<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 29, 1996
REGISTRATION NO. 333-3538
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
PRE-EFFECTIVE AMENDMENT NO. 1
TO THE
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
(EXACT NAME OF REGISTRANT AS SPECIFIED IN LIMITED PARTNERSHIP AGREEMENT)
<TABLE>
<S> <C> <C>
NEW YORK 6793 13-3769020
(STATE OF ORGANIZATION) (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
SMITH BARNEY FUTURES MANAGEMENT INC.
GENERAL PARTNER
390 GREENWICH STREET
NEW YORK, NEW YORK 10013
(212) 723-5424
(ADDRESS AND TELEPHONE NUMBER OF PRINCIPAL EXECUTIVE OFFICE)
------------------------
EMILY M. ZEIGLER, ESQ.
WILLKIE FARR & GALLAGHER
ONE CITICORP CENTER
153 EAST 53RD STREET
NEW YORK, NEW YORK 10022-4669
(212) 821-8000
(NAME, ADDRESS AND TELEPHONE NUMBER OF AGENT FOR SERVICE)
------------------------
Approximate date of commencement of proposed sale to the public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. /X/
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS MAXIMUM MAXIMUM AMOUNT OF
OF SECURITIES BEING AMOUNT BEING OFFERING AGGREGATE REGISTRATION
REGISTERED REGISTERED PRICE PER UNIT OFFERING PRICE FEE(1)
<S> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------
100,000
Units of Limited X
Partnership Net Asset Net Asset
Interest.............. 100,000 Units Value per Unit Value per Unit $27,096.59
</TABLE>
- --------------------------------------------------------------------------------
(1) This amount, calculated pursuant to Rule 457(c), is based on 83,299 Units at
$943.35 per Unit, the Net Asset Value per Unit as of March 31, 1996. $34,480
was previously paid in connection with Registration Statement 33-79244. Of
the 100,000 Units registered pursuant thereto, 16,701 were sold as of March
31, 1996. Consequently, this Registration Statement carries forward 83,299
Units and $7,383.40 in Registration Fees, pursuant to Rule 429.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
CROSS REFERENCE SHEET
<TABLE>
<CAPTION>
ITEM NUMBER AND CAPTION HEADING IN PROSPECTUS
------------------------------------------- ---------------------------------------------
<C> <S> <C>
1. Forepart of the Registration Statement and
Outside Front Cover of Prospectus........ Cover Page
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Cover Page; Table of Contents
3. Summary Information, Risk Factors and
Ratio of Earnings to Fixed Charges....... Summary of the Prospectus; Risk Factors
4. Use of Proceeds............................ Use of Proceeds
5. Determination of Offering Price............ Cover Page; Plan of Distribution
6. Dilution................................... *
7. Selling Security Holders................... *
8. Plan of Distribution....................... Plan of Distribution
9. Description of Securities to be
Registered............................... Cover Page; Redemptions; The Limited
Partnership Agreement
10. Interests of Named Experts and Counsel..... Legal Matters
11. Information With Respect to the
Registrant............................... Summary of the Prospectus; Risk Factors;
Commodity Futures Markets; Trading
Policies;
Financial Statements; The General Partner;
The Advisors; Conflicts of Interest;
Fees and Expenses to the Partnership;
The Limited Partnership Agreement
12. Disclosure of Commission Position on
Indemnification for Securities Act
Liability................................ *
</TABLE>
- ---------------
* Not applicable.
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED MAY 29, 1996
100,000 UNITS OF LIMITED PARTNERSHIP INTEREST
SMITH BARNEY DIVERSIFIED
FUTURES FUND L.P. II
------------------
Smith Barney Diversified Futures Fund L.P. II (the "Partnership") is a
limited partnership organized under the 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 Partnership is
soliciting subscriptions for 100,000 units of limited partnership interest (the
"Units"). The Partnership commenced trading operations on January 17, 1996. No
underwriting commissions are charged; hence, the entire amount of the
subscription price will be available for the Partnership's trading.
Smith Barney Inc. ("SB") acts as the commodity broker/dealer for the
Partnership and its affiliate, Smith Barney Futures Management Inc., is the
General Partner of the Partnership (the "General Partner"). See "The General
Partner" and "The Commodity Broker/Dealer". All trading decisions are currently
made for the Partnership by Chesapeake Capital Corporation ("Chesapeake"), John
W. Henry & Co., Inc. ("JWH") and Millburn Ridgefield Corporation ("Millburn")
(collectively, the "Advisors"). None of the Advisors is affiliated with the
General Partner or SB. See "The Advisors" and "Conflicts of Interest".
THESE ARE SPECULATIVE SECURITIES.
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING RISKS. (SEE
"RISK FACTORS" AT PAGES 10-16). THIS OFFERING INVOLVES SIGNIFICANT RISKS THAT
SHOULD BE CONSIDERED BY INVESTORS AND THE FOLLOWING LIST OF RISKS IS NOT
COMPLETE:
-- COMMODITY TRADING IS SPECULATIVE AND VOLATILE (AN INVESTOR COULD LOSE ALL
OF HIS INVESTMENT.)
-- AUTHORIZATION OF SUBSTANTIAL FEES TO GENERAL PARTNER AND AFFILIATES (THE
PARTNERSHIP REQUIRES A RETURN OF 10.80% IN THE FIRST YEAR OF OPERATIONS
TO BREAK EVEN, ASSUMING 18,000 UNITS HAVE BEEN SOLD AND A RETURN OF 6.78%
IN THE FIRST YEAR OF OPERATIONS TO BREAK EVEN, ASSUMING 100,000 UNITS
OFFERED HEREBY ARE SOLD. SUBSTANTIAL INCENTIVE FEES MAY BE PAID DURING A
YEAR EVEN THOUGH THE PARTNERSHIP MAY INCUR A NET LOSS FOR THE FULL YEAR.)
-- CONFLICTS OF INTEREST MAY EXIST IN THE MANAGEMENT OF THE PARTNERSHIP
(INCLUDING THE RELATIONSHIP BETWEEN THE GENERAL PARTNER AND THE COMMODITY
BROKER/DEALER; THE BROKERAGE RATE CHARGED BY THE COMMODITY BROKER/DEALER;
DISTRIBUTION OF PROFITS; ACCOUNTS OF SB, THE GENERAL PARTNER AND THEIR
AFFILIATES; CONTROL OF OTHER ACCOUNTS BY THE ADVISORS; OTHER ACTIVITIES
AND POOLS OPERATED BY SB; AND INCENTIVE FEES CHARGED BY THE ADVISORS).
THESE CONFLICTS OF INTEREST MAY ADVERSELY AFFECT THE NET PERFORMANCE OF
THE PARTNERSHIP.
-- NO PUBLIC MARKET FOR UNITS EXISTS.
-- LIMITED PARTNERS MAY HAVE LIMITED VOTING RIGHTS WITH RESPECT TO THE
PARTNERSHIP'S AFFAIRS.
-- WHILE THE GENERAL PARTNER DOES NOT INTEND TO MAKE DISTRIBUTIONS, PROFITS
EARNED IN ANY YEAR WILL RESULT IN AN INCREASE IN A LIMITED PARTNER'S TAX
LIABILITY.
(continued on next page)
THESE SECURITIES ARE SPECULATIVE AND INVOLVE A HIGH DEGREE OF RISK. THE
SECURITIES ARE SUITABLE FOR INVESTMENT ONLY BY A PERSON WHO CAN AFFORD TO LOSE
HIS ENTIRE INVESTMENT. SEE "RISK FACTORS" AT PAGES 10-16.
THIS OFFERING IS NOT A MUTUAL FUND OR ANY OTHER TYPE OF INVESTMENT COMPANY
WITHIN THE MEANING OF THE INVESTMENT COMPANY ACT OF 1940 AND IS NOT SUBJECT TO
REGULATION THEREUNDER. SEE "RISK FACTORS" AT PAGES 10-16.
SUBSCRIBERS WILL BE REQUIRED TO MAKE CERTAIN REPRESENTATIONS AND WARRANTIES
IN THE SUBSCRIPTION AGREEMENT.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE COMMODITY FUTURES TRADING COMMISSION HAS NOT PASSED UPON THE MERITS OF
PARTICIPATING IN THIS POOL NOR HAS THE COMMISSION PASSED ON THE ADEQUACY
OR ACCURACY OF THIS DISCLOSURE DOCUMENT.
<TABLE>
<S> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
PROCEEDS TO
PRICE TO UNDERWRITING THE PARTNERSHIP
PUBLIC COMMISSIONS(1) (1)(2)(3)
- --------------------------------------------------------------------------------------------------------
Net Asset Value Net Asset Value
Per Unit (minimum purchase: $5,000)(4)............. per Unit (1) per Unit
- --------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------
</TABLE>
(Notes on pages ii and iii)
------------------
SMITH BARNEY INC.
The date of this Prospectus and Disclosure Document is May 29, 1996
<PAGE> 4
The Partnership is soliciting subscriptions for 100,000 units of limited
partnership interest ("Units") with a minimum subscription per investor of
$5,000 (except that the minimum investment is $2,000 for employee benefit plans,
subject to higher minimums in certain states). The Partnership will continue to
offer Units until the earlier of two years from the date hereof and the date on
which all of the Units are sold (the "Continuous Offering"). During the
Continuous Offering, Units and fractional Units (rounded to four decimal places)
will be sold at their Net Asset Value per Unit as of the last business day of
the month ending at least 5 days after a subscription is accepted. Net Asset
Value is defined in the Glossary at page 121. A subscription may be revoked by a
subscriber if the General Partner determines not to offer Units as of the end of
a month. See "Plan of Distribution" and "Subscription Procedure". The Units are
being offered through SB on a best efforts basis without any firm underwriting
commitment (so that neither SB nor any other underwriter has agreed to purchase
any Units). The Partnership will dissolve no later than December 31, 2014. See
"Summary of the Prospectus -- The Partnership -- Dissolution of the
Partnership".
- ---------------
NOTES:
(1) The Units are being offered on a best efforts basis through SB and such
other members of the National Association of Securities Dealers, Inc. or foreign
brokers as may participate in the offering. No underwriting commissions will be
paid in connection with this offering. SB may pay underwriting commissions of up
to $50 per Unit sold out of its own funds. SB will pay a portion of the
brokerage fees it receives to its registered representatives ("Financial
Consultants") who sell Units in the offering and who are registered with the
Commodity Futures Trading Commission ("CFTC") as associated persons of a futures
commission merchant for continuing services to be provided by such persons to
purchasers of Units. Those services will include (i) answering questions
regarding daily net asset value and computations thereof, monthly statements,
annual reports and tax information provided by the Partnership, (ii) providing
assistance to investors including when and whether to redeem the Units or
purchase additional Units and (iii) general servicing of accounts. A Financial
Consultant may be credited with up to approximately 85% of the amount of
brokerage fees attributable to Units sold by him. The brokerage fees will be
paid for the life of the Partnership, although the rate at which such fees are
charged may change. See "Plan of Distribution" and "The Commodity
Broker/Dealer -- Brokerage Fees". No portion of SB's brokerage fees will be paid
to any Financial Consultant who is not registered with the CFTC as an associated
person of a futures commission merchant.
(2) The Partnership began its initial offering of Units on August 21, 1995
and began trading on January 17, 1996 with an initial capitalization of
$8,617,000. As of February 29, 1996, the Partnership's Net Assets were
$10,491,900 and the Net Asset Value per Unit initially sold for $1,000 was
$928.25. During the Continuous Offering, subscription amounts will be held in
escrow at European American Bank, New York, New York, until the first business
day of the month in which the subscription is to take effect, at which time the
subscription funds will be transferred to the Partnership's trading account. The
funds held in escrow will be invested as the General Partner shall from time to
time direct by written instrument delivered to the escrow agent in an interest
bearing bank money market account. See "Plan of Distribution".
(3) The initial offering and organizational expenses of the Partnership
were capped at $525,000, which amount was paid by SB. This amount is being
recouped from interest earned on the Partnership's assets. The Limited
Partnership Agreement requires the Partnership to bear all of its offering
expenses of the Continuous Offering. Nonetheless, SB has agreed to pay the
expenses of the Continuous Offering in 1996 estimated at $275,000. This amount
will also be recouped from interest earned on the Partnership's assets. See
"Fees and Expenses to the Partnership" and "Redemptions".
(4) The minimum additional subscription during the Continuous Offering for
investors who are already limited partners will be $1,000 (except in Maine,
where the minimum additional subscription will be $5,000). In the case of sales
to employee-benefit plans including qualified corporate pension and
profit-sharing plans, "simplified employee pension plans," so-called, "Keogh"
(H.R. 10) plans and Individual Retirement Accounts, and subject to higher
minimum investment standards imposed by certain states as listed in Exhibit C
hereto, the minimum purchase is $2,000. See "ERISA Considerations."
------------------------
ii
<PAGE> 5
An annual report containing financial statements and the report of the
Partnership's independent accountants will be distributed to limited partners
not more than 90 days after the close of the Partnership's fiscal year.
------------------------
The Partnership is subject to the informational requirements of the
Securities Exchange Act of 1934 and in accordance therewith files reports and
other information with the Securities and Exchange Commission. Such reports and
other information can be inspected and copied at public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
and its Northeast regional office at 7 World Trade Center, Suite 1300, New York,
NY 10018 and its Midwest regional office at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, IL 60661. Copies of such material can be obtained
from the Public Reference Section of the Commission, Washington, D.C. 20549 at
prescribed rates.
------------------------
A COPY OF THE NASAA GUIDELINES FOR THE REGISTRATION OF COMMODITY POOL
PROGRAMS, AS AMENDED AND ADOPTED AS OF AUGUST 30, 1990, WILL BE PROVIDED TO ANY
PERSON, WITHOUT CHARGE, UPON REQUEST. SAID REQUEST MAY BE MADE IN WRITING TO THE
PARTNERSHIP, C/O SMITH BARNEY FUTURES MANAGEMENT INC., 390 GREENWICH STREET, NEW
YORK, NEW YORK 10013 OR BY CALLING (212) 723-5424.
NO PERSON IS AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE MATTERS
DESCRIBED HEREIN, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER BY ANY PERSON WITHIN ANY JURISDICTION TO ANY PERSON TO WHOM
SUCH OFFER WOULD BE UNLAWFUL. THE DELIVERY OF THIS PROSPECTUS AT ANY TIME DOES
NOT IMPLY THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT
TO THE DATE OF ITS ISSUE.
UNTIL AUGUST 30, 1996 (90 DAYS AFTER THE DATE HEREOF), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
------------------------
iii
<PAGE> 6
RISK DISCLOSURE STATEMENT
YOU SHOULD CAREFULLY CONSIDER WHETHER YOUR FINANCIAL CONDITION PERMITS YOU
TO PARTICIPATE IN A COMMODITY POOL. IN SO DOING, YOU SHOULD BE AWARE THAT
FUTURES AND OPTIONS TRADING CAN QUICKLY LEAD TO LARGE LOSSES AS WELL AS GAINS.
SUCH TRADING LOSSES CAN SHARPLY REDUCE THE NET ASSET VALUE OF THE POOL AND
CONSEQUENTLY THE VALUE OF YOUR INTEREST IN THE POOL. IN ADDITION, RESTRICTIONS
ON REDEMPTIONS MAY AFFECT YOUR ABILITY TO WITHDRAW YOUR PARTICIPATION IN THE
POOL.
FURTHER, COMMODITY POOLS MAY BE SUBJECT TO SUBSTANTIAL CHARGES FOR
MANAGEMENT, AND ADVISORY AND BROKERAGE FEES. IT MAY BE NECESSARY FOR THOSE POOLS
THAT ARE SUBJECT TO THESE CHARGES TO MAKE SUBSTANTIAL TRADING PROFITS TO AVOID
DEPLETION OR EXHAUSTION OF THEIR ASSETS. THIS DISCLOSURE DOCUMENT CONTAINS A
COMPLETE DESCRIPTION OF EACH EXPENSE TO BE CHARGED BY THIS POOL AT PAGES 17 AND
18 AND A STATEMENT OF THE PERCENTAGE RETURN NECESSARY TO BREAK EVEN, THAT IS, TO
RECOVER THE AMOUNT OF YOUR INITIAL INVESTMENT, AT PAGE 21.
THIS BRIEF STATEMENT CANNOT DISCLOSE ALL THE RISKS AND OTHER FACTORS
NECESSARY TO EVALUATE YOUR PARTICIPATION IN THIS COMMODITY POOL. THEREFORE,
BEFORE YOU DECIDE TO PARTICIPATE IN THIS COMMODITY POOL, YOU SHOULD CAREFULLY
STUDY THIS DISCLOSURE DOCUMENT, INCLUDING A DESCRIPTION OF THE PRINCIPAL RISK
FACTORS OF THIS INVESTMENT, AT PAGES 10-16.
YOU SHOULD ALSO BE AWARE THAT THIS COMMODITY POOL MAY TRADE FOREIGN FUTURES
OR OPTIONS CONTRACTS. TRANSACTIONS ON MARKETS LOCATED OUTSIDE THE UNITED STATES,
INCLUDING MARKETS FORMALLY LINKED TO A UNITED STATES MARKET, MAY BE SUBJECT TO
REGULATIONS WHICH OFFER DIFFERENT OR DIMINISHED PROTECTION TO THE POOL AND ITS
PARTICIPANTS. FURTHER, UNITED STATES REGULATORY AUTHORITIES MAY BE UNABLE TO
COMPEL THE ENFORCEMENT OF THE RULES OF REGULATORY AUTHORITIES OR MARKETS IN
NON-UNITED STATES JURISDICTIONS WHERE TRANSACTIONS FOR THE POOL MAY BE EFFECTED.
------------------------
iv
<PAGE> 7
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
------
<S> <C>
Risk Disclosure Statement................. iv
Summary of the Prospectus................. 1
The Offering............................ 1
The Partnership......................... 2
Financial Information................... 9
Risk Factors.............................. 10
Fees and Expenses to the Partnership...... 17
Potential Benefits to Investors........... 22
Conflicts of Interest..................... 23
Trading Policies.......................... 26
The General Partner....................... 27
Background.............................. 27
Principals.............................. 27
The Partnership -- Management's
Discussion and Analysis of Financial
Conditions and Results of Operation... 29
Performance of the Partnership.......... 30
Other Pools Operated by the General
Partner............................... 31
The Advisors..............................
Chesapeake Capital Corporation ......... 38
John W. Henry & Co., Inc................ 48
Millburn Ridgefield Corporation......... 66
Fiduciary Responsibility.................. 82
The Commodity Broker/Dealer............... 83
Income Tax Aspects........................ 86
Summary of Federal Income Tax
Consequences for United States
Taxpayers Who Are Individuals......... 87
Tax Consequences for Exempt
Organizations......................... 92
State, Local and Other Taxes............ 92
Summary of the United States Federal
Income Tax Consequences for Non-U.S.
Taxpayers............................. 93
<CAPTION>
Page
------
<S> <C>
Basis of Summary of Income Tax
Aspects............................... 93
Use of Proceeds........................... 93
Plan of Distribution...................... 94
Investment Requirements................... 95
Subscription Procedure.................... 96
The Limited Partnership Agreement......... 96
Liability of Limited Partners........... 97
Management of Partnership Affairs....... 97
Sharing of Profits and Losses........... 97
Additional Partners..................... 98
Restrictions on Transfer or
Assignment............................ 98
Dissolution of the Partnership.......... 99
Removal or Admission of General
Partner............................... 99
Amendments; Meetings.................... 99
Reports to Limited Partners............. 99
Power of Attorney....................... 100
Indemnification......................... 100
Redemptions............................... 100
ERISA Considerations...................... 101
Legal Matters............................. 103
Experts................................... 103
Additional Information.................... 103
Commodity Markets......................... 104
Commodity Futures....................... 104
Forward Contracts....................... 104
Uses of Commodity Markets............... 104
Options................................. 105
Regulation.............................. 105
Margins................................. 107
Financial Statements...................... 108
Glossary.................................. 121
Limited Partnership Agreement -- Exhibit
A....................................... A-1
Subscription Agreement -- Exhibit B....... B-1
Suitability Requirements -- Exhibit C..... C-1
</TABLE>
v
<PAGE> 8
SUMMARY OF THE PROSPECTUS
The following is a summary of the Prospectus. The Prospectus contains more
detailed information under the captions referred to below, and this summary is
qualified in its entirety by the information appearing elsewhere in this
Prospectus. See also the Glossary.
THE OFFERING
Securities Offered......100,000 Units at Net Asset Value per Unit as of the end
of each month during the Continuous Offering. Net Asset
Value is defined in the Glossary at page 121.
Minimum Subscription....The minimum subscription is $5,000, except for
subscriptions by employee-benefit plans (and subject to
higher minimums imposed by certain states) which may be
made for a minimum of $2,000. The minimum investment for
subscribers who are already limited partners will be
$1,000 (except in Maine, where the minimum additional
subscription will be $5,000). During the Continuous
Offering, the minimum subscription will purchase Units
and fractional Units (rounded to four decimal places) as
of the end of the last day of the month ending at least
5 days after a subscription is accepted. See "Plan of
Distribution". The General Partner and its affiliates
are free to purchase Units for investment purposes,
provided that in no event will total contributions by
these entities equal or exceed 10% of the total
contributions to the Partnership at any time.
Plan of Distribution....The Units will be offered through SB and possibly other
selling agents on a best efforts basis (so that neither
SB nor any other underwriter has agreed to purchase any
Units). Units will be offered until the earlier of the
sale of all 100,000 Units and two years after the date
of this Prospectus (the "Continuous Offering"). The
General Partner may determine to increase the number of
Units offered, or not to offer Units in a particular
month. For any subscriber wishing to subscribe for Units
as of the first day of a month, a completed Subscription
Agreement (Exhibit B to the Prospectus) must be received
by the General Partner at least 6 days previously.
Subscription funds must be delivered to the escrow agent
and will be held until the first business day of the
month in which the subscription is to take effect, at
which time the subscription funds will be transferred to
the Partnership's trading account. The General Partner
has sole discretion to offer additional Units but has no
present intention to do so. The General Partner may
reject any subscription for any reason. A subscription
may be revoked during the Continuous Offering within
five business days of the investor's subscription or if
the General Partner determines not to offer Units as of
the end of a month. See "Plan of Distribution" and
"Subscription Procedure".
Use of Proceeds.........The proceeds of the offering will be deposited in the
Partnership's trading accounts at SB and will be used to
trade in commodity interests including futures
contracts, options and forward contracts. Such proceeds
will be maintained in cash. A subscription will be
either accepted or rejected within four business days
from the receipt of the subscription by the General
Partner. See "Use of Proceeds".
Purchase of Units
by Retirement Plans...Participants in employee-benefit plans may be capable of
purchasing Units with a portion of their retirement
assets. See "ERISA Considerations".
1
<PAGE> 9
THE PARTNERSHIP
The Partnership.........Smith Barney Diversified Futures Fund L.P. II is a
limited partnership organized on May 10, 1994 under the
laws of the State of New York with the name Consulting
Group Managed Futures Fund L.P. The Partnership changed
its name as of July 31, 1995. The initial offering
period of the Units began August 21, 1995, and the
Partnership commenced trading operations on January 17,
1996. See "The Limited Partnership Agreement".
Risk Factors............An investment in the Partnership is speculative and
involves substantial risks. The risks of an investment
in the Partnership include, but are not limited to:
-- the speculative and volatile nature of trading in
commodity futures, forward and option contracts;
-- that commodity trading is highly leveraged and may be
illiquid;
-- the brokerage rate to be charged by the commodity
broker is 1/2 of 1% of month-end Net Assets per month
(6% per year) and is not determined by arm's-length
negotiation;
-- the possibility of incentive fees to be charged by
the General Partner (if it determines to act as a
trading advisor to the Partnership);
-- the fees and expenses which the Partnership incurs
regardless of the Partnership's trading performance;
-- substantial incentive fees may be paid during a year
even though the Partnership incurs a net loss for the
full year;
-- that the Partnership is subject to certain conflicts
of interest (including those arising from the
relationship between the General Partner and the
commodity broker/dealer);
-- the accounts of SB, the General Partner and their
affiliates (which may result in conflicts of interest
between these persons and entities and the
Partnership);
-- the control of other accounts by the Advisors;
-- other activities of SB (which may result in
competition or conflicts of interest between it and
the Partnership);
-- existence of other commodity pools sponsored and
established by the General Partner and SB and the
Advisors and their affiliates;
-- no public market for Units exists;
-- investors have limited voting rights with respect to
the Partnership's affairs;
-- the distribution of profits (which will be made, if
any, in the sole discretion of the General Partner);
and
-- profits earned in any year will result in an increase
in a limited partners' tax liability.
Dissolution of the
Partnership...........The Partnership will dissolve and its affairs be wound
up as soon as practicable upon the first to occur of the
following: (i) December 31, 2014; (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
2
<PAGE> 10
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. See "Risk
Factors -- Dissolution of the Partnership, Cessation of
Trading" and "The Limited Partnership Agreement --
Management of Partnership Affairs".
Offices.................The offices of the Partnership and the General Partner
are located at c/o Smith Barney Futures Management Inc.,
390 Greenwich Street, New York, New York 10013, (212)
723-5424.
Trading Policies........The Partnership's objective is to achieve capital
appreciation by engaging in speculative trading of a
diversified portfolio of commodity interests which may
include futures contracts, options, forward contracts
and physicals. There can be no assurance that the
Partnership's investment objective will be met. The
Partnership's trading policies, in summary, are to
invest Partnership funds only in commodity contracts
traded in sufficient volume to permit the ease of taking
and liquidating positions; that no additional positions
in a commodity will be initiated by an Advisor if such
positions would result in aggregate positions for all
commodities requiring as margin more than 66 2/3% of the
Partnership's assets allocated to that Advisor; that the
Partnership will not employ the trading technique
commonly known as "pyramiding"; that the Partnership
will not utilize borrowings except short-term borrowings
if the Partnership takes delivery of any cash
commodities; that the Partnership may, from time to
time, engage in spreads or straddles; and that the
Partnership will not permit the churning of its trading
accounts. This discussion is a summary only and is
qualified in its entirety by reference to the discussion
under "Trading Policies". See "Commodity Markets" and
"Trading Policies". The terms "pyramiding", "spreads"
and "straddles" are defined in the Glossary.
Management..............The General Partner of the Partnership is Smith Barney
Futures Management Inc., a corporation organized under
the laws of the State of Delaware and an affiliate of
Smith Barney Inc. ("SB"). SB acts as commodity
broker/dealer for the Partnership. The General Partner
administers the business and affairs of the Partnership.
The Advisors currently make trading decisions for the
Partnership. Each Advisor was initially allocated
one-third of the Partnership's assets to manage, but the
General Partner, consistent with its fiduciary duties to
the limited partners, may modify these allocations at
any time in its sole discretion. Future allocations to
the Advisors or additional advisors will be made at the
discretion of the General Partner. In allocating assets
to the Advisors, the General Partner has considered each
Advisor's past performance, trading style, volatility of
markets traded and fee requirements. All of the
Partnership's assets in its trading accounts at SB will
be available for trading, subject to the trading
policies of the Partnership.
-- Chesapeake currently trades pursuant to its
"Diversified Trading Program" and its "Financials and
Metals Program" for the Partnership. The Diversified
Trading Program emphasizes a maximum range of
diversification with a global portfolio of futures,
forward and cash markets which include, but are not
limited to, agricultural products, precious and
industrial metals, currencies, financial instruments,
and stock, financial and economic indices. The
Financials and Metals Program offers the opportunity to
achieve a diversified portfolio of investment in futures
and forward interest contracts worldwide, but
3
<PAGE> 11
specializes in the larger and more liquid markets now
available for trading.
-- JWH currently utilizes its Global Diversified
Portfolio and its Original Investment Program in its
management of the assets allocated to it by the
Partnership. The Global Diversified Portfolio utilizes
an intermediate-term trading system, which attempts to
identify and profit from market trends and to remain
neutral (i.e., no position taken) during non-trending
market periods. The Original Investment Program employs
a very long-term, trend-following reversal approach in
which a position, either long or short, is held in every
market at all times.
-- Millburn currently trades the World Resource
Portfolio version of its Diversified Program for the
Partnership. In the World Resource Portfolio, Millburn
trades a broadly diversified portfolio of approximately
fifty markets in the following six sectors: currencies,
precious and industrial metals, debt instruments, stock
indices, agricultural commodities and energy.
The Advisors may override computer-generated trading
signals or may adjust their trading programs in the
future. The Advisors are not affiliated with one another
and none is affiliated with the General Partner or SB.
Each Advisor makes its trading decisions independently.
The Advisors are not responsible for the organization or
operation of the Partnership. See "Conflicts of
Interest", "Fiduciary Responsibility" and "The Commodity
Broker/Dealer".
The limited partners do not participate in the
management or control of the Partnership. Under the
Limited Partnership Agreement, responsibility for
managing the Partnership is vested solely in the General
Partner. The General Partner is a fiduciary to the
limited partners. As such, the General Partner must
exercise good faith and fairness in all dealings
affecting the Partnership. In the event that a limited
partner believes the General Partner has violated its
fiduciary responsibility to the limited partners, he may
seek legal relief for himself or on behalf of the
Partnership, if the General Partner has refused to bring
the action, or if an effort to cause the General Partner
to bring the action is not likely to succeed, or may
have a right to bring a class action on behalf of all of
the limited partners, under applicable laws, including
partnership, commodities or securities laws, to recover
damages from or require an accounting by the General
Partner. Limited partners may also be afforded certain
rights for reparations under the Commodity Exchange Act
("CEA") for violations of the CEA by the General
Partner. The General Partner may be removed and
successor general partners may be admitted upon the vote
of a majority of the outstanding Units. See "The Limited
Partnership Agreement" and "Fiduciary Responsibility".
Any limited partner, upon written request addressed to
the General Partner, may obtain from the General Partner
a list of the names and addresses of record of all
limited partners and the number of Units held by each
limited partner. Upon receipt of a written request
delivered in person or by certified mail, signed by
limited partners owning at least 10% of the outstanding
Units, that a meeting of the Partnership be called to
consider any matter upon which limited partners may vote
pursuant to the Limited Partnership Agreement, the
General Partner, by written notice to each limited
partner of record mailed within 15 days after such
receipt, must call a meeting of the Partnership. Such
meeting must be held at least 30 but not more than 60
days after the mailing of such notice and the notice
must specify the date, a reasonable time and place, and
the purpose of such meeting.
See "Risk Factors" and "Fees and Expenses to the
Partnership."
4
<PAGE> 12
Fiscal Year.............The fiscal year of the Partnership will commence on
January 1 and end on December 31 each year ("fiscal
year").
Fees and Expenses
to the Partnership....The Partnership will pay substantial fees to the
Advisors and SB. The Partnership will pay each Advisor 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 month-end Net Assets) allocated to the respective
Advisor. (Management fees are subject to an overall
limitation in the Limited Partnership Agreement and the
Revised Commodity Pool Guidelines of the North American
Securities Administrators Association, Inc. (the "NASAA
Guidelines"), as described under "Fees and Expenses to
the Partnership -- Caps on Fees".) The Partnership will
also pay each Advisor an incentive fee payable quarterly
equal to 20% of the New Trading Profits earned by each
Advisor for the Partnership (except JWH, which will
receive an incentive fee of 15% of New Trading Profits),
including unrealized appreciation on open positions, as
of the end of each period. (Incentive fees are subject
to the limits imposed by the NASAA Guidelines and the
Limited Partnership Agreement, as described under "Fees
and Expenses to the Partnership -- Caps on Fees".) New
Trading Profits does not include interest earned or
accrued during the period. Since the Advisors' incentive
fees are paid quarterly, substantial incentive fees may
be paid during a year even though the Partnership may
incur a net loss for the full year.
The Customer Agreement provides that the Partnership
will pay SB a monthly brokerage fee equal to 1/2 of 1%
of month-end Net Assets (6% per year) in lieu of
brokerage commissions on a per trade basis. (The
brokerage fee -- together with National Futures
Association ("NFA"), exchange, floor brokerage, give-up,
user and clearing fees -- is subject to the limitation
imposed by the NASAA Guidelines, as described under
"Fees and Expenses to the Partnership -- Caps on Fees".)
See "Fees and Expenses to the Partnership -- The
Commodity Broker/Dealer". SB will pay a portion of such
brokerage fees to its Financial Consultants who have
sold Units in this offering and who are registered as
associated persons with the CFTC. Such Financial
Consultants would be credited with a maximum of 5% of
Net Assets per year in return for continuing services to
be provided by them to Unit holders as described under
"The Commodity Broker/Dealer -- Brokerage Fees".
Brokerage fees will be paid for the life of the
Partnership, although the rate at which such fees are
paid may be changed. Based on an estimate of the number
of transactions generated by the Advisors in customer
accounts in 1995, the fee that the Partnership pays is
estimated to equal $48.98 per round-turn transaction (as
defined in the Glossary), of which $44.50 is brokerage
commissions and $4.48 is other trading-related fees. The
General Partner will review, at least annually, the
brokerage rates charged to other comparable commodity
pools to the extent practicable, to determine that the
brokerage rates being paid by the Partnership are
competitive with such other rates. The General Partner
will renegotiate the Customer Agreement if its fiduciary
duties so require. Brokerage fees will not exceed the
limit imposed in the NASAA Guidelines. The General
Partner, consistent with the restrictions imposed by the
Limited Partnership Agreement attached hereto as Exhibit
A, as well as the NASAA Guidelines discussed below, may
negotiate for increased brokerage fees in appropriate
circumstances. The Partnership shall seek the best
prices and services available in its commodity futures
brokerage transactions. The NASAA Guidelines provide
that a brokerage commission is presumptively
5
<PAGE> 13
reasonable if it is 80% of the published retail rate
plus pit brokerage fees or if it (including pit
brokerage fees) is 14% annually of the average Net
Assets of the Partnership (excluding Partnership assets
not directly related to trading activity). See "The
Commodity Broker/Dealer -- Brokerage Fees". The
brokerage fee payable to SB for a year would equal a
maximum of $6,000,000 per year assuming that the
Partnership sold the maximum amount of Units offered
hereby at $1,000 per Unit and Net Assets remained at the
same level for the year. On these assumptions, Financial
Consultants could be credited with a maximum of
$5,000,000.
The Partnership will pay or reimburse SB if previously
paid for National Futures Association ("NFA"), exchange,
clearing, user, give-up and floor brokerage fees, all of
which are estimated to be up to .8% of Net Assets per
year. The Partnership will effect all transactions in
spot and forward foreign currencies with SB at prices
quoted by SB which do not include a mark-up.
The General Partner bears such general and
administrative expenses of the Partnership as may be
incurred, but (except as noted below) the Partnership
pays all of its legal, accounting, filing, reporting and
data processing expenses, incentive fees, management
fees, brokerage fees, expenses of the Continuous
Offering and extraordinary expenses (only periodic
filing and reporting fees are subject to an overall
limitation in the Limited Partnership Agreement as
described under "Fees and Expenses of the
Partnership -- Cap on Fees"). The aggregate annual
expenses of every character paid or incurred by the
Partnership, including management fees, advisory fees
and all other fees, except for incentive fees, commodity
brokerage fees, the actual cost of legal and audit
services and extraordinary expenses, when added to the
customary and routine administrative expenses of the
Partnership, shall in no event exceed, on an annual
basis, 1/2 of 1% of Net Assets per month (6% per year).
For the purpose of this limitation, customary and
routine administrative expenses shall include all
expenses of the Partnership other than commodity
brokerage fees, incentive fees, the actual cost of legal
and audit services and extraordinary expenses.
The Partnership was not initially responsible for the
payment of offering and organizational expenses related
to the initial offering period which were borne by SB.
SB currently recoups the offering and organizational
expenses related to the initial offering ($525,000)
(together with interest at the prime rate quoted by The
Chase Manhattan Bank, N.A.) from interest earned on the
Partnership's cash in segregated bank accounts. The
accrued liability for reimbursement of offering and
organizational expenses of the initial offering period
will not reduce Net Asset Value per Unit for any purpose
(other than financial reporting), including calculation
of management and brokerage fees and the purchase and
redemption value of Units. SB has agreed to pay the
expenses of the Continuous Offering in 1996 estimated at
$275,000. This amount (together with interest at the
prime rate quoted by The Chase Manhattan Bank, N.A.)
will also be recouped from interest earned on the
Partnership's assets. SB may, but is not required to,
pay any expenses incurred in connection with the 1997
Continuous Offering. There is no cap on the amount of
such expenses to be paid by SB and the offering expenses
that may be paid or reimbursed to SB by the Partnership
are capped at 15% of the Partner's aggregate
subscriptions. SB pays monthly interest to the
Partnership on 80% of the average daily equity
maintained in cash in the Partnership's account. Such
segregated bank accounts do not ordinarily earn
interest. Interest used to reimburse SB will not be
taken into account in computing
6
<PAGE> 14
brokerage or management fees. See "Fees and Expenses to
the Partnership", "Plan of Distribution" and
"Redemptions".
The table below summarizes the fees and expenses to the
Partnership:
<TABLE>
<CAPTION>
ENTITY FORM OF COMPENSATION AMOUNT OF COMPENSATION
------------------- ---------------------------- ----------------------------
<S> <C> <C>
Advisors........... Monthly management fee 1/6 of 1% (2% per year) or
(Subject to cap) 1/3 of 1% (4% per year) of
month-end Net Assets.
Quarterly incentive fee 20% or 15% of New Trading
(Subject to cap) Profits earned by each
Advisor for the
Partnership in each
calendar quarter.
Commodity Brokerage fee 1/2 of 1% of month-end Net
Broker............. (Subject to cap) Assets per month (6% per
(SB) year)(1) (a portion of
which will be paid to SB
Financial Consultants who
have sold Units in this
offering), and
reimbursement of other ac-
tual transaction fees paid
in connection with trading
estimated at .8% of Net
Assets.
Others............. Periodic legal, accounting, Actual expenses incurred
filing and reporting fees, estimated at between .5% and
expenses of the Continuous 2.4% of Net Assets per
Offering as well as year (exclusive of
extraordinary expenses extraordinary expenses).
</TABLE>
----------------------------------------
(1) Brokerage fees will be paid for the life of the
Partnership, but the rate at which such fees will be
paid may change, provided that such fees (i) remain
competitive with the brokerage rates paid by public
commodity pools which are comparable to the
Partnership, (ii) will not be increased for the first
five years of trading if any Advisor is affiliated with
the General Partner and (iii) will not exceed the
limitations imposed by the NASAA Guidelines, which
provide that brokerage fees (together with NFA,
exchange, floor brokerage, give-up, user and clearing
fees) will be considered presumptively reasonable if
they do not exceed 14% annually of the Partnership's
Net Assets (excluding Partnership assets not directly
related to trading activity). SB may receive a benefit
with respect to Partnership assets maintained in cash
as described below under the heading "Fees and Expenses
to the Partnership -- Commodity Broker/Dealer."
Interest Income.........All of the Partnership's assets will be deposited in
cash in brokerage accounts at SB. SB deposits the
Partnership's cash in segregated bank accounts as
required by CFTC regulations. Such accounts do not earn
interest. However, SB will pay monthly interest to the
Partnership on 80% of the average daily equity
maintained in cash in the Partnership's account at SB
during each month at a 30-day Treasury bill rate
determined weekly by SB based on the average
non-competitive yield on 3-month U.S. Treasury bills
maturing in 30 days (or on the maturity date closest
thereto) from the date on which such weekly rate is
determined. Interest payments to the Partnership will be
used to reimburse SB for the offering and organizational
expenses of the initial offering period (as capped at
$525,000), and the expenses of the Continuous Offering
for 1996 (estimated at $275,000), plus interest at the
prime rate quoted by The Chase Manhattan Bank, N.A.
Interest used to reimburse SB will not be taken into
account in calculating brokerage or management fees. All
assets in the Partnership's accounts may be used to meet
margin requirements. SB intends to require the
Partnership to meet its standard customer margin
requirements which may be greater than exchange minimum
levels. SB may benefit from the use of the Partnership's
cash to the extent that such use reduces SB's interest
expense in an amount greater than the amount of interest
payments received by the Partnership. See "Commodity
Markets -- Margins" and "The Commodity
Broker/Dealer -- Customer Agreement".
Break-even Analysis.....The General Partner estimates that during each fiscal
year, the Partnership would be required to make trading
profits equal to 10.80% assuming 18,000
7
<PAGE> 15
Units (approximately the number of Units sold as of
February 29, 1996) are sold and 6.78% assuming 100,000
Units are sold ($107.98 and $67.78, respectively, based
upon a $1,000 investment) of the Net Asset Value per
Unit in order for the value of a Unit at year end to
equal the initial value of that Unit at the beginning of
the year. Assuming 18,000 Units are sold, this estimate
consists of the following: (i) the brokerage fee of 6%
of Net Assets per year (6% of Net Assets), (ii) a
management fee of 2.67% (represents a blended average)
per year (2.49% of Net Assets), (iii) NFA, exchange,
clearing, floor brokerage, give-up and user fees which
may equal up to approximately .8% of Net Assets per year
(.8% of Net Assets), (iv) legal, accounting, reporting
and filing fees and expenses of the Continuous Offering
in 1996 estimated at $425,000 (2.36% of Net Assets per
year), (v) initial offering and organizational expenses
of $525,000 (2.91% of Net Assets), and (vi) interest
income equal to approximately 3.76% of Net Assets.
Assuming 100,000 Units offered hereby are sold, this
estimate consists of the following: (i) the brokerage
fee of 6% of Net Assets per year (6.18% of Net Assets),
(ii) a management fee of 2.67% (represents a blended
average) per year (2.56% of Net Assets), (iii) NFA,
exchange, clearing, floor brokerage, give-up and user
fees which may equal up to approximately .8% per year
(.82% of Net Assets), (iv) legal, accounting, reporting
and filing fees and expenses of the Continuous Offering
in 1996 estimated at $450,000 (.45% of Net Assets), (v)
initial offering and organizational expenses of $525,000
(.53% of Net Assets), and (vi) interest income equal to
approximately 3.76% of Net Assets. See "Fees and
Expenses to the Partnership."
Redemptions.............Beginning with the quarter ending June 30, 1996, on 10
days' notice to the General Partner, a limited partner
may require the Partnership to redeem his Units at their
Net Asset Value as of the last day of a month. Because
Net Asset Value fluctuates daily, Limited Partners will
not know the redemption value of their Units at the time
their notice of redemption is submitted. The General
Partner reserves the right to permit the redemption of
Units more frequently than monthly (but no more
frequently than daily), provided that such action is in
the best interest of the Partnership taking into account
potential tax consequences to Limited Partners. See
"Redemptions". No fee is charged for redemptions. The
Partnership's assets are generally valued at fair market
value, or in the absence of a fair market value, as
determined in good faith by the General Partner. Options
are generally valued at the last sale price or, in the
absence of a last sale price, the last bid price. The
value of a futures contract equals the unrealized gain
or loss on the contract that is determined by marking it
to the current settlement price for a like contract
acquired on the day on which the futures contract is
being valued. A settlement price may not be used if the
market makes a limit move with respect to a particular
commodity. Forward contracts and futures contracts, when
no market quote is available, will be valued at their
fair market value as determined by the General Partner.
The accrued liability for reimbursement of offering and
organizational expenses incurred during the initial
offering period will not reduce Net Asset Value per Unit
for any purpose (other than financial reporting),
including calculation of advisory and brokerage fees and
the purchase and redemption value of Units. Interest
earned by the Partnership will be used to reimburse SB
for the offering and organizational expenses of the
Partnership in connection with the initial offering
period (capped at $525,000) and the Continuous Offering
in 1996 (estimated at $275,000) until such expenses are
reimbursed.
8
<PAGE> 16
Distributions...........Distributions of profits, if any, will be made in the
sole discretion of the General Partner and at such times
as the General Partner may decide. In view of the fact
that a limited partner may redeem his Units and no
charge is assessed upon redemption, the General Partner
has no current intention of making any distributions. In
any event, the General Partner does not intend to make
any distribution which would reduce the Net Asset Value
of a Unit below $1,000, or if the size of a distribution
would not warrant the administrative expense which would
be involved, or if, in the opinion of the General
Partner, a distribution would otherwise not be in the
best interests of the Partnership or the limited
partners. The determination of what is in the best
interests of the Partnership or limited partners will be
made on a case by case basis by the General Partner in
its sole discretion and consistent with its fiduciary
obligations to the Partnership and the limited partners.
To the extent that profits are retained by the
Partnership, the Net Assets of the Partnership will be
greater, thereby increasing the amount of the brokerage
fee which will be earned by SB. See "Conflicts of
Interest". A limited partner's tax liability for profits
of the Partnership may exceed the amount of any
distributions received from the Partnership. See "Risk
Factors -- Tax Consequences" and "Income Tax Aspects".
Income Tax Aspects......The trading activities of the Partnership, in general,
generate capital gain and loss and ordinary income.
Counsel to the Partnership has opined that the
Partnership will be treated as a partnership for federal
income tax purposes. Accordingly, the Partnership pays
no federal income tax; rather, limited partners are
allocated their proportionate share of the taxable
income or losses realized by the Partnership during the
period of the Partnership's taxable year that Units were
owned by them. Unrealized gains on "Section 1256
contracts" as defined in the Internal Revenue Code of
1986 (the "Code") held by the Partnership at the end of
its taxable year must be included in income under the
"mark-to-market" rule and will be allocated to partners
in proportion to their respective capital accounts. The
mark-to-market rule does not apply to the Partnership's
positions in futures contracts on most foreign exchanges
and in foreign currency forward contracts not in the
interbank market, unless the Partnership elects such
treatments under Code Section 988.
The Partnership should not generate to Exempt
Organizations unrelated business taxable income that
would result from an investment in a publicly-traded
partnership.
FINANCIAL INFORMATION
STATEMENT OF FINANCIAL CONDITION OF THE PARTNERSHIP(1)
DECEMBER 31, 1995
<TABLE>
<S> <C>
Total Assets (cash).............................................. $ 2,000
======
Partners' Capital................................................ $ 2,000
======
</TABLE>
----------------------------------------
(1) As of December 31, 1995, the Partnership had not
commenced commodities trading activities, and the
only transactions were the organization of the
Partnership, the preparation of the initial offering
and capital contributions of $1,000 by the General
Partner and $1,000 by one limited partner. See
"Financial Statements".
9
<PAGE> 17
RISK FACTORS
INVESTMENT IN THE UNITS IS SPECULATIVE AND INVESTORS SHOULD NOT INVEST IN
UNITS UNLESS THEY CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT. PROSPECTIVE
PURCHASERS SHOULD CONSIDER THE FOLLOWING RISKS BEFORE SUBSCRIBING FOR UNITS.
COMMODITY TRADING RISKS
COMMODITY TRADING IS SPECULATIVE. Commodity futures markets are highly
volatile. Profitability of the Partnership's commodity trading will depend on
the ability of the Advisors to analyze the commodity markets, which are
influenced by, among other things, changing supply and demand relationships,
weather, government agricultural, commercial and trade programs and policies,
national and international political and economic events and changes in interest
rates. See "Commodity Futures Markets". The Advisors' technical trading methods
do not generally take into account such fundamental factors except to the extent
such factors are reflected in the technical input data analyzed by some of the
Advisors. The Advisors may trade futures contracts on stock indices. Such
contracts have experienced substantial volatility. While a volatile market can
produce trends which might be identified by the trend-following strategies
employed by some of the Advisors, such markets can also be without sustained
price trends. Participation in a volatile market without significant trends
could produce substantial losses for the Partnership.
COMMODITY TRADING IS HIGHLY LEVERAGED. Because of the low margin deposits
normally required in commodity futures trading, a high degree of leverage is
typical of a commodity trading account. AS A RESULT, A RELATIVELY SMALL PRICE
MOVEMENT IN A COMMODITY CONTRACT MAY RESULT IN SUBSTANTIAL LOSSES TO THE
INVESTOR. For example, if at the time of purchase 10% of the price of the
futures contract is deposited as margin, a 10% decrease in the price of the
futures contract would, if the contract is then closed out, result in a total
loss of the margin deposit before any deduction for the brokerage fee. Thus,
like other leveraged investments, any purchase or sale of a commodity contract
may result in losses to the Partnership in excess of the amount initially
deposited by the Partnership as margin with respect to that contract. SB does
not intend to require the Partnership to deposit and maintain margin with
respect to its forward currency trading. The General Partner will, however,
impose trading limits on forward trading. See "Commodity Markets -- Margins".
COMMODITY TRADING MAY BE ILLIQUID. Most commodity exchanges limit
fluctuations in commodity contract prices during a single day by regulations
referred to as "daily price fluctuation limits" or "daily limits". During a
single trading day no trades may be executed at prices beyond the daily limit.
Once the price of a contract for a particular commodity has increased or
decreased by an amount equal to the daily limit, positions in the commodity can
be neither taken nor liquidated unless traders are willing to effect trades at
or within the limit. Commodity futures prices have moved the daily limit for
several consecutive days with little or no trading in the past. Similar
occurrences could prevent the Partnership from promptly liquidating unfavorable
positions and thus subject the Partnership to substantial losses. See "Commodity
Markets -- Regulations".
RISKS OF PURCHASING AND WRITING OPTIONS. The Partnership may engage in the
trading of commodity options on exchanges. Such trading involves risks
substantially similar to those involved in trading commodity futures contracts
in that options are speculative and highly leveraged. Specific market movements
of the commodities or futures contracts underlying an option cannot accurately
be predicted. The purchaser of an option is subject to the risk of losing the
entire purchase price of the option. The writer of an option is subject to the
risk of loss resulting from the difference between the premium received for the
option and the price of the commodity or futures contract underlying the option
which the writer must purchase or deliver upon exercise of the option. The
Advisors currently do not trade options extensively, but may do so in the
future. The Partnership may trade in over-the-counter currency options to the
extent permitted by CFTC regulation.
RISKS INHERENT IN TRADING STRATEGIES. Trading decisions of the Advisors
may be based on both fundamental and technical analysis. Fundamental analysis
examines factors external to the trading markets which affect the supply and
demand for a particular commodity in order to predict future prices. Such
analysis may not result in trading profits because of the impact of unexamined
factors affecting supply and demand, incorrect interpretation of certain
factors, the effect of unrelated factors or the inability of fundamental
10
<PAGE> 18
analysis to enable an Advisor to determine that previous decisions were
incorrect in sufficient time to avoid substantial losses. The buy and sell
decisions based on technical and trend-following strategies are not based on
analysis of fundamental supply and demand factors, general economic factors or
anticipated world events. The profitability of such trading programs depends
upon occurrence in the future of major price moves or trends in commodities. In
the past there have been periods without trends and such periods may recur. The
past performance of such trading programs is not necessarily indicative of their
future profitability, and no trading program can consistently determine which
commodity futures contracts to enter into or when to enter into them. The best
commodity trading program will not be profitable if there are no trends of the
kind it seeks to identify and follow. Any factor which may lessen the prospect
of major trends in the future (such as increased government control of, or
participation in, the markets) may reduce the Advisors' ability to trade
profitably in the future. Any factor which would make it more difficult to
execute timely trades, such as a significant lessening of liquidity in a
particular market, would also be detrimental to profitability. AS A RESULT OF
THESE FACTORS AND THE GENERAL VOLATILITY OF THE COMMODITIES MARKETS, INVESTORS
SHOULD VIEW THEIR INVESTMENT AS LONG TERM (AT LEAST 2 YEARS) IN ORDER TO PERMIT
THE STRATEGIES OF THE ADVISORS TO FUNCTION OVER TIME. ALTHOUGH THE ADVISORS'
STRATEGIES MAY BE VIEWED AS LONG-TERM, SUCH STRATEGIES MAY ENTAIL THE FREQUENT
OPENING AND CLOSING OF PARTICULAR TRADING POSITIONS. Further, commodity trading
advisors may alter their strategies from time to time in an attempt better to
evaluate market movements. As a result of such periodic modifications, it is
possible that the trading strategies used by the Advisors in the future may be
different from those presently in use. Further, the total amount of funds being
managed by each Advisor may be substantially increased by the addition of the
Partnership's account. Moreover, somewhat different trading strategies may be
required for accounts of differing sizes or trading objectives. See "The
Advisors -- Trading Strategies". Limited partners will be notified of material
changes in the Advisors' trading strategies.
POSSIBLE EFFECTS OF SPECULATIVE POSITION LIMITS. The CFTC and U.S.
exchanges have established limits referred to as "speculative position limits"
on the maximum net long or net short position which any person may hold or
control in particular futures and options on futures, and most exchanges have
established limits referred to as "trading limits" on the amount of fluctuation
in commodity futures contract prices on a single trading day. Currently, trading
limits do not generally apply to currency futures contracts. See "Commodity
Markets -- Regulation". All commodity futures and options accounts owned or
controlled directly or indirectly by each Advisor or its principals, including
the Partnership's account, are combined for speculative position limit purposes.
Each Advisor believes that established speculative position and trading limits
will not adversely affect its trading for the Partnership. However, it is
possible that the trading instructions of an Advisor for the Partnership may
have to be modified and that positions held by the Partnership may have to be
liquidated in order to avoid exceeding such limits. Such modification or
liquidation, if required, could adversely affect the operations and
profitability of the Partnership. Furthermore, in the unlikely event that
positions in other pools operated by the General Partner but not advised by one
of the Advisors or other accounts managed by SB or its employees are required to
be aggregated with the Partnership's positions, it is more likely that the
trading instructions of the Advisors for the Partnership would have to be
modified and that positions held by the Partnership would have to be liquidated
in order to avoid exceeding such limits. Neither CFTC nor exchange position nor
trading limits apply to forward contracts in foreign currencies.
POSSIBLE EFFECTS OF COMPETITION. The Partnership may experience increased
competition for the best prices on the same commodity contracts, not only
because of the utilization by other persons of trend following trading
strategies (see "Possible Effects of Other Trend-Following Programs"), but also
because at February 29, 1996, commodity accounts aggregating approximately $2.7
billion (including notional funds), and $2.6 billion (excluding notional funds),
were being managed by the Advisors. Trading orders for such accounts similar to
those of the Partnership are likely to occur contemporaneously. The Advisors
enter trading orders either through the SB order desk or through a floor broker
selected by the Advisor. Orders placed with SB are transmitted through a floor
broker selected by SB and the order fill is then relayed to the Advisor. For
orders entered through a floor broker selected by the Advisor, such orders are
given with instructions to the floor broker to give up the trade to SB for order
clearance and the Advisor provides SB with a list of such "give up" trades
initiated by the floor broker. There is no specific limit under any agreement
between any Advisor and the Partnership as to the number of accounts which may
be managed or advised by that Advisor, so that such competition could be further
increased if the Advisor chooses to manage additional accounts in the
11
<PAGE> 19
future. The performance of the Partnership's investments in commodity interests
could also be adversely affected by the manner in which particular orders are
entered by an Advisor for all such accounts traded by that Advisor.
TRADING IN FORWARD FOREIGN CURRENCIES. The Partnership will engage in the
trading of forward contracts in foreign currencies. In this connection, the
Partnership contracts with SB to make or take future delivery of a particular
foreign currency. Although the foreign currency market is not believed to be
necessarily more volatile than the market in other commodities, there is less
protection against defaults in the forward trading of currencies than there is
in trading such currencies on an exchange since such forward contracts are not
guaranteed by an exchange or clearing house. Investors are not afforded the
regulatory protections of such exchanges or the CFTC; rather, banks and dealers
act as principals in such markets. Neither the CFTC nor banking authorities
regulate trading in forward foreign currencies. There are no limits on daily
price movements or on speculative positions in this market. Moreover, principals
are not required to continue to make markets in these contracts. The CFTC has
indicated that it may assert jurisdiction over forward contracts in foreign
currencies and attempt to prohibit certain entities from engaging in such
transactions. In the event that such prohibition included the Partnership, the
Partnership would cease trading such contracts. Either of the Advisors may trade
forward contracts in foreign currencies extensively for the Partnership's
account and thus, such a cessation of forward trading could have a substantial
adverse effect on the performance of those Advisors. There are no limits on an
Advisor's ability to trade currency forwards other than the trading policies of
the Partnership and the allocation to each Advisor. See "Trading Policies".
TRADING ON FOREIGN EXCHANGES AND TRADING IN PHYSICAL COMMODITIES. The
Partnership may trade in commodity contracts on exchanges located outside the
U.S. such as the London International Financial Futures Exchange and the Sydney
Futures Exchange. Trading on such exchanges is not regulated by the CFTC and
may, therefore, be subject to more risks than trading on domestic exchanges such
as the risks of exchange controls, expropriation, burdensome taxation, moratoria
and political or diplomatic events. See "Commodity Markets -- Regulation". There
are no limits on the Advisors' ability to trade on CFTC-approved foreign markets
in accordance with the Partnership's trading policies. See "Trading Policies."
The Partnership may engage in spot commodity transactions (transactions in
physical commodities), including contracts on foreign currencies. Such spot
transactions are not regulated by the CFTC. Some of such transactions may be
entered into in conjunction with exchange for physical transactions. In any
principal transactions entered by the Partnership, the Partnership is subject to
the risk of the inability of, or refusal by, a counterparty to perform with
respect to the underlying contract. Such transactions may be entered into with
SB or an affiliate at prices quoted by SB which will not include a mark-up.
RISKS OF PARTNERSHIP FUNDS HELD IN FOREIGN DEPOSITORIES. The Partnership's
funds held in connection with contracts on U.S. contract markets that are priced
and settled in a foreign currency may be held in accounts denominated in a
foreign currency with a depository located outside the United States or its
territories. The Partnership currently does not intend to maintain any of its
assets with depositories located outside the United States or its territories.
There are no limits on the amount of funds that may be held in foreign
depositories or in funds that may be denominated in foreign currencies. See "Use
of Proceeds". Such accounts are subject to the risk that events could occur
which would hinder or prevent the availability of these funds for distribution
to customers including the Partnership. Such accounts may also be subject to
foreign currency exchange rate risks. The Partnership has agreed with SB, its
future commission merchant, that in order to avoid the possible dilution of
other customer funds, any Partnership claims based on such funds will be
subordinated in the unlikely event that both of the following conditions are
met: (A) SB is placed in receivership or bankruptcy and (B) there are
insufficient funds available for distribution denominated in the foreign
currency as to which the Partnership has a claim to satisfy all claims against
those funds. The Partnership has agreed with SB that if both conditions (A) and
(B) occur, the Partnership's claim against SB's assets attributable to funds
held overseas in a particular foreign currency may be satisfied out of
segregated customer funds held in accounts denominated in dollars or other
foreign currencies only after each customer whose funds are held in dollars or
in such other foreign currencies receives its pro rata portion of such funds.
12
<PAGE> 20
RISKS OF PARTNERSHIP STRUCTURE
SUBSTANTIAL FEES AND EXPENSES TO THE PARTNERSHIP. The Partnership is
obligated to pay brokerage fees, legal, accounting and reporting expenses and
filing fees regardless of whether the Partnership realizes profits. Incentive
fees payable by the Partnership are based upon New Trading Profits earned by
each Advisor for the Partnership at the end of each fiscal quarter, including
any unrealized appreciation on open commodity positions. Such appreciation may
never be realized by the Partnership; however, any such lost appreciation would
have to be recovered before another incentive fee would be payable. It should be
noted that since the Advisors' incentive fees are paid quarterly, substantial
incentive fees may be paid during a year even though the Partnership may incur a
net loss for the full year. In addition, the Partnership is obligated to pay
incentive fees based on trading profits generated by each Advisor regardless of
whether the Partnership as a whole is profitable in a particular period.
Therefore, it is possible that the Partnership could incur substantial incentive
fees in a year in which it had no net trading profits or in which it actually
lost money. A $1,000 Unit would have to increase between 6.78% (assuming 100,000
Units offered hereby are sold) or 10.80% (assuming 18,000 Units are sold) in the
first year of trading operations (that is, by between $67.78 and $107.98) for
the redemption value per Unit to equal $1,000. The Partnership is therefore
required to make trading profits and interest income equal to the aforementioned
percentage in order to avoid depletion or exhaustion of its assets from these
expenses. See "Fees and Expenses to the Partnership".
CONFLICTS OF INTEREST. Conflicts of interest exist in the structure and
operation of the Partnership's business. These conflicts include (1) the
conflict between the duty of the General Partner to act in the best interests of
the Partnership and any advantage to SB, an affiliate of the General Partner,
resulting from the trading of the Partnership's account, and (2) the probable
competition with the Partnership by SB, each of the Advisors, the General
Partner and other commodity pools and accounts organized or advised by such
persons, or their principals, affiliates or customers. The Limited Partnership
Agreement requires the General Partner to review brokerage rates at least
annually and to determine that such rates are competitive with those charged to
other similar commodity pools. In addition, the General Partner, as a fiduciary
to the limited partners, must resolve any conflict in favor of the limited
partners. See "Conflicts of Interest".
NO PUBLIC MARKET FOR UNITS EXISTS. Although a limited partner may transfer
his Units as of the first day of any fiscal quarter, no market exists for their
sale and none is likely to develop. In addition, a transferee of a Unit can only
become a substituted limited partner with the General Partner's consent. See
"The Limited Partnership Agreement -- Restrictions on Transfer or Assignment".
However, a limited partner may require the Partnership to redeem some or all of
his Units at their Net Asset Value as of the last day of any month on 10 days'
notice to the General Partner. Under extraordinary circumstances, including
market conditions that would prohibit the liquidation of positions, the
Partnership may delay redemptions beyond the end of the applicable month. See
"Redemptions".
LIMITED PARTNERS WILL NOT PARTICIPATE IN MANAGEMENT. Purchasers of the
Units are not entitled to participate in the management or control of the
Partnership or the conduct of its business. Limited Partners have limited voting
rights with respect to the Partnership's affairs. See "The Limited Partnership
Agreement -- Management of Partnership Affairs".
EXPIRATION OF MANAGEMENT AGREEMENTS WITH THE ADVISORS. The Management
Agreements between the General Partner and each of the Advisors expire on June
30, 1996. No assurance is given that the services of an Advisor will be
available on the terms contained in its Management Agreement after its
expiration (provided, however, that in any contract renewal or renegotiation an
existing Advisor will carry forward all losses attributable to that Advisor), or
that a new advisor would agree to such terms. See "The Advisors -- Management
Agreements". In the event that a new advisor is selected, New Trading Profits
earned by the new advisor will not be reduced by cumulative net realized trading
losses, if any, incurred by the prior advisor. Any fees paid to a new or
replacement advisor will comply with NASAA Guidelines. Subject to the caps of
fees to which the Partnership is generally subject, the fees payable by the
Partnership to an Advisor could increase following the termination of a
management agreement, either according to the terms of a new management
agreement, or if a new advisor were selected by the General Partner for the
Partnership.
13
<PAGE> 21
DISSOLUTION OF THE PARTNERSHIP; CESSATION OF TRADING. The Partnership will
dissolve on December 31, 2014, unless earlier dissolved pursuant to the Limited
Partnership Agreement, regardless of its financial condition or market positions
on such date. Liquidation of positions at such date may result in losses to the
Partnership. The Partnership may cease trading and liquidate all open positions
prior to its dissolution. The General Partner will dissolve the Partnership if
Net Asset Value per Unit falls below $400 as of the end of a trading day. See
"The Limited Partnership Agreement -- Dissolution of the Partnership" and "The
Limited Partnership Agreement -- Management of Partnership Affairs."
In the event of early cessation of trading, the Partnership would continue
to accrue legal, accounting, reporting and filing expenses.
NO INDEPENDENT REVIEW. The Partnership, the General Partner and SB are
affiliated entities and are represented by single counsel. Therefore, to the
extent the Partnership and this offering would benefit by independent review,
such benefit will not be available in this offering. There may also be an
absence of arm's-length negotiations with respect to some of the terms of this
offering, including with respect to the Customer Agreement and Selling Agreement
with SB. The General Partner believes that the terms received by the Partnership
with respect to such negotiation are no less favorable to the Partnership than
they would be as a result of arm's-length negotiations. The Advisors are each
represented by themselves or by their own counsel.
OPERATING HISTORY OF PARTNERSHIP AND GENERAL PARTNER. The CFTC requires
commodity pool operators to disclose to prospective pool participants the actual
performance record of their pools for at least the previous five years. The
Partnership commenced trading operations on January 17, 1996 (see table at page
30). However, the General Partner currently operates over eighteen other active
commodity pools. The performance records of these pools are set forth under the
caption "The General Partner -- Other Pools Operated by the General Partner".
