2
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, 1998
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: Units of
Limited
Partnership
Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
As of February 28, 1999 Limited Partnership Units with an aggregate value of
$1,201.32 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORTED BY REFERENCE
Supplements dated February 1, 1998 and April 30, 1998 to Prospectus dated April
30, 1997.
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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, 1998 are
reported in the Statement of Partners' Capital on page F-6 under "Item 8.
Financial Statements and Supplementary Data." The General Partner has agreed to
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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. On September 1,
1998, the Partnership's commodity broker, Smith Barney Inc., merged with Salomon
Brothers Inc and changed its name to Salomon Smith Barney Inc. ("SSB"). SSB is
an affiliate of the General Partner. The General Partner is wholly owned by
Salomon Smith Barney Holdings, Inc. ("SSBH"), which is the sole owner of SSB. On
October 8, 1998, Travelers Group Inc. merged with Citicorp Inc. and changed its
name to Citigroup Inc. SSBH is a wholly owned subsidiary of Citigroup Inc.
The 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 SSB.
As of December 31, 1998, all commodity trading decisions are made for the
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Partnership by John W. Henry & Company, Inc. ("JWH"), Millburn Ridgefield
Corporation, Campbell and Company Inc., 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 SSB. The Advisors are not
responsible for the organization or operation of the Partnership. 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.
Pursuant to the terms of the Management Agreements (the "Management
Agreements"), the Partnership is obligated to pay each Advisor: (i) a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
that JWH will receive a monthly management fee equal to 1/3 of 1% (4% per year))
of the Partnership allocated to each Advisor as of the end of each month and
(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 SSB (the
"Customer Agreement") which provides that the Partnership will pay SSB a monthly
brokerage fee equal to 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. SSB 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
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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 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 SSB gives the Partnership the
legal right to net unrealized gains and losses.
In addition, SSB pays the Partnership interest on 80% of the average
daily equity maintained in cash in its account during each month at a 30-day
U.S. Treasury bill rate determined weekly by SSB based on the average
non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from
the date on which such weekly rate is determined. However, SSB began paying
interest to the Partnership only after the amount of interest accrued equaled
the total amount of offering and organizational expenses paid by SSB 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 years ended December 31, 1998 and 1997 and for the period
from January 17, 1996 (commencement of trading operations) to December 31, 1996
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is set forth under "Item 6. Selected Financial Data." The Partnership capital as
of December 31, 1998, was $151,797,782.
(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, SSB.
Item 3. Legal Proceedings.
There are no material legal proceedings pending against the Partnership
or the General Partner.
This section describes the major legal proceedings, other than ordinary
routine litigation incidental to the business, to which SSBH, the parent company
of this General Partner or its subsidiaries is a party or to which any of their
property is subject.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust ("APT"), Ameritech Corporation, and an officer of
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Ameritech filed suit against Salomon Brothers Inc. ("SBI") and Salomon Brothers
Realty Corporation ("SBRC") in the U.S. District Court for the Northern District
of Illinois (Harris Trust Savings Bank, not individually but solely as trustee
for the Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v.
Salomon Brothers Inc and Salomon Brothers Realty Corp.). The second amended
complaint alleges that three purchases by APT from defendants of participation
interests in net cash flow or resale proceeds of three portfolios of motels
owned by Motels of America, Inc. ("MOA"), as well as a fourth purchase by APT of
a similar participation interest with respect to a portfolio of motels owned by
Best Inns, Inc. ("Best"), violated the Employee Retirement Income Security Act
("ERISA"), and that the purchase of the participation interests for the third
MOA portfolio and for the Best portfolio violated the Racketeer Influenced and
Corrupt Organization Act ("RICO") and state law. SBI had acquired the
participation interests in transactions in which it purchased as principal
mortgage notes issued by MOA and Best to finance purchases of motel portfolios;
95% of three such interests and 100% of one such interest were sold to APT for
purchase prices aggregating approximately $20.9 million. Plaintiffs' second
amended complaint seeks (a) judgment on the ERISA claims for the purchase prices
of the four participation interests (approximately $20.9 million), for
rescission and for disgorgement of profits, as well as other relief, and (b)
judgment on the claims brought under RICO and state law in the amount of $12.3
million, with damages trebled to $37 million on the RICO claims and punitive
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damages in excess of $37 million on certain of the state law claims as well as
other relief. The court dismissed the RICO, breach of contract, and unjust
enrichment claims. The court also found that defendants did not qualify as an
ERISA fiduciary and dismissed the claims based on that allegation. Defendants
moved for summary judgment on the sole remaining claim. The motion was denied,
and defendants appealed to the U.S. Court of Appeals for the Seventh Circuit.
Defendants are awaiting a decision.
Both the Department of Labor and the Internal Revenue Service have
advised SBI that they were or are reviewing the transactions in which APT
acquired such participation interests. With respect to the Internal Revenue
Service review, SSBH, SBI and SBRC have consented to extensions of time for the
assessment of excise taxes that may be claimed to be due with respect to the
transactions for the years 1987, 1988 and 1989. In August 1996, the IRS sent
SSBH, SBI and SBRC what appeared to be draft "30-day letters" with respect to
the transactions and SSBH, SBI and SBRC were given an opportunity to comment on
whether the IRS should issue 30-day letters, which would actually commence the
assessment process. In October 1996, SSBH, SBI and SBRC submitted a memorandum
setting forth reasons why the IRS should not issue 30-day letters with respect
to the transactions.
In December 1996, a complaint seeking unspecified monetary damages
was filed by Orange County, California against numerous brokerage firms,
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including Smith Barney, in the U.S. Bankruptcy Court for the Central District of
California (County of Orange et al. v. Bear Stearns & Co. Inc. et al.).
Plaintiff alleges, among other things, that defendants recommended and sold to
plaintiff unsuitable securities and that such transactions were outside the
scope of plaintiff's statutory and constitutional authority (ultra vires).
Defendants' motion for summary judgment was granted with respect to the ultra
vires claims in February 1999. The court allowed the filing of an amended
complaint asserting claims based on alleged breaches of fiduciary duty.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
declaratory judgment that Smith Barney Inc. and another underwriter are
responsible for any damages that the City may incur in the event the Internal
Revenue Service denies tax exempt status to the City's General Obligation
Refunding Bonds Series 1991. The Company filed a motion to dismiss the
complaints in September 1998, and the complaints were subsequently amended. The
Company has filed a motion to dismiss the amended complaints.
In November 1998, a purported class action complaint was filed in the
United States District Court for the Middle District of Florida (Dwight Brock as
Clerk for Collier County v. Merrill Lynch, et al.). The complaint alleges that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including SSB,
charged excessive mark-ups in connection with advanced refunding transactions.
The Company intends to contest this complaint vigorously.
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Environmental Matters
In July 1996, the City and County of Denver ("Denver") enacted an
ordinance imposing a substantial fee on any radioactive waste or
radium-contaminated material disposed of in the City of Denver. Under this
ordinance, Denver assessed a subsidiary of Salomon, the S.W. Shattuck Chemical
Company, Inc. ("Shattuck"), $9.35 million for certain disposal already carried
out. Shattuck sued to enjoin imposition of the fee on constitutional grounds.
The United States also sued, seeking to enjoin imposition of the fee on
constitutional grounds. Denver counterclaimed and moved to add SSBH as a
defendant for past costs. These cases have been consolidated before the U.S.
District Court in Colorado, which granted Shattuck's motion for a preliminary
injunction enjoining Denver from enforcing the ordinance during the pendency of
the litigation. The parties have reached a settlement.
The Company and various subsidiaries have also been named as defendants
in various matters incident to and typical of the businesses in which they are
engaged. These include numerous civil actions, arbitration proceedings and other
matters in which the Company's broker-dealer subsidiaries have been named,
arising in the normal course of business out of activities as a broker and
dealer in securities, as an underwriter of securities, as an investment banker
or otherwise. In the opinion of the Company's management, none of these actions
is expected to have a material adverse effect on the consolidated financial
condition of the Company and its subsidiaries.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote
during the last fiscal year covered by this report.
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PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a) Market Information. The Partnership has issued no stock.
There is no public market for the Units of Limited
Partnership Interest.
(b) Holders. The number of holders of Units of Limited
Partnership Interest as of December 31, 1998 was 5,887.
