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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, 2000
Commission File Number 0-26132
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
(Exact name of registrant as specified in its charter)
New York 13-3729162
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
388 Greenwich St. - 7th 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, 2001, Limited Partnership Units with an aggregate value of
$72,666,658 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
PART I
Item 1. Business.
(a) General development of business. Smith Barney Diversified Futures
Fund L.P. ("Partnership") is a limited partnership organized under the
partnership laws of the State of New York, on August 13, 1993 to engage in
speculative trading of a diversified portfolio of commodity interests, including
futures contracts, options and forwards. The commodity interests that are traded
by the Partnership are volatile and involve a high degree of market risk. The
Partnership commenced trading operations on January 12, 1994. A total of 150,000
Units of Limited Partnership Interest in the Partnership ("Units") were offered
to the public. A Registration Statement on Form S-1 relating to the public
offering became effective on October 29, 1993. Between October 29, 1993 and
January 11, 1994, 75,615 Units were sold to the public at $1,000 per Unit.
Proceeds of the offering were held in an escrow account and were transferred,
along with the general partner's contribution of $781,000 to the Partnership's
trading account on January 12, 1994 when the Partnership commenced trading. An
additional 150,000 Units were registered on a Registration Statement on Form S-1
effective February 17, 1994. Sales of additional Units and additional general
partner contributions and redemptions of Units for the year ended December 31,
2000 are reported in the Statement of Partners' Capital on page F-6 under "Item
8. Financial Statements and Supplementary Data."
2
The general partner has agreed to make capital contributions, if necessary,
so that its general partnership interest will be equal to the greater of (i) an
amount to entitle it to 1% of each material item of Partnership income, loss,
deduction or credit and (ii) the greater of (a) 1% of the partners'
contributions to the Partnership or (b) $25,000. The Partnership will be
liquidated upon the first of the following to occur: December 31, 2013; the net
asset value of a Unit decreases to less than $400 as of the close of any
business day; or under certain circumstances as defined in the Limited
Partnership Agreement of the Partnership (the "Limited Partnership Agreement").
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The Partnership's commodity broker is
Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General Partner.
The General Partner is wholly owned by Salomon Smith Barney Holdings Inc.
("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly owned subsidiary of
Citigroup Inc.
The Partnership's trading of futures, forwards and options contracts, if
applicable, on commodities is done on United States of America and foreign
commodity exchanges. It engages in such trading through a commodity brokerage
account maintained with SSB.
3
As of December 31, 2000, all commodity trading decisions are made for the
Partnership by Campbell & Company, Inc. ("Campbell"), Willowbridge Associates,
Inc. ("Willowbridge"), Bridgewater Associates Inc. ("Bridgewater"), Dominion
Capital Management Inc. ("Dominion") and Stonebrook Structured Products, LLC
("Stonebrook") (collectively, the "Advisors"). None of the Advisors is
affiliated with one another, the General Partner or SSB. The Advisors are not
responsible for the organization or operation of the Partnership. John W. Henry
& Company, Inc. ("JWH") and Rabar Market Research, Inc. ("Rabar") were
terminated as Advisors to the Partnership on July 1, 2000. Bridgewater and
Dominion were added as Advisors on that date
Pursuant to the terms of the Management Agreements (the "Management
Agreements"), the Partnership pays Campbell, Dominion and Willowbridge a monthly
management fee equal to 1/6 of 1% (2% per year) of Net Assets allocated to the
Advisor as of the end of each month. Bridgewater receives a monthly management
fee equal to 5/48 of 1% (1.25% per year) of month end Net Assets of the
Partnership allocated to the Advisor as of the end of each month. For the period
January 1, 2000 through February 29, 2000, Stonebrook was paid a monthly
management fee equal to 1/16 of 1% (0.75% per year) of a fixed notional account
size of $75,000,000. Effective March 1, 2000, Stonebrook receives a monthly
management fee equal to 1/20 of 1% (0.60% per year) of a fixed notional account
size determined on a monthly basis by the General Partner. In addition, the
Partnership is obligated to pay each Advisor, except Stonebrook, 20% of the New
4
Trading Profits, as defined in the Management Agreements, earned by each Advisor
to the Partnership in each calendar quarter. Stonebrook does not receive an
incentive fee. For the period January 1, 2000 through June 30, 2000, the
Partnership was obligated to pay John W. Henry & Company, Inc. a monthly
management fee equal to 1/3 of 1% (4% per year) and an incentive fee payable
quarterly equal to 15% of the New Trading Profits, as defined in the Management
Agreement.
The Partnership has entered into a Customer Agreement with SSB (the
"Customer Agreement") which provides that the Partnership will pay SSB a monthly
brokerage fee equal to 11/24 of 1% of month-end Net Assets allocated to the
Advisors (5.5% per year) in lieu of brokerage commissions on a per trade basis.
Persons investing $1,000,000 or more will pay a reduced brokerage fee of 7/24 of
1% of month-end Net Assets (3.5% per year), receiving the differential between
this reduced fee and 5.5% per year in the form of additional Units. SSB pays a
portion of its brokerage fees to its financial consultants who have sold Units
and who are registered as associated persons with the Commodity Futures Trading
Commission (the "CFTC"). The Partnership pays for National Futures Association
("NFA") fees, exchange and clearing fees, give-up and user fees and floor
brokerage fees. The Customer Agreement between the Partnership and SSB gives the
Partnership the legal right to net unrealized gains and losses. Brokerage fees
will be paid for the life of the Partnership, although the rate at which such
fees are paid may be changed.
5
In addition, SSB pays the Partnership interest on 80% of the average
daily equity maintained in cash in its account during each month at a 30-day
U.S. Treasury bill rate determined weekly by SSB based on the average
non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from
the date on which such weekly rate is determined.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests. The Partnership does not engage in sales of goods or services. The
Partnership's net income (loss) from operations for the years ended December 31,
2000, 1999, 1998, 1997 and 1996 is set forth under "Item 6. Selected Financial
Data". The Partnership capital as of December 31, 2000 was $80,499,049.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does
not engage in sales of goods or services, or own any long lived assets, and
therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The
General Partner operates out of facilities provided by its affiliate, SSB.
6
Item 3. Legal Proceedings.
