 31, 2018; the net asset value of a Unit decreases to less than $400
as of a close of any business day; or under certain other circumstances as
defined in the Limited Partnership Agreement.
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at fair value on the
last business day of the year, which represents market value for those
commodity interests for which market quotations are readily available or
other measures of fair value deemed appropriate by management of the
General Partner for those commodity interests for which market quotations
are not readily available, including dealer quotes for swaps and certain
option contracts. Investments in commodity interests denominated in
foreign currencies are translated into U.S. dollars at the exchange rates
prevailing on the last business day of the year. Realized gains (losses)
and changes in unrealized values on commodity interests are recognized in
the period in which the contract is closed or the changes occur and are
included in net gains (losses) on trading of commodity interests.
F-7
<PAGE>
b. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
c. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
3. Agreements:
a. Limited Partnership Agreement:
The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make trading
decisions for the Partnership.
b. Management Agreement:
The General Partner, on behalf of the Partnership, has entered into a
Management Agreement with AAA Capital Management, Inc. (the "Advisor"),
registered commodity trading advisor. Mr. A. Anthony Annunziato is the
sole trading principal of the Advisor and is also an employee of SSB. The
Partnership will pay the Advisor a monthly management fee equal to 1/6 of
1% (2% per year) of month-end Net Assets allocated to the Advisor. In
addition, the Advisor will be a Special Limited Partner of the
Partnership and will receive an annual profit share allocation to its
capital account in the Partnership equal to 20% of New Trading Profits,
as defined, earned on behalf of the Partnership during each calendar year
in the form of Units.
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SSB brokerage commissions at $18 per round turn
for futures and swap transactions and $9 per side for options. The
brokerage fee is inclusive of applicable floor brokerage. In addition,
the Partnership will pay SSB National Futures Association ("NFA") fees,
exchange, clearing, user and give-up fees. SSB will pay a portion of
brokerage fees to its financial consultants who have sold Units in this
Partnership. All of the Partnership's assets are deposited in the
Partnership's account at SSB. The Partnership's cash is deposited by SSB
in segregated bank accounts to the extent required by Commodity Futures
Trading Commission regulations. At December 31, 1998, the amount of cash
held for margin requirements was $12,153,750. SSB has agreed to pay the
Partnership interest on 80% of the average daily equity maintained in
cash in its account during each month at a 30-day U.S. Treasury bill rate
determined weekly by SSB based on the average noncompetitive yield on
3-month U.S. Treasury bills maturing in 30 days from the date on which
such weekly rate is determined. The Customer Agreement between the
Partnership and SSB gives the Partnership the legal right to net
unrealized gains and losses. The Customer Agreement may be terminated
upon notice by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity interests. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
F-8
<PAGE>
All of the commodity interests, owned by the Partnership, are held for
trading purposes. The fair value of these commodity interests, including
options and swaps thereon, if applicable, at December 31, 1998, was
$10,233,146 and the average fair value during the period then ended, based
on a monthly calculation was $22,308.
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner and at such times as the General Partner may decide.
Beginning with the first full month ending at least three months after the
commencement of trading, a limited partner may require the Partnership to
redeem his Units at their Net Asset Value as of the last day of a month on
10 days' notice to the General Partner. There is no fee charged to limited
partners in connection with redemptions.
6. Offering and Organization Costs:
Offering and organization expenses of $75,951 relating to the issuance and
marketing of Units offered were initially paid by SSB. As of December 31,
1998, the Partnership has reimbursed SSB for $75,951 of offering and
organization expenses from the interest earned on funds held in its account.