(c) Distribution. The Partnership did not declare a
distribution in 1998 or 1997.
(d) Use of Proceeds. For the twelve months ended December
31, 1998, there were additional sales of 38,309.9229
Units totaling $42,074,000 and contributions by the
General Partner representing 283.5082 Unit equivalents
totaling $311,000. Proceeds from the sale of additional
Units are used in the trading of commodity interest
including futures contracts,options and forward contracts.
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Item 6. Selected 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 years ended December 31, 1998 and 1997 and for the period from January
17, 1996 (commencement of trading operations) to December 31, 1996 and total
assets at December 31, 1998, 1997 and 1996 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1998 1997 1996
------------- ------------- -------------
Realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
of $8,891,659, $6,257,856 and
$2,169,468, respectively $ 14,064,160 $ (461,654) $ 8,869,618
Interest income 4,818,279 3,634,245 1,190,687
------------- ------------- -------------
$ 18,882,439 $ 3,172,591 $ 10,060,305
============= ============= =============
Net Income (loss) $ 12,979,536 $ (313,824) $ 7,582,653
============= ============= =============
Increase (decrease) in net asset
value per unit $ 95.43 $ (1.30) $ 185.99
============= ============= =============
Total assets $ 154,692,651 $ 113,547,434 $ 56,960,922
============= ============= =============
</TABLE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash 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
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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 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.
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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, 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
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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 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 gains or losses 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
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interest income payable by SSB is dependent upon interest rates over which the
Partnership has no control.
No forecast can be made as to the level of redemptions in any given
period. Beginning 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, 1998, 13,377.6641 Units
were redeemed totaling 15,146,446. 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 ceased to offer Units effective March 1, 1998. For
the year ended December 31, 1998, there were additional sales of 38,309.9229
Units totaling $42,074,000 and contributions by the General Partner representing
283.5082 Units equivalents totaling $311,000. 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.
(c) Results of Operations. For the year ended December 31, 1998 the
net asset value per Unit increased 8.5% from $1,123.76 to $1,219.19. 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. The net asset value of $939.07 at commencement
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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 $22,955,819 before
commissions and expenses in 1998. These gains were primarily attributable to
trading in currencies, U.S. and non-U.S. interest rate products and livestock
and were partially offset by losses in grains, metals, softs and indices.
The Partnership experienced net trading gains of $5,796,202 before
commissions and expenses in 1997. These gains were primarily attributable to the
trading of U.S. and non-U.S. 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 primarily 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. 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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(d) Operational Risk
The Company is directly exposed to market risk and credit
risk, which arise in the normal course of its business activities. Slightly less
direct, but of critical importance, are risks pertaining to operational and back
office support. This is particularly the case in a rapidly changing and
increasingly global environment with increasing transaction volumes and an
expansion in the number and complexity of products in the marketplace. Such
risks include: Operational/Settlement Risk - the risk of financial and
opportunity loss and legal liability attributable to operational problems, such
as inaccurate pricing of transactions, untimely trade execution, clearance
and/or settlement, or the inability to process large volumes of transactions.
The Company is subject to increased risks with respect to its trading activities
in emerging market securities, where clearance, settlement, and custodial risks
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are often greater than in more established markets.
Technological Risk - the risk of loss attributable to technological limitations
or hardware failure that constrain the Company's ability to gather, process, and
communicate information efficiently and securely, without interruption, with
customers, among units within the Company, and in the markets where the Company
participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
management's authorization, and that financial information utilized by
management and communicated to external parties, including the Company's
stockholder, creditors, and regulators, is free of material errors.
Risk of Computer System Failure (Year 2000 Issue)
The Year 2000 issue is the result of existing computers in
many businesses using only two digits to identify a year in the date field.
These computers and programs, often referred to as "information technology,"
were designed and developed without considering the impact of the upcoming
change in the century. If not corrected, many computer applications could fail
or create erroneous results at the Year 2000. Such systems and processes are
dependent on correctly identifying dates in the next century.
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The General Partner administers the business of the
Partnership through various systems and processes maintained by SSBH and SSB. In
addition, the operation of the Partnership is dependent on the capability of the
Partnership's Advisors, the brokers and exchanges through which the Advisors
trade, and other third parties to prepare adequately for the Year 2000 impact on
their systems and processes. The Partnership itself has no systems or
information technology applications relevant to its operations.
The General Partner, SSB, SSBH and their parent organization
Citigroup Inc. have undertaken a comprehensive, firm-wide evaluation of both
internal and external systems (systems related to third parties) to determine
the specific modifications needed to prepare for the year 2000. The combined
Year 2000 program in SSB is expected to cost approximately $140 million over the
four years from 1996 through 1999, and involve over 450 people at the peak
staffing level. SSB expects to complete all compliance and certification work by
June 1999. At this time, over 95% of SSBH systems have completed the correction
process and are Year 2000 compliant. Over 73% of the systems have completed
certification testing. The Year 2000 project at SSBH remains on schedule.
The systems and components supporting the General Partner's
business that require remediation have been identified and modifications have
been made to bring them into Year 2000 compliance. Testing of these systems was
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completed in the fourth quarter of 1998. Final testing and certification are
expected to be completed by the end of the first quarter of 1999.
This expenditure and the General Partner's resources dedicated
to the preparation for Year 2000 do not and will not have a material impact on
the operation or results of the Partnership.
The General Partner has requested and received statements from
the Advisors that each has undertaken its own evaluation and remediation plans
to identify any of its computer systems that are Year 2000 vulnerable. Each
Advisor has confirmed it is taking immediate actions to remedy those systems as
necessary. The General Partner will continue to inquire into and to confirm each
Advisor's readiness for Year 2000.
The most likely and most significant risk to the Partnership
associated with the lack of Year 2000 readiness is the failure of outside
organizations, including the commodities exchanges, clearing organizations, or
regulators with which the Partnership interacts to resolve their Year 2000
issues in a timely manner. This risk could involve the inability to determine
the value of the Partnership at some point in time and would make effecting
purchases or redemptions of Units in the Partnership infeasible until such
valuation was determinable.
SSB has successfully participated in industry-wide testing
including: The Streetwide Beta Testing organized by the Securities Industry
Association (SIA), a government securities clearing test with the Federal
Reserve Bank of New York, The Depository Trust Company, and The Bank of new
York, and Futures Industry Association participants test. The firm is also
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participating in the streetwide testing which commenced in March 1999.
It is possible that problems may occur that would require some
time to repair. Moreover, it is possible that problems will occur outside SSBH
for which SSBH could experience a secondary effect. Consequently, SSBH is
preparing comprehensive, written contingency plans so that alternative
procedures and a framework for critical decisions are defined before any
potential crisis occurs.
The goal of Year 2000 contingency planning is a set of
alternate procedures to be used in the event of a critical system failure or a
failure by a supplier or counterparty. Planning work was completed in December
1998, and testing of alternative procedures will be conducted in the first half
of 1999.
European Economic and Monetary Union
European Economic and Monetary Union ("EMU") is an historic event in
Europe involving the unification of currency in eleven major countries. The new
unified currency, called the Euro, is expected to compete on a global scale with
the U.S. Dollar and the Japanese Yen. Introduction of the Euro began on January
1, 1999, when the European Central Bank assumed control of the monetary policy
for participating nations. Exchange rates between the participating countries
were fixed and the Euro is available for electronic payments. Also on January 1,
1999, various issuers re-denominated their securities and harmonized bond
payment conventions. A three-year transition period began on January 1, 1999,
after which Euro notes and coins will be issued by the European Central Bank and
national currencies will be phased out. 22
<PAGE>
The Company completed a successful conversion to the Euro and
has commenced trading and settlement in the new currency with no major
exceptions.
As the preceding risks are largely interrelated, so are the
Company's actions to mitigate and manage them. The Company's Chief
Administrative Officer is responsible for, among other things, oversight of
global operations and technology. An essential element in mitigating the risks
noted above is the optimization of information technology and the ability to
manage and implement change. To be an effective competitor in an
information-driven business of a global nature requires the development of
global systems and databases that ensure increased and more timely access to
reliable data.