Salomon Smith Barney Inc, ("SSB") is a New York corporation with its
principal place of business at 388 Greenwich St., New York, New York 10013. SSB
is registered as a broker-dealer and futures commission merchant ("FCM"), and
provides futures brokerage and clearing services for institutional and retail
participants in the futures markets. SSB and its affiliates also provide
investment banking and other financial services for clients worldwide.
There have been no administrative, civil or criminal actions pending,
on appeal or concluded against SSB or any of its individual principals within
the past five years that management believes may have a material impact on
SSB's ability to act as an FCM. In the ordinary course of its business, SSB is
a party to various claims and regulatory inquiries. Proceedings deemed to be
material for purposes of CFTC disclosure requirements are:
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust), Ameritech Corporation, and an officer of Ameritech
sued Salomon Brothers Inc and Salomon Brothers Realty Corporation in the U.S.
District Court for the Northern District of Illinois (Harris Trust Savings
Bank, not individually but solely as trustee for the Ameritech Pension Trust,
Ameritech Corporation and John A. Edwardson v. Salomon Brothers Inc and Salomon
Brothers Realty Corp.). The complaint alleged that purchases by Ameritech
Pension Trust from the Salomon entities of approximately $20.9 million in
participations in a portfolio of motels owned by Motels of America, Inc. and
Best Inns, Inc. violated the Employee Retirement Income Security Act ("ERISA"),
7
the Racketeer Influenced and Corrupt Organization Act ('RICO") and state law.
Salomon Brothers Inc had acquired the participations issued by Motels of
America and Best Inns to finance purchases of motel portfolios and sold 95% of
three such issues and 100% of one such issue to Ameritech Pension Trust.
Ameritech Pension Trust's complaint sought (1) approximately $20.9 million on
the ERISA claim, and (2) in excess of $70 million on the RICO and state law
claims as well as other relief. In various decisions between August 1993 and
July 1999, the courts hearing the case have dismissed all of the allegations in
the complaint against the Salomon entities. In October 1999, Ameritech appealed
to the U.S. Supreme Court and in January 2000, the Supreme Court agreed to hear
the case. An argument was heard on April 17, 2000. The appeal seeks review of
the decision of the U.S. Court of Appeals for the Seventh Circuit that
dismissed the sole remaining ERISA claim against the Salomon entities. In June
the Supreme Court reversed the Seventh Circuit and the matter has been remanded
to the Trial Courts.
Both the Department of Labor and the Internal Revenue Service have
advised Salomon Brothers Inc that they were or are reviewing the transactions
in which Ameritech Pension Trust acquired such participations. With respect to
the Internal Revenue Service review, Salomon Smith Barney Holdings, Salomon
Brothers Inc and Salomon Brothers Realty 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.
8
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
Salomon 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.) The
complaint alleged, among other things, that the brokerage firms recommended and
sold unsuitable securities to Orange County. Salomon Smith Barney and the
remaining brokerage firms settled with Orange County in mid 1999.
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc, et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
determination that Smith Barney Inc. and another underwriter will be responsible
for any damages that the City may incur in the event the Internal Revenue
Service denies tax exempt status to the City's General Obligation Refunding
Bonds Series 1991. The complaints were subsequently amended. Salomon Smith
Barney has asked the court to dismiss the amended complaints. The Court denied
the motion but stayed the case. Subsequently, the city withdrew its lawsuit.
It November 1998, a class action complaint was filed in the United States
District Court for the Middle District of Florida (Dwight Brock as Clerk for
Collier County v. Merrill Lynch, et al.). The complaint alleged that, pursuant
to a nationwide conspiracy, 17 broker-dealer defendants, including
9
Salomon Smith Barney, charged excessive mark-ups in connection with advanced
refunding transactions. Among other relief, plaintiffs sought compensatory and
punitive damages, restitution and/or rescission of the transactions and
disgorgement of alleged excessive profits. In October 1999, the plaintiff filed
a second amended complaint. Salomon Smith Barney has asked the court to dismiss
the amended complaint.
In connection with the Louisiana and Florida matters, the IRS and SEC
have been conducting an industry-wide investigation into the pricing of
Treasury securities in advanced refunding transactions. In April 2000 SSB and
several other broker-dealers entered into a settlement with the IRS and the
SEC.
In December 1998, Salomon Smith Barney was one of twenty-eight market
making firms that reached a settlement with the SEC in the matter titled In the
Matter of Certain Market Making Activities on NASDAQ. As part of the settlement
of that matter, Salomon Smith Barney, without admitting or denying the factual
allegations, agreed to an order that required that it: (i) cease and desist
from committing or causing any violations of Sections 15(c)(1) and (2) of the
Securities Exchange Act of 1934 and Rules l5cl -2, 15c2-7 and 17a-3 thereunder,
(ii) pay penalties totaling approximately $760,000, and (iii) submit certain
policies and procedures to an independent consultant for review.
In March 1999, a complaint seeking in excess of $250 million was filed
by a hedge fund and its investment advisor against Salomon Smith Barney in the
Supreme Court of the State of New York, County of New York (MKP Master Fund,
10
LDC et al. v. Salomon Smith Barney Inc.). The complaint included allegations
that, while acting as prime broker for the hedge fund, Salomon Smith Barney
breached its contracts with plaintiffs, misused their monies, and engaged in
tortious (wrongful) conduct, including breaching its fiduciary duties. Salomon
Smith Barney asked the court to dismiss the complaint in full. In October 1999,
the court dismissed the tort claims, including the breach of fiduciary duty
claims. The court allowed the breach of contract and misuse of money claims to
stand, Salomon Smith Barney will continue to contest this lawsuit vigorously.
Item 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a
vote during the last fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Security Holder
Matters.
(a) Market Information. The Partnership has issued no stock. There is
no established public market for the Units of Limited Partnership
Interest.
(b) Holders. The number of holders of Units of Limited Partnership
Interest as of December 31, 2000 was 4,123.
11
(c) Distribution. The Partnership did not declare a distribution
in 2000 or 1999.
(d) Use of Proceeds: For the twelve months ended December 31,
2000, there were additional sales of 49.4149 Units totaling
$61,337. For the twelve months ended December 31, 1999,
there were additional sales of 88.1293 Units totaling
$120,344. For the twelve months ended December 31, 1998,
there were additional sales of 90.7211 Units totaling
$117,210. Proceeds from the sale of additional Units are
used in the trading of commodity interests including futures
contracts, options and forward contracts.
