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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, 1999
Commission File Number 333-61961
SALOMON SMITH BARNEY GLOBAL DIVERSIFIED FUTURES FUND L.P.
(Exact name of registrant as specified in its charter)
New York 13-4015586
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
c/o Smith Barney Futures Management LLC
390 Greenwich St. - 1st Fl.
New York, New York 10013
(Address and Zip Code of principal executive offices)
(212) 723-5424
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Units of
Limited
Partnership
Interest
(Title
of Class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
form 10-K [X]
As of February 29, 2000 Limited Partnership Units with an aggregate value of
$89,227,994 were outstanding and held by non-affiliates.
DOCUMENTS INCORPORATED BY REFERENCE
None
32
PART I
Item 1. Business.
(a) General development of business. Salomon Smith Barney Global
Diversified Futures Fund L.P. (the "Partnership") is a limited partnership
organized under the laws of the State of New York, on June 15, 1998 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. A
total of 100,000 Units of Limited Partnership Interest in the Partnership
("Units") were offered to the public. Sales of additional Units and additional
general partner contributions and redemptions of Units for the year ended
December 31, 1999 are reported in The Statement of Partners' Capital on page F-6
under "Item 8. Financial Statement and Supplementary Data". A Registration
Statement on Form S-1 relating to the public offering became effective on
November 25, 1998. Between November 25, 1998 (commencement of offering period)
and February 1, 1999, 33,380 Units were sold at $1,000 per Unit. Proceeds of the
offering were held in an escrow account and were transferred, along with the
general partner's contribution of $338,000 to the Partnership's trading account
on February 2, 1999 when the Partnership commenced trading.
The General Partner has agreed to make capital contributions, if
necessary, so that its general partnership interest will be equal to the greater
2
of (i) 1% of the partners' contributions to the Partnership or (ii) $25,000. The
Partnership will be liquidated upon the first of the following to occur:
December 31, 2018; the net asset value of a Unit decreases to less than $400 as
of the close of any business day; or under certain circumstances as defined in
the Limited Partnership Agreement of the Partnership (the "Limited Partnership
Agreement").
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form of
organization from a corporation to a limited liability company on October 1,
1999. 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 contracts on commodities is done
on United States and foreign commodity exchanges. It engages in such trading
through a commodity brokerage account maintained with SSB.
As of December 31, 1999, all commodity trading decisions are made for the
Partnership by Campbell & Company,Inc. ("Campbell"), Eagle Trading Systems, Inc.
("Eagle"), Eckhardt Trading Company ("Eckhardt") and Rabar Market Research, Inc.
("Rabar") (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.
3
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 Eagle's management fee will be reduced by Eagle's pro rata share of
customary and routine administrative expenses of the Partnership) allocated to
each Advisor as of the end of each month and (ii) an incentive fee payable
annually equal to 20% of the New Trading Profits, as defined in the Management
Agreements, except Eagle, which will receive an incentive fee of 23% of New
Trading Profits, earned by each Advisor for the Partnership.
The Partnership has entered into a Customer Agreement with SSB (the
"Customer Agreement") which provides that the Partnership will pay SSB (i) a
monthly brokerage fee equal to 9/20 of 1% of month-end Net Assets allocated to
the Advisors (5.4% per year) in lieu of brokerage commissions on a per trade
basis. For the period from February 2, 1999 (commencement of trading operations)
to July 31, 1999, the Partnership paid SSB brokerage commissions at $54 per
round turn for transactions entered into by Campbell. 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
4
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
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 loss from operations for the period from February 2, 1999
(commencement of trading operations) to December 31, 1999 is set forth under
"Item 6. Select Financial Data". Partnership's capital as of December 31, 1999,
was $87,129,455.
(c) Narrative description of business.
See Paragraphs (a) and (b) above.
(i) through (x) - Not applicable.
(xi) through (xii) - Not applicable.
(xiii) - The Partnership has no employees.
(d) Financial Information About Geographic Areas. The Partnership does
not engage in sales of goods or services or own any long lived assets and
therefore this item is not applicable.
5
Item 2. Properties.
The Partnership does not own or lease any properties. The General
Partner operates out of facilities provided by its affiliate, SSB.
Item 3. Legal Proceedings.
There have been no material administrative, civil or criminal
actions within the past five years against SSB or any of its individual
principals and no such actions are currently pending, except as follows.
In September 1992, Harris Trust and Savings Bank (as trustee for
Ameritech Pension Trust), Ameritech Corporation, and an officer of Ameritech
sued Salomon Brothers Inc ("SBI") and Salomon Brothers Realty Corporation
("SBRC") in the U.S. District Court for the Northern District of Illinois
(Harris Trust Savings Bank, not individually but solely as trustee for the
Ameritech Pension Trust, Ameritech Corporation and John A. Edwardson v. Salomon
Brothers Inc and Salomon Brothers Realty Corp.). The complaint alleged that
purchases by Ameritech Pension Trust from the Salomon entities of approximately
$20.9 million in participations in a portfolio of motels owned by Motels of
America, Inc. and Best Inns, Inc. violated the Employee Retirement Income
Security Act ("ERISA"), the Racketeer Influenced and Corrupt Organization Act
("RICO") and state law. SBI had acquired the participations issued by Motels of
America and Best Inns to finance purchases of motel portfolios and sold 95% of
three such issues and 100% of one such issue to Ameritech Pension Trust.