Investors should note that the advisors to such pools operated by the General
Partner may vary from the Advisors for the Partnership, and that the trading
strategies of such advisors may also vary from those employed by the Advisors.
INVESTORS SHOULD NOTE THAT THE PERFORMANCE RECORDS OF THE GENERAL PARTNER'S
OTHER COMMODITY POOLS ARE NOT INDICATIVE OF THE PERFORMANCE OF THE PARTNERSHIP.
RELIANCE ON ADVISORS AND KEY PERSONNEL. The Partnership will rely on the
Advisors to manage its portfolio. There can be no assurance that the respective
trading systems and strategies used by the Advisors will prove to be successful
under all or any market conditions. In addition, each Advisor relies on key
personnel to implement its trading strategies and is therefore subject to the
risk that those individuals may be unable to implement such trading strategies.
The General Partner may terminate an Advisor in certain circumstances and may
replace such Advisor with a new advisor or may make trading decisions for the
Partnership itself, but it is extremely unlikely that the General Partner or
replacement advisor would trade in the same way that the terminated Advisor
traded for the Partnership. See "The Advisors -- Management Agreements."
RESTRICTIONS ON TRANSFER OR ASSIGNMENT. The Limited Partnership Agreement
provides that a limited partner may assign his Units upon notice to the General
Partner. No assignment of Units will be effective against the Partnership or the
General Partner until the commencement of the next fiscal quarter after the
General Partner receives such notice. Without the consent of the General Partner
(which consent may be withheld at its sole and absolute discretion for the
purpose of preserving the Partnership's tax status or to avoid adverse legal
consequences to the Partnership), no assignee may become a substituted limited
partner. An assignee who becomes a substituted limited partner will be subject
to all of the rights and liabilities of a limited partner of the Partnership. An
assignee who does not become a substituted limited partner will be entitled to
receive the share of the profits or the return of capital to which his assignor
would otherwise be entitled, but will not be entitled to vote, to an accounting
of Partnership transactions, to receive tax information or to inspect the books
and records of the Partnership.
LEGAL AND REGULATORY RISKS
TAX LIABILITY MAY EXCEED CASH DISTRIBUTIONS. Cash will be distributed to
the partners in the sole discretion of the General Partner, and the General
Partner may determine not to make a distribution in any particular year of the
Partnership. The Partnership's taxable income for a fiscal year (including both
realized
14
<PAGE> 22
income and income resulting from marking-to-market positions in regulated
futures contracts) will be taxable to the partners in accordance with their pro
rata shares of Partnership profits for tax purposes whether or not any cash has
been distributed to the partners. As a result, cash distributions to a limited
partner in a given year may be less than the taxes payable by that partner with
respect to Partnership profits for that year. However, subject to certain
conditions and exceptions, each partner may redeem his Units (as of the end of
any month) in order to provide funds for the payment of taxes or for any other
purpose. See "Redemptions" and "Income Tax Aspects".
POSSIBILITY OF TAXATION AS A CORPORATION. The General Partner has been
advised by Willkie Farr & Gallagher, its attorneys, that under current federal
income tax laws and regulations and given the factual assumptions set forth
under "Income Tax Aspects", the Partnership will be classified as a partnership
and not as an association taxable as a corporation. Such opinion is not binding
on the Internal Revenue Service. No ruling has been obtained from the Internal
Revenue Service in this regard and the Partnership does not intend to apply for
any such ruling. The facts and authorities relied upon by counsel in their
opinion may change in the future. See "Income Tax Aspects -- Classification as a
Partnership". If the Partnership should be treated as a corporation for federal
income tax purposes, income or loss of the Partnership would not be passed
through to the partners, and the Partnership would be subject to tax on its
income at the rate of tax applicable to corporations. In addition, all or a
portion of distributions of Partnership income would generally be taxable to the
partners as corporate dividends, and the partners' tax on such distributions
would be in addition to the corporate tax paid by the Partnership on the same
income.
TAXATION OF COMMODITY INTERESTS. Commodity interests are subject to
special tax rules, which rules will apply to the taxation of Partnership income
and loss. There can be no assurance that the Internal Revenue Service will not
issue regulations that would adversely affect the expected treatment of
Partnership transactions or that such regulations would not be given retroactive
effect. Finally, Willkie Farr & Gallagher cannot opine on whether and to what
extent Partnership transactions would be taken into account by the Internal
Revenue Service in determining the tax consequences of transactions entered into
by a partner in his individual capacity. See "Income Tax Aspects".
ABSENCE OF REGULATION APPLICABLE TO SECURITIES MUTUAL FUNDS AND THEIR
ADVISORS. Since the purpose of the Partnership is to trade commodities, the
Partnership has not registered as a securities investment company, or "mutual
fund", subject to extensive regulation by the Securities and Exchange Commission
imposed upon such entities under the 1940 Act. Therefore, investors may not be
accorded the protective measures provided by such legislation. In addition, none
of the Advisors is registered as an investment adviser under the Investment
Advisers Act of 1940 or any similar state law. However, the General Partner is a
CFTC-registered commodity pool operator and each of the Advisors is a
CFTC-registered commodity trading advisor. See "Commodity
Markets -- Regulation". Any determination that the Partnership be required to
register as an investment company under the 1940 Act could have serious adverse
consequences for the Partnership, the General Partner, the Advisors and the
limited partners. In the event of such determination (or for any other reason),
the General Partner may, in its discretion, withdraw from the Partnership,
causing its dissolution.
REGULATION OF COMMODITY POOL OPERATORS AND COMMODITY TRADING ADVISORS. The
General Partner is a registered commodity pool operator and each of the Advisors
is a registered commodity trading advisor, as required by Federal law. Any
determination by the CFTC to terminate, suspend, revoke or not renew the
registration of the General Partner would cause the General Partner to withdraw
as general partner of the Partnership; the limited partners would then determine
to select a replacement general partner (as provided in the Limited Partnership
Agreement) or to dissolve the Partnership. Any determination by the CFTC to
terminate, suspend, revoke or not renew the registrations of any of the Advisors
would cause the General Partner to terminate the respective Management Agreement
with such Advisor, as permitted in the Management Agreements. The General
Partner could reallocate the Partnership's assets managed by that Advisor to the
other advisors; or appoint a new advisor (including itself).
15
<PAGE> 23
SALES AND DISTRIBUTION RISKS
PARTICIPATION OF PROMOTERS. SB and the General Partner have been
instrumental in the organization of the Partnership and may be deemed
"promoters" of the Partnership within the meaning of Rule 405 under the
Securities Act of 1933. No selling agent which is not affiliated with the
General Partner and SB has made an investigation of the offering or has
participated in the negotiation of its terms or the structuring of the
Partnership.
NO ASSURANCE THAT UNITS WILL BE SOLD. The offering of Units is being made
on behalf of the Partnership through SB on a best efforts basis without any
commitment by an underwriter to purchase any of the Units. Therefore, no
assurance is given that all of the Units will be sold. See "Plan of
Distribution".
CONSIDERATIONS FOR NON-U.S. INVESTORS. Non-U.S. investors should note that
Units are denominated in U.S. dollars and that changes in rates of exchange
between currencies may cause the value of the investment to diminish or to
increase. Non-U.S. investors should consult their own tax advisors concerning
local tax implications of this investment.
The foregoing list of Risk Factors does not purport to be a complete
explanation of the risks involved in this offering. Potential investors should
read the entire Prospectus before determining to invest in the Units.
16
<PAGE> 24
FEES AND EXPENSES TO THE PARTNERSHIP
The Partnership is subject to the following fees and expenses which are
described in more detail below:
<TABLE>
<CAPTION>
ENTITY FORM OF COMPENSATION AMOUNT OF COMPENSATION
- ------------------------- --------------------------------- ---------------------------------
<S> <C> <C>
Advisors................. Monthly management fee 1/6 of 1% (2% per year) to
(Subject to cap) Chesapeake and Millburn or 1/3
of 1% (4% per year) to JWH of
month-end allocated Net Assets.
(These fees are subject to an
overall limitation in the
Limited Partnership Agreement
and the NASAA Guidelines, as
described below.)
Quarterly incentive fee 20% to Chesapeake and Millburn or
(Subject to cap) 15% to JWH of New Trading
Profits earned by each Advisor
for the Partnership in each
calendar quarter. (Incentive
fees are subject to the limits
imposed by the NASAA Guidelines
and the Limited Partnership
Agreement, as described below.)
Commodity Brokerage fee 1/2 of 1% of month-end Net
Broker................... (Subject to cap) Assets per month (6% per year)(1)
(SB) (a portion of which will be
paid to SB Financial
Consultants who have sold Units
in this offering), and
reimbursement of other actual
transaction fees paid in
connection with trading
estimated at .8% of Net Assets.
(The brokerage fee -- together
with NFA, exchange, floor
brokerage, give-up, user and
clearing fees -- are subject to
the limitation imposed by the
NASAA Guidelines, as described
below.)
(continued on next page)
</TABLE>
17
<PAGE> 25
<TABLE>
<CAPTION>
ENTITY FORM OF COMPENSATION AMOUNT OF COMPENSATION
- ------------------------- --------------------------------- ---------------------------------
<S> <C> <C>
Others................... Periodic legal, accounting, Actual expenses incurred
filing and reporting fees, estimated at between .5% and 2.4%
expenses of the Continuous of Net Assets per year
Offering as well as (exclusive of extraordinary
extraordinary expenses expenses). (Periodic filing and
reporting fees and expenses of
the Continuous Offering are
subject to an overall
limitation in the Limited
Partnership Agreement as
described below.)
</TABLE>
- ---------------
(1) Brokerage fees will be paid for the life of the Partnership, but the rate at
which such fees will be paid may change, provided that such fees (i) remain
competitive with the brokerage rates paid by public commodity pools which
are comparable to the Partnership, (ii) will not be increased for the first
five years of trading if any Advisor is affiliated with the General Partner
and (iii) together with NFA, exchange, floor brokerage, give-up, user and
clearing fees, will not exceed the limitations imposed by the NASAA
Guidelines. SB may receive a benefit with respect to Partnership assets
maintained in cash as described below under the heading "Fees and Expenses
to the Partnership -- Commodity Broker/Dealer."
The table below estimates for a one year period the dollar amount of the
brokerage fee (6% of Net Assets per year) payable to SB and the dollar amount of
the management fee paid by the Partnership to the Advisors (the management fee
used for this calculation was 2.67%. This represents an average fee payment
based upon either a 4% or 2% management fee as paid to the respective Advisors).
The table is based on the assumptions that (i) either 18,000 or 100,000 Units
are sold (at $1,000 per Unit) and (ii) Net Asset Value remains constant for the
entire one year period.
<TABLE>
<CAPTION>
18,000 100,000
UNITS SOLD UNITS SOLD
---------- ----------
<S> <C> <C>
Commodity Broker.................................................... $1,087,848 $6,043,598
Advisors............................................................ $ 481,672 $2,675,954
</TABLE>
There is no cap on incentive fees or on brokerage fees, together with NFA,
exchange, floor brokerage, give-up, user and clearing fees, other than that
imposed by the NASAA Guidelines.
CAPS ON FEES. Fees to which the Partnership is subject are in turn subject
to several limitations imposed by the Limited Partnership Agreement or the NASAA
Guidelines or both as follows. (A) The Limited Partnership Agreement contains an
overall limitation on expenses which provides that the aggregate annual fees and
expenses of every kind paid or incurred by the Partnership ("Aggregate
Expenses"), including management fees, advisory fees and all other fees except
for incentive fees and commodity brokerage fees, when added to the customary and
routine administrative expenses of the Partnership, shall in no event exceed, on
an annual basis, 1/2 of 1% of Net Assets per month as required by the NASAA
Guidelines. For the purpose of this limitation, customary and routine
administrative expenses include all expenses of the Partnership other than
commodity brokerage fees, incentive fees, the actual cost of legal and
accounting services and extraordinary expenses. Periodic filing and reporting
fees are also subject to this overall limitation. There is no cap on the costs
of legal and accounting services or extraordinary expenses. (B) In addition, as
provided in the Limited Partnership Agreement and the NASAA Guidelines, the
aggregate incentive fee paid by the Partnership shall not exceed 15% of New
Trading Profits, except that an additional 2% incentive fee may be paid for each
1% by which the Partnership's Aggregate Expenses are reduced below 6% annually.
(C) Furthermore, the NASAA Guidelines also provide that brokerage fees (together
with NFA, exchange, floor brokerage, give-up, user and clearing fees) will be
considered presumptively reasonable if they do not exceed 14% annually of the
Partnership's Net Assets (excluding Partnership assets not directly related to
trading activity).
18
<PAGE> 26
In addition, the Limited Partnership Agreement prohibits the payment of
management and incentive fees to any person who receives brokerage commissions
or fees on transactions for the Partnership, as well as the payment by any
broker of rebates or give-ups to any advisor. Such prohibitions may not be
circumvented by any reciprocal business arrangements.
In no event will organizational and offering expenses exceed 15% of the
Partners' capital contributions.
ADVISORS. THE PARTNERSHIP PAYS EACH ADVISOR A MONTHLY MANAGEMENT FEE EQUAL
TO 1/6 OF 1% (2% PER YEAR) OF MONTH-END NET ASSETS (EXCEPT THAT JWH RECEIVES A
MONTHLY MANAGEMENT FEE EQUAL TO 1/3 OF 1% (4% PER YEAR) OF MONTH-END NET ASSETS)
ALLOCATED TO THE RESPECTIVE ADVISOR. THE PARTNERSHIP ALSO PAYS AN INCENTIVE FEE
PAYABLE QUARTERLY EQUAL TO 20% OF NEW TRADING PROFITS EARNED BY CHESAPEAKE AND
MILLBURN FOR THE PARTNERSHIP AND 15% OF NEW TRADING PROFITS EARNED BY JWH TO THE
RESPECTIVE ADVISORS. The quarterly incentive fees payable to the Advisors (for
purposes of calculating the Net Asset Value as of the end of the month that is
not the end of a quarter) will be accrued on a monthly basis. New Trading
Profits are computed solely based on commodity trading. "New Trading Profits"
earned by an Advisor is defined in the Management Agreement as the excess, if
any, of Net Assets managed by the Advisor at the end of the fiscal period over
Net Assets managed by the Advisor 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 are attributed to each
Advisor based on the Advisor's proportionate share of Net Assets and shall not
include management fees of the Partnership's other Advisors. Ongoing expenses
above do not include expenses of litigation not involving the activities of the
Advisor on behalf of the Partnership. No incentive fee will be paid until the
end of the first full calendar quarter of trading, which fee will be based on
New Trading Profits earned from the commencement of trading through the end of
the calendar quarter ending on June 30, 1996.
If any payment is made to an Advisor with respect to New Trading Profits
earned by an Advisor for the Partnership, and the Partnership thereafter incurs
a net loss for any subsequent period, the Advisor will retain the amount
previously paid in respect of New Trading Profits. If Net Assets allocated to
the Advisor are reduced due to redemptions, distributions or reallocations,
there will be a proportional reduction in the related loss carryforward amount
that must be recouped before the Advisor is eligible to receive another
incentive fee. Since the incentive fee is paid quarterly, substantial incentive
fees may be paid to an Advisor during a fiscal year even though the account
managed by the Advisor may incur a net loss for the full year. For example, if
at the end of the last fiscal quarter an Advisor had earned New Trading Profits
of $500,000, that Advisor would be paid an incentive fee of 20% (or, in the case
of JWH, 15%) thereof, or $100,000 (or $75,000) respectively. That Advisor would
be entitled to retain that $100,000 (or $75,000) even if that account
experienced losses during the subsequent fiscal quarter. However, that Advisor
would not be again entitled to an incentive fee until such losses incurred by
that Advisor were recovered.
The following table is provided in order to illustrate the effect of
management fees, incentive fees and brokerage commissions payable by the
Partnership over a two-year period if beginning Net Assets is assumed to
represent the sale during the offering period of 18,000 or 100,000 Units and to
include the General Partner's investment in the Partnership (resulting in a
total of either 18,182 or 101,010 units of limited and general partnership
interest). The table reflects the calculation of brokerage fees of 1/2 of 1% of
month-end Net Assets per month, management fees of 1/6 or 1/3 of 1% of month-end
Net Assets and incentive fees of 20% or 15% of New Trading Profits. The table
assumes that (i) the Partnership's Net Assets increase as a result of New
Trading Profits at a constant rate of 2% per month (26.8% per year on a compound
basis), (ii) no redemptions or cash distributions are made and (iii) the
Partnership has no interest income.
19
<PAGE> 27
MANAGEMENT FEES, INCENTIVE FEES AND BROKERAGE FEES
<TABLE>
<CAPTION>
NET
TOTAL FEES TOTAL FEES ASSET VALUE
18,000 100,000 PER UNIT AT
PER UNIT UNITS SOLD UNITS SOLD END OF YEAR
-------- ----------- ------------ -----------
<S> <C> <C> <C> <C>
First Year.................................. $ 123.12 $ 2,238,629 $ 12,436,689 $1,130.96
Second Year................................. $ 139.23 $ 2,531,411 $ 14,063,241 $1,279.10
-------- ----------- ------------
Totals............................ $ 262.35 $ 4,770,040 $ 26,499,930
</TABLE>
Thus, if the Partnership's Net Assets increased as a result of New Trading
Profits by 2% each month, the investor's Units would each have a Net Asset Value
at the end of the first year of $1,130.96, having paid per Unit management fees,
incentive fees and brokerage commissions of approximately $123.12.
COMMODITY BROKER/DEALER. SB initially paid offering and organizational
expenses of the initial offering period estimated at $900,000. Of the $900,000,
$525,000 will be reimbursed from interest income earned by the Partnership and
SB will bear the remaining $375,000 itself. In addition, SB has agreed to pay
the expenses of the 1996 Continuous Offering, which expenses will also be
reimbursed by the Partnership from interest income. Interest used to reimburse
SB will not be taken into account in computing brokerage or management fees. See
"Plan of Distribution" and "The Commodity Broker/Dealer -- Customer Agreement".
SB may, but is not required to, pay any expenses incurred in connection with the
1997 Continuous Offering. SB acts as commodity broker/dealer for the
Partnership. The Partnership has agreed to pay SB a monthly commodity brokerage
fee equal to 1/2 of 1% of month-end Net Assets (6% per year). The Partnership
pays a flat rate brokerage fee instead of per transaction brokerage commissions.
However, based on an estimate of the number of transactions generated by the
Advisors in their customer accounts in 1995 the fee that the Partnership pays is
estimated to equal $48.98 per round-turn transaction (of which $44.50 is
brokerage commission and $4.48 is other trading-related fees). The brokerage
rate may be substantially higher than the rate which SB charges certain other
customers with accounts of a similar size. The brokerage fees will be paid for
the life of the Partnership, although the rates at which such fees are paid may
change. See "The Commodity Broker/Dealer -- Brokerage Fees". Brokerage fees will
not exceed the limit imposed by the NASAA Guidelines. The Partnership enters
into spot and forward transactions with SB as principal at prices quoted by SB
which reflect a price differential between the bid and the ask prices (which
differential includes anticipated profits and costs to SB as dealer), but do not
include a mark-up. The spread charged on related party trades will be at or
below market prices. Thus, the price quoted to the Partnership will be less than
or equal to the price quoted to any other SB account for the same forward or
spot transaction.
The Partnership's funds will be maintained in cash and deposited by SB in
segregated bank accounts as required by CFTC regulations. Such accounts do not
earn interest. SB has informal arrangements with various banks with which it
does business pursuant to which it obtains overdraft privileges which are
extended as a result of the total banking relationship between SB and the banks
which includes the deposit of customer funds so segregated (although such funds
cannot be attached by the bank in the event of the failure of SB to repay the
overdraft). As a result of such overdraft privileges, SB is usually able to
reduce its other short term borrowings which generally carry a higher interest
rate than the 30-day U.S. Treasury bill yield.
The Partnership will pay, or will reimburse SB if previously paid by SB on
behalf of the Partnership, for any NFA, exchange, floor brokerage, give-up, user
or clearing fees applicable to the Partnership's trading. Such fees and charges
will be paid to the exchange on which the trades are effected, to the floor
broker or brokerage executing a transaction, to the clearing association for
such exchange or to the NFA. Although it is impossible to predict the amount of
such fees accurately, based on the past performance of the Advisors, the
Partnership could pay up to approximately .8% of Net Assets per year to cover
these fees. This is an estimate and not a cap. Such fees are subject to various
caps as discussed in this section under "Caps on Fees".
OTHERS. The Partnership is obligated to pay periodic legal, accounting,
filing, reporting and data processing fees and the expenses of the Continuous
Offering which may equal up to approximately .5% of Net Assets ($450,000) if
100,000 Units offered hereby are sold and 2.4% of Net Assets ($425,000) if
18,000 Units offered hereby are sold. The Limited Partnership Agreement requires
the Partnership to bear all of its offering
20
<PAGE> 28
expenses of the Continuous Offering. Nonetheless, SB has agreed to pay the
expenses of the Continuous Offering in 1996 estimated at $275,000. This amount
will also be recouped from interest earned on the Partnership's assets. See
"Commodity Broker/Dealer" above. The Partnership also bears any extraordinary
expenses incurred by it. Any and all other general and administrative expenses
of the Partnership are borne by the General Partner.
BREAK-EVEN ANALYSIS
The following table is a summary of fees and expenses expressed both as a
dollar amount and as a percentage of a $1,000 investment in the Partnership. See
"Fees and Expenses to the Partnership." The break-even point per Unit (that is,
the trading profit the Partnership must realize in the first year of a limited
partner's investment so that such investment at the end of the year is equal to
its value at the beginning of the year), assuming a limited partner purchases
Units at $1,000 each as of the beginning of the year and redeems its Units at
the end of the first year of its investment, is 10.80%, or $107.98 per Unit
(assuming the estimated Partnership size is $18,000,000), or 6.78%, or $67.78
per Unit (assuming the estimated Partnership size is $100,000,000).
<TABLE>
<CAPTION>
ESTIMATED PARTNERSHIP SIZE
---------------------------
<S> <C> <C>
$18,000,000 $100,000,000
----------- ------------
Selling Price Per Unit(1)....................................... $ 1,000.00 $ 1,000.00
----------- ------------
Interest Income Credit(2)....................................... $ (37.60) $ (37.60)
Brokerage Fees(3)............................................... $ 68.00 $ 70.01
Trading Advisors' Management Fees(4)............................ $ 24.88 $ 25.62
Initial and Continuous Offering Expenses(5)..................... $ 44.40 $ 8.00
Operating Expenses(6)........................................... $ 8.30 $ 1.75
Amount of Trading Income Required for the Partnership's Net
Asset Value per Unit at the End of One Year to Equal the
Selling Price per Unit........................................ $ 107.98 $ 67.78
----------- ------------
Percentage of Selling Price per Unit............................ 10.80% 6.78%
========== ===========
</TABLE>
- ---------------
(1) Investors will purchase Units at the prevailing Net Asset Value per Unit.
Approximately 18,000 Units were sold as of February 29, 1996. The Net Asset
Value per Unit as of February 29, 1996 was $928.25.
(2) The Partnership earns interest income on 80% of the average daily equity
maintained in the Partnership's cash accounts at a rate equal to the average
yield on the 30-day U.S. Treasury bills issued during each month. For
purposes of this analysis, interest income was estimated at 3.76% of the
Partnership's Net Asset Value (assuming an estimated annual interest rate of
4.7%). Interest used to reimburse SB for offering and organizational
expenses (see Note (5) below) will not be taken into account in calculating
brokerage or management fees.
(3) Brokerage fees were estimated at 6.8% (6% for brokerage fees and .8% for
other trading-related expenses) of Net Assets.
(4) The Partnership's Advisors are paid management fees ranging from 2% to 4%. A
blended rate of 2.67% of Net Assets was used for purposes of this analysis.
(5) Initial organizational and offering expenses were borne by SB. SB currently
recoups these expenses (capped at $525,000, together with interest at the
prime rate quoted by The Chase Manhattan Bank N.A.) from interest earned on
the Partnership's cash in its segregated bank accounts. The accrued
liability for reimbursement of offering and organizational expenses of the
initial offering period will not reduce Net Asset Value per Unit for any
purpose (other than financial reporting), including calculation of
management and brokerage fees and the purchase and redemption value of
Units. SB has agreed to pay the expenses of the Continuous Offering in 1996
estimated at $275,000. This amount (together with interest at the prime rate
quoted by The Chase Manhattan Bank N.A.) will also be recouped from interest
earned on the Partnership's assets. (See Note (2) above).
(6) Operating expenses include periodic legal, accounting, filing and reporting
fees, but do not include extraordinary expenses. These expenses are expected
to amount to either $150,000 or $175,000 assuming
21
<PAGE> 29
either 18,000 or 100,000 Units offered hereby are sold, respectively.
Assuming 18,000 Units are sold this estimate consists of (i) legal expenses
of $50,000, (ii) accounting expenses of $50,000 and (iii) other expenses
(such as filing and reporting fees) of $50,000. Assuming 100,000 Units are
sold, this estimate is comprised of (i) legal expenses of $50,000, (ii)
accounting expenses of $50,000 and (iii) other expenses (such as filing and
reporting fees) of $75,000.
The Advisors will also receive an incentive fee of 20%, or 15% in the case
of JWH. These amounts have not been included in the table above because they are
calculated based on Trading Profits after deducting all of the Partnership's
expenses.
POTENTIAL BENEFITS TO INVESTORS
Investment in the Units is speculative and involves risks, including the
risk of loss. See "Risk Factors". However, investment in the Partnership offers
the following potential advantages:
PROFESSIONAL TRADING MANAGEMENT. Commodity trading decisions are made for
the Partnership by the Advisors. The Advisors manage the commodity investments
of the Partnership pursuant to the trading policies of the Partnership and
certain trend-following techniques and other technical and fundamental
strategies. The performance of commodity accounts managed by the Advisors is
described under "The Advisors".
DIVERSIFICATION. The assets of the Partnership will normally be invested
in a number of commodities, so that each limited partner will obtain greater
diversification in commodities traded than would be possible trading
individually unless substantially more than the $5,000 minimum investment
($2,000 in the case of employee-benefit plans, and subject to higher minimums in
certain states) required by the Partnership were committed to the commodity
markets. See "Trading Policies" and "The Advisors".
Allocating a portion of the risk segment of a portfolio to a managed
futures investment, such as the Partnership, can add a potentially valuable
element of diversification to a traditionally structured stock and bond
portfolio. Historically, the returns of many managed futures investments have
exhibited a substantial degree of non-correlation with the performance of the
general equity and debt markets (as reflected in the performance of various
market indices such as the Standard & Poor's 500 Index for domestic equities,
the Lehman Brothers Bond Index for debt and the Morgan Stanley Europe, Australia
and the Far East Index for international equities), suggesting that a managed
futures component may provide a valuable complement to a traditional portfolio.
This benefit of adding a managed futures component to a portfolio is an
application of Modern Portfolio Theory. Modern Portfolio Theory is an analytical
framework that suggests that is possible for an investor to construct a
portfolio using multiple asset classes that attempts to balance desired returns
with tolerable risk (volatility as measured by standard deviation). This
objective can be achieved by adding investments for which the desired return has
a low to negative or non-correlation to the other assets in the portfolio.
Consequently, allocating a limited portion of the risk segment of a portfolio to
a managed futures program such as the Partnership, if the managed futures
performance is in fact non-correlated with stocks and bonds, can potentially
improve the overall return and reduce the volatility of total portfolio over the
long term.
Although the General Partner generally endorses the modern portfolio
theory, there can be no assurance that any managed futures investment will be
successful, avoid substantial losses or generate performance non-correlated with
the equity or debt markets. Furthermore, non-correlation is not negative
correlation. Even if the performance of the Partnership is non-correlated with
these markets, this does not mean that the Partnership's results will not
parallel either or both during significant periods of time. In any event, unless
a managed futures investment is successful, it cannot add a potentially valuable
element of diversification to a portfolio.
MULTI-ADVISOR TRADING. The General Partner has selected multiple Advisors
for the Partnership in an attempt to protect against losses while retaining the
ability to make profits for the Partnership. Due to the different trading
methods to be employed for the Partnership, losses incurred by one of the
Advisors may be offset in whole or in part by profits earned by the other
Advisors during the same time period, although there is no guarantee that this
result will occur. In fact, profits earned by one Advisor may be entirely offset
by losses incurred by the other Advisors.
22
<PAGE> 30
LIMITED LIABILITY. Unlike an individual who invests directly in commodity
futures or forward contracts, an investor in the Partnership cannot be
individually subjected to margin calls and cannot lose more than the amount of
his contribution to the Partnership and his share of the Partnership's profits
(including distributions of profits and payments on redemption of his Units). It
is possible for a limited partner to lose the entire amount of his contribution
to the Partnership. See "Commodity Markets -- Margins" and "The Limited
Partnership Agreement -- Liability of Limited Partners".
INTEREST INCOME. SB will pay the Partnership interest on 80% of the
average daily equity maintained in cash in the Partnership's trading accounts
with SB. The Partnership will reimburse SB for the total amount of offering and
organizational expenses of the initial offering period (capped at $525,000), and
expenses of the Continuous Offering in 1996 (estimated at $275,000), plus
interest at the prime rate quoted by The Chase Manhattan Bank, N.A., from
interest income. An individual trader would generally not receive interest on
the funds in his commodity account unless he committed substantially more than
the $5,000 minimum investment required by the Partnership. See "The Commodity
Broker/Dealer -- Customer Agreement".
BROKERAGE FEES. The Partnership pays SB a fixed monthly brokerage fee
equal to 1/2 of 1% of month-end Net Assets (6% per year) in lieu of brokerage
commissions on a per trade basis. The Partnership will also pay certain fees in
connection with its trading as described under "Fees and Expenses to the
Partnership -- Others." See "Fees and Expenses to the Partnership -- Commodity
Broker/Dealer". The Partnership may therefore pay lower commission rates than
many public customers of SB. Certain public customers of SB may pay lower
commission rates than the Partnership pays, and other commodity brokerage firms
might offer lower rates to an account the size of the Partnership's because
different accounts require different levels of service and monitoring based upon
the number of advisors and the volume and complexity of trading. In addition,
pursuant to its Customer Agreement with SB, the Partnership will receive several
administrative services, such as account reconcilement, payment of fees and
expenses, crediting of interest income and assistance with regulatory filings
and monthly reports. These types of services may not be provided to certain
other public customers of SB and may account for the possibly higher fees paid
by the Partnership. See "Commodity Broker/Dealer -- Customer Agreement".
Brokerage fees will be paid for the life of the Partnership, although the rate
at which such fees are paid may change. See "Conflicts of Interest" and "The
Commodity Broker/Dealer -- Brokerage Fees".
ADMINISTRATIVE CONVENIENCE. The Partnership provides investors with many
services designed to simplify the administrative details involved in engaging
directly in commodities transactions, including maintaining the books and
accounts of trading activities, preparing monthly and annual reports to limited
partners and supplying limited partners with information necessary for
individual federal tax returns. See "The Limited Partnership
Agreement -- Reports to Limited Partners".
CONFLICTS OF INTEREST
The following inherent or potential conflicts of interest should be
considered by prospective investors before subscribing for Units:
RELATIONSHIP BETWEEN THE GENERAL PARTNER AND THE COMMODITY
BROKER/DEALER. The General Partner is an affiliate of SB, which acts as the
commodity broker/dealer for the Partnership. Since SB charges the Partnership a
monthly brokerage fee based on Net Assets rather than a per transaction
commission, the General Partner has no incentive to select advisors that will
generate a large number of trades to benefit SB. Instead, the General Partner
may have a conflict of interest between its responsibility to manage the
Partnership for the benefit of the limited partners and its interest in
selecting advisors that will generate a small number of trades, thus incurring
small amounts of charges incidental to trading so that Net Assets, from which
SB's fees are paid, remain relatively higher. Furthermore, the less active the
trading, the fewer services SB will be required to provide to the Partnership
with respect to such trading. In addition, the General Partner may have an
incentive to select advisors that trade more forward and spot contracts than
futures and options contracts, since forward and spot prices may include a
profit margin to SB as dealer. Because the General Partner is an affiliate of
SB, the General Partner has a potential conflict of interest in its decision to
replace the futures commission merchant, if necessary. The fact that the General
Partner and SB are affiliated creates a
23
<PAGE> 31
potential conflict in that the fees received by SB may not have been set by
"arm's-length" negotiation. The General Partner is a fiduciary to the limited
partners and, as such, must resolve any conflict in favor of the limited
partners. Prospective investors should be aware that because SB and certain
Financial Consultants (excluding principals of the General Partner) receive a
portion of the commodity brokerage fees generated by the Partnership and
allocated to outstanding Units sold by them, SB and such Financial Consultants
may have a conflict of interest in advising subscribers as to whether they
should redeem their Units or purchase additional Units. Except as otherwise set
forth in this section, no other conflict of interest exists on the part of any
other principal of SB. See "The Commodity Broker/Dealer -- Brokerage Fees".
BROKERAGE RATE CHARGED BY THE COMMODITY BROKER/DEALER. Pursuant to the
Customer Agreement between the Partnership and SB, SB acts as the commodity
broker/dealer for the Partnership. Because the General Partner is an affiliate
of SB, the General Partner may have a conflict of interest between its
responsibility to manage the Partnership for the benefit of the limited partners
and its interest in obtaining brokerage rates which are favorable to SB. SB
charges the Partnership a monthly brokerage fee equal to 1/2 of 1% of month-end
Net Assets (6% per year). Although the Customer Agreement is non-exclusive, so
that the Partnership has the right to seek lower brokerage rates from other
brokers at any time, the General Partner believes that the arrangements between
the Partnership and SB are consistent with arrangements other comparable
commodity pools have entered into with other futures commission merchants and
are fair to the Partnership and does not intend to negotiate with SB to obtain
lower commission rates or to refer brokerage transactions to other firms.
However, the General Partner will review, at least annually, the commission
rates charged to other comparable commodity pools to determine that the
brokerage fee being paid by the Partnership is competitive with such other
rates. The General Partner, as a fiduciary to the limited partners, must resolve
any conflict in favor of the limited partners. Therefore, at the time of such
review, the General Partner will consider whether any action need be taken in
light of its obligations to the Partnership, and will advise the limited
partners of any action so taken. Limited partners would not be able to require
the General Partner to take any specific action, but could vote to terminate the
Customer Agreement with SB (with the vote of limited partners owning more than
50% of the Units) if independent counsel provides the General Partner with an
opinion that such vote would not affect their status as limited partners. See
"The Limited Partnership Agreement -- Amendments; Meetings".
DISTRIBUTION OF PROFITS. The General Partner has sole discretion as to the
distribution of profits, if any, to the limited partners. The determination of
what is in the best interest of the Partnership or limited partners will be made
on a case by case basis by the General Partner in its sole discretion and
consistent with its fiduciary obligations to the Partnership and the limited
partners. To the extent that profits are retained by the Partnership rather than
distributed, the Net Assets of the Partnership, which determine the brokerage
fees payable in any year, will be increased, thereby increasing the maximum
amount of fees which can be earned by SB. In addition, the amount of funds in
segregated accounts at banks which extend overdraft privileges to SB will be
greater to the extent that profits are retained. See "The Commodity
Broker/Dealer -- Customer Agreement". Thus, the General Partner may have a
conflict of interest between its obligation to the limited partners in
considering a distribution of profits and its interest in increasing fees
payable to SB. Any such conflict must be resolved in favor of the limited
partners. In any event, the General Partner does not intend to make any
distribution which would reduce the Net Asset Value of a Unit below $1,000, or
if the size of a distribution would not warrant the administrative expense which
would involved, or if, in the opinion of the General Partner, a distribution
would otherwise not be in the best interests of the Partnership or the limited
partners. The General Partner has no current intention of making any
distributions.
ACCOUNTS OF SB, THE GENERAL PARTNER AND THEIR AFFILIATES. The officers,
directors and employees of SB and the General Partner, as well as SB and the
General Partner themselves, may trade in commodity contracts for their own
accounts. The records of any such trading will not be available for inspection
by limited partners. In addition, SB is a futures commission merchant and
effects transactions in commodity futures contracts for its customers. Thus, it
is possible that SB could effect transactions for the Partnership in which the
other parties to the transactions are its officers, directors or employees or
its customers. Such persons might also compete with the Partnership in making
purchases or sales of contracts without knowing that the Partnership is also
bidding on such contracts. Trading decisions for the Partnership are not
currently made by the General
24
<PAGE> 32
Partner, SB or their affiliates. CFTC regulations require that SB, to the extent
possible, insure that each order received from the Partnership which is
executable at or near the market price be transmitted to the floor of the
appropriate contract market before any order in the same commodity for any
proprietary account of SB.
CONTROL OF OTHER ACCOUNTS BY THE ADVISORS. The Advisors manage the
accounts of clients other than the Partnership including other commodity pools
and intend to manage such accounts in the future. Certain Advisors and their
principals or affiliates also act as commodity pool operators with respect to
other commodity pools. The Advisors act as advisors to the following pools
operated by the General Partner: JWH acts as advisor to the following pools
operated by the General Partner: Shearson Lehman Futures 1000 Plus L.P.,
Shearson Lehman Select Advisors Futures Fund L.P., SLB Mid-West Futures Fund
L.P., Smith Barney Mid-West Futures Fund II, L.P., Hutton Investors Futures Fund
L.P. II, Smith Barney Diversified Futures Fund L.P., F-1000 Futures Fund L.P.
Michigan Series II, and Smith Barney Principal Plus Futures Fund L.P.;
Chesapeake acts as advisor to the following pools operated by the General
Partner: F-1000 Futures Fund L.P. Series VIII, Smith Barney Diversified Futures
Fund L.P., ERISA Futures Fund, L.P. and Smith Barney Tidewater Futures Fund L.P.
In addition, the Advisors and their principals and affiliates may trade for
their own accounts. The records of any such trading will not be available for
inspection by limited partners. It is possible that as a result of a neutral
allocation system, testing a new trading system, trading proprietary accounts
more aggressively, or other actions not constituting a violation of fiduciary
duties, the Advisors or their principals or affiliates may take positions in
their proprietary accounts that are opposite or ahead of a client (including the
Partnership). As a result, positions in proprietary accounts of the Advisors and
their principals or affiliates may be taken which are in competition with
positions taken for the Partnership. In addition, principals of certain Advisors
devote time to other business activities. All commodity futures and options
positions held by all accounts owned or controlled directly or indirectly by
each of the Advisors and its principals, respectively, including the portion of
the Partnership's account managed by that Advisor will be aggregated for
purposes of determining compliance with speculative position limits. As a
result, the Partnership might not be able to enter into or maintain certain
positions if such positions, when added to the positions held by such other
accounts, would exceed the applicable limits. If trading orders must be revised
as a result of the application of speculative position limits, an Advisor will
modify such orders in a manner which will not substantially disproportionately
affect the Partnership as compared with that Advisor's other accounts. In
addition, the Advisors will not knowingly or deliberately use trading strategies
for the Partnership which are inferior to those used for any other client or
account nor favor any other account over the Partnership in any way, although
certain Advisors may offer different trading programs and various factors
affecting different types and sizes of accounts may require the utilization of
different strategies or methods for such accounts. See "Commodity
Markets -- Regulation". See also "Risk Factors -- Possible Effects of
Competition" and "The Advisors -- Management Agreements" with respect to other
potential conflicts of interest arising in connection with the operations and
activities of the Advisors.
OTHER ACTIVITIES OF SB. SB maintains a commodity research department which
makes trading recommendations on a daily basis. In addition, SB sponsors
commodity trading programs in which certain customers participate. The trading
records of such programs will not be made available to limited partners. In such
programs and in its trading recommendations, transactions may be made or
recommended which are similar or opposed to transactions being made for the
Partnership. SB will not provide advisory services to the Partnership.
OTHER COMMODITY POOLS. The General Partner and its predecessors over the
last five years have sponsored and established over 48 commodity pools and may
sponsor or establish other commodity pools which may compete with the
Partnership. See "The General Partner -- Other Pools Operated by the General
Partner". Neither the General Partner nor SB will knowingly or deliberately
favor any such pools over the Partnership in their dealings on behalf of such
other pools. In addition, the General Partner may in the future serve as an
advisor or co-advisor to such other commodity pools or to the Partnership. If
the General Partner were to serve as a trading advisor to the Partnership, there
would be a conflict between its duty to determine its management fees in the
best interests of the Partnership and its interest in maximizing fees paid to
itself (subject to limitations imposed by the NASAA Guidelines as set forth in
the Partnership Agreement). Of
25
<PAGE> 33
course, the General Partner is bound by its fiduciary duties as a general
partner to resolve this potential conflict in the best interest of the limited
partners.
GENERAL PARTNER'S CHOICE OF ADVISORS. The Limited Partnership Agreement
empowers the General Partner to make trading decisions for the Partnership
itself or to delegate some or all of its authority to make such decisions to one
or more trading advisors. The Limited Partnership Agreement empowers the General
Partner on behalf of the Partnership to enter into, renew, terminate or
renegotiate a management agreement with such advisors pursuant to which the
Partnership will be obligated to pay management and/or incentive fees to the
advisors. The Partnership has entered into the Management Agreements described
herein with Chesapeake, JWH and Millburn as advisors. However, the General
Partner may have a conflict of interest between its obligations to act in the
best interests of the limited partners and its own interest in receiving fees
from the Partnership in the future. The General Partner believes that the fees
charged to the Partnership are fair to the Partnership and acknowledges its
fiduciary duty to negotiate future contracts including contracts with itself in
the best interests of the limited partners.
TRADING POLICIES
The objective of the Partnership is to preserve and to achieve substantial
appreciation of its assets through speculative trading in commodity interests
including futures contracts, options and forward contracts. Commodity futures
and options trading may be conducted on all major United States and, to a lesser
extent, on certain foreign commodities exchanges. The Partnership does not
intend to act as a dealer. The Partnership will attempt to accomplish its
trading objectives by following the trading policies set forth below:
1. Partnership funds will be invested only in commodity contracts
which are traded in sufficient volume to permit, in the opinion of the
Advisor trading that contract, ease of taking and liquidating positions.
2. No Advisor will initiate 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. For the purpose of this limitation,
forward contracts in currencies will be deemed to have the same margin
requirements as the same or similar futures contracts traded on the Chicago
Mercantile Exchange.
3. The Partnership will 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.
4. The Partnership will not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities,
provided that neither the deposit of margin with a commodity broker nor
obtaining and drawing on a line of credit with respect to forward contracts
shall constitute borrowing.
5. From time to time trading strategies such as spreads or straddles
may be employed on behalf of the Partnership. The term "spread" or
"straddle" describes a commodity trading strategy involving the
simultaneous buying and selling of 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.
6. The Partnership will not permit the churning of its commodity
trading accounts.
The trading policies described above (except the Partnership's basic
investment policies, Nos. 3, 4 and 6) may be altered by the General Partner
without approval by the limited partners if it is determined that such change is
in the best interests of the Partnership (based upon factors including but not
limited to the performance of various futures markets, advisors and the risks
associated with modified trading policies). The limited partners will be
notified by mail within seven business days of any material changes in trading
policies. The limited partners may also change the trading policies of the
Partnership in accordance with the Partnership Agreement, as set forth in
Section 17(c) thereof, set forth in Exhibit A hereto. Such procedures are also
summarized under "The Limited Partnership Agreement -- Amendments; Meetings."
26
<PAGE> 34
THE GENERAL PARTNER
BACKGROUND
The Partnership's General Partner and commodity pool operator is Smith
Barney Futures Management Inc. which is a Delaware corporation that is wholly
owned by Smith Barney Holdings, Inc., which is the sole owner of SB. Smith
Barney Holdings, Inc. is a wholly owned subsidiary of Travelers Group, Inc., a
publicly-held company whose shares are listed on the New York Stock Exchange and
is engaged in various financial service and other businesses. The General
Partner is the successor to the business of Smith Barney Futures Partners, Inc.
(which was the surviving entity of the merger on August 2, 1993 of three
commodity pool operators: Smith Barney Futures Partners, Inc., Lehman Brothers
Capital Management Corp. and Hutton Commodity Management Inc.). The General
Partner is a commodity pool operator and a member of the NFA under the
registration and memberships of Smith Barney Futures Partners, Inc, which became
registered with the CFTC as a commodity pool operator and a member of the NFA on
September 2, 1986. The principal offices of the General Partner are located at
390 Greenwich Street - 1st floor, New York, New York 10013; telephone (212)
723-5424.
PRINCIPALS
The officers and directors of the General Partner are Jack H. Lehman, III
(Chairman and Director), Philip M. Waterman, Jr. (Vice-Chairman and Director),
David J. Vogel (Director and President), Michael Schaefer (Director), Steven J.
Keltz (Secretary and Director), Daniel A. Dantuono (Chief Financial Officer,
Treasurer and Director), Daniel R. McAuliffe, Jr. (Director) and Shelley Ullman
(Director). Each director and officer is subject to re-appointment annually.
Mr. Waterman, age 59, has been in the brokerage business since 1958. He is
a Senior Executive Vice President of SB (since 1989) and was Co-Director of SB's
commodity division from 1989 through May 1996. He has been a director of the
General Partner since 1989 and was its President from 1991 through June 21, 1993
when he became Co-Chairman. He is currently Vice-Chairman of the General
Partner. Before joining SB, he was employed for 15 years by the brokerage firm
of Shearson Lehman Brothers Inc. ("SLB"), where from January 1980 to December
1988 he was Senior Executive Vice President and from January 1980 to 1985 he was
the head of the firm's International Division. He is currently a board member of
the Commodity Exchange, Inc. and former board member of the Futures Industry
Association.
Mr. Lehman, age 50, is a Senior Executive Vice President and Director of
SB's commodity division. In addition, he has been a Director of the General
Partner since July 1993 and was Co-Chairman of SB's commodity division from July
1992 through May 1996. Before joining SB, he was employed for twenty years at
SLB where from 1982 through April 1992 he was a Senior Executive Vice President
and Director of Commodities. He was a director and the Chairman of Lehman
Brothers Capital Management Corp., one of the predecessors of the General
Partner. Mr. Lehman is a past Chairman of the Futures Industry Association and
currently serves on its Executive Committee. He has been a member of the Board
of Governors of the Commodity Exchange, Inc. and the Comex Clearing Association.
Mr. Schaefer, age 46, has been involved in the securities and commodities
brokerage business for over twenty-five years and has been an Executive Vice
President of SB since early 1992. He has been employed with the firm in various
capacities associated with its commodity businesses since 1981. His principal
areas of responsibility include futures research, trade execution, clearing and
administration. He is a member of various major U.S. commodity exchanges and a
Director of the NFA. He has been a Director of the General Partner since its
organization in 1986.
Mr. Vogel, age 51, became an Executive Vice President of SB and a Director
of the General Partner on August 2, 1993. In May 1996, he was appointed
President of the General Partner. From January 1993 to July 1993, Mr. Vogel was
an Executive Vice President of SLB. Formerly, Mr. Vogel was the chairman and CEO
of LIT America, Inc. (September 1988 through December 1992) and an Executive
Vice President of Thomson McKinnon Securities Inc. (June 1979 through August
1988). Mr. Vogel is also a past chairman of the Futures Industry Association, a
past director of Comex Clearing Corporation and the Comex Exchange and a past
Governor of the Chicago Mercantile Exchange.
27
<PAGE> 35
Mr. Keltz, age 46, is an Associate General Counsel in the Law Department of
SB. He became Secretary and Director of the General Partner on August 2, 1993.
He is a Director of SB since October 1995. From October 1988 through July 1993,
Mr. Keltz was employed by SLB as First Vice President and Associate General
Counsel where he provided legal counsel to various derivative products
businesses. Mr. Keltz was Vice President, Product Manager -- Futures and an
Associate General Counsel for PaineWebber Incorporated from 1985 through
September 1988.
Mr. Dantuono, age 38, is a Senior Vice President of SB (since March 1994)
prior to which he was a First Vice President since August 1993. Mr. Dantuono was
Vice President at SLB where he was employed since 1980. He has been Chief
Financial Officer, Treasurer and Director of the General Partner since August
1993. Prior to August 1993, Mr. Dantuono was Controller and Treasurer of a
corporate predecessor of the General Partner.
Mr. McAuliffe, age 46, is a Senior Vice President of SB (since August 1990)
and became a director of the General Partner in April 1994. Mr. McAuliffe is
Director of Managed Futures Marketing and Sales at SB, a position he held since
1989 at SLB. Since joining SLB in 1986, he has been responsible for the
marketing and sales of retail futures products, including public and private
futures funds and managed account programs. Prior to joining SLB, Mr. McAuliffe
was employed by Merrill Lynch Pierce Fenner & Smith from 1983 through 1986.
Prior to joining Merrill Lynch, Mr. McAuliffe was employed by Citibank from 1973
to 1983. He is a member of the Managed Futures Association and the Marketing
Division of the Futures Industry Association.
Ms. Ullman, age 37, is a Senior Vice President of SB (since October 1989)
and a director of the General Partner (since April 1994). Previously, Ms. Ullman
was a First Vice President of SLB and a vice president and assistant secretary
of a predecessor of the General Partner, with responsibility for execution,
administration, operations and performance analysis for managed futures funds
and accounts.
There have been no administrative, civil or criminal actions pending, on
appeal or concluded against the General Partner or any of its individual
principals within the past five years that are material to a decision whether to
invest in the Partnership.
The Limited Partnership Agreement requires the General Partner to maintain
a cash investment in the Partnership equal to the greater of (i) an amount which
will entitle the General Partner to an interest of 1% in each material item of
Partnership income, gain, loss, deduction or credit and (ii) the greater of (a)
1% of the aggregate capital contributions of all partners or (b) $25,000. If all
100,000 Units are sold (at $1,000 per Unit), the General Partner will contribute
$1,010,000 (to date the General Partner has contributed $114,000) and will share
in profits and losses of the Partnership in proportion to its share of
Partnership capital on the same basis as the limited partners. The General
Partner's capital contribution to the Partnership will be treated as Units of
General Partnership Interest for the purpose of Partnership accounting. Units of
General Partnership Interest are equal in all respects to Units held by limited
partners, except as to liability and the ability to vote. See "The Limited
Partnership Agreement -- Sharing of Profits and Losses" and "Amendments;
Meetings." The Limited Partnership Agreement also requires the General Partner,
with respect to each additional limited partnership of which it is a general
partner, to maintain a net worth (excluding its capital contributions to the
additional partnership) at an amount not less than 10% of the total
contributions to the additional partnership. In addition, the Limited
Partnership Agreement requires that the General Partner maintain an overall net
worth (including capital contributions) equal to the greater of (a) 10% of the
total contributions (including contributions by the General Partner) to all
limited partnerships to which it is a general partner (including the
Partnership) plus (prior to the termination of the Public Offering) 5% of the
Units being offered for sale in the Partnership or (b) $50,000.
As of February 29, 1996, the General Partner currently owned 114 units of
general partnership interest in the Partnership. Alexander J. Sloane was the
initial Limited Partner of the Partnership and acquired one Unit of limited
partnership interest for $1,000 to permit the Partnership to be organized as a
limited partnership under the laws of the State of New York. Mr. Sloane redeemed
his Unit for $1,000 and withdrew from the Partnership at the commencement of
trading. Mr. Daniel R. McAuliffe, Jr. and Mr. David J. Vogel own 5 and 7.54
Units, respectively. No other principal of the General Partner owns any Units,
although they are not precluded from purchasing such Units.
28
<PAGE> 36
As of February 29, 1996, the General Partner acts as general partner to
over eighteen other active commodity pools that are currently trading. The
performance of all of these pools for the past five years is set forth on pages
33--35.
The statement of financial condition of the General Partner at December 31,
1995 and the report of the independent accountants thereon is set forth under
"Financial Statements."
THE PARTNERSHIP -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
LIQUIDITY AND CAPITAL RESOURCES
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 and cash equivalents, net unrealized appreciation (depreciation) on open
futures contracts and interest receivables. Because of the low margin deposits
normally required in commodity futures trading, relatively small price movements
may result in substantial losses to the Partnership. While substantial losses
could lead to a material decrease in liquidity no such losses occurred during
the first quarter of 1996.
The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by gains or losses on commodity futures
trading, expenses, interest income, additions and redemptions of Units and
distributions of profits, if any.
RESULTS OF OPERATIONS
During the period January 17, 1996 (commencement of operations) to March
31, 1996, the Partnership's net asset value per Unit decreased 2.2% from $939.07
to $918.44 while the redemption value per Unit decreased 5.6% from $1,000 to
$943.69. For the purpose of a redemption, any accrued liability for
reimbursement of offering and organization expenses does not reduce net asset
value per Unit. The net asset value per Unit is reflective of charging offering
and organization expenses against the initial capital of the Partnership and is
reported for financial reporting purposes only. The Partnership experienced a
net trading loss before commissions and expenses in the first quarter of 1996 of
$320,195. Losses were recognized in the trading of commodity futures in precious
metals, interest rates, stock indices, agricultural products and currencies.
These losses were partially offset by gains recognized in the trading of energy
products.
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 correctly those price trends. These 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.
Interest income on 80% of the Partnership's daily equity maintained in cash
was earned on a 30-day Treasury bill rate determined weekly by SB based on the
average non-competitive yield on 3-month U.S. Treasury bills maturing in 30
days.
Brokerage commissions are calculated on the Partnership's net asset value
as of the last day of each month and therefore, are affected by trading
performance, subscriptions and redemptions.
Management fees are calculated on the portion of the Partnership's net
asset value allocated to each Advisor at the end of the month and, therefore,
are affected by trading performance, subscriptions and redemptions.
Incentive fees are based on the new trading profits generated by each
Advisor at the end of the quarter, as defined in the advisory agreements between
the Partnership, the General Partner and each Advisor.
Reference should be made to the Partnership's Statement of Financial
Condition, Statement of Income and Expenses and Partners' Capital and Notes to
Financial Statements included in this Prospectus.
29
<PAGE> 37
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
include forwards, futures and option, 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
Partner monitors and controls the Partnership risk exposure on a daily basis
through financial, credit and risk management monitoring systems and,
accordingly, believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Partnership is subject.
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 Partnership has made no material commitments for capital expenditures.
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, redemption 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's Advisors may or may not be able to identify. Partnership
expenses 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. The amount of interest income payable by SB is dependent upon
interest rates over which the Partnership has no control.
Due to the highly leveraged nature of commodities trading, small price
movements may result in substantial losses. See "Risk Factors" and "Commodity
Markets." In order to provide some protection against a material decline in
liquidity caused by trading losses, the Partnership adheres to the trading
policies set forth under "Trading Policies."
PERFORMANCE OF THE PARTNERSHIP
The table below sets forth the performance of the Partnership from its
commencement of trading operations on January 17, 1996, on a monthly basis.
Notes to the table below appear on page 36.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
JANUARY 17, 1996 (COMMENCEMENT OF TRADING OPERATIONS) TO FEBRUARY 29, 1996
<TABLE>
<CAPTION>
PERCENTAGE
RATE OF
RETURN
(COMPUTED
ON A
COMPOUNDED
MONTHLY
BASIS)
-----------
<S> <C>
1996
---------
January........................................................ 1.53%
February....................................................... (8.57)%
- --------------------------------------------------------------------------------------
Inception of Trading: January
17, 1996
Aggregate Subscriptions: $11,344,000 (2/96)
Current Net Assets: $10,491,900 (2/96)
Largest Monthly Percentage Draw-Down: 8.57 (2/96)
Largest Peak-to-Valley Draw-Down: 8.57 (1/96-2/96)
</TABLE>
30
<PAGE> 38
OTHER POOLS OPERATED BY THE GENERAL PARTNER
Tables 1, 2 and 3 below set forth in capsule format, as prescribed by CFTC
regulations, the performance of the other commodity pools which have been
operated by the General Partner during the past five years. Table 1 sets forth
the performance of commodity pools currently operated by the General Partner for
the period from January 1, 1991 through February 29, 1996. Table 2 sets forth
the performance of commodity pools which were previously operated by the General
Partner during that period and which have terminated trading operations. Table 3
sets forth the performance of commodity pools for that same period previously
operated by the General Partner for which it does not act as commodity pool
operator as of the date of this Prospectus.
Each of the funds has as its investment purpose to profit by speculation in
commodity interests. As of February 29, 1996, the only active funds operated by
the General Partner which did not have a net asset value in excess of their
initial offering amount were Smith Barney International Advisors Currency Fund
L.P., F-1000 Futures Fund L.P. Michigan Series II, Smith Barney Tidewater
Futures Fund L.P. and Smith Barney Diversified Futures Fund L.P. II. This
situation is attributable to the failure of the trading systems employed by the
respective advisors to speculate profitably over the period tabulated. It may be
noted that three of the four funds have traded for three years or less and their
trading programs, which should be considered long-term, may not have had a
sufficient time in which to take full effect.
Smith Barney Futures Management Inc. offers other pools which have more
than one trading advisor but whose performance may differ from the Partnership.
Differences are due to combinations of different trading advisors (and programs
traded) as well as different partnership or organizational structures.
31
<PAGE> 39
ADDITIONAL INFORMATION FOR POOLS CURRENTLY OPERATED BY THE GENERAL PARTNER
AS OF FEBRUARY 29, 1996
<TABLE>
<CAPTION>
GENERAL
GENERAL PARTNER
COMMENCEMENT NUMBER OF PARTNER UNITS INITIAL
NAME OF POOL OF TRADING PARTICIPANTS OWNED INVESTMENT
- ---------------------------------------------- ------------ ------------ ------------- ----------
<S> <C> <C> <C> <C>
Monetary Venture Fund......................... Feb-87 13 3 $ 17,000
Select Advisors Futures Fund.................. Jul-87 776 34 $ 507,000
Hutton Investors Futures Fund II.............. Jul-87 450 44 $ 314,000
SLH Performance Partners Futures Fund......... Jun-89 349 24 $ 166,000
Shearson Lehman Futures 1000 Plus............. May-91 2,523 345 $ 631,000
SLB Mid-West Futures Fund..................... Dec-91 812 322 $ 25,000
Smith Barney International Advisors
Currency Fund............................... Mar-92 269 8,000 $ 144,760
Greenbrier Futures Fund....................... Jul-92 48 170 $ 68,000
F-1000 Futures Fund Series VIII............... Aug-92 931 175 $ 384,000
F-1000 Futures Fund Series IX................. Mar-93 710 103 $ 249,000
ERISA Futures Fund............................ Aug-93 163 108 $ 75,000
Smith Barney Diversified Futures Fund......... Jan-94 9,527 2,049 $ 781,000
F-1000 Futures Fund Michigan Series I......... May-94 26 110 $ 110,000
Smith Barney Mid-West Futures Fund II......... Sep-94 678 360 $ 97,000
F-1000 Futures Fund Michigan Series II........ Jun-95 2 207 $ 207,000
Smith Barney Tidewater Futures Fund........... Jul-95 150 94 $ 52,000
Smith Barney Principal Plus Futures Fund
L.P. ....................................... Nov-95 1,846 376 $ 376,000
Smith Barney Diversified Futures Fund II...... Jan-96 450 170 $ 87,000
</TABLE>
IT SHOULD NOT BE ASSUMED THAT PARTICIPANTS IN THE PARTNERSHIP WILL
EXPERIENCE RETURNS, IF ANY, COMPARABLE TO THOSE EXPERIENCED BY INVESTORS IN THE
FUNDS. THE RESULTS SET FORTH IN THE FOLLOWING TABLES ARE NOT INDICATIVE OF, AND
HAVE NO BEARING ON, ANY RESULTS THAT MAY BE OBTAINED BY THE PARTNERSHIP NOR ARE
THE PAST RESULTS OF SUCH FUNDS A GUARANTEE OF THE FUTURE PERFORMANCE OF THE
PARTNERSHIP. THIS IS DUE IN LARGE PART TO THE FACT THAT THE RESULTS CONTAINED IN
THESE TABLES DERIVE TO AN EXTENT FROM THE UNCERTAIN NATURE AND FUNCTION OF
COMMODITIES MARKETS AS WELL AS THE DIVERGENT TRADING STRATEGIES, POLICIES AND
METHODS OF THE ADVISORS DIRECTING VARIOUS FUNDS.
