UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended December 31, 1997
Commission File Number 0-22491
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
(Exact name of registrant as specified in its charter)
New York 13-3769020
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management Inc.
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 100,000 Units
of Limited
Partnership
Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [ ]
<PAGE>
PART I
Item 1. Business.
(a) General development of business. Smith Barney Diversified Futures Fund
L.P. II ("Partnership") is a limited partnership organized on May 10, 1994 under
the Partnership laws of the State of New York. The Partnership commenced trading
operations on January 17, 1996. The Partnership engages in speculative trading
of commodity interests, including forward contracts on foreign currencies,
commodity options and commodity futures contracts and other financial
instruments, foreign currencies and stock indices.
A Registration Statement on Form S-1 relating to the public offering
became effective on August 21, 1995. Beginning August 21, 1995, 100,000 Units of
Limited Partnership Interest ("Units") were publicly offered at $1,000 per Unit
for a period of ninety days, subject to increase for up to an additional sixty
days at the sole discretion of the General Partner. Between August 21, 1995
(commencement of the offering period) and January 16, 1996, 8,529 Units were
sold at $1,000 per Unit. Proceeds of the offering were held in an escrow account
and were transferred, along with the General Partner's contribution of $87,000
to the Partnership's trading account on January 17, 1996 when the Partnership
commenced trading. Sales of additional Units and additional General Partner's
contributions and redemptions of Units for the year ended December 31, 1997 are
reported in the Statement of Partners' Capital on page F-5 under "Item 8.
Financial Statements and
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Supplementary Data."
The General Partner has agreed to make capital contributions, if
necessary, so that its general partnership interest will be equal to the greater
of (i) an amount to entitle it to 1% of each material item of Partnership
income, loss, deduction or credit and (ii) the greater of (a) 1% of the
partners' contributions to the Partnership or (b) $25,000. The Partnership will
be liquidated upon the first of the following to occur: December 31, 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 of the Partnership (the "Limited Partnership Agreement").
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership and is a wholly owned subsidiary of Smith
Barney Inc. ("SB"). SB acts as commodity broker for the Partnership. On November
28, 1997, Smith Barney Holdings Inc. was merged with Salomon Inc to form Salomon
Smith Barney Holdings Inc. ("SSBH"), a wholly owned subsidiary of Travelers
Group Inc. SB is a wholly owned subsidiary of SSBH.
The Partnership's trading of futures contracts on commodities is done
primarily on United States and foreign commodity exchanges. It engages in such
trading through a commodity brokerage account maintained with SB.
As of December 31, 1997, all commodity trading decisions are made for the
Partnership by John W. Henry & Company, Inc. ("JWH"), Millburn Ridgefield
Corporation and Chesapeake Capital Corporation,
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Willowbridge Associates Inc. and ARA Portfolio Management Company, L.L.C.
(collectively, the "Advisors"). None of the Advisors is affiliated with the
General Partner or SB. The Advisors are not responsible for the organization or
operation of the Partnership. Willowbridge Associates Inc. and ARA Portfolio
Management Company, L.L.C. were added as advisors to the Partnership on May 1,
1997.
Pursuant to the terms of the Management Agreements (the "Management
Agreement"), the Partnership is obligated to pay each Advisor: (i) a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
that JWH will receive a monthly management fee equal to 1/3 of 1% (4% per year))
of the Partnership allocated to each Advisor as of the end of each month and
(ii) an incentive fee payable quarterly, equal to 20% of the New Trading Profits
(except JWH, which will receive an incentive fee of 15% of New Trading Profits)
(as defined in the Management Agreements) of the Partnership.
The Partnership has entered into a Customer Agreement with SB (the
"Customer Agreement") which provides that the Partnership will pay SB a monthly
brokerage fee equal to 1/2 of 1% of month-end Net Assets allocated to the
Advisors (6% per year) in lieu of brokerage commissions on a per trade basis. SB
also pays a portion of its brokerage fees to its financial consultants who have
sold Units and who are registered as associated persons with the Commodity
Futures Trading Commission (the "CFTC"). The Partnership pays for National
Futures Association ("NFA") fees, exchange and clearing fees, give-up and user
fees and floor brokerage fees. Brokerage fees will be
4
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paid for the life of the Partnership, although the rate at which such fees are
paid may be changed. The Customer Agreement between the Partnership and SB gives
the Partnership the legal right to net unrealized gains and losses.
In addition, SB pays the Partnership interest on 80% of the average daily
equity maintained in cash in its account during each month at a 30-day U.S.
Treasury bill rate determined weekly by SB based on the average non-competitive
yield on 3-month U.S. Treasury bills maturing in 30 days from the date on which
such weekly rate is determined. However, SB began paying interest to the
Partnership only after the amount of interest accrued equaled the total amount
of offering and organizational expenses paid by SB in connection with the
Partnership's offering plus interest at the prime rate quoted by The Chase
Manhattan Bank.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests (including, but not limited to, futures contracts, options and forward
contracts on U.S. Treasury Bills, other financial instruments, foreign
currencies, stock indices and physical commodities). The Partnership does not
engage in sales of goods or services. The Partnership's net income (loss) from
operations for the year ended December 31, 1997 and for the period from January
17, 1996 (commencement of trading operations) to December 31, 1996 is set forth
under "Item 6. Select Financial Data." The Partnership capital as of December
31, 1997 was $111,579,692.
5
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(c) Narrative description of business. See Paragraphs (a) and (b) above.
(i) through (x) - Not applicable. (xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Foreign and Domestic Operations and Export
Sales. The Partnership does not engage in sales of goods or services, and
therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, SB.
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Partnership is a party
or to which any of its assets is subject. No material legal proceedings
affecting the Partnership were terminated during the fiscal year. Item 4.
Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote during
the last fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Security
Holder Matters.
(a) Market Information. The Partnership has issued no
stock. There is no public market for the Units of
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Limited Partnership Interest.
(b) Holders. The number of holders of Units of Limited
Partnership Interest as of December 31, 1997 was
5,144.
(c) Distribution. The Partnership did not declare a distribution in
1997 or 1996.
Item 6. Select Financial Data. The Partnership commenced trading operations on
January 17, 1996. Realized and unrealized trading gains (losses), interest
income, net income (loss) and increase (decrease) in net asset value per Unit
for the year ended December 31, 1997 and for the period from January 17, 1996
(commencement of trading operations) to December 31, 1996 and total assets at
December 31, 1997 and 1996 were as follows:
1997 1996
------------- --------
Realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees of
$6,257,856 and $2,169,468,
respectively $ (461,654) $ 8,869,618
Interest Income 3,634,245 1,190,687
------------- -----------
$ 3,172,591 $10,060,305
============= ===========
Net Income (loss) $ (313,824) $ 7,582,653
============= ===========
Increase (decrease) in net asset
value per unit $(1.30) $185.99
======= =======
Total assets $113,547,434 $56,960,922
============= ===========
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(a) Liquidity. The Partnership does not engage in sales
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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 receivable.
Because of the low margin deposits normally required in commodity futures
trading, relatively small price movements may result in substantial losses to
the Partnership. Such substantial losses could lead to a material decrease in
liquidity. To minimize this risk, the Partnership will follow certain policies
including:
(1) Partnership funds are invested only in futures contracts which are
traded in sufficient volume to permit, in the opinion of the Advisors, ease of
taking and liquidating positions.
(2) The Partnership will not permit the churning of its commodity
trading accounts.
(3) No Advisor initiates additional positions in any commodity if such
additional positions would result in aggregate positions for all commodities
requiring as margin more than 66-2/3% of the Partnership's assets allocated to
the Advisor.
(4) The Partnership 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.
(5) The Partnership will not utilize borrowing except short-term
borrowing if the Partnership takes delivery of any cash commodities.
(6) The Advisor may, from time to time, employ trading
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strategies such as spread or straddles on behalf of the Partnership. The term
"spread" or "straddle" describes a commodity futures trading strategy involving
the simultaneous buying and selling of futures contracts on the same commodity
but involving different delivery dates or markets and in which the trader
expects to earn a profit from a widening or narrowing of the difference between
the prices of the two contracts.
The Partnership is party to financial instruments with off- balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
include forwards, futures and options, whose value is based upon an underlying
asset, index, or reference rate, and generally represent future commitments to
exchange currencies or cash flows, or to purchase or sell other financial
instruments at specified terms at specified future dates. Each of these
instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. The General
Partner monitors and controls the Partnership's risk exposure on a daily basis
through financial, credit and risk management monitoring systems and,
accordingly believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Partnership is subject. (See
also Item 8. Financial Statements and Supplementary Data., for further
information on financial instrument risk included in the notes to financial
statements.)
Other than the risks inherent in commodity futures trading,
9
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the Partnership knows of no trends demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, at its
discretion, cause the Partnership to cease trading operations and liquidate all
open positions upon the first to occur of the following: (i) December 31, 2014;
(ii) the vote dissolve the Partnership by limited partners owning more than 50%
of the Units; (iii) assignment by the General Partner of all of its interest in
the Partnership or withdrawal, removal, bankruptcy or any other event that
causes the General Partner to cease to be a general partner under the New York
Revised Limited Partnership Act unless the Partnership is continued as described
in the Limited Partnership Agreement; (iv) Net Asset Value per Unit falls to
less than $400 as of the end of any trading day; or (v) the occurrence of any
event which shall make it unlawful for the existence of the Partnership to be
continued.
(b) Capital resources. (i) The Partnership has made no material
commitments for capital expenditures.
(ii) The Partnership's capital consists of the capital contributions
of the partners as increased or decreased by gains or losses on commodity
trading, and by expenses, interest income, redemptions of Units and
distributions of profits, if any. Gains or losses on commodity futures trading
cannot be predicted. Market moves in commodities are dependent upon fundamental
and technical factors which the Partnership may or may not be able to
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identify. Partnership expenses will consist of, among other things, commissions,
management fees and incentive fees. The level of these expenses is dependent
upon the level of trading and the ability of the Advisors to identify and take
advantage of price movements in the commodity markets, in addition to the level
of net assets maintained. In addition, the amount of interest income payable by
SB is dependent upon interest rates over which the Partnership has no control.
No forecast can be made as to the level of redemptions in any given
period. Beginning June 30, 1996 a Limited Partner may cause all of his Units to
be redeemed by the Partnership at the Net Asset Value thereof as of the last day
of each month on ten days' written notice to the General Partner. No fee will be
charged for redemptions. For the year ended December 31, 1997, 11,519.2474 Units
were redeemed totaling $12,684,088. For the period ended December 31, 1996,
1,911.1385 Units were redeemed totaling $1,968,649.
The Partnership continues to offer Units at the Net Asset Value per Unit
as of the end of each month. For the year ended December 31, 1997, there were
additional sales of 61,154.0723 Units totaling $68,708,600 and contributions by
the General Partner representing 505.8725 Unit equivalents totaling $571,000.
For the period ended December 31, 1996, there were additional sales of
42,034.2002 Units totaling $41,190,000 and contributions by the General Partner
representing 411.0108 Unit equivalents totaling $402,000.
11
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(c) Results of Operations.
For the year ended December 31, 1997, the net asset value per Unit
decreased 0.1% from $1,125.06 to $1,123.76. For the period from January 17, 1996
(commencement of trading operations) to December 31, 1996, the net asset value
per Unit increased 19.8% from $939.07 to $1,125.06. There were no operations in
1995. The net asset value of $939.07 at commencement of trading operations is
reflective of charging offering and organizational expenses against the initial
capital of the Partnership for financial reporting purposes.
The Partnership experienced net trading gains of $5,796,202 before
commissions and expenses in 1997. These gains were attributable to gains
incurred in the trading of interest rates, metals, indices and foreign
currencies. However, these trading gains were partially offset by losses
experienced in the trading of energy, grains, livestock and softs.
The Partnership experienced net trading gains of $11,039,086 before
commissions and expenses in 1996. These gains were attributable to gains
incurred in the trading of interest rates, metals, energy and foreign
currencies. However, these trading gains were partially offset by losses
experienced in the trading of stock indices and agricultural commodity futures.
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.
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The profitability of the Partnership depends on the existence of major price
trends and the ability of the Advisors to identify those price trends correctly.
Price trends are influenced by, among other things, changing supply and demand
relationships, weather, governmental, agricultural, commercial and trade
programs and policies, national and international political and economic events
and changes in interest rates. To the extent that market trends exist and the
Advisors are able to identify them, the Partnership expects to increase capital
through operations.
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Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Independent Accountants. F-2
Financial Statements:
Statement of Financial Condition at
December 31, 1997 and 1996. F-3
Statement of Income and Expenses for
the year ended December 31,
1997 and for the period from January
17, 1996 (commencement of
trading operations) to December 31, 1996. F-4
Statement of Partners' Capital for
the years ended December 31, 1997,
1996 and 1995. F-5
Notes to Financial Statements. F-6 - F-11
F-1
Continued
<PAGE>
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, 1997 and 1996, and the related statements of income and expenses
for the year ended December 31, 1997 and for the period from January 17, 1996
(commencement of trading operations) to December 31, 1996, and of partners'
capital for the years ended December 31, 1997, 1996 and 1995. These financial
statements are the responsibility of the management of the General Partner. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. 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 audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Smith Barney Diversified
Futures Fund L.P. II as of December 31, 1997 and 1996, and the results of its
operations for the years ended December 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
March 6, 1998
F-2
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Smith Barney Diversified Futures Fund L.P. II
Statement of Financial Condition
December 31, 1997 and 1996
Assets: 1997 1996
Equity in commodity futures
trading account:
Cash and cash equivalents $104,013,967 $ 54,370,448
(Note 3c)
Net unrealized appreciation
on open futures contracts 8,931,038 1,981,313
Commodity options owned, at
market value (cost $144,827
and $420,667 in 1997 and 219,299 430,497
1996, respectively)
113,164,304 56,782,258
------------ ------------
Interest receivable 383,130 178,664
------------ ------------
$113,547,434 $ 56,960,922
------------ ------------
Liabilities and Partners'
Capital:
Liabilities:
Accrued expenses:
Commissions $ 578,625 $ 288,503
Management fees 263,105 133,127
Incentive fees 18,146 1,036,077
Other 67,467 47,744
Redemptions payable (Note 5) 1,040,399 145,230
Commodity options written, at
market value (premiums
received $28,124 in 1996) -- 12,237
------------ ------------
1,967,742 1,662,918
Partners' capital (Notes 1 and 7):
General Partner, 1,003.8833
and 498.0108 Unit
equivalents outstanding in
1997 and 1996, respectively 1,128,124 560,295
Limited Partners, 98,287.8866
and 48,653.0617 Units of
Limited Partnership
Interest outstanding in 1997
and 1996, respectively 110,451,568 54,737,709
------------ ------------
111,579,692 55,298,004
------------ ------------
$113,547,434 $ 56,960,922
------------ ------------
See notes to financial statements.
F-3
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Smith Barney Diversified Futures Fund L.P. II
Statement of Income and Expenses
for the year ended 1997 and
for the period from January 17, 1996 (commencement of
trading operations)
to December 31, 1996
1997 1996
Income:
Net gains (losses) on
trading of commodity
interests:
Realized gains
(losses) on closed positions $(1,202,278) $9,032,056
Change in unrealized
gains 6,998,480 2,007,030
on open positions
----------- -----------
5,796,202 11,039,086
Less, Brokerage
commissions and
clearing fees
($164,059 and $67,406,
respectively) (Note 3c) 6,257,856 2,169,468
----------- -----------
Net realized and
unrealized (461,654) 8,869,618
gains (losses)
Interest income
(Notes 3c and 6) 3,634,245 1,190,687
----------- -----------
3,172,591 10,060,305
Expenses:
Management fees (Note 2,545,702 866,887
3b)
Incentive fees (Note 3b) 314,930 1,199,948
Other expenses 625,783 119,553
Organization expense (Note 6) -- 291,264
----------- -----------
3,486,415 2,477,652
----------- -----------
Net income (loss) $(313,824) $7,582,653
----------- -----------
Net income (loss) per
Unit of Limited
Partnership Interest
and General Partner
Unit equivalent (Notes 1 and 7) $ (1.30) $ 185.99
----------- -----------
See notes to financial statements.
