UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended December 31, 1999
Commission File Number 0-26132
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
(Exact name of registrant as specified in its charter)
New York 13-3729162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act: Units
of Limited
Partnership
Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
As of February 29, 2000 Limited Partnership Units with an aggregate value
of $110,920,751 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
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PART I
Item 1. Business.
(a) General development of business. Smith Barney Diversified Futures
Fund L.P. ("Partnership") is a limited partnership organized under the laws of
the State of New York, on August 13, 1993 to engage in speculative trading of a
diversified portfolio of commodity interests, including futures contracts,
options and forwards. The commodity interests that are traded by the Partnership
are volatile and involve a high degree of market risk. The Partnership commenced
trading operations on January 12, 1994. A total of 150,000 Units of Limited
Partnership Interest in the Partnership ("Units") were offered to the public. A
Registration Statement on Form S-1 relating to the public offering became
effective on October 29, 1993. Between October 29, 1993 and January 11, 1994,
75,615 Units were sold to the public at $1,000 per Unit. Proceeds of the
offering were held in an escrow account and were transferred, along with the
general partner's contribution of $781,000 to the Partnership's trading account
on January 12, 1994 when the Partnership commenced trading. An additional
150,000 Units were registered on a Registration Statement on Form S-1 effective
February 17, 1994. Sales of additional Units and additional general partner
contributions and redemptions of Units for the year ended December 31, 1999 are
reported in the Statement of Partners' Capital on page F-6 under "Item 8.
Financial Statements and Supplementary Data."
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The general partner has agreed to make capital contributions, if
necessary, so that its general partnership interest will be equal to the greater
of (i) an amount to entitle it to 1% of each material item of Partnership
income, loss, deduction or credit and (ii) the greater of (a) 1% of the
partners' contributions to the Partnership or (b) $25,000. The Partnership will
be liquidated upon the first of the following to occur: December 31, 2013; the
net asset value of a Unit decreases to less than $400 as of the close of any
business day; or under certain circumstances as defined in the Limited
Partnership Agreement of the Partnership (the ALimited Partnership Agreement@).
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form of
organization from a corporation to a limited liability company on October 1,
1999. The Partnership's commodity broker is 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. ("SSBHI"), which is the sole owner of SSB.
SSBHI is a wholly owned subsidiary of Citigroup Inc.
The Partnership's trading of futures contracts on commodities is done
on United States and foreign commodity exchanges. It engages in such trading
through a commodity brokerage account maintained with SSB.
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As of December 31, 1999, all commodity trading decisions are made for the
Partnership by Campbell & Company, Inc., John W. Henry & Company, Inc. ("JWH"),
Rabar Market Research Inc.("Rabar"), Willowbridge Associates, Inc., Trendview
Management, Inc. and Stonebrook Capital Management, Inc. ("Stonebrook")
(collectively, the "Advisors"). None of the Advisors is affiliated with one
another, the General Partner or SSB. The Advisors are not responsible for the
organization or operation of the Partnership. Stonebrook was added as an Advisor
to the Partnership effective April 9, 1999.
Pursuant to the terms of the Management Agreements (the "Management
Agreements"), the Partnership is obligated to pay each Advisor: (i) a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
that JWH will receive a monthly management fee equal to 1/3 of 1% (4% per year)
of the Partnership allocated to each Advisor as of the end of each month and
Stonebrook will receive a monthly management fee equal to 1/16 of 1% (0.75% per
year) of a fixed notional account size of $75,000,000) and (ii) an incentive fee
payable quarterly (except for Rabar who will be paid annually), equal to 20% of
the New Trading Profits (as defined in the Management Agreements)(except JWH,
which will receive an incentive fee of 15% of New Trading Profits) earned by
each Advisor for the Partnership. Stonebrook does not receive an incentive fee.
The Partnership has entered into a Customer Agreement with SSB (the
"Customer Agreement") which provides that the Partnership will pay SSB a monthly
brokerage fee equal to 11/24 of 1% of month-end Net Assets allocated to the
Advisors (5.5% per year) in lieu of brokerage commissions on a per trade basis.
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Persons investing $1,000,000 or more will pay a reduced brokerage fee of 7/24 of
1% of month-end Net Assets (3.5% per year), receiving the differential between
this reduced fee and 5.5% per year in the form of additional Units. SSB pays a
portion of its brokerage fees to its financial consultants who have sold Units
and who are registered as associated persons with the Commodity Futures Trading
Commission (the "CFTC"). The Partnership pays for National Futures Association
("NFA") fees, exchange and clearing fees, give-up and user fees and floor
brokerage fees. The Customer Agreement between the Partnership and SSB gives the
Partnership the legal right to net unrealized gains and losses. Brokerage fees
will be paid for the life of the Partnership, although the rate at which such
fees are paid may be changed.
In addition, SSB pays 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
non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from
the date on which such weekly rate is determined.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests. The Partnership does not engage in sales of goods or services. The
Partnership's net income (loss) from operations for the years ended December 31,
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1999, 1998, 1997, 1996 and 1995 is set forth under "Item 6. Selected Financial
Data". The Partnership capital as of December 31, 1999 was $117,508,532.
(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.
(d) Financial Information About Geographic Areas. The Partnership does
not engage in sales of goods or services, or own any long lived assets, and
therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SSB.
Item 3. Legal Proceedings.
There have been no material administrative, civil or criminal actions
within the past five years against SSB or any of its individual principals and
no such actions are currently pending, except as follows.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust), Ameritech Corporation, and an officer of Ameritech
sued 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 complaint alleged that
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purchases by Ameritech Pension Trust from the Salomon entities of approximately
$20.9 million in participations in a portfolio of motels owned by Motels of
America, Inc. and Best Inns, Inc. violated the Employee Retirement Income
Security Act ("ERISA"), the Racketeer Influenced and Corrupt Organization Act
("RICO") and state law. SBI had acquired the participations issued by Motels of
America and Best Inns to finance purchases of motel portfolios and sold 95% of
three such issues and 100% of one such issue to Ameritech Pension Trust.
Ameritech Pension Trust's complaint sought (1) approximately $20.9 million on
the ERISA claim, and (2) in excess of $70 million on the RICO and state law
claims as well as other relief. In various decisions between August 1993 and
July 1999, the courts hearing the case have dismissed all of the allegations in
the complaint against the Salomon entities. In October 1999, Ameritech appealed
to the U.S. Supreme Court and in January 2000, the Supreme Court agreed to hear
the case and oral argument will be heard April 17, 2000. The appeal seeks review
of the decision of the U.S. Court of Appeals for the Seventh Circuit that
dismissed the sole remaining ERISA claim against the Salomon entities.
Both the Department of Labor and the Internal Revenue Service ("IRS")
have advised SBI that they were or are reviewing the transactions in which
Ameritech Pension Trust acquired such participations. With respect to the IRS
review, SSBHI, 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. As of the date of this report,
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the IRS has not issued such 30-day letters to SSBHI, SBI or SBRC.
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
SSB, in the U.S. Bankruptcy Court for the Central District of California.
(County of Orange et al. v. Bear Stearns & Co. Inc. et al.) The complaint
alleged, among other things, that the brokerage firms recommended and sold
unsuitable securities to Orange County. SSB and the remaining brokerage firms
settled with Orange County in mid 1999.