12
Item 6. Selected Financial Data. Realized and unrealized trading gains (losses),
interest income, net income (loss) and increase (decrease) in net asset value
per Unit for the years ended December 31, 2000, 1999, 1998, 1997 and 1996 and
total assets at December 31, 2000, 1999, 1998, 1997 and 1996 were as follows:
2000 1999 1998 1997 1996
------------- ------------- ------------- ------------ -----------
Realized and unrealized trading
gains(losses) net of brokerage
commissions and clearing fees
of $5,795,482, $7,950,768,
$8,540,127, $9,893,999, and
$10,754,060,
respectively $ (8,911,325) $ (8,806,023) $ 11,635,004 $ 5,083,043 $ 23,283,977
Interest income 4,241,957 4,687,547 5,203,988 6,331,875 6,631,110
------------- ------------- ------------- ------------- -------------
$ (4,669,368) $ (4,118,476) $ 16,838,992 $ 11,414,918 $ 29,915,087
============= ============= ============= ============= =============
Net income (loss) $ (7,766,838) $ (9,063,470) $ 9,913,148 $ 5,525,809 $ 21,056,614
============= ============= ============= ============= =============
Increase (decrease) in net
asset value per unit $ (89.14) $ (94.66) $ 99.32 $ 48.07 $ 158.70
============= ============= ============= ============= =============
Total assets $ 83,024,864 $ 120,563,424 $ 146,464,780 $ 154,556,541 $ 178,462,215
============= ============= ============= ============= =============
13
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash, net unrealized appreciation (depreciation) on open
positions and interest receivable. Because of the low margin deposits normally
required in commodity trading, relatively small price movements may result in
substantial losses to the Partnership. Such substantial losses could lead to a
material decrease in liquidity. To minimize this risk, the Partnership follows
certain policies including:
(1) Partnership funds are invested only in commodity interests which
are traded in sufficient volume to permit, in the opinion of the Advisors, ease
of taking and liquidating positions.
(2) The Partnership diversifies its positions among various
commodities.
(3) No Advisor initiates additional positions in any commodity if such
additional positions would result in aggregate positions for all commodities
requiring as margin more than 66-2/3% of the Partnership's assets allocated to
the Advisor.
(4) The Partnership may occasionally accept delivery of a commodity.
Unless such delivery is disposed of promptly by retendering the warehouse
receipt representing the delivery to the appropriate clearing house, the
physical commodity position will be fully hedged.
14
(5) The Partnership does not employ the trading technique commonly
known as "pyramiding," in which the speculator uses unrealized profits on
existing positions as margin for the purchase or sale of additional positions in
the same or related commodities.
(6) The Partnership does not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
(7) The Advisor may, from time to time, employ trading strategies such
as spreads or straddles on behalf of the Partnership. The term "spread" or
straddle" describes a commodity futures trading strategy involving the
simultaneous buying and selling of futures contracts on the same commodity but
involving different delivery dates or markets and in which the trader expects to
earn a profit from a widening or narrowing of the difference between the prices
of the two contracts.
The Partnership is party to financial instruments with off-balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
may include forwards, futures and options, whose value is based upon an
underlying asset, index, or reference rate, and generally represent future
commitments to exchange currencies or cash flows, or to purchase or sell other
financial instruments at specified terms at specified future dates. Each of
these instruments is subject to various risks similar to those relating to the
underlying financial instruments including market and credit risk. The General
Partner monitors and controls the Partnership's risk exposure on a daily basis
15
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 trading, the Partnership
knows of no trends, demands, commitments, events or uncertainties which will
result in or which are reasonably likely to result in the Partnership's
liquidity increasing or decreasing in any material way. The Limited Partnership
Agreement provides that the Partnership will cease trading operations and
liquidate all open positions upon the first to occur of the following: (i)
December 31, 2013; (ii) the vote to dissolve the Partnership by limited partners
owning more than 50% of the Units; (iii) assignment by the General Partner of
all of its interest in the Partnership or withdrawal, removal, bankruptcy or any
other event that causes the General Partner to cease to be a general partner
under the New York Revised Limited Partnership Act unless the Partnership is
continued as described in the Limited Partnership Agreement; (iv) net asset
value per Unit falls to less than $400 as of the end of any trading day; or (v)
the occurrence of any event which shall make it unlawful for the existence of
the Partnership to be continued.
16
(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 trading cannot be
predicted. Market moves in commodities are dependent upon fundamental and
technical factors which the Partnership may or may not be able to identify.
Partnership expenses will consist of, among other things, commissions,
management fees and incentive fees. The level of these expenses is dependent
upon the level of trading and the ability of the Advisors to identify and take
advantage of price movements in the commodity markets, in addition to the level
of net assets maintained. In addition, the amount of interest income payable by
SSB is dependent upon interest rates over which the Partnership has no control.
No forecast can be made as to the level of redemptions in any given
period. 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, 2000, 23,914.7410 Units were
redeemed totaling $29,303,982. For the year ended December 31, 1999, 12,865.1295
Units were redeemed totaling $17,452,603. For the year ended December 31, 1998,
13,724.6661 Units were redeemed totaling $17,507.358.
17
The Partnership ceased to offer Units effective April 1, 1996.
Additional sales of 49.4149 Units totaling $61,337 for the year ending December
31, 2000 and 88.1293 Units totaling $120,344 for the year ending December 31,
1999 and 90.7211 Units totaling $117,210 for the year ending December 31, 1998,
represent additional Units offered as the differential between the ordinary
brokerage fee and the reduced brokerage fee to existing limited partners
investing $1,000,000 or more.
(c) Results of Operations.
For the year ended December 31, 2000, the net asset value per Unit
decreased 6.8% from $1,303.09 to $1,213.95. For the year ended December 31,
1999, the net asset value per Unit decreased 6.8% from $1,397.75 to $1,303.09.
For the year ended December 31, 1998, the net asset value per Unit increased
7.6% from $1,298.43 to $1,397.75.