F-4
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Smith Barney Diversified
Futures Fund L.P. II
Statement of Partners' Capital
for the years ended
December 31, 1997, 1996 and 1995
Limited General
Partners Partner Total
Partners' capital at
December 31, 1994 $ 1,000 $ 1,000 $ 2,000
------------- ------------- -------------
Partners' capital at
December 31, 1995 1,000 1,000 2,000
Proceeds from offering
of 8,529
Units of Limited
Partnership Interest
and General Partner's
contribution
representing
86 Unit equivalents
(Note 1) 8,529,000 86,000 8,615,000
Offering and
organization costs (Note 6) (519,700) (5,300) (525,000)
------------- ------------- -------------
Opening Partnership
capital for operations 8,010,300 81,700 8,092,000
Net Income 7,506,058 76,595 7,582,653
Sale of 42,034.2002
Units of Limited
Partnership Interest
and General Partner's
contribution
representing 411.0108
Unit equivalents 41,190,000 402,000 41,592,000
Redemption of
1,911.1385 Units of
Limited Partnership
Interest (1,968,649) -- (1,968,649)
------------- ------------- -------------
Partners' capital at
December 31, 1996 54,737,709 560,295 55,298,004
Net Loss (310,653) (3,171) (313,824)
Sale of 61,154.0723
Units of Limited
Partnership Interest
and General Partner's
contribution
representing 505.8725
Unit equivalents 68,708,600 571,000 69,279,600
Redemption of
11,519.2474 Units of
Limited Partnership
Interest (12,684,088) -- (12,684,088)
------------- ------------- -------------
Partners' capital at
December 31, 1997 $ 110,451,568 $ 1,128,124 $ 111,579,692
------------- ------------- -------------
See notes to financial statements.
F-5
<PAGE>
Smith Barney Diversified
Futures Fund L.P. II
Notes to Financial Statements
1. Partnership Organization:
Smith Barney Diversified Futures Fund L.P. II (the "Partnership") is a
limited partnership which was organized on May 10, 1994 under the
partnership laws of the State of New York to engage in the speculative
trading of a diversified portfolio of commodity interests including futures
contracts, options and forward contracts. The commodity interests that are
traded by the Partnership are volatile and involve a high degree of market
risk.
Between August 21, 1995 (commencement of the offering period) and January
16, 1996, 8,529 Units of Limited Partnership Interest ("Units") were sold at
$1,000 per Unit. The proceeds of the initial offering were held in an escrow
account until January 17, 1996, at which time they were turned over to the
Partnership for trading. The Partnership continues to offer Units during the
continuous offering period. The Partnership is authorized to sell 100,000
Units during the public offering period of the Partnership.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership and is a wholly owned subsidiary of
Smith Barney Inc. ("SB"). SB acts as commodity broker for the Partnership
(see Note 3c). On November 28, 1997, Smith Barney Holdings Inc. was merged
with Salomon Inc to form Salomon Smith Barney Holdings Inc. ("SSBH"), a
wholly owned subsidiary of Travelers Group Inc. SB is a wholly owned
subsidiary of SSBH.
The General Partner and each limited partner share in the profits and losses
of the Partnership in proportion to the amount of partnership interest owned
by each except that no limited partner shall be liable for obligations of
the Partnership in excess of his initial capital contribution and profits,
if any, net of distributions.
The Partnership will be liquidated upon the first to occur of the following:
December 31, 2014; the net asset value of a Unit decreases to less than $400
as of a close of any business day; or under certain other circumstances as
defined in the Limited Partnership Agreement.
F-6
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2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at market value for
those commodity interests for which market quotations are readily
available or at fair value on the last business day of the year.
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 year. 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.
b. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
c. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
3. Agreements:
a. Limited Partnership Agreement:
The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make trading
decisions for the Partnership.
b. Management Agreements:
The General Partner, on behalf of the Partnership, has entered into
Management Agreements with John W. Henry & Company, Inc. ("JWH"),
Millburn Ridgefield Corporation, Chesapeake Capital Corporation,
Willowbridge Associates Inc. and ARA Portfolio Management Company,
L.L.C., (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
month-end Net Assets allocated to the Advisor (except JWH, which will
receive a monthly management fee equal to 1/3 of 1% (4% per year) of
month-end Net Assets). In addition, the Partnership is obligated to 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).
Willowbridge Associates Inc. and ARA Portfolio Management Company, L.L.C.
were added as Advisors to the Partnership on May 1, 1997.
F-7
<PAGE>
c. 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, in lieu of brokerage
commissions on a per trade basis. SB will pay a portion of brokerage fees
to its financial consultants who have sold Units in this Partnership.
Brokerage fees will be paid for the life of the Partnership, although the
rate at which such fees are paid may be changed. The Partnership will pay
for National Futures Association ("NFA") fees, exchange, clearing, user,
give-up and floor brokerage fees. All of the Partnership's assets are
deposited in the Partnership's account at SB. The Partnership's cash is
deposited by SB in segregated bank accounts as required by Commodity
Futures Trading Commission regulations. At December 31, 1997 and 1996,
the amount of cash held for margin requirements was $20,242,392 and
$6,904,509, respectively. 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 a 30-day U.S. Treasury bill rate determined weekly
by SB based on the average noncompetitive yield on 3-month U.S. Treasury
bills maturing in 30 days from the date on which such weekly rate is
determined. The Customer Agreement between the Partnership and SB gives
the Partnership the legal right to net unrealized gains and losses. The
Customer Agreement may be terminated upon notice by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity interests. The results of the Partnership's trading
activity are shown in the statement of income and expense.
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 December 31, 1997 and 1996 was $9,150,337 and $2,399,573,
respectively, and the average fair value during the year then ended, based
on monthly calculation was $5,938,920 and $2,965,883, respectively.
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner; however, beginning with the quarter ended June 30, 1996, a
limited partner may require the Partnership to redeem his Units at their Net
Asset Value as of the last day of any month on 10 days' notice to the
General Partner provided that no redemption may result in the limited
partner holding fewer than 3 Units after redemption is effected. There is no
fee charged to limited partners in connection with redemptions.
F-8
<PAGE>
6. Organization and Offering Costs:
Expenses related to the continuous offering of Units in 1997 totaled
$501,620 and are included in other expenses.
Offering and organization expenses of approximately $525,000 relating to the
issuance and marketing of Units during the initial offering period were
initially paid by SB and were charged against the initial capital of the
Partnership. In addition, expenses of $291,264 related to the continuous
offering of Units were incurred through December 31, 1996. As of December
31, 1996, the Partnership had reimbursed SB for all such expenses incurred
during the initial offering and continuous offering period (in addition to
interest at the prime rate quoted by the Chase Manhattan Bank totaling
approximately $20,929) from interest earned on funds held in its account.
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit for the year ended December 31, 1997
and for the period from January 17, 1996 (commencement of trading
operations) to December 31, 1996 were as follows:
<PAGE>
1997 1996
Net realized and
unrealized gains $ (0.92) $ 177.40
(losses)
Interest income 43.48 36.09
Expenses (43.86) (67.51)
Other -- 40.01
--------- ---------
Increase (decrease) (1.30) 185.99
for period
Net asset value per
Unit, beginning of period 1,125.06 939.07
--------- ---------
Net asset value per
Unit, end of period $1,123.76 $1,125.06
--------- ---------
8. Financial Instrument Risk:
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, or to purchase or
sell other financial instruments at specific terms at specified future
dates, or, in the case of derivative commodity instruments, to have a
reasonable possibility to be settled in cash or with another financial
instrument. These instruments may be traded on an exchange or
over-the-counter ("OTC"). Exchange traded instruments are standardized and
include futures and certain option contracts. OTC contracts are negotiated
between contracting parties and include forwards and certain options. Each
of these instruments is subject to various risks similar to those related to
the underlying financial instruments including market and credit risk. In
general, the risks associated with OTC contracts are greater than those
associated with exchange traded instruments because of the greater risk of
default by the counterparty to an OTC contract.
F-9
<PAGE>
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity
or security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as a counterparty to the
transactions. The Partnership's risk of loss in the event of counterparty
default is typically limited to the amounts recognized in the statement of
financial condition and not represented by the contract or notional amounts
of the instruments. The Partnership has concentration risk because the sole
counterparty or broker with respect to the Partnership's assets is 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. These monitoring systems allow the General Partner to
statistically analyze actual trading results with risk adjusted performance
indicators and correlation statistics. In addition, on-line monitoring
systems provide account analysis of futures, forwards and options positions
by sector, margin requirements, gain and loss transactions and collateral
positions.
The notional or contractual amounts of these instruments, while
appropriately not recorded in the financial statements, reflect the extent
of the Partnership's involvement in these instruments. At December 31, 1997,
the Partnership's commitment to purchase and sell these instruments was
$529,827,193 and $562,544,334, respectively, as detailed below. All of these
instruments mature within one year of December 31, 1997. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity. At December 31, 1997, the fair value of the Partnership's
derivatives, including options thereon, was $9,150,337, as detailed below.
F-10
<PAGE>
December 31, 1997
----------------------------------------
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair Value
Currencies:
-Exchange
Traded $ 16,384,721 $107,228,370 $ 480,324
Contracts
-OTC Contracts 51,178,514 103,210,400 451,488
Energy -- 35,726,058 1,910,464
Grains 7,962,725 10,551,808 79,029
Interest Rate 140,875,215 11,765,610 717,418
U.S
Interest Rate
Non-U.S 262,803,653 198,052,010 1,149,142
Livestock -- 7,732,038 262,598
Metals 21,841,650 52,955,116 2,665,247
Softs 26,105,281 19,193,510 888,328
Indices 2,675,434 16,129,414 546,299
------------ ------------ ------------
Total $529,827,193 $562,544,334 $ 9,150,337
------------ ------------ ------------
At December 31, 1996, the notional or contractual amounts of the Partnership's
commitment to purchase and sell these instruments was $287,865,518 and
$181,348,343, respectively, and the fair value of the Partnership's derivatives,
including options thereon, was $2,399,573 as detailed below.
F-11
<PAGE>
December 31, 1996
----------------------------------------
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair Value
Currencies:
-Exchange
Traded $ 12,752,114 $ 15,672,967 $ 596,711
Contracts
-OTC Contracts 48,300,653 72,590,507 393,543
Energy 12,060,803 -- 328,180
Grains 175,750 4,560,014 148,525
Interest Rate 54,062,085 4,098,651 (55,803)
U.S
Interest Rate
Non-U.S 137,083,934 42,405,484 (44,169)
Livestock 385,930 -- 840
Metals 7,349,851 23,421,538 416,746
Softs 7,984,383 8,534,913 28,892
Indices 7,710,015 10,064,269 586,108
------------ ------------ ------------
Total $287,865,518 $181,348,343 $ 2,399,573
------------ ------------ ------------
9. Subsequent Events:
Chesapeake Capital Corporation was terminated as an Advisor to the
Partnership on January 31, 1998. Campbell & Co., Inc. was added as an
Advisor on February 1, 1998.
F-11
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
During the last two fiscal years and any subsequent interim
period, no independent accountant who was engaged as the principal accountant to
audit the Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are
managed by its General Partner, Smith Barney Futures Management Inc. Investment
decisions will be made by John W. Henry & Company, Inc., Chesapeake Capital
Corporation, Millburn Ridgefield Corporation, Willowbridge Associates Inc. and
ARA Portfolio Management Company, L.L.C. (collectively, the "Advisors").
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by Smith Barney Futures Management Inc., its General Partner, which
receives compensation for its services, as set forth under "Item 1. Business."
SB, an affiliate of the General Partner, is the commodity broker for the
Partnership and receives brokerage commissions for such services, as described
under "Item 1. Business." Brokerage commissions and clearing fees of $6,257,856
were paid for the year ended December 31, 1997. Management fees and incentive
fees of $2,545,702 and $314,930, respectively, were paid to the Advisors for the
year ended December 31, 1997.
14
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
(a). Security ownership of certain beneficial owners.
As of March 1, 1998, the Partnership knows of no person who beneficially owns
more than 5% of the Units outstanding.
(b). Security ownership of management. Under the terms of the
Limited Partnership Agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns Units of general partnership interest
equivalent to 1,003.8833 Units (1.0%) of Limited Partnership Interest as of
December 31, 1997.
(c). Changes in control. None.
Item 13. Certain Relationship and Related Transactions.
Smith Barney Inc. and Smith Barney Futures Management Inc. would be
considered promoters for purposes of item 404 (d) of Regulation S-K. The nature
and the amounts of compensation each promoter will receive from the Partnership
are set forth under "Item 1. Business" and "Item 11. Executive Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1997 and
1996. Statement of Income and Expenses for the year ended
December 31, 1997 and for the period from January 17, 1996
(commencement of trading operations) to
15
<PAGE>
December 31, 1996.
Statement of Partners' Capital for the years ended December
31, 1997, 1996 and 1995.
(2) Financial Statement Schedules: Financial Data
Schedule for the year ended December 31, 1997.
(3) Exhibits:
3.1 - Limited Partnership Agreement (filed as Exhibit 3.1 to the
Registration Statement on Form S-1 (File No. 33-79244 and
incorporated herein by reference).
3.2 - Certificate of Limited Partnership of the
Partnership as filed in the office of the County
Clerk of New York County (filed as Exhibit 3.2 to
the Registration Statement on Form S-1 (Filed No.
33-79244) and incorporated herein by reference).
10.1- Customer Agreement between the Partnership and Smith Barney
(filed as Exhibit 10.1 to the Registration Statement on Form
S-1 (File No. 33-79244) and incorporated herein by reference).
10.2- Subscription Agreement (filed as Exhibit 10.2 to the
Registration Statement on Form S-1 (File No. 33-
29144) and incorporated herein by reference).
10.3- Escrow Instructions relating to escrow of
subscription funds (filed as Exhibit 10.3 to the
Registration Statement on Form S-1 (File No. 33-
79244) and incorporated herein by reference).
10.4- Management Agreement among the Partnership, the
16
<PAGE>
General Partner and Chesapeake Capital Corporation
(filed as Exhibit 10.5 to the Registration Statement
on Form S-1 (File No. 33-79244) and incorporated
herein by reference).
10.5- Management Agreement among the Partnership, the
General Partner and John W. Henry & Co. Inc. (filed
as Exhibit 10.6 to the Registration Statement on
Form S-1 (File No. 33-79244) and incorporated herein
by reference).
10.6- Management Agreement among the Partnership, the
General Partner and Millburn Ridgefield Corporation
(filed as Exhibit 10.7 to the Registration Statement
on Form S-1 (File No. 33-79244) and incorporated
herein by reference).
10.7- Management Agreement among the Partnership, the
General Partner and Willowbridge Associates Inc.
(filed herein).
10.8- Management Agreement among the Partnership, the General Partner
and ARA Portfolio Management Company, L.L.C.(filed herein).
10.9- Management Agreement among the Partnership, the
General Partner and Campbell & Co., Inc. (filed
herein).