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the
period from March 16, 1998 (commencement of trading operations) to December
31, 1998 were as follows:
1998
Net realized and unrealized gains $ 214.27
Interest income 30.39
Expenses (60.33)
---------
Increase for period 184.33
Net asset value per Unit, beginning of period 1,000.00
---------
Net asset value per Unit, end of period $ 1,184.33
========
8. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial
instruments may include forwards, futures, options and swaps, whose value is
based upon an underlying asset, index, or reference rate, and generally
represent future commitments to exchange currencies or cash flows, or to
purchase or sell other financial instruments at specific terms at specified
future dates, or, in the case of derivative commodity instruments, to have a
reasonable possibility to be settled in cash or with another financial
instrument. These instruments may be traded on an exchange or
over-the-counter ("OTC"). Exchange traded instruments are standardized and
include futures and certain option contracts. OTC contracts are negotiated
between contracting parties and include forwards and certain options. Each
of these instruments is subject to various risks similar to those related to
the underlying financial instruments including market and credit risk. In
general, the risks associated with OTC contracts are greater than those
associated with exchange traded instruments because of the greater risk of
default by the counterparty to an OTC contract.
F-9
<PAGE>
The Partnership's swap contracts are OTC contracts.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity
or security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as a counterparty to the
transactions. The Partnership's risk of loss in the event of counterparty
default is typically limited to the amounts recognized in the statement of
financial condition and not represented by the contract or notional amounts
of the instruments. The Partnership has concentration risk because the sole
counterparty or broker with respect to the Partnership's assets is SSB. As
of December 31, 1998, the sole counterparty to the Partnership's swap
contracts was Citibank, N.A. which is affiliated with the Partnership.
The General Partner monitors and controls the Partnership's risk exposure on
a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership
is subject. These monitoring systems allow the General Partner to
statistically analyze actual trading results with risk adjusted performance
indicators and correlation statistics. In addition, on-line monitoring
systems provide account analysis of futures, forwards and options positions
by sector, margin requirements, gain and loss transactions and collateral
positions.
The notional or contractual amounts of these instruments, while
appropriately not recorded in the financial statements, reflect the extent
of the Partnership's involvement in these instruments.
At December 31, 1998, the Partnership's commitment to purchase and sell
these instruments was $175,493,309 and $151,251,090, respectively, as
detailed below. All of these instruments mature within one year of December
31, 1998. However, due to the nature of the Partnership's business, these
instruments may not be held to maturity. At December 31, 1998, the fair
value of the Partnership's derivatives, including options thereon, if
applicable, was $10,233,146, as detailed below.
December 31, 1998
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair Value
Energy $160,941,944 $147,860,010 $ 9,604,751
Energy swaps 9,818,065 3,391,080 606,945
Indices 4,733,300 -- 21,450
------------ ------------ ------------
Total $175,493,309 $151,251,090 $ 10,233,146
------------ ------------ ------------
F-10
<PAGE>
9. New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 requires that an entity recognize all derivatives in the statement
of financial condition and measure those instruments at fair value. SFAS 133
is effective for fiscal years beginning after June 15, 1999. SFAS 133 is
expected to have no material impact on the financial statements of the
Partnership as all commodity interests are recorded at fair value, with
changes therein reported in the statement of income and expenses.
F-11
<PAGE>
SMITH BARNEY FUTURES MANAGEMENT INC.
(a wholly-owned subsidiary of
Salomon Smith Barney Holdings Inc.)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998
<PAGE>
Report of Independent Accountants
To the Board of Directors and
Shareholder of Smith Barney Futures Management Inc.:
In our opinion, the accompanying statement of financial condition presents
fairly, in all material respects, the financial position of Smith Barney Futures
Management Inc. (the "Company", a wholly owned subsidiary of Salomon Smith
Barney Holdings Inc.) at December 3l, 1998, in conformity with generally
accepted accounting principles. This financial statement is the responsibility
of the Company's management; our responsibility is to express an opinion on this
statement of financial condition based on our audit. We conducted our audit of
this statement in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the statement of financial condition is free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the statement of financial condition, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
March 15, 1999
<PAGE>
SMITH BARNEY FUTURES MANAGEMENT INC.
(A wholly-owned subsidiary of Salomon Smith Barney Holdings Inc.)