The Partnership experienced net trading losses of $3,115,843 before
commissions and expenses for the year ended December 31, 2000. Losses were
primarily attributable to the trading in currencies, U.S. and non-U.S. interest
rates, grains, livestock, indices, metals and softs and were partially offset by
gains recognized in the trading of energy products
The Partnership experienced net trading losses of $855,255 before
commissions and expenses in 1999. Losses were primarily attributable to the
18
trading of non-U.S. interest rates, metals, softs, livestock, indices and grains
and were partially offset by gains recognized in the trading of currencies,
energy and U.S. interest rates
The Partnership experienced net trading gains of $20,175,131 before
commissions and expenses in 1998. Gains were primarily attributable to the
trading of commodity futures in U.S. and non- U.S. interest rates, energy,
livestock, grains and currencies and were partially offset by losses recognized
in the trading of indices, softs and metals.
Commodity markets are highly volatile. Broad price fluctuations and rapid
inflation increase the risks involved in commodity trading, but also increase
the possibility of profit. The profitability of the Partnership depends on the
existence of major price trends and the ability of the Advisors to identify
those price trends correctly. Price trends are influenced by, among other
things, changing supply and demand relationships, weather, governmental,
agricultural, commercial and trade programs and policies, national and
international political and economic events and changes in interest rates. To
the extent that market trends exist and the Advisors are able to identify them,
the Partnership expects to increase capital through operations
(d) Operational Risk
The Partnership is directly exposed to market risk and credit risk, which
arise in the normal course of its business activities. Slightly less direct, but
of critical importance, are risks pertaining to operational and back office
support. This is particularly the case in a rapidly changing and increasingly
19
global environment with increasing transaction volumes and an expansion in the
number and complexity of products in the marketplace.
Such risks include:
Operational/Settlement Risk - the risk of financial and opportunity loss and
legal liability attributable to operational problems, such as inaccurate pricing
of transactions, untimely trade execution, clearance and/or settlement, or the
inability to process large volumes of transactions. The Partnership is subject
to increased risks with respect to its trading activities in emerging market
securities, where clearance, settlement, and custodial risks are often greater
than in more established markets.
Technological Risk - the risk of loss attributable to technological limitations
or hardware failure that constrain the Partnership's ability to gather, process,
and communicate information efficiently and securely, without interruption, to
customers, among units within the Partnership, and in the markets where the
Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
management's
20
authorization, and that financial information utilized by management and
communicated to external parties, including the Partnership's unitholders,
creditors, and regulators, is free of material errors.
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 results among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Conse- quently, it is not
possible to predict how a particular future market scenario will affect
performance, and the Partnership's past performance is not necessarily
indicative of its future results.
21
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
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
22
of 1934). All quantitative disclosures in this section are deemed to be
forward-looking statements for purposes of the safe harbor except for statements
of historical fact (such as the terms of particular contracts and the number of
market risk sensitive instruments held during or at the end of the reporting
period).
The Partnership's risk exposure in the various market sectors traded by
the Advisors is quantified below in terms of Value at Risk. Due to the
Partnership's mark-to-market accounting, any loss in the fair value of the
Partnership's open positions is directly reflected in the Partnership's earnings
(realized or unrealized).
Exchange maintenance margin requirements have been used by the
Partnership as the measure of its Value at Risk. Maintenance margin requirements
are set by exchanges to equal or exceed the maximum losses reasonably expected
to be incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
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.
23
The fair value of the Partnership's futures and forward positions does
not have any optionality component. However, certain of the Advisors trade
commodity options. The Value at Risk associated with options is reflected in the
following table as the margin requirement attributable to the instrument
underlying each option. Where this instrument is a futures contract, the futures
margin, and where this instrument is a physical commodity, the
futures-equivalent maintenance margin has been used. This calculation is
conservative in that it assumes that the fair value of an option will decline by
the same amount as the fair value of the underlying instrument, whereas, in
fact, the fair values of the options traded by the Partnership in almost all
cases fluctuate to a lesser extent than those of the underlying instruments.
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.
24
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, 2000. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 2000, the
Partnership's total capitalization was approximately $80,499,049.
December 31, 2000
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk
- -------------------------------------------------------------------------------------------------
Currencies
- -Exchange Traded Contracts $1,036,320 1.29% $2,346,347 $ 211,754
- -OTC Contracts 534,174 0.66% 3,722,194 534,174
Energy 794,200 0.99% 5,401,200 562,400
Grains 79,900 0.10% 1,183,900 17,150
Interest rates U.S. 745,550 0.93% 2,104,984 197,900
Interest rates Non-U.S 2,209,842 2.74% 6,211,403 1,114,191
Livestock 38,980 0.05% 115,375 9,600
Metals (Exchange Traded and OTC Contracts) 188,650 0.23% 1,916,625 188,650
Softs 64,500 0.08% 1,489,882 16,500
Indices 1,594,597 1.98% 2,703,115 358,641
---------- ----------
Total $7,286,713 9.05%
========== ==========
25
As of December 31, 1999, the Partnership's total capitalization was
approximately $117,508,532.
December 31, 1999
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- -------------------------------------------------------------------------------------------------------------
Currencies
- -Exchange Traded Contracts $ 856,142 0.73% $ 1,118,598 $ 466,987
- -OTC Contracts 2,522,728 2.15% 4,861,168 2,444,372
Energy 2,287,500 1.95% 2,876,700 1,480,266
Grains 483,740 0.41% 1,348,250 274,200
Interest rates U.S. 1,758,561 1.50% 2,272,250 640,040
Interest rates Non-U.S 3,094,296 2.63% 6,249,718 1,651,106
Livestock 65,500 0.05% 131,750 30,400
Metals (Exchange Traded and OTC Contracts) 1,703,375 1.45% 2,498,700 516,800
Softs 1,308,505 1.11% 1,373,896 839,305
Indices 2,043,921 1.74% 3,609,182 831,151
----------- -----------
Total $16,124,268 13.72%
=========== ===========
26
Material Limitations on Value at Risk as an Assessment of Market Risk
The face value of the market sector instruments held by the Partnership
is typically many times the applicable maintenance margin requirement (margin
requirements generally range between 2% and 15% of contract face value) as well
as, many times, the capitalization of the Partnership. The magnitude of the
Partnership's open positions creates a "risk of ruin" not typically found in
most other investment vehicles. Because of the size of its positions, certain
market conditions -- unusual, but historically recurring from time to time --
could cause the Partnership to incur severe losses over a short period of time.
