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, 1996
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 [ ]
<PAGE>
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, 1996 are
reported in the Statement of Partners' Capital on page F-5 under "Item 8.
Financial Statements and Supplementary Data."
2
<PAGE>
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").
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 its commodity broker,
Smith Barney Inc. ("SB").
Smith Barney Futures Management Inc., acts as the general partner of the
Partnership (the "General Partner"). SB is an affiliate of the General Partner.
Under the Limited Partnership Agreement, the General Partner administers the
business and affairs of the Partnership. As of December 31, 1996, 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, 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
3
<PAGE>
operation of the Partnership.
Pursuant to the terms of the Management Agreements (the "Management
Agreement"), the Partnership is obligated to pay each Advisor: (i) a monthly
management fee equal to 1/6 of 1% (2% per year) of month-end Net Assets (except
that JWH will receive a monthly management fee equal to 1/3 of 1% (4% per year))
of the Partnership allocated to each Advisor as of the end of each month and
(ii) an incentive fee payable quarterly, equal to 20% of the New Trading Profits
(except JWH, which will receive an incentive fee of 15% of New Trading Profits)
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.
SB 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 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
4
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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,
1996, 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, 1996 was $171,587,261.
(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.
5
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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
Partnership Interest as of December 31, 1996 was 7,706.
(c) Distribution. The Partnership did not declare a
distribution in 1996.
6
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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, 1996, 1995 and for the period from January 12,
1994 (commencement of trading operations) to December 31, 1994 and total assets
at December 31, 1996, 1995, 1994 and 1993 were as follows:
<TABLE>
<CAPTION>
1996 1995 1994 1993
------------- ------------- ------------ -------
<S> <C> <C> <C> <C>
Realized and unrealized
trading gains (losses) net
of brokerage commissions
and clearing fees of
$10,754,060, $11,751,508 and
$9,866,501, respectively $ 23,283,977 $ 23,528,907 $ 1,167,729
Interest Income 6,631,110 8,077,695 5,227,466
------------ ------------- ------------
$ 29,915,087 $ 31,606,602 $ 6,395,195
============= ============= ============
Net Income (loss) $ 21,056,614 $ 22,177,218 $ (2,229,371)
============= ============= =============
Increase (decrease) in net
asset value per unit $ 158.70 $124.60 $ (32.94)
========= ======== =========
Total assets $178,462,215 $201,319,665 $186,365,419 $2,000
============= ============= ============= ======
</TABLE>
7
<PAGE>
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.
8
<PAGE>
(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 the Partnership's risk exposure on a daily basis
through financial,
9
<PAGE>
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 Statement 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.
10
<PAGE>
(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, 1996
42,559.6065 units were redeemed totaling $45,695,264. For the year ended
December 31, 1995 46,400.1653 Units were redeemed totaling $47,827,665 which
includes the General Partner's redemption representing 48.7530 Units equivalents
totaling $60,045. For the
11
<PAGE>
period ended December 31, 1994 33,561.8122 Units were redeemed
totaling $32,289,431.
The Partnership ceased to offer Units at the Net Asset Value per Unit as
of the end of each month effective April 1, 1996. 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. For the period ended December 31, 1994, there were
additional sales of 141,214.7500 Units totaling $136,109,323 and contributions
by the General Partner representing 1,316.6838 Unit equivalents totaling
$1,274,000.
(c) Results of Operations.
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.
For the period from January 12, 1994 (commencement of trading operations) to
December 31, 1994, the net asset value per Unit decreased 3.3% from $1,000.00 to
$967.06.
The Partnership experienced net trading gains of $34,038,037 before
commissions and expenses in 1996. These gains were 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
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<PAGE>
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.
The Partnership experienced net trading gains of $11,034,230 before
commissions and expenses for the period ended December 31, 1994. Realized
trading losses of $12,300,678 were attributable to losses incurred in the
trading of commodity futures in stock indices, energy and interest rates.
However, these realized trading losses were partially offset by realized gains
experienced in the trading of metals, foreign currencies 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.
13
<PAGE>
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, 1996 and 1995. F-3
Statement of Income and Expenses
for the years ended December 31, 1996
and 1995 and for the period January 12,
1994 (commencement of trading operations)
to December 31, 1994. F-4
Statement of Partner's Capital for
the years ended December 31, 1996, 1995
and 1994. F-5
Notes to Financial Statements. F-6 - F-11
F-1
<PAGE>
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, 1996 and 1995, and the related statements of income and expenses
for the years ended December 31, 1996 and 1995 and for the period from January
12, 1994 (commencement of trading operations) to December 31, 1994, and of
partners' capital for the years ended December 31, 1996, 1995, and 1994. 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, 1996 and 1995, and the results of its
operations for the years ended December 31, 1996, 1995 and 1994, in conformity
with generally accepted accounting principles.
Coopers & Lybrand L.L.P.
New York, New York
February 28, 1997
F-2
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Statement of Financial Condition
December 31, 1996 and 1995
Assets: 1996 1995
Equity in commodity futures
trading account:
Cash and cash equivalents (Note 3c) $170,574,018 $181,687,559
Net unrealized appreciation
on open futures contracts 6,887,203 18,951,551
Commodity options owned, at
market value (cost $607,539 and
$5,360, in 1996 and 1995,
respectively) 442,696 5,520
------------ ------------
177,903,917 200,644,630
Interest receivable 558,298 675,035
------------ ------------
$178,462,215 $201,319,665
============ ============
Liabilities and Partners' Capital:
Liabilities:
Accrued expenses:
Commissions $ 831,169 $ 940,399
Management fees 412,599 447,124
Incentive fees 3,476,717
Other 108,043 107,357
Redemptions payable (Note 5) 2,005,213 5,631,797
Commodity options written, at
market value (premiums received
$83,070 and $2,400, in 1996 and
1995, respectively) 41,213 2,560
------------ ------------
6,874,954 7,129,237
------------ ------------
Partners' capital (Notes 1, 5, and 7):
General Partner, 2,048.9308
Unit equivalents outstanding
in 1996 and 1995 2,561,901 2,236,736
Limited Partners, 135,181.6379
and 175,835.9644 Units of
Limited Partnership Interest
outstanding in
1996 and 1995, respectively 169,025,360 191,953,692
------------ ------------
171,587,261 194,190,428
------------ ------------
$178,462,215 $201,319,665
============ ============
See notes to financial statements.