10.10- Letters extending Management Agreements with John W. Henry &
Company , Inc., Chesapeake Capital Corporation and Millburn
Ridgefield Corporation. (filed herein).
10.11- Letter from General Partner terminating Management
Agreement with Chesapeake Capital Corporation (filed
herein).
(b) Reports on 8-K: None Filed.
17
<PAGE>
Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.
Annual Report to Limited Partners
18
<PAGE>
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 24th day of March 1998.
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 & Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel, Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael Schaefer /s/ Daniel A. Dantuono
Michael Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
19
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000923660
<NAME> Smith Barney Diversified Futures Fund L.P. II
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 104,013,967
<SECURITIES> 9,150,337
<RECEIVABLES> 383,130
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 113,547,434
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 113,547,434
<CURRENT-LIABILITIES> 1,967,742
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 111,579,692
<TOTAL-LIABILITY-AND-EQUITY> 113,547,434
<SALES> 0
<TOTAL-REVENUES> 3,172,591
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 3,486,415
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (313,824)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (313,824)
<EPS-PRIMARY> (1.30)
<EPS-DILUTED> 0
</TABLE>
MANAGEMENT AGREEMENT
AGREEMENT made as of the 30th day of April, 1997 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM"), SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P. II, a New York limited partnership (the
"Partnership") and ARA PORTFOLIO MANAGEMENT COMPANY L.L.C., a Delaware limited
liability company (the "Advisor").
W I T N E S S E T H :
WHEREAS, SBFM is the general partner of SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P. II, a limited partnership organized for the
purpose of speculative trading of commodity interests, including futures
contracts, options and forward contracts with the objective of achieving
substantial capital appreciation; and
WHEREAS, the Limited Partnership Agreement establishing the
Partnership (the "Limited Partnership Agreement") permits SBFM to delegate to
one or more commodity trading advisors SBFM's authority to make trading
decisions for the Partnership; and
WHEREAS, the Advisor is registered as a commodity trading
advisor with the Commodity Futures Trading Commission ("CFTC") and is a member
of the National Futures Association ("NFA"); and
WHEREAS, SBFM is registered as a commodity pool operator with
the CFTC and is a member of the NFA; and
WHEREAS, SBFM, the Partnership and the Advisor wish to enter
into this Agreement in order to set forth the terms and conditions upon which
the Advisor will render and implement advisory services in connection with the
conduct by the Partnership of its commodity trading activities during the term
of this Agreement;
NOW, THEREFORE, the parties agree as follows:
1. DUTIES OF THE ADVISOR. (a) Upon the commencement of trading
by the Advisor on behalf of the Partnership and for the period and on the terms
and conditions of this Agreement, the Advisor shall have sole authority and
responsibility, as one of the Partnership's agents and attorneys-in-fact, for
directing the investment and reinvestment of the assets and funds of the
Partnership allocated to it by the General Partner in commodity interests,
including commodity futures contracts, options and forward contracts. All such
trading on behalf of the Partnership shall be in accordance with the trading
strategies set forth in the Advisor's Disclosure Document dated February 28,
1997 and in accordance with the trading policies set forth in the Partnership's
Prospectus dated as of May 31, 1996 (as supplemented, the "Prospectus"),and as
such trading policies may be changed from time to time upon receipt by the
Advisor of prior written notice of such change and pursuant to the trading
strategy selected by SBFM to be utilized by the Advisor in managing the
Partnership's assets. SBFM has initially selected the Advisor's Gamma Program to
manage the Partnership's assets allocated to it. Any open positions or other
investments at the time of receipt of such notice of a change in trading policy
shall not be deemed to violate the changed policy and shall be closed or sold in
the ordinary course of trading. The Advisor may not deviate from the trading
policies set forth in the Prospectus without the prior written consent of the
Partnership given by SBFM. The Advisor makes no representation or warranty that
the trading to be directed by it for the Partnership will be profitable or will
not incur losses.
(b) SBFM acknowledges receipt of the Advisor's Disclosure
Document dated _____________, 199__ as filed with the CFTC. All trades made by
the Advisor for the account of the Partnership shall be made through such
commodity broker or brokers as SBFM shall direct, and the Advisor shall have no
authority or responsibility for selecting or supervising any such broker in
connection with the execution, clearance or confirmation of transactions for the
Partnership or for the negotiation of brokerage rates charged therefor. However,
the Advisor, with the prior written permission (by either original or fax copy)
of SBFM, may direct all trades in commodity futures and options to a futures
commission merchant or independent floor broker it chooses for execution with
instructions to give-up the trades to the broker designated by SBFM, provided
that the futures commission merchant or independent floor broker and any give-up
or floor brokerage fees are approved in advance by SBFM. All give-up or similar
fees relating to the foregoing shall be paid by the Partnership after all
parties have executed the relevant give-up agreements (by either original or fax
copy).
(c) The initial allocation of the Partnership's assets to the
Advisor will be made to the Advisor's Gamma Program. In the event the Advisor
wishes to use a trading system or methodology other than or in addition to the
system or methodology outlined in the Prospectus in connection with its trading
for the Partnership, either in whole or in part, it may not do so unless the
Advisor gives SBFM prior written notice of its intention to utilize such
different trading system or methodology and SBFM consents thereto in writing. In
addition, the Advisor will provide five days' prior written notice to SBFM of
any change in the trading system or methodology to be utilized for the
Partnership which the Advisor deems material. If the Advisor deems such change
in system or methodology or in markets traded to be material, the changed system
or methodology or markets traded will not be utilized for the Partnership
without the prior written consent of SBFM. In addition, the Advisor will notify
SBFM of any changes to the trading system or methodology that would require a
change in the description of the trading strategy or methods described in the
Prospectus. Further, the Advisor will provide the Partnership with a current
list of all commodity interests to be traded for the Partnership's account and
will not trade any additional commodity interests for such account without
providing notice thereof to SBFM and receiving SBFM's written approval. The
Advisor also agrees to provide SBFM, on a monthly basis, with a written report
of the assets under the Advisor's management together with all other matters
deemed by the Advisor to be material changes to its business not previously
reported to SBFM.
(d) The Advisor agrees to make all material disclosures to
the Partnership regarding itself and its principals as defined in Part 4 of the
CFTC's regulations ("principals"), shareholders, directors, officers and
employees, their trading performance and general trading methods, its customer
accounts (but not the identities of or identifying information with respect to
its customers) and otherwise as are required in the reasonable judgment of SBFM
to be made in any filings required by Federal or state law or NFA rule or order.
Notwithstanding Sections 1(d) and 4(d) of this Agreement, the Advisor is not
required to disclose the actual trading results of proprietary accounts of the
Advisor or its principals unless SBFM reasonably determines that such disclosure
is required in order to fulfill its fiduciary obligations to the Partnership or
the reporting, filing or other obligations imposed on it by Federal or state law
or NFA rule or order. The Partnership and SBFM acknowledge that the trading
advice to be provided by the Advisor is a property right belonging to the
Advisor and that they will keep all such advice confidential. Further, SBFM
agrees to treat as confidential any results of proprietary accounts and/or
proprietary information with respect to trading systems obtained from the
Advisor.
(e) The Advisor understands and agrees that SBFM may
designate other trading advisors for the Partnership and apportion or
reapportion to such other trading advisors the management of an amount of Net
Assets (as defined in Section 3(b) hereof) as it shall determine in its absolute
discretion. The designation of other trading advisors and the apportionment or
reapportionment of Net Assets to any such trading advisors pursuant to this
Section 1 shall neither terminate this Agreement nor modify in any regard the
respective rights and obligations of the parties hereunder.
(f) SBFM may, from time to time, in its absolute discretion,
select additional trading advisors and reapportion funds among the trading
advisors for the Partnership as it deems appropriate. SBFM shall use its best
efforts to make reapportionments, if any, as of the first day of a month. The
Advisor agrees that it may be called upon at any time promptly to liquidate
positions in SBFM's sole discretion so that SBFM may reallocate the
Partnership's assets, meet margin calls on the Partnership's account, fund
redemptions, or for any other reason, except that SBFM will not require the
liquidation of specific positions by the Advisor. SBFM will use its best efforts
to give two days' prior notice to the Advisor of any reallocations or
liquidations.
(g) The Advisor will not be liable for trading losses in the
Partnership's account including losses caused by errors; provided, however, that
(i) the Advisor will be liable to the Partnership with respect to losses
incurred due to errors committed or caused by it or any of its principals or
employees in communicating improper trading instructions or orders to any broker
on behalf of the Partnership and (ii) the Advisor will be liable to the
Partnership with respect to losses incurred due to errors committed or caused by
any executing broker (other than any SBFM affiliate) selected by the Advisor,
(it also being understood that SBFM, with the assistance of the Advisor, will
first attempt to recover such losses from the executing broker).
2. INDEPENDENCE OF THE ADVISOR. For all purposes herein, the
Advisor shall be deemed to be an independent contractor and, unless otherwise
expressly provided or authorized, shall have no authority to act for or
represent the Partnership in any way and shall not be deemed an agent, promoter
or sponsor of the Partnership, SBFM, or any other trading advisor. The Advisor
shall not be responsible to the Partnership, the General Partner, any trading
advisor or any limited partners for any acts or omissions of any other trading
advisor no longer acting as an advisor to the Partnership.
3. COMPENSATION. (a) In consideration of and as compensation
for all of the services to be rendered by the Advisor to the Partnership under
this Agreement, the Partnership shall pay the Advisor (i) an incentive fee
payable quarterly equal to 20% of New Trading Profits (as such term is defined
below) earned by the Advisor for the Partnership and (ii) a monthly fee for
professional management services equal to 1/6 of 1% (2% per year) of the
month-end Net Assets of the Partnership allocated to the Advisor.
(b) "Net Assets" shall have the meaning set forth in
Paragraph 7(d)(1) of the Limited Partnership Agreement dated as of May 19, 1994
and without regard to further amendments thereto, provided that in determining
the Net Assets of the Partnership on any date, no adjustment shall be made to
reflect any distributions, redemptions or incentive fees payable as of the date
of such determination.
(c) "New Trading Profits" shall mean the excess, if any, of
Net Assets managed by the Advisor 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 will be attributed to the
Advisor based on the Advisor's proportionate share of Net Assets. Ongoing
expenses above will not include expenses of litigation not involving the
activities of the Advisor on behalf of the Partnership. Ongoing expenses include
offering and organizational expenses of the Partnership. No incentive fee shall
be paid until the end of the first full calendar quarter of trading by the
Advisor on behalf of the Partnership, which fee shall be based on New Trading
Profits earned from the commencement of trading by the Advisor through the end
of the first full calendar quarter. Interest income earned, if any, will not be
taken into account in computing New Trading Profits earned by the Advisor. If
Net Assets allocated to the Advisor are reduced due to redemptions,
distributions or reallocations (net of additions), there will be a corresponding
proportional reduction in the related loss carryforward amount that must be
recouped before the Advisor is eligible to receive another incentive fee.
(d) Quarterly incentive fees and monthly management fees
shall be paid within twenty (20) business days following the end of the period,
as the case may be, for which such fee is payable. In the event of the
termination of this Agreement as of any date which shall not be the end of a
fiscal quarter or a calendar month, as the case may be, the quarterly incentive
fee shall be computed as if the effective date of termination were the last day
of the then current quarter and the monthly management fee shall be prorated to
the effective date of termination. If, during any month, the Partnership does
not conduct business operations or the Advisor is unable to provide the services
contemplated herein for more than two successive business days, the monthly
management fee shall be prorated by the ratio which the number of business days
during which SBFM conducted the Partnership's business operations or utilized
the Advisor's services bears in the month to the total number of business days
in such month.
(e) The provisions of this Paragraph 3 shall survive the
termination of this Agreement.
4. RIGHT TO ENGAGE IN OTHER ACTIVITIES. (a) The services
provided by the Advisor hereunder are not to be deemed exclusive. SBFM on its
own behalf and on behalf of the Partnership acknowledges that, subject to the
terms of this Agreement, the Advisor and its officers, directors, employees and
shareholder(s), may render advisory, consulting and management services to other
clients and accounts. The Advisor and its officers, directors, employees and
shareholder(s) shall be free to trade for their own accounts and to advise other
investors and manage other commodity accounts during the term of this Agreement
and to use the same information, computer programs and trading strategies,
programs or formulas which they obtain, produce or utilize in the performance of
services to SBFM for the Partnership. However, the Advisor represents, warrants
and agrees that it believes the rendering of such consulting, advisory and
management services to other accounts and entities will not require any material
change in the Advisor's basic trading strategies and will not affect the
capacity of the Advisor to continue to render services to SBFM for the
Partnership of the quality and nature contemplated by this Agreement.
(b) If, at any time during the term of this Agreement, the
Advisor is required to aggregate the Partnership's commodity positions with the
positions of any other person for purposes of applying CFTC- or exchange-imposed
speculative position limits, the Advisor agrees that it will promptly notify
SBFM if the Partnership's positions are included in an aggregate amount which
exceeds the applicable speculative position limit. The Advisor agrees that, if
its trading recommendations are altered because of the application of any
speculative position limits, it will not modify the trading instructions with
respect to the Partnership's account in such manner as to affect the Partnership
substantially disproportionately as compared with the Advisor's other accounts.
The Advisor further represents, warrants and agrees that under no circumstances
will it knowingly or deliberately use trading strategies or methods for the
Partnership that are inferior to strategies or methods employed for any other
client or account and that it will not knowingly or deliberately favor any
client or account managed by it over any other client or account in any manner,
it being acknowledged, however, that different trading strategies or methods may
be utilized for differing sizes of accounts, accounts with different trading
policies, accounts experiencing differing inflows or outflows of equity,
accounts which commence trading at different times, accounts which have
different portfolios or different fiscal years, accounts utilizing different
executing brokers and accounts with other differences, and that such differences
may cause divergent trading results.
(c) It is acknowledged that the Advisor and/or its officers,
employees, directors and shareholder(s) presently act, and it is agreed that
they may continue to act, as advisor for other accounts managed by them, and may
continue to receive compensation with respect to services for such accounts in
amounts which may be more or less than the amounts received from the
Partnership.
(d) The Advisor agrees that it shall make such information
available to SBFM respecting the performance of the Partnership's account as
compared to the performance of other accounts managed by the Advisor or its
principals as shall be reasonably requested by SBFM. The Advisor presently
believes and represents that existing speculative position limits will not
materially adversely affect its ability to manage the Partnership's account
given the potential size of the Partnership's account and the Advisor's and its
principals' current accounts and all proposed accounts for which they have
contracted to act as trading manager.
5. TERM. (a) This Agreement shall continue in effect until
June 30, 1997. SBFM may, in its sole discretion, renew this Agreement for
additional one-year periods upon notice to the Advisor not less than 30 days
prior to the expiration of the previous period. At any time during the term of
this Agreement, SBFM may terminate this Agreement at any month-end upon 30 days'
notice to the Advisor. At any time during the term of this Agreement, SBFM may
elect to immediately terminate this Agreement upon 30 days' notice to the
Advisor if (i) the Net Asset Value per Unit shall decline as of the close of
business on any day to $400 or less; (ii) the Net Assets allocated to the
Advisor (adjusted for redemptions, distributions, withdrawals or reallocations,
if any) decline by 50% or more as of the end of a trading day from such Net
Assets' previous highest value; (iii) limited partners owning at least 50% of
the outstanding Units shall vote to require SBFM to terminate this Agreement;
(iv) the Advisor fails to comply with the terms of this Agreement; (v) SBFM, in
good faith, reasonably determines that the performance of the Advisor has been
such that SBFM's fiduciary duties to the Partnership require SBFM to terminate
this Agreement; or (vi) SBFM reasonably believes that the application of
speculative position limits will substantially affect the performance of the
Partnership. At any time during the term of this Agreement, SBFM may elect
immediately to terminate this Agreement if (i) the Advisor merges, consolidates
with another entity, sells a substantial portion of its assets, or becomes
bankrupt or insolvent, except as provided in Section 10 hereof, (ii) A. Rajpal
Arulpragasam dies, becomes incapacitated, leaves the employ of the Advisor,
ceases to control the Advisor or is otherwise not managing the trading programs
or systems of the Advisor, or (iii) the Advisor's registration as a commodity
trading advisor with the CFTC or its membership in the NFA or any other
regulatory authority, is terminated or suspended. This Agreement will
immediately terminate upon dissolution of the Partnership or upon cessation of
trading prior to dissolution.