The foregoing Value at Risk table -- as well as the past performance of the
Partnership -- give no indication of this "risk of ruin." 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.
27
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
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, 2000, by market sector.
28
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.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The General Partner does not anticipate that the
risk profile of the Partnership's currency sector will change significantly in
the future. The currency trading Value at Risk figure includes foreign margin
amounts converted into U.S. dollars with an incremental adjustment to reflect
the exchange rate risk inherent to the dollar-based Partnership in expressing
Value at Risk in a functional currency other than dollars.
29
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, 2000, the Partnership's primary exposures were in the Financial
Times (England), Nikkei (Japan) and Hang Seng (Hong Kong) stock indices. The
Partnership is primarily exposed to the risk of adverse price trends or static
markets in the major U.S., European and Japanese indices. (Static markets would
not cause major market changes but would make it difficult for the Partnership
to avoid being "whipsawed" into numerous small losses.)
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 General Partner anticipates that gold and
silver will remain the primary metals market exposure for the Partnership.
Softs. The Partnership's primary commodities exposure is to
agricultural price movements which are often directly affected by severe or
unexpected weather conditions. Cocoa, cotton and sugar accounted for the
substantial bulk of the Partnership's commodity exposure as of December 31,
2000.
Energy. The Partnership's primary energy market exposure is to gas
and oil price movements, often resulting from political developments in the
Middle East. Oil prices can be volatile and substantial profits and losses have
been and are expected to continue to be experienced in this market.
30
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the
Partnership as of December 31, 2000.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, Euro dollar, British pounds and Swiss francs. The
Advisor regularly converts foreign currency balances to dollars in an attempt to
control the Partnership's non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure.
The General Partner monitors and controls the Partnership's risk
exposure on a daily basis through financial, credit and risk management
monitoring systems and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership is
subject.
The General Partner monitors the Partnership's performance and the
concentration of its open positions, and consults with the Advisors concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require certain of the Advisors to close out
individual positions as well as enter certain positions traded on behalf of the
Partnership. However, any such intervention would be a highly unusual event. The
General Partner primarily relies on the Advisors' own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
31
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 ongoing modifications to their trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisors to discuss their risk management and to
look for any material changes to the Advisors' portfolio balance and trading
techniques. The Advisors are required to notify the General Partner of any
material changes to their programs.
32
36
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath of Affirmation F-2
Report of Independent Accountants F-3
Financial Statements:
Statement of Financial Condition at
December 31, 2000 and 1999 F-4
Statement of Income and Expenses
for the years ended December 31, 2000
1999 and 1998 F-5
Statement of Partners' Capital for
the years ended December 31, 2000,
1999 and 1998 F-6
Notes to Financial Statements F-7 - F-11
F-1
To The Limited Partners of
Smith Barney
Diversified Futures Fund L.P.
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: Daniel A. Dantuono, Chief Financial Officer
Smith Barney Futures Management LLC
General Partner, Smith Barney
Diversified Futures Fund L.P.
Smith Barney Futures Management LLC
388 Greenwich Street
7th Floor
New York, N.Y. 10013
212-723-5424
F-2
Report of Independent Accountants
To the Partners of
Smith Barney Diversified Futures Fund L.P.:
In our opinion, the accompanying statement of financial condition and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Smith Barney
Diversified Futures Fund L.P. at December 31, 2000 and 1999, and the results of
its operations for each of the three years in the period ended December 31,
2000, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
management of the General Partner; our responsibility is to express an opinion
on these financial statements based on our audits. We conducted our audits of
these financial statements in accordance with auditing standards generally
accepted in the United States of America, 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 our opinion.
PricewaterhouseCoopers LLP
New York, New York
February 22, 2001
F-3
Smith Barney
Diversified Futures Fund L.P.
Statement of Financial Condition
December 31, 2000 and 1999
2000 1999
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $ 78,497,039 $114,347,833
Net unrealized appreciation on open positions 4,215,703 5,310,783
Commodity options owned, at market value
(cost $0 and $663,996 in 2000 and 1999, respectively) -- 501,192
------------ ------------
82,712,742 120,159,808
Interest receivable 312,122 403,616
------------ ------------
$ 83,024,864 $120,563,424
------------ ------------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 376,655 $ 556,459
Management fees 159,510 326,697
Incentive fees 290,312 --
Professional fees 69,352 120,995
Other 6,388 7,571
Redemptions payable (Note 5) 1,623,598 2,043,170
------------ ------------
2,525,815 3,054,892
------------ ------------
Partners' capital (Notes 1, 5 and 6):
General Partner, 2,048.9308 Unit equivalents outstanding
in 2000 and 1999 2,487,300 2,669,941
Limited Partners, 64,262.8850 and 88,128.2111 Units of
Limited Partnership Interest outstanding in 2000 and 1999,
respectively 78,011,749 114,838,591
------------ ------------
80,499,049 117,508,532
------------ ------------
$ 83,024,864 $120,563,424
------------ ------------
See notes to financial statements.
F-4
Smith Barney
Diversified Futures Fund L.P.
Statement of Income and Expenses
for the years ended
December 31, 2000, 1999 and 1998
2000 1999 1998
Income:
Net gains (losses) on trading of commodity interests:
Realized gains (losses) on closed positions $ (2,183,567) $ 3,152,375 $ 22,204,292
Change in unrealized losses on open positions (932,276) (4,007,630) (2,029,161)
------------ ------------ ------------
(3,115,843) (855,255) 20,175,131
Less, Brokerage commissions including clearing fees
of $267,538, $237,946 and $251,241, respectively
(Note 3c) (5,795,482) (7,950,768) (8,540,127)
------------ ------------ ------------
Net realized and unrealized gains (losses) (8,911,325) (8,806,023) 11,635,004
Interest income 4,241,957 4,687,547 5,203,988
------------ ------------ ------------
(4,669,368) (4,118,476) 16,838,992
------------ ------------ ------------
Expenses:
Management fees (Note 3b) 2,741,877 4,128,925 4,049,675
Incentive fees (Note 3b) 290,312 668,443 2,741,328
Professional fees 27,264 123,075 83,791
Other expenses 38,017 24,551 51,050
------------ ------------ ------------
3,097,470 4,944,994 6,925,844
------------ ------------ ------------
Net income (loss) $ (7,766,838) $ (9,063,470) $ 9,913,148
------------ ------------ ------------
Net income (loss) per Unit of Limited
Partnership Interest and General Partner Unit
equivalent (Notes 1 and 6) $ (89.14) $ (94.66) $ 99.32
------------ ------------ ------------
See notes to financial statements.