(e) New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133"). SFAS
133 requires that an entity recognize all derivatives in the statement of
financial condition and measure those instruments at fair value. SFAS 133 is
effective for fiscal year beginning after June 15, 1999 SFAS 133 is expected to
have no material impact on the financial statements of the Partnership as all
commodity interests are recorded at fair value, with changes therein reported in
the statement of income and expenses.
23
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
flow. The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification effects among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
24
<PAGE>
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's
market risk exposures contain "forward-looking statements" within the meaning of
the safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor except for statements of historical
fact (such as the terms of particular contracts and the number of market risk
sensitive instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
25
<PAGE>
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized). Exchange maintenance margin requirements have been
used by the Partnership as the measure of its Value at Risk. Maintenance margin
requirements are set by exchanges to equal or exceed the maximum losses
reasonably expected to be incurred in the fair value of any given contract in
95%-99% of any one-day intervals. The maintenance margin levels are established
by dealers and exchanges using historical price studies as well as an assessment
of current market volatility (including the implied volatility of the options on
a given futures contract) and economic fundamentals to provide a probabilistic
estimate of the maximum expected near-term one-day price fluctuation.
Maintenance margin has been used rather than the more generally available
initial margin, because initial margin includes a credit risk component which is
not relevant to Value at Risk.
In the case of market sensitive instruments which are not exchange
traded (almost exclusively currencies in the case of the Partnership), the
margin requirements for the equivalent futures positions have been used as Value
at Risk. In those rare cases in which a futures-equivalent margin is not
available, dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does
not have any optionality component. However, certain of the Advisors trade
commodity options. The Value at Risk associated with options is reflected in the
26
<PAGE>
following table as the margin requirement attributable to the instrument
underlying each option. Where this instrument is a futures contract, the futures
margin, and where this instrument is a physical commodity, the
futures-equivalent maintenance margin has been used. This calculation is
conservative in that it assumes that the fair value of an option will decline by
the same amount as the fair value of the underlying instrument, whereas, in
fact, the fair values of the options traded by the Partnership in almost all
cases fluctuate to a lesser extent than those of the underlying instruments.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been added to determine each trading category's aggregate
Value at Risk. The diversification effects resulting from the fact that the
Partnership's positions are rarely, if ever, 100% positively correlated have not
been reflected. The Partnership's Trading Value at Risk in Different Market
Sectors
The following table indicates the trading Value at Risk associated with
the Partnership's open positions by market category as of December 31, 1998. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1998, the
Partnership's total capitalization was $151,797,782.
27
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
December 31, 1998
% of Total
Market Sector Value at Risk Capitalization
Currencies
- - OTC Contracts $ 3,585,707 2.36%
- - Exchange Traded Contracts 407,950 0.27%
Energy 1,783,000 1.17%
Grains 434,400 0.29%
Interest rate U.S. 1,261,900 0.83%
Interest rates Non-U.S 4,400,489 2.90%
Livestock 169,300 0.11%
Metal 1,666,300 1.10%
Softs 1,260,507 0.83%
Stock Indices 1,999,807 1.32%
----------- ------
Total $16,969,360 11.18%
=========== =====
</TABLE>
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership
is typically many times the applicable margin requirement (margin requirements
generally range between 2% and 15% of contract face value) as well as the
capitalization of the Partnership. The magnitude of the Partnership's open
positions creates a "risk of ruin" not typically found in most other investment
vehicles. Because of the size of its positions, certain market conditions --
unusual, but historically recurring from time to time -- could cause the
Partnership to incur severe losses over a short period of time. The foregoing
Value at Risk table -- as well as the past performance of the Partnership --
give no indication of this "risk of ruin."
28
<PAGE>
Non-Trading Risk
The Partnership has non-trading market risk on its foreign cash
balances not needed for margin. However, these balances (as well as any market
risk they represent) are immaterial.
Materiality as used in this section, "Qualitative and Quantitative
Disclosures About Market Risk," is based on an assessment of reasonably possible
market movements and the potential losses caused by such movements, taking into
account the leverage, optionality and multiplier features of the Partnership's
market sensitive instruments. Qualitative Disclosures Regarding Primary Trading
Risk Exposures
The following qualitative disclosures regarding the Partnership's
market risk exposures - except for (i) those disclosures that are statements of
historical fact and (ii) the descriptions of how the Partnership manages its
primary market risk exposures - constitute forward-looking statements within the
meaning of Section 27A of the Securities Act and Section 21E of the Securities
Exchange Act. The Partnership's primary market risk exposures as well as the
strategies used and to be used by the General Partner and the Advisors for
managing such exposures are subject to numerous uncertainties, contingencies and
risks, any one of which could cause the actual results of the Partnership's risk
controls to differ materially from the objectives of such strategies. Government
interventions, defaults and expropriations, illiquid markets, the emergence of
dominant fundamental factors, political upheavals, changes in historical price
29
<PAGE>
relationships, an influx of new market participants, increased regulation and
many other factors could result in material losses as well as in material
changes to the risk exposures and the management strategies of the Partnership.
There can be no assurance that the Partnership's current market exposure and/or
risk management strategies will not change materially or that any such
strategies will be effective in either the short- or long- term. Investors must
be prepared to lose all or substantially all of their investment in the
Partnership
The following were the primary trading risk exposures of the
Partnership as of December 31, 1998, by market sector.
Interest Rates. Interest rate risk is the principal market exposure of
the Partnership. Interest rate movements directly affect the price of the
futures positions held by the Partnership and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7
interest rates will remain the primary market exposure of the Partnership for
the foreseeable future. The changes in interest rates which have the most effect
on the Partnership are changes in long-term, as opposed to short-term, rates.
30
<PAGE>
Consequently, even a material change in short-term rates would have little
effect on the Partnership were the medium- to long-term rates to remain steady.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Partnership's currency sector will change significantly in
the future, although it is difficult at this point to predict the effect of the
introduction of the Euro on the Advisors' currency trading strategies. The
currency trading Value at Risk figure includes foreign margin amounts converted
into U.S. dollars with an incremental adjustment to reflect the exchange rate
risk inherent to the dollar-based Partnership in expressing Value at Risk in a
functional currency other than dollars.
Stock Indices. The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by the
Partnership are by law limited to futures on broadly based indices. As of
December 31, 1998, the Partnership's primary exposures were in the S&P 500,
Financial Times (England), Nikkei (Japan) and Hang Seng (Hong Kong) stock
indices. The General Partner anticipates little, if any, trading in non-G-7
stock indices. The Partnership is primarily exposed to the risk of adverse price
trends or static markets in the major U.S., European and Japanese indices.
(Static markets would not cause major market changes but would make it difficult
31
<PAGE>
for the Partnership to avoid being "whipsawed" into numerous small losses.)
Metals. The Partnership's primary metal market exposure is to fluctuations in
the price of gold and silver. Although certain of the Advisors will from time to
time trade base metals such as aluminum and copper, the principal market
exposures of the Partnership have consistently been in the precious metals, gold
and silver. The Advisors' gold trading has been increasingly limited due to the
long-lasting and mainly non-volatile decline in the price of gold over the last
10-15 years. However, silver prices have remained volatile over this period, and
the Advisors have from time to time taken substantial positions as they have
perceived market opportunities to develop. The General Partner anticipates that
gold and silver will remain the primary metals market exposure for the
Partnership.
Commodities. The Partnership's primary commodities exposure is to
agricultural price movements which are often directly affected by severe or
unexpected weather conditions. Coffee, cocoa, cotton and sugar accounted for the
substantial bulk of the Partnership's commodity exposure as of December 31,
1998.
Energy. The Partnership's primary energy market exposure is to gas and oil
price movements, often resulting from political developments in the Middle East.
Oil prices are currently depressed, but they can be volatile and substantial
profits and losses have been and are expected to continue to be experienced in
this market.
32
<PAGE>
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership
as of December 31, 1998.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, German marks, British pounds and French francs.
The Advisor regularly converts foreign currency balances to dollars in an
attempt to control the Partnership's non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure.
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
individual positions as well as enter programs traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisors' own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
Each Advisor applies its own risk management policies to its trading. The
Advisors often follow diversification guidelines, margin limits and stop loss
points to exit a position. The Advisors' research of risk management often
suggests on going modifications to their trading programs. As part of the
General Partner's risk management, the General Partner periodically meets with
the Advisors to discuss their risk management and to look for any material
changes to the Advisors'portfolio balance and trading techniques.The Advisors
are required to notify the General Partner of any material changes to their
programs.