32
<PAGE> 40
TABLE 1
CAPSULE PERFORMANCE OF OTHER POOLS CURRENTLY OPERATED BY SMITH BARNEY FUTURES
MANAGEMENT INC. FOR THE PERIOD JANUARY 1991 THROUGH FEBRUARY 29, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Worst Monthly
Current Percent Draw-Down
Inception Aggregate Total ------------------
Type of of Subscriptions NAV Percent
Name of Pool Pool Trading $(000) $(000) (%) Date
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Monetary Venture Fund 1 Feb-87 2,368 382 14.14 {Jan-92}
Select Advisors Futures Fund A Jul-87 50,507 5,869 13.69 {Jan-92}
Hutton Investors Futures Fund II A Jul-87 30,304 15,622 15.16 {Jan-92}
SLH Performance Partners Futures Fund A Jun-89 16,541 3,050 8.02 {Jul-94}
Shearson Lehman Futures 1000 Plus 2,A May-91 63,088 40,668 7.26 {Jan-92}
- -------------------------------------------------------------------------------------------------------------------------
SLB Mid West Futures Fund 1 Dec-91 60,804 56,486 11.24 {Apr-92}
Smith Barney International Advisors Currency Fund A Mar-92 32,312 3,815 7.08 {Nov-93}
Greenbrier Futures Fund 1 Jul-92 24,547 26,026 10.23 {Aug-94}
F-1000 Futures Fund Series VIII 2,A Aug-92 36,000 17,865 3.84 {Feb-96}
F-1000 Futures Fund Series IX 2,A Mar-93 24,005 10,141 4.26 {Feb-96}
- -------------------------------------------------------------------------------------------------------------------------
Erisa Futures Fund 1,A Aug-93 19,866 10,456 4.56 {Aug-94}
Smith Barney Diversified Futures Fund A Jan-94 255,786 175,183 8.12 {Feb-96}
F-1000 Futures Fund Michigan Series I 1,2,A May-94 10,697 11,467 5.86 {Feb-96}
SLB Mid West Futures Fund II 1 Sep-94 44,231 41,411 6.19 {Feb-96}
F-1000 Futures Fund Michigan Series II 1,2,A Jun-95 20,490 20,414 5.08 {Feb-96}
- -------------------------------------------------------------------------------------------------------------------------
Smith Barney Tidewater Futures Fund 1 Jul-95 9,428 8,782 4.57 {Feb-96}
Smith Barney Principal Plus Futures Fund 2,A Nov-95 37,507 37,610 5.94 {Feb-96}
Smith Barney Diversified Futures Fund II A Jan-96 11,344 10,492 8.57 {Feb-96}
- -------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Worst Peak-to-Valley Percentage Rate of Return
Draw-Down (Computed on a Compounded Monthly Basis)
-----------------------------
Percent
Name of Pool (%) Time Period 1991 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Monetary Venture Fund 37.41* {Dec-91 to Jan-95} 27.23 (8.02) (3.18) (27.47) 32.05 (6.63)
Select Advisors Futures Fund 30.07 {Dec-91 to May-92} 15.21 (10.47) 20.62 (13.96) 26.91 (2.75)
Hutton Investors Futures Fund II 27.03 {Dec-91 to May-92} 28.54 1.28 29.40 (4.66) 41.78 (0.01)
SLH Performance Partners Futures Fund 24.12 {Jul-93 to Jan-95} (3.16) 1.23 4.38 (10.59) 18.04 (4.04)
Shearson Lehman Futures 1000 Plus 11.77 {Dec-91 to May-92} 15.74 1.99 10.82 (6.41) 12.79 (0.73)
- ------------------------------------------------------------------------------------------------------------------------------------
SLB Mid West Futures Fund 26.53 {Dec-91 to May-92} (0.21) 4.91 39.88 (8.64) 36.24 (0.50)
Smith Barney International Advisors Currency Fund 24.12* {Sep-92 to Feb-96} - 16.93 0.95 (10.40) (5.04) (1.61)
Greenbrier Futures Fund 15.48* {Jul-94 to Jun-95} - 8.64 33.45 16.74 (1.09) (1.32)
F-1000 Futures Fund Series VIII 12.23 {Aug-93 to Oct-94} - (2.34) 18.93 (10.41) 12.69 (2.76)
F-1000 Futures Fund Series IX 8.42* {May-95 to Oct-95} - - 3.91 (4.13) 12.89 (4.80)
- ------------------------------------------------------------------------------------------------------------------------------------
Erisa Futures Fund 10.10 {Jul-93 to Jan-95} - - (0.59) (7.19) 20.91 (0.83)
Smith Barney Diversified Futures Fund 14.50* {May-95 to Oct-95} - - - (3.29) 12.86 (7.55)
F-1000 Futures Fund Michigan Series I 8.80* {May-95 to Oct-95} - - - 1.38 14.25 (6.43)
SLB Mid West Futures Fund II 12.35 {Oct-94 to Jan-95} - - - (7.54) 31.74 (0.63)
F-1000 Futures Fund Michigan Series II 5.08* {Jan-96 to Feb-96} - - - - 2.25 (2.56)
- ------------------------------------------------------------------------------------------------------------------------------------
Smith Barney Tidewater Futures Fund 10.63* {Jun-95 to Oct-95} - - - - (1.25) (3.38)
Smith Barney Principal Plus Futures Fund 5.94* {Jan-96 to Feb-96} - - - - 5.75 (5.18)
Smith Barney Diversified Futures Fund II 8.57* {Jan-96 to Feb-96} - - - - - (7.17)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
Notes Follow Table 3
Type of Pool Legend
1-Privately Offered
2-Principal Protected
3-Multi-Advisor
A-More than one trading advisor but not a multi-advisor pool as that term is
defined in Part 4 of the regulations of the CFTC.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
33
<PAGE> 41
TABLE 2
CAPSULE PERFORMANCE OF OTHER POOLS PREVIOUSLY OPERATED BY SMITH BARNEY FUTURES
MANAGEMENT INC. FOR THE PERIOD JANUARY 1991 THROUGH FEBRUARY 1996 AND WHICH
HAVE CEASED TRADING OPERATIONS AS OF THE DATE OF THIS DISCLOSURE DOCUMENT
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Worst Monthly
NAV Percent Draw-Down
Inception Aggregate Before --------------------
Type of of Termination Subscriptions Termination Percent
Name of Pool Pool Trading Date $(000) $(000) (%) Date
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Commodity Venture Fund Nov-80 Feb-95 15,153 1,412 14.04 {Jan-92}
Matterhorn Commodity Partners Jun-81 Mar-93 15,153 1,989 23.99 {Jan-92}
Commodity Strategy Partners Aug-82 Aug-91 17,794 1,750 14.32 {Apr-91}
Matterhorn Commodity Partners II Apr-84 Mar-93 10,653 2,453 24.72 {Jan-92}
Shearson Lehman Futures 1000 Fund 2 Jan-86 Feb-91 12,699 12,405 n/a { n/a }
- -----------------------------------------------------------------------------------------------------------------------------------
Hutton Investors Futures Fund III A Apr-88 Dec-93 7,614 612 16.12 {Jan-91}
Hutton Investors Futures Fund A Jan-89 May-92 47,250 1,945 18.42 {Jan-92}
Ayco Futures Fund 1 May-88 Jul-94 5,114 161 29.35 {Apr-94}
F-1000 Guarantee Futures Fund II 2 Jun-88 Aug-93 101,012 33,053 3.45 {Feb-92}
F-1000 Guarantee Futures Fund III 2 Aug-88 Aug-93 55,824 10,955 3.39 {Feb-92}
- -----------------------------------------------------------------------------------------------------------------------------------
Parnel Futures Fund 1 Nov-88 Oct-94 2,885 74 19.43 {Feb-94}
F-1000 Guarantee Futures Fund IV 2 Dec-88 Feb-94 45,692 16,389 5.93 {Jan-94}
Mid Atlantic Futures Fund 1 Jul-89 Mar-92 3,501 1,458 18.07 {Oct-91}
F-1000 Futures Fund V 2 Sep-89 Apr-92 87,546 8,253 7.92 {Jan-91}
F-1000 Futures Fund VI 2 May-90 May-95 32,996 21,805 9.25 {Jan-92}
- -----------------------------------------------------------------------------------------------------------------------------------
Peregrine Futures Fund A Dec-91 Sep-95 9,767 432 16.21 {Aug-93}
Shearson Lehman Brothers Erisa Futures Fund 1,A Jan-92 Jun-93 14,026 15,244 3.10 {Apr-92}
Signet Partners 1,A Jan-93 Feb-95 522 191 11.97 {Aug-93}
Smith Barney Offshore Futures Fund 3,A Aug-93 Aug-94 2,704 1,945 6.50 {Jan-94}
- -----------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Worst Peak-to-Valley Percentage Rate of Return
Draw-Down (Computed on a Compounded Monthly Basis)
---------------------------
Percent
Name of Pool (%) Time Period 1991 1992 1993 1994 1995 1996
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Commodity Venture Fund 39.53* {Dec-91 to Feb-95} 27.52 (8.33) (2.16) (26.37) (8.44) -
Matterhorn Commodity Partners 45.23* {Jun-89 to May-92} (1.44) (31.81) 7.02 - - -
Commodity Strategy Partners 35.49* {Jun-88 to Mar-90} (27.69) - - - - -
Matterhorn Commodity Partners II 51.59* {Jun-89 to May-92} (1.90) (32.68) 5.19 - - -
Shearson Lehman Futures 1000 Fund n/a { n/a to n/a } 0.45 - - - - -
- ------------------------------------------------------------------------------------------------------------------------------
Hutton Investors Futures Fund III 36.54* {Jan-89 to Feb-91} 15.26 (6.90) (5.56) - - -
Hutton Investors Futures Fund 45.25* {Jun-89 to Apr-92} (3.06) (30.73) - - - -
Ayco Futures Fund 78.99* {Jun-89 to Apr-94} 0.56 (31.08) (36.84) (45.77) - -
F-1000 Guarantee Futures Fund II 6.31 {Dec-91 to Mar-92} 18.07 (3.05) 4.79 - - -
F-1000 Guarantee Futures Fund III 6.34 {Dec-91 to Mar-92} 17.18 (3.46) 4.15 - - -
- ------------------------------------------------------------------------------------------------------------------------------
Parnel Futures Fund 38.09* {Dec-93 to Apr-94} 32.76 (8.32) 25.49 (28.79) - -
F-1000 Guarantee Futures Fund IV 9.49 {Dec-91 to May-92} 5.50 (2.86) 5.81 (7.22) - -
Mid Atlantic Futures Fund 27.34* {Mar-91 to Nov-91} (3.87) (8.17) - - - -
F-1000 Futures Fund V 13.05* {Aug-89 to Jan-91} 2.08 (1.15) - - - -
F-1000 Futures Fund VI 17.16 {Dec-91 to May-92} 28.55 1.35 22.03 (2.43) 18.61 -
- ------------------------------------------------------------------------------------------------------------------------------
Peregrine Futures Fund 32.42* {Jun-93 to Nov-93} (0.38) (5.19) (20.56) 5.91 (3.05) -
Shearson Lehman Brothers Erisa Futures Fund 6.01 {Dec-91 to Apr-92} - 18.42 12.68 - - -
Signet Partners 11.97 {Jul-93 to Aug-93} - - 29.21 53.32 (0.36) -
Smith Barney Offshore Futures Fund 6.50 {Dec-93 to Jan-94} - - 2.22 2.68 - -
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
Notes Follow Table 3
Type of Pool Legend
1-Privately Offered
2-Principal Protected
3-Offshore
4-Multi-Advisor
A-More than one trading advisor but not a multi-advisor pool as that term is
defined in Part 4 of the regulations of the CFTC.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
34
<PAGE> 42
TABLE 3
CAPSULE PERFORMANCE OF OTHER POOLS PREVIOUSLY OPERATED BY SMITH BARNEY FUTURES
MANAGEMENT INC. FOR THE PERIOD JANUARY 1991 THROUGH FEBRUARY 1996 AND WHICH
SMITH BARNEY FUTURES MANAGEMENT INC. NO LONGER ACTS AS COMMODITY POOL OPERATOR
AS OF THE DATE OF THIS DISCLOSURE DOCUMENT
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
NAV Worst Monthly
Inception Aggregate Before Percent Draw-Down
-------------------
Type of of Transfer Subscriptions Transfer Percent
Name of Pool Pool Trading Date $(000) $(000) (%) Date
<S> <C> <C> <C> <C> <C> <C> <C>
Commodity Trend Timing Fund Jan-80 May-95 16,625 1,275 14.67 {Feb-94}
Commodity Trend Timing Fund II Dec-82 Apr-95 34,428 1,412 14.48 {Feb-94}
FT Tryon Futures Fund 1,A May-87 Jun-91 49,513 24,455 2.84 {Jan-91}
Overlook Performance Fund 3,A Aug-88 May-91 252,706 86,921 1.16 {Apr-91}
Shearson Lehman Hutton Guarantee Futures Fund I 2,3 Apr-89 Jul-93 10,202 1,562 5.49 {Feb-92}
- -------------------------------------------------------------------------------------------------------------------------------
FT Tryon Futures Fund II 1,A Aug-90 May-91 60,391 58,726 2.71 {Jan-91}
Premier Futures Limited 3,A Jun-91 Jul-93 9,878 6,157 7.74 {Jan-92}
Lehman Brothers Japan Futures Fund 3,A Feb-91 Jul-93 53,007 72,267 7.43 {Jan-92}
New Millennium Futures Fund Limited 3 Mar-91 Jul-93 10,366 1,210 6.93 {Apr-91}
Delafund 3 Jan-93 Jul-93 2,521 1,542 15.35 {May-93}
- -------------------------------------------------------------------------------------------------------------------------------
Harbourer Futures Fund 3 May-93 Dec-94 25,003 12,657 5.10 {Feb-94}
- -------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Worst Peak-to-Valley Percentage Rate of Return
Draw-Down (Computed on a Compounded Monthly Basis)
----------------------------
Percent
Name of Pool (%) Time Period 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commodity Trend Timing Fund 54.35 * {Jul-93 to Feb-95} 38.15 (14.52) 17.23 (50.55) (5.08) -
Commodity Trend Timing Fund II 54.67 * {Jul-93 to Feb-95} 38.82 (15.03) 16.74 (50.43) (6.86) -
FT Tryon Futures Fund 4.08 {Dec-90 to Feb-91} 0.03 - - - - -
Overlook Performance Fund 1.16 {Mar-91 to Apr-91} 5.85 - - - - -
Shearson Lehman Hutton Guarantee Futures Fund I 10.57 {Dec-91 to Mar-92} 26.50 (4.23) 11.10 - - -
- ------------------------------------------------------------------------------------------------------------------------------------
FT Tryon Futures Fund II 4.05 * {Dec-90 to Feb-91} (3.69) - - - - -
Premier Futures Limited 14.60 {Dec-91 to May-92} 12.80 (4.75) 29.84 - - -
Lehman Brothers Japan Futures Fund 11.28 {Dec-91 to Apr-92} 22.48 2.88 14.46 - - -
New Millennium Futures Fund Limited 26.94 * {Mar-91 to Mar-93} (14.56) (9.76) 9.08 - - -
Delafund 22.20 * {Apr-93 to Jul-93} - - (18.12) - - -
- ------------------------------------------------------------------------------------------------------------------------------------
Harbourer Futures Fund 5.10 {Jan-94 to Feb-94} - - 42.95 39.20 - -
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- -----------------------
Notes Follow Table
Type of Pool Legend
1-Privately Offered
2-Principal Protected
3-Offshore
4-Multi-Advisor
A-More than one trading advisor but not a multi-advisor pool as that term is
defined in Part 4 of the regulations of the CFTC.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
35
<PAGE> 43
NOTES TO TABLES 1, 2 AND 3 AND THE PARTNERSHIP'S TABLE
POOLS OPERATED BY SMITH BARNEY FUTURES MANAGEMENT INC.
(a) "Draw-Down" is defined as losses experienced by a pool over a specified
period of time.
(b) "Largest Monthly Draw-Down" is the largest monthly loss experienced by the
pool is any calendar month expressed as a percentage of the total equity in
the pool and includes the month and year of such draw-down.
(c) "Largest Peak-to-Valley Draw-Down" is the greatest cumulative percentage
decline in month-end net asset value (regardless of whether it is
continuous) due to losses sustained by the pool during a period in which
the initial month-end net asset value of such draw-down has not been equal
or greater than any subsequent months ending net asset value and indicates
the months and year(s) of such decline from the initial month-end net asset
value to the lowest month-end net asset value of such decline. In the case
where the pool is in a current draw-down, or was in a current draw-down at
the termination or transfer date, the month of the lowest net asset value
of such draw-down is disclosed followed by an asterisk (*).
For purposes of the Largest Peak-to-Valley Draw-Down calculation, any
draw-down which began prior to the beginning of the five most recent
calendar year period is deemed to have occurred during such five calendar
year period.
(d) "Annual (Year to Date) Rate of Return" is calculated by compounding the
Monthly ROR (as described below) over the months in a given year, i.e.,
each Monthly ROR, in hundredths, is added to one (1) and the result is
multiplied by the subsequent Monthly ROR similarly expressed. One is then
subtracted from the product and the result is multiplied by one hundred
(100).
Monthly rate of return ("Monthly ROR") is calculated by dividing each
month's net performance by the corresponding beginning net asset value
adjusted for time-weighted additions or time-weighted withdrawals.
36
<PAGE> 44
THE ADVISORS
The General Partner has selected Chesapeake, JWH and Millburn as the
Partnership's trading advisors. Each Advisor manages the Partnership's assets in
accordance with the trading policies set forth above. Each Advisor was initially
allocated one-third of the Partnership's assets to manage, but the General
Partner, consistent with its fiduciary duties to the limited partners, may
modify these allocations at any time in its sole discretion. Future allocations
to the Advisors or additional advisors will be made at the discretion of the
General Partner. In selecting Advisors for the Partnership, the General Partner
considered past performance, trading style, volatility of markets traded and fee
requirements. Each Advisor had (i) a minimum of five years of performance and
(ii) a trading style that blended well with the other Advisors. Each of the
Advisors will be responsible only for trading the assets of the Partnership
allocated to it. Each Advisor will trade independently of the others.
None of the Advisors or their principals currently own any Units, although
they are not precluded from purchasing Units.
There has been no administrative, civil or criminal action during the
preceding five years or ever, either threatened, pending or completed against
any Advisor or its principals that would be material to an investor's decision
whether or not to purchase Units.
The following descriptions include background information, information
concerning each Advisor's trading strategy and the performance record for each
Advisor. Investors should note that the summaries of trading strategies were
prepared by each Advisor and may emphasize different aspects of each Advisor's
trading. Consequently, comparison of the strategies may prove difficult or
impossible. In any event, each Advisor's trading strategies are proprietary and
confidential, and the summaries are therefore general in nature.
Table A, and where applicable, Table A-1 for each Advisor includes the
performance of each program or portfolio that the Advisor will initially use to
trade the Partnership's account. In the case of Chesapeake, Table A (the
Diversified Trading Program) and Table A-1 (the Financials and Metals Program),
show the actual performance of all accounts traded pursuant to those methods for
the period covered by the tables. In the case of JWH, Table A (the Global
Diversified Portfolio) and Table A-1 (the Original Investment Program), show the
actual performance of all accounts traded pursuant to those methods for the
period covered by the tables. In the case of Millburn, Table A (Proprietary and
Actual Performance Record of Millburn World Resource Fund L.P.) shows the actual
performance of the World Resource version of the Diversified Portfolio which
Millburn will initially use to trade the Partnership's account. The World
Resource Version of the Diversified Portfolio has been traded only since January
1, 1995 initially in an account funded by Millburn and its principals and Table
A-1 (the Diversified Portfolio Composite) shows the actual performance of all
accounts traded pursuant to the Diversified Portfolio for the period covered by
the table.
Tables B and B-1 for each Advisor were prepared by the General Partner and
set forth the results of each program or portfolio that the Advisor will use for
the Partnership's account for the period July 1988 (March 1992 in the case of
Chesapeake's Financials and Metals Program) through January 1996, adjusted for
all Advisors to take into account the brokerage, management and incentive fees
and other expenses (including offering and organizational expenses) to be paid
by the Partnership and interest to be earned by the Partnership. Partnership
interest was estimated using historical 30-day Treasury bill rates of the time
period presented on Table B and B-1. Such rates are higher than current 30-day
Treasury bill rates that will be used to calculate Partnership interest income.
The application of historical rates may compare more closely to the Advisors'
interest income which was most likely earned at the then prevailing interest
rates of a particular time period.
Table C sets forth both a composite of actual monthly rates of return as
presented on each Advisor's program or portfolio traded for the Partnership and
a hypothetical composite adjusted performance record of the Advisors using the
pro forma rates of return derived in Tables B and B-1.
37
<PAGE> 45
CHESAPEAKE CAPITAL CORPORATION
BACKGROUND
Chesapeake Capital Corporation ("Chesapeake") was incorporated under the
laws of the Commonwealth of Virginia in February 1988 for the purpose of
offering investment advisory and portfolio management services to both retail
and institutional investors in trading commodity interest contracts. On August
19, 1991, Chesapeake was merged into Chesapeake Capital Corporation, an Illinois
corporation formed on August 13, 1991. Chesapeake is registered as a commodity
trading advisor ("CTA") and commodity pool operator ("CPO") with the CFTC and is
also a member in good standing of the NFA. Chesapeake has been registered with
the CFTC as a CTA since June 20, 1988 and as a CPO since May 8, 1991 and a
member of NFA since June 20, 1988. Chesapeake's principal place of business is
located at 500 Forest Avenue, Richmond, Virginia 23229; telephone (804)
285-5417. All business records will be kept at Chesapeake's principal place of
business.
PRINCIPALS
Mr. R. Jerry Parker, Jr., age 38, received his B.S. in Commerce, with an
emphasis in Accounting, from the University of Virginia in January 1980. Mr.
Parker worked in the accounting field for four years after graduating from
college and became a licensed Certified Public Accountant in Virginia in 1982.
From January 1983 until November 1983, Mr. Parker was a CPA at Wilkinson &
Lester, a certified public accounting firm based in Richmond, Virginia. From
November 1983 until January 1987, Mr. Parker was employed as an exempt CTA by
Richard J. Dennis, a principal and shareholder of Richard J. Dennis & Company, a
Chicago-based CTA and commodity pool operator registered with the CFTC, in his
"Turtle" training program. From January 1987 until February 1989, Mr. Parker
traded for Mr. Thomas Dennis as an exempt CTA. During these periods, Mr. Parker
had complete discretionary trading authority over a commodity portfolio of $1
million to $1.5 million. In February 1988, Mr. Parker ceased trading for Mr.
Thomas Dennis and formed Chesapeake.
Mr. Parker is the Chairman, Chief Executive Officer and a principal of
Chesapeake.
John M. Hoade, age 39, received a Bachelor of Science degree in Business
Administration from Lynchburg College in 1978. From 1976 through 1990, Mr. Hoade
was employed by Thurston Metals, Inc., located in Lynchburg, Virginia, in sales,
marketing and general management. Mr. Hoade joined Chesapeake in December 1990
to direct its operation and marketing. He is registered with the NFA as an
Associated Person and as a principal of Chesapeake.
Mr. Hoade is the President, Secretary and a principal of Chesapeake.
There have never been any material administrative, civil or criminal
actions against Chesapeake or its principals.
TRADING STRATEGY
Chesapeake will trade pursuant to its "Diversified Trading Program" and its
"Financials and Metals Program" for the Partnership. The Diversified Trading
Program emphasizes a maximum range of diversification with a global portfolio of
futures and forwards which include, but are not limited to, agricultural
products, precious and industrial metals, currencies, financial instruments, and
stock, financial and economic indices. The Financial and Metals Program offers
the opportunity to achieve a diversified portfolio of investment in futures and
forward interest contracts worldwide, but specializes in the larger and more
liquid markets now available for trading. This program currently excludes all
contracts traded by the Diversified Trading Program except interest rate
contracts, currency contracts, stock index contracts, certain precious and
industrial metal contracts, and the energy contracts. Chesapeake may trade on
any U.S. or non-U.S. exchange. Chesapeake monitors and has the potential to
trade over 100 markets around the world.
The variety of investment portfolios currently offered by Chesapeake are
the "Diversified Trading Program," the "Financials and Metals Program," and the
"Diversified 2XL Trading Program" (the "Trading
38
<PAGE> 46
Programs"). While all of the Trading Programs employ the same general trading
methodology, as described below, they differ in their emphasis of certain
markets or market sectors and exclusion of others. The following overview is not
intended as a detailed and exhaustive review of the trading methodology or
strategies employed by Chesapeake, as the exact nature of the methods and these
systems is proprietary and confidential.
Chesapeake, relying primarily on technical analysis, believes that future
price movements in all markets may be more accurately anticipated by analyzing
historical price movements within a quantitative framework rather than by
attempting to predict or forecast changes in price through fundamental economic
analysis. The trading methodologies employed by Chesapeake are based on programs
analyzing a large number of interrelated mathematical and statistical formulas
and techniques which are quantitative, proprietary in nature and which have been
either learned or developed by Mr. Parker.
In addition to such mathematical evaluations, Chesapeake employs a
technique of technical analysis generally known as "charting" in order to
attempt to determine optimal support and resistance levels and entry and exit
points in the various markets. In order to determine the overall technical
condition of the market at every point in time and to be used as a timing
mechanism for all trades, Chesapeake also makes extensive use of a study of
internally-generated market information, which includes, but is not limited to,
price volatility, open interest, daily price action, volume and market
psychology or sentiment.
The profitability of Chesapeake's Trading Programs, traded pursuant to
technical analysis emphasizing mathematical and charting approaches, will depend
upon the occurrence in the future, as in the past, of major trends in some
commodities. If there are no trends, the Trading Programs are likely to be
unprofitable. There have been trendless periods in the past which can be
expected to recur, and any factor which lessens the prospect of trends in the
future, such as increased governmental control, regulation, or participation as
a purchaser or seller in commodity markets (including joint governmental control
or regulation of, or participation in, international currency markets), lessens
the prospect that a program utilizing technical analysis, including the Trading
Programs, will be profitable in the future. In addition, the future
profitability of the Trading Programs would also be adversely affected by
factors which increase the number of signals leading to unprofitable trades. For
example, a significant increase in technically-oriented trading (trend-following
or otherwise) in particular commodity might cause a change in the pattern of
price movements in a manner which might be unfavorable.
Trend-following trading systems, such as those employed by Chesapeake, will
seldom effect market entry or exit at the most favorable price in the particular
market trend. Rather, this type of trading system seeks to close out losing
positions quickly and to hold portions of profitable positions for as long as
the trading system determines that the particular market trend continues to
exist. There can be no assurance, however, that profitable positions can be
liquidated at the most favorable price in a particular trend. As a result, the
number of losing transactions may exceed substantially the number of profitable
transactions. However, if Chesapeake's approach is successful, these losses
should generally be small and more than offset by a few large gains.
The Trading Programs are oriented toward the preservation of original
equity. The commencement of trading or a drawdown from starting equity are
considered the situations of highest risk, and risk management techniques at
this point are emphasized over those which invite greater risk in the interest
of enhancing performance. These risk management techniques include
diversification among markets and strategies. Also, the Trading Programs adhere
to the requirements of a money management system which determines and limits the
equity committed to each trade, each market, each commodity complex (in Trading
Programs which trade in more than one commodity complex) and each account.
Chesapeake engages in transactions in physical commodities, including the
exchange of futures for physicals transactions. An exchange of futures for
physicals ("EFP") is a transaction permitted under the rules of many futures
exchanges in which two parties holding futures positions may close out their
positions without making an open, competitive trade on the exchange. Generally,
the holder of a short futures position buys the physical commodity, while the
holder of a long futures position sells the physical commodity. The prices at
which such transactions are executed are negotiated between the parties.
39
<PAGE> 47
Chesapeake generally uses between 15% and 30% of the equity in a
fully-funded Diversified Trading Program account as original margin for trading,
but at times the margin-to-equity ratio can be higher. The Financials and Metals
Program excludes certain contracts traded in the Diversified Program. The
remaining contracts are not, in general, "leveraged up" to account for the
exclusion of certain contracts. Accordingly, the Financial and Metals Program
generally utilizes a somewhat lower margin-to-equity ratio than the Diversified
Trading Program.
All decisions concerning the liquidation of positions, the commodities to
be traded and the size of positions to be taken or maintained will require the
exercise of judgment by Chesapeake. The decision not to trade commodity interest
contracts for a certain period, or not to trade certain commodity interest
contracts due to lack of discernible price movements (trends) or lack of
liquidity, may result at times in clients (such as the Partnership) missing
significant profit opportunities which might otherwise have been captured by
Chesapeake. In addition, clients who choose Trading Programs which exclude
certain markets or market sectors will miss opportunities for profit in those
excluded markets which may be realized by other Chesapeake Trading Programs
which participate in those markets.
The risk assumed and, consequently, the potential for profit experienced by
a particular account at different times, and by different accounts at the same
time, vary significantly according to the Program(s) traded, the market
conditions, the percentage gained or lost in the account, the size of the
account, the brokerage commissions charged to the account, the management and
incentive fees charged to the account, and when the account commenced trading.
The trading strategy utilized by Chesapeake's Trading Programs may be
revised from time to time by Chesapeake, as a result of ongoing research and
development which seeks to devise new trading systems, as well as to test
methods currently employed. The trading methods used by Chesapeake in the future
may differ significantly from those presently used, due to the changes which may
result from this research.
PAST PERFORMANCE
Table A represents the composite performance record of Chesapeake's
Diversified Trading Program for the period July 1988 through February 1996.
Table A-1 represents the composite performance record of Chesapeake's
Financial and Metals Program for the period March 1992 through February 1996.
Table A-2 represents the composite capsule performance results of all other
trading programs directed by Chesapeake for the time periods indicated.
The information presented in the following records has not been audited.
However, Chesapeake believes that such information is accurate and fairly
presented.
NO REPRESENTATION IS MADE THAT THE PARTNERSHIP WILL OR IS LIKELY TO ACHIEVE
RESULTS SIMILAR TO THOSE SHOWN OR TO AVOID SUBSTANTIAL LOSSES. FURTHERMORE, THE
RATES OR RETURN EARNED WHEN AN ADVISOR IS MANAGING A LIMITED AMOUNT OF EQUITY
MAY BEAR LITTLE RELATIONSHIP TO THOSE WHICH SUCH ADVISOR IS ABLE TO ACHIEVE
MANAGING LARGER AMOUNTS OF EQUITY.
THE FOLLOWING FIGURES HAVE NOT BEEN ADJUSTED TO REFLECT THE CHARGES PAYABLE
BY THE PARTNERSHIP.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
40
<PAGE> 48
Table A
Chesapeake Capital Corporation
Diversified Trading Program
July 1988 Through February 29, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Percentage monthly rate of return
(computed on a compounded monthly basis)
- ---------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January................................................ 1.69 (3.23) (3.33) 0.42 (10.98)
February............................................... (4.26) (4.39) (4.88) 15.99 (2.86)
March.................................................. - 8.60 0.09 5.86 0.53
April.................................................. - 1.45 (0.60) 7.38 (0.44)
May.................................................... - 6.84 9.06 0.40 (3.66)
June................................................... - 0.88 7.02 0.98 6.52
July................................................... - (3.09) (1.70) 9.49 12.96
August................................................. - (2.66) (2.98) 5.88 3.16
September.............................................. - 0.20 3.49 (2.63) (6.78)
October................................................ - (1.11) 1.97 (0.06) 5.21
November............................................... - 1.76 4.83 1.03 2.27
December............................................... - 9.18 2.86 5.77 (1.93)
Annual (or Period) Rate of Return...................... -2.64% 14.09% 15.87% 61.82% 1.81%
- ---------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------
Percentage monthly rate of return
(computed on a compounded monthly basis)
- -----------------------------------------------------------------------------------------------------
1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
January................................................ (1.29) 0.49 4.93 -
February............................................... 4.84 3.37 (5.42) -
March.................................................. 2.32 8.62 6.64 -
April.................................................. (2.80) 4.37 (8.82) -
May.................................................... 0.27 (4.61) 22.38 -
June................................................... (1.25) 1.77 (8.28) -
July................................................... (1.75) 6.25 11.66 (9.41)
August................................................. (3.32) 15.15 (11.75) 6.85
September.............................................. 4.39 0.60 (2.82) 2.03
October................................................ 4.21 1.86 (7.40) 10.65
November............................................... (4.68) (0.25) 3.90 11.06
December............................................... 12.08 0.11 28.56 7.04
Annual (or Period) Rate of Return...................... 12.51% 43.12% 28.30% 29.91%
- -----------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Average Annual Rate of Return (1/1/91-2/29/96) 18.33%
Compound Average Annual Rate of Return (7/1/88-2/29/96) (i) 25.46%
- --------------------------------------------------------------------------------------------------------------------------
<S> <C>
Inception of Trading by CTA: February 1988
Inception of Trading in Program: February 1988
Number of Open Accounts as of February 29, 1996: 63
Aggregate Assets (Excluding "Notional" Equity) in all Programs: $737,172,000 (2/96)
Aggregate Assets (Including "Notional" Equity) in all Programs: $898,769,000 (2/96)
Aggregate Assets (Excluding "Notional" Equity) in Program: $695,261,000 (2/96)
Aggregate Assets (Including "Notional" Equity) in Program: $854,044,000 (2/96)
Largest Monthly Draw-Down:
Past Five Years and Year to Date: 10.98% (1/92)
July 1988 to Date (ii): 11.75% (8/89)
Largest Peak-to-Valley Draw-Down:
Past Five Years and Year to Date: 16.62%(12/91-5/92)
July 1988 to Date (ii): 20.58%(7/89-10/89)
</TABLE>
- -------------------
Notes follow Table A-2
(i) This Compound Average Annual Rate of Return is shown as a comparison to the
Compound Pro Forma Average Annual Rate of Return
prepared by the General Partner for the same time period on Table B.
(ii) This draw-down information is shown as a comparison to the pro forma
draw-down information prepared by the General Partner
for the same time period on Table B.
- --------------------------------------------------------------------------------
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
41
<PAGE> 49
Table A-1
Chesapeake Capital Corporation
Financials & Metals Program
March 1992 Through February 29, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Percentage monthly rate of return (computed on a compounded monthly basis)
- ---------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January............................................ 2.65 (1.09) (4.99) 1.76 -
February........................................... (4.77) (4.49) (5.65) 12.93 -
March.............................................. - 9.58 1.44 1.62 (0.19)
April.............................................. - 1.41 0.33 8.96 2.77
May................................................ - 6.90 4.59 1.77 1.13
June............................................... - (1.11) 3.32 1.49 4.88
July............................................... - (1.81) (4.23) 11.06 8.60
August............................................. - (1.31) (1.74) 8.70 3.95
September.......................................... - (0.38) 1.73 (0.89) (4.93)
October............................................ - (1.70) 4.18 2.08 5.33
November........................................... - 1.47 3.29 0.69 2.08
December........................................... - 5.39 1.62 4.27 -1.08
Annual (or Period) Rate of Return.................. -2.25% 12.61% 3.22% 68.53% 24.19%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Average Annual Rate of Return (3/92-2/29/96) 24.18%
- ---------------------------------------------------------------------------------------------------------------------------------
Inception of Trading by CTA: February 1988
Inception of Trading in Program: March 1992
<S> <C> <C>
Number of Open Accounts as of February 29, 1996: 6
Aggregate Assets (Excluding "Notional" Equity) in all Programs: $737,172,000 (2/96)
Aggregate Assets (Including "Notional" Equity) in all Programs: $898,769,000 (2/96)
Aggregate Assets (Excluding "Notional" Equity) in Program: $22,297,000 (2/96)
Aggregate Assets (Including "Notional" Equity) in Program: $25,111,000 (2/96)
Largest Monthly Draw-Down: 5.65% (2/94)
Largest Peak-to-Valley Draw-Down: 10.36% (12/93-2/94)
</TABLE>
- -------------------
Notes follow Table A-2
42
<PAGE> 50
Table A-2
Other Trading Programs Directed by Chesapeake Capital Corporation
For the Period March 1992 Through February 29, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Inception Number Aggregate Assets Aggregate Assets
of of in Program in Program Largest
Trading Open February 29, 1996 February 29, 1996 Monthly
Name of Program Program Accounts (Excluding Notional) (Including Notional) Draw-Down
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Diversified 2XL Program Apr-94 4 $19,614,000 $19,614,000 9.32% (2/96)
Pacific Rim Program Jun-94 N/A-Closed N/A-Closed N/A-Closed 3.30% (7/95)
Foreign Finacials Program Jun-92 N/A-Closed N/A-Closed N/A-Closed 5.77% (9/92)
- ------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Largest Percentage Rate of Return
Peak-to- (Computed on a Compounded Monthly Basis)
Valley
Name of Program Draw-Down 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Diversified 2XL Program 15.07% (12/94-2/95) (6.74) 18.77 26.88 - -
(2 Month) (9 Months)
Pacific Rim Program 3.30% (6/95-7/95*) - 37.04 (2.76) - -
(8 Months) (7 Months)
Foreign Finacials Program 5.77% (8/92-9/92) - - (1.77) 21.90 21.42
(6 Months) (7 Months)
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
Notes follow Table
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
43
<PAGE> 51
CHESAPEAKE
NOTES TO PERFORMANCE SUMMARIES
In the accompanying performance summary, Chesapeake has adopted a new
method of computing rate of return and performance disclosure, referred to as
the "Fully-Funded Subset" method, pursuant to an Advisory (the "Fully-Funded
Subset Advisory") published by the Commodity Futures Trading Commission. The
Fully-Funded Subset refers to that subset of accounts included in the applicable
composite which is funded entirely by actual funds (as defined in the Advisory).
To qualify for use of the Fully-Funded Subset method, the Fully-Funded
Subset Advisory requires that certain computations be made in order to arrive at
the Fully-Funded Subset and that the accounts for which performance is so
reported meets two tests which are designed to provide assurance that the
Fully-Funded Subset and the resultant rates of return are representative of the
trading program. Chesapeake has performed these tests for periods subsequent to
January 1, 1992. However, for periods prior to January 1, 1992, due to cost
considerations, the Fully-Funded Subset method has not been used. Instead, the
rates of return reported are based on a computation which uses the Nominal
Account Sizes of all of the accounts included in the composites calculated in
accordance with the Only Accounts Traded method ("OAT"). Chesapeake believes
that this method yields substantially the same rates of return as would the
Fully-Funded Subset method and that the rates of return as presented herein are
representative of the Trading Programs for the periods presented.
For the periods from January 1, 1992 through December 31, 1993, Chesapeake
compared the OAT method and the Fully-Funded Subset method and found that the
two methods yielded substantially the same rates of return. Consequently,
Chesapeake continued to use the OAT method until the end of 1993. From January
1, 1994 through the period covered by the summary, Chesapeake used the
Fully-Funded Subset method.
(a) "Draw-Down" is defined as losses experienced by a program over a specified
period of time.
(b) "Largest Monthly Draw-Down" is the largest monthly loss experienced by the
program on a composite basis in any calendar month expressed as a
percentage of the total equity in the program and includes the month and
year of such draw-down.
Individual accounts may have experienced larger monthly draw-downs.
(c) "Largest Peak-to-Valley Draw-Down" is the greatest cumulative percentage
decline in month and net asset value (regardless of whether it is
continuous) due to losses sustained by the trading program during a period
in which the initial composite month-end net asset value of such
peak-to-valley draw-down has not been equal or greater than any subsequent
months composite ending net asset value and indicates the months and
year(s) of such decline from the initial month end net asset value to the
lowest month-end net asset value of such decline. In the case where the
trading program is in a current draw-down, or was in a current draw-down
when the trading program closed, the month of the lowest net asset value of
such draw-down is disclosed followed by an asterisk (*).
For purposes of the Largest Peak-to-Valley draw-down calculation, any
draw-down which began prior to the beginning of the five most recent
calendar year period is deemed to have occurred during such five calendar
year period.
Individual accounts may have experienced larger peak-to-valley draw-downs.
(d) "Annual (or Period) Rate of Return" is calculated by compounding the Monthly
ROR (as described below) over the months in a given year, i.e., each
Monthly ROR, in hundredths, is added to one (1) and the result is
multiplied by the subsequent Monthly ROR similarly expressed. One is then
subtracted from the product and the result is multiplied by one hundred
(100). The Compound Average Annual Rate of Return is similarly calculated
except that before subtracting one (1) from the product, the product is
exponentially changed by the factor of one (1) divided by the number of
years in the performance summary and then one (1) is subtracted. The
Compound Average Annual Rate of Return appears on Tables A and A-1.
44
<PAGE> 52
Monthly rate of return ("Monthly ROR") for each month beginning January 1994 is
calculated by dividing net performance of the Fully-Funded Subset by the
beginning equity of the Fully-Funded Subset, except in periods of significant
additions or withdrawals to the accounts in the Fully-Funded Subset. In such
instances, the Fully-Funded Subset is adjusted to exclude accounts with
significant additions or withdrawals which would materially distort the rate of
return pursuant to the Fully-Funded Subset method.
Monthly ROR for each period prior to January 1992 is calculated using the OAT
method, which is net performance divided by beginning equity subject to certain
adjustments. In this calculation, accounts are excluded from both net
performance and beginning equity if their inclusion would materially distort the
Monthly ROR. The excluded accounts include (1) accounts for which there has been
a material addition or withdrawal during the month, (2) accounts which were open
for only part of the month or (3) accounts which had no open positions during
the month due to the intention of permanently closing the account. Such accounts
were not charged with material nonrecurring costs during the month.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
45
<PAGE> 53
Table B
Chesapeake Capital Corporation
Pro Forma Performance
Diversified Program
July 1, 1988 Through January 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage pro forma monthly rate of return (computed on a compounded monthly basis)
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January............................. 1.39 (3.77) (4.58) 0.46 (11.08) (2.00) 0.26 4.80 -
February............................ - (4.70) (5.25) 15.41 (3.47) 4.71 3.83 (5.89) -
March............................... - 7.93 (0.11) 5.82 0.30 2.26 8.54 6.61 -
April............................... - 0.98 (0.84) 7.15 (0.72) (3.98) 4.40 (8.93) -
May................................. - 6.31 9.17 0.21 (3.79) (0.42) (5.12) 23.73 -
June................................ - 0.37 6.83 0.83 6.18 (1.60) 1.92 (7.83) -
July................................ - (3.67) (2.94) 9.18 13.57 (2.28) 6.22 11.55 (10.30)
August.............................. - (3.45) (3.16) 5.64 2.76 (3.79) 14.03 (11.88) 6.70
September........................... - (0.20) 3.41 (2.92) (7.21) 4.25 0.16 (2.21) 1.72
October............................. - (1.62) 1.78 (0.38) 4.82 4.22 1.44 (7.53) 9.45
November............................ - 1.24 4.74 0.92 1.92 (5.65) (0.92) 3.94 9.61
December............................ - 8.60 2.53 5.31 (2.10) 12.79 (0.59) 28.17 6.33
Annual (or Period) Pro Forma
Rate of Return................... 1.39% 7.08% 10.96% 57.47% -1.11% 7.32% 38.27% 29.31% 24.19%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Pro Forma Average Annual Rate of Return (1/1/91-1/31/96) 14.76%
Compound Pro Forma Average Annual Rate of Return (7/1/88-1/31/96) 21.83%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Largest Monthly Draw-Down:
Past Five Years and Year to Date: 11.08% (1/92)
July 1988 to Date: 11.88% (8/89)
Largest Peak-to-Valley Draw-Down:
Past Five Years and Year to Date: 17.77% (12/91-5/92)
July 1988 to Date: 20.32% (7/89-10/89)
</TABLE>
- ---------------------
Notes appear at Page 76
THE ACCOMPANYING FOOTNOTES ARE AN INTEGRAL PART OF THIS PRO FORMA PERFORMANCE
CAPSULE
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
46
<PAGE> 54
Table B-1
Chesapeake Capital Corporation
Pro Forma Performance
Financials & Metals Portfolio
March 1992 Through January 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage pro forma monthly rate of return
(computed on a compounded monthly basis)
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
January....................................... 3.24 (2.07) (5.71) 1.13 -
February...................................... - (5.01) (6.25) 11.99 -
March......................................... - 13.27 0.70 1.02 (0.76)
April......................................... - 1.40 (0.44) 8.00 2.18
May........................................... - 8.86 3.58 1.18 0.48
June.......................................... - (1.51) 2.39 0.97 4.05
July.......................................... - (2.20) (5.04) 10.17 7.59
August........................................ - (1.81) (2.47) 7.85 3.23
September..................................... - (0.08) 0.96 (1.40) (5.36)
October....................................... - (1.96) 3.16 1.40 4.59
November...................................... - 1.54 2.42 0.09 1.45
December...................................... - 4.26 1.08 3.53 (2.32)
Annual (or Period) Pro Forma Rate of Return... 3.24% 14.08% -6.14% 55.39% 15.50%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Pro Forma Average Annual Rate of Return (3/92-1/31/96) 19.12%
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Largest Monthly Draw-Down: 6.25% (2/94)
Largest Peak-to-Valley Draw-Down: 12.95% (12/93-8/94)
</TABLE>
- ---------------------
Notes appear at Page 76
THE ACCOMPANYING FOOTNOTES ARE AN INTEGRAL PART OF THIS PRO FORMA PERFORMANCE
CAPSULE
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
47
<PAGE> 55
JOHN W. HENRY & CO., INC.
BACKGROUND
John W. Henry & Co., Inc. ("JWH") is a United States based global
investment management corporation with offices at 301 Yamato Road, Boca Raton,
Florida, and One Glendinning Place, Westport, Connecticut 06880. Its telephone
number is (203) 221-0431. JWH is recognized as a leader in managing capital in
futures, interest rate, and foreign exchange markets for international banks,
brokerage firms, pension funds, institutions, and high-net-worth individuals.
JWH trades numerous contracts on a 24-hour basis in the U.S., Europe and Asia,
and has grown to be one of the largest advisors in the industry, managing over
$1.3 billion in client capital.
John W. Henry & Company began managing assets in 1981 as a sole
proprietorship, and was later incorporated in the state of California as John W.
Henry & Co., Inc. to conduct business as a commodity trading advisor. The sole
shareholder of JWH is the John W. Henry Trust dated July 27, 1990. The trustee
and sole beneficiary of the Trust is John W. Henry. The firm is registered as a
commodity trading advisor as of February 1982 and as a commodity pool operator
as of July 1989 with the Commodity Futures Trading Commission and is a member of
the National Futures Association.
PRINCIPALS
Mr. John W. Henry, age 46, is Chairman of the JWH Board of Directors and is
trustee and sole beneficiary of the John W. Henry Trust dated July 27, 1990. He
currently concentrates his activities at JWH on portfolio management, business
issues and frequent dialogue with trading supervisors. Mr. Henry is the
exclusive owner of certain trading systems licensed to Elysian Licensing
Corporation, a corporation wholly owned by Mr. Henry, and sublicensed by Elysian
Licensing Corporation to JWH and utilized by JWH in managing client accounts.
Mr. Henry has served on the Board of Directors of the National Association
of Futures Trading Advisors and the Managed Futures Trade Association , and has
served on the Nominating Committee of the National Futures Association. Mr.
Henry currently serves on the Board of Directors of the FIA and is chairman of
the FIA Task Force on Derivatives for Investment. He also currently serves on a
panel created by the Chicago Mercantile Exchange and the Chicago Board of Trade
to study cooperative efforts related to electronic trading, common clearing, and
the issues regarding mergers. In 1989, Mr. Henry established residency in
Florida and since that time has performed services from that location as well as
at the offices of JWH in Westport, Connecticut. Mr. Henry is a principal of
Westport Capital Management Corporation, Global Capital Management Limited, JWH
Investments, Inc., and JWH Risk Management, Inc., all of which are affiliates of
John W. Henry & Co., Inc. Since the beginning of 1987, Mr. Henry has devoted,
and will continue to devote, considerable time to business activities unrelated
to JWH and its affiliates.
Mr. Mark H. Mitchell, age 46, is an Executive Vice President of JWH. He is
also a Vice Chairman and a Director of JWH Risk Management, Inc. Prior to his
employment at JWH in January 1994, Mr. Mitchell was a partner of Chapman and
Cutler, a Chicago law firm, where he headed its futures law practice since
August 1983. From August 1980 to March 1991, he served as General Counsel of the
National Association of Futures Trading Advisors and, from March 1991 to
December 1993, he served as General Counsel of the Managed Futures Association.
Mr. Mitchell is currently a member of the Commodity Pool Operator/Commodity
Trading Advisor Advisory Committee and the Special Committee for the Review of a
Multi-tiered Regulatory Approach to NFA rules, both of the National Futures
Association; and of the Executive Committee of the Law and Compliance Division
of the Futures Industry Association. In 1985, he received the Richard P.
Donchian Award for Outstanding Contributions to the Field of Commodity Money
Management. He has been editor of Futures International Law Letter and of its
predecessor publication, Commodities Law Letter. He received an A.B. with honors
from Dartmouth College and a J.D. from the University of California at Los
Angeles, where he was named to the Order of the Coif, the national legal
honorary society.
Mr. David R. Bailin, age 36, is an Executive Vice President and is a member
of the Operating Committee of JWH. He is responsible for the development,
implementation, and management of JWH's sales and marketing
48
<PAGE> 56
infrastructure. Prior to joining JWH in December 1995, Mr. Bailin was Managing
Director -- Development since April 1994 for Global Asset Management ("GAM"), a
Bermuda based management firm with over $7 billion in managed assets. He was
responsible for overseeing the international distribution of GAM's funds as well
as for establishing new distribution relationships and channels. Prior to his
employment with GAM, Mr. Bailin headed the real estate asset management division
of Geometry Asset Management beginning in July 1992. Prior to that time,
beginning in 1987, he was President of Warner Financial, an investment advisory
business in Boston, Massachusetts. Mr. Bailin received a B.A. from Amherst
College and an M.B.A. from Harvard Business School.
Mr. Peter F. Karpen, age 45, is a Managing Director and a member of the
Operating Committee of JWH. He is also the President of JWH Investments, Inc.,
President and Director of Westport Capital Management Corporation and President
and Chairman of the Board of Directors of Global Capital Management Limited. Mr.
Karpen joined JWH in June 1995 from CS First Boston where he was Director of
Futures and Options since 1988 and Vice President since 1981. Mr. Karpen has
been a member of the board of the Futures Industry Association since 1984 and a
member of its Executive Committee since 1988. Mr. Karpen was Chairman of the FIA
in 1994 and 1995. In addition, he is a Public Director of the New York Cotton
Exchange and serves on the CFTC's Financial Products Advisory Committee. He has
been a Trustee of the Futures Industry Institute, a member of the CFTC's
Regulatory Coordination Advisory Committee, and a member of several commodities
and securities exchanges in the United States. He received his B.A. from Boston
University and MBA from Boston College.
Mr. Karpen announced his resignation from JWH and its affiliates on March
18, 1996 but will continue in his present capacities for 6 months from that
date.
Mr. James E. Johnson, Jr., age 43, is Chief Financial Officer and Chief
Administrative Officer for JWH. In addition, beginning in March 1996, Mr.
Johnson was also a principal of Westport Capital Management Corporation and JWH
Risk Management, Inc. He also serves as a member of the company's Operating
Committee. Mr. Johnson joined JWH in May of 1995 from Bankers Trust Company
where he was Managing Director and Chief Financial Officer for their
Institutional Asset Management Division since January 1983. His areas of
responsibility included finance, operations and technology for the $160 billion
global asset advisor. Prior to joining Bankers Trust, Mr. Johnson was a Product
Manager at American Express Company responsible for research and market
strategies for the Gold Card. He received a BA with honors from Columbia
University and an MBA in Finance and Marketing from New York University.
Ms. Elizabeth A. M. Kenton, age 30, is a Senior Vice President, the
Director of Compliance and a member of the Operating Committee of JWH. Ms.
Kenton is also a Senior Vice President of JWH Risk Management, Inc., director of
Westport Capital Management Corporation, the executive vice president of JWH
Investments, Inc. and a director of Global Capital Management Limited. Since
joining JWH in March 1989, Ms. Kenton has held positions of increasing
responsibility in Research and Development, Administration and Regulatory
Compliance. Prior to her employment at JWH, Ms. Kenton was Associate Manager of
Finance and Trading Operations at Krieger Investments, a currency and commodity
trading firm. From July 1987 to September 1988, Ms. Kenton worked for Bankers
Trust Company as a Product Specialist for foreign exchange and Treasury options
trading. She received a B.S. in Finance from Ithaca College.
Ms. Mary Elizabeth Hardy, age 35, is a Vice President, the Manager of
Trading Administration, and is a member of the Operating Committee of JWH. Since
joining JWH in September 1990, Ms. Hardy has held positions of increasing
responsibility in Research and Development and Trading. Prior to her employment
at JWH, Ms. Hardy held the position of Associate Editor at Waters Information
Services, a publishing company, where she wrote weekly articles covering
technological advances in the securities and futures markets. Prior to joining
Waters in 1989, Ms. Hardy was at Shearson Lehman Brothers where she held the
position of Assistant Director of the Managed Futures Trading Department. Prior
to joining the Managed Futures Trading Department, Ms. Hardy was an
institutional salesperson for Shearson, in a group specializing in financial
futures and options. Previously, Ms. Hardy was an institutional salesperson for
Donaldson, Lufkin and Jenrette with a group which also specialized in financial
futures and options. Ms. Hardy chairs the Managed Futures Association's Trading
and Markets committee. She received a B.B.A. in Finance from Pace University.
49
<PAGE> 57
Mr. David M. Kozak, age 48, is Counsel to the Firm, a vice president, and
Secretary of JWH. He is also Secretary of JWH Risk Management, Inc. Prior to
joining JWH in September 1995, Mr. Kozak was employed at the law firm of Chapman
and Cutler, where he was an associate from September 1983 and a partner from
1989. Mr. Kozak has concentrated in commodity futures law since 1981, with
emphasis in the area of commodity money management. During the time he was
employed at Chapman and Cutler, he served as outside counsel to NAFTA and the
MFA. Mr. Kozak is currently a member of The NFA Special Committee on CPO/CTA
Disclosure Issues, the Government Relations Committee of the Managed Futures
Association and the Visiting Committee of the University of Chicago Library. He
received a B.A. from Lake Forest College, an M.A. from The University of
Chicago, and a J.D. from Loyola University of Chicago.
Mr. Kevin S. Koshi, age 32, is a Senior Vice President and Chief Trader.
Mr. Koshi is responsible for the supervision and administration of all aspects
of order execution strategies, and implementation of trading policies and
procedures. Mr. Koshi joined JWH in August 1988 as a professional in the Finance
Department, and since 1990 has held positions of increasing responsibility in
the Trading Department. He received a B.S. in Finance from California State
University at Long Beach.
Mr. Barry S. Fox, age 32, is the Director of Research and is responsible
for the design and testing of existing and new programs. He also supports and
maintains the proprietary algorithms used to generate JWH trades. Mr. Fox joined
JWH in 1991 and since that time has held positions of increasing responsibility
in the Research and Development department. Prior to his employment at JWH, Mr.
Fox provided sales and financial analysis support for Spreadsheet Solutions, a
financial software development company. Prior to joining Spreadsheet Solutions
in October 1990, Mr. Fox operated a trading company where he traded his own
proprietary capital. Before that, he was employed with Bankers Trust as a
product specialist for foreign exchange and treasury options trading. He
received a B.S. in Business Administration from the University of Buffalo.
Ms. Glenda G. Twist, age 45, is a Director of JWH and has held that
position since August 1993. Ms. Twist joined JWH in September 1991 with
responsibilities for corporate liaison and she continues her duties in that
area. Her responsibilities include assistance in the day-to-day administration
of the Florida office, and review and compilation of financial information for
JWH. Ms. Twist was President of J.W. Henry Enterprises Corp., for which she
performed financial, consulting and administrative services from January 1991 to
August 1991. From 1988 to 1990, Ms. Twist was Executive Director of Cities in
Schools, a program in Arkansas designed to prevent students from leaving school
before completing their high school education. She received her B.S. in
Education from Arkansas State University.
Mr. Michael D. Gould, age 41, is Director of Investor Services at JWH. He
is responsible for general business development and oversees the investor
services function. He joined JWH in April 1994 from Smith Barney Inc. where he
served as Senior Sales Manager and Vice President -- Futures for the Managed
Futures Department. He held the identical position with the predecessor firms of
Shearson Lehman Brothers and Lehman Brothers. Prior to that time, he was engaged
in a proprietary trader development program at Tricon USA from September 1990 to
October 1991. He was a registered financial consultant with Merrill Lynch from
1985 through August 1990. His professional career began in 1982 as an
owner-operator of a non-ferrous metals trading and export business which he ran
until September 1985.
Mr. Jack M. Ryng, C.P.A., age 34, is Controller for JWH and Secretary and
Chief Financial Officer of JWH Investments, Inc. Prior to his employment with
JWH, Mr. Ryng was a Senior Manager with Deloitte & Touche where he held
positions of increasing responsibility since September 1985 for commodities and
securities industry clients. His clients included a large commodity pool
operator in the United States along with other broker/dealers, futures
commission merchants, investment banks, and foreign exchange operations in the
areas of accounting, regulatory compliance and consulting. Prior to his
employment by the Financial Services Center of Touche Ross & Co. (the
predecessor firm of Deloitte & Touche), he worked for Leonard Rosen & Co. as a
senior accountant. Mr. Ryng is a member of AICPA and the New York C.P.A. Society
and is a member of the board of the New York operations division of the FIA. He
received a B.S. in Business Administration from Duquesne University.
50
<PAGE> 58
Mr. Michael J. Scoyni, age 49, is a Managing Director of JWH, and is a
principal of Westport Capital Management Corporation. Mr. Scoyni has been
associated with Mr. Henry since 1974 and with JWH since 1982. He was engaged in
research and development for John W. Henry & Company (JWH's predecessor) from
November 1981 to December 1982 and subsequently has been employed in positions
of increasing responsibility. He received a B.A. in Anthropology from California
State University.
Mr. Christopher E. Deakins, age 36, is a Vice President of JWH. He is
responsible for general business development and investor services support.
Prior to joining JWH in August 1995, he was a vice president, national sales,
and a member of the Management Team for RXR Capital Management, Inc. His
responsibilities consisted of business development, institutional sales, and
broker dealer support. Prior to joining RXR in August 1986, he was engaged as an
account executive for Prudential-Bache Securities starting in February 1985.
Prior to that, he was an account executive for Merrill Lynch, Pierce, Fenner &
Smith Incorporated in 1983 and 1985. He received a B.A. in Economics from
Hartwick College.
Chris J. Lautenslager, age 38, is a Vice President of JWH. He is
responsible for general business development and Investor Services support.
Prior to joining JWH in April 1996, he was the Vice President of Institutional
Sales for I/B/E/S International, Inc., a distributor of corporate earnings
estimate information. His responsibilities consisted of business development and
support of global money managers and investment bankers. Prior to his employment
with I/B/E/S, Mr. Lautenslager devoted time to personal activities from April
1994 to March 1995, following the closing of the Stamford, Connecticut office of
Gruntal & Co., where he had worked as a proprietary equity trader since November
1993. Before that, he held the same position at S.A.C. Capital Management
starting in February 1993. From October 1987 to December 1993, Mr. Lautenslager
was a partner and managing director of Limitless Option Partners, a registered
Chicago Mercantile Exchange trading and brokerage organization, where he traded
currency futures and options. He received a B.S. in Accounting from the
University of Colorado and a Masters in Management from Northwestern University.
Mr. Edwin B. Twist, age 45, is a Director of JWH and has held that position
since August 1993. Mr. Twist joined JWH as Internal Projects Manager in
September 1991. Mr. Twist's responsibilities include assistance in the
day-to-day administration and internal projects of JWH's Florida office. Mr.
Twist was Secretary and Treasurer of J.W. Henry Enterprises Corp., a Florida
corporation engaged in administrative and financial consulting services, for
which he performed financial, consulting and administrative services from
January 1991 to August 1991. Prior to his employment with JWH, Mr. Twist was an
owner and manager for 16 years of a 2,500 acre commercial farm in eastern
Arkansas.
Ms. Nancy O. Fox, C.P.A., age 30, is a Vice President and the manager of
investment support of JWH. She is responsible for the day-to-day activities of
the Investment Support Department, including all aspects of operations and
performance reporting. Prior to joining JWH in January 1992, Ms. Fox was a
senior accountant at Deloitte & Touche, where she served commodities and
securities industry clients and held positions of increasing responsibility
since July 1987. Ms. Fox is a member of the AICPA and the New Jersey Society of
C.P.A.s. She received a B.S. in Accounting and Finance from Fairfield
University.
TRADING POLICIES
Trading Techniques
The quantitative models of JWH are guided by a proprietary set of
mathematical formulas that provide signals for investment decisions integrated
within a disciplined money-management framework. JWH trading techniques focus on
long-term trends rather than day-to-day price fluctuations. Positions held for
two to four months are not unusual, and positions have been held for more than
one year. Historically, only thirty to forty percent of all trades made pursuant
to the trading methods have been profitable. Large profits on a few trades in
positions that typically exist for several months have produced favorable
overall results. Generally, the majority of losing trades have been liquidated
within weeks. The greatest cumulative percentage decline in daily net asset
value JWH has experienced in any single program was nearly sixty percent.
Investors should understand that similar or greater drawdowns are possible in
the future.
51
<PAGE> 59
JWH at its sole discretion may override computer-generated trading signals,
and may at times use discretion in the application of its quantitative models
which may affect performance positively or negatively. Subjective aspects of
JWH's trading systems also include the determination of program leverage,
commencement of trading in an account, contracts traded, contract month
selection, markets traded, margin utilization, and effective trade execution.
Program Modifications
In an effort to maintain and improve performance, JWH has engaged, and
continues to engage, in an extensive program of research. While the basic
parameters underlying the firm's investment approach have remained intact
throughout its history, the potential benefits of employing more than one
trading parameter alternatively, or in varying combinations, is a subject of
continual testing, review and evaluation. Extensive research and analysis may
suggest substitution of alternative parameters with respect to particular
contracts in light of relative differences in historical trading performance
achieved through testing different parameters. In addition, risk management
research and analysis may suggest modifications regarding the relative weighting
among various contracts, the addition or deletion of particular contracts for a
program or a change in the degree of leverage employed.
As capital in each JWH trading program increases, additional emphasis and
weighting may be placed on certain markets which have historically demonstrated
the greatest liquidity and profitability. Furthermore, the weighting of capital
committed to various markets in the investment programs is dynamic, and JWH may
vary the weighting at its discretion as market conditions, liquidity, position
limit considerations and other factors warrant.
Leverage
Leverage adjustments have been and continue to be an integral part of JWH's
trading methods. At its discretion, JWH may adjust leverage in certain markets
or entire trading programs. Leverage adjustments may be made at certain times
for some trading programs but not for others. Factors which may affect the
decision to adjust leverage include: ongoing research, program volatility,
current market volatility, risk exposure, and subjective judgement and
evaluation of these and other general market conditions. Such decisions to
change leverage may positively or negatively affect performance, and will alter
risk exposure for an account. Leverage adjustments may lead to greater profits
or losses, more frequent and larger margin calls, and greater brokerage expense.
No assurance is given that such leverage adjustments will be to the financial
advantage of JWH clients. JWH reserves the right, in its sole discretion, to
adjust its leverage policy without notification to investors.
Addition, Redemption and Reallocation of Capital for Commodity Pool or Fund
Accounts
JWH has developed procedures for trading fund accounts, such as the
Partnership, that provide for the addition, redemption and/or reallocation of
capital. Investors who purchase or redeem units in a fund are most frequently
permitted to do so at a price equal to the net asset value per unit on the close
of business on the last business day of the month or quarter. In addition, funds
often may reallocate capital among advisors at the close of business on the last
business day of the month. In order to provide market exposure commensurate with
equity in the account on the date of these transactions JWH's general practice
is to adjust positions as near as possible to the close of business on the last
trading date of the month. The intention is to provide for additions,
redemptions and reallocations at a net asset value per unit that will be the
same for each of these transactions and to eliminate possible variation in net
asset value per unit that could occur as a result of inter-day price changes
when additions are calculated on the first day of the subsequent month.
Therefore JWH may, in its sole discretion, adjust its investment in its trading
of the assets associated with the addition, redemption and reallocation of
capital as near as possible to the close of business on the last business day of
the month to reflect the amount then available for trading. Based on JWH's
determination of liquidity or other market conditions, JWH may decide to
commence trading earlier in the day on, or before, the last business day of the
month. In the case of an addition to a fund account, JWH may also, in its sole
discretion, delay the actual start of trading for those new assets. No assurance
is given that JWH will be able to achieve the
52
<PAGE> 60
objectives described above in connection with funding level changes. The use of
discretion by JWH in the application of this procedure may affect performance
positively or negatively.
JWH utilizes its Global Diversified Portfolio and Original Investment
Program in managing the portion of the Partnership's assets allocated to it,
one-half of which is allocated to each Program.
THE GLOBAL DIVERSIFIED PORTFOLIO
The Global Diversified Portfolio, JWH's most diversified trading program,
invests in a number of different markets, sectors, and countries worldwide,
including base metals on the London Metals Exchange, long-term and short-term
interest rates in the U.S., Europe, and Asia, currencies and stock indexes in
Japan and the U.K. and participates in both U.S. and international agricultural
and energy markets.
THE ORIGINAL INVESTMENT PROGRAM
The Original Investment Program, first offered in 1981, was designed to
participate in markets prominent at that time. The program was restructured in
July 1992, to include a broader array of markets, particularly global financial
markets, which have evolved over the last decade. Importantly, the trading
system was not changed. The Original Investment Program employs long-term
quantitative models and invests in the following markets: interest rates,
foreign exchange, stock indexes, metals, energy and grains.
OTHER JWH PROGRAMS
In addition to the Global Diversified Portfolio and the Original Investment
Program, JWH currently operates ten different investment programs for U.S. and
foreign investors, none of which were initially utilized by JWH for the
Partnership. Each Program is operated separately and independently. With the
exception of InterRateTM, these programs utilize intermediate and long-term,
quantitative trend-analysis models designed to achieve speculative rates of
return.
The International Foreign Exchange Program, begun in 1986, concentrates
exclusively on trading 10 to 15 foreign currencies in outright and cross-rate
positions, primarily through forward contracts. Portfolios are dynamic and
include from time to time various matrices of futures positions. The Financial
and Metals Portfolio participates in four major market sectors -- interest
rates, global currencies, stock indices, and precious metals -- and initiates
trades according to trend-emergence and computerized determination of relative
risk. InterRateTM, which commenced trading in November 1987, uses a portfolio of
foreign currency contracts that seeks to capture interest-rate differentials
between countries. This program utilizes leverage that is significantly lower
than other JWH programs, reducing the risk as it seeks to generate returns
significantly enhanced over the rates of prevailing 90-day U.S. government
securities. The World Financial Perspective, which began in 1986, involves
trading the financial and energy sector markets from the perspective of the
Japanese yen, German mark, Swiss franc, British pound, Australian dollar, French
franc, Canadian dollar, and the U.S. dollar. This pricing of key global markets
in terms of foreign currencies provides a level of diversification not generally
found in futures portfolios. In February 1991, JWH began trading a program in
which the same trading techniques utilized in the International Foreign Exchange
Program are primarily applied to the currencies of the major industrial nations
known as the Group of Seven, and Switzerland. These currencies are among the
most liquid, actively traded currencies in the world. The G-7 Currency Portfolio
makes use of both outright positions and cross-rate positions. Positions are
primarily taken in the Interbank market and from time to time on futures
exchanges. The Yen Financial Portfolio began in August 1991 and uses the same
trading system as the Financial and Metals Portfolio. The Yen Financial
Portfolio concentrates trading specifically in the Japanese Financial markets
trading only the Japanese Yen, the 10-year Japanese Government Bond, the
Euroyen, and the Nikkei 225 stock index. The International Currency and Bond
Portfolio, begun in January 1993, combines the techniques employed in the G-7
Currency Portfolio and the global bond sector of the Financial and Metals
Portfolio to make a combined portfolio of currencies and international long-term
bonds. The Global Financial Portfolio, which began trading client capital in
June 1994, utilizes the same long-term, quantitative reversal model as JWH's
first portfolio, the Original Investment Program. The portfolio is comprised of
diverse financial markets including select global currencies,
53
<PAGE> 61
interest rates, and stock indexes, as well as energy. The Dollar Program began
trading proprietary capital in June 1994. This program is designed to capitalize
on price movements in the U.S. dollar utilizing an intermediate term
quantitative trend analysis model, and takes outright positions in the Japanese
yen, German mark, Swiss franc and British pound versus the U.S. dollar. The
Delevered Yen Denominated Financial and Metals Portfolio was opened at the
request of a client in October 1995. It is not open to new investment except at
the sole discretion of JWH. This program seeks to capitalize on sustained moves
in global financial markets utilizing intermediate-term and long-term
quantitative trend analysis models, some of which attempt to employ neutral
stances during periods of nontrending markets. This portfolio is traded at
approximately one-half of the leverage of the traditional Financial and Metals
Portfolio and is traded from the perspective of the Japanese yen. The Worldwide
Bond Program began trading proprietary capital in 1994. This program invests in
the long-term portion of global interest rate markets. Although this program
concentrates on one sector, diversification is achieved by trading the interest
rate instruments of numerous countries. The program utilizes the proprietary
quantitative models developed by JWH, but with a moderate level of leverage as
compared with programs that participate in multiple market sectors. The KT
Diversified Program, which began in 1983 and closed in February 1994,
participated in 8 market sectors and traded 19-24 commodities only on U.S.
exchanges.
