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, 2002
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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Acts).
Yes No X
---- ----
Limited Partnership Units with an aggregate value of $59,584,792 were
outstanding and held by non-affiliates as of the last business day of the
registrants most recently completed second fiscal quarter.
As of February 28, 2003, 46,276.4142 Limited Partnership Units were outstanding.
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,
2002 are reported in the Statement of Partners' Capital on page F-9 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 per Unit falls below $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.
As of December 31, 2002, all commodity trading decisions are made for the
Partnership by Campbell & Company, Inc. ("Campbell"), Willowbridge Associates,
Inc. ("Willowbridge"), Winton Capital Management ("Winton"), Graham Capital
Management L.P. ("Graham") and Stonebrook Structured Products, LLC
3
("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. Dominion
Capital Management Inc. ("Dominion") was terminated as Advisor to the
Partnership on February 15, 2002.
Pursuant to the terms of the Management Agreements (the "Management
Agreements"), the Partnership pays Campbell, Dominion, Graham and Willowbridge a
monthly management fee equal to 1/6 of 1% (2% per year) of Net Assets, Winton
will receive a monthly management fee equal to 1/12 of 1.50% (1.50% per year),
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
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.
4
The Partnership has entered into a Customer Agreement with SSB (the
"Customer Agreement") which provides that the Partnership pays 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.
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
5
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,
2002, 2001, 2000, 1999 and 1998 is set forth under "Item 6. Selected Financial
Data". The Partnership capital as of December 31, 2002 was $68,061,947.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership
does not engage in sales of goods or services, or own any long
lived assets, and therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General Partner
operates out of facilities provided by its affiliate, SSB.
Item 3. Legal Proceedings.
This section describes the major pending legal proceedings, other than
ordinary routine litigation incidental to the business, to which Salomon Smith
Barney Holdings Inc. ("SSBHI") or its subsidiaries is a party or to which any of
their property is subject. There are no material legal proceedings pending
against the Partnership or the General Partner.
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
6
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 Commodity Futures Trading Commission ("CFTC") disclosure
requirements are:
In December 1996, a complaint seeking unspecified monetary damages was
filed by Orange County, California against numerous brokerage firms, including
SSB, in the U.S. Bankruptcy Court for the Central District of California (County
of Orange et al. v. Bear Stearns & Co. Inc. et al.). The complaint alleged,
among other things, that the brokerage firms recommended and sold unsuitable
securities to Orange County. SSB and the remaining brokerage firms settled with
Orange County in mid 1999. SSB paid $1,333,333 to settle this matter.
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
7
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. SSB has asked the
court to dismiss the amended complaints. The court denied the motion but stayed
the case. Subsequently, the City withdrew its lawsuit.
In November 1998, a class action complaint was filed in the U.S. 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 SSB, charged
excessive mark-ups in connection with advanced refunding transactions. Among
other relief, plaintiffs sought compensatory and punitive damages, restitution
and/or rescission of the transactions and disgorgement of alleged excessive
profits. In October 1999, the plaintiff filed a second amended complaint. In
November 1999, SSB moved to dismiss the amended complaint. In May 2001, the
parties reached and the court preliminarily approved a tentative settlement. SSB
paid $1,063,457 to settle this matter and in September 2001, the court approved
the settlement.
In connection with the Louisiana and Florida matters, the IRS and SEC
conducted an industry-wide investigation into the pricing of Treasury securities
in advanced refunding transactions. In April 2000, SSB and several other
8
broker-dealers entered into a settlement with the IRS and the SEC. Thereafter,
the plaintiffs filed voluntary discontinuances.
In December 1998, SSB was one of 28 market making firms that reached a
settlement with the SEC in the matter titled In the Matter of Certain Market
Making Activities on NASDAQ. As part of the settlement of that matter, SSB,
without admitting or denying the factual allegations, agreed to an order which
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 SEC
Rules 15c1-2, 15c2-7 and 17a-3 thereunder, (ii) pay penalties totaling
approximately $760,000 and (iii) submit certain policies and procedures to an
independent consultant for review.
In March 1999, a complaint seeking in excess of $250 million was filed by a
hedge fund and its investment advisor against SSB in the Supreme Court of the
State of New York, County of New York (MKP Master Fund, LDC et al. v. Salomon
Smith Barney Inc.). The complaint included allegations that, while acting as
prime broker for the hedge fund, SSB breached its contracts with plaintiffs,
misused their monies and engaged in tortious conduct, including breaching its
fiduciary duties. SSB asked the court to dismiss the complaint in full. In
October 1999, the court dismissed the tort claims, including the breach of
fiduciary duty claims. The court allowed the breach of contract and conversion
claims to stand. In December 1999, SSB filed an answer and asserted
9
counterclaims against the investment advisor. In response to plaintiff's motion
to strike out the counterclaims, in January 2000, SSB amended its counterclaims
against the investment advisor to seek indemnification and contribution.
Plaintiffs moved to strike SSB's amended counterclaims in February 2000. In
September 2000, the court denied plaintiffs' motion to dismiss SSB's
counterclaims based on indemnification and contribution. In August 2002, SSB
filed a motion for summary judgment.
In April 2002, numerous class action complaints were filed against Salomon
Smith Barney and other investment banks in the U.S. District Court for the
Southern District of New York alleging violations of certain federal securities
laws (including Section 11 of the Securities Act of 1933 and Section 10(b) of
the Securities Exchange Act of 1934) with respect to the allocation of shares
for certain initial public offerings and related aftermarket transactions and
damage to investors caused by allegedly biased research analyst reports. On
February 19, 2003, the court issued an opinion denying the defendants' motion to
dismiss. Also pending in the Southern District of New York against SSB and other
investment banks are several alleged class actions which have been consolidated
into a single class action alleging violations of certain federal and state
antitrust laws in connection with the allocation of shares in initial public
offerings underwritten by such parties. The defendants in these actions have
moved to dismiss the consolidated amended complaint but the court has not yet
rendered a decision on those motions.