Ameritech Pension Trust's complaint sought (1) approximately $20.9 million on
6
the ERISA claim, and (2) in excess of $70 million on the RICO and state law
claims as well as other relief. In various decisions between August 1993 and
July 1999, the courts hearing the case have dismissed all of the allegations in
the complaint against the Salomon entities. In October 1999, Ameritech appealed
to the U.S. Supreme Court and in January 2000, the Supreme Court agreed to hear
the case and oral argument will be heard April 17, 2000. The appeal seeks review
of the decision of the U.S. Court of Appeals for the Seventh Circuit that
dismissed the sole remaining ERISA claim against the Salomon entities.
Both the Department of Labor and the Internal Revenue Service ("IRS")
have advised SBI that they were or are reviewing the transactions in which
Ameritech Pension Trust acquired such participations. With respect to the IRS
review, SSBHI, SBI and SBRC have consented to extensions of time for the
assessment of excise taxes that may be claimed to be due with respect to the
transactions for the years 1987, 1988 and 1989. As of the date of this report,
the IRS has not issued such 30-day letters to SSBHI, SBI or SBRC.
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.
7
In June 1998, complaints were filed in the U.S. District Court for the
Eastern District of Louisiana in two actions (Board of Liquidations, City Debt
of the City of New Orleans v. Smith Barney Inc. et ano. and The City of New
Orleans v. Smith Barney Inc. et ano.), in which the City of New Orleans seeks a
determination that Smith Barney Inc. and another underwriter will be responsible
for any damages that the City may incur in the event the IRS 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. In May 1999, the Court denied SSB's motion to dismiss, but
stayed the litigation because the matter was not ripe. In March 2000, the city
filed a notice of discontinuance dismissing the complaint.
In November 1998, a class action complaint was filed in the United
States District Court for the Middle District of Florida (Dwight Brock as Clerk
for Collier County v. Merrill Lynch, et al.). The complaint alleged that,
pursuant to a nationwide conspiracy, 17 broker-dealer defendants, including 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. SSB has asked the court to dismiss the amended complaint.
8
In connection with the Louisiana and Florida matters, the IRS and SEC
have been conducting an industry-wide investigation into the pricing of Treasury
securities in advanced refunding transactions.
In December 1998, SSB was one of twenty-eight market making firms that
reached a settlement with the SEC in the matter titled In the Matter of Certain
Market Making Activities on NASDAQ. As part of the settlement of that matter,
SSB, without admitting or denying the factual allegations, agreed to an order
that required that it: (i) cease and desist from committing or causing any
violations of Sections 15(c)(1) and (2) of the Securities Exchange Act of 1934
and Rules 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 (wrongful) 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 misuse of money claims to stand. In December 1999, SSB filed an
answer and asserted counterclaims against the investment advisor. In response to
plaintiff's motion to strike the counterclaims, in January 2000, SSB amended its
9
counterclaims against the investment advisor to seek indemnification and
contribution. Plaintiffs moved to strike SSB's amended counterclaims in February
2000. SSB will continue to contest this lawsuit vigorously.
In the course of its business, SSB, as a major futures commission
merchant and broker-dealer is a party to various claims and routine regulatory
investigations and proceedings that the general partner believes do not have a
material effect on the business of SSB. 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, 1999 was 2,518.
(c) Distribution. The Partnership did not declare a distribution in 1999
and 1998.
(d) Use of Proceeds. For the period ended December 31, 1999, there were
additional sales of 60,121.0615 Units totaling $59,480,000 and
contributions by the General Partner representing 603.9704 Unit
equivalents totaling $598,000. Proceeds from the sale of additional
Units are used in the trading of commodity interests including futures
contracts, options and forward contracts.
10
Item 6. Selected Financial Data. The Partnership commenced trading operations on
February 2, 1999. Realized and unrealized trading losses, interest income, net
loss and decrease in net asset value per Unit for the period from February 2,
1999 (commencement of trading operations) to December 31, 1999 and total assets
at December 31, 1999 and 1998 were as follows:
1999 1998
------------- ------------
Realized and unrealized trading
losses net of brokerage
Commissions and clearing fees
of $3,196,873 $(3,647,829) $ -0-
Interest income 2,047,606 -0-
============= =========
Net loss $(3,911,911) $ -0-
============= =========
Decrease in net asset
Value per Unit $(48.61) $ -0-
========= =========
Total assets $89,065,209 $ 2,000
============= =========
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
futures contracts and interest receivable. Because of the low margin deposits
normally required in commodity futures trading, relatively small price movements
11
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 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.
(5) The Partnership will not employ the trading technique commonly
known as "pyramiding", in which the speculator uses unrealized profits on
existing positions as margin for the purchase or sale of additional positions in
the same or related commodities.
(6) The Partnership will not utilize borrowings except short-term
borrowings if the Partnership takes delivery of any cash commodities.
12
(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
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).
13
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 the Partnership will cease trading
operations and liquidate all open positions upon the first to occur of the
following: (i) December 31, 2018; (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.
(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.
14
Partnership expenses will consist of, among other things, commissions,
management fees and incentive fees. The level of these expenses is dependent
upon the level of trading gains or losses and the ability of the Advisors to
identify and take advantage of price movements in the commodity markets, in
addition to the level of net assets maintained. In addition, the amount of
interest income payable by SSB is dependent upon interest rates over which the
Partnership has no control.