33
<PAGE>
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P. II
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath or Affirmation F-2
Report of Independent Accountants. F-3
Financial Statements:
Statement of Financial Condition at
December 31, 1998 and 1997. F-4
Statement of Income and Expenses for the years ended
December 31, 1998 and 1997 and for the period from
January 17, 1996 (commencement of trading operations)
to December 31, 1996. F-5
Statement of Partners' Capital for
the years ended December 31, 1998, 1997
and 1996. F-6
Notes to Financial Statements. F-7 - F-11
F-1
Continued
<PAGE>
To The Limited Partners of
Smith Barney Diversified Futures Fund L.P. II
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: Daniel A. Dantuono, Chief Financial Officer
Smith Barney Futures Management Inc.
General Partner, Smith Barney Diversified
Futures Fund L.P. II
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424
F-2
<PAGE>
Report of Independent Accountants
To the Partners of
Smith Barney Diversified Futures Fund L.P. II:
In our opinion, the accompanying statement of financial condition and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Smith Barney
Diversified Futures Fund L.P. II at December 31, 1998 and 1997, and the results
of its operations for each of the three years in the period ended December 31,
1998, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the management of the General
Partner; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by the management of the General Partner,
and evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 26, 1999
F-3
<PAGE>
Smith Barney Diversified Futures Fund L.P. II
Statement of Financial Condition
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Assets:
Equity in commodity futures trading
account:
Cash (Note 3c) $146,338,218 $104,013,967
Net unrealized appreciation on open
futures contracts 7,931,171 8,931,038
Commodity options owned, at fair
value cost($144,827 in 1997) -- 219,299
------------ ------------
154,269,389 113,164,304
Interest receivable 423,262 383,130
------------ ------------
$154,692,651 $113,547,434
------------ ------------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 788,297 $ 578,625
Management fees 344,022 263,105
Incentive fees 236,839 18,146
Other 59,980 67,467
Redemptions payable (Note 5) 1,465,731 1,040,399
------------ ------------
2,894,869 1,967,742
------------ ------------
Partners' capital (Notes 1 and 7):
General Partner, 1,287.3915 and
1,003.8833 Unit equivalents
outstanding
in 1998 and 1997, respectively 1,569,575 1,128,124
Limited Partners, 123,220.1454 and
98,287.8866 Units of Limited
Partnership Interest outstanding in
1998 and 1997, respectively 150,228,207 110,451,568
------------ ------------
151,797,782 111,579,692
------------ ------------
$154,692,651 $113,547,434
============ ============
</TABLE>
See notes to financial statements.
F-4
<PAGE>
Smith Barney Diversified Futures Fund L.P. II
Statement of Income and Expenses
for the year ended 1998 and 1997 and for the period from
January 17, 1996 (commencement of trading operations) to
December 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Income:
Net gains (losses) on
trading of commodity
interests:
Realized gains (losses)
on closed positions $ 24,030,158 $ (1,202,278) $ 9,032,056
Change in unrealized
gains on open positions (1,074,339) 6,998,480 2,007,030
------------ ------------ ------------
22,955,819 5,796,202 11,039,086
Less, Brokerage
commissions including
clearing fees
of $201,707, $164,059
and $67,406,
respectively (Note 3c) (8,891,659) (6,257,856) (2,169,468)
------------ ------------ ------------
Net realized and
unrealized gains(losses) 14,064,160 (461,654) 8,869,618
Interest income
(Notes 3c and 6) 4,818,279 3,634,245 1,190,687
------------ ------------ ------------
18,882,439 3,172,591 10,060,305
------------ ------------ ------------
Expenses:
Management fees (Note 3b) 3,553,437 2,545,702 866,887
Incentive fees (Note 3b) 1,998,362 314,930 1,199,948
Other expenses 351,104 625,783 119,553
Organization expense
(Note 6) -- -- 291,264
------------ ------------ ------------
5,902,903 3,486,415 2,477,652
------------ ------------ ------------
Net income (loss) $ 12,979,536 $ (313,824) $ 7,582,653
============ ============ ============
Net income (loss) per Unit
of Limited Partnership
Interest and General
Partner Unit equivalent
(Notes 1 and 7) $ 95.43 $ (1.30) 185.99
============ ============ ============
</TABLE>
See notes to financial statements.
F-5
<PAGE>
Smith Barney Diversified
Futures Fund L.P. II
Statement of Partners' Capital
for the years ended
December 31, 1998, 1997 and 1996
<TABLE>
<CAPTION>
Limited Genearal
Partners Partner Total
<S> <C> <C> <C>
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
Net income 12,849,085 130,451 12,979,536
Sale of 38,309.9229 Units
of Limited Partnership
Interest and General
Partner's contribution
representing 283.5082
Unit equivalents 42,074,000 311,000 42,385,000
Redemption of 13,377.6641
Units of Limited
Partnership Interest (15,146,446) -- (15,146,446)
------------- ------------- -------------
Partners' capital at
December 31, 1998 $ 150,228,207 $ 1,569,575 $ 151,797,782
============= ============= =============
</TABLE>
See notes to financial statements.
F-6
<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. On September 1, 1998, the
Partnership's commodity broker, Smith Barney Inc., merged with Salomon
Brothers Inc and changed its name to Salomon Smith Barney Inc. ("SSB"). SSB
is an affiliate of the General Partner. The General Partner is wholly owned
by Salomon Smith Barney Holdings, Inc. ("SSBH"), which is the sole owner of
SSB. On October 8, 1998, Travelers Group Inc. merged with Citicorp Inc. and
changed its name to Citigroup Inc. SSBH is a wholly owned subsidiary of
Citigroup Inc. The General Partner and each limited partner share in the
profits and losses of the Partnership 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.
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at fair value on the
last business day of the year, which represents market value for those
commodity interests for which market quotations are readily available.
Investments in commodity interests denominated in foreign currencies are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the year. Realized gains (losses) and changes in
unrealized values on commodity interests are recognized in the period in
which the contract is closed or the changes occur and are included in net
gains (losses) on trading of commodity interests.
b. 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.
F-7
<PAGE>
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, Campbell & Co., Inc., 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 SSB and are not responsible for the
organization or operation of the Partnership. The Parnership 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, as defined, earned by each Advisor for the Partnership
(except JWH, which will receive an incentive fee of 15% of New Trading
Profits).
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SSB a monthly brokerage fee equal to 1/2 of 1%
(6% per year) of month-end Net Assets, as defined, in lieu of brokerage
commissions on a per trade basis. SSB 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 SSB.
The Partnership's cash is deposited by SSB in segregated bank accounts to
the extent required by Commodity Futures Trading Commission regulations.
At December 31, 1998 and 1997, the amount of cash held for margin
requirements was $18,983,738 and $20,242,392, respectively. SSB has
agreed to pay the Partnership interest on 80% of the average daily equity
maintained in cash in its account during each month at a 30-day U.S.
Treasury bill rate determined weekly by SSB based on the average
noncompetitive yield on 3-month U.S. Treasury bills maturing in 30 days
from the date on which such weekly rate is determined. The Customer
Agreement between the Partnership and SSB gives the Partnership the legal
right to net unrealized gains and losses. The Customer Agreement may be
terminated upon notice by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity interests. The results of the Partnership's trading
activity are shown in the statement of income and expenses. All of the
commodity interests, owned by the Partnership, are held for trading
purposes. The fair value of these commodity interests, including options
thereon, if applicable, at December 31, 1998 and 1997 was $7,931,171 and
$9,150,337, respectively, and the average fair value during the year then
ended, based on a monthly calculation, was $8,531,763 and $5,938,920,
respectively.
F-8
<PAGE>
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.