(b) The Advisor may terminate this Agreement by giving not
less than 30 days' notice to SBFM (i) in the event that the trading policies of
the Partnership as set forth in the Prospectus are changed in such manner that
the Advisor reasonably believes will adversely affect the performance of its
trading strategies; (ii) after June 30, 1997; (iii) in the event that the
General Partner or Partnership fails to comply with the terms of this Agreement;
or (iv) in the event the assets allocated to the Advisor to manage in the
Partnership falls below Two Million Dollars ($2,000,000). The Advisor may
immediately terminate this Agreement if SBFM's registration as a commodity pool
operator or its membership in the NFA is terminated or suspended.
(c) Except as otherwise provided in this Agreement, any
termination of this Agreement in accordance with this Paragraph 5 or Paragraph
1(e) shall be without penalty or liability to any party, except for any fees due
to the Advisor pursuant to Section 3 hereof.
6. INDEMNIFICATION. (a)(i) In any threatened, pending or
completed action, suit, or proceeding to which the Advisor was or is a party or
is threatened to be made a party arising out of or in connection with this
Agreement or the management of the Partnership's assets by the Advisor or the
offering and sale of units in the Partnership, SBFM shall, subject to
subparagraph (a)(iii) of this Paragraph 6, indemnify and hold harmless the
Advisor against any loss, liability, damage, cost, expense (including, without
limitation, attorneys' and accountants' fees), judgments and amounts paid in
settlement actually and reasonably incurred by it in connection with such
action, suit, or proceeding if the Advisor acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership, and provided that its conduct did not constitute negligence,
intentional misconduct, or a breach of its fiduciary obligations to the
Partnership as a commodity trading advisor, unless and only to the extent that
the court or administrative forum in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the Advisor is fairly and reasonably
entitled to indemnity for such expenses which such court or administrative forum
shall deem proper; and further provided that no indemnification shall be
available from the Partnership if such indemnification is prohibited by Section
16 of the Partnership Agreement. The termination of any action, suit or
proceeding by judgment, order or settlement shall not, of itself, create a
presumption that the Advisor did not act in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership.
(ii) Without limiting sub-paragraph (i) above, to the extent
that the Advisor has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subparagraph (i) above, or in
defense of any claim, issue or matter therein, SBFM shall indemnify it against
the expenses (including, without limitation, attorneys' and accountants' fees)
actually and reasonably incurred by it in connection therewith.
(iii) Any indemnification under subparagraph (i) above,
unless ordered by a court or administrative forum, shall be made by SBFM only as
authorized in the specific case and only upon a determination by independent
legal counsel in a written opinion that such indemnification is proper in the
circumstances because the Advisor has met the applicable standard of conduct set
forth in subparagraph (i) above. Such independent legal counsel shall be
selected by SBFM in a timely manner, subject to the Advisor's approval, which
approval shall not be unreasonably withheld. The Advisor will be deemed to have
approved SBFM's selection unless the Advisor notifies SBFM in writing, received
by SBFM within five days of SBFM's telecopying to the Advisor of the notice of
SBFM's selection, that the Advisor does not approve the selection.
(iv) In the event the Advisor is made a party to any claim,
dispute or litigation or otherwise incurs any loss or expense as a result of, or
in connection with, the Partnership's or SBFM's activities or claimed activities
unrelated to the Advisor, SBFM shall indemnify, defend and hold harmless the
Advisor against any loss, liability, damage, cost or expense (including, without
limitation, attorneys' and accountants' fees) incurred in connection therewith.
(v) As used in this Paragraph 6(a), the terms "Advisor" shall
include the Advisor, its principals, officers, directors, stockholders and
employees and the term "SBFM" shall include the Partnership.
(b)(i) The Advisor agrees to indemnify, defend and hold
harmless SBFM, the Partnership and their affiliates against any loss, liability,
damage, cost or expense (including, without limitation, attorneys' and
accountants' fees), judgments and amounts paid in settlement actually and
reasonably incurred by them (A) as a result of the material breach of any
material representations and warranties made by the Advisor in this Agreement,
or (B) as a result of any act or omission of the Advisor relating to the
Partnership if there has been a final judicial or regulatory determination or,
in the event of a settlement of any action or proceeding with the prior written
consent of the Advisor, a written opinion of an arbitrator pursuant to Paragraph
14 hereof, to the effect that such acts or omissions violated the terms of this
Agreement in any material respect or involved negligence, bad faith,
recklessness or intentional misconduct on the part of the Advisor (except as
otherwise provided in Section 1(g)).
(ii) In the event SBFM, the Partnership or any of their
affiliates is made a party to any claim, dispute or litigation or otherwise
incurs any loss or expense as a result of, or in connection with, the activities
or claimed activities of the Advisor or its principals, officers, directors,
shareholder(s) or employees unrelated to SBFM's or the Partnership's business,
the Advisor shall indemnify, defend and hold harmless SBFM, the Partnership or
any of their affiliates against any loss, liability, damage, cost or expense
(including, without limitation, attorneys' and accountants' fees) incurred in
connection therewith.
(iii) A. Rajpal Arulpragasam or William L. Brown shall have
no liability to the Partnership or SBFM or any of their respective officers,
directors, employees, partners or affiliates under this Agreement or in
connection with the transactions contemplated by this Agreement except in the
case of his own fraud or willful misconduct.
(c) In the event that a person entitled to indemnification
under this Paragraph 6 is made a party to an action, suit or proceeding alleging
both matters for which indemnification can be made hereunder and matters for
which indemnification may not be made hereunder, such person shall be
indemnified only for that portion of the loss, liability, damage, cost or
expense incurred in such action, suit or proceeding which relates to the matters
for which indemnification can be made.
(d) None of the indemnifications contained in this Paragraph
6 shall be applicable with respect to default judgments, confessions of judgment
or settlements entered into by the party claiming indemnification without the
prior written consent, which shall not be unreasonably withheld, of the party
obligated to indemnify such party.
(e) The provisions of this Paragraph 6 shall survive the
termination of this Agreement.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) The Advisor represents and warrants that:
(i) All references to the Advisor and its principals in the
Prospectus are accurate in all material respects and as to them the Prospectus
does not contain any untrue statement of a material fact or omit to state a
material fact which is necessary to make the statements therein not misleading,
except that with respect to Table B in the Prospectus, this representation and
warranty extends only to the underlying data made available by the Advisor for
the preparation thereof and not to any hypothetical or pro forma adjustments.
Subject to such exception, all references to the Advisor and its principals in
the Prospectus will, after review and approval of such references by the Advisor
prior to the use of such Prospectus in connection with the offering of the
Partnership's units, be accurate in all material respects.
(ii) The information with respect to the Advisor set forth in
the actual performance tables in the Prospectus is based on all of the customer
accounts managed on a discretionary basis by the Advisor's principals and/or the
Advisor during the period covered by such tables and required to be disclosed
therein.
(iii) The Advisor will be acting as a commodity trading
advisor with respect to the Partnership and not as a securities investment
adviser and is duly registered with the CFTC as a commodity trading advisor, is
a member of the NFA, and is in compliance with such other registration and
licensing requirements as shall be necessary to enable it to perform its
obligations hereunder, and agrees to maintain and renew such registrations and
licenses during the term of this Agreement.
(iv) The Advisor is a limited liability company duly
organized, validly existing and in good standing under the laws of the State of
Delaware and has full power and authority to enter into this Agreement and to
provide the services required of it hereunder.
(v) The Advisor will not, by acting as a commodity trading
advisor to the Partnership, breach or cause to be breached any undertaking,
agreement, contract, statute, rule or regulation to which it is a party or by
which it is bound.
(vi) This Agreement has been duly and validly authorized,
executed and delivered by the Advisor and is a valid and binding agreement
enforceable in accordance with its terms.
(vii) At any time during the term of this Agreement that a
prospectus relating to the Units is required to be delivered in connection with
the offer and sale thereof, the Advisor agrees upon the request of SBFM to
provide the Partnership with such information as shall be necessary so that, as
to the Advisor and its principals, such prospectus is accurate.
(b) SBFM represents and warrants for itself and the
Partnership that:
(i) The Prospectus (as from time to time amended or
supplemented, which amendment or supplement is approved by the Advisor as to
descriptions of itself and its actual performance) does not contain any untrue
statement of a material fact or omit to state a material fact which is necessary
to make the statements therein not misleading, except that the foregoing
representation does not apply to any statement or omission concerning the
Advisor in the Prospectus, made in reliance upon, and in conformity with,
information furnished to SBFM by or on behalf of the Advisor expressly for use
in the Prospectus (it being understood that the hypothetical and pro forma
adjustments in Table B were not furnished by the Advisor).
(ii) It is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has full corporate
power and authority to perform its obligations under this Agreement.
(iii) SBFM and the Partnership have the capacity and
authority to enter into this Agreement on behalf of the Partnership.
(iv) This Agreement has been duly and validly authorized,
executed and delivered on SBFM's and the Partnership's behalf and is a valid and
binding agreement of SBFM and the Partnership enforceable in accordance with its
terms.
(v) SBFM will not, by acting as General Partner to the
Partnership and the Partnership will not, breach or cause to be breached any
undertaking, agreement, contract, statute, rule or regulation to which it is a
party or by which it is bound which would materially limit or affect the
performance of its duties under this Agreement.
(vi) It is registered as a commodity pool operator and is a
member of the NFA, and it will maintain and renew such registration and
membership during the term of this Agreement.
(vii) The Partnership is a limited partnership duly organized
and validly existing under the laws of the State of New York and has full power
and authority to enter into this Agreement and to perform its obligations under
this Agreement.
8. COVENANTS OF THE ADVISOR, SBFM AND THE PARTNERSHIP.
(a) The Advisor agrees as follows:
(i) In connection with its activities on behalf of the
Partnership, the Advisor will comply with all applicable rules and regulations
of the CFTC and/or the commodity exchange on which any particular transaction is
executed.
(ii) The Advisor will promptly notify SBFM of the
commencement of any material suit, action or proceeding involving it, whether or
not any such suit, action or proceeding also involves SBFM.
(iii) In the placement of orders for the Partnership's
account and for the accounts of any other client, the Advisor will utilize a
pre-determined, systematic, fair and reasonable order entry system, which shall,
on an overall basis, be no less favorable to the Partnership than to any other
account managed by the Advisor. The Advisor acknowledges its obligation to
review the Partnership's positions, prices and equity in the account managed by
the Advisor daily and within two business days to notify, in writing, the broker
and SBFM and the Partnership's brokers of (i) any error committed by the Advisor
or its principals or employees; (ii) any trade which the Advisor believes was
not executed in accordance with its instructions; and (iii) any discrepancy with
a value of $10,000 or more (due to differences in the positions, prices or
equity in the account) between its records and the information reported on the
account's daily and monthly broker statements.
(iv) The Advisor will maintain a net worth of not less than
$400,000 during the term of this Agreement.
(b) SBFM agrees for itself and the Partnership that:
(i) SBFM and the Partnership will comply with all applicable
rules and regulations of the CFTC and/or the commodity exchange on which any
particular transaction is executed.
(ii) SBFM will promptly notify the Advisor of the
commencement of any material suit, action or proceeding involving it or the
Partnership, whether or not such suit, action or proceeding also involves the
Advisor.
9. COMPLETE AGREEMENT. This Agreement constitutes the entire
agreement between the parties pertaining to the subject matter hereof.
10. ASSIGNMENT. This Agreement may not be assigned by any
party without the express written consent of the other parties.
11. AMENDMENT. This Agreement may not be amended except by the
written consent of the parties.
12. NOTICES. All notices, demands or requests required to be
made or delivered under this Agreement shall be in writing and delivered
personally or by registered or certified mail or expedited courier, return
receipt requested, postage prepaid, to the addresses below or to such other
addresses as may be designated by the party entitled to receive the same by
notice similarly given:
If to SBFM:
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, New York 10013
Attention: David J. Vogel
If to the Advisor:
ARA Portfolio Management Company LLC
195 Church Street
9th floor
New Haven, Connecticut 06510-2009
Attention: A. Rajpal Arulpragasam
13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
14. ARBITRATION. The parties agree that any dispute or
controversy arising out of or relating to this Agreement or the interpretation
thereof, shall be settled by arbitration in accordance with the rules, then in
effect, of the National Futures Association or, if the National Futures
Association shall refuse jurisdiction, then in accordance with the rules, then
in effect, of the American Arbitration Association; provided, however, that the
power of the arbitrator shall be limited to interpreting this Agreement as
written and the arbitrator shall state in writing his reasons for his award.
Judgment upon any award made by the arbitrator may be entered in any court of
competent jurisdiction.
15. NO THIRD PARTY BENEFICIARIES. There are no third party
beneficiaries to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
SMITH BARNEY FUTURES MANAGEMENT INC.
By: /s/ David J. Vogel
David J. Vogel
President and Director
SMITH BARNEY 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
ARA PORTFOLIO MANAGEMENT COMPANY LLC
By: /s/ A. R. Arulpragasam___
Name: A. R. Arulpragasam
Title: President
MANAGEMENT AGREEMENT
AGREEMENT made as of the 30th day of January, 1998 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM"), SMITH BARNEY
DIVERSIFIED FUTURES FUND L. P. II, a New York limited partnership (the
"Partnership") and CAMPBELL & COMPANY, INC., a Maryland corporation (the
"Advisor").
W I T N E S S E T H :
WHEREAS, SBFM is the general partner of Smith Barney
Diversified Futures Fund L. P. II, a limited partnership organized for the
purpose of speculative trading of commodity interests, including futures
contracts, options and forward contracts with the objective of achieving
substantial capital appreciation; and
WHEREAS, the Limited Partnership Agreement establishing the
Partnership (the "Limited Partnership Agreement") permits SBFM to delegate to
one or more commodity trading advisors SBFM's authority to make trading
decisions for the Partnership; and
WHEREAS, the Advisor is registered as a commodity trading
advisor with the Commodity Futures Trading Commission ("CFTC") and is a member
of the National Futures Association ("NFA"); and
WHEREAS, SBFM is registered as a commodity pool operator with
the CFTC and is a member of the NFA; and
WHEREAS, SBFM, the Partnership and the Advisor wish to enter
into this Agreement in order to set forth the terms and conditions upon which
the Advisor will render and implement advisory services in connection with the
conduct by the Partnership of its commodity trading activities during the term
of this Agreement;
NOW, THEREFORE, the parties agree as follows:
1. DUTIES OF THE ADVISOR. (a) For the period and on the terms
and conditions of this Agreement, the Advisor shall have sole authority and
responsibility, as one of the Partnership's agents and attorneys-in-fact, for
directing the investment and reinvestment of the assets and funds of the
Partnership allocated to it by the General Partner in commodity interests,
including commodity futures contracts, options and forward contracts. All such
trading on behalf of the Partnership shall be in accordance with the trading
strategies and trading policies set forth in the Prospectus and Disclosure
Document to be dated on or about February 1, 1998, as supplemented (the
"Prospectus"), and as such trading policies may be changed from time to time
upon receipt by the Advisor of prior written notice of such change and pursuant
to the trading strategy selected by SBFM to be utilized by the Advisor in
managing the Partnership's assets. SBFM has initially selected the Advisor's
Financial, Metal and Energy Large Portfolio to manage the Partnership's assets
allocated to it. Any open positions or other investments at the time of receipt
of such notice of a change in trading policy shall not be deemed to violate the
changed policy and shall be closed or sold in the ordinary course of trading.