No forecast can be made as to the level of redemptions in any given
period. Beginning at the end of six full months after trading commences August
31, 1999, a Limited Partner may cause all or some of his Units to be redeemed by
the Partnership at the Redemption Net Asset Value thereof as of the last day of
each month, ending at least three months after such Units have been issued, on
ten days' written notice to the General Partner. No fee will be charged for
redemptions. For the year ended December 31, 1999, 2,862.0307 Units were
redeemed totaling $2,754,634. Redemption Net Asset Value differs from Net Asset
Value calculated for financial reporting purposes in that the accrued liability
for reimbursement of offering and organization expenses for the Initial Offering
Period will not be included in the calculation of Redemption Net Asset Value.
Offering and organization expenses of approximately $700,000, relating
to the issuance and marketing of the Partnership's Units offered were initially
paid by SSB. These costs are being reimbursed to SSB by the Partnership in 24
equal monthly installments (together with interest at the prime rate quoted by
the Chase Manhattan Bank).
15
As of December 31, 1999, $297,315 of these costs have been reimbursed
to SSB, by the Partnership.
In addition, the Partnership has recorded interest expense of $40,947,
for the period ended December 31, 1999, which is included in other expenses.
The remaining deferred liability for these costs due to SSB of $402,685
(exclusive of interest charges) will not reduce Net Asset Value per Unit for any
purpose (other than financial reporting), including calculation of advisory and
brokerage fees and the redemption value of Units.
The Partnership continues to offer Units at the Net Asset Value per
Unit as of the end of each quarter. For the year ended December 31, 1999, there
were additional sales of 60,121.0615 Units totaling $59,480,000 and
contributions by the General Partner representing 603.9704 Unit equivalents
totaling $598,000.
(c) Results of Operations.
For the period from February 2, 1999 (commencement of trading
operations) to December 31, 1999, the net asset value per Unit decreased 4.9%
from $1,000 to $951.39. There were no operations for the year ended December 31,
1998.
The Partnership experienced net trading losses of $450,956 before
commissions and expenses for the year ended December 31, 1999. These losses were
primarily attributable to the trading of commodity futures in
16
currencies, metals, livestock, softs and non-U.S. interest rates and were
partially offset by gains recognized in the trading of commodity futures in
indices, grains, U.S. interest rates and energy.
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 Advisor 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 Advisor is 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 global environment with increasing transaction volumes and an
expansion in the number and complexity of products in the marketplace.
17
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, with
customers, among units within the Partnership, and in the markets where the
Partnership participates.
Legal/Documentation Risk - the risk of loss attributable to deficiencies in the
documentation of transactions (such as trade confirmations) and customer
relationships (such as master netting agreements) or errors that result in
noncompliance with applicable legal and regulatory requirements.
Financial Control Risk - the risk of loss attributable to limitations in
financial systems and controls. Strong financial systems and controls ensure
that assets are safeguarded, that transactions are executed in accordance with
management's authorization, and that financial information utilized by
management and communicated to external parties, including the Partnership's
unitholder, creditors, and regulators, is free of material errors.
18
Risk of Computer System Failure (Year 2000 Issue)
SSBHI's computer systems and business processes successfully handled
the date change from December 31, 1999 to January 1, 2000. SSBHI is not aware of
any significant year 2000 problems encountered internally or with the third
parties with which it interfaces, including customers and counterparties, the
global financial market infrastructure, and the utility infrastructure on which
all corporations rely.
Based on operations since January 1, 2000, SSBHI does not expect any
significant impact to its ongoing business as a result of the year 2000 issue.
However, it is possible that the full impact of year 2000 issues has not been
fully recognized and no assurances can be given that year 2000 problems will not
emerge.
The pretax costs associated with required system modifications and
conversions totaled approximately $130 million. These costs were funded through
operating cash flow and expensed in the period in which they were incurred.
The expenditures and the General Partner's resources dedicated
to the preparation for Year 2000 did not have a material impact on the operation
or results of the Partnership.
The most likely and most significant risk to the Partnership
associated with the lack of Year 2000 readiness is the failure of outside
organizations, including the commodities exchanges, clearing organizations, or
regulators with which the Partnership interacts to resolve their Year 2000
issues in a timely manner. This risk could involve the inability to determine
the value of the Partnership at some point in time and would make effecting
purchases or redemptions of Units in the Partnership infeasible until such
valuation was determinable.
19
(e) New Accounting Pronouncements
The Partnership adopted Statement on Financial Accounting Standards No.
133 ("SFAS 133"), Accounting For Derivative Financial Instruments and Hedging
Activities. SFAS 133 requires that an entity recognize all derivative
instruments in the statement of financial condition and measure those financial
instruments at fair value. SFAS 133 has no impact on Partners' Capital and
operating results as all derivative instruments are recorded at fair value, with
changes therein reported in the statement of income and expenses.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Introduction
The Partnership is a speculative commodity pool. The market sensitive
instruments held by it are acquired for speculative trading purposes, and all or
substantially all of the Partnership's assets are subject to the risk of trading
loss. Unlike an operating company, the risk of market sensitive instruments is
integral, not incidental, to the Partnership's main line of business.
Market movements result in frequent changes in the fair market value of
the Partnership's open positions and, consequently, in its earnings and cash
20
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. Consequently, it is not possible
to predict how a particular future market scenario will affect performance, and
the Partnership's past performance is not necessarily indicative of its future
results.
Value at Risk is a measure of the maximum amount which the Partnership
could reasonably be expected to lose in a given market sector. However, the
inherent uncertainty of the Partnership's speculative trading and the recurrence
in the markets traded by the Partnership of market movements far exceeding
expectations could result in actual trading or non-trading losses far beyond the
indicated Value at Risk or the Partnership's experience to date (i.e., "risk of
ruin"). In light of the foregoing as well as the risks and uncertainties
intrinsic to all future projections, the inclusion of the quantification
included in this section should not be considered to constitute any assurance or
representation that the Partnership's losses in any market sector will be
limited to Value at Risk or by the Partnership's attempts to manage its market
risk.