6. Organization and Offering Costs:
Expenses related to the continuous offering of Units in 1998 and 1997
totaled $248,844 and $501,620, respectively, 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 SSB 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 SSB 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 of Partnership interest for the
years ended December 31, 1998 and 1997 and for the period from January 17,
1996 (commencement of trading operations) to December 31, 1996 were as
follows:
1998 1997 1996
Net realized and unrealized
gains (losses) $ 103.15 $ (0.92) $ 177.40
Interest income 41.25 43.48 36.09
Expenses (48.97) (43.86) (67.51)
Other -- -- 40.01
--------- --------- ---------
Increase (decrease) for period 95.43 (1.30) 185.99
Net asset value per Unit,
beginning of period 1,123.76 1,125.06 939.07
--------- --------- ---------
Net asset value per Unit,
end of period $1,219.19 $ 1,123.76 $ 1,125.06
========== ========= =========
8. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial
instruments may include forwards, futures 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. Market risk is the potential
F-9
<PAGE>
for changes in the value of the financial instruments traded by the
Partnership due to market changes, including interest and foreign exchange
rate movements and fluctuations in commodity or security prices. Market risk
is directly impacted by the volatility and liquidity in the markets in which
the related underlying assets are traded. Credit risk is the possibility
that a loss may occur due to the failure of a counterparty to perform
according to the terms of a contract. Credit risk with respect to exchange
traded instruments is reduced to the extent that an exchange or clearing
organization acts as a counterparty to the transactions. The Partnership's
risk of loss in the event of counterparty default is typically limited to
the amounts recognized in the statement of financial condition and not
represented by the contract or notional amounts of the instruments. The
Partnership has concentration risk because the sole counterparty or broker
with respect to the Partnership's assets is SSB. The General Partner
monitors and controls the Partnership's risk exposure on a daily basis
through financial, credit and risk management monitoring systems, and
accordingly believes that it has effective procedures for evaluating and
limiting the credit and market risks to which the Partnership is subject.
These monitoring systems allow the General Partner to statistically analyze
actual trading results with risk adjusted performance indicators and
correlation statistics. In addition, on-line monitoring systems provide
account analysis of futures, forwards and options positions by sector,
margin requirements, gain and loss transactions and collateral positions.
The notional or contractual amounts of these instruments, while
appropriately not recorded in the financial statements, reflect the extent
of the Partnership's involvement in these instruments. At December 31, 1998,
the Partnership's commitment to purchase and sell these instruments was
$627,878,574 and $849,849,754, respectively, as detailed below. All of these
instruments mature within one year of December 31, 1998. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity. At December 31, 1998, the fair value of the Partnership's
derivatives, including options thereon, if applicable, was $7,931,171, as
detailed below.
December 31, 1998
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair Value
Currencies:
-Exchange Traded Contracts $ 23,119,700 $ 1,535,710 $ (260,990)
-OTC Contracts 206,074,644 166,497,199 (1,219,718)
Energy -- 16,794,100 316,796
Grains 301,800 15,364,740 446,680
Interest Rate U.S. 70,685,806 226,439,506 (588,909)
Interest Rate Non-U.S 281,828,669 352,070,813 7,311,953
Livestock -- 4,570,380 214,540
Metals 15,054,941 42,312,165 790,656
Softs 14,099,125 15,753,068 853,554
Indices 16,713,889 8,512,073 66,609
------------ ------------ ------------
Total $627,878,574 $849,849,754 $ 7,931,171
============ ============ ============
F-10
<PAGE>
At December 31, 1997, the notional or contractual amounts of the Partnership's
commitment to purchase and sell these instruments was $529,827,193 and
$562,544,334, respectively, and the fair value of the Partnership's derivatives,
including options thereon, if applicable, was $9,150,337, as detailed below.
December 31, 1997
Notional or Contractual
Amount of Commitments
To Purchase To Sell Fair Value
Currencies:
-Exchange Traded Contracts $ 16,384,721 $107,228,370 $ 480,324
-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 U.S. 140,875,215 11,765,610 717,418
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
============ ============ ============
9. Subsequent Events:
Millburn Ridgefield Corporation and ARA Portfolio Management Company,
L.L.C. were terminated as Advisors to the Partnership on January 31, 1999.
Beacon Management Corporation and Roy G. Niederhoffer Co., Inc. were
added as Advisors on February 1, 1999.
10. New Accounting Pronouncements:
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
Accounting for Derivative Instruments and Hedging Activities ("SFAS 133").
SFAS 133 requires that an entity recognize all derivatives in the statement
of financial condition and measure those instruments at fair value. SFAS
133 is effective for fiscal years beginning after June 15, 1999. SFAS 133
is expected to have no material impact on the financial statements of the
Partnership as all commodity interests are recorded at fair value, with
changes therein reported in the statement of income and expenses.
F-11
<PAGE>
<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. As of
December 31, 1998, investment decisions were being made by John W. Henry
& Company, Inc., Campbell and Company Inc., 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. SSB, an
affiliate of the General Partner, is the commodity broker for the Partnership
and receives brokerage commissions for such services, as described under "Item
1. Business." Brokerage commissions and clearing fees of $8,891,659 were paid
for the year ended December 31, 1998. Management fees and incentive fees of
$3,553,437 and $1,998,362, respectively, were paid to the Advisors for the year
ended December 31, 1998.
35
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners. As of March 1,
1999, 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 1,287.3915 Units (1.0%) of Limited Partnership Interest as of
December 31, 1998.
(c). Changes in control. None.
Item 13. Certain Relationship and Related Transactions.
Salomon 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, 1998 and 1997.
Statement of Income and Expenses for the years ended December31,
1998 and 1997 and for the period from January 17, 1996
(commencement of trading operations) to December 31, 1996.
Statement of Partners' Capital for the years ended December 31,
1998, 1997 and 1996.
(2)Financial Statement Schedules: Financial Data Schedule for the
year ended December 31, 1998.
36
<PAGE>
(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).
37
<PAGE>
10.4- Management Agreement among the Partnership, the 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 as Exhibit
10.7 to the Form 10-K for the year ended December 31, 1997).
10.8- Management Agreement among the Partnership, the General
Partner and ARA Portfolio Management Company, L.L.C. (filed
as Exhibit 10.8 to the Form 10-K for the year ended December
31, 1997).
10.9- Letter from General Partner terminating Management Agreement
with Chesapeake Capital Corporation (filed as Exhibit 10.9
to the Form 10-K for the year ended December 31, 1997).
38
<PAGE>
10.10- Management Agreement among the Partnership, the General
Partner and Campbell & Co., Inc. (filed as Exhibit 10.10 to
the Form 10-K for the year ended December 31, 1997).
10.11- Letters extending Management Agreements with John W. Henry
& Company Inc., Chesapeake Capital Corporation and Millburn
Ridgefield Corporation for 1996 and 1997 (filed as Exhibit
10.11 to the Form 10-K for the year ended December 31,
1997).
10.12- Letters from General Partner terminating Management
Agreement with Millburn Ridgefield Corporation (filed
herein).
10.13- Letter from General Partner terminating Management
Agreement with ARA Portfolio Management (filed herein).
10.14- Management Agreement among the Partnership, the General
Partner and Beacon Management Corporation (filed herein).
10.15- Management Agreement among the Partnership, the General
Partner and Roy G. Neiderhoffer Co., Inc. (filed herein).
10.16- Letters extending Management Agreements with John W. Henry
& Company Inc., Campbell & and Company, Inc. and
Willowbridge Associates Inc.(filed herein). (b) Reports on
8-K: None Filed.
39
<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
40
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this 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 1999.
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 Exchange Act of 1934, 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 R. Schaefer /s/ Daniel A. Dantuono
Michael R. Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
41
<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-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 146,338,218
<SECURITIES> 7,931,171
<RECEIVABLES> 423,262
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 154,692,651
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 154,692,651
<CURRENT-LIABILITIES> 2,894,869
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 151,797,782
<TOTAL-LIABILITY-AND-EQUITY> 154,692,651
<SALES> 0
<TOTAL-REVENUES> 18,882,439
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,902,903
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 12,979,536
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,979,536
<EPS-PRIMARY> 95.43
<EPS-DILUTED> 0
</TABLE>
January 27, 1999
George Crapple
Millburn Ridgefield
1270 Avenue fo the Americas
New York, New York 10020-1795
Re: Smith Barney Diversified Futures Fund L.P. II
Dear George:
Please liquidate all of your positions in the above references
fund(s) in an orderly fashion by the close of business Friday,
January 29, 1999.