F-5
Smith Barney
Diversified Futures Fund L.P.
Statement of Partners' Capital
for the years ended
December 31, 2000, 1999 and 1998
Limited General
Partners Partner Total
Partners' capital at December 31, 1997 $ 148,720,868 $ 2,660,393 $ 151,381,261
Net income 9,709,648 203,500 9,913,148
Sale of 90.7211 Units of Limited
Partnership Interest 117,210 -- 117,210
Redemption of 13,724.6661 Units of
Limited Partnership Interest (17,507,358) -- (17,507,358)
------------- ------------- -------------
Partners' capital at December 31, 1998 141,040,368 2,863,893 143,904,261
Net loss (8,869,518) (193,952) (9,063,470)
Sale of 88.1293 Units of Limited
Partnership Interest 120,344 -- 120,344
Redemption of 12,865.1295 Units of
Limited Partnership Interest (17,452,603) -- (17,452,603)
------------- ------------- -------------
Partners' capital at December 31, 1999 114,838,591 2,669,941 117,508,532
Net loss (7,584,197) (182,641) (7,766,838)
Sale of 49.4149 Units of Limited
Partnership Interest 61,337 -- 61,337
Redemption of 23,914.7410 Units of
Limited Partnership Interest (29,303,982) -- (29,303,982)
------------- ------------- -------------
Partners' capital at December 31, 2000 $ 78,011,749 $ 2,487,300 $ 80,499,049
------------- ------------- -------------
See notes to financial statements.
F-6
Smith Barney
Diversified Futures Fund L.P.
Notes to Financial Statements
1. Partnership Organization:
Smith Barney Diversified Futures Fund L.P. (the "Partnership") is a limited
partnership which was organized on August 13, 1993 under the partnership
laws of the State of New York to engage in the speculative trading of a
diversified portfolio of commodity interests including futures contracts,
options and forward contracts. The commodity interests that are traded by
the Partnership are volatile and involve a high degree of market risk. The
Partnership was authorized to sell 300,000 Units during its initial offering
period. Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The Partnership's commodity broker is
Salomon Smith Barney Inc. ("SSB"). SSB is an affiliate of the General
Partner. The General Partner is wholly owned by Salomon Smith Barney
Holdings Inc. ("SSBHI"), which is the sole owner of SSB. SSBHI is a wholly
owned subsidiary of Citigroup Inc.
The General Partner and each limited partner share in the profits and losses
of the Partnership in proportion to the amount of partnership interest owned
by each except that no limited partner shall be liable for obligations of
the Partnership in excess of his initial capital contribution and profits,
if any, net of distributions.
The Partnership will be liquidated upon the first of the following to occur:
December 31, 2013; the net asset value of a Unit decreases to less than $400
as of the close of any business day; or under certain circumstances as
defined in the Limited Partnership Agreement.
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at fair value on the
last business day of the year, which represents market value for those
commodity interests for which market quotations are readily available.
Investments in commodity interests denominated in foreign currencies are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the year. Realized gains (losses) and changes in
unrealized values on commodity interests and foreign currencies are
recognized in the period in which the contract is closed or the changes
occur and are included in net gains (losses) on trading of commodity
interests.
b. The partnership may purchase and write (sell) options. An option is a
contract allowing, but not requiring, its holder to buy (call) or sell
(put) a specific or standard commodity or financial instrument at a
specified price during a specified time period. The option premium is the
total price paid or received for the option contract. When the fund
writes an option, the premium received is recorded as a liability in the
statement of financial condition and marked to market daily. When the
fund purchases an option, the premium paid is recorded as an asset in the
statement of financial condition and marked to market daily.
c. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
F-7
d.The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
these estimates.
3. Agreements:
a. Limited Partnership Agreement:
The Limited Partnership Agreement provides that the General Partner shall
manage the business of the Partnership and may make all trading decisions
for the Partnership.
b. Management Agreements:
The General Partner has entered into Management Agreements with Campbell &
Co., Inc. ("Campbell"), Bridgewater Associates, Inc. ("Bridgewater"),
Dominion Capital Management, Inc. ("Dominion"), Willowbridge Associates,
Inc. ("Williowbridge") and Stonebrook Structured Products, LLC.
("Stonebrook"), (collectively, the "Advisors"), registered commodity
trading advisors. The Advisors are not affiliated with one another, are not
affiliated with the General Partner or SSB and are not responsible for the
organization or operation of the Partnership. The Partnership will pay
Campbell, Dominion and Willowbridge a monthly management fee equal to 1/6
of 1% (2% per year) of Net Assets allocated to the Advisor as of the end of
each month. Bridgewater will receive a monthly management fee equal to 5/48
of 1% (1.25% per year) of month end Net Assets of the Partnership allocated
to the Advisor as of the end of each month. For the period January 1, 2000
through February 29, 2000, Stonebrook was paid a monthly management fee
equal to 1/16 of 1% (0.75% per year) of a fixed notional account size of
$75,000,000. Effective March 1, 2000, Stonebrook will receive a monthly
management fee equal to 1/20 of 1% (0.60% per year) of the fixed notional
account size determined on a monthly basis by the General Partner. In
addition, the Partnership is obligated to pay each Advisor 20% of the New
Trading Profits, as defined in the Management Agreements, earned by each
Advisor for the Partnership in each calendar quarter. Stonebrook does not
receive an incentive fee. For the period January 1, 2000 through June 30,
2000, the Partnership was obligated to pay John W. Henry & Company, Inc. a
monthly management fee equal to 1/3 of 1% (4% per year) and an incentive
fee payable quarterly equal to 15% of the New Trading Profits, as defined
in the Management Agreement. John W. Henry and Company, Inc. ("JWH") and
Rabar Market Research, Inc. were terminated as Advisors to the Partnership
on July 1, 2000. Bridgewater Associates, Inc. and Dominion Capital
Management, Inc. were added as Advisors on that date.
c. Customer Agreement
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SSB a monthly brokerage fee equal to 11/24 of 1%
(5.5% per year) of month-end Net Assets in lieu of brokerage commissions on
a per trade basis. Persons investing $1,000,000 or more will pay a reduced
brokerage fee of 7/24 of 1% of month-end Net Assets (3.5% per year),
receiving the differential between this reduced fee and 5.5% per year in
the form of additional Units. SSB will pay a portion of brokerage
F-8
fees to its financial consultants who have sold Units in this offering.