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
determination that Smith Barney Inc. and another underwriter will be responsible
for any damages that the City may incur in the event the IRS denies tax exempt
status to the City's General Obligation Refunding Bonds Series 1991. The
complaints were subsequently amended. SSB has asked the court to dismiss the
amended complaints. In May 1999, the Court denied SSB's motion to dismiss, but
stayed the litigation because the matter was not ripe. In March 2000, the city
filed a notice of discontinuance dismissing the complaint.
In November 1998, a 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 alleged that,
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pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced refunding transactions.
Among other relief, plaintiffs sought compensatory and punitive damages,
restitution and/or rescission of the transactions and disgorgement of alleged
excessive profits. In October 1999, the plaintiff filed a second amended
complaint. SSB has asked the court to dismiss the amended complaint.
In connection with the Louisiana and Florida matters, the IRS and SEC
have been conducting an industry-wide investigation into the pricing of Treasury
securities in advanced refunding transactions.
In December 1998, SSB was one of twenty-eight market making firms that
reached a settlement with the SEC in the matter titled In the Matter of Certain
Market Making Activities on NASDAQ. As part of the settlement of that matter,
SSB, without admitting or denying the factual allegations, agreed to an order
that required that it: (i) cease and desist from committing or causing any
violations of Sections 15(c)(1) and (2) of the Securities Exchange Act of 1934
and Rules 15c1-2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling
approximately $760,000, and (iii) submit certain policies and procedures to an
independent consultant for review.
In March 1999, a complaint seeking in excess of $250 million was filed
by a hedge fund and its investment advisor against SSB in the Supreme Court of
the State of New York, County of New York (MKP Master Fund, LDC et al. v.
Salomon Smith Barney Inc.). The complaint included allegations that, while
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acting as prime broker for the hedge fund, SSB breached its contracts with
plaintiffs, misused their monies, and engaged in tortious (wrongful) conduct,
including breaching its fiduciary duties. SSB asked the court to dismiss the
complaint in full. In October 1999, the court dismissed the tort claims,
including the breach of fiduciary duty claims. The court allowed the breach of
contract and misuse of money claims to stand. In December 1999, SSB filed an
answer and asserted counterclaims against the investment advisor. In response to
plaintiff's motion to strike the counterclaims, in January 2000, SSB amended its
counterclaims against the investment advisor to seek indemnification and
contribution. Plaintiffs moved to strike SSB's amended counterclaims in February
2000. SSB will continue to contest this lawsuit vigorously.
In the course of its business, SSB, as a major futures commission
merchant and broker-dealer is a party to various claims and routine regulatory
investigations and proceedings that the general partner believes do not have a
material effect on the business of SSB.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote
during the last fiscal year covered by this report.
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PART II
Item 5. Market for Registrant's Common Equity and Related Security
Holder Matters.
(a)Market Information. The Partnership has issued no stock. There is
no established public market for the Units of Limited Partnership
Interest.
(b) Holders. The number of holders of Units of Limited Partnership
Interest as of December 31, 1999 was 5,316.
(c) Distribution. The Partnership did not declare a distribution in
1999 or 1998.
(d) Use of Proceeds: For the twelve months ended December 31, 1999,
there were additional sales of 88.1293 Units totaling $120,344 and
90.7211 Units totaling $117,210 for the twelve months ended
December 31, 1998 and 256.5390 Units totaling $328,301 for the
twelve months ended December 31, 1997.
Proceeds from the sale of additional Units are used in the trading of
commodity interests including futures contracts, options and forward
contracts.
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Item 6. Selected Financial Data. Realized and unrealized trading gains (losses),
interest income, net income (loss) and increase (decrease) in net asset value
per Unit for the years ended December 31, 1999, 1998, 1997, 1996 and 1995 and
total assets at December 31, 1999, 1998, 1997, 1996 and 1995 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
1999 1998 1997 1996 1995
------------- ------------- ------------- ------------- -------------
Realized and unrealized trading
gains(losses) net of brokerage
commissions and clearing fees
of $7,950,768, $8,540,127,
$9,893,999, $10,754,060 and
$11,751,508, respectively $ (8,806,023) $ 11,635,004 $ 5,083,043 $ 23,283,977 $ 23,528,907
Interest income 4,687,547 5,203,988 6,331,875 6,631,110 8,077,695
------------- ------------- ------------- ------------- -------------
$ (4,118,476) $ 16,838,992 $ 11,414,918 $ 29,915,087 $ 31,606,602
============= ============= ============= ============= =============
Net income (loss) $ (9,063,470) $ 9,913,148 $ 5,525,809 $ 21,056,614 $ 22,177,218
============= ============= ============= ============= =============
Increase (decrease) in net
asset value per unit $ (94.66) $ 99.32 $ 48.07 $ 158.70 $ 124.60
============= ============= ============= ============= =============
Total assets $ 120,563,424 $ 146,464,780 $ 154,556,541 $ 178,462,215 $ 201,319,665
============= ============= ============= ============= =============
</TABLE>
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash, net unrealized appreciation (depreciation) on open
futures contracts and interest receivable. 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 decrease in liquidity. To minimize this risk, the
Partnership follows certain policies including:
(1) Partnership funds are invested only in futures contracts which are
traded in sufficient volume to permit, in the opinion of the Advisors, ease of
taking and liquidating positions.
(2) The Partnership diversifies its positions among various
commodities.
(3) No Advisor initiates additional positions in any commodity if such
additional positions would result in aggregate positions for all commodities
requiring as margin more than 66-2/3% of the Partnership's assets allocated to
the Advisor.
(4) The Partnership may occasionally accept delivery of a commodity.
Unless such delivery is disposed of promptly by retendering the warehouse
receipt representing the delivery to the appropriate clearing house, the
physical commodity position will be fully hedged.
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(5) 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 purchase or sale of additional positions in
the same or related commodities.
(6) The Partnership does not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
(7) 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 two contracts.
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 and options, 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. Each of
these instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. The General
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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. (See also Item 8.
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 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 Partnership will cease trading
operations and liquidate all open positions upon the first to occur of the
following: (i) December 31, 2013; (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 withdrawal,
removal, bankruptcy or any other event that causes the General Partner to cease
to be a general partner under the New York Revised Limited Partnership Act
unless the Partnership is continued as described in the Limited Partnership
Agreement; (iv) net asset value per Unit falls to less than $400 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.
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(b) Capital resources. (i) The Partnership has made no material commitments
for capital expenditures.
(ii) The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by gains or losses on commodity 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. Partnership expenses will
consist of, among other things, commissions, management fees and incentive fees.
The level of these expenses is dependent upon the level of trading and the
ability of the Advisors to identify and take advantage of price movements in the
commodity markets, in addition to the level of net assets maintained. In
addition, 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. Beginning on April 1, 1994, a Limited Partner may cause all of his Units
to be redeemed by the Partnership at the net Asset Value thereof as of the last
day of each month on ten days' written notice to the General Partner. No fee
will be charged for redemptions. For the year ended December 31, 1999,
12,865.1295 Units were redeemed totaling $17,452,603. For the year ended
December 31, 1998, 13,724.6661 Units were redeemed totaling $17,507,358. For the
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year ended December 31, 1997, 20,899.0206 Units were redeemed totaling
$26,060,110.
The Partnership ceased to offer Units effective April 1, 1996.
Additional sales of 88.1293 Units totaling $120,344 for the year ending December
31, 1999 and 90.7211 Units totaling $117,210 for the year ending December 31,
1998 and 256.5390 Units totaling $328,301 for the year ending December 31, 1997,
represent additional Units offered as the differencial between the ordinary
brokerage fee and the reduced brokerage fee to existing limited partners
investing $1,000,000 or more.