PAST PERFORMANCE
Table A sets forth the composite performance capsule results of all
accounts traded according to the Global Diversified Portfolio of JWH for the
period July 1988 through February, 1996.
Table A-1 sets forth the composite performance capsule results of all
accounts traded according to the Original Investment Program of JWH for the
period July 1988 through February, 1996.
Table A-2 reflects the composite capsule performance results of all other
trading programs directed by JWH during the periods indicated by the table.
Table A-3 reflects the composite capsule performance results of all trading
programs directed by JWH Investments, Inc. ("JWHII") an affiliate of JWH
registered as a commodity trading advisor and an investment advisor, during the
periods indicated by the table.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
54
<PAGE> 62
Table A
John W. Henry & Co., Inc.
Global Diversified Portfolio
July 1, 1988 Through February 29, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Percentage monthly rate of return (computed on a compounded monthly basis)
- -------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January..................... (1.3) (6.9) (2.6) 1.7 (12.3) (1.3) 16.9 1.1 -
February.................... (9.8) 13.5 (0.8) 16.6 (15.2) 7.1 27.9 1.4 -
March....................... - 8.5 4.0 2.9 1.1 (4.9) 10.7 0.5 -
April....................... - 7.3 0.9 6.6 (3.9) 3.8 5.9 (1.8) -
May......................... - 1.2 7.9 1.5 (1.9) 2.5 (15.1) 18.7 -
June........................ - (1.7) 10.8 1.0 6.5 1.6 3.1 (14.5) -
July........................ - (8.9) (2.6) 14.3 17.4 (16.8) 5.3 17.4 (15.9)
August...................... - (5.0) (6.4) (0.0) 6.1 0.4 12.0 (12.6) 20.9
September................... - (5.1) 2.1 (4.2) (5.3) 18.2 8.2 (7.8) (7.2)
October..................... - (2.2) (3.6) 0.1 (1.6) 0.2 (6.9) (15.7) 2.1
November.................... - 5.9 5.6 3.1 (0.2) 1.9 (0.3) 21.7 1.0
December.................... - 14.9 (4.1) 6.1 (0.1) 28.2 (2.3) 5.0 (5.4)
Annual (or Period)
Rate of Return.......... -11.0% 19.6% 10.1% 59.8% -12.6% 40.4% 77.5% 4.8% -7.9%
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Average Annual Rate of Return (1/1/91-2/29/96) 17.47%
Compound Average Annual Rate of Return (7/1/88-2/29/96) (i) 19.56%
- -------------------------------------------------------------------------------------------------------------------------
Inception of Client Account Trading by CTA: October 1982
Inception of Client Account Trading in Program: June 1988
<S> <C> <C>
Number of Open Accounts as of February 29, 1996: 21
Aggregate Assets (Excluding "Notional" Equity) in all Programs: $1,320,206,000 (2/96)
Aggregate Assets (Including "Notional" Equity) in all Programs: $1,340,118,000 (2/96)
Aggregate Assets (Excluding "Notional" Equity) in Program: $99,977,000 (2/96)
Aggregate Assets (Including "Notional" Equity) in Program: $119,889,000 (2/96)
Largest Monthly Draw-Down:
Past Five Years and Year to Date: 16.82% (7/91)
July 1988 to Date (ii): 16.82% (7/91)
Largest Peak-to-Valley Draw-Down:
Past Five Years and Year to Date: 29.09% (12/91-5/92)
July 1988 to Date (ii): 32.06% (7/89-10/89)
</TABLE>
- -----------------------
Notes follow Table A-3
(i) This Compound Average Annual Rate of Return is shown as a comparison to the
Compound Pro Forma Average Annual Rate of Return
prepared by the General Partner for the same time period on Table B.
(ii) This draw-down information is shown as a comparison to the pro forma
draw-down information prepared by the General Partner
for the same time period on Table B.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
55
<PAGE> 63
Table A-1
John W. Henry & Co., Inc.
Original Investment Program
July 1, 1988 Through February 29, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Percentage monthly rate of return (computed on a compounded monthly basis)
- ------------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January.............................. 5.3 2.2 (2.9) (0.8) (6.1) (0.5) 7.1 0.8 -
February............................. (7.4) 17.9 1.5 9.5 (8.8) 0.3 (2.0) (19.9) -
March................................ - 16.6 4.4 (3.5) 0.7 (2.1) 18.4 11.7 -
April................................ - 9.1 0.2 10.4 (0.8) (5.8) 12.4 (5.1) -
May.................................. - (4.4) 5.5 0.1 (4.5) 4.4 (10.9) 29.0 -
June................................. - 1.7 6.6 (4.1) 8.3 (0.7) 7.2 (3.9) -
July................................. - (0.0) (7.1) 14.9 9.1 (7.4) 10.9 8.1 (19.8)
August............................... - (3.9) (4.7) (3.6) 9.1 (3.6) 19.1 (13.7) (4.3)
September............................ - (3.9) (2.8) 0.6 (2.7) 10.7 (2.1) (13.2) 6.3
October.............................. - 3.3 (14.1) (1.5) 2.2 (3.9) (1.9) (12.0) (2.5)
November............................. - 1.1 10.2 3.5 3.6 (1.3) 1.0 7.4 1.6
December............................. - 6.8 (0.0) 11.4 2.2 17.7 (2.3) 9.8 (12.5)
Annual (or Period)
Rate of Return................... -2.5% 53.2% -5.7% 40.6% 10.9% 5.4% 66.8% -10.8% -29.2%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Average Annual Rate of Return (1/1/91-2/29/96) 17.66%
Compound Average Annual Rate of Return (7/1/88-2/29/96) (i) 12.34%
- ------------------------------------------------------------------------------------------------------------------------------------
Inception of Client Account Trading by CTA: October 1982
Inception of Client Account Trading in Program: October 1982
<S> <C>
Number of Open Accounts as of February 29, 1996: 18
Aggregate Assets (Excluding "Notional" Equity) in all Programs: $1,320,206,000 (2/96)
Aggregate Assets (Including "Notional" Equity) in all Programs: $1,340,118,000 (2/96)
Aggregate Assets in Program: $99,082,000 (2/96)
Largest Monthly Draw-Down:
Past Five Years and Year to Date: 14.11% (10/94)
July 1988 to Date (ii): 19.91% (2/89)
Largest Peak-to-Valley Draw-Down
Past Five Years and Year to Date: 26.17% (6/94-10/94)
July 1988 to Date (ii): 46.46% (7/88-10/89)
</TABLE>
- -----------------------
Notes follow Table A-3
(i) This Compound Average Annual Rate of Return is shown as a comparison to the
Compound Pro Forma Average Annual Rate of Return prepared by the General
Partner for the same time period on Table B-1.
(ii) This draw-down information is shown as a comparison to the pro forma
draw-down information prepared by the General Partner for the same time
period on Table B-1.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
56
<PAGE> 64
Table A-2
Other Trading Programs Directed by JWH
For the Period January 1991 Through February 29, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Inception Number
of Client of Aggregate Assets
Trading in Open in Program
Name of Program Program Accounts February 29, 1996
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Financial and Metals Portfolio Oct-84 88 $857,229,000
World Finacial Perspective Apr-87 5 $14,175,000
TM
InterRate Dec-88 1 $16,896,000
International Foreign Exchange Program Aug-86 8 $78,085,000
G-7 Currency Portfolio Feb-91 10 $85,791,000
International Currency and Bond Portfolio Jan-93 1 $2,028,000
Global Financial Portfolio Jun-94 3 $14,344,000
Delevered Yen Denominated Financial and Metals Profile Oct-95 1 554,675,000
(Yen Denominated)
KT Diversified Program Jan-84 N/A-Closed N/A-Closed
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Largest
Largest Peak-to-
Monthly Valley
Name of Program Draw-Down Draw-Down
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Financial and Metals Portfolio 18.0% (1/92) 39.5% (12/91-5/92)
World Finacial Perspective 21.6% (1/92) 41.1% (9/90-10/92*)
TM
InterRate 9.7% (9/92) 17.8% (8/92-2/94*)
International Foreign Exchange Program 12.0% (1/92) 24.1% (12/91-4/92)
G-7 Currency Portfolio 10.7% (1/92) 19.5% (7/93-1/95)
International Currency and Bond Portfolio 6.7% (7/94) 20.1% (6/94-1/95)
Global Financial Portfolio 17.4% (11/94) 46.0% (6/94-1/95)
Delevered Yen Denominated Financial and Metals Profile 3.2% (2/96) 3.2% (1/96-2/96)
KT Diversified Program 19.2% (7/91) 46.7% (9/90-3/92)
- ---------------------------------------------------------------------------------------------------------------
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage Rate of Return
(Computed on a Compounded Monthly Basis)
Name of Program 1996 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financial and Metals Portfolio 0.1 38.5 (5.3) 46.8 (10.9) 61.9
(2 Months)
World Finacial Perspective 1.3 32.2 (15.2) 13.7 (23.2) 14.6
(2 Months)
TM
InterRate 1.7 5.2 3.4 (5.4) (0.7) 8.7
(2 Months)
International Foreign Exchange Program (2.6) 16.9 (6.3) (4.5) 4.5 38.7
(2 Months)
G-7 Currency Portfolio (1.4) 32.2 (4.9) (6.3) 14.6 48.5
(2 Months)
International Currency and Bond Portfolio (1.1) 36.5 (2.3) 14.8 - -
(2 Months)
Global Financial Portfolio 0.4 86.2 (37.7) - - -
(2 Months) (7 Months)
Delevered Yen Denominated Financial and Metals Profile (0.7) 0.2 - - - -
(2 Months) (3 Months)
KT Diversified Program - - (14.0) 20.6 (11.9) (2.1)
(2 Months)
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Notes follow Table A-3
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
57
<PAGE> 65
Table A-2 (Continued)
Other Trading Programs Directed by JWH
For the Period January 1991 Through February 29, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------
Inception Number Aggregate Assets
of Client of Aggregate Assets in Program
Trading in Open in Program December 31, 1995
Name of Program Program Accounts February 29, 1996 (Excluding Notional Funds
- ----------------------------------------------------------------------------------------------------------------------------
Yen Financial Portfolio: Jan-92 10 $52,624,000
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Account 1 Jan-92 1 $7,458,000
Account 2 Apr-92 N/A-Closed N/A-Closed
Account 3 Feb-92 N/A-Closed N/A-Closed
Account 4 Apr-94 N/A-Closed N/A-Closed
Account 5 Nov-93 N/A-Closed N/A-Closed
Account 6 Nov-93 N/A-Closed N/A-Closed
Account 7 Dec-92 1 $1,560,000
Account 8 Jan-93 1 $3,603,000
Account 9 Jan-93 N/A-Closed N/A-Closed
Account 10 Apr-93 N/A-Closed N/A-Closed
Account 11 Jan-94 N/A-Closed N/A-Closed
Account 12 Dec-92 N/A-Closed N/A-Closed
Account 13 Mar-94 1 $1,035,000
Account 14 Jan-94 1 $991,000
Account 15 Dec-94 1 6,182,000 $6,182,000
Account 16 Jun-94 N/A-Closed N/A-Closed N/A-Closed
Account 17 Jun-94 1 $24,188,000
Account 18 Jun-94 N/A-Closed N/A-Closed
Account 19 Aug-94 1 $3,669,000
Account 20 Apr-94 N/A-Closed N/A-Closed
Account 21 Mar-94 N/A-Closed N/A-Closed
Account 22 Apr-94 N/A-Closed N/A-Closed
Account 23 Jan-95 1 $2,131,000
Account 24 Apr-93 N/A-Closed N/A-Closed
Account 25 Oct-93 N/A-Closed N/A-Closed
Account 26 Mar-94 1 189,476,000
(Yen Denominated)
- ----------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------
Largest
Largest Peak-to-
Monthly Valley
Name of Program Draw-Down Draw-Down
- ---------------------------------------------------------------------------
Yen Financial Portfolio: (See Below) (See Below)
- ---------------------------------------------------------------------------
<S> <C> <C> <C>
Account 1 14.4% (2/92) 17.5% (1/92-2/92)
Account 2 11.7% (5/92) 11.7% (4/92-5/92)
Account 3 11.5% (2/92) 11.5% (2/92-2/92)
Account 4 5.4% (5/94) 10.5% (4/94-12/94*)
Account 5 9.0% (8/95) 18.8% (4/95-8/95*)
Account 6 6.3% (5/94) 16.5% (4/94-1/95*)
Account 7 4.9% (7/95) 15.8% (12/93-1/95)
Account 8 6.9% (7/95) 14.2% (4/95-2/96*)
Account 9 6.2% (7/95) 15.8% (4/95-12/95*)
Account 10 5.8% (5/94) 19.9% (11/93-9/94*)
Account 11 5.5% (5/94) 11.0% (4/94-8/94*)
Account 12 6.0% (7/95) 12.4% (4/95-10/95*)
Account 13 6.2% (7/95) 15.0% (4/95-10/95*)
Account 14 6.0% (7/95) 15.1% (4/94-1/95)
Account 15 6.6% (7/95) 16.6% (4/95-2/96*)
Account 16 5.1% (7/94) 10.4% (6/94-11/94*)
Account 17 6.5% (7/95) 12.0% (4/95-10/95*)
Account 18 3.6% (7/94) 9.9% (6/94-1/95)
Account 19 7.1% (7/95) 17.3% (4/95-2/96*)
Account 20 4.7% (5/94) 7.0% (4/94-9/94*)
Account 21 6.3% (5/94) 11.0% (4/94-9/94*)
Account 22 9.1% (5/94) 12.9% (4/94-9/94*)
Account 23 7.5% (7/95) 20.5% (4/95-2/96*)
Account 24 6.1% (5/94) 17.9% 11/93-12/94*)
Account 25 6.0% (5/94) 14.1% (4/94-12/94*)
Account 26 4.6% (5/95) 12.8% (3/94-1/95*)
- ---------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Percentage Rate of Return
(Computed on a Compounded Monthly Basis)
Name of Program 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------------------
Yen Financial Portfolio: ------------------------------(See Amount Detail Below)-----------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Account 1 (3.3) 20.6 (13.0) 76.4 20.1 -
(2 Months) (12 Months)
Account 2 - - - 62.6 27.0 -
(9 Months) (9 Months)
Account 3 - - - - 32.7 -
(11 Months)
Account 4 - - (7.4) - - -
(9 Months)
Account 5 - 20.0 (13.4) 5.2 - -
(8 Months) (2 Months)
Account 6 - (0.7) (15.1) 4.8 - -
(1 Month) (2 Months)
Account 7 (0.3) 31.4 (14.1) 69.2 0.1 -
(2 Months) (1 Month)
Account 8 (1.8) 21.0 (8.8) 76.3 - -
(2 Month) (12 Months)
Account 9 - 10.9 (4.1) 43.6 - -
(12 Months) (1 Month)
Account 10 - - (19.0) 25.3 - -
(9 Months) (9 Months)
Account 11 - - (6.7) - - -
(8 Months)
Account 12 0.3 26.6 (5.1) 73.9 (1.0) -
(1 Month) (1 Month)
Account 13 (1.7) 18.5 (10.1) - - -
(2 Months) (10 Months)
Account 14 (1.7) 22.4 (7.5) - - -
(2 Month) (12 Months)
Account 15 (2.5) 18.3 0.2 - - -
(2 Month) (1 Month)
Account 16 - - (7.9) - - -
(7 Months)
Account 17 (0.9) 24.2 (1.6) - - -
(2 Months) (7 Months)
Account 18 - 48.1 (6.6) - - -
(3 Months) (7 Months)
Account 19 (1.4) 21.1 (4.3) - - -
(2 Months) (5 Months)
Account 20 - - (4.6) - - -
(6 Months)
Account 21 - - (9.8) - - -
(7 Months)
Account 22 - - (9.8) - - -
(6 Months)
Account 23 (3.3) 13.2 - - - -
(2 Months) (12 Months)
Account 24 - - (16.6) 26.5 - -
(12 Months) (9 Months)
Account 25 - - (12.5) 3.2 - -
(12 Months) (3 Months)
Account 26 0.0 28.1 (11.2) - - -
(2 Month) (10 Months)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------------
Notes follow Table A-3
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
58
<PAGE> 66
Table A-3
Other Trading Programs Directed by JWHII
For the Period September 1991 Through July 31, 1995
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
Inception Number Largest
of of Largest Peak-to-
Trading Open Aggregate Assets Monthly Valley
Name of Program Program Accounts in Program Draw-Down Draw-Down
<S> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Financial and Metals Portfolio Sep-91 N/A-Closed N/A-Closed 16.6% (1/92) 34.4% (12/91-5/92)
TM
InterRate Feb-92 N/A-Closed N/A-Closed 9.3% (9/92) 20.6% (8/92-11/93*)
(11 Months) (11 Months)
- --------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Percentage Rate of Return
(Computed on a Compounded Monthly Basis)
Name of Program 1995 1994 1993 1992 1991
<S> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Financial and Metals Portfolio 30.3 (0.8) 46.1 (4.0) 58.5
(7 Months) (4 Months)
TM
InterRate - - (9.9) 2.8 -
(11 Months) (11 Months)
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
- ------------------
Notes follow Table
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
59
<PAGE> 67
JWH AND JWHII
NOTES TO PERFORMANCE SUMMARY
NOTES TO TABLES A, A-1, A-2 AND A-3
(a) "Draw-Down" is defined as losses experienced by a program over a specified
period of time.
(b) "Largest Monthly Draw-Down" is the largest monthly loss experience by the
program on a composite basis in any calendar month expressed as a
percentage of the total equity in the program and includes the month and
year of such draw-down.
Individual accounts may have experienced larger monthly draw-downs.
(c) "Largest Peak-to-Valley Draw-Down" is the greatest cumulative percentage
decline in month-end net asset value (regardless of whether it is
continuous) due to losses sustained by the trading program during a period
in which the initial composite month-end net asset value of such draw-down
has not been equal or greater than any subsequent months' composite ending
net asset value and indicates the months and year(s) of such decline from
the initial month-end net asset value to the lowest month-end net asset
value of such decline. In the case where the trading program is in a
current draw-down, or was in a current draw-down when the trading program
closed, the month of the lowest net asset value of such draw-down is
disclosed followed by an asterisk(*).
For purposes of the Largest Peak-to-Valley Draw-Down calculation, any
peak-to-valley draw-down which began prior to the beginning of the most
recent five calendar year period is deemed to have occurred during such
five calendar year period.
Individual accounts may have experienced larger peak-to-valley draw-downs.
(d) "Annual (or Period) Rate of Return" is calculated by compounding the
Adjusted ROR (as described below) over the months in a given year, i.e.,
each Adjusted ROR, in hundredths, is added to one (1) and the result is
multiplied by the subsequent Adjusted ROR similarly expressed. One is then
subtracted from the product and the result is multiplied by one hundred
(100). The Compound Average Annual Rate of Return is similarly calculated
except that before subtracting one (1) from the product, the product is
exponentially changed by the factor of one (1) divided by the number of
years in the performance summary and then one (1) is subtracted. The
Compound Average Annual Rate of Return appears on Table A.
Adjusted rate of return ("Adjusted ROR") is calculated by dividing net
performance by the sum of beginning equity plus additions minus
withdrawals. For such purposes, all additions and withdrawals are
effectively treated as if they had been made on the first of the month even
if, in fact, they occurred later, unless, beginning in 1991, they are
material to the performance of a program, in which case they are
time-weighted.
ADDITIONAL NOTES TO ALL PERFORMANCE RECORDS:
An investor should note that in a presentation of past performance data,
different accounts, even though traded according to the same investment program,
can have varying investment results. The reasons for this include numerous
material differences among accounts including, but not limited to: a) procedures
governing timing for the commencement of trading and means of moving toward full
portfolio commitment of new accounts; b) the period during which accounts are
active; c) the investment program used (although all accounts may be traded in
accordance with the same approach, such approach may be modified periodically as
a result of ongoing research and development by JWH); d) leverage employed; e)
the size of the account, which can influence the size of positions taken and
restrict the account from participating in all markets available to an
investment program; f) the amount of interest income earned by an account, which
will depend on the rates paid by an FCM on equity deposits and/or on the portion
of an account invested in interest-bearing obligations such as U.S. Treasury
bills; g) the amount of management and incentive fees paid to an investment
manager and the amount of brokerage commissions paid; h) the timing of orders to
open or close positions; i) the market conditions, which in part determine the
quality of trade executions; and j) trading instructions/restrictions of the
client.
60
<PAGE> 68
During the periods covered by the capsule performance records, and
particularly since 1989, JWH increased and decreased leverage in certain markets
and entire programs, and also altered the composition of the markets and
contracts for certain programs. In general, before 1993, JWH programs used
greater leverage than they currently do. In addition, the subjective aspects
listed in the "Trading Techniques" section have been utilized more often in
recent years and therefore may have had a more pronounced effect on performance
results during recent periods. In reviewing the JWH capsule performance records,
prospective investors should bear in mind the possible effects of these
variations on rates of return and in the application of JWH's investment
methods.
The composite rates of return indicated should not be taken as
representative of any rate of return actually achieved by any single account
represented in the records. Investors are further cautioned that the data set
forth in the performance capsule records are not indicative of any results which
may be attained by JWH in the future since past performance is not necessarily
indicative of future results. JWH has decreased leverage in certain markets and
entire programs on several occasions over the last five years. These actions
have reduced the volatility of certain programs when compared to the volatility
prior to the decreases in leverage. While historical returns represent actual
performance achieved, investors should be aware that the degree of leverage
currently utilized may be significantly different from that used during previous
time periods.
ADDITIONAL FOOTNOTE TO THE GLOBAL DIVERSIFIED PORTFOLIO COMPOSITE TRACK RECORD
AND JWHII INTERRATE(TM) PERFORMANCE SUMMARIES UTILIZING THE FULLY-FUNDED SUBSET
METHOD (THE "SUMMARIES"):
The level of Actual Funds in the accounts that make up the Summaries
currently requires additional disclosure. Actual Funds are the amount of
margin-qualifying assets on deposit. Nominal Account Size is a dollar amount
which clients have agreed to in writing and which determines the level of
trading in the account regardless of the amount of Actual Funds. Notional Funds
are the amount by which the Nominal Account Size exceeds the amount of Actual
Funds. The amount of notional equity in the accounts that compose the Summaries
requires additional disclosure under current CFTC policy. The Summaries include
notional equity in excess of the 10% disclosure threshold established by the
CFTC and reflect the adoption of a method of presenting rate-of-return and
performance disclosure authorized by the CFTC, referred to as the Fully Funded
Subset method. This method permits notional and fully funded accounts to be
included in a single performance record.
To qualify for use of the Fully Funded Subset method, the Advisory requires
that certain computations be made in order to arrive at the Fully Funded Subset,
and that the accounts for which performance is so reported meet two tests which
are designed to provide assurance that the Fully Funded Subset and the resultant
Adjusted Rates of Return are representative of the programs.
These computations have been performed since January 1, 1992 for JWH and
the inception of JWHII InterRate(TM). They were designed to provide assurance
that the performance presented to the Summaries and calculated on a Fully Funded
Subset basis would be representative of such performance calculated on a basis
which includes notional equity in Beginning Equity. The Adjusted Rates of Return
in the Records are calculated by dividing Net Performance by the sum of
Beginning Equity plus Additions minus Withdrawals. JWH and JWHII believe that
this method yields substantially the same adjusted rates of return as would the
Fully Funded Subset method were there any "fully funded" accounts, and that the
Adjusted Rates of Return for the Records are representative of the programs for
the periods presented.
Rates of return determined on the basis of Beginning Equity (Actual Funds)
can be calculated from the Adjusted Rates of Return by dividing such Adjusted
Rates of Return by a fraction, the numerator of which is Beginning Equity
(Actual Funds) and the denominator of which is Beginning Equity. Alternatively,
these rates of return can be calculated by dividing Net Performance of Beginning
Equity (Actual Funds). As an example, in the Global Diversified Portfolio for
the month of August 1992, the Adjusted Rate of Return was 6.1 percent; an
account which had 50 percent Actual Funds would have had an Adjusted Rate of
Return of 12.2 percent (6.1%/50%).
61
<PAGE> 69
ADDITIONAL NOTES FOR THE FINANCIAL AND METALS PORTFOLIO COMPOSITE PERFORMANCE
SUMMARY
In May 1992, 35 percent of the assets in the Financial Metals Portfolio was
deleveraged 50 percent at the request of a client. The deleveraging materially
affected the rates of return in JWH's performance records. The 1992 annual rate
of return for these deleveraged accounts was negative 24.3 percent. The 1992
annual rate of return for the Financial and Metals Portfolio Composite
Performance Summary was negative 10.9 percent. If these accounts had been
excluded from the Financial and Metals Portfolio Composite Performance Summary,
the 1992 annual rate of return would have been negative 3.9 percent. The effect
of this deleveraging was eliminated in September 1992.
Additionally, the Financial and Metals Portfolio Composite Performance
Record includes the performance of several accounts that do not participate in
global markets due to their smaller account equities which do not meet the
minimums established for this program. Accounts not meeting such minimums can
experience performance materially different than the performance of an account
which meets the minimum account size. The performance of such accounts has no
material effect on the overall Financial Metals Portfolio Composite Performance
Summary.
In May 1991, one proprietary account began trading and in March 1992 a
second proprietary began trading pursuant to the Financial and Metals Portfolio.
Both accounts appear in the capsule performance from their inception until
August 1995. The maximum percentage of proprietary funds during this time was
less than 0.5%.
ADDITIONAL NOTE FOR YEN FINANCIAL PORTFOLIO COMPOSITE PERFORMANCE SUMMARIES
The Yen Financial Portfolio is traded from the Japanese yen perspective.
Accounts may be opened with either U.S. dollars or Japanese yen deposits.
Accounts originally opening with U.S. dollars establish additional interbank
positions in Japanese yen in an effort to enable such accounts to generate
returns similar to returns generated by accounts with yen-denominated balances.
Over time, as profits and losses are recognized in yen-denominated Japanese
markets, accounts may hold varying levels of U.S. dollars and Japanese yen.
Additionally, the interbank position is adjusted periodically to reflect the
actual portions of the account balances remaining in U.S. dollars. Because
performance may be affected by fluctuations in the dollar/yen conversion rate,
and investors may open accounts with either U.S. dollars or Japanese yen
deposits, performance records from the perspective of both denominations are
presented.
Accordingly, as the equity mix between U.S. dollars and Japanese yen
varies, performance from each perspective will also vary. Investors should be
aware that their individual account performance may differ from the composite
performance records presented in relation to the perspective of their base
currency. Such differences arise from exchange rate movements, percentage of
account balances held in yen, and fee arrangements.
ADDITIONAL NOTE FOR GLOBAL FINANCIAL PORTFOLIO COMPOSITE PERFORMANCE SUMMARY
Since the inception of the Global Financial Portfolio, the timing of
individual account openings has had a material impact on compounded rates of
return. Based on the account startup methodology used by JWH, the performance of
individual accounts composing the Global Financial Portfolio Composite
Performance Summary has varied. In 1994, the two accounts that were open
generated separate rates of return of -44% and -17%. For the period January 1995
through June 1995, the three open accounts achieved separate rates of return of
101%, 75% and 67%. As of June 1995, these accounts now maintain mature positions
and are performing consistently with each other. Due to the six-month period in
1995 of varied performance, the three accounts therefore achieved an annual rate
of return for 1995 of 122%, 92% and 78%, respectively.
Prior to December 1991 for JWH and July 1992 for JWHII, performance tables
are presented on a cash basis except as otherwise stated in the footnotes to the
tables. The recording of items on a cash basis should not, for most months, be
materially different to presenting such rates of return on an accrual basis. Any
differences in the monthly rates of return between the two methods would be
immaterial to the overall performance presented.
62
<PAGE> 70
Beginning with the change to the accrual basis of accounting for incentive
fees in December 1991 for JWH and July 1992 for JWHII, the net effect to monthly
net performance and the rate of return in the performance tables of continuing
to record interest income, management fees, commissions and other expenses on a
cash basis is materially equivalent to the full accrual basis.
ADDITIONAL NOTES TO THE PERFORMANCE SUMMARIES FOR THE GLOBAL DIVERSIFIED
PORTFOLIO, ORIGINAL INVESTMENT PROGRAM, THE GLOBAL FINANCIAL PORTFOLIO, THE
INTERNATIONAL CURRENCY AND BOND PORTFOLIO, AND THE G-7 CURRENCY PORTFOLIO
The performance capsules for the above-mentioned programs (except the
Global Diversified Portfolio and the G-7 Currency Portfolio) each presently
include one proprietary account trading pursuant to an investment in a fund. The
Proprietary Account included in the G-7 Currency Portfolio and the Global
Diversified Portfolio closed in December 1995. These proprietary accounts are
traded in exactly the same manner that client funds would be traded, and are
subject to all of the same fees and expenses that would be charged to a client
investment in the fund. Therefore, there is no material impact on the rates of
return presented.
The Global Diversified Portfolio began trading client capital in June 1988.
From July 1995 through December 1995 one proprietary account began trading
pursuant to an investment in a fund.
The Original Investment Program began trading client capital in October
1992. During certain periods covered in the capsule performance record,
proprietary funds are included. Client funds comprised the entire track record
during the period July 1988 through October 1994. In November 1994, one
proprietary account was traded pursuant to an investment in a fund.
The Global Financial Portfolio began trading client capital in June 1994.
In July 1995, one proprietary account began trading pursuant to an investment in
a fund.
The International Currency and Bond Portfolio began trading client capital
in January 1993. In October 1995, one proprietary account began trading pursuant
to an investment in a fund.
The G-7 Currency Portfolio began trading client capital in February 1991.
From July 1995 through December 1995, one proprietary was trading pursuant to an
investment in a fund.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
63
<PAGE> 71
Table B
John W. Henry & Co. Inc.
Pro Forma Performance
Global Diversified Portfolio
July 1, 1988 Through January 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Percentage pro forma monthly rate of return (computed on a compounded monthly basis)
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January........................ (1.28) (6.95) (3.04) 1.81 (12.53) (0.76) 15.83 1.96 -
February....................... - 13.40 (1.10) 16.38 (14.82) 7.33 23.65 1.76 -
March.......................... - 8.64 3.98 2.66 0.83 (4.65) 9.84 1.94 -
April.......................... - 7.12 0.71 6.58 (3.93) 3.67 9.85 (1.63) -
May............................ - 1.01 7.65 1.24 (1.85) 2.65 (13.44) 17.43 -
June........................... - (1.69) 10.18 1.34 6.91 1.52 3.36 (12.63) -
July........................... - (8.96) (2.72) 13.87 18.18 (16.59) 4.87 15.98 (16.20)
August......................... - (5.00) (6.44) (0.02) 5.73 0.37 10.29 (11.13) 19.42
September...................... - (5.12) 1.86 (4.14) (5.03) 18.34 6.95 (7.06) (7.08)
October........................ - (2.19) (3.65) (0.17) (1.64) 0.65 (5.93) (15.21) 1.68
November....................... - 5.88 5.49 2.96 (0.47) 2.04 (0.23) 22.58 1.30
December....................... - 14.72 (4.12) 5.69 (0.31) 28.26 (2.37) 4.60 (4.77)
Annual (or Period)
Pro Forma Rate of Return... -1.28% 18.88% 7.61% 57.69% -12.29% 43.19% 75.25% 11.17% -8.79%
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Pro Forma Average Annual Rate of Return (1/1/91-1/31/96) 19.76%
Compound Pro Forma Average Annual Rate of Return (7/1/88-1/31/96) 21.74%
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Largest Monthly Draw-Down:
Past Five Years and Year to Date: 16.59% (7/91)
July 1988 to Date: 16.59% (7/91)
Largest Peak-to-Valley Draw-Down:
Past Five Years and Year to Date: 29.16% (12/91-5/92)
July 1988 to Date: 29.97% (7/89-10/89)
</TABLE>
- --------------------
Notes appear at Page 76
THE ACCOMPANYING FOOTNOTES ARE AN INTEGRAL PART OF THIS PRO FORMA PERFORMANCE
CAPSULE
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
64
<PAGE> 72
Table B-1
John W. Henry & Co. Inc.
Pro Forma Performance
Original Investment Program
July 1, 1988 Through January 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
Percentage pro forma monthly rate of return (computed on a compounded monthly basis)
- --------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January........................ 4.72 2.20 (3.23) (1.08) (6.27) 0.28 7.08 0.35 -
February....................... - 16.54 1.60 8.89 (8.93) (0.24) (1.83) (19.11) -
March.......................... - 15.97 4.12 (3.53) 2.64 (1.48) 18.48 12.15 -
April.......................... - 8.81 0.38 9.27 (0.79) (5.76) 12.33 (5.30) -
May............................ - (4.33) 4.90 0.08 (4.27) 4.33 (10.64) 29.13 -
June........................... - 1.41 6.48 (3.44) 8.61 (0.58) 7.35 (3.19) -
July........................... - (0.18) (7.10) 13.57 8.77 (7.48) 10.55 7.78 (20.22)
August......................... - (4.05) (5.09) (3.84) 8.48 (3.53) 17.60 (13.28) (4.74)
September...................... - (4.02) (3.13) 0.43 (2.79) 10.83 (1.47) (12.80) 5.96
October........................ - 3.07 (13.71) (1.84) 1.82 (4.45) (1.16) (11.73) (2.97)
November....................... - 1.14 10.17 3.09 2.93 (1.28) 1.45 7.79 1.54
December....................... - 6.83 (0.32) 10.15 1.67 19.00 (2.20) 10.15 (12.32)
Annual (or Period)
Pro Forma Rate of Return... 4.72% 49.28% -7.10% 34.14% 10.45% 6.97% 68.59% -7.94% -30.44%
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Pro Forma Average Annual Rate of Return (1/1/91-1/31/96) 17.82%
Compound Pro Forma Average Annual Rate of Return (7/1/88-1/31/96) 12.75%
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Largest Monthly Draw-Down:
Past Five Years and Year to Date: 13.71% (10/94)
July 1988 to Date: 20.22% (7/88)
Largest Peak-to-Valley Draw-Down:
Past Five Years and Year to Date: 26.30% (6/94-10/94)
July 1988 to Date: 46.06% (7/88-10/89)
</TABLE>
- --------------------
Notes appear at Page 76
THE ACCOMPANYING FOOTNOTES ARE AN INTEGRAL PART OF THIS PRO FORMA PERFORMANCE
CAPSULE
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
65
<PAGE> 73
MILLBURN RIDGEFIELD CORPORATION
BACKGROUND
Millburn Ridgefield Corporation ("Millburn") is a Delaware corporation
organized in May 1982 to manage discretionary accounts in the futures and
forward markets. Millburn is the corporate successor to a futures trading and
advisory organization which has been managing assets since 1971. All references
to Millburn prior to May 1982 refer to its predecessors. Millburn has been
registered with the Commodity Futures Trading Commission (the "CFTC") as a
commodity trading advisor since July 1, 1982 and as a commodity pool operator
since September 13, 1984. Millburn is also registered with the CFTC as a futures
commission merchant. Millburn's main business address is 600 Steamboat Road,
Greenwich, Connecticut 06830; telephone (203) 625-7554. A description of the
principals of Millburn follows:
PRINCIPALS
Harvey Beker. Mr. Beker, age 42, is President, Co-Chief Executive Officer
and a Director of Millburn and The Millburn Corporation, and a partner of
ShareInVest Research L.P., which manages assets in equity markets. He received a
Bachelor of Arts degree in economics from New York University in 1974 and a
Master of Business Administration degree in finance from N.Y.U. in 1975. From
June 1975 to July 1977, Mr. Beker was employed by Loeb Rhoades, Inc., where he
developed and traded silver arbitrage strategies. From July 1977 to June 1978,
Mr. Beker was a futures trader at Clayton Brokerage Co. of St. Louis. Mr. Beker
joined The Millburn Corporation June 1978. During his tenure at Millburn he has
been instrumental in the development of the research, trading and operations.
Mr. Beker became a principal of the firm in 1982.
George E. Crapple. Mr. Crapple, age 51, is Vice Chairman, Co-Chief
Executive Officer and a Director of Millburn, a Director of The Millburn
Corporation and a partner of ShareInVest. In 1966 he graduated with honors from
the University of Wisconsin where his field of concentration was economics, and
he was elected to Phi Beta Kappa. In 1969 he graduated from Harvard Law School
magna cum laude where he was a member of the Harvard Law Review. He was a lawyer
with Sidley & Austin, Chicago, Illinois, from 1969 until April 1, 1983, as a
partner since 1975, specializing in commodities, securities, corporate and tax
law. He was first associated with Millburn in 1976 and joined Millburn full time
in April 1983. He is a member of the Financial Products Advisory Committee of
the CFTC; a former member of the Board of Directors of the Futures Industry
Association; and a former Chairman of the Eastern Business Conduct Committee of
the National Futures Association.
Barry Goodman. Mr. Goodman, age 38, is Senior Vice President, Director of
Trading, Co-Director of Research and a principal of the firm. Mr. Goodman joined
Millburn in 1982. His direct responsibilities include overseeing the firm's
trading operation and managing its trading relationships, as well as the design
and implementation of trading systems. From 1980 through late 1982, he was a
commodity trader for E.F. Hutton & Co. At Hutton he developed and implemented
trading strategies pertaining to the futures market. He graduated magna cum
laude from Harpur College of the State University of New York in 1979 with a
B.A. in economics.
Grant N. Smith. Mr. Smith, age 43, is Senior Vice President, Co-Director
of Research and a principal of the firm. He has direct responsibility for the
design, testing and implementation of quantitative trading strategies, as well
as for planning and overseeing the computerized decision-support systems of the
firm. He joined Millburn in 1975. He received a B.S. degree in 1974 and an M.S.
degree in 1975 from the Massachusetts Institute of Technology. While at MIT, he
held several teaching and research positions in the computer science field and
participated in various projects relating to database management.
Mark B. Fitzsimmons. Mr. Fitzsimmons, age 48, is Senior Vice President and
a principal of the firm. His responsibilities include both marketing and
investment strategy. He graduated summa cum laude from the University of
Bridgeport, Connecticut in 1970 with a B.S. in economics. His graduate work was
done at the University of Virginia, where he received a certificate of candidacy
for a Ph.D. in economics in 1973. He joined Millburn in 1990 from Morgan Stanley
& Co. Inc. where he was a Principal and Manager of institutional foreign
exchange sales and was involved in strategic trading for the firm. From 1977 to
1987 he
66
<PAGE> 74
was with Chemical Bank New York Corporation, first as a Senior Economist in
Chemical's Foreign Exchange Advisory Service and later as a Vice President and
Manager of Chemical's Corporate Trading Group. While at Chemical he also traded
both foreign exchange and fixed income products. From 1973 to 1977 Mr.
Fitzsimmons was employed by the Federal Reserve Bank of New York, dividing his
time between the International Research Department and the Foreign Exchange
Department.
Dennis B. Newton. Mr. Newton, age 43, is Vice President of Millburn. His
primary responsibilities are in administration and marketing. Prior to joining
Millburn in August of 1991, Mr. Newton was President of Phoenix Asset
Management, a registered commodity pool operator from April 1990 to August 1991.
Mr. Newton was a Director of Managed Futures with Prudential-Bache Securities
from September 1987 to March 1990. He joined Prudential-Bache from Heinold Asset
Management, Inc. where he was a member of the senior management team. Heinold
was a pioneer and one of the largest sponsors of funds utilizing futures and
currency forward trading.
Malcolm H. Wiener. Mr. Wiener, age 60, is the founder and non-executive
Chairman of Millburn. The Millburn Corporation and ShareInVest, serves as an
advisor to these entities and is a major investor in funds managed by Millburn
and ShareInVest. He does not, however, have investment or operational authority
or responsibility for any of the entities or supervisory authorities over their
officers or employees. Mr. Wiener graduated magna cum laude from Harvard College
in 1957, where his field of concentration was economics and he was elected to
Phi Beta Kappa. From 1957 to 1960 he served as an officer in the United States
Navy. Mr. Wiener graduated from the Harvard Law School in 1963 and practiced law
in New York City specializing in corporate law and financial transactions until
1973. Mr. Wiener began research on and trading of futures contracts pursuant to
systematic trading methods and money management principles in 1971 and the
management on a full-time basis of private funds in this area in 1973. He is the
author of numerous papers on the history of trade and is a member of the Council
on Foreign Relations. He serves on the board or visiting committees of various
non-profit institutions including the Kennedy School of Government and the
Wiener Center for Social Policy at Harvard University, the Harvard Art Museums,
the Metropolitan Museum in New York, the Museum of Fine Arts in Boston, the
American School of Classical Studies in Athens and the Council on Economic
Priorities in New York.
TRADING STRATEGY
Millburn offers three separate basic portfolios, a Diversified Portfolio,
which is offered in two versions -- Original and World Resource which has a
lower currency and a higher energy and agricultural commodity weighting than
original -- a Financial Markets Portfolio and a Currency Portfolio. Each
portfolio, at the present time, uses the same trading methods. Millburn will
trade the World Resource version of its Diversified Portfolio for the
Partnership. The World Resource version of the Diversified Portfolio was first
traded, and is currently traded, in an account established by Millburn and its
principals January 1, 1995. The Partnership employs the World Resource version
of the Diversified Portfolio.
DIVERSIFIED PORTFOLIO
Millburn trades a broadly diversified portfolio of approximately fifty
markets in the following six sectors: currencies, precious and industrial
metals, debt instruments, stock indices, agricultural commodities and energy.
The following table compares the respective market sector weightings of the
Original and World Resource versions of the Diversified Portfolio as of March
1996.
<TABLE>
<CAPTION>
CURRENCIES AND FINANCIALS
----------------------------------------- NON-FINANCIALS
INTEREST STOCK --------------------------------------
CURRENCIES RATES INDICIES TOTAL ENERGY AGRICULTURAL METALS TOTAL
---------- -------- --------- ----- ------ ------------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Original........................ 41% 19% 5% 65% 7% 14% 14% 35%
World Resource.................. 19% 19% 11% 49% 17% 19% 15% 51%
</TABLE>
The principal technical trading systems which generate buy and sell signals
for each market have been developed through actual trading experience and
through computer testing against historical futures trading
67
<PAGE> 75
data. Given trends in price of sufficient duration and magnitude, these trading
systems may be profitable even though more than half of all individual trades
are unprofitable. A period of time without such trends, however, may result in
substantial losses. While the trading method and trading systems are continually
tested and revised, the basic money management principles have remained
unchanged.
The money management principles which Millburn employs include: (a)
limiting trading to markets which Millburn believes to be sufficiently liquid in
respect to the amount of trading contemplated; (b) diversifying positions among
various markets and market sectors to limit exposure in any one area; (c)
limiting the assets committed as margin (including imputed margins on forward
positions), generally, within a range of 15% to 40% of the assets at minimum
exchange margin requirements, although the amount committed to margin at any
time may be substantially higher; (d) prohibiting pyramiding (that is, using
unrealized profits in a particular market as margin for additional positions in
the same market); and (e) changing the equity utilized for trading by an account
solely on a controlled periodic basis rather than as an automatic consequence of
an increase in equity resulting from trading profits.
Decisions whether to trade a particular market are based upon various
factors, including the liquidity of the market, its significance in terms of
desired degrees of concentration and diversifications, and its profit potential,
both historically and at a given time. These decisions require the exercise of
judgment by Millburn. Judgmental decisions not to trade certain markets for
certain periods, or to reduce the size of a position in a particular market, may
result at times in missing significant profit opportunities.
The money management principles, computer-assisted research into historical
trading data and judgment and experience of Millburn are factors upon which
decisions concerning the percentage of assets to be used for each market traded
and the size of positions taken or maintained will be based. From time to time
non-systematic decisions to increase, decrease, cover or reverse a futures or
forward position may be made. Such decisions also require the exercise of
judgment and may include consideration of the volatility of the particular
market; the pattern of price movement, both inter-day and intra-day; open
interest; volume of trading; changes in spread relationships between various
contract months and between related futures and forward contracts; and overall
portfolio balance and risk exposure.
With regard to the technique of execution of trades, Millburn may rely to
an extent on the judgment of others, including floor brokers. No assurance is
given that it will be possible to execute trades regularly at or near the
desired buy or sell point.
In addition to systematic futures and forward trading, Millburn will engage
in options trading and may engage in spread and straddle trading--a type of
transaction involving the simultaneous buying and selling of futures contracts
for the same market with different delivery dates to earn profits from a
widening or narrowing movement of the prices of the futures contracts. Such
trading may or may not involve technical trend analysis.
CURRENCY PORTFOLIO
Millburn trades approximately twenty to thirty different currencies in its
Currency Portfolio, including "cross-rate" positions (positions in two different
currencies other than the United States dollar), primarily pursuant to the
proprietary, technical trading systems described above.
FINANCIAL MARKETS PORTFOLIO
Millburn manages several accounts which trade approximately forty markets
in four sectors: currencies, debt instruments, stock indices and precious and
industrial metals. Millburn adjusts the leverage at which it trades different
portfolios to reflect the number of markets traded and the weightings of the
various markets and will adjust leverage in particular markets from time to
time. At the present time, Millburn utilizes similar systems and methods to
trade a particular market whether that market is in a narrowly diversified
(e.g., currency only), fully diversified or financials portfolio.
The Currency Portfolio and the Financial Markets Portfolio use the same
basic trading method and trading systems as the Diversified Portfolio. Millburn
has and may in the future adjust the leveraging used in
68
<PAGE> 76
the Currency Portfolio and/or Financial Markets Portfolio to reflect the assumed
greater volatility of a concentrated portfolio.
PAST PERFORMANCE
Table A represents the composite performance record of Millburn's World
Resource version of the Diversified Portfolio for the period January 1995
through February 1996.
Table A-1 represents the composite performance record of Millburn's
Diversified Portfolio for the period July 1988 through February 1996.
Table A-2 represents the composite capsule performance results of all other
trading programs directed by Millburn for the time periods indicated.
Past performance is not necessarily indicative of future results.
69
<PAGE> 77
Table A
Millburn Ridgefield Corporation
World Resource Version of the Diversified Portfolio
January 1, 1995 Through February 29, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Percentage monthly rate of return
(computed on a compounded monthly basis)
- ------------------------------------------------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
January......................................................... (0.41) 0.92
February........................................................ (12.20) 6.49
March........................................................... - 10.03
April........................................................... - 5.55
May............................................................. - 4.03
June............................................................ - 3.44
July............................................................ - (5.51)
August.......................................................... - (2.17)
September....................................................... - (5.96)
October......................................................... - (2.28)
November........................................................ - 1.12
December........................................................ - 17.70
Annual (or Period) Rate of Return............................... -12.56% 35.79%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Inception of Client Account Trading by CTA: February 1971
Inception of Client Account Trading in Program: January 1995
<S> <C> <C>
Number of Open Accounts as of February 29, 1996: 4
Aggregate Assets in all Programs: $488,503,000 (2/96)
Aggregate Assets in Program: $45,418,000 (2/96)
Largest Monthly Draw-Down: 12.20% (2/96)
Largest Peak-to-Valley Draw-Down: 15.06% (6/95-10/95)
</TABLE>
- -----------------------
Notes follow Table A-2
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
70
<PAGE> 78
Table A-1
Millburn Ridgefield Corporation
Diversified Portfolio
July 1, 1988 Through February 29, 1996
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
Percentage monthly rate of return (computed on a compounded monthly basis)
- -----------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January...................... 7.80 (3.09) (7.56) (2.69) (8.53) (5.32) 4.33 3.18 -
February..................... (11.19) 6.81 (1.47) 5.78 (1.34) 1.40 4.21 (4.67) -
March........................ - 16.85 7.67 (0.70) (0.72) 2.60 2.99 7.53 -
April........................ - 4.64 (2.27) 5.76 (0.73) (0.09) 2.40 (1.51) -
May.......................... - (1.10) 4.63 (1.79) 0.90 (1.13) (5.66) 17.04 -
June......................... - 0.99 5.80 (2.54) 14.25 1.63 3.51 (8.11) -
July......................... - (2.48) (3.00) 5.11 8.87 (3.61) 16.05 (3.62) (9.26)
August....................... - 1.43 (5.26) (8.06) 7.56 (6.09) 3.39 (8.53) (0.47)
September.................... - (1.84) 3.68 1.09 (0.19) 0.91 2.73 (2.74) 0.67
October...................... - 0.06 3.02 (0.70) (3.95) (0.30) 7.65 (8.78) 1.49
November..................... - 0.20 4.76 1.33 2.66 0.10 3.00 4.74 6.11
December..................... - 7.92 2.46 9.02 (0.73) 16.35 0.24 7.93 (4.27)
Annual (or Period)
Rate of Return............... -4.26% 32.82% 11.78% 10.90% 17.31% 4.87% 53.38% -0.96% -6.28%
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Average Annual Rate of Return (1/1/91-2/29/96) 13.68%
Compound Average Annual Rate of Return (7/1/88-2/29/96) 14.16%
- -----------------------------------------------------------------------------------------------------------------------------------
Inception of Client Account Trading by CTA: February 1971
Inception of Client Account Trading in Program: February 1971
<S> <C> <C>
Number of Open Accounts as of February 29, 1996: 6
Aggregate Assets in all Programs: $488,503,000 (2/96)
Aggregate Assets in Program: $134,242,000 (2/96)
Largest Monthly Draw-Down:
Past Five Years and Year to Date: 11.19% (2/96)
July 1988 to Date: 11.19% (2/96)
Largest Peak-to-Valley Draw-Down:
Past Five Years and Year to Date: 11.19% (1/96-2/96)*
July 1988 to Date: 28.13% (5/89-10/89)
</TABLE>
- -----------------------
Notes follow Table A-2
(i) This Compound Average Annual Rate of Return is shown as a comparison to the
Compound Pro Forma Average Annual Rate of Return
prepared by the General Partner for the same time period on Table B.
(ii) This draw-down information is shown as a comparison to the pro forma
draw-down information prepared by the General Partner
for the same time period on Table B.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
71
<PAGE> 79
Table A-2
Millburn Ridgefield Corporation
Other Trading Programs Directed by Millburn
For the Period January 1991 Through February 29, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------------
Inception Number Largest
of Client of Aggregate Assets Largest Peak-to-
Trading in Open in Program Monthly Valley
Name of Program Program Accounts February 29, 1996 Draw-Down Draw-Down
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Global Program-Normal Leverage Nov-89 5 $204,991,000 9.04% (1/94) 13.50% (6/94-1/95)
Global Program-High Leverage Jul-93 4 $29,620,000 12.93% (1/94) 20.00% (6/94-1/95)
Currency Program-Normal Leverage Nov-89 9 $59,858,000 9.35% (8/93) 25.49% (9/92-1/95)
Currency Program-High Leverage Jul-93 1 $14,374,000 13.10% (8/93) 29.75% (7/93-1/95)
- -------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
Percentage Rate of Return
(Computed on a Compounded Monthly Basis)
Name of Program 1996 1995 1994 1993 1992 1991
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Global Program-Normal Leverage 1.74 25.76 (5.24) 9.10 9.66 8.36
(2 Months)
Global Program-High Leverage 1.00 32.15 (9.03) 9.34 - -
(2 Month) (6 Months)
Currency Program-Normal Leverage 3.48 18.88 (7.90) (13.00) 12.47 (1.92)
(2 Month)
Currency Program-High Leverage 3.91 25.15 (21.29) (11.10) - -
(2 Month) (6 Months)
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
- --------------------------------------
Notes follow Table
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
72
<PAGE> 80
MILLBURN
NOTES TO TABLES A, A-1, AND A-2
(a) "Draw-Down" is defined as losses experienced by a program over a specified
period of time.
(b) "Largest Monthly Draw-Down" is the largest monthly loss experienced by the
program on a composite basis in any calendar month expressed as a
percentage of the total equity in the program and includes the month and
year of such draw-down.
Individual accounts may have experienced larger monthly draw-downs.
(c) "Largest Peak-to-Valley Draw-Down" is the greatest cumulative percentage
decline in month-end net asset value (regardless of whether it is
continuous) due to losses sustained by the trading program during a period
in which the initial composite month-end net asset value of such
peak-to-valley draw-down has not been equal or greater than any subsequent
month's composite ending net asset value and indicates the months and
year(s) of such decline from the initial month-end net asset value to the
lowest month-end net asset value of such decline. In the case where the
trading program is in a current draw-down, or was in a current draw-down
when the trading program closed, the month of the lowest net asset value of
such draw-down is disclosed followed by an asterisk (*).
For purposes of the Largest Peak-to-Valley draw-down calculation, any
draw-down which began prior to the beginning of the most recent five
calendar year period is deemed to have occurred during such five calendar
year period.
Individual accounts may have experienced larger peak-to-valley draw-downs.
(d) "Annual (or Period) Rate of Return" is calculated by compounding the Monthly
ROR (as described below) over the months in a given year, i.e., each
Monthly ROR, in hundredths, is added to one (1) and the result is
multiplied by the subsequent Monthly ROR similarly expressed. One is then
subtracted from the product and the result is multiplied by one hundred
(100). The compound Average Annual Rate of Return is similarly calculated
except that before subtracting one (1) from the product, the product is
exponentially changed by the factor of one (1) divided by the number of
years in the performance summary and then one (1) is subtracted. The
Compound Average Annual Rate of Return appears on Table 1.
Monthly rate of return ("Monthly ROR") is calculated by dividing net profit
(loss) for the month by that month's starting Equity. If there were
additions or withdrawals during a month which, when included in the
starting equity figure used to calculate Monthly ROR, increased or
decreased the Monthly ROR by 10% or more from the Monthly ROR calculated
without including the additions or withdrawals in starting equity, Monthly
ROR was calculated by dividing net profit (loss) by starting equity plus
additions, minus withdrawals.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS.
73
<PAGE> 81
Table B
Millburn Ridgefield Corporation
Pro Forma Performance
World Resource Version of the Diversified Portfolio
January 1, 1995 Through January 31, 1996
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
Percentage pro forma monthly rate of return
(computed on a compounded monthly basis)
- -------------------------------------------------------------------------------------------------------------------
1996 1995
<S> <C> <C>
January........................................................... (1.41) 0.30
February.......................................................... - 4.55
March............................................................. - 7.31
April............................................................. - 3.86
May............................................................... - 2.66
June.............................................................. - 2.15
July.............................................................. - (5.76)
August............................................................ - (2.12)
September......................................................... - (6.36)
October........................................................... - (2.35)
November.......................................................... - 1.22
December.......................................................... - 17.30
Annual (or Period) Pro Forma Rate of Return....................... -1.41% 22.74%
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C> <C>
- -------------------------------------------------------------------------------------------------------------------
Largest Monthly Draw-Down: 6.36% (9/95)
Largest Peak-to-Valley Draw-Down: 15.65% (6/95-10/95)
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
_____________________
Notes appear at Page 76
THE ACCOMPANYING FOOTNOTES ARE AN INTEGRAL PART OF THIS PRO FORMA PERFORMANCE
CAPSULE
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
74
<PAGE> 82
Table B-1
Millburn Ridgefield Corporation
Pro Forma Performance
Diversified Portfolio
July 1, 1988 Through January 31, 1996
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
Percentage pro forma monthly rate of return (computed on a compounded monthly basis)
- ------------------------------------------------------------------------------------------------------------------------
1996 1995 1994 1993 1992 1991 1990 1989 1988
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
January...................... 6.75 (3.43) (8.15) (3.04) (8.83) (5.84) 4.24 3.19 -
February..................... - 6.16 (2.17) 5.52 (1.75) 0.97 4.17 (5.08) -
March........................ - 14.33 7.19 (1.28) (1.16) 2.35 3.02 7.89 -
April........................ - 3.82 (2.66) 5.43 (1.14) (0.51) 2.35 (1.84) -
May.......................... - (1.23) 4.44 (2.04) 0.33 (1.43) (7.04) 17.74 -
June......................... - 0.57 5.20 (3.05) 14.06 1.36 3.49 (8.30) -
July......................... - (3.22) (3.67) 5.06 7.83 (4.20) 17.77 (4.36) (10.34)
August....................... - 1.24 (5.79) (9.06) 6.44 (6.60) 2.86 (9.50) (1.03)
September.................... - (2.44) 3.22 0.75 (0.41) 0.29 2.33 (3.06) 0.14
October...................... - (0.87) 2.72 (0.96) (4.65) (0.97) 6.60 (9.09) 0.92
November..................... - (0.29) 5.11 1.16 2.63 (0.33) 2.51 4.45 6.20
December..................... - 8.20 1.86 9.41 (1.18) 18.80 0.05 7.64 (4.90)
Annual (or Period)
Pro Forma Rate of Return..... 6.75% 23.57% 6.12% 6.71% 10.71% 1.78% 49.28% -3.95% -9.43%
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Compound Pro Forma Average Annual Rate of Return (1/1/91-1/31/96) 10.79%
Compound Pro Forma Average Annual Rate of Return (7/1/88-1/31/96) 10.86%
- ------------------------------------------------------------------------------------------------------------------------
<S> <C>
Largest Monthly Draw-Down:
Past Five Years and Year to Date: 9.06% (8/93)
July 1988 to Date: 10.34% (7/88)
Largest Peak-to-Valley Draw-Down:
Past Five Years and Year to Date: 14.33% (12/90-11/91)
July 1988 to Date: 30.05% (5/89-10/89)
</TABLE>
- ---------------------
Notes appear at Page 76
THE ACCOMPANYING FOOTNOTES ARE AN INTEGRAL PART OF THIS PRO FORMA PERFORMANCE
CAPSULE
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
75
<PAGE> 83
NOTES TO TABLES B AND B-1 FOR ALL ADVISORS
Tables B and B-1 were prepared by the General Partner and present the
results of applying certain arithmetical calculations to various figures in each
Advisor's performance record for the program or portfolio which will be traded
for the Partnership in order to indicate approximately what the month-to-month
effect on such figures would have been had the accounts in question been charged
the brokerage, management and incentive fees which will be paid by the
Partnership, as opposed to the brokerage commissions and management and
incentive fees which they did in fact pay, and received interest income on 80%
of account equity. Adjustments for pro forma other expenses and initial and
continuous offering and organizational expenses were made to each of the Tables
B and B-1, where applicable, based upon an assumed average partnership size of
$40 million. The pro forma calculations are made on a month-to-month basis,
i.e., the pro forma adjustment to trading profits (losses), brokerage
commissions, management and incentive fees and interest income in one month does
not affect the actual figures which are used in the following month for making
the similar pro forma calculations for that period, except for pro forma
incentive fees as described in Note 4. Accordingly, the pro forma tables do not
reflect on a cumulative basis the effect of the difference between the fees to
be charged to and interest earned by the Partnership and the fees and
commissions charged to and interest earned by the Partnership and the fees and
commissions charged to and interest earned by the accounts in the actual
performance tables.
1. Pro forma brokerage fees for each month have been calculated by adding the
sum of (a) actual ending equity, actual management and incentive fees,
actual brokerage commissions, actual other expenses and pro forma interest
income minus actual interest income (the "Base Amount"), and (b)
multiplying the result by 1/2 of 1%, plus estimated NFA, exchange,
"give-up" and floor brokerage fees.
2. Pro forma management fees for each month have been calculated by taking the
Base Amount, subtracting pro forma brokerage fees and multiplying the
result by 1/6 of 1% for all Advisors except JWH, which has been calculated
using 1/3 of 1%.
3. Pro forma other expenses have been calculated by taking the Base Amount,
subtracting pro forma brokerage fees and pro forma management fees and
multiplying the result by 1/12 of .38%.
4. Pro forma incentive fees have been calculated by: (a) adding to the actual
net performance, actual management and incentive fees, actual brokerage
commissions and actual other expenses, (b) subtracting actual interest
income, pro forma brokerage fees, pro forma management fees and pro forma
other expenses, and (c) multiplying the resulting figure by 20% for all
Advisors except JWH, which has been calculated using 15%. Pro forma
incentive fees were calculated on a monthly basis (in accordance with
generally accepted accounting principles) and as to reflect the reversal of
previously accrued incentive fees when profits sufficient to generate
incentive fees are recognized as of the end of an interim month in a
quarter but lost in a subsequent month in such quarter. In the case where
there is cumulative negative net performance, which must be reversed before
an incentive fee becomes payable, and there are net withdrawals, the
cumulative negative net performance amount has been proportionately
reduced.
5. Pro forma interest income has been calculated by: (a) adding actual
beginning equity to the sum of: actual ending equity, actual management and
incentive fees, actual brokerage commissions and actual other expenses, (b)
subtracting actual interest income, (c) dividing this sum by two, (d)
multiplying by 80% and (e) then multiplying the result by the monthly
historical 30-day Treasury bill rate. For purposes of the calculation of
pro forma interest income, Partnership interest was estimated using
historical 30-day Treasury bill rates of the time period presented on
Tables B and B-1. Such rates are higher than current 30-day Treasury bill
rates that will be used to calculate Partnership interest income. The
application of historical rates may compare more closely to the interest
income reflected in the Advisors' performance tables which was most likely
earned at the then prevailing interest rates of a particular time period.
The Partnership will reimburse SB from interest earned until the amount of
interest accrued equals the amount of all offering and organizational
expenses of the initial offering period and the 1996 Continuous Offering,
plus interest at the prime rate quoted by The Chase Manhattan Bank N.A.
76
<PAGE> 84
6. Pro forma monthly rate of return ("Pro Forma Monthly ROR") equals pro
forma net performance divided by the actual beginning equity (from the
historical performance tables) or equity adjusted for material additions
and withdrawals, where applicable.
7. Pro forma annual rate of return equals the Pro Forma Monthly ROR ("Monthly
ROR") compounded over the number of periods in a given year, i.e. each Pro
Forma Monthly ROR in hundredths is added to one (1) and the result is
multiplied by the previous period's Pro Forma Monthly ROR similarly
expressed. One is then subtracted from the product. The Compound Pro Forma
Average Annual Rate of Return for the entire period presented is similarly
calculated except that before subtracting one (1) from the product, the
product is exponentially changed by the factor of one (1) divided by the
number of years in the period presented and then one (1) is subtracted. The
compound pro forma average annual rate of return for the entire period
appears as the last entry in the column.
8. "Largest Monthly Draw-Down" is the largest pro forma monthly loss
experienced by the program on a composite basis in any calendar month
expressed as a percentage of the total equity in the program and includes
the month and year of such draw-down.
9. "Largest Peak-to-Valley Draw-Down" is the greatest cumulative pro forma
percentage decline in month end net asset value (regardless of whether it
is continuous) due to losses sustained by the trading program during a
period in which the initial composite month-end net asset value of such
peak-to-valley draw-down has not been equal or greater than any subsequent
month's composite ending net asset value and indicates the months and
year(s) of such decline from the initial month-end net asset value to the
lowest month-end net asset value of such decline.