Brokerage fees will be paid for the life of the Partnership, although the
rate at which such fees are paid may be changed. The Partnership will pay
for National Futures Association ("NFA") fees, exchange, clearing, user,
give-up and floor brokerage fees. All of the Partnership's assets are
deposited in the Partnership's account at SSB. The Partnership's cash is
deposited by SSB in segregated bank accounts to the extent required by
Commodity Futures Trading Commission regulations. At December 31, 2000
and 1999, the amount of cash held for margin requirements was $8,447,742
and $18,616,389, respectively. SSB has agreed to pay the Partnership
interest on 80% of the average daily equity maintained in cash in its
account during each month at a 30-day U.S. Treasury bill rate determined
weekly by SSB based on the average noncompetitive yield on 3-month U.S.
Treasury bills maturing in 30 days from the date on which such weekly
rate is determined. The Customer Agreement between the Partnership and
SSB gives the Partnership the legal right to net unrealized gains and
losses. The Customer Agreement may be terminated upon notice by either
party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity instruments. The results of the Partnership's trading
activities are shown in the statement of income and expenses.
All of the commodity interests owned by the Partnership are held for trading
purposes. The average fair value during the years ended December 31, 2000
and 1999, based on a monthly calculation, was $3,287,910 and $6,571,306,
respectively. The fair value of these commodity interests, including options
thereon, if applicable, at December 31, 2000 and 1999 was $4,215,703 and
$5,811,975, respectively, as detailed below.
Fair Market Value
December 31, December 31,
2000 1999
Currencies:
-Exchange Traded Contracts $ 2,468,848 $ 423,503
-OTC Contracts (30,488) 196,398
Energy 249,658 1,095,761
Grains 70,445 64,492
Interest Rates U.S. 836,897 1,352,098
Interest Rates Non-U.S 405,108 220,653
Livestock 42,390 (19,700)
Metals (Exchange Traded and OTC Contracts) (5,315) 941,009
Softs 45,386 493,230
Indices 132,774 1,044,531
----------- -----------
Total $ 4,215,703 $ 5,811,975
----------- -----------
F-9
5. Distributions and Redemptions:
Distributions of profits, if any, will be made at the sole discretion of the
General Partner and at such times as the General Partner may decide. A
limited partner may require the Partnership to redeem his Units at their Net
Asset Value as of the last day of each month on 10 days' notice to the
General Partner. No fee will be charged for redemptions.
6. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 2000, 1999 and 1998 were as follows:
2000 1999 1998
Net realized and unrealized
gains (losses) $ (103.90)$ (92.07)$ 115.88
Interest income 54.09 48.30 47.60
Expenses (39.33) (50.89) (64.16)
--------- --------- ---------
Increase (decrease) for year (89.14) (94.66) 99.32
Net asset value per Unit, beginning of year 1,303.09 1,397.75 1,298.43
--------- --------- ---------
Net asset value per Unit, end of year $ 1,213.95 $ 1,303.09 $ 1,397.75
--------- --------- ---------
7. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial
instruments may include forwards, futures and options, whose value is based
upon an underlying asset, index, or reference rate, and generally represent
future commitments to exchange currencies or cash flows, to purchase or sell
other financial instruments at specific terms at specified future dates, or,
in the case of derivative commodity instruments, to have a reasonable
possibility to be settled in cash, through physical delivery or with another
financial instrument. These instruments may be traded on an exchange or
over-the-counter ("OTC"). Exchange traded instruments are standardized and
include futures and certain option contracts. OTC contracts are negotiated
between contracting parties and include forwards and certain options. Each
of these instruments is subject to various risks similar to those related to
the underlying financial instruments including market and credit risk. In
general, the risks associated with OTC contracts are greater than those
associated with exchange traded instruments because of the greater risk of
default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity
or security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as a counterparty to the transactions
(see table in Note 4). The Partnership's risk of loss in the event of
counterparty default is typically limited to the amounts recognized in the
F-10
statement of financial condition and not represented by the contract or
notional amounts of the instruments. The Partnership has credit risk and
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. The majority of these
instruments mature within one year of December 31, 2000. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity.
8. Subsequent Events:
On January 1, 2001 there were additional sales representing 1.8388 Units of
Limited Partnership Interest totaling $2,232 and on January 31, 2001
additional redemptions representing 854.5653 Units of Limited Partnership
Interest totaling $1,011,301.
Bridgewater Associates, Inc. was terminated as an Advisor to the
Partnership on March 1, 2001. Winton Capital Management and Graham Capital
Management L.P. were added as Advisors to the Partnership on that date.
F-11
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
During the last two fiscal years and any subsequent interim period, no
independent accountant who was engaged as the principal accountant to audit the
Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are managed by
its General Partner, Smith Barney Futures Management LLC. At December 31, 2000
investment decisions were be made by Campbell & Company, Inc., Bridgewater
Associates, Inc., Dominion Capital Management, Inc., Willowbridge Associatees,
Inc. and Stonebrook Structured Products, LLC (collectively the "Advisors").
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are managed by
Smith Barney Futures Management LLC, its General Partner. SSB, an affiliate of
the General Partner, is the commodity broker for the Partnership and receives
brokerage commissions for such services, as described under "Item 1. Business."
Brokerage commissions and clearing fees of $5,795,482 were earned for the year
ended December 31, 2000. Management fees and incentive fees of $2,741,877 and
$290,312, respectively, were earned by the Advisors for the year ended December
31, 2000.
33
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners.
The Partnership knows of no person who beneficially owns more
than 5% of the Units outstanding.
(b). Security ownership of management. Under the terms of the
Limited Partnership Agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns Units of general partnership interest
equivalent to 2,048.9308 Units (3.19%) of Limited Partnership Interest as of
December 31, 2000.
(c). Changes in control. None.
Item 13. Certain Relationship and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management
LLC would be considered promoters for purposes of item 404 (d) of Regulation
S-K. The nature and the amounts of compensation each promoter will receive from
the Partnership are set forth under "Item 1. Business", "Item 11. Executive
Compensation," and "Item 8. Financial Statements and Supplementary Data."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 2000 and 1999.
34
Statement of Income and Expenses for the years ended
December 31, 2000, 1999 and 1998. Statement of
Partners' Capital for the years ended December 31,
2000, 1999 and 1998.
(2) Financial Statement Schedules: Financial Data Schedule
for the year ended December 31, 2000.
(3) Exhibits
3.1 - Limited Partnership Agreement (filed as Exhibit 3.1
to the Registration Statement on Form S-1 (File No.
33-75056 and incorporated herein by reference).
3.2 - Certificate of Limited Partnership of the Partnership
as filed in the office of the County Clerk of New York
County on October 13, 1993 (filed as Exhibit 3.2 to the
Registration Statement on Form S-1 (File No. 33-75056)
and incorporated herein by reference).
10.1-Customer Agreement between the Partnership and Smith
Barney (filed as Exhibit 10.1 to the Registration
Statement on Form S-1 (File No. 33-75056) and
incorporated herein by reference).
10.3-Escrow Instructions relating to escrow of subscription
funds (filed as Exhibit 10.3 to the Registration
Statement on Form S-1 (File No. 33-75056) and
incorporated herein by reference).
10.5-Management Agreement among the Partnership, the
General Partner and Campbell & Company, Inc. (filed as
Exhibit 10.5 to the Registration Statement on Form S-1
(File No. 33-75056) and incorporated herein by
reference).
35
10.6-Management Agreement among the Partnership, the General
Partner and Colorado Commodity Management Corp. (filed
as Exhibit 10.6 to the Registration Statement on Form
S-1 (File No. 33-75056) and incorporated herein by
reference).
10.7-Management Agreement among the Partnership, the
General Partner and John W. Henry & Company, Inc.
(filed as Exhibit 10.7 to the Registration Statement on
Form S-1 (File No. 33-75056) and incorporated herein by
reference).
10.8-Management Agreement among the Partnership, the General
Partner and Hyman Beck & Company (filed as Exhibit 10.8
to the Registration Statement on Form S-1 (File No.
33-75056) and incorporated herein by reference).
10.9-Letter dated May 19, 1994 from the General Partner to
Colorado Commodities Management Corp. terminating the
Management Agreement
(previously filed)
10.10-Management Agreement among the Partnership, the
General Partner and Chesapeake Capital Corp.
(previously filed).
10.11-Letters extending Management Agreements with John W.
Henry & Company, Inc., Hyman Beck & Company, Campbell &
Co., Inc. and Chesapeake Capital Corp. (previously
filed)
36
10.12- Management Agreement among the Partnership, the
General Partner and Abraham Trading Co. (previously
filed).
10.13- Management Agreement among the Partnership, the
General Partner and Rabar Market Research Inc.
(previously filed).
10.14- Management Agreement among the Partnership, the
General Partner and AIS Futures Management, Inc.
(previously filed).
10.15- Letter dated October 1, 1996 from the General Partner
to Hyman Beck & Company terminating the Management
Agreement (previously filed).
10.16- Management Agreement among the Partnership, the
General Partner and Telesis Management Inc. (filed as
Exhibit 10.16 to the Form 10-K for the year ended
December 31, 1997).
10.17- Letter terminating Management Agreement with
Chesapeake Capital Corporation (filed as Exhibit 10.17
to the Form 10-K for the year ended
December 31, 1997).
10.18- Letter terminating Management Agreement with Abraham
Trading Co. (filed as Exhibit 10.18 to the Form 10-K
for the year ended December 31, 1997)
10.19- Management Agreement among the Partnership the
General Partner and Trendview Management, Inc. (filed
as Exhibit 10.19 to the Form 10-K for the
year ended December 31, 1997).
37
10.20- Letters extending Management Agreements with Campbell
& Co., Chesapeake Capital Corp., John W. Henry &
Company Inc., AIS Futures Management L.L.C., Abraham
Trading Co. and Rabar Market Research Inc. (filed as
Exhibit 10.20 to the Form 10-K for the year ended
December 31, 1997).
10.21- Letter terminating AIS Futures Management, Inc.
(previously filed)
10.22- Letter terminating Telesis Management Inc.
(previously filed).
10.23- Letters extending Management Agreements with Campbell
& Co., John W. Henry & Company Inc., Rabar Market
Research Inc. and Trendview Management Inc. (previously
filed).
10.24- Management Agreement among the Partnership the
General Partner and Willowbridge Associates, Inc.
(filed as Exhibit 10.24 to the Form 10-K for the year
ended December 31, 1999).
10.25- Management Agreement among the Partnership the
General Partner and Stonebrook Capital Management, Inc.
(filed as Exhibit 10.25 to the Form 10-K for the year
ended December 31, 1999).
38
10.26- Letters extending Management Agreements with Campbell
& Co., Inc., John W. Henry & Company Inc., Rabar Market
Research Inc. and Trendview Management Inc. (previously
filed).
10.27- Letters terminating John W. Henry & Company Inc.,
Rabar Market Research Inc. and Trendview Management
Inc. (filed herein).
10.28- Management Agreement among the Partnership, the
General Partner and Bridgewater Associates, Inc. (filed
herein).
10.29- Management Agreement among the Partnership, the
General Partner and Dominion Capital Management, Inc.
(filed herein).
10.30- Letter extending Management Agreements with Campbell
& Co., Inc., Willowbridge Associates, Inc. and
Stonebrook Structured Products, LLC (filed herein).
(b) Reports on 8-K: None Filed.
39
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
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York on the 30th day of March 2001.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
By: Smith Barney Futures Management LLC
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this annual report on Form 10-K has been signed below by the following persons
in the capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael R. Schaefer /s/ Daniel A. Dantuono
Michael R. Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
41