21
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 Advisor 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 and unrealized).
Exchange maintenance margin requirements have been used by the
Partnership as the measure of its Value at Risk. Maintenance margin requirements
are set by exchanges to equal or exceed the maximum losses reasonably expected
to be incurred in the fair value of any given contract in 95%-99% of any one-day
intervals. The maintenance margin levels are established by dealers and
exchanges using historical price studies as well as an assessment of current
market volatility (including the implied volatility of the options on a given
futures contract) and economic fundamentals to provide a probabilistic estimate
22
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.
In quantifying the Partnership's Value at Risk, 100% positive
correlation in the different positions held in each market risk category has
been assumed. Consequently, the margin requirements applicable to the open
contracts have simply been added to determine each trading category's aggregate
Value at Risk. The diversification effects resulting from the fact that the
Partnership's positions are rarely, if ever, 100% positively correlated have not
been reflected.
23
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, 1999. All
open position trading risk exposures of the Partnership have been included in
calculating the figures set forth below. As of December 31, 1999, the
Partnership's total capitalization was $87,129,455.
December 31, 1999
Year to Date
% of Total High Low
Market Sector Value at Risk Capitalization Value at Risk Value at Risk
- ----------------------------------------------------------------------------------------------
Currencies
- - OTC Contracts $ 558,527 0.64% $1,002,296 $ 984,599
- - Exchange Traded Contracts 822,857 0.94% 1,021,552 334,359
Energy 573,400 0.66% 1,312,030 710,300
Grains 185,580 0.21% 245,800 104,800
Interest rates U.S. 596,952 0.69% 1,006,783 367,400
Interest rates Non-U.S. 1,576,125 1.81% 2,040,413 1,217,949
Metals 747,900 0.86% 1,004,400 438,150
Softs 149,600 0.18% 185,450 47,200
Livestock 12,000 0.01% 32,800 1,800
Indices 1,787,970 2.05% 2,717,417 724,053
---------- ------
Total $7,010,911 8.05%
========== ======
There was no trading in the year ended December 31, 1998.
24
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.
25
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.
26
The following were the primary trading risk exposures of the
Partnership as of December 31, 1999, by market sector.
Interest Rates. Interest rate risk is the principal market exposure of
the Partnership. Interest rate movements directly affect the price of the
futures positions held by the Partnership and indirectly the value of its stock
index and currency positions. Interest rate movements in one country as well as
relative interest rate movements between countries materially impact the
Partnership's profitability. The Partnership's primary interest rate exposure is
to interest rate fluctuations in the United States and the other G-7 countries.
However, the Partnership also takes futures positions on the government debt of
smaller nations -- e.g., Australia. The General Partner anticipates that G-7
interest rates will remain the primary market exposure of the Partnership for
the foreseeable future. The changes in interest rates which have the most effect
on the Partnership are changes in long-term, as opposed to short-term, rates.
Consequently, even a material change in short-term rates would have little
effect on the Partnership were the medium- to long-term rates to remain steady.
Currencies. The Partnership's currency exposure is to exchange rate
fluctuations, primarily fluctuations which disrupt the historical pricing
relationships between different currencies and currency pairs. These
fluctuations are influenced by interest rate changes as well as political and
general economic conditions. The Partnership's major exposures have typically
been in the dollar/yen, dollar/mark and dollar/pound positions. The General
Partner does not anticipate that the risk profile of the Partnership's currency
27
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.
Stock Indices. The Partnership's primary equity exposure is to equity
price risk in the G-7 countries. The stock index futures traded by the
Partnership are by law limited to futures on broadly based indices. As of
December 31, 1999, the Partnership's primary exposures were in the Financial
Times (England), Nikkei (Japan) and SFE (Australian) stock indices. The General
Partner anticipates little, if any, trading in non-G-7 stock indices. The
Partnership is primarily exposed to the risk of adverse price trends or static
markets in the major U.S., European and Japanese indices. (Static markets would
not cause major market changes but would make it difficult 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 the Advisor will from
time to time trade base metals such as aluminum, copper and tin, the principal
market exposures of the Partnership have consistently been in the precious
metals, gold and silver. The Advisor's gold trading has been increasingly
limited due to the long-lasting and mainly non-volatile decline in the price of
gold over the last 10-15 years. However, silver prices have remained volatile
28
over this period, and the Advisor has from time to time taken substantial
positions as they have perceived market opportunities to develop. The General
Partner anticipates that gold and silver will remain the primary metals market
exposure for the Partnership.
Qualitative Disclosures Regarding Non-Trading RiskExposure
The following were the only non-trading risk exposures of the
Partnership as of December 31, 1999.
Foreign Currency Balances. The Partnership's primary foreign currency
balances are in Japanese yen, German marks, British pounds and French francs.
The Advisor regularly converts foreign currency balances to dollars in an
attempt to control the Partnership's non-trading risk.
Qualitative Disclosures Regarding Means of Managing Risk Exposure
The General Partner monitors 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 Advisor concerning
the Partnership's overall risk profile. If the General Partner felt it necessary
to do so, the General Partner could require the Advisor 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
29
General Partner primarily relies on the Advisor's own risk control policies
while maintaining a general supervisory overview of the Partnership's market
risk exposures.