77
<PAGE> 85
TABLE C
HYPOTHETICAL COMPOSITE ADJUSTED PERFORMANCE RECORD
FOR THE PERIOD JULY 1, 1988 THROUGH JANUARY 31, 1996
<TABLE>
<CAPTION>
COMPOSITE OF COMPOUND
ACTUAL MONTHLY HYPOTHETICAL ANNUAL
PERIOD ENDING RATE OF RETURN $1,000 UNIT RATE OF RETURN
- ---------------------------------------------------------------- -------------- ------------ --------------
<S> <C> <C> <C>
1988
JULY............................................................ (12.18)% $ 878
AUGUST.......................................................... 4.88 921
SEPTEMBER....................................................... 0.49 926
OCTOBER......................................................... 4.28 965
NOVEMBER........................................................ 6.50 1,028
DECEMBER........................................................ (1.08) 1,017 1.68
1989
JANUARY......................................................... 3.34 1,051
FEBRUARY........................................................ (5.82) 989
MARCH........................................................... 6.43 1,053
APRIL........................................................... (5.09) 999
MAY............................................................. 20.74 1,207
JUNE............................................................ (8.70) 1,102
JULY............................................................ 7.23 1,181
AUGUST.......................................................... (11.19) 1,049
SEPTEMBER....................................................... (4.73) 1,000
OCTOBER......................................................... (9.52) 904
NOVEMBER........................................................ 6.98 968
DECEMBER........................................................ 16.85 1,131 11.21
1990
JANUARY......................................................... 4.50 1,182
FEBRUARY........................................................ 6.99 1,264
MARCH........................................................... 8.38 1,370
APRIL........................................................... 4.93 1,438
MAY............................................................. (7.59) 1,329
JUNE............................................................ 2.99 1,368
JULY............................................................ 9.04 1,492
AUGUST.......................................................... 11.85 1,669
SEPTEMBER....................................................... 2.16 1,705
OCTOBER......................................................... 1.29 1,727
NOVEMBER........................................................ 0.73 1,739
DECEMBER........................................................ (0.52) 1,730 53.03
1991
JANUARY......................................................... (2.31) 1,691
FEBRUARY........................................................ 3.84 1,755
MARCH........................................................... 0.71 1,768
APRIL........................................................... (1.29) 1,745
MAY............................................................. 0.66 1,756
JUNE............................................................ 0.05 1,757
JULY............................................................ (5.45) 1,662
AUGUST.......................................................... (3.52) 1,603
SEPTEMBER....................................................... 6.29 1,704
OCTOBER......................................................... 1.54 1,730
NOVEMBER........................................................ (2.03) 1,695
DECEMBER........................................................ 16.66 1,977 14.28
1992
JANUARY......................................................... (10.17) 1,776
FEBRUARY........................................................ 16.25 2,065
MARCH........................................................... (18.59) 1,681
APRIL........................................................... (0.44) 1,674
MAY............................................................. (1.10) 1,655
JUNE............................................................ 8.36 1,794
JULY............................................................ 11.17 1,994
AUGUST.......................................................... 5.63 2,106
SEPTEMBER....................................................... (3.86) 2,025
OCTOBER......................................................... 1.06 2,046
NOVEMBER........................................................ 2.04 2,088
DECEMBER........................................................ (0.69) 2,074 4.87
1993
JANUARY......................................................... (0.05) 2,073
FEBRUARY........................................................ 11.95 2,321
MARCH........................................................... 1.72 2,361
APRIL........................................................... 7.48 2,537
MAY............................................................. 0.35 2,546
JUNE............................................................ (0.21) 2,541
JULY............................................................ 10.21 2,800
AUGUST.......................................................... 1.41 2,840
SEPTEMBER....................................................... (1.40) 2,800
OCTOBER......................................................... 0.28 2,808
NOVEMBER........................................................ 1.60 2,853
DECEMBER........................................................ 6.60 3,041 46.62
1994
JANUARY......................................................... (4.50) 2,904
FEBRUARY........................................................ (3.00) 2,817
MARCH........................................................... 3.21 2,908
APRIL........................................................... (0.36) 2,897
MAY............................................................. 6.38 3,082
JUNE............................................................ 6.56 3,284
JULY............................................................ (3.33) 3,175
AUGUST.......................................................... (4.03) 3,047
SEPTEMBER....................................................... 2.19 3,113
OCTOBER......................................................... 0.10 3,117
NOVEMBER........................................................ 4.99 3,272
DECEMBER........................................................ 0.85 3,300 8.51
1995
JANUARY......................................................... (2.02) 3,233
FEBRUARY........................................................ 3.13 3,335
MARCH........................................................... 9.92 3,666
APRIL........................................................... 4.33 3,824
MAY............................................................. 3.83 3,971
JUNE............................................................ 0.59 3,994
JULY............................................................ (4.16) 3,828
AUGUST.......................................................... (2.77) 3,722
SEPTEMBER....................................................... (2.79) 3,618
OCTOBER......................................................... (1.26) 3,573
NOVEMBER........................................................ 2.18 3,651
DECEMBER........................................................ 10.95 4,050 22.72
1996
JANUARY......................................................... 1.23 4,100 1.23
COMPOUND AVERAGE ANNUAL RATE OF RETURN (JULY 1988-JANUARY 1996) 20.45
</TABLE>
<TABLE>
<CAPTION>
HYPOTHETICAL COMPOSITE
WEIGHTED AVERAGE
ADJUSTED HYPOTHETICAL
PERIOD ENDING RATE OF RETURN $1,000 UNIT
- ---------------------------------------------------------------- ---------------------- ------------
<S> <C> <C>
1988
JULY............................................................ (12.96)% $ 870
AUGUST.......................................................... 4.34 908
SEPTEMBER....................................................... 0.18 910
OCTOBER......................................................... 3.51 942
NOVEMBER........................................................ 6.02 999
DECEMBER........................................................ (1.49) 984
1989
JANUARY......................................................... 3.34 1,017
FEBRUARY........................................................ (5.99) 956
MARCH........................................................... 6.78 1,020
APRIL........................................................... (5.19) 967
MAY............................................................. 21.32 1,174
JUNE............................................................ (8.23) 1,077
JULY............................................................ 6.79 1,150
AUGUST.......................................................... (11.25) 1,021
SEPTEMBER....................................................... (4.46) 975
OCTOBER......................................................... (9.65) 881
NOVEMBER........................................................ 7.28 945
DECEMBER........................................................ 16.44 1,101
1990
JANUARY......................................................... 4.37 1,149
FEBRUARY........................................................ 6.74 1,226
MARCH........................................................... 8.29 1,328
APRIL........................................................... 5.79 1,405
MAY............................................................. (7.89) 1,294
JUNE............................................................ 3.14 1,334
JULY............................................................ 9.18 1,457
AUGUST.......................................................... 10.83 1,615
SEPTEMBER....................................................... 1.76 1,643
OCTOBER......................................................... 0.94 1,659
NOVEMBER........................................................ 0.34 1,664
DECEMBER........................................................ (0.93) 1,649
1991
JANUARY......................................................... (2.53) 1,607
FEBRUARY........................................................ 3.69 1,666
MARCH........................................................... 0.57 1,676
APRIL........................................................... (1.92) 1,644
MAY............................................................. 0.39 1,650
JUNE............................................................ (0.15) 1,648
JULY............................................................ (6.14) 1,546
AUGUST.......................................................... (3.76) 1,488
SEPTEMBER....................................................... 6.52 1,585
OCTOBER......................................................... 1.32 1,606
NOVEMBER........................................................ (2.42) 1,567
DECEMBER........................................................ 18.12 1,852
1992
JANUARY......................................................... (10.38) 1,659
FEBRUARY........................................................ 14.33 1,897
MARCH........................................................... (17.91) 1,557
APRIL........................................................... (0.86) 1,544
MAY............................................................. (1.47) 1,521
JUNE............................................................ 8.10 1,644
JULY............................................................ 11.11 1,827
AUGUST.......................................................... 5.03 1,919
SEPTEMBER....................................................... (4.10) 1,840
OCTOBER......................................................... 0.51 1,850
NOVEMBER........................................................ 1.63 1,880
DECEMBER........................................................ (1.13) 1,859
1993
JANUARY......................................................... (0.22) 1,855
FEBRUARY........................................................ 11.61 2,070
MARCH........................................................... 1.37 2,098
APRIL........................................................... 7.03 2,246
MAY............................................................. 0.11 2,248
JUNE............................................................ (0.37) 2,240
JULY............................................................ 9.99 2,464
AUGUST.......................................................... 0.72 2,482
SEPTEMBER....................................................... (1.80) 2,437
OCTOBER......................................................... (0.17) 2,433
NOVEMBER........................................................ 1.44 2,468
DECEMBER........................................................ 6.27 2,623
1994
JANUARY......................................................... (5.06) 2,490
FEBRUARY........................................................ (3.18) 2,411
MARCH........................................................... 2.94 2,482
APRIL........................................................... (0.61) 2,466
MAY............................................................. 6.14 2,618
JUNE............................................................ 6.33 2,784
JULY............................................................ (3.95) 2,674
AUGUST.......................................................... (4.58) 2,551
SEPTEMBER....................................................... 1.73 2,595
OCTOBER......................................................... (0.78) 2,575
NOVEMBER........................................................ 5.01 2,704
DECEMBER........................................................ 0.19 2,709
1995
JANUARY......................................................... (2.74) 2,635
FEBRUARY........................................................ 3.41 2,725
MARCH........................................................... 9.95 2,996
APRIL........................................................... 4.11 3,119
MAY............................................................. 3.38 3,224
JUNE............................................................ (0.03) 3,223
JULY............................................................ (4.66) 3,073
AUGUST.......................................................... (3.26) 2,973
SEPTEMBER....................................................... (3.05) 2,882
OCTOBER......................................................... (1.39) 2,842
NOVEMBER........................................................ 2.30 2,907
DECEMBER........................................................ 10.54 3,214
1996
JANUARY......................................................... 0.96 3,245
COMPOUND AVERAGE ANNUAL RATE OF RETURN (JULY 1988-JANUARY 1
</TABLE>
<TABLE>
<CAPTION>
HYPOTHETICAL
COMPOUND
ANNUAL
PERIOD ENDING RATE OF RETURN
- ---------------------------------------------------------------- ---------------------
<S> <C>
1988
JULY............................................................
AUGUST..........................................................
SEPTEMBER.......................................................
OCTOBER.........................................................
NOVEMBER........................................................
DECEMBER........................................................ (1.64)
1989
JANUARY.........................................................
FEBRUARY........................................................
MARCH...........................................................
APRIL...........................................................
MAY.............................................................
JUNE............................................................
JULY............................................................
AUGUST..........................................................
SEPTEMBER.......................................................
OCTOBER.........................................................
NOVEMBER........................................................
DECEMBER........................................................ 11.91
1990
JANUARY.........................................................
FEBRUARY........................................................
MARCH...........................................................
APRIL...........................................................
MAY.............................................................
JUNE............................................................
JULY............................................................
AUGUST..........................................................
SEPTEMBER.......................................................
OCTOBER.........................................................
NOVEMBER........................................................
DECEMBER........................................................ 49.81
1991
JANUARY.........................................................
FEBRUARY........................................................
MARCH...........................................................
APRIL...........................................................
MAY.............................................................
JUNE............................................................
JULY............................................................
AUGUST..........................................................
SEPTEMBER.......................................................
OCTOBER.........................................................
NOVEMBER........................................................
DECEMBER........................................................ 12.29
1992
JANUARY.........................................................
FEBRUARY........................................................
MARCH...........................................................
APRIL...........................................................
MAY.............................................................
JUNE............................................................
JULY............................................................
AUGUST..........................................................
SEPTEMBER.......................................................
OCTOBER.........................................................
NOVEMBER........................................................
DECEMBER........................................................ 0.39
1993
JANUARY.........................................................
FEBRUARY........................................................
MARCH...........................................................
APRIL...........................................................
MAY.............................................................
JUNE............................................................
JULY............................................................
AUGUST..........................................................
SEPTEMBER.......................................................
OCTOBER.........................................................
NOVEMBER........................................................
DECEMBER........................................................ 41.09
1994
JANUARY.........................................................
FEBRUARY........................................................
MARCH...........................................................
APRIL...........................................................
MAY.............................................................
JUNE............................................................
JULY............................................................
AUGUST..........................................................
SEPTEMBER.......................................................
OCTOBER.........................................................
NOVEMBER........................................................
DECEMBER........................................................ 3.30
1995
JANUARY.........................................................
FEBRUARY........................................................
MARCH...........................................................
APRIL...........................................................
MAY.............................................................
JUNE............................................................
JULY............................................................
AUGUST..........................................................
SEPTEMBER.......................................................
OCTOBER.........................................................
NOVEMBER........................................................
DECEMBER........................................................ 18.64
1996
JANUARY......................................................... 0.96
COMPOUND AVERAGE ANNUAL RATE OF RETURN (JULY 1988-JANUARY 1 16.79
</TABLE>
- ---------------
See hypothetical composite pro forma description on page 79.
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
78
<PAGE> 86
NOTES TO TABLE C
The compound annual Hypothetical Composite Weighted Average Adjusted Annual
Rate of Return for each year is calculated by applying on a compound basis each
of the Hypothetical Composite Weighted Average Adjusted Monthly Rates of Return
for such quarter or year, not by adding or averaging such monthly Rates of
Return.
The Hypothetical Composite Adjusted Performance Record was prepared by the
General Partner and is a result of (a) making certain pro forma adjustments to
the respective historical performance records of the three Advisors' programs to
be used for the Partnership in an attempt to approximate the brokerage fees,
management fees, incentive fees, other expenses, and interest income calculated
in accordance with the fee and income structure of the Partnership as opposed to
the corresponding fees, expenses or income actually charged or earned in the
historical performance records (for purposes of the calculation of Partnership
interest income, historical 30-day Treasury bill rates of the time period
presented on Tables B and B-1 were used. Such rates are higher than current
30-day Treasury bill rates that will be used to calculate Partnership interest
income. The application of historical rates may compare more closely to the
Advisor's interest income which was most likely earned at the then prevailing
interest rates of a particular time period.), (b) assuming the following initial
allocation of Partnership assets is made to the Advisors: Chesapeake -- one
third; JWH -- one third; and Millburn -- one third. In the case of Chesapeake
and JWH, their allocable share of Partnership assets were then further allocated
to two separate portfolios as traded by those Advisors: Chesapeake-50% to the
Diversified Trading Program and 50% to the Financials and Metals Program and
JWH-50% to the Global Diversified Program and 50% to the Original Investment
Program. Chesapeake's pro forma performance record for the Financials and Metals
Program commenced after July 1, 1988. For purposes of calculating the
Hypothetical Composite Weighted Average Pro Forma Rate of Return; (i)
Chesapeake's share of assets were allocated to the Chesapeake's Diversified
Trading Program until March 1992 (the time the Financials and Metals Program
started trading) then a proportional amount of Chesapeake's assets were
allocated to each portfolio in accordance with the General Partner's trading
allocations and (ii) pro forma monthly rates of return calculated based upon
Millburn's Diversified Portfolio Composite (a version of the World Resource
Program) were used for the period July 1988 through December 1994 and pro forma
monthly rates of return calculated based upon Millburn's World Resource Program
were used beginning January 1, 1995 (the time the World Resource Program began
trading), (c) calculating a combined weighted Pro Forma Rate of Return and (d)
applying on a compound basis each of the monthly Hypothetical Composite Weighted
Average Pro Forma Rates of Return to an assumed hypothetical investment of
$1,000, made at the beginning of the period. For example, Chesapeake's initial
allotment of $333 to the Diversified Trading Program was multiplied by their Pro
Forma Rate of Return in Table B. In July 1988, Chesapeake Pro Forma Rate of
Return was (10.30)%, which results in a decrease of $34 for the first month and
a corresponding decrease to their trading allotment to $299. Next, this process
was repeated for each Advisor and each Advisor's new trading allocations were
added to reach a net asset value as of the end of the month of $870, a decrease
of 12.96% over the initial $1,000. Finally, these computations were repeated
each month, beginning with last month's assets allocated to each Advisor plus
trading profits or losses.
The trading results presented in each Advisor's program or portfolio traded
for the Partnership are based upon an account or group of accounts traded by the
respective Advisors in programs similar to the ones traded for the Partnership.
The Hypothetical Composite Adjusted Performance Record does not reflect how
the Partnership operates, but is based instead upon estimates and assumptions
considered by the General Partner to be reasonable. Prospective investors must
note, however, that there are other methods by which the Hypothetical Composite
Adjusted Performance Record could have reasonably been calculated. Such
alternative methods may have produced different composite performance results.
Irrespective of the limitations of the pro forma adjustments that have been
made to the Advisor's historical records, any composite of different trading
approaches that have never, in fact, traded an account together is necessarily
artificial and hypothetical in some respects. Such hypothetical presentations
are also subject to the fact that they can be designed with the benefit of
hindsight.
79
<PAGE> 87
The hypothetical $1,000 unit column represents the net asset value of a
hypothetical unit as of the end of each month.
The Hypothetical Composite Adjusted Performance Record is based on pro
forma adjustments to actual trading results; it contains no simulated
performance. However, the table is nevertheless hypothetical in that no single
account has been managed by the Advisors as a group. CFTC and NFA regulations
require that the following cautionary legend accompany all hypothetical trading
records: HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT
LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT
REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN
EXECUTED, THE RESULTS MAY HAVE UNDER-OR-OVER COMPENSATED FOR THE IMPACT, IF
ANY, OF CERTAIN MARKET FACTORS SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING
PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH
THE BENEFIT OF HINDSIGHT, NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL
OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.
The above table must be read in conjunction with the description of the
manner in which the Pro Forma Rates of Return for each Advisor were calculated
set forth under "The Advisors -- Notes to Table B and B-1 for all Advisors". The
Hypothetical Composite Adjusted Performance Record has been calculated on the
basis of Pro Forma Rate of Return figures only and Rate of Return may not be an
accurate indication of actual performance due to the effect of additions and
withdrawals and other factors. Investors should be careful to consider the
monthly rates of return and volatility before determining whether to invest. In
any event, past results are no guarantee of future performance and no
representation is made that the Partnership is likely to achieve profits similar
to those shown in the Hypothetical Composite Adjusted Performance Record.
Although the General Partner believes that the Hypothetical Composite
Adjusted Performance Record provides information pertinent to evaluating the
desirability of investing in the Partnership, prospective investors must
carefully consider the manner in which (a) the individual Advisor's Pro Forma
Rates of Return have been calculated and (b) weighted averages of these Pro
Forma Rates of Return have been derived for purposes of producing the
Hypothetical Composite Adjusted Performance Record in assessing the importance
of either of the above Tables to such investor's decision whether to purchase
Units.
MANAGEMENT AGREEMENTS
The Management Agreement that the General Partner and the Partnership has
entered into with each Advisor provides that the Advisor has sole discretion in
determining the investment of the assets of the Partnership allocated by the
General Partner to that Advisor subject to the Partnership's trading policies.
Each agreement continues in effect until June 30, 1996 and is renewable by the
General Partner for additional one-year periods upon notice to the Advisor not
less than 30 days prior to the expiration of the previous period. The agreement
can be terminated by the General Partner on 30 days' written notice to the
Advisor if (i) the Net Asset Value per Unit declines as of the close of business
on any day to $400 or less, (ii) the Net Assets allocated to an Advisor
(adjusted for redemptions, reallocations and withdrawals, 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 vote
to require the General Partner to terminate the agreement, (iv) the Advisor
fails to comply with the terms of the agreement, (v) the General Partner, acting
in good faith, upon due consideration by its Board of Directors reasonably
determines that the performance of the Advisor has been such that the General
Partner's fiduciary duties to the Partnership require termination of the
agreement, or (vi) the General Partner reasonably believes that the application
of speculative position limits resulting from the aggregation of the
Partnership's positions with those of the accounts managed by the Advisor and
its principals (if any) will substantially adversely affect the results of the
Partnership's commodity trading. The agreement also provides that the Advisor
may terminate the agreement upon 30 days' notice to the General Partner in the
event that (i) the Trading Policies are changed in a manner which the Advisor
reasonably believes will adversely affect the performance of its trading
strategies, (ii) at any time after June 30, 1996 or (iii) the General Partner or
Partnership fails to comply with the terms of the agreement. The Advisor may
immediately terminate the Agreement if (i) the General Partner fails to consent
to the Advisor's making a
80
<PAGE> 88
material change in the trading program outlined herein, (ii) the General Partner
requires the Advisor to liquidate its positions other than in order that the
General Partner may reallocate the Partnership's assets, meet margin calls on
the Partnership's account or fund redemptions or (iii) if the General Partner's
registration as a commodity pool operator or its membership in the NFA is
terminated or suspended. The General Partner may immediately terminate the
agreement of an Advisor if its controlling principal (or principals) dies,
becomes incapacitated, or is otherwise not managing the trading programs of the
Advisor, or if the respective Advisor merges, consolidates with another entity,
sells a substantial portion of its assets or becomes insolvent or bankrupt, or
if its registration with the CFTC or membership in NFA is suspended or
terminated.
The compensation payable by the Partnership to the Advisors under each
Management Agreement is described under "Fees and Expenses to the Partnership."
Under each Management Agreement the Advisor and its principals are free to
render advisory services with respect to other clients and accounts and may use
the same or different trading strategies which are utilized in managing the
Partnership's investments. However, the Advisor represents and agrees that any
such other services will not affect its capacity to continue to render services
to the Partnership of the quality and nature contemplated by the Management
Agreement. Further, if trading recommendations must be revised as a result of
the application of speculative position limits, the Advisor is required to
modify such orders in a manner which will not substantially disproportionately
affect the Partnership as compared with the Advisor's other accounts trading
that program. In addition, the Advisor represents and agrees that it will not
knowingly or deliberately use trading strategies for the Partnership which are
inferior to those used for any other client or account nor favor any other
account over the Partnership in any way, although certain Advisors may offer
different trading programs and the Advisor's trading will not necessarily
experience the same results as other accounts managed by the Advisor due to
differences in such variables including the portfolio selected (which may differ
from the trading programs selected and allocations utilized by other accounts);
the proportion of funds utilized as margin in the markets; brokerage commissions
and management and incentive fees (which may be higher or lower than other
accounts under the Advisor's management); and changes in the Advisor's trading
methodology, including the size and degree of diversification in terms of the
number of and differences in commodities traded at a particular time.
The agreement provides that with respect to any action in which the Advisor
is a party arising out of or in connection with the Management Agreement or the
management of the Partnership's assets, the Partnership and the General Partner
shall indemnify and hold harmless the Advisor, subject to receipt of an
independent legal opinion regarding the applicable standard of conduct, against
any loss, liability, damage, cost, expense (including attorneys' and
accountants' fees), judgments and amounts paid in settlement, incurred by such
person in connection with such action 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 if such actions did not involve negligence, intentional
misconduct, or a breach of fiduciary obligations to the Partnership as a
commodity trading advisor in accordance with applicable law. To the extent that
the Advisor has been successful in defense of any action, no independent legal
opinion is needed.
81
<PAGE> 89
FIDUCIARY RESPONSIBILITY
Duties of the General Partner. Except as described below, the General
Partner, to the exclusion of all limited partners, conducts and manages the
business of the Partnership including, without limitation, the investment of the
funds of the Partnership. The General Partner may delegate its responsibility
for the investment of the Partnership's assets to one or more qualified trading
advisors. The General Partner monitors the trading and performance of the
Partnership and does not "churn" or permit the "churning" of the Partnership's
account. The General Partner is further authorized to enter into the Customer
Agreement with SB described herein under "The Commodity
Broker/Dealer -- Customer Agreement" and to cause the Partnership to pay SB a
brokerage fee equal to 1/2 of 1% of month-end Net Assets allocated to the
Advisors (6% per year) per month. The General Partner may take such other
actions as it deems necessary or desirable to manage the business of the
Partnership including, but not limited to, the following: opening bank accounts
with state or national banks; paying, or authorizing the payment of,
distributions to the partners and expenses of the Partnership, such as incentive
fees, brokerage fees, legal and accounting fees, printing and reporting fees,
and registration and other fees of governmental agencies; and investing or
directing the investment of funds of the Partnership not being utilized as
margin deposits. The General Partner shall seek the best prices and services
available in its commodity futures brokerage transactions. The General Partner
reviews, not less often than annually, the brokerage rates charged to public
commodity pools which are comparable to the Partnership to determine, to the
extent practicable, that the brokerage fee paid by the Partnership is
competitive with such other rates. See "The Limited Partnership
Agreement -- Management of Partnership Affairs" and "Risk Factors -- Dissolution
of the Partnership; Cessation of Trading".
The General Partner has sole discretion in determining what distributions
(other than on redemptions of Units), if any, the Partnership will make to its
partners. See "The Limited Partnership Agreement -- Sharing of Profits and
Losses". The General Partner takes such actions as it deems necessary or
appropriate at any time to admit new or substituted limited partners to the
Partnership. See "The Limited Partnership Agreement -- Additional Partners" and
"The Limited Partnership Agreement -- Restrictions on Transfer or Assignment".
General Partner as a Fiduciary. Under New York law, the General Partner
has a responsibility to the limited partners to exercise good faith and fairness
in all dealings affecting the Partnership. The General Partner has fiduciary
responsibility for the safekeeping and use of all funds and assets of the
Partnership. The General Partner shall not permit the limited partners to
contract away the fiduciary obligation owed to the limited partners by the
General Partner under common law. The law of fiduciary duties is a developing
and changing area of the law and limited partners who have questions concerning
the responsibilities of the General Partner should consult their counsel. In the
event that a limited partner believes the General Partner has violated its
fiduciary responsibility to the limited partners, he may seek legal relief for
himself or on behalf of the Partnership, if the General Partner has refused to
bring the action, or if an effort to cause the General Partner to bring the
action is not likely to succeed, or may have a right to bring a class action on
behalf of all of the limited partners, under applicable laws, including
partnership, commodities or securities laws, to recover damages from or require
an accounting by the General Partner. Limited partners may also be afforded
certain rights for reparations under the CEA for violations of the CEA by the
General Partner. There can be no assurance, however, that adequate remedies will
be available to the limited partners in the event that the General Partner fails
to perform its fiduciary obligations to the Partnership. In addition, a limited
partner may institute legal proceedings against the General Partner if it or a
duly selected trading advisor engages in excessive trading. Limited partners
should be aware that it would be difficult to establish that commodity trading
has been excessive due to the broad trading authority given to the General
Partner under the Limited Partnership Agreement and the Advisors under the
Management Agreements, the scarcity of judicial decisions providing standards
defining excessive trading, and the exculpatory provisions in the Limited
Partnership Agreement.
The Limited Partnership Agreement provides that the Partnership shall
indemnify and hold harmless the General Partner or its affiliates, subject to
receipt of an independent legal opinion regarding the applicable standard of
conduct, against any loss, liability, expense (including attorneys' and
accountants' fees), judgments and amounts paid in settlement, if the General
Partner (or its affiliate) determined in good faith
82
<PAGE> 90
that the course of conduct which caused the loss or liability was in the best
interests of the Partnership, the General Partner (or its affiliate) was acting
on behalf of or performing services for the Partnership and if such loss or
liability was not the result of negligence or misconduct. The General Partner
would be able to defend itself on that basis if it were involved in a lawsuit,
as established in New York law. No indemnification of the General Partner or its
affiliates is permitted for losses resulting from a violation of the Securities
Act of 1933 or of any state securities law. In addition, indemnification of the
General Partner and its affiliates in connection with any action against the
General Partner may only be made if consistent with applicable provisions of the
New York Revised Limited Partnership Act. The provisions of the Limited
Partnership Agreement are consistent with New York standards of fiduciary duty.
The Limited Partnership Agreement provides further that the General Partner
shall not be personally liable for the return or repayment of all or any portion
of the capital or profits of any partner (or assignee), it being expressly
agreed therein that any such return of capital or profits made pursuant to the
Limited Partnership Agreement shall be made from the assets (which shall not
include any right of contribution from the General Partner) of the Partnership.
The effect of the above provisions may be that an investor in the Units
would have a more limited right of action than would be the case had such
provisions not existed. The CFTC has issued a statement of policy relating to
indemnification of officers and directors of a futures commission merchant and
its controlling persons under which it has taken the position that whether such
indemnification is consistent with the policies expressed in the CEA will be
determined by the CFTC on a case-by-case basis.
The limited partners may be afforded certain rights for reparations under
the CEA. The CFTC has adopted rules implementing the reparations provisions of
the CEA which provide that any person may file a complaint for a reparations
award with the CFTC for violation of the CEA against a floor broker, a futures
commission merchant and its associated persons, a commodity trading advisor or a
commodity pool operator. The General Partner is registered with the CFTC as a
commodity pool operator and a commodity trading advisor; each of the Advisors is
registered with the CFTC as a commodity trading advisor; and SB is registered
with the CFTC as a futures commission merchant. In addition, the NFA has adopted
certain arbitration rules which, in appropriate circumstances, might provide
rights to limited partners. The General Partner, the Advisors and SB are members
of the NFA.
THE COMMODITY BROKER/DEALER
Smith Barney Inc., the Partnership's selling agent and commodity
broker/dealer through which the Partnership executes its trades, is a clearing
member of The Board of Trade of the City of Chicago, the Chicago Mercantile
Exchange, and other principal U.S. commodity exchanges. It is also registered
with the SEC as a securities broker-dealer and with the CFTC as a futures
commission merchant, and is a member of the NFA, the National Association of
Securities Dealers, Inc. and major securities exchanges, including the New York
Stock Exchange. SB has approximately 500 domestic and international offices and
over 10,000 Financial Consultants. Its principal office is located at 390
Greenwich Street, New York, New York 10013; telephone (212) 816-6000.
SB provides commodity brokerage and clearing services for both retail and
professional participants in the commodity futures markets, including clearing
services for other commodity pools and other members of the commodity exchanges
of which it is a clearing member.
BROKERAGE FEES. The Partnership has entered into a non-exclusive Customer
Agreement (as described below) with SB pursuant to which SB executes trades on
behalf of the Partnership. Pursuant to the Customer Agreement, the Partnership
pays SB a monthly brokerage fee equal to 1/2 of 1% of month-end Net Assets (6%
per year) in lieu of per transaction fees and regardless of how many or how few
trades are executed during a month. This fee does not include exchange, floor
brokerage, user, give-up, clearing and NFA fees which will be paid by the
Partnership with respect to futures and options transactions. The Partnership
shall seek the best price and services available in its commodity futures
brokerage transactions. SB acts as principal on any spot and forward
transactions entered into by the Partnership. Such transactions are entered into
at prices quoted
83
<PAGE> 91
by SB which reflect a spread between the bid and ask (which spread includes
anticipated profits and costs to SB as dealer), but does not include a mark-up.
The spread charged on related party trades will be at or below market price. SB
pays a portion of its brokerage fee to its Financial Consultants who are
registered as associated persons of a futures commission merchant and who have
sold Units in this offering so long as they are still employed by SB. Such
Financial Consultants provide ongoing services to investors including (i)
answering questions regarding daily net asset value and computations thereof,
monthly statements, annual reports and tax information provided by the
Partnership; (ii) providing assistance to investors in deciding whether and when
to redeem their Units or purchase additional Units; and (iii) general servicing
of accounts. Such Financial Consultants receive a portion of the fees
attributable to Units for the sale of which they were responsible. For this
purpose fees are deemed to be attributable to Units sold by a Financial
Consultant in the proportion which the number of such Units bears to the number
of all Units outstanding at any time. For example, if a Financial Consultant
were responsible for the sale of 200 Units and there were 40,000 Units
outstanding, .5% (200 divided by 40,000) of the aggregate amount available for
such payments would be attributable to the Units sold by a Financial Consultant
and the Financial Consultant would currently be credited with approximately 85%
of the amount attributable to the Units sold by him.
The brokerage fee charged to the Partnership may not equal the lowest rates
which SB charges to any speculative account, including the accounts of its
employees, and may not be as low as rates which might be charged by other
commodity broker/dealers because different accounts require different levels of
service and monitoring based upon the number of advisors and the volume and
complexity of trading. In addition, pursuant to its Customer Agreement with SB,
the Partnership will receive several administrative services, such as account
reconcilement, payment of fees and expenses, crediting interest income and
assistance with preparation of all regulatory filings and monthly reports. These
types of services may not be provided to other speculative accounts of SB and
may account for the possibly higher rates charged to the Partnership. Since the
Customer Agreement is nonexclusive, and since the Partnership is not permitted
to enter into an exclusive brokerage agreement, the Partnership would have the
right to seek lower brokerage rates from other broker/dealers. The General
Partner believes that the arrangements between SB and the Partnership are
consistent with arrangements made between comparable commodity pools and other
broker/dealers and are fair to the Partnership. Therefore, the General Partner
does not intend to negotiate with any other broker/dealers for services to the
Partnership nor does it intend to negotiate with SB to obtain a better rate.
However, the General Partner will review, at least annually, the brokerage rates
charged to other comparable commodity pools to the extent practicable, to
determine that the brokerage rates being paid by the Partnership are competitive
with such other rates. The General Partner will renegotiate the Customer
Agreement if its fiduciary duties so require. In accordance with the Limited
Partnership Agreement, limited partners owning more than 50% of the outstanding
Units may terminate the Customer Agreement with SB (an affiliate of the General
Partner) on sixty days' notice without penalty. See "Conflicts of Interest".
CUSTOMER AGREEMENT. The Partnership has entered into a Customer Agreement
with SB pursuant to which SB executes transactions for the Partnership's
accounts in accordance with orders placed by the Advisors. In addition to
specifying the services performed by SB, which include the execution of orders
and the rendering of bookkeeping and clerical assistance to the Partnership and
the General Partner, the Customer Agreement provides that SB will pay monthly
interest to the Partnership on 80% of the average daily equity maintained in
cash in the Partnership's trading account at SB during each month (i.e., the
sum, computed as of the close of business on each day of a month, of (i) the
cash balance in such accounts and (ii) the liquidating value of all open
positions therein, divided by the total number of calendar days in that month)
at a 30-day Treasury bill rate determined weekly by SB based on the average
non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days (or on
the maturity date closest thereto) from the date on which such weekly rate is
determined. SB will be reimbursed from interest income earned by the Partnership
for payment of the Partnership's initial offering and organizational expenses
(capped at $525,000) and its 1996 Continuous Offering expenses estimated at
$275,000, plus interest at the prime rate quoted by The Chase Manhattan, N.A.
Interest used to reimburse SB will not be taken into account in computing
brokerage or management fees.
The Customer Agreement also provides that with respect to any action in
which SB or its affiliates is a party (other than an action by or in the right
of the Partnership), the Partnership shall indemnify and hold
84
<PAGE> 92
harmless such person, subject to receipt of an independent legal opinion
regarding the applicable standard of conduct, against any loss, liability,
damage, cost, expense (including attorneys' and accountants' fees), judgments
and amounts paid in settlement, if the indemnified person acted in good faith
and in a manner reasonably believed to be in the best interests of the
Partnership, and if such actions did not involve negligence, misconduct, or a
breach of fiduciary obligations. To the extent that the indemnified party has
been successful in defense of any action, no independent legal opinion is
needed.
LITIGATION. There have been no administrative, civil or criminal actions
pending, on appeal or concluded against SB or any of its individual principals
within the past five years that are material to a decision whether to invest in
the Partnership, except as follows.
In connection with the SEC's investigation of the primary distribution of
U. S. Treasury notes and unsecured debt securities issued by government
sponsored enterprises ("GSEs"), which investigation emanated from disclosure of
activities of a large primary dealer in U. S. Treasury auctions (Salomon
Brothers), Smith Barney, in order to settle that aspect of the SEC's
investigation relating to GSE securities and without admitting or denying
liability, consented to the entry of an order by the SEC that Smith Barney
violated Section 17(a) of the Securities Exchange Act of 1934 (the "Exchange
Act") and 17 C.F.R. Section 240.17a-3 and 17a-4 for failure to maintain accurate
books and records in connection with the primary distribution of GSE unsecured
debt securities. The order requires that Smith Barney cease and desist from
violating Section 17(a) of the Exchange Act and 17 C.F.R. Section 240.17a-3 and
240.17a-4 in connection with the primary distribution of GSE unsecured debt
securities; Smith Barney pay a civil money penalty of $100,000; and Smith Barney
implement and maintain policies and procedures reasonably designed to ensure
Smith Barney's future compliance with provisions of Section 17(a) of the
Exchange Act and 17 C.F.R. Section 240.17a-3 and 240.17a-4 in connection with
the primary distribution of GSE unsecured debt securities. The size of the civil
money penalty paid by each institution was a function of the amount of business
done by it with the GSEs and not related to the culpability of each settling
institution.
In the course of its business, SB, as a major futures commission merchant
and broker-dealer is a party to various claims and routine regulatory
investigations and proceedings which the General Partner believes do not have a
material effect on the business of SB.
85
<PAGE> 93
INCOME TAX ASPECTS
The General Partner has been advised by its counsel, Willkie Farr &
Gallagher, that, in its opinion, the following summary describes the material
federal income tax consequences to a United States taxpayer who invests in the
Partnership, subject to the uncertainties referred to herein. The legal opinions
appearing in this section are the legal opinions of Willkie Farr & Gallagher.
The following summary is based upon the Code, and rules, regulations and
existing interpretations relating thereto, any of which could be changed at any
time. A complete discussion of all federal, state and local tax aspects of an
investment in the Partnership is beyond the scope of the following summary, and
prospective investors should consult their own tax advisers particularly as
respects the effect of their own individual tax characteristics.
CLASSIFICATION AS A PARTNERSHIP
An organization formed as a partnership will be treated as a partnership
for federal income tax purposes rather than as a corporation only if it has no
more than two of the four corporate characteristics that the Treasury
Regulations use to distinguish a partnership from a corporation for tax
purposes. These four characteristics are continuity of life, centralization of
management, limited liability, and free transferability of interests. The
Partnership has not requested, nor does it intend to request, a ruling from the
Internal Revenue Service (the "Service") that it will be treated as a
partnership for federal income tax purposes. Rather, it is the opinion of
Willkie Farr & Gallagher that, based on the facts and certain representations as
stated herein, the current federal income tax law and regulations and the
assumption that the General Partner will maintain its net worth as discussed
below, the Partnership will not possess more than two corporate characteristics
and thus will be treated as a partnership for federal income tax purposes. The
opinion of counsel is not binding upon the Service.
The General Partner is required by the Limited Partnership Agreement to (a)
maintain a net worth (excluding its capital contributions to the Partnership)
equal to at least 10% of the total contributions to the Partnership, (b)
maintain, with respect to each additional limited partnership of which it is a
general partner, a net worth (excluding its capital contributions to the
additional partnership) equal to at least 10% of the total contributions to such
additional limited partnership, and (c) an overall net worth (including capital
contributions) equal to at least 10% of the total contributions to all limited
partnerships in which it is a general partner. This requirement is imposed by
the Partnership, but corresponds to the net worth that the Service would require
the General Partner to maintain if the Partnership were now to seek a favorable
ruling on the Partnership's status. The General Partner may fail to meet this
net worth test, or the Service may adopt a more stringent standard for its
ruling purposes so that the Partnership's net worth requirement would no longer
correspond to that of the Service. Any failure by the General Partner to satisfy
the net worth requirement imposed by the Partnership, or voluntarily to increase
its net worth to correspond to any more stringent requirements which may be
established in the future by the Service for its ruling purposes, would increase
the risk that the Partnership would be treated as an association and taxed as a
corporation.
Pursuant to Code Section 7704, "publicly traded partnerships" are taxed as
corporations. If the Partnership were treated as an association taxable as a
corporation for federal income tax purposes, the income of the Partnership would
be taxed to the Partnership at corporate rates, no Partnership losses could be
used by the Partners to offset their own income and all or a portion of any
distribution by the Partnership to the partners would be taxed to them as
dividends to the extent of the current and accumulated earnings and profits of
the Partnership. See "Application of 'Publicly Traded Partnership' Rules to the
Partnership". The discussion which follows assumes that the Partnership will be
treated as a partnership for federal income tax purposes.
IN GENERAL
The Partnership will pay no federal income tax. Rather in the opinion of
Willkie Farr & Gallagher, each limited partner will report on his federal income
tax return his distributive share of the Partnership's income, gains, losses,
deductions, credits and other items for the Partnership's taxable year ending
with or within the partner's taxable year. A limited partner's distributive
share of such items for federal income tax purposes will
86
<PAGE> 94
be determined under the Limited Partnership Agreement generally on a pro rata
basis in accordance with his capital account. A limited partner must report (and
pay taxes on) his share of partnership income for a particular taxable year
whether or not any cash is actually distributed to him for that year.
SUMMARY OF THE FEDERAL INCOME TAX CONSEQUENCES
FOR UNITED STATES TAXPAYERS WHO ARE INDIVIDUALS
The following discussion applies only to limited partners who are citizens
or residents of the United States for federal income tax purposes, and who are
taxed as individuals. Corporate limited partners should consult their own tax
counsel as to the federal, state and local tax aspects of an investment in the
Partnership and, in particular, should consider the discussion of the New York
State corporate franchise tax under "State, Local and Other Taxes" below.
ALLOCATION OF TAX ITEMS
Limited partners will be allocated their proportionate share of the taxable
income or losses realized by the Partnership during the period of the
Partnership's taxable year that Units were owned by them. For this purpose,
transfers or assignments of Units will be effective only as of the first day of
the quarter after the quarter in which the General Partner consents to such
transfer or assignment. The allocation of taxable income for Federal income tax
purposes by the Partnership may differ from the way in which the benefits of the
income have been allocated among the Partners for financial purposes as a
consequence of new Limited Partners joining the Partnership and existing
Partners adding capital to, or withdrawing capital from, the Partnership during
a taxable year of the Partnership. For example, a partner may redeem Units at a
time at which the Partnership has realized gains which are offset by unrealized
losses. The unrealized losses will reduce the amount paid to the partner on
redemption but, when later realized, may not be allocated for tax purposes to
the redeemed partner. Alternatively, if a partner redeems Units when there are
net unrealized gains, the redeemed partner will be paid for his share of such
gain, but when they are later realized any resulting tax liability may have to
be borne by the remaining partners.
Unrealized gains/losses on many commodity interests held by the Partnership
at the end of its taxable year must be included in income under the
"mark-to-market" rule described below. For federal income tax purposes, these
gains/losses will be allocated to partners in proportion to their respective
capital accounts. The General Partner will determine each Partner's share of the
Partnership's gain or loss for tax purposes by marking to market the
Partnership's investments as of the end of each month of the taxable year and by
allocating the resulting gain or loss to those Partners who were Partners of the
Partnership during the month to which such gain or loss relates. Some ambiguity
exists under current law regarding the application of the mark-to-market rules
to Partners who redeem or transfer their interests other than at the end of the
Partnership's taxable year. Mark-to-market gains and losses might be allocated
only to those Partners holding interests in the Partnership at the end of the
Partnership's year and the Partnership may not be entitled to a basis adjustment
with respect to gains and losses on "Section 1256 contracts" (defined below in
"Commodity Provisions") regardless of whether the gains or losses may be
allocated monthly.
LIMITATIONS ON DEDUCTIONS
(1) Basis: A partner may not deduct Partnership losses to the extent they
exceed his basis in the Partnership as of the time he seeks to take that
deduction. A limited partner's initial tax basis for his interest in the
Partnership will be the amount of money he contributes to the Partnership and by
additional contributions. This initial basis will be increased by the
Partnership's income previously allocated to him for tax purposes and will be
reduced by the Partnership's losses previously allocated to him for tax
purposes, and by any distributions previously made to him by the Partnership.
Losses denied under this limitation are suspended and may be carried forward and
deducted in subsequent taxable years, subject to this and all other applicable
limitations.
(2) At Risk: Similarly, a partner may not deduct Partnership losses for
tax purposes for a particular taxable year to the extent they exceed the amount
he has "at risk" for his interest in the Partnership at the end
87
<PAGE> 95
of that year. At the end of a taxable year, a limited partner will be "at risk"
for tax purposes to the extent of the total of all money he has contributed to
the Partnership (except to the extent that the money contributed has been
borrowed by the limited partner either without recourse to the limited partner
or from a person with an interest in the Partnership or a person related to such
a person), plus his share of Partnership income for tax purposes previously
allocated to him, reduced by the amount of the Partnership's losses previously
allocated to him and reduced by the amount of any prior distributions to him.
Losses denied under this limitation are suspended and may be carried forward and
deducted in subsequent taxable years, subject to this and all other applicable
limitations.
(3) Capital Losses: An allocable share of the Partnership's capital losses
may be used to offset short-term or long-term capital gains realized by a
partner, plus (for taxpayers other than corporations) up to $3,000 ($1,500 in
the case of a married individual filing a separate return) a year of ordinary
income. Generally, noncorporate taxpayers may carry forward, but may not carry
back, unused net capital losses. A noncorporate taxpayer may elect, however, to
carry unused net capital losses from trading in Section 1256 contracts back to
each of the three preceding years to the extent of the capital gain net income
for such preceding year from trading in Section 1256 contracts (or of overall
capital gain net income for the year, if less). Proposed legislation would amend
the rules limiting the use of capital losses against an individual's ordinary
income.
(4) Passive Activity: The Partnership's income will not be treated as a
"passive activity" for purposes of the limitation on the deduction of passive
activity losses.
(5) Miscellaneous Itemized Deductions: If the Partnership is treated as
engaged merely in an investment activity (and not in a trade or business), a
limited partner taxed as an individual would be allowed a deduction for his
share of general partnership expenses (which could include management fees,
incentive fees and legal and audit expenses but not commodity trading expenses)
only to the extent that the total of all of his investment and other
miscellaneous expenses exceeds 2% of his adjusted gross income. Whether the
Partnership will be engaged in a trade or business or in an investment activity
will depend on the extent and nature of the Partnership's trading activity in
any taxable year and could vary from year to year. However, based on the
contemplated extent of trading of the Partnership, the General Partner has been
advised by its legal counsel that the Partnership's activities should be
classified as a trade or business, rather than as an investment activity. It is
often difficult to distinguish among investment, trading and dealership
activities, and it is possible that the Service could conclude, based on its
independent examination of the facts regarding the Partnership's operations,
that the Partnership's transactions constitute dealer transactions or investing
in securities. Such determinations on the part of the Service may significantly
alter the tax consequences of a limited partner's investment in the Partnership
as described herein.
Section 68 of the Code further limits an individual partner's ability to
deduct certain itemized deductions that otherwise are deductible against taxable
income. Specifically, for regular income tax purposes (but not for alternative
minimum tax purposes), the amount of itemized deductions that non-corporate
partners (other than estates and trusts) having adjusted gross income in excess
of a "threshold" amount (as defined below) will be allowed to deduct is reduced
by an amount equal to the lesser of (i) 3% of such partner's adjusted gross
income or (ii) 80% of the amount of the otherwise allowable itemized deductions
for the taxable year. The "threshold" amount for 1996 is $117,950 ($58,975 for
married persons filing separately). For purposes of Section 68, itemized
deductions are determined after application of the other loss disallowance rules
of the Code and do not include any deductions for medical expenses, investment
interest expense or for certain losses under Section 165(a) of the Code.
(6) Syndication Fees: Neither the Partnership nor any partner will be
entitled to any deduction for syndication expenses, that is, amounts paid or
incurred in connection with issuing and marketing the Units. There is a risk
that some portion of the brokerage fees to be paid to SB would be treated as a
nondeductible payment by the Partnership of syndication expenses.
(7) Investment Interest: A noncorporate taxpayer may deduct the total of
all his interest expense incurred or continued to purchase or carry "property
held for investment" only to the extent of his net "investment income" from all
such property he holds. A Unit of the Partnership should be considered
88
<PAGE> 96
"property held for investment", and the interest expense incurred by a limited
partner to purchase or carry a Unit and such limited partner's distributive
share of Partnership investment interest expense should generally be subject to
this limitation.
The deduction of investment interest that is disallowed under these rules
is not lost permanently but may be claimed as an investment interest deduction
in succeeding taxable years subject to the limitation. A limited partner's net
investment income will not include that portion of investment income derived
from long-term capital gains unless the partner elects to treat such gains as
short-term gains.
Under the Code, a taxpayer may not deduct interest on indebtedness incurred
or continued to purchase or carry obligations, the interest on which is exempt
from tax. In the case of a limited partner owning tax-exempt obligations, the
Service might take the position that the limited partner's allocable portion of
any interest expense of the Partnership should be viewed in whole or in part as
incurred to enable the limited partner to purchase or carry the tax-exempt
obligations and that the deduction of any interest by the limited partner should
be denied in whole or in part.
CAPITAL GAIN
The trading activities of the Partnership will, as a general rule, generate
capital gain and loss, and ordinary income. Partnership transactions would
result in ordinary income if the Partnership were considered to hold property
for sale to customers in the ordinary course of a trade or business. The
Partnership does not expect to hold its commodity interests for sale to
customers, and in particular does not expect to effect transactions in physical
commodities (other than spot and forward currency transactions), on a regular
basis. Certain foreign currency transactions could result in ordinary income as
discussed below. Proposed legislation would reduce capital gain tax rates for
individuals and corporations.
INTEREST INCOME
SB will pay interest on a portion of the average daily cash equity in the
brokerage account. Interest paid to the Partnership will be taxable currently to
the limited partners as ordinary income. In addition, any interest earned by an
investor on any subscription amounts that may be held in escrow will also be
taxable as ordinary income to him and should be reported in accordance with his
regular method of accounting.
COMMODITY PROVISIONS
The Partnership will engage in speculative trading in commodities,
commodity options and commodity futures contracts on all major United States and
certain foreign commodity exchanges and will trade in forward contracts in
foreign currencies. The Advisors may from time to time employ trading strategies
such as spreads or straddles on behalf of the Partnership. Special tax rules
generally apply to transactions in commodity interests.
(1) Mark-to-Market: Under the Code, all positions in Section 1256
contracts held by the Partnership at the end of its taxable year will be marked
to their market value, and any unrealized gain or loss on those positions will
be included in the income of the partners as if each position had been sold for
its fair market value on the last day of the Partnership's taxable year. (If,
however, the taxable year of the Partnership is different from the taxable year
of a partner, the operation of the mark-to-market rule is unclear, and the
treatment described herein may be challenged by the Service.) The General
Partner will mark to market the Partnership's investments as of the end of each
month of the taxable year. Section 1256 contracts generally include (i)
regulated futures contracts ("RFCs"), which are futures contracts traded on
regulated United States (and certain foreign) exchanges (including cash
settlement contracts such as Eurodollar or stock index contracts), (ii) most
foreign currency forward contracts traded in the interbank market (hereinafter
"interbank contracts"), and (iii) domestic (and certain foreign) exchange-traded
options on commodities, including options on RFCs, debt securities and stock
indices. Accordingly, it is expected that the mark-to-market rule will apply to
many of the Partnership's transactions in commodity interests. However, the
mark-to-market rules will not apply to the Partnership's positions in futures
contracts on most foreign exchanges and in foreign currency forward contracts
not in the interbank market, unless the Partnership elects such treatment
89
<PAGE> 97
under the provisions of Code Section 988, as discussed below. If the Partnership
does not make that election, a partner may elect to have the partner's share of
foreign currency gain or loss on certain of the Partnership's Section 1256
contracts treated as ordinary income or loss, as described below.
After positions in Section 1256 contracts held by the Partnership at the
end of its taxable year are marked to market, the resulting gain or loss will be
combined with any gain or loss realized by the Partnership from positions in
Section 1256 contracts closed during that year. Provided such positions were
held as capital assets and were not part of a "hedging transaction", nor part of
a "straddle" (see below), 60% of the resulting net gain or loss will be treated
as a long-term capital gain or loss and 40% of such net gain or loss will be
treated as a short-term gain or loss, regardless of the period of time
particular positions were actually held by the Partnership. (However, gain or
loss from positions treated as Section 1256 contracts under the Code Section 988
election provisions, if elected by the Partnership, would be treated entirely as
short-term capital gain or loss.)
(2) Straddles: If the Partnership incurs a loss upon the disposition of
any position which is part of a "straddle" (i.e., two or more offsetting
positions), recognition of that loss for tax purposes will be deferred until the
Partnership recognizes the gain in the offsetting position of the straddle. This
rule would apply to all of the positions in a straddle which includes one or
more Section 1256 contracts but which does not consist entirely of Section 1256
contracts (a "mixed straddle"), but not to a straddle all of the positions of
which are Section 1256 contracts. (Depending upon whether the Partnership makes
certain elections, the Section 1256 contract components of a mixed straddle may
be treated as not subject to the mark-to-market rules.) This provision would
also apply to the Partnership's positions in futures contracts on most foreign
exchanges and in forward contracts on foreign currency (other than interbank
contracts), which could result in the deferral of deductions for losses
resulting from the disposition of such positions or from the disposition of
Section 1256 contracts which offset those positions. The Partnership can
specifically identify particular positions as being components of a straddle, in
which case a realized loss would be allowable only upon the liquidation of all
of the components of the identified straddle. The Partnership's trading
strategies may include the use of spreads or straddles, with or without making
such identifications.
Interest and other carrying charges allocable to positions which are part
of a straddle must be capitalized, rather than deducted currently.
(3) Wash and Short Sale Rules: The "short sale" rules may apply to
positions held by the Partnership so that what might otherwise be characterized
as long-term capital gain would be characterized as short-term capital gain or
potential short-term capital loss as long-term capital loss. Furthermore, "wash
sale" rules, which prevent the recognition of a loss from the sale of a security
where a substantially identical security is (or has been) acquired within a
prescribed time period, also apply where certain offsetting positions (other
than identified straddle positions) are entered into within the prescribed
period.
(4) Section 988: Currency gain or loss from transactions in (i) bank
forward contracts not traded in the interbank market and (ii) currency futures
contracts traded on a foreign exchange may be treated as ordinary income or loss
under Code Section 988. The Partnership may elect, in effect, to recognize gain
or loss from instruments described in clauses (i) and (ii) of the preceding
sentence under the mark-to-market rules of Code Section 1256. Pursuant to that
election, gain or loss from such positions would be treated entirely as
short-term capital gain or loss. The Partnership will make the election
necessary to gain such treatment if such election is otherwise in the best
interests of the Partnership. If the Partnership does not make the election, the
partners may individually elect to have their share of foreign currency gain or
loss from certain of the Partnership's Section 1256 contracts treated as
ordinary income or loss, rather than 60% long-term and 40% short-term capital
gain or loss.
(5) Partner-Partnership Positions: It is unclear to what extent the loss
deferral, short sale, capitalization and wash sale rules would apply to
straddles consisting of Partnership transactions and transactions by a partner
in his individual capacity. Each prospective limited partner should review the
application of these rules to his own particular tax situation, with special
regard to the potential interaction between Partnership operations and
commodities transactions entered into by the prospective limited partner in his
individual capacity.
90
<PAGE> 98
APPLICATION OF 'PUBLICLY TRADED PARTNERSHIP' RULES TO THE PARTNERSHIP
Under Code Section 7704, certain publicly traded partnerships are treated
as corporations for federal income tax purposes. Publicly traded partnerships,
as defined in Code Section 7704(b), are partnerships the interests in which are
traded on an established securities market or are readily tradeable on a
secondary market (or the substantial equivalent thereof).
Even if a partnership is considered to be publicly traded, Code Section
7704(c) provides that such a partnership will not be treated as a corporation
for federal income tax purposes if, as to each taxable year of its existence,
(i) with certain exceptions to be prescribed by forthcoming Treasury
Regulations, the partnership is not required to register under the 1940 Act, and
(ii) at least 90% of its gross income is "qualifying income," such as interest,
dividends, gains from the disposition of stock or securities, and, in the case
of a partnership that has as a principal activity the buying and selling of
commodities and commodity instruments, income and gains from such commodities
transactions.
On the basis of its examination of the Partnership's objectives and trading
policies as described herein, Willkie Farr & Gallagher has concluded that at
least 90% of the annual gross income of the Partnership will consist of
qualifying income, as defined above. Based on that conclusion, the Partnership
could be expected to satisfy the gross income requirement in each of its taxable
years, beginning with the current taxable year. Further, Willkie Farr &
Gallagher has concluded that, so long as the Partnership is engaged primarily in
commodity trading, it will not be required to register under the 1940 Act.
Therefore, the Partnership does not expect to be taxed as a corporation under
Code Section 7704 even if it were to be viewed as publicly traded.
Should the aforementioned facts, assumptions and representations fail to be
accurate for any reason, the IRS may take the position that the Partnership
should be treated as an association taxable as a corporation for federal income
tax purposes. The continued treatment of the Partnership as a partnership also
is dependent upon existing Code provisions, regulations promulgated thereunder
and administrative interpretations thereof, all of which are subject to change.
Therefore, no assurances can be given that the Partnership's classification for
federal income tax purposes may not be changed during the term of its existence.
PARTNERSHIP AUDIT PROCEDURES
The Partnership's federal income tax information return may be audited.
While partners have certain rights to participate in a partnership audit, some
of these rights are not available to partners owning less than a 1% profit
interest in a partnership with more than 100 partners. Accordingly, a limited
partner may not be able to participate in an audit of the Partnership's
information return, but could nevertheless be bound by a settlement reached in
that audit unless he has filed a timely pre-settlement notice with the Service
stating that he will not be bound by the settlement. An audit of the
Partnership's returns may result in an audit of a limited partner's tax return
and lead to adjustments of income and loss unrelated to an investment in the
Partnership.
REDEMPTION OF UNITS
To the extent of his tax basis in his Units, cash distributed to a limited
partner by the Partnership upon redemption of Units will constitute a return of
capital that will not be reportable as taxable income, but will reduce his tax
basis in his Units. To the extent that cash distributions exceed a limited
partner's tax basis in his Units, an event which should only arise upon
redemption, such distributions will be taxable to him as gain from the sale or
exchange of the Units. Upon complete redemption of all of a limited partner's
Units, the limited partner may recognize loss to the extent of any unrecovered
basis in the redeemed Units. If the limited partner is not a "dealer" with
respect to the Units and has held his Units for more than one year, any gain or
loss on their redemption will be long-term capital gain or loss.
BROKER REPORTING AND BACKUP WITHHOLDING
The subscription documents require each prospective investor in the
Partnership to furnish the investor's "taxpayer identification number." If the
number furnished is not correct, the investor may be subject to
91
<PAGE> 99
penalties imposed by the Service and payments to the investor in redemption of
Units (and, possibly, other Partnership distributions) may become subject to 31%
backup withholding.
The Partnership is not required to treat either its commodities
transactions or redemptions of Units as requiring separate reporting to
investors under Code Section 6045, since the information required to be
furnished by that section is identical to that furnished to each investor on
Schedule K-1 of Form 1065. The same information will be furnished to the Service
on Form 1065. Accordingly, investors will not receive separate Forms 1099-B with
respect to such transactions.
ALTERNATIVE MINIMUM TAX
The alternative minimum tax for individuals is imposed on "alternative
minimum taxable income" ("AMTI") in excess of an exemption amount of $33,750
($45,000 for married individuals filing a joint return and $22,500 for married
individuals filing separate returns). A 26% rate applies to the first $175,000
of a taxpayer's AMTI in excess of the exemption amount, and a 28% rate applies
to AMTI more than $175,000 above the exemption amount. The exemption amount is
phased out at a rate of 25 cents on the dollar for AMTI in excess of $112,500
($150,000 for married individuals filing a joint return and $75,000 for married
individuals filing separate returns). AMTI consists of taxable income determined
with certain adjustments and increased by the amount of items of tax preference.
AMTI may not be offset by certain interest deductions, including (in certain
circumstances) interest incurred to purchase or carry Units in the Partnership.
Corporations are also subject to an alternative minimum tax.
TAX CONSEQUENCES FOR EXEMPT ORGANIZATIONS
The following is a brief summary of the federal income tax consequences to
entities otherwise exempt from such tax (such as employee benefit plans,
individual retirement plans, individual retirement accounts and charitable
organizations) ("Exempt Organizations").
In general, an investment in the Partnership is not expected to result in
significant amounts of "unrelated business income." If, however, any portion of
an Exempt Organization's allocable share of Partnership income is treated as
"unrelated business taxable income", the Exempt Organization will be liable for
a tax on that amount (plus all other unrelated business taxable income for the
taxable year), minus applicable modifications and deductions, at the rates
applicable to corporations.
Unrelated business income includes certain income derived from
"debt-financed property." Such "debt-financed property" generally will include
securities purchased on margin. However, the Service has stated in private
rulings that margin accounts maintained with respect to certain commodities
trading do not create indebtedness and therefore such commodities traded on
margin do not constitute "debt-financed property." However, there is no
published authority for this view, private rulings have no value as precedent
and the Partnership will not seek a ruling from the Service on this issue.
Therefore, there is a risk that the Partnership's income could be viewed as
generated from debt-financed property and would therefore constitute unrelated
business income.
If the Partnership were to purchase physical commodities with borrowed
funds (whether upon delivery under a futures or forward contract or otherwise)
and to sell those commodities at a gain, such gain would likely constitute
unrelated business income. The Partnership is entitled to engage in such
leveraged purchases of physical commodities. See "Trading Policies."
STATE, LOCAL AND OTHER TAXES
In addition to federal income taxes, limited partners may be subject to
other taxes, such as state or local income taxes, and estate, inheritance or
intangible property taxes which may be imposed by various jurisdictions. A
non-New York corporate limited partner that is not otherwise subject to New York
State taxation may become subject to the New York State Corporate Franchise Tax.
The current minimum New York State corporate franchise tax ranges between $1,500
and $325, based on gross payroll, and the tax
92
<PAGE> 100
liability could be greater depending on the application of alternate statutory
formulas for determining the amount of the corporate partner's net income that
is allocable to New York State. In general, such non-New York State corporate
limited partners will be subject to the Franchise Tax on their income allocable
to New York unless (1) at least 90% of the Partnership's gross income is from
dividends, interest, securities loans and gains from the sale of stock or
securities or foreign currencies, or other income (including but not limited to
income and gains from commodities and gains from options, futures, or forward
contracts) derived with respect to the Partnership's investments in stock,
securities or currencies, or (2) such partner's partnership interest is less
than 1% or the tax basis in the interest does not exceed $1,000,000. While the
Partnership expects to satisfy the 90% income test described above, no assurance
can be given as to whether an investment in the Partnership will create a
Franchise Tax liability. Non-New York corporate limited partners that are
subject to New York taxes solely as a result of their investment in the
Partnership may make an irrevocable election to be subject to New York taxes
only on their share of Partnership income allocable to New York.
The Partnership expects to take the position that it trades for its own
account and is exempt from the New York City Unincorporated Business Tax.
Non-New York City corporate limited partners are subject to the New York City
General Corporate Tax on income allocable to the City. The current minimum
General Corporate Tax is $300, although the actual tax liability could be
greater depending on how the corporate partner's income is allocated to New York
City.
Each prospective limited partner should consult his own tax counsel with
regard to state, local and other taxes.
SUMMARY OF THE UNITED STATES FEDERAL INCOME TAX
CONSEQUENCES FOR NON-U.S. TAXPAYERS
A non-resident alien individual, foreign corporation or foreign partnership
not otherwise engaged in a United States trade or business or acting as a dealer
in commodities will not be deemed to be engaged in a United States trade or
business by virtue of an investment as a limited partner in the Partnership.
Capital gains earned by the Partnership and allocated to such a foreign limited
partner will, as a general rule, not be subject to United States federal income
taxation or withholding, but may be subject to taxation by the jurisdiction in
which such foreign limited partner is resident, organized or operating. Interest
income earned by the Partnership on its margin account with SB and interest
earned by limited partners on escrow deposits will, as a general rule, likewise
not be subject to the United States federal income tax or withholding, but may
be subject to tax in other jurisdictions to which such foreign limited partner
is connected. Prospective foreign limited partners who are engaged in a United
States trade or business or who act as dealers in commodities may be subject to
United States income tax and should consult their tax advisors before investing
in the Partnership.
BASIS OF SUMMARY OF INCOME TAX ASPECTS
Except as otherwise set forth, the foregoing statements regarding the
federal income tax consequences to Limited Partners of an investment in the
Partnership are based upon the provisions of the Code as currently in effect and
the existing administrative and judicial interpretations thereunder. No
assurance can be given that administrative, judicial or legislative changes
(other than those discussed above) will not occur that would make the foregoing
statements incorrect or incomplete. Further, the foregoing discussion is not
intended as a substitute for careful tax planning, particularly since certain of
the income tax consequences of an investment in the Partnership may not be the
same for all taxpayers. Accordingly, prospective investors in the Partnership
are urged to consult their tax advisers with specific reference to their own tax
situation under federal law and the provisions of applicable state, local and
municipal laws before subscribing for Units.