F-3
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Statement of Income and Expenses
for the years ended December 31, 1996 and
1995 and for the period from January 12, 1994
(commencement of trading operations) to
December 31, 1994
1996 1995 1994
Income:
Net gains (losses) on trading
of commodity interests:
Realized gains (losses) on
closed positions $ 46,225,371 $ 39,663,772 $(12,300,678)
Change in unrealized
gains/ losses on
open positions (12,187,334) (4,383,357) 23,334,908
------------ ------------ ------------
34,038,037 35,280,415 11,034,230
Less, Brokerage
commissions and
clearing fees
($393,877, $433,213
and $273,864,
respectively) (Note 3c) (10,754,060) (11,751,508) (9,866,501)
------------ ------------ ------------
Net realized and
unrealized gains 23,283,977 23,528,907 1,167,729
Interest income 6,631,110 8,077,695 5,227,466
------------ ------------ ------------
29,915,087 31,606,602 6,395,195
------------ ------------ ------------
Expenses:
Management fees (Note 3b) 4,682,124 4,940,353 4,285,947
Incentive fees (Note 3b) 3,923,488 4,073,071 3,023,294
Other 252,861 415,960 170,003
Organization expense (Note 6) 1,145,322
------------ ------------ ------------
8,858,473 9,429,384 8,624,566
------------ ------------ ------------
Net income (loss) $ 21,056,614 $ 22,177,218 $ (2,229,371)
============ ============ ============
Net income (loss) per
Unit of Limited Partnership
Interest and General Partner
Unit equivalent (Notes 1 and 7) $ 158.70 $ 124.60 $ (32.94)
============ ============ ============
See notes to financial statements.
F-4
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Statement of Partners' Capital
for the years ended December 31, 1996,
1995 and 1994
Limited General
Partners Partner Total
Partners' capital at
December 31, 1993 $ 1,000 $ 1,000 $ 2,000
Proceeds from offering of 75,614
Units of Limited Partnership
Interest and General Partner's
contribution representing 780
Unit equivalents (Note 1) 75,614,000 780,000 76,394,000
------------- ------------- -------------
Opening Partnership
capital for operations 75,615,000 781,000 76,396,000
Net loss (2,202,957) (26,414) (2,229,371)
Sale of 141,214.7500 Units of
Limited Partnership Interest
and General Partner's
contribution representing
1,316.6838 Unit equivalents 136,109,323 1,274,000 137,383,323
Redemption of 33,561.8122 Units
of Limited Partnership Interest (32,289,431) 0 (32,289,431)
------------- ------------- -------------
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 0 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 0 2,035,483
Redemption of 42,559.6065 Units
of Limited Partnership Interest (45,695,264) 0 (45,695,264)
------------- ------------- -------------
Partners' capital at
December 31, 1996 $ 169,025,360 $ 2,561,901 $ 171,587,261
============= ============= =============
See notes to financial statements.
F-5
<PAGE>
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.
Between October 29, 1993 and January 11, 1994, 75,615 Units of Limited
Partnership Interest ("Units") were sold at $1,000.00 per Unit. The proceeds
of the offering were held in an escrow account until January 12, 1994, at
which time they were turned over to the Partnership for trading. The
Partnership was authorized to sell 300,000 Units during its offering period.
Smith Barney Futures Management Inc. is the general partner (the "General
Partner") of the Partnership. Smith Barney Inc. ("SB"), an affiliate of the
General Partner, acts as commodity broker for the Partnership (see Note 3c).
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
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Notes to Financial Statements
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. and Rabar Market
Research 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 (except JWH, which will receive an
incentive fee of 15% of New Trading Profits). AIS Futures Management, Inc.
was added as an Advisor to the Partnership effective October 1, 1996 and
Hyman Beck & Co., Inc., was terminated on the same date.
F-7
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Notes to Financial Statements
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, 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, 1996 and 1995, the amount of cash held for
margin requirements was $17,906,764 and $37,366,691, 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 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. 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.
F-8
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Notes to Financial Statements
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 statements 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, 1996 and 1995 was $7,288,686 and $18,954,511,
respectively and the average fair value during the years then ended, based on
monthly calculation, was $14,427,778 and $12,694,190, 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.
Beginning on April 1, 1994, a limited partner may require the Partnership to
redeem his Units at their Net Asset Value as of the last day of each month 10
days' notice to the General Partner. No fee will be charged for redemptions.
6. Organization and Offering Costs:
Offering and organization expenses of $1,145,322 relating to the issuance and
marketing of units offered were initially paid by SB. The Partnership has
reimbursed SB for all such expenses from interest paid to the Partnership and
has recorded such reimbursement amounts as organization expense in 1994.
7. Net Asset Value Per Unit:
Changes in the net asset value per Unit for the years ended December 31,
1996, 1995 and 1994 were as follows:
1996 1995 1994
Net realized and
unrealized
gains/losses $ 175.18 $ 132.42 $ (11.88)
Interest income 41.97 44.48 29.36
Expenses (58.45) (52.30) (50.42)
--------- --------- ---------
Increase(decrease)
for period 158.70 124.60 (32.94)
Net asset value per
Unit, beginning of
period 1,091.66 967.06 1,000.00
--------- --------- ---------
Net asset value per
Unit, end of period $1,250.36 $1,091.66 $ 967.06
========= ========= =========
F-9
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Notes to Financial Statements
8. 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.