The Advisor applies its own risk management policies to its trading.
The Advisor often follows diversification guidelines, margin limits and stop
loss points to exit a position. The Advisor's research of risk management often
suggests ongoing modifications to its trading programs.
As part of the General Partner's risk management, the General Partner
periodically meets with the Advisor to discuss its risk management and to look
for any material changes to the Advisor's portfolio balance and trading
techniques. The Advisor is required to notify the General Partner of any
material changes to its programs.
30
Item 8. Financial Statements and Supplementary Data.
SALOMON SMITH BARNEY GLOBAL DIVERSIFIED FUTURES FUND L.P.
INDEX TO FINANCIAL STATEMENTS
Page
Number
Oath or Affirmation F-2
Report of Independent Accountants. F-3
Financial Statements:
Statement of Financial Condition at
December 31, 1999 and 1998. F-4
Statement of Income and Expenses for
the period from February 2,1999
(commencement of trading operations)
to December 31, 1999. F-5
Statement of Partners' Capital for
the period from June 15, 1998
(date Partnership was organized) to
December 31, 1999. F-6
Notes to Financial Statements. F-7 - F-11
F-1
Continued
To The Limited Partners of
Salomon Smith Barney Global Diversified Futures Fund L.P.
To the best of the knowledge and belief of the undersigned, the information
contained herein is accurate and complete.
By: Daniel A. Dantuono, Chief Financial Officer
Smith Barney Futures Management LLC
General Partner, Salomon Smith Barney
Global Diversified Futures Fund L.P.
Smith Barney Futures Management LLC
390 Greenwich Street
1st Floor
New York, N.Y. 10013
212-723-5424
F-2
Report of Independent Accountants
To the Partners of
Salomon Smith Barney Global Diversified Futures Fund L.P.:
In our opinion, the accompanying statement of financial condition and the
related statements of income and expenses and of partners' capital present
fairly, in all material respects, the financial position of Salomon Smith Barney
Global Diversified Futures Fund L.P. at December 31, 1999 and 1998 and the
results of its operations for the period from June 15, 1998 (date Partnership
was organized) to December 31, 1999, in conformity with accounting principles
generally accepted in the United States. 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, which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by the management of the General Partner, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
New York, New York
February 25, 2000
F-3
Salomon Smith Barney
Global Diversified Futures Fund L.P.
Statement of Financial Condition
December 31, 1999 and 1998
1999 1998
Assets:
Equity in commodity futures trading account:
Cash (Note 3c) $85,369,042 $2,000
Net unrealized appreciation on open futures contracts 3,293,682 --
Commodity options owned, at market value (cost $242,328) 105,484 --
--------------- ---------------
88,768,208 2,000
Interest receivable 297,001 --
$89,065,209 $2,000
--------------- --------------
--------------- --------------
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $411,280 $ --
Management fees 147,997 --
Incentive fees 213,409 --
Professional fees 173,740 --
Other 30,222 --
Due SSB (Note 6) 434,877 --
Redemptions Payable (Note 5) 565,176 --
--------------- ---------------
1,976,701 --
Partners' capital (Notes 1 and 7):
General Partner, 941.9704 and 1 Unit equivalent outstanding
in 1999 and 1998, respectively 895,767 1,000
Limited Partners, 90,639.0308 and 1 Unit of Limited Partnership
Interest outstanding in 1999 and 1998, respectively 86,192,741 1,000
--------------- ---------------
87,088,508 2,000
--------------- ---------------
$89,065,209 $2,000
--------------- --------------
--------------- --------------
See notes to financial statements.
F-4
Salomon Smith Barney
Global Diversified Futures Fund L.P.
Statement of Income and Expenses
for the period from February 2, 1999
(commencement of trading operations)
to December 31, 1999
1999
Income:
Net loss on trading of commodity interests:
Realized losses on closed positions $(3,607,794)
Change in unrealized gain on open positions 3,156,838
-------------
(450,956)
Less, Brokerage commissions including
clearing fees of $87,226 (Note 3c) (3,196,873)
-------------
Net realized and unrealized losses (3,647,829)
Interest income (Notes 3c) 2,047,606
-------------
(1,600,223)
-------------
Expenses:
Management fees (Note 3b) 1,119,609
Incentive fees (Note 3b) 213,409
Professional fees 235,716
Other expenses 83,901
-------------
1,652,635
-------------
Net loss $(3,252,858)
-------------
-------------
Net loss per Unit of Limited Partnership Interest and
General Partner Unit equivalent (Notes 1 and 7) $ (28.29)
-------------
-------------
See notes to financial statements.
F-5
Salomon Smith Barney
Global Diversified Futures Fund L.P.
Statement of Partners' Capital
for the period from June 15, 1998
(date Partnership was organized)
to December 31, 1999
Limited General
Partners Partner Total
Initial capital contributions $1,000 $1,000 $2,000
Proceeds from offering of 33,379 Units of Limited
Partnership Interest and General Partner's
contribution representing 337 Unit equivalents
(Note 1) 33,379,000 337,000 33,716,000
Offering and organization costs (Note 6) (693,000) (7,000) (700,000)
-------------- -------------- ---------------
Opening Partnership capital for operations 32,687,000 331,000 33,018,000
Net loss (3,219,625) (33,233) (3,252,858)
Sale of 60,121.0615 Units of Limited Partnership
Interest and General Partner's contribution
representing 603.9704 Unit equivalents 59,480,000 598,000 60,078,000
Redemption of 2,862.0307 Units of Limited
Partnership Interest (2,754,634) -- (2,754,634)
--------------- -------------- ---------------
Partners' capital at December 31, 1999 $86,192,741 $895,767 $87,088,508
--------------- --------------- --------------
--------------- --------------- --------------
See notes to financial statements.