USE OF PROCEEDS
The net proceeds to the Partnership from this offering are estimated at
$92,825,000 assuming that all 100,000 Units were sold at the Net Asset Value per
Unit which prevailed as at February 29, 1996. No selling
93
<PAGE> 101
commissions or organizational and offering expenses related to the initial
offering period were initially paid by the Partnership. As used in this
Prospectus, organizational and offering expenses include legal and accounting
fees, marketing and printing expenses, escrow charges and filing, registration
and recording fees. Such expenses were approximately $900,000 for organization
and initial offering period with respect to Units included in this Prospectus,
and are estimated at $275,000 for 1996. The expenses of the initial offering
period to be reimbursed from the Partnership's interest income were capped at
$525,000 (plus interest at the prime rate quoted by The Chase Manhattan Bank,
N.A.) and paid by SB. Similarly, SB will pay and be reimbursed for the 1996
offering expenses (plus interest at the prime rate quoted by The Chase Manhattan
Bank, N.A.). SB may, but is not required to, pay any expenses incurred in
connection with the 1997 Continuous Offering. In no event will such expenses
exceed 15% of the total amount of the offering. Escrow charges consist of the
following: (i) a $2,500 fee per escrow account, (ii) all maintenance fees
incurred in the cost of operating the bank money market account, (iii) a wire
charge of $5.00-$22.00 and (iv) miscellaneous distributions and subscription
charges.
The proceeds from the offering will be deposited in the Partnership's
commodity trading accounts at SB and will be used for trading in commodity
futures contracts, forward contracts and other commodity interests in accordance
with the trading techniques and policies described under the captions "Trading
Policies" and "The Advisors." See also "Risk Factors -- Commodity Trading
Risks." All of the assets of the Partnership are maintained in cash and
segregated as customer funds under the CEA, except that margin with respect to
certain non-U.S. futures and options transactions are maintained in separate
secured amount accounts at U.S. banks not affiliated with the General Partner as
required by CFTC regulations. The General Partner estimates that approximately
80-95% of the Partnership's assets will be segregated as customer funds. The
Partnership's funds held in connection with contracts on U.S. contract markets
that are priced and settled in a foreign currency may be held in accounts
denominated in a foreign currency with a depository located outside the United
States or its territories, although it currently does not intend to do so. See
"Risk Factors." SB will deposit the assets of the Partnership (other than margin
for non-U.S. futures and options) in segregated bank accounts as required by the
CFTC. The banks will not pay interest on such accounts. However, SB will pay
monthly interest to the Partnership on 80% of the average daily equity
maintained in cash in the Partnership's account at SB during each month (i.e.,
the sum, computed as of the close of business on each day of a month, of (i) the
cash balance in such accounts and (ii) the liquidating value of all open
positions therein, divided by the total number of calendar days in that month)
at a 30-day Treasury bill rate determined weekly by SB based on the average non-
competitive yield on 3-month U.S. Treasury bills maturing in 30 days (or on the
maturity date closest thereto) from the date on which such weekly rate is
determined. The Partnership will reimburse to SB from interest income the total
amount of offering and organizational expenses of the initial offering period
and the expenses of the Continuous Offering in 1996, plus interest at the prime
rate quoted by The Chase Manhattan N.A. Such interest will be paid from SB's own
funds. The interest paid by SB to the Partnership will be credited to the
Partnership's accounts at SB monthly and consequently will be available to the
Partnership for trading purposes after reimbursement of the offering and
organizational expenses. The Partnership will make no loans. The assets of the
Partnership will not be commingled with the assets of any other entity, nor used
as margin for any other account. Deposit of assets with a commodity broker as
margin shall not constitute commingling. The Partnership estimates that its
margin-to-equity ratio will generally be in the range of 10% to 40%.
PLAN OF DISTRIBUTION
The Units are offered by the Partnership through its selling agent, SB,
pursuant to a Selling Agreement between the Partnership and SB. SB may permit
other member firms of the National Association of Securities Dealers, Inc.
("NASD") and certain foreign brokers to participate in the offering. The Units
will be offered on a best efforts basis without any firm underwriting commitment
(so that neither SB nor any other underwriter has agreed to purchase any Units).
See "Risk Factors -- No Assurance That Units Will Be Sold". The Partnership will
pay no selling commissions to SB or any such members. The General Partner is an
affiliate of SB. SB receives brokerage fees from the Partnership in its capacity
as commodity broker/dealer for the Partnership. Such fees may be deemed to be
underwriting compensation. SB pays a portion of its brokerage fees to its
Financial Consultants who sell Units in the offering. Any additional firm (other
than a foreign broker who offers solely to non-U.S. clients) selected by SB that
receives continuing compensation in
94
<PAGE> 102
the form of a portion of the commodity brokerage fees paid by the Partnership
will be registered with the NFA as a futures commission merchant or an
introducing broker. Further, any associated person of SB or such other firm who
receives continuing compensation in the form of a portion of the commodity
brokerage fees paid by the Partnership will be registered with the NFA as an
associated person of a futures commission merchant or an introducing broker
(qualified as an associated person by having taken the Series 3 or 31
Commodities Exam or having been "grandfathered" as an associated person
qualified to do commodity brokerage). In connection with the sale of Units, SB
may implement sales incentive and promotional programs for its Financial
Consultants who sell Units. Such programs may offer Financial Consultants bonus
compensation and/or gift items based on sales of Units. No such programs will be
offered to Financial Consultants unaffiliated with SB. SB will submit any
proposed sales incentive program to the NASD for approval prior to its
implementation. In no event will the total compensation paid to SB, its
employees and any participating member firms in connection with the distribution
of Units exceed 10% of the proceeds of the offering. (For this purpose, "total
compensation" does not include brokerage fees.)
The Units will be offered at Net Asset Value per Unit as of the end of each
month, until the earlier of the sale of all 100,000 Units and two years from the
date of this Prospectus (the "Continuous Offering"). Net Asset Value is defined
in the Glossary at page 121. The General Partner may determine to increase the
number of Units offered, not to offer Units in a particular month or to register
additional Units in a subsequent offering. All subscriptions will be held in an
escrow account by European American Bank, New York, New York until the first day
of the month beginning at least 6 days after receipt of the subscription, on
which day subscription funds will be transferred to the Partnership's trading
accounts at SB. If the General Partner, in its sole discretion, determines not
to offer Units during a particular month in the Continuous Offering,
subscriptions will remain in escrow until the beginning of the next month on
which sales will be effective. Subscribers will be paid a pro rata share of the
interest earned on the subscriptions during the escrow period.
The General Partner, acting in the best interests of the limited partners,
may at any time select a different escrow agent, provided that such escrow agent
is not affiliated with the General Partner or SB. Any such escrow agent would be
directed by the General Partner to invest subscriptions in legally permissible
interest bearing investments including direct United States government
obligations, certificates of deposit or bank money market accounts. However,
since such investments carry different minimum dollar amounts and varying
interest rates, the amount of interest, if any, that will be earned on a
subscription cannot be calculated.
The General Partner may reject any subscription for any reason within a
reasonable time. During the Continuous Offering, a subscriber may revoke his
subscription if the General Partner determines not to offer Units as of the end
of a month.
INVESTMENT REQUIREMENTS
The minimum initial investment in the Partnership is $5,000 except that
investments by employee-benefit plans may be made for a minimum of $2,000
(subject to higher minimums in certain states). See Exhibit C hereto and "ERISA
Considerations". Investors who are already limited partners may purchase
additional Units with a minimum of $1,000 (except in Maine, where the minimum
additional subscription will be $5,000).
Each investor must represent and warrant in the Subscription Agreement
attached hereto as Exhibit B that he either has (i) a net worth of at least
$150,000 (exclusive of home, furnishings and automobiles) or (ii) a net worth of
at least $45,000 and an annual income of $45,000. Certain states have higher
suitability requirements which are set forth in Exhibit C to this Prospectus.
BY EXECUTING THE SUBSCRIPTION AGREEMENT, INVESTORS ARE NOT WAIVING ANY
RIGHTS THEY MAY HAVE UNDER THE SECURITIES ACT OF 1933.
Each investor, by executing and returning the Subscription Agreement,
represents and warrants that (1) he has received a copy of the Prospectus as
appropriately supplemented; (2) he meets all applicable suitability standards as
set forth in the Prospectus as appropriately supplemented; (3) he consents to
the execution and delivery of a Customer Agreement between SB and the
Partnership and to the payment to SB
95
<PAGE> 103
of fees as described in the Prospectus; and, (4) if he is not a citizen or
resident of the United States for federal income tax purposes, that he is not a
dealer in commodities and he agrees to pay or reimburse the General Partner or
SB for any taxes imposed as a result of his status as a limited partner.
All of the representations and warranties are primarily intended to assure
and confirm that the investor is fully aware of and understands the elements of
the Partnership's structure and operation prior to making his investment. In
addition, they are intended to enable the Partnership, the General Partner and
SB to comply with certain requirements under the Commodity Exchange Act and
various state securities laws.
In addition, each of Representations (1) through (3) above is intended to
foreclose to the investor the possibility of alleging the opposite of such
representation and warranty in litigation by the investor against the General
Partner, the Partnership or SB. The General Partner, the Partnership and SB
would rely on such representations and warranties to respond to arguments made
to the contrary in the event of such litigation.
Representation (4) is intended to require a non-U.S. investor subject to
that representation to be responsible for any taxes imposed as a result of that
investor's status as a limited partner and enable the Partnership and General
Partner to comply with federal tax laws. Each investor must also be either a
citizen or a resident of the United States for U.S. tax purposes or must agree
to reimburse SB or the Partnership for any taxes, including but not limited to
withholding tax, incurred in connection with the investor's interest in the
Partnership. See "Income Tax Aspects -- Summary of United States Federal Income
Tax Consequences for non-U.S. Taxpayers."
The General Partner may reject a subscription for any reason within a
reasonable time (within four business days of receipt of payment by the General
Partner).
POTENTIAL INVESTORS SHOULD CONSIDER THE UNITS AS A LONG-TERM (AT LEAST TWO
YEAR) INVESTMENT TO PERMIT THE TRADING METHODS TO BE EMPLOYED IN MANAGING THE
PARTNERSHIP'S INVESTMENTS TO FUNCTION OVER A SIGNIFICANT PERIOD OF TIME. SEE
"RISK FACTORS -- COMMODITY TRADING IS SPECULATIVE", "RISK FACTORS -- TRADING
STRATEGIES" AND "THE ADVISORS -- TRADING STRATEGIES".
SUBSCRIPTION PROCEDURE
In order to purchase Units, an investor must complete and execute a copy of
the Subscription Agreement attached hereto as Exhibit B and deliver and/or mail
the Subscription Agreement to any branch office of SB or another selling agent.
Payment for subscriptions may be made by the subscriber authorizing his
Financial Consultant to debit his SB account for a minimum of $5,000 (or for a
minimum of $2,000 for subscriptions made by employee-benefit plans). During the
Continuous Offering, $5,000 will purchase a number of Units determined by their
Net Asset Value as of the effective date of the purchase (the first day of the
month beginning at least 6 days after receipt and acceptance of the
subscription). The General Partner may determine not to offer Units during any
particular month. Subscribers who authorize SB to debit their securities account
must have their subscription payment in their account on the specified
settlement date and such account will be debited on the settlement date which
will occur not later than five business days following notification to SB and
the subscriber of the acceptance of the subscription. That notification will
occur within a reasonable time.
Subscribers who do not maintain an account with SB should consult their
brokers for instructions as to payment. Such payment will be made either by
debiting such subscriber's securities account in the manner described herein or
by delivery to the broker of a check made payable to European American Bank,
Escrow Agent for SBDF II, Subscribers' Escrow Account No. 002-060739.
THE LIMITED PARTNERSHIP AGREEMENT
This Prospectus contains an explanation of the material terms and
provisions of the Limited Partnership Agreement, a copy of which is attached as
Exhibit A hereto and is incorporated herein by this reference. Each
96
<PAGE> 104
prospective investor should read this summary and the Limited Partnership
Agreement thoroughly before investing. The following description is a summary
only and is not intended to be complete.
LIABILITY OF LIMITED PARTNERS
The Partnership was formed on May 10, 1994 under the laws of the State of
New York. Under the New York Revised Limited Partnership Act ("New York Act"),
only a Limited Partner's capital contribution to the Partnership, and its share
of assets and undistributed profits, are subject to the risks of the
Partnership's business. Under the New York Act, a limited partner is otherwise
entitled to limited liability and is not responsible for the Partnership's
obligations if its activities in connection with the business of the Partnership
are limited to the exercise by it, in accordance with the provisions of the
Limited Partnership Agreement, of the rights granted it therein. Certain states
where the Partnership anticipates doing business have statutes providing for the
same limitations on limited partner liability, but in those states that do not
have such statutes and where judicial precedents are unclear, a limited partner
may not have the benefit of such limitations. Under the New York Act, if a
limited partner participates in the control of the Partnership's business, which
it is prohibited from doing by the terms of the Limited Partnership Agreement,
it may lose the limitation of liability afforded by the New York Act and become
liable as a general partner to persons who transact business with the
Partnership reasonably believing, based upon the limited partner's conduct, that
the limited partner is a general partner.
Section 121-607 of the New York Act prohibits a limited partnership from
making a distribution to a partner to the extent that, at the time of the
distribution and after giving effect thereto, all liabilities of the limited
partnership (other than liabilities to partners on account of their partnership
interests and liabilities for which the recourse of creditors is limited to
specified property of the limited partnership) exceed the fair value of the
assets of the limited partnership. For purposes of this limitation, the fair
value of property that is subject to a liability for which recourse of creditors
is limited is included in the assets of a limited partnership only to the extent
that the fair value of the property exceeds that liability. Under the New York
Act, a limited partner who received such a prohibited distribution and who knew
that the distribution violated the New York Act is liable to the limited
partnership for the amount of the distribution for a period of three years from
the date of the distribution. This section of the New York Act does not affect
any obligation or liability of a limited partner under the Limited Partnership
Agreement or other applicable law (including relevant fraudulent conveyance
acts) for the amount of a distribution.
MANAGEMENT OF PARTNERSHIP AFFAIRS
The limited partners will not participate in the management or control of
the Partnership. Under the Limited Partnership Agreement, responsibility for
managing the Partnership is vested solely in the General Partner. The General
Partner may select one or more trading advisors to direct all trading for the
Partnership. Other responsibilities of the General Partner include, but are not
limited to, the following: determining whether the Partnership will make
distributions of profits to partners; administering redemptions of limited
partners' Units; preparing monthly and annual reports to the limited partners;
preparing and filing necessary reports with regulatory authorities; calculating
the Net Asset Value; executing various documents on behalf of the Partnership
and the limited partners pursuant to powers of attorney; and supervising the
liquidation of the Partnership if an event causing dissolution of the
Partnership occurs.
The Limited Partnership Agreement requires the General Partner to cause the
Partnership to dissolve at any time that Net Asset Value per Unit falls below
$400 as of the end of a trading day.
SHARING OF PROFITS AND LOSSES
Partnership Accounting. Each partner will have a capital account, and its
initial balance will be the amount he paid for his Units or, in the case of the
General Partner, its capital contribution (which shall be treated as Units of
General Partnership Interest). Any increase or decrease in the Net Assets of the
Partnership will be allocated among the partners on a monthly basis and will be
added to or subtracted from
97
<PAGE> 105
the accounts of the partners in the ratio that each account bears to all
accounts. The General Partner is not personally liable for return of capital
contributions or profits to the limited partners.
Federal Tax Allocations. At the end of each fiscal year the Partnership's
realized capital gain or loss, aggregate capital gain or loss resulting from the
monthly mark-to-market system, and ordinary income or loss, will be allocated
among the partners, and each partner will be required to include in his personal
income tax return his share of such items. Allocations will be pro rata for
short-term capital gain or loss, long-term capital gain or loss, and net
ordinary income or loss realized by the Partnership; however, each Partner's
share of the Partnership's capital gain or loss from "Section 1256 Contracts"
for tax purposes will be determined by marking to market the Partnership's
investments as of the end of each month of the taxable year and by allocating
the resulting gain or loss to those Partners who were Partners during the month
to which such gain or loss relates.
For any limited partner who redeems or acquires Units during any fiscal
year, his proportionate share of the capital gain or loss and ordinary income
and loss will be that which was realized by the Partnership during the period
that such Units were owned by such limited partner. Transfers or assignments of
Units will be effective as of the first day of the fiscal quarter following the
quarter in which notice of such transfer or assignment is given to the General
Partner. For purposes of determining the Net Asset Value of Units, gains and
losses will be allocated among those persons who are partners when unrealized
gains or losses occur due to changes in the value of open positions. For federal
income tax purposes, gains and losses are allocated among those who are partners
when positions are closed and the gains or losses are realized. Therefore, if a
partner's proportionate interest in the Partnership should increase, as a result
of redemptions of Units by other partners, between the time an unrealized gain
occurs and the time the gain is realized by the Partnership, the partner's share
of taxable gain for the fiscal year may exceed his economic gain as reflected in
the Net Asset Value of his Units.
Upon dissolution of the Partnership, (and after satisfaction of all
liabilities of the Partnership), the assets of the Partnership will be
distributed to each partner in the ratio that his capital account bears to the
capital accounts of all partners.
ADDITIONAL PARTNERS
The General Partner has the sole discretion to determine whether to offer
for sale additional Units and to admit additional limited partners. There is no
limitation on the number of Units which may be outstanding at any time. All
Units offered by the Partnership after commencement of trading operations must
be sold at the Partnership's then current Net Asset Value per Unit (plus selling
commissions, if any). The General Partner may make arrangements for the sale of
additional Units or partial Units in the future. See "Plan of Distribution". The
General Partner may also consent to the admission of any assignee of Units as a
substituted limited partner.
RESTRICTIONS ON TRANSFER OR ASSIGNMENT
The Limited Partnership Agreement provides that a limited partner may
assign his Units upon notice to the General Partner. No assignment of Units will
be effective against the Partnership or the General Partner until the
commencement of the next fiscal quarter after the General Partner receives such
notice. Without the consent of the General Partner (which consent may be
withheld at its sole and absolute discretion for the purpose of preserving the
Partnership's tax status or to avoid adverse legal consequences to the
Partnership), no assignee may become a substituted limited partner. An assignee
who becomes a substituted limited partner will be subject to all of the rights
and liabilities of a limited partner of the Partnership. An assignee who does
not become a substituted limited partner will be entitled to receive the share
of the profits or the return of capital to which his assignor would otherwise be
entitled, but will not be entitled to vote, to an accounting of Partnership
transactions, to receive tax information, or to inspect the books and records of
the Partnership. Under the New York Act, an assigning limited partner remains
liable to the Partnership for any amounts for which he may be liable under such
law regardless of whether any assignee to whom he has assigned Units becomes a
substituted limited partner.
98
<PAGE> 106
DISSOLUTION OF THE PARTNERSHIP
The Partnership shall dissolve and its affairs shall be wound up as soon as
practicable upon the first to occur of the following: (i) December 31, 2014;
(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
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, such as the entry
of a decree of judicial dissolution.
REMOVAL OR ADMISSION OF GENERAL PARTNER
The General Partner may be removed and successor general partners may be
admitted upon the vote of a majority of the outstanding Units.
AMENDMENTS; MEETINGS
The Limited Partnership Agreement may be amended if approved in writing by
the General Partner and limited partners owning more than 50% of the outstanding
Units. Any Units purchased by the General Partner, the Advisors or their
affiliates will not be entitled to any of the voting rights to which such Units
would otherwise be entitled under Section 17 of the Limited Partnership
Agreement, except as required by law. Limited partners are entitled to vote by
proxy.
Any limited partner, upon written request addressed to the General Partner,
may obtain from the General Partner a list of the names and addresses of record
of all limited partners and the number of Units held by each limited partner.
Upon receipt of a written request delivered in person or by certified mail,
signed by limited partners owning at least 10% of the outstanding Units, that a
meeting of the Partnership be called to consider any matter upon which limited
partners may vote pursuant to the Limited Partnership Agreement, the General
Partner, by written notice to each limited partner of record mailed within 15
days after such receipt, must call a meeting of the Partnership. Such meeting
must be held at least 30 but not more than 60 days after the mailing of such
notice and the notice must specify the date, a reasonable time and place, and
the purpose of such meeting.
At any such meeting, upon the approval by an affirmative vote of limited
partners owning more than 50% of the Units, the following actions may be taken:
(i) the Limited Partnership Agreement may, with certain exceptions, be amended;
(ii) the Partnership may be dissolved; (iii) the General Partner may be removed
and a new general partner may be admitted immediately prior to the removal of
the General Partner provided that the new general partner shall continue the
business of the Partnership without dissolution; (iv) a new general partner or
general partners may be admitted if the General Partner elects to withdraw from
the Partnership immediately prior to the withdrawal of the General Partner,
provided that the new general partner shall continue the business of the
Partnership without dissolution; (v) any contracts with the General Partner or
any of its affiliates or any trading advisor may be terminated without penalty
on 60 days' notice; and (vi) the sale of all assets of the Partnership may be
approved.
REPORTS TO LIMITED PARTNERS
The books and records of the Partnership will be maintained at its
principal office and the limited partners have the right at all times during
reasonable business hours to have access to and copy the Partnership's books and
records. Within 30 days of the end of each month, the General Partner will
provide the limited partners with a financial report containing information
relating to the Net Assets and Net Asset Value of a Unit as of the end of such
month as well as such other information relating to the operations of the
Partnership which is required to be reported to the limited partners by CFTC
regulations. In addition, if any of the following events occur, notice thereof
will be mailed to each limited partner within seven business days of such
occurrence: a decrease in the Net Asset Value of a Unit to 50% or less of the
Net Asset Value most recently reported; a decrease in assets maintained in cash
to 50% or less of the amount most recently reported; any change in
99
<PAGE> 107
advisors; any change in commodity brokers or any change to payment of brokerage
commissions on a round turn basis; any change of the General Partner; any
material change in the Partnership's trading policies or any material change in
an advisor's trading strategies. In addition, a certified annual report of
financial condition will be distributed to the limited partners not more than 90
days after the close of the Partnership's fiscal year. Not more than 75 days
after the close of the fiscal year, tax information necessary for the
preparation of the limited partners' annual federal income tax returns will be
distributed to the limited partners.
POWER OF ATTORNEY
To facilitate the execution of various documents by the General Partner on
behalf of the Partnership and the limited partners, the limited partners will
appoint the General Partner, with power of substitution, their attorney-in-fact
by executing a Subscription Agreement (including the Power of Attorney) attached
hereto as Exhibit B. Such documents include, without limitation, the Limited
Partnership Agreement and Certificate of Limited Partnership and amendments
and/or restatements thereto, and customer agreements with SB.
INDEMNIFICATION
The Limited Partnership Agreement provides that with respect to any action
in which the General Partner or any of its affiliates is a party because of its
relationship to the Partnership, the Partnership shall indemnify and hold
harmless such person, subject to receipt of an independent legal opinion
regarding the applicable standard of conduct, against any loss, liability,
expense (including attorneys' and accountants' fees), judgments and amounts paid
in settlement, incurred by it in connection with such action, if the indemnified
person acted in good faith, the course of conduct which caused the loss or
liability was in the best interests of the Partnership, the General Partner (or
its affiliate) was acting on behalf of or providing services for the Partnership
and if such actions did not involve negligence or misconduct. No indemnification
of the General Partner or its affiliates is permitted for losses resulting from
a violation of the Securities Act of 1933 or any State securities law. In
addition, no indemnification of the General Partner or its affiliates may be
made in connection with any action against them if it would be inconsistent with
the New York Act.
REDEMPTIONS
Beginning as of June 30, 1996, a limited partner may cause some or all of
his Units to be redeemed by the Partnership at the Net Asset Value thereof as of
the last day of a month (the "Redemption Date") on 10 days' notice to the
General Partner. Because Net Asset Value fluctuates daily, Limited Partners will
not know the Net Asset Value applicable to their redemption at the time a notice
of redemption is submitted. Payment for the redeemed Units will be made within
10 business days following the Redemption Date by crediting the investor's SB
account. The Net Asset Value of a Unit is defined in the Limited Partnership
Agreement to equal the Net Assets of the Partnership divided by the number of
units of limited and general partnership interest outstanding. Net Assets of the
Partnership is defined to mean the total assets of the Partnership, including
all cash, Treasury Bills, accrued interest and the market value of all open
commodity positions, less all liabilities of the Partnership, determined in
accordance with generally accepted accounting principles. For the purpose of a
redemption, any accrued liability for reimbursement of offering and
organizational expenses for the initial offering period will not reduce Net
Asset Value per Unit. The General Partner reserves the right to permit the
redemption of Units more frequently than monthly (but no more frequently than
daily), provided that such action is in the best interest of the Partnership
taking into account potential tax consequences to Limited Partners.
Except as set forth below, all requests for redemption will be honored, and
the Partnership's positions in commodity contracts will be liquidated to the
extent necessary to effect redemptions. The right to redeem is contingent upon
the Partnership having property sufficient to discharge its liabilities on the
Redemption Date and upon receipt by the General Partner of a written or oral
request for redemption at least 10 days prior to the Redemption Date. The
General Partner may temporarily suspend redemptions if necessary in order to
liquidate positions in an orderly manner. No partial redemptions are permitted
if after giving effect to the redemption a Limited Partner would own fewer than
three Units.
100
<PAGE> 108
Federal income tax aspects of redemptions are described under "Income Tax
Aspects". Under New York law, a limited partner who has received a distribution
upon redemption of Units may under certain circumstances be liable for any
amount, not exceeding the amount of such distribution. See "The Limited
Partnership Agreement -- Liability of Limited Partners."
Under the Limited Partnership Agreement, the General Partner may determine
to permit more frequent redemptions in the future.
ERISA CONSIDERATIONS
The phrase "employee benefit plan" refers to plans of various types
including corporate pension and profit-sharing plans, "simplified employee
pension plans," so-called "Keogh" (H.R. 10) plans for self-employed individuals,
including partners, and "individual retirement accounts" (or "IRAs") for persons
(including employees and self-employed persons) who receive compensation income.
Notwithstanding the general requirement that investors in the Partnership
must invest a minimum of $5,000, a minimum investment of $2,000 has been set for
qualified employee benefit plans (see "Investment Requirements"). Greater
minimum purchases may be mandated by the securities laws and regulations of
certain states, and investors should consult the Subscription Agreement which is
attached as Exhibit B to this Prospectus and any supplement affixed hereto to
determine the requirements applicable to them.
Units may not be purchased by an employee benefit plan if SB or its
Affiliates (a) have investment discretion with respect to the assets of such
plan or (b) regularly give individualized investment advice which serves as a
primary basis for the investment decisions made with respect to such assets.
This prohibition is designed to prevent violations of certain provisions of the
Employee Retirement Income Security Act of 1974 ("ERISA") and Section 4975 of
the Internal Revenue Code of 1986 (the "Code").
In considering an investment in the Partnership of a portion of the assets
of an employee benefit plan, a fiduciary should consider (i) whether the
investment is in accordance with the documents and instruments governing and
plan; (ii) whether the investment satisfies the diversification rules of Section
404(a)(1)(C) of ERISA, if applicable; (iii) whether the investment will result
in unrelated business taxable income to the plan; (iv) whether the investment
provides sufficient liquidity; (v) the need to value the assets of the plan
annually; and (vi) whether the investment is prudent.
Assets of employee benefit plans ("plan assets") are generally subject to
the fiduciary duty provisions of ERISA and the prohibited transaction provisions
of ERISA and Section 4975 of the Code. ERISA does not define "plan assets";
however, the Department of Labor has published a final regulation defining the
term "plan assets" (the "Final Regulation") for purposes of Title I of ERISA and
Section 4975 of the Code. Under the Final Regulation, generally, when a plan
makes an equity investment in another entity, the underlying assets of that
entity will be considered plan assets unless (1) the equity interest is a
"publicly-offered" security or a security issued by an investment company
registered under the Investment Company Act of 1940, (2) the entity is an
"operating company," or (3) equity participation in the entity by benefit plan
investors is not "significant."
Under the Final Regulation, a "publicly-offered" security is a security
that is (i) freely transferable, (ii) part of a class of securities that is
owned by 100 or more investors independent of the issuer and of one another, and
(iii) either (A) a part of a class of securities registered under section 12(b)
or 12(g) of the Securities Exchange Act of 1934, or (B) sold to the plan as part
of an offering of securities to the public pursuant to an effective registration
statement under the Securities Act of 1933 and the class of securities of which
such security is part is registered under the Securities Exchange Act of 1934
within 120 days (or such later time as may be allowed by the Securities and
Exchange Commission) after the end of the fiscal year of the issuer during which
the offering of such securities to the public occurred.
For purposes of this definition, whether a security is "freely
transferable" is a factual question to be determined on the basis of all
relevant facts and circumstances. If a security is part of an offering in which
the minimum investment is $10,000 or less, however, certain customary
restrictions (enumerated in the Final
101
<PAGE> 109
Regulation) imposed on the transfer of partnership interests necessary to permit
partnerships to comply with applicable federal and state laws, to ensure
favorable treatment under federal or state tax laws, and to meet reasonable
administrative needs will not, alone or in combination, affect a finding that
such securities are freely transferable. Although no assignee may become a
substituted limited partner without the consent of the General Partner, a
limited partner may assign the economic benefits of ownership of Units upon
notice to the General Partner (see "Restrictions on Transfer or Assignment"
above). Because these restrictions are among the permissible restrictions
enumerated in the Final Regulation, the Units should be deemed to be freely
transferable.
Inasmuch as the Units should be deemed to be freely transferable, the Units
are or will be registered under the federal securities laws as set forth in the
Final Regulations and assuming that the Units will be held by over 100 persons,
the Units should qualify as "publicly-offered" securities within the meaning of
the Final Regulation. As a result, under the Final Regulation the underlying
assets of the Partnership should not be treated as plan assets.
In the unlikely event that the Partnership were deemed to hold plan assets,
prohibited transactions could arise under ERISA and the Code. In addition,
investment by a fiduciary of an employee benefit plan could be deemed an
improper delegation of investment authority, and the fiduciary could be liable
either directly, or under the co-fiduciary rules of ERISA, for the acts of the
General Partner of the Partnership. Additional issues relating to the "plan
assets" and "prohibited transaction" concepts of ERISA and the Code arise by
virtue of the General Partner's ownership of interests in the Partnership and
the possible relationship between an Affiliate of the General Partner and any
employee benefit plan which may purchase Units. Further, certain transactions
between the Partnership and the General Partner and certain Affiliates of the
General Partner could be prohibited transactions.
It should be noted that even if the Partnership's assets are not deemed to
be plan assets, the Department of Labor has stated in Interpretive Bulletin 75-2
(29 C.F.R. sec.2509.75-2, as amended by the Final Regulation) that it would
consider a fiduciary who makes or retains an investment in a partnership for the
purpose of avoiding the application of the fiduciary responsibility provisions
of ERISA to be in contravention of the fiduciary provisions of ERISA. The
Department of Labor indicated further that if a plan invests in or retains its
investment in a partnership and as part of the arrangement it is expected that
the partnership will enter into a transaction with a party in interest to the
plan (within the meaning of ERISA) which involves a direct or indirect transfer
to or use by the party in interest of any assets of the plan, the plan's
investment in the partnership would be a prohibited transaction under ERISA.
A fiduciary that has engaged in a prohibited transaction would be
personally liable to (i) restore to the employee benefit plan any profit
realized on the transaction and (ii) make good to the employee benefit plan any
losses suffered by the employee benefit plan as a result of the transaction. A
prohibited transaction may also result in the imposition of an excise tax under
the Code upon "disqualified persons" (as defined in Section 4975 of the Code)
with respect to the employee benefit plan. The disqualified persons involved
would be liable to pay an excise tax equal to 5% of the amount involved in the
prohibited transaction for each year during which the investment is in place,
and would be required to eliminate the prohibited transaction by reversing the
transaction and making good to the employee benefit plan any losses resulting
from the prohibited transaction. If the transaction is not corrected within a
certain time period, the disqualified person involved could also be liable for
an additional excise tax in an amount equal to 100% of the amount involved.
In addition to liability for employee benefit plan losses, ERISA imposes a
civil penalty against fiduciaries of employee benefit plans who breach the
prudence and other fiduciary standards of ERISA, and against non-fiduciaries who
knowingly participate in the transaction giving rise to the breach of the ERISA
fiduciary standards. The civil penalty is equal to 20 percent of the amount
recovered from a fiduciary or non-fiduciary with respect to such breach or
knowing participation pursuant to a settlement agreement with the United States
Secretary of Labor or a court order resulting from a proceeding instituted by
the Secretary. The penalty may be waived and, in any event, would be offset to
the extent of the responsible party's liability for excise tax under the Code.
102
<PAGE> 110
Each limited partner will be furnished with monthly statements and annual
reports which include the Net Asset Value per Unit. The General Partner believes
that these statements will be sufficient to permit plan fiduciaries to provide
an annual valuation of plan investments as required by ERISA; however,
fiduciaries should note that they have the ultimate responsibility for providing
such valuation. Accordingly, plan fiduciaries should consult with their
attorneys or other advisors regarding their obligations under ERISA with respect
to making such valuations.
Plan fiduciaries should understand the illiquid nature of an investment in
the Partnership and that a secondary market may not exist for a Unit.
Accordingly, plan fiduciaries should review both anticipated and unanticipated
liquidity needs for their respective plans, particularly those for a
participant's termination of employment, retirement, death or disability or plan
termination. Plan fiduciaries should be aware that distributions to certain
participants may be required to commence in the year after the participant
attains age 70 1/2.
LEGAL MATTERS
Legal matters in connection with the securities being offered hereby have
been passed upon for the Partnership by Willkie Farr & Gallagher, One Citicorp
Center, 153 East 53rd Street, New York, New York 10022. Willkie Farr & Gallagher
has also acted as counsel for SB and the General Partner in connection with this
offering.
EXPERTS
The statements made and opinions referred to in this Prospectus under the
captions "Risk Factors", "Income Tax Aspects" and "The Limited Partnership
Agreement" which are attributed to Willkie Farr & Gallagher are made on the
authority of such firm as experts in tax and partnership law.
The statement of financial condition of the Partnership at December 31,
1995 and the statement of financial condition of the General Partner at December
31, 1995 included in this Prospectus have been audited by Coopers & Lybrand
L.L.P., independent accountants, as set forth in their reports appearing
elsewhere herein. Such financial statements are included herein in reliance upon
such reports, which reports are given upon their authority as experts in
accounting and auditing.
ADDITIONAL INFORMATION
This Prospectus does not contain all the information set forth in the
Registration Statement and the exhibits relating thereto which the Partnership
has filed with the Securities and Exchange Commission, Washington, D.C. For
further information pertaining to the Partnership and the securities offered
hereby, reference is hereby made to the Registration Statement, including the
exhibits filed as part thereof. Copies of the exhibits are on file at the
offices of the Securities and Exchange Commission in Washington, D.C. and may be
obtained, at the prescribed charge, upon request to the Commission or may be
examined, without charge, at the offices of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Washington, D.C.
A copy of the NASAA Guidelines for the Registration of Commodity Pool
Programs, as amended and adopted as of August 30, 1990, will be provided to any
person, without charge, upon request. Said request may be made in writing to the
Partnership, c/o Smith Barney Futures Management Inc., 390 Greenwich Street, New
York, New York 10013 or by calling (212) 723-5424.
103
<PAGE> 111
COMMODITY MARKETS
COMMODITY FUTURES
Commodity futures contracts are contracts made on a commodity exchange
which provide for the future delivery of various agricultural commodities,
industrial commodities, foreign currencies or financial instruments at a
specified date, time and place. The contractual obligations may be satisfied
either by taking or making physical delivery of an approved grade of the
commodity (or cash settlement in the case of certain futures contracts) or by
entering into an offsetting contract to purchase or sell the same commodity on
the same exchange prior to the designated date of delivery. As an example of an
offsetting transaction in which the physical commodity is not delivered, the
contractual obligations arising from one contract to sell December 1996 wheat on
a commodity exchange may be fulfilled at any time before delivery of the
commodity is required by entering into one contract to purchase December 1996
wheat on the same exchange. In such instance the difference between the price at
which the futures contract to sell was entered into and the price paid for the
offsetting contract, after allowance for the brokerage commission or fees and
exchange and clearing fees, represents the profit or loss to the trader.
FORWARD CONTRACTS
Currencies may be purchased or sold for future delivery through banks or
dealers pursuant to what are commonly referred to as "forward contracts." In
such instances, the bank or dealer generally acts as principal in the
transaction and includes its anticipated profit and costs of the transaction in
the prices it quotes. Mark-ups and/or commissions may also be charged on such
transactions. The Partnership will trade foreign currency forward contracts to a
significant extent. The forward markets are substantially unregulated. See
"-- Regulation," below. Unlike futures contracts, forward contracts are not of
any standard size. Rather, they are the subject of individual negotiation
between the parties involved. Moreover, because there is no clearinghouse system
applicable to forward contracts, forward contracts are not fungible, and there
is no direct means of "offsetting" a forward contract by purchase of an
offsetting position on the same (or a linked) exchange as one can a futures
contract. The forward markets provide what has typically been a highly liquid
market for currency trading, and in certain cases the prices quoted for forward
contracts may be more favorable than those quoted for comparable futures
positions on the International Monetary Market of the Chicago Mercantile
Exchange. Unlike futures contracts traded on United States exchanges, no daily
settlements of unrealized profit or loss are made in the case of open forward
contract positions.
Commodity future and forward prices are highly volatile and are influenced
by, among other things, changing supply and demand relationships, government
agricultural, commercial and trade programs and policies, national and
international political and economic events, weather and climate conditions,
insects and plant disease, purchases and sales by foreign countries and changing
interest rates.
USES OF COMMODITY MARKETS
Two broad classifications of persons who trade in commodity futures and
forwards are "hedgers" and "speculators". Commercial interests, including
farmers, which market or process commodities use the commodities markets
primarily for hedging. Hedging is a protective procedure designed to minimize
losses which may occur because of price fluctuations. For example, a
merchandiser or processor may hedge against price fluctuations between the time
he makes a contract to sell a raw or processed commodity and the time he must
perform the contract as follows: at the time he contracts to sell the commodity
at a future date, he simultaneously enters into futures contracts to buy the
necessary equivalent quantity of the commodity and, at the time for performance
of the contract, he either accepts delivery under his futures contracts or buys
the actual commodity and closes out his futures position by entering into an
offsetting contract to sell the commodity. Similarly, a processor may need to
purchase raw materials abroad in foreign currencies in order to fulfill a
contract for forward delivery of a commodity or byproduct in the United States.
Such a processor may hedge against the price fluctuation of foreign currency by
entering into a futures (or forward) contract for the foreign currency. Thus the
commodity markets enable the hedger to shift the risk of price fluctuations to
the
104
<PAGE> 112
speculator. The usual objective of the hedger is to protect the profit which he
expects to earn from his farming, merchandising or processing operations, rather
than to profit from his commodity trading.
The speculator, unlike the hedger, generally expects neither to deliver nor
receive the physical commodity. Instead, the speculator risks his capital with
the hope of profiting from price fluctuations in commodity futures contracts.
The speculator is, in effect, the risk bearer who assumes the risks which the
hedger seeks to avoid. Speculators rarely take delivery of the physical
commodity but usually close out their futures positions by entering into
offsetting contracts. Because the speculator may take either long or short
positions in the commodity market, it is possible for him to make profits or
incur losses regardless of the direction of price trends. Commodities trades
made by the Partnership will be speculative rather than for hedging purposes.
A very large number of firms and individuals trade in the commodities
markets as hedgers or speculators, many of whom have assets greatly in excess of
the Partnership's.
OPTIONS
The CFTC permits domestic exchanges to apply for licensing for the trading
of options on futures contracts and on physical commodities. The Partnership may
trade in such commodity options as are established on domestic exchanges.
Trading policies of the Partnership place no limitation on the percentage of Net
Assets which may be invested in options, and the Partnership may write options.
The Partnership may trade over-the-counter currency options to the extent
permitted by CFTC regulations.
The risks involved in trading commodity options on exchanges are similar to
those involved in trading futures contracts, in that options are speculative and
highly leveraged. Specific market movements of the commodity or futures contract
underlying an option cannot be predicted. Options are bought and sold on the
trading floor of a commodity exchange. The purchaser of an option pays a premium
and may be charged commissions and other fees. The writer of an option must make
margin deposits and may be charged commissions and other fees. Exchanges provide
trading mechanisms so that an option once purchased can later be sold and an
option once written can later be liquidated by an offsetting purchase. However,
there can be no assurance that a liquid offset market will exist for any
particular option or at any particular time. In such case, it might not be
possible to effect offsetting transactions in particular options. Thus in the
case of an option on a future, to realize any profit, a holder would have to
exercise his option and have to comply with margin requirements for the
underlying futures contract. A writer could not terminate his obligation until
the option expired or he was assigned an exercise notice.
REGULATION
Commodity exchanges provide centralized market facilities for trading in
futures contracts relating to specified commodities. Among the principal
exchanges in the United States are the Chicago Board of Trade, the Chicago
Mercantile Exchange (including the International Monetary Market) and the New
York Mercantile Exchange, Inc.
Commodity exchanges in the United States are subject to regulation under
the Commodity Exchange Act (the "CEA") by the CFTC. Under the amendments to the
CEA effected by the Commodity Futures Trading Commission Act of 1974, the CFTC
has become the governmental agency having responsibility for regulation of U.S.
commodity exchanges and commodity futures trading. The function of the CFTC is
to implement the objectives of the CEA of preventing price manipulation and
excessive speculation and promoting orderly and efficient commodity futures
markets. Such regulation, among other things, provides that futures trading in
commodities must be upon exchanges designated as "contract markets", and that
all trading on such exchanges must be done by or through exchange members. Under
the 1974 amendments to the CEA, futures trading in all commodities traded on
domestic exchanges is regulated. In addition, on September 8, 1981, the CFTC
adopted rules regulating trading of commodity options which had previously been
banned by the CFTC. However, trading in spot commodities and forward contracts
may not be within the jurisdiction of the CFTC and may therefore be effectively
unregulated. Investors should note that various government agencies have
investigated practices engaged in on the floors of the Chicago Board of Trade,
the
105
<PAGE> 113
Chicago Mercantile Exchange and certain New York exchanges and in this
connection a number of floor brokers on the Chicago Mercantile Exchange have
been indicted and some have been convicted for certain trading practices.
The CFTC also has exclusive jurisdiction to regulate the activities of
"commodity pool operators" and "commodity trading advisors". The General Partner
is registered as a commodity pool operator and a commodity trading advisor and
all of the Advisors are registered as commodity trading advisors. Registration
as a commodity pool operator or as a commodity trading advisor requires annual
filings setting forth the organization and identity of the management and
controlling persons of the commodity pool operator or commodity trading advisor.
In addition, the CFTC has authority under the CEA to require and review books
and records of, and review documents prepared by, a commodity pool operator or a
commodity trading advisor. The CFTC has adopted regulations which impose certain
disclosure, reporting and record-keeping requirements on commodity pool
operators and commodity trading advisors. The CFTC is authorized to suspend a
person's registration as a commodity pool operator or commodity trading advisor
if the CFTC finds that such person's trading practices tend to disrupt orderly
market conditions, that any controlling person thereof is subject to an order of
the CFTC denying such person trading privileges on any exchange, and in certain
other circumstances.
SB, the commodity broker/dealer for the Partnership, is also subject to
regulation by and registration with the CFTC as a "futures commission merchant".
With respect to domestic futures and options trading, the CEA requires all
futures commission merchants to meet and maintain specified fitness and
financial requirements, account separately for all customers' funds, property
and positions, and maintain specified books and records on customer transactions
open to inspection by the staff of the CFTC. The CEA authorizes the CFTC to
regulate trading by commodity brokerage firms and their employees, permits the
CFTC to require exchange action in the event of market emergencies, and
establishes an administrative procedure under which commodity traders may
institute complaints for damages arising from alleged violations of the CEA.
Under such procedures, limited partners may be afforded certain rights for
reparations under the CEA. For a discussion of such rights, see "Fiduciary
Responsibility".
Most exchanges (but currently not the foreign currency futures markets
other than during the first fifteen minutes of a trading day or the foreign
currency forward market) normally have regulations which limit the amount of
fluctuation in commodity futures contract prices during a single trading day.
These regulations specify what are referred to as "daily price fluctuation
limits" or, more commonly, "daily limits". The daily limits establish the
maximum amount the price of a futures contract may vary from the previous day's
settlement price at the end of the trading session. Once the daily limit has
been reached in a particular commodity, no trades may be made at a price beyond
the limit. Positions in the commodity could then be taken or liquidated only if
traders are willing to effect trades at or within the limit during the period
for trading on such day. The "daily limit" rule does not limit losses which
might be suffered by a trader because it may prevent the liquidation of
unfavorable positions. Also, commodity futures prices have moved the daily limit
for several consecutive trading days in the past, thus preventing prompt
liquidation of futures positions and subjecting the commodity futures trader to
substantial losses. See "Risk Factors -- Commodity Trading May Be Illiquid".
The CFTC and U.S. exchanges have established limits, referred to as
"position limits", on the maximum net long or net short position which any
person, or group of persons acting together, may hold or control in particular
commodities. The position limits established by the CFTC apply to grains,
soybeans, cotton, eggs and potatoes. U.S. exchanges have established speculative
position limits for all commodity contracts for which no such limits have been
established. The CFTC has adopted a statement of policy with respect to the
treatment of positions held by a commodity pool, such as the Partnership, under
its rules relating to the aggregation of futures positions for purposes of
determining compliance with speculative position limits. In connection
therewith, futures positions of the Partnership are allocated only to the person
or entity controlling trading decisions for the Partnership and not to the
limited partners. Currently, all of the positions held by all accounts owned or
controlled directly or indirectly by the Advisors and their principals will be
aggregated with the Partnership's positions. Depending upon the total amount of
funds being managed in both the Partnership's account and other accounts
controlled directly or indirectly by the Advisors, such position limits
106
<PAGE> 114
may affect the ability of the Advisor to establish particular positions in
certain commodities for the Partnership or may require the liquidation of
positions.
In addition, pursuant to authority in the CEA, the NFA has been formed and
registered with the CFTC as a self-regulatory body in order to relieve the CFTC
of the burden of direct regulation of commodity professionals. The NFA is
required to establish and enforce for its members training standards and
proficiency tests, minimum financial requirements and standards of fair
practice. Pursuant to permission granted in the CEA, the CFTC has delegated some
of its registration functions to the NFA. The Advisors, the General Partner and
SB are each members of the NFA.
The above-described regulatory structure may be modified by rules and
regulations promulgated by the CFTC or by legislative changes enacted by the
Congress. Furthermore, the fact of CFTC registration of the General Partner and
SB does not imply that the CFTC has passed upon or approved this offering or
their qualifications to act as described in this Prospectus.
MARGINS
Commodity futures contracts are customarily bought and sold on margins
which range upward from as little as less than one percent of the purchase price
of the contract being traded. Because of these low margins, price fluctuations
occurring in commodity futures markets may create profits and losses which are
greater than are customary in other forms of investment or speculation. Margin
is the minimum amount of funds which must be deposited by the commodity futures
trader with his commodity broker in order to initiate futures trading or to
maintain his open positions in futures contracts. A margin deposit is not a
partial payment, as it is in connection with the trading of securities, but is
like a cash performance bond; it helps assure the trader's performance of the
commodity futures contract. Since the margin deposit is not a partial payment of
the purchase price, the trader does not pay interest to his broker on a
remaining balance. The minimum amount of margin required in regard to a
particular futures contract is set from time to time by the exchange upon which
such commodity futures contract is traded and may be modified from time to time
by the exchange during the term of the contract. Brokerage firms carrying
accounts for traders in commodity futures contracts may increase the amount of
margin required as a matter of policy in order to afford further protection for
themselves. SB intends to require the Partnership to meet its standard customer
margin requirements, which are generally greater than exchange minimum levels.
When the market value of a particular open commodity futures position
changes to a point where the margin on deposit does not satisfy the maintenance
margin requirements, a margin call will be made by the trader's broker. If the
margin call is not met within a reasonable time, the broker is required to close
out the trader's position. Margin requirements are computed each day by the
trader's commodity broker. With respect to the Partnership's trading, the
Partnership, and not the limited partners personally, will be subject to the
margin calls.
SB will not require the Partnership to meet and maintain margin on its
forward contracts.
107
<PAGE> 115
REPORT OF INDEPENDENT ACCOUNTANTS
To the Partners of
Smith Barney Diversified Futures Fund L.P. II
We have audited the accompanying statement of financial condition of SMITH
BARNEY DIVERSIFIED FUTURES FUND L.P. II (a New York Limited Partnership) as of
December 31, 1995. This financial statement is the responsibility of the
management of the General Partner. Our responsibility is to express an opinion
on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. An audit also includes
assessing the accounting principles used and significant estimates made by the
management of the General Partner, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statement referred to above presents fairly,
in all material respects, the financial position of SMITH BARNEY DIVERSIFIED
FUTURES FUND L.P. II as of December 31, 1995, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
March 25, 1996
108
<PAGE> 116
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31, 1995
<TABLE>
<S> <C>
ASSETS
Cash................................................................ $2,000
------
Total assets.............................................. $2,000
======
PARTNERS' CAPITAL
Partners' capital................................................... $2,000
------
Total partners' capital................................... $2,000
======
</TABLE>
NOTES TO STATEMENT OF FINANCIAL CONDITION
(1) PARTNERSHIP ORGANIZATION:
Smith Barney Diversified Futures Fund L.P. II (the "Partnership") was
formed under the laws of the State of New York on May 10, 1994 with the name
Consulting Group Managed Futures Fund L.P., and has not yet commenced
operations. The only transactions to date are the original capital contributions
of $1,000 by the General Partner, Smith Barney Futures Management Inc. and
$1,000 by the Initial Limited Partner. The General Partner has agreed to make
capital contributions so that its General Partnership interest will be the
greater of (i) 1% of the partners' contributions to the Partnership or (ii)
$25,000. The Limited Partnership Agreement provides that 5,000 units of limited
partnership interest ("Units") must be sold at $1,000 per Unit prior to
commencement of trading activities. All subscriptions plus interest earned
thereon are to be refunded should less than 5,000 Units be sold during the
subscription period or extension thereof. The minimum subscription is $5,000
except that subscriptions for employee benefit plans can be made for a minimum
of $2,000. The Partnership is authorized to sell 100,000 Units.
The General Partner is a wholly-owned subsidiary of Smith Barney Inc.
("SB"), the Partnership's commodity broker (see Note 2b). The General Partner
and each limited partner will 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, 2014; 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) AGREEMENTS:
A. MANAGEMENT AGREEMENTS:
All trading decisions will be made for the Partnership by Chesapeake
Capital Corporation, Millburn Ridgefield Corporation and John W. Henry &
Co., Inc. ("JWH") (collectively, the "Advisors"), registered commodity
trading advisors. The Advisors are not affiliated with one another and none
is affiliated with the General Partner or SB 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
will receive a monthly management fee equal to 1/3 of 1% (4% per year) of
month-end allocated Net Assets). In addition, the Partnership is obligated
to pay each Advisor 20% of the New Trading Profits of the Partnership
(except JWH, which will receive an incentive fee of 15% of New Trading
Profits) as defined in the Limited Partnership Agreement.
B. CUSTOMER AGREEMENT:
The Partnership has entered into a Customer Agreement which provides
that the Partnership will pay SB a monthly brokerage fee equal to 1/2 of 1%
(6% per year) of month-end Net Assets, as defined,
109
<PAGE> 117
allocated to the Advisors in lieu of brokerage commissions on a per trade
basis. The Partnership will pay for National Futures Association ("NFA")
fees, exchange, clearing, user, give-up and floor brokerage fees. SB will
pay a portion of such brokerage fees to its financial consultants who have
sold Units. Brokerage fees will be paid for the life of the Partnership,
although the rate at which such fees are paid may be changed. SB has agreed
to pay the Partnership interest on 80% of the average daily equity
maintained in cash in its account during each month at the rate of the
average non-competitive yield on 3-month U.S. Treasury Bills issued during
each month. Interest payments to the Partnership will begin after the
amount of interest accrued equals the total amount of offering and
organization expenses plus interest at the prime rate (see Note 4). The
Customer Agreement may be terminated upon notice by either party.
(3) DISTRIBUTIONS AND REDEMPTIONS:
Distributions of profits, if any, will be made at the sole discretion of
the General Partner and at such times as the General Partner may decide.
Beginning with the end of the first quarter ending after trading commences, a
limited partner may require the Partnership to redeem his Units at their
Redemption 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. Redemption Net
Asset Value differs from Net Asset Value calculated for financial reporting
purposes in that the accrued liability for reimbursement of offering and
organization expenses will not be included in the calculation of Redemption Net
Asset Value.
(4) ORGANIZATION AND OFFERING EXPENSES:
SB will initially bear the Partnership's organization and offering expenses
incurred (in connection with the Initial Offering Period capped at $525,000) in
connection with the issuance and distribution during the Offering Period of the
securities being registered. SB will be reimbursed the offering and organization
expenses (together with interest at the prime rate quoted by The Chase Manhattan
Bank, N.A.) from retention of interest on the Partnership's cash in segregated
bank accounts. Interest income will accrue to the Partnership as earned and once
all such offering and organization expenses equal to $525,000 have been
reimbursed to SB, the Partnership will realize all subsequent interest income in
cash credited to its account.
(5) SUBSEQUENT EVENT:
The Partnership commenced trading operations on January 17, 1996 with total
capital of $8,617,000.
110
<PAGE> 118
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
STATEMENTS OF FINANCIAL CONDITION
ASSETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
1996 1995
----------- ------------
(UNAUDITED)
<S> <C> <C>
Equity in commodity futures trading account:
Cash and cash equivalents....................................... $15,248,601 $2,000
Net unrealized appreciation open futures contracts.............. 718,849
Commodity options owned, at market value (premiums purchased
$104,150).................................................... 97,345
----------- ------
16,064,795 2,000
=========== ======
LIABILITIES AND PARTNERS' CAPITAL
Liabilities:
Accrued expenses:
Commissions..................................................... $ 81,455
Management fees................................................. 35,962
Other........................................................... 27,031
Due to SB....................................................... 425,849
----------- ------
570,297 0
----------- ------
Partners' Capital
General Partner, 169.6125 and 1 Unit equivalents outstanding in
1996 and 1995, respectively..................................... 155,779 1,000
Limited Partners, 16,700.7588 and 1 Units of Limited Partnership
interest outstanding in 1996 and 1995, respectively............. 15,338,719 1,000
----------- ------
15,494,498 2,000
----------- ------
$16,064,795 $2,000
=========== ======
</TABLE>
See Notes to Financial Statements.
111
<PAGE> 119
SMITH BARNEY DIVERSIFIED FUTURES FUND LP, II
STATEMENT OF INCOME AND EXPENSES AND PARTNERS' CAPITAL
(UNAUDITED)
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 17, 1996
(COMMENCEMENT OF
TRADING OPERATIONS)
TO MARCH 31,
1996
--------------------
<S> <C>
Income:
Net losses on trading of commodity futures:
Realized losses on closed positions................................... $(1,032,239)
Change in unrealized gains/losses on open positions................... 712,044
-----------
(320,195)
Less, brokerage commissions and clearing fees ($5,501)..................... (176,191)
-----------
Net realized and unrealized losses......................................... (496,386)
Interest income............................................................ 99,151
-----------
(397,235)
-----------
Expenses:
Management fees.......................................................... 67,442
Other expenses........................................................... 27,825
-----------
95,267
-----------
Net loss................................................................. (492,502)
Proceeds from offering -- Limited Partners................................. 8,530,000
General Partner................................. 87,000
Offering and organization expense.......................................... (525,000)
Additions -- Limited Partners.............................................. 7,816,000
General Partner............................................... 79,000
-----------
Partner's capital, end of period........................................... $15,494,498
===========
Net asset value per Unit
(16,870.3713 Units outstanding at March 31, 1996)........................ $ 918.44
===========
Net loss per Unit of Limited Partnership Interest and General Partnership
Unit equivalent.......................................................... $ (20.63)
===========
Redemption net asset value per Unit........................................ $ 943.69
===========
</TABLE>
See Notes to Financial Statements.
112
<PAGE> 120
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1996
(UNAUDITED)
GENERAL
Smith Barney Diversified Futures Fund L.P. II (the "Partnership") was
formed under the laws of the State of New York, on May 10, 1994 with the name
Consulting Group Managed Futures Fund L.P. The Partnership engages in the
speculative trading of commodity interests including forward contracts on
foreign currencies, commodity options and commodity futures contracts on U.S.
Treasury Bills and other financial instruments, foreign currencies and stock
indices. The commodity interests that are traded by the Partnership are volatile
and involve a high degree of market risk.
Between August 21, 1995 (commencement of the offering period) and January
16, 1996, 8,529 Units of limited partnership interest were sold at $1,000 per
unit. The proceeds of the offering were held in an escrow account until January
17, 1996, at which time they were turned over to the Partnership for trading.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership. Smith Barney Inc. ("SB"), an affiliate of
the General Partner, acts as commodity broker for the Partnership. All trading
decisions are made for the Partnership by John W. Henry & Co., Millburn
Ridgefield Corporation and Chesapeake Capital Corporation (collectively, the
"Advisors").
The Partnership's cash is deposited by SB in segregated bank accounts as
required by Commodity Futures Trading Commission regulations. At March 31, 1996,
the amount of cash held for margin requirements was $4,396,073.
The accompanying financial statements are unaudited but, in the opinion of
management, include all adjustments (consisting only of normal recurring
adjustments) necessary for a fair presentation of the Partnership's financial
condition at March 31, 1996 and the results of its operations for the period
from January 17, 1996 (commencement of operations) to March 31, 1996. These
financial statements present the results of an interim period and do not include
all disclosures normally provided in annual financial statements. It is
suggested that these financial statements be read in conjunction with the
financial statements and notes included in the Partnership's annual report on
Form 10-K filed with the Securities and Exchange Commission for the year ended
December 31, 1995.
Due to the nature of commodity trading, the results of operations for the
interim period presented should not be considered indicative of the results that
may be expected for the entire year.
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 market value for those commodity interests
for which market quotations are readily available or at fair value on the last
business day of the period. Investments in commodity interests denominated in
foreign currency are translated into U.S. dollars at the exchange rates
prevailing on the last business day of the period. Realized gain (loss) 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. The Customer Agreement between
the Partnership and SB gives the Partnership the legal right to net unrealized
gains and losses.
(b) Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income and
expenses.
113
<PAGE> 121
(c) The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from these
estimates.
ORGANIZATION AND OFFERING COSTS
Offering and organization expenses of $525,000 relating to the issuance and
marketing of Units offered were initially paid by SB. The accrued liability for
reimbursement of offering and organization expenses will not reduce Net Asset
Value per Unit for any purpose (other than financial reporting), including
calculation of advisory and brokerage fees and the redemption value of Units.
Interest earned by the Partnership will be used to reimburse SB for the offering
and organization expenses of the Partnership until such time as such expenses
are fully reimbursed. As of March 31, 1996, the Partnership has reimbursed SB
for $99,151 of offering and organization expenses.
NET ASSET VALUE PER UNIT
Changes in net asset value per Unit for the period from January 17, 1995
(commencement of operations) to March 31, 1996 were as follows:
<TABLE>
<CAPTION>
PERIOD FROM
JANUARY 17, 1996
(COMMENCEMENT OF
OPERATIONS) TO
MARCH 31, 1996
----------------
<S> <C>
Net realized and unrealized gains (losses).................. $ (48.12)
Interest income............................................. 7.59
Expenses.................................................... (8.19)
Other....................................................... 28.09
----------------
Increase (decrease) for period.............................. (20.63)
Net asset value per Unit, beginning of period............... 939.07
----------------
Net asset value per Unit, end of period..................... $ 918.44
==============
Redemption net asset value per Unit*........................ $ 943.69
==============
</TABLE>
- ---------------
* For the purpose of a redemption, any accrued liability for reimbursement of
offering and organization expenses will not reduce redemption net asset value
per unit.
TRADING ACTIVITIES AND FINANCIAL INSTRUMENT RISK
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
activity are shown in the statement of income and expenses.
All of the commodity interests owned by the Partnership are held for
trading purposes. The fair value of these commodity interests, including options
thereon, at March 31, 1996 was $816,194 and the average fair value during the
quarter then ended, based on monthly calculation, was $587,683.
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
include forwards, futures 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 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.
114
<PAGE> 122
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. The
Partnership's sole counterparty with respect to OTC contracts is SB. Therefore,
the Partnership's sole credit risk on these transactions is the possibility that
SB will fail to perform. Credit risk with respect to exchange traded instruments
is reduced to the extent that an exchange or clearing organization acts as a
counterparty to the transactions. The Partnership's risk of loss in the event of
counterparty default is typically limited to the amounts recognized in the
statement of financial condition and not represented by the contract or notional
amounts of the instruments.
The Partnership has concentration risk because the sole broker with respect
to the Partnership's assets is SB.
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 notional or contractual amounts of these instruments, while not
recorded in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. At March 31, 1996, the notional or contractual
amounts of the Partnership's commitment to purchase and sell these instruments
was approximately $79,516,352 and $138,925,190, respectively. All of these
instruments mature within one year of March 31, 1996. However, due to the nature
of the Partnership's business, these instruments may not be held to maturity.
The aggregate nominal amount of OTC contracts is generally minimal.
<TABLE>
<CAPTION>
NOTIONAL OR CONTRACTUAL
AMOUNT OF COMMITMENTS
----------------------------------
TO PURCHASE TO SELL
-------------- ---------------
<S> <C> <C>
Currencies.................................. $19,676,623.20 $ 60,604,396.46
Interest Rate USD........................... 1,013,250.00 7,571,406.26
Livestock................................... 401,690.00 150,490.00
Metals...................................... 7,443,896.80 4,085,605.25
Energy...................................... 8,178,476.00 0.00
Sales....................................... 6,651,083.34 822,237.83
Interest Rates Foreign...................... 25,490,468.44 65,564,379.02
Grains...................................... 3,395,036.00 126,675.00
Stock Index................................. 7,265,826.23 0.00
-------------- ---------------
Total............................. $79,516,352.01 $138,925,189.92
============= ==============
</TABLE>
115
<PAGE> 123
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholder of
Smith Barney Futures Management Inc.:
We have audited the accompanying statement of financial condition of SMITH
BARNEY FUTURES MANAGEMENT INC. (a wholly-owned subsidiary of Smith Barney
Holdings Inc.) as of December 31, 1995. This statement of financial condition is
the responsibility of the Company's management. Our responsibility is to express
an opinion on this statement of financial condition based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of financial condition is free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement of financial condition.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the statement of financial condition referred to above
presents fairly, in all material respects, the financial position of SMITH
BARNEY FUTURES MANAGEMENT INC. as of December 31, 1995, in conformity with
generally accepted accounting principles.
COOPERS & LYBRAND L.L.P.
New York, New York
March 29, 1996.
116
<PAGE> 124
SMITH BARNEY FUTURES MANAGEMENT INC.
(A WHOLLY-OWNED SUBSIDIARY OF SMITH BARNEY HOLDINGS INC.)
STATEMENT OF FINANCIAL CONDITION AT MARCH 31, 1996 (UNAUDITED)
AND DECEMBER 31, 1995
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, 1995
MARCH 31, 1996 -----------------
---------------
(UNAUDITED)
<S> <C> <C>
Cash equivalents............................................. $ 9,822 $ 700,106
Receivable from limited partnerships......................... 3,049,080 4,911,202
Receivable from affiliate.................................... 4,520,715 224,447
Investments in limited partnerships, at equity............... 5,633,953 5,674,078
--------------- -----------------
13,213,370 11,509,833
Fixed assets (net of accumulated depreciation of $74,139).... 21,163 24,187
--------------- -----------------
Total Assets....................................... $13,234,733 $11,534,020
============ =============
LIABILITIES & STOCKHOLDER'S EQUITY
Payable to affiliates........................................ 171,700 103,050
Accounts payable and accrued liabilities..................... 175,852 160,738
Dividends payable............................................ 1,650,000
--------------- -----------------
Total Liabilities............................................ 1,997,552 263,788
Common stock, no par value, 3,000 shares authorized, 200
shares issued and outstanding (100 shares, $1 stated value;
100 shares, no stated value)............................... 100 100
Additional paid-in capital................................... 67,413,746 67,413,746
Retained earnings............................................ 1,823,335 1,856,386
--------------- -----------------
69,237,181 69,270,232
Less: Note receivable from SBHI.............................. (58,000,000) (58,000,000)
--------------- -----------------
11,237,181 11,270,232
--------------- -----------------
Total Liabilities and Stockholder's Equity......... $13,234,733 $11,534,020
============ =============
</TABLE>
Purchasers of Units in the Partnership are not acquiring any interest in the
General Partner.