If you have any questions, I can be reached at 212- 723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
Daniel A. Dantuono
Chief Financial Officer & Director
DAD/sr
January 27, 1999
A.R. Arulpragasam
ARA Portfolio Management
195 Church Street
9th Floor
New Haven, CT 06510-2009
Re: Smith Barney Diversified Futures Fund L.P. II
Dear Raj:
Please liquidate all of your positions in the above references
fund(s) in an orderly fashion by the close of business Friday,
January 29, 1999.
If you have any questions, I can be reached at 212- 723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
Daniel A. Dantuono
Chief Financial Officer & Director
DAD/sr
MANAGEMENT AGREEMENT
AGREEMENT made as of the 1st day of February, 1999 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM" or the "Trading
Manager"), SMITH BARNEY DIVERSIFIED FUTURES FUND L.P., a New York limited
partnership (the "Partnership") and BEACON MANAGEMENT CORPORATION (USA), 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) For the period and on the terms
and conditions of this Agreement, the Advisor shall have sole authority and
responsibility, as one of the Partnership's agents and attorneys-in-fact, for
directing the investment and reinvestment of the assets and funds of the
Partnership allocated to it by the General Partner in commodity interests,
including commodity futures contracts, options and forward contracts. All such
trading on behalf of the Partnership shall be in accordance with the trading
policies set forth in the Prospectus and Disclosure Document dated April 30,
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 Meka Program (the "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 February 1, 1999 as filed with the NFA and the CFTC. All trades
made by the Advisor for the account of the Partnership shall be made through
such commodity broker or brokers as SBFM shall direct, and the Advisor shall
have no authority or responsibility for selecting or supervising any such broker
in connection with the execution, clearance or confirmation of transactions for
the Partnership or for the negotiation of brokerage rates charged therefor.
However, the Advisor, with the prior written permission (by either original or
fax copy) of SBFM, may direct all trades in commodity futures and options to a
futures commission merchant or independent floor broker it chooses for execution
with instructions to give-up the trades to the broker designated by SBFM,
provided that the futures commission merchant or independent floor broker and
any give-up or floor brokerage fees are approved in advance by SBFM. All give-up
or similar fees relating to the foregoing shall be paid by the Partnership after
all parties have executed the relevant give-up agreements (by either original or
fax copy). 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 made to the Program. In the event the Advisor wishes to use a
trading system or methodology other than or in addition to the Program as
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 which consent shall not be
unreasonably withheld. 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 which consent shall not be
unreasonably withheld. 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, if
applicable. Further, the Advisor will provide the Partnership with a current
list of all commodity interests to be traded for the Partnership's account. The
Advisor also agrees to provide SBFM, on a monthly basis, with a written report
of the assets under the Advisor's management in an agreed-upon format. The
Advisor further agrees that it will convert foreign currency balances (not
required to margin positions denominated in a foreign currency) to U.S. dollars
no less frequently than monthly. U.S. dollar equivalents in individual foreign
currencies of more than $100,000 will be converted to U.S. dollars within one
business day after such funds are no longer needed to margin foreign positions.
(d) The Advisor agrees to make all material disclosures to the
Partnership regarding itself and its principals as defined in Part 4 of the
CFTC's regulations ("principals"), shareholders, directors, officers and
employees, their trading performance and general trading methods, its customer
accounts (but not the identities of or identifying information with respect to
its customers) 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. 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, and agree that
such advice shall not be disclosed to third parties without the prior written
consent of the Advisor. Nothing in this Agreement shall require the Advisor to
disclose the non-public details of its strategies.
(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 and to require such reallocations or liquidations only at
month-end.
(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 solely and directly to errors committed or caused by it or any of
its principals or employees in communicating 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 Salomon Smith Barney Inc. or any of
its affiliates) 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, the General Partner, or any other trading
advisor. The Advisor shall not be responsible to the Partnership, SBFM, any
trading advisor or any limited partners for any acts or omissions of any other
trading 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 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.
(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, to the best of its present
knowledge, 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 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 pool accounts managed by the Advisor or its
principals using the same strategy as shall be reasonably requested by SBFM. The
Advisor presently believes and represents that existing speculative position
limits will not materially adversely affect its ability to manage the
Partnership's account given the potential size of the Partnership's account and
the Advisor's and its principals' current accounts and all proposed accounts for
which they have contracted to act as trading manager.
5. TERM. (a) This Agreement shall continue in effect until
June 30, 1999. SBFM may, in its sole discretion, renew this Agreement for
additional one-year periods upon notice to the Advisor not less than 30 days
prior to the expiration of the previous period. At any time during the term of
this Agreement, SBFM may terminate this Agreement at any month-end upon 30 days'
notice to the Advisor. At any time during the term of this Agreement, SBFM may
elect to immediately terminate this Agreement upon 30 days' notice to the
Advisor if (i) the Net Asset Value per Unit shall decline as of the close of
business on any day to $400 or less; (ii) the Net Assets allocated to the
Advisor (adjusted for redemptions, distributions, withdrawals or reallocations,
if any) decline by 50% or more as of the end of a trading day from such Net
Assets' previous highest value; (iii) limited partners owning at least 50% of
the outstanding Units shall vote to require SBFM to terminate this Agreement;
(iv) the Advisor fails to comply with the terms of this Agreement in a material
manner; (v) SBFM, in good faith, reasonably determines that the performance of
the Advisor has been such that SBFM's fiduciary duties to the Partnership
require SBFM to terminate this Agreement; or (vi) SBFM reasonably believes that
the application of speculative position limits will substantially affect the
performance of the Partnership. At any time during the term of this Agreement,
SBFM may elect immediately to terminate this Agreement if (i) the Advisor
merges, consolidates with another entity, sells a substantial portion of its
assets, or becomes bankrupt or insolvent, (ii) Grant W. Schaumburg Jr. and Mark
S. Stratton 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. 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) if liquidations are ordered pursuant to Section 1(f)
above; (iii) after June 30, 1999; or (iv) 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
trading advisor, or SFG's registration as a commodity pool operator or either of
their memberships 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, 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 material breach of its fiduciary obligations to the
Partnership as a commodity trading advisor. 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) To the extent that the Advisor has been successful on the
merits or otherwise in defense of any action, suit or proceeding referred to in
subparagraph (i) above, or in defense of any claim, issue or matter therein,
SBFM shall indemnify it against the expenses (including, without limitation,
attorneys' and accountants' fees) actually and reasonably incurred by it in
connection therewith.
(iii) Any indemnification under subparagraph (i) above, unless
ordered by a court or administrative forum, shall be made by SBFM only as
authorized in the specific case and only upon a determination by independent
legal counsel in a written opinion that such indemnification is proper in the
circumstances because the Advisor has met the applicable standard of conduct set
forth in subparagraph (i) above. Such independent legal counsel shall be
selected by SBFM in a timely manner, subject to the Advisor's approval, which
approval shall not be unreasonably withheld. The Advisor will be deemed to have
approved SBFM's selection unless the Advisor notifies SBFM in writing, received
by SBFM within five days of SBFM's telecopying to the Advisor of the notice of
SBFM's selection, that the Advisor does not approve the selection.
(iv) In the event the Advisor is made a party to any claim,
dispute or litigation or otherwise incurs any loss or expense as a result of, or
in connection with, the Partnership's or SBFM's activities or claimed activities
unrelated to the Advisor, SBFM shall indemnify, defend and hold harmless the
Advisor against any loss, liability, damage, cost or expense (including, without
limitation, attorneys' and accountants' fees) incurred in connection therewith.
(v) As used in this Paragraph 6(a), the terms "Advisor" shall
include the Advisor, its principals, officers, directors, stockholders and
employees and the term "SBFM" shall include the Partnership.
(b)(i) The Advisor agrees to indemnify, defend and hold
harmless SBFM, the Partnership and their affiliates against any loss, liability,
damage, cost or expense (including, without limitation, attorneys' and
accountants' fees), judgments and amounts paid in settlement actually and
reasonably incurred by them (A) as a result of the material breach of any
material representations and warranties made by the Advisor in this Agreement,
or (B) as a result of any act or omission of the Advisor relating to the
Partnership if there has been a final judicial or regulatory determination or,
in the event of a settlement of any action or proceeding with the prior written
consent of the Advisor, a written opinion of an arbitrator pursuant to Paragraph
14 hereof, to the effect that such acts or omissions violated the terms of this
Agreement in any material respect or involved negligence, bad faith,
recklessness or intentional misconduct on the part of the Advisor (except as
otherwise provided in Section 1(g)).