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1998
ASSETS
Receivable from limited partnerships $ 4,635,696
Receivable from affiliate 6,527,944
Investments in limited partnerships, at equity 11,159,677
Other assets 47,981
------------
Total Assets $ 22,371,298
LIABILITIES & STOCKHOLDER=S EQUITY
Dividend payable to SSBHI $ 4,000,000
Accounts payable and accrued liabilities 433,593
------------
Total Liabilities 4,433,593
Common stock, no par value, 3,000 shares
authorized, 200 shares issued and
outstanding (100 shares, $1 stated value;
100 shares, no stated value) 100
Additional paid-in capital 67,413,746
Retained earnings 8,523,859
------------
75,937,705
Less: Note receivable from SSBHI (58,000,000)
17,937,705
Total Liabilities & Stockholder=s Equity $ 22,371,298
============
The accompanying notes are an integral part of this statement of financial
condition.
<PAGE>
SMITH BARNEY FUTURES MANAGEMENT INC.
(A wholly-owned subsidiary of Salomon Smith Barney Holdings Inc.)
NOTES TO STATEMENT OF FINANCIAL CONDITION
1. Organization
Smith Barney Futures Management Inc. (the "Company") is a wholly-owned
subsidiary of Salomon Smith Barney Holdings Inc. ("SSBHI"). On October 8, 1998,
Citicorp Inc. merged with and into a newly formed, wholly-owned subsidiary of
Travelers Group Inc. ("Travelers"), the Company's ultimate parent. Following the
merger, Travelers changed its name to Citigroup Inc. ("Citigroup"). On November
28, 1997, Smith Barney Holdings Inc. was merged with Salomon Inc to form SSBHI.
The Company does not believe that its compliance with applicable law as a result
of the Citigroup merger will have a material adverse effect on its ability to
continue to operate the business in which it is presently engaged except, as
more fully disclosed in footnote 8, the Company will no longer be the general
partner of three Limited Partnerships subsequent to March 1, 1999, due to
restrictions imposed resulting from this merger.
The Company was organized and is authorized to act as a general partner for the
management of investment funds and is registered as a commodity pool operator
with the Commodity Futures Trading Commission.
At December 31, 1998, the Company is the general partner for 20 Limited
Partnerships (the "Limited Partnerships") with total assets of $885,267,009,
total liabilities of $21,514,812 and total partners' capital of $863,752,197.
The limited partnerships are organized to engage in the speculative trading of
commodity futures contracts and other commodity interests. The Company's
responsibilities as the general partner are described in the various limited
partnership agreements. The Company has a general partner's liability which is
unlimited (except to the extent it may be limited by the limited partnership
agreement) with respect to the Limited Partnerships.
The Company is also the Trading Manager for 7 offshore funds. As Trading
Manager, the Company will select trading advisors who in the Trading Manager's
opinion, have demonstrated a high degree of skill in trading commodity interest
contracts to manage the assets of the funds. For these services, the Company
receives management fees. The Company does not have an equity investment in
these offshore funds.
2. Significant Accounting Policies
The statement of financial condition is prepared in accordance with generally
accepted accounting principles which requires the use of management's best
judgement and estimates. Estimates may vary from actual results.
<PAGE>
SMITH BARNEY FUTURES MANAGEMENT INC.
(A wholly-owned subsidiary of Salomon Smith Barney Holdings Inc.)
NOTES TO STATEMENT OF FINANCIAL CONDITION, Continued
The carrying values of financial instruments in the statement of financial
condition approximate their fair values as they are either short-term in nature
or interest-bearing at floating rates
Investments in Limited Partnerships, at equity, are valued at the Company's
proportionate share of the net asset values as reported by the Limited
Partnerships and approximate fair value. The Limited Partnerships value
positions at the closing market quotations on the last business day of the year.
Under the terms of each of the limited partnership agreements for which it is a
general partner, the Company is solely responsible for managing the partnership.