F-6
Salomon Smith Barney
Global Diversified Futures Fund L.P.
Notes to Financial Statements
1. Partnership Organization:
Salomon Smith Barney Global Diversified Futures Fund L.P. (the
"Partnership") is a limited partnership organized under the laws of the
State of New York, on June 15, 1998 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.
Between November 25, 1998 (commencement of the offering period) and February
1, 1999, 33,380 Units of Limited Partnership Interest ("Units") were sold at
$1,000 per Unit. The proceeds of the initial offering were held in an escrow
account until February 2, 1999, at which time they were turned over to the
Partnership for trading.
Smith Barney Futures Management LLC acts as the general partner (the
"General Partner") of the Partnership. The General Partner changed its form
of organization from a corporation to a limited liability company on October
1, 1999. The Partnership's commodity broker is Salomon Smith Barney Inc.
("SSB"). SSB is an affiliate of the General Partner. The General Partner is
wholly owned by Salomon Smith Barney Holdings Inc. ("SSBHI"), which is the
sole owner of SSB. SSBHI is a wholly owned subsidiary of Citigroup Inc.
The General Partner and each limited partner share in the profits and losses
of the Partnership in proportion to the amount of partnership interest owned
by each except that no limited partner shall be liable for obligations of
the Partnership in excess of his initial capital contribution and profits,
if any, net of distributions.
The Partnership will be liquidated upon the first to occur of the following:
December 31, 2018; the net asset value of a Unit decreases to less than $400
as of a close of any business day; or under certain other circumstances as
defined in the Limited Partnership Agreement.
2. Accounting Policies:
a. All commodity interests (including derivative financial instruments and
derivative commodity instruments) are used for trading purposes. The
commodity interests are recorded on trade date and open contracts are
recorded in the statement of financial condition at fair value on the
last business day of the year, which represents market value for those
commodity interests for which market quotations are readily available.
Investments in commodity interests denominated in foreign currencies are
translated into U.S. dollars at the exchange rates prevailing on the last
business day of the year. Realized gains (losses) and changes in
unrealized values on commodity interests are recognized in the period in
which the contract is closed or the changes occur and are included in net
gains (losses) on trading of commodity interests.
b. The partnership may purchase and write (sell) options. An option is a
contract allowing, but not requiring, its holder to buy (call) or sell
(put) a specific or standard commodity or financial instrument at a
specified price during a specified time period. The option premium is the
total price paid or received for the option contract. When the fund
writes an option, the premium received is recorded as a liability in the
statement of financial condition and marked to market daily. When the
fund purchases an option, the premium paid is recorded as an asset in the
statement of financial condition and marked to market daily.
c. Income taxes have not been provided as each partner is individually
liable for the taxes, if any, on his share of the Partnership's income
and expenses.
F-7
d. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from these estimates.
3. Agreements:
a. Limited Partnership Agreement:
The General Partner administers the business and affairs of the
Partnership including selecting one or more advisors to make trading
decisions for the Partnership.
b. Management Agreement:
The General Partner, on behalf of the Partnership, has entered into a
Management Agreement with Campbell & Company, Inc. ("Campbell"), Eagle
Trading Systems, Inc. ("Eagle"), Eckhardt Trading Company ("Eckhard") and
Rabar Market Research, Inc. ("Rabar") (collectively, the "Advisors"),
registered commodity trading advisors. The Advisors are not affiliated
with one another and none is affiliated with the General Partner or SSB
and are not responsible for the organization or operation of the
Partnership. The Partnership will pay each Advisor a monthly management
fee equal to 1/6 of 1% (2% a year) of month-end Net Assets allocated to
the Advisor. In addition, the Partnership is obligated to pay each
Advisor an incentive fee payable annually equal to 20% of the New Trading
Profits, as defined in the Management Agreements, earned by each Advisor
for the Partnership, except for Eagle, which will receive an incentive
fee of 23% of New Trading Profits.
c. Customer Agreement:
The Partnership has entered into a Customer Agreement which provides that
the Partnership will pay SSB a monthly brokerage fee equal to 9/20 of 1%
(5.4% per year) of month-end Net Assets, as defined, allocated to the
Advisors, in lieu of brokerage commissions on a per trade basis. For the
period from February 2, 1999 (commencement of trading operations) to July
31, 1999, the Partnership paid SSB brokerage commissions at $54 per round
turn for transactions entered into by Campbell. SSB will pay a portion of
brokerage fees to its financial consultants who have sold Units in this
Partnership. Brokerage fees will be paid for the life of the Partnership,
although the rate at which such fees are paid may be changed. The
Partnership will pay for National Futures Association ("NFA") fees,
exchange, clearing, user, give-up and floor brokerage fees. All of the
Partnership's assets are deposited in the Partnership's account at SSB.
The Partnership's cash is deposited by SSB in segregated bank accounts to
the extent required by Commodity Futures Trading Commission regulations.
At December 31, 1999, the amount of cash held for margin requirements was
$7,885,066. SSB has agreed to pay the Partnership interest on 80% of the
average daily equity maintained in cash in its account during each month
at a 30-day U.S. Treasury bill rate determined weekly by SSB based on the
average noncompetitive yield on 3-month U.S. Treasury bills maturing in
30 days from the date on which such weekly rate is determined. The
Customer Agreement between the Partnership and SSB gives the Partnership
the legal right to net unrealized gains and losses. The Customer
Agreement may be terminated upon notice by either party.
4. Trading Activities:
The Partnership was formed for the purpose of trading contracts in a variety
of commodity interests, including derivative financial instruments and
derivative commodity interests. The results of the Partnership's trading
activity are shown in the statement of income and expenses.
F-8
All of the commodity interests, owned by the Partnership, are held for
trading purposes. The average fair value during the period ended December
31, 1999, based on a monthly calculation was $1,447,941. The fair value of
these commodity interests, including options thereon, if applicable, at
December 31, 1999, was $3,399,166, as detailed below.
Fair Value
December 31,
1999
------------
Currencies:
-Exchange Traded Contracts $286,131
-OTC Contracts (383,900)
Energy 276,537
Grains (14,942)
Interest Rates U.S. 803,746
Interest Rates Non-U.S. 306,279
Livestock (10,200)
Metals 594,978
Softs 1,657
Indices 1,538,880
------------
Total $3,399,166
------------
------------
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.
Beginning with the first full month ending at least three months after the
commencement of trading, a limited partner may require the Partnership to
redeem his Units at their Net Asset Value as of the last day of a month on
10 days notice to the General Partner. For the purpose of a redemption, any
accrued liability for reimbursement of offering and organization expenses
for the Initial Offering Period will not reduce Net Asset Value per Unit.
There is no fee charged to limited partners in connection with redemptions.
6. Offering and Organization Costs:
Offering and organization expenses of approximately $700,000 relating to the
issuance and marketing of the Partnership's Units offered were initially
paid by SSB. These costs are being reimbursed to SSB by the Partnership in
24 equal monthly installments (together with interest at the prime rate
quoted by the Chase Manhattan Bank).
As of December 31, 1999, $297,315 of these costs have been reimbursed to
SSB, by the Partnership.
In addition, the Partnership has recorded interest expense of $40,947, for
the period ended December 31, 1999 which is included in other expenses.
The remaining deferred liability for these costs due to SSB of $402,685
(exclusive of interest charges) will not reduce Net Asset Value per Unit for
any purpose (other than financial reporting), including calculation of
advisory and brokerage fees and the redemption value of Units.
F-9
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit of Partnership interest for the
period from February 2, 1999 (commencement of trading operations) to
December 31, 1999 were as follows:
1999
------------
Net realized and unrealized loss $(43.11)
Interest income 32.26
Expenses (17.44)
------------
Decrease for period (28.29)
Net asset value per Unit, beginning of period 1,000.00
Offering and organization cost adjustment (20.76)
------------
Net asset value per Unit, end of period $950.95
------------
------------
Redemption value per Unit, end of period* $956.34
------------
------------
*For the purpose of a redemption, any accrued liability for reimbursement of
offering and organization expenses will not reduce redemption net asset
value per unit.
8. Financial Instrument Risks:
The Partnership is party to financial instruments with off-balance sheet
risk, including derivative financial instruments and derivative commodity
instruments, in the normal course of its business. These financial
instruments may include forwards, futures and options, whose value is based
upon an underlying asset, index, or reference rate, and generally represent
future commitments to exchange currencies or cash flows, or to purchase or
sell other financial instruments at specific terms at specified future
dates, or, in the case of derivative commodity instruments, to have a
reasonable possibility to be settled in cash, through physical delivery or
with another financial instrument. These instruments may be traded on an
exchange or over-the-counter ("OTC"). Exchange traded instruments are
standardized and include futures and certain option contracts. OTC contracts
are negotiated between contracting parties and include forwards and certain
options. Each of these instruments is subject to various risks similar to
those related to the underlying financial instruments including market and
credit risk. In general, the risks associated with OTC contracts are greater
than those associated with exchange traded instruments because of the
greater risk of default by the counterparty to an OTC contract.
Market risk is the potential for changes in the value of the financial
instruments traded by the Partnership due to market changes, including
interest and foreign exchange rate movements and fluctuations in commodity
or security prices. Market risk is directly impacted by the volatility and
liquidity in the markets in which the related underlying assets are traded.
Credit risk is the possibility that a loss may occur due to the failure of a
counterparty to perform according to the terms of a contract. Credit risk
with respect to exchange traded instruments is reduced to the extent that an
exchange or clearing organization acts as a counterparty to the transactions
(see table in Note 4). The Partnership's risk of loss in the event of
counterparty default is typically limited to the amounts recognized in the
statement of financial condition and not represented by the contract or
notional amounts of the instruments. The Partnership has concentration risk
because the sole counterparty or broker with respect to the Partnership's
assets is SSB.
The General Partner monitors and controls the Partnership's risk exposure on
a daily basis through financial, credit and risk management monitoring
systems, and accordingly believes that it has effective procedures for
evaluating and limiting the credit and market risks to which the Partnership
F-10
is subject. These monitoring systems allow the General Partner to
statistically analyze actual trading results with risk adjusted performance
indicators and correlation statistics. In addition, on-line monitoring
systems provide account analysis of futures, forwards and options positions
by sector, margin requirements, gain and loss transactions and collateral
positions.
The notional or contractual amounts of these instruments, while
appropriately not recorded in the financial statements, reflect the extent
of the Partnership's involvement in these instruments. The majority of these
instruments mature within one year of December 31, 1999. However, due to the
nature of the Partnership's business, these instruments may not be held to
maturity.