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.
F-10
<PAGE>
Smith Barney
Diversified Futures Fund L.P.
Notes to Financial Statements
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, 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. All of
these instruments mature within one year of December 31, 1996. However, due
to the nature of the Partnership's business, these instruments may not be
held to maturity. At December 31, 1996, the fair value of the Partnership's
derivatives, including options thereon, was $7,288,686, as detailed below.
Notional or Contractual
Amount of Commitments
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 0 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
============= ============= =============
F-11
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.
During the last two fiscal years and any subsequent interim period, no
independent accountant who was engaged as the principal accountant to audit the
Partnership's financial statements has resigned or was dismissed.
PART III
Item 10.Directors and Executive Officers of the Registrant.
The Partnership has no officers or directors and its affairs are managed
by its General Partner, Smith Barney Futures Management Inc. Investment
decisions will be made by Campbell & Company, Inc., Chesapeake Capital
Corporation, John W. Henry & Company, Inc., Abraham Trading Co., Rabar Market
Research, Inc. and AIS Futures 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 $10,754,060 were paid
for the year ended December 31, 1996. Management fees and incentive fees of
$4,682,124 and $3,923,488, respectively, were paid or payable to the Advisors
for the year ended December 31, 1996.
14
<PAGE>
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 (1.5%) of Limited Partnership Interest as of
December 31, 1996.
(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, 1996 and
1995. Statement of Income and Expenses for the years ended
December 31, 1996, 1995 and for the period from January 12,
1994 (commencement of trading
15
<PAGE>
operations) to December 31, 1994. Statement of Partner's
Capital for the years ended December 31, 1996, 1995, and 1994.
(2) Financial Statement Schedules: None.
(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
16
<PAGE>
by reference).
10.6- Management Agreement among the Partnership, the
General Partner and Colorado Commodity Management
Corp. (filed as Exhibit 10.6 to the Registration
Statement on Form S-1 (File No. 33-75056) and
incorporated herein by reference).
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).
17
<PAGE>
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.
(filed herein).
10.15- Letter dated October 1, 1996 from the General Partner to Hyman
Beck & Company terminating the Management Agreement (filed
herein).
(b) Reports on 8-K: None Filed.
18
<PAGE>
Supplemental Information To Be Furnished With Reports Filed Pursuant To
Section 15(d) Of The Act by Registrants Which Have Not Registered Securities
Pursuant To Section 12 Of the Act.
Annual Report to Limited Partners
19
<PAGE>
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 1997.
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/ Philip M. Waterman, Jr. /s/ Daniel R. McAuliffe, Jr.
Philip M. Waterman, Jr. Daniel R. McAuliffe, Jr.
Director and Vice-Chairman Director
/s/ Steve J. Keltz /s/ Shelley Ullman
Steve J. Keltz Shelley Ullman
Secretary and Director Director
20
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000911503
<NAME> SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 170,574,018
<SECURITIES> 7,329,899
<RECEIVABLES> 558,298
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 178,462,215
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 178,462,215
<CURRENT-LIABILITIES> 6,874,954
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 171,587,261
<TOTAL-LIABILITY-AND-EQUITY> 178,462,215
<SALES> 0
<TOTAL-REVENUES> 29,915,087
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 8,858,473
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 21,056,614
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,056,614
<EPS-PRIMARY> 158.70
<EPS-DILUTED> 0
</TABLE>
September 26, 1996
Hyman Beck & Co. Inc.
6 Campus Drive - 2nd Fl.
Parsippany, N.J. 07054
Attention: Mr. David Fuller
Dear Mr. Fuller:
Effective immediately, all assets have been reallocated away from your
trading accounts in the Smith Barney Diversified Futures Fund L.P.. This
effectively terminates your management agreement with the Fund. Please liquidate
your positions in an orderly fashion by Monday, September 30, 1996.
If you have any questions, please call me at 212-723-5416.
Very truly yours,
SMITH BARNEY FUTURES MANAGEMENT INC.
Daniel A. Dantuono
Chief Financial Officer & Directors
DAD/sp
MANAGEMENT AGREEMENT
AGREEMENT made as of the ___ day of September, 1996 among SMITH
BARNEY FUTURES MANAGEMENT INC., a Delaware corporation ("SBFM"), SMITH BARNEY
DIVERSIFIED FUTURES FUND L.P., a New York limited partnership (the
"Partnership") and AIS FUTURES MANAGEMENT, INC., a Delaware corporation (the
"Advisor").
W I T N E S S E T H :
WHEREAS, SBFM is the general partner of Smith Barney Diversified
Futures Fund L.P., a limited partnership organized for the purpose of
speculative trading of commodity interests, including futures contracts, options
and forward contracts with the objective of achieving substantial capital
appreciation; and
WHEREAS, the Limited Partnership Agreement establishing the
Partnership (the "Limited Partnership Agreement") permits SBFM to delegate to
one or more commodity trading advisors SBFM's authority to make trading
decisions for the Partnership; and
WHEREAS, the Advisor is registered as a commodity trading advisor
with the Commodity Futures Trading Commission ("CFTC") and is a member as such
of the National Futures Association ("NFA"); and
WHEREAS, SBFM is registered as a commodity pool
operator with the CFTC and is a member as such of the NFA; and
WHEREAS, SBFM and the Advisor wish to enter into this Agreement in
order to set forth the terms and conditions upon which the Advisor will render
and implement advisory services in connection with the conduct by the
Partnership of its commodity trading activities during the term of this
Agreement;
NOW, THEREFORE, the parties agree as follows:
1. DUTIES OF THE ADVISOR. (a) For the period and on the terms and
conditions of this Agreement, the Advisor shall have sole authority and
responsibility, as one of the Partnership's agents and attorneys-in-fact, for
directing the investment and reinvestment of the assets and funds of the
Partnership allocated to it by the General Partner in commodity interests,
including commodity futures contracts, options and forward contracts. All such
trading on behalf of the Partnership shall be in accordance with the trading
policies set forth in the Partnership's Prospectus dated as of February 17,
1994, as supplemented (the "Prospectus"), and as such trading policies may be
changed from time to time upon receipt by the Advisor of prior written notice of
such change and pursuant to the trading strategy selected by SBFM to be utilized
by the Advisor in managing the Partnership's assets. SBFM has initially selected
the Advisor's MAAP Program traded at up to approximately six times leverage to
manage the Partnership's assets allocated to it. Any open positions or other
investments at the time of receipt of such notice of a change in trading policy
shall not be deemed to violate the changed policy and shall be closed or sold in
the ordinary course of trading. The Advisor may not change the trading policies
set forth in the Prospectus without the prior written consent of the Partnership
given by SBFM. The Advisor makes no representation or warranty that the trading
to be directed by it for the Partnership will be profitable or will not incur
losses.