In April 2002, Citigroup and, in one case, SSB were named as defendants
10
along with, among others, commercial and/or investment banks, certain current
and former Enron officers and directors, lawyers and accountants in two alleged
consolidated class action complaints that were filed in the U.S. District Court
for the Southern District of Texas seeking unspecified damages. One action,
brought on behalf of individuals who purchased Enron securities (Newby, et al.
v. Enron Corp., et al.), alleges violations of Sections 11 and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and the other action, brought on behalf of current and former Enron
employees (Tittle, et al. v. Enron Corp., et al.), alleges violations of ERISA
and RICO, as well as negligence and civil conspiracy. On May 8, 2002, Citigroup
and SSB filed motions to dismiss the complaints. On December 19, 2002, the
motions to dismiss the Newby complaint were denied. The motion to dismiss the
complaint in Tittle remains pending.
Since April 2002, SSB and several other broker dealers have received
subpoenas and/or requests for information from various governmental and
self-regulatory agencies and Congressional committees, including the NASD Inc.
which has raised issues about SSB's internal e-mail retention practices and
research on Winstar Communications, Inc. With respect to Winstar, SSB has
entered into a settlement agreement. SSB agreed to pay a penalty in the amount
of $5 million and did not admit to any wrongdoing. With respect to other such
matters, on December 20, 2002, Citigroup and a number of other broker/dealers
11
reached a settlement-in-principle with the SEC, the NASD Inc., the New York
Stock Exchange (the "NYSE") and the Attorney General of New York of all issues
raised in their research, initial public offerings allocation and
spinning-related inquiries. In addition, with respect to issues raised by the
NASD, the NYSE and the SEC about SSB's and other firms' e-mail retention
practices, SSB and several other broker/dealers and the NASD, the NYSE and the
SEC entered into a settlement agreement in December 2002. SSB agreed to pay a
penalty in the amount of $1.65 million and did not admit to any allegation of
wrongdoing.
Since May 2002, Citigroup, SSB and certain principals, executive officers
and current and former employees have been named as defendants in a number of
alleged class action complaints filed in the U.S. District Court for the
Southern District of New York by purchasers of various securities alleging they
violated federal securities law, including Sections 10 and 20 of the Securities
Exchange Act of 1934 by issuing research reports without reasonable basis and
failing to disclose conflicts of interest in connection with published
investment research, including Global Crossing, WorldCom, Inc., AT&T, Winstar,
Rhythm Net Connections, Level 3 Communications, MetroMedia Fiber Network, XO
Communications and Williams Communications Group Inc. Nearly all of these
actions are pending before a single judge in the U.S. District Court for the
Southern District of New York for coordinated proceedings. The court has
consolidated these actions into nine separate categories corresponding to the
companies named above.
12
Additional actions have been filed against Citigroup and certain of its
affiliates, including SSB, and certain of their current and former directors,
officers and employees, along with other parties, including: (1) three putative
class actions filed in state courts and federal courts on behalf of persons who
maintained accounts with SSB asserting, among other things, common law claims,
claims under state statutes, and claims under the Investment Advisers Act of
1940, for allegedly failing to provide objective and unbiased investment
research and investment management, seeking, among other things, return of fees
and commissions; (2) approximately fifteen actions filed in different state
courts by individuals asserting, among other claims, common law claims and
claims under state securities laws, for allegedly issuing research reports
without a reasonable basis in fact and for allegedly failing to disclose
conflicts of interest with companies in connection with published investment
research, including Global Crossing and WorldCom, Inc.; (3) approximately five
actions filed in different state courts by pension and other funds asserting
common law claims and statutory claims under, among other things, state and
federal securities laws, for allegedly issuing research reports without a
reasonable basis in fact and for allegedly failing to disclose conflicts of
interest with companies in connection with published investment research,
including WorldCom, Inc. and Qwest Communications International Inc.; and (4)
more than two hundred arbitrations asserting common law claims and statutory
claims under, among other things, state and federal securities laws, for
13
allegedly issuing research reports without a reasonable basis in fact and for
allegedly failing to disclose conflicts of interest with companies in connection
with published investment research.
In July 2002, Citigroup, SSB and various of its affiliates and certain of
their officers and other employees were named as defendants, along with, among
others, commercial and/or investment banks, certain current and former Enron
officers and directors, lawyers and accountants in an alleged class action filed
in the U.S. District Court for the Southern District of New York on behalf of
purchasers of the Yosemite Notes and Enron Credit-Linked Notes, among other
securities (Hudson Soft Co., Ltd v. Credit Suisse First Boston Corporation, et
al.). The complaint alleges violations of RICO and of Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and seeks unspecified damages.
Additional actions have been filed against Citigroup and certain of its
affiliates, including SSB, along with other parties, including (i) three actions
brought in state courts by state pension plans for alleged violations of state
securities law and common law fraud and unjust enrichment; (ii) an action by
banks that participated in two Enron revolving credit facilities, alleging
fraud, gross negligence and breach of implied duties in connection with
defendants' administration of a credit facility with Enron; (iii) an action
brought by several funds in connection with secondary market purchases of Enron
Corp. debt securities alleging violations of federal securities law, including
Section 11 of the Securities Act of 1933, and claims for fraud and
14
misrepresentation; (iv) a series of alleged class actions by purchasers of
NewPower Holdings common stock alleging violations of federal securities law,
including Section 11 of the Securities Act of 1933 and Section 10(b) of the
Securities Exchange Act of 1934; (v) an action brought by two investment funds
in connection with purchases of Enron-related securities for alleged violations
of state securities and unfair competition statutes; (vi) an action brought by
several investment funds and fund owners in connection with purchases of notes
of the Osprey I and Osprey II Trusts for alleged violation of state and federal
securities laws and claims for common law fraud, misrepresentation and
conspiracy; (vii) an action brought by several investment funds and fund owners
in connection with purchases of notes of the Osprey I and Osprey II Trusts for
alleged violation of state and federal securities laws and state unfair
competition laws and claims for common law fraud and misrepresentation; (viii)
an action brought by the Attorney General of Connecticut in connection with
various commercial and investment banking services provided to Enron; (ix) a
putative class action brought by clients of SSB in connection with research
reports concerning Enron, alleging breach of contract; (x) actions brought by
several investment funds in connection with the purchase of notes and/or
certificates of the Osprey Trusts, the Marlin Trust, and the Marlin Water trust,
as well as the purchase of other Enron or Enron-related securities, alleging
15
violation of state and federal securities laws, and common law civil conspiracy
and fraud; (xi) an action brought by a retirement and health benefits plan in
connection with the purchase of certain Enron notes, alleging violation of
federal securities law, including Section 11 of the Securities Act of 1933, as
amended, violations of state securities and unfair competition law, and common
law fraud and breach of fiduciary duty; and (xii) an action brought by two
broker/dealers in connection with the purchase of certain notes, alleging
violation of federal and state securities laws. Several of these cases have been
consolidated with the Newby action and stayed pending the Court's decision on
the pending motions of certain defendants to dismiss Newby.