9. Subsequent Events:
On January 1, 2000 there were additional sales of 4,516.1762 Units totaling
$4,319,000 and contributions by the General Partner representing 125.4784
unit equivalents totaling $120,000. On January 31, 2000 there were
additional redemptions of 1,234.5566 Units totaling $1,179,644.
10. New Accounting Pronouncements:
The Partnership adopted Statement on Financial Accounting Standards No. 133
("SFAS 133"), Accounting for Derivative Financial Instruments and Hedging
Activities. SFAS 133 requires that an entity recognize all derivative
instruments in the statement of financial condition and measure those
financial instruments at fair value. SFAS 133 has no impact on Partners'
Capital and operating results as all derivative instruments are recorded at
fair value, with changes therein reported in the statement of income and
expenses.
F-11
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
During the last fiscal year and any subsequent interim period, no
independent accountant who was engaged as the principal accountant to audit the
Partnership's financial statements has resigned or was dismissed.
PART III
Item 10. Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs
are managed by its General Partner, Smith Barney Futures Management LLC.
Investment decisions will be made by 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 $3,196,873 were paid
for the year ended December 31, 1999. Management fees and incentive fees of
$1,119,609 and $213,409, respectively, were paid or payable to the Advisors for
the year ended December 31, 1999.
31
Item 12. Security Ownership of Certain Beneficial Owners and Management.
(a). Security ownership of certain beneficial owners.
As of March 1, 2000, two beneficial owners who are neither a director nor
executive officer own more than five percent (5%) of the outstanding Units
issued by the Registrant as follows:
Title Name and Address of Amount and Nature of Percent of
of Class Beneficial Owner Beneficial Ownership Class
- -------- --------------------- -------------------- ----------
Units of Greenawn LLC 8,855.7783 Units 9.7%
Limited 927 Fifth Ave.
Partnership New York, N.Y. 10021
Interest
Units of Mel D. Blumenthal & 7,860.3164 Units 8.6%
Limited Paulette Blumenthal
Partnership Family Trust
Interest 2184 Mandeville Canyon Rd.
Los Angeles, Ca 90094
(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 941.9704 Units of Limited Partnership Interest (1.03%) as of
December 31, 1999.
(c). Changes in control. None.
Item 13. Certain Relationship and Related Transactions.
Salomon Smith Barney Inc. and Smith Barney Futures Management LLC would
be considered promoters for purposes of item 404 (d) of Regulation S-K. The
nature and the amounts of compensation each promoter will receive from the
Partnership are set forth under "Item 1. Business", "Item 8. Financial
Statements and Supplementary Data." and "Item 11. Executive Compensation."
32
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, 1999
and 1998.
Statement of Income and Expenses for the period from
February 2, 1999 (commencement of trading operations)
to December 31, 1999. Statement of Partners' Capital
for the period from June 15, 1998 (date Partnership
was organized to December 31, 1999.
(2) Financial Statement Schedules: Financial Data
Schedule for the year ended December 31, 1999 and 1998.
(3) Exhibits:
3.1 - Limited Partnership Agreement (filed as Exhibit 3.1 to the
Registration Statement on Form S-1 (File No. 333-61961 and
incorporated herein by reference).
3.2 - Certificate of Limited Partnership of the Partnership as
filed in the office of the Secretary of State of the State
of New York on June 15, 1998 (filed as Exhibit 3.2 to the
Registration Statement on Form S-1 (File No. 333-61961) and
incorporated herein by reference).
33
10.1-Customer Agreement between the Partnership and Salomon
Smith Barney (filed as Exhibit 10.1 to the Registration
Statement on Form S-1 (File No. 333-61961) 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. 333-61961) 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.
333-61961) and incorporated herein by reference).
10.6-Management Agreement among the Partnership, the General
Partner and Eagle Trading Systems, Inc. (filed as Exhibit
10.6 to the Registration Statement on Form S-1 (File No.
333-61961) and incorporated herein by reference).
10.7-Management Agreement among the Partnership, the General
Partner and Eckhardt Trading Company (filed as Exhibit 10.7
to the Registration Statement on Form S-1 (File No.
333-61961) and incorporated herein by reference).
34
10.8-Management Agreement among the Partnership, the General
Partner and Rabar Market Research (filed as Exhibit 10.8 to
the Registration Statement on Form S-1 (File No. 333-61961)
and incorporated herein by reference).
10.9-Letter extending Management Agreements with Campbell &
Company, Inc., Eagle Trading Systems, Inc., Eckhardt Trading
Company and Rabar Market Research (filed herein).
(b) Reports on 8-K: None Filed.
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this annual report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized,
in the City of New York and State of New York on the 30th day of March 2000.
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
By: Smith Barney Futures Management LLC
(General Partner)
By /s/ David J. Vogel
David J. Vogel, President & Director
Pursuant to the requirements of the Securities Exchange Act of 1934,
this annual report on Form 10-K has been signed below by the following persons
in the capacities and on the date indicated.
/s/ David J. Vogel /s/ Jack H. Lehman III
David J. Vogel Jack H. Lehman III
Director, Principal Executive Chairman and Director
Officer and President
/s/ Michael R. Schaefer /s/ Daniel A. Dantuono
Michael R. Schaefer Daniel A. Dantuono
Director Treasurer, Chief Financial
Officer and Director
/s/ Daniel R. McAuliffe, Jr. /s/ Steve J. Keltz
Daniel R. McAuliffe, Jr. Steve J. Keltz
Director Secretary and Director
/s/ Shelley Ullman
Shelley Ullman
Director
36