The Advisor may not deviate from the trading policies set forth in the
Prospectus without the prior written consent of the Partnership given by SBFM.
The Advisor makes no representation or warranty that the trading to be directed
by it for the Partnership will be profitable or will not incur losses.
(b) SBFM acknowledges receipt of the Advisor's Disclosure
Document dated January 20, 1998 as filed with the NFA and CFTC. All trades made
by the Advisor for the account of the Partnership shall be made through such
commodity broker or brokers as SBFM shall direct, and the Advisor shall have no
authority or responsibility for selecting or supervising any such broker in
connection with the execution, clearance or confirmation of transactions for the
Partnership or for the negotiation of brokerage rates charged therefor. However,
the Advisor, with the prior written permission (by either original or fax copy)
of SBFM, may direct all trades in commodity futures and options to a futures
commission merchant or independent floor broker it chooses for execution with
instructions to give-up the trades to the broker designated by SBFM, provided
that the futures commission merchant or independent floor broker and any give-up
or floor brokerage fees are approved in advance by SBFM. All give-up or similar
fees relating to the foregoing shall be paid by the Partnership after all
parties have executed the relevant give-up agreements (by either original or fax
copy).
(c) The initial allocation of the Partnership's assets to the
Advisor will be made to the Advisor's Financial, Metal and Energy Large
Portfolio. In the event the Advisor wishes to use a trading system or
methodology other than or in addition to the system or methodology outlined in
the Prospectus in connection with its trading for the Partnership, either in
whole or in part, it may not do so unless the Advisor gives SBFM prior written
notice of its intention to utilize such different trading system or methodology
and SBFM consents thereto in writing. In addition, the Advisor will provide five
days' prior written notice to SBFM of any change in the trading system or
methodology to be utilized for the Partnership which the Advisor deems material.
If the Advisor deems such change in system or methodology or in markets traded
to be material, the changed system or methodology or markets traded will not be
utilized for the Partnership without the prior written consent of SBFM. In
addition, the Advisor will notify SBFM of any changes to the trading system or
methodology that would require a change in the description of the trading
strategy or methods described in the Prospectus. Further, the Advisor will
provide the Partnership with a current list of all commodity interests to be
traded for the Partnership's account and will not trade any additional commodity
interests for such account without providing notice thereof to SBFM and
receiving SBFM's written approval. The Advisor also agrees to provide SBFM, on a
monthly basis, with a written report of the assets under the Advisor's
management together with all other matters deemed by the Advisor to be material
changes to its business not previously reported to SBFM.
(d) The Advisor agrees to make all material disclosures to the
Partnership regarding itself and its principals as defined in Part 4 of the
CFTC's regulations ("principals"), shareholders, directors, officers and
employees, their trading performance and general trading methods, its customer
accounts (but not the identities of or identifying information with respect to
its customers) and otherwise as are required in the reasonable judgment of SBFM
to be made in any filings required by Federal or state law or NFA rule or order.
Notwithstanding Sections 1(d) and 4(d) of this Agreement, the Advisor is not
required to disclose the actual trading results of proprietary accounts of the
Advisor or its principals unless SBFM reasonably determines that such disclosure
is required in order to fulfill its fiduciary obligations to the Partnership or
the reporting, filing or other obligations imposed on it by Federal or state law
or NFA rule or order. The Partnership and SBFM acknowledge that the trading
advice to be provided by the Advisor is a property right belonging to the
Advisor and that they will keep all such advice confidential. Further, SBFM
agrees to treat as confidential any results of proprietary accounts and/or
proprietary information with respect to trading systems obtained from the
Advisor.
(e) The Advisor understands and agrees that SBFM may designate
other trading advisors for the Partnership and apportion or reapportion to such
other trading advisors the management of an amount of Net Assets (as defined in
Section 3(b) hereof) as it shall determine in its absolute discretion. The
designation of other trading advisors and the apportionment or reapportionment
of Net Assets to any such trading advisors pursuant to this Section 1 shall
neither terminate this Agreement nor modify in any regard the respective rights
and obligations of the parties hereunder. The Advisor may terminate this
Agreement immediately if the Net Assets of the Partnership managed by the
Advisor fall below $500,000 (after adjustment for trading losses and
redemptions).
(f) SBFM may, from time to time, in its absolute discretion,
select additional trading advisors and reapportion funds among the trading
advisors for the Partnership as it deems appropriate. SBFM shall use its best
efforts to make reapportionments, if any, as of the first day of a month. The
Advisor agrees that it may be called upon at any time promptly to liquidate
positions in SBFM's sole discretion so that SBFM may reallocate the
Partnership's assets, meet margin calls on the Partnership's account, fund
redemptions, or for any other reason, except that SBFM will not require the
liquidation of specific positions by the Advisor. SBFM will use its best efforts
to give two days' prior notice to the Advisor of any reallocations or
liquidations.
(g) The Advisor will not be liable for trading losses in the
Partnership's account including losses caused by errors; provided, however, that
(i) the Advisor will be liable to the Partnership with respect to losses
incurred due to errors committed or caused by it or any of its principals or
employees in communicating improper trading instructions or orders to any broker
on behalf of the Partnership and (ii) the Advisor will be liable to the
Partnership with respect to losses incurred due to errors committed or caused by
any executing broker (other than any SBFM affiliate) selected by the Advisor;
notwithstanding the foregoing, the Advisor's liability in the aggregate shall in
no event exceed $500,000 for the errors of executing brokers selected by the
Advisor (other than SBFM affiliates), (it also being understood that SBFM, with
the assistance of the Advisor, will first attempt to recover such losses from
the executing broker). The liability limit will be subject to review and
revision (i) each June 30th; and (ii) each time an additional allocation of the
Partnership's assets is made to the Advisor.
2. INDEPENDENCE OF THE ADVISOR. For all purposes herein, the
Advisor shall be deemed to be an independent contractor and, unless otherwise
expressly provided or authorized, shall have no authority to act for or
represent the Partnership in any way and shall not be deemed an agent, promoter
or sponsor of the Partnership, SBFM, or any other trading advisor. The Advisor
shall not be responsible to the Partnership, the General Partner, any trading
advisor or any limited partners for any acts or omissions of any other trading
advisor, whether or not they are still acting as an advisor to the Partnership.
3. COMPENSATION. (a) In consideration of and as compensation
for all of the services to be rendered by the Advisor to the Partnership under
this Agreement, the Partnership shall pay the Advisor (i) an incentive fee
payable quarterly equal to 20% of New Trading Profits (as such term is defined
below) earned by the Advisor for the Partnership and (ii) a monthly fee for
professional management services equal to 1/6 of 1% (2% per year) of the
month-end Net Assets of the Partnership allocated to the Advisor.
(b) "Net Assets" shall have the meaning set forth in Paragraph
7(d)(1) of the Limited Partnership Agreement dated as of May 19, 1994, amended
as of August 8, 1994, and amended and restated as of July 31, 1995 and without
regard to further amendments thereto, provided that in determining the Net
Assets of the Partnership on any date, no adjustment shall be made to reflect
any distributions, redemptions or incentive fees payable as of the date of such
determination.
(c) "New Trading Profits" shall mean the excess, if any, of
Net Assets managed by the Advisor 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 will be attributed to the
Advisor based on the Advisor's proportionate share of Net Assets. Ongoing
expenses above will not include expenses of litigation not involving the
activities of the Advisor on behalf of the Partnership. Ongoing expenses include
offering and organizational expenses of the Partnership. No incentive fee shall
be paid until the end of the first full calendar quarter of trading, which fee
shall be based on New Trading Profits earned from the commencement of trading
operations by the Partnership through the end of the first full calendar
quarter. Interest income earned, if any, will not be taken into account in
computing New Trading Profits earned by the Advisor. If Net Assets allocated to
the Advisor are reduced due to redemptions, distributions or reallocations (net
of additions), there will be a corresponding proportional reduction in the
related loss carryforward amount that must be recouped before the Advisor is
eligible to receive another incentive fee.
(d) Quarterly incentive fees and monthly management fees shall
be paid within twenty (20) business days following the end of the period, as the
case may be, for which such fee is payable. In the event of the termination of
this Agreement as of any date which shall not be the end of a fiscal quarter or
a calendar month, as the case may be, the quarterly incentive fee shall be
computed as if the effective date of termination were the last day of the then
current quarter and the monthly management fee shall be prorated to the
effective date of termination. If, during any month, the Partnership does not
conduct business operations or the Advisor is unable to provide the services
contemplated herein for more than two successive business days, the monthly
management fee shall be prorated by the ratio which the number of business days
during which SBFM conducted the Partnership's business operations or utilized
the Advisor's services bears in the month to the total number of business days
in such month.
(e) The provisions of this Paragraph 3 shall survive the
termination of this Agreement.
4. RIGHT TO ENGAGE IN OTHER ACTIVITIES. (a) The services
provided by the Advisor hereunder are not to be deemed exclusive. SBFM on its
own behalf and on behalf of the Partnership acknowledges that, subject to the
terms of this Agreement, the Advisor and its officers, directors, employees and
shareholder(s), may render advisory, consulting and management services to other
clients and accounts. The Advisor and its officers, directors, employees and
shareholder(s) shall be free to trade for their own accounts and to advise other
investors and manage other commodity accounts during the term of this Agreement
and to use the same information, computer programs and trading strategies,
programs or formulas which they obtain, produce or utilize in the performance of
services to SBFM for the Partnership. However, the Advisor represents, warrants
and agrees that it believes the rendering of such consulting, advisory and
management services to other accounts and entities will not require any material
change in the Advisor's basic trading strategies and will not affect the
capacity of the Advisor to continue to render services to SBFM for the
Partnership of the quality and nature contemplated by this Agreement.
(b) If, at any time during the term of this Agreement, the
Advisor is required to aggregate the Partnership's commodity positions with the
positions of any other person for purposes of applying CFTC- or exchange-imposed
speculative position limits, the Advisor agrees that it will promptly notify
SBFM if the Partnership's positions are included in an aggregate amount which
exceeds the applicable speculative position limit. The Advisor agrees that, if
its trading recommendations are altered because of the application of any
speculative position limits, it will not modify the trading instructions with
respect to the Partnership's account in such manner as to affect the Partnership
substantially disproportionately as compared with the Advisor's other accounts.
The Advisor further represents, warrants and agrees that under no circumstances
will it knowingly or deliberately use trading strategies or methods for the
Partnership that are inferior to strategies or methods employed for any other
client or account and that it will not knowingly or deliberately favor any
client or account managed by it over any other client or account in any manner,
it being acknowledged, however, that different trading strategies or methods may
be utilized for differing sizes of accounts, accounts with different trading
policies, accounts experiencing differing inflows or outflows of equity,
accounts which commence trading at different times, accounts which have
different portfolios or different fiscal years, accounts utilizing different
executing brokers and accounts with other differences, and that such differences
may cause divergent trading results.
(c) It is acknowledged that the Advisor and/or its officers,
employees, directors and shareholder(s) presently act, and it is agreed that
they may continue to act, as advisor for other accounts managed by them, and may
continue to receive compensation with respect to services for such accounts in
amounts which may be more or less than the amounts received from the
Partnership.
(d) The Advisor agrees that it shall make such information
available to SBFM respecting the performance of the Partnership's account as
compared to the performance of other accounts managed by the Advisor or its
principals as shall be reasonably requested by SBFM. The Advisor presently
believes and represents that existing speculative position limits will not
materially adversely affect its ability to manage the Partnership's account
given the potential size of the Partnership's account and the Advisor's and its
principals' current accounts and all proposed accounts for which they have
contracted to act as trading manager.
5. TERM. (a) This Agreement shall continue in effect until
June 30, 1998. SBFM may, in its sole discretion, renew this Agreement for
additional one-year periods upon notice to the Advisor not less than 30 days
prior to the expiration of the previous period. At any time during the term of
this Agreement, SBFM may terminate this Agreement at any month-end upon 30 days'
notice to the Advisor. At any time during the term of this Agreement, SBFM may
elect to immediately terminate this Agreement upon 30 days' notice to the
Advisor if (i) the Net Asset Value per Unit shall decline as of the close of
business on any day to $400 or less; (ii) the Net Assets allocated to the
Advisor (adjusted for redemptions, distributions, withdrawals or reallocations,
if any) decline by 50% or more as of the end of a trading day from such Net
Assets' previous highest value; (iii) limited partners owning at least 50% of
the outstanding Units shall vote to require SBFM to terminate this Agreement;
(iv) the Advisor fails to comply with the terms of this Agreement; (v) SBFM, in
good faith, reasonably determines that the performance of the Advisor has been
such that SBFM's fiduciary duties to the Partnership require SBFM to terminate
this Agreement; or (vi) SBFM reasonably believes that the application of
speculative position limits will substantially affect the performance of the
Partnership. At any time during the term of this Agreement, SBFM may elect
immediately to terminate this Agreement if (i) the Advisor merges, consolidates
with another entity, sells a substantial portion of its assets, or becomes
bankrupt or insolvent, except as provided in Section 10 hereof, (ii) D. Keith
Campbell dies, becomes incapacitated, leaves the employ of the Advisor, ceases
to control the Advisor or is otherwise not managing the trading programs or
systems of the Advisor, or (iii) the Advisor's registration as a commodity
trading advisor with the CFTC or its membership in the NFA or any other
regulatory authority, is terminated or suspended. This Agreement will
immediately terminate upon dissolution of the Partnership or upon cessation of
trading prior to dissolution.
<PAGE>
(b) The Advisor may terminate this Agreement by giving not
less than 30 days' notice to SBFM (i) in the event that the trading policies of
the Partnership as set forth in the Prospectus are changed in such manner that
the Advisor reasonably believes will adversely affect the performance of its
trading strategies; (ii) after June 30, 1998; or (iii) in the event that the
General Partner or Partnership fails to comply with the terms of this Agreement.
The Advisor may immediately terminate this Agreement if SBFM's registration as a
commodity pool operator or its membership in the NFA is terminated or suspended.
(c) Except as otherwise provided in this Agreement, any
termination of this Agreement in accordance with this Paragraph 5 or Paragraph
1(e) shall be without penalty or liability to any party, except for any fees due
to the Advisor pursuant to Section 3 hereof.
6. INDEMNIFICATION. (a)(i) In any threatened, pending or
completed action, suit, or proceeding to which the Advisor was or is a party or
is threatened to be made a party arising out of or in connection with this
Agreement or the management of the Partnership's assets by the Advisor or the
offering and sale of units in the Partnership, SBFM shall, subject to
subparagraph (a)(iii) of this Paragraph 6, indemnify and hold harmless the
Advisor against any loss, liability, damage, cost, expense (including, without
limitation, attorneys' and accountants' fees), judgments and amounts paid in
settlement actually and reasonably incurred by it in connection with such
action, suit, or proceeding if the Advisor acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership, and provided that its conduct did not constitute negligence,
intentional misconduct, or a breach of its fiduciary obligations to the
Partnership as a commodity trading advisor, unless and only to the extent that
the court or administrative forum in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the Advisor is fairly and reasonably
entitled to indemnity for such expenses which such court or administrative forum
shall deem proper; and further provided that no indemnification shall be
available from the Partnership if such indemnification is prohibited by Section
16 of the Partnership Agreement. The termination of any action, suit or
proceeding by judgment, order or settlement shall not, of itself, create a
presumption that the Advisor did not act in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership.