Additionally, Citigroup and certain of its affiliates, including SSB, have
provided substantial information to, and have entered into substantive
discussions with, the Securities and Exchange Commission regarding certain of
their transactions with Enron and a transaction with Dynegy Inc. Citigroup and
certain of its affiliates, including SSB, also have received subpoenas and
requests for information from various other regulatory and governmental agencies
and Congressional committees, as well as from the Special Examiner in the Enron
bankruptcy, regarding certain transactions and business relationships with Enron
and its affiliates. Citigroup and such affiliates, including SSB, are
cooperating fully with all such requests.
Citigroup and SSB are involved in a number of lawsuits arising out of the
underwriting of debt securities of WorldCom, Inc. These lawsuits include
putative class actions filed in July 2002 by alleged purchasers of WorldCom debt
16
securities in the United States District Court for the Southern District of New
York (Above Paradise Investments Ltd. V. Worldcom, Inc., et al.; Municipal
Police Employees Retirement System Of Louisiana V. Worldcom, Inc., et al.), and
in the United States District Court for the Southern District of Mississippi
(Longacre Master Fund V. Worldcom, Inc., et al.). These putative class action
complaints assert violations of federal securities law, including Sections 11
and 12 of the Securities Act of 1933, as amended, and seek unspecified damages
from the underwriters.
On October 11, 2002, the Above Paradise and Municipal Police Employees
lawsuits filed in the United States District Court for the Southern District of
New York were superseded by the filing of a consolidated putative class action
complaint in the United States District Court for the Southern District of New
York (In Re Worldcom, Inc. Securities Litigation). In the consolidated
complaint, in addition to the claims of violations by the underwriters of the
federal securities law, including Sections 11 and 12 of the Securities Act of
1933, as amended, the plaintiffs allege violations of Section 10(b) of the
Securities Exchange Act of 1934, as amended, and Rule 10b-5 promulgated
thereunder, by SSB arising out of alleged conflicts of interest of SSB and Jack
Grubman. The plaintiffs continue to seek unspecified compensatory damages. In
addition to the consolidated class action complaint, the Southern District of
Mississippi class action has been transferred by the Judicial Panel on
MultiDistrict Litigation to the Southern District of New York for centralized
pre-trial proceedings with other WorldCom-related actions.
17
In addition to the several putative class actions that have been commenced,
certain individual actions have been filed in various federal and state courts
against Citigroup and SSB, along with other parties, concerning WorldCom debt
securities including individual state court actions brought by approximately 18
pension funds and other institutional investors in connection with the
underwriting of debt securities of WorldCom alleging violations of Section 11 of
the Securities Act of 1933, as amended, and, in one case, violations of various
state securities laws and common law fraud. Most of these actions have been
removed to federal court and have been transferred to the Southern District of
New York for centralized pre-trial proceedings with other WorldCom-related
actions.
A putative class action on behalf of participants in WorldCom's 401(k)
salary savings plan and those WorldCom benefit plans covered by ERISA alleging
violations of ERISA and common law fraud (Emanuele V. Worldcom, Inc., Et Al.),
which was commenced in the United States District Court for the District of
Columbia, also has been transferred by the Judicial Panel on MultiDistrict
Litigation to the Southern District of New York for centralized pre-trial
proceedings with other WorldCom-related actions. In December 2002, the claims
against SSB and the other underwriters were dismissed without prejudice.
On or about January 27, 2003, lead plaintiff in a consolidated putative
18
class action in the United States District Court for the District of New Jersey
(In Re AT&T Corporation Securities Litgation) sought leave to amend its
complaint on behalf of purchasers of AT&T common stock asserting claims against,
among others, AT&T Corporation, to add as named defendants Citigroup, SSB and
certain executive officers and current and former employees, asserting claims
under federal securities laws for allegedly issuing research reports without a
reasonable basis in fact and for allegedly failing to disclose conflicts of
interest with AT&T in connection with published investment research.
On or about January 28, 2003, lead plaintiff in a consolidated putative
class action in the United States District Court for the Southern District of
New York (In Re Global Crossing, Ltd. Securities Litigation) filed a
consolidated complaint on behalf of purchasers of the securities of Global
Crossing and its subsidiaries, which names as defendants, among others,
Citigroup, SSB and certain executive officers and current and former employees,
asserting claims under federal securities laws for allegedly issuing research
reports without a reasonable basis in fact and for allegedly failing to disclose
conflicts of interest with Global Crossing in connection with published
investment research.
SSBHI 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 SSBHI's broker-dealer subsidiaries have been named, arising in
19
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 SSBHI's management, none of these actions is
expected to have a material adverse effect on the results of operations,
consolidated financial condition or liquidity of SSBHI 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.
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, 2002 was 3,200.
(c) Distribution. The Partnership did not declare a distribution in
2002 or 2001.
(d) Use of Proceeds: For the twelve months ended December 31, 2002,
there were additional sales of 9.1776 Units totaling $11,163. For
the twelve months ended December 31, 2001, there were additional
sales of 20.7023 Units totaling $24,751. For the twelve months
20
ended December 31, 2000, there were additional sales of 49.4149
Units totaling $61,337.
Proceeds from the sale of additional Units are used in the
trading of commodity interests including futures contracts,
options and forward contracts.