Other responsibilities are disclosed in each limited partnership agreement. The
Company is required to make a capital contribution to each such Limited
Partnership. The limited partnership agreements generally require the general
partner to maintain a cash investment in the Limited Partnerships equal to the
greater of (i) an amount which will entitle the general partner to an interest
of 1% in each material item of partnership income, gain, loss, deduction or
credit or (ii) the greater of (a) 1% of the aggregate capital contributions of
all partners or (b) a minimum of $25,000. While it is the general partner
thereof, the Company may not reduce its percentage interest in such Limited
Partnerships to less than such required level, as defined in each limited
partnership agreement.
Consistent with the limited partnership agreements, the Company received an
opinion of counsel that it may maintain its net worth, as defined in the Limited
Partnership agreements (excluding its investment in each such Limited
Partnership), at an amount not less than 5% of the total contributions to the
Limited Partnerships by all partners. SSBHI will contribute such amounts of
additional capital to the Company, all or part of which may be contributed by a
note (see Note 3), so that the Company may maintain its net worth requirement.
This requirement was met at December 31, 1998.
Receivable from Limited Partnerships includes deferred offering costs which
represent payments made by the Company on behalf of certain Limited Partnerships
during their original offering, such as legal fees, printing costs, etc. These
costs are reimbursed by the Limited Partnerships to the Company over a period
varying from eighteen to twenty-four months or as interest income is earned by
the Limited Partnership in accordance with the Limited Partnership's prospectus.
The offering costs reimbursable at December 31, 1998 were $633,659. Repayment of
these costs is not contingent upon the operating results of the Limited
Partnerships. In addition, as general partner, the Company earns
<PAGE>
SMITH BARNEY FUTURES MANAGEMENT INC.
(A wholly-owned subsidiary of Salomon Smith Barney Holdings Inc.)
NOTES TO STATEMENT OF FINANCIAL CONDITION, Continued
monthly management fees and commissions from the Limited Partnerships as defined
by the limited partnership agreements. Management fees and commissions
receivable at December 31, 1998 were $4,002,037.
3. Note Receivable from SSBHI
The note receivable consists of a $58,000,000 demand note dated June 22, 1994
which is non-interest bearing and is included in additional paid-in-capital as
of December 31, 1998. The demand note was issued to the Company by SSBHI.
4. Related Party Transactions
Substantially all transactions of the Company, including the allocation of
certain income and expenses, are with SSBHI, Limited Partnerships of which it is
the general partner, and other affiliates. Receivable from affiliate represents
amounts due from Salomon Smith Barney Inc., a wholly-owned subsidiary of SSBHI,
for interest income, advisory fees, and commissions.
5. Income Taxes
Under income tax allocation agreements with SSBHI and Citigroup, the Company's
Federal, state, and local income taxes are provided on a separate return basis
and are subject to utilization of tax attributes in Citigroup's consolidated
income tax returns. Under the tax sharing agreement with SSBHI, the Company
remits taxes to SSBHI.
As of December 31, 1998, all taxes have been remitted to SSBHI.
6. Employee Benefit Plans
The Company participates in a noncontributory defined benefit pension plan with
Citigroup which covers substantially all U.S. employees.
The Company, through Citigroup, has a defined contribution employee savings plan
covering substantially all U.S. employees. In addition, the Company has various
incentive plans under which stock of Citigroup is purchased for subsequent
distribution to employees, subject to vesting requirements.
7. Stockholder's Equity
During the year the Company declared dividends of $8,000,000 (and distributed
$4,000,000) on its outstanding common stock. Other than net income there were no
other changes to stockholder's equity.
<PAGE>
SMITH BARNEY FUTURES MANAGEMENT INC.
(A wholly-owned subsidiary of Salomon Smith Barney Holdings Inc.)
NOTES TO STATEMENT OF FINANCIAL CONDITION, Continued
8. Subsequent Events
As of March 1, 1999, SFG Global Investments, Inc. will become the general
partner of Smith Barney Telesis Futures Fund L.P., Smith Barney Potomac Futures
Fund L.P., and Smith Barney Tidewater Futures Fund L.P. The Company will act as
Trading Manager of these funds. The Company intends to keep 1% interest in these
funds as a Limited Partner.