The accompanying notes are an integral part of this statement of financial
condition.
117
<PAGE> 125
SMITH BARNEY FUTURES MANAGEMENT INC.
(A WHOLLY-OWNED SUBSIDIARY OF SMITH BARNEY HOLDINGS INC.)
NOTES TO STATEMENT OF FINANCIAL CONDITION
1. ORGANIZATION
Smith Barney Futures Management Inc. (the "Company") is a wholly-owned
subsidiary of Smith Barney Holdings Inc. ("SBHI"). The Company's ultimate parent
company is Travelers Group Inc. ("Travelers"). The Company is registered as a
commodity pool operator with the Commodity Futures Trading Commission. The
Company was organized and is authorized to act as a general partner for the
management of investment funds. At December 31, 1995, the Company is the general
partner for 18 limited partnerships and trading manager for 1 offshore
corporation with total assets of $544,056,106, total liabilities of $27,200,681
and total partners' capital of $516,855,425. The limited partnerships are
organized to engage in the speculative trading of commodity futures contracts
and other commodity interests. The Company's responsibilities as the general
partner are described in the various limited partnership agreements. The Company
has a general partner's liability, which is unlimited (except to the extent it
may be limited by contract) with respect to the partnerships.
2. SIGNIFICANT ACCOUNTING POLICIES
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 statement of financial condition. Actual results could differ from
these estimates.
Cash equivalents consist of highly liquid investments issued by an
affiliate, with a maturity of three months or less when purchased.
Investments in limited partnerships, at equity, are valued at the Company's
proportionate share of the net asset values as reported by the limited
partnerships. The limited partnerships value positions at the closing market
quotations on the last business day of the year.
Under the terms of each of the limited partnership agreements for which it
is a general partner, the Company is solely responsible for managing the
partnership. Other responsibilities are disclosed in each limited partnership
agreement. The Company is required to make a capital contribution to each such
partnership. The Limited Partnership Agreements generally require the General
Partner to maintain a cash investment in the partnerships equal to the greater
of (i) an amount which will entitle the General Partner to an interest of 1% in
each material item of partnership income, gain, loss, deduction or credit and
(ii) the greater of (a) 1% of the aggregate capital contributions of all
partners or (b) a minimum of $25,000. While it is the general partner thereof,
it may not reduce its percentage interest in such partnerships to less than such
required level, as defined in each partnership agreement. The Company has also
agreed that so long as it remains the general partner, it will at all times
maintain its net worth, as defined in the limited partnership agreements
(excluding its investment in each such partnership), at an amount not less than
10% of the total contributions to the partnerships by all partners. SBHI will
contribute such amounts of additional capital to the Company, all or part of
which may be contributed by a note (see Note 3), so that the Company maintains
its net worth requirement. The Company further agrees that it will not be a
general partner of any additional limited partnerships unless at all times when
it is general partner of any such additional partnership its net worth shall be
at least equal to the net worth required by the preceding sentence plus, for
each such additional partnership, an amount equal (excluding its investment in
each such partnership) to 10% of the total contributions to such partnership.
Receivable from limited partnerships includes deferred offering costs which
represent payments made by the Company on behalf of certain funds during their
original offering, such as legal fees, printing costs, etc. These costs are
deferred until the funds commence operations and then are reimbursed over a
period varying from eighteen to twenty-four months or as interest income is
earned by the fund in accordance with the funds' prospectus. The unreimbursed
organizational and offering costs at December 31, 1995 are approximately
118
<PAGE> 126
SMITH BARNEY FUTURES MANAGEMENT INC.
(A WHOLLY-OWNED SUBSIDIARY OF SMITH BARNEY HOLDINGS INC.)
NOTES TO STATEMENT OF FINANCIAL CONDITION -- (CONTINUED)
$1,134,756. In addition, as general partner, the Company earns monthly
management fees and commissions from certain partnerships as defined by the
partnership agreements.
All financial instruments in the statement of financial condition
approximate fair value as they are short term or carried at fair value as of
December 31, 1995.
3. NOTE RECEIVABLE
The note receivable consists of a $58,000,000 demand note dated June 22,
1994 which is non-interest bearing. The demand note was issued to the Company by
SBHI.
4. RELATED PARTY TRANSACTIONS
Substantially all transactions of the Company, including the allocation of
certain income and expenses, are with SBHI, limited partnerships of which it is
the general partner, and other affiliates. Receivable from affiliate represents
amounts due from Smith Barney Inc. for interest income, advisory fees, and
commissions. Payable to affiliates includes amounts due to SBHI and other
affiliates.
5. INCOME TAXES
Under income tax allocation agreements with SBHI and Travelers, the
Company's Federal, state, and local income taxes are provided on a separate
return basis and are subject to utilization of tax attributes in Travelers
consolidated income tax provision. Under the tax sharing agreement with SBHI,
the Company remits taxes to SBHI.
6. EMPLOYEE BENEFIT PLANS
The Company participates in a noncontributory defined benefit pension plan
with Travelers which covers substantially all U.S. employees.
The Company, through Travelers, has a defined contribution employee savings
plan covering substantially all U.S. employees. In addition, the Company has
various incentive plans under which stock of Travelers is purchased for
subsequent distribution to employees, subject to vesting requirements.
7. STOCKHOLDERS EQUITY
During the year the Company declared and distributed an earnings dividend
of $8,190,058 and a liquidating dividend in the amount of $1,809,942 on its
outstanding common stock. Other than net income, there were no other changes to
equity.
8. SUBSEQUENT EVENTS
The Company declared a dividend in the amount of $1,650,000 payable to
holder of record at the close of business on March 29, 1996 payable on April 15,
1996.
119
<PAGE> 127
SMITH BARNEY HOLDINGS INC.
Smith Barney Holdings Inc. (the "Company") provides investment banking,
brokerage and other financial services through its wholly owned subsidiaries.
Its principal operating subsidiary is SB, an investment banking, securities
trading and brokerage firm that traces its origins back to 1873. SB (formerly
Smith Barney, Harris Upham & Co. Incorporated, "SBHU") was formed in 1976
through the merger of Smith Barney & Co. and Harris Upham & Co. In July 1993,
SBHU and the Company acquired substantially all of the assets and certain of the
liabilities of the domestic retail brokerage business and the asset management
business of Shearson Lehman Brothers Holdings Inc. and its subsidiaries (the
"Shearson Acquisition") and SBHU changed its name to Smith Barney Shearson Inc.
That name was changed to Smith Barney Inc. on April 1, 1994.
Smith Barney Holdings Inc. is a wholly owned subsidiary of Travelers Group
Inc. (formerly The Travelers Inc.), a financial services holding company
engaged, through its subsidiaries, principally in three business segments:
Consumer Services, Investment Services (including the Company); Consumer Finance
Services, Life Insurance Services; and Property and Casualty Insurance Services.
The principal offices of the Company are located at 388 Greenwich Street,
New York, New York 10013, telephone 212-816-6000. The Company was incorporated
in Delaware in 1989.
The following is summary information for the Company for the year ending
December 31, 1994 (audited), the year ending December 31, 1995 (audited) and the
quarter ending March 31, 1996 (unaudited).
SUMMARY FINANCIAL INFORMATION
(AMOUNTS IN MILLIONS, EXCEPT WHERE INDICATED)
<TABLE>
<CAPTION>
QUARTER ENDED
YEAR ENDED YEAR ENDED MARCH 31,
DECEMBER 31, DECEMBER 31, 1996
1994 1995 (UNAUDITED)
------------ ------------ -------------
<S> <C> <C> <C>
Income Statement Data
Revenues.............................. $5,518 $6,783 $ 7,950
Income before taxes and cumulative
effect of change in accounting
principle.......................... $ 676 $1,021 $ 366
Net income............................ $ 388 $ 595 $ 223
Balance Sheet Data
Total assets (billions)............... $ 46.0 $ 41.0 $ 44.9
Total liabilities (billions).......... $ 43.0 $ 38.5 $ 42.4
Stockholder's equity.................. $2,316 $2,474 $ 2,474
</TABLE>
The General Partner will provide a copy of the Company's annual report as
filed with the SEC to any limited partner requesting it.
120
<PAGE> 128
GLOSSARY
The following glossary may assist the prospective investor in understanding
the terms used in this Prospectus. It should be noted preliminarily that
commodity futures contracts are contracts made on or through a commodity
exchange, and generally provide for future delivery of agricultural and
industrial commodities, foreign currencies and financial instruments. Such
contracts are uniform for each commodity and vary only with respect to price and
delivery time. A commodity futures contract to accept delivery (buy) is referred
to as a "long" contract; conversely a contract to make delivery (sell) is
referred to as a "short" contract. Until a commodity futures contract is
satisfied by delivery or offset it is said to be an "open" position. Other terms
used herein include the following:
Advisor. Any person who for any consideration engages in the business
of advising others, either directly or indirectly, as to the value,
purchase, or sale of commodity contracts or commodity options.
Affiliate. An affiliate of a person means (a) any person directly or
indirectly owning, controlling or holding with power to vote 10% or more of
the outstanding voting securities of such person; (b) any person 10% or
more of whose outstanding voting securities are directly or indirectly
owned, controlled or held with power to vote, by such person; (c) any
person, directly or indirectly, controlling, controlled by, or under common
control of such person; (d) any officer, director or partner of such
person; or (e) if such person is an officer, director or partner, any
person for which such person acts in such capacity.
Churning. Engaging in excessive trading with respect to a commodity
account for the purpose of generating brokerage commissions.
Commission. The fee charged by a broker for executing a trade in a
commodity account of a customer. SB charges most customers, but not the
Partnership, commissions per futures contract on a "round-turn" basis,
i.e., only upon the closing of an open position.
Commodity. The term commodity refers to goods, wares, merchandise,
produce and in general everything that is bought and sold in commerce,
including financial instruments. Out of this large class, certain
commodities have been selected as appropriate vehicles for trading on
various national and international exchanges located in principal marketing
and commercial areas. Among the commodities currently traded are wheat,
corn, oats, hogs, poultry, potatoes, sugar, cotton, lumber, copper, silver,
gold, GNMAs, T-Bills, stock indices, British pounds sterling and Japanese
yen.
Commodity Broker. Any person who engages in the business of effecting
transactions in commodity contracts for the account of others or for his
own account.
Commodity Contract. A contract or option thereon providing for the
delivery or receipt at a future date of a specified amount and grade of a
traded commodity at a specified price and delivery point.
Daily price fluctuation limit. The maximum permitted fluctuation
(imposed by an exchange and approved by the CFTC) in the price of a futures
contract for a given commodity that can occur on an exchange on a given day
in relation to the previous day's settlement price. Such maximum permitted
fluctuation is subject to change from time to time by the exchange.
Delivery. The process of satisfying a commodity futures contract by
transferring ownership of a specified quantity and grade of a cash
commodity to the purchaser thereof. Certain financial instrument futures
contracts are not settled by delivery of the financial instrument, but
rather are settled in cash.
Forward contract. A contract relating to the purchase and sale of a
physical commodity for delivery at a future date. It is distinguished from
a futures contract in that it is not traded on an exchange and it contains
terms and conditions specifically negotiated by the parties.
Limit order. An order to execute a trade at a specified price or
better. As contrasted with a stop order, a limit order does not become a
market order when the limit price is reached.
Margin. Good faith deposits with a broker to assure fulfillment of a
purchase or sale of a commodity futures contract. Commodity margins do not
involve the payment of interest.
121
<PAGE> 129
Margin call. A demand for additional funds after the initial good
faith deposit required to maintain a customer's account in compliance with
the requirements of a particular commodity exchange or a commodity broker.
Market order. An order to execute a trade at the prevailing price as
soon as possible.
Net Assets. The total assets of the Partnership including all cash,
plus Treasury securities at accrued interest and the market value of all
open commodity positions maintained by the Partnership, less brokerage
charges accrued and less all other liabilities of the Partnership,
determined in accordance with generally accepted accounting principles
under the accrual basis of accounting. Net Assets equal Net Asset Value.
Net Asset Value of a Unit. Net Assets divided by the aggregate number
of Units of limited and general partnership interest outstanding.
Net Worth. The excess of total assets over total liabilities as
determined by generally accepted accounting principles. Net Worth shall be
determined exclusive of home, home furnishings and automobiles.
New Trading Profits. The excess, if any, of Net Assets at the end of
the period over Net Assets at the end of the highest previous period or Net
Assets 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 period decreased by interest or other income, not directly
related to trading activity, earned on Partnership assets during the
period, whether the assets are held separately or in margin accounts.
Notional Funds. Funds not actually held in a client's account but
that have been committed by a client to the trading activity of a commodity
trading advisor.
Option. A contract giving the purchaser the right, as opposed to the
obligation, to acquire or to dispose of the commodity or commodity futures
contract underlying the option.
Organizational and Offering Expenses. All expenses incurred by the
Partnership in connection with and in preparing the Partnership for
registration and subsequently offering and distributing it to the public,
including, but not limited to, total underwriting and brokerage discounts
and commissions (including fees of the underwriter's attorneys), expenses
for printing, engraving, mailing, salaries of employees while engaged in
sales activity, charges of transfer agents, registrars, trustees, escrow
holders, depositories, experts, expenses of qualification of the sale of
its Units under federal and state law, including taxes and fees,
accountants' and attorneys' fees.
Pit brokerage fees. Includes floor brokerage, clearing fees, National
Futures Association fees and exchange fees.
Position limit. The maximum number of futures contracts for a given
commodity that can be held or controlled at one time by one person or a
group of persons acting together. Such limitation is imposed by the CFTC or
an exchange.
Pyramiding. A method of using all or a part of an unrealized profit
in a commodity contract position to provide margin for any additional
commodity contracts of the same or related commodities.
Round-turn Transaction. The process of "opening" an investment in a
commodity interest by taking a position together with the process of
"closing" out that investment by undertaking an offsetting transaction.
SB standard public customer rates. Brokerage commissions which SB
charges to its public customers, including individuals, which rates change
from time to time.
Settlement price. The closing price for futures contracts in a
particular commodity established by the clearing house or exchange after
the close of each day's trading.
122
<PAGE> 130
Sponsor. Any person directly or indirectly instrumental in organizing
the Partnership or any person who will manage or participate in the
management of the Partnership, including a commodity broker who pays any
portion of the organizational expenses of the Partnership, the General
Partner and any other person who regularly performs or selects the persons
who perform services for the Partnership. Sponsor does not include wholly
independent third parties such as attorneys, accountants and underwriters
whose only compensation is for professional services rendered in connection
with the offering of the Units. The term "Sponsor" shall be deemed to
include its Affiliates.
Spot contract. A cash market transaction in which the buyer and
seller agree to the immediate purchase and sale of a specific commodity
lot, usually with a two-day settlement.
Spread or Straddle. A commodity trading strategy involving the
simultaneous buying and selling of 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.
Stop order. An order given to a broker to execute a trade in a
commodity futures contract when the market price for the contract reaches
the specified stop order price. Stop orders may be utilized to protect
gains or limit losses on open positions or to enter into new positions.
Stop orders become market orders when the stop price is reached.
Unrealized profit or loss. The profit or loss which would be realized
on an open position if it were closed out at the current settlement price.
Valuation Date. The date as of which the Net Assets of the
Partnership are determined.
Valuation Period. A regular period of time between Valuation Dates.
123
<PAGE> 131
EXHIBIT A
----------------------
LIMITED PARTNERSHIP AGREEMENT
----------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Paragraph and Subject Page
- -------------------------------------- ----
<C> <S> <C>
1. Formation and Name.............. A-1
2. Principal Office................ A-1
3. Business........................ A-1
4. Term, Dissolution and
Fiscal Year................... A-1
Term............................ A-1
Dissolution..................... A-2
Fiscal Year..................... A-2
5. Net Worth of General Partner.... A-2
6. Capital Contributions and Units
of Partnership Interest....... A-2
7. Allocation of Profits and
Losses........................ A-3
Capital Accounts................ A-3
Allocations..................... A-3
Allocation of Profit and Loss
for Federal Income Tax
Purposes...................... A-3
Definitions..................... A-4
Expenses and Limitation
Thereof....................... A-5
Limited Liability of Limited
Partners...................... A-5
Return of Limited Partner's
Capital Contribution.......... A-5
Distributions................... A-5
8. Management of the Partnership... A-6
9. Audits and Reports to Limited
Partners...................... A-7
<CAPTION>
Paragraph and Subject Page
- -------------------------------------- ----
<C> <S> <C>
10. Transfer and Redemption
of Units...................... A-8
Initial Limited Partner......... A-8
Transfer........................ A-8
Redemption...................... A-9
11. Public Offering of Units of
Limited Partnership
Interest...................... A-10
12. Admission of Additional
Partners...................... A-10
13. Special Power of Attorney....... A-10
14. Withdrawal of a Partner......... A-10
15. No Personal Liability for Return
of Capital.................... A-11
16. Indemnification................. A-11
17. Amendments; Meetings............ A-11
Amendments with Consent of the
General Partner............... A-11
Meetings........................ A-12
Amendments and Actions without
Consent of the General
Partner....................... A-12
Continuation.................... A-12
18. Governing Law................... A-12
19. Miscellaneous................... A-12
Priority among Limited
Partners...................... A-12
Notices......................... A-12
Binding Effect.................. A-12
Captions........................ A-13
</TABLE>
<PAGE> 132
(This page has been left blank intentionally.)
<PAGE> 133
EXHIBIT A
LIMITED PARTNERSHIP AGREEMENT
This Limited Partnership Agreement dated as of May 19, 1994, amended as of
August 8, 1994 and amended and restated as of July 31, 1995 by and between Smith
Barney Futures Management Inc., 390 Greenwich Street, New York, New York 10013
(the "General Partner"), and Alexander J. Sloane (the "Initial Limited Partner")
and those other parties who shall execute this Agreement, whether in counterpart
or by attorney-in-fact, as limited partners (the Initial Limited Partner and
such other parties are collectively, the "Limited Partners") (the General
Partner and Limited Partners may be collectively referred to herein as
"Partners"),
W I T N E S S E T H :
WHEREAS, the parties hereto desire to form and continue a limited
partnership for the purpose of trading in commodity interests including futures
contracts, options and forward contracts;
NOW, THEREFORE, the parties hereto agree as follows:
1. FORMATION AND NAME.
The parties hereto hereby form a limited partnership under the New York
Uniform Limited Partnership Act. The name of the limited partnership is Smith
Barney Diversified Futures Fund L.P. II (the "Partnership"). The General Partner
shall execute and file a Certificate of Limited Partnership in accordance with
the provisions of the New York Revised Uniform Limited Partnership Act and
execute, file, record and publish, as appropriate, such amendments, restatements
and other documents as are or become necessary or advisable, as determined by
the General Partner.
2. PRINCIPAL OFFICE.
The principal office of the Partnership shall be 390 Greenwich Street, New
York, New York 10013 or such other place as shall be designated by the General
Partner.
3. BUSINESS.
(a) The Partnership business and purpose is to trade, buy, sell or
otherwise acquire, hold or dispose of interests in commodities of all
descriptions, including futures contracts, commodity options, forward contracts
and any other rights or interests pertaining thereto.
(b) The objective of the Partnership business is appreciation of its assets
through speculative diversified trading. The Partnership shall not:
(1) engage in the pyramiding of its positions by using unrealized
profit on existing positions as margin for the purchase or sale of
additional positions in the same or related commodities;
(2) utilize borrowings except short-term borrowings if the Partnership
takes delivery of cash commodities, provided that neither the deposit of
margin with a commodity broker nor obtaining and drawing on a line of
credit with respect to forward contracts shall constitute borrowing; or
(3) permit the churning of its account.
4. TERM, DISSOLUTION AND FISCAL YEAR.
(a) Term. The term of the Partnership shall commence on the date the
Certificate of Limited Partnership is filed in the office of the Secretary of
State of the State of New York, and shall end upon the first to occur of the
following: (1) December 31, 2014; (2) receipt by the General Partner of an
election to dissolve the Partnership at a specified time by Limited Partners
owning more than 50% of the Units of Limited
A-1
<PAGE> 134
Partnership Interest then outstanding, notice of which is sent by registered
mail to the General Partner not less than 90 days prior to the effective date of
such dissolution; (3) assignment by the General Partner of all of its interest
in the Partnership, withdrawal, removal, bankruptcy, or any other event that
causes the General Partner to cease to be a general partner under the
Partnership Act (unless the Partnership is continued pursuant to Paragraph 17);
(4) any event which shall make it unlawful for the existence of the Partnership
to be continued; or (5) if Net Asset Value falls below $400 as of the end of any
business day after trading.
(b) Dissolution. Upon the dissolution of the Partnership, the assets of
the Partnership shall be distributed to creditors, including any Partners who
may be creditors, to the extent otherwise permitted by law, in satisfaction of
liabilities of the Partnership (whether by payment or the making of reasonable
provision for payment thereof) other than liabilities for which reasonable
provision for payment has been made and liabilities for distributions to
Partners; to Partners and former Partners in satisfaction of liabilities for
distributions; and to Partners first for the return of their contributions and
second respecting their partnership interests, in the proportions in which the
Partners share in distributions. Following distribution of the assets of the
Partnership, a Certificate of Cancellation for the Partnership shall be filed as
required by the Partnership Act.
(c) Fiscal Year. The fiscal year of the Partnership will commence on
January 1 and end on December 31 each year ("fiscal year"). Each fiscal year of
the Partnership is divided into four fiscal quarters commencing on the first day
of January, April, July and October ("fiscal quarter").
5. NET WORTH OF GENERAL PARTNER.
The General Partner agrees that at all times after the termination of the
initial offering period of the Partnership's Units of Limited Partnership
Interest described in Paragraph 11 hereof (the "Public Offering"), so long as it
remains the General Partner of the Partnership, it will maintain a Net Worth (as
defined below but excluding its capital contribution to the Partnership) at an
amount not less than 10% of the total contributions to the Partnership by all
Partners. The General Partner also agrees, with respect to each additional
limited partnership of which it is general partner, to maintain a net worth
(excluding its capital contribution to the additional partnership) at an amount
not less than 10% of the total contributions to the additional partnership.
The General Partner agrees that it will maintain an overall Net Worth
(including capital contributions) equal to the greater of (a) 10% of the total
contributions (including contributions by the General Partner) to all limited
partnerships to which it is a general partner (including the Partnership) plus
(prior to the termination of the Public Offering) 5% of the Units being offered
for sale in the Partnership or (b) $50,000.
For the purposes of this Paragraph 5, Net Worth shall be based upon current
fair market value of the assets of the General Partner. The requirements of this
Paragraph 5 may be modified if the General Partner obtains an opinion of counsel
for the Partnership that a proposed modification will not adversely affect the
classification of the Partnership as a partnership for federal income tax
purposes and will not violate any state securities or blue sky laws to which the
Partnership may be subject from time to time.
6. CAPITAL CONTRIBUTIONS AND UNITS OF PARTNERSHIP INTEREST.
The General Partner shall contribute to the Partnership, immediately prior
to the time the Partnership commences trading activities and as necessary
thereafter, an amount which shall at least equal the greater of (i) an amount
which will entitle the General Partner to an interest of at least 1% in each
material item of Partnership income, gain, loss, deduction or credit and (ii)
the greater of (a) 1% of capital contributions or (b) $25,000. The General
Partner's contribution shall be evidenced by "Units of General Partnership
Interest." The General Partner may not make any transfer or withdrawal of its
contribution to the Partnership while it is General Partner which would reduce
its percentage interest in the Partnership to less than such required interest
in the Partnership. Any withdrawal of any such excess interest by the General
Partner may be made only upon not less than 30 days' notice to the Limited
Partners prior to the end of a fiscal quarter.
A-2
<PAGE> 135
Interests in the Partnership, other than those of the General Partner,
shall be evidenced by "Units of Limited Partnership Interest" which the General
Partner on behalf of the Partnership shall, in accordance with the Prospectus
included in the Registration Statement referred to in Paragraph 11, sell to
persons desiring to become Limited Partners. For each Unit of Limited
Partnership Interest purchased prior to the commencement of trading operations,
a Limited Partner shall contribute $1,000 to the capital of the Partnership. For
any Unit (or partial unit rounded to four decimal places) of Limited Partnership
Interest purchased thereafter, a Limited Partner shall contribute to the capital
of the Partnership an amount equal to the Net Asset Value of a Unit (or partial
unit, as the case may be) of Limited Partnership Interest as of the close of
business on the day preceding the effective date of such purchase, and shall pay
in addition any selling commission which must be paid with respect to such
purchase. The aggregate of all contributions shall be available to the
Partnership to carry on its business, and no interest shall be paid on any such
contribution. The General Partner may, in its discretion, split the Units at any
time, provided that any such action will not adversely affect the capital
account of any limited partner. All subscriptions for Units of Limited
Partnership Interest made pursuant to the Public Offering of the Units of
Limited Partnership Interest must be on the form provided in the Prospectus.
The proceeds from the sale of the Units of Limited Partnership Interest
pursuant to the Public Offering shall be placed in an escrow account and shall
not be contributed to the capital of the Partnership prior to the termination of
the Initial Offering Period. If subscriptions for at least 5,000 Units of
Limited Partnership Interest shall not have been received and accepted by the
General Partner when the Initial Offering Period is terminated, this Agreement
shall terminate, the full amount of all subscriptions shall be promptly returned
to the subscribers, and the Certificate of Limited Partnership shall be
cancelled. If subscriptions for at least 5,000 Units of Limited Partnership
Interest shall have been received and accepted by the General Partner prior to
the termination of the Initial Offering Period, the proceeds thereof shall be
contributed to the capital of the Partnership and the Partnership shall
thereafter commence trading operations. All subscribers shall receive the
interest earned on their subscriptions while held in escrow. All subscribers who
have been accepted by the General Partner shall be deemed admitted as Limited
Partners at the time they are reflected as such on the books and records of the
Partnership.
7. ALLOCATION OF PROFITS AND LOSSES.
(a) Capital Accounts. A capital account shall be established for each
Partner. The initial balance of each Partner's capital account shall be the
amount of his initial capital contribution to the Partnership.
(b) Allocations. As of the close of business on the last day of each month
during each fiscal year of the Partnership, the following determinations and
allocations shall be made:
(1) The Net Assets of the Partnership (as defined in Paragraph
7(d)(1)) before any management and incentive fees payable by the
Partnership as of such date shall be determined.
(2) Monthly management fees, if any, payable by the Partnership as of
such date shall then be charged against Net Assets. Brokerage fees payable
to SB pursuant to Paragraph 7(i) shall be charged pro rata to the capital
accounts of the Units.
(3) Incentive fees, if any, shall then be charged against Net Assets.
(4) Any increase or decrease in Net Assets as of the end of the month
(after the adjustments in subparagraphs (2) and (3) above) shall then be
credited or charged to the capital accounts of each Partner in the ratio
that the balance of each account bears to the balance of all accounts.
(5) The amount of any distribution to a Partner, any amount paid to a
Limited Partner on redemption of Units of Limited Partnership Interest, and
any amount paid to the General Partner on redemption of Units of General
Partnership Interest, shall be charged to that Partner's capital account.
(c) Allocation of Profit and Loss for Federal Income Tax Purposes. The
Partnership's realized capital gain or loss and ordinary income or loss shall be
allocated among the Partners in the ratio that each Partner's capital account
bears to all Partners' capital accounts. Any Partner who redeems Units of
Limited or General
A-3
<PAGE> 136
Partnership Interest during any fiscal year will be allocated his proportionate
share of the capital gain or loss and ordinary income or loss realized by the
Partnership during the period that such Units of Limited or General Partnership
Interest were owned by such Partner, based on the ratio that the capital
accounts allocable to such acquired or redeemed Units of Limited or General
Partnership Interest bear to the capital accounts allocable to all Partners'
Units of Limited or General Partnership Interest for such period. Any Partner
who transfers or assigns Units of Limited or General Partnership Interest during
any fiscal year shall be allocated his proportionate share of the capital gain
or loss and ordinary income or loss realized by the Partnership through the end
of the fiscal quarter in which notice of such transfer or assignment is given to
the General Partner in accordance with Paragraph 10(b) hereof, and the
transferee or assignee of such Units shall be allocated his proportionate share
of the capital gain or loss and ordinary income or loss realized by the
Partnership commencing with the fiscal quarter next succeeding the quarter in
which notice of transfer or assignment is given. The method of allocating gains
and losses for tax purposes may be changed by the General Partner upon receipt
of advice from counsel to the Partnership that such change is required by
applicable law or regulations.
(d) Definitions:
(1) Net Assets. Net Assets of the Partnership shall mean the total
assets of the Partnership including all cash, plus Treasury Bills at
market, accrued interest, and the market value of all open commodity
positions maintained by the Partnership, less brokerage charges accrued and
less all other liabilities of the Partnership, determined in accordance
with generally accepted accounting principles under the accrual basis of
accounting.
(2) Net Asset Value per Unit. The Net Asset Value of each Unit of
Limited Partnership Interest and each Unit of General Partnership Interest
shall be determined by dividing the Net Assets of the Partnership by the
aggregate number of Units of Limited and General Partnership Interest
outstanding.
(3) Capital Contributions. Capital contributions shall mean the total
investment in the Partnership by a Partner or by all Partners, as the case
may be.
(4) New Trading Profits. The excess, if any, of Net Assets managed by
the Advisor at the end of the fiscal period over Net Assets managed by the
Advisor 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 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.
(5) Organizational and Offering Expenses. Organizational and offering
expenses shall mean all expenses incurred by the Partnership in connection
with and in preparing for registration and subsequent offering and
distributing it to the public, including but not limited to, total
underwriting and brokerage discounts and commissions (including fees of the
underwriter's attorneys), expenses for printing, engraving, mailing,
salaries of employees while engaged in sales activities, charges of
transfer agents, registrars, trustees, escrow holders, depositories,
experts, expenses of qualification of the sale of its Units of Limited
Partnership Interest under federal and state law, including taxes and fees,
accountants' and attorneys' fees.
(6) Valuation Date. The date as of which the Net Assets of the
Partnership are determined.
(7) Valuation Period. A regular period of time between Valuation
Dates.
(8) Advisor. Any person who for any consideration engages in the
business of advising others, either directly or indirectly, as to the
value, purchase, or sale of commodity contracts or commodity options.
(9) Commodity Contract. A contract or option thereon providing for
the delivery or receipt at a future date of a specified amount and grade of
a traded commodity at a specified price and delivery point.
A-4
<PAGE> 137
(10) Pyramiding. A method of using all or a part of an unrealized
profit in a commodity contract position to provide margin for any
additional commodity contracts of the same or related commodities.
(11) Sponsor. Any person directly or indirectly instrumental in
organizing the Partnership or any person who will manage or participate in
the management of the Partnership, including a commodity broker who pays
any portion of the organizational expenses of the Partnership, the General
Partner and any other person who regularly performs or selects the persons
who perform services for the Partnership. Sponsor does not include wholly
independent third parties such as attorneys, accountants and underwriters
whose only compensation is for professional services rendered in connection
with the offering of the Units. The term "Sponsor" shall be deemed to
include its Affiliates.
(e) Expenses and Limitation Thereof. Subject to the limitations set forth
below in this Paragraph 7(e), the Partnership shall bear all commodity brokerage
fees and shall be obligated to pay all liabilities incurred by it, including,
without limitation, all expenses incurred in connection with its trading
activities, and any management and incentive fees. The General Partner shall
bear all other operating expenses except legal, accounting, filing, data
processing and reporting fees and extraordinary expenses. Appropriate reserves
may be created, accrued and charged against Net Assets for contingent
liabilities, if any, as of the date any such contingent liability becomes known
to the General Partner. The aggregate annual expenses of every character paid or
incurred by the Partnership, including management fees, advisory fees and all
other fees, except for incentive fees, commodity brokerage commissions, the
actual cost of legal and audit services and extraordinary expenses, when added
to the customary and routine administrative expenses of the Partnership, shall
in no event exceed, on an annual basis, 1/2 of 1% of Net Assets per month. For
the purpose of this limitation, customary and routine administrative expenses
shall include all expenses of the Partnership other than commodity brokerage
commissions, incentive fees, the actual cost of legal and audit services and
extraordinary expenses. All expenses of the Partnership shall be billed directly
to and paid by the Partnership. If necessary, the General Partner will reimburse
the Partnership, no less frequently than quarterly, for the amount by which
aggregate fees and expenses exceed, on an annual basis, 1/2 of 1% of Net Assets
per month. Reimbursements to the General Partner or its affiliates shall not be
allowed, except for reimbursement of actual cost of legal and audit services
used for or by the Partnership and charges incidental to trading. Expenses
incurred by the General Partner in connection with administration of the
Partnership including but not limited to salaries, rent, travel expenses and
such other items generally falling under the category of overhead, shall not be
charged to the Partnership. In no event will organizational and offering
expenses exceed 15% of the Partners' initial capital contributions. For this
purpose, organizational and offering expenses include interest on loans from SB
to the Partnership for payment of organizational and offering expenses, if any.
(f) Limited Liability of Limited Partners:
(1) Each Unit of Limited Partnership Interest, when purchased by a
Limited Partner, subject to the qualifications set forth below, shall be
fully paid and non-assessable.
(2) A Limited Partner will have no liability in excess of his
obligation to make contributions to the capital of the Partnership and his
share of the Partnership's assets and undistributed profits, subject to the
qualifications provided in New York law.
(g) Return of Limited Partner's Capital Contribution. Except to the extent
that a Limited Partner shall have the right to withdraw capital through
redemption of Units of Limited Partnership Interest or shall be entitled to
distributions in accordance with the terms of this Agreement, no Limited Partner
shall have any right to demand the return of his capital contribution or any
profits added thereto, except upon dissolution of the Partnership. In no event
shall a Limited Partner be entitled to demand and receive property other than
cash.
(h) Distributions. The General Partner shall have sole discretion in
determining what distributions (other than on redemption of Units of Limited
Partnership Interest), if any, the Partnership will make to its Partners.
Distributions shall be pro rata in accordance with the respective capital
accounts of the Partners.
A-5
<PAGE> 138
8. MANAGEMENT OF THE PARTNERSHIP.
Except as hereinafter provided, the General Partner, to the exclusion of
all Limited Partners, shall conduct, manage and control the business of the
Partnership including, without limitation, the investment of the funds of the
Partnership. The General Partner shall have fiduciary responsibility for the
safekeeping and use of all funds and assets of the Partnership. The Partnership
shall not permit the limited partners to contract away the fiduciary obligation
owed to the limited partners by the General Partner under common law. Except as
provided herein, no Partner shall be entitled to any salary, draw or other
compensation from the Partnership. Each Limited Partner hereby undertakes to
advise the General Partner of such additional information as may be deemed by
the General Partner to be required or appropriate to open and maintain an
account or accounts with commodity brokerage firms for the purpose of trading in
commodity contracts.
The General Partner may delegate its responsibility, in whole or in part,
for the investment of the Partnership's assets to one or more qualified trading
advisors and may delegate trading discretion to such persons. If the General
Partner decides to direct trading for the Partnership itself, the General
Partner may nonetheless render advisory services to other clients or accounts
and may use the same trading strategies which are utilized in managing the
Partnership's investments. However, the General Partner agrees and represents
that any such other services will not affect its capacity to continue to render
services to the Partnership of the quality and nature contemplated by this
Agreement. If the General Partner determines to delegate its responsibility for
trading decisions to one or more trading advisors, it may negotiate and enter
into one or more management agreements with the advisor(s) on behalf of the
Partnership, including a management agreement under which the General Partner is
one of the advisors. Any such agreement could obligate the Partnership to pay
management and incentive fees to the advisors in amounts determined by the
General Partner acting in the best interests of the Partnership; provided,
however, that such fees will in no event exceed those permitted under NASAA
Guidelines for the Registration of Commodity Pools (the "Guidelines") and that
neither the General Partner nor any affiliate of the General Partner shall
receive an incentive fee in excess of 15% of New Trading Profits or a management
fee if it or any of its affiliates receives any portion of the brokerage
commissions paid by the Partnership. Specifically, except to the extent
permitted by future changes to the Guidelines, incentive fees paid by the
Partnership to an Advisor shall never exceed 15%, increased by an additional 2%
for each 1% by which the Partnership's aggregate annual expenses are reduced
below 6% annually, of New Trading Profits, calculated not more often than
quarterly on the Valuation Date, over the highest previous Valuation Date.
The General Partner shall monitor the trading and performance of any
trading advisor for the Partnership and shall not permit the "churning" of the
Partnership's account. The General Partner shall calculate the Net Assets of the
Partnership daily and shall make available, upon the request of a Limited
Partner, the Net Asset Value of a Unit of Limited Partnership Interest. The
Partnership shall seek the best price and services available in its commodity
futures brokerage transactions. The Partnership may not enter into an exclusive
brokerage contract. The General Partner is authorized to enter into the Customer
Agreement with Smith Barney Inc. ("SB") described in the Prospectus and to cause
the Partnership to pay SB a monthly brokerage fee equal to 1/2 of 1% of
month-end Net Assets (6% per year) (exclusive of fees incurred in connection
with trading including exchange, clearing, floor brokerage, give-up and NFA
fees) and to negotiate Customer Agreements in the future on these or other
terms. Any interest or other income derived from any portion of the
Partnership's assets whether held in the Partnership's margin account or
otherwise shall accrue solely to the benefit of the Partnership except as
otherwise provided in the Guidelines. Neither the General Partner nor any
affiliate of the General Partner shall directly or indirectly pay or award any
commissions or other compensation to any person engaged to sell Units of Limited
Partnership Interests or to give investment advice to a potential Limited
Partner, provided, however, that neither the General Partner nor any affiliate
of the General Partner is prohibited from paying to a registered broker-dealer
or other properly licensed person a normal sales commission, including trail
commissions, for selling Units of Limited Partnership Interests. The General
Partner may take such other actions as it deems necessary or desirable to manage
the business of the Partnership including, but not limited to, the following:
opening bank accounts with state or national banks; paying, or authorizing the
payment of, distributions to the Partners and expenses of the Partnership, such
as management fees, brokerage commissions or fees, legal and accounting fees,
printing and reporting fees, and
A-6
<PAGE> 139
registration and other fees of governmental agencies; and investing or directing
the investment of funds of the Partnership not being utilized as margin
deposits. Only those goods and services enumerated in the Limited Partnership
Agreement will be those provided by the General Partner to the Partnership.
Except as provided in the Prospectus, the General Partner shall not take any
action with respect to the assets or property of the Partnership which does not
benefit the Partnership.
The General Partner shall review, not less often than annually and to the
extent practicable, the brokerage rates charged to public commodity pools which
are comparable to the Partnership to determine that the brokerage fees being
paid by the Partnership are competitive with such other rates. The General
Partner may in its discretion, acting in the best interests of the Partnership,
negotiate with SB to amend the Customer Agreement so that the Partnership is
charged brokerage commissions on a round-turn basis instead of the monthly fee
initially contemplated; provided that the commission rate agreed to is
comparable to rates charged to comparable public commodity pools and further
provided that such commissions, including pit brokerage fees will not exceed the
limitation set forth in the Guidelines.
The General Partner shall maintain a list of the names and addresses of,
and interests owned by, all Partners, a copy of which shall be furnished to
Limited Partners upon request either in person or by mail and upon payment of
the cost of reproduction and mailing, and such other books and records relating
to the business of the Partnership at the principal office of the Partnership.
The General Partner shall retain such records for a period of not less than six
years. The Limited Partners shall be given reasonable access to the books and
records of the Partnership.
The Partnership shall not enter into any contract with the General Partner
or any of its affiliates or with any trading advisor which has a term of more
than one year. The Partnership shall make no loans. Assets of the Partnership
will not be commingled with assets of any other entity. Deposit of assets with a
commodity broker or dealer shall not constitute commingling. Except as provided
herein, no person may receive, directly or indirectly, any Net Asset fee for
investment advice or management who shares or participates in any commodity
brokerage commissions or fees from transactions for the Partnership; no broker
(including the General Partner and its affiliates) may pay, directly or
indirectly, rebates or give ups to any trading advisor; and such prohibitions
shall not be circumvented by any reciprocal business arrangements. On loans made
available to the Partnership by the General Partner or any of its affiliates,
the lender may not receive interest in excess of its interest costs, nor may the
lender receive interest in excess of the amounts which would be charged the
Partnership (without reference to the lender's financial abilities or
guarantees) by unrelated banks on comparable loans for the same purpose and the
lender shall not receive points or other financing charges or fees regardless of
the amounts.
Subject to Paragraph 5 hereof, the General Partner may engage in other
business activities and shall not be required to refrain from any other activity
nor disgorge any profits from any such activity, whether as general partner of
additional partnerships for investment in commodity futures contracts or
otherwise. The General Partner may engage and compensate (consistent with the
Guidelines) on behalf of the Partnership from funds of the Partnership, such
persons, firms or corporations, including any affiliated person or entity, as
the General Partner in its sole judgment shall deem advisable for the conduct
and operation of the business of the Partnership.
No person dealing with the General Partner shall be required to determine
its authority to make any undertaking on behalf of the Partnership, nor to
determine any fact or circumstance bearing upon the existence of its authority.
9. AUDITS AND REPORTS TO LIMITED PARTNERS.
The Partnership books and records shall be audited annually by independent
accountants. The Partnership will cause each Partner to receive (i) within 90
days after the close of each fiscal year, audited financial statements including
a balance sheet and statements of income and partners' equity for the fiscal
year then ended, and (ii) within 75 days after the close of each fiscal year,
such tax information as is necessary for him to complete his federal income tax
return. In addition, within 30 days of the end of each month the Partnership
will provide each Limited Partner with reports showing Net Assets and Net Asset
Value per Unit
A-7
<PAGE> 140
of Limited and General Partnership Interest as of the end of such month, as well
as information relating to the advisory and brokerage fees and other expenses
incurred by the Partnership during such month. Both annual and monthly reports
shall include such additional information as the Commodity Futures Trading
Commission may require under the Commodity Exchange Act to be given to
participants in commodity pools such as the Partnership. The General Partner
shall calculate the Net Asset Value per Unit of Limited and General Partnership
Interest daily and shall make such information available upon the request of a
Limited Partner for a purpose reasonably related to such Limited Partner's
interest as a limited partner in the Partnership. The General Partner will
submit to state securities law administrators any information which such
administrators require to be filed, including, but not limited to, copies of the
annual and monthly reports to be provided to Limited Partners.
In addition, if any of the following events occur, notice of such event
shall be mailed to each Limited Partner within seven business days of the
occurrence of the event: (i) a decrease in the Net Asset Value of a Unit of
Limited Partnership Interest to 50% or less of the Net Asset Value most recently
reported; (ii) a decrease in assets maintained in cash to 50% or less of the
amount most recently reported; (iii) any material change in contracts with
advisors including any change in advisors or any modification in connection with
the method of calculating the incentive fee; (iv) any change in commodity
brokers or any change to payment or brokerage commissions on a round turn basis;
(v) any change in the General Partner; or (vi) any material change in the
Partnership's trading policies or in any advisor's trading strategies; and (vii)
any other material change affecting the compensation of any party. Any notice
sent pursuant to this paragraph will include a description of the Limited
Partners' voting rights and/or redemption rights under this Agreement. In the
event of a change to payment of brokerage commissions on a round-turn basis,
each Limited Partner will be notified and permitted to redeem his Units prior to
the effective date of such change.
10. TRANSFER AND REDEMPTION OF UNITS.
(a) Initial Limited Partner. As of the day after trading commences, the
Initial Limited Partner may redeem his Unit for $1,000 and withdraw from the
Partnership.
(b) Transfer. Each Limited Partner expressly agrees that he will not
assign, transfer or dispose of, by gift or otherwise, any of his Units of
Limited Partnership interest or any part or all of his right, title and interest
in the capital or profits of the Partnership without giving written notice of
the assignment, transfer or disposition to the General Partner and that no
assignment, transfer or disposition shall be effective against the Partnership
or the General Partner until the first day of the fiscal quarter next succeeding
the quarter in which the General Partner receives the written notice described
below. Any assignment, transfer or disposition by an assignee of Units of
Limited Partnership Interest of his interest in the capital or profits of the
Partnership shall not be effective against the Partnership or the General
Partner until the first day of the fiscal quarter next succeeding the quarter in
which the General Partner receives the written notice described below. If the
General Partner receives an opinion of counsel to the effect that a transfer
should be prohibited in order to protect against treatment as a publicly traded
partnership, such transfer shall be prohibited. Upon advice of counsel, the
General Partner shall eliminate or modify any restrictions on substitutions or
assignment at such time as the restriction is no longer necessary. If an
assignment, transfer or disposition occurs by reason of the death of a Limited
Partner or assignee, such written notice may be given by the duly authorized
representative of the estate of the Limited Partner or assignee and shall be
supported by such proof of legal authority and valid assignment as may
reasonably be requested by the General Partner. The written notice required by
this paragraph shall specify the name and residence address of the assignee, the
date of assignment, shall include a statement by the assignee that he agrees to
give the above-described written notice to the General Partner upon any
subsequent assignment, and shall be signed by the assignor and assignee. The
General Partner may, in its sole discretion, waive receipt of the
above-described notice or waive any defect therein. Any such assignee shall
become a substituted Limited Partner only upon the consent of the General
Partner (which consent may only be withheld for the purpose of preserving the
Partnership's tax status or to avoid adverse legal consequences to the
Partnership), upon the execution of a Power of Attorney by such assignee
appointing the General Partner as his attorney-in-fact in the form contained in
paragraph 13 hereof. The estate or any beneficiary of a deceased Limited Partner
or assignee shall have no right to withdraw any capital
A-8
<PAGE> 141
or profits from the Partnership except by redemption of Units of Limited
Partnership Interest. Upon the death of a Limited Partner, his estate shall have
any rights of inventory, accounting, appraisal or examination of Partnership
records as are granted by law. A substituted Limited Partner shall have all the
rights and powers and shall be subject to all the restrictions and liabilities
of a Limited Partner of the Partnership. A substituted Limited Partner is also
liable for the obligations of his assignor to make contributions to the
Partnership, but shall not be liable for the obligations of his assignor under
the Partnership Act to return distributions received by the assignor, provided,
however, that a substituted Limited Partner shall not be obligated for
liabilities unknown to him at the time he became a substituted Limited Partner
and which could not be ascertained from this Agreement. Each Limited Partner
agrees that with the consent of the General Partner any assignee may become a
substituted Limited Partner without the further act or approval of any Limited
Partner. If the General Partner withholds consent, an assignee shall not become
a substituted Limited Partner and shall not have any of the rights of a Limited
Partner except that the assignee shall be entitled to receive that share of
capital or profits and shall have that right of redemption to which his assignor
would otherwise have been entitled. An assigning Limited Partner shall remain
liable to the Partnership as provided in the Partnership Act, regardless of
whether his assignee becomes a substituted Limited Partner. The transfer of
Units of Limited Partnership Interest shall be subject to all applicable
securities laws. The transferor or assignor shall bear the cost related to such
transfer or assignment. Certificates representing Units of Limited Partnership
Interest may bear appropriate legends to the foregoing effect. Except for
transfers by gift, inheritance, intrafamily transfers, family dissolutions and
transfers to affiliates, no transfer may be made that results in either the
transferor or the transferee holding fewer than three Units.
(c) Redemption. After the first full quarter after the commencement of
trading operations, a Limited Partner (or any assignee thereof) may withdraw
some or all of his capital contribution and undistributed profits, if any, from
the Partnership in multiples of the Net Asset Value of a Unit of Limited
Partnership Interest (such withdrawal being herein referred to as "redemption")
as of the last day of a calendar month (the "Redemption Date") after a request
for redemption has been made to the General Partner; provided, that all
liabilities, contingent or otherwise, of the Partnership, except any liability
to Partners on account of their capital contributions, have been paid or there
remains property of the Partnership sufficient to pay them. For the purpose of a
redemption, any accrued liability for reimbursement of offering and
organizational expenses will not reduce Net Asset Value per Unit. Interest
earned by the Partnership will be used to reimburse SB for the offering and
organizational expenses of the Partnership until such time as $525,000 of such
expenses are reimbursed, after which the interest will accrue to the
Partnership. As used herein, "request for redemption" shall mean a letter or
oral request in a form specified by the General Partner received by the General
Partner at least 10 days in advance of the Redemption Date. No partial
redemptions are permitted if after giving effect to the redemption a Limited
Partner would own fewer than three Units. Upon redemption a Limited Partner (or
any assignee thereof) shall receive, per Unit of Limited Partnership Interest
redeemed, an amount equal to the Net Asset Value of a Unit of Limited
Partnership Interest as of the Redemption Date, less any amount owing by such
Partner (and his assignee, if any) to the Partnership. If redemption is
requested by an assignee, all amounts owed by the Partner to whom such Unit of
Limited Partnership Interest was sold by the Partnership as well as all amounts
owed by all assignees of such Unit of Limited Partnership Interest shall be
deducted from the Net Asset Value of such Unit of Limited Partnership Interest
upon redemption by an assignee. Payment will be made within 10 business days
after the Redemption Date. The General Partner may temporarily suspend
redemptions if necessary in order to liquidate commodity positions in an orderly
manner, and may, in its discretion, in a particular case, permit redemptions
before the end of any applicable holding period, partial redemptions, or at
times other than month-end.
The General Partner may, in its sole discretion and upon notice to the
Limited Partners, declare a special redemption date on which Limited Partners
may redeem their Units at Net Asset Value, provided that the Limited Partner
submits a request for redemption in a form acceptable to the General Partner.
The General Partner shall declare such a special redemption date whenever the
Partnership experiences a decline in net asset value per unit as of the close of
business on any business day to less than 50% of the net asset value per unit on
the last valuation date. The Partnership shall suspend trading during such
special redemption period.
A-9
<PAGE> 142
11. PUBLIC OFFERING OF UNITS OF LIMITED PARTNERSHIP INTEREST.
The General Partner on behalf of the Partnership shall (i) cause to be
filed a Registration Statement, and such amendments thereto as the General
Partner deems advisable, with the United States Securities and Exchange
Commission for the registration and public offering of the Units of Limited
Partnership Interest, and (ii) qualify the Units of Limited Partnership Interest
for sale under the securities laws of such States of the United States or
foreign countries as the General Partner shall deem advisable.
The General Partner may make such arrangements for the sale of the Units of
Limited Partnership Interest as it deems appropriate, including, without
limitation, the execution on behalf of the Partnership of a selling agreement
with SB as an agent of the Partnership for the offer and sale of the Units of
Limited Partnership Interest as contemplated in the Prospectus.
12. ADMISSION OF ADDITIONAL PARTNERS.
After the Public Offering of the Units of Limited Partnership Interest has
been terminated by the General Partner, no additional General Partners will be
admitted to the Partnership except as described in Paragraph 17(c). The General
Partner may take such actions as may be necessary or appropriate at any time to
offer new Units or partial Units and to admit new Limited Partners to the
Partnership. Any new Limited Partners accepted by the General Partner shall be
deemed admitted as Limited Partners at the time they are reflected as such on
the books and records of the Partnership.
13. SPECIAL POWER OF ATTORNEY.
Each Limited Partner does irrevocably constitute and appoint the General
Partner and each other person or entity that shall after the date of this
Agreement become a general partner of the Partnership with the power of
substitution, as his true and lawful attorney-in-fact, in his name, place and
stead, to execute, acknowledge, swear to, file and record in his behalf in the
appropriate public offices and publish (i) this Agreement and Certificate of
Limited Partnership including amendments and/or restatements thereto; (ii) all
instruments which the General Partner deems necessary or appropriate to reflect
any amendment, change or modification of the Partnership in accordance with the
terms of this Agreement; (iii) Certificates of Assumed Name; and (iv) Customer
Agreements with SB or other commodity brokerage firms. The Power of Attorney
granted herein shall be irrevocable and deemed to be a power coupled with an
interest and shall survive and not be affected by the subsequent incapacity,
disability or death of a Limited Partner. Each Limited Partner hereby agrees to
be bound by any representation made by the General Partner and by any successor
thereto, acting in good faith pursuant to such Power of Attorney; provided,
however, that the action taken was determined to be in the best interest of the
Partnership and did not constitute negligence or misconduct of the General
Partner or any successor thereto. In the event of any conflict between this
Agreement and any instruments filed by such attorney pursuant to the Power of
Attorney granted in this Paragraph, this Agreement shall control.
14. WITHDRAWAL OF A PARTNER.
The Partnership shall be dissolved and its affairs wound up upon the
assignment by the General Partner of all of its interest in the Partnership,
withdrawal, removal, bankruptcy or any other event that causes the General
Partner to cease to be a general partner under the Partnership Act (unless the
Partnership in continued pursuant to Paragraph 17). The General Partner shall
not withdraw from the Partnership without giving the Limited Partners one
hundred twenty (120) days' prior written notice. The death, incompetency,
withdrawal, insolvency or dissolution of a Limited Partner shall not (in and of
itself) dissolve the Partnership, and such Limited Partner, his estate,
custodian or personal representative shall have no right to withdraw or value
such Limited Partner's interest in the Partnership except as provided in
Paragraph 10 hereof. Each Limited Partner (and any assignee of such Partner's
interest) expressly agrees that in the event of his death, he waives on behalf
of himself and his estate, and he directs the legal representative of his estate
and any person interested therein to waive, the furnishing of any inventory,
accounting, or appraisal of the assets of the Partnership and any right to an
audit; provided, however, that this waiver in no way limits the rights of the
A-10
<PAGE> 143
Limited Partners or their representatives to have access to the Partnership's
books and records as described in Paragraph 8 hereof.
If a General Partner withdraws as general partner and the Limited Partners
elect to continue the Partnership, the withdrawing General Partner shall pay all
expenses incurred as a result of its withdrawal. If the Partnership is continued
pursuant to Paragraph 17, the General Partner will be responsible for all
expenses resulting from its withdrawal or removal as a general partner. In the
event of removal or withdrawal of the General Partner, the General Partner is
entitled to a redemption of its interest in the Partnership at its Net Asset
Value on the next Redemption Date following the date of General Partner removal
or withdrawal.
15. NO PERSONAL LIABILITY FOR RETURN OF CAPITAL.
The General Partner, subject to paragraph 16 hereof, shall not be
personally liable for the return or repayment of all or any portion of the
capital or profits of any Partner (or assignee), it being expressly agreed that
any such return of capital or profits made pursuant to this Agreement shall be
made solely from the assets (which shall not include any right of contribution
from the General Partner) of the Partnership.
16. INDEMNIFICATION.
(a) The General Partner and its Affiliates shall have no liability to the
Partnership or to any Partner for any loss suffered by the Partnership which
arises out of any action or inaction of the General Partner or its Affiliates if
the General Partner determined in good faith that the course of conduct which
caused the loss or liability was in the best interest of the Partnership, the
General Partner (or its affiliate) was acting on behalf of or performing
services for the Partnership and such loss or liability was not the result of
negligence or misconduct of the General Partner or its Affiliates. The General
Partner and its Affiliates shall be indemnified by the Partnership against any
losses, judgment, liabilities, expenses and amounts paid in settlement of any
claims sustained by them in connection with the Partnership, provided that the
General Partner shall have determined in good faith that such course of conduct
was in the best interests of the Partnership and such loss or liability was not
the result of negligence or misconduct on the part of the General Partner or its
Affiliates.
(b) Notwithstanding (a) above, the General Partner and its Affiliates and
any person acting as a Broker-Dealer shall not be indemnified for any losses,
liabilities or expenses arising from or out of an alleged violation of federal
or state securities laws.
(c) The Partnership shall not incur the cost of that portion of any
insurance which insures any party against any liability the indemnification of
which is herein prohibited.
(d) For purposes of this Paragraph 16, the term "Affiliates" shall mean (a)
any person directly or indirectly owning, controlling or holding with power to
vote 10% or more of the outstanding voting securities of such person; (b) any
person 10% or more of whose outstanding voting securities are directly or
indirectly owned, controlled or held with power to vote, by such person; (c) any
person, directly or indirectly, controlling, controlled by, or under common
control of such person; (d) any officer, director or partner of such person; or
(e) if such person is an officer, director or partner, any person for which such
person acts in such capacity.
(e) The provision of advances from Partnership funds to the General Partner
and its Affiliates for legal expenses and other costs incurred as a result of
any legal action initiated against the General Partner or its Affiliates is
prohibited.
(f) Indemnification under this Agreement is recoverable from the assets of
the Partnership and not from the Limited Partners.
17. AMENDMENTS; MEETINGS.
(a) Amendments with Consent of the General Partner. If at any time during
the term of the Partnership the General Partner shall deem it necessary or
desirable to amend this Agreement (including the Partnership's basic investment
policies set forth in paragraph 3(b) hereof) such amendment shall be effective
only if approved in writing by the General Partner and by Limited Partners
owning more than 50% of the
A-11
<PAGE> 144
Units of Limited Partnership Interest then outstanding and if made in accordance
with the Partnership Act. Any such supplemental or amendatory agreement shall be
adhered to and have the same effect from and after its effective date as if the
same had originally been embodied in and formed a part of this Agreement.
(b) Meetings. Upon receipt of a written request, signed by Limited
Partners owning at least 10% of the Units of Limited Partnership Interest then
outstanding, delivered in person or by certified mail that a meeting of the
Partnership be called to vote upon any matter which the Limited Partners may
vote upon pursuant to this Agreement, the General Partner shall, by written
notice, either in person or by certified mail, to each Limited Partner of record
mailed within fifteen days after receipt of such request, call a meeting of the
Partnership. Such meeting shall be held at least thirty but not more than sixty
days after the mailing of such notice, and such notice shall specify the date, a
reasonable place and time, and the purpose of such meeting.
(c) Amendments and Actions without Consent of the General Partner. At any
meeting called pursuant to Paragraph 17(b), upon the approval by an affirmative
vote (which may be in person or by proxy) of Limited Partners owning more than
50% of the outstanding Units of Limited Partnership Interest, the following
actions may be taken: (i) this Agreement may be amended in accordance with the
Partnership Act; (ii) the Partnership may be dissolved; (iii) the General
Partner may be removed and a new general partner may be admitted immediately
prior to the removal of the General Partner provided that the new general
partner of the Partnership shall continue the business of the Partnership
without dissolution; (iv) if the General Partner elects to withdraw from the
Partnership a new general partner or general partners may be admitted
immediately prior to withdrawal of the General Partner provided that the new
general partner of the Partnership shall continue the business of the
Partnership without dissolution; (v) any contracts with the General Partner, any
of its affiliates or any commodity trading advisor to the Partnership may be
terminated on sixty days' notice without penalty; and (vi) the sale of all the
assets of the Partnership may be approved.
(d) Continuation. Upon the assignment by the General Partner of all of its
interest in the Partnership, the withdrawal, removal, bankruptcy or any other
event that causes the General Partner to cease to be a general partner under the
Partnership Act, the Partnership is not dissolved and is not required to be
wound up by reason of such event if, within 90 days after such event, all
remaining Partners agree in writing to continue the business of the Partnership
and to the appointment, effective as of the date of such event, of a successor
General Partner. In the event of the withdrawal by the General Partner and the
continuation of the Partnership pursuant to this paragraph, the General Partner
shall pay all expenses incurred as a result of its withdrawal.
18. GOVERNING LAW.
The validity and construction of this Agreement shall be governed by and
construed in accordance with the laws of the State of New York including,
specifically, the New York Revised Uniform Partnership Act, as amended (without
regard to its choice of law principles); provided, however, that causes of
action for violations of federal or state securities laws shall not be governed
by this Section 18.
19. MISCELLANEOUS.
(a) Priority among Limited Partners. No Limited Partner shall be entitled
to any priority or preference over any other Limited Partner with regard to the
return of contributions of capital or to the distribution of any profits or
otherwise in the affairs of the Partnership.
(b) Notices. All notices under this Agreement, other than reports by the
General Partner to the Limited Partners, shall be in writing and shall be
effective upon personal delivery, or, if sent by registered or certified mail,
postage prepaid, addressed to the last known address of the party to whom such
notice is to be given, upon the deposit of such notice in the United States
mail. Reports by the General Partner to the Limited Partners shall be in writing
and shall be sent by first class mail to the last known address of each Limited
Partner.
(c) Binding Effect. This Agreement shall inure to and be binding upon all
the parties, their successors, permitted assigns, custodians, estates, heirs and
personal representatives. For purposes of determining the
A-12
<PAGE> 145
rights of any Partner or assignee hereunder, the Partnership and the General
Partner may rely upon the Partnership records as to who are Partners and
assignees and all Partners and assignees agree that their rights shall be
determined and that they shall be bound thereby, including all rights which they
may have under Paragraph 17 hereof.
(d) Captions. Captions in no way define, limit, extend or describe the
scope of this Agreement nor the effect of any of its provisions.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the day first written above.
<TABLE>
<S> <C>
General Partner: Initial Limited Partner:
SMITH BARNEY
FUTURES MANAGEMENT INC.
/s/ ALEXANDER J. SLOANE
------------------------------------------------
Alexander J. Sloane
By: /s/ ALEXANDER J. SLOANE
- ------------------------------------
Alexander J. Sloane, President
Limited Partners:
All Limited Partners now and hereafter
admitted as limited partners of the
Partnership pursuant to powers of attorney
now and hereafter executed in favor of and
delivered to the General Partner
By: SMITH BARNEY
FUTURES MANAGEMENT INC.
Attorney-in-Fact
By: /s/ ALEXANDER J. SLOANE
------------------------------------------------
Alexander J. Sloane, President
</TABLE>
A-13
<PAGE> 146
(This page has been left blank intentionally.)
<PAGE> 147
EXHIBIT B
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
SUBSCRIPTION AGREEMENT
Dear Sirs:
A. SUBSCRIBER PROVISIONS.
1. Subscription for Units. I hereby subscribe for the amount indicated
below of units of limited partnership interest ("Units") of SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P. II (the "Partnership") at the Net Asset Value per
Unit during the Continuous Offering (as that term is defined under "Plan of
Distribution") (with a minimum investment of $5,000, except $2,000 for
employee-benefit plans, subject to higher minimum in certain states). A
SUBSCRIPTION MAY BE REVOKED BY A SUBSCRIBER FOR FIVE BUSINESS DAYS FOLLOWING THE
INVESTOR'S SUBSCRIPTION DURING THE CONTINUOUS OFFERING IF THE GENERAL PARTNER
DETERMINES NOT TO OFFER UNITS AS OF THE END OF A MONTH.
2. Representations and Warranties. BY EXECUTING THIS SUBSCRIPTION
AGREEMENT, I AM NOT WAIVING ANY RIGHTS UNDER THE FEDERAL OR STATE SECURITIES
LAWS. As an inducement to the General Partner on behalf of the Partnership to
sell me the Units for which I have subscribed, I (either in my individual
capacity or as an authorized representative of an entity, if applicable) hereby
represent and warrant to the General Partner and the Partnership as follows:
(A) I HAVE RECEIVED A COPY OF THE PROSPECTUS AND DISCLOSURE DOCUMENT OF
THE PARTNERSHIP, INCLUDING THE LIMITED PARTNERSHIP AGREEMENT (AS
SUPPLEMENTED BY STICKER SUPPLEMENTS, IF ANY) AND A COPY OF THE MOST RECENT
MONTHLY STATEMENT AND ANNUAL REPORT, IF ANY, RELATING TO AND DESCRIBING THE
TERMS AND CONDITIONS OF THIS OFFERING OF UNITS ("PROSPECTUS").
(B) I MEET THE APPLICABLE INVESTOR SUITABILITY REQUIREMENTS SET FORTH IN
EXHIBIT C TO THE PROSPECTUS AND REPRESENT THAT ALL THE INFORMATION SET FORTH
WITH RESPECT TO MY FINANCIAL POSITION IS CORRECT AND COMPLETE AS OF THE DATE
OF THIS SUBSCRIPTION AGREEMENT, AND IF THERE SHOULD BE ANY MATERIAL CHANGE
IN SUCH INFORMATION PRIOR TO MY ADMISSION AS A LIMITED PARTNER, I WILL
IMMEDIATELY FURNISH SUCH REVISED OR CORRECTED INFORMATION TO THE GENERAL
PARTNER.