(ii) Without limiting sub-paragraph (i) above, to the extent
that the Advisor has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subparagraph (i) above, or in
defense of any claim, issue or matter therein, SBFM shall indemnify it against
the expenses (including, without limitation, attorneys' and accountants' fees)
actually and reasonably incurred by it in connection therewith.
(iii) Any indemnification under subparagraph (i) above, unless
ordered by a court or administrative forum, shall be made by SBFM only as
authorized in the specific case and only upon a determination by independent
legal counsel in a written opinion that such indemnification is proper in the
circumstances because the Advisor has met the applicable standard of conduct set
forth in subparagraph (i) above. Such independent legal counsel shall be
selected by SBFM in a timely manner, subject to the Advisor's approval, which
approval shall not be unreasonably withheld. The Advisor will be deemed to have
approved SBFM's selection unless the Advisor notifies SBFM in writing, received
by SBFM within five days of SBFM's telecopying to the Advisor of the notice of
SBFM's selection, that the Advisor does not approve the selection.
(iv) In the event the Advisor is made a party to any claim,
dispute or litigation or otherwise incurs any loss or expense as a result of, or
in connection with, the Partnership's or SBFM's activities or claimed activities
unrelated to the Advisor, SBFM shall indemnify, defend and hold harmless the
Advisor against any loss, liability, damage, cost or expense (including, without
limitation, attorneys' and accountants' fees) incurred in connection therewith.
(v) As used in this Paragraph 6(a), the terms "Advisor" shall
include the Advisor, its principals, officers, directors, stockholders and
employees and the term "SBFM" shall include the Partnership.
(b)(i) The Advisor agrees to indemnify, defend and hold
harmless SBFM, the Partnership and their affiliates against any loss, liability,
damage, cost or expense (including, without limitation, attorneys' and
accountants' fees), judgments and amounts paid in settlement actually and
reasonably incurred by them (A) as a result of the material breach of any
material representations and warranties made by the Advisor in this Agreement,
or (B) as a result of any act or omission of the Advisor relating to the
Partnership if there has been a final judicial or regulatory determination or,
in the event of a settlement of any action or proceeding with the prior written
consent of the Advisor, a written opinion of an arbitrator pursuant to Paragraph
14 hereof, to the effect that such acts or omissions violated the terms of this
Agreement in any material respect or involved negligence, bad faith,
recklessness or intentional misconduct on the part of the Advisor (except as
otherwise provided in Section 1(g)).
(ii) In the event SBFM, the Partnership or any of their
affiliates is made a party to any claim, dispute or litigation or otherwise
incurs any loss or expense as a result of, or in connection with, the activities
or claimed activities of the Advisor or its principals, officers, directors,
shareholder(s) or employees unrelated to SBFM's or the Partnership's business,
the Advisor shall indemnify, defend and hold harmless SBFM, the Partnership or
any of their affiliates against any loss, liability, damage, cost or expense
(including, without limitation, attorneys' and accountants' fees) incurred in
connection therewith.
(iii) D. Keith Campbell shall have no liability to the
Partnership or SBFM or any of their respective officers, directors, employees,
partners or affiliates under this Agreement or in connection with the
transactions contemplated by this Agreement except in the case of fraud or
willful misconduct by D. Keith Campbell.
(c) In the event that a person entitled to indemnification
under this Paragraph 6 is made a party to an action, suit or proceeding alleging
both matters for which indemnification can be made hereunder and matters for
which indemnification may not be made hereunder, such person shall be
indemnified only for that portion of the loss, liability, damage, cost or
expense incurred in such action, suit or proceeding which relates to the matters
for which indemnification can be made.
(d) None of the indemnifications contained in this Paragraph 6
shall be applicable with respect to default judgments, confessions of judgment
or settlements entered into by the party claiming indemnification without the
prior written consent, which shall not be unreasonably withheld, of the party
obligated to indemnify such party.
(e) The provisions of this Paragraph 6 shall survive the
termination of this Agreement.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) The Advisor represents and warrants that:
(i) All references to the Advisor and its principals in the
Prospectus are accurate in all material respects and as to them the Prospectus
does not contain any untrue statement of a material fact or omit to state a
material fact which is necessary to make the statements therein not misleading,
except that with respect to Table B in the Prospectus, this representation and
warranty extends only to the underlying data made available by the Advisor for
the preparation thereof and not to any hypothetical or pro forma adjustments.
Subject to such exception, all references to the Advisor and its principals in
the Prospectus will, after review and approval of such references by the Advisor
prior to the use of such Prospectus in connection with the offering of the
Partnership's units, be accurate in all material respects.
(ii) The information with respect to the Advisor set forth in
the actual performance tables in the Prospectus is based on all of the customer
accounts managed on a discretionary basis by the Advisor's principals and/or the
Advisor during the period covered by such tables and required to be disclosed
therein.
(iii) The Advisor will be acting as a commodity trading
advisor with respect to the Partnership and not as a securities investment
adviser and is duly registered with the CFTC as a commodity trading advisor, is
a member of the NFA, and is in compliance with such other registration and
licensing requirements as shall be necessary to enable it to perform its
obligations hereunder, and agrees to maintain and renew such registrations and
licenses during the term of this Agreement.
(iv) The Advisor is a corporation duly organized, validly
existing and in good standing under the laws of the State of Maryland and has
full power and authority to enter into this Agreement and to provide the
services required of it hereunder.
(v) The Advisor will not, by acting as a commodity trading
advisor to the Partnership, breach or cause to be breached any undertaking,
agreement, contract, statute, rule or regulation to which it is a party or by
which it is bound.
(vi) This Agreement has been duly and validly authorized,
executed and delivered by the Advisor and is a valid and binding agreement
enforceable in accordance with its terms.
(vii) At any time during the term of this Agreement that a
prospectus relating to the Units is required to be delivered in connection with
the offer and sale thereof, the Advisor agrees upon the request of SBFM to
provide the Partnership with such information as shall be necessary so that, as
to the Advisor and its principals, such prospectus is accurate.
(b) SBFM represents and warrants for itself and the
Partnership that:
(i) The Prospectus (as from time to time amended or
supplemented, which amendment or supplement is approved by the Advisor as to
descriptions of itself and its actual performance) does not contain any untrue
statement of a material fact or omit to state a material fact which is necessary
to make the statements therein not misleading, except that the foregoing
representation does not apply to any statement or omission concerning the
Advisor in the Prospectus, made in reliance upon, and in conformity with,
information furnished to SBFM by or on behalf of the Advisor expressly for use
in the Prospectus (it being understood that the hypothetical and pro forma
adjustments in Table B were not furnished by the Advisor).
(ii) It is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has full corporate
power and authority to perform its obligations under this Agreement.
(iii) SBFM and the Partnership have the capacity and authority
to enter into this Agreement on behalf of the Partnership.
(iv) This Agreement has been duly and validly authorized,
executed and delivered on SBFM's and the Partnership's behalf and is a valid and
binding agreement of SBFM and the Partnership enforceable in accordance with its
terms.
(v) SBFM will not, by acting as General Partner to the
Partnership and the Partnership will not, breach or cause to be breached any
undertaking, agreement, contract, statute, rule or regulation to which it is a
party or by which it is bound which would materially limit or affect the
performance of its duties under this Agreement.
(vi) It is registered as a commodity pool operator and is a
member of the NFA, and it will maintain and renew such registration and
membership during the term of this Agreement.
(vii) The Partnership is a limited partnership duly organized
and validly existing under the laws of the State of New York and has full power
and authority to enter into this Agreement and to perform its obligations under
this Agreement.
8. COVENANTS OF THE ADVISOR, SBFM AND THE PARTNERSHIP.
(a) The Advisor agrees as follows:
(i) In connection with its activities on behalf of the
Partnership, the Advisor will comply with all applicable rules and regulations
of the CFTC and/or the commodity exchange on which any particular transaction is
executed.
(ii) The Advisor will promptly notify SBFM of the commencement
of any material suit, action or proceeding involving it, whether or not any such
suit, action or proceeding also involves SBFM.
(iii) In the placement of orders for the Partnership's account
and for the accounts of any other client, the Advisor will utilize a
pre-determined, systematic, fair and reasonable order entry system, which shall,
on an overall basis, be no less favorable to the Partnership than to any other
account managed by the Advisor. The Advisor acknowledges its obligation to
review the Partnership's positions, prices and equity in the account managed by
the Advisor daily and within two business days to notify, in writing, the broker
and SBFM and the Partnership's brokers of (i) any error committed by the Advisor
or its principals or employees; (ii) any trade which the Advisor believes was
not executed in accordance with its instructions; and (iii) any discrepancy with
a value of $10,000 or more (due to differences in the positions, prices or
equity in the account) between its records and the information reported on the
account's daily and monthly broker statements.
(iv) The Advisor will maintain a net worth of not less than
$2,000,000 during the term of this Agreement.
(b) SBFM agrees for itself and the Partnership that:
(i) SBFM and the Partnership will comply with all applicable
rules and regulations of the CFTC and/or the commodity exchange on which any
particular transaction is executed.
(ii) SBFM will promptly notify the Advisor of the commencement
of any material suit, action or proceeding involving it or the Partnership,
whether or not such suit, action or proceeding also involves the Advisor.
9. COMPLETE AGREEMENT. This Agreement constitutes the entire
agreement between the parties pertaining to the subject matter hereof.
10. ASSIGNMENT. This Agreement may not be assigned by any
party without the express written consent of the other parties.
11. AMENDMENT. This Agreement may not be amended except by the
written consent of the parties.
12. NOTICES. All notices, demands or requests required to be
made or delivered under this Agreement shall be in writing and delivered
personally or by registered or certified mail or expedited courier, return
receipt requested, postage prepaid, to the addresses below or to such other
addresses as may be designated by the party entitled to receive the same by
notice similarly given:
If to SBFM:
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, New York 10013
Attention: David J. Vogel
If to the Advisor:
Campbell & Company, Inc.
210 West Pennsylvania Avenue
Baltimore, Maryland 21204
Attention: Ms. Michelle Rader
13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
14. ARBITRATION. The parties agree that any dispute or
controversy arising out of or relating to this Agreement or the interpretation
thereof, shall be settled by arbitration in accordance with the rules, then in
effect, of the National Futures Association or, if the National Futures
Association shall refuse jurisdiction, then in accordance with the rules, then
in effect, of the American Arbitration Association; provided, however, that the
power of the arbitrator shall be limited to interpreting this Agreement as
written and the arbitrator shall state in writing his reasons for his award.
Judgment upon any award made by the arbitrator may be entered in any court of
competent jurisdiction.
<PAGE>
15. NO THIRD PARTY BENEFICIARIES. There are no third party
beneficiaries to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
SMITH BARNEY FUTURES
MANAGEMENT INC.
By /s/ DAVID J. VOGEL
David J. Vogel
President and Director
SMITH BARNEY 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
CAMPBELL & COMPANY, INC.
By /s/ BRUCE L. CLELAND
Bruce L. Cleland
President
MANAGEMENT AGREEMENT
AGREEMENT made as of the 30th day of April, 1997 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM"), SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P. II, a New York limited partnership (the
"Partnership") and WILLOWBRIDGE ASSOCIATES INC., a Delaware corporation (the
"Advisor").
W I T N E S S E T H :
WHEREAS, SBFM is the general partner of SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P. II, a limited partnership organized for the
purpose of speculative trading of commodity interests, including futures
contracts, options and forward contracts with the objective of achieving
substantial capital appreciation; and
WHEREAS, the Limited Partnership Agreement establishing the
Partnership (the "Limited Partnership Agreement") permits SBFM to delegate to
one or more commodity trading advisors SBFM's authority to make trading
decisions for the Partnership; and
WHEREAS, the Advisor is registered as a commodity trading
advisor with the Commodity Futures Trading Commission ("CFTC") and is a member
of the National Futures Association ("NFA"); and
WHEREAS, SBFM is registered as a commodity pool operator with
the CFTC and is a member of the NFA; and
WHEREAS, SBFM, the Partnership and the Advisor wish to enter
into this Agreement in order to set forth the terms and conditions upon which
the Advisor will render and implement advisory services in connection with the
conduct by the Partnership of its commodity trading activities during the term
of this Agreement;
NOW, THEREFORE, the parties agree as follows:
1. DUTIES OF THE ADVISOR. (a) Upon the commencement of trading
by the Advisor on behalf of the Partnership and for the period and on the terms
and conditions of this Agreement, the Advisor shall have sole authority and
responsibility, as one of the Partnership's agents and attorneys-in-fact, for
directing the investment and reinvestment of the assets and funds of the
Partnership allocated to it by the General Partner in commodity interests,
including commodity futures contracts, options and forward contracts. All such
trading on behalf of the Partnership shall be in accordance with the trading
strategies set forth in the Advisor's Disclosure Document dated October 29, 1996
and in accordance with the trading policies set forth in the Partnership's
Prospectus dated as of May 31, 1996 (as supplemented, the "Prospectus"),and as
such trading policies may be changed from time to time upon receipt by the
Advisor of prior written notice of such change and pursuant to the trading
strategy selected by SBFM to be utilized by the Advisor in managing the
Partnership's assets. SBFM has initially selected the Advisor's Select
Investment Program using the Argo Trading System to manage the Partnership's
assets allocated to it. Any open positions or other investments at the time of
receipt of such notice of a change in trading policy shall not be deemed to
violate the changed policy and shall be closed or sold in the ordinary course of
trading. The Advisor may not deviate from the trading policies set forth in the
Prospectus without the prior written consent of the Partnership given by SBFM.
The Advisor makes no representation or warranty that the trading to be directed
by it for the Partnership will be profitable or will not incur losses. SBFM and
the Partnership each acknowledge that the Advisor may utilize exchange for
physicals transactions in its trading for the Partnership.
(b) SBFM acknowledges receipt of the Advisor's Disclosure
Document dated October 29, 1996 as filed with the CFTC. All trades made by the
Advisor for the account of the Partnership shall be made through such commodity
broker or brokers as SBFM shall direct, and the Advisor shall have no authority
or responsibility for selecting or supervising any such broker in connection
with the execution, clearance or confirmation of transactions for the
Partnership or for the negotiation of brokerage rates charged therefor. However,
the Advisor, with the prior written permission (by either original or fax copy)
of SBFM, may direct all trades in commodity futures and options to a futures
commission merchant or independent floor broker it chooses for execution with
instructions to give-up the trades to the broker designated by SBFM, provided
that the futures commission merchant or independent floor broker and any give-up
or floor brokerage fees are approved in advance by SBFM. All give-up or similar
fees relating to the foregoing shall be paid by the Partnership after all
parties have executed the relevant give-up agreements (by either original or fax
copy) and the Advisor shall have no responsibility for such payment. SBFM will
cause the Partnership's commodity brokers to provide the Advisor with copies of
all confirmation, purchase and sale, monthly and similar statements at the time
such statements are available to SBFM.
(c) The initial allocation of the Partnership's assets to the
Advisor will be approximately U. S. $6,000,000 (all of which shall be actual
funds) made to the Advisor's Select Investment Program using the Argo Trading
System (the "Program"). The Advisor will not be allocated any notional funds.