21
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, 2002, 2001, 2000, 1999 and 1998 and
total assets at December 31, 2002, 2001, 2000, 1999 and 1998 were as follows:
2002 2001 2000 1999 1998
Realized and unrealized
trading gains (losses) net
of brokerage commissions
and clearing fees of
$3,930,667, $4,686,916,
$5,795,482, $7,950,768,
and $8,540,127,
respectively $ 16,374,175 $ (2,355,466) $ (8,911,325) $ (8,806,023) $ 11,635,004
Interest income 816,470 2,044,447 4,241,957 4,687,547 5,203,988
$ 17,190,645 $ (311,019) $ (4,669,368) $ (4,118,476) $ 16,838,992
Net income (loss) $ 12,647,726 $ (3,195,464) $ (7,766,838) $ (9,063,470) $ 9,913,148
Increase(decrease) in Net
Asset Value per Unit $ 257.21 $ (52.73) $ (89.14) $ (94.66) $ 99.32
Total assets $ 69,064,973 $ 67,123,600 $ 83,024,864 $ 120,563,424 $ 146,464,780
22
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.
(5) The Partnership does not employ the trading technique commonly known as
23
"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
24
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.
25
(b) Capital resources. (i) The Partnership has made no material commitments
for capital expenditures as of the end of the latest fiscal period.
(ii) The Partnership's capital consists of the capital contributions of the
partners as increased or decreased by gains or losses on commodity futures
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. 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, 2002, 9,179.2695 Units were redeemed totaling
$10,965,683. For the year ended December 31, 2001, 9,178.3060 Units were
redeemed totaling $10,959,595. For the year ended December 31, 2000, 23,914.7410
26
Units were redeemed totaling $29,303,982.
The Partnership ceased to offer Units effective April 1, 1996. Additional
sales of 9.1776 Units totaling $11,163 for the year ending December 31, 2002,
20.7023 Units totaling $24,751 for the year ending December 31, 2001 and 49.4149
Units totaling $61,337 for the year ending December 31, 2000, 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, 2002, the Net Asset Value per Unit
increased 22.1% from $1,161.22 to $1,418.43. For the year ended December 31,
2001, the Net Asset Value per Unit decreased 4.3% from $1,213.95 to $1,161.22.
For the year ended December 31, 2000, the Net Asset Value per Unit decreased
6.8% from $1,303.09 to $1,213.95.
The Partnership experienced net trading gains of $20,304,842 before
commissions and expenses in 2002. Gains were primarily attributable to the
trading of U.S. and non-U.S. interest rates, currencies, livestock, indices and
grains and were partially offset by losses recognized in the trading of energy,
softs and metals.
The Partnership experienced net trading gains of $2,331,450 before
commissions and expenses in 2001. Gains were primarily attributable to the
trading of commodity futures in U.S. and non- U.S. interest rates, indices and
27
grains and were partially offset by losses recognized in the trading of energy,
livestock, softs and metals.
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.
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
28
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
29
management's authorization, and that financial information utilized by
management and communicated to external parties, including the Partnership's
unitholders, creditors, and regulators, is free of material errors.
(e) Critical Accounting Policies
The General Partner believes that the accounting policies that will be most
critical to the Partnership's financial condition and results of operations
relate to the valuation of the Partnership's positions. The majority of the
Partnership's positions will be exchange-traded futures contracts, which will be
valued daily at settlement prices published by the exchanges. If applicable, the
Partnership's spot and forward foreign currency contracts will also be valued at
published daily settlement prices or at dealers' quotes. The General Partner
expects that under normal circumstances substantially all of the Partnership's
assets will be valued by objective measures and without difficulty.
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.
30
Market movements result in frequent changes in the fair market value of the
Partnership's open positions and, consequently, in its earnings and cash flow.
The Partnership's market risk is influenced by a wide variety of factors,
including the level and volatility of interest rates, exchange rates, equity
price levels, the market value of financial instruments and contracts, the
diversification results among the Partnership's open positions and the liquidity
of the markets in which it trades.
The Partnership rapidly acquires and liquidates both long and short
positions in a wide range of different markets. Conse- quently, it is not
possible to predict how a particular future market scenario will affect
performance, and the Partnership's past performance is not necessarily
indicative of its future results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification 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.
31
Quantifying the Partnership's Trading Value at Risk
The following quantitative disclosures regarding the Partnership's market
risk exposures contain "forward-looking statements" within the meaning of the
safe harbor from civil liability provided for such statements by the Private
Securities Litigation Reform Act of 1995 (set forth in Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934).
All quantitative disclosures in this section are deemed to be forward-looking
statements for purposes of the safe harbor except for statements of historical
fact (such as the terms of particular contracts and the number of market risk
sensitive instruments held during or at the end of the reporting period).
The Partnership's risk exposure in the various market sectors traded by the
Advisors is quantified below in terms of Value at Risk. Due to the Partnership's
mark-to-market accounting, any loss in the fair value of the Partnership's open
positions is directly reflected in the Partnership's earnings (realized or
unrealized).
Exchange maintenance margin requirements have been used by the Partnership
as the measure of its Value at Risk. Maintenance margin requirements are set by
exchanges to equal or exceed the maximum losses reasonably expected to be
incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
32
futures contract) and economic fundamentals to provide a probabilistic estimate
of the maximum expected near-term one-day price fluctuation. Maintenance margin
has been used rather than the more generally available initial margin, because
initial margin includes a credit risk component which is not relevant to Value
at Risk.
In the case of market sensitive instruments which are not exchange traded
(almost exclusively currencies in the case of the Partnership), the margin
requirements for the equivalent futures positions have been used as Value at
Risk. In those rare cases in which a futures-equivalent margin is not available,
dealers' margins have been used.
The fair value of the Partnership's futures and forward positions does not
have any optionality component. However, certain of the Advisors trade commodity
options. The Value at Risk associated with options is reflected in the following
table as the margin requirement attributable to the instrument underlying each
option. Where this instrument is a futures contract, the futures margin, and
where this instrument is a physical commodity, the futures-equivalent
maintenance margin has been used. This calculation is conservative in that it
assumes that the fair value of an option will decline by the same amount as the
fair value of the underlying instrument, whereas, in fact, the fair values of
the options traded by the Partnership in almost all cases fluctuate to a lesser
extent than those of the underlying instruments.
In quantifying the Partnership's Value at Risk, 100% positive correlation
33
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.
34
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, 2002 and the
highest and lowest value at any point during the year. All open position trading
risk exposures of the Partnership have been included in calculating the figures
set forth below. As of December 31, 2002, the Partnership's total capitalization
was approximately $68,061,947.
December 31, 2002
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
Currencies
- -Exchange Traded Contracts $ 1,180,345 1.73% $2,717,416 $ 506,770
- -OTC Contracts 857,002 1.26% 1,440,741 679,944
Energy 2,200,600 3.23% 2,523,100 171,800
Grains 265,962 0.39% 741,782 93,826
Interest rates U.S. 746,000 1.10% 1,238,000 180,300
Interest rates Non-U.S. 2,151,659 3.16% 3,004,497 549,484
Livestock 46,800 0.07% 124,650 15,350
Metals
- Exchange Traded Contracts 191,200 0.28% 953,900 90,100
- OTC Contracts 98,125 0.14% 689,975 75,875
Softs 216,363 0.32% 490,238 149,845
Indices 281,850 0.41% 2,838,322 231,546
Lumber 12,000 0.02% 26,200 1,300
--------- ----
Total $8,247,906 12.11%
--------- -----
35
As of December 31, 2001, the Partnership's total capitalization was
approximately $66,368,741.
December 31, 2001
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
Currencies
- -Exchange Traded Contracts $1,438,612 2.17% $2,016,783 $ 683,915
- -OTC Contracts 1,444,918 2.18% 1,828,788 53,800
Energy 1,413,300 2.13% 2,065,852 247,200
Grains 313,294 0.47% 683,174 9,200
Interest rates U.S. 191,325 0.29% 1,522,884 146,035
Interest rates Non-U.S. 725,240 1.09% 3,638,563 669,473
Livestock 77,824 0.12% 243,220 3,600
Metals
- Exchange Traded Contracts 264,800 0.40% 426,200 63,000
- OTC Contracts 103,400 0.16% 504,650 24,450
Softs 223,514 0.33% 438,420 28,700
Indices 1,508,367 2.27% 2,779,410 227,165
Lumber 3,900 0.01% 20,200 950
--------- -----
Total $ 7,708,494 11.62%
-------- -----
36
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.
37
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, 2002, by market sector.
38
Interest Rates. 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.
39
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
limited to futures on broadly based indices. As of December 31, 2002, the
Partnership's primary exposures were in the S&P500, NASDAQ and Nikkei (Japan)
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. Corn and wheat accounted for the substantial bulk of the
Partnership's commodity exposure as of December 31, 2002.
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.
40
Qualitative Disclosures Regarding Non-Trading Risk Exposure
The following were the only non-trading risk exposures of the Partnership
as of December 31, 2002.
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.
41
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.
42
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
Reports of Independent Accountants. F-3 - F-4
Financial Statements:
Statements of Financial Condition at
December 31, 2002 and 2001. F-5
Condensed Schedules of Investments at
December 31, 2002 and 2001. F-6 - F-7
Statements of Income and Expenses
for the years ended December 31, 2002
2001 and 2000. F-8
Statements of Partners' Capital for
the years ended December 31, 2002,
2001 and 2000. F-9
Notes to Financial Statements. F-10 - F-14
Selected unaudited quarterly financial
data. F-15
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: /s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and Director
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 Auditors
To the Partners of
Smith Barney Diversified Futures Fund L.P.:
We have audited the accompanying statement of financial condition of Smith
Barney Diversified Futures Fund L.P. (the Partnership), including the condensed
schedule of investments, as of December 31, 2002, and the related statements of
income and expenses, and partners' capital for the year then ended. These
financial statements are the responsibility of the Partnership's management. Our
responsibility is to express an opinion on these financial statements based on
our audit. The financial statements of the Partnership as of December 31, 2001
and for the years ended December 31, 2001 and 2000 were audited by other
auditors whose report dated February 28, 2002 expressed an unqualified opinion
on those statements.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Smith Barney Diversified
Futures Fund L.P. as of December 31, 2002, and the results of its operations and
changes in its partners' capital for the year then ended, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
New York, New York
March 7, 2003
F-3
Report of Independent Accountants
To the Partners of
Smith Barney Diversified Futures Fund L.P.:
In our opinion, the accompanying statement of financial condition, including the
condensed schedule of investments, 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,
2001, and the results of its operations for each of the two years in the period
ended December 31, 2001, 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 28, 2002
F-4
Smith Barney
Diversified Futures Fund L.P.
Statements of Financial Condition
December 31, 2002 and 2001
2002 2001
Assets:
Equity in commodity futures trading account:
Cash (restricted $10,243,181 and $8,487,086 in 2002 and 2001,
respectively) (Note 3c) $64,057,301 $63,493,595
Net unrealized appreciation on open positions* 4,954,354 2,703,661
Commodity options owned, at fair value (cost $0 and $1,752,250
in 2002 and 2001, respectively) -- 849,250
------------- -------------
69,011,655 67,046,506
Interest receivable 53,318 77,094
------------- -------------
$69,064,973 $67,123,600
-------------- --------------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions (Note 3c) $ 320,817 4 308,245
Management fees (Note 3b) 143,470 153,342
Incentive fees (Note 3b) 55,035 -
Professional fees 65,161 63,828
Other 6,271 11,854
Redemptions payable (Note 5) 412,272 217,590
------------- -------------
1,003,026 754,859
------------- -------------
Partners' capital (Notes 1 and 5):
General Partner, 1,276.7484 and 2,048.9308 Units equivalents
outstanding in 2002 and 2001, respectively 1,810,978 2,379,259
Limited Partners, 46,707.3718 and 55,105.2813 Units of Limited
Partnership Interest outstanding in 2002 and 2001, respectively 66,250,969 63,989,482
------------- -------------
68,061,947 66,368,741
------------- -------------
$69,064,973 $67,123,600
-------------- --------------
* Forward contracts included in this balance are presented gross in the
accompanying Condensed Schedule of Investments.
See accompanying notes to financial statements.
F-5
Smith Barney Diversified Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2002
Sector Contract Fair Value
Currencies Futures contracts purchased 2.42% $1,648,464
Futures contracts sold 0.06% 39,145
----------
Total futures contracts 2.48% 1,687,609
Unrealized appreciation on forward contracts 2.64% 1,794,109
Unrealized depreciation on forward contracts (2.12)% (1,442,027)
----------
Total forward contracts 0.52% 352,082
----------
Total Currencies 3.00% 2,039,691
----------
Total Energy 0.82% Futures contracts purchased 0.82% 559,848
----------
Grains Futures contracts purchased (0.03)% (17,701)
Futures contracts sold 0.31% 211,274
----------
Total Grains 0.28% 193,573
----------
Total Interest Rates U.S. 0.74% Futures contracts purchased 0.74% 504,413
----------
Interest Rates Non-U.S. Futures contracts purchased 2.39% 1,626,124
Futures contracts sold (0.02)% (14,486)
----------
Total Interest Rates Non-U.S. 2.37% 1,611,638
----------
Total Livestock 0.03% Futures contracts purchased 0.03% 20,199
----------
Metals Futures contracts purchased 0.39% 267,635
Futures contracts sold 0.00% * (38)
----------
Total Futures contracts 0.39% 267,597
Unrealized appreciation on forward contracts 0.16% 107,580
Unrealized depreciation on forward contracts (1.00)% (684,000)
----------
Total forward contracts (0.84)% (576,420)
----------
Total Metals (0.45)% (308,823)
----------
Softs Futures contracts purchased 0.22% 154,672
Futures contracts sold 0.04% 26,226
----------
Total Softs 0.26% 180,898
----------
Indices Futures contracts purchased (0.05)% (39,594)
Futures contracts sold 0.28% 192,753
----------
Total Indices 0.23% 153,159
----------
Total Lumber 0.00% * Futures contracts sold 0.00% * (242)
----------
Total Fair Value 7.28% $4,954,354
---------
Investments % of Investments
Country Composition at Fair Value at Fair Value
---------------------- ---------------- --------------
Australia $ 122,881 2.48%
Canada 79,168 1.60
France (5,648) (0.11)
Germany 688,910 13.90
Hong Kong 36,610 0.74
Japan 169,176 3.41
Spain (4,767) (0.10)
United Kingdom 137,533 2.78
United States 3,730,491 75.30
---------- -------
$4,954,354 100.00%
========= =======
Percentages are based on Partners' capital unless otherwise indicated
* Due to rounding
See accompanying notes to financial statements.
F-6
Smith Barney Diversified Futures Fund L.P.
Condensed Schedule of Investments
December 31, 2001
Sector Contract Fair Value
Energy Futures contracts purchased (0.06)% $ (40,499)
Futures contracts sold (0.19)% (126,734)
----------
Total Energy - (0.25)% (167,233)
----------
Grains Futures contracts purchased (0.01)% (4,000)
Futures contracts sold 0.42% 280,846
----------
Total Grains - 0.41% 276,846
----------
Interest Rates U.S. Futures contracts purchased 0.07% 48,625
Futures contracts sold 0.03% 14,496
----------
Total Interest Rates U.S. - 0.10% 63,121
----------
Interest Rates Non-U.S. Futures contracts purchased (0.19)% (129,572)
Futures contracts sold 0.29% 194,860
----------
Total Interest Rates Non-U.S. - 0.10% 65,288
----------
Livestock Futures contracts purchased 0.06% 42,050
Futures contracts sold (0.08)% (57,934)
----------
Total Livestock - (0.02)% (15,884)
----------
Metals Futures contracts purchased 0.12% 82,041
Futures contracts sold (0.55)% (365,357)
----------
Total Metals - (0.43)% (283,316)
----------
Currencies Exchange contracts purchased 0.75% 501,553
Exchange contracts sold 1.38% 914,350
----------
Total Exchange 2.13% 1,415,903
Over the counter contracts purchased 0.20% 132,886
Over the counter contracts sold 1.47% 974,655
----------
Total Over the counter 1.67% 1,107,541
----------
Total Currencies - 3.80% 2,523,444
----------
Softs Futures contracts purchased 0.19% 125,707
Futures contracts sold (0.02)% (14,192)
----------
Total Softs - 0.17% 111,515
----------
Indices Futures contracts purchased 0.21% 140,713
Futures contracts sold (0.01)% (5,850)
----------
Total Indices - 0.20% 134,863
----------
Total Lumber - (0.01)% Futures contracts sold (0.01)% (4,983)
----------
Total Fair Value on Future and Forwards - 4.07% 2,703,661
----------
Total Currencies - 1.28% Commodity options owned 1.28% 849,250
----------
Total Investments - 5.35% $3,552,911
---------
Investments % of Investments
Country Composition at Fair Value at Fair Value
--------------------- ------------- ------------
Australia $ 18,429 0.52%
Canada 22,325 0.63
France 24,533 0.69
Germany 144,855 4.08
Hong Kong 3,976 0.11
Italy 1,696 0.05
Japan (73,301) (2.06)
Spain (5,828) (0.16)
United Kingdom (432,138) (12.16)
United States 3,848,364 108.32
---------- ------
$3,552,911 100.00%
========= ======+
Percentages are based on Partners' capital unless otherwise indicated
See accompanying notes to financial statements.
F-7
Smith Barney
Diversified Futures Fund L.P.
Statements of Income and Expenses
for the years ended
December 31, 2002, 2001 and 2000
2002 2001 2000
Income:
Net gains (losses) on trading of commodity
interests:
Realized gains (losses) on closed positions and
foreign currencies $17,151,149 $4,746,492 $(2,183,567)
Change in unrealized gains (losses) on
open positions 3,153,693 (2,415,042) (932,276)
------------ ------------ ------------
20,304,842 2,331,450 (3,115,843)
Interest income 816,470 2,044,447 4,241,957
------------ ------------ ------------
21,121,312 4,375,897 1,126,144
------------ ------------ ------------
Expenses:
Brokerage commissions including clearing fees
of $163,483, $343,071 and $267,538, respectively
(Note 3c) 3,930,667 4,686,916 5,795,482
Management fees (Note 3b) 1,591,520 2,042,475 2,741,877
Incentive fees (Note 3b) 2,865,987 726,162 290,312
Professional fees 73,032 79,297 27,264
Other expenses 12,380 36,511 38,017
------------ ------------ ------------
8,473,586 7,571,361 8,892,952
------------ ------------ ------------
Net income (loss) $12,647,726 $(3,195,464) $(7,766,838)
------------ ----------- ------------
Net income (loss) per Unit of Limited Partnership
Interest and General Partner Unit equivalent
(Notes 1 and 6) $257.21 $(52.73) $(89.14)
------------ ----------- ------------
See accompanying notes to financial statements.
F-8
Smith Barney
Diversified Futures Fund L.P.
Statements of Partners' Capital
for the years ended
December 31, 2002, 2001 and 2000
Limited General
Partners Partner Total
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
Net loss (3,087,423) (108,041) (3,195,464)
Sale of 20.7023 Units of Limited
Partnership Interest 24,751 -- 24,751
Redemption of 9,178.3060 Units of
Limited Partnership Interest (10,959,595) -- (10,959,595)
----------- ----------- ------------
Partners' capital at December 31, 2001 63,989,482 2,379,259 66,368,741
Net income 12,216,008 431,718 12,647,726
Sale of 9.1776 Units of Limited
Partnership Interest 11,163 -- 11,163
Redemption of 8,407.0871 Units of Limited
Partnership Interest and 772.1824 Units
of General Partnership Interest (9,965,684) (999,999) (10,965,683)
----------- ----------- -----------
Partners' capital at December 31, 2002 $66,250,969 $1,810,978 $68,061,947
---------- ---------- ----------
See accompanying notes to financial statements.
F-9
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 their 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 gains (losses) on open positions
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
Partnership writes an option, the premium received is recorded as a
liability in the statement of financial condition and marked to market
daily. When the Partnership purchases an option, the premium paid is
recorded as an asset in the statement of financial condition and
marked to market daily.
F-10
c. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on their share of the Partnership's
income and expenses.
d. The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent 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.
e. Certain prior period amounts have been reclassified to conform to
current year presentation.
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"), Winton Capital Management ("Winton"). Graham
Capital Management L.P. ("Graham"), Willowbridge Associates, Inc.
("Willowbridge") and Stonebrook Structured Products, LLC ("Stonebrook"),
(collectively, the "Advisors"), each of which are 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, Graham and Willowbridge a monthly management fee equal to 1/6 of
1% (2% per year) of Net Assets allocated to the Advisors as of the end of
each month. Winton will receive a monthly management fee equal to 1/12 of
1.5% (1.5% per year) of Net Assets allocated to the Advisor as of the end
of each month. Stonebrook will receive a monthly management fee equal to
1/20 of 1% (0.60% per year) of the total Net Assets of the Partnership
determined on a monthly basis by the General Partner. Month-end Net Assets,
for the purpose of calculating management fees are Net Assets, as defined
in the Limited Partnership Agreement, prior to the reduction of redemptions
and incentive fees.
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. Dominion Capital Management, Inc. was
terminated as an Advisor to the Partnership on February 15, 2002.
F-11
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. Month-end Net Assets, for
the purpose of calculating commissions are Net Assets, as defined in
the Limited Partnership Agreement, prior to the reduction of all
liabilities of the Partnership. SSB will pay a portion of brokerage
fees to its financial consultants who have sold Units in this
offering. Brokerage fees will be paid for the life of the Partnership,
although the rate at which such fees are paid may be changed. The
Partnership will pay for National Futures Association fees as well as
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, 2002 and 2001, the amount of
cash held for margin requirements was $10,243,181 and $8,487,086,
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, 2002 and 2001, based on a monthly calculation, was $4,063,172 and
$3,898,076, respectively.
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 their Units at their
Net Asset Value as of the last day of each month on 10 days' notice to the
General Partner. No fee will be charged for redemptions.
F-12
6. Financial Highlights:
Changes in the net asset value per Unit of Partnership interest for the
years ended December 31, 2002, 2001 and 2000 were as follows:
2002 2001 2000
Net realized and unrealized gains (losses)* $330.00 $(39.24) $(103.90)
Interest income 15.57 32.68 54.09
Expenses** (88.36) (46.17) (39.33)
--------- --------- ---------
Increase (decrease) for year 257.21 (52.73) (89.14)
Net asset value per Unit, beginning of year 1,161.22 1,213.95 1,303.09
--------- --------- ---------
Net asset value per Unit, end of year $1,418.43 $1,161.22 $1,213.95
--------- --------- ---------
* Includes brokerage commissions
** Excludes brokerage commissions
Ratios to average net assets :
Net investment loss before incentive fees*** (7.5)% (6.6)%
Incentive fees (4.5)% (1.0)%
------ ------
Net investment loss after incentive fees (12.0)% (7.6)%
------ -------
Net income before incentive fees**** 24.3% 5.4%
Incentive fees**** (4.5)% (1.0)%
------ ------
Net income after incentive fees**** 19.8% 4.4%
------ -------
Operating expenses 8.8% 9.4%
Incentive fees 4.5% 1.0%
------ ------
Total expenses 13.3% 10.4%
------ -------
Total return:
Total return before incentive fees 27.3% (3.4)%
Incentive fees (5.2)% (0.9)%
------ ------
Total return after incentive fees 22.1% (4.3)%
------ -------
*** Interest income less total expenses (exclusive of incentive fees)
**** Supplemental information not required
The above ratios may vary for individual investors based on the timing of
capital transactions during the year.
F-13
7. Financial Instrument Risks:
In the normal course of its business, the Partnership is party to financial
instruments with off-balance sheet risk, including derivative financial
instruments and derivative commodity instruments. These financial
instruments may include forwards, futures and options, whose values are
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. 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 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 majority of these instruments mature within one year of December 31,
2002. However, due to the nature of the Partnership's business, these
instruments may not be held to maturity.
8. Subsequent Events:
Stonebrook Structured Products, LLC, was terminated as an Advisor to the
Partnership on January 31, 2003.
F-14
Selected unaudited quarterly financial data for the years ended December 31,
2002 and December 31, 2001 is summarized below:
For the period For the period For the period For the period
from from from from
October 1, 2002 July 1, 2002 April 1, 2002 January 31, 2002
to to to to
December 31, 2002 September 30, 2002 June 30, 2002 March 31, 2002
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
including interest income $(1,397,807) $16,127,782 $ 5,619,177 $(3,158,507)
Net Income (loss) $(1,881,979) $13,154,546 $ 4,973,961 $(3,598,802)
Increase (decrease) in Net Asset
Value per Unit $( 36.33) $ 259.57 $ 96.98 $( 63.01)
For the period For the period For the period For the period
from from from from
October 1, 2001 July 1, 2001 April 1, 2001 January 31, 2001
to to to to
December 31, 2001 September 30, 2001 June 30, 2001 March 31, 2001
Net realized and unrealized trading
gains (losses) net of brokerage
commissions and clearing fees
including interest income $(3,896,180) $ 6,291,216 $(5,423,517) $ 2,717,462
Net Income (loss) $(4,403,236) $ 5,421,399 $(5,489,618) $ 1,275,991
Increase (decrease) in Net Asset Value per Unit $( 76.67) $ 90.38 $( 87.04) $ 20.60
F-15
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
PricewaterhouseCoopers LLP was previously the principal accountant for the
Partnership. On July 9, 2002, that firm was dismissed as principal accountant
and KPMG LLP was engaged as principal accountant. The decision to change
accountants was approved by the general partner of the Partnership.
In connection with the audits of the two fiscal years ended December 31,
2001, and through July 9, 2002, there were no disagreements with
PricewaterhouseCoopers LLP on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to
make reference thereto in their reports on the financial statements for such
years.
The audit reports of PricewaterhouseCoopers LLP on the financial statements
of the Partnership as of and for the years ended December 31, 2001 and 2000 did
not contain any adverse opinion or disclaimer of opinion, nor were they
qualified or modified as to uncertainty, audit scope, or accounting principle.
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, 2002
investment decisions were made by Campbell & Company, Inc., Winton Capital
Management, Graham Capital Management L.P., Willowbridge Associatees, Inc. and
43
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 $3,930,667 were earned for the year
ended December 31, 2002. Management fees and incentive fees of $1,591,520 and
$2,865,987, respectively, were earned by the Advisors for the year ended
December 31, 2002.
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 1,276.7484 Units (2.7%) of Limited Partnership Interest as of
December 31, 2002.
(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
44
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."
Item 14. Control and Procedures
Based on their evaluation of the Partnership's disclosure controls and
procedures as of a date within 90 days of the filing of this report, the Chief
Executive Officer and Chief Financial Officer have concluded that such controls
and procedures are effective.
There were no significant changes in the Partnership's internal controls or
in other factors that could significantly affect such controls subsequent to the
date of their evaluation.
PART IV
Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) (1) Financial Statements:
Statements of Financial Condition at December 31, 2002 and
2001.
Statements of Income and Expenses for the years ended
December 31, 2002, 2001 and 2000.
Statements of Partners' Capital for the years ended December
31, 2002, 2001 and 2000.
(2) Financial Statement Schedules: Financial Data Schedule for
the year ended December 31, 2002.
45
(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).
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).
46
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).
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).
47
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).
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.
48
(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).
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.
(previously filed).
10.28- Management Agreement among the Partnership, the General
Partner and Bridgewater Associates, Inc. (previously filed).
49
10.29- Management Agreement among the Partnership, the General
Partner and Dominion Capital Management, Inc. (previously
filed).
10.30- Letters extending Management Agreements with Campbell &
Co., Inc., Willowbridge Associates, Inc. and Stonebrook
Structured Products, LLC (previously filed).
10.31- Letter terminating Bridgewater Associates, Inc.
(previously filed).
10.32- Management Agreement among the Partnership, the General
Partner and Winton Capital Management (previously filed).
10.33- Management Agreement among the Partnership, the General
Partner and Graham Capital Management L.P. (previously
filed).
10.34- Letters extending Management Agreements with Campbell &
Co., Inc., Willowbridge Associates, Inc., Dominion Capital
Management, Inc. and Stonebrook Structured Products, LLC
(previously filed).
10.35- Letter terminating Dominion Capital Management, Inc.
(filed herein).
10.36- Letters extending Management Agreements with Campbell &
Co., Inc., Willowbridge associates, Inc., Winton Capital
Management, Stonebrook Structured Products, LLC and Graham
Capital Management L.P. (filed herein).
50
99.1 Certificate of Chief Executive Officer.
99.2 Certificate of Chief Financial Officer.
(b) Report on Form 8-K: None Filed.
51
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
No proxy material has been sent to Limited Partners.
52
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 27th day of March 2003.
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/ Shelley Ullman
David J. Vogel Director
Director, Principal Executive
Officer and President
/s/ Maureen O'Toole /s/ Steve J. Keltz
Maureen O'Toole Secretary and Director
Director
/s/ Daniel R. McAuliffe, Jr.
Daniel R. McAuliffe, Jr.
Chief Financial Officer and
Director
53
TYPE> EX-27
DESCRIPTION> FINANCIAL DATA SCHEDULE
TEXT>
ARTICLE> 5
CIK> 0000911503
NAME> Smith Barney Diversified Futures Fund L.P.
PERIOD-TYPE> 12-MONTHS
FISCAL-YEAR-END> DEC-31-2002
PERIOD-START> JAN-01-2002
PERIOD-END> DEC-31-2002
CASH> 64,057,301
SECURITIES> 4,954,354
RECEIVABLES> 53,318
ALLOWANCES> 0
INVENTORY> 0
CURRENT-ASSETS> 69,064,973
PP&E> 0
DEPRECIATION> 0
TOTAL-ASSETS> 69,064,973
CURRENT-LIABILITIES> 1,003,026
BONDS> 0
PREFERRED-MANDATORY> 0
PREFERRED> 0
COMMON> 0
OTHER-SE> 68,061,947
TOTAL-LIABILITY-AND-EQUITY> 69,064,973
SALES> 0
TOTAL-REVENUES> 21,121,312
CGS> 0
TOTAL-COSTS> 0
OTHER-EXPENSES> 8,473,586
LOSS-PROVISION> 0
INTEREST-EXPENSE> 0
INCOME-PRETAX> 12,647,726
INCOME-TAX> 0
INCOME-CONTINUING> 0
DISCONTINUED> 0
EXTRAORDINARY> 0
CHANGES> 0
NET-INCOME> 12,647,726
EPS-PRIMARY> 257.21
EPS-DILUTED> 0