(c) I hereby consent to the execution and delivery of the Customer
Agreement between the Partnership and SB and to the payment to SB of fees as
described in the Prospectus.
(d) If I am not a citizen or resident of the United States for federal
income tax purposes, I represent that I am not a dealer in commodities and I
agree to pay the General Partner or SB for any taxes, including but not
limited to withholding tax, imposed as a result of my status as a limited
partner.
3. Employee-Benefit Plans. The undersigned individual, employer or trustee
who has investment discretion over the assets of the subscribing
employee-benefit plan ("Director") represents and agrees as follows:
(a) Either (A) or (B): (A) neither SB nor any of its employees or
affiliates (i) manages any part of the investment portfolio of the
subscribing employee-benefit plan (the "Plan"), or (ii) has an agreement or
understanding, written or unwritten, with the Fiduciary under which the
Fiduciary regularly receives information, recommendations or advice
concerning investments which are used as a primary basis for the Plan's
investment decisions and which are individualized to the particular needs of
the Plan.
or (B) The relationship between the Plan and SB or any of its employees
or affiliates comes within (i) or (ii) above with respect to only a portion
of the Plan's assets and the investment in the Partnership is being made by
the Fiduciary from a portion of Plan assets with respect to which such
relationship does not exist.
(b) Although an SB Financial Consultant may have suggested that the
Director consider the investment in the Partnership, the Director has
studied the Prospectus and has made the investment decision solely on the
basis of the Prospectus and without reliance on such suggestion.
(c) The Plan is in compliance with all applicable Federal regulatory
requirements.
4. Acceptance of Limited Partnership Agreement and Power of Attorney. I
hereby apply to become a limited partner as of the date the sale of my Units
becomes effective, and I hereby agree to each and every term of the Limited
Partnership Agreement as if my signature were subscribed therein.
I hereby irrevocably constitute and appoint Smith Barney Futures Management
Inc., the General Partner of the Partnership, as my true and lawful
Attorney-in-Fact, with full power of substitution, in my name, place and stead,
to execute, acknowledge, swear to, file and record on my behalf in the
appropriate public offices (i) the Limited Partnership Agreement of the
Partnership and a Certificate of Limited Partnership, including amendments and
restatements thereto; (ii) all instruments which the General Partner deems
necessary or appropriate to reflect any amendment, change, modification or
restatement of the Limited Partnership Agreement in accordance with the terms of
the Limited Partnership Agreement, as amended, including any instruments
necessary to dissolve the Partnership; (iii) certificates of assumed name; and
(iv) customer agreements with any commodity brokerage firm. The power of
attorney granted hereby shall be deemed to be coupled with an interest and shall
be irrevocable and survive the death, disability or incapacity of the
undersigned.
------------------
B. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, except for matters arising
under federal and state securities laws.
------------------
C. RISK DISCLOSURE.
1. Investment in the Partnership is speculative and includes the risks
summarized under "Risk Factors" in the Prospectus. Each investor must be
able to afford the risks of an investment in the Partnership.
2. Smith Barney Futures Management Inc., the General Partner, is an
affiliate of Smith Barney Inc. ("SB"). SB is the Selling Agent and the
Commodity Broker/Dealer and recipient of brokerage fees. Therefore,
conflicts of interest exist (see "Conflicts of Interest" and "The Commodity
Broker/Dealer" in the Prospectus). SB will receive substantial brokerage
fees from the Partnership regardless of the Partnership's trading
performance (see "Fees and Expenses to the Partnership" in the Prospectus).
3. Beginning with the quarter ending June 30, 1996, an Investor may
redeem his Units only as of the last day of a calendar month, all as set
forth in the Limited Partnership Agreement.
4. The offering of Units is made solely on the information in the
Prospectus and Exhibits thereto. No person is authorized to make any
representations not contained in the Prospectus.
B-1
<PAGE> 148
SMITH BARNEY DIVERSIFIED EXHIBIT B
FUTURES FUND L.P. II
PLEASE COMPLETE
SUBSCRIPTION AMOUNT (MINIMUM $5,000,
EXCEPT $2,000 FOR EMPLOYEE-BENEFIT PLANS
INCLUDING IRAS. SUBJECT TO HIGHER
MINIMUMS IN CERTAIN STATES. SEE
EXHIBIT C -- SUITABILITY REQUIREMENTS.)
<TABLE>
<S> <C>
-----------------------------------------------------------
$ - - - -
-----------------------------------------------------------
SMITH BARNEY ACCOUNT NUMBER
ACCOUNT NAME ----------------------------------------------------------------
----------------------------------------------------------------
STATE OR COUNTRY
OF RESIDENCE
----------------------------------------------------------------
</TABLE>
CIRCLE APPLICABLE ACCOUNT TYPE BELOW
<TABLE>
<S> <C> <C>
1 INDIVIDUAL ACCOUNT 3 CORPORATION 6 IRA, KEOGH, SEP
2 JOINT ACCOUNT 4 PARTNERSHIP 7 EMPLOYEE BENEFIT PLAN
5 TRUST 8 OTHER _________________________
</TABLE>
PAYMENT
PAYMENT FOR SUBSCRIPTIONS MAY BE MADE BY AUTHORIZING YOUR FINANCIAL CONSULTANT
TO DEBIT YOUR SMITH BARNEY INC. SECURITIES ACCOUNT IN THE AMOUNT OF YOUR
SUBSCRIPTION. SUBSCRIBERS WHO AUTHORIZE SMITH BARNEY INC. TO DEBIT THEIR
SECURITIES ACCOUNT MUST HAVE THEIR SUBSCRIPTION PAYMENT IN THEIR ACCOUNT ON THE
SPECIFIED SETTLEMENT DATE. THE ACCOUNT WILL BE DEBITED ON THE SETTLEMENT DATE
WHICH WILL OCCUR NOT LATER THAN 5 BUSINESS DAYS FOLLOWING NOTIFICATION TO SMITH
BARNEY INC. AND THE INVESTOR OF THE ACCEPTANCE OF THE SUBSCRIPTION.
SIGNATURE
IF JOINT OWNERSHIP, ALL PARTIES MUST SIGN. IF FIDUCIARY, PARTNERSHIP OR
CORPORATION, INDICATE TITLE OF SIGNATORY UNDER SIGNATURE LINES.
<TABLE>
<S> <C>
- ------------------------------------------------------------ ------------------------------------------------------------
SUBSCRIBER'S SIGNATURE SUBSCRIBER'S SIGNATURE
- ------------------------------------------------------------ ------------------------------------------------------------
TITLE TITLE
- ------------------------------------------------------------ ------------------------------------------------------------
DATE DATE
</TABLE>
BRANCH MANAGER ATTESTATION
I have received all documents required to open this account and acknowledge the
suitability of this investment for the client pursuant to Paragraphs (b)(3)(B)
and (b)(4)(d) of Section 34, Article III of the NASD's Rules of Fair Practice,
which sections require that (i) in recommending the purchase of Units, the
selling agent determine the suitability of the Subscriber and maintain records
containing the basis of the suitability determination; and (ii) prior to
executing a purchase of Units, the selling agent inform the subscriber of facts
relating to the liquidity and marketability of the Units. If the account is a
partnership or trust, I acknowledge that my review of the partnership or trust
allows investments in limited partnerships whose principal business is in
futures trading.
Branch Manager's Signature ________________________________
Print Name: _______________________________________________
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
<S> <C>
FOR BRANCH USE ENTER IOI FOR SECURITY NO.
FC PLEASE COMPLETE INDICATED BELOW (CHECK ONE):
FINANCIAL CONSULTANT NAME 8955101 __________
8955105 __________
____________________________________________________________
PRINT NAME
FC TELEPHONE NO. ___________________________________________
FC WIRE CODE _______________________________________________
</TABLE>
SEND COMPLETED SUBSCRIPTION AGREEMENT TO:
SMITH BARNEY FUTURES MANAGEMENT INC.
390 GREENWICH STREET - 1ST FLOOR
NEW YORK, NEW YORK 10013
ATTN.: KRISTIN MCAREE TEL (212) 723-4976
NOT ACCEPTABLE FOR CLIENT SUBSCRIPTION
<PAGE> 149
EXHIBIT C
SUITABILITY REQUIREMENTS
(a) I understand that a subscriber must have (i) net worth of at least
$150,000 (exclusive of home, furnishings and automobiles), or (ii) net worth of
at least $45,000 (exclusive of home, furnishings and automobiles) and an annual
income of $45,000. I understand that certain states impose more restrictive
investment requirements than the foregoing.
(b) I understand that the investment requirements as to net worth ("NW")
(exclusive of home, furnishings and automobiles) and past and anticipated annual
income ("AI") or taxable income ("TI") set forth below opposite the state in
which I am a resident apply to my subscription:
<TABLE>
<S> <C>
Arizona................... $225,000 NW and (1) or $75,000 NW and $75,000 AI and (1)
California................ $250,000 NW or $100,000 NW and $65,000 AI
Iowa...................... $225,000 NW and (1) or $75,000 NW and $75,000 AI and (1)
Maine..................... $200,000 NW or $50,000 NW and $50,000 AI
Massachusetts............. $225,000 NW or $60,000 NW and $60,000 AI
Michigan.................. $225,000 NW and (1) or $60,000 NW and $60,000 AI and (1)
Mississippi............... $225,000 NW and $60,000 AI
Missouri.................. $225,000 NW or $75,000 NW and $75,000 AI
North Carolina............ $225,000 NW or $60,000 NW and $60,000 TI
Pennsylvania.............. $175,000 NW and (2) or $100,000 NW and $50,000 AI and (2)
Tennessee................. $225,000 NW or $60,000 NW and $60,000 AI
Texas..................... $225,000 NW or $60,000 NW and $60,000 TI
</TABLE>
- ---------------
(1) In addition, my investment will represent no more than 10% of my
net worth less the value of any other investments in limited
partnership interests.
(2) In addition, if my net worth is less than $1,000,000, my
investment will represent no more than 10% of my net worth less
the value of any other investments in limited partnership
interests.
(c) [Minnesota residents only]. I understand that I must qualify as an
"institutional purchaser" and must execute a separate Investor Accreditation
Form for the purpose of demonstrating my qualification.
(d) [Iowa Individual Retirement Accounts only]. I understand that my
investment in the Partnership must be for a minimum of $3,000.
(e) [For all Maine Residents including employee-benefit plans]. Your
investment in the Partnership, whether in the initial or continuous offering,
must be for a minimum of $5,000.
(f) [Ohio Residents only] I understand that my investment will represent no
more than 10% of my net worth less the value of any other investment in limited
partnership interests.
C-1
<PAGE> 150
EXECUTION COPY
SMITH BARNEY DIVERSIFIED
FUTURES FUND L.P. II
SUBSCRIPTION AGREEMENT
Dear Sirs:
A. SUBSCRIBER PROVISIONS.
1. Subscription for Units. I hereby subscribe for the amount indicated
below of units of limited partnership interest ("Units") of SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P. II (the "Partnership") at Net Asset Value per Unit
during the Continuous Offering (as that term is defined under "Plan of
Distribution") (with a minimum investment of $5,000, except $2,000 for
employee-benefit plans, subject to higher minimum in certain states). A
SUBSCRIPTION MAY BE REVOKED BY A SUBSCRIBER FOR FIVE BUSINESS DAYS FOLLOWING THE
INVESTOR'S SUBSCRIPTION DURING THE CONTINUOUS OFFERING IF THE GENERAL PARTNER
DETERMINES NOT TO OFFER UNITS AS OF THE END OF A MONTH.
2. Representations and Warranties. BY EXECUTING THIS SUBSCRIPTION
AGREEMENT, I AM NOT WAIVING ANY RIGHTS UNDER THE FEDERAL OR STATE SECURITIES
LAWS. As an inducement to the General Partner on behalf of the Partnership to
sell me the Units for which I have subscribed, I (either in my individual
capacity or as an authorized representative of an entity, if applicable) hereby
represent and warrant to the General Partner and the Partnership as follows:
(A) I HAVE RECEIVED A COPY OF THE PROSPECTUS AND DISCLOSURE DOCUMENT OF
THE PARTNERSHIP, INCLUDING THE LIMITED PARTNERSHIP AGREEMENT (AS
SUPPLEMENTED BY STICKER SUPPLEMENTS, IF ANY) AND A COPY OF THE MOST RECENT
MONTHLY STATEMENT AND ANNUAL REPORT, IF ANY, RELATING TO AND DESCRIBING THE
TERMS AND CONDITIONS OF THIS OFFERING OF UNITS ("PROSPECTUS").
(B) I MEET THE APPLICABLE INVESTOR SUITABILITY REQUIREMENTS SET FORTH IN
EXHIBIT C TO THE PROSPECTUS AND REPRESENT THAT ALL THE INFORMATION SET FORTH
WITH RESPECT TO MY FINANCIAL POSITION IS CORRECT AND COMPLETE AS OF THE DATE
OF THIS SUBSCRIPTION AGREEMENT, AND IF THERE SHOULD BE ANY MATERIAL CHANGE
IN SUCH INFORMATION PRIOR TO MY ADMISSION AS A LIMITED PARTNER, I WILL
IMMEDIATELY FURNISH SUCH REVISED OR CORRECTED INFORMATION TO THE GENERAL
PARTNER.
(c) I hereby consent to the execution and delivery of the Customer
Agreement between the Partnership and SB and to the payment to SB of fees as
described in the Prospectus.
(d) If I am not a citizen or resident of the United States for federal
income tax purposes, I represent that I am not a dealer in commodities and I
agree to pay the General Partner or SB for any taxes, including but not
limited to withholding tax, imposed as a result of my status as a limited
partner.
3. Employee-Benefit Plans. The undersigned individual, employer or trustee
who has investment discretion over the assets of the subscribing
employee-benefit plan ("Director") represents and agrees as follows:
(a) Either (A) or (B): (A) neither SB nor any of its employees or
affiliates (i) manages any part of the investment portfolio of the
subscribing employee-benefit plan (the "Plan"), or (ii) has an agreement or
understanding, written or unwritten, with the Fiduciary under which the
Fiduciary regularly receives information, recommendations or advice
concerning investments which are used as a primary basis for the Plan's
investment decisions and which are individualized to the particular needs of
the Plan.
or (B) The relationship between the Plan and SB or any of its employees
or affiliates comes within (i) or (ii) above with respect to only a portion
of the Plan's assets and the investment in the Partnership is being made by
the Fiduciary from a portion of Plan assets with respect to which such
relationship does not exist.
(b) Although an SB Financial Consultant may have suggested that the
Director consider the investment in the Partnership, the Director has
studied the Prospectus and has made the investment decision solely on the
basis of the Prospectus and without reliance on such suggestion.
(c) The Plan is in compliance with all applicable Federal regulatory
requirements.
4. Acceptance of Limited Partnership Agreement and Power of Attorney. I
hereby apply to become a limited partner as of the later of the date trading
commences or the date the sale of my Units becomes effective, and I hereby agree
to each and every term of the Limited Partnership Agreement as if my signature
were subscribed therein.
I hereby irrevocably constitute and appoint Smith Barney Futures Management
Inc., the General Partner of the Partnership, as my true and lawful
Attorney-in-Fact, with full power of substitution, in my name, place and stead,
to execute, acknowledge, swear to, file and record on my behalf in the
appropriate public offices (i) the Limited Partnership Agreement of the
Partnership and a Certificate of Limited Partnership, including amendments and
restatements thereto; (ii) all instruments which the General Partner deems
necessary or appropriate to reflect any amendment, change, modification or
restatement of the Limited Partnership Agreement in accordance with the terms of
the Limited Partnership Agreement, as amended, including any instruments
necessary to dissolve the Partnership; (iii) certificates of assumed name; and
(iv) customer agreements with any commodity brokerage firm. The power of
attorney granted hereby shall be deemed to be coupled with an interest and shall
be irrevocable and survive the death, disability or incapacity of the
undersigned.
------------------
B. GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, except for matters arising
under federal and state securities laws.
------------------
C. RISK DISCLOSURE.
1. Investment in the Partnership is speculative and includes the risks
summarized under "Risk Factors" in the Prospectus. Each investor must be
able to afford the risks of an investment in the Partnership.
2. Smith Barney Futures Management Inc., the General Partner, is an
affiliate of Smith Barney Inc. ("SB"). SB is the Selling Agent and the
Commodity Broker/Dealer and recipient of brokerage fees. Therefore,
conflicts of interest exist (see "Conflicts of Interest" and "The Commodity
Broker/Dealer" in the Prospectus). SB will receive substantial brokerage
fees from the Partnership regardless of the Partnership's trading
performance (see "Fees and Expenses to the Partnership" in the Prospectus).
3. Beginning with the quarter ending June 30, 1996, an Investor may
redeem his Units only as of the last day of a calendar month, all as set
forth in the Limited Partnership Agreement.
4. The offering of Units is made solely on the information in the
Prospectus and Exhibits thereto. No person is authorized to make any
representations not contained in the Prospectus.
<PAGE> 151
SMITH BARNEY DIVERSIFIED EXECUTION COPY
FUTURES FUND L.P. II
PLEASE COMPLETE
SUBSCRIPTION AMOUNT (MINIMUM $5,000,
EXCEPT $2,000 FOR EMPLOYEE-BENEFIT PLANS
INCLUDING IRAS. SUBJECT TO HIGHER
MINIMUMS IN CERTAIN STATES.
SEE EXHIBIT C -- SUITABILITY REQUIREMENTS.)
<TABLE>
<S> <C>
-----------------------------------------------------------
$ - - - -
-----------------------------------------------------------
SMITH BARNEY ACCOUNT NUMBER
ACCOUNT NAME ----------------------------------------------------------------
----------------------------------------------------------------
STATE OR COUNTRY
OF RESIDENCE
----------------------------------------------------------------
</TABLE>
CIRCLE APPLICABLE ACCOUNT TYPE BELOW
<TABLE>
<S> <C> <C>
1 INDIVIDUAL ACCOUNT 3 CORPORATION 6 IRA, KEOGH, SEP
2 JOINT ACCOUNT 4 PARTNERSHIP 7 EMPLOYEE BENEFIT PLAN
5 TRUST 8 OTHER ________________
</TABLE>
PAYMENT
PAYMENT FOR SUBSCRIPTIONS MAY BE MADE BY AUTHORIZING YOUR FINANCIAL CONSULTANT
TO DEBIT YOUR SMITH BARNEY INC. SECURITIES ACCOUNT IN THE AMOUNT OF YOUR
SUBSCRIPTION. SUBSCRIBERS WHO AUTHORIZE SMITH BARNEY INC. TO DEBIT THEIR
SECURITIES ACCOUNT MUST HAVE THEIR SUBSCRIPTION PAYMENT IN THEIR ACCOUNT ON THE
SPECIFIED SETTLEMENT DATE. THE ACCOUNT WILL BE DEBITED ON THE SETTLEMENT DATE
WHICH WILL OCCUR NOT LATER THAN 5 BUSINESS DAYS FOLLOWING NOTIFICATION TO SMITH
BARNEY INC. AND THE INVESTOR OF THE ACCEPTANCE OF THE SUBSCRIPTION.
SIGNATURE
IF JOINT OWNERSHIP, ALL PARTIES MUST SIGN. IF FIDUCIARY, PARTNERSHIP OR
CORPORATION, INDICATE TITLE OF SIGNATORY UNDER SIGNATURE LINES.
<TABLE>
<S> <C>
- ------------------------------------------------------------ ------------------------------------------------------------
SUBSCRIBER'S SIGNATURE SUBSCRIBER'S SIGNATURE
- ------------------------------------------------------------ ------------------------------------------------------------
TITLE TITLE
- ------------------------------------------------------------ ------------------------------------------------------------
DATE DATE
</TABLE>
BRANCH MANAGER ATTESTATION
I have received all documents required to open this account and acknowledge the
suitability of this investment for the client pursuant to Paragraphs (b)(3)(B)
and (b)(4)(d) of Section 34, Article III of the NASD's Rules of Fair Practice,
which sections require that (i) in recommending the purchase of Units, the
selling agent determine the suitability of the Subscriber and maintain records
containing the basis of the suitability determination; and (ii) prior to
executing a purchase of Units, the selling agent inform the subscriber of facts
relating to the liquidity and marketability of the Units. If the account is a
partnership or trust, I acknowledge that my review of the partnership or trust
allows investments in limited partnerships whose principal business is in
futures trading.
Branch Manager's Signature ________________________________
Print Name: _______________________________________________
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
<S> <C>
FOR BRANCH USE ENTER IOI FOR SECURITY NO.
FC PLEASE COMPLETE INDICATED BELOW (CHECK ONE):
FINANCIAL CONSULTANT NAME 8955101 __________
____________________________________________________________ 8955105 __________
PRINT NAME
FC TELEPHONE NO. ___________________________________________
FC WIRE CODE _______________________________________________
</TABLE>
SEND COMPLETED SUBSCRIPTION AGREEMENT TO:
SMITH BARNEY FUTURES MANAGEMENT INC.
390 GREENWICH STREET - 1ST FLOOR
NEW YORK, NEW YORK 10013
ATTN.: KRISTIN MCAREE TEL (212) 723-4976
PHOTOCOPIES OR FAXES NOT ACCEPTABLE
<PAGE> 152
PART II
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
<TABLE>
<S> <C>
Filing Fee -- Securities and Exchange Commission (1933 Act)............ $ 0
Filing Fee -- National Association of Securities Dealers, Inc. ........ $ 9,933.50
Printing Expenses...................................................... $ 75,000*
Legal Fees............................................................. $ 100,000*
Blue Sky Fees and Expenses (excluding legal fees)...................... $ 50,000*
Accounting Fees........................................................ $ 5,000*
Marketing.............................................................. $ 30,000*
Miscellaneous.......................................................... $ 5,066.50
-----------
Total............................................................. $ 275,000*
==========
</TABLE>
-------------------------
*Estimated
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 16 of the Limited Partnership Agreement (attached as Exhibit A to
the Prospectus which forms a part of this Registration Statement) provides for
indemnification of the General Partner, its officers, directors, stockholders,
employees and controlling persons. The General Partner and its Affiliates shall
be indemnified by the Partnership against any losses, judgment, liabilities,
expenses and amounts paid in settlement of any claims sustained by them in
connection with the Partnership, provided that the General Partner shall have
determined in good faith that such course of conduct was in the best interest of
the Partnership and such loss or liability was not the result of negligence or
misconduct on the part of the General Partner or its Affiliates. Notwithstanding
the foregoing, the Registrant is not permitted to indemnify the General Partner
or its affiliates for liabilities resulting from a violation of the Securities
Act of 1933 or any State securities law in connection with the offer or sale of
the Units of limited partnership interest.
Section 5 of the Selling Agreement provides for indemnification of the
Registrant by SB against any and all loss, liability, claim, damage and expense
arising out of or based upon any untrue or alleged untrue statement of material
fact contained in any preliminary prospectus, the Registration Statement or the
Prospectus, or any related sales material used by SB in connection with this
offering of Units, or the omission or alleged omission therefrom of a material
fact required to be stated therein or necessary to make the statements therein
not misleading, provided that such statement or omission was made in reliance
upon and in conformity with information furnished to the Registrant by SB,
expressly for use in any preliminary prospectus, the Registration Statement or
Prospectus, or any amendment or supplement thereto.
Section 7 of the Customer Agreement provides for indemnification of SB by
the Registrant against any loss, liability, damage, cost, expense (including
attorneys' fees and accountants' fees), judgments and amounts paid in settlement
actually and reasonably incurred by it in connection with such action, suit or
proceeding if SB acted in good faith and in a manner it reasonably believed to
be in the best interest of the Registrant, except that no indemnification shall
be made in respect of any claim, issue or matter which as to SB constituted
negligence, misconduct or breach of its fiduciary obligations to the Registrant,
unless, and only to the extent that, the court in which such action or suit was
brought shall determine upon application that, despite the adjudication of
liability but in view of all circumstances of the case, SB is fairly and
reasonably entitled to indemnification for such expenses which such court shall
deem proper, and further provided that no indemnification shall be available
from the Registrant if such indemnification is prohibited by Section 16 of the
Limited Partnership Agreement.
Section 6 of each of the Management Agreements provides for indemnification
by the General Partner of the Advisor for any loss, liability, damage, cost,
expense (including without limitation, attorneys' and accountants' fees),
judgments and amounts paid in settlement actually and reasonably incurred by it
in connection with such action, suit or proceeding if the Advisor acted in good
faith and in a manner reasonably believed to be in or not opposed to the best
interests of the Registrant, and provided that its conduct did not constitute
negligence, intentional misconduct, or a breach of its fiduciary obligations to
the Registrant's commodity trading advisor, unless and only to the extent that
the court or administrative forum in which such
II-1
<PAGE> 153
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 Registrant if such
indemnification is prohibited by Section 16 of the Limited Partnership
Agreement.
The agreements filed as Exhibits 1.1, 10.1, 10.4, 10.5 and 10.6 contain
certain indemnity provisions.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
On May 18, 1994 Registrant sold one Unit of Limited Partnership Interest to
Alexander J. Sloane for $1,000. No underwriting or sales commissions were paid
in connection with this sale. The Registrant claims an exemption from
registration based on Section 4(2) of the Securities Act of 1933 as a sale not
involving a public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS:
<TABLE>
<S> <C>
1.1 -- Form of Amended Selling Agreement between Registrant and Smith Barney Inc.
1.2 -- Form of Amended Soliciting Dealer Agreement
3.1 -- Limited Partnership Agreement (included as Exhibit A to the Prospectus)
*3.2 -- Certificate of Limited Partnership of Registrant
*4.1 -- Specimen of Unit Certificate
5.1 -- Opinion of Willkie Farr & Gallagher relating to the legality of the Units
8.1 -- Tax Opinion of Willkie Farr & Gallagher
10.1 -- Form of Letter of Amendment to the Customer Agreement between Registrant
and Smith Barney Inc.
10.2 -- Form of Subscription Agreement (included as Exhibit B to the Prospectus)
*10.4 -- Form of Amended Management Agreement between Smith Barney Futures Manage-
ment Inc., and Chesapeake Capital Corporation
*10.5 -- Form of Amended Management Agreement between Smith Barney Shearson Futures
Management Inc. and John W. Henry & Co., Inc.
*10.6 -- Form of Amended Management Agreement between Smith Barney Futures Manage-
ment Inc. and Millburn Ridgefield Corporation
24.1 -- Consent of Independent Accountants (included in Part II of this
Registration Statement)
24.2 -- Consent of Counsel (included in Part II of this Registration Statement)
</TABLE>
- ---------------
* Previously filed as like-numbered Exhibits to Registration Statement
No. 33-79244, and incorporated by reference herein.
(B) FINANCIAL STATEMENT SCHEDULES:
Not Applicable.
II-2
<PAGE> 154
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1993 (the "Act");
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represents a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
(2) That for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of
such securities at that time shall be deemed to be the initial bona fide
offering thereof.
(3) To remove from registration by means of post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) Insofar as indemnification for liabilities arising under the Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Commission such
indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of
expenses incurred or paid by a director, officer or controlling person of
the registrant in the successful defense of any action, suit or proceeding)
is asserted by such director, officer or controlling person in connection
with the securities being registered, the registrant will, unless in the
opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Act and will be governed by the final adjudication of such issue.
II-3
<PAGE> 155
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS REGISTRATION STATEMENT 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 28TH DAY OF MAY, 1996.
SMITH BARNEY DIVERSIFIED
FUTURES FUND L.P. II
By SMITH BARNEY FUTURES
MANAGEMENT INC.
(General Partner)
By /s/ DAVID J. VOGEL
David J. Vogel, President and
Director
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS
POST-EFFECTIVE AMENDMENT NO. 1 TO THE REGISTRATION STATEMENT HAS BEEN SIGNED
BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATE INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ --------------------------------- ----------------
<S> <C> <C>
SMITH BARNEY FUTURES General Partner May 28, 1996
MANAGEMENT INC.
/s/ DAVID J. Director, Principal Executive May 28, 1996
VOGEL Officer and President
- ------------------------------------------
DAVID J. VOGEL
/s/ MICHAEL SCHAEFER Director May 28, 1996
- ------------------------------------------
MICHAEL SCHAEFER
/s/ PHILIP M. WATERMAN, JR. Director and Vice-Chairman May 28, 1996
- ------------------------------------------
PHILIP M. WATERMAN, JR.
Secretary and Director May 28, 1996
- ------------------------------------------
STEVEN J. KELTZ
/s/ JACK H. LEHMAN Chairman and Director May 28, 1996
III
- ------------------------------------------
JACK H. LEHMAN III
/s/ DANIEL A. DANTUONO Treasurer, Chief Financial May 28, 1996
- ------------------------------------------ Officer and Director
DANIEL A. DANTUONO
/s/ DANIEL R. MCAULIFFE, JR. Director May 28, 1996
- ------------------------------------------
DANIEL R. MCAULIFFE, JR.
Director May 28, 1996
- ------------------------------------------
SHELLEY ULLMAN
</TABLE>
II-4
<PAGE> 156
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this Registration Statement and Prospectus
to be used in registering, under the Securities Act of 1933, 100,000 Units of
Limited Partnership Interest of (i) our report dated March 29, 1996 accompanying
the statement of financial condition of Smith Barney Futures Management Inc. and
(ii) our report dated March 25, 1996 accompanying the statement of financial
condition of Smith Barney Diversified Futures Fund L.P. II.
We also consent to the reference to our firm under the caption "Experts" in
the Prospectus.
/s/ COOPERS & LYBRAND L.L.P.
New York, New York
May 28, 1996
<PAGE> 157
CONSENT OF COUNSEL
As counsel for the Registrant, we hereby consent to the references made to
our firm in this Registration Statement.
/s/ WILLKIE FARR & GALLAGHER
New York, New York
May 28, 1996
<PAGE> 158
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
--------- -----------------------------------------------------------------------------
<C> <S> <C>
1.1 -- Form of Amended Selling Agreement between Registrant and Smith
Barney Inc.
1.2 -- Form of Amended Soliciting Dealer Agreement
3.1 -- Limited Partnership Agreement (included as Exhibit A to the
Prospectus)
*3.2 -- Certificate of Limited Partnership of Registrant
*4.1 -- Specimen of Unit Certificate
5.1 -- Opinion of Willkie Farr & Gallagher relating to the legality of
the Units
8.1 -- Tax Opinion of Willkie Farr & Gallagher
10.1 -- Form of Letter of Amendment to the Customer Agreement between
Registrant and Smith Barney Inc.
10.2 -- Form of Subscription Agreement (included as Exhibit B to the
Prospectus)
*10.4 -- Form of Amended Management Agreement between Smith Barney
Futures Management Inc., and Chesapeake Capital Corporation
*10.5 -- Form of Amended Management Agreement between Smith Barney
Shearson Futures
Management Inc. and John W. Henry & Co., Inc.
*10.6 -- Form of Amended Management Agreement between Smith Barney
Futures Management Inc. and Millburn Ridgefield Corporation
24.1 -- Consent of Independent Accountants (included in Part II of this
Registration Statement)
24.2 -- Consent of Counsel (included in Part II of this Registration
Statement)
</TABLE>
- ---------------
* Previously filed as like-numbered Exhibits to Registration Statement
No. 33-79244, and incorporated by reference herein.
<PAGE> 1
EXHIBIT 1.1
SELLING AGREEMENT
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
100,000 Units of Limited Partnership Interest
AGREEMENT made as of the __ day of May, 1996, by and among
SMITH BARNEY DIVERSIFIED FUTURES FUND L. P. II, a New York limited partnership
(the "Partnership"), SMITH BARNEY FUTURES MANAGEMENT INC., a Delaware
corporation ("SBFM") and SMITH BARNEY INC., a Delaware corporation ("SB").
W I T N E S S E T H :
WHEREAS, the Partnership has filed a registration statement on
Form S-1 (File No. 333-3538) with the Securities and Exchange Commission (the
"SEC") in accordance with the provisions of the Securities Act of 1933, as
amended, and the rules and regulations thereunder (collectively, the "Act"), and
as a part thereof a form of preliminary prospectus relating to the offer and
sale of up to 100,000 Units of Limited Partnership Interest in the Partnership
(the "Units") (the registration statement in the form in which it becomes
effective under the Act being hereinafter referred to as the "Registration
Statement" and the prospectus in the form included therein being hereinafter
referred to as the "Prospectus"; provided that (1) if the Partnership files a
post-effective amendment to such registration statement, then the term
"Registration Statement" shall refer to the registration statement as amended by
such post-effective amendment, and the term "Prospectus" shall refer to the
amended prospectus then on file with the SEC and (2) if a prospectus filed by
the Partnership pursuant to either Rule 424(b) or (c) promulgated under the Act
shall differ from the prospectus on file at the time the Registration Statement
or any post-effective amendment thereof shall have become effective, the term
"Prospectus" shall refer to the prospectus filed pursuant to Rule 424(b) or (c),
from and after the date on which it shall have been filed); and
WHEREAS, the Partnership has entered into three individual
management agreements with Chesapeake Capital
<PAGE> 2
Corporation, John W. Henry & Co., Inc. and Millburn Ridgefield Corporation (the
"Advisors", and, individually, an "Advisor"), and SBFM, (the "Management
Agreements"), pursuant to which commodity trading decisions are made by each
Advisor as described in the Prospectus; and
WHEREAS, SB has agreed to assist in the offer and sale of the
Units upon the terms and in reliance upon the representations, warranties and
agreements set forth herein;
NOW, THEREFORE, the parties hereto agree as follows:
1. Appointment of Selling Agent
(a) The Partnership hereby appoints SB as its
exclusive agent to offer and sell the Units on the terms and conditions
set forth herein and in the Registration Statement and the Prospectus
during a period commencing on the date the Registration Statement is
declared effective by the SEC and ending upon the earlier of the date
two years from the date thereof and the date on which 100,000 Units are
sold (the "Continuous Offering").
(b) SB hereby accepts appointment as selling agent
for the Partnership to effect sales of up to 100,000 Units as provided
herein, in the Registration Statement and in the Prospectus. SB
represents and hereby confirms that in selling to subscribers and
otherwise carrying out its obligations under this agreement it will
comply with Section 34 of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc. ("NASD"), as set forth in full
in Schedule I hereto. SB agrees that SBFM has the right to reject any
subscription for Units for any reason and to suspend sales of Units
during the Continuous Offering. At SB's discretion it may form a group
of securities dealers ("Soliciting Dealers") to solicit sales of the
Units during the Continuous Offering. Any such Soliciting Dealer shall
execute a Soliciting Dealer Agreement in substantially the form
attached hereto as Exhibit A.
Each such dealer shall become a party to this Agreement upon
notice by SB to the Partnership that SB and such dealer have entered
into such Soliciting Dealer Agreement.
- 2 -
<PAGE> 3
(c) SB agrees initially to bear all expenses of the
Partnership in connection with the Continuous Offering in 1996
(estimated at $275,000), including, without limitation, fees and
expenses of its counsel, SEC and other filing fees, blue sky fees and
expenses, printing expenses, fees and expenses of independent public
accountants and escrow fees.
(d) SB agrees that all funds received by SB from
subscribers shall be promptly delivered to European American Bank as
escrow agent for the benefit of the subscribers by noon of the second
business day after receipt. Furthermore, SB will require all Soliciting
Dealers to forward to SB, for delivery to the escrow agent, all checks
received by them from subscribers for Units by noon of the next
business day after their receipt of the checks. SB represents and
hereby confirms that if it receives checks from customers it will act
as processing broker-dealer in accordance with Rule 15c2-4 under the
Securities Exchange Act of 1934 and NASD Notices to Members 84-7 and
84-64.
(e) SB represents and confirms that it is registered
with the National Futures Association ("NFA") as a futures commission
merchant, and any Soliciting Dealer selected by SB that receives
continuing compensation in the form of a portion of the commodity
brokerage fees paid by the Partnership shall be registered with the NFA
as a futures commission merchant or an introducing broker. Further, any
associated person of SB or a Soliciting Dealer who receives continuing
compensation in the form of a portion of the commodity brokerage fees
paid by the Partnership shall be registered with the NFA as an
associated person of a futures commission merchant or an introducing
broker (qualified as an associated person by having taken the Series 3
Commodities Exam or having been "grandfathered" as an associated person
qualified to do commodity brokerage).
2. Agreements of the Partnership. The Partnership
agrees with SB as follows:
(a) The Partnership will advise SB, promptly after it
receives notice thereof, (i) of the time when the Registration
Statement has become effective and when any
- 3 -
<PAGE> 4
amendment thereto becomes effective, (ii) of the issuance by the SEC of
any stop order or of any order preventing or suspending the use of any
Prospectus, or the initiation or threat of any proceeding for any such
purpose and (iii) of any request by the SEC for amendments or
supplements to the Registration Statement or Prospectus or for
additional information. In the event of the issuance of any stop order
or of any order preventing or suspending the use of any Prospectus, the
Partnership will promptly use its best efforts to obtain its
withdrawal.
(b) The Partnership will furnish to SB, without
charge, two signed copies of the Registration Statement as originally
filed and each amendment thereto, including all exhibits.
(c) The Partnership will not file any amendment to
the Registration Statement or make any amendment or supplement to the
Prospectus of which SB shall not previously have been advised or to
which SB shall reasonably object in writing.
(d) The Partnership will furnish SB with copies of
any preliminary prospectus and of the Prospectus in such quantities as
they may from time to time reasonably request. If at any time when the
Prospectus is required to be delivered under the Act any event shall
have occurred as a result of which the Prospectus as then amended or
supplemented would include an untrue statement of a material fact or
omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading, or if for any other reason it shall be
necessary to amend or supplement the Prospectus in order to comply with
the Act, the Partnership will notify SB and upon its request prepare
and furnish without charge to it as many copies as it may from time to
time reasonably request of an amended Prospectus or a supplement to the
Prospectus which will correct such statement or omission or effect such
compliance.
(e) The Partnership will take such action as SB may
reasonably request to qualify the Units for offering and sale under the
securities or blue sky laws of such
- 4 -
<PAGE> 5
jurisdictions as it may request and will comply with such laws so as to
permit the continuance of sales in such jurisdictions for as long as
may be necessary to complete the distribution.
3. Representations and Warranties.
The Partnership represents and warrants to SB that:
(a) Each preliminary prospectus filed as part of the
Registration Statement as originally filed or as part of any amendment
thereto complied or when so filed will comply in all material respects
with the requirements of the Act and the Commodity Exchange Act
("CEA").
(b) At the time the Registration Statement becomes
effective and at all times subsequent thereto up to the termination of
the Continuous Offering, the Registration Statement and the Prospectus,
and any amendments or supplements thereto, will comply in all material
respects with the provisions of the Act and the CEA and neither the
Registration Statement nor the Prospectus, nor any amendment or
supplement thereto, will contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided,
however, that the representations and warranties contained in
subparagraphs (a) and (b) above do not apply to any statements or
omissions in the Registration Statement or Prospectus, or any amendment
or supplement thereto, made in reliance upon information furnished to
the Partnership by SB or on its behalf expressly for use therein.
(c) The Partnership is duly formed and validly
existing as a limited partnership under the New York Revised Uniform
Limited Partnership Act (the "Partnership Law"), with full partnership
power and authority to carry out its obligations under this Agreement,
its Certificate of Limited Partnership, as amended from time to time
(the "Partnership Certificate"), and its Limited Partnership Agreement,
as amended from time to time (the "Partnership Agreement"), and to
conduct its business as described in the Prospectus. The Partnership
conducts no business and owns or leases no
- 5 -
<PAGE> 6
properties which would require it to qualify to do business
as a foreign organization in any jurisdiction.
(d) The offer and sale of the Units has been duly
authorized by the Partnership and the Units constitute valid limited
partnership interests in the Partnership which conform to the
description thereof contained in the Prospectus; and the liability of
each limited partner will be limited as set forth in the Prospectus,
and no limited partner will be subject to personal liability for the
debts, obligations, or liabilities of the Partnership by reason of his
being a limited partner other than as described in the Prospectus.
(e) The offer and sale of the Units and the
compliance by the Partnership with all of the provisions of this
Agreement will not conflict with or result in a breach of any of the
terms or provisions of any agreement to which the Partnership is a
party or by which it is bound, nor will such action result in a
violation of the provisions of the Partnership Agreement or Partnership
Certificate or any statute or any order, rule or regulation of any
court or governmental agency or body having jurisdiction over the
Partnership or any of its properties.
(f) A separate escrow account will be opened at
European American Bank (the "Escrow Agent") and maintained for all
funds received from subscribers for Units. All payments received from
persons desiring to purchase Units will be deposited in such account
and held in accordance with the terms of such Escrow Agreement.
(g) Coopers & Lybrand, who have certified certain
financial statements contained in the Registration Statement, are
independent public accountants as required by the Act.
- 6 -
<PAGE> 7
4. Conditions of Closing. The obligations of the parties
hereunder shall at all times be subject to the continued accuracy of all
representations and warranties of the parties contained herein as though such
representations and warranties had been made at and as of such times, and to the
following additional condition:
The Registration Statement shall have become effective and no
stop order suspending the effectiveness of the Registration Statement shall have
been issued and no proceeding for that purpose shall have been initiated or
threatened by the SEC; and all requests for additional information on the part
of the SEC shall have been complied with;
5. Indemnification.
SB agrees to indemnify and hold harmless the Partnership
against any and all loss, liability, claim, damage and expense whatsoever
(including but not limited to any and all expense whatsoever reasonably incurred
in investigating, preparing or defending against any litigation, commenced or
threatened, or any claim whatsoever) arising out of or based upon any untrue or
alleged untrue statement of material fact contained in any preliminary
prospectus, the Registration Statement or the Prospectus (as from time to time
amended and supplemented), or any related sales material used by SB in
connection with this offering of Units, or the omission or alleged omission
therefrom of a material fact required to be stated therein or necessary to make
the statements therein not misleading, provided that such statement or omission
was made in reliance upon and in conformity with information furnished to the
Partnership by SB, expressly for use in any preliminary prospectus, the
Registration Statement or Prospectus or any amendment or supplement thereto.
6. Term.
(a) This Agreement may be terminated by SB, at its
option, by giving notice to the Partnership, if:
(i) there shall have been, since the
respective dates as of which information is given in the
Registration Statement, any material adverse change in the
condition, financial or otherwise, of the Partnership or SBFM,
which change in its judgment shall
- 7 -
<PAGE> 8
render it inadvisable to proceed with the offer and sale of
the Units; or
(ii) any of the conditions specified in
Section 4 hereof shall not have been fulfilled when and as
required by this Agreement to be fulfilled.
(iii) The termination of this Agreement for
any reason set forth in this Section 6 shall not affect the
obligations of the Partnership contained in Section 2 hereof.
7. Miscellaneous.
(a) All representations, warranties and agreements
contained in this Agreement shall remain operative and in full force
and effect regardless of (i) any investigation made by or on behalf of
any party, (ii) delivery of and payment for the Units, or (iii)
termination of this Agreement.
(b) Except as otherwise expressly provided, this
Agreement is made solely for the benefit of, and shall be binding upon,
the parties hereto and their respective successors and assigns, and no
other person shall have any right or obligation under it. The terms
"successors" and "assigns" shall not include any purchasers, as such,
of Units in the Partnership.
(c) Whenever notice is required to be given by the
provisions of this Agreement, such notice shall be in writing and
delivered personally or by registered or certified mail, return receipt
requested, postage prepaid, and properly addressed as follows:
If to the Partnership to:
Smith Barney Diversified Futures Fund L. P. II
c/o Smith Barney Futures Management Inc.
390 Greenwich Street
New York, New York 10013
If to SB to:
- 8 -
<PAGE> 9
Smith Barney Inc.
388 Greenwich Street
New York, New York 10013
If to SBFM to:
Smith Barney Futures Management Inc.
390 Greenwich Street
New York, New York 10013
(d) No party is authorized by the Partnership to give
any information or make any representation in connection with the
offering of Units other than those contained in the Prospectus and such
sales literature the use of which has been authorized in writing by the
Partnership.
(e) This Agreement may be signed in counterpart.
(f) This Agreement shall be governed by and construed
in accordance with the laws of the State of New York.
IN WITNESS WHEREOF, this Agreement has been executed by or on
behalf of the parties as of the day and year first above mentioned.
SMITH BARNEY DIVERSIFIED
FUTURES FUND L. P. II
By: Smith Barney
Futures Management Inc.,
General Partner
By:
-----------------------------------
SMITH BARNEY
FUTURES MANAGEMENT INC.
- 9 -
<PAGE> 10
By:
----------------------------------
SMITH BARNEY INC.
By:
----------------------------------
- 10 -
<PAGE> 11
SCHEDULE I
SUITABILITY
(3)(A) A member or person associated with a member shall not underwrite
or participate in a public offering of a direct participation program unless
standards of suitability have been established by the program for participants
therein and such standards are fully disclosed in the prospectus and are
consistent with the provisions of subparagraph (B) of this section.
(B) In recommending to a participant the purchase, sale or exchange of
an interest in a direct participation program, a member or person associated
with a member shall:
(i) have reasonable grounds to believe, on the basis
of information obtained from the participant concerning his investment
objectives, other investments, financial situation and needs, and any
other information known by the member or associated person, that:
a. the participant is or will be in a
financial position appropriate to enable him to realize to a
significant extent the benefits described in the prospectus,
including the tax benefits where they are a significant aspect
of the program:
b. the participant has a fair market net
worth sufficient to sustain the risks inherent in the program,
including loss of investment and lack of liquidity; and
c. the program is otherwise suitable for the
participant; and
(ii) maintain in the files of the member documents
disclosing the basis upon which the determination of suitability was
reached as to each participant.
(C) Subparagraph 3(A) and 3(B) shall not apply to:
(i) a secondary public offering of or a secondary
market transaction in a unit, depositary receipt, or other
- 11 -
<PAGE> 12
interest in a direct participation program for which quotations are
displayed on the Nasdaq System or which is listed on a registered
national securities exchange, or
(ii) an initial public offering of a unit, depositary
receipt or other interest in a direct participation program for which
an application for inclusion on the Nasdaq System or listing on a
registered national securities exchange has been approved by Nasdaq or
such exchange and the applicant makes a good faith representation that
it believes such inclusion on Nasdaq or listing on an exchange will
occur within a reasonable period of time following the formation of the
program.
(D) Notwithstanding the provisions of subparagraphs (A) and
(B) hereof, no member shall execute any transaction in a direct
participation program in a discretionary account without prior written
approval of the transaction by the customer.
DISCLOSURE
(4)(A) Prior to participating in a public offering of a direct
participation program, a member or person associated with a member shall have
reasonable grounds to believe, based on information made available to him by the
sponsor through a prospectus or other materials, that all material facts are
adequately and accurately disclosed and provide a basis for evaluating the
program.
(B) In determining the adequacy of disclosed facts pursuant to
subparagraph (A) hereof, a member or person associated with a member shall
obtain information on material facts relating at a minimum to the following, if
relevant in view of the nature of the program:
(i) items of compensation;
(ii) physical properties;
(iii) tax aspects;
(iv) financial stability and experience of the
sponsor;
(v) the program's conflicts and risk factors; and
(vi) appraisals and other pertinent reports.
- 12 -
<PAGE> 13
(C) For purposes of subparagraphs (A) or (B) hereof, a member or person
associated with a member may rely upon the results of an inquiry conducted by
another member or members, provided that:
(i) the member or person associated with a member has
reasonable grounds to believe that such inquiry was conducted with due
care;
(ii) the results of the inquiry were provided to the
member or person associated with a member with the consent of the
member or members conducting or directing the inquiry; and
(iii) no member that participated in the inquiry is a
sponsor of the program or an affiliate of such sponsor.
(D) Prior to executing a purchase transaction in a direct participation
program, a member or person associated with a member shall inform the
prospective participant of all pertinent facts relating to the liquidity and
marketability of the program during the term of the investment; provided,
however, that this subsection shall not apply to an initial or secondary public
offering of or a secondary market transaction in a unit, depositary receipt or
other interest in a direct participation program which complies with
subparagraph 3(C).
- 13 -
<PAGE> 1
EXHIBIT 1.2
SOLICITING DEALER AGREEMENT
SMITH BARNEY DIVERSIFIED FUTURES FUND L. P. II
100,000 Units of Limited Partnership Interest
Ladies and Gentlemen:
We have entered into an agreement (the "Selling Agreement")
with, and have agreed to act as selling agent for, Smith Barney Diversified
Futures Fund L. P. II, a New York limited partnership (the "Partnership"), in
connection with the sale of up to 100,000 units of limited partnership interest
in the Partnership (the "Units"). The Units and the terms of the offering are
more fully described in the enclosed prospectus, receipt of which you hereby
acknowledge.
We are hereby inviting certain dealers, subject to the other
terms and conditions set forth below and in such Prospectus, to solicit
subscriptions for the Units. Such dealers who execute and deliver a Soliciting
Dealer Agreement are referred to herein as "Soliciting Dealers". You hereby
confirm that you are a member in good standing of the National Association of
Securities Dealers, Inc. (the "NASD") or if you are a non-member broker or
dealer in a country other than the United States, that you will comply with the
provisions of Article III, Sections 8, 24(c) and 36 of the Rules of Fair
Practice of the NASD (the "Rules") in making any sales to purchasers within the
United States to the same extent as if you were a member of the NASD and to
comply with Article III, Section 25 of the Rules as that Section applies to a
non-member broker/dealer in a country other than the United States. You hereby
confirm that you are registered with the National Futures Association ("NFA") as
an introducing broker or a futures commission merchant if you will receive any
portion of the commodity brokerage fees paid by the Partnership and any of your
associated persons who receive continuing compensation in the form of a portion
of the commodity brokerage commissions are duly registered with the NFA as an
associated person of a futures
<PAGE> 2
commission merchant or introducing broker (qualified as an associated person by
having taken the Series 3 Commodity Exam or having been "grandfathered" as an
associated person qualified to do commodities brokerage).
The public offering price of the Units is the Net Asset Value
per Unit during the Continuous Offering (as defined in the Selling Agreement),
with the minimum purchase being $5,000 except in the case of employee benefit
plans, as to which the minimum purchase is $2,000 (subject to higher minimum
investments required by certain states). You shall be paid as selling
commissions a total of up to approximately 85% of the amount of brokerage fees
attributable to Units sold by you.
In the event that the sale of Units for which you have
solicited a Subscription Agreement shall not occur, whether by reason of the
failure of any condition specified herein or in the Subscription Agreement or in
the Selling Agreement, rejection of the subscription by the Partnership or
otherwise, no commission in respect thereof shall be due. Commissions will be
payable only with respect to transactions lawful in the jurisdictions where they
occur.
You agree to retain in your records and make available to us
and the Partnership, for a period of at least six years, information
establishing that each purchaser of the Units pursuant to a Subscription
Agreement solicited by you is within the permitted class of investors under the
requirements set forth in the Prospectus, and under the requirements, if any, of
the jurisdiction in which such purchaser is a resident.
All subscriptions solicited by you will be subject to
acceptance by us and by the Partnership and we reserve the right in our
uncontrolled discretion to reject any such subscription, to accept or reject
subscriptions in the order of their receipt by the Partnership or otherwise, and
to allot. Neither you nor any other person is authorized to give any information
or make any representations other than those contained in the Prospectus in
connection with the sale of any of the Units. No Soliciting Dealer is authorized
to act as agent for us when offering any of the Units to the public or
otherwise, it being understood that you and each other Soliciting Dealer are
independent contractors with us. Nothing herein contained shall constitute you
or any other Soliciting Dealer an associate or partner with us.
-2-
<PAGE> 3
Upon release by us, you may offer the Units at the Price to
the Public set forth in the Prospectus, subject to the terms and conditions
hereof.
This Agreement shall terminate upon the termination of the
Selling Agreement, unless earlier terminated. We may terminate this Agreement at
any time by written or telegraphic notice.
We shall have full authority to take such action as we may
deem advisable in respect of all matters pertaining to the offering. We shall be
under no liability to you except for lack of good faith and for obligations
expressly assumed by us in this Agreement. Nothing contained in this paragraph
is intended to operate as, and the provisions of this paragraph shall not
constitute, a waiver by you of compliance with any provision of the Securities
Act of 1933, as amended (the "1933 Act"), or of the rules and regulations
thereunder.
Upon application to us, we will inform you as to the
jurisdictions in which we believe the Units have been qualified for sale under,
or are exempt from the requirements of, the respective securities laws of such
jurisdictions, but we assume no responsibility or obligation as to your right to
sell Units in any jurisdiction.
You confirm that you are familiar with Securities Act Release
No. 4968 and Rule 15c2-8 under the Securities Exchange Act of 1934 (the "1934
Act"), relating to the distribution of preliminary and final prospectuses, and
confirm that you have complied and will comply therewith, as well as with all
other applicable provisions of the 1933 Act and 1934 Act, and the rules and
regulations promulgated thereunder. We will make available to you, to the extent
they are made available to us by the Partnership, such number of copies of the
Prospectus as you may reasonably request for the purposes contemplated by the
1933 Act, the 1934 Act, and the applicable rules and regulations thereunder.
You confirm your obligation to transmit customer funds to the
escrow agent in accordance with Rule 15c2-4 under the 1934 Act and the National
Association of Securities Dealers, Inc.'s Notices to Members 84-7 and 84-64 and
87-61. Investors will be instructed to make checks payable to European American
Bank, Escrow Agent for Smith Barney Principal Plus Futures Fund L.
-3-
<PAGE> 4
P. II, Subscribers' Escrow Account No. 002-060739. Each Soliciting Dealer shall
promptly, upon receipt of checks, drafts or money orders from subscribers for
Units, transmit such checks, drafts or money orders, together with a copy of the
executed Subscription Agreement, to the Escrow Agent by noon of the second
business day after the General Partner receives the subscription documents for
purposes of a suitability determination, which documents were forwarded to the
General Partner by noon of the next business day following receipt of the check
by the Soliciting Dealer.
You represent to us that you have complied or will comply with
Sections 3 and 4 of Section 34 of the Rules of Fair Practice of the National
Association of Securities Dealers, Inc., which sections require as follows:
SUITABILITY
(3)(A) A member or person associated with a member shall not underwrite
or participate in a public offering of a direct participation program unless
standards of suitability have been established by the program for participants
therein and such standards are fully disclosed in the prospectus and are
consistent with the provisions of subparagraph (B) of this section.
(B) In recommending to a participant the purchase, sale or exchange of
an interest in a direct participation program, a member or person associated
with a member shall:
(i) have reasonable grounds to believe, on the basis of
information obtained from the participant concerning his investment,
objectives other investments, financial situation and needs, and any
other information known by the member or associated person, that:
a. the participant is or will be in a financial
position appropriate to enable him to realize to a
significant extent the benefits described in the
prospectus, including the tax benefits where they are a
significant aspect of the program:
b. the participant has a fair market net worth
sufficient to sustain the risks inherent in the
-4-
<PAGE> 5
program, including loss of investment and lack of
liquidity; and
c. the program is otherwise suitable for the
participant; and
(ii) maintain in the files of the member documents disclosing
the basis upon which the determination of suitability was reached as to
each participant.
(C) Subparagraph 3(A) and 3(B) shall not apply to:
(i) a secondary public offering of or a secondary market
transaction in a unit, depositary receipt, or other interest in a
direct participation program for which quotations are displayed on the
Nasdaq System or which is listed on a registered national securities
exchange, or
(ii) an initial public offering of a unit, depositary receipt
or other interest in a direct participation program for which an
application for inclusion on the Nasdaq System or listing on a
registered national securities exchange has been approved by Nasdaq or
such exchange and the applicant makes a goodfaith representation that
it believes such inclusion on Nasdaq or listing on an exchange will
occur within a reasonable period of time following the formation of the
program.
(D) Notwithstanding the provisions of subparagraphs (A) and (B) hereof,
no member shall execute any transaction in a direct participation program in a
discretionary account without prior written approval of the transaction by the
customer.
-5-
<PAGE> 6
DISCLOSURE
(4)(A) Prior to participating in a public offering of a direct
participation program, a member or person associated with a member shall have
reasonable grounds to believe, based on information made available to him by the
sponsor through a prospectus or other materials, that all material facts are
adequately and accurately disclosed and provide a basis for evaluating the
program.
(B) In determining the adequacy of disclosed facts pursuant to
subparagraph (A) hereof, a member or person associated with a member shall
obtain information on material facts relating at a minimum to the following, if
relevant in view of the nature of the program:
(i) items of compensation;
(ii) physical properties;
(iii) tax aspects;
(iv) financial stability and experience of the sponsor;
(v) the program's conflicts and risk factors; and
(vi) appraisals and other pertinent reports.
(C) For purposes of subparagraphs (A) or (B) hereof, a member or person
associated with a member may rely upon the results of an inquiry conducted by
another member or members, provided that:
(i) the member or person associated with a member has
reasonable grounds to believe that such inquiry was conducted with due
care;
(ii) the results of the inquiry were provided to the member or
person associated with a member with the consent of the member or
members conducting or directing the inquiry; and
(iii) no member that participated in the inquiry is a sponsor
of the program or an affiliate of such sponsor.
(D) Prior to executing a purchase transaction in a direct participation
program, a member or person associated with a member shall inform the
prospective participant of all pertinent facts relating to the liquidity and
marketability of the program during the term of the investment; provided,
however, that this
-6-
<PAGE> 7
subsection shall not apply to an initial or secondary public offering of or a
secondary market transaction in a unit, depositary receipt or other interest in
a direct participation program which complies with subparagraph 3(C).
Any notice from us to you shall be deemed to have been duly
given if mailed or telegraphed to you at the address to which this Agreement is
mailed.
Please confirm your agreement hereto by signing and returning
to us the enclosed duplicate of this letter. Upon receipt thereof, this letter
and such signed duplicate copy will evidence the agreement between us. Notice
will thereafter be given to the Partnership in order that you shall become a
party to the Selling Agreement.
Very truly yours,
SMITH BARNEY INC.
By
------------------------------------
AGREED AND ACCEPTED:
- -------------------------------------------
(Name of Soliciting Dealer)
By
-----------------------------------------
(Signature of Soliciting Dealer)
- -------------------------------------------
(Address to which all communications
are to be sent)
Dated as of April __, 1996
-7-
<PAGE> 1
EXHIBIT 5.1
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
May 28, 1996
Smith Barney Diversified Futures Fund L.P. II
c/o Smith Barney Futures Management Inc.
390 Greenwich Street - 1st Floor
New York, New York 10013
Re: Smith Barney Diversified Futures Fund L.P. II
Ladies and Gentlemen:
We have acted as counsel for Smith Barney Diversified Futures Fund L.P. II (the
"Partnership"), a limited partnership organized under the New York Revised
Limited Partnership Act (the "Act") in connection with the issuance and sale
(the "Offering") of up to 100,000 units of limited partnership interest in the
Partnership (the "Units").
In this connection, we have examined originals or photostatic or certified
copies of all such documents, records, certificates and agreements as we have
deemed relevant and necessary as a basis for the opinions hereinafter set forth.
On the basis of the foregoing, we are of the opinion that:
1. The Partnership is duly formed and validly existing as a limited partnership
under the Act.
2. Assuming (i) the due authorization, execution and delivery to the General
Partner of a Subscription Agreement by those persons and entities who subscribed
for Units in the offering described in the Prospectus (the "Limited
<PAGE> 2
Smith Barney Diversified
Futures Fund L.P. II
May 28, 1996
Page 2
Partners"), (ii) the due acceptance by the General Partner of a Subscription
Agreement for each Limited Partner and the due acceptance by the General Partner
of the Limited Partners to the Partnership as limited partners of the
Partnership, (iii) the payment by each Limited Partner to the Partnership of the
full consideration due from him or it for the Units subscribed to by him or it,
(iv) that the books and records of the Partnership set forth all information
required by the Limited Partnership Agreement (the "Agreement") and the Act,
including all information with respect to all persons and entities to be
admitted as Partners and their contributions to the Partnership, (v) that the
Limited Partners, as limited partners, do not participate in the control of the
business of the Partnership, and (vi) that the Units are offered and sold as
described in the Registration Statement and the Agreement, (a) the Units to be
issued to the Limited Partners will represent valid limited partnership
interests in the Partnership, as to which the Limited Partners, as limited
partners, will have no liability in excess of their obligations to make
contributions to the Partnership, their obligations to make other payments
provided for in the Agreement and their share of the Partnership's assets and
undistributed profits (subject to the obligation of a Limited Partner to repay
any funds wrongfully distributed to it), and (b) the Limited Partners will be
entitled to all of the benefits of limited partners as permitted under the Act.
3. There are no provisions in the Agreement the inclusion of which would cause
the Limited Partners to be deemed to be participating in the control of the
business of the Partnership.
We hereby consent to the inclusion of our opinion as an exhibit to the
Partnership's Registration Statement.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE> 1
EXHIBIT 8-1
WILLKIE FARR & GALLAGHER
153 East 53rd Street
New York, NY 10022
May 28, 1996
Smith Barney Diversified Futures Fund L.P. II
c/o Smith Barney Futures Management Inc.
390 Greenwich Street - 1st Floor
New York, New York 10013
Re: Smith Barney Diversified Futures Fund L.P. II
Ladies and Gentlemen:
We have acted as counsel for Smith Barney Diversified Futures Fund L.P. II, a
limited partnership organized under the New York Revised Limited Partnership Act
(the "Partnership"), in connection with the preparation and filing with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
of a registration statement on Form S-1 (the "Registration Statement"), relating
to the registration of 100,000 Units of Limited Partnership Interest in the
Partnership.
In so acting, we have reviewed such data, documents, statutes and regulations
and have considered such questions of law and fact as we have deemed pertinent
for purposes of this opinion. Based upon the foregoing, we are of the opinion
that the Partnership should be classified as a partnership for federal income
tax purposes and not as an association taxable as a corporation. In addition, we
hereby confirm to you our opinion under the caption "Income Tax Aspects" in the
Prospectus constituting part of the Registration Statement including, in
particular, the description of the consequences to an investor of the classified
form of the
<PAGE> 2
Smith Barney Principal Plus Futures Fund L.P.
May 28, 1996
Page 2
Partnership as a partnership for federal income tax purposes. This
opinion is based upon the facts as stated in the Registration Statement and the
current federal income tax law and regulations. No tax ruling has been obtained
from the Internal Revenue Service confirming this treatment and the General
Partner of the Partnership does not intend to request such a ruling.
We hereby consent to the inclusion of our opinion in the Partnership's
Registration Statement.
Very truly yours,
/s/ Willkie Farr & Gallagher
<PAGE> 1
EXHIBIT 10.1
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
c/o Smith Barney Futures Management Inc.
390 Greenwich Street
New York, NY 10013
May __, 1996
SMITH BARNEY INC.
390 Greenwich Street
New York, NY 10013
Re: Customer Agreement
Gentlemen:
Reference is made to the Customer Agreement ("Customer
Agreement") dated August 31, 1994, between Smith Barney Inc.
and Smith Barney Diversified Futures Fund L.P. II. This
letter sets forth our understanding with respect to the
following amendment to the Customer Agreement:
1. The fourth sentence of Section 4 of the Customer Agreement shall be amended
and restated to read as follows:
The Partnership will reimburse to SB from interest income the total amount of
offering and organizational expenses (but not selling commissions) of the
initial offering ($525,000) and the Continuous Offering in 1996, plus interest
at the prime rate quoted by The Chase Manhattan Bank N.A.
2. SB and the Partnership agree that the parties shall have the right to offset
any unrealized gains and losses on the Partnership's open positions and to net
any open orders for the purchase or sale of any property of the Partnership.
3. All other provisions of the Customer Agreement remain unchanged.
<PAGE> 2
SMITH BARNEY INC.
May __, 1996
Page 2
If you agree to the foregoing, please return a signed copy of this letter to the
undersigned.
Sincerely,
SMITH BARNEY DIVERSIFIED
FUTURES
FUND L.P. II
By: Smith Barney Futures
Management Inc.
its General Partner
By:_____________________________
Name:
Title:
ACCEPTED AND AGREED to
this ____ day of May, 1996
SMITH BARNEY INC.
By:___________________________
Name:
Title:
