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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the year ended December 31, 1997
Commission File Number 33-75056
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 Inc.
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: 300,000 Units
of Limited
Partnership
Interest
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [ ]
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 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's
contributions and redemptions of Units for the year ended December 31, 1997 are
reported in the Statement of Partners' Capital on page F-5 under "Item 8.
Financial Statements and Supplementary Data."
2
The General Partner has agreed to make capital contributions, if
necessary, so that its general partnership interest will be equal to the greater
of (i) an amount to entitle it to 1% of each material item of Partnership
income, loss, deduction or credit and (ii) the greater of (a) 1% of the
partners' contributions to the Partnership or (b) $25,000. The Partnership will
be liquidated upon the first of the following to occur: December 31, 2013; the
net asset value of a Unit decreases to less than $400 as of the close of any
business day; or under certain circumstances as defined in the Limited
Partnership Agreement of the Partnership (the "Limited Partnership Agreement").
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership and is a wholly owned subsidiary of Smith
Barney Inc. ("SB"). SB acts as commodity broker for the Partnership. On November
28, 1997, Smith Barney Holdings Inc. was merged with Salomon Inc to form Salomon
Smith Barney Holdings Inc. ("SSBH"), a wholly owned subsidiary of Travelers
Group Inc. SB is a wholly owned subsidiary of SSBH.
The Partnership's trading of futures contracts on commodities is done
on United States and foreign commodity exchanges. It engages in such trading
through a commodity brokerage account maintained with SB.
As of December 31, 1997, all commodity trading decisions are made for the
Partnership by Campbell & Company, Inc., John W. Henry & Company, Inc. ("JWH"),
Chesapeake Capital Corporation, Abraham Trading Co., Rabar Market Research
3
Inc.("Rabar"), Telesis Management Inc. and AIS Futures Management, Inc.
(collectively, the "Advisors"). None of the Advisors is affiliated with one
another, the General Partner or SB. The Advisors are not responsible for the
organization or operation of the Partnership. Telesis Management Inc. was added
as an Advisor to the Partnership effective August 1, 1997.
Pursuant to the terms of the Management Agreements (the "Management
Agreements"), the Partnership is obligated to pay each Advisor: (i) a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
that JWH will receive a monthly management fee equal to 1/3 of 1% (4% per year))
of the Partnership allocated to each Advisor as of the end of each month and
(ii) an incentive fee payable quarterly (except for Rabar who will be paid
annually), equal to 20% of the New Trading Profits (as defined in the Management
Agreements)(except JWH, which will receive an incentive fee of 15% of New
Trading Profits) of the Partnership.
The Partnership has entered into a Customer Agreement with SB (the
"Customer Agreement") which provides that the Partnership will pay SB a monthly
brokerage fee equal to 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. SB pays a
portion of its brokerage fees to its
4
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 SB 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, SB pays the Partnership interest on 80% of the average
daily equity maintained in cash in its account during each month at a 30-day
U.S. Treasury bill rate determined weekly by SB based on the average
non-competitive yield on 3-month U.S. Treasury bills maturing in 30 days from
the date on which such weekly rate is determined.
(b) Financial information about industry segments. The Partnership's
business consists of only one segment, speculative trading of commodity
interests. The Partnership does not engage in sales of goods or services. The
Partnership's net income (loss) from operations for the year ended December 31,
1997, 1996 and 1995 and for the period from January 12, 1994 (commencement of
trading operations) to December 31, 1994 is set forth under "Item 6. Select
Financial Data". The Partnership capital as of December 31, 1997 was
$151,381,261.
5
(c) Narrative description of business.
See Paragraphs (a) and (b above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Foreign and Domestic
Operations and Export Sales. The Partnership does not engage in sales of goods
or services, and therefore this item is not applicable.
Item 2. Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SB.
Item 3. Legal Proceedings.
There are no pending legal proceedings to which the Partnership is a
party or to which any of its assets is subject. No material legal proceedings
affecting the Partnership were terminated during the fiscal year. Item 4.
Submission of Matters to a Vote of Security Holders.
There were no matters submitted to the security holders for a vote
during the last fiscal year covered by this report.
PART II
Item 5. Market for Registrant's Common Equity and Related Security
Holder Matters.
(a) Market Information. The Partnership has issued no
stock. There is no established public market for the
Units of Limited Partnership Interest.
(b) Holders. The number of holders of Units of Limited
6
Partnership Interest as of December 31, 1997 was 6,817.
(c) Distribution. The Partnership did not declare a
distribution in 1997 or 1996.
7
Item 6. Select Financial Data. The Partnership commenced trading operations on
January 12, 1994. 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, 1997, 1996 and 1995 and for the period from
January 12, 1994 (commencement of trading operations) to December 31, 1994 and
total assets at December 31, 1997, 1996, 1995, 1994 and 1993 were as follows:
1997 1996 1995 1994 1993
------------- ------------- ------------- ------------ ---------
Realized and unrealized
trading gains (losses) net
of brokerage commissions
and clearing fees of
$9,893,999, $10,754,060,
$11,751,508 and $9,866,501,
respectively $ 5,083,043 $ 23,283,977 $ 23,528,907 $ 1,167,729
Interest Income 6,331,875 6,631,110 8,077,695 5,227,466
------------- ------------- ------------- -------------
$ 11,414,918 $ 29,915,087 $ 31,606,602 $ 6,395,195
============= ============= ============= =============
Net Income (loss) $ 5,525,809 $ 21,056,614 $ 22,177,218 $ (2,229,371)
============= ============= ============= =============
Increase (decrease) in net
asset value per unit $ 48.07 $ 158.70 $ 124.60 $ (32.94)
============= ============= ============= =============
Total assets $ 154,556,541 $ 178,462,215 $ 201,319,665 $ 186,365,419 $ 2,000
============= ============= ============= ============= =============
8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
(a) Liquidity. The Partnership does not engage in sales of goods or
services. Its only assets are its equity in its commodity futures trading
account, consisting of cash and cash equivalents, net unrealized appreciation
(depreciation) on open futures contracts and interest receivable. Because of the
low margin deposits normally required in commodity futures trading, relatively
small price movements may result in substantial losses to the Partnership. Such
substantial losses could lead to a material decrease in liquidity. To minimize
this risk, the Partnership will follow certain policies including:
(1) Partnership funds are invested only in futures contracts which are
traded in sufficient volume to permit, in the opinion of the Advisors, ease of
taking and liquidating positions.
(2) The Partnership 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.
9
(5) The Partnership does not employ the trading technique commonly
known as "pyramiding", in which the speculator uses unrealized profits on
existing positions as margin for the purchase or sale of additional positions in
the same or related commodities.
(6) The Partnership does not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
(7) The Advisor may, from time to time, employ trading strategies such
as spreads or straddles on behalf of the Partnership. The term "spread" or
straddle" describes a commodity futures trading strategy involving the
simultaneous buying and selling of futures contracts on the same commodity but
involving different delivery dates or markets and in which the trader expects to
earn a profit from a widening or narrowing of the difference between the prices
of the two contracts.
The Partnership is party to financial instruments with off- balance
sheet risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial instruments
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
10
the Partnership's risk exposure on a daily basis through financial, credit and
risk management monitoring systems and, accordingly believes that it has
effective procedures for evaluating and limiting the credit and market risks to
which the Partnership is subject. (See also Item 8. Financial Statements and
Supplementary Data., for further information on financial instrument risk
included in the notes to financial statements.)
Other than the risks inherent in commodity futures trading, the
Partnership knows of no trends, demands, commitments, events or uncertainties
which will result in or which are reasonably likely to result in the
Partnership's liquidity increasing or decreasing in any material way. The
Limited Partnership Agreement provides that the General Partner may, at its
discretion, cause the Partnership to cease trading operations and liquidate all
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.
11
(b) Capital resources. (i) The Partnership has made no material
commitments for capital expenditures.
(ii) The Partnership's capital consists of the capital
contributions of the partners as increased or decreased by gains or losses on
commodity trading, and by expenses, interest income, redemptions of Units and
distributions of profits, if any. Gains or losses on commodity futures trading
cannot be predicted. Market moves in commodities are dependent upon fundamental
and technical factors which the Partnership may or may not be able to identify.
Partnership expenses will consist of, among other things, commissions,
management fees and incentive fees. The level of these expenses is dependent
upon the level of trading and the ability of the Advisors to identify and take
advantage of price movements in the commodity markets, in addition to the level
of net assets maintained. In addition, the amount of interest income payable by
SB is dependent upon interest rates over which the Partnership has no control.
No forecast can be made as to the level of redemptions in any given
period. Beginning on April 1, 1994, a Limited Partner may cause all of his Units
to be redeemed by the Partnership at the net Asset Value thereof as of the last
day of each month on ten days' written notice to the General Partner. No fee
will be charged for redemptions. For the year ended December 31, 1997,
20,899.0206 Units were redeemed totaling $26,060,110. For the year ended
December 31, 1996, 42,559.6065 Units were redeemed totaling $45,695,264. For the
year ended December 31, 1995, 46,400.1653
12
Units were redeemed totaling $47,827,665 which includes the General Partner's
redemption representing 48.7530 Units equivalents
totaling $60,045.
The Partnership ceased to offer Units effective April 1, 1996.
Additional sales of 256.5390 Units totaling $328,301 for the year ending
December 31, 1997 represent additional Units offered as a reduced brokerage fee
to existing limited partners investing $1,000,000 or more. For the year ended
December 31, 1996, there were additional sales of 1,905.2800 Units totaling
$2,035,483. For the year ended December 31, 1995, there were additional sales of
38,919.4389 Units totaling $40,580,354.
(c) Results of Operations.
For the year ended December 31, 1997, the net asset value per Unit
increased 3.8% from $1,250.36 to $1,298.43. For the year ended December 31,
1996, the net asset value per Unit increased 14.5% from $1,091.66 to $1,250.36.
For the year ended December 31, 1995, the net asset value per Unit increased
12.9% from $967.06 to $1,091.66.
The Partnership experienced net trading gains of $14,977,042 before
commissions and expenses for the year ended December 31, 1997. Gains were
recognized in the trading of commodity futures in currencies, indices, metals,
softs and interest rates and were partially offset by losses recognized in the
trading of energy, grains and livestock.
The Partnership experienced net trading gains of $34,038,037
before commissions and expenses in 1996. These gains were
13
recognized in the trading of interest rates, metals, currencies and energy
commodity futures. These gains were partially offset by losses recognized in the
trading of indices and agricultural products.
The Partnership experienced net trading gains of $35,280,415 before
commissions and expenses in 1995. Realized trading gains of $39,663,772 were
attributable to gains incurred in the trading of interest rates, stock indices
and foreign currencies commodity futures. However, these realized trading gains
were partially offset by realized losses experienced in the trading of energy
and agricultural commodity futures.
Commodity futures markets are highly volatile. Broad price
fluctuations and rapid inflation increase the risks involved in commodity
trading, but also increase the possibility of profit. The profitability of the
Partnership depends on the existence of major price trends and the ability of
the Advisors to identify those price trends correctly. Price trends are
influenced by, among other things, changing supply and demand relationships,
weather, governmental, agricultural, commercial and trade programs and policies,
national and international political and economic events and changes in interest
rates. To the extent that market trends exist and the Advisors are able to
identify them, the Partnership expects to increase capital through operations.
14
Item 8. Financial Statements and Supplementary Data.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
INDEX TO FINANCIAL STATEMENTS
Page
Number
Report of Independent Accountants. F-2
Financial Statements:
Statement of Financial Condition at
December 31, 1997 and 1996. F-3
Statement of Income and Expenses
for the years ended December 31, 1997
1996 and 1995. F-4
Statement of Partners' Capital for
the years ended December 31, 1997,
1996 and 1995. F-5
Notes to Financial Statements. F-6 - F-11
F-1
Continued
Report of Independent Accountants
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. (a New York Limited Partnership) as of
December 31, 1997 and 1996, and the related statements of income and expenses
and partners' capital for the years ended December 31, 1997, 1996 and 1995.
These financial statements are the responsibility of the management of the
General Partner. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by the
management of the General Partner, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of SMITH BARNEY DIVERSIFIED
FUTURES FUND L.P. as of December 31, 1997 and 1996, and the results of its
operations for the years ended December 31, 1997, 1996 and 1995, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
March 6, 1998
F-2
Smith Barney
Diversified Futures Fund L.P.
Statement of Financial Condition
December 31, 1997 and 1996
1997 1996
Assets:
Equity in commodity futures
trading account:
Cash and cash equivalents $142,852,854 $170,574,018
(Note 3c)
Net unrealized appreciation
on open futures contracts 11,184,770 6,887,203
Commodity options owned,
at market
value (cost $607,539 in
1996) -- 442,696
------------ ------------
154,037,624 177,903,917
Interest receivable 518,917 558,298
------------ ------------
$154,556,541 $178,462,215
------------ ------------
Liabilities and Partners'
Capital:
Liabilities:
Accrued expenses:
Commissions $ 721,970 $ 831,169
Management fees 359,579 412,599
Incentive fees 492,736 3,476,717
Other 79,457 108,043
Redemptions payable (Note 5) 1,521,538 2,005,213
Commodity options written,
at market value (premiums
received $83,070 in 1996 -- 41,213
------------ ------------
3,175,280 6,874,954
Partners' capital (Notes 1, 5, and 6):
General Partner, 2,048.9308
Unit equivalents
outstanding
in 1997 and 1996 2,660,393 2,561,901
Limited Partners,
114,539.1563 and
135,181.6379 Units of
Limited Partnership
Interest outstanding in
1997 and 1996, respectively 148,720,868 169,025,360
------------ ------------
151,381,261 171,587,261
------------ ------------
$154,556,541 $178,462,215
------------ ------------
See notes to financial statements.
F-3
Smith Barney
Diversified Futures Fund L.P.
Statement of Income and Expenses
for the years ended
December 31, 1997, 1996 and 1995
1997 1996 1995
Income:
Net gains on trading of
commodity interests:
Realized gains on
closed positions $ 10,556,489 $ 46,225,371 $ 39,663,772
Change in
unrealized gains/
losses on open
positions 4,420,553 (12,187,334) (4,383,357)
------------ ------------ ------------
14,977,042 34,038,037 35,280,415
Less, Brokerage
commissions and
clearing fees
($316,227,
$393,877 and
$433,213,
respectively)
(Note 3c) (9,893,999) (10,754,060) (11,751,508)
------------ ------------ ------------
Net realized and
unrealized gains 5,083,043 23,283,977 23,528,907
Interest income 6,331,875 6,631,110 8,077,695
------------ ------------ ------------
11,414,918 29,915,087 31,606,602
------------ ------------ ------------
Expenses:
Management fees
(Note 3b) 4,455,840 4,682,124 4,940,353
Incentive fees
(Note 3b) 1,301,462 3,923,488 4,073,071
Other 131,807 252,861 415,960
------------ ------------ ------------
5,889,109 8,858,473 9,429,384
------------ ------------ ------------
Net income $ 5,525,809 $ 21,056,614 $ 22,177,218
------------ ------------ ------------
Net income per Unit of
Limited Partnership
Interest
and General Partner Unit
equivalent (Notes 1 and 6) $ 48.07 $ 158.70 $ 124.60
------------ ------------ ------------
See notes to financial statements.
F-4
Smith Barney
Diversified Futures Fund L.P.
Statement of Partners' Capital
for the years ended
December 31, 1997, 1996 and 1995
Limited General
Partners Partner Total
Partners' capital at
December 31, 1994 $ 177,231,935 $ 2,028,586 $ 179,260,521
Net income 21,909,023 268,195 22,177,218
Sale of 38,919.4389
Units of Limited
Partnership
Interest 40,580,354 -- 40,580,354
Redemption of
46,351.4123 Units
of Limited
Partnership
Interest and
General Partner's
redemption
representing
48.7530 Unit
equivalents (47,767,620) (60,045) (47,827,665)
------------- ------------- -------------
Partners' capital at
December 31, 1995 191,953,692 2,236,736 194,190,428
Net income 20,731,449 325,165 21,056,614
Sale of 1,905.2800
Units of Limited
Partnership
Interest 2,035,483 -- 2,035,483
Redemption of
42,559.6065 Units
of Limited
Partnership
Interest (45,695,264) -- (45,695,264)
------------- ------------- -------------
Partners' capital at
December 31, 1996 169,025,360 2,561,901 171,587,261
Net income 5,427,317 98,492 5,525,809
Sale of 256.5390
Units of Limited
Partnership
Interest 328,301 -- 328,301
Redemption of
20,899.0206 Units
of Limited
Partnership
Interest (26,060,110) -- (26,060,110)
------------- ------------- -------------
Partners' capital at
December 31, 1997 $ 148,720,868 $ 2,660,393 $ 151,381,261
------------- ------------- -------------
See notes to financial statements.
F-5
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 offering period.
Smith Barney Futures Management Inc. acts as the general partner (the
"General Partner") of the Partnership and is a wholly owned subsidiary of
Smith Barney Inc. ("SB"). SB acts as commodity broker for the Partnership
(see Note 3c). On November 28, 1997, Smith Barney Holdings Inc. was merged
with Salomon Inc to form Salomon Smith Barney Holdings Inc. ("SSBH"), a
wholly owned subsidiary of Travelers Group Inc. SB is a wholly owned
subsidiary of SSBH.
The General Partner and each limited partner share in the profits and losses
of the Partnership in proportion to the amount of partnership interest owned
by each except that no limited partner shall be liable for obligations of
the Partnership in excess of his initial capital contribution and profits,
if any, net of distributions.
The Partnership will be liquidated upon the first 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 market value for
those commodity interests for which market quotations are readily
available or at fair value on the last business day of the year.
Investments in commodity interests denominated in foreign currency are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the year. Realized gain (loss) and changes in unrealized
values on commodity interests are recognized in the period in which the
contract is closed or the changes occur and are included in net gains
(losses) on trading of commodity interests.
F-6
b. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
c. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
3. Agreements:
a. Limited Partnership Agreement:
The 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., Chesapeake Capital Corporation, John W. Henry & Company,
Inc. ("JWH"), AIS Futures Management, Inc., Abraham Trading Co., Rabar
Market Research Inc. ("Rabar") and Telesis Management Inc. (collectively,
the "Advisors"), registered commodity trading advisors. The Advisors are
not affiliated with one another and none is affiliated with the General
Partner or SB and are not responsible for the organization or operation
of the Partnership. The Partnership will pay each Advisor a monthly
management fee equal to 1/6 of 1% (2% per year) of Net Assets allocated
to the Advisor as of the end of each month (except JWH, which will
receive a monthly management fee equal to 1/3 of 1% (4% per year) of
month-end Net Assets). In addition, the Partnership is obligated to pay
each Advisor 20% of the New Trading Profits earned by each Advisor for
the Partnership in each calendar quarter (Rabar will be paid annually)
(except JWH, which will receive an incentive fee of 15% of New Trading
Profits). Telesis Management Inc. was added as an Advisor to the
Partnership effective August 1, 1997.
c. Customer Agreement
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SB a monthly brokerage fee equal up to 11/24 of
1% (5.5% per year) of month-end Net Assets in lieu of brokerage
commissions on a per trade basis. Persons investing $1,000,000 or more
will pay a reduced brokerage fee of 7/24 of 1% of month-end Net Assets
(3.5% per year), receiving the differential between this reduced fee and
5.5% per year in the form of additional Units. SB 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 ("NFA") fees,
F-7
exchange, clearing, user, give-up and floor brokerage fees. All of the
Partnership's assets are deposited in the Partnership's account at SB.
The Partnership's cash is deposited by SB in segregated bank accounts as
required by Commodity Futures Trading Commission regulations. At December
31, 1997 and 1996, the amount of cash held for margin requirements was
$28,016,682 and $17,906,764, respectively. SB has agreed to pay the
Partnership interest on 80% of the average daily equity maintained in
cash in its account during each month at a 30-day U.S. Treasury bill rate
determined weekly by SB based on the average noncompetitive yield on
3-month U.S. Treasury bills maturing in 30 days from the date on which
such weekly rate is determined. The Customer Agreement between the
Partnership and SB gives the Partnership the legal right to net
unrealized gains and losses. The Customer Agreement may be terminated
upon notice by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity 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 fair value of these commodity interests, including options
thereon, at December 31, 1997 and 1996 was $11,184,770 and $7,288,686,
respectively, and the average fair value during the years then ended, based
on monthly calculation, was $10,552,252 and $14,427,778, 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 his Units at their Net
Asset Value as of the last day of each month on 10 days' notice to the
General Partner. No fee will be charged for redemptions.
F-8
6. Net Asset Value Per Unit:
Changes in the net asset value per Unit for the years ended December 31,
1997, 1996 and 1995 were as follows:
1997 1996 1995
Net realized and
unrealized gains $ 44.59 $ 175.18 $ 132.42
Interest income 49.04 41.97 44.48
Expenses (45.56) (58.45) (52.30)
--------- --------- ---------
Increase for year 48.07 158.70 124.60
Net asset value per
Unit, beginning of
year 1,250.36 1,091.66 967.06
--------- --------- ---------
Net asset value per
Unit, end of year $1,298.43 $1,250.36 $1,091.66
--------- --------- ---------
7. Financial Instrument Risk:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial
instruments include forwards, futures and options, whose value is based upon
an underlying asset, index, or reference rate, and generally represent
future commitments to exchange currencies or cash flows, to purchase or sell
other financial instruments at specific terms at specified future dates, or,
in the case of derivative commodity instruments, to have a reasonable
possibility to be settled in cash or with another financial instrument.
These instruments may be traded on an exchange or over-the-counter ("OTC").
Exchange traded instruments are standardized and include futures and certain
option contracts. OTC contracts are negotiated between contracting parties
and include forwards and certain options. Each of these instruments is
subject to various risks similar to those related to the underlying
financial instruments including market and credit risk. In general, the
risks associated with OTC contracts are greater than those associated with
exchange traded instruments because of the greater risk of default by the
counterparty to an OTC contract.
Market risk is the potential 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.
F-9
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as a counterparty to the
transactions. The Partnership's risk of loss in the event of counterparty
default is typically limited to the amounts recognized in the statement of
financial condition and not represented by the contract or notional amounts
of the instruments. The Partnership has concentration risk because the sole
counterparty or broker with respect to the Partnership's assets is SB.
The General Partner monitors and controls the Partnership's risk exposure on
a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership
is subject. These monitoring systems allow the General Partner to
statistically analyze actual trading results with risk-adjusted performance
indicators and correlation statistics. In addition, on-line monitoring
systems provide account analysis of futures, forwards and options positions
by sector, margin requirements, gain and loss transactions and collateral
positions.
The notional or contractual amounts of these instruments, while not recorded
in the financial statements, reflect the extent of the Partnership's
involvement in these instruments. At December 31, 1997, the notional or
contractual amounts of the Partnership's commitment to purchase and sell
these instruments was $825,601,374 and $788,720,477, respectively. All of
these instruments mature within one year of December 31, 1997. However, due
to the nature of the Partnership's business, these instruments may not be
held to maturity.
F-10
At December 31, 1997, the fair value of the Partnership's derivatives,
including options thereon, was $11,184,770, as detailed below.
December 31, 1997
-------------------------------------
Notional or Contractual
Amount of Commitment
To Purchase To Sell Fair Value
Currencies
-Exchange
Traded
Contracts $ 11,004,227 $ 85,052,231 $ 710,480
-OTC
Contracts 91,780,207 172,891,448 430,261
Energy 2,293,498 51,019,266 2,859,466
Grains 1,900,330 34,874,210 884,824
Interest Rate
Non-U.S 450,921,559 320,673,268 1,205,068
Interest Rate
U.S 221,651,270 -- 1,004,688
Livestock -- 7,873,583 241,315
Metals 23,394,060 69,472,845 2,414,000
Softs 18,743,743 20,872,968 934,676
Indices 3,912,480 25,990,658 499,992
------------ ------------ -----------
Total $825,601,374 $788,720,477 $11,184,770
------------ ------------ -----------
At December 31, 1996, the notional or contractual amounts of the
Partnership's commitment to purchase and sell these instruments was $852,011,994
and $465,891,579, respectively, and the fair value of the Partnership's
derivatives, including options thereon, was $7,288,686 as detailed below.
December 31, 1996
--------------------------------------
Notional or Contractual
Amount of Commitment
To Purchase To Sell Fair Value
Currencies
-Exchange
Traded
Contracts $ 45,531,748 $ 99,346,984 $ 2,104,939
-OTC
Contracts 81,321,969 94,859,240 893,020
Energy 39,406,151 -- 2,582,805
Interest Rate
U.S 128,723,410 20,658,535 (57,409)
Interest Rate
Non-U.S 494,435,015 117,300,683 (389,818)
Grains 3,521,825 31,295,014 694,742
Metals 22,575,658 72,077,301 1,126,558
Indices 24,509,712 15,044,568 453,162
Softs 5,868,966 15,302,854 (141,817)
Livestock 6,117,540 6,400 22,504
------------ ------------ -----------
Total $852,011,994 $465,891,579 $ 7,288,686
------------ ------------ -----------
8. Subsequent Events:
Effective January 31, 1998, Chesapeake Capital Corporation and Abraham
Trading Co. were terminated as Advisors. Trendview Management, Inc. was
added as an Advisor on February 1, 1998.
F-11
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
During the last two fiscal years and any subsequent interim
period, no independent accountant who was engaged as the principal accountant to
audit the Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are managed by
its General Partner, Smith Barney Futures Management Inc. Investment decisions
will be made by Campbell & Company, Inc., Chesapeake Capital Corporation, John
W. Henry & Company, Inc., Abraham Trading Co., Rabar Market Research, Inc., AIS
Futures Management, Inc. and Telesis Management Inc. (collectively the
"Advisors").
Item 11. Executive Compensation.
The Partnership has no directors or officers. Its affairs are
managed by Smith Barney Futures Management Inc., its General Partner, which
receives compensation for its services, as set forth under "Item 1. Business."
SB, an affiliate of the General Partner, is the commodity broker for the
Partnership and receives brokerage commissions for such services, as described
under "Item 1. Business." Brokerage commissions and clearing fees of $9,893,999
were paid for the year ended December 31, 1997. Management fees and incentive
fees of $4,455,840 and $1,301,462, respectively, were paid or payable to the
Advisors for the year ended December 31, 1997.