(b) SBFM acknowledges receipt of the Advisor's Disclosure Document
dated January 2, 1996 (the "Disclosure Document") as filed with the CFTC. All
trades made by the Advisor for the account of the Partnership shall be made
through such commodity broker or brokers as SBFM shall direct, and the Advisor
shall have no authority or responsibility for selecting or supervising any such
broker in connection with the execution, clearance or confirmation of
transactions for the Partnership or for the negotiation of brokerage rates
charged therefor. However, the Advisor, with the prior written permission (by
either original or fax copy) of SBFM, may direct all trades in commodity futures
and options to a futures commission merchant or independent floor broker it
chooses for execution with instructions to give-up the trades to the broker
designated by SBFM, provided that the futures commission merchant or independent
floor broker and any give-up or floor brokerage fees are approved in advance by
SBFM. All give-up or similar fees relating to the foregoing shall be paid by the
Partnership after all parties have executed the relevant give-up agreements (by
either original or fax copy).
(c) The initial allocation of the Partnership's assets to the
Advisor will be made to the Advisor's MAAP Program traded at up to approximately
six times leverage. In the event the Advisor wishes to use a trading system or
methodology other than or in addition to such program in connection with its
trading for the Partnership, either in whole or in part, it may not do so unless
the Advisor gives SBFM prior written notice of its intention to utilize such
different trading system or methodology and SBFM consents thereto in writing. In
addition, the Advisor will provide five days' prior written notice to SBFM of
any change in the trading system or methodology to be utilized for the
Partnership which the Advisor deems material. If the Advisor deems such change
in system or methodology or in markets traded to be material, the changed system
or methodology or markets traded will not be utilized for the Partnership
without the prior written consent of SBFM. Further, the Advisor will provide the
Partnership with a current list of all commodity interests intended to be traded
for the Partnership's account and will not trade any additional commodity
interests for such account without providing notice thereof to SBFM and
receiving SBFM's written approval. The Advisor also agrees to provide SBFM, on a
monthly basis, with a written report of the assets under the Advisor's
management together with all other matters deemed by the Advisor to be material
changes to its business not previously reported to SBFM.
(d) Upon reasonable request the Advisor agrees to make all material
disclosures to the Partnership regarding itself and its principals as defined in
Part 4 of the CFTC's regulations ("principals"), shareholders, directors,
officers and employees, their trading performance and general trading methods,
its customer accounts (but not the identities of or identifying information with
respect to its customers) and otherwise as are required in the reasonable
judgment of SBFM to be made in any filings required by Federal or state law or
NFA rule or order. Notwithstanding Sections 1(d) and 4(d) of this Agreement, the
Advisor is not required to disclose the actual trading results of proprietary
accounts of the Advisor or its principals unless SBFM reasonably determines that
such disclosure is required in order to fulfill its fiduciary obligations to the
Partnership or the reporting, filing or other obligations imposed on it by
Federal or state law or NFA rule or order. The Partnership and SBFM acknowledge
that the trading advice to be provided by the Advisor is a property right
belonging to the Advisor, agree to treat as confidential any results of
proprietary accounts and/or proprietary information with respect to trading
systems obtained from the Advisor and agree that they will keep all such
information confidential and shall use it for no other purpose than monitoring
the Partnership's account.
(e) The Advisor understands and agrees that SBFM may designate other
trading advisors for the Partnership and apportion or reapportion to such other
trading advisors the management of an amount of Net Assets (as defined in
Section 3(b) hereof) as it shall determine in its absolute discretion. The
designation of other trading advisors and the apportionment or reapportionment
of Net Assets to any such trading advisors pursuant to this Section 1 shall
neither terminate this Agreement nor modify in any regard the respective rights
and obligations of the parties hereunder.
(f) SBFM may, from time to time, in its absolute discretion, select
additional trading advisors and reapportion funds among the trading advisors for
the Partnership as it deems appropriate. SBFM shall use its best efforts to make
reapportionments, if any, as of the first day of a month. The Advisor agrees
that it may be called upon at any time promptly to liquidate positions in SBFM's
sole discretion so that SBFM may reallocate the Partnership's assets, meet
margin calls on the Partnership's account, fund redemptions, or for any other
reason, except that SBFM will not require the liquidation of specific positions
by the Advisor. The Advisor shall not be subject to liability for the results of
following such instructions from SBFM. SBFM will use its best efforts to give
two days' prior notice to the Advisor of any reallocations or liquidations.