The parties acknowledge that if assets of the Partnership under the Advisor's
management fall below $1,000,000, the Advisor may not be able to trade the full
Argo portfolio. In the event the Advisor wishes to use a trading system or
methodology other than or in addition to the Program in connection with its
trading for the Partnership, either in whole or in part, it may not do so unless
the Advisor gives SBFM prior written notice of its intention to utilize such
different trading system or methodology and SBFM consents thereto in writing. In
addition, the Advisor will provide five days' prior written notice to SBFM of
any change in the Program to be utilized for the Partnership which the Advisor
deems material. If the Advisor deems such change in the Program or in markets
traded to be material, the changed Program or markets traded will not be
utilized for the Partnership without the prior written consent of SBFM. In
addition, the Advisor will notify SBFM of any changes to the Program that would
require a change in the description of the trading strategy or methods described
in any prospectus of the Partnership. Non-material changes in the trading
systems utilized on behalf of the Partnership may be instituted without prior
written approval. Further, the Advisor will provide the Partnership with a
current list of all commodity interests to be traded for the Partnership's
account and will not trade any additional commodity interests for such account
without providing notice thereof to SBFM and receiving SBFM's written approval.
The Advisor also agrees to provide SBFM, on a monthly basis, with a written
report of the assets under the Advisor's management together with all other
matters deemed by the Advisor to be material changes to its business not
previously reported to SBFM.
(d) The Advisor agrees to make all material disclosures to
the Partnership regarding itself and its principals as defined in Part 4 of the
CFTC's regulations ("principals"), shareholders, directors, officers and
employees, their trading performance and general trading methods, its customer
accounts (but not the identities of or identifying information with respect to
its customers or other information deemed by the Advisor to be proprietary or
confidential) and otherwise as are required in the reasonable judgment of SBFM
to be made in any filings required by Federal or state law or NFA rule or order.
Notwithstanding Sections 1(d) and 4(d) of this Agreement, the Advisor is not
required to disclose the actual trading results of proprietary accounts of the
Advisor or its principals unless SBFM reasonably determines that such disclosure
is required in order to fulfill its fiduciary obligations to the Partnership or
the reporting, filing or other obligations imposed on it by Federal or state law
or NFA rule or order. The Partnership and SBFM acknowledge that the trading
advice to be provided by the Advisor is a property right belonging to the
Advisor and that they will keep all such advice confidential. Further, SBFM
agrees to treat as confidential any results of proprietary accounts and/or
proprietary information with respect to trading systems obtained from the
Advisor. SBFM and the Partnership shall not distribute any description of the
Advisor, its principals, or its or their trading performance without the prior
written consent of the Advisor.
(e) The Advisor understands and agrees that SBFM may
designate other trading advisors for the Partnership and apportion or
reapportion to such other trading advisors the management of an amount of Net
Assets (as defined in Section 3(b) hereof) as it shall determine in its absolute
discretion. The designation of other trading advisors and the apportionment or
reapportionment of Net Assets to any such trading advisors pursuant to this
Section 1 shall neither terminate this Agreement nor modify in any regard the
respective rights and obligations of the parties hereunder. The Advisor may
terminate this Agreement immediately if the Net Assets of the Partnership
managed by the Advisor fall below $180,000.
(f) SBFM may, from time to time, in its absolute discretion,
select additional trading advisors and reapportion funds among the trading
advisors for the Partnership as it deems appropriate. SBFM shall use its best
efforts to make reapportionments, if any, as of the first day of a month. The
Advisor agrees that it may be called upon at any time promptly to liquidate
positions in SBFM's sole discretion so that SBFM may reallocate the
Partnership's assets, meet margin calls on the Partnership's account, fund
redemptions, or for any other reason, except that SBFM will not require the
liquidation of specific positions by the Advisor. SBFM will use its best efforts
to give two days' prior notice to the Advisor of any reallocations or
liquidations.
(g) The Advisor will not be liable for trading losses in the
Partnership's account including losses caused by errors; provided, however, that
(i) the Advisor will be liable to the Partnership with respect to losses
incurred due to errors committed or caused by it or any of its principals or
employees in communicating improper trading instructions or orders to any broker
on behalf of the Partnership and (ii) the Advisor will be liable to the
Partnership with respect to losses incurred due to errors committed or caused by
any executing broker (other than any SBFM affiliate) selected by the Advisor,
(it also being understood that SBFM, with the assistance of the Advisor, will
first attempt to recover such losses from the executing broker).
2. INDEPENDENCE OF THE ADVISOR. For all purposes herein, the
Advisor shall be deemed to be an independent contractor and, unless otherwise
expressly provided or authorized, shall have no authority to act for or
represent the Partnership in any way and shall not be deemed an agent, promoter
or sponsor of the Partnership, SBFM, or any other trading advisor. The Advisor
shall not be responsible to the Partnership, the General Partner, any trading
advisor or any limited partners for any acts or omissions of any other trading
advisor.
3. COMPENSATION. (a) In consideration of and as compensation
for all of the services to be rendered by the Advisor to the Partnership under
this Agreement, the Partnership shall pay the Advisor (i) an incentive fee
payable quarterly equal to 20% of New Trading Profits (as such term is defined
below) earned by the Advisor for the Partnership and (ii) a monthly fee for
professional management services equal to 1/6 of 1% (2% per year) of the
month-end Net Assets of the Partnership allocated to the Advisor (which shall
include any committed funds).
(b) "Net Assets" shall have the meaning set forth in
Paragraph 7(d)(1) of the Limited Partnership Agreement dated as of May 19, 1994
and without regard to further amendments thereto, provided that in determining
the Net Assets of the Partnership on any date, no adjustment shall be made to
reflect any distributions, redemptions or incentive fees payable as of the date
of such determination.
(c) "New Trading Profits" shall mean the excess, if any, of
Net Assets managed by the Advisor (which shall include any committed funds) at
the end of the fiscal period over Net Assets managed by the Advisor (which shall
include any committed funds) at the end of the highest previous fiscal period or
Net Assets allocated to the Advisor at the date trading commences, whichever is
higher, and as further adjusted to eliminate the effect on Net Assets resulting
from new capital contributions, redemptions, reallocations or capital
distributions, if any, made during the fiscal period decreased by interest or
other income, not directly related to trading activity, earned on the
Partnership's assets during the fiscal period, whether the assets are held
separately or in margin accounts. Ongoing expenses will be attributed to the
Advisor based on the Advisor's proportionate share of Net Assets. Ongoing
expenses above will not include expenses of litigation not involving the
activities of the Advisor on behalf of the Partnership. Ongoing expenses include
offering and organizational expenses of the Partnership. No incentive fee shall
be paid until the end of the first full calendar quarter of trading by the
Advisor on behalf of the Partnership, which fee shall be based on New Trading
Profits earned from the commencement of trading by the Advisor through the end
of the first full calendar quarter. Interest income earned, if any, will not be
taken into account in computing New Trading Profits earned by the Advisor. If
Net Assets allocated to the Advisor are reduced due to redemptions,
distributions or reallocations (net of additions), there will be a corresponding
proportional reduction in the related loss carryforward amount that must be
recouped before the Advisor is eligible to receive another incentive fee.
(d) Quarterly incentive fees and monthly management fees
shall be paid within twenty (20) business days following the end of the period,
as the case may be, for which such fee is payable. In the event of a redemption,
reallocation, distribution or the termination of this Agreement as of any date
which shall not be the end of a fiscal quarter or a calendar month, as the case
may be, the quarterly incentive fee shall be computed as if the effective date
of the redemption, reallocation, distribution or termination were the last day
of the then current quarter and the monthly management fee shall be prorated to
the effective date of the redemption, reallocation, distribution or termination.
If, during any month, the Partnership does not conduct business operations or
the Advisor is unable to provide the services contemplated herein for more than
two successive business days, the monthly management fee shall be prorated by
the ratio which the number of business days during which SBFM conducted the
Partnership's business operations or utilized the Advisor's services bears in
the month to the total number of business days in such month.
(e) The provisions of this Paragraph 3 shall survive the
termination of this Agreement.
4. RIGHT TO ENGAGE IN OTHER ACTIVITIES. (a) The services
provided by the Advisor hereunder are not to be deemed exclusive. SBFM on its
own behalf and on behalf of the Partnership acknowledges that, subject to the
terms of this Agreement, the Advisor and its officers, directors, employees and
shareholder(s), may render advisory, consulting and management services to other
clients and accounts. The Advisor and its officers, directors, employees and
shareholder(s) shall be free to trade for their own accounts and to advise other
investors and manage other commodity accounts during the term of this Agreement
and to use the same information, computer programs and trading strategies,
programs or formulas which they obtain, produce or utilize in the performance of
services to SBFM for the Partnership. However, the Advisor represents, warrants
and agrees that it believes the rendering of such consulting, advisory and
management services to other accounts and entities will not require any material
change in the Advisor's Program and will not affect the capacity of the Advisor
to continue to render services to SBFM for the Partnership of the quality and
nature contemplated by this Agreement.
(b) If, at any time during the term of this Agreement, the
Advisor is required to aggregate the Partnership's commodity positions with the
positions of any other person for purposes of applying CFTC- or exchange-imposed
speculative position limits, the Advisor agrees that it will promptly notify
SBFM if the Partnership's positions are included in an aggregate amount which
exceeds the applicable speculative position limit. The Advisor agrees that, if
its trading recommendations are altered because of the application of any
speculative position limits, it will not modify the trading instructions with
respect to the Partnership's account in such manner as to affect the Partnership
substantially disproportionately as compared with the Advisor's other accounts.
The Advisor further represents, warrants and agrees that under no circumstances
will it knowingly or deliberately use trading strategies or methods for the
Partnership that are inferior to strategies or methods employed for any other
client or account whose assets are traded pursuant to the Program and that it
will not knowingly or deliberately favor any such client or account managed by
it over any other client or account whose assets are traded pursuant to the
Program in any manner, it being acknowledged, however, that different trading
strategies or methods may be utilized for differing sizes of accounts, accounts
traded with different degrees of leverage, accounts with different trading
policies, accounts experiencing differing inflows or outflows of equity,
accounts which commence trading at different times, accounts which have
different portfolios or different fiscal years, accounts utilizing different
executing brokers and accounts with other differences, and that such differences
may cause divergent trading results.
(c) It is acknowledged that the Advisor and/or its officers,
employees, directors and shareholder(s) presently act, and it is agreed that
they may continue to act, as advisor for other accounts managed by them, and may
continue to receive compensation with respect to services for such accounts in
amounts which may be more or less than the amounts received from the
Partnership.
(d) The Advisor agrees that it shall make such information
available to SBFM respecting the performance of the Partnership's account as
compared to the performance of other accounts managed by the Advisor or its
principals as shall be reasonably requested by SBFM, provided that nothing
contained herein shall be deemed to require the Advisor to disclose the names of
other customers or information that the Advisor deems to be proprietary or
confidential. The Advisor presently believes and represents that existing
speculative position limits will not materially adversely affect its ability to
manage the Partnership's account given the potential size of the Partnership's
account and the Advisor's and its principals' current accounts and all proposed
accounts for which they have contracted to act as trading manager.
5. TERM. (a) This Agreement shall continue in effect until
June 30, 1997. SBFM may, in its sole discretion, renew this Agreement for
additional one-year periods upon notice to the Advisor not less than 30 days
prior to the expiration of the previous period. At any time during the term of
this Agreement, SBFM may terminate this Agreement at any month-end upon 30 days'
notice to the Advisor. At any time during the term of this Agreement, SBFM may
elect to terminate this Agreement upon 30 days' notice to the Advisor if (i) the
Net Asset Value per Unit shall decline as of the close of business on any day to
$400 or less; (ii) the Net Assets allocated to the Advisor (adjusted for
redemptions, distributions, withdrawals or reallocations, if any) decline by 50%
or more as of the end of a trading day from such Net Assets' previous highest
value; (iii) limited partners owning at least 50% of the outstanding Units shall
vote to require SBFM to terminate this Agreement; (iv) the Advisor fails to
comply with the terms of this Agreement; (v) SBFM, in good faith, reasonably
determines that the performance of the Advisor has been such that SBFM's
fiduciary duties to the Partnership require SBFM to terminate this Agreement; or
(vi) SBFM reasonably believes that the application of speculative position
limits will substantially affect the performance of the Partnership. At any time
during the term of this Agreement, SBFM may elect immediately to terminate this
Agreement if (i) the Advisor merges, consolidates with another entity, sells a
substantial portion of its assets, or becomes bankrupt or insolvent, except as
provided in Section 10 hereof, (ii) Philip Yang and Michael Gan both die, become
incapacitated, leave the employ of the Advisor, cease to control the Advisor or
are otherwise not managing the trading programs or systems of the Advisor, or
(iii) the Advisor's registration as a commodity trading advisor with the CFTC or
its membership in the NFA or any other regulatory authority, is terminated or
suspended or if the Advisor's license agreement with Caxton Corporation is
terminated. This Agreement will immediately terminate upon dissolution of the
Partnership or upon cessation of trading prior to dissolution.
(b) The Advisor may terminate this Agreement by giving not
less than 30 days' notice to SBFM (i) in the event that the trading policies of
the Partnership as set forth in the Prospectus are changed in such manner that
the Advisor reasonably believes will adversely affect the performance of its
trading strategies; (ii) after June 30, 1997; or (iii) in the event that the
General Partner or Partnership fails to comply with the terms of this Agreement.
The Advisor may immediately terminate this Agreement if SBFM's registration as a
commodity pool operator or its membership in the NFA is terminated or suspended
or if the Advisor's license agreement with Caxton Corporation is terminated.
(c) Except as otherwise provided in this Agreement, any
termination of this Agreement in accordance with this Paragraph 5 or Paragraph
1(e) shall be without penalty or liability to any party, except for any fees due
to the Advisor pursuant to Section 3 hereof.
6. INDEMNIFICATION. (a)(i) In any threatened, pending or
completed action, suit, or proceeding to which the Advisor was or is a party or
is threatened to be made a party arising out of or in connection with this
Agreement or the management of the Partnership's assets by the Advisor or the
offering and sale of units in the Partnership, SBFM shall, subject to
subparagraph (a)(iii) of this Paragraph 6, indemnify and hold harmless the
Advisor against any loss, liability, damage, cost, expense (including, without
limitation, attorneys' and accountants' fees), judgments and amounts paid in
settlement actually and reasonably incurred by it in connection with such
action, suit, or proceeding if the Advisor acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership, and provided that its conduct did not constitute negligence,
intentional misconduct, or a breach of its fiduciary obligations to the
Partnership as a commodity trading advisor, unless and only to the extent that
the court or administrative forum in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the Advisor is fairly and reasonably
entitled to indemnity for such expenses which such court or administrative forum
shall deem proper; and further provided that no indemnification shall be
available from the Partnership if such indemnification is prohibited by Section
16 of the Partnership Agreement. The termination of any action, suit or
proceeding by judgment, order or settlement shall not, of itself, create a
presumption that the Advisor did not act in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership.
(ii) Without limiting sub-paragraph (i) above, to the extent
that the Advisor has been successful on the merits or otherwise in defense of
any action, suit or proceeding referred to in subparagraph (i) above, or in
defense of any claim, issue or matter therein, SBFM shall indemnify it against
the expenses (including, without limitation, attorneys' and accountants' fees)
actually and reasonably incurred by it in connection therewith.
(iii) Any indemnification under subparagraph (i) above,
unless ordered by a court, arbitrator or administrative forum, shall be made by
SBFM only as authorized in the specific case and only upon a determination by
independent legal counsel in a written opinion that such indemnification is
proper in the circumstances because the Advisor has met the applicable standard
of conduct set forth in subparagraph (i) above. Such independent legal counsel
shall be selected by SBFM in a timely manner, subject to the Advisor's approval,
which approval shall not be unreasonably withheld. The Advisor will be deemed to
have approved SBFM's selection unless the Advisor notifies SBFM in writing,
received by SBFM within five days of SBFM's telecopying to the Advisor of the
notice of SBFM's selection, that the Advisor does not approve the selection.
(iv) In the event the Advisor is made a party to any claim,
dispute or litigation or otherwise incurs any loss or expense as a result of, or
in connection with, the Partnership's or SBFM's activities or claimed activities
unrelated to the Advisor, SBFM shall indemnify, defend and hold harmless the
Advisor against any loss, liability, damage, cost or expense (including, without
limitation, attorneys' and accountants' fees) incurred in connection therewith.
(v) As used in this Paragraph 6(a), the terms "Advisor" shall
include the Advisor, its principals, officers, directors, stockholders and
employees and the term "SBFM" shall include the Partnership.
(b)(i) The Advisor agrees to indemnify, defend and hold
harmless SBFM, the Partnership and their principals, officers, directors and
employees against any loss, liability, damage, cost or expense (including,
without limitation, attorneys' and accountants' fees), judgments and amounts
paid in settlement actually and reasonably incurred by them (A) as a result of
the material breach of any material representations and warranties made by the
Advisor in this Agreement, or (B) as a result of any act or omission of the
Advisor relating to the Partnership if there has been a final judicial or
regulatory determination or, in the event of a settlement of any action or
proceeding with the prior written consent of the Advisor, a written opinion of
an arbitrator pursuant to Paragraph 14 hereof, to the effect that such acts or
omissions violated the terms of this Agreement in any material respect or
involved negligence, bad faith or intentional misconduct on the part of the
Advisor (except as otherwise provided in Section 1(g)).
(ii) In the event SBFM, the Partnership or any of their
principals, officers, directors and employees is made a party to any claim,
dispute or litigation or otherwise incurs any loss or expense as a result of, or
in connection with, the activities or claimed activities of the Advisor or its
principals, officers, directors, shareholder(s) or employees unrelated to SBFM's
or the Partnership's business, the Advisor shall indemnify, defend and hold
harmless SBFM, the Partnership or any of their principals, officers, directors
and employees against any loss, liability, damage, cost or expense (including,
without limitation, attorneys' and accountants' fees) actually and reasonably
incurred in connection therewith.
(iii) Neither Philip Yang nor Michael Gan shall have any
liability to the Partnership or SBFM or any of their respective officers,
directors, employees, partners or affiliates under this Agreement or in
connection with the transactions contemplated by this Agreement except in the
case of his own fraud or willful misconduct.
(iv) Any indemnification under subparagraph (b)(i) above,
unless ordered by a court, arbitrator or administrative forum, shall be made by
the Advisor only as authorized in the specific case and only upon a
determination by independent legal counsel in a written opinion that such
indemnification is proper in the circumstances. Such independent legal counsel
shall be selected by the Advisor in a timely manner, subject to SBFM's approval,
which approval shall not be unreasonably withheld. SBFM will be deemed to have
approved the Advisor's selection unless SBFM notifies the Advisor in writing,
received by the Advisor within five days of the Advisor's facsimile to SBFM of
the notice of the Advisor's selection, that SBFM does not approve the selection.
(c) In the event that a person entitled to indemnification
under this Paragraph 6 is made a party to an action, suit or proceeding alleging
both matters for which indemnification can be made hereunder and matters for
which indemnification may not be made hereunder, such person shall be
indemnified only for that portion of the loss, liability, damage, cost or
expense incurred in such action, suit or proceeding which relates to the matters
for which indemnification can be made.
(d) None of the indemnifications contained in this Paragraph
6 shall be applicable with respect to default judgments, confessions of judgment
or settlements entered into by the party claiming indemnification without the
prior written consent, which shall not be unreasonably withheld, of the party
obligated to indemnify such party.
(e) The provisions of this Paragraph 6 shall survive the
termination of this Agreement.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) The Advisor represents and warrants that:
(i) All references to the Advisor and its principals in the
Prospectus are accurate in all material respects and as to them the Prospectus
does not contain any untrue statement of a material fact or omit to state a
material fact which is necessary to make the statements therein not misleading,
except that with respect to Table B, if any is presented for the Advisor in the
Prospectus, this representation and warranty extends only to the underlying data
made available by the Advisor for the preparation thereof and not to any
hypothetical or pro forma adjustments. Subject to such exception, all references
to the Advisor and its principals in the Prospectus will, after review and
approval of such references by the Advisor prior to the use of such Prospectus
in connection with the offering of the Partnership's units, be accurate in all
material respects.
(ii) The information with respect to the Advisor set forth in
the actual performance tables in the Advisor's Disclosure Document is based on
all of the customer accounts managed on a discretionary basis by the Advisor's
principals and/or the Advisor during the period covered by such tables and
required to be disclosed therein.
(iii) The Advisor will be acting as a commodity trading
advisor with respect to the Partnership and not as a securities investment
adviser and is duly registered with the CFTC as a commodity trading advisor, is
a member of the NFA, and is in compliance with such other registration and
licensing requirements as shall be necessary to enable it to perform its
obligations hereunder, and agrees to maintain and renew such registrations and
licenses during the term of this Agreement.
(iv) The Advisor is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
full power and authority to enter into this Agreement and to provide the
services required of it hereunder.
(v) The Advisor will not, by acting as a commodity trading
advisor to the Partnership, breach or cause to be breached any undertaking,
agreement, contract, statute, rule or regulation to which it is a party or by
which it is bound.
(vi) This Agreement has been duly and validly authorized,
executed and delivered by the Advisor and is a valid and binding agreement
enforceable in accordance with its terms.
(vii) At any time during the term of this Agreement that a
prospectus relating to the Units is required to be delivered in connection with
the offer and sale thereof, the Advisor agrees upon the request of SBFM to
provide the Partnership with such information as shall be necessary so that, as
to the Advisor and its principals, such prospectus is accurate.
(b) SBFM represents and warrants for itself and the
Partnership that:
(i) The Prospectus (as from time to time amended or
supplemented, which amendment or supplement is approved by the Advisor as to
descriptions of itself and its actual performance) does not contain any untrue
statement of a material fact or omit to state a material fact which is necessary
to make the statements therein not misleading, except that the foregoing
representation does not apply to any statement or omission concerning the
Advisor in the Prospectus, made in reliance upon, and in conformity with,
information furnished to SBFM by or on behalf of the Advisor expressly for use
in the Prospectus (it being understood that any hypothetical or pro forma
adjustments in Table B were not furnished by the Advisor). All authorizations,
consents or orders of any court, or of any federal, state or other governmental
or regulatory agency or body required for the valid authorization, issuance,
offer and sale of the Partnership's Units were obtained, and, to the best of its
knowledge, after due inquiry no order preventing or suspending the use of the
Prospectus with respect to the Units was issued by the Securities and Exchange
Commission (the "SEC"), the CFTC or the NFA. The Partnership's Registration
Statement and Prospectus contained all material statements which were required
to be made therein, conformed in all material respects to the requirements of
the Securities Act of 1933 and the Commodity Exchange Act, and the rules and
regulations of the SEC and the CFTC, respectively, thereunder, and with the
rules of the NFA.
(ii) It is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has full corporate
power and authority to perform its obligations under this Agreement.
(iii) SBFM and the Partnership have the capacity and
authority to enter into this Agreement on behalf of the Partnership.
(iv) This Agreement has been duly and validly authorized,
executed and delivered on SBFM's and the Partnership's behalf and is a valid and
binding agreement of SBFM and the Partnership enforceable in accordance with its
terms.
(v) SBFM will not, by acting as General Partner to the
Partnership and the Partnership will not, breach or cause to be breached any
undertaking, agreement, contract, statute, rule or regulation to which it is a
party or by which it is bound which would materially limit or affect the
performance of its duties under this Agreement.
(vi) It is registered as a commodity pool operator and is a
member of the NFA, and it will maintain and renew such registration and
membership during the term of this Agreement.
(vii) The Partnership is a limited partnership duly organized
and validly existing under the laws of the State of New York and has full power
and authority to enter into this Agreement and to perform its obligations under
this Agreement.
(viii) SBFM and the Partnership will comply with all laws,
rules, regulations and orders applicable to the offer and sale of Units in all
jurisdictions in which Units are offered or sold.
8. COVENANTS OF THE ADVISOR, SBFM AND THE PARTNERSHIP.
(a) The Advisor agrees as follows:
(i) In connection with its activities on behalf of the
Partnership, the Advisor will comply with all applicable rules and regulations
of the CFTC and/or the commodity exchange on which any particular transaction is
executed.
(ii) The Advisor will promptly notify SBFM of the
commencement of any material suit, action or proceeding involving it, whether or
not any such suit, action or proceeding also involves SBFM.
(iii) In the placement of orders for the Partnership's
account and for the accounts of any other client, the Advisor will utilize a
pre-determined, fair and reasonable order entry system, which shall, on an
overall basis, be no less favorable to the Partnership than to any other account
managed by the Advisor. The Advisor acknowledges its obligation to review the
Partnership's positions, prices and equity in the account managed by the Advisor
daily and within two business days to notify, in writing, the broker and SBFM
and the Partnership's brokers of (i) any error committed by the Advisor or its
principals or employees; (ii) any trade which the Advisor believes was not
executed in accordance with its instructions; and (iii) any discrepancy with a
value of $10,000 or more (due to differences in the positions, prices or equity
in the account) between its records and the information reported on the
account's daily and monthly broker statements.
(iv) The Advisor will maintain a net worth of not less than
$250,000 during the term of this Agreement.
(b) SBFM agrees for itself and the Partnership that:
(i) SBFM and the Partnership will comply with all applicable
rules and regulations of the CFTC and/or the commodity exchange on which any
particular transaction is executed.
(ii) SBFM will promptly notify the Advisor of the
commencement of any material suit, action or proceeding involving it or the
Partnership, whether or not such suit, action or proceeding also involves the
Advisor.
9. COMPLETE AGREEMENT. This Agreement constitutes the entire
agreement between the parties pertaining to the subject matter hereof.
10. ASSIGNMENT. This Agreement may not be assigned by any
party without the express written consent of the other parties.
11. AMENDMENT. This Agreement may not be amended except by the
written consent of the parties.
12. NOTICES. All notices, demands or requests required to be
made or delivered under this Agreement shall be effective upon actual receipt
and shall be in writing and delivered personally or by facsimile or by
registered or certified mail or expedited courier, return receipt requested,
postage prepaid, to the addresses below or to such other addresses as may be
designated by the party entitled to receive the same by notice similarly given:
If to SBFM:
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, New York 10013
Attention: David J. Vogel
If to the Advisor:
Willowbridge Associates Inc.
101 Morgan Lane
Suite 180
Plainsboro, New Jersey 08536
Attention: Theresa C. Morris
with a copy to:
Mayer, Brown & Platt
190 South LaSalle Street
Chicago, Illinois 60603
Attention: Deborah A. Monson
13. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of New York.
14. ARBITRATION. The parties agree that any dispute or
controversy arising out of or relating to this Agreement or the interpretation
thereof, shall be settled by arbitration in accordance with the rules, then in
effect, of the National Futures Association or, if the National Futures
Association shall refuse jurisdiction, then in accordance with the rules, then
in effect, of the American Arbitration Association; provided, however, that the
power of the arbitrator shall be limited to interpreting this Agreement as
written and the arbitrator shall state in writing his reasons for his award.
Judgment upon any award made by the arbitrator may be entered in any court of
competent jurisdiction.
15. CONFIDENTIALITY. Nothing in this Agreement shall require
the Advisor to disclose the details of its trading system, methods, models,
strategies and formulas. SBFM and the Partnership acknowledge that the trading
systems, methods, models, strategies and formulas of the Advisor are the sole
and exclusive property of the Advisor; SBFM and the Partnership further agree
that it will keep confidential and will not disseminate information regarding
such systems, methods, models, strategies and formulas to any person.
16. NO THIRD PARTY BENEFICIARIES. There are no third party
beneficiaries to this Agreement, except that certain persons not parties to this
Agreement have rights under Section 6 hereof.
IN WITNESS WHEREOF, this Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
SMITH BARNEY FUTURES
MANAGEMENT INC.
By__ /s/ David J. Vogel
David J. Vogel
President and Director
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
WILLOWBRIDGE ASSOCIATES INC.
By__/s/ Theresa C. Morris_____
Theresa C. Morris
Senior Vice President
May 31, 1996
Chesapeake Capital Corp.
500 Forest Avenue
Richmond, Va. 23229
Attention: Mr. John Hoade
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II
Dear Mr. Hoade:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1997.
All other provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
CHESAPEAKE CAPITAL CORP.
By:
Print Name:
DAD/sr
rw/1
May 31, 1996
Millburn Ridgefield Corp.
1270 Avenue of the Americas
New York, New York 10020-1795
Attention: Mr. George Crapple
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II
Dear Mr. George Crapple:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1997.
All other provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
MILLBURN RIDGEFIELD CORP.
By:
Print Name:
DAD/sr
rw/1
May 31, 1996
John W. Henry & Company
One Glendinning Place
Westport, Ct. 06880
Attn: Ms. Beth Kenton
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II
Dear Ms. Kenton:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1997.
All other provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
JOHN W. HENRY & COMPANY
By:
Print Name:
DAD/sr
August 12, 1997
Chesapeake Capital Corp.
500 Forest Avenue
Richmond, Va. 23229
Attention: Mr. John Hoade
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II
Dear Mr. Hoade:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1998.
All other provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
CHESAPEAKE CAPITAL CORP.
By:
Print Name:
DAD/sr
rw/1
June 24, 1997
Millburn Ridgefield Corp.
1270 Avenue of the Americas
New York, New York 10020-1795
Attention: Mr. George Crapple
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II
Dear Mr. George Crapple:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1998.
All other provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
MILLBURN RIDGEFIELD CORP.
By:
Print Name:
DAD/sr
rw/1
June 19, 1997
John W. Henry & Company
One Glendinning Place
Westport, Ct. 06880
Attn: Ms. Beth Kenton
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II
Dear Ms. Kenton:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1998.
All other provisions of the Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
JOHN W. HENRY & COMPANY
By:
Print Name:
DAD/sr
Smith Barney Futures Management Inc.
390 Greenwich St., 1st Floor
New York, New York 10013
212-723-5416
Fax: 212-723-8985
January 12, 1998
Chesapeake Capital
500 Forest Avenue
Richmond, Va. 23239
Attention: Mr. John M. Hoade
Re: Smith Barney Diversified Futures Fund L.P.
Smith Barney Diversified Futures Fund L.P. II (Diversified)
Smith Barney Diversified Futures Fund L.P. II (F&M)
Smith Barney Global Markets Futures Fund L.P.
Dear Mr. Hoade:
We are in receipt of your letter notifying us of your intention to resign
as manager of the funds noted above. We understand your position and appreciate
your decision.
We will take the appropriate steps to effect your resignation as of January
31, 1998. Please liquidate all of your positions for these accounts by Friday,
January 30, 1998.
It is our intention that you continue to manage Smith Barney Tidewater
Futures Fund L.P. if you so desire. Please advise.
Sincerely,
SMITH BARNEY FUTURES MANAGEMENT INC.
David J. Vogel,
President
DJV/sr