(ii) In the event SBFM, the Partnership or any of their
affiliates is made a party to any claim, dispute or litigation or otherwise
incurs any loss or expense as a result of, or in connection with, the activities
or claimed activities of the Advisor or its principals, officers, directors,
shareholder(s) or employees unrelated to SBFM's or the Partnership's business,
the Advisor shall indemnify, defend and hold harmless SBFM, the Partnership or
any of their affiliates against any loss, liability, damage, cost or expense
(including, without limitation, attorneys' and accountants' fees) incurred in
connection therewith.
(c) In the event that a person entitled to indemnification
under this Paragraph 6 is made a party to an action, suit or proceeding alleging
both matters for which indemnification can be made hereunder and matters for
which indemnification may not be made hereunder, such person shall be
indemnified only for that portion of the loss, liability, damage, cost or
expense incurred in such action, suit or proceeding which relates to the matters
for which indemnification can be made.
(d) None of the indemnifications contained in this Paragraph 6
shall be applicable with respect to default judgments, confessions of judgment
or settlements entered into by the party claiming indemnification without the
prior written consent, which shall not be unreasonably withheld, of the party
obligated to indemnify such party.
(e) The provisions of this Paragraph 6 shall survive the
termination of this Agreement.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) The Advisor represents and warrants that:
(i) All references to the Advisor and its principals in the
Prospectus, if any, 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 (if
applicable), this representation and warranty extends only to the underlying
performance 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 which would materially limit or affect the performance of its
duties under this Agreement.
(vi) This Agreement has been duly and validly authorized,
executed and delivered by the Advisor and is a valid and binding agreement
enforceable in accordance with its terms.
(vii) At any time during the term of this Agreement that a
prospectus relating to the Units is required to be delivered in connection with
the offer and sale thereof, the Advisor agrees upon the request of SBFM to
provide the Partnership with such information as shall be necessary so that, as
to the Advisor and its principals, such prospectus is accurate.
(b) SBFM represents and warrants for itself and the
Partnership that:
(i) The Prospectus (as from time to time amended or
supplemented, which amendment or supplement is approved by the Advisor as to
descriptions of itself and its actual performance) does not contain any untrue
statement of a material fact or omit to state a material fact which is necessary
to make the statements therein not misleading, except that the foregoing
representation does not apply to any statement or omission concerning the
Advisor in the Prospectus, made in reliance upon, and in conformity with,
information furnished to SBFM by or on behalf of the Advisor expressly for use
in the Prospectus.
(ii) It is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware and has full corporate
power and authority to perform its obligations under this Agreement.
(iii) SBFM and the Partnership have the capacity and authority
to enter into this Agreement on behalf of the Partnership.
(iv) This Agreement has been duly and validly authorized,
executed and delivered on SBFM's and the Partnership's behalf and is a valid and
binding agreement of SBFM and the Partnership enforceable in accordance with its
terms.
(v) SBFM will not, by acting as General Partner to the
Partnership and the Partnership will not, breach or cause to be breached any
undertaking, agreement, contract, statute, rule or regulation to which it is a
party or by which it is bound which would materially limit or affect the
performance of its duties under this Agreement.
(vi) It is registered as a commodity pool operator and is a
member of the NFA, and 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.
(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 demonstrate to SBFM's satisfaction its
ability to bear its responsibilities arising under this Agreement, by
presentation of supporting documentation (such as financial statements together
with a certification of accuracy or, in certain cases, the individual
obligations of the controlling principals of the Advisor for the Advisor's
responsibilities hereunder) as SBFM may reasonably request. In this connection,
Advisor agrees that it shall cause the Promissory Note attached hereto as Rider
A to be executed.
(b) SBFM agrees for itself and the Partnership that:
(i) SBFM and the Partnership will comply with all applicable
laws, rules and regulations including those 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, 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:
Beacon Management Corporation (USA)
47 Hulfish Street
Princeton, New Jersey 08542
Attention: Grant W. Schaumburg Jr.
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>
0556053.02
-1-
15. NO THIRD PARTY BENEFICIARIES. There are no third party
beneficiaries to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
SMITH BARNEY FUTURES
MANAGEMENT INC.
By
David J. Vogel
President and Director
SMITH BARNEY DIVERSIFIED
FUTURES FUND L. P. II
By: Smith Barney
Futures Management Inc.
(General Partner)
By
David J. Vogel
President and Director
BEACON MANAGEMENT
CORPORATION (USA)
By
Name:
Title:
<PAGE>
RIDER A
PROMISSORY NOTE
Princeton, New Jersey
Date: February 1, 1999
FOR VALUE RECEIVED, the undersigned, Grant W. Schaumburg Jr.
and Mark S. Stratton, each promise to pay on demand, to the order of SMITH
BARNEY DIVERSIFIED FUTURES FUND L. P. II (the "Fund") or Smith Barney Futures
Management Inc. ("SBFM") as the Fund or SBFM shall elect, the sum of Two Hundred
Thousand Dollars ($200,000). This note shall be callable by the Fund or SBFM
only if and to the extent that Beacon Management Corporation (USA) ("Beacon"), a
Delaware corporation, does not have sufficient assets to fulfill Beacon's
obligations associated with the Management Agreement dated February 1, 1999
among SBFM, the Fund and Beacon.
- ------------------------- -------------------------
Grant W. Schaumburg Jr. Mark S. Stratton
MANAGEMENT AGREEMENT
AGREEMENT made as of the 1st day of February, 1999 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM"), SMITH BARNEY
DIVERSIFIED FUTURES FUND L. P. II, a New York limited partnership (the
"Partnership") and R.G. NIEDERHOFFER CAPITAL MANAGEMENT, 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) For the period and on the terms
and conditions of this Agreement, the Advisor shall have sole authority and
responsibility, as one of the Partnership's agents and attorneys-in-fact, for
directing the investment and reinvestment of the assets and funds of the
Partnership allocated to it by the General Partner in commodity interests,
including commodity futures contracts, options and forward contracts. All such
trading on behalf of the Partnership shall be in accordance with the trading
policies set forth in the Prospectus and Disclosure Document dated April 30,
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 Program (the "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 materially deviate from the trading policies set
forth in the Prospectus without the prior written consent of the Partnership
given by SBFM. SBFM acknowledges that the Advisor may utilize exchange for
physical transactions in its trading for the Partnership. 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 October 9, 1998 as filed with the NFA and CFTC (the "Disclosure
Document"). All trades made by the Advisor for the account of the Partnership
shall be cleared 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). 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 (all
actual, no notional, funds) to the Advisor will be made to the Program. The
parties acknowledge that if assets of the Fund under the Advisor's management
fall below U.S. $1 million, the Advisor may not be able to trade all of the
Program's portfolio for the Fund. In the event the Advisor wishes to use a
trading system or methodology materially different from, other than or in
addition to the Program as outlined in the Disclosure Document in connection
with its trading for the Partnership, either in whole or in part, it may not do
so unless the Advisor gives SBFM prior written notice of its intention to
utilize such different trading system or methodology and SBFM consents thereto
in writing. In addition, the Advisor will provide five days' prior written
notice to SBFM of any change in the trading system or methodology to be utilized
for the Partnership which the Advisor deems material. If the Advisor deems such
change in system or methodology or in markets traded to be material, the changed
system or methodology or markets traded will not be utilized for the Partnership
without the prior written consent of SBFM. In addition, the Advisor will notify
SBFM of any changes to the trading system or methodology that would require a
change in the description of the trading strategy or methods described in the
Disclosure Document, if applicable. Immaterial changes may be instituted without
prior written approval of SBFM. Further, the Advisor will provide the
Partnership with a current list of all commodity interests to be traded for the
Partnership's account. The Advisor also agrees to provide SBFM, on a monthly
basis, with a written report of the assets under the Advisor's management
together with all other matters deemed by the Advisor to be material changes to
its business not previously reported to SBFM. The Advisor further agrees that it
will use its best efforts to convert foreign currency balances (not required to
margin positions denominated in a foreign currency) to U.S.
dollars no less frequently than approximately monthly.