(g) The Advisor will not be liable for trading losses in the
Partnership's account including losses caused by errors; provided, however, that
(i) the Advisor will be liable to the Partnership with respect to losses
incurred due to errors committed or caused by it or any of its principals or
employees in communicating improper trading instructions or orders to any broker
on behalf of the Partnership and (ii) the Advisor will be liable to the
Partnership with respect to losses incurred due to errors committed or caused by
any executing broker (other than any SBFM affiliate) selected by the Advisor,
but only to the extent of the fees which have been paid by the Partnership to
the Advisor up until the point at which the error occurred plus any future fees
which may be earned by the Advisor under this Agreement (it also being
understood that SBFM, with the assistance of the Advisor, will first attempt to
recover such losses from the executing broker).
2. INDEPENDENCE OF THE ADVISOR. For all purposes herein, the Advisor
shall be deemed to be an independent contractor and, unless otherwise expressly
provided or authorized, shall have no authority to act for or represent the
Partnership in any way and shall not be deemed an agent, promoter or sponsor of
the Partnership, SBFM, or any other trading advisor and shall have no
responsibility or liability therefor. The Advisor shall not be responsible to
the Partnership, the General Partner, any trading advisor or any limited
partners for any acts or omissions of any other trading advisor acting as an
advisor to the Partnership.
3. COMPENSATION. (a) In consideration of and as compensation for all
of the services to be rendered by the Advisor to the Partnership under this
Agreement, the Partnership shall pay the Advisor (i) an incentive fee payable
quarterly equal to 20% of New Trading Profits (as such term is defined below)
earned by the Advisor for the Partnership and (ii) a monthly fee for
professional management services equal to 1/6 of 1% (2% per year) of the
month-end Net Assets of the Partnership allocated to the Advisor.
(b) "Net Assets" shall have the meaning set forth in Paragraph
7(d)(1) of the Limited Partnership Agreement dated as of August 27, 1993 and
without regard to further amendments thereto (and as set forth in Appendix A
hereto), provided that in determining the Net Assets of the Partnership on any
date, no adjustment shall be made to reflect any distributions, redemptions or
incentive fees payable as of the date of such determination.
(c) "New Trading Profits" shall mean the excess, if any, of Net
Assets managed by the Advisor at the end of the fiscal period over Net Assets
managed by the Advisor at the end of the highest previous fiscal period or Net
Assets allocated to the Advisor at the date trading commences, whichever is
higher, and as further adjusted to eliminate the effect on Net Assets resulting
from new capital contributions, redemptions, reallocations or capital
distributions, if any, made during the fiscal period decreased by interest or
other income, not directly related to trading activity, earned on the
Partnership's assets during the fiscal period, whether the assets are held
separately or in margin accounts. Ongoing expenses will be attributed to the
Advisor based on the Advisor's proportionate share of Net Assets. Ongoing
expenses above will not include expenses of litigation not involving the
activities of the Advisor on behalf of the Partnership. Ongoing expenses include
offering and organizational expenses of the Partnership. Interest income earned,
if any, will not be taken into account in computing New Trading Profits earned
by the Advisor. If Net Assets allocated to the Advisor are reduced due to
redemptions, distributions or reallocations (net of additions), there will be a
corresponding proportional reduction in the related loss carryforward amount
that must be recouped before the Advisor is eligible to receive another
incentive fee.
(d) Quarterly incentive fees and monthly management fees shall be
paid within twenty (20) business days following the end of the period, as the
case may be, for which such fee is payable. In the event of the termination of
this Agreement as of any date which shall not be the end of a fiscal quarter or
a calendar month, as the case may be, the quarterly incentive fee shall be
computed as if the effective date of termination were the last day of the then
current quarter and the monthly management fee shall be prorated to the
effective date of termination. If, during any month, the Partnership does not
conduct business operations or the Advisor is unable to provide the services
contemplated herein for more than two successive business days, the monthly
management fee shall be prorated by the ratio which the number of business days
during which SBFM conducted the Partnership's business operations or utilized
the Advisor's services bears in the month to the total number of business days
in such month.
(e) The provisions of this Paragraph 3 shall survive the termination
of this Agreement.
4. RIGHT TO ENGAGE IN OTHER ACTIVITIES. (a) The services provided by
the Advisor hereunder are not to be deemed exclusive. SBFM on its own behalf and
on behalf of the Partnership acknowledges that, subject to the terms of this
Agreement, the Advisor and its officers, directors, employees and
shareholder(s), may render advisory, consulting and management services to other
clients and accounts. The Advisor and its officers, directors, employees and
shareholder(s) shall be free to trade for their own accounts and to advise other
investors and manage other commodity accounts during the term of this Agreement
and to use the same information, computer programs and trading strategies,
programs or formulas which they obtain, produce or utilize in the performance of
services to SBFM for the Partnership. However, the Advisor represents, warrants
and agrees that it believes the rendering of such consulting, advisory and
management services to other accounts and entities will not require any material
change in the Advisor's basic trading strategies and will not affect the
capacity of the Advisor to continue to render services to SBFM for the
Partnership as contemplated by this Agreement.
(b) If, at any time during the term of this Agreement, the Advisor
is required to aggregate the Partnership's commodity positions with the
positions of any other person for purposes of applying CFTC- or exchange-imposed
speculative position limits, the Advisor agrees that it will promptly notify
SBFM if the Partnership's positions are included in an aggregate amount which
exceeds the applicable speculative position limit. The Advisor agrees that, if
its trading recommendations are altered because of the application of any
speculative position limits, it will not modify the trading instructions with
respect to the Partnership's account in such manner as to affect the Partnership
substantially disproportionately as compared with the Advisor's other accounts.
The Advisor further represents, warrants and agrees that under no circumstances
will it knowingly or deliberately use trading strategies or methods for the
Partnership that are inferior to strategies or methods employed for any other
client or account and that it will not knowingly or deliberately favor any
client or account managed by it over any other client or account in any manner,
it being acknowledged, however, that (i) SBFM has directed the Advisor to trade
its MAAP Program at six times leverage, and (ii) different trading strategies or
methods may be utilized for differing sizes of accounts, accounts with different
trading policies, accounts experiencing differing inflows or outflows of equity,
accounts which commence trading at different times, accounts which have
different portfolios or different fiscal years, accounts utilizing different
executing brokers and accounts with other differences, and that such differences
may cause divergent trading results.