(c) Results of Operations.
For the year ended December 31, 1999, the net asset value per
Unit decreased 6.8% from $1,397.75 to $1,303.09. For the year ended December 31,
1998, the net asset value per Unit increased 7.6% from $1,298.43 to $1,397.75.
For the year ended December 31, 1997, the net asset value per Unit increased
3.8% from $1,250.36 to $1,298.43.
The Partnership experienced net trading losses of $855,255 before
commissions and expenses in 1999. Losses were primarily attributable to the
trading of non-U.S. interest rates, metals, softs, livestock, indices and grains
and were partially offset by gains recognized in the trading of currencies,
energy and U.S. interest rates.
The Partnership experienced net trading gains of $20,175,131 before
commissions and expenses in 1998. Gains were primarily attributable to the
trading of commodity futures in U.S. and non- U.S. interest rates, energy,
livestock, grains and currencies and were partially offset by losses recognized
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in the trading of indices, softs and metals.
The Partnership experienced net trading gains of $14,977,042 before
commissions and expenses for the year ended December 31, 1997. Gains were
primarily attributable to the trading of commodity futures in U.S. and non-U.S.
interest rates currencies, indices, metals and softs were partially offset by
losses recognized in the trading of energy, grains and livestock.
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 existence of major price trends and the ability of
the Advisors to identify those price trends correctly. Price trends are
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 market trends exist and the Advisors are able to
identify them, the Partnership expects to increase capital through operations.
(d) 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
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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. The
Partnership is subject to increased risks with respect to its trading
activities in emerging market securities, where clearance, settlement, and
custodial risks are often greater than in more established markets.
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, to
customers, among units within the Partnership, 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) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
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
<PAGE>
with management's authorization, and that financial information utilized
by management and communicated to external parties, including the
Partnership's unitholders, creditors, and regulators, is free of material
errors.
Risk of Computer System Failure (Year 2000 Issue)
SSBHI's computer systems and business processes successfully handled
the date change from December 31, 1999 to January 1, 2000. SSBHI is not aware of
any significant year 2000 problems encountered internally or with the third
parties with which it interfaces, including customers and counterparties, the
global financial market infrastructure, and the utility infrastructure on which
all corporations rely.
Based on operations since January 1, 2000, SSBHI does not expect any
significant impact to its ongoing business as a result of the year 2000 issue.
However, it is possible that the full impact of year 2000 issues has not been
fully recognized and no assurances can be given that year 2000 problems will not
emerge.
The pretax costs associated with required system modifications and
conversions totaled approximately $130 million. These costs were funded through
operating cash flow and expensed in the period in which they were incurred.
The expenditures and the General Partner's resources dedicated
to the preparation for Year 2000 did not have a material impact on the operation
or results of the Partnership.
The most likely and most significant risk to the Partnership
associated with the lack of Year 2000 readiness is the failure of outside
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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.
(e) New Accounting Pronouncements
The Partnership adopted Statement on Financial Accounting Standards No. 133
("SFAS 133"), Accounting For Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize all
derivative instruments in the statement of financial condition and measure those
financial instruments at fair value. SFAS 133 has no impact on Partners' Capital
and operating results as all derivative instruments are recorded at fair value,
with changes therein reported in the statement of income and expenses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
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.
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Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification results 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. Conse- quently, it is not
possible to predict how a particular future market scenario will affect
performance, and the Partnership's past performance is not necessarily
indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
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limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Quantifying the Partnership'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 from civil liability provided for such statements
by the Private Securities Litigation Reform Act of 1995 (set forth in Section
27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act
of 1934). All quantitative disclosures in this section are deemed to be
forward-looking statements for purposes of the safe harbor except for statements
of historical fact (such as the terms of particular contracts and the number of
market risk sensitive instruments held during or at the end of the reporting
period).
The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized).
Exchange maintenance margin requirements have been used by the
Partnership as the measure of its Value at Risk. Maintenance margin requirements
are set by exchanges to equal or exceed the maximum losses reasonably expected
to be incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
23
<PAGE>
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In the case of market sensitive instruments which are not exchange
traded (almost exclusively currencies in the case of the Partnership), the
margin requirements for the equivalent futures positions have been used as Value
at Risk. In those rare cases in which 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, certain of the Advisors trade
commodity options. The Value at Risk associated with options is reflected in the
following table 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 instrument, whereas, in
fact, the fair values of the options traded by the Partnership in almost all
cases fluctuate to a lesser extent than those of the underlying instruments.
24
<PAGE>
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 added 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.
25
<PAGE>
The Partnership's Trading Value at Risk in Different Market Sectors
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of December 31, 1999. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1999, the
Partnership's total capitalization was approximately $117,508,532.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, 1999
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- --------------------------------------------------------------------------------
Currencies
- -OTC Contracts $ 2,522,728 2.15% $ 4,861,168 $ 2,444,372
- -Exchange Traded Contracts 856,142 0.73% 1,118,598 466,987
Energy 2,287,500 1.95% 2,876,700 2,099,900
Grains 483,740 0.41% 1,348,250 372,050
Interest rates U.S. 1,758,561 1.50% 2,272,250 1,086,450
Interest rates Non-U.S 3,094,296 2.63% 6,249,718 3,643,895
Livestock 65,500 0.05% 131,750 30,400
Metals 1,703,375 1.45% 2,498,700 1,197,900
Softs 1,308,505 1.11% 1,373,896 839,305
Indices 2,043,921 1.74% 3,609,182 1,277,732
----------- -----------
Total $16,124,268 13.72%
=========== ===========
</TABLE>
26
<PAGE>
As of December 31,1998, the Partnership's total capitalization was approximately
$143,904,261.
December 31, 1998
% of Total
Market Sector Value at Risk Capitalization
Currencies
- -OTC Contracts $ 2,036,442 1.41%
- -Exchange Traded Contracts 210,542 0.15%
Energy 1,400,100 0.97%
Grains 538,800 0.37%
Interest rates U.S. 961,640 0.67%
Interest rates Non-U.S. 5,454,576 3.79%
Livestock 21,674 0.02%
Metals 1,393,950 0.97%
Softs 933,802 0.65%
Indices 1,220,543 0.85%
----------- -----
Total $14,172,069 9.85%
=========== =====
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 (margin
requirements generally range between 2% and 15% 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."
27
<PAGE>
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. However, these balances (as well as any market
risk they represent) are immaterial.
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.
Qualitative Disclosures Regarding Primary Trading Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
primary market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk
controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price
28
<PAGE>
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 management strategies of the Partnership.
There can be no assurance that the Partnership's current market exposure and/or
risk management strategies will not change materially or that any such
strategies will be effective in either the short- or long-term. Investors must
be prepared to lose all or substantially all of their investment in the
Partnership
The following were the primary trading risk exposures of the Partnership
as of December 31, 1999, by market sector.
Interest Rates. Interest rate risk is the principal market exposure
of the Partnership. Interest rate movements directly affect the price of the
futures positions held by the Partnership and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure
is to interest rate fluctuations in the United States and the other G-7
countries. However, the Partnership also takes futures positions on the
government debt of smaller nations -- e.g., Australia. The General Partner
anticipates that G-7 interest rates will remain the primary market exposure
of the Partnership for the foreseeable future. The changes in interest rates
which have the most effect on the Partnership are changes in long-term, as
<PAGE>
opposed to short-term, rates. Consequently, even a material change in short-term
rates would have little effect on the Partnership were the medium- to long-term
rates to remain steady.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Partnership's currency sector will change significantly in
the future. The currency trading Value at Risk figure includes foreign margin
amounts converted into U.S. dollars with an incremental adjustment to reflect
the exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in a functional currency other than dollars.
Stock Indices. The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by the
Partnership are by law limited to futures on broadly based indices. As of
December 31, 1999, the Partnership's primary exposures were in the S&P 500,
Financial Times (England), Nikkei (Japan) and Hang Seng (Hong Kong) stock
indices. The General Partner anticipates little, if any, trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.
(Static markets would not cause major market changes but would make it difficult
for the Partnership to avoid being "whipsawed" into numerous small losses.)
30
<PAGE>
Metals. The Partnership's primary metal market exposure is to
fluctuations in the price of gold and silver. Although certain of the Advisors
will from time to time trade base metals such as aluminum and copper, the
principal market exposures of the Partnership have consistently been in the
precious metals, gold and silver. The Advisors' gold trading has been
increasingly limited due to the long-lasting and mainly non-volatile decline in
the price of gold over the last 10-15 years. However, silver prices have
remained volatile over this period, and the Advisors have from time to time
taken substantial positions as they have perceived market opportunities to
develop. The General Partner anticipates that gold and silver will remain the
primary metals market exposure for the Partnership.
Softs. The Partnership's primary commodities exposure is to
agricultural price movements which are often directly affected by severe or
unexpected weather conditions. Coffee, cocoa, cotton and sugar accounted for the
substantial bulk of the Partnership's commodity exposure as of December 31,
1999.
Energy. The Partnership's primary energy market exposure is to gas
and oil price movements, often resulting from political developments in the
Middle East. Oil prices can be volatile and substantial profits and losses
have been and are expected to continue to be experienced in this market.
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the
Partnership as of December 31, 1999.
31
<PAGE>
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, German marks, British pounds and French francs.
The Advisor regularly converts foreign currency balances to dollars in an
attempt to control the Partnership's non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure.
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.
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
individual positions as well as enter certain positions traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisors' own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
Each Advisor applies its own risk management policies to its trading.
The Advisors often follow diversification guidelines, margin limits and stop
loss points to exit a position. The Advisors' research of risk management often
32
<PAGE>
suggests ongoing modifications to their trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisors to discuss their risk management and to
look for any material changes to the Advisors' portfolio balance and trading
techniques. The Advisors are required to notify the General Partner of any
material changes to their programs.
33
<PAGE>
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath of Affirmation F-2
Report of Independent Accountants. F-3
Financial Statements:
Statement of Financial Condition at
December 31, 1999 and 1998. F-4
Statement of Income and Expenses
for the years ended December 31, 1999
1998 and 1997. F-5
Statement of Partners' Capital for
the years ended December 31, 1999,
1998 and 1997. F-6
Notes to Financial Statements. F-7 - F-11
F-1
<PAGE>
To The Limited Partners of
Smith Barney
Diversified Futures 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 LLC
General Partner, Smith Barney
Diversified Futures Fund L.P.
Smith Barney Futures Management LLC
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 Diversified Futures 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
Diversified Futures Fund L.P. at December 31, 1999 and 1998, and the results of
its operations for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 audits. We conducted our audits of these
financial statements in accordance with auditing standards generally accepted in
the United States, 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 audits provide a reasonable basis for the
opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 25, 2000
F-3
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Statement of Financial Condition
December 31, 1999 and 1998
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $114,347,833 $136,910,140
Net unrealized appreciation on open
futures contracts 5,310,783 9,155,609
Commodity options owned, at market value
(cost $663,996) 501,192 --
------------ ------------
120,159,808 146,065,749
Interest receivable 403,616 399,031
------------ ------------
$120,563,424 $146,464,780
------------ ------------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 556,459 $ 684,171
Management fees 326,697 360,801
Incentive fees -- 721,179
Professional fees 120,995 64,697
Other 7,571 24,488
Redemptions payable (Note 5) 2,043,170 705,183
------------ ------------
3,054,892 2,560,519
------------ ------------
Partners' capital:
General Partner, 2,048.9308 Unit equivalents outstanding 2,669,941 2,863,893
in 1999 and 1998
Limited Partners, 88,128.2111 and 100,905.2113 Units of
Limited Partnership Interest outstanding in 1999 and
1998, respectively 114,838,591 141,040,368
------------ ------------
117,508,532 143,904,261
------------ ------------
$120,563,424 $146,464,780
------------ ------------
</TABLE>
See notes to financial statements.
F-4
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Statement of Income and Expenses
for the years ended
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1999 1998 1997
Income:
Net gains (losses) on trading of commodity interests:
Realized gains on closed positions $ 3,152,375 $ 22,204,292 $ 10,556,489
Change in unrealized gains (losses) on open
positions (4,007,630) (2,029,161) 4,420,553
------------ ------------ ------------
(855,255) 20,175,131 14,977,042
Less, Brokerage commissions including clearing fees
of $237,946, $251,241 and $316,227, respectively
(Note 3c) (7,950,768) (8,540,127) (9,893,999)
------------ ------------ ------------
Net realized and unrealized gains (losses) (8,806,023) 11,635,004 5,083,043
Interest income 4,687,547 5,203,988 6,331,875
------------ ------------ ------------
(4,118,476) 16,838,992 11,414,918
------------ ------------ ------------
Expenses:
Management fees (Note 3b) 4,128,925 4,049,675 4,455,840
Incentive fees (Note 3b) 668,443 2,741,328 1,301,462
Professional fees 123,075 83,791 76,038
Other 24,551 51,050 55,769
------------ ------------ ------------
4,944,994 6,925,844 5,889,109
------------ ------------ ------------
Net income (loss) $ (9,063,470) $ 9,913,148 $ 5,525,809
------------ ------------ ------------
Net income (loss) per Unit of Limited
Partnership Interest and General Partner Unit
equivalent (Notes 1 and 6) $ (94.66) $ 99.32 $ 48.07
------------ ------------ ------------
</TABLE>
See notes to financial statements.
F-5
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Statement of Partners' Capital
for the years ended
December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Limited General
Partners Partner Total
<S> <C> <C> <C>
Partners' capital at December 31, 1996 $ 169,025,360 $ 2,561,901 $ 171,587,261
Net income 5,427,317 98,492 5,525,809
Sale of 256.5390 Units of Limited
Partnership Interest 328,301 -- 328,301
Redemption of 20,899.0206 Units of Limited
Partnership Interest (26,060,110) -- (26,060,110)
------------- ------------- -------------
Partners' capital at December 31, 1997 148,720,868 2,660,393 151,381,261
Net income 9,709,648 203,500 9,913,148
Sale of 90.7211 Units of Limited
Partnership Interest 117,210 -- 117,210
Redemption of 13,724.6661 Units of
Limited Partnership Interest (17,507,358) -- (17,507,358)
------------- ------------- -------------
Partners' capital at December 31, 1998 141,040,368 2,863,893 143,904,261
Net loss (8,869,518) (193,952) (9,063,470)
Sale of 88.1293 Units of Limited
Partnership Interest 120,344 -- 120,344
Redemption of 12,865.1295 Units of
Limited Partnership Interest (17,452,603) -- (17,452,603)
------------- ------------- -------------
Partners' capital at December 31, 1999 $ 114,838,591 $ 2,669,941 $ 117,508,532
------------- ------------- -------------
</TABLE>
See notes to financial statements.
F-6
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Notes to Financial Statements
1. Partnership Organization:
Smith Barney Diversified Futures Fund L.P. (the "Partnership") is a limited
partnership which was organized on August 13, 1993 under the partnership
laws of the State of New York to engage in the speculative trading of a
diversified portfolio of commodity interests including futures contracts,
options and forward contracts. The commodity interests that are traded by
the Partnership are volatile and involve a high degree of market risk. The
Partnership was authorized to sell 300,000 Units during its offering period.
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form
of organization from a corporation to a limited liability company on October
1, 1999. The Partnership's commodity broker is 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. ("SSBHI"), which is the
sole owner of SSB. SSBHI is a wholly owned subsidiary of Citigroup Inc.
The General Partner and each limited partner share in the profits and losses
of the Partnership 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 of the following to occur:
December 31, 2013; the net asset value of a Unit decreases to less than $400
as of the close of any business day; or under certain 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.
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.
b. The partnership may purchase and write (sell) options. An option is a
contract allowing, but not requiring, its holder to buy (call) or sell
(put) a specific or standard commodity or financial instrument at a
specified price during a specified time period. The option premium is the
total price paid or received for the option contract. When the fund
writes an option, the premium received is recorded as a liability in the
statement of financial condition and marked to market daily. When the
fund purchases an option, the premium paid is recorded as an asset in the
statement of financial condition and marked to market daily.
c. 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.
F-7
<PAGE>
d. 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 Limited Partnership Agreement provides that the General Partner shall
manage the business of the Partnership and may make all trading decisions
for the Partnership.
b. Management Agreements:
The General Partner has entered into Management Agreements with Campbell
& Co., Inc., John W. Henry & Company, Inc. ("JWH"), Trendview Management
Inc., Rabar Market Research Inc. ("Rabar"), Willowbridge Associates, Inc.
and Stonebrook Capital Management, Inc. ("Stonebrook"), (collectively,
the "Advisors"), registered commodity trading advisors. The Advisors are
not affiliated with one another and none is affiliated with the General
Partner or SSB and are not responsible for the organization or operation
of the Partnership. The Partnership will pay each Advisor a monthly
management fee equal to 1/6 of 1% (2% per year) of Net Assets allocated
to the Advisor as of the end of each month, except JWH, which will
receive a monthly management fee equal to 1/3 of 1% (4% per year), and
Stonebrook, which will receive a monthly management fee equal to 1/16 of
1% (0.75% per year) of a fixed notional account size of $75,000,000. In
addition, the Partnership is obligated to pay each Advisor 20% of the New
Trading Profits, as defined in the Management Agreements, earned by each
Advisor for the Partnership in each calendar quarter (Rabar will be paid
annually) except JWH, which will receive an incentive fee of 15% of New
Trading Profits. Stonebrook does not receive an incentive fee. Telesis
Management Inc. was terminated as an Advisor on January 31, 1999.
Stonebrook was added as an Advisor on April 9, 1999.
c. Customer Agreement
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SSB a monthly brokerage fee equal to 11/24 of 1%
(5.5% per year) of month-end Net Assets in lieu of brokerage commissions
on a per trade basis. Persons investing $1,000,000 or more will pay a
reduced brokerage fee of 7/24 of 1% of month-end Net Assets (3.5% per
year), receiving the differential between this reduced fee and 5.5% per
year in the form of additional Units. SSB will pay a portion of brokerage
fees to its financial consultants who have sold Units in this offering.
Brokerage fees will be paid for the life of the Partnership, although the
rate at which such fees are paid may be changed. The Partnership will pay
for National Futures Association ("NFA") fees, exchange, clearing, user,
give-up and floor brokerage fees. 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, 1999
and 1998, the amount of cash held for margin requirements was $18,616,389
F-8
<PAGE>
and $15,565,181, respectively. 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 instruments. The results of the Partnership's trading
activities are shown in the statement of income and expenses.
All of the commodity interests owned by the Partnership are held for trading
purposes. The average fair value during the years ended December 31, 1999
and 1998, based on a monthly calculation, was $6,571,306 and $8,814,289,
respectively. The fair value of these commodity interests, including options
thereon, if applicable, at December 31, 1999 and 1998 was $5,811,975 and
$9,155,609, respectively, as detailed below.
Fair Market Value
December 31, December 31,
1999 1998
Currencies:
-Exchange Traded Contracts $ 423,503 $ 57,514
-OTC Contracts 196,398 56,390
Energy 1,095,761 433,210
Grains 64,492 415,008
Interest Rates U.S. 1,352,098 (740,429)
Interest Rates Non-U.S 220,653 7,987,464
Livestock (19,700) 20,120
Metals 941,009 468,466
Softs 493,230 383,544
Indices 1,044,531 74,322
----------- -----------
Total $ 5,811,975 $ 9,155,609
----------- -----------
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. A
limited partner may require the Partnership to redeem his Units at their Net
Asset Value as of the last day of each month on 10 days' notice to the
General Partner. No fee will be charged for redemptions.
F-9
<PAGE>
6. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 1999, 1998 and 1997 were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
<S> <C> <C> <C>
Net realized and unrealized gains (losses) $ (92.07)$ 115.88 $ 44.59
Interest income 48.30 47.60 49.04
Expenses (50.89) (64.16) (45.56)
-------- --------- ---------
Increase (decrease) for year (94.66) 99.32 48.07
Net asset value per Unit, beginning of year 1,397.75 1,298.43 1,250.36
--------- --------- ---------
Net asset value per Unit, end of year $ 1,303.09 $ 1,397.75 $ 1,298.43
--------- --------- ---------
</TABLE>
7. 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 and options, whose value is based
upon an underlying asset, index, or reference rate, and generally represent
future commitments to exchange currencies or cash flows, 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, 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 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.
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
(see table in Note 4). 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.
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
F-10
<PAGE>
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. The majority of these
instruments mature within one year of December 31, 1999. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity.
8. Subsequent Events:
On January 1, 2000 there were additional sales representing 7.5079 Units of
Limited Partnership Interest totaling $9,783 and on January 31, 2000
additional redemptions representing 2,172.9431 Units of Limited Partnership
Interest totaling $2,906,029. Trendview Management, Inc. was terminated as
an Advisor to the Partnership on January 31, 2000.
9. New Accounting Pronouncements:
The Partnership adopted Statement on Financial Accounting Standards No. 133
("SFAS 133"), Accounting for Derivative Financial Instruments and Hedging
Activities, on January 1, 1999. SFAS 133 requires that an entity recognize
all derivative instruments in the statement of financial condition and
measure those financial instruments at fair value. SFAS 133 has no impact on
Partners' Capital and operating results as all derivative instruments are
recorded at fair value, with changes therein reported in the statement of
income and expenses.
F-11
<PAGE>
Item 9.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.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are managed by
its General Partner, Smith Barney Futures Management LLC. Investment decisions
will be made by Campbell & Company, Inc., John W. Henry & Company, Inc., Rabar
Market Research, Inc., Trendview Management, Inc., Willowbridge Associatees,
Inc. and Stonebrook Capital Management, Inc. (collectively the "Advisors").
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by Smith Barney Futures Management LLC, its General Partner. 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." Brokerage commissions and clearing fees of $7,950,768 were paid
for the year ended December 31, 1999. Management fees and incentive fees of
$4,128,925 and $668,443, respectively, were paid or payable to the Advisors for
the year ended December 31, 1999.
34
<PAGE>
Item 12. 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. The General Partner owns Units of general partnership interest
equivalent to 2,048.9308 Units (2.3%) of Limited Partnership Interest as of
December 31, 1999.
(c). Changes in control. None.
Item 13. Certain Relationship and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management LLC would be
considered promoters for purposes of item 404 (d) of Regulation S-K. The nature
and the amounts of compensation each promoter will receive from the Partnership
are set forth under "Item 1. Business", "Item 11. Executive Compensation," and
"Item 8. Financial Statements and Supplementary Data."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1999
and 1998.
35
<PAGE>
Statement of Income and Expenses for the years ended December
31, 1999, 1998 and 1997. Statement of Partners' Capital
for the years ended December 31, 1999, 1998 and 1997.
(2) Financial Statement Schedules: Financial Data Schedule for the
year ended December 31, 1999.
(3) Exhibits:
3.1 - Limited Partnership Agreement (filed as Exhibit 3.1 to
the Registration Statement on Form S-1 (File No.33-75056 and
incorporated herein by reference).
3.2 - Certificate of Limited Partnership of the Partnership as
filed in the office of the County Clerk of New York County on
October 13, 1993 (filed as Exhibit 3.2 to the Registration
Statement on Form S-1 (File No.33-75056) and incorporated
herein by reference).
10.1 - Customer Agreement between the Partnership and Smith Barney
(filed as Exhibit 10.1 to the Registration Statement on
Form S-1 (File No. 33-75056) and incorporated herein by
reference).
10.3 - Escrow Instructions relating to escrow of subscription funds
(filed as Exhibit 10.3 to the Registration Statement on
Form S-1 (File No. 33-75056) and incorporated herein by
reference).
10.5 - Management Agreement among the Partnership, the General
Partner and Campbell & Company, Inc. (filed as Exhibit 10.5 to
36
<PAGE>
the Registration Statement on Form S-1 (File No. 33-75056) and
incorporated herein by reference).
10.6 - Management Agreement among the Partnership, the General
Partner and Colorado Commodity Management Corp. (filed as
Exhibit 10.6 to the Registration Statement on Form S-1(File No.
33-75056) and incorporated herein by reference).
10.7 - Management Agreement among the Partnership, the General
Partner and John W. Henry & Company, Inc.(filed as Exhibit 10.
7 to the Registration Statement on Form S-1 (File No.
33-75056) and incorporated herein by reference).
10.8 - Management Agreement among the Partnership, the General
Partner and Hyman Beck & Company (filed as Exhibit 10.8 to the
Registration Statement on Form S-1 (File No. 33-75056) and
incorporated herein by reference).
10.9 - Letter dated May 19, 1994 from the General Partner to
Colorado Commodities Management Corp. terminating the Management
Agreement (previously filed).
10.10 - Management Agreement among the Partnership, the General
Partner and Chesapeake Capital Corp. (previously filed).
10.11 - Letters extending Management Agreements with John W. Henry
& Company, Inc., Hyman Beck & Company, Campbell & Co., Inc.
and Chesapeake Capital Corp. (previously filed).
37
<PAGE>
10.12 - Management Agreement among the Partnership, the General
Partner and Abraham Trading Co. (previously filed).
10.13 - Management Agreement among the Partnership, the General
Partner and Rabar Market Research Inc.(previously filed).
10.14 - Management Agreement among the Partnership the General
Partner and AIS Futures Management, Inc. (previously filed).
10.15 - Letter dated October 1, 1996 from the General Partner
to Hyman Beck & Company terminating the Management
Agreement (previously filed).
10.16 - Management Agreement among the Partnership, the General
Partner and Telesis Management Inc.(filed as Exhibit 10.16 to
the Form 10-K for the year ended December 31, 1997).
10.17 - Letter terminating Management Agreement with Chesapeake
Capital Corporation (filed as Exhibit 10.17 to the Form
10-K for the year ended December 31, 1997).
10.18 - Letter terminating Management Agreement with Abraham
Trading Co.(filed as Exhibit 10.18 to the Form 10-K for the year
ended December 31, 1997).
38
<PAGE>
10.19 - Management Agreement among the Partnership the General
Partner and Trendview Management, Inc. (filed as Exhibit 10.19
to the Form 10-K for the year ended December 31, 1997).
10.20- Letters extending Management Agreements with Campbell & Co.,
Chesapeake Capital Corp., John W. Henry & Company Inc., AIS
Futures Management L.L.C., Abraham Trading Co. and Rabar Market
Research Inc.(filed as Exhibit 10.20 to the Form 10-K for the
year ended December 31, 1997).
10.21- Letter terminating AIS Futures Management, Inc. (previously
filed).
10.22- Letter terminating Telesis Management Inc.(previously filed).
10.23- Letters extending Management Agreements with Campbell & Co.,
John W. Henry & Company Inc., Rabar Market Research Inc. and
Trendview Management Inc. (previously filed).
10.24- Management Agreement among the Partnership the General
Partner and Willowbridge Associates, Inc. (filed as Exhibit 10
.24 to the Form 10-K for the year ended December 31, 1999).
39
<PAGE>
10.25- Management Agreement among the Partnership the General
Partner and Stonebrook Capital Management, Inc. (filed as
Exhibit 10.25 to the Form 10-K for the year ended December 31,
1999).
10.26- Letters extending Management Agreements with Campbell &
Co., John W. Henry & Company Inc., Rabar Market Research Inc.
and Trendview Management Inc. (filed herein).
(b) Reports on 8-K: None Filed.
40
<PAGE>
Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.
Annual Report to Limited Partners
41
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York on the 30th day of March 2000.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
By: Smith Barney Futures Management LLC
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this annual report on Form 10-K has been signed below by the following persons
in the capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
- ----------------------------- ------------------------------
David J. Vogel Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael R. Schaefer /s/ Daniel A. Dantuono
Michael R. Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
42
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000911503
<NAME> Smith Barney Diversified Futures Fund L.P.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 114,347,833
<SECURITIES> 5,811,975
<RECEIVABLES> 403,616
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 120,563,424
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 120,563,424
<CURRENT-LIABILITIES> 3,054,892
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 117,508,532
<TOTAL-LIABILITY-AND-EQUITY> 120,563,424
<SALES> 0
<TOTAL-REVENUES> (4,118,476)
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 4,944,994
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (9,063,470)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,063,470)
<EPS-BASIC> (94.66)
<EPS-DILUTED> 0
</TABLE>
June 1, 1999
Campbell & Co. Inc.
210 West Pennsylvania Avenue
Baltimore, MD 21204
Attention: Ms. Terry Livesey
RE: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P.
Dear Ms. Livesey:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 2000
and all other provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above or fax to 212-723-8985. If you have any questions I can be
reached at 212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
CAMPBELL & CO. INC.
By:
Print Name:
DAD/sr
June 22, 1999
John W. Henry & Company, Inc.
One Glendinning Place
Westport, Ct. 06880
Attn: Ms. Beth Kenton
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P.
Dear Ms. Kenton:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
are extending the term of the Management Agreement through June 30, 2000 and all
other provisions of the Management Agreement will remain unchanged.