15
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
(a). Security ownership of certain beneficial owners.
The Partnership knows of no person who beneficially owns more than 5% of the
Units outstanding.
(b). Security ownership of management. Under the terms of the
Limited Partnership Agreement, the Partnership's affairs are managed by the
General Partner. The General Partner owns Units of general partnership interest
equivalent to 2,048.9308 Units (1.8%) of Limited Partnership Interest as of
December 31, 1997.
(c). Changes in control. None.
Item 13. Certain Relationship and Related Transactions.
Smith Barney Inc. and Smith Barney Futures Management Inc. would be
considered promoters for purposes of item 404 (d) of Regulation S-K. The nature
and the amounts of compensation each promoter will receive from the Partnership
are set forth under "Item 1. Business" and "Item 11. Executive Compensation."
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) (1) Financial Statements:
Statement of Financial Condition at December 31, 1997 and 1996.
Statement of Income and Expenses for the years ended December
31, 1997, 1996 and 1995.
16
Statement of Partners' Capital for the years ended
December 31, 1997, 1996, and 1995.
(2) Financial Statement Schedules: Financial Data
Schedule for the year ended December 31, 1997.
(3) Exhibits:
3.1 - Limited Partnership Agreement (filed as Exhibit 3.1
to the Registration Statement on Form S-1 (File No.
33-75056 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).
17
10.6- Management Agreement among the Partnership, the
General Partner and Colorado Commodity Management
Corp. (filed as Exhibit 10.6 to the Registration
Statement on Form S-1 (File No. 33-75056) and
incorporated herein by reference).
10.7- Management Agreement among the Partnership, the
General Partner and John W. Henry & Company, Inc.
(filed as Exhibit 10.7 to the Registration Statement
on Form S-1 (File No. 33-75056) and incorporated
herein by reference).
10.8- Management Agreement among the Partnership, the
General Partner and Hyman Beck & Company (filed as
Exhibit 10.8 to the Registration Statement on Form
S-1 (File No. 33-75056) and incorporated herein by
reference).
10.9- Letter dated May 19, 1994 from the General Partner
to Colorado Commodities Management Corp. terminating
the Management Agreement (previously filed).
10.10- Management Agreement among the Partnership, the
General Partner and Chesapeake Capital Corp.(previously
filed).
10.11- Letters extending Management Agreements with John W.
Henry & Company, Inc., Hyman Beck & Company,
Campbell & Co., Inc. and Chesapeake Capital Corp.
(previously filed).
18
10.12- Management Agreement among the Partnership, the
General Partner and Abraham Trading Co. (previously
filed).
10.13- Management Agreement among the Partnership, the
General Partner and Rabar Market Research Inc.
(previously filed).
10.14- Management Agreement among the Partnership, the General
Partner and AIS Futures Management, Inc. (previously
filed).
10.15- Letter dated October 1, 1996 from the General Partner
to Hyman Beck & Company terminating the Management
Agreement (previously filed).
10.16- Management Agreement among the Partnership, the
General Partner and Telesis Management Inc. (filed
herein).
10.17- Letter terminating Management Agreement with
Chesapeake Capital Corporation (filed herein).
10.18- Letter terminating Management Agreement with Abraham
Trading Co. (filed herein).
10.19- Management Agreement among the Partnership the
General Partner and Trendview Management, Inc.
(filed herein).
10.20- Letters extending Management Agreements with Campbell &
Co., Chesapeake Capital Corp., John W. Henry & Company,
Inc., AIS Futures Managment, Inc, Abraham Trading Co.,
and Rabar Market Research Inc. for 1996 and 1997 (filed
herein)
(b) Reports on 8-K: None Filed.
19
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
20
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of New York
and State of New York on the 24th day of March 1998.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
By: Smith Barney Futures Management Inc.
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel, Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael Schaefer /s/ Daniel A. Dantuono
Michael Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
21