(c) It is acknowledged that the Advisor and/or its officers,
employees, directors and shareholder(s) presently act, and it is agreed that
they may continue to act, as advisor for other accounts managed by them, and may
continue to receive compensation with respect to services for such accounts in
amounts which may be more or less than the amounts received from the
Partnership.
(d) The Advisor agrees that it shall make such information available
to SBFM respecting the performance of the Partnership's account as compared to
the performance of other accounts managed by the Advisor or its principals as
shall be reasonably requested by SBFM, subject to the preservation of the
confidentiality of such information, including but not limited to the Advisor's
trading systems, methods, models, strategies, formulas and the identity of
clients. The Advisor presently believes and represents that existing speculative
position limits will not materially adversely affect its ability to manage the
Partnership's account given the potential size of the Partnership's account and
the Advisor's and its principals' current accounts and all proposed accounts for
which they have contracted to act as trading manager.
5. TERM. (a) This Agreement shall continue in effect until June 30,
1997. SBFM may, in its sole discretion, renew this Agreement for additional
one-year periods upon notice to the Advisor not less than 30 days prior to the
expiration of the previous period. At any time during the term of this
Agreement, SBFM may terminate this Agreement at any month-end upon 30 days'
notice to the Advisor. At any time during the term of this Agreement, SBFM may
elect to immediately terminate this Agreement upon 30 days' notice to the
Advisor if (i) the Net Asset Value per Unit shall decline as of the close of
business on any day to $400 or less; (ii) the Net Assets allocated to the
Advisor (adjusted for redemptions, distributions, withdrawals or reallocations,
if any) decline by 50% or more as of the end of a trading day from such Net
Assets' previous highest value; (iii) limited partners owning at least 50% of
the outstanding Units shall vote to require SBFM to terminate this Agreement;
(iv) the Advisor fails to comply with the terms of this Agreement; (v) SBFM, in
good faith, reasonably determines that the performance of the Advisor has been
such that SBFM's fiduciary duties to the Partnership require SBFM to terminate
this Agreement; or (vi) SBFM reasonably believes that the application of
speculative position limits will substantially affect the performance of the
Partnership. At any time during the term of this Agreement, SBFM may elect
immediately to terminate this Agreement if (i) the Advisor merges, consolidates
with another entity, sells a substantial portion of its assets, or becomes
bankrupt or insolvent, except as provided in Section 10 hereof, (ii) John Hummel
dies, becomes incapacitated, leaves the employ of the Advisor, ceases to control
the Advisor or is otherwise not managing the trading programs or systems of the
Advisor, or (iii) the Advisor's registration as a commodity trading advisor with
the CFTC or its membership in the NFA or any other regulatory authority, is
terminated or suspended. This Agreement will immediately terminate upon
dissolution of the Partnership or upon cessation of trading prior to
dissolution.
(b) The Advisor may terminate this Agreement by giving not less than
30 days' notice to SBFM (i) in the event that the trading policies of the
Partnership as set forth in the Prospectus are changed in such manner that the
Advisor reasonably believes will adversely affect the performance of its trading
strategies; (ii) after June 30, 1997; or (iii) in the event that the General
Partner or Partnership fails to comply with the terms of this Agreement. The
Advisor may immediately terminate this Agreement if SBFM's registration as a
commodity pool operator or its membership in the NFA is terminated or suspended.
(c) Except as otherwise provided in this Agreement, any termination
of this Agreement in accordance with this Paragraph 5 or Paragraph 1(e) shall be
without penalty or liability to any party, except for any fees due to the
Advisor pursuant to Section 3 hereof.
6. INDEMNIFICATION. (a)(i) In any threatened, pending or completed
action, suit, or proceeding to which the Advisor was or is a party or is
threatened to be made a party arising out of or in connection with this
Agreement or the management of the Partnership's assets by the Advisor or the
offering and sale of units in the Partnership, SBFM shall, subject to
subparagraph (a)(iii) of this Paragraph 6, indemnify and hold harmless the
Advisor against any loss, liability, damage, cost, expense (including, without
limitation, attorneys' and accountants' fees), judgments and amounts paid in
settlement actually and reasonably incurred by it in connection with such
action, suit, or proceeding if the Advisor acted in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership, and provided that its conduct did not constitute negligence,
intentional misconduct, or a breach of this agreement and to the extent that the
court or administrative forum in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all circumstances of the case, the Advisor is fairly and reasonably
entitled to indemnity for such expenses which such court or administrative forum
shall deem proper; and further provided that no indemnification shall be
available from the Partnership if such indemnification is prohibited by Section
16 of the Partnership Agreement. The termination of any action, suit or
proceeding by judgment, order or settlement shall not, of itself, create a
presumption that the Advisor did not act in good faith and in a manner
reasonably believed to be in or not opposed to the best interests of the
Partnership.
(ii) Without limiting sub-paragraph (i) above, to the extent that
the Advisor has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subparagraph (i) above, or in defense
of any claim, issue or matter therein, SBFM shall indemnify it against the
expenses (including, without limitation, attorneys' and accountants' fees)
actually and reasonably incurred by it in connection therewith.
(iii) Any indemnification under subparagraph (i) above, unless
ordered by a court or administrative forum, shall be made by SBFM only as
authorized in the specific case and only upon a determination by independent
legal counsel in a written opinion that such indemnification is proper in the
circumstances because the Advisor has met the applicable standard of conduct set
forth in subparagraph (i) above. Such independent legal counsel shall be
selected by SBFM in a timely manner, subject to the Advisor's approval, which
approval shall not be unreasonably withheld. The Advisor will be deemed to have
approved SBFM's selection unless the Advisor notifies SBFM in writing, received
by SBFM within five days of SBFM's telecopying to the Advisor of the notice of
SBFM's selection, that the Advisor does not approve the selection.