Please acknowledge receipt of this modification by signing one copy of this
letter and returning it to the attention of Mr. Daniel Dantuono at the address
above or fax to 212-723-8985. If you have any questions I can be reached at
212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer
RECEIVED
JOHN W. HENRY & COMPANY, INC.
By:
Print Name:
DAD/sr
June 1, 1999
Rabar Market Research
10 Bank St. - Suite 830
White Plain, N.Y. 10606
Attention: Mr. John Dreyer &
Mr. Paul Rabar
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund
Dear Mr. Dreyer & Mr. Rabar:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 2000
and all other provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above or fax to 212-723-8985. If you have any questions I can be
reached at 212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
RABAR MARKET RESEARCH
By:
Print Name:
DAD/sr
June 1, 1999
Trendview Management Inc.
600 B Street - Suite 1650
San Diego, California 92101
Attention: Mr. Clark Smith
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P.
Dear Mr. Smith:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 2000
and.all other provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above or fax to 212-723-8985. If you have any questions I can be
reached at 212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
TRENDVIEW MANAGEMENT INC.
By:
Print Name:
DAD/sr
MANAGEMENT AGREEMENT
AGREEMENT made as of the 1st day of April, 1999 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM"), SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P., a New York limited partnership (the
"Partnership") and STONEBROOK CAPITAL MANAGEMENT, INC., a corporation organized
under the laws of Delaware (the "Advisor").
W I T N E S S E T H :
WHEREAS, SBFM is the general partner of Smith Barney
Diversified Futures 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 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) 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 Prospectus and Disclosure
Document dated as of February 17, 1994, as supplemented (the "Prospectus"), 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 Volatility Hedge
Program ("VHP 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 Prospectus 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 March 31, 1999 as filed with the NFA and CFTC (the "Disclosure
Document"). 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
(initially a notional amount of $75 million) to the Advisor will be made to the
Advisor's VHP 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 Disclosure Document 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 Disclosure Document. 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.
(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. The Advisor may refuse to accept any additional allocations to its
management.
(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. The Advisor
shall not be responsible to the Partnership, the General Partner, any trading
advisor or any limited partners for any acts or omissions of any other trading
advisor, whether or not they are still acting as an advisor to the Partnership.
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 a monthly fee for
professional management services equal to 1/16 of 1% (0.75% per year) of a fixed
notional account size of $75,000,000 (computed monthly by multiplying
$75,000,000 by 0.75% and multiplying the result thereof by the ratio which the
total number of calendar days in that month bears to 365 days).
(b) "Net Assets" shall have the meaning set forth in Paragraph
7(d)(1) of the Limited Partnership Agreement dated as of August 27, 1993 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 incentive fees payable as of the date
of such determination.
(c) Monthly management fees shall be paid within twenty (20)
business days following the end of the month 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 calendar month, the monthly management 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
management 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 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, 1999. 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, (ii) Jerome Abernathy 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 in the event that (i) the trading policies of
the Partnership as set forth in the Prospectus are changed in such manner that
the Advisor reasonably believes will adversely affect the performance of its
trading strategies; (ii) after June 30, 1999; 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, the Partnership or any of their
affiliates 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, the Partnership or
any of their affiliates 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
Advisor's Disclosure Document are accurate in all material respects and as to
them the Disclosure Document 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.
(ii) The performance information in the Disclosure Document 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 Delaware 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.
(b) SBFM represents and warrants for itself and the
Partnership that:
(i) The Prospectus (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 Prospectus, made in reliance upon, and in conformity with,
information furnished to SBFM by or on behalf of the Advisor expressly for use
in the Prospectus.
(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 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.
(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 or (ii) any trade which the Advisor believes was
not executed in accordance with its instructions.
(iv) The Advisor will demonstrate to SBFM's satisfaction its
ability to bear its responsibilities arising under this Agreement, by
presentation of supporting documentation (such as financial statements together
with a certification of accuracy or, in certain cases, the individual
obligations of the controlling principals of the Advisor for the Advisor's
responsibilities hereunder) as SBFM may reasonably request. In this connection,
the Advisor agrees that it shall cause the Promissory Note attached hereto as
Rider A to be executed.
(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:
If to SBFM:
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, New York 10013
Attention: Mr. David J. Vogel
If to the Advisor:
Stonebrook Capital Management Inc.
17 State Street
38th Floor
New York, New York 10004
Attn: Mr. Jerome Abernathy
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
David J. Vogel
President and Director
SMITH BARNEY DIVERSIFIED
FUTURES FUND L.P.
By: Smith Barney
Futures Management Inc.
(General Partner)
By
David J. Vogel
President and Director
STONEBROOK CAPITAL MANAGEMENT INC.
By
Jerome Abernathy
President
<PAGE>
RIDER A
PROMISSORY NOTE
New York, New York
Date: April 1, 1999
FOR VALUE RECEIVED, the undersigned, Jerome Abernathy,
promises to pay on demand, to the order of SMITH BARNEY DIVERSIFIED FUTURES FUND
L.P. (the "Fund") or Smith Barney Futures Management Inc. ("SBFM") as the Fund
or SBFM shall elect, the sum of One Hundred Thousand Dollars ($100,000). This
note shall be callable by the Fund or SBFM only if and to the extent that
Stonebrook Capital Management, Inc. ("Stonebrook"), a New York corporation, does
not have sufficient assets to fulfill Stonebrook's obligations associated with
the Management Agreement dated April 1, 1999 among SBFM, the Fund and
Stonebrook.
- -------------------------
Jerome Abernathy
President
MANAGEMENT AGREEMENT
AGREEMENT made as of the 1st day of February, 1999 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM"), SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P., a New York limited partnership (the
"Partnership") and WILLOWBRIDGE ASSOCIATES INC., a Delaware corporation (the
"Advisor").
W I T N E S S E T H :
WHEREAS, SBFM is the general partner of Smith Barney
Diversified Futures 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) 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
policies set forth in the Prospectus and Disclosure Document dated as of
February 17, 1994, as supplemented (the "Prospectus"), 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 Select Investment Program using the Vulcan
Trading System to manage 50% of the Partnership's assets allocated to it, and
the Advisor's Argo Trading System to manage 50% of 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
Prospectus 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. SBFM and
the Partnership each acknowledge that the Advisor may utilize exchange for
physicals transactions in its trading for the Partnership.
(b) SBFM acknowledges receipt of the Advisor's Disclosure
Document dated May 31, 1998 as filed with the NFA and CFTC (the "Disclosure
Document"). 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) and the Advisor shall have no
responsibility for such payment. SBFM will cause the Partnership's commodity
brokers to provide the Advisor with copies of all confirmation, purchase and
sale, monthly and similar statements at the time such statements are available
to SBFM.
(c) The initial allocation of the Partnership's assets to the
Advisor will be approximately U.S. $13,000,000 (all of which shall be actual
funds) made to the Advisor's Select Investment Program, 50% of such funds to be
traded using the Vulcan Trading System and 50% of such funds to be traded using
the Argo Trading System (each, a "Trading System" and collectively, the
"Program"). The Advisor will not be allocated any notional funds. The parties
acknowledge that if assets of the Partnership under the Advisor's management in
either Trading System fall below $750,000, the Advisor may not be able to trade
that Trading System in full. 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 Disclosure Document 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 any prospectus
of the Partnership. Non-material changes in the trading systems utilized on
behalf of the Partnership may be instituted without prior written approval.
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.
The Advisor further agrees that it will convert foreign currency balances (not
required to margin positions denominated in a foreign currency) to U.S. dollars
no less frequently than monthly. U.S. dollar equivalents in individual foreign
currencies of more than $100,000 will be converted to U.S. dollars within one
business day after such funds are no longer needed to margin foreign positions.
(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 or other information deemed by the Advisor to be proprietary and
confidential) 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. SBFM and the Partnership shall not distribute any description of the
Advisor, its principals, or its or their trading performance without the prior
written consent of 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. The Advisor may terminate this
Agreement immediately if the Net Assets of the Partnership managed by the
Advisor fall below $500,000.
(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 committed by any
commodity broker/dealer selected by SBFM; 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. The Advisor
shall not be responsible to the Partnership, the General Partner, any trading
advisor or any limited partners for any acts or omissions of 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) an incentive fee
payable quarterly equal to 20% of New Trading Profits (as such term is defined
below) earned by the Advisor for the Partnership and (ii) a monthly fee for
professional management services equal to 1/6 of 1% (2% per year) of the
month-end Net Assets of the Partnership allocated to the Advisor (which shall
include any committed funds).
(b) "Net Assets" shall have the meaning set forth in Paragraph
7(d)(1) of the Limited Partnership Agreement dated as of August 27, 1993 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 incentive fees payable as of the date
of such determination.
(c) "New Trading Profits" shall mean the excess, if any, of
Net Assets managed by the Advisor (which shall include any committed funds) at
the end of the fiscal period over Net Assets managed by the Advisor (which shall
include any committed funds) at the end of the highest previous fiscal period or
Net Assets allocated to the Advisor 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 period decreased by interest or
other income, not directly related to trading activity, earned on the
Partnership's assets during the fiscal period, whether the assets are held
separately or in margin accounts. Ongoing expenses will be attributed to the
Advisor based on the Advisor's proportionate share of Net Assets. Ongoing
expenses above will not include expenses of litigation not involving the
activities of the Advisor on behalf of the Partnership. Ongoing expenses include
offering and organizational expenses of the Partnership. Interest income earned,
if any, will not be taken into account in computing New Trading Profits earned
by the Advisor. If Net Assets allocated to the Advisor are reduced due to
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 Advisor is eligible to receive another
incentive fee.
(d) Quarterly incentive fees and monthly management fees shall
be paid within twenty (20) business days following the end of the period, as the
case may be, 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 quarter or
a calendar month, as the case may be, the quarterly incentive fee shall be
computed as if the effective date of termination were the last day of the then
current quarter and the monthly management 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
management 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. No incentive fee shall be paid to the Advisor until the end of
the first full calendar quarter of the Advisor's trading for the Partnership,
which incentive fee shall be based on New Trading Profits (if any) from the
commencement of trading for the Partnership by the Advisor through the end of
the first full calendar quarter.
(e) 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 Program 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 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 whose assets are traded pursuant to the Program and that it
will not knowingly or deliberately favor any such client or account managed by
it over any other client or account whose assets are traded pursuant to the
Program in any manner, it being acknowledged, however, that different trading
strategies or methods may be utilized for differing sizes of accounts, accounts
traded with different degrees of leverage, 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, provided that nothing
contained herein shall be deemed to require the Advisor to disclose the names of
other customers or information that the Advisor deems to be proprietary or
confidential. 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, 1999. 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 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) Philip Yang and Michael Gan both die, become
incapacitated, leave the employ of the Advisor, cease to control the Advisor or
are 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 or if the Advisor's license agreement with Caxton Corporation is
terminated. This Agreement will immediately terminate upon dissolution of the
Partnership or upon cessation of trading prior to dissolution.
<PAGE>
(b) The Advisor may terminate this Agreement by giving not
less than 30 days' notice to SBFM in the event that (i) the trading policies of
the Partnership as set forth in the Prospectus are changed in such manner that
the Advisor reasonably believes will adversely affect the performance of its
trading strategies; (ii) after June 30, 1999; 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
or if the Advisor's license agreement with Caxton Corporation is terminated.
(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 Limited 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, arbitrator 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 principals, officers, directors and
employees 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 or intentional misconduct on the part of the
Advisor (except as otherwise provided in Section 1(g)).
(ii) In the event SBFM, the Partnership or any of their
principals, officers, directors and employees 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, the Partnership or any of their principals, officers, directors
and employees against any loss, liability, damage, cost or expense (including,
without limitation, attorneys' and accountants' fees) actually and reasonably
incurred in connection therewith.
(iii) Neither Philip Yang nor Michael Gan shall have any
liability to the Partnership or SBFM or any of their respective officers,
directors, employees, partners or affiliates under this Agreement or in
connection with the transactions contemplated by this Agreement except in the
case of his own fraud or willful misconduct.
(iv) Any indemnification under subparagraph (b)(i) above,
unless ordered by a court, arbitrator or administrative forum, shall be made by
the Advisor 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. Such independent legal counsel
shall be selected by the Advisor in a timely manner, subject to SBFM's approval,
which approval shall not be unreasonably withheld. SBFM will be deemed to have
approved the Advisor's selection unless SBFM notifies the Advisor in writing,
received by the Advisor within five days of the Advisor's facsimile to SBFM of
the notice of the Advisor's selection, that SBFM does not approve the selection.
(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
Advisor's Disclosure Document are accurate in all material respects and as to
them the Disclosure Document as of the date of the Disclosure Document 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.
(ii) The performance information in the Disclosure Document 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 Delaware 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.
(b) SBFM represents and warrants for itself and the
Partnership that:
(i) The Prospectus (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, if any, in the Prospectus, made in reliance upon, and in conformity
with, information furnished to SBFM by or on behalf of the Advisor expressly for
use in the Prospectus.
(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.
(viii) SBFM and the Partnership will comply with all laws,
rules, regulations and orders applicable to the offer and sale of Units in all
jurisdictions in which Units are offered or sold.
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 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.
(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, 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
$250,000 during the term of this Agreement,
(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 effective upon actual receipt
and shall be in writing and delivered personally or by facsimile 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:
If to SBFM:
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, New York 10013
Attention: Mr. David J. Vogel
If to the Advisor:
Willowbridge Associates Inc.
101 Morgan Lane
Suite 180
Plainsboro, New Jersey 08536
Attention: Theresa C. Morris
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Joseph P. Collins
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.
<PAGE>
0556237.08
15. CONFIDENTIALITY. Nothing in this Agreement shall require
the Advisor to disclose the details of its trading system, methods, models,
strategies and formulas. SBFM and the Partnership acknowledge that the trading
systems, methods, models, strategies and formulas of the Advisor are the sole
and exclusive property of the Advisor; SBFM and the Partnership further agree
that it will keep confidential and will not disseminate information regarding
such systems, methods, models, strategies and formulas to any person.
16. NO THIRD PARTY BENEFICIARIES. There are no third party
beneficiaries to this Agreement except that certain persons not parties to this
Agreement have rights under Section 6 hereof.
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
Daniel A. Dantuono
Chief Financial Officer,
Treasurer and Director
SMITH BARNEY DIVERSIFIED
FUTURES FUND L.P.
By: Smith Barney
Futures Management Inc.
(General Partner)
By
Daniel A. Dantuono
Chief Financial Officer,
Treasurer and Director
WILLOWBRIDGE ASSOCIATES INC.
By
Theresa C. Morris
Senior Vice President