(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 disclosure documents and amendments thereto or 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 and will not make use of such advice in any manner
or disclose such advice to third parties. 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 $1,000,000 (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 and the Partnership
acknowledge that any such request to liquidate positions by SBFM may result in
the Partnership incurring losses which it might otherwise not have incurred.
SBFM will use its best efforts to give two days' prior notice to the Advisor of
any reallocations or liquidations. The Advisor may refuse any increase in the
amount of the allocated assets in its sole discretion.
(g) The Advisor will not be liable for trading losses in the
Partnership's account including losses caused by errors; provided, however, that
the Advisor will be liable to the Partnership with respect to losses incurred
due to negligent 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.
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 simultaneous 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 principals, officers, directors,
employees and shareholder(s), may render advisory, consulting and management
services to other clients and accounts. The Advisor and its principals,
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 and different
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. The Partnership and SBFM acknowledge that all such trading for
other accounts may increase the level of competition with respect to priorities
of order entry and may restrict the ability of the Advisor to obtain or maintain
positions in futures due to the application of CFTC or exchange imposed
speculative position limits and daily trading limits. 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 materially 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 a 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 on an
overall basis, it being acknowledged, however, that different trading
strategies, programs, methods and degrees of leverage may be utilized for
differing sizes of accounts, accounts with different trading policies and
restrictions, 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. SBFM and the Partnership further
acknowledge that the Advisor offers another trading program than the Program
which they have selected and that such other trading program may obtain more
favorable results than the Program.
(c) It is acknowledged that the Advisor and/or its principals,
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 client accounts managed by the Advisor or
its principals pursuant to the Program 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 advisor.
5. TERM. (a) This Agreement shall continue in effect until
June 30, 1999. SBFM may, in its sole discretion, renew this Agreement for
additional one-year periods upon notice to the Advisor not less than 30 days
prior to the expiration of the previous period. At any time during the term of
this Agreement, SBFM may terminate this Agreement at any month-end upon 30 days'
notice to the Advisor. At any time during the term of this Agreement, SBFM may
elect to immediately terminate this Agreement upon 30 days' notice to the
Advisor if (i) the Net Asset Value per Unit shall decline as of the close of
business on any day to $400 or less; (ii) the Net Assets allocated to the
Advisor (adjusted for redemptions, distributions, withdrawals or reallocations,
if any) decline by 50% or more as of the end of a trading day from such Net
Assets' previous highest value; (iii) limited partners owning at least 50% of
the outstanding Units shall vote to require SBFM to terminate this Agreement;
(iv) the Advisor fails to comply with the terms of this Agreement in all
material respects; (v) SBFM, in good faith, reasonably determines that the
performance of the Advisor has been such that SBFM's fiduciary duties to the
Partnership require SBFM to terminate this Agreement; or (vi) SBFM reasonably
believes that the application of speculative position limits will substantially
affect the performance of the Partnership. At any time during the term of this
Agreement, SBFM may elect immediately to terminate this Agreement if (i) the
Advisor merges, consolidates with another entity, sells a substantial portion of
its assets, or becomes bankrupt or insolvent, (ii) R.G. Niederhoffer 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, 1999; or (iii) in the event that the
General Partner or Partnership fails to comply with the terms of this Agreement.
The Advisor may immediately terminate this Agreement if SBFM's registration as a
commodity pool operator or its membership in the NFA is terminated or suspended.
(c) Except as otherwise provided in this Agreement, any
termination of this Agreement in accordance with this Paragraph 5 or Paragraph
1(e) shall be without penalty or liability to any party, except for any fees due
to the Advisor pursuant to Section 3 hereof.
6. EXCULPATION AND INDEMNIFICATION. (a)(i) The Advisor shall
not be liable to SBFM, the Partnership or their respective shareholders,
partners, successors or assigns under this Agreement for any act or failure to
act taken or omitted in good faith in a manner reasonably believed to be in or
not opposed to the best interests of the Partnership if such act or failure to
act did not constitute negligence, intentional misconduct, a material breach of
any material representations or warranties made by the Advisor in this
Agreement, or a breach of its fiduciary obligations to the Partnership as a
commodity trading advisor. 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, a material breach of any material
representations or warranties made by the Advisor in this Agreement, 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) 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 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 as a result of the Advisor's failure to act in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership, or if the Advisor's conduct constituted negligence, intentional
misconduct, a material breach of any material representations or warranties made
by the Advisor in this Agreement, or a breach of its fiduciary obligations to
the Partnership as a commodity trading advisor.
(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) Any indemnification under subparagraph (i) above, unless
ordered by a court 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 telecopying to SBFM of the notice of 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 to the Partnership and
SBFM that:
(i) All references, if any, 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 (if
applicable), 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, if any, 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 have been
prepared in accordance with the "Fully Funded Subset" method or such other
method approved by the CFTC as described in the Disclosure Document. The
information with respect to the Program pertains to 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 corporate 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 which would materially limit or affect the performance of its
duties under this Agreement.
(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 in all material
respects.
(b) SBFM represents and warrants to the Advisor 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, if any) is complete and
accurate in all material respects and 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,
if any, 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, if applicable, 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.
(viii) The Partnership and SBFM are and shall remain in
compliance in all material respects with all statutes, laws, rules, regulations
and orders of any government, governmental agency or self-regulatory
organization applicable to its business, this Agreement or the offering of the
units in the Partnership.
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; (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, and any
assignment without the express written consent of all the parties shall be null
and void.
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:
R.G. Niederhoffer Capital Management, Inc.
145 West 57th Street
10th Floor
New York, New York 10019
Attention: Roy G. Niederhoffer
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 acknowledges that the trading systems, methods,
models, strategies and formulas of the Advisor are the sole and exclusive
property of the Advisor; SBFM further agrees that it will keep confidential and
will not disseminate information regarding such systems, methods, models,
strategies and formulas to any person.
<PAGE>
15. NO THIRD PARTY BENEFICIARIES. Except as otherwise provided
in this Agreement, there are no third party beneficiaries to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed for and
on behalf of the undersigned as of the day and year first above written.
SMITH BARNEY FUTURES
MANAGEMENT INC.
By
David J. Vogel
President and Director
SMITH BARNEY DIVERSIFIED
FUTURES FUND L. P. II
By: Smith Barney
Futures Management Inc.
(General Partner)
By
David J. Vogel
President and Director
R.G. NIEDERHOFFER CAPITAL
MANAGEMENT, INC.
By
Roy G. Niederhoffer
President
June 22, 1998
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, 1999
and make the attached modification on Rider 1. All other provisions of the
Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above or fax to 212-723-8985. If you have any questions I can be
reached at 212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
JOHN W. HENRY & COMPANY
By:
Print Name:
DAD/sr
June 22, 1998
Willowbridge Associates Inc.
101 Morgan Lane - Suite 180
Plainsboro, N.J. 07036
Attention: Ms. Theresa Morris
Re: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II
Dear Ms. Morris:
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, 1999
and make the attached modification on Rider 1. Per our recent correspondence to
you, the current allocation is 50% to the Argo trading system and 50% to the
Vulcan trading system. All other provisions of the Management Agreement will
remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above or fax to 212-723-8985. If you have any questions I can be
reach at 212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
WILLOWBRIDGE ASSOCIATES INC.
By:
Print Name:
DAD/sr
June 22, 1998
Campbell & Co. Inc.
210 West Pennsylvania Avenue
Baltimore, MD 21204
Attention: Ms. Terry Livesey
RE: Management Agreement Renewal
Smith Barney Diversified Futures Fund L.P. II
Dear Ms. Livesey:
We are writing with respect to your management agreement concerning the
commodity pool to which reference is made above (the "Management Agreement"). We
would like to extend the term of the Management Agreement through June 30, 1999
and make the attached modification on Rider 1. All other provisions of the
Management Agreement will remain unchanged.
Please indicate your agreement to and acceptance of this modification by signing
one copy of this letter and returning it to the attention of Mr. Daniel Dantuono
at the address above or fax to 212-723-8985. If you have any questions I can be
reached at 212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
By:
Daniel A. Dantuono
Chief Financial Officer,
Director & Treasurer
AGREED AND ACCEPTED
CAMPBELL & CO. INC.
By:
Print Name:
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