(iv) In the event the Advisor is made a party to any claim, dispute
or litigation or otherwise incurs any loss or expense as a result of, or in
connection with, the Partnership's or SBFM's activities or claimed activities
unrelated to the Advisor, SBFM shall indemnify, defend and hold harmless the
Advisor against any loss, liability, damage, cost or expense (including, without
limitation, attorneys' and accountants' fees) incurred in connection therewith.
(v) As used in this Paragraph 6(a), the terms "Advisor" shall
include the Advisor, its principals, officers, directors, stockholders and
employees and the term "SBFM" shall include the Partnership.
(b)(i) The Advisor agrees to indemnify, defend and hold harmless
SBFM, the Partnership and their affiliates against any loss, liability, damage,
cost or expense (including, without limitation, attorneys' and accountants'
fees), judgments and amounts paid in settlement actually and reasonably incurred
by them (A) as a result of the material breach of any material representations
and warranties made by the Advisor in this Agreement, or (B) as a result of any
act or omission of the Advisor relating to the Partnership if there has been a
final judicial or regulatory determination or, in the event of a settlement of
any action or proceeding with the prior written consent of the Advisor, a
written opinion of an arbitrator pursuant to Paragraph 14 hereof, to the effect
that such acts or omissions violated the terms of this Agreement in any material
respect or involved negligence, bad faith, recklessness or intentional
misconduct on the part of the Advisor (except as otherwise provided in Section
1(g)).
(ii) In the event SBFM, the Partnership or any of their affiliates
is made a party to any claim, dispute or litigation or otherwise incurs any loss
or expense as a result of, or in connection with, the activities or claimed
activities of the Advisor or its principals, officers, directors, shareholder(s)
or employees unrelated to SBFM's or the Partnership's business, the Advisor
shall indemnify, defend and hold harmless SBFM, the Partnership or any of their
affiliates against any loss, liability, damage, cost or expense (including,
without limitation, attorneys' and accountants' fees) incurred in connection
therewith.
(iii) John Hummel shall have no liability to the Partnership or SBFM
or any of their respective officers, directors, employees, partners or
affiliates under this Agreement or in connection with the transactions
contemplated by this Agreement except in the case of fraud or willful misconduct
by John Hummel.
(c) In the event that a person entitled to indemnification under
this Paragraph 6 is made a party to an action, suit or proceeding alleging both
matters for which indemnification can be made hereunder and matters for which
indemnification may not be made hereunder, such person shall be indemnified only
for that portion of the loss, liability, damage, cost or expense incurred in
such action, suit or proceeding which relates to the matters for which
indemnification can be made.
(d) None of the indemnifications contained in this Paragraph 6 shall
be applicable with respect to default judgments, confessions of judgment or
settlements entered into by the party claiming indemnification without the prior
written consent, which shall not be unreasonably withheld, of the party
obligated to indemnify such party.
(e) The provisions of this Paragraph 6 shall survive the termination
of this Agreement.
7. REPRESENTATIONS, WARRANTIES AND AGREEMENTS.
(a) The Advisor represents and warrants that:
(i) All references to the Advisor and its principals in the
Advisor's Disclosure Document are accurate in all material respects and as to
them the Disclosure Document does not contain any untrue statement of a material
fact or omit to state a material fact which is necessary to make the statements
therein not misleading.
(ii) The performance information in the Disclosure Document is based
on all of the customer accounts managed on a discretionary basis by the
Advisor's principals and/or the Advisor during the period covered by such tables
and required to be disclosed therein.
(iii) The Advisor will be acting as a commodity trading advisor with
respect to the Partnership and not as a securities investment adviser and is
duly registered with the CFTC as a commodity trading advisor, is a member as
such of the NFA, and is in compliance with such other registration and licensing
requirements as shall be necessary to enable it to perform its obligations
hereunder, and agrees to maintain and renew such registrations and licenses
during the term of this Agreement.
(iv) The Advisor is a corporation duly organized, validly existing
and in good standing under the laws of the State of Delaware and has full power
and authority to enter into this Agreement and to provide the services required
of it hereunder.
(v) The Advisor will not, by acting as a commodity trading advisor
to the Partnership, breach or cause to be breached any undertaking, agreement,
contract, statute, rule or regulation to which it is a party or by which it is
bound.
(vi) This Agreement has been duly and validly authorized, executed
and delivered by the Advisor and is a valid and binding agreement enforceable in
accordance with its terms.
(vii) At any time during the term of this Agreement that a
prospectus relating to the Units is required to be delivered in connection with
the offer and sale thereof, the Advisor agrees upon the request of SBFM to
provide the Partnership with such information as shall be necessary so that, as
to the Advisor and its principals, such prospectus is accurate, and any
reference or information regarding the Advisor therein shall be approved by the
Advisor in writing prior to its use.
(b) SBFM represents and warrants for itself and the
Partnership that:
(i) The Prospectus (as from time to time amended or supplemented,
which amendment or supplement is approved by the Advisor as to descriptions of
itself and its actual performance) does not contain any untrue statement of a
material fact or omit to state a material fact which is necessary to make the
statements therein not misleading, except that the foregoing representation does
not apply to any statements concerning the Advisor in the Prospectus, if any,
specifically approved by the Advisor for such use prior to its use.
(ii) It is a corporation duly organized, validly existing and in
good standing under the laws of the State of Delaware and has full corporate
power and authority to perform its obligations under this Agreement.
(iii) SBFM and the Partnership have the capacity and authority to
enter into this Agreement on behalf of the Partnership.
(iv) This Agreement has been duly and validly authorized, executed
and delivered on SBFM's and the Partnership's behalf and is a valid and binding
agreement of SBFM and the Partnership enforceable in accordance with its terms.
(v) SBFM will not, by acting as General Partner to the Partnership
and the Partnership will not, breach or cause to be breached any undertaking,
agreement, contract, statute, rule or regulation to which it is a party or by
which it is bound.
(vi) It is registered as a commodity pool operator and is a member
of the NFA, and it will maintain and renew such registration and membership
during the term of this Agreement.
(vii) The Partnership is a limited partnership duly organized and
validly existing under the laws of the State of New York and has full power and
authority to enter into this Agreement and to perform its obligations under this
Agreement.
8. COVENANTS OF THE ADVISOR, SBFM AND THE
PARTNERSHIP(a) The Advisor agrees as follows:
(i) In connection with its activities on behalf of the Partnership,
the Advisor will comply with all applicable rules and regulations of the CFTC
and/or the commodity exchange on which any particular transaction is executed.
(ii) The Advisor will promptly notify SBFM of the commencement of
any material suit, action or proceeding involving it, whether or not any such
suit, action or proceeding also involves SBFM.
(iii) In the placement of orders for the Partnership's account and
for the accounts of any other client, the Advisor will utilize a pre-determined,
systematic, fair and reasonable order entry system, which shall, on an overall
basis, be no less favorable to the Partnership than to any other account managed
by the Advisor. The Advisor acknowledges its obligation to review the
Partnership's positions, prices and equity in the account managed by the Advisor
daily and within two business days to notify, in writing, the broker and SBFM
and the Partnership's brokers of (i) any error committed by the Advisor or its
principals or employees; (ii) any trade which the Advisor believes was not
executed in accordance with its instructions; and (iii) any discrepancy with a
value of $10,000 or more (due to differences in the positions, prices or equity
in the account) between its records and the information reported on the
account's daily and monthly broker statements.
(iv) The Advisor will maintain a net worth of not less than $250,000
during the term of this Agreement.
(v) The Advisor will keep confidential all of the terms of this
Agreement. In particular, the Advisor will not, directly or indirectly, disclose
to any other party the terms of this Agreement related to the Advisor's
liability for give-up transactions or any other which differs from SBFM's
Standard Form Management Agreement.
(b) SBFM agrees for itself and the Partnership that:
(i) SBFM and the Partnership will comply with all applicable rules
and regulations of the CFTC and/or the commodity exchange on which any
particular transaction is executed.
(ii) SBFM will promptly notify the Advisor of the commencement of
any material suit, action or proceeding involving it or the Partnership, whether
or not such suit, action or proceeding also involves the Advisor.
(iii) SBFM will keep confidential all of the terms of this Agreement.
In particular, SBFM will not, directly or indirectly, disclose to any other
party the terms of this Agreement which differ from SBFM's Standard Form
Management
Agreement.
9. COMPLETE AGREEMENT. This Agreement constitutes the
entire agreement between the parties pertaining to the subject
matter hereof.
10. ASSIGNMENT. This Agreement may not be assigned by any party
without the express written consent of the other parties, except that the
Advisor may incorporate or transfer all of its assets, trading programs or
goodwill to, or merge or consolidate with, any corporation, partnership or sole
proprietorship controlled by John Hummel and/or the Advisor, and may assign this
Agreement to any such corporation, partnership or sole proprietorship; provided,
that said corporation, partnership or sole proprietorship assumes all rights and
obligations of the Advisor under this Agreement and is entitled to and agrees to
use the trading method and systems of the Advisor for the benefit of the
Partnership.
11. AMENDMENT. This Agreement may not be amended
except by the written consent of the parties.
12. NOTICES. All notices, demands or requests required to be made or
delivered under this Agreement shall be in writing and delivered personally or
by registered or certified mail or expedited courier, return receipt requested,
postage prepaid, to the addresses below or to such other addresses as may be
designated by the party entitled to receive the same by notice similarly given:
If to SBFM:
Smith Barney Futures Management Inc.
390 Greenwich Street
1st Floor
New York, New York 10013
Attention: David J. Vogel
Facsimile: 212-723-8985
If to the Advisor:
AIS Futures Management, Inc.
375 Park Avenue
New York, New York 10152
Attention: John R. Hummel
Facsimile: 212-339-9736
13. GOVERNING LAW. This Agreement shall be governed
by and construed in accordance with the laws of the State of New
York.
14. ARBITRATION. The parties agree that any dispute or controversy
arising out of or relating to this Agreement or the interpretation thereof,
shall be settled by arbitration in accordance with the rules, then in effect, of
the National Futures Association or, if the National Futures Association shall
refuse jurisdiction, then in accordance with the rules, then in effect, of the
American Arbitration Association; provided, however, that the power of the
arbitrator shall be limited to interpreting this Agreement as written and the
arbitrator shall state in writing his reasons for his award. Judgment upon any
award made by the arbitrator may be entered in any court of competent
jurisdiction.
15. NO THIRD PARTY BENEFICIARIES. There are no third
party beneficiaries to this Agreement.
IN WITNESS WHEREOF, this Agreement has been executed for and on
behalf of the undersigned as of the day and year first above written.
SMITH BARNEY FUTURES MANAGEMENT INC.
By________________________
David J. Vogel
President and Director
SMITH BARNEY DIVERSIFIED FUTURES FUND L.P.
By: Smith Barney Futures Management Inc.
(General Partner)
By________________________
David J. Vogel
President and Director
AIS FUTURES MANAGEMENT, INC.
By________________________
Name:
Title:
<PAGE>
Appendix A
Net Assets. NET ASSETS of the Partnership shall mean the total assets
of the Partnership including all cash, plus Treasury Bills at market, accrued
interest, and the market value of all open commodity positions maintained by the
Partnership, less brokerage charges accrued and less all other liabilities of
the Partnership, determined in accordance with generally accepted accounting
principles under the accrual basis of accounting.
